-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RNssAqujEIwJWCOLS6SySsDTwi0WCV0+gZ2BOD9HbS1z/fa3+oxEuQTAPPztiMP6 zSyYgviJnpk+BF6klzlDxA== 0000702902-09-000006.txt : 20090220 0000702902-09-000006.hdr.sgml : 20090220 20090220162607 ACCESSION NUMBER: 0000702902-09-000006 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20090220 ITEM INFORMATION: Financial Statements and Exhibits FILED AS OF DATE: 20090220 DATE AS OF CHANGE: 20090220 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HARLEYSVILLE NATIONAL CORP CENTRAL INDEX KEY: 0000702902 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 232210237 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-15237 FILM NUMBER: 09625426 BUSINESS ADDRESS: STREET 1: 483 MAIN ST STREET 2: P O BOX 195 CITY: HARLEYSVILLE STATE: PA ZIP: 19438 BUSINESS PHONE: 2152568851 MAIL ADDRESS: STREET 1: 483 MAIN STREET CITY: HARLEYSVILLE STATE: PA ZIP: 19438 8-K/A 1 form8-ka.htm FORM 8-K/A-HARLEYSVILLE NATIONAL CORPORATION form8-ka.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
               
FORM 8-K/A
 
AMENDMENT NO. 1 TO CURRENT REPORT
 
Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
 
               
Date of Report (Date of earliest event reported): February 20, 2009 (December 5, 2008)
 
HARLEYSVILLE NATIONAL CORPORATION
 
               
(Exact name of registrant as specified in its charter)
 
Pennsylvania
  
0-15237
  
23-2210237
(State or other jurisdiction of incorporation)
  
(Commission File Number)
  
(IRS Employer Identification No.)
 
 
483 Main Street, Harleysville, PA
  
19438
(Address of principal executive offices)
  
(Zip Code)
 
 
215-256-8851
              
(Registrant’s telephone number, including area code)
 
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):
 
o
  
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
o
  
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
o
  
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
o
  
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
 
-1-
CURRENT REPORT ON FORM 8-K
 
 
Explanatory Note
 
This Amendment No. 1 on Form 8-K/A amends and supplements Item 9.01 of the Current Report on Form 8-K of Harleysville National Corporation (the “Registrant”), filed with the Securities and Exchange Commission on December 5, 2008 (the “Initial Form 8-K”), to include financial statements and pro forma financial information permitted pursuant to Item 9.01 of Form 8-K to be excluded from the Initial Form 8-K and filed by amendment to the Initial Form 8-K no later than 71 days after the date on which the Initial Form 8-K was required to be filed or February 20, 2009. As previously reported in the Initial Form 8-K, effective as of December 5, 2008, the Registrant completed the acquisition of Willow Financial Bancorp, Inc. pursuant to the merger agreement dated as of May 20, 2008.
 
Item 9.01.  Financial Statements and Exhibits
 
(a)  
Financial Statements of Businesses Acquired
 
The audited consolidated financial statements and related footnotes of Willow Financial Bancorp, Inc. as of June 30, 2008 and 2007, with independent registered public accountants’ report thereon and report on internal control over financial reporting as of June 30, 2008, are filed as Exhibit 99.1 to this Amendment No. 1 to Form 8-K.
 
The unaudited consolidated financial statements and related footnotes of Willow Financial Bancorp, Inc. as of September 30, 2008 are filed as Exhibit 99.2 to this Amendment No. 1 to Form 8-K.
 
(b)  
Pro Forma Financial Information
 
The unaudited pro forma combined consolidated balance sheet for Harleysville National Corporation and Willow Financial Bancorp, Inc. as of September 30, 2008 and the unaudited pro forma combined consolidated income statement for the nine months ended September 30, 2008 are filed as Exhibit 99.3 to this Amendment No. 1 to Form 8-K. The unaudited pro forma combined consolidated income statement for Harleysville National Corporation and Willow Financial Bancorp, Inc. for the year ended December 31, 2007 is contained in Harleysville National Corporation’s Registration Statement on No. 333-152007 on Form S-4/A, filed with the Commission on July 31, 2008 and incorporated herein by this reference.
 
-2-
 
(c)
Shell Company Transactions
 
 
Not Applicable
 
 
(d)
Exhibits.
 
 
 
Exhibit Number
  
Description
23.1
  
Consent of KPMG LLP, Independent Registered Public Accountants.
99.1
  
Audited consolidated financial statements and related footnotes of Willow Financial Bancorp, Inc. as of June 30, 2008 and 2007, with independent registered public accountants’ report thereon and report on internal control over financial reporting as of June 30, 2008.
99.2
  
Unaudited consolidated financial statements and related footnotes of Willow Financial Bancorp, Inc. as of September 30, 2008.
99.3
  
Unaudited pro forma combined consolidated balance sheet for Harleysville National Corporation and Willow Financial Bancorp, Inc. as of September 30, 2008 and the unaudited pro forma combined consolidated income statement for the nine months ended September 30, 2008.
 
 
-3-
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Current Report on Form 8-K to be signed on its behalf by the undersigned, thereunto duly authorized.
 
   
HARLEYSVILLE NATIONAL CORPORATION
   
(Registrant)
     
     
Dated: February 20, 2009
  
/s/ George S. Rapp
   
George S. Rapp
   
Executive Vice President, and
   
Chief Financial Officer
 
-4-

Exhibit Index
 
 
Exhibit Number
  
Description
23.1
  
Consent of KPMG LLP, Independent Registered Public Accountants.
99.1
  
Audited consolidated financial statements and related footnotes of Willow Financial Bancorp, Inc. as of June 30, 2008 and 2007, with independent registered public accountants’ report thereon and report on internal control over financial reporting as of June 30, 2008.
99.2
  
Unaudited consolidated financial statements and related footnotes of Willow Financial Bancorp, Inc. as of September 30, 2008.
99.3
  
Unaudited pro forma combined consolidated balance sheet for Harleysville National Corporation and Willow Financial Bancorp, Inc. as of September 30, 2008 and the unaudited pro forma combined consolidated income statement for the nine months ended September 30, 2008.

-5-
 EX-23.1 2 exhibit231.htm KPMG CONSENT exhibit231.htm

 
Exhibit 23.1
 
 
Consent of Independent Registered Public Accounting Firm
 
We consent to the incorporation in Form 8-K/A of Harleysville National Corporation of our reports dated September 15, 2008, with respect to the consolidated statements of financial condition of Willow Financial Bancorp, Inc. and subsidiary as of June 30, 2008 and 2007, and the related consolidated statements of operations, changes in stockholders’ equity and comprehensive (loss) income, and cash flows for each of the years in the three-year period ended June 30, 2008, and the effectiveness of internal control over financial reporting as of June 30, 2008, which reports appears in the Form 8-K/A of Harleysville National Corporation dated February 20, 2009.
 
On our report dated September 15, 2008, on the effectiveness of internal control over financial reporting as of June 30, 2008, expresses our opinion that Willow Financial Bancorp, Inc. and subsidiary did not maintain effective internal control over financial reporting as of June 30, 2008 because of the effect of a material weakness on the achievement of objectives of the control criteria and contains an explanatory paragraph that states that a material weakness has been identified in the areas of effective review and analysis of financial statement account reconciliations and journal entries and their impact on financial reporting matters.
 

 
KPMG LLP
 
Philadelphia, Pennsylvania
 
February 20, 2009
 
-6-

EX-99.1 3 exhibit991.htm AUDITED FINANCIAL STATEMENTS - WILLOW FINANCIAL exhibit991.htm
Exhibit 99.1
 
Item 8. Consolidated 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, 2008 and 2007, and the related consolidated statements of operations, changes in stockholders’ equity and comprehensive (loss) income, and cash flows for each of the years in the three-year period ended June 30, 2008. 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, 2008 and 2007, and the results of their operations and their cash flows for each of the years in the three-year period ended June 30, 2008, 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, 2008, 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 15, 2008, expressed an adverse opinion on the effectiveness of the Company’s internal control over financial reporting.
 
/s/ KPMG LLP                                                                
    
Philadelphia, Pennsylvania
    
September 15, 2008
    


-7-


Item 8. Consolidated 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 Willow Financial Bancorp, Inc. and subsidiary’s (the Company) internal control over financial reporting as of June 30, 2008, 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’s Report on Internal Control over Financial Reporting in Item 9Ab. 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. A material weakness has been identified and included in Management’s Report on Internal Controls Over Financial Reporting in the area of effective review and analysis of financial statement account reconciliations and review of journal entries and considering the impact of routine and non-routine 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, 2008 and 2007 and the related consolidated statements of operations, stockholders’ equity and comprehensive (loss) income, and cash flows for each of the years in the three-year period ended June 30, 2008 of the Company. This material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the June 30, 2008 consolidated financial statements, and this report does not affect our report dated September 15, 2008 which expressed an unqualified opinion on those consolidated financial statements.
 
 
In our opinion, because of the effect of the aforementioned material weakness 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, 2008, based on criteria established in Internal Control—Integrated Framework issued by COSO.
 
/s/ KPMG LLP                                                                
    
Philadelphia, Pennsylvania
    
September 15, 2008
    

-8-
Willow Financial Bancorp, Inc.
Consolidated Statements of Financial Condition

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

See accompanying Notes to Consolidated Financial Statements

-9-
Willow Financial Bancorp, Inc.
Consolidated Statements of Operations

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

See accompanying Notes to Consolidated Financial Statements


-10-


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

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

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

See accompanying Notes to Consolidated Financial Statements


-11-

Willow Financial Bancorp, Inc.
Consolidated Statements of Cash Flows

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


See accompanying Notes to Consolidated Financial Statements

-12-

1.            Description of Business and Basis of Consolidated Financial Statement Presentation

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

Consummation of the HNC Merger is subject to a number of customary conditions, including but not limited to (i) the approval of the HNC Merger Agreement by both the shareholders of the Company and HNC and (ii) the requisite regulatory approvals of the HNC Merger and the proposed merger of the Company’s banking subsidiary, the Bank, with and into HNC’s banking subsidiary Harleysville National Bank, following consummation of the HNC Merger. The HNC Merger is intended to qualify as reorganization for federal income tax purposes, such that the shares of the Company exchanged for shares of HNC Common Stock will be issued to the Company’s shareholders on a tax-free basis.

The HNC Merger Agreement contains certain termination rights for each of the Company and HNC and further provides that, upon termination of the Merger Agreement under specified circumstances, the Company may be required to pay to HNC a termination fee of $7.0 million.

Effective on September 21, 2006, Willow Grove Bancorp Inc. and Willow Grove Bank changed their names to Willow Financial Bancorp, Inc. and Willow Financial Bank, respectively. As contained herein, 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 obtained from the Federal Home Loan Bank (“FHLB”) of Pittsburgh.

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 (“FFB”), a Pennsylvania chartered commercial bank  with 13 full-service banking offices, and Willow Investment Services (“WIS”), formerly Philadelphia Corporation for Investment Services (“PCIS”), a registered investment advisor and broker dealer. Pursuant to the Agreement and Plan of Merger, dated as of January 20, 2005 (the “Merger Agreement”), Chester Valley was merged with and into the Company, with the Company as the surviving corporation (the “Merger”), and Chester Valley was merged with and into the Bank with the Bank as the surviving bank (the “Bank Merger”). 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. (“Uvest”), a North Carolina Corporation and registered broker-dealer for consideration of $100 but providing that such shares may be repurchased for $100 at any 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 the Bank, and a Financial Services Agreement between

-13-
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. Since March 2007, PCIS has been doing business as “Willow Investment Services” (“WIS”). Upon consummation of the sale of PCIS stock to Uvest, WIS 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 WIS continue to be consolidated in the Company’s financial statements. The affiliation agreement with Uvest has the primary effect of relieving WIS 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. As of June 30, 2008, approximately $400 thousand of additional payments were earned and paid based on BeneServ achieving the established performance thresholds. Approximately $143 thousand of the additional payments were accrued and are included in other liabilities on the consolidated statement of financial condition. 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 as a result of this acquisition.

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

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

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

The consolidated financial statements include the balances of the Company and its wholly owned subsidiaries and business segments. 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. GAAP.

In preparing the consolidated financial statements, the Company is required to make certain estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the statement of financial condition and statement of operations for the period. Actual reports 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, income taxes, investment impairment, and intangible asset impairment.

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

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


-14-
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 (“AFS”) and mortgage servicing assets. The Company is subject to certain Federal banking laws and regulations as further described herein and in Note 19. 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 $108.6 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
  
$
145,334
  
Book value of Chester Valley
  
48,391
  
Adjustments to record assets and liabilities at fair value:
      
Loan discount
  
(1,181
)
FHLB advance discount
  
(1,747
)
Certificate of deposit premium
  
(1,036
)
Trust preferred premium
  
(277
)
Write-off existing intangibles
  
(3,193
)
Other liabilities
  
(3,505
)
Market value adjustment on premises and equipment
  
(738
)
Core deposit intangible
  
14,883
  
Resulting goodwill
  
93,737
  
 
The following table summarizes the pro forma operating results of the Company 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
  
34,390
  
Provision for loan losses
  
3,824
  
Other income
  
8,620
  
Other expense
  
53,955
  
Income before tax
  
3,957
  
Income tax
  
1,000
  
Net income
  
2,957
  
Non-recurring items(a)
  
5,492
  
Adjusted net income(b)
  
$
8,449
  
Earnings per Share:
      
Basic
  
$
0.21
  
Diluted
  
$
0.20
  
 

-15-
 
(a)
Reflects gross losses on securities sales ($1.8 million), professional fees ($1.8 million) and stock option compensation payments to holders of certain Chester Valley options ($4.7 million).

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

The Company has deemed the acquisitions of BeneServ and Carnegie 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 certain estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the statement of financial condition and statement of operations 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, securities valuation, income taxes and intangible asset impairment. Management believes that the allowance for loan losses, the balances in income tax accounts and the determination of the intangible asset and investment impairment 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.

 
Investment Securities

The Company divides its securities portfolio into three segments: (a) Held-to-maturity (“HTM”), (b) AFS and (c) trading. Securities in the HTM 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 AFS 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 HTM and AFS 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. FHLB of Pittsburgh stock, which is not readily marketable, is 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 AFS. 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.

 
Loans Held for Sale
 
 
Real estate 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


-16-

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.

 
Loans Receivable

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.

 
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, “Selected Loan Loss Allowance Methodology and Documentation Issues.” 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.

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

 
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.

