Willow Financial Bancorp (WGBC) 10-Q 2008 Q2 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)
x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended December 31, 2007
	OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from                          to

Commission file number: 000-49706

Willow Financial Bancorp, Inc.

(Exact name of registrant as specified in its charter)

Pennsylvania	80-0034942
(State or other jurisdiction	(I.R.S. Employer
of incorporation or organization)	Identification No.)

170 South Warner Road, Wayne, Pennsylvania 19087

(Address of principal executive offices)

(610) 995-1700

(Registrant’s telephone number, including area code)

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES   o NO   x

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

Large accelerated filer   o	Accelerated filer   x
Non-accelerated filer   o	Smaller reporting company   o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES   o NO   x

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. The Registrant had 15,669,304 shares of common stock issued and outstanding as of May 9, 2008.

WILLOW FINANCIAL BANCORP, INC.

INDEX

PART I FINANCIAL INFORMATION

Item 1.	Financial Statements (unaudited)
	Consolidated Statements of Financial Condition at December 31, 2007 and June 30, 2007	3
	Consolidated Statements of Operations — For the three months ended December 31, 2007 and 2006	4
	Consolidated Statements of Operations — For the six months ended December 31, 2007 and 2006	5
	Consolidated Statements of Other Comprehensive Income — For the three and six months ended December 31, 2007 and 2006	6
	Consolidated Statements of Cash Flows — For the six months ended December 31, 2007 and 2006	7
	Notes to the Unaudited Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	27
Item 4.	Controls and Procedures	27

PART II		OTHER INFORMATION		27
	Item 1.		Legal Proceedings	27
	Item 1a.		Risk Factors	28
	Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds	28
	Item 3.		Defaults Upon Senior Securities	28
	Item 4.		Submission of Matters to a Vote of Security Holders	28
	Item 5.		Other Information	29
	Item 6.		Exhibits	30

2

WILLOW FINANCIAL BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Dollars in Thousands, Except for Share Amounts)

	(Unaudited)
	December 31,			June 30,
	2007			2007
Assets
Cash in banks	$	30,150		$	21,124
Interest-earning deposits	12,230			39,153
Total cash and cash equivalents	42,380			60,277
Investment securities — trading	1,285			1,176
Federal Home Loan Bank stock	15,960			11,394
Investment securities available for sale (amortized cost of $192,610 and $193,232, respectively)	189,938			188,339
Investment securities held to maturity (fair value of $80,987 and $86,488, respectively)	81,819			88,363
Loans held for sale	23,442			8,075
Loans receivable	1,126,709			1,047,012
Deferred fees and costs, net	1,430			491
Allowance for loan losses	(12,666		)	(12,210		)
Loans receivable, net	1,115,473			1,035,293
Accrued interest receivable	7,298			6,654
Property and equipment, net	11,890			11,307
Bank owned life insurance	12,169			11,930
Real estate owned	447			—
Other intangible assets, net	13,295			14,345
Goodwill	58,797			95,597
Other assets	18,018			18,546
Total Assets	$	1,592,211		$	1,551,296
Liabilities and Stockholders’ Equity
Liabilities:
Interest-bearing deposits	$	883,636		$	951,629
Non-interest bearing deposits	128,604			141,101
Securities sold under agreements to repurchase	75,000			20,000
Advance payments by borrowers for taxes and insurance	3,371			4,254
Federal Home Loan Bank advances	302,579			189,764
Trust preferred securities	25,774			25,774
Accrued interest payable	2,174			2,303
Other liabilities	10,408			17,038
Total Liabilities	1,431,546			1,351,863
Commitments and contingencies	—			—
Stockholders’ Equity:
Common stock - $0.01 par value; 40,000,000 shares authorized; 17,490,474 and 17,487,770 shares issued at December 31, 2007 and June 30, 2007, respectively	175			175
Additional paid-in capital	190,922			190,776
Retained earnings — substantially restricted	4,221			46,030
Treasury stock (1,822,606 and 1,920,025 shares at December 31, 2007 and June 30, 2007, respectively, at cost)	(30,259		)	(31,046		)
Accumulated other comprehensive loss	(1,763		)	(3,180		)
Obligation of deferred compensation plan	1,310			1,277
Unallocated common stock held by:
Employee Stock Ownership Plan (ESOP)	(2,582		)	(2,958		)
Recognition and Retention Plan Trust (RRP)	(1,359		)	(1,641		)
Total Stockholders’ Equity	160,665			199,433
Total Liabilities and Stockholders’ Equity	$	1,592,211		$	1,551,296

See accompanying notes to consolidated financial statements.

3

WILLOW FINANCIAL BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in Thousands, Except for Per Share Amounts, Unaudited)

	Three months Ended December 31,
	2007			2006
INTEREST INCOME:
Loans	$	17,865		$	17,110
Mortgage-backed and investment securities	3,903			4,274
Total interest income	21,768			21,384
INTEREST EXPENSE:
Deposits	7,902			7,113
Securities sold under agreements to repurchase	744			253
Borrowings	3,156			3,030
Total interest expense	11,802			10,396
NET INTEREST INCOME	9,966			10,988
Provision for loan losses	419			—
Net interest income after provision for loan losses	9,547			10,988
NON-INTEREST INCOME:
Investment services income, net	901			858
Income from insurance operations	585			—
Service charges and fees	1,357			1,305
Gain on the sale of:
Loans	570			94
Securities available for sale	9			114
Gain on termination of interest rate corridor	—			804
Other	177			157
Total non-interest income	3,599			3,332
NON-INTEREST EXPENSES:
Salaries and employee benefits	7,270			5,779
Occupancy and equipment	2,304			1,979
Data processing	509			369
Advertising	577			568
Deposit insurance premiums	31			30
Goodwill impairment	40,000			—
Amortization of intangible assets	525			543
Professional fees	1,152			549
Other	1,618			1,070
Total non-interest expenses	53,986			10,887
(Loss) income before income taxes	(40,840		)	3,433
Income tax (benefit) expense	(1,225		)	1,025
NET (LOSS) INCOME	$	(39,615	)	$	2,408
(LOSS) EARNINGS PER SHARE (a)
Basic	$	(2.62	)	$	0.16
Diluted	$	(2.62	)	$	0.16
DIVIDENDS PER SHARE PAID DURING PERIOD	$	0.12		$	0.12
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic	15,110,225			15,058,603
Diluted	15,207,750			15,342,441

(a) Earnings per share and weighted average shares outstanding for the three months ended December 31, 2006 have been adjusted to reflect the 5% stock dividend paid on February 23, 2007.

See accompanying notes to consolidated financial statements.

4

WILLOW FINANCIAL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in Thousands, Except for Per Share Amounts, Unaudited)

	Six months Ended December 31,
	2007			2006
INTEREST INCOME:
Loans	$	35,367		$	34,793
Mortgage-backed and investment securities	8,165			8,481
Total interest income	43,532			43,274
INTEREST EXPENSE:
Deposits	16,469			13,608
Securities sold under agreements to repurchase	1,027			508
Borrowings	5,765			5,831
Total interest expense	23,261			19,947
NET INTEREST INCOME	20,271			23,327
Provision (recovery) for loan losses	661			(100		)
Net interest income after provision for loan losses	19,610			23,427
NON-INTEREST INCOME:
Investment services income, net	1,995			1,606
Income from insurance operations	1,146			—
Service charges and fees	2,633			2,742
Gain (loss) on the sale of:
Loans	1,211			247
Securities available for sale	25			114
Gain on termination of interest rate corridor	—			804
Other	455			129
Total non-interest income	7,465			5,642
NON-INTEREST EXPENSES:
Salaries and employee benefits	14,239			11,650
Occupancy and equipment	4,505			3,887
Data processing	962			718
Advertising	872			962
Deposit insurance premiums	61			60
Goodwill impairment	40,000			—
Amortization of intangible assets	1,050			1,118
Professional fees	1,663			1,081
Other	2,969			2,367
Total non-interest expenses	66,321			21,843
(Loss) income before income taxes	(39,246		)	7,226
Income tax (benefit) expense	(787		)	2,225
NET (LOSS) INCOME	$	(38,459	)	$	5,001
(LOSS) EARNINGS PER SHARE (a)
Basic	$	(2.55	)	$	0.33
Diluted	$	(2.55	)	$	0.32
DIVIDENDS PER SHARE PAID DURING PERIOD	$	0.23		$	0.23
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic	15,087,380			15,029,813
Diluted	15,201,560			15,326,129

(a) Earnings per share and weighted average shares outstanding for the six months ended December 31, 2006 have been adjusted to reflect the 5% stock dividend paid on February 23, 2007.

See accompanying notes to consolidated financial statements.

