- Quarterly Report (10-Q)

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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 September 30, 2011

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 No. 0-14555

VIST FINANCIAL CORP.

(Exact name of Registrant as specified in its charter)

PENNSYLVANIA		23-2354007
(State or other jurisdiction of		(I.R.S. Employer
Incorporation or organization)		Identification No.)

1240 Broadcasting Road

Wyomissing, Pennsylvania 19610

(Address of principal executive offices)

(610) 208-0966

(Registrants telephone number, including area code)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

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

Large accelerated filer o		Accelerated filer o

Non-accelerated filer o		Smaller reporting company x
(Do not check if a smaller reporting company)

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

State the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

6,588,270 shares of common stock, par value

$5.00 per share, as of November 9, 2011

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VIST FINANCIAL CORP.

Quarterly Report on Form 10-Q for the Quarterly Period Ended September 30, 2011

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			PAGE

PART I FINANCIAL INFORMATION			3
Item 1.		Financial Statements (Unaudited)	3
	Consolidated Balance Sheets as of September 30, 2011 and December 31, 2010		3
	Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2011 and 2010		4
	Consolidated Statements of Changes in Shareholders’ Equity for the Nine Months Ended September 30, 2011 and 2010		5
	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2011 and 2010		6
	Notes to Unaudited Consolidated Financial Statements		8
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations	54
Item 3.		Quantitative and Qualitative Disclosures about Market Risk	78
Item 4.		Controls and Procedures	78

PART II OTHER INFORMATION			79
Item 1.		Legal Proceedings	79
Item 1A.		Risk Factors	79
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds	79
Item 3.		Defaults Upon Senior Securities	79
Item 4.		[Removed and Reserved]	79
Item 5.		Other Information	79
Item 6.		Exhibits	80
Signatures			82
Certifications

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Item 1. Financial Statements

VIST FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

	September 30,			December 31,
	2011			2010
	(Unaudited)
ASSETS
Cash and due from banks	$	16,067		$	15,443
Federal funds sold	—			1,500
Interest-bearing deposits in banks	39,428			872
Total cash and cash equivalents	55,495			17,815

Securities available for sale	347,522			279,755
Securities held to maturity, fair value of $2,491 at September 30, 2011 and $1,888 at December 31, 2010	2,584			2,022
Federal Home Loan Bank stock	6,100			7,099
Mortgage loans held for sale	1,772			3,695

Loans	927,850			954,363
Allowance for loan losses	(15,458		)	(14,790		)
Net loans	912,392			939,573

Covered loans	57,032			66,770
Premises and equipment, net	6,515			5,639
Other real estate owned	2,849			5,303
Covered other real estate owned	596			247
Goodwill	42,108			41,858
Identifiable intangible assets, net	3,385			3,795
Bank owned life insurance	19,710			19,373
FDIC prepaid deposit insurance	2,911			3,985
FDIC indemnification asset	6,816			7,003
Other assets	17,947			21,080

Total assets	$	1,485,734		$	1,425,012

LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Non-interest bearing	$	116,543		$	122,450
Interest bearing	1,098,961			1,026,830
Total deposits	1,215,504			1,149,280

Repurchase agreements	103,917			106,843
Federal funds purchased	—			—
Borrowings	—			10,000
Junior subordinated debt, at fair value	18,591			18,437
Other liabilities	6,708			8,005
Total liabilities	1,344,720			1,292,565

Shareholders’ equity:
Preferred stock: $0.01 par value; authorized 1,000,000 shares; $1,000 liquidation preference per share; 25,000 shares of Series A 5% (increasing to 9% in 2014) cumulative preferred stock issued and outstanding; Less: discount of $1,136 at September 30, 2011 and $1,480 at December 31, 2010	23,864			23,520
Common stock, $5.00 par value; authorized 20,000,000 shares; issued:
6,593,435 shares at September 30, 2011 and 6,546,273 shares at December 31, 2010	32,968			32,732
Stock warrant	2,307			2,307
Surplus	65,741			65,506
Retained earnings	13,928			12,960
Accumulated other comprehensive income (loss)	2,397			(4,387		)
Treasury stock: 10,484 shares at cost	(191		)	(191		)
Total shareholders’ equity	141,014			132,447

Total liabilities and shareholders’ equity	$	1,485,734		$	1,425,012

See Notes to Unaudited Consolidated Financial Statements.

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VIST FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited; in thousands, except share data)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2011			2010			2011			2010

Interest and dividend income:
Interest and fees on loans	$	13,434		$	12,638		$	40,920		$	37,496
Interest on securities:
Taxable	3,134			2,691			8,796			8,532
Tax-exempt	311			423			979			1,269
Dividend income	21			21			65			39
Other interest income	21			15			36			289
Total interest and dividend income	16,921			15,788			50,796			47,625

Interest expense:
Interest on deposits	3,793			3,954			11,409			12,694
Interest on short-term borrowings	1			—			1			18
Interest on repurchase agreements	1,201			1,205			3,564			3,585
Interest on borrowings	—			90			7			277
Interest on junior subordinated debt	410			363			1,223			1,052
Total interest expense	5,405			5,612			16,204			17,626

Net interest income	11,516			10,176			34,592			29,999
Provision for loan losses	1,977			3,550			6,067			8,160
Net interest income after provision for loan losses	9,539			6,626			28,525			21,839

Non-interest income:
Commissions and fees from insurance sales	3,139			3,024			9,152			9,192
Customer service fees	427			478			1,277			1,610
Mortgage banking activities	209			266			527			631
Brokerage and investment advisory commissions and fees	152			279			489			565
Earnings on bank owned life insurance	119			111			337			302
Other commissions and fees	448			402			1,364			1,464
Gain on sale of equity interest	—			—			—			1,875
Loss on sale of and write downs on other real estate owned	(168		)	(838		)	(1,180		)	(1,432		)
Other (loss) income	(91		)	223			(114		)	464
Net realized gains on sales of securities	490			179			872			465
Total other-than-temporary impairment losses:
Total other-than-temporary impairment losses on investments	507			(785		)	309			(783		)
Portion of loss recognized in other comprehensive income	(1,113		)	163			(1,221		)	12
Net credit impairment loss recognized in earnings	(606		)	(622		)	(912		)	(771		)
Total non-interest income	4,119			3,502			11,812			14,365

Non-interest expense:
Salaries and employee benefits	6,102			5,584			18,002			16,422
Occupancy expense	1,173			1,057			3,666			3,274
Furniture and equipment expense	670			655			2,064			1,941
Outside processing services	926			1,036			2,923			2,921
Professional services	863			750			2,666			2,104
Marketing and advertising expense	339			285			1,224			792
FDIC deposit and other insurance expense	215			612			1,440			1,668
Amortization of identifiable intangible assets	135			146			410			417
Other real estate owned expense	589			687			1,413			1,785
Other expense	957			967			2,680			2,816
Total non-interest expense	11,969			11,779			36,488			34,140

Income (loss) before income taxes	1,689			(1,651		)	3,849			2,064
Income tax expense (benefit)	270			(1,049		)	616			(573		)
Net income (loss)	1,419			(602		)	3,233			2,637
Preferred stock dividends and discount accretion	427			420			1,282			1,259
Net income (loss) available to common shareholders	$	992		$	(1,022	)	$	1,951		$	1,378

EARNINGS PER SHARE DATA
Average shares outstanding for basic earnings per common share	6,579,850			6,511,195			6,571,411			6,192,250
Basic earnings (losses) per common share	$	0.15		$	(0.16	)	$	0.30		$	0.22
Average shares outstanding for diluted earnings per common share	6,603,398			6,511,195			6,612,204			6,236,889
Diluted earnings (losses) per common share	$	0.15		$	(0.16	)	$	0.30		$	0.22
Cash dividends declared per actual common shares outstanding	$	0.05		$	0.05		$	0.15		$	0.15

See Notes to Unaudited Consolidated Financial Statements.

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VIST FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

Nine Months Ended September 30, 2011 and 2010

(Unaudited; Dollar amounts in thousands, except share data)

	Preferred Stock			Common Stock													Accumulated
	Number of			Number of													Other
	Shares	Liquidation		Shares		Par			Stock					Retained			Comprehensive			Treasury
	Issued	Value		Issued		Value			Warrant		Surplus			Earnings			(Loss) Income			Stock			Total
Balance, January 1, 2011	25,000	$	23,520	6,546,273		$	32,732		$	2,307	$	65,506		$	12,960		$	(4,387	)	$	(191	)	$	132,447

Comprehensive income:
Net income	—	—		—		—			—		—			3,233			—			—			3,233
Change in net unrealized gains on securities available for sale, net of tax effect and reclassification adjustments for gains and impairment charges	—	—		—		—			—		—			—			6,389			—			6,389
Change in net unrealized losses on securities held to maturity, net of tax effect and reclassification adjustments for gains and impairment charges	—	—		—		—			—		—			—			395			—			395
Total comprehensive income																							10,017
Restricted stock issued in connection with employee compensation	—	—		26,000		130			—		(130		)	—			—			—			—
Cancellation of restricted stock issued in connection with employee compensation	—	—		(417	)	(2		)	—		2			—			—			—			—
Common stock issued in connection with directors’ compensation	—	—		14,615		73			—		38			—			—			—			111
Common stock issued in connection with director and employee stock purchase plans	—	—		6,464		32			—		14			—			—			—			46
Tax benefits from employee stock transactions	—	—		—		—			—		1			—			—			—			1
Compensation expense related to stock options and restricted stock	—	—		—		—			—		310			—			—			—			310
Issuance of common stock from stock option exercises	—	—		500		3			—		—			—			—			—			3
Preferred stock discount accretion	—	344		—		—			—		—			(344		)	—			—			—
Common stock cash dividends paid ($0.05 per share)	—	—		—		—			—		—			(983		)	—			—			(983		)
Preferred stock cash dividends paid or declared	—	—		—		—			—		—			(938		)	—			—			(938		)
Balance, September 30, 2011	25,000	$	23,864	6,593,435		$	32,968		$	2,307	$	65,741		$	13,928		$	2,397		$	(191	)	$	141,014

	Preferred Stock			Common Stock											Accumulated
	Number of			Number of											Other
	Shares	Liquidation		Shares	Par		Stock					Retained			Comprehensive			Treasury
	Issued	Value		Issued	Value		Warrant		Surplus			Earnings			Loss			Stock			Total
Balance, January 1, 2010	25,000	$	23,092	5,819,174	$	29,096	$	2,307	$	63,744		$	11,892		$	(4,512	)	$	(191	)	$	125,428

Comprehensive income:
Net income	—	—		—	—		—		—			2,637			—			—			2,637
Change in net unrealized gains on securities available for sale, net of tax effect and reclassification adjustments for gains and impairment charges	—	—		—	—		—		—			—			4,641			—			4,641
Change in net unrealized losses on securities held to maturity, net of tax effect and reclassification adjustments for gains and impairment charges	—	—		—	—		—		—			—			(373		)	—			(373		)
Total comprehensive income																					6,905

Restricted stock issued in connection with employee compensation	—	—		1,000	5		—		(5		)	—			—			—			—
Common stock issued in connection with directors’ compensation	—	—		53,280	266		—		38			—			—			—			304
Common stock issued in connection with director and employee stock purchase plans	—	—		7,556	38		—		21			—			—			—			59
Compensation expense related to stock options and restricted stock	—	—		—	—		—		112			—			—			—			112
Issuance of common stock	—	—		644,000	3,220		—		1,611			—			—			—			4,831
Preferred stock discount accretion	—	321		—	—		—		—			(321		)	—			—			—
Common stock cash dividends paid ($0.05 per share)	—	—		—	—		—		—			(911		)	—			—			(911		)
Preferred stock cash dividends paid or declared	—	—		—	—		—		—			(938		)	—			—			(938		)
Balance, September 30, 2010	25,000	$	23,413	6,525,010	$	32,625	$	2,307	$	65,521		$	12,359		$	(244	)	$	(191	)	$	135,790

See Notes to Unaudited Consolidated Financial Statements.

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VIST FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited; Dollar amounts In thousands)

	For The Nine Months Ended September 30,
	2011			2010
Cash Flows From Operating Activities
Net income	$	3,233		$	2,637
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses	6,067			8,160
Provision for depreciation and amortization of premises and equipment	923			979
Amortization of identifiable intangible assets	410			417
Deferred income tax expense (benefit)	112			(685		)
Director stock compensation	111			304
Net amortization of securities (premiums) discounts	(6,705		)	516
Amortization of mortgage servicing rights	31			80
Accretion related to the net present value of the FDIC indemnification asset	(38		)	—
Accretion of fair value discounts related to covered loans	(685		)	—
Net realized losses on sales of and write downs on other real estate owned	1,180			1,432
Impairment charge on investment securities recognized in earnings	912			771
Net realized gains on sales of securities	(872		)	(465		)
Gain on sale of equity interest	—			(1,875		)
Proceeds from sales of loans held for sale	22,424			25,021
Net gains on sales of loans held for sale (included in mortgage banking activities)	(458		)	(564		)
Loans originated for sale	(20,043		)	(25,885		)
Earnings on bank owned life insurance	(337		)	(302		)
Decrease in FDIC prepaid deposit insurance	1,074			—
Decrease in FDIC indemnification asset	225			—
Compensation expense related to stock options and restricted stock	310			112
Net change in fair value of junior subordinated debt	154			(1,646		)
Net change in fair value of interest rate swaps	(133		)	1,465
(Decrease) increase in accrued interest receivable and other assets	(505		)	4,433
(Decrease) increase in accrued interest payable and other liabilities	(1,164		)	607

Net Cash Provided by Operating Activities	6,226			15,512

Cash Flow From Investing Activities
Investment securities:
Purchases - available for sale	(164,639		)	(99,310		)
Principal repayments, maturities and calls - available for sale	34,947			51,062
Proceeds from sales - available for sale	78,307			52,818
Net decrease (increase) in loans receivable	17,958			(25,793		)
Net decrease in covered loans	10,423			—
Net decrease in Federal Home Loan Bank stock	999			—
Sales of other real estate owned	4,081			4,245
Purchases of premises and equipment	(1,926		)	(703		)
Disposals of premises and equipment	127			57
Contingent payments	(250		)	(250		)
Net Cash Used In Investing Activities	(19,973		)	(17,874		)

See Notes to Unaudited Consolidated Financial Statements.

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VIST FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(Unaudited; Dollar amounts In thousands)

	For The Nine Months Ended September 30,
	2011			2010
Cash Flow From Financing Activities
Net increase in deposits	66,224			57,504
Net decrease in short-term securities sold under agreements to repurchase	(2,926		)	(6,311		)
Repayments of long-term debt	(10,000		)	(10,000		)
Issuance of common stock	—			4,831
Proceeds from stock purchase plans	49			59
Tax benefits from employee stock transactions	1			—
Cash dividends paid on preferred and common stock	(1,921		)	(1,849		)
Net Cash Provided By Financing Activities	51,427			44,234

Increase in cash and cash equivalents	37,680			41,872
Cash and Cash Equivalents:
January 1	17,815			27,372
September 30	$	55,495		$	69,244

Cash Payments For:
Interest	$	16,589		$	18,155
Taxes	$	1,860		$	—

Supplemental Schedule of Non-cash Investing and Financing Activities
Transfer of loans receivable to other real estate owned	$	3,156		$	3,987

See Notes to Unaudited Consolidated Financial Statements.

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VIST FINANCIAL CORP.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Basis of Presentation

The unaudited consolidated financial statements include the accounts of VIST Financial Corp. (the “Company”), a bank holding company, which has elected to be treated as a financial holding company, and its wholly-owned subsidiaries, VIST Bank (the “Bank”), VIST Insurance, LLC (“VIST Insurance”) and VIST Capital Management, LLC (“VIST Capital”). As of September 30, 2011, the Bank’s wholly-owned subsidiary was VIST Mortgage Holdings, LLC. All significant inter-company accounts and transactions have been eliminated.

Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The unaudited consolidated financial statements contain all adjustments (consisting only of normal recurring accruals and adjustments) necessary to present fairly our financial position as of September 30, 2011 and December 31, 2010, and the related consolidated statements of operations, changes in shareholders’ equity and cash flows for each of the periods ended September 30, 2011 and 2010. The results of operations for interim periods are not necessarily indicative of operating results expected for the full year. These interim consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010 and with the Company’s other reports that were filed during 2011 with the SEC.

Note 2. Use of Estimates

The process of preparing consolidated financial statements in conformity with U.S. GAAP requires the use of estimates and assumptions that affect the reported amounts of certain types of assets, liabilities, revenues and expenses. Accordingly, actual results may differ from estimated amounts. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the valuation of deferred tax assets, the assessment of other-than-temporary impairment of investment securities, the potential impairment of restricted stock and fair value disclosures.

Note 3. Recently Issued Accounting Standards

In April 2011, the FASB issued (ASU) 2011-02 Receivables (Topic 310) A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring. This Update gives creditors additional guidance and clarification for evaluating whether or not a creditor has granted a concession and whether or not a debtor is experiencing financial difficulties for purposes of determining whether a restructuring constitutes a troubled debt restructuring. The amendments in this Update are effective for the first interim or annual period beginning on or after June 15, 2011 and should be applied retrospectively to the beginning of the annual period of adoption. No significant impact to amounts reported in the consolidated financial position or results of operations occurred from the adoption of ASU 2011-02.

In April 2011, the FASB issued (ASU) 2011-03 Transfers and Servicing (Topic 860) Reconsideration of Effective Control for Repurchase Agreements. The purpose of this Update is to improve the accounting for repurchase agreements and other agreements that entitle and obligate transferors to repurchase or redeem financial assets prior to their maturity. This Update removes from the assessment of effective control, the criterion requiring the transferor to have the ability to repurchase or redeem financial assets at substantially the agreed terms even in the event of default by the transferee and the collateral maintenance implementation guidance related to that criterion. The amendments in this Update are effective for the first interim or annual period beginning on or after December 15, 2011 and should be applied prospectively to new or modification transactions that occur after the effective date. No significant impact to amounts reported in the consolidated financial position or results of operations is expected from the adoption of ASU 2011-03.

In May 2011, the FASB issued (ASU) 2011-04 Fair Value Measurement (Topic 820) Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. The purpose of this Update is to change the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. This Update clarifies the Board’s intent about the application of existing fair value measurement and disclosure requirements and includes changes to particular principles or requirements for measuring fair value or for disclosing information about fair value measurements. In addition, to improve consistency in application across jurisdictions some changes in wording are necessary to ensure that U.S. GAAP and IFRS fair value measurement and disclosure requirements are described in the same way. The amendments in this Update are effective during interim and annual period beginning on or after December 15, 2011. Early application by public entities is not permitted. No significant impact to amounts reported in the consolidated financial position or results of operations is expected from the adoption of ASU 2011-04.

In June 2011, the FASB issued (ASU) 2011-05 Comprehensive Income (Topic 220) Presentation of Comprehensive Income. The purpose of this Update is to indicate that an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive

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VIST FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

income. Regardless of whether an entity chooses to present comprehensive income in a single continuous statement or in two separate but consecutive statements, the entity is required to present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement(s) where the components of net income and the components of other comprehensive income are presented. The amendments in this Update are effective for the first interim or annual period beginning on or after December 15, 2011 and should be applied retrospectively. No significant impact to amounts reported in the consolidated financial position or results of operations is expected from the adoption of ASU 2011-05. The Bank elected not to early adopt this update.

In September 2011, the FASB issued (ASU) 2011-08 Intangibles — Goodwill and Other (Topic 350) Testing Goodwill for Impairment. The purpose of this amendment is to simplify how entities test goodwill for impairment. This amendment permits an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in Topic 350. The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent. These amendments are effective for interim and annual goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early application is permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011, if an entity’s financial statements for the most recent annual or interim period have not yet been issued. No significant impact to amounts reported in the consolidated financial position or results of operations is expected from the adoption of ASU 2011-08. The Bank elected not to early adopt this update.

Note 4. Earnings Per Common Share

Basic earnings per common share is computed by dividing net income available to common shareholders by the weighted-average number of common shares outstanding during the period. Diluted earnings per common share reflect the potential dilution that could occur if options to issue common stock were exercised. Potential common shares that may be issued related to outstanding stock options are determined using the treasury stock method. Stock options with exercise prices that exceed the average market price of the Company’s common stock during the periods presented are excluded from the dilutive earnings per common share calculation. For the three and nine months ended September 30, 2011, weighted average anti-dilutive common stock options totaled 681,714 and 681,456, respectively. For the three and nine months ended September 30, 2010, weighted average anti-dilutive common stock options totaled 591,948.

Earnings per common share for the respective periods indicated have been computed based upon the following:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010
	(Dollar amounts in thousands)

Net income (loss)	$	1,419		$	(602	)	$	3,233		$	2,637
Less: preferred stock dividends	(313		)	(313		)	(938		)	(938		)
Less: preferred stock discount accretion	(114		)	(107		)	(344		)	(321		)

Net income (loss) available to common shareholders	$	992		$	(1,022	)	$	1,951		$	1,378

Average common shares outstanding	6,579,850			6,511,195			6,571,411			6,192,250
Effect of dilutive stock options	23,548			—			40,793			44,639

Average number of common shares used to calculate diluted earnings per common share	6,603,398			6,511,195			6,612,204			6,236,889

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VIST FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Note 5. Securities Available For Sale and Securities Held to Maturity

The amortized cost and estimated fair values of securities available for sale and held to maturity were as follows at September 30, 2011 and December 31, 2010:

Securities Available For Sale

	September 30, 2011									December 31, 2010
			Gross		Gross							Gross		Gross
	Amortized		Unrealized		Unrealized			Fair		Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value		Cost		Gains		Losses			Value
	(Dollar amounts in thousands)

U.S. Government agency securities	$	8,697	$	835	$	(68	)	$	9,464	$	11,648	$	366	$	(224	)	$	11,790
Agency residential mortgage-backed debt securities	287,572		9,340		(611		)	296,301		216,956		6,220		(811		)	222,365
Non-Agency collateralized mortgage obligations	9,700		10		(2,285		)	7,425		13,663		—		(3,648		)	10,015
Obligations of states and political subdivisions	26,440		573		(6		)	27,007		33,141		18		(2,252		)	30,907
Trust preferred securities - single issuer	500		—		(375		)	125		500		1		—			501
Trust preferred securities - pooled	5,097		—		(2,800		)	2,297		5,396		—		(4,912		)	484
Corporate and other debt securities	2,581		—		(100		)	2,481		1,117		—		(69		)	1,048
Equity securities	3,265		33		(876		)	2,422		3,345		30		(730		)	2,645
Total investment securities available for sale	$	343,852	$	10,791	$	(7,121	)	$	347,522	$	285,766	$	6,635	$	(12,646	)	$	279,755

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VIST FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Securities Held To Maturity

	September 30, 2011
	Amortized Cost		Other-Than- Temporary Impairment Recognized In Accumulated Other Comprehensive Loss			Carrying Value		Gross Unrealized Holding Gains		Gross Unrealized Holding Losses			Fair Value
	(Dollar amounts in thousands)

Trust preferred securities - single issuer	$	2,004	$	—		$	2,004	$	15	$	(108	)	$	1,911
Trust preferred securities - pooled	617		(37		)	580		—		—			580

Total investment securities held to maturity	$	2,621	$	(37	)	$	2,584	$	15	$	(108	)	$	2,491

	December 31, 2010
	Amortized Cost		Other-Than- Temporary Impairment Recognized In Accumulated Other Comprehensive Loss			Carrying Value		Gross Unrealized Holding Gains		Gross Unrealized Holding Losses			Fair Value
	(Dollar amounts in thousands)

Trust preferred securities - single issuer	$	2,007	$	—		$	2,007	$	26	$	(160	)	$	1,873
Trust preferred securities - pooled	650		(635		)	15		—		—			15

Total investment securities held to maturity	$	2,657	$	(635	)	$	2,022	$	26	$	(160	)	$	1,888

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VIST FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

The age of unrealized losses and fair value of related investment securities available for sale and investment securities held to maturity at September 30, 2011 and December 31, 2010 were as follows:

Securities Available for Sale

	September 30, 2011
	Less than Twelve Months						More than Twelve Months						Total
	Fair		Unrealized			Number of	Fair		Unrealized			Number of	Fair		Unrealized			Number of
	Value		Losses			Securities	Value		Losses			Securities	Value		Losses			Securities
	(Dollar amounts in thousands)

U.S. Government agency securities	$	2,595	$	(68	)	1	$	—	$	—		—	$	2,595	$	(68	)	1
Agency residential mortgage-backed debt securities	46,124		(535		)	18	13,074		(76		)	6	59,198		(611		)	24
Non-Agency collateralized mortgage obligations	—		—			—	6,676		(2,285		)	7	6,676		(2,285		)	7
Obligations of states and political subdivisions	490		(6		)	1	—		—			—	490		(6		)	1
Trust preferred securities - single issuer	125		(375		)	1	—		—			—	125		(375		)	1
Trust preferred securities - pooled	—		—			—	2,297		(2,800		)	8	2,297		(2,800		)	8
Corporate and other debt securities	1,445		(55		)	1	1,036		(45		)	2	2,481		(100		)	3
Equity securities	994		(6		)	1	825		(870		)	23	1,819		(876		)	24
Total investment securities available for sale	$	51,773	$	(1,045	)	23	$	23,908	$	(6,076	)	46	$	75,681	$	(7,121	)	69

Securities Held To Maturity

	September 30, 2011
	Less than Twelve Months					More than Twelve Months						Total
	Fair		Unrealized		Number of	Fair		Unrealized			Number of	Fair		Unrealized			Number of
	Value		Losses		Securities	Value		Losses			Securities	Value		Losses			Securities
	(Dollar amounts in thousands)

Trust preferred securities - single issue	$	—	$	—	—	$	918	$	(108	)	1	$	918	$	(108	)	1
Trust preferred securities - pooled	—		—		—	580		(37		)	1	580		(37		)	1
Total investment securities held to maturity	$	—	$	—	—	$	1,498	$	(145	)	2	$	1,498	$	(145	)	2

Securities Available for Sale

	December 31, 2010
	Less than Twelve Months						More than Twelve Months						Total
	Fair		Unrealized			Number of	Fair		Unrealized			Number of	Fair		Unrealized			Number of
	Value		Losses			Securities	Value		Losses			Securities	Value		Losses			Securities
	(Dollar amounts in thousands)

U.S. Government agency securities	$	4,244	$	(224	)	3	$	—	$	—		—	$	4,244	$	(224	)	3
Agency residential mortgage-backed debt securities	43,774		(811		)	21	—		—			—	43,774		(811		)	21
Non-Agency collateralized mortgage obligations	1,510		(6		)	1	7,450		(3,642		)	8	8,960		(3,648		)	9
Obligations of states and political subdivisions	27,200		(2,130		)	31	965		(122		)	2	28,165		(2,252		)	33
Trust preferred securities - single issuer	—		—			—	—		—			—	—		—			—
Trust preferred securities - pooled	—		—			—	484		(4,912		)	8	484		(4,912		)	8
Corporate and other debt securities	934		(66		)	1	114		(3		)	1	1,048		(69		)	2
Equity securities	989		(11		)	1	1,031		(719		)	22	2,020		(730		)	23
Total investment securities available for sale	$	78,651	$	(3,248	)	58	$	10,044	$	(9,398	)	41	$	88,695	$	(12,646	)	99

Securities Held To Maturity

	December 31, 2010
	Less than Twelve Months						More than Twelve Months						Total
	Fair		Unrealized			Number of	Fair		Unrealized			Number of	Fair		Unrealized			Number of
	Value		Losses			Securities	Value		Losses			Securities	Value		Losses			Securities
	(Dollar amounts in thousands)

Trust preferred securities - single issue	$	870	$	(160	)	1	$	—	$	—		—	$	870	$	(160	)	1
Trust preferred securities - pooled	—		—			—	15		(635		)	1	15		(635		)	1
Total investment securities held to maturity	$	870	$	(160	)	1	$	15	$	(635	)	1	$	885	$	(795	)	2

At September 30, 2011, there were 23 securities with unrealized losses in the less than twelve month category and 46 securities with unrealized losses in the twelve month or more categories.

