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

GENERAL

VIST Financial Corp. ("the Company") is a Pennsylvania business corporation headquartered in Wyomissing, Pennsylvania. The Company offers a wide array of financial services through its banking, insurance and wealth management subsidiaries. Unless otherwise indicated, all references in this Management's Discussion and Analysis to "VIST," "we," "us," "our," or similar terms refer to VIST Financial Corp. and its subsidiaries on a consolidated basis. The Company's banking subsidiary, VIST Bank, is referred to as "the Bank." At September 30, 2009, the Company had consolidated total assets of $1.3 billion, consolidated total deposits of $967.5 million, consolidated total shareholders' equity of $125.1 million, and employed 289 full time equivalent employees.

This Management's Discussion and Analysis is part of the Company's Quarterly Report on Form 10-Q for the third quarter of 2009 which was filed with the SEC, and updates the Management's Discussion and Analysis in the Company's Annual Report on Form 10-K for the year ended December 31, 2008, which is referred to as the 2008 Form 10-K, and in the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2009. The Company previously filed these reports with the SEC. You should read the financial information in this Management's Discussion and Analysis and elsewhere in this Form 10-Q in conjunction with the financial information contained in those reports. Certain previously reported amounts have been reclassified to conform to current period classifications as presented in this Form 10-Q.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Note 2 to the Company's consolidated financial statements (included in Item 8 of
the Form 10-K for the year ended December 31, 2008) lists significant accounting policies used in the development and presentation of its financial statements. This discussion and analysis, the significant accounting policies, and other financial statement disclosures identify and address key variables and other qualitative and quantitative factors that are necessary for an understanding and evaluation of the Company and its results of operations.

The Company prepares the consolidated financial statements in accordance with United States generally accepted accounting principles, which are referred to as GAAP, and which require management to make judgments in the application of its accounting policies that involve significant estimates and assumptions about the effect of matters that are inherently uncertain. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to 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 2008 Form 10-K/A, as amended. Although no significant changes to the Company's critical accounting policies were made during the first nine months of 2009, the Company has provided updated information with respect to its accounting for the fair value of financial instruments in Note 9 "Fair Value Measurements and Fair Value of Financial Instruments."

SIGNIFICANT DEVELOPMENTS

Effective April 1, 2009, the Company adopted the provisions of FASB ASC 320, Recognition and Presentation of Other-Than-Temporary Impairments. The FSP generally requires that the credit-related portion of other-than-temporary impairment losses recognized during the period for certain debt securities be reflected in results of operations, and that the portion of the losses related to factors other than credit be recognized as a component of other comprehensive income in the balance sheet. Previous guidance required impairment losses not related to credit to be recognized in results of operations.

The Company identified certain securities that were considered to be other-than-temporarily impaired. For the third quarter and first nine months of 2009, the resulting pre-tax losses on these securities, defined as the gross difference between the fair value and book value of these securities, were $4.0 million and $5.0 million, respectively. The application of the provisions of FASB ASC 320 resulted in the identification of $2.7 million of these pre-tax losses as related to factors other than credit, and these losses remained in other comprehensive income as of September 30, 2009. These losses are netted against the aforementioned gross other-than-temporary impairment losses, and the net credit impairment losses are presented in our consolidated statement of operations. Disclosure of other-than-temporary impairment losses, both related and not related to credit, is provided in Note 6, "Comprehensive Income" to the consolidated financial statements included in this Form 10-Q.

FORWARD LOOKING STATEMENTS

The Company may from time to time make written or oral "forward-looking statements," including statements contained in the Company's filings with the Securities and Exchange Commission (including this Quarterly Report on Form 10-Q and the exhibits hereto and thereto), in its reports to shareholders and in other communications by the Company, which are made in good faith by the Company pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995.

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;

† 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 laws and regulations applicable to financial institutions (including laws concerning taxes, banking, securities and insurance);

† the ability to control operating risks, information technology systems risks and outsourcing risks, the possibility of errors in the quantitative models used to manage Company business and the possibility that key controls will fail or be circumvented;

† the ability to pursue acquisitions, strategic alliances, finance future business acquisitions and obtain regulatory approvals and consents for acquisitions;

† changes in consumer spending and saving habits; the nature, extent, and timing of governmental actions and reforms, including the rules of participation for the Trouble Asset Relief Program voluntary Capital Purchase Program under the Emergency Economic Stabilization Act of 2008, which may be changed unilaterally and retroactively by legislative or regulatory actions;

† changes in accounting standards and practices;

† changes in tax legislation and in the interpretation of existing tax laws by U.S. tax authorities that impact the amount of taxes due;

† 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.