5

WILLOW FINANCIAL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE INCOME

(Dollars in Thousands, Unaudited)

	Three months Ended December 31,
	2007			2006
Net (loss) income	$	(39,615	)	$	2,408
Other comprehensive (loss) income, net of tax:
Net unrealized holding gains on securities available for sale during the period	694			251
Gain on termination of interest rate corridor	—			(523		)
Reclassification adjustment for gains included in net income	(6		)	(74		)
Net unrealized loss on cash flow hedge	—			(35		)
Comprehensive (loss) income	$	(38,927	)	$	2,027

	Six months Ended December 31,
	2007			2006
Net (loss) income	$	(38,459	)	$	5,001
Other comprehensive (loss) income, net of tax:
Net unrealized holding gains on securities available for sale during the period	1,472			2,444
Change in tax rate	(38		)	—
Gain on termination of interest rate corridor	—			(523		)
Reclassification adjustment for gain included in net income	(17		)	(74		)
Net unrealized loss on cash flow hedge	—			(244		)
Comprehensive (loss) income	$	(37,042	)	$	6,604

See accompanying notes to consolidated financial statements.

6

WILLOW FINANCIAL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW

(Dollars in Thousands, Unaudited)

	Six months Ended December 31,
	2007			2006
Net (loss) income	$	(38,459	)	$	5,001
Add (deduct) items not affecting cash flows from operating activities:
Depreciation	1,497			1,207
Amortization of premiums and accretion of discounts, net	551			(346		)
Impairment on goodwill	40,000			—
Amortization of intangible assets	1,050			1,118
Provision (reduction) for loan losses	661			(100		)
Gain on sale of loans held for sale	(1,211		)	(247		)
(Gain) loss on sale of investment securities	(25		)	(114		)
Gain on sale of interest rate corridor	—			(804		)
Origination of loans held for sale	(100,054		)	(17,629		)
Proceeds from the sale of loans held for sale	85,898			15,459
Increase in trading account securities	(109		)	(110		)
Amortization of deferred loan fees, discounts and premiums	(105		)	(591		)
(Increase) decrease in accrued interest receivable	(644		)	324
Increase in value of bank owned life insurance	(239		)	(212		)
Decrease (increase) in other assets	(311		)	(2,068		)
(Decrease) increase in other liabilities	(6,698		)	2,172
Stock based compensation	967			957
Excess tax benefits from stock-based compensation	(9		)	(99		)
(Decrease) increase in accrued interest payable	(129		)	325
Net cash flows (used in) provided by operating activities	(17,369		)	4,243
Cash flows from investment activities:
Capital expenditures	(1,842		)	(2,527		)
Proceeds from the sale of office buildings	—			717
Net (increase) decrease in loans	(81,183		)	26,844
Proceeds from maturities, sales, payments and calls of investment securities held to maturity	6,547			8,180
Purchase of securities available for sale	(15,506		)	(18,829		)
(Increase) decrease in FHLB stock	(4,566		)	3,305
Proceeds from sales and calls of securities available for sale	15,788			40,398
Net cash used for acquisitions	(2,300		)	—
Net cash flows (used in) provided by investment activities	(83,062		)	58,088
Cash flows from financing activities:
Net (decrease) increase in deposits	(80,490		)	19,810
Increase in securities sold under agreements to repurchase	55,000			—
Proceeds from FHLB advances	362,600			87,400
Repayments of FHLB advances	(249,974		)	(149,301		)
Decrease in advance payments by borrowers for taxes and insurance	(883		)	(1,380		)
Cash dividends on common stock	(3,451		)	(3,444		)
Common stock repurchased	(299		)	—
Stock options exercised	22			501
Excess tax benefits from stock-based compensation	9			99
Net cash flows provided by (used in) financing activities	82,534			(46,315		)
Net (decrease) increase in cash and cash equivalents	(17,897		)	16,016
Cash and cash equivalents:
Beginning of period	60,277			30,955
End of period	42,380			$	46,971
Supplemental disclosures:
Cash payments during the year for:
Taxes	$	51		$	1,150
Interest	$	23,390		$	19,919
Non-cash items:
Net unrealized gain on investment securities available for sale, net of tax	$	1,472		$	2,444
Net unrealized loss on cash flow hedge, net of tax	$	—		$	(244	)

See accompanying notes to consolidated financial statements.

7

WILLOW FINANCIAL BANCORP, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1.Summary of Significant Accounting Policies

Description of Business

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 Global Select 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 loans 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, a Pennsylvania chartered commercial bank (“FFB”) with 13 full-service banking offices, and Philadelphia Corporation for Investment Services, a registered investment advisor and broker dealer (“PCIS”). Pursuant to the Agreement and Plan of Merger, dated as of January 20, 2005 (the “Merger Agreement”), Chester Valley was merged with and into the Company, with the Company as the surviving corporation (the “Merger”), and FFB was merged with and into the Bank with the Bank as the surviving bank (the “Bank Merger”). WIS became a wholly owned subsidiary of the Company. As a result of the Merger, each outstanding share of Chester Valley common stock, par value $1.00 per share (the “Chester Valley Common Stock”), was converted into the right to receive, at the election of the shareholder, either $27.90 in cash or 1.4823 shares of the Company common stock, par value $0.01 per share (the “Company Common Stock”), subject to the allocation and pro ration provisions set forth in the Merger Agreement. The acquisition resulted in the Company’s issuance of an aggregate of 4,977,256 shares of Company Common Stock and $51.0 million in cash.  The total merger consideration paid for the Chester Valley Common Stock was $145.3 million. This included capitalized acquisition costs and the value of Chester Valley vested stock options converted to options of the Company at the average stock price of the Company on the four days surrounding the announcement of the acquisition.  The Company used general corporate funds to pay the aggregate cash consideration of approximately $51.0 million for the shares of Chester Valley Common Stock acquired in the Merger for cash, as well as the approximate $3.2 million in acquisition costs.

Effective February 28, 2006, the Bank completed the sale of all outstanding shares of capital stock of PCIS to Uvest BD-A, Inc., a North Carolina Corporation and registered broker-dealer (“Uvest”) for consideration of $100 but providing that such shares may be repurchased for $100 at any time after the closing date of the stock sale. Concurrently with the execution of the sale of PCIS, the parties entered into a related Sub-Clearing and Brokerage Services Agreement, which provides that an affiliate of Uvest will provide securities clearing and certain supervisory and compliance services for the Bank, and a Financial Services Agreement between PCIS and the Bank which provides that the Bank will be entitled to 90% of the revenue generated by the securities brokerage activities conducted at the PCIS office and will bear substantially all operational and overhead expenses. Since March 2007, PCIS has been doing business as “Willow Investment Services.” Upon consummation of the sale of PCIS stock to Uvest, WIS is no longer a subsidiary of the Company. However, under the provisions of FIN 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.  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

8

Company recorded goodwill and other intangibles of $4.4 million as a result of this acquisition based on the preliminary purchase price allocation.

On December 21, 2007, the Company completed its acquisition of Carnegie Wealth Management (“Carnegie”) for a purchase price of up to $4.8 million in cash plus approximately $1.1 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 the Company include its three business segments, Willow Financial Bank, Willow Investment Services, and BeneServ, unless the context of the reference indicates otherwise. See Note 13 to the financial statements included herein. For periods after December 21, 2007, the WIS segment includes the operations of Carnegie Wealth Management.

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

2.Basis of Financial Statement Presentation

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 financial statements should be read in conjunction with the audited financial statements and the notes thereto in its Amended Report on Form 10-K for the Company for the year ended June 30, 2007, as restated, which are included in the Company’s Amendment No. 2 on Form 10-K/A for the year ended June 30, 2007 (File No. 000-49706).  The results for the interim periods presented are not necessarily indicative of the results that may be expected for the year ending 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 and intangible asset impairment.

The Company follows the provisions of Statement of Financial Accounting Standards (“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 has 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 has no impact on the Company’s or the Bank’s tangible capital nor does it impact the Company’s tangible book value per share. See note 17 for additional information on the goodwill impairment.

As described in Amendment No. 2 on Form 10-K/A to our Annual Report on Form 10-K for the fiscal year ended June 30, 2007, as filed with the Securities and Exchange Commission on May 5, 2008 (File No. 000-49706), the Company restated its consolidated financial statements for the four quarters of fiscal 2007 and fiscal 2006 to reflect the impact of

9

various adjustments. Quarterly information for the three and six-month periods ended December 31, 2006 as well as the June 30, 2007 balance sheet, reported herein reflects the restated amounts.

3.Recent Accounting Pronouncements

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

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

FASB Statement No, 157, Fair Value Measurements

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”).  SFAS 157 establishes a framework for measuring fair value in accordance with U.S. generally accepted accounting principles, and enhances disclosures about fair value measurements.  SFAS 157 applies when other accounting pronouncement 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 did not elect early adoption and is currently assessing the implications of this Statement on its financial statements.

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

In February 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 155, Accounting for Certain Hybrid Financial Instruments. Under this new statement, an entity may re-measure at fair value a hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation from the host, if the holder irrevocably elects to account for the whole instrument on a fair value basis.  Subsequent changes in the fair value of the instrument would be recognized in earnings. This statement is effective for all financial instruments that the Company acquires or issues after July 1, 2007. This statement had no impact on the Company’s financial position or results of operations as of December 31, 2007.