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VIST FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Management evaluates investment securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Factors that may be indicative of impairment include, but are not limited to, the following:

· Fair value below cost and the length of time

· Adverse condition specific to a particular investment

· Rating agency activities ( e.g. , downgrade)

· Financial condition of an issuer

· Dividend activities

· Suspension of trading

· Management intent

· Changes in tax laws or other policies

· Subsequent market value changes

· Economic or industry forecasts

Other-than-temporary impairment means management believes the security’s impairment is due to factors that could include its inability to pay interest or dividends, its potential for default, and/or other factors. When a held to maturity or available for sale debt security is assessed for other-than-temporary impairment, management has to first consider (a) whether the Company intends to sell the security, and (b) whether it is more likely than not that the Company will be required to sell the security prior to recovery of its amortized cost basis. If one of these circumstances applies to a security, an other-than-temporary impairment loss is recognized in the statement of operations equal to the full amount of the decline in fair value below amortized cost. If neither of these circumstances applies to a security, but the Company does not expect to recover the entire amortized cost basis, an other-than-temporary impairment loss has occurred that must be separated into two categories: (a) the amount related to credit loss, and (b) the amount related to other factors. In assessing the level of other-than-temporary impairment attributable to credit loss, management compares the present value of cash flows expected to be collected with the amortized cost basis of the security. The portion of the total other-than-temporary impairment related to credit loss is recognized in earnings (as the difference between the fair value and the present value of the estimated cash flows), while the amount related to other factors is recognized in other comprehensive income. The total other-than-temporary impairment loss is presented in the statement of operations, less the portion recognized in other comprehensive income. When a debt security becomes other-than-temporarily impaired, its amortized cost basis is reduced to reflect the portion of the total impairment related to credit loss.

If a decline in market value of a security is determined to be other than temporary, under U.S. GAAP, we are required to write these securities down to their estimated fair value. As of September 30, 2011, we owned single issuer and pooled trust preferred securities of other financial institutions, private label collateralized mortgage obligations and equity securities whose aggregate historical cost basis is greater than their estimated fair value (see table above). We reviewed all investment securities and have identified those securities that are other-than-temporarily impaired. The losses associated with these other-than-temporarily impaired securities have been bifurcated into the portion of non-credit impairment losses recognized in other comprehensive loss and into the portion of credit impairment losses recorded in earnings (see Note 18 — Comprehensive Income to the consolidated financial statements). We perform an ongoing analysis of all investment securities utilizing both readily available market data and third party analytical models. Future changes in interest rates or the credit quality and strength of the underlying issuers may reduce the market value of these and other securities. If such decline is determined to be other than temporary, we will write them down through a charge to earnings to their then current fair value.

A. Obligations of U. S. Government Agencies and Corporations. The unrealized gains and losses on the Company’s investments in obligations of U.S. Government agencies were caused by changes in interest rates as a result of current monetary policy and ongoing economic turmoil. At September 30, 2011, the fair value of the U. S. Government agencies and corporations bonds represented 2.7% of the total fair value of the available for sale securities held in the investment securities portfolio. The contractual cash flows are guaranteed by an agency of the U.S. Government. The Company does not consider these investments to be other-than-temporarily impaired at September 30, 2011. Future evaluations of the above mentioned factors could result in the Company recognizing an impairment charge.

B. Mortgage-Backed Debt Securities. The unrealized gains and losses on the Company’s investments in federal agency residential mortgage-backed securities and corporate (non-agency) collateralized mortgage obligations (“CMO”) were primarily caused by changes in interest rates and changing credit and pricing spreads in the market as a result of ongoing economic turmoil. At September 30, 2011, federal agency residential mortgage-backed securities represented 85.3% of the total fair value of available for sale securities held in the investment securities portfolio and corporate (non-agency) collateralized mortgage obligations represented 2.1% of the total fair value of available for sale securities held in the investment securities portfolio. The Company purchased those securities at a price relative to the market at the time of purchase. The contractual cash flows of the federal agency residential

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VIST FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

mortgage-backed securities are guaranteed by the U.S. Government. Because the decline in the market value of agency residential mortgage-backed debt securities is primarily attributable to changes in interest rates and changes in market pricing since the time of purchase and not credit quality, the Company does not consider those investments to be other-than-temporarily impaired at September 30, 2011. Future evaluations of the above mentioned factors could result in the Company recognizing an impairment charge.

As of September 30, 2011, the Company owned 8 corporate (non-agency) collateralized mortgage obligation issues in super senior or senior tranches of which 6 corporate (non-agency) collateralized mortgage obligation issues aggregate historical cost basis is greater than estimated fair value. At September 30, 2011, all 8 non-agency CMO’s with an amortized cost basis of $9.7 million were collateralized by residential real estate. The Company uses a two step modeling approach to analyze each non-agency CMO issue to determine whether or not the current unrealized losses are due to credit impairment and therefore other-than-temporarily impaired (“OTTI”). Step one in the modeling process applies default and severity credit vectors to each security based on current credit data detailing delinquency, bankruptcy, foreclosure and real estate owned (REO) performance. The results of the credit vector analysis are compared to the security’s current credit support coverage to determine if the security has adequate collateral support. If the security’s current credit support coverage falls below certain predetermined levels, step two is utilized. In step two, the Company uses a third party to assist in calculating the present value of current estimated cash flows to ensure there are no adverse changes in cash flows during the quarter leading to an other-than-temporary-impairment. Management’s assumptions used in step two include default and severity vectors and prepayment assumptions along with various other criteria including: percent decline in fair value; credit rating downgrades; probability of repayment of amounts due, credit support and changes in average life. One non-agency CMO qualified for the step two modeling approach which produced an OTTI credit loss for the three and nine month periods ended September 30, 2011 of $470,000 and $616,000, respectively. Because of the results of the modeling process and because the Company has no intention to sell these securities, nor is it more likely than not that the Company will be required to sell these securities, the Company does not consider the remaining non-agency CMO investments with no prior OTTI charges to be other-than-temporarily impaired at September 30, 2011. Future changes in interest rates or the credit quality and support of the underlying issuers may reduce the market value of these and other securities. If such decline is determined to be other than temporary, the Company will record the necessary charge to earnings and/or AOCI to reduce the securities to their then current fair value.

C. State and Municipal Obligations. The unrealized gains and losses on the Company’s investments in state and municipal obligations were primarily caused by changes in interest rates and changing credit spreads in the market as a result of current monetary policy in response to ongoing economic turmoil. At September 30, 2011, state and municipal obligation bonds represented 7.8% of the total fair value of available for sale securities held in the investment securities portfolio. The Company purchased those obligations at a price relative to the market at the time of the purchase, and the tax advantaged benefit of the interest earned on these investments reduces the Company’s federal tax liability. The Company does not consider those investments to be other-than-temporarily impaired at September 30, 2011. Future evaluations of the above mentioned factors could result in the Company recognizing an impairment charge.

D. Corporate and Other Debt Securities. Included in other debt securities available for sale at September 30, 2011, were 1 asset-backed security and 2 corporate securities representing 0.7% of the total fair value of available for sale securities. The unrealized losses on corporate and other debt securities relate primarily to changing pricing and credit spreads due to ongoing economic turmoil affecting these markets and not necessarily the expected cash flows of the individual securities. Due to market conditions, it is unlikely that the Company would be able to recover its investment in these securities if the Company sold the securities at this time. Because the Company has analyzed the credit risk and cash flow characteristics of these securities, the Company does not consider these investments to be other-than-temporarily impaired at September 30, 2011.

E. Trust Preferred Securities. Included in trust preferred securities were single issuer, trust preferred securities (“TRUPS” or “CDO”) representing 0.1% and 76.7% of the total fair value of available for sale securities and the total held to maturity securities, respectively, and pooled TRUPS representing 0.7% and 23.3% of the total fair value of available for sale securities and the total held to maturity securities, respectively.

As of September 30, 2011, the Company owned 3 single issuer TRUPS issues and 8 pooled TRUPS issues of other financial institutions. At September 30, 2011, the historical cost basis of 2 single issuer TRUPS and 8 pooled TRUPS was greater than each security’s estimated fair value. Investments in TRUPs in which the historical cost basis was greater than each security’s estimated fair value included (a) amortized cost of $1.5 million of single issuer TRUPS of other financial institutions with a fair value of $1.0 million and (b) amortized cost of $5.7 million of pooled TRUPS of other financial institutions with a fair value of $2.9 million. The issuers in these securities are primarily banks, but some of the pools do include a limited number of insurance companies. The Company has evaluated these securities and determined that the decreases in estimated fair value are temporary with the exception of 5 pooled TRUPS which were other than temporarily impaired at September 30, 2011. As of December 31, 2010, the Company owned

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VIST FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

3 single issuer TRUPS and 8 pooled TRUPS of other financial institutions. At December 31, 2010, the historical cost basis of 1 single issuer TRUPS and 8 pooled TRUPS was greater than each security’s estimated fair value. Investments in TRUPs included (a) amortized cost of $2.5 million of single issuer TRUPS of other financial institutions with a fair value of $2.4 million and (b) amortized cost of $6.0 million of pooled TRUPS of other financial institutions with a fair value of $499,000. The issuers in these securities are primarily banks, but some of the pools do include a limited number of insurance companies. The Company has evaluated these securities and determined that the decreases in estimated fair value are temporary with the exception of five pooled TRUPS which were other than temporarily impaired at December 31, 2010.

For the three months ended September 30, 2011, the Company recognized a subsequent net credit impairment charge to earnings of $136,000 on 3 available for sale pooled TRUPS as the Company’s estimate of projected cash flows it expected to receive for these TRUPs was less than the security’s carrying value. For the nine months ended September 30, 2011, the Company recognized a subsequent net credit impairment charge to earnings of $296,000 on 4 available for sale pooled TRUPS as the Company’s estimate of projected cash flows it expected to receive for these TRUPs was less than the security’s carrying value. For the three and nine months ended September 30, 2011, respectively, the OTTI losses recognized on available for sale pooled trust preferred securities resulted primarily from continuing collateral default and deferrals as a result of stressed economic conditions affecting the financial services industry. During the most recent quarter ended September 30, 2011, the Company has seen a slight improvement in the underlying credit quality of 2 pooled TRUPS. The Company performs an ongoing analysis of these securities utilizing both readily available market data and third party analytical models. Future changes in interest rates or the credit quality and strength of the underlying issuers may reduce the market value of these and other securities. If such decline is determined to be other than temporary, the Company will record the necessary charge to earnings and/or AOCI to reduce the securities to their then current fair value.

As of September 30, 2011, no OTTI charges were recorded on any of the single issue TRUPs. Future changes in interest rates or the credit quality and strength of the underlying issuers may reduce the market value of these and other securities. If such decline is determined to be other than temporary, the Company will record the necessary charge to earnings and/or AOCI to reduce the securities to their then current fair value.

For pooled TRUPS, on a quarterly basis, the Company uses a third party model (“model”) to assist in calculating the present value of current estimated cash flows to the previous estimate to ensure there are no adverse changes in cash flows. The model’s valuation methodology is based on the premise that the fair value of a CDO’s collateral should approximate the fair value of its liabilities. Conceptually, this premise is supported by the notion that cash generated by the collateral flows through the CDO structure to bond and equity holders, and that the CDO structure neither enhances nor diminishes its value. This approach was designed to value structured assets like TRUPS that currently do not have an active trading market, but are secured by collateral that can be benchmarked to comparable, publicly traded securities. The following describes the model’s assumptions, cash flow projections, and the valuation approach developed using the market value equivalence approach:

Defaults and Expected Deferrals

The model takes into account individual defaults that have already occurred by any participating entity within the pool of entities that make up the securities underlying collateral. The analyses show the individual names of each entity which are currently in default or have deferred their dividend payment. In light of the severity of current economic and credit market conditions, the model makes the conservative assumption that all deferring issuers will default. The model assesses incremental, near-term default risk by performing a ratio analysis designed to generate an estimate of the CAMELS rating that regulators use to assess the financial health of banks and thrifts which is updated quarterly. These shadow ratios reflect the key metrics that define the acronym CAMELS, specifically capital adequacy, asset quality, management, earnings, liquidity, and sensitivity to interest rates. The model calculates these ratios for each individual issuer in the TRUPS pool using publicly available data for the most recent quarter, and weighs the results. Capital adequacy and liquidity measures are emphasized relative to benchmark weights to account for the current stress on the banking system. The model assigned a numerical score to each issuer based on their CAMELS ratios, with scores ranging from 1 for the strongest institutions, to 4 and 5 for banks believed to be experiencing above average stress in the current credit cycle. Similar to the default assumption regarding deferring issuers, the model assumes that all shadow CAMEL ratings of 4 and 5 will also default. The model’s assumptions incorporate the belief that the severity of the stress on the banking system has introduced the potential for a sudden and dramatic decline in the operating performance of banks. Although difficult to identify, the model uses an estimated pool-wide default probability of .36% annually for the duration of each deal. This default rate is consistent with Moody’s idealized default probability for applicable corporate credits, and represents the base case default scenario used to model each deal.

Prepayments

Generally, TRUPS are callable within five to ten years of issuance. Due to current market conditions and the limited, eight year history of TRUPS, prepayments are difficult to predict. The model assumes that prepayments will be limited to those issuers that are acquired by large banks with low financing costs. In deference to the conventional view that the banking industry will undergo significant consolidation over the next several years, the model conservatively estimates that 10% of TRUP’s pools will be acquired

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VIST FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

and recapitalized over the next 3 to 4 years. As a result of the 2010 passage of the Dodd-Frank (“Dodd-Frank”) Wall Street Reform and Consumer Protection Act, prepayment assumptions for certain individual issuers within each TRUPS pool were modified. The Dodd-Frank bill contains a provision that eliminates the Tier 1 capital treatment of TRUP’s for banks with total assets greater than $15 billion beginning in the first half of 2013. The model assumes that these larger banks would begin to call and prepay their TRUP’s during this timeframe. In addition, the model assumes that certain individual issuers that are both profitable and well capitalized and currently paying fixed rates greater than 9% or floating rate with spreads greater than 325bps will begin to call and prepay their TRUP’s in the middle of 2011. Beyond the middle of 2011, the model assumes a 5% prepayment every 5 years going forward. Thereafter, the model assumes no further prepayments.

Auction Calls

Auction calls are a structural feature designed to create a 10-year expected life for secured by 30-year TRUPS collateral. Auction call provisions mandate that at the end of the tenth year of a deal, the Trustee submit the collateral to auction at a minimum price sufficient to retire the deal’s liabilities at par. If the initial auction is unsuccessful, turbo payments take effect that divert cash flows from equity holders to pay down senior bond principal, and auctions are repeated quarterly until successful. During the period that the TRUPS market was active, it was generally assumed that auction calls would succeed because they offered a source of collateral that dealers could recycle into new TRUPS. However, given the uncertain future of the TRUPS market, negative collateral credit migration, and the decline in market value of TRUPS, the model assumes that a successful auction call is highly unlikely. Therefore, model expects that the TRUPS will extend through their full 30-year maturity.

Cash Flow Projections

The model projects deal cash flows using a proprietary model that incorporates the priority of payments defined in each TRUPS offering memorandum, and specific structural features such as over collateralization and interest coverage tests. The model estimates gross collateral cash flows based on the default, recovery, prepayment, and auction call assumptions described above, a forward LIBOR curve, and the specific terms of each issue, including collateral coupon spreads, payment dates, first call dates, and maturity dates. To derive a measure of each security’s net revenue, the model adjusts projected gross cash flows by an estimate of net hedge payments based on the terms of the deal’s swap agreements, and subtracted the administrative expenses disclosed in each TRUPS offering memorandum. To project cash flows to bond and equity holders, the model analyzes net revenue projections through a vector of each TRUPS priority of payments. The model captures coupon payments to each tranche, the priority of principal distributions, and diversions of cash flows from each security’s lower tranches to the senior tranche in the event of over-collateralization or interest coverage test failures.

Valuation

The fair value of an asset is determined by the market’s required rate of return for its cash flows. Identifying the market’s required rate of return for the Notes is challenging, given that, over the last year, trading in TRUPS has virtually ceased, and the few secondary market transactions that have occurred have been limited to distressed sales that do not accurately represent a measure of fair value. This task of obtaining a reasonable fair value is further complicated by the fact that TRUPS do not have a benchmark index, such as the ABX, and are not readily comparable to other CDO asset classes. The model’s solution to this problem was to rely on market value equivalence to derive the fair value of the Notes based on the model’s assessment of the fair value of the underlying collateral. At this stage of the analysis, it is important to note that the model accounts for the negative credit migration of TRUPS pools by incorporating projected defaults and recoveries into the model’s cash flow projections. Therefore, so as not to double-count incremental default risk when discounting these cash flows to fair value, the model produces a purchased yield discount rate for the each pool that reflects the pools credit rating at origination.

Under market value equivalence, the decline in market value of the TRUPS liabilities should correspond to the decline in the market value of the collateral. Since there is no observable spread curve for TRUPS on which to base the allocation of this loss, the model allocates the loss pro rata across tranches. This assumption approximates a parallel shift in the credit curve, which is broadly consistent with the general movement of spreads during the credit crisis. The model then calculates internal rates of return for each tranche based on their loss-adjusted values and scheduled interest and principal income. These rates serve as the basis for the model’s estimate of the market’s required rate of return for each tranche, as originally rated.

At this stage of the valuation, the model addressed the decline in the credit quality of the collateral. TRUPS are designed so that credit losses are absorbed sequentially within the capital structure, beginning with the equity tranche and ending with the senior notes. The par amount of the capital structure that is junior to a particular bond is called subordination, which is a measure of the collateral losses that can be sustained prior to that bond suffering a loss. As defaults occur, the bond’s subordination is reduced or eliminated, increasing its default risk and reducing its market value. To account for this increased risk, the model reduces the subordination of each tranche by incremental defaults that projected to occur over the next two years, and then re-calibrates the market discount rate for each tranche based on the remaining subordination.

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VIST FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

The final step in our valuation was to discount the cash flows that the model projects for each tranche by their respective market required rates of return. To confirm that the model’s valuation results were reliable, the model noted that under market equivalence constraints, the fair values of the TRUPS assets and liabilities should vary proportionately.

The following table provides additional information related to our single issuer trust preferred securities:

	September 30, 2011
					Gross
	Amortized		Fair		Unrealized			Number of
	Cost		Value		Gains/Losses			Securities
	(Dollar amounts in thousands)
Investment grades:
BBB Rated	978		993		15			1
Not rated	500		125		(375		)	1
Not rated	1,026		918		(108		)	1
Total	$	2,504	$	2,036	$	(468	)	$	3

There were no interest deferrals or defaults in any of the single issuer trust preferred securities in our investment portfolio as of September 30, 2011.

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VIST FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

The following table provides additional information related to our pooled trust preferred securities as of:

September 30, 2011
Deal	Class	Amortized Cost		Fair Value		Unrealized Gain/Loss			Lowest Credit Rating	# of Performing Issuers	Actual Deferral		Expected Deferral		Current Outstanding Collateral Balance		Current Tranche Subordination		Actual Defaults/ Deferrals as a % of Outstanding Collateral		Expected Deferrals/ Defaults as a % of Remaining Collateral		Excess Subordination as a % of Current Performing Collateral
	(Dollar amounts in thousands)
Pooled trust preferred available for sale securities for which an other-than-temporary inpairment charge has been recognized:
Holding #2	Class B-2	$	585	$	305	$	(280	)	Ca (Moody’s)	16	$	121,250	$	10,000	$	239,250	$	33,000	50.7	%	8.5	%	0.0	%
Holding #3	Class B	487		244		(243		)	Caa3 (Moody’s)	17	156,100		23,500		345,500		62,650		45.2	%	12.4	%	0.0	%
Holding #4	Class B-2	894		370		(524		)	Ca (Moody’s)	19	99,750		—		267,000		38,500		37.4	%	0.0	%	0.0	%
Holding #5	Class B-3	335		115		(220		)	Ca (Moody’s)	43	176,280		7,500		573,745		53,600		30.7	%	1.9	%	0.0	%
	Total	$	2,301	$	1,034	$	(1,267	)

Pooled trust preferred held to maturity securities for which an other-than-temporary inpairment charge has been recognized:
Holding #9	Mezzanine	617		580		(37		)	Ca (Moody’s)	18	87,000		—		228,500		20,289		38.1	%	0.0	%	0.0	%
	Total	$	617	$	580	$	(37	)

Pooled trust preferred available for sale securities for which an other-than-temporary inpairment charge has not been recognized:
Holding #6	Class B-1	1,300		548		(752		)	CCC- (S&P)	15	$	32,500	$	15,000	$	193,500	$	109,033	16.8	%	9.3	%	20.0	%
Holding #7	Class C	1,003		229		(774		)	CCC- (S&P)	25	46,000		—		282,050		31,938		16.3	%	0.0	%	14.1	%
Holding #8	Senior Subordinate	493		486		(7		)	Baa2 (Moody’s)	5	34,000		—		116,000		81,000		29.3	%	0.0	%	13.2	%
	Total	$	2,796	$	1,263	$	(1,533	)


Grand Total		$	5,714	$	2,877	$	(2,837	)

In addition to the above factors, our evaluation of impairment also includes a stress test analysis which provides an estimate of excess subordination for each tranche. We stress the cash flows of each pool by increasing current default assumptions to the level of defaults which results in an adverse change in estimated cash flows. This stressed breakpoint is then used to calculate excess subordination levels for each pooled trust preferred security.

Future evaluations of the above mentioned factors could result in the Company recognizing additional impairment charges on its TRUPS portfolio.

F. Equity Securities. Included in equity securities available for sale at September 30, 2011, were equity investments in 27 financial services companies. The Company owns 1 qualifying Community Reinvestment Act (“CRA”) equity investment with an amortized cost and fair value of approximately $1.0 million and $994,000, respectively. The remaining 26 equity securities have an average amortized cost of approximately $87,000 and an average fair value of approximately $55,000. Testing for other-than-temporary-impairment for equity securities is governed by FASB ASC 320-10. While approximately $870,000 in fair value of the equity securities has been below amortized cost for a period of more than twelve months, the Company believes the decline in market value of the equity investment in financial services companies is primarily attributable to changes in market pricing and not fundamental changes in the earning potential of the individual companies. Included in equity securities available for sale at December 31, 2010, were equity investments in 25 financial services companies. The Company owns 1 qualifying Community Reinvestment Act (“CRA”) equity investment with an amortized cost and fair value of approximately $1.0 million and $989,000, respectively. The remaining 25 equity securities have an average amortized cost of approximately $94,000 and an average fair value of approximately $66,000. While approximately $1.0 million in fair value of the equity securities at December 31, 2010 has been below amortized cost for a period of more than twelve months, the Company believes the decline in market value of the equity investment in financial services companies is primarily attributable to changes in market pricing and not fundamental changes in the earning potential of the individual companies. For the three and nine months ended September 30, 2011 and 2010, respectively, the Company did not recognize any net credit impairment charges to earnings. The Company has the intent and ability to retain its investment in its equity

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VIST FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

securities for a period of time sufficient to allow for any anticipated recovery in market value. The Company does not consider its equity securities to be other-than-temporarily-impaired at September 30, 2011 and 2010, respectively.

As of September 30, 2011, the fair value of all securities available for sale that were pledged to secure public deposits, repurchase agreements, and for other purposes required by law were $298.8 million as compared to $226.9 million at December 31, 2010, respectively.

The contractual maturities of securities at September 30, 2011 are set forth in the following table. Maturities may differ from contractual maturities in mortgage-backed securities because the mortgages underlying the securities may be prepaid without any penalties. Therefore, mortgage-backed securities are not included in the maturity categories below .

	At September 30, 2011
	Securities Available for Sale				Securities Held to Maturity
	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value
	(Dollar amounts in thousands)

Due in one year or less	$	—	$	—	$	—	$	—
Due after one year through five years	20		20		—		—
Due after five years through ten years	6,349		6,458		—		—
Due after ten years	36,946		34,896		2,621		2,491
Agency residential mortgage-backed debt securities	287,572		296,301		—		—
Non-Agency collateralized mortgage obligations	9,700		7,425		—		—
Equity securities	3,265		2,422		—		—
	$	343,852	$	347,522	$	2,621	$	2,491

Actual maturities of debt securities may differ from those presented above since certain obligations provide the issuer the right to call or prepay the obligation prior to the scheduled maturity without penalty.

Net realized gains on the sale of investment securities available for sale and included in earnings for the three and nine months ended September 30, 2011 and 2010 were as follows :

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2011			2010		2011			2010
	(Dollar amounts in thousands)

Gross gains	$	603		$	179	$	1,392		$	479
Gross losses	(113		)	—		(520		)	(14		)
Net realized gains on sales of securities	$	490		$	179	$	872		$	465

The specific identification method was used to determine the cost basis for all investment security available for sale transactions. There are no securities classified as trading, therefore, there were no gains or losses included in earnings that were a result of transfers of securities from the available-for-sale category into a trading category. There were no sales or transfers from securities classified as held-to-maturity. See Note 18 — Comprehensive Income to the consolidated financial statements for unrealized holding losses on available-for-sale securities for the periods reported.

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VIST FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

The following table presents the changes in the credit loss component of cumulative other-than-temporary impairment losses on debt securities classified as either held to maturity or available for sale that the Company has recognized in earnings, for which a portion of the impairment loss (non-credit factors) was recognized in other comprehensive income (see Note 18 to the consolidated financial statements):

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2011		2010			2011		2010
	(Dollar amounts in thousands)

Balance, beginning of period	$	2,562	$	2,617		$	2,256	$	2,468
Additions:
Initial credit impairments	—		—			146		81
Subsequent credit impairments	606		622			766		690
Reductions:
Fully written down credit impaired debt and equity securities	—		(1,062		)	—		(1,062		)
Balance, end of period	$	3,168	$	2,177		$	3,168	$	2,177

The credit loss component of the impairment loss represents the difference between the present value of expected future cash flows and the amortized cost basis of the security prior to considering credit losses. The beginning balance represents the credit loss component for debt securities for which other-than-temporary impairment occurred prior to the periods presented. Other-than-temporary impairment recognized in earnings for the three and nine months ended September 30, 2011, for credit impaired debt securities are presented as additions in two components based upon whether the current period is the first time the debt security was credit impaired (initial credit impairment) or is not the first time the debt security was credit impaired (subsequent credit impairments). The credit loss component is reduced if the Company sells, intends to sell or believes it will be required to sell previously credit impaired debt securities. Additionally, the credit loss component is reduced if (i) the Company receives the cash flows in excess of what it expected to receive over the remaining life of the credit impaired debt security, (ii) the security matures or (iii) the security is fully written down.

Note 6. Loans and Related Allowance for Credit Losses

Covered loans acquired from Allegiance Bank of North America (“Allegiance”) are shown as a separate line item on the consolidated balance sheet and are not included in the consolidated net loan totals. Covered loans are excluded from the analysis of the allowance for loan loss, as they are accounted for separately. Accordingly, no allowance for loan losses related to the acquired loans was recorded on the acquisition date as the fair value of the loans acquired incorporated assumptions regarding credit risk.