-17-

 
Goodwill and Other Intangible Assets

Goodwill represents the excess cost over fair value of assets acquired over liabilities as a result of the Merger, and other previously disclosed 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 twelve-year life using a method that approximates a level yield method. A customer intangible recorded as a result of the acquisitions of BeneServ and Carnegie are being amortized to expense over  ten-year lives. The Company follows the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets,” and performs impairment tests of the intangible assets at least annually and impairment losses are recognized if the carrying value of the intangible exceeds its fair value. As discussed in Note 9 of the Notes to the Consolidated Financial Statements, the Company recorded an impairment charge to goodwill for the quarter ended December 31, 2007 in the amount of $40.0 million.

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.

 
(Loss) / Earnings Per Share

(Loss) / 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, which is computed in 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.

Recently Issued Accounting Pronouncements

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

FASB Statement No.  162, The Hierarchy of Generally Accepted Accounting Principles

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

FASB Staff Position FSP No. FAS 142-3, Determination of the Useful Life of Intangible Assets

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

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FASB Statement No. 161, Disclosures about Derivative Instruments and Hedging Activities

In March 2008, the Financial Accounting Standards Board issued Statement No. 161, “Disclosures about Derivative Instruments and Hedging Activities.” Statement No. 161 requires disclosure of the fair values of derivative instruments and their gains and losses in a tabular format. It also requires disclosure of derivative features that are credit risk-related and cross-referencing within footnotes to enable financial statement users to locate important information about derivative instruments. Statement No. 161 is effective for financial statements issued for fiscal years and interim periods after November 15, 2008, with early application encouraged. The Company is evaluating the impact of Statement No. 161 on its consolidated financial statements.

FASB Statement No. 141(R), Business Combinations

In December 2007, the Financial Accounting Standards Board issued Statement No. 141(R), “Business Combinations.” Statement No. 141(R) requires the acquiring entity in a business combination to recognize all (and only) the assets acquired and liabilities assumed in the transaction; establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed; and requires the acquirer to disclose to investors and other users all of the information they need to evaluate and understand the nature and financial effect of the business combination. Statement No. 141(R) is effective for fiscal years beginning after December 15, 2008. The Company is evaluating the impact of Statement No. 141(R) on its consolidated financial statements.

FASB Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements

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

 
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 did not elect early adoption and is currently assessing the implications of this Statement on its consolidated financial statements.

 
FASB Statement No, 157, Fair Value Measurements

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). 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 consolidated financial statements.

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


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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 53,963 options were unawarded at June 30, 2008. Included in this amount are 419 shares forfeited during the year ended June 30, 2008. 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 224,913 were available for future grants at June 30, 2008. Included in this amount are 37,018 shares forfeited during the year ended June 30, 2008. 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 $145 thousand and 3.6 years, respectively at June 30, 2008. Compensation expense related to option awards was $134 thousand, $208 thousand, and $306 thousand for the years ended June 30, 2008, 2007 and 2006, respectively.

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

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

The Company expects approximately 1,719 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,
  
   
2008
    
2007
    
2006
  
Proceeds of options exercised
   $ 42,694     $ 1,390,643     $ 1,275,040  
                         
Related tax benefit recognized
     8,628       234,024       198,851  
                         
Intrinsic value of options exercised
     19,159       687,451       1,134,995  

 
The following table provides information about options outstanding and exercisable options at June 30, 2008:
 
 

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


 
-20-
The weighted average remaining contractual life for options outstanding and weighted average exercise price per share for exercisable options at June 30, 2008 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
  
104,817
  
$
3.79
  
1.3
104,817
  
$
3.79
  
$
7.50- $9.50
  
214,351
  
8.29
  
3.2
214,351
  
8.29
  
$
9.51- $14.00
  
501,580
  
12.15
  
4.7
452,361
  
12.04
  
$
14.01- $16.50
  
38,253
  
14.78
  
6.3
28,656
  
14.51
  
Total
  
859,001
  
$
10.28
  
4.0
800,185
  
$
10.04
  

The Company did not grant any stock options during the year ended June 30, 2008.  During the years ended June 30, 2007 and 2006, the Company granted 70,025 and 22,096 stock options respectively. The weighted average grant date fair value of options granted was $2.61 for the year ended June 30, 2007. The fair value for stock options granted is 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
  
2008
    
2007
  
Expected average risk-free interest rate
     n/a       4.63 %
Expected average life (in years)
     n/a       5.50  
Expected volatility
     n/a       25.03 %
Expected dividend yield
     n/a       3.72 %

The 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 $313,111 and $241,918 for the years ended June 30, 2008 and 2007, 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, 2008, 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, 2008, 207,551 granted shares were vested pursuant to the terms of the 2002 RRP. At the November 9, 2005 Annual Meeting, shareholders approved the 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, 2008, 192,382 shares were granted under the 2005 RRP; however, 23,285 shares were forfeited.

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


-21-
Activity in issued but unvested RRP shares under the three plans during the year ended June 30, 2008 was as follows:
RRP Shares
  
RRP Shares
    
Weighted
Average
Grant Date
Fair Value
  
Unvested awards beginning of period
     166,520     $ 13.85  
Granted
     16,871       8.39  
Vested
     (83,424 )     13.58  
Forfeited
     (11,118 )     14.08  
Unvested awards period end
     88,849     $ 13.08  
The aggregate intrinsic value of unvested RRP awards under the three plans at June 30, 2008 was $4 thousand.

6.
(Loss) / Earnings Per Share

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

The following is a reconciliation of the numerators and denominators of the basic and diluted (loss) / earnings per share calculations.
   
Year Ended June 30,
  
   
2008
    
2007
    
2006
  
   
Basic
    
Diluted
    
Basic
    
Diluted
    
Basic
    
Diluted
  
   
(Dollars in thousands, except share data)
  
Net (loss) / income
   $ (43,475 )   $ (43,475 )   $ 7,267     $ 7,267     $ 6,667     $ 6,667  
Dividends on unvested stock awards
     (34 )     (34 )     (56 )     (56 )     (76 )     (76 )
Income available to common stock holders
   $ (43,509 )   $ (43,509 )   $ 7,211     $ 7,211     $ 6,591     $ 6,591  
Weighted average shares outstanding
     15,126,078       15,126,078       15,117,871       15,117,871       13,934,631       13,934,631  
Effect of dilutive securities:
                                                
Common stock equivalents
     —       —       —       226,283       —       338,155  
Unvested stock awards
     —       —       —       6,705       —       18,915  
Adjusted weighted average shares used in earnings per share calculation
     15,126,078       15,126,078       15,117,871       15,350,859       13,934,631       14,291,701  
(Loss) / Earnings per share
   $ (2.88 )   $ (2.88 )   $ 0.48     $ 0.47     $ 0.47     $ 0.46  
The Company had 625,871 anti-dilutive shares at June 30, 2008.

7.           Investment Securities

HTM and AFS investment securities at June 30, 2008 and 2007 consisted of the following:
   
June 30, 2008
  
   
Amortized
cost
    
Unrealized
gains
    
Unrealized
losses
    
Estimated
fair value
  
   
(Dollars in thousands)
  
Investment securities held to maturity:
                        
Mortgage-backed securities:
                        
FNMA
   $ 13,507     $ 130     $ (144 )   $ 13,493  
FHLMC
     9,525       —       (155 )     9,370  
CMOs
     52,749       —       (1,998 )     50,751  
Total investment securities held to maturity
     75,781       130       (2,297 )     73,614  
Investment securities available for sale:
                                
US government agency securities
     24,330       55       (335 )     24,050  
Municipal bonds
     27,129       86       (1,477 )     25,738  
Mortgage-backed securities:
                                
FNMA
     63,011       101       (1,451 )     61,661  
GNMA
     1,983       —       (63 )     1,920  
FHLMC
     27,867       63       (421 )     27,509  
CMOs
     12,802       1       (947 )     11,856  
Corporate debt securities
     20,586       34       (2,260 )     18,360  
Equity securities
     10,227       23       (82 )     10,168  
Total investment securities available for sale
     187,935       363       (7,036 )     181,262  
Total investment securities
   $ 263,716     $ 493     $ (9,333 )   $ 254,876  

 
-22-

   
June 30, 2007
  
   
Amortized
cost
    
Unrealized
gains
    
Unrealized
losses
    
Estimated
fair value
  
   
(Dollars in thousands)
  
Investment securities held to maturity:
                        
Mortgage-backed securities:
                        
FNMA
   $ 16,253     $ 4     $ (414 )   $ 15,843  
FHLMC
     11,839       —       (455 )     11,384  
CMOs
     60,271       —       (1,010 )     59,261  
Total investment securities held to maturity
     88,363       4       (1,879 )     86,488  
Investment securities available for sale:
                                
US government agency securities
     35,285       —       (1,077 )     34,208  
Municipal bonds
     30,585       55       (635 )     30,005  
Mortgage-backed securities:
                                
FNMA
     38,007       5       (1,050 )     36,962  
FHLMC
     35,833       2       (1,028 )     34,807  
CMOs
     22,080       20       (331 )     21,769  
Corporate debt securities
     19,978       73       (625 )     19,426  
Equity securities
     11,464       69       (371 )     11,162  
Total investment securities available for sale
     193,232       224       (5,117 )     188,339  
Total investment securities
   $ 281,595     $ 228     $ (6,996 )   $ 274,827  
 
Proceeds from the sales of investment securities AFS for the years ended June 30, 2008, 2007 and 2006 were $76.8 million, $47.8 million, and $103.3 million, respectively. Gross gains of $198 thousand, $279 thousand and $533 thousand were realized in fiscal 2008, 2007, and 2006, respectively. There were gross losses of $0, $51 thousand and $1.5 million for fiscal 2008, 2007 and 2006, respectively. Additionally, there were no recognized losses in fiscal 2007 and 2006 resulting from other-than-temporary declines in values of certain equity securities; however, in fiscal 2008, the Company recorded an impairment charge of approximately $1.9 million related to the holding of certain debt securities, mutual funds, and common stock on two Pennsylvania financial institutions and another financial services related equity security.
 
At June 30, 2008, investment securities with a total carrying value of $85.7 million are held as collateral for the Company’s reverse repurchase arrangements. Accrued interest receivable on investment securities amounted to $1.7 million and $1.5 million at June 30, 2008 and 2007, respectively.
 
The amortized cost and estimated fair value of investment securities HTM and AFS at June 30, 2008, by contractual maturity, are shown below.
 
   
1 year
or less
    
After 1 year
but less than
5 years
    
After 5 years
but less than
10 years
    
After 10 years
or with
no stated
maturity
    
Total
  
   
(Dollars in thousands)
  
US government agency securities
   $ —     $ 7,424     $ 1,973     $ 14,653     $ 24,050  
Mortgage-backed securities and CMOs
     1,291       4,497       25,750       145,022       176,560  
Municipal bonds
     343       1,171       1,709       22,515       25,738  
Corporate bonds
     —       —       1,208       17,152       18,360  
Equity securities
     —       —       —       10,168       10,168  
Total investment securities at fair value
   $ 1,634     $ 13,092     $ 30,640     $ 209,510     $ 254,876  
                                         
Total investment securities at amortized cost
   $ 1,633     $ 13,108     $ 31,309     $ 217,666     $ 263,716  
 

-23-
The Company must maintain ownership of specified amounts of stock as a member of the FHLB. The Company’s ownership of FHLB stock was $15.8 million and $11.4 million as of June 30, 2008 and 2007, 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 $24.1 million of U.S. Government agency securities at June 30, 2008, none are callable within one year.
 
As described in Note 12, certain investment securities AFS are maintained to collateralize advances from the FHLB. Provided below is a summary of investment securities classified as HTM and AFS, which were in an unrealized loss position at June 30, 2008 and 2007. Approximately $2.2 million, or 23.8%, of the unrealized loss at June 30, 2008 was comprised of securities in a continuous loss position for twelve months or more, which included certain equity securities. 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 included certain equity securities.
 
   
June 30, 2008
  
   
Under One Year
    
One Year or More
  
   
Estimated
Fair Value
    
Gross
Unrealized
Losses
    
Estimated
Fair Value
    
Gross
Unrealized
Losses
  
   
(Dollars in thousands)
  
Investment securities held to maturity:
                        
Mortgage-backed securities:
                        
FNMA
   $ 6,777     $ (144 )   $ —     $ —  
FHLMC
     9,370       (155 )     —       —  
CMOs
     34,988       (887 )     15,763       (1,111 )
Total investment securities held to maturity
     51,135       (1,186 )     15,763       (1,111 )
Investment securities available for sale:
                                
US government agency securities
     12,722       (192 )     4,351       (143 )
Mortgage-backed securities:
                                
FNMA
     47,466       (1,353 )     6,728       (98 )
GNMA
     1,920       (63 )     —       —  
FHLMC
     19,996       (400 )     1,527       (21 )
CMOs
     10,100       (834 )     1,390       (113 )
Corporate debt securities
     7,055       (1,456 )     7,148       (804 )
Municipal bonds
     16,914       (1,477 )     —       —  
Equity securities
     1,941       (82 )     —       —  
Total investment securities available for sale
     118,114       (5,857 )     21,144       (1,179 )
Total investment securities
   $ 169,249     $ (7,043 )   $ 36,907     $ (2,290 )
 
 
   
June 30, 2007
  
   
Under One Year
    
One Year or More
  
   
Estimated
Fair Value
    
Gross
Unrealized
Losses
    
Estimated
Fair Value
    
Gross
Unrealized
Losses
  
   
(Dollars in thousands)
  
Investment securities held to maturity:
                        
Mortgage-backed securities:
                        
FNMA
   $ —     $ —     $ 15,007     $ (414 )
FHLMC
     —       —       11,384       (455 )
CMOs
     —       —       59,261       (1,010 )
Total investment securities held to maturity
     —       —       85,652       (1,879 )
Investment securities available for sale:
                                
US government agency securities
     18,625       (777 )     15,583       (300 )
Mortgage-backed securities:
                                
FNMA
     1,077       (8 )     35,105       (1,042 )
FHLMC
     —       —       34,053       (1,027 )
CMOs
     7,727       (83 )     11,731       (249 )
Corporate debt securities
     8,257       (238 )     3,036       (386 )
Municipal bonds
     15,795       (636 )     —       —  
Equity securities
     —       —       10,511       (371 )
Total investment securities available for sale
     51,481       (1,742 )     110,019       (3,375 )
Total investment securities
   $ 51,481     $ (1,742 )   $ 195,671     $ (5,254 )
 
-24-

Securities 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 included 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 through a charge to earnings in the statement of operations. Based upon an evaluation performed as of June 30, 2008, the Company recorded impairment charges of approximately $1.9 million for the year ended June 30, 2008 related to the holding of certain debt securities, mutual funds, and common stock on two Pennsylvania financial institutions and another financial services related equity security.