FASB Interpretation 48, Accounting for Uncertainty in Income Tax Positions

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 December 31, 2007, 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 December 31, 2007, tax years 2005 through 2007 remain subject to Federal examination as well as examination by state taxing jurisdictions.

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

The Task Force reached a consensus that, for endorsement split-dollar life insurance arrangements, an employer should recognize the liability for future benefits based on the substantive agreement with the employee, since the postretirement benefit obligation is not effectively settled.  An entity is permitted to apply the consensus by retrospective application to all prior periods in accordance with FASB Statement No. 154, including its required disclosures.  The consensus is effective for fiscal years beginning after December 15, 2007, with early adoption permitted as of the beginning of an entity’s fiscal year.  The Bank has recorded a liability of $262 thousand at December 31, 2007 within other liabilities on the consolidated statement of financial condition to account for the settlement of the future benefit obligation.

4.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:

	Six months Ended December 31,
	(In thousands)
	2007			2006
Compensation expense	$	610		$	507
Tax benefit	(189		)	(156		)
Net income effect	$	421		$	351

5.             (Loss) Earnings Per Share

(Loss)/earnings per share, basic and diluted, were ($2.62), ($2.62), and ($2.55), ($2.55), respectively, for the three and six months ended December 31, 2007, compared to $0.16, $0.16, and $0.33, $0.32, respectively, for the three and six months ended December 31, 2006. The primary reason for the decline in earnings per share is a the previously discussed goodwill impairment charge. This is a non-cash expense that does not impact the tangible capital of the Company.  The Bank remains well capitalized under Office of Thrift Supervision guidelines, as discussed further in note 14.

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

	Three months Ended December 31,
	2007						2006
(Dollars in thousands, except per share data)	Basic			Diluted			Basic			Diluted
Net (loss) income	$	(39,615	)	$	(39,615	)	$	2,408		$	2,408
Dividends on unvested common stock awards	(12		)	(12		)	(16		)	(16		)
Net income available to common stockholders	$	(39,627	)	$	(39,627	)	$	2,392		$	2,392
Weighted average shares outstanding	15,110,225			15,110,225			15,058,603			15,058,603
Effect of dilutive securities:
Common stock equivalents	—			97,525			—			283,838
Adjusted weighted average shares used in earnings per share computation	15,110,225			15,207,750			15,058,603			15,342,441
(Loss) earnings per share	$	(2.62	)	$	(2.62	)	$	0.16		$	0.16

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	Six months Ended December 31,
	2007						2006
(Dollars in thousands, except per share data)	Basic			Diluted			Basic			Diluted
Net (loss) income	$	(38,459	)	$	(38,459	)	$	5,001		$	5,001
Dividends on unvested common stock awards	(24		)	(24		)	(32		)	(32		)
Net (loss) income available to common stockholders	$	(38,483	)	$	(38,483	)	$	4,969		$	4,969
Weighted average shares outstanding	15,087,380			15,087,380			15,029,813			15,029,813
Effect of dilutive securities:
Common stock equivalents	—			114,180			—			296,316
Adjusted weighted average shares used in earnings per share computation	15,087,380			15,201,560			15,029,813			15,326,129
(Loss) earnings per share	$	(2.55	)	$	(2.55	)	$	0.33		$	0.32

6.             Securities

The amortized cost and estimated fair value of held to maturity and available for sale securities at December 31, 2007 and June 30, 2007 are as follows:

	December 31, 2007
	Amortized cost		Unrealized gains		Unrealized losses			Estimated fair value
	(Dollars in thousands)
Held to maturity:
Mortgage-backed securities:
FNMA	$	15,057	$	83	$	(103	)	$	15,037
FHLMC	10,682		—		(65		)	10,617
CMOs	56,080		1		(748		)	55,333
Total held to maturity	$	81,819	$	84	$	(916	)	$	80,987
Available for sale:
US government agency securities	$	41,622	$	232	$	(287	)	$	41,567
Municipal bonds	34,001		118		(480		)	33,639
Mortgage-backed securities:
FNMA	32,959		65		(302		)	32,722
FHLMC	32,211		36		(314		)	31,933
CMOs	19,113		118		(144		)	19,087
Corporate debt securities	21,240		—		(1,234		)	20,006
Equity securities	11,464		29		(509		)	10,984
Total available for sale	$	192,610	$	598	$	(3,270	)	$	189,938
Total securities	$	274,429	$	682	$	(4,186	)	$	270,925

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

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. Approximately $10.4 million of the Company’s investment in equity securities is an investment in a mutual fund, which is comprised of adjustable rate mortgage securities and thus the fair values are directly correlated to movements in interest rates. 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 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 December 31, 2007 are not other-than-temporary impairments.

7.             Loan Portfolio

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

	As of December 31, 2007					As of June 30, 2007
(Dollars in thousands)	Amount			Percentage of Total		Amount			Percentage of Total
Real estate loans:
Single-family residential	$	249,880		22.18	%	$	273,247		26.10	%
Commercial real estate and multi-family residential	338,679			30.06		316,099			30.19
Construction	104,116			9.24		93,180			8.90
Home equity	327,549			29.07		272,295			26.01
Total real estate loans	1,020,224			90.55		954,821			91.20
Consumer loans	4,981			0.44		3,917			0.37
Commercial business loans	101,504			9.01		88,274			8.43
Total loans receivable	1,126,709			100.00	%	1,047,012			100.00	%
Allowance for loan losses	(12,666		)			(12,210		)
Deferred net loan origination fees and other discounts	1,430					491
Loans receivable, net	$	1,115,473				$	1,035,293

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The following is a summary of the activity in the allowance for loan losses for the six months ended December 31, 2007 and 2006:

(Dollars in thousands)	2007			2006
Balance at the beginning of period	$	12,210		$	16,737
Plus: Provisions (reductions) for loan losses	661			(100		)
Less charge-offs for:
Mortgage loans	(125		)	(76		)
Consumer loans	(127		)	(130		)
Commercial business loans	(7		)	(3,094		)
Total charge-offs	(259		)	(3,300		)
Plus: Recoveries	54			19
Balance at the end of the period	$	12,666		$	13,356

8.Deposits

Deposit balances consisted of the following at December 31, 2007 and June 30, 2007:

	As of December 31, 2007				As of June 30, 2007
(Dollars in thousands)	Amount		Percentage of Total		Amount		Percentage of Total
Savings accounts	$	78,122	7.72	%	$	87,565	8.01	%
Money market deposit accounts	385,388		38.07		403,487		36.93
Certificates less than $100,000	221,371		21.87		239,967		21.96
Certificates $100,000 and greater	72,637		7.18		94,705		8.67
Interest-bearing checking accounts	126,118		12.46		125,905		11.52
Non-interest bearing accounts	128,604		12.70		141,101		12.91
Total deposits	$	1,012,240	100.0	%	$	1,092,730	100.0	%

9.             Trust Preferred Securities and Other Borrowings

On March 31, 2006, the Company issued $25.8 million of Junior Subordinated Debentures to Willow Financial 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 December 31, 2007, the Bank had $75.0 million outstanding in repurchase agreements with a weighted average interest rate of 3.87%.  The underlying securities collateralizing these repurchase agreements had a market value of $85.9 million at December 31, 2007.

10.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, payable on February 29, 2008 to owners of record on February 22, 2008.

11.          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

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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 $16.6 million in loans under this agreement and had a maximum credit risk exposure of $461 thousand at December 31, 2007. The fair value of these guarantees was determined to be insignificant at December 31, 2007.

12.Accounting for Derivative Instruments and Hedging

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

At December 31, 2007, the Company had three 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 December 31, 2007, the total outstanding notional amount on these swaps was $4.0 million.  The weighted average floating and fixed rates on these transactions were 4.9% and 4.6%, respectively, at December 31, 2007. Based on the decrease in the market value of the interest rate swaps from June 30, 2007 to December 31, 2007, the Company recognized a loss of $141 thousand and $262 thousand, respectively, in other income in the consolidated statement of operations for the three and six months ended December 31, 2007 with respect to these three swap arrangements.

In August 2003, Chester Valley purchased a $30.0 million notional amount 3.50% six month LIBOR interest rate cap while simultaneously selling a $30.0 million notional amount 6.00% six-month LIBOR interest rate cap (“Interest Rate Corridor”) which expires in August 2008.  Chester Valley paid a net premium, which entitled it to receive the difference between six-month LIBOR from 3.50% up to 6.00% applied to the $30.0 million notional amount. Upon consummation of the Merger, the Company assumed the Interest Rate Corridor and designated it to hedge certain borrowings of Willow Financial Bank, which were variable in nature and indexed to six-month LIBOR. The Interest Rate Corridor was being used to hedge the cash flows of this borrowing. Prior to December 31, 2006, the Interest Rate Corridor could potentially reduce the negative impact on earnings of the borrowings in a rising interest rate environment. The fair market value of the Interest Rate Corridor has 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.