The components of loans by portfolio class as of September 30, 2011 and December 31, 2010 were as follows:

	September 30, 2011					December 31, 2010
				As a % of					As a % of
	Amount			gross loans		Amount			gross loans
	(dollars in thousands)

Residential real estate - one to four family	$	133,992		14.4	%	$	153,499		16.1	%
Residential real estate - multi family	56,440			6.1	%	53,497			5.6	%
Commercial, industrial and agricultural	162,258			17.5	%	150,097			15.7	%
Commercial real estate	417,198			45.0	%	427,546			44.8	%
Construction	71,077			7.7	%	78,202			8.2	%
Consumer	2,207			0.2	%	2,713			0.3	%
Home equity lines of credit	84,678			9.1	%	88,809			9.3	%
Gross loans	927,850			100.0	%	954,363			100.0	%
Allowance for loan losses	(15,458		)			(14,790		)
Loans, net of allowance for loan losses	$	912,392				$	939,573

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VIST FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Commercial real estate loans are secured by real estate as evidenced by mortgages or other liens on nonfarm nonresidential properties, including business and industrial properties, hotels, motels, churches, hospitals, educational and charitable institutions and similar properties. Commercial real estate loans include owner-occupied and non-owner occupied loans, which amount to $159.5 million and $257.7 million, respectively, at September 30, 2011 as compared to $158.4 million and $269.1 million, respectively, at December 31, 2010.

Residential real estate loans — one to four family - serviced for other financial institutions are not reflected in the Company’s consolidated balance sheets as they are not owned by the Company. The unpaid principal balance of these loans serviced for other financial institutions as of September 30, 2011 and December 31, 2010 was $9.6 million and $11.3 million, respectively. The balance of capitalized servicing rights, which reflects fair value is included in other assets in the consolidated balance sheets, was $0 and $31,000 at September 30, 2011 and December 31, 2010, respectively.

An analysis of changes in the Company’s allowance for credit losses is presented in the table below:

	Nine Months Ended			Year Ended			Nine Months Ended
	September 30,			December 31,			September 30,
	2011			2010			2010
	(in thousands)

Beginning balance	$	14,790		$	11,449		$	11,449
Charge offs	(5,518		)	(7,383		)	(5,482		)
Recoveries	119			514			291
Provision for loan losses	6,067			10,210			8,160
Ending balance	$	15,458		$	14,790		$	14,418

An analysis of changes in the Company’s allowance for credit losses by portfolio class is presented in the table below:

	For The Nine Months Ended September 30, 2011
	Residential			Residential			Commerical												Home Equity
	Real Estate			Real Estate			Industrial &			Commercial									Lines of						Total
	One to Four Family			Multi-Family			Agricultural			Real Estate			Construction			Consumer			Credit			Unallocated			Loans
	(in thousands)
Allowance for Loan Losses:
Beginning balance, January 1, 2011	$	2,918		$	735		$	2,576		$	3,321		$	3,063		$	310		$	1,713		$	154		$	14,790

Charge offs	(978		)	(313		)	(786		)	(1,158		)	(1,192		)	(320		)	(771		)	—			(5,518		)
Recoveries	20			1			35			30			4			2			27			—			119
Provision for loan losses	378			1,230			847			1,300			2,062			62			340			(152		)	6,067

Ending balance, September 30, 2011	$	2,338		$	1,653		$	2,672		$	3,493		$	3,937		$	54		$	1,309		$	2		$	15,458

	For The Year Ended December 31, 2010
	Residential			Residential			Commerical												Home Equity
	Real Estate			Real Estate			Industrial &			Commercial									Lines of					Total
	One to Four Family			Multi-Family			Agricultural			Real Estate			Construction			Consumer			Credit			Unallocated		Loans
	(in thousands)
Allowance for Loan Losses:
Beginning balance, January 1, 2010	$	1,159		$	205		$	2,027		$	2,723		$	4,413		$	526		$	389		$	7	$	11,449

Charge offs	(1,978		)	(62		)	(500		)	(440		)	(2,983		)	(45		)	(1,375		)	—		(7,383		)
Recoveries	101			—			150			18			46			17			182			—		514
Provision for loan losses	3,636			592			899			1,020			1,587			(188		)	2,517			147		10,210

Ending balance, December 31, 2010	$	2,918		$	735		$	2,576		$	3,321		$	3,063		$	310		$	1,713		$	154	$	14,790

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VIST FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

The following table presents the Company’s loans that were individually and collectively evaluated for impairment and their related allowance for loan loss by loan portfolio class as of September 30, 2011 and December 31, 2010.

	At September 30, 2011
	Residential		Residential		Commerical								Home Equity
	Real Estate		Real Estate		Industrial &		Commercial						Lines of				Total
	One to Four Family		Multi-Family		Agricultural		Real Estate		Construction		Consumer		Credit		Unallocated		Loans
	(in thousands)
ALLL ending balance:
Individually evaluated for impairment	$	1,481	$	1,498	$	1,221	$	2,296	$	2,968	$	22	$	652	$	—	$	10,138
Collectively evaluated for impairment	857		155		1,451		1,197		969		32		657		—		5,318
Unallocated balance	—		—		—		—		—		—		—		2		2
Total	$	2,338	$	1,653	$	2,672	$	3,493	$	3,937	$	54	$	1,309	$	2	$	15,458

Loans ending balance:
Individually evaluated for impairment	9,035		4,975		7,251		11,945		18,546		22		2,336		—		54,110
Collectively evaluated for impairment	124,957		51,465		155,007		405,253		52,531		2,185		82,342		—		873,740
Total	$	133,992	$	56,440	$	162,258	$	417,198	$	71,077	$	2,207	$	84,678	$	—	$	927,850

	At December 31, 2010
	Residential		Residential		Commerical								Home Equity
	Real Estate		Real Estate		Industrial &		Commercial						Lines of				Total
	One to Four Family		Multi-Family		Agricultural		Real Estate		Construction		Consumer		Credit		Unallocated		Loans
	(in thousands)
ALLL ending balance:
Individually evaluated for impairment	$	2,163	$	633	$	1,155	$	1,895	$	2,203	$	276	$	1,193	$	—	$	9,518
Collectively evaluated for impairment	755		102		1,421		1,426		860		34		520		—		5,118
Unallocated Balance	—		—		—		—		—		—		—		154		154
Total	$	2,918	$	735	$	2,576	$	3,321	$	3,063	$	310	$	1,713	$	154	$	14,790

Loans ending balance:
Individually evaluated for impairment	11,658		2,432		4,477		9,655		18,412		277		2,175		—		49,086
Collectively evaluated for impairment	141,841		51,065		145,620		417,891		59,790		2,436		86,634		—		905,277
Total	$	153,499	$	53,497	$	150,097	$	427,546	$	78,202	$	2,713	$	88,809	$	—	$	954,363

The recorded investment in impaired loans not requiring an allowance for loan losses was $9.1 million at September 30, 2011 as compared to $8.4 million at December 31, 2010. The recorded investment in impaired loans requiring an allowance for loan losses was $45.0 million at September 30, 2011 as compared to $40.7 million at December 31, 2010 and the related allowance for loan losses associated with these loans was $10.1 million and $9.5 million at September 30, 2011 and December 31, 2010, respectively.

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VIST FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

The following table presents the Company’s impaired loans along with their related allowance for loan loss by loan portfolio class as of September 30, 2011.

	At September 30, 2011						At December 31, 2010
			Unpaid						Unpaid
	Recorded		Principal		Related		Recorded		Principal		Related
Impaired Loans:	Investment		Balance		Allowance		Investment		Balance		Allowance
	(in thousands)
With no specific allowance recorded:
Residential real estate 1-4 family	$	1,682	$	1,682	$	—	$	1,866	$	2,146	$	—
Residential real estate multi family	1,338		1,338		—		365		427		—
Commercial industrial & agricultural	482		482		—		363		363		—
Commercial real estate	1,797		2,238		—		900		900		—
Construction	3,214		3,265		—		4,123		4,242		—
Consumer	—		—		—		—		—		—
Home equity lines of credit	563		563		—		755		755		—
Total	9,076		9,568		—		8,372		8,833		—

With an allowance recorded:
Residential real estate 1-4 family	7,353		7,492		1,481		9,792		9,828		2,163
Residential real estate multi family	3,637		3,740		1,498		2,067		2,067		633
Commercial industrial & agricultural	6,769		6,824		1,221		4,114		4,114		1,155
Commercial real estate	10,148		10,592		2,296		8,755		8,932		1,895
Construction	15,332		17,819		2,968		14,289		15,145		2,203
Consumer	22		22		22		277		277		276
Home equity lines of credit	1,773		1,773		652		1,420		1,456		1,193
Total	45,034		48,262		10,138		40,714		41,819		9,518

Total:
Residential real estate 1-4 family	9,035		9,174		1,481		11,658		11,974		2,163
Residential real estate multi family	4,975		5,078		1,498		2,432		2,494		633
Commercial industrial & agricultural	7,251		7,306		1,221		4,477		4,477		1,155
Commercial real estate	11,945		12,830		2,296		9,655		9,832		1,895
Construction	18,546		21,084		2,968		18,412		19,387		2,203
Consumer	22		22		22		277		277		276
Home equity lines of credit	2,336		2,336		652		2,175		2,211		1,193
Total	$	54,110	$	57,830	$	10,138	$	49,086	$	50,652	$	9,518

For the three and nine months ended September 30, 2011, the average recorded investment in impaired loans was $56.7 million and $54.6 million and interest income recognized on impaired loans was $360,000 and $1.6 million for the three and nine months ended September 30, 2011.

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VIST FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

The following presents the average balance of impaired loans by portfolio class along with the related interest income recognized by the Company for the three and nine months ended September 30, 2011.

	For The Three Months Ended September 30, 2011				For The Nine Months Ended September 30, 2011
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
Impaired Loans:	Investment		Recognized		Investment		Recognized
	(in thousands)
With no specific allowance recorded:
Residential real estate 1-4 family	$	2,885	$	31	$	2,685	$	89
Residential real estate multi family	922		31		554		45
Commercial industrial & agricultural	558		1		461		18
Commercial real estate	3,423		14		2,137		137
Construction	3,222		7		3,633		30
Consumer	2		—		1		—
Home equity lines of credit	677		3		704		10
Total	11,690		87		10,175		329

With an allowance recorded:
Residential real estate 1-4 family	7,956		30		8,658		239
Residential real estate multi family	3,704		28		3,373		85
Commercial industrial & agricultural	6,740		68		5,945		199
Commercial real estate	10,672		83		10,552		337
Construction	14,286		29		14,219		319
Consumer	137		1		202		5
Home equity lines of credit	1,555		34		1,490		58
Total	45,049		273		44,439		1,242

Total:
Residential real estate 1-4 family	10,841		61		11,343		328
Residential real estate multi family	4,626		59		3,927		130
Commercial industrial & agricultural	7,298		69		6,406		217
Commercial real estate	14,095		97		12,689		474
Construction	17,508		36		17,852		349
Consumer	139		1		203		5
Home equity lines of credit	2,232		37		2,194		68
Total	$	56,739	$	360	$	54,614	$	1,571

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VIST FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

The following table presents loans that are no longer accruing interest by portfolio class. These loans are considered impaired and included in the previous impaired loan tables.

	September 30,		December 31,
	2011		2010
	(in thousands)
Non-accrual loans:
Residential real estate one to four family	$	4,749	$	5,595
Residential real estate multi-family	4,651		1,950
Commercial industrial & agricultural	2,734		2,016
Commercial real estate	6,806		5,477
Construction	12,035		10,393
Consumer	22		15
Home equity lines of credit	922		1,067
Total non-accrual loans	$	31,919	$	26,513

Non-accrual loans that maintained a current payment status for six consecutive months are placed back on accrual status under the Bank’s loan policy. Loans on which the accrual of interest has been discontinued amounted to $31.9 million and $26.5 million at September 30, 2011 and December 31, 2010, respectively. Loan balances past due 90 days or more and still accruing interest, but which management expects will eventually be paid in full, amounted to $306,000 and $594,000 at September 30, 2011 and December 31, 2010, respectively.

The performance and credit quality of the loan portfolio is also monitored by analyzing the age of the loans receivable as determined by the length of time a recorded payment is past due. The following tables present the classes of the loan portfolio summarized by the past due status as of September 30, 2011 and December 31, 2010:

	September 30, 2011
											Total
	31-60 days		61-90 days		>90 days		Total				Financing		>90 days and
	Past Due		Past Due		Past Due		Past Due		Current		Receivables		Accruing
	(in thousands)
Age Analysis of Past Due Loans:
Residential real estate one to four family	$	1,850	$	749	$	3,042	$	5,641	$	128,351	$	133,992	$	—
Residential real estate multi-family	385		838		937		2,160		54,280		56,440		—
Commercial industrial and agricultural	55		19		2,603		2,677		159,581		162,258		—
Commercial real estate	4,299		996		6,063		11,358		405,840		417,198		306
Construction	2,700		—		11,464		14,164		56,913		71,077		—
Consumer	19		8		—		27		2,180		2,207		—
Home equity lines of credit	925		351		588		1,864		82,814		84,678		—
Total	$	10,233	$	2,961	$	24,697	$	37,891	$	889,959	$	927,850	$	306

	December 31, 2010
											Total
	31-60 days		61-90 days		>90 days		Total				Financing		>90 days and
	Past Due		Past Due		Past Due		Past Due		Current		Receivables		Accruing
	(in thousands)
Age Analysis of Past Due Loans:
Residential real estate one to four family	$	914	$	1,659	$	4,204	$	6,777	$	146,722	$	153,499	$	249
Residential real estate multi-family	549		465		1,400		2,414		51,083		53,497		—
Commercial industrial and agricultural	582		417		1,693		2,692		147,405		150,097		—
Commercial real estate	857		756		4,625		6,238		421,308		427,546		—
Construction	—		—		10,610		10,610		67,592		78,202		245
Consumer	5		17		15		37		2,676		2,713		—
Home equity lines of credit	557		550		534		1,641		87,168		88,809		100
Total	$	3,464	$	3,864	$	23,081	$	30,409	$	923,954	$	954,363	$	594

Table of Contents

VIST FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

The following tables present the classes of the loan portfolio summarized by the aggregate pass, watch, special mention, substandard and doubtful rating within the Company’s internal risk rating system as of September 30, 2011 and December 31, 2010:

	September 30, 2011
	Residential		Residential		Commerical								Home Equity
	Real Estate		Real Estate		Industrial &		Commercial						Lines of		Gross
	1-4 Family		Multi Family		Agricultural		Real Estate		Construction		Consumer		Credit		Loans
	(in thousands)
Credit Rating:
Pass	$	118,230	$	50,452	$	152,987	$	357,696	$	42,191	$	1,942	$	81,358	$	804,856
Watch	1,413		1,013		2,020		40,600		5,833		243		779		51,901
Special Mention	729		—		3,726		4,298		1,257		—		481		10,491
Substandard	13,620		4,975		3,525		14,604		21,796		22		2,060		60,602
Doubtful	—		—		—		—		—		—		—		—
	$	133,992	$	56,440	$	162,258	$	417,198	$	71,077	$	2,207	$	84,678	$	927,850

	December 31, 2010
	Residential		Residential		Commerical								Home Equity
	Real Estate		Real Estate		Industrial &		Commercial						Lines of		Gross
	1-4 Family		Multi Family		Agricultural		Real Estate		Construction		Consumer		Credit		Loans
	(in thousands)
Credit Rating:
Pass	$	135,231	$	49,136	$	136,978	$	358,853	$	48,878	$	2,224	$	85,075	$	816,375
Watch	2,519		1,621		6,460		49,945		5,863		212		1,425		68,045
Special Mention	1,653		—		476		2,554		6,351		—		75		11,109
Substandard	14,096		2,740		6,183		16,194		17,110		277		2,234		58,834
Doubtful	—		—		—		—		—		—		—		—
	$	153,499	$	53,497	$	150,097	$	427,546	$	78,202	$	2,713	$	88,809	$	954,363

Table of Contents

VIST FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Troubled Debt Restructurings (“TDRs”) - As a result of adopting the amendments in ASU No. 2011-02 in the third quarter of 2011, the Company reassessed all restructurings that occurred on or after January 1, 2011, for which the borrower was determined to be troubled, for identification as TDRs. Upon identifying those receivables as TDRs, the Company identified them as impaired under the guidance in Section 310-10-35 of the Accounting Standards Codification. The amendments in ASU No. 2011-02 require prospective application of the impairment measurement guidance in Section 450-20 for those receivables newly identified as impaired.

TDRs may be modified by means of extended maturity at below market adjusted interest rates, a combination of rate and maturity, or by other means including covenant modifications, forbearance and other concessions. However, the Company generally only restructures loans by modifying the payment structure to interest only or by reducing the actual interest rate. Once a loan becomes a TDR, it will continue to be reported as a TDR during the term of the restructure. After the loan reverts to the original terms and conditions, it will still be considered a TDR until it has paid current for six consecutive months, at which time the loan will no longer be reported as a TDR.

The recorded investment in TDRs was $7.4 million and $10.8 million at September 30, 2011 and December 31, 2010, respectively. At September 30, 2011 and December 31, 2010, the Company had $6.7 million and $9.9 million of accruing TDRs while TDRs on nonaccrual status totaled $672,000 and $849,000 at September 30, 2011 and December 31, 2010, respectively. Some loan modifications classified as TDRs may not ultimately result in the full collection of principal and interest, as modified, and result in potential incremental losses. These potential incremental losses have been factored into our overall estimate of the allowance for loan losses. The level of any re-defaults will likely be affected by future economic conditions. At September 30, 2011 and December 31, 2010, the allowance for loan and lease losses included specific reserves of $698,000 and $423,000 related to TDRs, respectively.

The following table shows information on the troubled and restructured debt by loan portfolio for the three and nine month periods ended September 30, 2011 and September 30, 2010:

	Three Months Ended September 30, 2011
		Pre-Modification		Post-Modification
	Number of	Outstanding		Outstanding
	Contracts	Recorded Investment		Recorded Investment
	(Dollars in thousands)
Troubled Debt Restructurings:
Commercial industrial & agricultural	1	$	468	$	468
Commercial real estate	2	580		580
Total Troubled Debt Restructurings	3	$	1,048	$	1,048

	Nine Months Ended September 30, 2011
		Pre-Modification		Post-Modification
	Number of	Outstanding		Outstanding
	Contracts	Recorded Investment		Recorded Investment
	(Dollars in thousands)
Troubled Debt Restructurings:
Commercial industrial & agricultural	1	$	468	$	468
Commercial real estate	2	580		580
Home equity lines of credit	1	210		210
Total Troubled Debt Restructurings	4	$	1,258	$	1,258

For the three months ended September 30, 2011, the Company added an additional $1.0 million in TDRs respectively. For the nine months ended September 30, 2011, the Company added an additional $1.3 million in TDRS respectively. The Company had reserves allocated for loan loss of $234,000 and $266,000 for the additions in troubled debt restructurings made during the three and nine months ending September 30, 2011. A default on a troubled debt restructured loan for purposes of this disclosure occurs when the borrower is 90 days past due or a foreclosure or repossession of the applicable collateral has occurred. No defaults on troubled debt restructured loans occurred during the three and nine month periods ending September 30, 2011 on loans modified as a TDR within the previous 12 months.

Table of Contents

VIST FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Note 7. Covered Loans

At September 30, 2011, the Company had $57.0 million (net of fair value adjustments) of covered loans (covered under loss share agreements with the FDIC) as compared to $66.8 million at December 31, 2010. Covered loans were recorded at fair value on November 19, 2010 pursuant to the purchase accounting guidelines in FASB ASC 805 — “Business Combinations”. Upon acquisition, the Company evaluated whether each acquired loan (regardless of size) was within the scope of ASC 310-30, “Receivables — Loans and Debt Securities Acquired with Deteriorated Credit Quality”.

The carrying value of covered loans not exhibiting evidence of credit impairment at the time of the acquisition (i.e. loans outside of the scope of ASC 310-30) was $29.9 million at September 30, 2011 as compared to $37.8 million at December 31, 2010. The fair value of the acquired loans not exhibiting evidence of credit impairment was determined by projecting contractual cash flows discounted at risk-adjusted interest rates.

The carrying value of covered loans acquired and accounted for in accordance with ASC Subtopic 310-30, “Loans and Debt Securities Acquired with Deteriorated Credit Quality,” was $27.1 million at September 30, 2011 as compared to $29.0 million at December 31, 2010. Under ASC Subtopic 310-30, loans may be aggregated and accounted for as pools of loans if the loans being aggregated have common risk characteristics. Of the loans acquired with evidence of credit deterioration, a portion of the loans were aggregated into ten pools of loans based on common risk characteristics such as credit risk and loan type. Other loans acquired in the acquisition evidencing credit deterioration are recorded individually at the amount paid; which represents fair value. For pools or loans or individual loans evidencing credit deterioration, the expected cash flows in excess of amount paid is recorded as interest income over the remaining life of the loan or pool (accretable yield). The excess of the pool or loan’s contractual principal and interest over expected cash flows is not recorded (nonaccretable difference). There were no material increases or decreases in the expected cash flows of covered loans in each of the pools between November 19, 2010 (the “acquisition date”) and September 30, 2011. Overall, the Company accreted $590,000 into income on the loans acquired with evidence of credit deterioration since acquisition and $264,000 and $543,000 for the three and nine months ended September 30, 2011.

The components of covered loans by portfolio class as of September 30, 2011 and December 31, 2010 were as follows:

	September 30, 2011				December 31, 2010
			As a % of				As a % of
	Amount		gross loans		Amount		gross loans
	(Dollars in thousands)

Residential real estate - one to four family	$	18,564	32.6	%	$	25,711	38.5	%
Residential real estate - multi-family	5,534		9.7	%	7,081		10.6	%
Commercial, industrial and agricultural	1,686		3.0	%	2,655		4.0	%
Commercial real estate	16,837		29.5	%	17,719		26.5	%
Construction	8,229		14.4	%	8,255		12.4	%
Consumer	—		0.0	%	56		0.1	%
Home equity lines of credit	6,182		10.8	%	5,293		7.9	%
Covered Loans	$	57,032	100.0	%	$	66,770	100.0	%

Table of Contents

VIST FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

The following tables show the breakdown of covered loans that are current, past due, non-accrual and loans past due greater than 90 days and still accruing as of September 30, 2011 and December 31, 2011.

	September 30, 2011
											Total
	31-60 days		61-90 days		>90 days		Total				Financing		>90 days and
	Past Due		Past Due		Past Due		Past Due		Current		Receivables		Accruing
	(in thousands)
Age Analysis of Past Due Loans:
Residential real estate one to four family	$	—	$	153	$	1,051	$	1,204	$	17,360	$	18,564	$	—
Residential real estate multi-family	—		—		—		—		5,534		5,534		—
Commercial, industrial and agricultural	—		—		21		21		1,665		1,686		—
Commercial real estate	568		—		1,246		1,814		15,023		16,837		—
Construction	—		—		1,933		1,933		6,296		8,229		—
Consumer	—		—		—		—		—		—		—
Home equity lines of credit	100		—		—		100		6,082		6,182		—
Total	$	668	$	153	$	4,251	$	5,072	$	51,960	$	57,032	$	—

	December 31, 2010
											Total
	31-60 days		61-90 days		>90 days		Total				Financing		>90 days and
	Past Due		Past Due		Past Due		Past Due		Current		Receivables		Accruing
	(in thousands)
Age Analysis of Past Due Loans:
Residential real estate one to four family	$	421	$	587	$	881	$	1,889	$	23,822	$	25,711	$	336
Residential real estate multi-family	—		—		478		478		6,603		7,081		—
Commercial, industrial and agricultural	—		—		—		—		2,655		2,655		—
Commercial real estate	—		59		1,278		1,337		16,382		17,719		—
Construction	810		—		1,771		2,581		5,674		8,255		—
Consumer	—		—		—		—		56		56		—
Home equity lines of credit	—		—		—		—		5,293		5,293		—
Total	$	1,231	$	646	$	4,408	$	6,285	$	60,485	$	66,770	$	336

The following table presents covered loans that currently are not accruing interest as of September 30, 2011 and December 31, 2010.

	September 30, 2011		December 31, 2010
	(in thousands)
Non-accrual covered loans:
Residential real estate one to four family	$	2,502	$	881
Residential real estate multi-family	—		478
Commercial, industrial and agricultural	21		—
Commercial real estate	1,246		1,278
Construction	1,970		1,771
Consumer	—		—
Home equity lines of credit	—		—
Total non-accrual covered loans	$	5,739	$	4,408

Table of Contents

VIST FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Note 8. Acquisitions Including Goodwill and Other Intangible Assets

Acquisitions

On September 1, 2008, the Company paid cash of $1.8 million for Fisher Benefits Consulting, an insurance agency specializing in group employee benefits, located in Pottstown, Pennsylvania. Fisher Benefits Consulting has become a part of VIST Insurance. As a result of the acquisition, VIST Insurance continues to expand its retail and commercial insurance presence in southeastern Pennsylvania counties. The results of Fisher Benefits Consulting operations have been included in the Company’s consolidated financial statements since September 2, 2008. Included in the $1.8 million purchase price for Fisher Benefits Consulting was goodwill of $200,000 and identifiable intangible assets of $1.6 million. Contingent payments totaling $750,000, or $250,000 for each of the first three years following the acquisition, will be paid if certain predetermined revenue target ranges are achieved. These payments are added to goodwill when paid. The contingent payments could be higher or lower depending upon whether actual revenue earned in each of the three years following the acquisition is less than or exceeds the predetermined revenue goals. A contingent payment of $250,000 was made in both 2009 and 2010 as predetermined revenue targets were achieved. A contingent payment for $250,000 was also made during the third quarter of 2011.

On April 30, 2010, VIST Insurance purchased a client list from KDN/Lanchester Corp for contingent payments estimated to be $231,000. Included in the purchase price was $78,000 and $152,000 of goodwill and intangible assets, respectively. The agreement between VIST Insurance and KDN/Lanchester Corp contains a purchase price consisting of a percentage of revenue for a three year period, after which all revenues generated from the use of the list will revert to VIST Insurance. As a result of this purchase, VIST Insurance expects to expand its retail and commercial presence in southeastern Pennsylvania.

Table of Contents

VIST FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Goodwill

The Company had goodwill of $42.1 million at September 30, 2011 compared to $41.9 million at December 31, 2010, related to the acquisition of its banking, insurance and wealth management companies. The Company utilizes a third party valuation service to perform its goodwill impairment test on an annual basis. A fair value is determined for the banking and financial services, insurance services and investment services reporting units. If the fair value of the reporting business unit exceeds the book value, then no impairment write down of goodwill is necessary (a Step One evaluation). If the fair value is less than the book value, then an additional test (a Step Two evaluation) is necessary to assess goodwill for potential impairment. As a result of the goodwill impairment valuation analysis, the Company determined that no goodwill impairment write-off for any of its reporting units was necessary for the year ended December 31, 2010, however a Step Two evaluation was necessary for the banking and financial services reporting unit.

Reporting unit valuation is inherently subjective, with a number of factors based on assumption and management judgments. Among these are future growth rates, discount rates and earnings capitalization rates. Changes in assumptions and results due to economic conditions, industry factors and reporting business unit performance could result in different assessments of the fair value and could result in impairment charges in the future.