OVERVIEW OF FINANCIAL RESULTS

Financial Highlights

Net income for the Company for the quarter ended September 30, 2009 was $155,000 as compared to a net loss of $4.6 million for the same period in 2008. Basic and diluted (loss) available to common shareholders per common share for the third quarter of 2009 were $.04 and $.04, respectively, compared to basic and diluted (loss) available to common shareholders per common share of $.81 and $.81, respectively, for the same period of 2008. Net income for the Company for the first nine months ended September 30, 2009 was $178,000 as compared to a loss of $1.6 million for the same period in 2008. Basic and diluted (loss) available to common shareholders per common share for the first nine months ended September 30, 2009 was $.18 and $.18, respectively, compared to basic and diluted (loss) available to common shareholders per common share of $.28 and $.28, respectively, for the same period of 2008. Included in earnings for the three and nine months ended September 30, 2009 were pretax other-than-temporary impairment charges on available for sale investment securities of $2.0 million and $2.3 million, respectively.

The following are the key ratios for the Company as of or for the:

                                          Three Months Ended                Nine Months Ended
                                    September 30,    September 30,    September 30,    September 30,
                                        2009             2008             2009             2008

Return on average assets
(annualized)                                 0.05 %          -1.53 %           0.02 %          -0.18 %
Return on average shareholders'
equity (annualized)                          0.50 %         -17.89 %           0.19 %          -1.99 %
Common dividend payout ratio              -125.00 %           0.00 %        -138.89 %        -142.86 %
Average shareholders' equity to
average assets                               9.65 %           8.55 %           9.85 %           9.12 %

Net Interest Income

Net interest income is a primary source of revenue for the Company. Net interest income results from the difference between the interest and fees earned on loans and investments and the interest paid on deposits to customers and other non-deposit sources of funds, such as repurchase agreements and short and long-term borrowed funds. Interest-earning assets, which consist of investment securities, loans and leases and other liquid assets, are financed primarily by customer deposits and wholesale borrowings. Net interest margin represents the relationship between annualized net interest revenue (tax-effected) and average interest-earning assets for the period. All discussion of net interest margin is on a fully taxable equivalent basis (FTE).

Net interest income for the three months ended September 30, 2009 was $9.0 million, a decrease of $40,000, or 0.4%, compared to the $9.1 million reported for the same period in 2008. Net interest income for the nine months ended September 30, 2009 was $25.8 million, a decrease of $0.9 million, or 3.6%, compared to the $26.7 million reported for the same period in 2008. The FTE net interest margin decreased to 3.24% for the third quarter of 2009 from 3.44% for the same period in 2008. The FTE net interest margin decreased to 3.15% for the first nine months of 2009 from 3.51% for the same period in 2008.

The following summarizes net interest margin information:

                                            Three months ended September 30,
                                       2009                                  2008
                                       Interest                              Interest
                          Average       Income/       %         Average       Income/       %
                          Balance       Expense      Rate       Balance       Expense      Rate
                                              (Dollar amounts in thousands)
Interest-Earning
Assets:
Loans: (1) (2)
Commercial              $    711,597   $  10,177       5.60   $    704,869   $  11,249       6.24
Mortgage                      47,612         738       6.19         46,446         721       6.21
Consumer                     138,760       1,872       5.36        130,445       2,091       6.38
Investments (2)              254,560       3,481       5.47        211,430       3,057       5.78
Federal funds sold             8,426           4       0.18              -           -          -
Other short-term
investments                      658           -       0.00            287           -          -

Total
interest-earning
assets                  $  1,161,613   $  16,272       5.48   $  1,093,477   $  17,118       6.13

Interest-Bearing
Liabilities:
Transaction accounts    $    401,897   $   1,426       1.41   $    333,736   $   1,514       1.81
Certificates of
deposit                      443,914       3,526       3.15        339,363       3,492       4.09
Securities sold under
agreement to
repurchase                   120,948       1,134       3.66        125,678       1,168       3.70
Short-term borrowings            662           1       0.65         95,337         559       2.29
Long-term borrowings          35,000         339       3.78         60,000         607       3.96
Junior subordinated
debt                          19,984         357       7.09         20,159         331       6.53

Total
interest-bearing
liabilities                1,022,405       6,783       2.63        974,273       7,671       3.13

Noninterest-bearing
deposits                     111,489           -                   110,903           -