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 December 31, 2007; Willow Financial Bank (“WFB”), BeneServ, and WIS. The Willow Financial Bank segment primarily provides loan and deposit services to commercial and retail customers through

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its network of 29 branch locations as of December 31, 2007. 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 and six months ended December 31, 2007 and 2006 is as follows:

	For the three months ended December 31,
	2007										2006
	WFB			BeneServ		WIS		Total			WFB		BeneServ		WIS		Total
	(Dollars in Thousands)
Interest income	$	21,768		$	—	$	—	$	21,768		$	21,384	$	—	$	—	$	21,384
Interest expense	11,802			—		—		11,802			10,396		—		—		10,396
Net interest income	9,966			—		—		9,966			10,988		—		—		10,988
Non-interest income	2,483			585		531		3,599			2,775		—		557		3,332
Depreciation expense	779			3		1		783			609		—		—		609
Income tax (benefit) expense	(1,279		)	54		—		(1,225		)	1,000		—		25		1,025
Total net (loss) income	(39,722		)	106		1		(39,615		)	2,359		—		49		2,408
Total assets	1,586,145			5,897		169		1,592,211			1,532,699		—		1,472		1,534,171

	For the six months ended December 31,
	2007										2006
	WFB			BeneServ		WIS		Total			WFB		BeneServ		WIS		Total
	(Dollars in Thousands)
Interest income	$	43,532		$	—	$	—	$	43,532		$	43,274	$	—	$	—	$	43,274
Interest expense	23,261			—		—		23,261			19,947		—		—		19,947
Net interest income	20,271			—		—		20,271			23,327		—		—		23,327
Non-interest income	5,160			1,146		1,159		7,465			4,467		—		1,175		5,642
Depreciation expense	1,490			6		1		1,497			1,207		—		—		1,207
Income tax (benefit) expense	(959		)	155		17		(787		)	2,147		—		78		2,225
Total net (loss) income	(38,794		)	302		33		(38,459		)	4,849		—		152		5,001
Total assets	1,586,145			5,897		169		1,592,211			1,532,699		—		1,472		1,534,171

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 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.

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At December 31, 2007, the Bank had regulatory capital, which was well in excess of regulatory limits set by the Office of Thrift Supervision.  The current requirements and the Bank’s actual capital levels are detailed below:

	Actual Capital				Required for Capital Adequacy Purposes				Required to Be Well Capitalized under Prompt Corrective Action Provision
(Dollars in thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio
As of December 31, 2007
Tangible capital (to tangible assets)	$	120,374	7.9	%	22,968		1.5	%	$	30,624	2.0	%
Core capital (to adjusted tangible assets)	120,374		7.9	%	61,248		4.0	%	76,560		5.0	%
Tier I capital (to risk-weighted assets)	120,374		11.5	%	N/A		N/A		62,952		6.0	%
Risk-based capital (to risk-weighted assets)	132,579		12.6	%	83,936		8.0	%	104,920		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 merger of Willow Financial Bank and First Financial Bank, the Office of Thrift Supervision (“OTS”), as one of the conditions for approval, indicated that, for the periods ending December 31, 2005, 2006, and 2007, Willow Financial Bank must have tier one core capital ratios at least equal to 6.50%, 6.75%, and 7.25%, respectively, and total risk-based capital equal to 11.97%, 12.02% and 12.40%, respectively. Willow Financial Bank must also submit to the Office of Thrift Supervision, quarterly status reports detailing its compliance with the conditions on regulatory capital outlined in its approval letter. The Office of Thrift Supervision’s conditions for approval of the Bank Merger also indicated that, for the periods ending December 31, 2005, 2006, and 2007, Willow Financial Bancorp must have consolidated tangible capital ratios at least equal to 5.14%, 5.59% and 6.12%, respectively. Both the Company and the Bank currently exceeds all of these requirements.

15.          Income Taxes

For the three-month period ended December 31, 2007 the income tax benefit was $1.2 million compared to an income tax provision of $1.0 million for the comparable prior year period.  For the six-month period ended December 31, 2007, the income tax benefit was $787 thousand compared to a provision of $2.2 million for the comparable prior year period.  The effective tax rate for the six-month period ended December 31, 2007 was 2.28% compared to 30.8% for the six-month period ended December 31, 2006. The balance of tax-exempt securities and related income increased during that period and credits received on low income housing partnerships represented a larger portion of pre-tax book earnings. The goodwill impairment charge is not deductible for tax purposes. The federal statutory tax rate used in calculating the Company’s net deferred tax assets decreased from 35% to 34%, during the three months ended September 30, 2007, which increased income tax expense by approximately $108 thousand during the three-months ended September 30, 2007.

16.Commitments and Contingencies

See the Company’s Annual Report on Form 10-K/A, as amended, for the year ended June 30, 2007 for a summary of existing commitments and contingencies.  There have been no material changes in the Company’s commitments and contingencies since June 30, 2007.

17.          Goodwill 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.

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 this quarter. The market price of our stock declined from $12.11 on October 1, 2007 to $8.27 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 we compute using earnings multiple approach and various transaction market approaches.  Valuations were performed for each of the Company’s three reporting units. The Company’s completion of Step 1 indicated that

17

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 related its’ Banking unit for the quarter ended December 31, 2007 of $40.0 million. The impairment charge has no impact on the Company’s or the Bank’s tangible capital nor does 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.

18.          Subsequent Event — Pending Acquisition

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 have approved the Merger Agreement. The transaction is expected to close in the fourth calendar quarter of 2008.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Form 10-Q contains certain forward-looking statements (as defined in the Securities Exchange Act of 1934 and the regulations thereunder) which are not historical facts or which indicate the intentions, plans, beliefs, expectations or opinions of the Company’s management. Forward looking statements may be identified by the use of words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “should,” “could,” “may,” “likely,” “probably,” or “possibly”.  These statements reflect our current view with respect to future events and are subject to certain risks, uncertainties, and assumptions. Such statements are subject to certain risks and uncertainties, many of which are difficult to predict and generally beyond the control of Willow Financial Bancorp, Inc. and its management, that could cause actual results to differ materially from those expressed in, or implied or projected by, the forward looking information and statements. Factors that may affect the Company’s future operations are discussed in documents filed by Willow Financial Bancorp, Inc. with the Securities and Exchange Commission (“SEC”) from time to time, including the Company’s annual report on Form 10-K/A for the fiscal year ended June 30, 2007. Additional factors that could cause future results to vary from current management expectations include, but are not limited to, general economic conditions and the interest rate yield curve, legislative and regulatory changes, demand for loan products, changes in deposit flows, competition, changes in the quality or composition of the Company’s loan and investment portfolios, among other things.  Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated, expected, or intended.  We do not intend to update these forward-looking statements. Copies of the above referenced documents may be obtained from Willow Financial Bancorp, Inc. upon request without charge (except for Exhibits thereto) or can be accessed at the website maintained by the SEC at http://www.sec.gov.

Description of Business

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

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Willow Financial Bank and Willow Grove Bank.  Coincident with the name change, the Company’s trading symbol on the NASDAQ Global Select 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.

On December 21, 2007, the Company completed its acquisition of Carnegie Wealth Management (“Carnegie”) for a purchase price of up to $4.8 million in cash plus approximately $1.1 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 acquisition expands Willow’s wealth management focus, bringing total assets under management to over $900 million. The Company recorded goodwill and other intangibles of $3.2 million as a result of this acquisition based on the preliminary purchase price allocation.

The Company’s business plan focuses on the following primary goals—changing operations to a full-service community bank while maintaining a high level of asset quality.  The Company has made acquisitions of financial services businesses and other complementary lines of business to diversify revenue and provide additional services to customers. To the extent that additional acquisition opportunities present themselves and are deemed prudent by the Board of Directors and management, additional acquisitions will be considered.

The Company’s executive offices are located at 170 South Warner Road, Suite 300, Wayne, Pennsylvania, and its telephone number is (610) 995-1700.

Results of Operations

General.   For the three-month period ended December 31, 2007, the Company recorded a net loss of $39.6 million or $2.62 diluted loss per share as compared to net income of $2.4 million or $0.16 diluted earnings per share for the comparable quarter in the prior year. For the six-month period ended December 31, 2007, the net loss was $38.5 million or $2.55 diluted loss per share as compared to $5.0 million or $0.32 diluted earnings per share for the comparable period in the prior year. The most significant cause for these declines was a goodwill impairment charge of $40.0 million recorded in the three month period ended December 31, 2007. The Company’s net interest margin on a tax-equivalent basis decreased 42 basis points to 2.83% for the three months ended December 31, 2007 from 3.25% for the three months ended December 31, 2006. The net interest margin on a tax-equivalent basis decreased 47 basis points to 2.93% for the six months ended December 31, 2007 from 3.40% for the six months ended December 31, 2006.

Goodwill 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 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 this quarter. 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 we compute using earnings multiple approach and various transaction market approaches.  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 related its’ banking unit of $40.0 million for the quarter ended December 31, 2007. This impairment charge has no impact on the Company’s or the Bank’s tangible capital nor does 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.

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Net Interest Income.  Net interest income is determined primarily from the average interest rate spread (i.e. the difference between the average yields on interest-earning assets and the average rates paid on interest-costing liabilities) as well as the relative amounts of average interest-earning assets compared to interest-bearing liabilities. For the three months ended December 31, 2007 and 2006, our interest rate spread was 2.33% and 2.75%, respectively.  For the six months ended December 31, 2006 and 2006, our interest rate spread was 2.41% and 2.95%, respectively.