Framework for Interim Impairment Analysis

The Company utilizes the following framework from FASB ASC 350 “Intangibles - Goodwill & Other” to evaluate whether an interim goodwill impairment test is required, given the occurrence of events or if circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Examples of such events or circumstances include:

· a significant adverse change in legal factors or in the business climate;

· an adverse action or assessment by a regulator;

· unanticipated competition;

· a loss of key personnel;

· a more-likely-than-not expectation that a reporting unit or a significant portion of a reporting unit will be sold or otherwise disposed of; Financing Transactions,” of a significant asset group within a reporting unit; and

· recognition of a goodwill impairment loss in the financial statements of a subsidiary that is a component of a reporting unit.

When applying the framework above, management additionally considers that a decline in the Company’s market capitalization could reflect an event or change in circumstances that would more likely than not reduce the fair value of reporting business unit below its carrying value. However, in considering potential impairment of goodwill, management does not consider the fact that our market capitalization is less than the carrying value of our Company to be determinative that impairment exists. This is because there are factors, such as our small size and small market capitalization, which do not take into account important factors in evaluating the value of our Company and each reporting business unit, such as the benefits of control or synergies. Consequently, management’s annual process for evaluating potential impairment of our goodwill (and evaluating subsequent interim period indicators of impairment) involves a detailed level analysis and incorporates a more granular view of each reporting business unit than aggregate market capitalization, as well as significant valuation inputs.

Annual and Interim Impairment Tests and Results

Management estimates fair value annually utilizing multiple methodologies which include discounted cash flows, comparable companies and comparable transactions. Each valuation technique requires management to make judgments about inputs and assumptions which form the basis for financial projections of future operating performance and the corresponding estimated cash flows. The analyses performed require the use of objective and subjective inputs which include market-price of non-distressed financial institutions, similar transaction multiples, and required rates of return. Management works closely in this process with third party valuation professionals, who assist in obtaining comparable market data and performing certain of the calculations, based on information provided and assumptions made by management.

Table of Contents

VIST FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

FASB ASC 820 “Fair Value Measurements and Disclosures” defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A fair value measurement assumes that the transaction to sell or transfer the asset or transfer the liability occurs in the principal market for the asset or liability, or in the absence of a principal market, the most advantageous market for the asset or liability. FASB ASC 820 further defines market participants as buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact and (iv) willing to transact.

FASB ASC 820 establishes a fair value hierarchy to prioritize the inputs used in valuation techniques:

1. Level 1 inputs are observable inputs that reflect quoted prices for identical assets or liabilities in active markets.

2. Level 2 inputs are inputs other than quoted prices included in level 1 that are observable for the asset or liability through corroboration with observable market data

3. Level 3 inputs are unobservable inputs, such as a company’s own data

The Company monitors interim indicators noted in FASB ASC 350 to evaluate whether an interim goodwill impairment test is required, given the occurrence of events or if circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount, absent those events, the Company will perform its annual goodwill impairment evaluation during the fourth quarter of 2011.

Consideration of Market Capitalization in Light of the Results of Our Annual and Interim Goodwill Assessments

The Company’s stock price, like the stock prices of many other financial services companies, is trading below both book value as well as tangible book value. We believe that the Company’s current market value does not represent the fair value of the Company when taken as a whole and in consideration of other relevant factors. Because the Company is viewed by investors predominantly as a community bank, we believe our market capitalization is based on net tangible book value, reduced by nonperforming assets in excess of the allowance for loan losses. We believe that the marketplace ascribes effectively no value to the Company’s fee-based reporting units, the assets of which are composed principally of goodwill and intangibles. Management believes that as a stand-alone business each of these reporting units has value which is not being incorporated in the market’s valuation of the Company reflected in the share price. Management also believes that if these reporting units were carved out of the Company and sold, they would command a sales price reflective of their current performance. Management further believes that if these reporting units were sold, the results of the sale would increase both the tangible book value (resulting from, among other things, the reduction in associated goodwill) and therefore market capitalization, given the market’s current valuation approach described above.

Insurance services and investment services reporting units:

In performing step one of the goodwill impairment tests, it was necessary to determine the fair value of the insurance services and investment services reporting units. The fair value of these reporting units was estimated using a weighted average of both an income approach and a market approach. The income approach utilizes level 3 inputs and uses a dividend discount analysis, which calculates the present value of all excess cash flows plus the present value of a terminal value. This approach calculates cash flows based on financial results after a change of control transaction. The Market Approach utilizes level 2 inputs and is used to calculate the fair value of a company by examining pricing multiples in recent acquisitions of companies similar in size and performance to the company being valued.

Two key inputs to the income approach were our future cash flow projection and the discount rate. For the insurance services reporting unit, a 17.5% discount rate was applied, which was based on recently reported expected internal rates of return by market participants in the financial services industry as well as to account for the execution risk inherent in achieving the projections provided by the Company. For the investment services unit, a 15.0% to 25.0% discount rate range was applied which was representative of the required returns of investment of a market participant and the risk inherent in such an investment.

Table of Contents

VIST FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

The table below presents the fair value, carrying amount, and goodwill associated with the insurance and investment services reporting units with respect to the annual goodwill impairment test completed as of October 31, 2010:

Results of Annual Goodwill Impairment Testing

	October 31, 2010
Reporting Segment	Fair Value		Carrying Amount*		Goodwill
	(in thousands)

VIST Insurance, LLC	$	14,928	$	13,352	$	11,460
VIST Capital Management, LLC	1,687		1,359		1,021
	$	16,615	$	14,711	$	12,481

* Includes Goodwill

The results of the annual impairment analysis completed for both of the reporting segments above indicated no goodwill impairment existed as of October 31, 2010.

Banking and financial services unit:

In performing step one of the goodwill impairment test, it was necessary to determine the fair value of the banking and financial services reporting unit. The fair value of this reporting unit was estimated using a weighted average of a discounted dividend approach, a market (“selected transactions”) approach, a change in control premium to parent market price approach, and a change in control premium to peer market price approach.

The table below presents the fair value, carrying amount, and goodwill associated with the banking and financial services reporting unit with respect to the annual goodwill impairment test completed as of December 31, 2010:

Results of Annual Goodwill Impairment Testing

	December 31, 2010
Reporting Segment	Fair Value		Carrying Amount*		Goodwill
	(in thousands)

VIST Bank	$	104,409	$	117,669	$	29,316
	$	104,409	$	117,669	$	29,316

* Includes Goodwill

The annual impairment assessment for the banking and financial services reporting unit was as of December 31, 2010. Based on the results of the Step One goodwill impairment evaluation, the estimated fair value was less than the carrying value of this reporting unit and, therefore, in accordance with FASB ASC 350-20, a Step Two analysis was required to determine if there was goodwill impairment of the reporting unit.

A Step Two goodwill impairment evaluation was completed for the banking and financial services reporting unit. The Step Two evaluation consisted of the purchase price allocation method which, in determining the implied fair value of goodwill, the fair value of net assets (fair value of all assets other than goodwill, minus fair value of liabilities) is subtracted from the fair value of the reporting unit. Fair value estimates were made for all material balance sheet accounts to reflect the estimated fair value of the Company’s unrecorded adjustments to assets and liabilities including: loans, investment securities, building, core deposit intangible, certificates of deposit and borrowings.

Based on the results of the Step Two goodwill impairment evaluation, the fair value of the banking and financial services reporting units was more than its carrying amount, resulting in no goodwill impairment. In summary, management believes that its goodwill associated with its reporting units was not impaired as of December 31, 2010.

Table of Contents

VIST FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

The changes in the carrying amount of goodwill for the first nine months of 2011 and for the year ended December 31, 2010 were as follows:

	VIST
					Capital
	Bank		Insurance		Management		Total
	(in thousands)

Balance as of January 1, 2010	$	27,768	$	11,193	$	1,021	$	39,982
Additions to goodwill	1,548		78		—		1,626
Contingent payments made	—		250		—		250
Balance as of December 31, 2010	$	29,316	$	11,521	$	1,021	$	41,858
Additions to goodwill	—		—		—		—
Contingent payments made	—		250		—		250
Balance as of September 30, 2011	$	29,316	$	11,771	$	1,021	$	42,108

Other Intangible Assets

Amortizable intangible assets were composed of the following:

	September 30, 2011				December 31, 2010
	Gross				Gross
	Carrying		Accumulated		Carrying		Accumulated
	Amount		Amortization		Amount		Amortization
	(in thousands)
Amortizable intangible assets:
Purchase of client accounts (20 year weighted average useful life)	$	4,957	$	1,672	$	4,957	$	1,481
Employment contracts (7 year weighted average useful life)	1,135		1,135		1,135		1,122
Assets under management (20 year weighted average useful life)	184		84		184		77
Trade name (20 year weighted average useful life)	196		196		196		196
Core deposit intangible (7 year weighted average useful life)	1,852		1,852		1,852		1,653
Total	$	8,324	$	4,939	$	8,324	$	4,529

Aggregate Amortization Expense:
For the nine months ended September 30, 2011	$	410
For the nine months ended September 30, 2010	$	417

In accordance with the provisions of FASB ASC 350, the Company amortizes other intangible assets over the estimated remaining life of each respective asset.

Note 9. Junior Subordinated Debt

First Leesport Capital Trust I, a Delaware statutory business trust, was formed on March 9, 2000 and is a wholly-owned subsidiary of the Company. The Trust issued $5 million of 10.875% fixed rate capital trust pass-through securities to investors. First Leesport Capital Trust I purchased $5 million of fixed rate junior subordinated deferrable interest debentures from the Company. The debentures are the sole asset of the Trust. The terms of the junior subordinated debentures are the same as the terms of the capital securities. The obligations under the debentures constitute a full and unconditional guarantee by the Company of the obligations of the Trust under the capital securities. The capital securities are redeemable by the Company on or after March 9, 2010, at stated premiums, or earlier if the deduction of related interest for federal income taxes is prohibited, classification as Tier 1 Capital is no longer allowed, or certain other contingencies arise. The capital securities must be redeemed upon final maturity of the subordinated debentures on March 9, 2030. As of September 30, 2011, the Company has not exercised the call option on these debentures. In October 2002, the Company entered into an interest rate swap agreement with a notional amount of $5 million that effectively converted the securities to a floating interest rate of nine month LIBOR plus 5.25%. In September 2010, included in other income was a $272,000 premium paid to the Company resulting from the fixed rate payer exercising a call option to terminate this interest rate swap. In June 2003, the Company purchased a nine month LIBOR cap with a rate of 5.75% which created protection against rising interest rates for the above mentioned $5 million interest rate swap. Interest rate caps are generally used to limit the exposure from the

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VIST FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

repricing and maturity of liabilities and to limit the exposure created by other interest rate swaps. This interest rate cap matured in March 2010.

On September 26, 2002, the Company established Leesport Capital Trust II, a Delaware statutory business trust, in which the Company owns all of the common equity. Leesport Capital Trust II issued $10 million of mandatory redeemable capital securities carrying a floating interest rate of three month LIBOR plus 3.45% (3.80% at September 30, 2011). These debentures are the sole assets of the Trust. The terms of the junior subordinated debentures are the same as the terms of the capital securities. The obligations under the debentures constitute a full and unconditional guarantee by VIST Financial Corp. of the obligations of the Trust under the capital securities. These securities must be redeemed in September 2032, but may be redeemed on or after November 7, 2007 or earlier in the event that the interest expense becomes non-deductible for federal income tax purposes or if the treatment of these securities is no longer qualified as Tier 1 capital for the Company. As of September 30, 2011, the Company has not exercised the call option on these debentures. In September 2008, the Company entered into an interest rate swap agreement that effectively converts the $10 million of adjustable-rate capital securities to a fixed interest rate of 7.25%.

On June 26, 2003, Madison Bank established Madison Statutory Trust I, a Connecticut statutory business trust. Pursuant to the purchase of Madison Bank on October 1, 2004, the Company assumed Madison Statutory Trust I in which the Company owns all of the common equity. Madison Statutory Trust I issued $5 million of mandatory redeemable capital securities carrying a floating interest rate of three month LIBOR plus 3.10% (3.80% at September 30, 2011). These debentures are the sole assets of the Trusts. The terms of the junior subordinated debentures are the same as the terms of the capital securities. The obligations under the debentures constitute a full and unconditional guarantee by the Company of the obligations of the Trust under the capital securities. These securities must be redeemed in June 2033, but may be redeemed on or after September 26, 2008 or earlier in the event that the interest expense becomes non-deductible for federal income tax purposes or if the treatment of these securities is no longer qualified as Tier 1 capital for the Company. As of September 30, 2011, the Company has not exercised the call option on these debentures. In September 2008, the Company entered into an interest rate swap agreement that effectively converts the $5 million of adjustable-rate capital securities to a fixed interest rate of 6.90%.

Note 10. Regulatory Matters, Capital Adequacy and Shareholders’ Equity

The Company and the Bank are 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 their financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of its assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk-weightings and other factors.

Federal bank regulatory agencies have established certain capital-related criteria that must be met by banks and bank holding companies. The measurements which incorporate the varying degrees of risk contained within the balance sheet and exposure to off-balance sheet commitments were established to provide a framework for comparing different institutions. Regulatory guidelines require that Tier 1 capital and total risk-based capital to risk-adjusted assets must be at least 4.0% and 8.0%, respectively. In order for the Company to be considered “well capitalized” under the guidelines of the banking regulators, the Company must have Tier 1 capital and total risk-based capital to risk-adjusted assets of at least 6.0% and 10.0%, respectively. As of September 30, 2011, the Company and the Bank has met the criteria to be considered a well capitalized institution.

As of September 30, 2011, the most recent notification from the Bank’s primary regulator categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed its category.

The Company’s regulatory capital ratios are presented below for the periods indicated:

	September 30,		December 31,
	2011		2010

Leverage ratio	7.83	%	8.01	%
Tier I risk-based capital ratio	11.21	%	10.87	%
Total risk-based capital ratio	12.46	%	12.13	%

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VIST FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

On December 19, 2008, the Company issued to the United States Department of the Treasury (“Treasury”) 25,000 shares of Series A, Fixed Rate, Cumulative Perpetual Preferred Stock (“Series A Preferred Stock”), with a par value of $0.01 per share and a liquidation preference of $1,000 per share, and a warrant (“Warrant”) to initially purchase 376,984 shares of the Company’s common stock, par value $5.00 per share, for an aggregate purchase price of $25,000,000 in cash.

The Series A Preferred Stock qualifies as Tier 1 capital and will pay cumulative dividends at a rate of 5% per annum for the first five years, and 9% per annum thereafter. Under ARRA, the Series A Preferred Stock may be redeemed at any time following consultation by the Company’s primary bank regulator and Treasury, not withstanding the terms of the original transaction documents. Under FAQ’s issued recently by Treasury, participants in the Capital Purchase Program desiring to repay part of an investment by Treasury must repay a minimum of 25% of the issue price of the preferred stock.

Prior to the earlier of the third anniversary date of the issuance of the Series A Preferred Stock (December 19, 2011) or the date on which the Series A Preferred Stock have been redeemed in whole or the Treasury has transferred all of the Series A Preferred Stock to third parties which are not affiliates of the Treasury, the Company can not increase its common stock dividend from the last quarterly cash dividend per share ($0.10) declared on the common stock prior to October 14, 2008 without the consent of the Treasury,

The Warrant has a 10-year term and is immediately exercisable upon its issuance, with an exercise price subject to anti-dilution adjustments presently equal to $10.19 per share of common stock. As a result of the sale of 644,000 shares of the Company’s common stock to two institutional investors, the number of shares of common stock into which the Warrant is now exercisable is 367,984. In the event that the Company redeems the Series A Preferred Stock, the Company can repurchase the warrant at “fair value” as defined in the investment agreement with Treasury.

On April 21, 2010, the Company entered into separate stock purchase agreements with two institutional investors relating to the sale of an aggregate of 644,000 shares of the Company’s authorized but unissued common stock, par value $5.00 per share, at a purchase price of $8.00 per share. The Company completed the issuance of $4.8 million of common stock, net of related offering costs, on May 12, 2010.

In July 2011, VIST Financial filed an S-1 Registration statement with the SEC. The Company’s existing capital ratios continue to exceed all regulatory guidelines for a well-capitalized institution; and given the present volatility and uncertainty of the equity markets, the Company is evaluating capital alternatives both in terms of timing and the amount of capital to be raised.

Federal and state banking regulations place certain restrictions on dividends paid and loans or advances made by the Bank to the Company. At September 30, 2011, the Bank had approximately $9.4 million available for payment of dividends to the Company. Dividends paid by the Bank to the Company would be prohibited if the effect thereof would cause the Bank’s capital to be reduced below applicable minimum capital requirements.

Loans or advances are limited to 10% of the Bank’s capital stock and surplus on a secured basis. At September 30, 2011 and at December 31, 2010, the Bank had a $1.3 million loan outstanding to VIST Insurance.

On July 19, 2011, the Company declared a $0.05 per share cash dividend for common shareholders of record on August 1, 2011 which was payable on August 15, 2011. On October 18, 2011, the Company declared a $0.05 per share cash dividend for common shareholders of record on November 1, 2011 which is payable on November 15, 2011. For the first nine months of 2011, common stock dividends totaled $983,000, as compared to $911,000 for the same period in 2010.

For the first nine months of 2011 and 2010, preferred stock dividends and discount accretion totaled $1.3 million.

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VIST FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Note 11. Financial Instruments with Off-Balance Sheet Risk

Commitments to Extend Credit and Letters of Credit:

The Bank is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheets.

The Bank’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and letters of credit is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet investments.

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VIST FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

A summary of the Bank’s financial instrument commitments is as follows:

	September 30,		December 31,
	2011		2010
	(in thousands)
Commitments to extend credit:
Unfunded loan origination commitments	$	52,484	$	41,803
Unused home equity lines of credit	48,452		38,089
Unused business lines of credit	116,180		132,486
Total commitments to extend credit	$	217,116	$	212,378

Standby letters of credit	$	9,479	$	9,235

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The Bank evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management’s credit evaluation. Collateral held varies but may include personal or commercial real estate, accounts receivable, inventory and equipment.

Standby letters of credit written are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. The majority of these standby letters of credit expire within the next twelve months. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending other loan commitments. The Bank requires collateral supporting these letters of credit as deemed necessary. Management believes that the proceeds obtained through a liquidation of such collateral would be sufficient to cover the maximum potential amount of future payments required under the corresponding guarantees. The amount of the liability as of September 30, 2011 and 2010 for guarantees under standby letters of credit issued was not considered to be material.

Junior Subordinated Debt:

The Company has elected to record its junior subordinated debt at fair value with changes in fair value reflected in other income in the consolidated statements of operations. The fair value is estimated utilizing the income approach whereby the expected cash flows over the remaining estimated life of the debentures are discounted using the Company’s estimated credit spread over the current fully indexed yield based on an expectation of future interest rates derived from observed market interest rate curves and volatilities. At September 30, 2011 and December 31, 2010, the estimated fair value of the junior subordinated debt was $18.6 million and $18.4 million, respectively, and was offset by changes in the fair value of the related interest rate swaps.

During October 2002, the Company entered into an interest rate swap agreement with a notional amount of $5 million to manage its exposure to interest rate risk. This derivative financial instrument effectively converted fixed interest rate obligations of outstanding mandatory redeemable capital debentures to variable interest rate obligations, decreasing the asset sensitivity of its balance sheet by more closely matching the repricing of the Company’s variable rate assets with variable rate liabilities. The Company considers the credit risk inherent in the contracts to be negligible. This swap had a notional amount equal to the outstanding principal amount of the related trust preferred securities, together with the same payment dates, maturity date and call provisions as the related trust preferred securities.

Under the swap, the Company paid interest at a variable rate equal to nine month LIBOR plus 5.25%, adjusted semiannually, and the Company received a fixed rate equal to the interest that the Company is obligated to pay on the related trust preferred securities (10.875%). In September 2010, included in other income was a $272,000 premium paid to the Company resulting from the fixed rate payer exercising a call option to terminate this interest rate swap.

In September 2008, the Company entered into two interest rate swaps to manage its exposure to interest rate risk. The interest rate swap transactions involved the exchange of the Company’s floating rate interest rate payment on its $15 million in floating rate junior subordinated debt for a fixed rate interest payment without the exchange of the underlying principal amount. The first interest rate swap agreement effectively converts the $10 million of adjustable-rate capital securities to a fixed interest rate of 7.25%. Interest began accruing on this swap in February 2009. The second interest rate swap agreement effectively converts the $5 million of adjustable-rate capital securities to a fixed interest rate of 6.90%. Interest began accruing on this swap in March 2009. Entering into interest rate derivatives potentially exposes the Company to the risk of counterparties’ failure to fulfill their legal obligations including, but not limited to, potential amounts due or payable under each derivative contract. Notional principal amounts are often used to express the volume of these transactions, but the amounts potentially subject to credit risk are much smaller. These interest

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VIST FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

rate swaps are recorded on the balance sheet at fair value through adjustments to other income in the consolidated results of operations. The fair value measurement of the interest rate swaps is determined by netting the discounted future fixed or variable cash payments and the discounted expected fixed or variable cash receipts based on an expectation of future interest rates derived from observed market interest rate curves and volatilities.

The estimated fair values of the interest rate swap agreements represent the amount the Company would have expected to receive to terminate such contract. At September 30, 2011 and December 31, 2010, the estimated fair value of the interest rate swap agreements was $1.0 million and $1.1 million, respectively, and was offset by changes in the fair value of the related trust preferred debt. The swap agreements expose the Company to market and credit risk if the counterparty fails to perform. Credit risk is equal to the extent of a fair value gain on the swaps. The Company manages this risk by entering into these transactions with high quality counterparties.

Interest rate caps are generally used to limit the exposure from the repricing and maturity of liabilities and to limit the exposure created by other interest rate swaps. In June 2003, the Company purchased a nine month LIBOR cap to create protection against rising interest rates for the above mentioned $5 million interest rate swap. Interest rate caps are generally used to limit the exposure from the repricing and maturity of liabilities and to limit the exposure created by other interest rate swaps. This interest rate cap matured in March 2010.

In October 2010, the Company purchased a three month LIBOR interest rate cap to create protection against rising interest rates. The notional amount of this interest rate cap was $5.0 million and the initial premium paid for the interest rate cap was $206,000. At September 30, 2011, the recorded value of the interest rate cap was $170,000.

The following table provides the fair values of the Company’s derivative instruments included in the consolidated balance sheet at September 30, 2011 and December 31, 2010:

	Liability Derivatives
	September 30, 2011				December 31, 2010
	Balance				Balance
Derivatives Not Designated as Hedging	Sheet	Fair			Sheet	Fair
Instruments under FASB ASC 815:	Location	Value			Location	Value
	(Dollar amounts in thousands)

Interest rate cap	Other assets	$	170		Other assets	$	300
Interest rate swap contracts	Other liabilities	(1,006		)	Other liabilities	(1,139		)

Total derivatives		$	(836	)		$	(839	)

The following table provides the changes in fair values of the Company’s derivative instruments included in the consolidated statement of operations for the three and nine months ended September 30, 2011 and 2010:

		Amount of Gain or (Loss) Recognized in Income on Derivative
	Location of Gain or (Loss)	For the Three Months Ended						For the Nine Months Ended
Derivatives Not Designated as Hedging	Recognized in Income on	September 30,						September 30,
Instruments under FASB ASC 815:	Derivative	2011			2010			2011			2010
		(Dollar amounts in thousands)

Interest rate cap	Other income	$	(16	)	$	—		$	(130	)	$	—
Interest rate swap contracts	Other income	85			$	(1,311	)	133			$	(1,465	)

Total derivatives		$	69		$	(1,311	)	$	3		$	(1,465	)

During the nine month period ended September 30, 2011, the Company recorded interest payable under the interest rate swap agreements of $401,000, which was recorded as an increase in interest expense on the trust preferred securities. During the nine month period ended September 30, 2010, the Company recorded interest receivable under the interest rate swap agreements of $50,000, which was recorded as a decrease in interest expense on the trust preferred securities.

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VIST FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Note 12. Employee Benefit Plans

401(k) Salary Deferral Plan

The Company has a 401(k) Salary Deferral Plan. This plan covers all eligible employees who elect to contribute to the Plan. An employee who has attained 18 years of age and has been employed for at least 30 calendar days is eligible to participate in the Plan effective with the next quarterly enrollment period. Employees become eligible to receive the Company contribution to the Salary Deferral Plan at each future enrollment period upon completion of one year of service.

In July 2009, the Company’s Board of Directors approved a discretionary match of 50% for the first 2% of a participant’s pay deferred into the 401(k) Retirement Savings Plan. Contributions from the Company vest to the employee over a five year schedule. The expense associated with the Company’s contribution was $54,000 and $121,000 for the three and nine months ended September 30, 2011, respectively and $38,000 and $105,000 for the same periods in 2010, and was included in salaries and employee benefits expense in the Consolidated Statements of Operations.

During the third quarter of 2011, the Company’s Board of Directors approved a discretionary match of 50% for the first 3% of a participant’s pay deferred into the 401(k) Retirement Savings Plan.

Deferred Compensation Agreements and Salary Continuation Plan

The Company has entered into deferred compensation agreements with certain directors and a salary continuation plan for certain key employees. At September 30, 2011 and December 31, 2010, the present value of the future liability for these agreements was $1.9 million and $1.8 million, respectively. For the three months ended September 30, 2011 and 2010, $62,000 and $48,000, respectively, was charged to expense in connection with these agreements. For the nine months ended September 30, 2011 and 2010, $172,000 and $152,000, respectively, was charged to expense in connection with these agreements. To fund the benefits under these agreements, the Company is the owner and beneficiary of life insurance policies on the lives of certain directors and employees. These bank-owned life insurance policies had an aggregate cash surrender value of $19.7 million and $19.4 million at September 30, 2011 and December 31, 2010, respectively.

Employee Stock Purchase Plan

The Company has a non-compensatory Employee Stock Purchase Plan (“ESPP”). Under the ESPP, employees of the Company who elect to participate are eligible to purchase shares of common stock at prices up to a 5 percent discount from the market value of the stock. The ESPP does not allow the discount in the event that the purchase price would fall below the Company’s most recently reported book value per share. The ESPP allows an employee to make contributions through payroll deductions to purchase shares of common stock up to 15 percent of annual compensation. At September 30, 2011, the total number of remaining shares of common stock that may be issued pursuant to the ESPP is 218,890. As of September 30, 2011, a total of 84,986 shares have been issued under the ESPP. For the first nine months of 2011 and 2010, the market value of the Company’s stock was below the Company’s book value per share. The employees of the Company did not receive a 5% discount on purchases made under the ESPP during this timeframe. As a result, the Company did not recognize any expense relative to its ESPP for the three and nine months ended September 30, 2011 and 2010.

Note 13. Stock-based Compensation

The Company has an Employee Stock Incentive Plan (“ESIP”) that covered all officers and key employees of the Company and its subsidiaries and is administered by a committee of the Board of Directors. The ESIP plan expired on November 10, 2008, and as a result, no additional stock option awards remain to be granted. At September 30, 2011, there were 287,539 options granted and still outstanding under the ESIP. The option price for options previously issued under the ESIP was equal to 100% of the fair market value of the Company’s common stock on the date of grant and was not less than the stock’s par value when granted. Options granted under the ESIP have various vesting periods ranging from immediate up to 5 years, 20% exercisable not less than one year after the date of grant, but no later than ten years after the date of grant in accordance with the vesting. Vested options expire on the earlier of ten years after the date of grant, three months from the participant’s termination of employment or one year from the date of the participant’s death or disability. At September 30, 2011, a total of 148,072 options have been exercised under the ESIP and common stock shares were issued accordingly.