For the remaining unrealized loss not considered other-than-temporarily impaired, the Company has both the ability and intent to hold fixed income securities until such time as the value recovers or the security matures and for the equity securities management believes that, other than the aforementioned impairment charge, the unrealized losses are temporary and overall not significant to the value of equity securities and therefore believes that the above individual unrealized losses at June 30, 2008 are not other-than-temporary impairments.

8.
Loan Portfolio

Information about the Bank’s loans receivable is presented below as of and for the periods indicated:

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

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

As of June 30, 2008, 2007 and 2006, the Company had impaired loans with a total recorded investment of $829 thousand, $1.4 million, and $12.8 million, respectively. Average impaired loans were $1.0 million, $7.0 million and $5.0 million for the years ended June 30, 2008, 2007 and 2006, respectively. Cash of $242 thousand, $116 thousand and $281 thousand was collected on these impaired loans during the years ended June 30, 2008, 2007 and 2006, respectively. Interest income of $19 thousand, $0 and $196 thousand was recognized on such loans during the years ended June 30, 2008, 2007 and 2006, respectively. As of June 30, 2008, 2007 and 2006, there were no recorded investments in impaired loans for which there was 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, 2008, 2007 and 2006:
 
   
For the year ended June 30,
  
   
2008
    
2007
    
2006
  
   
(Dollars in thousands)
  
Balance at the beginning of the period
   $ 12,210     $ 16,737     $ 6,113  
Plus: Provisions for loan losses
     3,173       653       3,380  
Less charge-offs for:
                        
Real estate loans
     (82 )     (76 )     (24 )
Consumer loans
     (517 )     (277 )     (237 )
Commercial real estate loans
     —       (1,848 )     —  
Commercial business loans
     (87 )     (3,185 )     (47 )
Total charge-offs
     (686 )     (5,386 )     (308 )
Plus: Recoveries
     96       206       615  
Allowance acquired in the Merger
     —       —       6,937  
Balance at the end of the period
   $ 14,793     $ 12,210     $ 16,737  
 
-25-

9.           Goodwill and Other Intangible Assets

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

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

Year ending
  
(Dollars in
thousands)
  
June 30, 2009
  
$
2,285
  
June 30, 2010
  
2,108
  
June 30, 2011
  
1,930
  
June 30, 2012
  
1,752
  
June 30, 2013
  
1,574
  
   
$
9,649
  
 
The Company follows the provisions of SFAS No. 142, “Goodwill and Other Intangibles,” and performs an annual impairment test of goodwill. However, when circumstances indicate that an event has occurred during an interim period, the Company will perform an impairment test at that time. The Company determined that such an event occurred during the quarter ended December 31, 2007.
 
During this period, conditions in the housing market continued to deteriorate resulting in a tightening of available credit in the marketplace. Additionally, several companies that specialized in sub-prime lending declared bankruptcy. These market conditions and related concerns surrounding credit caused valuations for thrifts and other financial institutions to decrease significantly during the quarter ended December 31, 2007. The market price of the Company’s stock declined from $12.43 on October 1, 2007 to $8.39 at December 31, 2007.
 
As a result of the above conditions, the Company completed an interim impairment test of goodwill. The review encompasses a two-step process. The first step requires the Company to identify the reporting units and compare the fair value of each reporting unit, which an earnings multiple approach and various transaction market approaches are used in the computation. Valuations were performed for each of the Company’s three reporting units. The Company’s completion of Step 1 indicated that impairment may exist in the Banking unit and therefore the Company completed the second step. In the second step, the implied fair value of goodwill is calculated as the excess of the fair value of the reporting unit over the fair values assigned to its assets and liabilities. As a result of this impairment test, the Company recorded an impairment charge of $40.0 million related to its Banking unit for the quarter ended December 31, 2007. The impairment charge had no impact on the Company’s or the Bank’s tangible capital nor did it impact the Company’s tangible book value per share. Additionally, this impairment charge did not result from deterioration in the Company’s core deposit intangible.  The Company performed an additional impairment evaluation at June 30, 2008 and concluded that no additional impairment had occurred from the date of the previous assessment.
 
10.           Property and Equipment
 
Property and equipment by major classification are summarized as follows:
 
     
For the year ended
June 30,
  
 
Depreciable life
  
2008
    
2007
  
     
(Dollars in thousands)
  
Land
     $ 1,129     $ 1,129  
Buildings
15 to 40 years
     8,680       6,849  
Furniture, fixtures and equipment
3 to 7 years
     10,982       10,806  
Total
       20,791       18,784  
Accumulated depreciation
       (10,379 )     (7,477 )
Property and equipment, net
     $ 10,412     $ 11,307  
 

-26-
Depreciation expense for the years ended June 30, 2008, 2007 and 2006 amounted to $3.0 million, $2.6 million and $1.8 million, respectively.
 
In February 2006, the Bank completed a sale-leaseback of eight of its branch officers 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 FFB branches of $194 thousand reduced goodwill while the balance of such premium of $528 thousand is deferred and amortized as a reduction of rent expense over the term of the leases.
 
11.
Deposits
 
 
Deposit balances consisted of the following at June 30, 2008, and 2007:
 
   
June 30, 2008
  
June 30, 2007
  
   
Amount
  
Percent of
total
  
Amount
Percent of
total
  
   
(Dollars in thousands)
  
Savings accounts
  
$
80,982
  
8.1
%
$
87,565
8.0
%
Money market deposit accounts
  
408,990
  
40.8
  
403,487
36.9
  
Certificates less than $100,000
  
192,484
  
19.2
  
239,967
22.0
  
Certificates $100,000 and greater
  
57,048
  
5.7
  
94,705
8.7
  
Interest-bearing checking accounts
  
132,936
  
13.2
  
125,905
11.5
  
Non-interest bearing checking accounts
  
130,438
  
13.0
  
141,101
12.9
  
Total deposits
  
$
1,002,878
  
100.0
%
$
1,092,730
100.0
%
 
While certificates are frequently renewed at maturity rather than paid out, a summary of certificates by contractual maturity and rate at June 30, 2008 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%
   $ 30,871     $ 26,666     $ 7,650     $ 1,401     $ 1,135  
3.00% to 3.99%
     10,311       25,536       7,898       866       931  
4.00% to 4.99%
     53,353       29,804       30,063       3,728       4,532  
5.00% to 5.99%
     8,454       1,888       2,945       141       712  
6.00% and over
     38       5       327       149       128  
Total
   $ 103,027     $ 83,899     $ 48,883     $ 6,285     $ 7,438  

As of June 30, 2008, contractual maturities of certificates of deposit were:
Year ending
  
(Dollars in thousands)
  
June 30, 2009
  
$
186,926
  
June 30, 2010
  
48,883
  
June 30, 2011
  
6,285
  
June 30, 2012
  
3,834
  
June 30, 2013
  
2,368
  
Thereafter
  
1,236
  
   
$
249,532
  

Interest expense on deposits for the years ended June 30, 2008, 2007 and 2006 consisted of the following:
 
   
For the year ended June 30,
  
   
2008
    
2007
    
2006
  
   
(Dollars in thousands)
  
Savings accounts
   $ 14,419     $ 15,460     $ 6,808  
Checking accounts
     452       349       1,962  
Certificates
     13,349       12,889       9,706  
Total interest expense
   $ 28,220     $ 28,698     $ 18,476  

-27-
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 real estate loans and U.S. government agency, and mortgage-backed securities) in the amount of at least as much as its advances from the FHLB. The Company’s FHLB stock is also pledged to secure these advances.
 
At June 30, 2008, the Company’s FHLB advances have contractual maturities as follows:
 
   
Amount
outstanding
  
Weighted
average rate
  
   
(dollars in thousands)
  
Due by:
          
June 30, 2009
  
$
24,696
  
4.0
%
June 30, 2010
  
24,724
  
3.9
  
June 30, 2011
  
37,127
  
4.7
  
June 30, 2012
  
48,969
  
3.6
  
June 30, 2013
  
54,937
  
3.3
  
Thereafter
  
120,975
  
3.6
  
Total
  
$
311,428
  
3.8
%
 
At June 30, 2008, $242.5 million of the above advances were callable at the direction of the FHLB within certain parameters, of which $192.5 million could be called within one year. Included in the $192.5 million are $47.5 million in advances which could only be called if an index reaches a certain strike rate. At June 30, 2008, 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 the 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, 2008, the Bank had $75.0 million outstanding in repurchase agreements with a weighted average interest rate of 4.01%. The underlying securities collateralizing these repurchase agreements had a market value of $85.7 million at June 30, 2008. In addition, the Company had $1.5 million in secured borrowings at June 30, 2008 related to certain commercial business loan relationships.
 
14.           Capital Stock
 
On July 24, 2007, the Company declared a cash dividend on its common stock of $0.115 per share, paid on August 24, 2007, to owners of record on August 10, 2007. On October 23, 2007, the Company declared a cash dividend on its common stock of $0.115 per share, paid on November 23, 2007, to owners of record on November 9, 2007. On February 11, 2008, the Company declared a cash dividend on its common stock of $0.115 per share, paid on February 29, 2008, to owners of record on February 22, 2008. On May 21, 2008, the Company declared a cash dividend on its common stock of $0.115 per share, paid on May 29, 2008, to shareholders of record on May 22, 2008.
 

-28-
15.            Income Taxes

Income tax expense (benefit) for the years ended June 30, 2008, 2007 and 2006 consisted of the following:
 
     
Current
    
Deferred
    
Total
  
     
(Dollars in thousands)
  
For the year ended June 30, 2008
Federal
   $ 567     $ (2,780 )   $ (2,213 )
 
State
     85       —       85  
 
Total
   $ 652     $ (2,780 )   $ (2,128 )
For the year ended June 30, 2007
Federal
   $ 1,150     $ 1,718     $ 2,868  
 
State
     18       —       18  
 
Total
   $ 1,168     $ 1,718     $ 2,886  
For the year ended June 30, 2006
Federal
   $ 697     $ 2,289     $ 2,986  
 
State
     24       —       24  
 
Total
   $ 721     $ 2,289     $ 3,010  
 
The expense (benefit) for income taxes differed from that computed at the statutory federal corporate rate for the years ended June 30, 2008, 2007 and 2006 as follows:
 
   
For the year ended June 30,
  
   
2008
  
2007
  
2006
  
   
Amount
  
Percent of
pretax
loss
  
Amount
  
Percent of
pretax
income
  
Amount
  
Percent of
pretax
income
  
   
(Dollars in thousands)
  
At statutory rate
  
$
(15,505
)
34.0
%
$
3,554
  
35.0
%
$
3,387
  
35.0
%
State tax, net of federal tax benefit
  
56
  
(0.1
)
12
  
0.1
  
15
  
0.2
  
Low income housing credits
  
(183
)
0.4
  
(162
)
(1.6
)
(154
)
(1.6
)
Tax-exempt interest
  
(676
)
1.5
  
(601
)
(5.9
)
(269
)
(2.8
)
Meals and entertainment
  
14
  
0.0
  
11
  
0.1
  
6
  
0.1
  
BOLI
  
(163
)
0.4
  
(152
)
(1.5
)
(130
)
(1.3
)
Dividends on ESOP shares
  
(63
)
0.1
  
(93
)
(0.9
)
(106
)
(1.1
)
ESOP compensation expense
  
91
  
(0.2
)
138
  
1.4
  
174
  
1.8
  
Change in statutory federal tax rate
  
108
  
(0.3
)
—
  
—
  
(93
)
(1.0
)
Goodwill impairment
  
13,600
  
(29.8
)
—
  
—
  
—
  
—
  
HNC transaction costs
  
80
  
(0.2
)
—
  
—
  
—
  
—
  
Valuation allowance
  
354
  
(0.8
)
—
  
—
  
—
  
—
  
Other
  
159
  
(0.3
)
179
  
1.7
  
180
  
1.8
  
Income tax (benefit) expense
  
$
(2,128
)
4.7
%
$
2,886
  
28.4
%
$
3,010
  
31.1
%
 
Significant deferred tax assets and liabilities included in other assets and liabilities of the Company as of June 30, 2008 and 2007 are as follows:
   
June 30,
  
   
2008
    
2007
  
   
(Dollars in thousands)
  
Deferred loan fees
   $ 81     $ 84  
Retirement plan reserves
     473       488  
Employee benefits
     180       234  
Uncollected interest
     260       78  
Book bad debt reserves
     5,030       4,274  
Unrealized loss on investment securities available for sale
     2,270       1,712  
Investment impairment
     1,060       1,360  
Investment in joint venture
     190       236  
Loan discounts
     40       66  
Sale/Leaseback
     184       159  
Purchase accounting fair value adjustments
     77       88  
Securities write-downs
     313       —  
Money market fee reserves
     322       —  
Net operating loss carryover
     616       —  
Charitable contribution carryover
     67       —  
Low income housing credit carryover
     1,103       686  
AMT credit carryover
     876       691  
Other, net
     247       222  
Gross deferred tax assets
     13,389       10,378  
Valuation allowance
     (354 )     —  
Gross deferred tax assets, net of valuation allowance
     13,035       10,378  
Intangible asset amortization
     (2,463 )     (3,022 )
Depreciation
     (293 )     (372 )
Other
     (56 )     (99 )
Gross deferred tax liabilities
     (2,812 )     (3,493 )
Net tax deferred asset
   $ 10,223     $ 6,885  
 

-29-

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, 2008, the Company had a gross operating loss carryforward for U.S. federal income tax purposes of $1.8 million that expires in 2028.  The Company believes that all of its federal net operating loss carryforward, tax credits and a majority of the deferred tax assets are more likely than not to be recovered. The remaining deferred tax assets are offset by a valuation allowance of $354 thousand and $0 at June 30, 2008 and 2007, respectively.  The valuation allowance for the year ended June 30, 2008 of $354 thousand relates entirely to unrealized capital losses that the Company believes are not more likely than not to be recovered.
 
At June 30, 2008, the Company had $1.1 million in low income housing tax credit carry-forwards. These carry-forwards expire after June 30, 2026 if not utilized. In addition, the Company has $876 thousand of alternative minimum tax credit carry-forwards that have an indefinite life.
 
The Small Business Job Protection Act of 1996 (the “1996 Act”) eliminated the use of the reserve method of accounting for bad debt reserves 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, 2008, 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.
 
Effective July 1, 2007, the Company adopted Financial Interpretation No. 48, “Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 provides guidance on financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. According to FIN 48, a tax position is recognized if it is more-likely-than-not that the tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. If the tax position meets the more-likely-than-not recognition threshold, the position is measured to determine the amount of benefit to recognize and should be measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. FIN 48 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. As of June 30, 2008, the Company had no material unrecognized tax benefits, accrued interest or penalties.  Penalties are recorded in non-interest expense in the year they are assessed and are treated as a non-deductible expense for tax purposes. Interest is recorded in non-interest expense in the year it is assessed and is treated as a deductible expense for tax purposes. As of June 30, 2008, tax years 2005 through 2007 remain subject to Federal examination as well as examination by state taxing jurisdictions.
 