Total cost of funds     $  1,133,894       6,783       2.38   $  1,085,176       7,671       2.81

Net interest margin
(fully taxable
equivalent)                            $   9,489       3.24                  $   9,447       3.44

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

                                             Nine Months Ended September 30,
                                       2009                                  2008
                                       Interest                              Interest
                          Average       Income/                 Average       Income/       %
                          Balance       Expense     % Rate      Balance       Expense      Rate
                                              (Dollar amounts in thousands)
Interest-Earning
Assets:
Loans: (1) (2)
Commercial              $    703,738   $  30,061       5.64   $    678,831   $  33,489       6.48
Mortgage                      49,302       2,186       5.91         46,624       2,242       6.41
Consumer                     139,844       5,639       5.39        128,200       6,348       6.61
Investments (2)              244,836      10,060       5.48        206,736       8,915       5.75
Federal funds sold             9,457          12       0.18              -           -       0.00
Other short-term
investments                      457           1       0.20            385           9       3.46

Total
interest-earning
assets                  $  1,147,634   $  47,959       5.51   $  1,060,776   $  51,003       6.32

Interest-Bearing
Liabilities:
Transaction accounts    $    358,062   $   3,838       1.43   $    325,675   $   4,847       1.99
Certificates of
deposit                      464,035      11,440       3.29        329,898      10,677       4.32
Securities sold under
agreement to
repurchase                   121,823       3,297       3.57        120,266       3,016       3.35
Short-term borrowings          3,576          18       0.66         84,510       1,709       2.66
Long-term borrowings          45,275       1,256       3.66         59,799       1,810       3.98
Junior subordinated
debt                          19,835       1,034       6.97         20,142       1,082       7.18

Total
interest-bearing
liabilities                1,012,606      20,883       2.76        940,290      23,141       3.29

Noninterest-bearing
deposits                     107,787           -                   106,994           -

Total cost of funds     $  1,120,393      20,883       2.50   $  1,047,284      23,141       2.96

Net interest margin
(fully taxable
equivalent)                            $  27,076       3.15                  $  27,862       3.51

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

Average interest-earning assets for the three months ended September 30, 2009 were $1.16 billion, a $68.1 million, or 6.2%, increase over average interest-earning assets of $1.09 billion for the same period in 2008. Average interest-earning assets for the nine months ended September 30, 2009 were $1.15 billion, an $86.9 million, or 8.2%, increase over average interest-earning assets of $1.06 billion for the same period in 2008. The yield on average interest-earning assets decreased by 65 basis points to 5.48% for the third quarter of 2009, compared to 6.13% for the same period in 2008. The yield on average interest-earning assets decreased by 81 basis points to 5.51% for the first nine months of 2009, compared to 6.32% for the same period in 2008.

Average interest-bearing liabilities for the three months ended September 30, 2009 were $1.02 billion, a $48.1 million, or 4.9%, increase over average interest-bearing liabilities of $974.3 million for the same period in 2008. Average interest-bearing liabilities for the nine months ended September 30, 2009 were $1.01 billion, a $72.3 million, or 7.7%, increase over average interest-bearing liabilities of $940.3 million for the same period in 2008. In addition, average noninterest-bearing deposits increased to $111.5 million for the three months ended September 30, 2009, from $110.9 million for the same time period of 2008. Average noninterest-bearing deposits increased to $107.8 million for the nine months ended September 30, 2009, from $107.0 million for the same time period of 2008. The interest rate on total interest-bearing liabilities decreased by 50 basis points to 2.63% for the three months ended September 30, 2009, compared to 3.13% for the same period in 2008. The average interest rate paid on total interest-bearing liabilities decreased by 53 basis points to 2.76% for the nine months ended September 30, 2009, compared to 3.29% for the same period in 2008.

For the three months ended September 30, 2009, FTE net interest income increased .to $9.5 million compared to $9.4 million for the same period in 2008. For the nine months ended September 30, 2009, FTE net interest income decreased to $27.1 million compared to $27.9 million for the same period in 2008.