The Company has an Independent Directors Stock Option Plan (“IDSOP”). The IDSOP plan expired on November 10, 2008, and as a result, no additional stock option awards remain to be granted. At September 30, 2011, there were 76,100 stock options granted and still outstanding under the IDSOP. The IDSOP covers all directors of the Company who are not employees and former directors who continue to be employed by the Company. The option price for stock option awards previously issued under the ESIP was equal to the fair market value of the Company’s common stock on the date of grant. Options are exercisable from the date of grant and expire on

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VIST FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

the earlier of ten years after the date of grant, three months from the date the participant ceases to be a director of the Company or the cessation of the participant’s employment, or twelve months from the date of the participant’s death or disability. A total of 21,166 options had been exercised under the IDSOP and common stock shares were issued accordingly as of September 30, 2011.

On April 17, 2007, the Company’s shareholders approved the VIST Financial Corp. 2007 Equity Incentive Plan (“EIP”). The total number of options which may be granted under the EIP is equal to 12.5% of the outstanding shares of the Company’s common stock on the date of approval of the Plan. At September 30, 2011, there were 292,900 shares authorized for issuance for potential future equity awards pursuant to the EIP subject to automatic annual increases by an amount equal to 12.5% of any increase in the number of the Company’s outstanding shares of common stock during the preceding year or such lesser number as determined by the Company’s board of directors. The EIP covers all employees and non-employee directors of the Company and its subsidiaries. Incentive stock options, nonqualified stock options and restricted stock grants are authorized for issuance under the EIP (see below “Restricted Stock Grants” for additional information on restricted stock awards). The exercise price for stock options granted under the EIP must equal the fair market value of the Company’s common stock on the date of grant. Vesting of option awards under the EIP is determined by the Human Resources Committee of the board of directors, but must be at least one year. The committee may also subject an award to one or more performance criteria. Stock option and restricted stock awards generally expire upon termination of employment. In certain instances after an optionee terminates employment or service, the Committee may extend the exercise period for a vested nonqualified stock option up to the remaining term of the option. A vested incentive stock option must be exercised within three months following termination of employment if such termination is for reasons other than cause. However, a vested incentive stock option generally expires upon voluntary termination of employment. As of September 30, 2011, 500 options have been exercised under the EIP. The EIP expires on April 17, 2017.

Restricted Stock Grants. When granted, restricted stock shares are unvested stock, issuable one year after the date of the grant for non-employee directors and employees (“Vest Date”). Due to TARP restrictions, restricted stock grants vest over two years for certain employees. The Vest Date accelerates in the event there is a change in control of the Company, if the recipients are then still non-employee directors or employees by Company. Upon issuance of the shares, resale of the shares is restricted for an additional year, during which the shares may not be sold, pledged or otherwise disposed of. Prior to the vest date and in the event the recipient terminates association with the Company for reasons other than death, disability or change in control, the recipient forfeits all rights to the shares that would otherwise be issued under the grant. Restricted stock awards granted under the EIP were recorded at the date of award based on the market value of shares. The weighted average price per share of shares outstanding as of September 30, 2011 was $8.03 as compared to $6.61 at December 31, 2010. At September 30, 2011, there were no vested restricted stock grants.

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VIST FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

A summary of restricted stock award activity is presented below:

	Shares		Weighted Average Fair Value on Award Date
Outstanding at December 31, 2008	—		$	—
Additions	7,000		5.15
Forfeitures	—		—
Outstanding at December 31, 2009	7,000		5.15
Additions	15,500		7.18
Forfeitures	(1,000	)	(5.15		)
Outstanding at December 31, 2010	21,500		6.61
Additions	26,000		9.16
Forfeitures	(417	)	(5.15		)
Outstanding at September 30, 2011	47,083		$	8.03

Stock option activity for the nine months ended September 30, 2011 is summarized in the table below:

							Weighted-
			Weighted-				Average
			Average		Aggregate		Remaining
			Exercise		Intrinsic		Term
	Options		Price		Value		(in years)
Outstanding at the beginning of the year	858,912		$	13.66
Granted	15,000		8.61
Exercised	(500	)	0.20
Expired	(20,486	)	15.20
Forfeited	(12,797	)	5.71
Outstanding as of September 30, 2011	840,129		$	13.66	$	43,157	6.4
Exercisable as of September 30, 2011	595,499		$	16.44	$	24,579	5.4

There were no proceeds received from stock option exercises related to director and employee stock purchase plans in 2010. There was $2,000 received from stock option exercises related to the director and employee stock purchase plans during the first nine months of 2011.

As of September 30, 2011, the aggregate intrinsic value of options outstanding was $43,000, as compared to $479,000 at December 31, 2010. As of September 30, 2011, the weighted average remaining term of options outstanding was 6.4 years, as compared to 6.9 years at December 31, 2010.

The aggregate intrinsic value of a stock option represents the total pre-tax intrinsic value (the amount by which the current market value of the underlying stock exceeds the exercise price of the option) that would have been received by the option holder had all option holders exercised their options. The aggregate intrinsic value of a stock option will change based on fluctuations in the market value of the Company’s stock.

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VIST FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Stock-Based Compensation Expense. The Company adopted the provisions of FASB ASC 718 on January 1, 2006. FASB ASC 718 requires that stock-based compensation to employees be recognized as compensation cost in the consolidated statements of operations based on their fair values on the measurement date, which, for the Company, is the date of grant. For the three months ended September 30, 2011 and 2010, stock-based compensation expense totaled $108,000 and $36,000, respectively. For the nine months ended September 30, 2011 and 2010, stock-based compensation expense totaled $310,000 and $112,000, respectively. At September 30, 2011 there was approximately $416,000, of total unrecognized compensation cost related to non-vested stock options under the plans, as compared to $465,000 at December 31, 2010. Total unrecognized compensation cost related to non-vested stock options could be impacted by the performance of the Company as it relates to options granted which include performance-based goals.

Valuation of Stock-Based Compensation . There were 15,000 stock options granted during the first nine months of 2011, as compared to 16,950 for the same period in 2010. The fair value of options granted during the nine months ended September 30, 2011 was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions:

	For the Nine Months Ended
	September 30, 2011

Dividend yield	2.81		%
Expected life	7 years
Expected volatility	32.07		%
Risk-free interest rate	2.71		%
Weighted average fair value of options granted	$	2.41

The expected volatility is based on historic volatility. The risk-free interest rates for periods within the contractual life of the awards are based on the U.S. Treasury yield curve in effect at the time of the grant. The expected life is based on historical exercise experience. The dividend yield assumption is based on the Company’s history and expectation of dividend payouts.

Note 14. FDIC-Assisted Acquisition

On November 19, 2010, the Bank acquired certain assets and assumed certain liabilities of Allegiance Bank of North America (“Allegiance”) from the FDIC, as Receiver of Allegiance. Allegiance operated five community banking branches located within Chester, Montgomery and Philadelphia counties. The Bank closed one of the branches during the third quarter of 2011. The Bank’s bid to purchase Allegiance included the purchase of certain Allegiance assets at a discount of $5.9 million and time deposits at a premium of $534,000, in exchange for assuming certain Allegiance deposits and certain other liabilities. Based on the terms of this transaction, the FDIC paid the Company $1.8 million ($2.0 million less a settlement of approximately $200,000). As a result of the Allegiance acquisition, the Bank recorded $1.5 million of goodwill. No cash or other consideration was paid by the Bank. The Bank and the FDIC entered into loss sharing agreements regarding future losses incurred on loans and other real estate acquired through foreclosure existing at the acquisition date. Under the terms of the loss sharing agreements, the FDIC will reimburse the Bank for 70 percent of net losses on covered single family assets incurred up to $4.0 million, and 70 percent of net losses on covered commercial assets incurred up to $12.0 million. The FDIC will increase their reimbursement to 80 percent if net losses exceed the $4.0 million and $12 million thresholds. The term for loss sharing on residential real estate loans is ten years, while the term for loss sharing on non-residential real estate loans is five years in respect to losses and eight years in respect to loss recoveries. As a result of the loss sharing agreements with the FDIC, the Bank recorded an indemnification asset of $7.0 million at the time of acquisition. As of September 30, 2011, the Company has submitted cumulative net losses of $1.4 million for reimbursement to the FDIC under the loss-sharing agreements. The loss sharing agreements include clawback provisions should losses not meet the certain thresholds. Based on losses incurred through September 30, 2011 and an estimate of future expected losses, there was no clawback liability established at September 30, 2011. The Company could be subject to the clawback provision as actual losses incurred in the future could be less than the estimated future expected losses at September 30, 2011.

U.S. GAAP prohibits carrying over an allowance for loan losses for impaired loans purchased in the Allegiance FDIC-assisted acquisition. On the acquisition date, the preliminary estimate of the unpaid principal balance for all loans evidencing credit impairment acquired in the Allegiance acquisition was $41.5 million and the estimated fair value of the loans was $30.3 million. Total contractually required payments on these loans, including interest; at the acquisition date was $46.8 million. However, the Company’s preliminary estimate of expected cash flows was $36.4 million. At such date, the Company established a credit risk related non-accretable discount (a discount representing amounts which are not expected to be collected from the customer nor liquidation of collateral) of $10.3 million relating to these impaired loans, reflected in the recorded net fair value. This amount is reflected as a non-accretable fair value adjustment to loans and a portion is also reflected in a receivable from the FDIC. The Bank further estimated the timing and amount of expected cash flows in excess of the estimated fair value and established an accretable discount of $6.1 million on the acquisition date relating to these impaired loans.

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VIST FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

	As of
	November 19, 2010
	(in thousands)
Unpaid principal balance	$	41,459
Interest	5,321
Contractual cash flows	46,780
Non-accretable discount	(10,346		)
Expected cash flows	36,434
Accretable difference	(6,104		)
Estimated fair value	$	30,330

On the acquisition date, the preliminary estimate of the unpaid principal balance for all other loans acquired in the acquisition was $39.2 million and the estimated fair value of these loans was $38.4 million. The difference between unpaid principal balance and fair value of these loans which will be recognized in income on a level yield basis over the life of the loans, representing periods up to ninety months.

At the time of acquisition, the Company also recorded a net FDIC Indemnification Asset of $7.0 million representing the present value of the FDIC’s indemnification obligations under the loss sharing agreements for covered loans and other real estate. Such indemnification asset has been discounted by $465,000 for the expected timing of receipt of these cash flows.

Note 15. Segment Information

Under the standards set for public business enterprises regarding a company’s reportable operating segments in FASB ASC 280, “Segment Reporting”, the Company has four reportable segments: (i) banking and financial services (the “Bank”), (ii) insurance services (“VIST Insurance”), (iii) mortgage banking (“VIST Mortgage”), and (iv) wealth management services (“VIST Capital Management”). The Company’s insurance services, mortgage banking and wealth management services are managed separately from the Bank.

The Bank

The Bank consists of twenty-one full service, two limited access retirement community financial centers, and performs commercial and consumer loan, deposit and other banking services. The Bank engages in full service commercial and consumer banking business, including such services as accepting deposits in the form of time, demand and savings accounts. Such time deposits include certificates of deposit, individual retirement accounts and Roth IRAs. The Bank’s savings accounts include money market accounts, club accounts, NOW accounts and traditional regular savings accounts. In addition to accepting deposits, the Bank makes both secured and unsecured commercial and consumer loans, accounts receivable financing and makes construction and mortgage loans, including home equity loans. The Bank does not engage in sub-prime lending. The Bank also provides small business loans and other services including rents for safe deposit facilities.

Commercial and consumer lending provides revenue through interest accrued monthly and service fees generated on the various classes of loans. Deferred fees are amortized monthly into revenue based on loan portfolio type. Most commercial loan deferred fees are amortized utilizing the interest method over an average loan life. Most consumer and mortgage loans are amortized utilizing the interest method over the term of the loan. However, commercial and home equity lines of credit, as well as commercial interest only loans utilize a straight line method over an average loan life to amortized revenue on a monthly basis. Bank lending and mortgage operations are funded primarily through the retail and commercial deposits and other borrowing provided by the community banking segment.

Mortgage Banking

The Bank provides mortgage banking services to its customers through VIST Mortgage, a division of the Bank. VIST Mortgage operates offices in Reading, Schuylkill Haven and Blue Bell, which are located in Berks County, Pennsylvania, Schuylkill County, Pennsylvania and Montgomery County, Pennsylvania, respectively. The mortgage banking operation offers residential lending products and generates revenue primarily through gains recognized on loan sales.

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VIST FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Insurance

VIST Insurance, LLC (“VIST Insurance”), a full service insurance agency, offers a full line of personal and commercial property and casualty insurance as well as group insurance for businesses, employee and group benefit plans, and life insurance. VIST Insurance utilizes insurance companies and acts as an agent or broker to provide coverage for commercial, individual, surety bond, and group and personal benefit plans. VIST Insurance is headquartered in Wyomissing, Pennsylvania with sales offices at 1240 Broadcasting Road, Wyomissing, Pennsylvania; 1767 Sentry Parkway West (Suite 210) Blue Bell, Pennsylvania; 5 South Sunnybrook Road (Suite 100), Pottstown, Pennsylvania; and 237 Route 61 South, Schuylkill Haven, Pennsylvania.

Wealth Management

VIST Capital Management, LLC (“VIST Capital”) a full service investment advisory and brokerage services company, offers a full line of products and services for individual financial planning, retirement and estate planning, investments, corporate and small business pension and retirement planning. VIST Capital is headquartered at 1240 Broadcasting Road, Wyomissing, Pennsylvania

The following table shows the Company’s reportable business segments for the three and nine months ended September 30, 2011 and 2010. All inter-segment transactions are recorded at cost and eliminated as part of the consolidation process. Each of these segments perform specific business activities in order to generate revenues and expenses, which in turn, are evaluated by the Company’s senior management for the purpose of making resource allocation and performance evaluation decisions.

	VIST
	Bank			Insurance		Mortgage		Capital Management			Total
	(in thousands)
Three months ended September 30, 2011
Net interest income and other income from external sources	$	11,483		$	3,166	$	776	$	210		$	15,635
Income (loss) before income taxes	753			467		496		3			1,689
Total assets	1,394,573			17,583		72,441		1,137			1,485,734
Purchase of premises and equipment	305			10		—		—			315

Three months ended September 30, 2010
Net interest income and other income from external sources	$	10,381		$	3,003	$	879	$	299		$	14,562
Income (loss) before income taxes	(2,600		)	450		496		3			(1,651		)
Total assets	1,258,517			18,125		82,811		1,247			1,360,700
Purchase of premises and equipment	127			2		1		—			130

Nine Months Ended September 30, 2011
Net interest income and other income from external sources	$	34,312		$	9,175	$	2,282	$	635		$	46,404
Income before income taxes	1,329			1,165		1,349		6			3,849
Total Assets	1,394,573			17,583		72,441		1,137			1,485,734
Purchases of premises and equipment	1,885			36		4		1			1,926

Nine Months Ended September 30, 2010
Net interest income and other income from external sources	$	33,702		$	9,132	$	2,388	$	620		$	45,842
Income (loss) before income taxes	(815		)	1,527		1,523		(171		)	2,064
Total Assets	1,258,517			18,125		82,811		1,247			1,360,700
Purchases of premises and equipment	430			239		7		27			703

As presented above, income (loss) before income taxes does not reflect management fees paid to the Company by VIST Insurance, Mortgage and Capital Management of approximately $309,000, $147,000 and $50,000, respectively, for the three months ended September 30, 2011. For the three months ended September 30, 2010, income (loss) before income taxes does not reflect management fees paid to the Company by VIST Insurance, Mortgage and Capital Management of approximately $275,000, $147,000 and $37,000, respectively.

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VIST FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Income (loss) before income taxes does not reflect management fees paid to the Company by VIST Insurance, Mortgage and Capital Management of approximately $858,000, $441,000 and $128,000, respectively, for the nine months ended September 30, 2011. For the nine months ended September 30, 2010, income (loss) before income taxes does not reflect management fees paid to the Company by VIST Insurance, Mortgage and Capital Management of approximately $782,000, $441,000 and $102,000, respectively.

Note 16. Investment in Limited Partnership

In 2003, VIST Bank, the Company’s banking subsidiary (the “Bank”) entered into a limited partner subscription agreement with Midland Corporate Tax Credit XVI Limited Partnership (“partnership”), where the Bank receives special tax credits and other tax benefits. The Bank subscribed to a 6.2% interest in the partnership, which is subject to an adjustment depending on the final size of the partnership at a purchase price of $5 million. This investment is included in other assets and is not guaranteed. It is accounted for in accordance with FASB ASC 970, “Real Estate - General,” using the equity method. This agreement was accompanied by a payment of $1.7 million. The associated non-interest bearing promissory note payable included in other liabilities was zero at September 30, 2011. Installments were paid as requested. The net carrying value of the Midland Corporate Tax Credit XVI Limited Partnership is recorded in other assets in the Consolidated Balance Sheets and was $2.6 million at September 30, 2011, as compared to $2.8 million at December 31, 2010. Included in other expenses for the three and nine months ended September 30, 2011, was the Bank’s portion of the partnership’s net operating loss of $83,000 and $248,000, respectively. Included in other expenses for the three and nine months ended September 30, 2010, was the Bank’s portion of the partnership’s net operating loss of $83,000 and $248,000, respectively. For the full year of 2011, the Bank expects to receive a federal tax credit of approximately $459,000. For 2010, the Bank received a federal tax credit of approximately $460,000.

Note 17. Fair Value Measurements and Fair Value of Financial Instruments

FASB ASC 820, “Fair Value Measurements and Disclosures” defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosures about fair value measurements. This guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A fair value measurement assumes that a transaction to sell an asset or transfer a liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability shall not be adjusted for transaction costs. An orderly transaction is not a forced transaction, but rather a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities.

Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact, and (iv) willing to transact. FASB ASC 820 requires the use of valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities. The income approach uses valuation techniques to convert future amounts such as cash flows or earnings, to a single present amount on a discounted basis. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement cost). Valuation techniques should be consistently applied. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability based upon the best information available in the circumstances. In that regard, ASC Topic 820 establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs.

The three levels defined by FASB ASC 820 hierarchy are as follows:

Level 1: Quoted prices are available in active markets for identical assets or liabilities as of the reported date.

Level 2: Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reported date. The nature of these assets and liabilities include items for which quoted prices are available but traded less frequently, and items whose fair valued is calculated using observable data from other financial instruments.

Level 3: Assets and liabilities that have little to no pricing observability as of the reported date. These items do not have two-way markets and are measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation.

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VIST FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

The following tables summarize securities available for sale, junior subordinated debentures and derivatives, measured at fair value on a recurring basis as of September 30, 2011 and December 31, 2010, segregated by the level of the valuation inputs within the hierarchy utilized to measure fair value:

	As of September 30, 2011
	Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	(Level 1)		(Level 2)		(Level 3)		Total
	(In thousands)
ASSETS:
Securities Available For Sale:
U.S. Government agency securities	$	—	$	9,464	$	—	$	9,464
Agency mortgage-backed debt securities	—		296,301		—		296,301
Non-Agency collateralized mortgage obligations	—		7,425		—		7,425
Obligations of states and political subdivisions	—		27,007		—		27,007
Trust preferred securities - single issue	—		125		—		125
Trust preferred securities - pooled	—		2,297		—		2,297
Corporate and other debt securities	—		2,481		—		2,481
Equity securities	1,874		548		—		2,422
Interest rate cap (included in other assets)	—		—		170		170
	$	1,874	$	345,648	$	170	$	347,692

LIABILITIES:
Junior subordinated debt	$	—	$	—	$	18,591	$	18,591
Interest rate swaps (included in other liabilities)	—		—		1,006		1,006
	$	—	$	—	$	19,597	$	19,597

	As of December 31, 2010
	Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	(Level 1)		(Level 2)		(Level 3)		Total
	(In thousands)
ASSETS:
Securities Available For Sale:
U.S. Government agency securities	$	—	$	11,790	$	—	$	11,790
Agency mortgage-backed debt securities	—		222,365		—		222,365
Non-Agency collateralized mortgage obligations	—		10,015		—		10,015
Obligations of states and political subdivisions	—		30,907		—		30,907
Trust preferred securities - single issue	—		501		—		501
Trust preferred securities - pooled	—		484		—		484
Corporate and other debt securities	—		1,048		—		1,048
Equity securities	1,656		989		—		2,645
Interest rate cap (included in other assets)	—		—		300		300
	$	1,656	$	278,099	$	300	$	280,055

LIABILITIES:
Junior subordinated debt	$	—	$	—	$	18,437	$	18,437
Interest rate swaps (included in other liabilities)	—		—		1,139		1,139
	$	—	$	—	$	19,576	$	19,576

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VIST FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

The following table summarizes financial assets and financial liabilities measured at fair value on a nonrecurring basis as of September 30, 2011 and December 31, 2010, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

	September 30, 2011
	Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	(Level 1)		(Level 2)		(Level 3)		Total
	(in thousands)
Assets:
Impaired loans	$	—	$	—	$	34,896	$	34,896
Impaired covered loans	—		—		27,083		27,083
Other real estate owned	—		—		2,849		2,849
Covered other real estate owned	—		—		596		596
Total	$	—	$	—	$	65,424	$	65,424

	December 31, 2010
	Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	(Level 1)		(Level 2)		(Level 3)		Total
	(in thousands)
Assets:
Impaired loans	$	—	$	—	$	31,196	$	31,196
Impaired covered loans	—		—		29,000		29,000
Other real estate owned	—		—		5,303		5,303
Covered other real estate owned	—		—		247		247
Total	$	—	$	—	$	65,746	$	65,746

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VIST FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

The changes in Level 3 assets and liabilities measured at fair value on a recurring basis are summarized as follows:

	Three months ended September 30, 2011
			Total realized and
			Unrealized Gains (Losses)
	Fair Value at June 30, 2011		Recorded in Revenue			Recorded in Other Comprehensive Income		Transfers Into and/or Out of Level 3		Fair Value at September 30, 2011

Assets:
Interest rate cap	$	186	$	(16	)	$	—	$	—	$	170
	$	186	$	(16	)	$	—	$	—	$	170

Liabilities:
Junior subordinated debt	$	18,470	$	(121	)	$	—	$	—	$	18,591
Interest rate swaps	1,091		85			—		—		1,006
	$	19,561	$	(36	)	$	—	$	—	$	19,597

	Three months ended September 30, 2010
			Total realized and
			Unrealized Gains (Losses)
	Fair Value at June 30, 2010		Recorded in Revenue			Recorded in Other Comprehensive Income		Transfers Into and/or Out of Level 3		Fair Value at September 30, 2010
	(Dollar amounts in thousands)
Liabilities:
Junior subordinated debt	$	19,308	$	1,296		$	—	$	—	$	18,012
Interest rate swaps	265		(1,311		)	—		—		1,576
	$	19,573	$	(15	)	$	—	$	—	$	19,588

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VIST FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

	Nine months ended September 30, 2011
			Total realized and
			Unrealized Gains (Losses)
	Fair Value at December 31, 2010		Recorded in Revenue			Recorded in Other Comprehensive Income		Transfers Into and/or Out of Level 3		Fair Value at September 30, 2011
	(Dollar amounts in thousands)
Assets:
Interest rate cap	$	300	$	(130	)	$	—	$	—	$	170
	$	300	$	(130	)	$	—	$	—	$	170

Liabilities:
Junior subordinated debt	$	18,437	$	(154	)	$	—	$	—	$	18,591
Interest rate swaps	1,139		133			—		—		1,006
	$	19,576	$	(21	)	$	—	$	—	$	19,597

	Nine months ended September 30, 2010
			Total realized and
			Unrealized Gains (Losses)
	Fair Value at December 31, 2009		Recorded in Revenue			Recorded in Other Comprehensive Income		Transfers Into and/or Out of Level 3		Fair Value at September 30, 2010
	(Dollar amounts in thousands)
Liabilities:
Junior subordinated debt	$	19,658	$	1,646		$	—	$	—	$	18,012
Interest rate swaps	111		(1,465		)	—		—		1,576
	$	19,769	$	181		$	—	$	—	$	19,588

Certain assets, including goodwill, mortgage servicing rights, core deposits, other intangible assets, certain impaired loans and other long-lived assets, such as other real estate owned, are written down to fair value on a nonrecurring basis through recognition of an impairment charge to the consolidated statements of operations. There were no material impairment charges incurred on financial instruments carried at fair value on a nonrecurring basis during the three and nine months ended September 30, 2011.

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VIST FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

ASC Topic 825, “Financial Instruments” requires disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. The estimated fair values of financial instruments as of September 30, 2011 and December 31, 2010, are set forth in the table below. The information in the table should not be interpreted as an estimate of the fair value of the Company in its entirety since a fair value calculation is only provided for a limited portion of the Company’s assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company’s disclosures and those of other companies may not be meaningful.

	September 30, 2011				December 31, 2010
	Carrying		Estimated		Carrying		Estimated
	Amount		Fair Value		Amount		Fair Value
	(in thousands)
Financial Assets:
Cash and cash equivalents	$	55,495	$	55,495	$	16,315	$	16,315
Federal funds sold	—		—		1,500		1,500
Mortgage loans held for sale	1,772		1,772		3,695		3,695
Securities available for sale	347,522		347,522		279,755		279,755
Securities held to maturity	2,584		2,491		2,022		1,888
Federal Home Loan Bank stock	6,100		6,100		7,099		7,099
Loans, net	912,392		946,774		939,573		955,148
Covered loans	57,032		57,032		66,770		66,770
Mortgage servicing rights	—		—		31		31
Bank owned life insurance	19,710		19,710		19,373		19,373
FDIC indemnification asset	6,816		6,816		7,003		7,003
Accrued interest receivable	5,582		5,582		5,205		5,205
Interest rate cap	170		170		300		300

Financial Liabilities:
Deposits	1,215,504		1,193,181		1,149,280		1,132,887
Repurchase agreements	103,917		114,118		106,843		111,300
Borrowings	—		—		10,000		10,008
Junior subordinated debt	18,591		18,591		18,437		18,437
Accrued interest payable	2,130		2,130		2,515		2,515
Interest rate swap	1,006		1,006		1,139		1,139

Off-balance Sheet Financial Instruments:
Commitments to extend credit	—		—		—		—
Standby letters of credit	—		—		—		—

The following methods and assumptions were used to estimate the fair value of the company’s financial assets and financial liabilities:

Cash and cash equivalents: The carrying amounts reported in the balance sheet for cash and cash equivalents approximate those assets’ fair values.

Mortgage loans held for sale: The fair value of mortgage loans held for sale is determined, when possible, using Level 2 quoted secondary-market prices. If no such quoted price exists, the fair value of a loan is determined based on expected proceeds based on sales contracts and commitments.

All mortgage loans held for sale are sold 100% servicing released and made in compliance with applicable loan criteria and underwriting standards established by the buyers. These loans are originated according to applicable federal and state laws and follow proper standards for securing valid liens.

Securities available for sale: Certain common equity securities are reported at fair value utilizing Level 1 inputs (exchange quoted prices). All other securities classified as available for sale are reported at fair value utilizing Level 2 inputs. For these securities, the Company obtains fair value measurements from an independent pricing service with which the Company has historically transacted

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VIST FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

both purchases and sales of investment securities. Prices obtained from these sources include prices derived from market quotations and matrix pricing. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U. S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayments speeds, credit information and the bond’s terms and conditions.