16
Benefit Plans
 
 
 
Employee Stock Ownership Plan / 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 employee’s 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 $773 thousand, $628 thousand, and $255 thousand for the years ended June 30, 2008, 2007, and 2006, respectively.
 
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, 2008, there were 496,323 ESOP shares allocated to participants, representing a fair value of $4.0 million, in addition, there were 64,533 shares committed to be released. The
 

-30-
Company recorded compensation expense of $618 thousand, $890 thousand and $955 thousand for the ESOP for the years ended June 30, 2008, 2007 and 2006, 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 $784 thousand and $608 thousand, and $801 thousand and $648 thousand at June 30, 2008 and 2007, respectively. Effective in fiscal year 2008, the Company maintains a Supplemental Executive Retirement Plan for certain executives. The accrued liability of this plan was $307 thousand at June 30, 2008.
 
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.
 
17.
Commitments and Contingencies
 
 
At June 30, 2008 and 2007, the Company was committed to fund loans as follows:
 
   
June 30,
  
   
2008
    
2007
  
   
(Dollars in thousands)
  
Loans with fixed interest rates
   $ 23,985     $ 21,316  
Loans with variable interest rates
     12,371       6,041  
Total commitments to fund loans
   $ 36,356     $ 27,357  
 
 
Financial Instruments With Off-Balance 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. At June 30, 2008 and June 30, 2007, respectively, the Company was committed to the funding of first single family residential real estate loans of $31.8 million and $15.3 million, respectively, construction loans of $58.8 million and $48.7 million, respectively, commercial real estate loans of $4.0 million and $1.8 million, respectively, lines of credit of $172.7 million and $164.8 million, respectively, and standby letters of credit of $10.9 million and $16.8 million, respectively.
 
 
Guarantees
 
 
In the normal course of business, the Company sells loans in the 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 consolidated financial statements for such estimated losses.
 
On May 12, 2003, the Company entered into a sales and servicing master agreement with the FHLB of Pittsburgh. 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, 2008. The fair value of these guarantees was determined to be insignificant at June 30, 2008.
 
-31-
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 Cincinnati 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 “School District Litigation”). Willow Financial Bank filed an answer and counterclaim on September 20, 2007 seeking damages for Cincinnati’s breach of contract for failure to defend and for bad faith.  Cincinnati answered the Counterclaim and denied all of the Bank’s allegations. Willow Financial Bank has served discovery and received documents from Cincinnati and its counsel.  Cincinnati has not served any discovery. Willow Financial Bank filed a Motion for Judgment on the Pleadings as to Cincinnati’s duty to defend the Bank in the School District Litigation. Cincinnati filed its own Motion for Judgment on the Pleadings. Willow Financial Bank filed an opposition to Cincinnati’s Motion, and Boyertown also filed an opposition to Cincinnati’s Motion. The trial judge heard argument on the Bank’s Motion and Cincinnati’s Motion on May 30, 2008.
 
In the normal course of business, the Company is involved in 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.
 

-32-

 
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 $3.0 million, $2.9 million, and $2.0 million for the years ended June 30, 2008, 2007 and 2006, respectively. Minimum payments over the remainder of the leases are summarized as follows:
 
   
Minimum lease
payments
  
   
(Dollars in thousands)
  
Year ended:
      
June 30, 2009
  
$
2,740
  
June 30, 2010
  
2,368
  
June 30, 2011
  
2,179
  
June 30, 2012
  
1,914
  
June 30, 2013
  
1,769
  
Thereafter
  
15,403
  
Total
  
$
26,373
  
 
18.
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 swap options or combinations thereof to assist in its asset/liability management. In accordance with SFAS No. 133, “Accounting for Derivative Instruments,” the Company must document 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 in order to qualify for hedge accounting treatment. 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.
 
At June 30, 2008, the Company had four interest rate swap arrangements used to hedge specific loans originated by the Bank. The swaps effectively convert the rates from a fixed rate to a floating rate based on Libor throughout the life of the underlying loans. At June 30, 2008, the total outstanding notional amount on these swaps was $7.6 million. The weighted average floating and fixed rates on these transactions were 2.95% and 4.73%, respectively at June 30, 2008. The Company does not maintain sufficient documentation for these transactions to receive hedge accounting treatment and thus all changes in the fair value of the derivatives is recorded in the consolidated statement of operations. As such, based on the decrease in the market value of the interest rate swaps during fiscal 2008, the Company recognized a loss of $251 thousand in other income in the consolidated statement of operations with respect to these four swap agreements. The Company has recorded a net payable of $55 thousand at June 30, 2008 as compared to a net receivable of $196 thousand at June 30, 2007.
 
As part of the Chester Valley Merger, the Company assumed 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 Chester Valley 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 the 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”),
 
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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 the 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.
 
19.
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 consolidated 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, 2008, the Bank had regulatory capital, which was well in excess of regulatory limits set by the OTS. 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, 2008
                      
Tangible capital (to tangible assets)
  
$
109,164
  
7.2
%
$
22,845
1.5
%
$
30,460
2.0
%
Core capital (to adjusted tangible assets)
  
109,164
  
7.2
%
60,920
4.0
%
76,151
5.0
%
Tier I capital (to risk-weighted assets)
  
109,164
  
11.3
%
N/A
N/A
  
57,684
6.0
%
Risk-based capital (to risk-weighted assets)
  
120,720
  
12.6
%
76,912
8.0
%
96,140
10.0
%
As of June 30, 2007
                      
Tangible capital (to tangible assets)
  
$
117,703
  
8.2
%
$
21,580
1.5
%
$
28,773
2.0
%
Core capital (to adjusted tangible assets)
  
117,703
  
8.2
%
57,547
4.0
%
71,933
5.0
%
Tier I capital (to risk-weighted assets)
  
117,703
  
12.2
%
N/A
N/A
  
57,682
6.0
%
Risk-based capital (to risk-weighted assets)
  
127,983
  
13.3
%
76,909
8.0
%
96,136
10.0
%
 
In its letter approving the Chester Valley Merger Agreement, the OTS, as one of the conditions for approval, indicated that, for the periods ending December 31, 2005, 2006, and 2007, the Bank was required to have tier one core 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. The Bank also was required to submit to the OTS, quarterly status reports detailing its compliance with the conditions on regulatory capital outlined in its approval letter. The OTS’ conditions for approval of the Chester Valley Merger also indicated that, for the periods ending December 31, 2005, 2006, and 2007, the Company must have consolidated tangible capital ratios at least equal to 5.14%, 5.59% and 6.12%, respectively. Both the Company and the Bank met these requirements on the respective dates required, and there are no further requirements other than for normal reporting purposes.
 
20.
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.
 
-34-
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 would be 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, 2008 and 2007:
 
Cash and Cash Equivalents, Accrued Interest Receivable, Deposits with No Stated Maturities, Accrued Interest Payable, and Certificates
 
These financial instruments have carrying values that approximate fair value.
 
 
Investment Securities Trading, Available for Sale and Held to Maturity
 
 
Current quoted market prices were used to determine fair value.
 
 
Loans Receivable
 
 
Fair values were estimated for portfolios of loans with 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 Held for Sale
 
 
The fair value of real estate 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.
 
-35-
The carrying amounts and estimated fair values of the Company’s financial instruments, including off-balance sheet financial instruments, at June 30, 2008 and 2007 are as follows:
   
June 30, 2008
    
June 30, 2007
  
   
Carrying
Amount
    
Fair
Value
    
Carrying
Amount
    
Fair
Value
  
   
(Dollars in thousands)
  
Assets:
                        
Cash and cash equivalents
   $ 36,182     $ 36,182     $ 60,277     $ 60,277  
Investment securities — trading
     1,282       1,282       1,176       1,176  
Investment securities available for sale
     181,262       181,262       188,339       188,339  
Investment securities held to maturity
     75,781       73,614       88,363       86,488  
Loans held for sale
     14,199       14,199       8,075       8,075  
Loans receivable, net
     1,136,839       1,114,375       1,035,293       1,020,289  
Accrued interest receivable
     6,181       6,181       6,654       6,654  
Liabilities:
                                
Deposits with no stated maturities
     622,908       622,908       758,058       758,058  
Certificates
     249,532       250,563       334,672       315,561  
FHLB advances
     311,428       296,940       189,764       183,429  
Trust preferred securities
     27,312       26,176       25,774       24,537  
Accrued interest payable
     1,708       1,708       2,303       2,303  

21.
Comprehensive (Loss) Income
 
 
The tax effects allocated to each component of other comprehensive (loss) income  are as follows:
 
   
Year ended June 30, 2008
  
   
Before tax
amount
    
Tax Effect
    
After tax
Amount
  
   
(Dollars in thousands)
  
Other comprehensive loss:
                  
Unrealized holding losses during the period
   $ (3,455 )   $ 1,174     $ (2,281 )
Reclassification adjustment for losses included in net loss
     1,671       (568 )     1,103  
Change in tax rate
     —       (48 )      (48 )
Total other comprehensive loss
   $ (1,784 )   $ 558     $ (1,226 )
 
   
Year ended June 30 2007
  
   
Before tax
amount
    
Tax Effect
    
After tax
Amount
  
   
(Dollars in thousands)
  
Other comprehensive income:
                  
Unrealized holding gains during the period
   $ 1,638     $ (587 )   $ 1,051  
Reclassification adjustment for gains included in net  income
     (228 )     80       (148 )
Gain on termination of interest rate corridor
     (804 )     281       (523 )
Net unrealized loss on cash flow hedge
     (376 )     133       (243 )
Total other comprehensive income
   $ 230     $ (93 )   $ 137  
 
   
Year ended June 30, 2006
  
   
Before tax
amount
    
Tax Effect
    
After tax
Amount
  
   
(Dollars in thousands)
  
Other comprehensive loss:
                  
Unrealized holding losses during the period
   $ (4,549 )   $ 1,612     $ (2,937 )
Reclassification adjustment for losses included in net income
     919       (322 )     597  
Net unrealized gain on cash flow hedge
     579       (203 )     376  
Total other comprehensive loss
   $ (3,051 )   $ 1,087     $ (1,964 )
 
22.
Segment Information
 
 
Under the definition of SFAS No. 131, “Disclosures About Segments of an Enterprise and Related Information,” the Company has three operating segments at June 30, 2008; Willow Financial Bank (“WFB”), BeneServ, and WIS (including Carnegie),
 

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as compared to two operating segments at 2007; WFB and WIS. The WFB segment primarily provides loan and deposit services to commercial and retail customers through its network of 29 branch locations. BeneServ, which was acquired on March 30, 2007, is an insurance agency serving the corporate employee benefit market segment. The WIS segment operates a full service investment advisory and securities brokerage firm.
 
Segment information for the twelve months ended June 30, 2008 and 2007 is as follows:
 
 
   
For the year ended June 30,
  
   
2008
    
2007
  
   
WFB
    
BeneServ
    
WIS
    
Total
    
WFB
    
WIS
    
Total
  
   
(Dollars in Thousands)
  
                                           
Interest income
   $ 84,681     $ —     $ —     $ 84,681     $ 86,050     $ —     $ 86,050  
Interest expense
     43,003       —       —       43,003       41,062       —       41,062  
Net interest income
     41,678       —       —       41,678       44,988       —       44,988  
Non-interest income
     8,728       2,288       2,757       13,773       9,958       2,309       12,267  
Depreciation expense
     2,924       12       20       2,956       2,598       —       2,598  
Income tax (benefit) expense
     (2,388 )     239       21       (2,128 )     2,752       134       2,886  
Total net (loss) income
     (43,980 )     465       40       (43,475 )     6,988       279       7,267  
Goodwill
     54,574       1,426       959       56,959                          
Total assets
     1,573,744       6,762       4,139       1,584,645       1,550,343       953       1,551,296  
 
23.           Parent Company Financial Information (Willow Financial Bancorp, Inc.)
 
 
Condensed Statements of Financial Condition
 
   
At
June 30, 2008
    
At
June 30, 2007
  
   
(Dollars in thousands)
  
Assets:
            
Cash in banks
   $ 407     $ 440  
Note receivable from subsidiary
     4,446       4,770  
Investment in subsidiaries
     166,653       213,742  
Investment securities — trading
     1,282       1,176  
Investment securities available for sale (amortized cost of $ and $789, respectively)
     664       827  
Goodwill
     6,526       6,526  
Other assets
     2,032       1,963  
Total Assets
   $ 182,010     $ 229,444  
Liabilities and Stockholders’ Equity:
                
Subordinated debentures
   $ 25,744     $ 25,744  
Other liabilities
     6,169       4,267  
Total Liabilities
     31,913       30,011  
Total Stockholders’ Equity
     150,097       199,433  
Total Liabilities and Stockholders’ Equity
   $ 182,010     $ 229,444  
 

Condensed Statements of Operations
 
   
For the year ended June 30,
  
   
2008
    
2007
    
2006
  
   
(Dollars in thousands)
  
Interest income:
                  
Interest income
   $ 19     $ 542     $ 401  
Total interest income:
     19       542       401  
Non-interest income:
                        
Realized (loss) gain on investments
     (133 )     49       51  
Other
     —       2       48  
Total non-interest income
     (133 )     51       99  
Total income
     (114 )     593       500  
Expense:
                        
Professional fees
     15       14       281  
Stationery and printing
     —       —       27  
Consulting services
     —       —       38  
Interest expense on subordinated debentures
     1,553       2,434       1,109  
Investor relations
     10       14       70  
Other
     169       600       425  
Total expense
     1,747       3,062       1,950  
Loss before taxes
     (1,861 )     (2,469 )     (1,450 )
Income tax benefit
     (633 )     (129 )     —  
Loss before equity in income of subsidiary
     (1,228 )     (2,340 )     (1,450 )
Equity in income of subsidiary
     (42,247 )     9,607       8,117  
Net (loss) income
   $ (43,475 )   $ 7,267     $ 6,667  
 
 
Condensed Statements of Cash Flows
 
   
For the year ended June 30,
  
   
2008
    
2007
    
2006
  
   
(Dollars in thousands)
  
Net (loss) income:
   $ (43,475 )   $ 7,267     $ 6,667  
Add (deduct) items not affecting cash flows from operating activities:
                        
Equity in undistributed income of subsidiary
     42,247       (9,607 )     (8,117 )
Realized loss (gain) on investments
     133       (49 )     (51 )
Increase in other assets
     (1,855 )     (2,872 )     (2,644 )
Purchase of investment securities — trading
     (106 )     (274 )     (849 )
Net tax payments received from subsidiary
     2,062       8,438       —  
Increase (decrease) in other liabilities
     1,902       4,108       (191 )
Net cash provided by (used in) operating activities
     908       7,011       (5,185 )
Cash flows from investing activities:
                        
Purchase of investment securities available for sale
     —       —       (10,054 )
Proceeds from sales and calls of securities available for sale
     30       10,054       4,476  
Net repayment (funding) of notes receivable
     324       (1,284 )     1,367  
Net cash used for acquisition
     —       —       (35,032 )
Net cash provided by (used in) investing activities
     354       8,770       (39,243 )
Cash flows from financing activities:
                        
Capital contribution to subsidiaries
     —       —       (15,000 )
Dividends received from subsidiary
     6,000       —       43,806  
Proceeds from stock issuance
     —       1,392       1,275  
Proceeds from issuance of subordinated debentures
     —       —       25,000  
Repayment of trust preferred securities
     (299 )     (10,454 )     —  
Treasury stock purchases
     —       (3,242 )     (179 )
Dividends paid
     (6,996 )     (6,920 )     (6,718 )
Net cash (used in) provided by financing activities
     (1,295 )     (19,224 )     48,184  
Net (decrease) increase in cash and cash equivalents
     (33 )     (3,443 )     3,756  
Cash and cash equivalents at beginning of period
     440       3,883       127  
Cash and cash equivalents at end of period
   $ 407     $ 440     $ 3,883  
 
24.
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 $154 thousand and $137 thousand at June 30, 2008 and 2007, respectively, and all such loans were performing in accordance with their terms at such dates.
 