Net interest income for the three-month periods ended December 31, 2007 and 2006 was $10.0 million and $11.0 million, respectively, a decrease of $1.0 million.  This decrease was due primarily to an increase of 27 basis points in the average costs of interest-bearing liabilities to 3.75% for the three-month period ended December 31, 2007 from 3.48% for the three-month period ended December 31, 2006.  In addition, there was a 27 basis point decrease in the average yield on loans to 6.29% during the same period.  Net interest income for the six-month periods ended December 31, 2007 and 2006 was $20.3 million and $23.3 million, respectively, a decrease of $3.0 million. Net interest income decreased during this period primarily as a result of a 49 basis point increase in the average cost of interest-bearing liabilities to 3.79% for the six-month period ended December 31, 2007 as compared to 3.30% for the six-month period ended December 31, 2006. During the six months ended December 31, 2007, pressures existed in the market place that maintained deposit rates at a high level. Additionally, the Company increased its commercial loan portfolio, which tends to pay interest on a floating basis.  With the declining interest rate market, the Company’s commercial loan yields declined from the prior year.

The following tables present the average daily balances for various categories of assets and liabilities, and income and expense related to those assets and liabilities for the three and six-month periods ended December 31, 2007 and 2006.  Loans receivable include non-accrual loans.  To adjust nontaxable securities to a taxable equivalent, a 34.0% effective rate has been used for the three and six-month periods ended December 31, 2007 and 2006.  The adjustment of tax-exempt loans and securities to a tax equivalent yield in the table below may be considered to include non-GAAP financial information.  Management believes that it is a standard practice in the banking industry to present net interest margin, net interest spread and net interest income on a fully tax equivalent basis.  Therefore, management believes, these measures provide useful information to investors by allowing them to make peer comparisons. A GAAP reconciliation also is included below.

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	Three months Ended December 31,
	2007						2006
(Dollars in Thousands)	Average Balance		Interest		Yield/ Rate		Average Balance		Interest		Yield/ Rate
Interest-earning assets:
Single family residential	$	280,310	$	3,861	5.51	%	$	292,683	$	4,187	5.72	%
Construction and land	77,607		1,333		6.72		72,583		1,590		8.57
Commercial real estate	287,841		4,780		6.64		282,599		4,915		6.96
Commercial business	157,419		2,841		7.06		127,505		2,369		7.27
Consumer	327,280		5,148		6.16		269,597		4,236		6.15
Total loans	$	1,130,457	$	17,963	6.29		$	1,044,967	$	17,297	6.56
Securities and other investments	302,052		4,110		5.32		329,778		4,398		5.22
Total interest-earning assets	1,432,509		$	22,073	6.08	%	1,374,745		$	21,695	6.23	%
Non-interest earning assets	162,944						162,565
Total Assets	$	1,595,453					$	1,537,310
Liabilities and Stockholders’ Equity:
Interest-bearing deposits	$	899,645	$	7,902	3.48		$	894,295	$	7,113	3.16
FHLB borrowings	247,382		2,720		4.36		233,992		2,429		4.12
Repurchase agreements	75,000		744		3.94		20,000		253		5.02
Trust preferred securities	25,774		436		6.71		36,150		601		6.60
Total interest-bearing liabilities	1,247,801		11,802		3.75	%	1,184,437		10,396		3.48	%
Non-interest bearing deposits	131,088						135,102
Non-interest-bearing liabilities	16,071						13,803
Stockholders’ equity	200,493						203,968
Total liabilities and stockholders’ equity	$	1,595,453					$	1,537,310
Net interest income/interest rate spread			$	10,271	2.33	%			$	11,299	2.75	%
Net interest-earning assets/net interest margin	$	184,708			2.83	%	$	190,308			3.25	%
Ratio of average interest-earning assets to interest-bearing liabilities					115	%					116	%

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	Six months Ended December 31,
	2007						2006
(Dollars in Thousands)	Average Balance		Interest		Yield/ Rate		Average Balance		Interest		Yield/ Rate
Interest-earning assets:
Single family residential	$	278,848	$	7,383	5.30	%	$	295,345	$	8,759	5.93	%
Construction and land	76,716		3,018		7.70		74,745		3,294		8.62
Commercial real estate	284,646		9,953		6.99		286,786		9,822		6.85
Commercial business	147,715		5,411		7.17		128,962		4,817		7.31
Consumer	309,807		9,798		6.19		268,247		8,437		6.15
Total loans	$	1,097,732	$	35,563	6.41		$	1,054,085	$	35,129	6.60
Securities and other investments	306,309		8,556		5.46		329,656		8,656		5.14
Total interest-earning assets	1,404,041		$	44,119	6.20	%	1,383,741		$	43,785	6.25	%
Non-interest earning assets	161,784						159,491
Total Assets	$	1,565,825					$	1,543,232
Liabilities and Stockholders’ Equity:
Interest-bearing deposits	$	919,573	$	16,469	3.55		$	896,025	$	13,608	3.01
FHLB borrowings	220,308		4,912		4.42		245,679		4,725		3.82
Repurchase agreements	50,571		1,027		4.03		20,000		508		5.04
Trust preferred securities	25,774		853		6.56		36,168		1,106		6.07
Total interest-bearing liabilities	1,216,226		23,261		3.79	%	1,197,872		19,947		3.30	%
Non-interest bearing deposits	134,704						129,288
Non-interest-bearing liabilities	14,958						13,430
Stockholders’ equity	199,937						202,642
Total liabilities and stockholders’ equity	$	1,565,825					$	1,543,232
Net interest income/interest rate spread			$	20,858	2.41	%			$	23,838	2.95	%
Net interest-earning assets/net interest margin	$	187,815			2.93	%	$	185,869			3.40	%
Ratio of average interest-earning assets to interest-bearing liabilities					115	%					116	%

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

	Three months Ended December 31,
	2007						2006
	Interest Income		Tax Adjustment		Adjusted Income		Interest Income		Tax Adjustment		Adjusted Income
	(Dollars in thousands)
Loans	$	17,865	$	98	$	17,963	$	17,110	$	187	$	17,297
Investments	3,903		207		4,110		4,274		124		4,398
Total	$	21,768	$	305	$	22,073	$	21,384	$	311	$	21,695

The net interest margin on a GAAP basis was 2.75% and 3.16%, respectively, for the three months ended December 31, 2007 and 2006.

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	Six months Ended December 31,
	2007						2006
	Interest Income		Tax Adjustment		Adjusted Income		Interest Income		Tax Adjustment		Adjusted Income
	(Dollars in thousands)
Loans	$	35,367	$	196	$	35,563	$	34,793	$	336	$	35,129
Investments	8,165		391		8,556		8,481		175		8,656
Total	$	43,532	$	587	$	44,119	$	43,274	$	511	$	43,785

The net interest margin on a GAAP basis was 2.85% and 3.33%, respectively, for the six months ended December 31, 2007 and 2006.

Interest Income.  Interest income on loans increased $755 thousand, or 4.4%, for the three-month period ended December 31, 2007 compared to the three-month period ended December 31, 2006. This increase resulted primarily from a $85.5 million, or 8.2%, increase in average balance of loans over the period which was partially offset by a 27 basis point, or 4.1% decrease in the average yield on the loan portfolio. Interest income on loans increased $574 thousand, or 1.6%, for the six-month period ended December 31, 2007 compared to the similar prior year period. This resulted primarily from an increase in average loan balances of $43.6 million, or 4.1% in the six months ended December 31, 2007 compared to the six months ended December 31, 2006. This increase was offset by a decrease in the average yields earned on loans for the six-month period ended December 31, 2007 of 19 basis points to 6.41%. The decrease in average yields on loans for the three-month and six-month periods ended December 31, 2007 resulted primarily from the decrease in short-term interest rates that occurred between June 30, 2007 and December 31, 2007. Specifically, the Federal Reserve target rate decreased from 5.25% at June 30, 2007 to 4.25% at December 31, 2007. The Bank has a significant portfolio of variable rate loans, including commercial, residential mortgage, and consumer home equity loans whose rates reset with changes in Federal Reserve target rates. In addition, the yield on construction and land loans declined due to an internally originated $6.7 million collateralized commercial construction and land development loan with a long-term client of the Bank entering non-accrual status during the three months ended December 31, 2007. Also, the increase in loan balances was due primarily to new loans originated after market loan rates had decreased and during a period of intense competition for high-quality commercial, residential mortgage, and consumer loans. The Company does not invest in sub-prime loans or related assets and, accordingly, did not incur any significant impact to its loan yields from disruptions in the credit markets for sub-prime assets during the six-month period ended December 31, 2007. Interest income on securities decreased $371 thousand and $316 thousand, or 8.7% and 3.7%, respectively, for the three-month and six-month periods ended December 31, 2007 compared to the three-month and six-month periods ended December 31, 2006. The declines are due to the decrease of $27.7 million, or 8.4%, and $23.3 million, or 7.1%, respectively, in the average balance of investment securities for the three and six month periods ended December 31, 2007 as compared to the comparable prior year periods.  These decreases were partially offset by increases in the average tax-equivalent yields earned on securities of 10 basis points and 32 basis points for the three-month and six-month periods ended December 31, 2007 as compared to the same periods ended December 31, 2006. The Company’s investment security yields were enhanced during the three-month and six-month periods ended December 31, 2007 as the Company was able to reinvest significant cash inflows from lower-yielding investments into higher-yielding investments during the six-month period ending December 31, 2007.