Securities held to maturity: Fair values for securities classified as held to maturity are obtained from an independent pricing service with which the Company has historically transacted both purchases and sales of investment securities. Prices obtained from these sources include prices derived from market quotations and matrix pricing. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U. S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayments speeds, credit information and the bond’s terms and conditions.

Federal Home Loan Bank stock: Federal law requires a member institution of the Federal Home Loan Bank to hold stock of its district FHLB according to a predetermined formula. The redeemable carrying amount of Federal Home Loan Bank stock with limited marketability is carried at cost.

Loans, net: For non-impaired loans, fair values are estimated by discounting the projected future cash flows using market discount rates that reflect the credit and interest-rate risk inherent in the loan. Projected future cash flows are calculated based upon contractual maturity or call dates, projected repayments and prepayments of principal. Impaired loans are accounted for under FASB ASC 310, Accounting by Creditors for Impairment of a Loan (“FASB ASC 310”), and fair value is generally determined by using the fair value of the loan’s collateral. Loans are determined to be impaired when management determines, based upon current information and events, it is probable that all principal and interest payments due according to the contractual terms of the loan agreement will not be collected. Impaired loans are measured on a loan by loan basis based upon the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent.

Covered loans: Acquired loans are recorded at fair value on the date of acquisition. The fair values of loans with evidence of credit deterioration (impaired loans) are recorded net of a non-accretable difference and, if appropriate, an accretable yield. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is the non-accretable difference, which is included in the carrying amount of acquired loans.

Mortgage servicing rights: Fair value is based on market prices for comparable mortgage servicing contracts, when available, or alternatively, is based on a valuation model that calculates the present value of estimated future net servicing income.

Bank owned life insurance: Bank owned life insurance (“BOLI”) policies are carried at their cash surrender value. The Company recognizes tax-free income from the periodic increases in the cash surrender value of these policies and from death benefits.

FDIC indemnification asset: The indemnification asset represents the present value of the estimated cash payments expected to be received from the FDIC for future losses on covered assets based on the credit adjustment estimated for each covered asset and the loss sharing percentages. These cash flows are discounted at a market-based rate to reflect the uncertainty of the timing and receipt of the loss sharing reimbursement from the FDIC.

Accrued interest receivable: The carrying amount of accrued interest receivable approximates its fair value.

Interest rate cap: The Company records the fair value of its interest rate cap utilizing Level 3 inputs, with unrealized gains and losses reflected in other income in the consolidated statements of operations. The fair value measurement of the interest rate cap is based on valuation techniques including a discounted cash flow analysis. The discounted cash flow analysis reflects the contractual remaining term of the interest rate cap, future interest rates derived from observed market interest rate curves, volatility, and expected cash payments.

Deposit liabilities: The fair values disclosed for demand deposits (e.g., interest and non-interest checking, savings and certain types of money market accounts) are considered to be equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values for fixed-rate time deposits are estimated using a discounted cash flow calculation that applies interest rates currently being offered on time deposits to a schedule of aggregated expected monthly maturities on time deposits.

Federal funds purchased and securities sold under agreements to repurchase: The fair value of federal funds purchased and securities sold under agreements to repurchase is based on the discounted value of contractual cash flows using estimated rates currently offered for alternative funding sources of similar remaining maturities.

Borrowings: The fair value of borrowings is calculated based on the discounted value of contractual cash flows, using rates currently available for borrowings with similar features and maturities.

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VIST FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Junior subordinated debt: The Company records the fair value of its junior subordinated debt utilizing Level 3 inputs, with unrealized gains and losses reflected in other income in the consolidated statements of operations. The fair value is estimated utilizing the income approach whereby the expected cash flows over the remaining estimated life of the debentures are discounted using the Company’s credit spread over the current fully indexed yield based on an expectation of future interest rates derived from observed market interest rate curves and volatilities. The Company’s credit spread was calculated based on similar trust preferred securities issued within the last twelve months.

Accrued interest payable: The carrying amount of accrued interest payable approximates its fair value.

Interest rate swap: The Company records the fair value of its interest rate swaps utilizing Level 3 inputs, with unrealized gains and losses reflected in non-interest income in the consolidated statements of operations. The fair value measurement of the interest rate swaps is determined by netting the discounted future fixed or variable cash payments and the discounted expected fixed or variable cash receipts based on an expectation of future interest rates derived from observed market interest rate curves and volatilities.

Off-balance sheet financial instruments: Fair values for off-balance sheet, credit related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing.

Note 18. Comprehensive Income

Accounting principles generally require that recognized revenue, expense, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available for sale securities (including the non-credit portion of any other-than-temporary impairment charges relating to available for sale securities) are reported as a separate component of the equity section of the balance sheet, such items, along with net income, are components of comprehensive income.

The following table shows changes in each component of comprehensive income for the three and nine months ended September 30, 2011 and 2010:

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2011			2010			2011			2010
	(Dollar amounts in thousands)

Net income	$	1,419		$	(602	)	$	3,233		$	2,637

Other comprehensive income:
Change in unrealized holding gains on available for sale securities	4,916			2,797			9,930			6,943
Change in non-credit impairment losses on available for sale securities	49			158			(289		)	154
Reclassification adjustment for credit related impairment on available for sale securities realized in income	606			343			912			401
Change in non-credit impairment losses on held to maturity securities	459			5			598			(937		)
Reclassification adjustment for credit related impairment on held to maturity securities realized in income	—			279			—			370
Reclassification adjustment for net investment gains realized in income	(490		)	(179		)	(872		)	(465		)
Net unrealized gains	5,540			3,403			10,279			6,466
Income tax effect	(1,884		)	(1,157		)	(3,495		)	(2,198		)
Other comprehensive income	3,656			2,246			6,784			4,268
Total comprehensive income	$	5,075		$	1,644		$	10,017		$	6,905

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

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

Overview. Management’s discussion and analysis represents an overview of the financial condition and results of operations, and highlights the significant changes in the financial condition and results of operations, as presented in the accompanying consolidated financial statements for VIST Financial Corp. (the “Company”), a financial holding company, and its wholly-owned subsidiaries, VIST Bank (the “Bank”), VIST Insurance, LLC (“VIST Insurance”), and VIST Capital Management, LLC (“VIST Capital Management”). The Bank’s wholly-owned subsidiary, VIST Mortgage Holdings, LLC was inactive at September 30, 2011.

On November 19, 2010, the Company acquired certain assets and assumed certain liabilities of Allegiance Bank of North America (“Allegiance”) from the FDIC, as Receiver of Allegiance. Allegiance operated five community banking branches within Chester and Philadelphia counties. The Bank’s bid to purchase Allegiance included the purchase of certain Allegiance assets at a discount of $5.9 million and time deposits at a premium of $534,000, in exchange for assuming certain Allegiance deposits and certain other liabilities. Based on the terms of this transaction, the FDIC paid the Company $1.8 million ($2.0 million less a settlement of approximately $200,000). As a result of the Allegiance acquisition, the Company recorded $1.5 million of goodwill. No cash or other consideration was paid by the Bank. The Bank and the FDIC entered into loss sharing agreements regarding future losses incurred on loans and other real estate acquired through foreclosure existing at the acquisition date. Under the terms of the loss sharing agreements, the FDIC will reimburse the Bank for 70 percent of net losses on covered single family assets incurred up to $4.0 million, and 70 percent of net losses on covered non-single family assets incurred up to $12.0 million. The FDIC will increase their reimbursement to 80 percent if net losses exceed the $4.0 million and $12 million thresholds, respectively. The term for loss sharing on residential real estate loans is ten years, while the term for loss sharing on non-residential real estate loans is five years in respect to losses and eight years in respect to loss recoveries. The term for loss sharing on residential real estate loans is ten years, while the term for loss sharing on non-residential real estate loans is five years in respect to losses and eight years in respect to loss recoveries. The acquisition of Allegiance represents a significant market extension of the Company’s core Berks, Schuylkill, and Montgomery county markets into Philadelphia and the surrounding areas.

Forward Looking Statements . These forward-looking statements include statements with respect to the Company’s beliefs, plans, objectives, goals, expectations, anticipations, estimates and intentions, that are subject to significant risks and uncertainties, and are subject to change based on various factors (some of which are beyond the Company’s control). The words “may,” “could,” “should,” “would,” “believe,” “anticipate,” “estimate,” “expect,” “intend,” “plan” and similar expressions are intended to identify forward-looking statements. The following factors, among others, could cause the Company’s financial performance to differ materially from the plans, objectives, expectations, estimates and intentions expressed in such forward-looking statements: the strength of the United States economy in general and the strength of the local economies in which the Company conducts operations; the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System; inflation, interest rate, market and monetary fluctuations; credit risks of borrowers and changes in the availability and cost of credit and capital in the financial markets; changes in the prices, values and sales volumes of residential and commercial real estate; changes in the strength of the underlying issuers of securities in our investment portfolio; the timely development of and acceptance of new products and services of the Company and the perceived overall value of these products and services by users, including the features, pricing and quality compared to competitors’ products and services; the willingness of users to substitute competitors’ products and services for the Company’s products and services; the success of the Company in gaining regulatory approval of its products and services, when required; the impact of changes in financial services’ laws and regulations (including laws concerning taxes, banking, securities and insurance); technological changes; the risks of mergers and acquisitions, including, without limitation, the ability to find appropriate acquisition candidates, the related time and costs of implementing such transactions, integrating operations as part of these transactions and possible failures to achieve expected gains, revenue growth and/or expense savings from such transactions; changes in consumer spending and saving habits; changes in accounting policies, rules and practices; the loss of members of the Company’s executive management team; the nature, extent, and timing of governmental actions and reforms, including the rules of participation for the Trouble Asset Relief Program voluntary Capital Purchase Plan under the Emergency Economic Stabilization Act of 2008, which may be changed unilaterally and retroactively by legislative or regulatory actions; and the success of the Company at managing the risks involved in the foregoing.

The Company cautions that the foregoing list of important factors is not exclusive. Readers are also cautioned not to place undue reliance on these forward-looking statements, which reflect management’s analysis only as of the date of this report, even if subsequently made available by the Company on its website or otherwise. The Company does not undertake to update any forward-looking statement, whether written or oral, that may be made from time to time by or on behalf of the Company to reflect events or circumstances occurring after the date of this report.

Readers should carefully review the risk factors described in the Annual Report and other documents that we periodically file with the Securities and Exchange Commission (“SEC”), including our Form 10-K for the year ended December 31, 2010, and other reports that were filed during 2011 with the SEC.

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Critical Accounting Policies . The Company’s consolidated financial statements are prepared based upon the application of U.S. generally accepted accounting principles (“U.S. GAAP”). The reporting of our financial condition and results of operations is impacted by the application of accounting policies by management, some of which are particularly sensitive and require significant judgments, estimates and assumptions to be made in matters that are inherently uncertain. These accounting policies, along with the disclosures presented in other financial statement notes and in this financial review, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined. Management views critical accounting policies to be those which are highly dependent on subjective or complex judgments, estimates and assumptions, and where changes in those estimates and assumptions could have a significant impact on the consolidated financial statements. Management currently views the determination of the allowance for loan losses, revenue recognition for insurance activities, stock based compensation, derivative financial instruments, goodwill and intangible assets, fair value measurements including other than temporary impairment losses on available for sale securities, the valuation of junior subordinated debt and related hedges, the valuation of deferred tax assets and the effects of any business combinations. Additional information about these accounting policies is included in the “Critical Accounting Policies” section of Management’s Discussion and Analysis in the Company’s Form 10-K for the year ended December 31, 2010. No significant changes were made to the Company’s critical accounting policies during the first nine months of 2011.

FINANCIAL CONDITION

Total assets increased by $60.7 million or 4.3%, to $1.49 billion at September 30, 2011 from $1.43 billion at December 31, 2010. The overall increase in assets was attributable to a $66.2 million, or 5.8% increase in total deposits offset by a decrease in the loan portfolio.

Investment Securities Portfolio

The overall securities portfolio increased to $350.1 million at September 30, 2011, from $281.8 million at December 31, 2010 primarily due to the purchase of additional available for sale securities. Investment security purchases and sales generally occur to manage the Bank’s liquidity requirements, pledging requirements, interest rate risk, and to enhance net interest margin and capital management. The available-for-sale securities portfolio is evaluated regularly for possible opportunities to increase earnings through potential sales or portfolio repositioning. During the first nine months of 2011, proceeds of $78.3 million were received on sales, and $872,000 was recognized in net gains, while investment securities of $164.6 million were purchased. During the first nine months of 2010, proceeds of $52.8 million were received on sales, and $465,000 was recognized in net gains, while investment securities of $99.3 million were purchased. Securities classified as available for sale are marketable equity securities, and those debt securities that we intend to hold for an undefined period of time, but not necessarily to maturity. Any decision to sell an available-for-sale investment security would be based on various factors, including significant movements in interest rates, changes in maturity mix of assets and liabilities, liquidity needs, regulatory capital considerations, reasonable gain realization, changes in the creditworthiness of the issuing entity, changes in investment strategy and portfolio mix, and other similar factors. Changes in unrealized gains or losses on available-for-sale investment securities, net of taxes, are recorded as other comprehensive income, a component of stockholders’ equity. Debt securities that management has the positive ability and intent to hold to maturity are classified as held-to-maturity and recorded at amortized cost.

The available-for-sale securities portfolio included an after-tax net unrealized gain of $2.4 million at September 30, 2011, as compared to an after-tax net unrealized loss of $4.0 million at December 31, 2010. In addition, the held-to-maturity securities portfolio included an after-tax net unrealized loss of $25,000 at September 30, 2011, as compared to an after-tax net unrealized loss of $419,000 at December 31, 2010. Changes in long-term treasury interest rates, underlying collateral and credit concerns and dislocation and illiquidity in the current market continue to contribute to the decrease in the fair market value of certain securities.

Securities of $298.8 million were pledged to secure certain public, trust, and government deposits and for other purposes at September 30, 2011, as compared to and $226.9 million at December 31, 2010.

· Fair value below cost and the length of time

· Adverse condition specific to a particular investment

· Rating agency activities (e.g., downgrade)

· Financial condition of an issuer

· Dividend activities

· Suspension of trading

· Management intent

· Changes in tax laws or other policies

· Subsequent market value changes

· Economic or industry forecasts

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Other-than-temporary impairment means management believes the security’s impairment is due to factors that could include the issuer’s inability to pay interest or dividends, the issuer’s potential for default, and/or other factors. When a held to maturity or available for sale debt security is assessed for other-than-temporary impairment, management has to first consider (a) whether the Company intends to sell the security, and (b) whether it is more likely than not that the Company will be required to sell the security prior to recovery of its amortized cost basis. If one of these circumstances applies to a security, an other-than-temporary impairment loss is recognized in the statement of operations equal to the full amount of the decline in fair value below amortized cost. If neither of these circumstances applies to a security, but the Company does not expect to recover the entire amortized cost basis, an other-than-temporary impairment loss has occurred that must be separated into two categories: (a) the amount related to credit loss, and (b) the amount related to other factors. In assessing the level of other-than-temporary impairment attributable to credit loss, management compares the present value of cash flows expected to be collected with the amortized cost basis of the security. The portion of the total other-than-temporary impairment related to credit loss is recognized in earnings (as the difference between the fair value and the present value of the estimated cash flows), while the amount related to other factors is recognized in other comprehensive income. The total other-than-temporary impairment loss is presented in the statement of operations, less the portion recognized in other comprehensive income. When a debt security becomes other-than-temporarily impaired, its amortized cost basis is reduced to reflect the portion of the total impairment related to credit loss.

Loans, Credit Quality and Credit Risk

Gross loans decreased by $26.5 million to $927.9 million at September 30, 2011 from $954.4 million December 31, 2010. The overall decrease in the loan portfolio was the result of commercial loan prepayments exceeding new commercial loan originations, which were substantially lower for the first nine months of 2011, as compared to the same period in 2010.

The various components of loans at September 30, 2011 and December 31, 2010, were as follows:

	September 30, 2011					December 31, 2010
				As a % of					As a % of
	Amount			gross loans		Amount			gross loans
	(dollars in thousands)

Residential real estate - one to four family	$	133,992		14.4	%	$	153,499		16.1	%
Residential real estate - multi family	56,440			6.1	%	53,497			5.6	%
Commercial, industrial and agricultural	162,258			17.5	%	150,097			15.7	%
Commercial real estate	417,198			45.0	%	427,546			44.8	%
Construction	71,077			7.7	%	78,202			8.2	%
Consumer	2,207			0.2	%	2,713			0.3	%
Home equity lines of credit	84,678			9.1	%	88,809			9.3	%
Gross loans	927,850			100.0	%	954,363			100.0	%
Allowance for loan losses	(15,458		)			(14,790		)
Loans, net of allowance for loan losses	$	912,392				$	939,573

The Bank is required to pledge residential and commercial real estate secured loans to collateralize its potential borrowing capacity with the FHLB. As of September 30, 2011, the Bank had pledged approximately $657.4 million in loans to the FHLB to secure its maximum borrowing capacity, as compared to $713.5 million at December 31, 2010.

During 2011, the Bank participated in a shared national credit accepting $15 million of the overall loan request. The Bank was comfortable in this request based upon the high credit quality of the borrowing entity, the fact that the business was within our lending area, and the client has done business with the Bank’s commercial loan officer for a number of years. The Bank also performs loans sales of retail mortgage loans on a regular basis. The Bank does not buy or sell any retail consumer loans. For the first nine months of 2011, the Bank sold $22.0 million of residential mortgage loans generating $458,000 of gains recognized on the sale, which were recorded in non-interest income in the Consolidated Statements of Operations. For the first nine months of 2010, the Bank sold $24.5 million of residential mortgage loans generating $564,000 of gains recognized on the sale.

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Allowance for Loan Losses. The allowance for loan losses at September 30, 2011 was $15.5 million, or 1.67% of outstanding loans, as compared to $14.8 million or 1.55% at December 31, 2010. In accordance with U.S. GAAP, the allowance for loan losses represents management’s estimate of losses inherent in the loan and lease portfolio as of the balance sheet date and is recorded as a reduction to loans and leases. The allowance for loan losses is increased by the provision for loan losses, and decreased by charge-offs, net of recoveries. Loans deemed to be uncollectible are charged against the allowance for loan losses, and subsequent recoveries, if any, are credited to the allowance. All, or part, of the principal balance of loans receivable are charged off to the allowance as soon as it is determined that the repayment of all, or part, of the principal balance is highly unlikely. Non-residential consumer loans are generally charged off no later than 90 days past due on a contractual basis, earlier in the event of bankruptcy, or if there is an amount deemed uncollectible. Because all identified losses are immediately charged off, no portion of the allowance for loan losses is restricted to any individual loan or groups of loans, and the entire allowance is available to absorb any and all loan losses.

The allowance for loan losses is maintained at a level considered adequate to provide for losses that can be reasonably anticipated. Management performs a quarterly evaluation of the adequacy of the allowance, which is based on the Company’s past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, composition of the loan and lease portfolio, current economic conditions and other relevant factors. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant revision as more information becomes available.

The allowance consists of specific, general and unallocated components. The specific component relates to loans and leases that are classified as impaired. For such loans and leases, an allowance is established when the (i) discounted cash flows, or (ii) collateral value, or (iii) observable market price of the impaired loan is lower than the carrying value of that loan. The general component covers pools of loans by loan class including commercial loans not considered impaired, as well as smaller balance homogeneous loans, such as residential real estate, home equity loans, home equity lines of credit and other consumer loans. These pools of loans are evaluated for loss exposure based upon historical loss rates for each of these categories of loans, adjusted for relevant qualitative factors. Separate qualitative adjustments are made for higher-risk criticized loans that are not impaired. These qualitative risk factors include:

1. Lending policies and procedures, including underwriting standards and historical-based loss/collection, charge-off, and recovery practices.

2. National, regional, and local economic and business conditions as well as the condition of various market segments, including the value of underlying collateral for collateral dependent loans.

3. Nature and volume of the portfolio and terms of loans.

4. Experience, ability, and depth of lending management and staff.

5. Volume and severity of past due, classified and nonaccrual loans as well as trends and other loan modifications.

6. Quality of the Company’s loan review system, and the degree of oversight by the Company’s Board of Directors.

7. Existence and effect of any concentrations of credit and changes in the level of such concentrations.

8. Effect of external factors, such as competition and legal and regulatory requirements.

Each factor is assigned a value to reflect improving, stable or declining conditions based on management’s best judgment using relevant information available at the time of the evaluation.

An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for all criticized and classified loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent.

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An allowance for loan losses is established for an impaired loan if its carrying value exceeds its estimated fair value. The estimated fair values of substantially all of the Company’s impaired loans are measured based on the estimated fair value of the loan’s collateral.

For commercial loans secured by real estate, estimated fair values are determined primarily through third-party appraisals or evaluations. When a real estate secured loan becomes impaired, a decision is made regarding whether an updated certified appraisal of the real estate is necessary. This decision is based on various considerations, including the age of the most recent appraisal, the loan-to-value ratio based on the original appraisal and the condition of the property. Appraised values are discounted to arrive at the estimated selling price of the collateral, which is considered to be the estimated fair value. The discounts also include estimated costs to sell the property.

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For commercial and industrial loans secured by non-real estate collateral, such as accounts receivable, inventory and equipment, estimated fair values are determined based on the borrower’s financial statements, inventory reports, accounts receivable agings or equipment appraisals or invoices. Indications of value from these sources are generally discounted based on the age of the financial information or the quality of the assets.

For loans that are not rated as criticized or classified, the Company collectively evaluates the loans for impairment based upon homogeneous loan groups.

Loans whose terms are modified are classified as troubled debt restructurings if the Company grants such borrowers concessions and it is deemed that those borrowers are experiencing financial difficulty. Concessions granted under a troubled debt restructuring generally involve a temporary reduction in interest rate, an extension of a loan’s stated maturity date or a change in the loan payment to interest-only. For troubled debt restructurings on loans that are accruing interest, the Company will continue to accrue interest based upon the modified terms. Troubled debt restructurings on loans not accruing interest are restored to accrual status if principal and interest payments, under the modified terms, are current for six consecutive months after modification. Loans classified as troubled debt restructurings are tested for impairment.

The allowance calculation methodology includes further segregation of loan classes into risk rating categories. The borrower’s overall financial condition, repayment sources, guarantors and value of collateral, if appropriate, are evaluated annually for commercial loans or when credit deficiencies arise, such as delinquent loan payments, for commercial and consumer loans. Credit quality risk ratings include regulatory classifications of special mention, substandard, doubtful and loss. Loans criticized as special mention have potential weaknesses that deserve management’s close attention. If uncorrected, the potential weaknesses may result in deterioration of the repayment prospects. Loans classified substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They include loans that are inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified doubtful have all the weaknesses inherent in loans classified substandard with the added characteristic that collection or liquidation in full, on the basis of current conditions and facts, is highly improbable. Loans classified as a loss are considered uncollectible and are charged to the allowance for loan losses. Loans not classified are rated pass.

In addition, Federal regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses and may require the Company to recognize additions to the allowance based on their judgments about information available to them at the time of their examination, which may not be currently available to management. Based on management’s comprehensive analysis of the loan portfolio, management believes the current level of the allowance for loan losses is adequate.

The following table presents the allocation of the Company’s allowance for loan losses (“ALLL”) by portfolio segment at September 30, 2011, as compared to December 31, 2010.

	September 30, 2011				December 31, 2010
			% of				% of
	Amount		ALLL		Amount		ALLL
	(Dollar amounts in thousands)

Residential real estate one-to-four family	$	2,338	15.1	%	$	2,918	20.0	%
Residential real estate multi-family	1,653		10.7		735		5.0
Commercial, industrial and agricultural	2,672		17.3		2,576		17.6
Commercial real estate	3,493		22.6		3,321		22.7
Construction	3,937		25.5		3,063		20.9
Consumer	54		0.3		310		2.1
Home equity lines of credit	1,309		8.5		1,713		11.7
Allocated	15,456		100.0		14,636		100.0
Unallocated	2		0.0		154		0.0
Total	$	15,458	100.0	%	$	14,790	100.0	%

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The following table presents the activity related to the Company’s allowance for loan losses for the three and nine months ended September 30, 2011 and 2010:

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2011			2010			2011			2010
	(Dollar amounts in thousands)

Balance of allowance for loan losses, beginning of period	$	15,439		$	12,825		$	14,790		$	11,449
Loans charged-off:
Residential real estate one-to-four family	(302		)	(176		)	(978		)	(603		)
Residential real estate multi-family	(72		)	—			(313		)	(62		)
Commercial, industrial and agricultural	(432		)	(166		)	(786		)	(400		)
Commercial real estate	(108		)	(380		)	(1,158		)	(413		)
Construction	(729		)	(856		)	(1,192		)	(2,982		)
Consumer	(265		)	(6		)	(320		)	(33		)
Home equity lines of credit	(74		)	(576		)	(771		)	(989		)
Total loans charged-off	(1,982		)	(2,160		)	(5,518		)	(5,482		)
Recoveries of loans previously charged-off:
Residential real estate one-to-four family	3			20			20			30
Residential real estate multi-family	—			—			1			—
Commercial, industrial and agricultural	8			2			35			21
Commercial real estate	8			5			30			6
Construction	2			—			4			42
Consumer	1			1			2			15
Home equity lines of credit	2			175			27			177
Total recoveries	24			203			119			291
Net loan charge-offs	(1,958		)	(1,957		)	(5,399		)	(5,191		)
Provision for loan losses	1,977			3,550			6,067			8,160
Balance of allowance for loan losses, end of period	$	15,458		$	14,418		$	15,458		$	14,418

Net charge-offs to average loans (annualized)	0.84		%	0.88		%	0.77		%	0.77		%
Allowance for loan losses to loans outstanding	1.67		%	1.55		%	1.67		%	1.55		%
Loans outstanding at end of period (net of unearned income) (1)	$	927,850		$	927,579		$	927,850		$	927,579
Average balance of loans outstanding during the period (1)	$	927,206		$	907,407		$	932,942		$	903,545

(1) Excludes loans held for sale and covered loans

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Impaired Loans. The Company generally values impaired loans that are accounted for under FASB ASC 310, Accounting by Creditors for Impairment of a Loan (“FASB ASC 310”), based on the fair value of a loan’s collateral. Loans are determined to be impaired when management has utilized current information and economic events and judged that it is probable that not all of the principal and interest due under the contractual terms of the loan agreement will be collected. Other than as described herein, management does not believe there are any significant trends, events or uncertainties that are reasonably expected to have a material impact on the loan portfolio to affect future results of operations, liquidity or capital resources. However, based on known information, management believes that the effects of current and past economic conditions and other unfavorable business conditions may impact certain borrowers’ abilities to comply with their repayment terms and therefore may have an adverse effect on future results of operations, liquidity, or capital resources. Management closely monitors economic and business conditions and their impact on borrowers’ financial strength. At September 30, 2011, the recorded investment in loans that were considered to be impaired under U.S. GAAP totaled $54.1 million, compared to $49.1 million at December 31, 2010. Management continues to diligently monitor and evaluate the existing portfolio, and identify credit concerns and risks, including those resulting from the current economy.

Impaired Loans With a Related Allowance . At September 30, 2011, the Company had a recorded investment of $45.0 million in impaired loans with a related allowance, as compared to $40.7 million at December 31, 2010. This group of impaired loans and leases has a related allowance due to the probability that the borrower is not able to continue to make principal and interest payments due under the contractual terms of the loan or lease. Additionally, these loans appear to have insufficient collateral and the Company’s principal may be at risk; as a result, a related allowance is established to estimate future potential principal losses.