25.
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,
 
-37-

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 2008, the Company paid cash dividends of $7.0 million, or $0.46 per share.

-38-

 9Ab. Internal Control over Financial Reporting
 
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
 
 
Management of the Company and the Bank is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in the Exchange Act. Under the supervision and with the participation of management, including our Chief Executive Officer and Principal Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO Framework).
 
 
In connection with the completion of our testing of the internal controls and a review of our financial statements for the year ended June 30, 2008 under the COSO Framework, in our Form 10-K filed for the year ended June 30, 2008, management identified a material weakness in our internal control over financial reporting as described below:
 
 
·  
Adequate accounting personnel time was not allocated to permit an effective review and analysis of journal entries and general ledger account reconciliations and to consider the financial reporting impact of routine and non-routine transactions.
 
 
This resulted in misstatements that were corrected prior to the issuance of the consolidated financial statements. As a result of this material weakness, there is more than 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.
 
 
Based on our assessment under the COSO Framework, management concluded that our internal control over financial reporting was not effective as of June 30, 2008.
 
 
Our independent auditor, KPMG LLP, the independent registered public accounting firm that audited the financial statements included in this report on Form 10-K, has issued a report on of the Company’s internal control over financial reporting. Their report appears in Item 8.
 
 
9Ac. Changes in Internal Control Over Financial Reporting
 
 
See Item 9Ad. below for details on the Company’s implementation of its remediation plan during the fiscal quarter ended June 30, 2008.
 
 
9Ad. Remediation of Material Weaknesses in Process
 
 
In connection with the restatement of the Company’s June 30, 2007 financial statements in May 2008, management formulated a remediation program and dedicated considerable resources to implement the necessary changes. As a result of this effort, progress has been made in the remediation of the material weaknesses reported in the restated financial statements. Those remediation efforts included:
 
·  
Key personnel in the Accounting and Finance department were changed and additional resources were added. In May 2008, the Chief Accounting Officer also assumed the role of principal financial officer. A Corporate Controller with bank accounting and internal audit experience was hired in November 2007. In addition, in May 2008, the Company created the position of Financial Controls Manager and filled it with an individual with both accounting and operations experience.

·  
A thorough review of the internal audit risk assessment and related scope was initiated and a plan was developed to include a comprehensive review of general ledger account reconciliations and related processes beginning in July 2008.
 
·  
Policies and procedures regarding the reconciliation and journal entry process were reinforced through training sessions held throughout the second half of the fiscal year to ensure appropriate supporting documentation existed for all significant transactions. In addition, management implemented a monthly checklist process to monitor the timely completion of general ledger account reconciliations.
 
 
In addition to the remediation efforts noted above, the Company has commenced the following corrective actions in fiscal year 2009 to remediate the material weakness noted above:
 
 
·  
Additional personnel were added to the accounting staff, through the use of external consultants and experienced temporary staff, to ensure that management has appropriate accounting resources to more effectively review and analyzejournal entries and general ledger account reconciliations and to consider sufficiently the financial reporting impact of routine and non-routine transactions.
 
 
-39-

 
 
·  
Internal audit began to execute on its enhanced audit plan which includes a comprehensive review of general ledger account reconciliations and the related processes.
 
 
·  
Management implemented a general ledger close within a specified time period whereby any subsequent entries would require the approval of a member of accounting management. In addition management implemented a process of monitoring the aging of reconciling items by appropriate level of management.
 
 
In light of the efforts made to address the out of balance condition and other previous material weaknesses, the Company was unable to fully remediate the previously disclosed material weaknesses. While Management believes that progress has been made towards resolving the material weakness described in 9Ab above, sufficient time has not transpired for management to fully validate whether the remediation procedures in place have resolved the material weakness which is identified and described above.
 
 

 
-40-
 
 
EX-99.2 4 exhibit992.htm UNAUDITED FINANCIAL STATEMENT - WILLOW FINANCIAL exhibit992.htm
Exhibit 99.2
Willow Financial Bancorp, Inc.
Consolidated Statements of Financial Condition
(Dollars in Thousands, Except for Share Amounts)

   
September 30,
2008
    
June 30,
2008
  
   
(unaudited)
        
Assets:
            
Cash and cash equivalents:
            
Cash in banks
   $ 26,193     $ 28,427  
Interest-earning deposits
     6,692       7,755  
Total cash and cash equivalents
     32,885       36,182  
Investment securities — trading
     1,231       1,282  
Federal Home Loan Bank stock
     17,869       15,803  
Investment securities available for sale (amortized cost of $206,516 and $187,935, respectively)
     195,032       181,262  
Investment securities held to maturity (fair value of $70,777 and $73,614, respectively)
     72,973       75,781  
Loans held for sale
     14,444       14,199  
Loans receivable
     1,147,077       1,150,820  
Deferred fees and costs, net
     648       812  
Allowance for loan losses
     (16,753 )     (14,793 )
Loans receivable, net
     1,130,972       1,136,839  
Accrued interest receivable
     6,376       6,181  
Property and equipment, net
     9,823       10,412  
Bank owned life insurance
     12,534       12,410  
Real estate owned
     465       166  
Other intangibles, net
     13,750       14,589  
Goodwill
     57,247       56,959  
Other assets
     21,369       22,580  
Total Assets
   $ 1,586,970     $ 1,584,645  
                 
Liabilities and Stockholders’ Equity
                
Liabilities:
                
Interest-bearing deposits
   $ 850,367     $ 872,440  
Non-interest bearing deposits
     119,496       130,438  
Securities sold under agreements to repurchase
     75,000       75,000  
Advance payments by borrowers for taxes and insurance
     2,108       4,192  
Federal Home Loan Bank advances
     357,809       311,428  
Trust preferred securities and other borrowings
     27,284       27,312  
Accrued interest payable
     1,630       1,708  
Other liabilities
     9,416       12,030  
Total Liabilities
     1,443,110       1,434,548  
                 
Commitments and contingencies
     —       —  
Stockholders’ Equity:
                
Common stock - $0.01 par value; 40,000,000 shares authorized; 17,493,025 and 17,493,825 shares issued at September 30, 2008 and June 30, 2008, respectively
     178       178  
Additional paid-in capital
     191,013       190,943  
Retained (deficit) earnings — substantially restricted
     (7,926 )     (4,441 )
Treasury stock (1,819,436 and 1,822,606 shares at September 30, 2008 and June 30, 2008, respectively, at cost)
     (30,205 )     (30,258 )
Accumulated other comprehensive loss
     (7,580 )     (4,406 )
Obligation of deferred compensation plan
     1,228       1,293  
Unallocated common stock held by:
                
Employee Stock Ownership Plan (ESOP)
     (1,963 )     (2,141 )
Recognition and Retention Plan Trust (RRP)
     (885 )     (1,071 )
Total Stockholders’ Equity
     143,860       150,097  
Total Liabilities and Stockholders’ Equity
   $ 1,586,970     $ 1,584,645  

See accompanying Notes to Consolidated Financial Statements


-41-
Willow Financial Bancorp, Inc.
Consolidated Statements of Operations
(Dollars in Thousands, Except for Per Share Amounts, Unaudited)

   
Three months Ended September 30,
  
   
2008
    
2007
  
             
Interest Income:
            
Loans
   $ 16,687     $ 17,503  
Mortgage-backed and investment securities
     3,628       4,262  
Total interest income
     20,315       21,765  
Interest Expense:
                
Deposits
     4,946       8,567  
Securities sold under agreements to repurchase
     769       282  
Borrowings
     3,261       2,610  
Total interest expense
     8,976       11,459  
Net Interest Income
     11,339       10,306  
Provision for loan losses
     2,350       242  
Net interest income after provision for loan losses
     8,989       10,064  
Non-interest income:
                
Investment services income, net
     1,335       1,094  
Income from insurance operations
     590       561  
Service charges and fees
     1,473       1,277  
Gain (loss) on:
                
Sale of loans
     485       685  
Securities available for sale
     (1,593 )     16  
Other
     549       233  
Total non-interest income
     2,839       3,866  
Non-interest expense:
                
Salaries and employee benefits
     7,284       6,969  
Occupancy and equipment
     2,161       2,201  
Data processing
     666       454  
Advertising
     306       295  
Deposit insurance premiums
     494       30  
Amortization of intangible assets
     551       525  
Professional fees
     1,531       510  
Other
     1,376       1,350  
Total non-interest expense
     14,369       12,334  
(Loss) income before income taxes
     (2,541 )     1,596  
Income tax (benefit) expense
     (858 )     438  
Net (Loss) / Income
   $ (1,683 )   $ 1,158  
(Loss) Earnings per share
                
Basic
   $ (0.11 )   $ 0.08  
Diluted
   $ (0.11 )   $ 0.08  
Dividends per share paid during period
   $ 0.12     $ 0.12  
Weighted average shares outstanding
                
Basic
     15,272,423       15,088,328  
Diluted
     15,351,509       15,219,164  

See accompanying Notes to Consolidated Financial Statements


-42-

Willow Financial Bancorp, Inc.
Consolidated Statements of Other Comprehensive (Loss) / Income
(Dollars in Thousands, Unaudited)

   
Three months Ended
September 30,
  
   
2008
    
2007
  
             
Net (loss) income
   $ (1,683 )   $ 1,158  
                 
Other comprehensive (loss) income, net of tax:
                
Net unrealized (losses) gains on securities available for sale during the period
     (4,225 )     778  
Change in tax rate
     —       (38 )
Reclassification adjustment for losses (gains) included in net (loss) income
     1,051       (11 )
Comprehensive (loss) income
   $ (4,857 )   $ 1,887  



See accompanying Notes to Consolidated Financial Statements


-43-
Willow Financial Bancorp, Inc.
Consolidated Statements of Cash Flows
(Dollars in Thousands, Unaudited)

   
Three months Ended
September 30,
  
   
2008
    
2007
  
             
Net (loss) income
   $ (1,683 )   $ 1,158  
Add (deduct) items not affecting cash flows from operating activities:
                
Depreciation
     655       714  
Amortization of premiums and accretion of discounts on investments, net
     (43 )     362  
Amortization of intangible assets
     551       525  
Provision for loan losses
     2,350       242  
Gain on sale of loans held for sale
     (485 )     (685 )
Loss (gain) on sale of investment securities
     —       (16 )
Investment impairment
     1,593       —  
Origination of loans held for sale
     (55,111 )     (40,427 )
Proceeds from the sale of loans held for sale
     55,351       30,470  
Decrease (increase) in trading account securities
     51       (59 )
Amortization (accretion) of deferred loan fees, discounts and premiums
     38       (116 )
Increase in accrued interest receivable
     (195 )     (1,166 )
Increase in value of bank owned life insurance
     (124 )     (119 )
Decrease in other assets
     2,846       528  
Decrease in other liabilities
     (2,614 )     (4,671 )
Stock based compensation
     422       526  
Excess tax benefits from stock-based compensation
     —       —  
Decrease in accrued interest payable
     (78 )     (175 )
Net cash provided by (used in) operating activities
     3,524       (12,909 )
Cash flows from investment activities:
                
Capital expenditures
     (66 )     (1,318 )
Net decrease (increase) in loans
     3,180       (37,462 )
Proceeds from maturities, sales, payments and calls of investment securities held to maturity
     2,810       3,824  
Purchase of securities available for sale
     (32,756 )     (15,506 )
Increase in FHLB stock
     (2,066 )     (2,723 )
Proceeds from sales and calls of securities available for sale
     12,633       7,764  
Net cash used in investment activities
     (16,265 )     (45,421 )
Cash flows from financing activities:
                
Net decrease in deposits
     (33,015 )     (47,210 )
Increase in securities sold under agreements to repurchase
     —       55,000  
Proceeds from FHLB advances
     252,207       135,000  
Repayments of FHLB advances
     (205,834 )     (118,800 )
Repayments of other borrowings
     (28 )     —  
Decrease in advance payments by borrowers for taxes and insurance
     (2,084 )     (1,963 )
Cash dividends on common stock
     (1,802 )     (1,728 )
Common stock repurchased
     —       (299 )
Net cash used in financing activities
     9,444       20,000  
Net decrease in cash and cash equivalents
     (3,297 )     (38,330 )
Cash and cash equivalents:
                
Beginning of period
     36,182       60,277  
End of period
   $ 32,885     $ 21,947  
Supplemental disclosures:
                
Cash payments during the year for:
                
Taxes
   $ —     $ 41  
Interest
   $ 9,054     $ 11,634  
Non-cash items:
                
Net unrealized (loss) gain on investment securities available for sale, net of tax
   $ (3,174 )   $ 778  
.
See accompanying Notes to Consolidated Financial Statements
 
 

 
-44-
Willow Financial Bancorp, Inc.
Notes to the Unaudited Consolidated Financial Statements

1.
Basis of Consolidated Financial Statement Presentation

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

Consummation of the Merger is subject to a number of customary conditions, including but not limited to (i) the approval of the Merger Agreement by both the shareholders of the Company and HNC and (ii) the requisite regulatory approvals of the Merger and the proposed merger of the Company’s banking subsidiary, Willow Financial Bank, with and into HNC’s banking subsidiary Harleysville National Bank, following consummation of the Merger. The Merger is intended to qualify as reorganization for federal income tax purposes, such that the shares of the Company exchanged for shares of HNC Common Stock will be issued to the Company’s shareholders on a tax-free basis.