For the nine months ended September 30, 2009, FTE total interest income decreased to $48.0 million compared to $51.0 million for the same period in 2008. The decrease in total interest income for the nine months ended September 30, 2009 was primarily the result of a decrease in the interest rates on average investments and average outstanding commercial, mortgage and consumer loans compared to the same period in 2008. Earning asset yields on average outstanding loans decreased due mainly to a decrease in the targeted short-term interest rate, as established by the Federal Reserve Bank ("FRB"), which resulted in a decrease in the prime rate from 5.00% at September 30, 2008 to 3.25% at September 30, 2009. Average outstanding commercial loan balances increased by $24.9 million, or 3.7% from September 30, 2008 to September 30, 2009. Additionally, average outstanding total investment securities increased by $38.1 million or 18.4% from September 30, 2008 to September 30, 2009. Earning asset yields on average outstanding investment securities decreased slightly from 5.7% at September 30, 2008 to 5.5% at September 30, 2009.

For the nine months ended September 30, 2009, total interest expense decreased 9.8% to $20.9 million compared to $23.1 million for the same period in 2008. The decrease in total interest expense for the nine months ended September 30, 2009 was primarily the result of a decrease in the interest rates on average interest bearing liabilities compared to the same period in 2008. The average rate paid on total average outstanding interest-bearing liabilities decreased from 3.29% for the nine months ended September 30, 2008 to 2.76% for the nine months ended September 30, 2009. Total cost of funds decreased to 2.50% in 2009 from 2.96% in 2008. The decrease in total average interest-bearing deposit rates was the result of management's disciplined approach to deposit pricing in response to the decrease in short-term interest rates. Total average interest-bearing deposits increased $166.5 million or 25.4% from September 30, 2008 to September 30, 2009 due primarily to growth in time deposits and interest checking. The average rate paid on short-term borrowings and securities sold under agreements to repurchase increased from 3.07% for the nine months ended September 30, 2008 to 3.53% for the nine months ended September 30, 2009. The increase in short-term borrowings and securities sold under agreements to repurchase rates was the result of increases in targeted short term interest rates, as established by the FRB. Average short-term borrowings and securities sold under agreements to repurchase decreased $79.4 million or 38.8% from September 30, 2008 to September 30, 2009 due primarily to the growth in total average interest-bearing deposits.

Provision for Loan Losses

The provision for loan losses for the three months ended September 30, 2009 was $1.4 million compared to $525,000 for the same period of 2008. The provision for loan losses for the nine months ended September 30, 2009 was $6.5 million compared to $2.6 million for the same period of 2008. Net charge-offs to average loans was 0.39% annualized for the nine months ended September 30, 2009 compared to 0.46% for the year ended December 31, 2008. The provision reflects the amount deemed appropriate by management to provide a best estimate of probable losses given the present risk characteristics of the loan portfolio. Management continues to evaluate and classify the credit quality of the loan portfolio utilizing a qualitative and quantitative internal loan review process and, based on the results of the analysis at September 30, 2009, management has determined that the current allowance for loan losses is adequate as of such date. The ratio of the allowance for loan losses to loans outstanding at September 30, 2009 and December 31, 2008 was 1.33% and .92%, respectively. Please see further discussion under the caption "Allowance for Loan Losses."

Non-Interest Income (Loss)

Total non-interest income for the three months ended September 30, 2009 totaled $2.8 million, an increase of $4.8 million, or 238.9%, from a loss of ($2.0) million for the same period in 2008. Total non-interest income for the nine months ended September 30, 2009 totaled $13.0 million, an increase of $5.7 million, or 77.5%, from other income of $7.3 million for the same period in 2008.

The following table details non-interest income (loss) as follows:

                                          Three Months Ended          Nine Months Ended
                                             September 30,              September 30,
                                           2009         2008          2009          2008
                                                      (Dollars in thousands)
Customer service fees                   $      600    $     893    $     1,854    $   2,189
Mortgage banking activities, net               288          145            963          810
Commissions and fees from insurance
sales                                        3,260        3,052          9,254        8,523
Broker and investment advisory
commissions and fees                           112          186            594          650
Earnings on investment in life
insurance                                       96          171            280          503
Gain on sale of loans                            -            -              -           47
Other income                                   405          511          2,024        1,399
Total other non-interest income
before investments                           4,761        4,958         14,969       14,121

Net realized gains on sales of
securities                                      66           89            351          291
Losses from other-than-temporary
impairment                                  (4,026 )     (7,085 )       (4,999 )     (7,085 )
Losses not related to credit                 2,030            -          2,681            -
Net credit impairment losses on
securities recognized in earnings           (1,996 )     (7,085 )       (2,318 )     (7,085 )
Net losses related to investment
securities                                  (1,930 )     (6,996 )       (1,967 )     (6,794 )

Total other non-interest income
(loss)                                  $    2,831    $  (2,038 )  $    13,002    $   7,327
. . .