Interest Expense.   Interest expense on deposit accounts increased $789 million and $2.9 million, or 11.1% and 21.0%, respectively, for the three-month and six-month periods ended December 31, 2007 compared to the comparable prior year period.  The increase resulted primarily from an increase in the average cost of deposits by 32 basis points and 54 basis points, respectively, for the three-month and six-month periods ended December 31, 2007 as compared to the similar prior year periods.  Also, there was an increase in average deposits of $5.4 million and $23.5 million, respectively, for the three-month and six-month periods ended December 31, 2007 compared to the same periods ended December 31, 2006. During the three-month and six-month periods ended December 31, 2007, the Company experienced a lag in rate decreases on its variable rate deposits. This lag in deposit rate decreases is due to the competitive market which kept deposit rates higher during the immediate periods following Federal Reserve rate reductions. With the objective of maintaining competitive core deposit pricing, the Company’s variable deposit rate decreases occurred at a slower pace than the decreases experienced in the loan portfolio as floating rate loans contractually require adjustments in rates consistent with the Federal Funds rate adjustments.  Alternatively, the Company did not compete heavily for single-service certificates of deposit, thereby avoiding unprofitable rates on new certificates of deposit during the six-month period ended December 31, 2007. During the three-month period ended December 31, 2007, interest expense on borrowings increased by $617 thousand as compared to the prior comparable period.  This increase was due primarily to a $58.0 million increase in average borrowings during that period. During the six-month period ended December 31, 2007, interest expense on borrowings increased by $453 thousand as compared to the six-months ended December 31, 2006.  This increase was due primarily to an increase of 37 basis points

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in the average cost of borrowings. This increase occurred primarily due to certain short-term borrowings with lower average interest costs being replaced upon maturity with longer-term funding, which increased the average cost of funds. The Company chose this course of action to prudently manage its liquidity risk and interest rate risk, particularly in light of the funding market disruptions that existed during the 2007 calendar year.

Provision for Loan Losses.   The Company’s provision for loan losses increased $419 thousand for the three months ended December 31, 2007 compared to the corresponding prior three-month period as no provision was deemed necessary during that period. For the six months ended December 31, 2007 compared to the six-month period ended December 31, 2006, the provision for loan losses increased by $761 thousand.  The increase in the provision expense is a result of the reduction of residential mortgage loans as a percentage of total loans as the Company now sells primarily all of its residential mortgage production and the corresponding increase in commercial loans, which carry a higher level of risk, as a percentage of total loans. In addition, total non-performing loans increased from $3.9 million at June 30, 2007 to $10.1 million at December 31, 2007 due primarily to an internally originated $6.7 million collateralized commercial construction and land development loan with a long term client of the Bank. Management believes, to the best of its knowledge, that the allowance for loan losses was adequate at December 31, 2007 and represents at such date all known and inherent losses in the portfolio that are both probable and reasonably estimable, however, no assurance can be given as to the amount or timing of additional provisions for loan losses in the future as a result of potential increases in the amount of the Company’s non-performing loans in the remainder of the Company’s loan portfolio.

Non-Interest Income.  Non-interest income increased $267 thousand and $1.8 million, or 8.0% and 32.3%, respectively, for the three-month and six-month periods ended December 31, 2007 as compared to the comparable periods ended December 31, 2006. The increase during the three-month period was due primarily to an increase of $476 thousand in gains on the sale of loans, and $585 thousand in income recorded from the insurance operations of BeneServ. This increase was offset when compared to the prior period which included a one-time gain of $804 thousand recorded on the unwinding of an interest rate corridor and a decrease of $105 thousand in gains on the sale of securities available for sale. The increase for the six-month period was due primarily to an increase of $964 thousand in gains on the sale of loans, $1.1 million in income recorded from the insurance operations of BeneServ, and an increase of $389 thousand in investment services income. These increases were offset when compared to the six months ended December 31, 2006 which included the $804 thousand one-time gain noted above and a decrease of $89 thousand in gains on the sale of securities available for sale.

Non-Interest Expense.  Non-interest expense increased $43.1 million and $44.5 million, or 395.9% and 203.6%, respectively, for the three-month and six-month periods ended December 31, 2007 as compared to the comparable periods ended December 31, 2006. The most significant cause for this increase was the previously discussed goodwill impairment charge recorded in the three month period ended December 31, 2007. In addition, compensation and benefits increased $1.5 million and $2.6 million, respectively, for the three-month and six-month periods ended December 31, 2007 as compared to the comparable prior year periods due primarily to the acquisition of BeneServ, which occurred on March 30, 2007 and increased commissions paid to loan officers due to the expansion of the mortgage operations. Occupancy and equipment increased $325 thousand and $618 thousand, respectively, during these same periods due primarily to rental and other occupancy costs associated with the opening of the Oxford branch and the aforementioned BenServ acquisition. Data processing costs increased $140 thousand and $244 thousand, respectively, for the three-month and six-month periods ended December 31, 2007 as compared to the similar prior year periods due principally to rate increases of third party providers as well as increased account volumes. Professional fees increased $603 thousand and $582 thousand during these same periods due primarily to consulting and legal costs incurred in investigating the Company’s previously disclosed out of balance condition as well as increased costs for the Company’s independent registered public accounting firm.

Income Tax Benefit/Expense.  For the three-month period ended December 31, 2007 the income tax benefit was $1.2 million compared to an income tax provision of $1.0 million for the comparable prior year period.  For the six-month period ended December 31, 2007, the income tax benefit was $787 thousand compared to a provision of $2.2 million for the comparable prior year period.   The effective tax rate for the six-month period ended December 31, 2007 was 2.28% compared to 30.8% for the six-month period ended December 31, 2006. This decrease is due primarily to an increase during the six-months ended December 31, 2007 in the balance of tax-exempt securities and related income as well as credits received on low income housing partnerships representing a larger portion of pre-tax book earnings, exclusive of the goodwill impairment charge which is not deductible for tax purposes.  This was partially offset by a change in the federal statutory tax rate used in calculating the Company’s net deferred tax assets from 35% to 34%, which increased income tax expense by approximately $108 thousand during the three-months ended September 30, 2007.

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Changes in Financial Condition

General.  Total assets of the Company increased by $40.9 million, or 2.6%, from June 30, 2007 to December 31, 2007 due primarily to a $80.2 million increase in the net loan portfolio. Additionally, loans held for sale increased $15.4 million and FHLB stock increased $4.6 million. Goodwill decreased by $36.8 million due primarily to the aforementioned impairment charge of $40.0 million. Securities available for sale and held to maturity decreased a combined $4.9 million. Cash and cash equivalents decreased by approximately $17.9 million.  Total liabilities amounted to $1.43 billion at December 31, 2007, an increase of $79.7 million, or 5.9% from June 30, 2007. FHLB advances increased $112.8 million, or 59.5%, from June 30, 2007. Securities sold under agreements to repurchase increased $55.0 million, or 275.0%, from June 30, 2007. Total deposits decreased $80.5 million, or 7.4%, to $1.01 billion. Total stockholders’ equity decreased $38.8 million to $160.7 million at December 31, 2007 primarily due to the goodwill impairment charge.

Cash and Cash Equivalents. Cash and cash equivalents amounted to $42.4 million and $60.3 million at December 31, 2007 and June 30, 2007, respectively.  Cash and cash equivalents decreased during the period due primarily to the increase in loan fundings and decrease in deposits, offset by proceeds from FHLB advances and repayments of investment securities.

Assets Available or Held for Sale. Securities classified as available for sale increased $1.6 million from $188.3 million at June 30, 2007 to $189.9 million at December 31, 2007. Loans classified as held for sale increased  by $15.4 million, or 190.3%, to $23.4 million at December 31, 2007 from $8.1 million at June 30, 2007 due to an increase in origination and sale commitment volumes during that period.

Investment Securities Held to Maturity. At December 31, 2007, securities classified as held to maturity totaled $81.8 million as compared to $88.4 million at June 30, 2007. The approximate $6.5 million decline was primarily the result of calls and principal repayments within the portfolio.

Loans.  The net loan portfolio of the Company increased $80.2 million, or 7.7% to $1.12 billion at December 31, 2007.  The increase was due to growth experienced in the commercial real estate and construction portfolios as well as the acquisition of $34.9 million in home equity loans during the three-month period ended September 30, 2007. These purchased loans continue to perform substantially in accordance with their terms.

The following table sets forth information with respect to non-performing assets identified by the Company, including non-accrual loans and other real estate owned.