The Merger Agreement contains certain termination rights for each of the Company and HNC and further provides that, upon termination of the Merger Agreement under specified circumstances, the Company may be required to pay to HNC a termination fee of $7.0 million.

The Boards of Directors of the Company and HNC approved the Merger Agreement on May 20, 2008. On September 10, 2008, shareholders of both the Company and HNC also approved the Merger Agreement.

On September 25, 2008, The Harleysville National Bank and Trust Company, received approval from the Office of the Comptroller of the Currency to acquire Willow Financial Bank.  The Office of Thrift Supervision has also not objected to the transaction.  HNC expects to receive the approvals from the Federal Reserve Board and the Pennsylvania Department of Banking in November 2008 to acquire Willow Financial Bancorp, Inc. in a previously announced transaction.  HNC expects to close the transaction by early December 2008. The Company has a contingent payment of $1.2 million due to its independent financial advisors upon the closing of the Merger.

The accompanying consolidated financial statements were prepared in accordance with instructions to Form 10-Q, and therefore, do not include information or footnotes necessary for a complete presentation of financial condition, results of operations and cash flows in conformity with U.S. generally accepted accounting principles (“GAAP”).  However, all normal, recurring adjustments, which, in the opinion of management, are necessary for a fair presentation of these financial statements, have been included.  These consolidated financial statements should be read in conjunction with the audited financial statements and the notes thereto in its Report on Form 10-K for the Company for the year ended June 30, 2008 and 2007 (File No. 0-49706).  The operating results for the interim periods presented are not necessarily indicative of the results that may be expected for the year ending June 30, 2009.

The accounting policies of the Company, as applied in the consolidated interim financial statements presented herein, are substantially the same as those followed on an annual basis as presented in note 4 of the Annual Report on Form 10-K for the fiscal year ended June 30, 2008.

The consolidated financial statements include the balances of the Company and its wholly owned subsidiaries and business segments.  All material inter-company balances and transactions have been eliminated in consolidation.

In preparing the consolidated financial statements, the Company is required to make certain estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the statement of financial condition and statement of operations 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, income taxes, intangible asset impairment and other-than-temporary impairment on investments.

-45-
2.           Recent Accounting Pronouncements

FASB Staff Position FSP No. 133-1 and FIN 45-4, Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of
FASB Statement No. 133 and FASB Interpretation No. 45; and Clarification of the Effective Date of FASB Statement No. 161

In September 2008, the Financial Accounting Standards Board issued FASB Staff Position FSP No. 133-1 and FIN 45-4, “Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB Interpretation No. 45; and Clarification of the Effective Date of FASB Statement No. 161.” The FSP is intended to improve disclosures about credit derivatives by requiring more information about the potential adverse effects of changes in credit risk on the financial position, financial performance, and cash flows of the sellers of credit derivatives. It amends FAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” to require disclosures by sellers of credit derivatives, including credit derivatives embedded in hybrid instruments. The FSP also amends FAS Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others,” to require an additional disclosure about the current status of the payment / performance risk of a guarantee. The provisions of the FSP that amend FAS No. 133 and FIN 45 are effective for reporting periods (annual or interim) ending after November 15, 2008. Finally, the FSP clarifies that the disclosures required by FAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities,” should be provided for any reporting period (annual or interim) beginning after November 15, 2008. This clarification was effective upon issuance of the FSP. The Company is evaluating the impact of FSP No. 133-1 and FIN 45-4 on its consolidated financial statements.

EITF 08-5, Fair Value Measurements of Liabilities with Third-Party Credit Enhancements

The Emerging Issues Task Force reached a consensus that issuers of liabilities with third-party credit enhancements should exclude the effect of the guarantee or other credit enhancement when measuring the liability at fair value. The requirement applies to fair value measurements of liabilities for disclosure purposes as well as to fair value measurements included in amounts on the face of the financial statements. The consensus does not apply to fair value measurements for holders of guaranteed debt. The consensus will be applied prospectively for the reporting period beginning after December 15, 2008. Companies are required to disclose the valuation technique used to measure those liabilities in earlier periods, and the existence of the credit enhancement. Early application is permitted.  The Company is evaluating the impact of FSP No. EITF 08-5 on its consolidated financial statements.

FASB Staff Position FSP No. FAS 142-3, Determination of the Useful Life of Intangible Assets

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

FASB Statement No. 161, Disclosures about Derivative Instruments and Hedging Activities

In March 2008, the Financial Accounting Standards Board issued Statement No. 161, “Disclosures about Derivative Instruments and Hedging Activities.” Statement No. 161 requires disclosure of the fair values of derivative instruments and their gains and losses in a tabular format. It also requires disclosure of derivative features that are credit risk-related and cross-referencing within footnotes to enable financial statement users to locate important information about derivative instruments. Statement No. 161 is effective for financial statements issued for fiscal years and interim periods after November 15, 2008, with early application encouraged. The Company is evaluating the impact of Statement No. 161 on its consolidated financial statements.

FASB Statement No. 141(R), Business Combinations

In December 2007, the Financial Accounting Standards Board issued Statement No. 141(R), “Business Combinations.” Statement No. 141(R) requires the acquiring entity in a business combination to recognize all (and only) the assets acquired and liabilities assumed in the transaction; establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed; and requires the acquirer to disclose to investors and other users all of the information they need to evaluate and understand the nature and financial effect of the business combination. Statement No. 141(R) is effective for fiscal years beginning after December 15, 2008. The Company is evaluating the impact of Statement No. 141(R) on its consolidated financial statements.

-46-

FASB Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements

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

SAB 109, Written Loan Commitments Recorded at Fair Value Through Earnings

In November 2007, the SEC issued SAB 109, “Written Loan Commitments Recorded at Fair Value through Earnings.” SAB 109 revises and rescinds portions of SAB 105, “Application of Accounting Principles to Loan Commitments.” The SEC staff’s current view is that the expected net future cash flows related to the associated servicing of a loan should be included in the measurement of derivative and other written loan commitments that are accounted for at fair value through earnings. That view is consistent with the guidance in Financial Accounting Standards Board (FASB) No. 156, “Accounting for Servicing of Financial Assets” and FASB No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” SAB 109 retains the view expressed in SAB 105 that internally developed intangible assets should not be recorded as part of the fair value of a derivative loan commitment. The guidance in SAB 109 is effective for derivative loan commitments issued or modified in fiscal quarters beginning after December 15, 2007 and should be applied prospectively. Currently, this SAB has not had any material impact on the Company.

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

Effective July 1, 2008, the Company adopted SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. This statement provides entities with an irrevocable option to report most financial assets and liabilities at fair value, with subsequent changes in fair value reported in earnings. The election can be applied on an instrument-by-instrument basis. The statement establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. The Company did not elect to measure any existing financial assets or liabilities at fair value that are not currently required to be measured at fair value upon adoption of this statement. The adoption of this statement did not have a material impact on the Company’s financial position or results of operations.

 
FASB Staff Position No. 157-2, Effective Date of FASB Statement No. 157,

In February 2008, the Financial Accounting Standards Board issued FASB Staff Position No. 157-2, “Effective Date of FASB Statement No. 157.” FSP No. 157-2 delays the effective date of FASB Statement No. 157, “Fair Value Measurements,” for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually) to fiscal years beginning after November 15, 2008 and interim periods within those fiscal years for items within the scope of this FSP. The Company elected to defer the adoption of SFAS No. 157 for nonfinancial assets and nonfinancial liabilities measured on a nonrecurring basis until July 1, 2009.

 
FASB Staff Position No. 157-3, Determining Fair Value of Financial Assets in Markets That Are Not Active

In October 2008, the Financial Accounting Standards Board issued FASB Staff Position No. 157-3, “Determining Fair Value of Financial Assets in Markets That Are Not Active.” FSP No. 157-3 clarifies how management’s internal cash flow and discount rate assumptions should be considered when measuring fair value when relevant observable data does not exist, how observable market information in a market that is not active should be considered when measuring fair value, and how the use of market quotes (e.g. broker quotes or pricing services for the same or similar financial assets) should be considered when assessing the relevance of observable and unobservable data available to measure fair value. This FSP is effective upon issuance, including prior periods for which financial statements have not been issued. The Company has made no material changes in its valuation techniques as a result of the adoption of FSP No. 157-3.

-47-

3.
Stock Compensation Plans

The Company periodically grants stock option and restricted stock awards to its employees, which vest over three to five year periods. The following table presents compensation expense and the related tax impacts for option and restricted stock awards recognized in the consolidated statements of operations:

   
Three months Ended
September 30,
  
   
(In thousands)
  
   
2008
    
2007
  
Compensation expense
   $ 198     $ 333  
Tax benefit
     (63 )     (113 )
Net income effect
   $ 135     $ 220  

4.
(Loss) / Earnings Per Share

(Loss)/earnings per share, basic and diluted, were both $(0.11) for the three months ended September 30, 2008, compared to $0.08 for the three months ended September 30, 2007.

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

   
Three months ended September 30,
  
   
2008
    
2007
  
(Dollars in thousands, except per share data)
  
Basic
    
Diluted
    
Basic
    
Diluted
  
Net (loss) income
   $ (1,683 )   $ (1,683 )   $ 1,158     $ 1,158  
Dividends on unvested common stock awards
     (4 )     (4 )     (12 )     (12 )
Net (loss) income available to common stockholders
   $ (1,687 )   $ (1,687 )   $ 1,146     $ 1,146  
                                 
Weighted average shares outstanding
     15,272,423       15,272,423       15,088,328       15,088,328  
Effect of dilutive securities:
                                
Common stock equivalents
     —       79,086       —       130,836  
Adjusted weighted average shares used in (loss) earnings per share computation
     15,272,423       15,351,509       15,088,328       15,219,164  
                                 
(Loss) earnings per share (1)
   $ (0.11 )   $ (0.11 )   $ 0.08     $ 0.08  

Anti-dilutive options for the three months ended September 30, 2008 and 2007 total 590,044 shares and 537,560 shares, respectively.

 
(1)  Diluted shares used in the diluted earnings per share calculation represent basic shares for the September 30, 2008 period due to the net loss. Using actual diluted shares would result in anti-dilution.

-48-
5.           Investment Securities

The amortized cost and estimated fair value of held to maturity and available for sale securities at September 30, 2008 and June 30, 2008 are as follows:

   
September 30, 2008
  
   
Amortized
cost
    
Unrealized
gains
    
Unrealized
losses
    
Estimated
fair value
  
   
(Dollars in thousands)
  
Investment securities held to maturity:
                        
Mortgage-backed securities:
                        
FNMA
   $ 13,077     $ 101     $ (98 )   $ 13,080  
FHLMC
     8,895       —       (104 )     8,791  
CMOs
     51,001       —       (2,095 )     48,906  
Total investment securities held to maturity
   $ 72,973     $ 101     $ (2,297 )   $ 70,777  
                                 
Investment securities available for sale:
                                
US government agency securities
   $ 27,312     $ 66     $ (287 )   $ 27,091  
Municipal bonds
     27,195       56       (3,427 )     23,824  
Mortgage-backed securities:
                                
FNMA
     66,222       98       (853 )     65,467  
GNMA
     18,912       —       (247 )     18,665  
FHLMC
     25,332       82       (269 )     25,145  
CMOs
     12,318       —       (911 )     11,407  
Corporate debt securities
     19,933       33       (5,781 )     14,185  
Equity securities
     9,292       48       (92 )     9,248  
Total investment securities available for sale
   $ 206,516     $ 383     $ (11,867 )   $ 195,032  
Total investment securities
   $ 279,489     $ 484     $ (14,164 )   $ 265,809  

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


-49-
Investment securities 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 through a charge to earnings in the statement of operations. Based upon an evaluation performed as of September 30, 2008, the Company recorded impairment charges of $1.6 million for the quarter ended September 30, 2008. For the year ended June 30, 2008, the Company also recorded impairment charges of $1.9 million. The impairment charges related to the holdings of certain debt securities, mutual funds, and common stock of two Pennsylvania financial institutions and another financial services related equity security for which the Company recorded impairment charges in prior periods.

For the remaining unrealized loss not considered other-than-temporarily impaired, the Company has both the ability and intent to hold fixed income securities until such time as the value recovers or the security matures, and for the equity securities management believes that, other than the aforementioned impairment charge, the unrealized losses are temporary and overall not significant to the value of equity securities and therefore believes that the above individual unrealized losses at September 30, 2008 are not other-than-temporary impairments.

Mortgage-backed securities include issues of the Federal National Mortgage Association, Federal Home Loan Mortgage Corporation, and the Government National Mortgage Association. None of the Company’s mortgage-backed securities include subprime or Alt-A components, and management believes that the unrealized losses on these securities at September 30, 2008 were principally a result of decreased liquidity and larger risk premiums in the marketplace.

6.           Loan Portfolio

Information about the Bank’s loans receivable portfolio is presented below as of and for the periods indicated:

   
As of
September 30, 2008
  
As of
June 30, 2008
  
(Dollars in thousands)
  
Amount
  
Percentage of
Total
  
Amount
  
Percentage of
Total
  
Real estate loans:
                  
Single-family residential
  
$
230,272
  
20.1
%
$
240,659
  
20.9
%
Commercial real estate and multi-family residential
  
335,614
  
29.3
  
338,037
  
29.4
  
Construction
  
87,619
  
7.6
  
90,848
  
7.9
  
Home equity
  
340,329
  
29.7
  
335,420
  
29.2
  
Total real estate loans
  
993,834
  
86.7
  
1,004,964
  
87.4
  
Consumer loans
  
3,573
  
0.3
  
3,598
  
0.3
  
Commercial business loans
  
149,670
  
13.0
  
142,258
  
12.3
  
Total loans receivable
  
1,147,077
  
100.0
%
1,150,820
  
100.0
%
                   
Allowance for loan losses
  
(16,753
)
    
(14,793
)
    
Deferred net loan origination fees and other discounts
  
648
      
812
      
Loans receivable, net
  
$
1,130,972
      
$
1,136,839
      

The following is a summary of the activity in the allowance for loan losses for the three months ended September 30, 2008 and 2007:

(Dollars in thousands)
  
2008
    
2007
  
Balance at the beginning of period
   $ 14,793     $ 12,210  
Plus: Provisions for loan losses
     2,350       242  
Less charge-offs for:
                
Real estate loans
     (126 )     (43 )
Consumer loans
     (154 )     (63 )
Commercial business loans
     (150 )     (7 )
Total charge-offs
     (430 )     (113 )
Plus: Recoveries
     40       16  
Balance at the end of the period
   $ 16,753     $ 12,355  

-50-
7.           Deposits

Deposit balances consisted of the following at September 30, 2008 and June 30, 2008:

   
As of
September 30, 2008
  
As of
June 30, 2008
  
(Dollars in thousands)
  
Amount
  
Percentage of
Total
  
Amount
Percentage of
Total
  
                 
Savings accounts
  
$
76,040
  
7.9
%
$
80,982
8.1
%
Money market deposit accounts
  
408,612
  
42.1
  
408,990
40.8
  
Certificates less than $100,000
  
186,877
  
19.3
  
192,484
19.2
  
Certificates $100,000 and greater
  
61,288
  
6.3
  
57,048
5.7
  
Interest-bearing checking accounts
  
117,550
  
12.1
  
132,936
13.2
  
Non-interest bearing accounts
  
119,496
  
12.3
  
130,438
13.0
  
Total deposits
  
$
969,863
  
100.0
%
$
1,002,878
100.0
%

8.
Trust Preferred Securities and Other Borrowings

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 September 30, 2008, the Bank had $75.0 million outstanding in repurchase agreements with a weighted average interest rate of 4.01%. The underlying securities collateralizing these repurchase agreements had a market value of $87.7 million at September 30, 2008. In addition, the Company had $1.5 million in secured borrowings at September 30, 2008 related to certain commercial business loan relationships.