Impaired Loans Without a Related Allowance . At September 30, 2011, the Company had a recorded investment of $9.1 million in impaired loans without a related allowance, as compared to $8.4 million at December 31, 2010. This group of impaired loans is considered impaired due to the likelihood of the borrower not being able to continue to make principal and interest payments due under the contractual terms of the loan. However, these loans appear to have sufficient collateral and the Company’s principal does not appear to be at risk of probable principal losses; as a result, management believes a related allowance is not necessary.

Non-Performing Assets. Nonperforming assets consist of nonperforming loans and other real estate owned (“OREO”). Nonperforming loans consist of loans where the accrual of interest has been discontinued (i.e. non-accrual loans), and those loans that are 90 days or more past due and still accruing interest. Nonaccruing loans are no longer accruing interest income because of apparent financial difficulties of the borrower. Interest received on nonaccruing loans is recorded as income only after the past due principal is brought current and deemed collectible in full. Non-accrual loans that maintained a current payment status for six consecutive months are placed back on accrual status under the Bank’s loan policy. Loans on which the accrual of interest has been discontinued amounted to $31.9 million and $26.5 million at September 30, 2011 and December 31, 2010, respectively. A total of $13.9 million (represented by 62 loans) was added to non-accrual during the first nine months of 2011, and a total of $7.1 million (represented by 53 loans) was removed from non-accrual. Of the $13.9 million increase in non-accruals during the first nine months of 2011, $7.6 million or 55% of the increase was related to four commercial loans.

OREO includes assets acquired through foreclosure, deed in-lieu of foreclosure, and loans identified as in-substance foreclosures. A loan is classified as an in-substance foreclosure when effective control of the collateral has been taken prior to completion of formal foreclosure proceedings. OREO is held for sale and is recorded at fair value less estimated costs to sell. Costs to maintain OREO and subsequent gains and losses attributable to OREO liquidation are included in the Consolidated Statements of Operations in other income and other expense as realized. No depreciation or amortization expense is recognized. OREO was $2.8 million and $5.3 million at September 30, 2011 and December 31, 2010, respectively. The decrease in OREO during the first nine months of 2011 was mostly attributable to the sale of one commercial property. The Company decided to sell this property and incur a significant loss because management did not anticipate market conditions for the property to improve significantly over the next 18 to 24 months. Management estimated that selling the property at a significant loss would be preferable to incurring the significant expenses to maintain the property during the time it would likely take to sell. At September 30, 2011, four OREO properties amounted to $1.6 million or 57% of the Company’s total OREO. At September 30, 2011, the Company had fifteen OREO properties, as compared to twenty-three at December 31, 2010.

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The table below presents the various components of the Company’s non-performing assets at September 30, 2011 as compared to December 31, 2010:

	September 30, 2011			December 31, 2010
	(Dollar amounts in thousands)
Non-accrual loans:
Residential real estate one to four family	$	4,749		$	5,595
Residential real estate multi-family	4,651			1,950
Commercial, industrial and agricultural	2,734			2,016
Commercial real estate	6,806			5,477
Construction	12,035			10,393
Consumer	22			15
Home equity lines of credit	922			1,067
Total	31,919			26,513

Loans past due 90 days or more and still accruing:
Residential real estate one to four family	—			249
Residential real estate multi-family	—			—
Commercial, industrial and agricultural	—			—
Commercial real estate	306			—
Construction	—			245
Consumer	—			—
Home equity lines of credit	—			100
Total	306			594

Total non-performing loans	32,225			27,107
Other real estate owned	2,849			5,303
Total non-performing assets	$	35,074		$	32,410

Non-performing loans to loans outstanding at end of period	3.47		%	2.84		%
Non-performing assets to loans outstanding plus OREO at end of period	3.77		%	3.38		%

TDRs may be modified by means of extended maturity at below market adjusted interest rates, a combination of rate and maturity, or by other means including covenant modifications, forbearance and other concessions. However, the Company generally only restructures loans by modifying the payment structure to interest only or by reducing the actual interest rate. Once a loan becomes a TDR, it will continue to be reported as a TDR until it is ultimately repaid in full, reclassified to loans held for sale, or foreclosed and sold.

The following table shows information on the troubled and restructured debt by loan portfolio for the three and nine month periods ended September 30, 2011:

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	Three Months Ended September 30, 2011
		Pre-Modification		Post-Modification
	Number of	Outstanding		Outstanding
	Contracts	Recorded Investment		Recorded Investment
	(Dollars in thousands)
Troubled Debt Restructurings:
Commercial industrial & agricultural	1	$	468	$	468
Commercial real estate	2	580		580
Total Troubled Debt Restructurings	3	$	1,048	$	1,048

	Nine Months Ended September 30, 2011
		Pre-Modification		Post-Modification
	Number of	Outstanding		Outstanding
	Contracts	Recorded Investment		Recorded Investment
	(Dollars in thousands)
Troubled Debt Restructurings:
Commercial industrial & agricultural	1	$	468	$	468
Commercial real estate	2	580		580
Home equity lines of credit	1	210		210
Total Troubled Debt Restructurings	4	$	1,258	$	1,258

Covered Loans

The carrying value of covered loans not exhibiting evidence of credit impairment at the time of the acquisition (i.e. loans outside of the scope of ASC 310-30) was $29.9 million at September 30, 2011, as compared to $37.8 million at December 31, 2010. The fair value of the acquired loans not exhibiting evidence of credit impairment was determined by projecting contractual cash flows discounted at risk-adjusted interest rates.

The carrying value of covered loans acquired and accounted for in accordance with ASC Subtopic 310-30, “Loans and Debt Securities Acquired with Deteriorated Credit Quality,” was $27.1 million at September 30, 2011, as compared to $29.0 million at December 31, 2010. Under ASC Subtopic 310-30, loans may be aggregated and accounted for as pools of loans if the loans being aggregated have common risk characteristics. Of the loans acquired with evidence of credit deterioration, some of the loans were aggregated into ten pools of loans based on common risk characteristics such as credit risk and loan type. Other loans acquired in the acquisition evidencing credit deterioration are recorded initially at the amount paid. For pools or loans or individual loans evidencing credit deterioration, the expected cash flows in excess of amount paid is recorded as interest income over the remaining life of the loan or pool (accretable yield). The excess of the pool or loan’s contractual principal and interest over expected cash flows is not recorded (nonaccretable difference). There were no material increases or decreases in the expected cash flows of covered loans in each of the pools between November 19, 2010 (the “acquisition date”) and September 30, 2011. For the three and nine months ended September 30, 2011, the Company recognized $264,000 and $543,000 of income on the loans acquired with evidence of credit deterioration, respectively.

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Deposits

The components of the Company’s deposits at September 30, 2011 as compared to December 31, 2010 were as follows:

	September 30, 2011		December 31, 2010
	(in thousands)

Demand, non-interest bearing	$	116,543	$	122,450
Demand, interest bearing	463,900		399,286
Savings	183,315		129,728
Time, $100,000 and over	264,375		293,703
Time, other	187,371		204,113
Total deposits	$	1,215,504	$	1,149,280

Non-interest bearing deposits decreased to $116.5 million at September 30, 2011, from $122.5 million at December 31, 2010, a decrease of $5.9 million or 6.4%. Despite the decrease in non-interest bearing demand accounts, management continues its efforts to promote growth in these types of deposits, such as offering a free checking product, as a strategy to help reduce the Company’s overall cost of funds. Interest bearing deposits increased $72.1 million, or 7.0% during the first nine months of 2011. Management continues to promote these types of deposits through a disciplined pricing strategy as a means of managing the Company’s overall cost of funds, as well as management’s continuing emphasis on increasing market share through commercial and retail marketing programs and customer service.

Borrowings

At September 30, 2011, the Company did not have any borrowings (advances from the FHLB), as compared to $10.0 million at December 31, 2010. The reduction in borrowings was the result of a $10.0 FHLB advance that matured during the first quarter of 2011.

Shareholders’ Equity

Shareholders’ equity increased by $8.6 million to $141.0 million at September 30, 2011, as compared to $132.4 million at December 31, 2010. The increase in stockholders’ equity was largely attributable to unrealized gains on available-for-sale securities and an increase related to year-to-date earnings offset by dividends paid on common and preferred stock (for additional information related to the changes in shareholder’s equity, refer to the Consolidated Statement of Changes in Shareholder’s Equity in the Company’s Consolidated Financial Statements).

Regulatory Capital

Other than Tier 1 capital restrictions on the Company’s junior subordinated debt discussed later, the Company is not aware of any pending recommendations by regulatory authorities that would have a material impact on the Company’s capital, resources, or liquidity if they were implemented.

The adequacy of the Company’s regulatory capital is reviewed on an ongoing basis with regard to size, composition and quality of the Company’s resources. An adequate capital base is important for continued growth and expansion in addition to providing an added protection against unexpected losses.

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An important indicator in the banking industry is the leverage ratio, defined as the ratio of common shareholders’ equity less intangible assets, to average quarterly assets less intangible assets. The leverage ratio was 7.83% and 8.01% at September 30, 2011 and December 31, 2010, respectively.

As required by the federal banking regulatory authorities, guidelines have been adopted to measure capital adequacy. Under the guidelines, certain minimum ratios are required for core capital and total capital as a percentage of risk-weighted assets and other off-balance sheet instruments. For the Company, Tier 1 risk-based capital generally consists of common shareholders’ equity less intangible assets plus the junior subordinated debt, and Tier 2 risk-based capital includes the allowable portion of the allowance for loan losses, currently limited to 1.25% of risk-weighted assets. Any portion of the allowance for loan losses that exceeds the 1.25% limit of risk-weighted assets is disallowed for Tier 2 risk-based capital but is used to adjust the overall risk weighted asset calculation. At September 30, 2011, $3.0 million of the allowance for loan losses was disallowed for Tier 2 risk-based capital, but was used to adjust the overall risk weighted assets used in the regulatory ratio calculations. At December 31, 2010, $2.2 million of the allowance for loan losses was disallowed for Tier 2 risk-based capital, but was used to adjust the overall risk weighted assets used in the regulatory ratio calculations. Under Tier 1 risk-based capital guidelines, any amount of net deferred tax assets that exceeds either forecasted net income for the period or 10% of Tier 1 risk-based capital is disallowed. At September 30, 2011, the Company had no net deferred tax assets disallowed in the Tier 1 risk-based capital calculation. At December 31, 2010, $198,000 of net deferred tax assets was disallowed in the Tier 1 risk-based capital calculation. By regulatory guidelines, the separate component of equity for unrealized appreciation or depreciation on available for sale securities is excluded from Tier 1 risk-based capital. In addition, federal banking regulatory authorities have issued a final rule restricting the Company’s junior subordinated debt to 25% of Tier 1 risk-based capital. Amounts of junior subordinated debt in excess of the 25% limit generally may be included in Tier 2 risk-based capital. The final rule provided a five-year transition period, ending March 31, 2009. In 2009, the Federal Reserve extended this transition period to March 31, 2011. This will allow bank holding companies more flexibility in managing their compliance with these new limits in light of the current conditions of the capital markets. At September 30, 2011, the entire amount of these securities was allowable to be included as Tier 1 risk-based capital for the Company. At September 30, 2011 and December 31, 2010, the Company’s regulatory capital ratios were above minimum regulatory guidelines.

On December 19, 2008, the Company issued to the United States Department of the Treasury (“Treasury”) 25,000 shares of Series A, Fixed Rate, Cumulative Perpetual Preferred Stock (“Series A Preferred Stock”), with a par value of $0.01 per share and a liquidation preference of $1,000 per share, and a warrant (“Warrant”) to purchase 367,984 shares of the Company’s common stock, par value $5.00 per share, for an aggregate purchase price of $25.0 million in cash.

The Series A Preferred Stock qualifies as Tier 1 capital and will pay cumulative dividends at a rate of 5% per annum for the first five years, and 9% per annum thereafter. The Series A Preferred Stock generally may be redeemed at any time following consultation by the Company’s primary bank regulator and Treasury. Participants in the Capital Purchase Program desiring to repay part of an investment by Treasury must repay a minimum of 25% of the issue price of the preferred stock.

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The following table sets forth the Company’s capital ratios at September 30, 2011 and December 31, 2010:

	September 30, 2011			December 31, 2010
	(Dollar amounts in thousands)
Tier 1 Capital
Common shareholders’ equity excluding unrealized gains (losses) on securities	$	141,014		$	132,447
Disallowed goodwill, intangible assets and deferred tax assets	(45,471		)	(45,787		)
Junior subordinated debt	18,441			18,287
Unrealized losses on available for sale debt securities	(2,954		)	3,925
Total Tier 1 Capital	111,030			108,872

Tier 2 Capital
Allowable portion of allowance for loan losses	12,420			12,544
Total Tier 2 Capital	12,420			12,544
Total risk-based capital	$	123,450		$	121,416
Risk adjusted assets (including off-balance sheet exposures)	$	990,585		$	1,001,299

Leverage ratio	7.83		%	8.01		%
Tier I risk-based capital ratio	11.21		%	10.87		%
Total risk-based capital ratio	12.46		%	12.13		%

Regulatory guidelines require the Company’s Tier 1 capital ratio and the total risk-based capital ratio to be at least 4.0% and 8.0%, respectively.

On August 5, 2011, Standard & Poor’s rating agency lowered the long-term rating of the U.S. government and federal agencies from AAA to AA+. With regard to this action, the federal banking agencies, which include the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the National Credit Union Administration, and the Office of the Comptroller of the Currency, issued a press release which provided the following guidance to banks and bank holding companies:

For risk-based capital purposes, the risk weights for Treasury securities and other securities issued or guaranteed by the U.S. government, government agencies, and government-sponsored entities will not change. The treatment of Treasury securities and other securities issued or guaranteed by the U.S. government, government agencies, and government-sponsored entities under other federal banking agency regulations, including, for example, the Federal Reserve Board’s Regulation W, will also be unaffected.

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010

Overview . Net income for the third quarter of 2011 was $1.4 million, as compared to a net loss of $602,000 for the same period in 2010. Basic and diluted earnings per common share were $0.15 for the third quarter of 2011, as compared to basic and diluted loss per common share of $0.16 for the same period in 2010.

The following table presents some of the Company’s key ratios for three months ended September 30, 2011 and 2010:

	Three Months Ended September 30,
	2011		2010

Return on average assets (annualized)	0.39	%	-0.18	%
Return on average shareholders’ equity (annualized)	4.07	%	-1.76	%
Common dividend payout ratio	33.17	%	-31.86	%
Average shareholders’ equity to average assets	9.47	%	10.24	%

Net Interest Income

Net interest income, our primary source of revenue, is the amount by which interest income on loans, investments and interest-earning cash balances exceeds interest incurred on deposits and other non-deposit sources of funds, such as repurchase agreements and

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borrowings from the FHLB and other correspondent banks. The amount of net interest income is affected by changes in interest rates and by changes in the volume and mix of interest-sensitive assets and liabilities. Net interest income and corresponding yields are presented in the discussion and analysis below on a fully taxable-equivalent basis. Income from tax-exempt assets, primarily loans to or securities issued by state and local governments, is adjusted by an amount equivalent to the federal income taxes which would have been paid if the income received on these assets was taxable at the statutory rate of 34%. Net interest margin is the difference between the gross (tax-effected) yield on earning assets and the cost of interest bearing funds as a percentage of earning assets.

Net interest income as adjusted for tax-exempt financial instruments was $11.9 million for the three months ended September 30, 2011, as compared to $10.7 million for the same period in 2010. The combination of a benefit of a lower cost of funds resulted in less interest paid on average interest-bearing liabilities, and a slight decrease in the yield on interest-earning assets resulted in a higher net interest margin for the three months ended September 30, 2011, as compared to the same period in 2010. The taxable-equivalent net interest margin percentage for the third quarter of 2011 was 3.50%, as compared to 3.48% for the same period in 2010. The interest rate paid on average interest-bearing liabilities decreased by 29 basis points to 1.79% for the third quarter of 2011, as compared to 2.08% for the same period in 2010. The yield on interest-earning assets decreased by 19 basis points to 5.04% for the third quarter of 2011, as compared to 5.23% for the same period in 2010.

The tables below provide average asset and liability balances and the corresponding interest income and expense along with the average interest yields (assets) and interest rates (liabilities) for the three months ended September 30, 2011 and 2010:

	Three months ended September 30,
	2011					2010
	Average Balance		Interest Income/ Expense		% Rate	Average Balance		Interest Income/ Expense		% Rate
	(Dollar amounts in thousands)
Interest-Earning Assets:
Loans: (1) (2) (3)
Commercial	$	815,668	$	11,509	5.52	$	732,027	$	10,641	5.69
Mortgage	56,149		706		5.03	55,765		661		4.74
Consumer	115,210		1,452		5.00	122,260		1,598		5.18
Total loans	987,027		13,667		5.43	910,052		12,900		5.56
Investment securities (2)	345,700		3,626		4.17	263,656		3,362		5.10
Federal funds sold	—		—		0.00	43,386		15		0.13
Interest-earning deposits in banks	18,722		21		0.45	114		—		0.01
Total interest-earning assets	$	1,351,449	$	17,314	5.04	$	1,217,208	$	16,277	5.23

Interest-Bearing Liabilities:
Deposits:
Transaction accounts	$	608,012	$	1,346	0.88	$	475,332	$	1,284	1.07
Time deposit	465,592		2,447		2.08	453,309		2,670		2.33
Total deposits	1,073,604		3,793		1.40	928,641		3,954		1.69
Repurchase agreements	104,606		1,201		4.56	110,499		1,205		4.27
Short-term borrowings	178		1		2.23	20		—		0.44
Borrowings	—		—		0.00	10,000		90		3.53
Junior subordinated debt	18,472		410		8.81	19,294		363		7.46
Total interest-bearing liabilities	1,196,860		5,405		1.79	1,068,454		5,612		2.08
Noninterest-bearing deposits	118,465		—			114,340		—
Total cost of funds	$	1,315,325	5,405		1.63	$	1,182,794	5,612		1.88
Net interest income (fully taxable equivalent)			$	11,909				$	10,665
Net interest margin (fully taxable equivalent)					3.50					3.48

(1) Loan fees have been included in the interest income totals presented. Nonaccrual loans have been included in average loan balances.

(2) Interest income on loans and investments is presented on a taxable equivalent basis using a statutory tax rate of 34%.

(3) For the third quarter of 2011, covered loans acquired in the Allegiance acquisition on November 19, 2010 are included in loans.

Interest and fees on loans on a taxable equivalent basis increased by $0.8 million, or 5.9% to $13.7 million for the three months ended September 30, 2011, as compared to $12.9 million for the same period in 2010. The increase in interest and fees on loans was

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primarily the result of a higher level of loans, which was attributable to the covered loans acquired in the Allegiance acquisition and strong commercial loan growth during the fourth quarter of 2010. The average balance of loans (including covered loans) for the first nine months of 2011 increased by $88.2 million or 10%, to $993.7 million, as compared to $905.4 million for the same period in 2010. Management attributes the strong commercial loan growth to a well established market in the Reading, Pennsylvania area as well as continued penetration into the Philadelphia, Pennsylvania market through successful marketing initiatives.

Interest on securities on a taxable-equivalent basis was $3.6 million for the three months ended September 30, 2011 as compared to $3.4 million for the same period in 2010. The average balance of securities increased $82.0 million to $345.7 million for the third quarter of 2011, as compared to $263.7 million for the same period in 2010. The taxable-equivalent yield decreased by 93 basis points to 4.17% for the third quarter of 2011, as compared 5.10% for the same period in 2010. The benefit of additional interest income generated from an increase in investment portfolio volume was offset by less interest income that resulted from the decrease in the taxable-equivalent yield for the third quarter of 2011.

Interest expense on deposits decreased by $161,000, or 4.1%, to $3.8 million for the third quarter of 2011, as compared to $4.0 million for the same period in 2010. A benefit of a lower cost of deposits resulted in less interest paid on deposits, which more than offset the increase in the average balance of deposits. The average rate paid on deposits decreased by 29 basis points to 1.40% for the third quarter of 2011, as compared to 1.69% for the same period in 2010. For the third quarter of 2011, the average balance of interest-bearing deposits increased by $145.0 million to $1.07 billion, as compared to $928.6 million for the same period in 2010. The increase in interest bearing deposits for the three months ended September 30, 2011, was primarily due to an increase in interest bearing core deposits including time deposits maturing in one year or less, as well as the deposits that were assumed as part of the Allegiance acquisition during the fourth quarter of 2010.

The Company incurred minimal interest expense on borrowings for the third quarter of 2011, as compared to $90,000 for the same period in 2010. The Company reduced borrowings by $10.0 million during 2010 and another $10.0 million during the first quarter of 2011, which contributed to a $10.0 million decrease in the average balance of borrowings for the third quarter of 2011, as compared to the third quarter of 2010. The reductions in borrowings were the result of scheduled maturities.

The average interest rate paid on repurchase agreements increased to 4.56% for the three months ended September 30, 2011 as compared to 4.27% for the same period in 2010. The increase in the average interest rate paid on repurchase agreements was the result of increases in average interest rates paid on longer-term, wholesale repurchase agreements. Average repurchase agreement balances decreased $5.9 million or 5.3% for the third quarter of 2011 as compared to the same period in 2010. The increase in the average rate paid on repurchase agreements for the third quarter of 2011, was offset by the benefit received from the reduction in average balance for the third quarter of 2011, as compared to the same period in 2010.

Provision for Loan Losses

Management closely monitors the loan portfolio and the adequacy of the allowance for loan losses considering underlying borrower financial performance and collateral values, and increasing credit risks. Future material adjustments may be necessary to the provision for loan losses, and consequently the allowance for loan losses, if economic conditions or loan credit quality differ substantially from the assumptions management used in making our evaluation of the level of the allowance for loan losses as compared to the balance of outstanding loans. The provision for loan losses is an expense charged against net interest income to provide for estimated losses attributable to uncollectible loans. The provision is based on management’s analysis of the adequacy of the allowance for loan losses. The provision for loan losses was $2.0 million for the third quarter of 2011, as compared to $3.6 million for the same period in 2010. The decrease in provision for loan losses for the three months ended September 30, 2011 as compared to the same period in 2010, was reflective of higher charge-offs in 2010 and an increase in the specific allowance required on impaired loans due to underlying collateral values being more depressed in 2010. (for additional information refer to the related discussions on the “Allowance for Loan Losses” on page 57).

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Non-Interest Income

Non-interest income increased by $0.6 million, or 17.6%, to $4.1 million for the third quarter of 2011, as compared to $3.5 million for the same period in 2010.

Increases (decreases) in the components of non-interest income when comparing the three months ended September 30, 2011 to the same period in 2010 are as follows:

	Three Months Ended September 30,
	2011			2010			Increase / (Decrease)			%
	(Dollars in thousands)

Commissions and fees from insurance sales	$	3,139		$	3,024		$	115		3.8
Customer service fees	427			478			(51		)	(10.7	)
Mortgage banking activities	209			266			(57		)	(21.4	)
Brokerage and investment advisory commissions and fees	152			279			(127		)	(45.5	)
Earnings on bank owned life insurance	119			111			8			7.2
Other commissions and fees	448			402			46			11.4
Gain on sale of equity interest	—			—			—			—
Loss on sale of other real estate owned	(168		)	(838		)	670			(80.0	)
Other (loss) income	(91		)	223			(314		)	(140.8	)
Net realized gains on sales of securities	490			179			311			173.7
Net credit impairment loss recognized in earnings	(606		)	(622		)	16			(2.6	)
Total non-interest income	$	4,119		$	3,502		$	617		17.6

Revenue from commissions and fees from insurance sales increased by $115,000 to $3.1 million for the third quarter of 2011 as compared to $3.0 million for the same period in 2010. The increase for the comparative three month period is mainly attributed to an increase in income on commercial group insurance products offered through VIST Insurance, LLC, a wholly owned subsidiary of the Company.

Revenues from broker and investment advisory commissions and fees decreased by $127,000 to $152,000 for the three months ended September 30, 2011 as compared to $279,000 for the same period in 2010. The decrease in revenue was due primarily to overall decreases in investment advisory activities offered through VIST Capital Management, LLC, a wholly owned subsidiary of the Company.

Net realized losses on the sale of other real estate owned were $168,000 for the three months ended September 30, 2011 as compared to $838,000 for the same period in 2010. For the three months ended September 30, 2011 and 2010, the losses incurred were attributable to six and nine properties, respectively. For the three months ended September 30, 2010, losses related to one property accounted for 84% of the loss.

Other (loss) income decreased $314,000 to a loss of $91,000 for the three months ended September 30, 2011 as compared to income of $223,000 for the same period in 2010. Changes in other (loss) income were primarily due to fair market value adjustments on junior subordinated debt, interest rate caps, swaps and the cash surrender value on a deferred benefit plan.

Net realized gains on sales of available for sale securities were $490,000 for the three months ended September 30, 2011 as compared to $179,000 for the same period in 2010. Available for sale securities sold during the three months ended September 30, 2011 and 2010 were the result of liquidity and asset/liability management strategies.

For the three month period ended September 30, 2011, net credit impairment losses recognized in earnings resulting from OTTI losses on investment securities were $606,000, as compared to $622,000 for the same period in 2010. The net credit impairment losses for the comparative three month period relates to available for sale and held to maturity pooled trust preferred securities with continuing collateral defaults and deferrals as a result of stressed economic conditions affecting the financial services industry resulting in changes in the underlying cash flow assumptions used in determining the credit losses. Management regularly reviews the investment securities portfolio to determine whether to record other-than-temporary impairment. These impairment losses, which reflected the entire difference between the fair value and amortized cost basis of each individual security (additional information regarding investment securities, related gains and losses and the process of reviewing the portfolio for other-than-temporary impairment, is provided in Note 5 — Securities Available For Sale and Securities Held To Maturity to the consolidated financial statements).

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Non-Interest Expense

Non-interest expense was $12.0 million for the three months ended September 30, 2011, as compared to $11.8 million for the same period in 2010.

Increases (decreases) in the components of non-interest expense when comparing the three months ended September 30, 2011, to the same period in 2010, are as follows:

	Three Months Ended September 30,
	2011		2010		Increase / (Decrease)			%
	(Dollars in thousands)

Salaries and employee benefits	$	6,102	$	5,584	$	518		9.3
Occupancy expense	1,173		1,057		116			11.0
Furniture and equipment expense	670		655		15			2.3
Outside processing services	926		1,036		(110		)	(10.6	)
Professional services	863		750		113			15.1
Marketing and advertising expense	339		285		54			18.9
FDIC deposit and other insurance expense	215		612		(397		)	(64.9	)
Amortization of identifiable intangible assets	135		146		(11		)	(7.5	)
Other real estate owned expense	589		687		(98		)	(14.3	)
Other expense	957		967		(10		)	(1.0	)
Total non-interest expense	$	11,969	$	11,779	$	190		1.6

Salaries and employee benefits, the largest component of non-interest expense, increased $518,000 to $6.1 million, or 9.3% for the three months ended September 30, 2011, as compared to $5.6 million for the same period in 2010. Most of the increase in salaries and employee benefits for the comparative three month period was related to an increase in the total number of full-time equivalent employees, which totaled 302 at September 30, 2011 as compared to 275 at September 30, 2010. Included in salaries and employee benefits were stock-based compensation costs of $108,000 for the third quarter of 2011, as compared to $36,000 for the same period in 2010.