(Dollars in thousands)	December 31, 2007			June 30, 2007
Non-accrual loans:
Mortgage loans:
Single-family residential	$	762		$	845
Construction	7,198			463
Commercial real estate and multi-family residential	898			697
Home Equity	269			601
Consumer loans	9			56
Commercial business loans	957			1,188
Total	10,093			3,850
Performing troubled debt restructurings	1			1
Total non-performing loans	10,094			3,851
Other real estate owned, net	447			—
Total non-performing assets	$	10,541		$	3,851
Non-performing loans to total loans	0.90		%	0.37		%
Non-performing assets to total assets	0.66		%	0.25		%

Total non-performing assets increased $6.7 million, or 173.7%, to $10.5 million at December 31, 2007 compared to $3.9 million at June 30, 2007. Non-performing loans to total loans and non-performing loans to total assets were 0.90% and 0.66%, respectively, at December 31, 2007 as compared to 0.37% and 0.25%, respectively at June 30, 2007. This increase during the six-month period ended December 31, 2007 resulted primarily from an internally originated $6.7 million collateralized commercial construction and land development loan with a long-term client of the Bank.  Also, the real estate

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owned portfolio at December 31, 2007 included two residential properties located within the Company’s market area with an aggregate carrying value of $447 thousand as compared to no real estate owned as of June 30, 2007.  The allowance to gross loans decreased to 1.12% at December 31, 2007 from 1.17% at June 30, 2007. This decrease was due to the growth in the loan portfolio, partially offset by the impact of the increase in non-performing assets noted above.

Intangible Assets. The amount of the Company’s intangible assets totaled $72.1 million at December 31, 2007 compared to $109.9 million at June 30, 2007.  The decrease resulted primarily from the goodwill impairment charge of $40.0 million and normal intangible asset amortization offset by intangible assets of $3.2 million recorded from the acquisition of Carnegie Wealth Management.

Deposits.  The Company’s total deposits decreased by $80.5 million, or 7.4%, to $1.01 billion at December 31, 2007.  The decrease resulted from the maturity of higher costing certificates of deposit, which did not renew with the Bank.

Borrowings. Advances from the FHLB of Pittsburgh are an additional source of funds used to supplement the funding of loan demand as well as for liquidity and other asset/liability management purposes. At December 31, 2007, the total amount of these borrowings outstanding was $302.6 million, which is a $112.8 million, or a 59.5%, increase from the $189.8 million outstanding at June 30, 2007.  The Bank determined that it was beneficial to utilize these borrowings to fund its loan growth rather than pay higher rates for certificates of deposit..

Securities Sold Under Agreements to Repurchase.  The Company’s repurchase liability increased by $55.0 million from June 30, 2007 to December 31, 2007 due to six new agreements that were entered into by the Company during that period due to the opportunity to obtain lower cost funding rates than through FHLB borrowings, and maturing certificates of deposit.

Stockholders’ Equity.  Total stockholders’ equity of the Company amounted to $160.7 million at December 31, 2007 compared to $199.4 million at June 30, 2007, a decrease of $38.8 million.  This decrease was primarily the result of the goodwill impairment charge of $40.0 million offset by net income, before the impairment charge, of $1.5 million. The impairment charge has no impact on the Company’s or the Bank’s tangible capital nor does it impact the Company’s tangible book value per share. In addition, accumulated other comprehensive income increased by $1.4 million during the six-months ended December 31, 2007 as a result of $1.5 million in unrealized investment security gains, net of tax. Treasury stock decreased by $787 thousand primarily due to the release of $1.1 million in shares for the purchase of Carnegie Wealth Management offset by $299 thousand in stock repurchases. Cash dividends paid for the six-months ended December 31, 2007 were $3.6 million.

Liquidity and Commitments

The Company’s liquidity, represented by cash and cash equivalents, is a product of its operating, investing, and financing activities.  The Company’s primary sources of funds are deposits, sales, amortization, prepayments and maturities of outstanding loans and mortgage-backed securities, sales and maturities of investment securities and other short-term investments and funds provided from operations.  The Company also utilizes borrowings, generally in the form of FHLB advances, as a source of funds.  While scheduled payments from the amortization of loans and mortgage related securities and maturing investment securities and short-term investments are relatively predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions and competition.  In addition, the Company invests excess funds in short-term interest-earning assets, which provide liquidity to meet lending requirements. Additionally, the Company’s portfolio of securities available for sale provides the Company with additional tools in managing its liquidity.

Liquidity management is both a daily and long-term function of business management.  Excess liquidity is generally invested in short-term investments such as U.S. Treasury securities.  The Company uses its sources of funds primarily to meet its ongoing commitments, to pay maturing certificates of deposit and savings withdrawals, fund loan commitments and maintain a portfolio of mortgage backed and mortgage related securities and investment securities.  Certificates of deposit scheduled to mature in one year or less at December 31, 2007 totaled $231.3 million.  Based on historical experience, management believes, over the longer term, that a significant portion of maturing certificates of deposit will remain with the Company.  The Company has the ability to utilize borrowings, typically in the form of FHLB advances, as an additional source of funds.  The maximum borrowing capacity available to the Company from the FHLB was $581.5 million as of December 31, 2007, based on qualifying collateral, of which $292.9 million was available to draw upon at December 31, 2007.  The Company is required to maintain sufficient liquidity to ensure its safe and sound operation.  The Company anticipates that it will continue to have sufficient funds, together with borrowings, to meet its current commitments.

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Capital

At December 31, 2007 and June 30, 2007, the Bank had regulatory capital which was well in excess of regulatory limits set by the Office of Thrift Supervision.  For additional information and the Bank’s specific levels of regulatory capital at December 31, 2007 and June 30, 2007, see note 14 of the Notes to the Unaudited Consolidated Financial Statements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

For the discussion of the Company’s asset and liability management policies as well as the potential impact of interest rate changes upon the market value of the Company’s portfolio equity, see “Quantitative and Qualitative Disclosure About Market Risk” in the Company’s Amendment No. 2 Form 10-K/A for the year ended June 30, 2007.  Management, as part of its regular practices, performs periodic reviews of the impact of interest rate changes upon net interest income and the market value of the Company’s portfolio equity.  Management monitors interest rate risk and takes actions which it deems appropriate to maintain the short-term risk at levels considered acceptable while focusing on a longer-term loan diversification plan, which concentrates on the acquisition of shorter maturity or repricing assets.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

This evaluation of Disclosure Controls and Procedures should be read in conjunction with Item 9A Controls and Procedures included in Amendment No. 2 on Form 10-K/A to the Company’s Annual Report on Form 10-K for the year ended June 30, 2007 filed with the Securities and Exchange Commission on May 5, 2008.

Our management evaluated, with the participation of our Chief Executive Officer and Principal Financial Officer, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report.  Based on such evaluation, our Chief Executive Officer and Principal Financial Officer have determined that the remediation procedures discussed in the Company’s June 30, 2007 Form 10-K/A, as amended, are being implemented as of the date of this Quarterly Report.

In light of the material weaknesses previously reported in the Company’s 2007 Amendment No.1 on Form 10-K/A, the Company implemented additional analyses and procedures to ensure that its consolidated financial statements are prepared in accordance with GAAP and are fairly presented in all material respects. The Company has performed the additional analyses and procedures with respect to this Quarterly Report on Form 10-Q. Refer to Amendment No. 2 on Form 10-K/A to the Company’s June 30, 2007 Form 10-K/A for a detailed description of the additional procedures and analysis that were performed. Accordingly, the Company believes that the unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q fairly present, in all material respects, the Company’s financial position, results of operations and cash flows for the periods presented.

Changes in Internal Control Over Financial Reporting

Except as described in Item 9A to our Annual Report on Form 10-K for the year ended June 30, 2007, as amended, and incorporated by reference from Amendment No. 2 on Form 10-K/A, as filed on May 5, 2008 (SEC FILE No. 000-49706), no change in our internal control over financial reporting (as defined in Rules 13a-15(f) or 15(d)-15(f) under the Securities Exchange Act of 1934) occurred during the last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Part II. OTHER INFORMATION

Item 1.    Legal Proceedings

There has been no material developments in any of the legal proceedings previously reported in Item 3 of the Company’s Form 10-K for the year ended June 30, 2007.

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

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adverse effect on the financial condition and operations of the Company.

Item 1a. Risk Factors

Management of the Company does not believe that there have been any material changes to the risk factors previously described under Item 1A of the Company’s Annual Report on Form 10-K for the year ended June 30, 2007, previously filed with the Securities and Exchange Commission on October 10, 2007 (File No 000-49706).

Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds

a. Not applicable

b. Not applicable.

c. Purchases of Equity Securities

The following table represents the repurchasing activity of the share repurchase program during the six month period ended December 31, 2007:

Period	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
Month #1 July 1, 2007 – July 31, 2007	—	$	n/a	—	604,063
Month #2 August 1, 2007 – August 31, 2007	25,000	11.90		25,000	579,063
Month #3 September 1, 2007 – September 30, 2007	—	n/a		—	579,063
Month #4 October 1, 2007 – October 31, 2007	—	n/a		—	579,063
Month #5 November 1, 2007 – November 30, 2007	—	n/a		—	579,063
Month #6 December 31, 2007 – December 31, 2007	—	n/a		—	579,063
Total	25,000	$	11.90	25,000	579,063

Notes to this table:

(a)  On January 24, 2007, the Company issued a press release announcing that the Board of Directors authorized a share repurchase program (the “Program”). The Company has been in a blackout period since October 1, 2007 due to its delayed SEC filings. Repurchases may occur when the Company becomes current in these filings.

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

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

Item 3.    Defaults Upon Senior Securities

Not applicable.

Item 4.    Submission of Matters to a Vote of Security Holders

The Company’s Annual Meeting of Shareholders was held on November 14, 2007. Presented below is information regarding the results of matters voted upon at the Annual Meeting.

a.)RESULTS OF ELECTION OF CERTAIN DIRECTORS

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Name	For	Withhold
Donna Coughey	12,995,967	1,001,440
John J. Cunningham, III	13,050,288	947,119
James E. McErlane	12,942,208	1,055,199
William H. Weihenmayer	12,806,806	1,190,601

b.)Ratification of KPMG, LLP as the Company’s Independent Public Accounting Firm for fiscal 2008:

FOR	13,570,319
AGAINST	353,908
ABSTAIN	73,180

Item 5.    Other Information

a. Not applicable

b. Not applicable

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Item 6.    Exhibits

Exhibit No.	Description
3.1	Articles of Incorporation, as amended, of Willow Financial Bancorp, Inc. (1)
3.2	Amended and Restated Bylaws of Willow Grove Bancorp, Inc. (as amended through August 31, 2005)(2)
4.0	Form of Stock Certificate of Willow Grove Bancorp, Inc. (3)
4.1	Indenture, dated as of March 31, 2006, between Willow Grove Bancorp, Inc. and U.S. Bank National Association, as trustee (4)
4.2	Amended and Restated Declaration of Trust of Willow Grove Statutory Trust I, dated as March 31, 2006, among Willow Grove Bancorp, Inc., as sponsor, U.S. Bank National Association, as institutional trustee, and the administrators named therein (4)
4.3	Guarantee Agreement, dated as of March 31, 2006, between Willow Grove Bancorp, Inc. and U.S. Bank National Association, as guarantee trustee (4)
10.1	Retirement and Severance Agreement by and among Willow Grove Bancorp, Inc., Willow Grove Bank and Frederick A. Marcell Jr. (5)
10.2	Employment Agreement, dated November 25, 2002, between First Financial Bank and Michael J. Sexton (6)
10.3	Supplemental Retirement Agreement for Frederick A. Marcell Jr. and First Amendment thereto (7)(8)
10.4	Willow Grove Bancorp, Inc. 1999 Recognition and Retention Plan and Trust Agreement (9)
10.5	Willow Grove Bancorp, Inc. 2002 Recognition and Retention Plan and Trust Agreement (10)
10.6	Willow Grove Bancorp, Inc. Deferred Compensation Plan (11)
10.7	Form of First Financial Bank Executive Survivor Income Agreement by and between First Financial Bank and each of Donna M. Coughey, G. Richard Bertolet, Matthew D. Kelly and Colin N. Maropis (12)
10.8	First Financial Bank Executive Deferred Compensation Plan, as amended and restated effective January 1, 2003, and amendment thereto (13)
10.9	First Financial Bank Board of Directors Deferred Compensation Plan, as amended and restated effective January 1, 2003, and amendment thereto (13)
10.10	Willow Grove Bancorp, Inc. 2005 Recognition and Retention Plan and Trust Agreement (14)
10.11	Memorandum Agreement between the Company, the Bank and William M. Wright, dated December 27, 2006 (15)
10.12	Amended and Restated Employment Agreement between Willow Financial Bancorp, Inc., Willow Financial Bank and Donna M. Coughey (8)
10.13	Amended and Restated Employment Agreement between Willow Financial Bancorp, Inc., Willow Financial Bank and Joseph T. Crowley (8)
10.14	Amended and Restated Employment Agreement between Willow Financial Bank and Ammon J. Baus (8)
10.15	Amended and Restated Employment Agreement between Willow Financial Bank and Matthew D. Kelly (8)
10.16	Amended and Restated Employment Agreement between Willow Financial Bank and G. Richard Bertolet (8)
10.17	Amended and Restated Change in Control Severance Agreement between Willow Financial Bank and Neelesh Kalani (8)
10.18	Willow Financial Bank Amended and Restated 2005 Executive Deferred Compensation Plan (8)
10.19	Willow Financial Bank Amended and Restated Directors 2005 Deferred Compensation Plan (8)
10.20	Willow Financial Bank Amended and Restated Non-Employee Directors’ Retirement Plan (8)
10.21	First Amendment to Supplemental Retirement Agreement for Frederick A. Marcell, Jr. (8)
10.22	Willow Financial Bancorp, Inc. Amended and Restated 2007 Supplemental Executive Retirement Plan (8)
10.23	Willow Financial Bancorp, Inc. Amended and Restated 1999 Stock Option Plan (8)
10.24	Willow Financial Bancorp, Inc. Amended and Restated 2002 Stock Option Plan (8)
10.25	Amendment Number One to Chester Valley Bancorp, Inc. 1993 Stock Option Plan (8)
10.26	Amendment Number One to Chester Valley Bancorp, Inc. 1997 Stock Option Plan (8)
10.27	Amended and Restated Employment Agreement between Willow Financial Bank and Colin N. Maropis (8)
10.28	Amended and Restated Employment Agreement between Willow Financial Bank and Thomas Saunders (8)
10.29	Form of Amended and Restated Employment Agreement between Willow Financial Bank, BeneServ, Inc. and certain executives (8)
10.30	Form of Amended and Restated Change in Control Severance Agreement between Willow Financial Bank and certain officers (8)
31.1	Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive Officer
31.2	Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer
32.0	Section 1350 Certifications

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(1)	Incorporated by reference from the Company’s Form 8-K, dated September 21, 2006 and filed with the SEC on September 22, 2006 (SEC File No. 000-49706)
(2)	Incorporated by reference from the Company’s Form 8-K, dated August 31, 2005 and filed with the SEC on September 1, 2005 (SEC File No. 000-49706)
(3)	Incorporated by reference from the Company’s Registration Statement on Form S-1 filed on December 14, 2001, as amended, and declared effective on February 11, 2002 (Registration No. 333-75106)
(4)	Exhibit not included pursuant to Item 601(b) (4) (iii) of Regulation S-K. The Company will provide a copy of such exhibit to the SEC upon request.
(5)	Incorporated by reference from the Company’s Current Report on Form 8-K/A, dated as of January 20, 2005 and filed with the SEC on January 26, 2005 (SEC File No. 0-49706).
(6)	Incorporated by reference from Exhibit 10L to the Annual Report on Form 10-K of Chester Valley Bancorp Inc. for the fiscal year ended June 30, 2003 and filed with the SEC on September 12, 2003 (SEC File No. 0-18833).
(7)	Incorporated by reference from the registration statement on Form S-1 filed by the Company’s predecessor, a federal corporation also known as Willow Grove Bancorp, Inc. (the “Mid-Tier”) on September 18, 1998, as amended, and declared effective on November 12, 1998 (Registration No. 333-63737).
(8)	Incorporated by reference from the Company’s Current Report on Form 8-K, dated as of October 23, 2007 and filed with the SEC on October 29, 2007 (SEC File No. 000-49706).
(9)	Incorporated by reference from the Definitive Proxy Statement on Schedule 14A filed by the Mid-Tier on June 23, 1999 (SEC File No. 000-25191).
(10)	Incorporated by reference from the Company’s Definitive Proxy Statement on Schedule 14A filed on October 9, 2002 (SEC File No. 000-49706).
(11)	Incorporated by reference from the Company’s Form 10-Q for the quarter ended December 31, 2003, filed with the SEC on February 12, 2004 (SEC File No. 000-49706).
(12)	Incorporated by reference from the Company’s Form 10-K for the fiscal year ended June 30, 2006, filed with the SEC on September 13, 2005 (SEC File No. 000-49706).
(13)	Incorporated by reference from the Company’s Form 8-K, dated as of October 25, 2005 and filed with the SEC on October 31, 2005 (SEC File No. 000-49706).
(14)	Incorporated by reference from the Company’s Definitive Proxy Statement on Schedule 14A as filed on October 5, 2005 (SEC File No. 000-49706).
(15)	Incorporated by reference from the Company’s Form 10-Q for the quarter ended December 31, 2006, filed with the SEC on February 9, 2007 (SEC File No. 000-49706).

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

WILLOW FINANCIAL BANCORP, INC.

Date: May 21, 2008	By:	/s/ DONNA M. COUGHEY
	Donna M. Coughey
	President and Chief Executive Officer
Date: May 21, 2008	By:	/s/ NEELESH KALANI
	Neelesh Kalani
	Chief Accounting Officer

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