9.
Capital Stock

On July 24, 2007, the Company declared a cash dividend on its common stock of $0.115 per share, paid on August 24, 2007, to owners of record on August 10, 2007. On August 29, 2008, the Company declared a cash dividend on its common stock of $0.115 per share, paid on September 12, 2008, to owners of record on September 8, 2008.

10.
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 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 $36.0 million in loans under this agreement and had a maximum credit risk exposure of $461 thousand at September 30, 2008. The fair value of these guarantees was determined to be insignificant at September 30, 2008.

-51-

11.           Accounting for Derivative Instruments and Hedging

At September 30, 2008, the Company had four interest rate swap arrangements tied to specific loans originated by the Bank. The swaps effectively convert the rates from a fixed rate to a floating rate based on Libor throughout the life of the underlying loans.  At September 30, 2008, the total outstanding notional amount on these swaps was $7.5 million.  The weighted average floating and fixed rates on these transactions were 2.97% and 4.73%, respectively, at September 30, 2008. Based on the decrease in the market value of the interest rate swaps from June 30, 2008 to September 30, 2008, the Company recognized a loss of $120 thousand in other income in the consolidated statement of operations for the three months ended September 30, 2008 with respect to these four swap arrangements.

12.           Fair Value Disclosures

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 had made no material changes in its valuation techniques as a result of the adoption of SFAS No. 157.

Effective July 1, 2008, the Company adopted SFAS 157. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction, that is not a forced liquidation or distressed sale, between market participants at the measurement date. SFAS No. 157 establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs or minimize the use of unobservable inputs when measuring fair value. Observable inputs reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the reporting entity. Unobservable inputs reflect the Company’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances.

Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity has the ability to access at the measurement date. Level 2 inputs represent quoted prices for similar instruments in active markets, or quoted prices for identical instruments in non-active markets. Level 2 inputs also includes valuation techniques whose inputs are derived principally from observable market data other than quoted prices, such as interest rates or other market-corroborated means. Level 3 inputs are unobservable inputs for the asset or liability. The level in the hierarchy within which the fair value measurement in its entirety falls shall be determined based on the lowest level input that is significant to the fair value measurement in its entirety.

A description of the valuation methodologies used for financial instruments measured at fair value on a recurring basis, as well as the classification of the instruments pursuant to the valuation hierarchy, are as follows:

Trading Securities and Deferred Compensation Liability

Trading securities and the corresponding deferred compensation liability are reported using Level 1 inputs. Level 1 instruments generally include equity securities, valued based on quoted market prices in active markets. Equity securities consist of stocks of financial institutions, mutual funds, and other government sponsored stocks.

Securities Available for Sale

Securities classified as available for sale are reported using Level 1 and Level 2 inputs. Level 1 instruments generally include equity securities, valued based on quoted market prices in active markets. Equity securities consist of stocks of financial institutions, mutual funds, and stocks of government sponsored entities. If a quoted market price is not available for the specific security, then fair values are provided by independent third-party valuation services. These valuations services estimate fair values using pricing models and other accepted valuation methodologies, such as quotes for similar securities and observable yield curves and spreads. As part of the Company’s overall valuation process, management evaluates these third-party methodologies to ensure they are representative of exit prices in the Company’s principal or most advantageous market. Level 2 instruments include U.S. government agency obligations, municipal bonds, mortgage-backed securities, collateralized mortgage obligations, and corporate bonds. The fair value measurements are determined using both quoted prices for similar assets, when available, and model-based valuation techniques that derive fair value based on market-corrobarated data, such as instruments with similar prepayment speeds and default interest rates.

-52-


Derivative Financial Instruments

The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts).  The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves. To comply with the provisions of SFAS No. 157, the Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. The counterparty performance risk has been determined to have an insignificant impact on the valuation. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk the Company has considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.

Although the Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of September 30, 2008, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, the Company has determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.

The Company also has commitments with customers to fund mortgages and extend credit at a specified rate and commitments to sell both funded and unfunded mortgage loans at a specified rate. These loan commitments and forward contracts for mortgage loans  intended for sale in the secondary market are accounted for as derivatives and carried at estimated fair value. The Company estimates the fair value of these loan commitments and forward contracts using bids or indications provided by market participants on specific loans that are actively marketed for sale. The Company has determined that the inputs used to value its loan commitment and forward contracts fall within Level 2 of the fair value hierarchy.

The following table presents the financial instruments fair value at September 30, 2008, on the consolidated balance sheet and by SFAS No. 157 valuation hierarchy.

   
Fair Value Measurement Using
  
(Dollars in thousands)
  
Balance
September 30, 2008
    
Quoted Prices in
Active Markets
for Identical
Assets / Liabilities
(Level 1)
    
Significant Other
Observable Inputs
(Level 2)
  
Assets
                  
Investment securities - available for sale
   $ 195,032     $ 9,248     $ 185,784  
Investment securities – trading
     1,231       1,231       —  
Derivatives (1)
     175       —       175  
Total assets
   $ 196,438     $ 10,479     $ 185,959  
                         
Liabilities
                        
Deferred compensation liability (2)
     1,231       1,231       —  
Total liabilities
   $ 1,231     $ 1,231     $ —  

 
(1)
Included within Other Assets
(2)
Included within Other Liabilities

Assets Measured at Fair Value on a Nonrecurring Basis

A description of the valuation methodologies and classification levels used for financial instruments measured at fair value on a nonrecurring basis are listed below. These listed instruments are subject to fair value adjustments (impairment) as they are valued at the lower of cost or market.

-53-
Mortgage Loans Held for Sale

Mortgage loans originated and intended for sale in the secondary market are carried at the lower of aggregate cost or estimated fair value. The Company estimates the fair value of mortgage loans held for sale using bids or indications provided by market participants on specific loans that are actively marketed for sale. The Company has determined that the inputs used to value its mortgage loans held for sale fall within Level 2 of the fair value hierarchy. At September 30, 2008, loans held for sale were recorded at their carrying amount of $14.4 million with no impairment recorded during the first quarter of the fiscal year.

Impaired Loans

Certain loans are evaluated for impairment under FAS No. 114, “Accounting by Creditors for Impairment of a Loan - an amendment of FASB Statements No. 5 and 15.” Impaired loans are evaluated and valued at the time the loan is identified as impaired, at the lower of cost or market value. To estimate the impairment of a loan, the Company uses the practical expedient method, which is based upon the fair value of the underlying collateral for collateral-dependent loans. Currently, all of the Company’s impaired loans are secured by real estate. The value of the real estate collateral is determined based on an appraisal by independent licensed appraisers hired by the Company or other observable market data, which is readily available in the marketplace. As part of the Company’s overall valuation process, management evaluates the third-party appraisals to ensure that they are representative of the exit prices in the Company’s principal or most advantageous market. When the value of the real estate, less estimated costs to sell, is less than the principal balance of the loan, a specific reserve is established. The Company considers the appraisals used in its impairment analysis to be Level 3 inputs. Impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly.

Other Real Estate Owned

Other real estate property acquired through foreclosure or other means in satisfaction of a loan receivable is recorded at the fair value of the property at the transfer date less estimate selling costs. Costs to maintain other real estate are expensed as incurred.  The value of the real estate collateral is determined based on an appraisal by independent licensed appraisers hired by the Company or other observable market data, which is readily available in the marketplace. As part of the Company’s overall valuation process, management evaluates the third-party appraisals to ensure that they are representative of the exit prices in the Company’s principal or most advantageous markets. The Company considers the appraisals uesd in its impairment analysis to be Level 3 inputs.

Certain assets measured at fair value on a non-recurring basis are presented below:

   
Fair Value Measurement Using
  
(Dollars in thousands)
  
Balance
September 30,
2008
    
Quotes Prices in
Active Markets
for Identical
Assets /
Liabilities
(Level 1)
    
Significant
Other
Observable
Inputs
(Level 2)
    
Significant
Unobservable
Inputs
(Level 3)
  
Assets
                        
Mortages held for sale
   $ 14,444     $ —     $ 14,444     $ —  
Impaired loans (1)
     11,142       —       —       11,142  
Other real estate owned
     465       —       —       465  
Total assets
   $ 26,051     $ —     $ 14,444     $ 11,607  

(1) Specific reserves identified under FAS No. 114 during the first three months of fiscal 2009 totaled $3.4 million. These specific reserves were taken into consideration when the required level of the allowance for loan losses was determined at September 30, 2008.

SFAS No. 157 fair value measurement implementation for nonfinancial assets including goodwill and identifiable intangibles with balances $57.2 million and $13.8 million, respectively, at September 30, 2008, have been delayed until July 1, 2009 in accordance with FSP No. SFAS 157-2.

-54-
13.           Segment Information

Under the definition of SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information”, the Company has three operating segments at September 30, 2008; Willow Financial Bank (“WFB”), BeneServ and WIS (including Carnegie). The Willow Financial Bank segment primarily provides loan and deposit services to commercial and retail customers through its network of 29 branch locations as of September 30, 2008. BeneServ, which was acquired on March 30, 2007, is an insurance agency serving the corporate employee benefit market segment. The WIS segment operates a full service investment advisory and securities brokerage firm.

Segment information for the three months ended September 30, 2008 and 2007 is as follows:

   
For the three months ended September 30,
  
   
2008
    
2007
  
   
WFB
    
BeneServ
    
WIS
    
Total
    
WFB
    
BeneServ
    
WIS
    
Total
  
   
(Dollars in Thousands)
  
                                                 
Interest income
   $ 20,315     $ —     $ —     $ 20,315     $ 21,765     $ —     $ —     $ 21,765  
Interest expense
     8,976       —       —       8,976       11,459       —       —       11,459  
Net interest income
     11,339       —       —       11,339       10,306       —       —       10,306  
Non-interest income
     1,263       590       986       2,839       2,677       561       628       3,866  
Depreciation expense
     647       3       5       655       710       3       1       714  
Income tax (benefit) expense
     (1,030 )     57       115       (858 )     320       101       17       438  
Total net (loss) income
     (2,017 )     110       224       (1,683 )     929       196       33       1,158  
Total assets
     1,575,695       7,115       4,160       1,586,970       1,563,083       5,603       172       1,568,858  
Goodwill
     54,574       1,426       1,247       57,247       94,574       1,027       —       95,601  

14.
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 regulatory 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.


-55-

At September 30, 2008, the Bank had regulatory capital which was 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
  
(Dollars in thousands)
  
Amount
  
Ratio
  
Amount
Ratio
  
Amount
Ratio
  
As of September 30, 2008
                      
Tangible capital (to tangible assets)
  
$
106,532
  
7.0
%
$
22,934
1.5
%
$
30,578
2.0
%
Core capital (to adjusted tangible assets)
  
106,532
  
7.0
%
61,157
4.0
%
76,446
5.0
%
Tier I capital (to risk-weighted assets)
  
106,532
  
11.0
%
N/A
N/A
  
57,974
6.0
%
Risk-based capital (to risk-weighted assets)
  
118,575
  
12.3
%
77,298
8.0
%
96,623
10.0
%
                       
As of June 30, 2008
                      
Tangible capital (to tangible assets)
  
$
109,164
  
7.2
%
$
22,845
1.5
%
$
30,460
2.0
%
Core capital (to adjusted tangible assets)
  
109,164
  
7.2
%
60,920
4.0
%
76,151
5.0
%
Tier I capital (to risk-weighted assets)
  
109,164
  
11.3
%
N/A
N/A
  
57,684
6.0
%
Risk-based capital (to risk-weighted assets)
  
120,720
  
12.6
%
76,912
8.0
%
96,140
10.0
%

15.
Commitments and Contingencies

See the Company’s Annual Report on Form 10-K for the year ended June 30, 2008 for a summary of existing commitments and contingencies.  There have been no material changes in the Company’s commitments and contingencies since June 0, 2008.
 
 
 
-56-
 
 

EX-99.3 5 exhibit993.htm UNAUDITED PRO FORMAS - HNC AND WFBC exhibit993.htm

 
Exhibit 99.3
 
HARLEYSVILLE NATIONAL CORPORATION
 
UNAUDITED PRO FORMA COMBINED CONSOLIDATED FINANCIAL INFORMATION
 
      The following unaudited pro forma combined consolidated financial information and explanatory notes present how the combined consolidated financial statements of Harleysville National Corporation (“Harleysville National”) and Willow Financial Bancorp, Inc. (“Willow Financial”) may have appeared had the businesses actually been combined as of the date indicated. The unaudited pro forma combined balance sheet at September 30, 2008 assumes the merger was completed on that date. The unaudited pro forma combined consolidated income statement for the nine months ended September 30, 2008 gives effect to the merger as if the merger had been completed on January 1, 2008. The unaudited pro forma combined financial information shows the impact of the merger on Harleysville National’s and Willow Financial’s combined consolidated financial position and results of operations under the purchase method of accounting with Harleysville National treated as the acquirer. Under this method of accounting, Harleysville National is required to record the assets and liabilities of Willow Financial at their estimated fair values as of the date the merger is completed. The allocation of the purchase price reflected in the unaudited pro forma combined consolidated financial information was based upon the estimated fair values measured at the effective merger date of December 5, 2008. Although Harleysville National has substantially completed its evaluation of the assets and liabilities of Willow Financial, management is in the process of finalizing the identifiable intangible assets and purchase accounting adjustments; thus, the allocation of the purchase price is subject to revision.
 