Occupancy and furniture and equipment expense increased $131,000 to $1.8 million for the three months ended September 30, 2011 as compared to $1.7 million for the same period in 2010. The increase in occupancy and furniture and equipment expense for the comparative three month period was primarily due to an increase in building lease expense resulting from the additional retail branch locations from the Allegiance acquisition.

Outside processing expense decreased $110,000 or 10.6% to $926,000 for the third quarter of 2011 as compared to $1.0 million for the same period in 2010. The decrease in outside processing expense for the comparative three month period is due primarily to a decrease in costs incurred for computer services and network fees.

Professional services increased $113,000 or 15.1% to $863,000 for the third quarter of 2011 as compared to $750,000 for the same period in 2010. The increase in professional service expense was due primarily to legal and accounting expenses generated by an increase in accounting related services and consulting fees associated with various corporate projects.

FDIC deposit and other insurance expense decreased $397,000 or 64.9% to $215,000 for the third quarter of 2011 as compared to $612,000 for the same period in 2010. This decrease was due primarily to a reduction in FDIC insurance assessments resulting from a decrease in base assessment rates, as determined by the FDIC, partially offset by an increase in the Company’s overall deposit balances.

Other real estate owned decreased $98,000 or 14.3% to $589,000 for the third quarter of 2011 as compared to $687,000 for the same period in 2010. The decrease in other real estate owned was primarily due to a reduction in expenses for maintaining other real estate owned.

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Income Taxes

Generally, the Company’s effective tax rate is below the statutory rate due to tax-exempt earnings on loans, investments, bank-owned life insurance, and the impact of tax credits. The Company recorded income tax expense of $270,000 for the third quarter of 2011, as compared to an income tax benefit of $1.0 million for the same period in 2010. The income tax benefit for the third quarter of 2010 was primarily the result of a pre-tax net loss.

RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010

Overview . Net income for the nine months ended September 30, 2011 was $3.2 million, as compared to $2.6 million for the same period in 2010. Basic and diluted earnings per common share were $0.30 for the nine months ended September 30, 2011, as compared to basic and diluted earnings per common share of $0.22 for the same period in 2010. The improved operating results for the first nine months of 2011, as compared to the same period in 2010, resulted from a significant increase in net interest income, a reduction of loan loss provision and fewer losses on the sale of other real estate owned. The operating results for the first nine months of 2010 reflected a gain of approximately $1.9 million recognized on the sale of a 25% equity interest in First HSA, LLC related to the transfer of approximately $89.0 million of health savings account deposits in the second quarter of 2010.

The following table presents some of the Company’s key ratios for nine months ended September 30, 2011 and 2010:

	Nine Months Ended September 30,
	2011		2010

Return on average assets (annualized)	0.30	%	0.26	%
Return on average shareholders’ equity (annualized)	3.20	%	2.70	%
Common dividend payout ratio	50.38	%	67.89	%
Average shareholders’ equity to average assets	9.40	%	9.76	%

Net Interest Income

Net interest income as adjusted for tax-exempt financial instruments was $35.8 million for the nine months ended September 30, 2011, as compared to $31.5 million for the same period in 2010. A benefit of a lower cost of funds resulted in less interest paid on average interest-bearing liabilities. This benefit more than offset by a small decrease in the yield on interest-earning assets, which resulted in a higher net interest margin for the nine months ended September 30, 2011, as compared to the same period in 2010. The taxable-equivalent net interest margin percentage for the nine months ended September 30, 2011 was 3.63%, as compared to 3.44% for the same period in 2010. The interest rate paid on average interest-bearing liabilities decreased by 31 basis points to 1.85% for the nine months ended September 30, 2011, as compared to 2.16% for the same period in 2010. The yield on interest-earning assets decreased by 7 basis points to 5.22% for the nine months ended September 30, 2011, as compared to 5.29% for the same period in 2010.

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	Nine months ended September 30,
	2011					2010
	Average Balance		Interest Income/ Expense		% Rate	Average Balance		Interest Income/ Expense		% Rate
	(Dollar amounts in thousands)
Interest-Earning Assets:
Loans: (1) (2) (3)
Commercial	$	816,745	$	34,944	5.64	$	727,124	$	31,399	5.70
Mortgage	57,892		2,121		4.88	51,972		1,985		5.09
Consumer	119,017		4,554		5.11	126,345		4,905		5.19
Total loans	993,654		41,619		5.53	905,441		38,289		5.59
Investment securities (2)	310,405		10,344		4.60	268,585		10,508		5.22
Federal funds sold	7,281		21		0.39	26,439		26		0.13
Interest-earning deposits in banks	8,369		15		0.24	23,650		263		1.49
Total interest-earning assets	$	1,319,709	$	51,999	5.22	$	1,224,115	$	49,086	5.29

Interest-Bearing Liabilities:
Deposits:
Transaction accounts	$	573,883	$	3,979	0.93	$	502,361	$	4,352	1.16
Time deposit	475,716		7,430		2.09	442,491		8,342		2.52
Total deposits	1,049,599		11,409		1.46	944,852		12,694		1.80
Repurchase agreements	105,502		3,564		4.52	112,135		3,585		4.22
Short-term borrowings	188		1		0.39	4,880		18		0.50
Borrowings	330		7		2.75	10,366		277		3.53
Junior subordinated debt	18,501		1,223		8.84	19,553		1,052		7.19
Total interest-bearing liabilities	1,174,120		16,204		1.85	1,091,786		17,626		2.16
Noninterest-bearing deposits	119,023		—			109,257		—
Total cost of funds	$	1,293,143	16,204		1.68	$	1,201,043	17,626		1.96
Net interest income (fully taxable equivalent)			$	35,795				$	31,460
Net interest margin (fully taxable equivalent)					3.63					3.44

(1)		Loan fees have been included in the interest income totals presented. Nonaccrual loans have been included in average loan balances.
(2)		Interest income on loans and investments is presented on a taxable equivalent basis using a statutory tax rate of 34%.
(3)		For the first nine months of 2011, covered loans acquired in the Allegiance acquisition on November 19, 2010 are included in loans.

Interest and fees on loans on a taxable equivalent basis increased by $3.3 million, or 8.7% to $41.6 million for the nine months ended September 30, 2011, as compared to $38.3 million for the same period in 2010. The increase in interest and fees on loans for the nine months was primarily the result of an increase in the average balance of loans resulting from strong commercial loan growth and the additional loans acquired in the Allegiance acquisition, which increased by $88.2 million for the first nine months of 2011, as compared to the same periods in 2010. Management attributes the strong commercial loan growth to a well established market in the Reading, Pennsylvania area as well as continued penetration into the Philadelphia, Pennsylvania market through successful marketing initiatives.

Interest on securities on a taxable-equivalent basis was $10.3 million for the nine months ended September 30, 2011, as compared to $10.5 million for the same period in 2010. The average balance of securities increased $41.8 million to $310.4 million for the first nine months of 2011, as compared to $268.6 million for the same period in 2010. The taxable-equivalent yield decreased by 62 basis points to 4.60% for the first nine months of 2011, as compared 5.22% for the same period in 2010. The decrease in interest income for the first nine months of 2011 as compared to the same period in 2010, primarily resulted from the decrease in yield, which more than offset the additional income generated from a higher average balance of securities for the first nine months of 2011.

Interest expense on deposits decreased by $1.3 million or 10.1%, to $11.4 million for the first nine months of 2011, as compared to $12.7 million for the same period in 2010. A benefit of a lower cost of deposits resulted in less interest paid on deposits, which more than offset the increase in the average balance of deposits. The average rate paid on deposits decreased by 34 basis points to 1.46% for the first nine months of 2011, as compared to 1.80% for the same period in 2010. For the first nine months of 2011, the average balance of interest-bearing deposits increased by $104.7 million to $1.05 billion, as compared to $944.9 million for the same period in 2010. The overall increase in interest bearing deposits for the nine months ended September 30, 2011 as compared to the same period

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in 2010 was primarily due to an increase in interest bearing core deposits including time deposits maturing in one year or less, as well as the deposits that were assumed as part of the Allegiance acquisition.

Interest expense on borrowings decreased by $287,000 to $8,000 for the first nine months of 2011 compared to $295,000 for the first nine months of 2010. The Company reduced long term borrowings by $10.0 million during 2010 and another $10.0 million during the first quarter of 2011, which contributed to the $14.7 million decrease in the average balance of borrowings for the first nine months of 2011, as compared to the first nine months of 2010. The reductions in borrowings were the result of scheduled maturities.

Provision for Loan Losses

The provision for loan losses was $6.1 million for the first nine months of 2011, as compared to $8.2 million for the same period in 2010. The decrease in provision for loan losses for the first nine months of 2011 as compared to the same period in 2010, was reflective of higher charge-offs in 2010 and an increase in the specific allowance required on impaired loans due to underlying collateral values being more depressed in 2010 (for additional information refer to the related discussions on the “Allowance for Loan Losses” on page 57).

Non-Interest Income

Non-interest income decreased by $2.6 million, or 17.8%, to $11.8 million for the first nine months of 2011, as compared to $14.4 million for the same period in 2010.

Increases (decreases) in the components of non-interest income when comparing the nine months ended September 30, 2011 to the same period in 2010 are as follows:

	Nine Months Ended September 30,
	2011			2010			Increase / (Decrease)			%
	(Dollars in thousands)

Commissions and fees from insurance sales	$	9,152		$	9,192		$	(40	)	(0.4	)
Customer service fees	1,277			1,610			(333		)	(20.7	)
Mortgage banking activities	527			631			(104		)	(16.5	)
Brokerage and investment advisory commissions and fees	489			565			(76		)	(13.5	)
Earnings on bank owned life insurance	337			302			35			11.6
Other commissions and fees	1,364			1,464			(100		)	(6.8	)
Gain on sale of equity interest	—			1,875			(1,875		)	(100.0	)
Loss on sale of other real estate owned	(1,180		)	(1,432		)	252			(17.6	)
Other (loss) income	(114		)	464			(578		)	(124.6	)
Net realized gains on sales of securities	872			465			407			87.5
Net credit impairment loss recognized in earnings	(912		)	(771		)	(141		)	18.3
Total non-interest income	$	11,812		$	14,365		$	(2,553	)	(17.8	)

The overall decrease in non-interest income for the first nine months of 2011 as compared to the same period in 2010, was largely attributable to a gain of approximately $1.9 million recognized on the sale of a 25% equity interest in First HSA, LLC related to the transfer of approximately $89.0 million of health savings account deposits in the second quarter of 2010.

Customer service fees decreased 20.7% to $1.3 million for the nine months ended September 30, 2011 as compared to $1.6 million for the same period in 2010. The decrease in customer service fees for the comparative nine month period was primarily due to new regulations which took effect during the third quarter of 2010, which require the Company to receive the customer’s permission before covering overdrafts for debit card transactions made with ATM or debit cards. The implementation of this legislation significantly reduced income related to service charges on deposit accounts.

Revenue from mortgage banking activities decreased by 16.5% to $527,000 for the nine months ended September 30, 2011 as compared to $631,000 for the same period in 2010. The decrease in mortgage banking activities for the comparative nine month period was primarily due to a decrease in the volume of loans sold into the secondary mortgage market. The Company operates its mortgage banking activities through VIST Mortgage, a division of the Bank.

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Other commissions and fees decreased by 6.8% to $1.4 million for the first nine months of 2011 as compared to $1.5 million for the same period in 2010. The decrease in the comparative nine month period was primarily due to decreases in customer debit card activity through the debit card network interchange.

Net realized losses on the sale of other real estate owned were $1.2 million for the nine months ended September 30, 2011 compared to $1.4 million for the same period in 2010. One property accounted for 57% of the losses incurred during the first nine months of 2011. Four properties accounted for 79% of the losses incurred during the first nine months of 2010. The Company decided to sell these properties and incur the loss because management did not anticipate market conditions for the properties to improve significantly over the next 18 to 24 months. Management estimated that selling these properties at a loss would be preferable to incurring the significant expenses to maintain the properties during a longer selling process.

Other (loss) income decreased $578,000 or 124.6% to a loss of $114,000 for the nine months ended September 30, 2011 compared to income of $464,000 for the same period in 2010. Changes in other (loss) income were primarily due to fair market value adjustments on junior subordinated debt, interest rate caps, swaps and the cash surrender value of a deferred benefit.

Net realized gains on sales of available for sale securities were $872,000 for the nine months ended September 30, 2011 as compared to $465,000 for the same period in 2010. Sales of available for sale securities during 2011 and 2010 were the result of liquidity and asset/liability management strategies.

For the nine month period ended September 30, 2011, net credit impairment losses recognized in earnings resulting from OTTI losses on investment securities were $912,000, as compared to $771,000 for the same period in 2010. The net credit impairment losses for the comparative nine month period relates to OTTI charges for estimated credit losses on available for sale and held to maturity pooled trust preferred securities resulted primarily from continuing collateral defaults and deferrals as a result of stressed economic conditions affecting the financial services industry resulting in changes in the underlying cash flow assumptions used in determining the credit losses. Management regularly reviews the investment securities portfolio to determine whether to record other-than-temporary impairment. These impairment losses, which reflected the entire difference between the fair value and amortized cost basis of each individual security (additional information regarding investment securities, related gains and losses and the process of reviewing the portfolio for other-than-temporary impairment, is provided in Note 5 — Securities Available For Sale and Securities Held To Maturity to the consolidated financial statements).

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Non-Interest Expense

Non-interest expense was $36.5 million for the nine months ended September 30, 2011, as compared to $34.1 million for the same period in 2010.

Increases (decreases) in the components of non-interest expense when comparing the nine months ended September 30, 2011, to the same period in 2010, are as follows:

	Nine Months Ended September 30,
	2011		2010		Increase / (Decrease)			%
	(Dollars in thousands)

Salaries and employee benefits	$	18,002	$	16,422	$	1,580		9.6
Occupancy expense	3,666		3,274		392			12.0
Furniture and equipment expense	2,064		1,941		123			6.3
Outside processing services	2,923		2,921		2			0.1
Professional services	2,666		2,104		562			26.7
Marketing and advertising expense	1,224		792		432			54.5
FDIC deposit and other insurance expense	1,440		1,668		(228		)	(13.7	)
Amortization of identifiable intangible assets	410		417		(7		)	(1.7	)
Other real estate owned expense	1,413		1,785		(372		)	(20.8	)
Other expense	2,680		2,816		(136		)	(4.8	)
Total non-interest expense	$	36,488	$	34,140	$	2,348		6.9

Salaries and employee benefits, the largest component of non-interest expense, increased by 9.6% to $18.0 million for the nine months ended September 30, 2011, as compared to $16.4 million for the same period in 2010. Most of the increase in salaries and employee benefits for the comparative nine month period was related to an increase in the total number of full-time equivalent employees, which totaled 302 at September 30, 2011 compared to 275 at September 30, 2010. Included in salaries and employee benefits were stock-based compensation costs of $310,000 for the first nine months of 2011, as compared to $112,000 for the same period in 2010.

Occupancy and furniture and equipment expense increased to $5.7 million for the first nine months of 2011 as compared to $5.2 million for the same period in 2010. The increase in occupancy and furniture and equipment expense for the comparative nine month period was primarily due to an increase in building lease expense resulting from the additional retail branch locations from the Allegiance acquisition.

Professional services expense increased by 26.7% to $2.7 million for the first nine months of 2011 as compared to $2.1 million for the same period in 2010. The increase for the comparative nine month period was primarily due to integration expenses associated with the Allegiance acquisition.

Marketing and advertising expense increased $432,000 to $1.2 million for the first nine months of 2011 as compared to $792,000 for the same period in 2010. The increase for the comparative nine month period was primarily due to increased media space expense in the Philadelphia market area promoting the Allegiance branches.

FDIC deposit and other insurance expense decreased 13.7% to $1.4 million for the nine months ended September 30, 2011 as compared to $1.7 million for the same period in 2010. The decrease in expense for the comparative nine month periods is related to a decrease in FDIC insurance assessments resulting from a decrease in base assessment rates, as determined by the FDIC, partially offset by an increase in the Company’s overall deposit balances.

Other real estate owned expense decreased 20.8% to $1.4 million for the nine months ended September 30, 2011 as compared to $1.8 million for the same period in 2010. Part of the decrease in expense for the comparative nine month period was primarily due to a decrease in general expenses on the maintenance of other real estate owned; however, the expenses for the first nine months of 2010 also included $246,000 of past due real estate taxes related to two commercial properties.

Income Taxes

Generally, the Company’s effective tax rate is below the statutory rate due to tax-exempt earnings on loans, investments, and bank-owned life insurance, and the impact of tax credits. The Company recorded income tax expense of $616,000 for the nine months

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ended September 30, 2011, as compared to an income tax benefit of $573,000 for the same period in 2010. Included in the income tax expense for the comparative nine month period ended September 30, 2011 and 2010, was a federal tax benefit of approximately $146,000 and $371,000, respectively, from a $5.0 million investment in an affordable housing, corporate tax credit limited partnership.

Off Balance Sheet Commitments

A summary of the contractual amount of the Company’s financial instrument commitments is as follows:

	September 30,		December 31,
	2011		2010
	(in thousands)
Commitments to extend credit:
Unfunded loan origination commitments	$	52,484	$	41,803
Unused home equity lines of credit	48,452		38,089
Unused business lines of credit	116,180		132,486
Total commitments to extend credit	$	217,116	$	212,378
Standby letters of credit	$	9,479	$	9,235

Standby letters of credit written are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. The majority of these standby letters of credit expire within the next twenty-four months. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending other loan commitments. The Bank requires collateral supporting these letters of credit as deemed necessary. Management believes that the proceeds obtained through a liquidation of such collateral would be sufficient to cover the maximum potential amount of future payments required under the corresponding guarantees. The current amount of the liability as of September 30, 2011 for guarantees under standby letters of credit issued was $9.5 million, as compared to $9.2 million at December 31, 2010.

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Liquidity

The Bank’s objective is to maintain adequate liquidity to meet funding needs at a reasonable cost and to provide contingency plans to meet unanticipated funding needs or a loss of funding sources, while minimizing interest rate risk. Adequate liquidity provides resources for credit needs of borrowers, for depositor withdrawals and for funding corporate operations. Sources of liquidity are as follows:

· Deposit generation;

· Investment securities portfolio scheduled cash flows, prepayments, maturities and sales;

· Payments received on loans; and,

· Overnight correspondent bank borrowings credit lines, and borrowing capacity available from the Federal Reserve Bank and the Federal Home Loan Bank of Pittsburgh.

Management believes that the Bank’s core deposits remain fairly stable. Liquidity and funds management is governed by policies and measured on a daily basis, with supplementary weekly and monthly analyses. These measurements indicate that liquidity generally remains stable and exceeds our minimum defined levels of adequacy. Other than the trends of continued competitive pressures and volatile interest rates, there are no known demands, commitments, events or uncertainties that will result in, or that are reasonably likely to result in, liquidity increasing or decreasing in any material way. Considering all factors involved, management believes that liquidity is being maintained at an adequate level.

At September 30, 2011, the Company had a maximum borrowing capacity with the Federal Home Loan Bank of approximately $351.5 million. In the event that additional short-term liquidity is needed, the Bank has established relationships with several correspondent banks to provide short-term borrowings in the form of federal funds purchased.

The Bank is required to pledge residential and commercial real estate secured loans to collateralize its potential borrowing capacity with the FHLB. As of September 30, 2011, the Bank has pledged approximately $657.4 million in loans to the FHLB to secure its maximum borrowing capacity of $351.5 million.

Interest Rate Sensitivity

The banking industry has been required to adapt to an environment in which interest rates may be volatile and in which deposit deregulation has provided customers with the opportunity to invest in liquid, interest rate-sensitive deposits. The banking industry has adapted to this environment by using a process known as asset/liability (“ALM”) management.

The Company remains slightly asset sensitive and will continue its strategy to originate fixed rate and adjustable rate commercial loans and use excess federal funds sold to purchase investment securities to maintain a more neutral gap position.

ALM management is intended to provide for adequate liquidity and interest rate sensitivity by matching interest rate-sensitive assets and liabilities and coordinating maturities on assets and liabilities. With the exception of the majority of residential mortgage loans, loans generally are written having terms that provide for a readjustment of the interest rate at specified times during the term of the loan. In addition, interest rates offered for all types of deposit instruments are reviewed weekly and are established on a basis consistent with funding needs and maintaining a desirable spread between cost and return.

During October 2002, the Company entered into an interest rate swap agreement with a notional amount of $5.0 million. This derivative financial instrument effectively converted fixed interest rate obligations of outstanding junior subordinated debt instruments to variable interest rate obligations, decreasing the asset sensitivity of its balance sheet by more closely matching the Company’s variable rate assets with variable rate liabilities. In September 2010, the fixed rate payer exercised an imbedded call option and terminated the interest rate swap agreement.

During 2008, the Company entered into two interest rate swap agreements with a combined notional amount of $15.0 million. These derivative financial instruments effectively converted floating rate interest rate obligations of outstanding junior subordinated debt instruments to fixed interest rate obligations, decreasing the asset sensitivity of its balance sheet by more closely matching the Company’s fixed rate assets with fixed rate liabilities.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes in the Company’s assessment of its sensitivity to market risk since its presentation in the Annual Report on Form 10-K for the year ended December 31, 2010 filed with the SEC.

Item 4. Controls and Procedures

The Company’s management, with the participation of the Chief Executive Officer and the Chief Financial Officer, has evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended, as of September 30, 2011. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective as of such date.

There have been no changes in the Company’s internal control over financial reporting during the third quarter of 2011 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II - OTHER INFORMATION

Item 1. Legal Proceedings — None

Item 1A. Risk Factors

As a smaller reporting company, the Company is not required to provide the information required by this Item.

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

No shares of the Company’s common stock were repurchased by the Company during the three month period ended September 30, 2011. The maximum number of common shares that may yet be purchased under the Company’s current stock repurchase program is 115,000 shares.

Item 3. Defaults Upon Senior Securities — None

Item 4. [Removed and Reserved]

Item 5. Other Information

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Item 6. Exhibits

Exhibit No.		Description

3.1		Articles of Incorporation of VIST Financial Corp., as amended, including Statement with Respect to Shares for the Fixed rate Cumulative Perpetual Preferred Stock, Series A (incorporated by reference to Exhibit 3.1 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2008).

3.2		Bylaws of VIST Financial Corp. (incorporated by reference to Exhibit 3.2 to Registrant’s Current Report on Form 8-K filed on March 6, 2008).

10.1		Employment Agreement, dated September 19, 2005, among VIST Financial Corp., VIST Bank, and Robert D. Davis (incorporated herein by reference to Exhibit 10.1 to Registrant’s Current Report on Form 8-K/A filed on September 22, 2005).*

10.2		Supplemental Executive Retirement Plan (incorporated herein by reference to Exhibit 10.1 to Registrant’s Quarterly Report on Form 10-QSB for the quarter ended September 30, 1996).*

10.3		Deferred Compensation Plan for Directors (incorporated herein by reference to Exhibit 10.2 to Registrant’s Quarterly Report on Form 10-QSB for the quarter ended September 30, 1996).*

10.4		VIST Financial Corp. Non-Employee Director Compensation Plan (incorporated by reference to Exhibit 10-1 to Registrant’s Registration Statement on Form S-8 No. 333-37452).*

10.5		1998 Employee Stock Incentive Plan (incorporated by reference to Exhibit 99-1 to Registrant’s Registration Statement on Form S-8 No. 333-108130).*

10.6		1998 Independent Directors Stock Option Plan (incorporated by reference to Exhibit 99-1 to Registrant’s Registration Statement on Form S-8 No. 333-108129).*

10.7		Employment Agreement, dated September 17, 1998, among VIST Financial Corp., VIST Insurance, LLC, and Charles J. Hopkins, as amended (incorporated herein by reference to Exhibit 10.2 to Registrant’s Current Report on Form 8-K filed on July 19, 2007).*

10.9		Change in Control Agreement, dated February 11, 2004, among VIST Financial Corp., VIST Bank, and Jenette L. Eck. (incorporated by reference to Exhibit 10.10 of Registrant’s Annual Report Form 10-K for the year ended December 31, 2004).*

10.11		Amended and Restated Employment Agreement, dated as of July 2, 2007, among VIST Financial Corp., VIST Insurance, LLC, and Michael C. Herr (incorporated by reference to Exhibit 10.11 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2008).

10.12		Change in Control Agreement, dated January 3, 2007, among VIST Financial Corp., VIST Bank, and Christina S. McDonald (incorporated by reference to Exhibit 10.13 to Registrant’s Annual Report on Form 10-K for the year ended December 31, 2007).*

10.13		VIST Financial Corp. 2007 Equity Incentive Plan (incorporated by reference to Exhibit A of the Registrant’s definitive proxy statement, dated March 9, 2007).*

10.14		Letter Agreement, including Securities Purchase Agreement - Standard Terms, dated December 19, 2008, between VIST Financial Corp. and the United States Department of the Treasury (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed on December 23, 2008).

10.15		Form of Letter Agreement, dated December 19, 2008, between VIST Financial Corp. and certain of its executive officers relating to executive compensation limitations under the United States Treasury Department’s Capital Purchase Program (incorporated by reference to Exhibit 10.16 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2008).*

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Exhibit No.		Description

10.16		2010 Nonemployee Director Compensation Plan (incorporated by reference to Exhibit A to the Registrant’s definitive proxy statement for the Registrant’s 2009 Annual Meeting of Shareholders).

10.17		Stock Purchase Agreement, dated April 21, 2010, by and between VIST Financial Corp. and Emerald Advisors, Inc. (incorporated by reference to Exhibit 10.1 to Registrant’s Current Report on Form 8-K, filed on April 26, 2010).

10.18		Stock Purchase Agreement, dated April 21, 2010, between VIST Financial Corp. and Weaver Consulting & Asset Management, d/b/a Battlefield Capital Management, LLC (incorporated by reference to Exhibit 10.2 of the Registrant’s Current Report on Form 8-K, filed on April 26, 2010).

10.19		Change in Control Agreement, dated February 11, 2004, among VIST Financial Corp., VIST Bank and Edward C. Barrett (incorporated by reference to Exhibit 10.9 to Registrant’s Annual Report on Form 10-K for the year ended December 31, 2003).

10.20		Change in Control Agreement, dated March 15, 2011 among VIST Financial Corp., VIST Bank and Neena M. Miller (incorporated by reference to Exhibit 10.20 to Registrant’s Annual Report on Form 10-K for the year ended December 31, 2010).*

10.21		Change in Control Agreement, dated March 15, 2011 among VIST Financial Corp., VIST Bank and Louis J. Decesare, Jr. (incorporated by reference to Exhibit 10.21 to Registrant’s Annual Report on Form 10-K for the year ended December 31, 2010).*

31.1		Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.

31.2		Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.

32.1		Section 1350 Certification of Chief Executive Officer and Chief Financial Officer.

101.INS		XBRL Instance Document. **

101.SCH		XBRL Taxonomy Extension Schema Document. **

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document. **

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document. **

101.LAB		XBRL Taxonomy Extension Label Linkbase Document. **

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document. **

*	Denotes a management contract or compensatory plan or arrangement.
**	Furnished herewith.

Table of Contents

SIGNATURES

In accordance with the requirements of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

		VIST FINANCIAL CORP.
		(Registrant)

Dated: November 10, 2011	By	/s/ Robert D. Davis

		Robert D. Davis
		President and Chief Executive Officer

Dated: November 10, 2011	By	/s/ Edward C. Barrett

		Edward C. Barrett
		Executive Vice President and Chief Financial Officer