      The unaudited pro forma combined consolidated financial information has been derived from the historical consolidated financial statements and the accompanying notes of both Harleysville National and Willow Financial as filed with the Securities and Exchange Commission.
 
            The unaudited pro forma combined consolidated financial information is presented for illustrative purposes only and does not indicate the financial results of the combined company had the companies actually been combined at the beginning of the period presented. Furthermore, the information does not include the impact of possible revenue enhancements, expense efficiencies, asset dispositions and share repurchases, among other factors. In addition, as explained in more detail in the accompanying notes to unaudited pro forma combined consolidated financial information, the allocation of the purchase price reflected in the unaudited pro forma combined consolidated financial information is subject to adjustment and may vary from the actual purchase price allocation that was recorded upon completion of the merger based upon management’s finalization of the identifiable intangible assets and purchase accounting adjustments.
 

 
-57-


 
HARLEYSVILLE NATIONAL CORPORATION
 
UNAUDITED PRO FORMA COMBINED CONSOLIDATED BALANCE SHEET
 
SEPTEMBER 30, 2008
               
Proforma
               
Combined
   
Harleysville
  
Willow
  
Pro-Forma
  
Harleysville
(Dollars in thousands)
     
National
     
Financial(m)(n)
     
Adjustments
     
National
Assets
                                
Cash and due from banks
  
$
50,870
    
$
26,193
    
$
(7,750
)(a)  
  
$
69,313
  
Federal funds sold and securities purchased under agreements to resell
    
100,600
      
—
              
100,600
  
Interest-bearing deposits in banks
    
3,366
      
6,692
      
—
      
10,058
  
     Total cash and cash equivalents
    
154,836
      
32,885
      
(7,750
)
    
179,971
  
Residential mortgage loans held for sale
    
1,222
      
14,444
              
15,666
  
Investment securities - trading
    
—
      
1,231
              
1,231
  
Investment securities available for sale, at fair value
    
912,099
      
195,032
      
(18,306
)(b)
    
1,088,825
  
Investment securities held to maturity
    
53,003
      
72,973
      
(11,860
) (b)
    
114,116
  
Federal Home Loan Bank stock, Federal Reserve Bank stock and other
  investments
    
18,247
      
17,869
              
36,116
  
Loans and leases
    
2,537,815
      
1,147,725
      
(29,366
)(b)
        
                     
(6,318
)(b)
    
3,649,856
  
Less: Allowance for loan losses
    
(31,668
)
    
(16,753
)
    
 6,318
(b)
    
(42,103
)
     Net loans
    
2,506,147
      
1,130,972
      
(29,366
) 
    
3,607,753
  
Premises and equipment, net
    
35,316
      
9,823
      
(1,192
) (b)
    
43,947
  
Accrued interest receivable
    
16,029
      
6,376
              
22,405
  
Goodwill
    
110,278
      
57,247
      
70,555
(c)
    
238,080
  
Core deposit intangibles, net
    
7,045
      
8,818
      
5,561
(d)
    
21,424
  
Other intangibles, net
    
5,832
      
4,965
      
 (1,901)
(d)
    
8,896
  
Bank-owned life insurance
    
74,316
      
12,534
              
86,850
  
Other assets
    
55,360
      
21,801
      
 20,375
(e)
    
97,536
  
     Total assets
  
$
3,949,730
    
$
1,586,970
    
$
26,116
    
$
5,562,816
  
Liabilities and Shareholders’ Equity
                                
Deposits:
                                
   Noninterest-bearing
  
$
343,308
    
$
121,604
            
$
464,912
  
     Interest-bearing:
                                
          Checking
    
430,607
      
117,550
              
548,157
  
          Money market
    
727,693
      
408,612
              
1,136,305
  
          Savings
    
182,342
      
76,040
              
258,382
  
          Time deposits
    
1,334,326
      
248,165
      
776
(b)
    
1,583,267
  
               Total deposits
    
3,018,276
      
971,971
      
776
      
3,991,023
  
Short-term securities sold under agreements to repurchase
    
94,043
      
—
              
94,043
  
Other short-term borrowings
    
1,163
      
30,000
              
31,163
  
Long-term borrowings
    
368,755
      
404,319
      
23,437
(b)
    
796,511
  
Accrued interest payable
    
35,062
      
1,630
              
36,692
  
Subordinated debt    
82,992 
      
25,774 
      
(15,029
  )(b)    
93,737 
  
Other liabilities
    
38,445
      
9,416
              
47,861
  
               Total liabilities
    
3,638,736
      
1,443,110
      
9,184
      
5,091,030
  
Shareholders’ Equity:
                                
     Common stock
    
31,507
      
178
      
(178
)(f)
        
                     
11,515
(g)
    
43,022
  
     Additional paid-in capital
    
230,705
      
191,013
      
(191,013
)(f)
        
                     
149,277
(g)
    
379,982
  
     Retained earnings
    
84,762
      
(7,926
)
    
7,926
(f)
    
84,762
  
     Accumulated other comprehensive loss
    
(34,469
)
    
(7,580
)
    
7,580
(f)
    
(34,469
)
     Treasury stock, at cost
    
(1,511
)
    
(30,205
)
    
30,205
(f)
    
(1,511
)
     Obligation of deferred compensation plan
    
—
      
1,228
      
(1,228
)(f)
    
—
  
     Unallocated common stock held by:
                                
          Employee Stock Ownership Plan
    
—
      
(1,963
)
    
1,963
(f)
    
—
  
          Recognition and Retention Plan Trust
    
—
      
(885
)
    
885
(f)
    
—
  
               Total shareholders’ equity
    
310,994
      
143,860
      
16,932
      
471,786
  
          Total liabilities and shareholders’ equity
  
$
3,949,730
    
$
1,586,970
    
$
26,116
    
$
5,562,816
  
 
See Notes to Unaudited Pro Forma Combined Consolidated Financial Information

-58-
 
HARLEYSVILLE NATIONAL CORPORATION
 
UNAUDITED PRO FORMA COMBINED CONSOLIDATED INCOME STATEMENT
 
 FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008

               
Proforma Combined
(Dollars in thousands, except per share information)
     
Harleysville National
     
Willow
Financial(m)(n)
     
Pro-Forma Adjustments
     
Harleysville National
Interest Income
                                
Loans and leases, including fees
  
$
112,747
  
$
50,614
    
$
3,523
(h)
    
$
166,884
  
Investment securities:
                                
     Taxable
    
28,894
    
9,731
      
301
(h)
      
38,926
  
     Exempt from federal taxes
    
9,025
    
1,052
      
989
 (h)
      
11,066
  
Federal funds sold and securities purchased
                                
     under agreements to resell
    
963
            
(29
)(i)
      
934
  
Deposits in banks
    
82
    
67
                
149
  
          Total interest income
    
151,711
    
61,464
      
4,784
        
217,959
  
Interest Expense
                                
Savings and money market
    
19,536
    
8,590
                
28,126
  
Time deposits
    
40,414
    
8,107
      
(693
)(h)
      
47,828
  
Short-term borrowings
    
1,847
    
40
                
1,887
  
Long-term borrowings
    
15,221
    
11,981
      
(3,873
)(h)
      
23,329
  
          Total interest expense
    
77,018
    
28,718
      
(4,566
)
      
101,170
  
          Net interest income
    
74,693
    
32,746
      
9,350
        
116,789
  
Provision for loan losses
    
7,647
    
4,862
                
12,509
  
Net interest income after provision
                                
     for loan losses
    
67,046
    
27,884
      
9,350
        
104,280
  
Noninterest Income
                                
Service charges
    
9,849
    
2,797
                
12,646
  
Gain (loss) on sales of investment
                                
     securities, net
    
225
    
(3,289
)
              
(3,064
)
Wealth management
    
12,623
    
5,271
                
17,894
  
Bank-owned life insurance
    
2,047
    
365
                
2,412
  
Other income
    
8,129
    
4,003
                
12,132
  
          Total noninterest income
    
32,873
    
9,147
      
—
        
42,020
  
Noninterest Expense
                                
Salaries, wages and employee benefits
    
41,599
    
21,801
                
63,400
  
Occupancy
    
7,438
    
4,715
      
(367
)(h)
      
11,786
  
Furniture and equipment
    
3,251
    
2,111
                
5,362
  
Marketing
    
995
    
1,511
                
2,506
  
Amortization of intangibles
    
1,997
    
1,757
      
565
(k)
      
4,319
  
Merger Charges
    
974
    
1,398
                
2,372
  
Other expense
    
17,075
    
12,635
                
29,710
  
          Total noninterest expense
    
73,329
    
45,928
      
198
        
119,455
  
Income (loss) before income
                                
     tax expense (benefit)
    
26,590
    
(8,897
)
    
9,152
        
26,845
  
Income tax expense (benefit)
    
5,320
    
(2,200
)
    
3,203
        
6,323
  
Net income (loss)
  
$
21,270
  
$
(6,697
)
  
$
5,949
      
$
20,522
  
Net income (loss) per share information:
                                
     Basic
  
$
0.68
  
$
(0.44
)
            
$
0.48
  
     Diluted
  
$
0.67
  
$
(0.44
)
            
$
0.48
  
Cash dividends per share
  
$
0.60
  
$
0.35
              
$
0.60
  
Weighted average number of common shares:
                                
     Basic
    
31,363,779
    
15,200,923
      
(3,685,557
)(l)
      
42,879,145
  
     Diluted
    
31,531,942
    
15,261,321
      
(3,745,955
)(l)
      
43,047,308
  
 
See Notes to Unaudited Pro Forma Combined Consolidated Financial Information
 
-59-
NOTES TO UNAUDITED PRO FORMA COMBINED CONSOLIDATED FINANCIAL INFORMATION
 
NOTE 1 – ALLOCATION OF PURCHASE PRICE
 
     The allocation of the purchase price, based upon the estimated fair values measured at the effective merger date of December 5, 2008, is as follows:

Purchase Price:
    
(Dollars in thousands, except share data)
      
Purchase Price assigned to shares exchanged for stock:
      
Willow Financial common shares outstanding as of December 5, 2008
  
15,774,474
  
Exchange Ratio
  
0.73
  
Harleysville National shares to be issued as consideration
  
11,515,366
  
Average per share stock price for Harleysville National shares to be issued in the merger
$
13.79
  
Purchase price for Willow Financial common shares
$
158,797
  
Additional value ascribed to Willow Financial stock options that vest upon the merger date
  
1,995
  
Total value of the equity issued in the merger
  
160,792
  
Purchase price assigned to fractional shares exchanged for cash
  
18
  
Estimated fees and expenses directly related to the merger
  
2,389
  
Total purchase price
  
163,199
  
       
Net Assets Acquired:
      
Equity of Willow Financial
  
138,517
  
Estimated adjustments to reflect assets acquired at fair value:
      
Investments
  
(30,166
)
Loans
  
(29,366
)
Premises and equipment
  
(1,192
)
Core deposit intangibles, incremental to Willow Financial’s historical core deposit intangible
  
5,561
  
Customer list intangibles, incremental to Willow Financial’s historical customer list intangibles
  
(1,901
)
Estimated adjustments to reflect liabilities assumed at fair value:
      
Time deposits
  
(776
)
Long-term borrowings
  
(23,437
)
Subordinated Debt
  
15,029
  
Deferred tax on purchase accounting adjustments
  
20,375
  
Net assets acquired
  
92,644
  
Goodwill, incremental to Willow Financial’s historical goodwill
$
70,555
  
 
     The pro forma adjustments included in the unaudited pro forma combined consolidated balance sheet and income statements are as follows:

(a)     
Direct merger costs associated with the transaction including estimated cash outlays for one-time direct merger costs such as investment banking, legal and accounting services, severance, contract cancellations third party data processing costs and litigation costs as well as approximately $18,000 in cash outlay for fractional shares of common stock exchanged for cash. Willow Financial’s costs are reflected as a reduction of equity, and therefore, the equity balance will not agree with Willow Financial’s reported September 30, 2008 equity.
 
(b)
Adjustments to reflect assets acquired and liabilities assumed in the merger at estimated fair values measured  at December 5, 2008, the effective date of the merger, in accordance with SFAS No. 141, “Business Combinations.” In addition, a purchase accounting adjustment of $6.3 million was recorded to reflect a reduction in the carrying value of loans and the allowance for loan losses related to acquired impaired loans in accordance with SOP 03-3, “Accounting for Certain Loans or Debt Securities Acquired in a Transfer.”
 
(c)
To record estimated goodwill associated with the transaction, incremental to Willow Financial’s historical goodwill.
 
(d)
To record the estimated core deposit intangible and customer list intangible associated with the transaction, incremental to Willow Financial’s historical intangibles, with an expected life of ten years using the sum of the years digits amortization method.
 

-60-
 
NOTES TO UNAUDITED PRO FORMA COMBINED CONSOLIDATED FINANCIAL INFORMATION
 
NOTE 1 – ALLOCATION OF PURCHASE PRICE (Continued)
 

(e)
To record the net deferred tax impact arising from adjustments to record fair value of assets and liabilities. The tax effects of proforma adjustments are reflected at an assumed tax rate of 35%.
 
(f)
Adjustment to eliminate Willow Financial’s historical equity balances.
 
(g)     
To record the issuance of 11,515,366 shares of Harleysville National common stock in connection with the merger based on the fixed conversion ratio of 100% of outstanding Willow Financial common stock at December 5, 2008 into shares of Harleysville National common stock at the fixed exchange ratio of 0.73 in the merger agreement at an estimated average purchase price of $13.79 and the exchange of Willow Financial common stock options into vested Harleysville National common stock options with a fair value of $2.0 million. The purchase price is based upon the average Harleysville National stock price for two days before and two days after the agreement date of May 20, 2008 and the agreement date.
 
(h)
Fair value related amortization over the estimated life of the related asset/liability.
 
(i)
Foregone interest income assumed to have been earned on the cash used to pay the one-time direct merger costs associated with the transaction at an assumed rate of 0.50% per annum.
 
(j)
Footnote letter intentionally not used.
 
(k)
Adjustment for amortization of core deposit intangible and customer list intangible created as a result of the transaction based upon an expected life of ten years and using the sum of the years digits basis.
 
(l)
Adjustment for estimated weighted average shares to be issued in the merger with Willow Financial utilizing the fixed exchange ratio of 0.73 in the merger agreement.
 
(m)
Willow Financial traditionally reports its year ended as of June 30, 2008. These statements reflect Willow Financial’s nine months ended September 30, 2008 to be comparable to Harleysville National.
   
(n)
Certain items in the pro forma combined consolidated statements have been reclassified for Willow Financial in order to conform with Harleysville National’s historical classifications.
 

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