10-Q 1 g10q-25444.txt 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark one) [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2001 -------------------------------------------------- OR [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT For the transition period from to ----------------------- ------------------------ Commission file number 0-21264 --------------------------------------------------------- VISTA BANCORP, INC. -------------------------------------------------------------------------------- (Exact name of small business issuer as specified in its charter) New Jersey 22-2870972 -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 305 Roseberry Street, P.O. Box 5360, Phillipsburg, New Jersey 08865 -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (908) 859-9500 -------------------------------------------------------------------------------- (Issuer's telephone number, including area code) (Former name, former address and former fiscal year, if changed since last report.) Check whether the issuer (1) 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 report), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS: Check whether the registrant filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court. Yes No --- --- APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. As of August 9, 2001, there were 5,299,093 shares of $.50 par value Common Stock outstanding. VISTA BANCORP, INC. AND SUBSIDIARIES ---------------------------------------------- VISTA BANCORP, INC. Form 10-Q For the period ended June 30, 2001

VISTA BANCORP, INC. AND SUBSIDIARIES ----------------------------------------

3 Vista Bancorp, Inc. and Subsidiaries ========================================== CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

The accompanying notes to consolidated financial statements are an integral part of these statements. 4 VISTA BANCORP, INC. AND SUBSIDIARIES ----------------------------------------- CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY For The Six Months Ended June 30, 2000 and 2001

The accompanying notes to consolidated financial statements are an integral part of these statements. 5 VISTA BANCORP, INC. AND SUBSIDIARIES -------------------------------------------

THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE STATEMENTS. 6 VISTA BANCORP, INC. AND SUBSIDIARIES ---------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. Basis of Presentation The accompanying consolidated financial statements of Vista Bancorp, Inc. and its subsidiaries (Vista) reflect all adjustments and disclosures, which are, in the opinion of management, necessary for a fair presentation of interim results. The financial information has been prepared in accordance with Vista's customary accounting practices and has not been audited. Certain information and footnote disclosures required under generally accepted accounting principles have been condensed or omitted pursuant to the Securities and Exchange Commission (SEC) rules and regulations. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make certain estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. These interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in Vista's Annual Report for the year ended December 31, 2000. Results of operations for the three-month and six-month periods ended June 30, 2001, are not necessarily indicative of the results to be expected for the full year. NOTE 2. Recently Issued Accounting Standards In July 2001, the Financial Accounting Standards Board issued two statements - Statement 141, "Business Combinations", and Statement 142, "Goodwill and Other Intangible Assets" which will potentially impact reported goodwill and other intangible assets. Statement 141: o Eliminates the pooling method for accounting for business combinations. o Requires that intangible assets that meet certain criteria be reported separately from goodwill. o Requires negative goodwill arising from a business combination to be recorded as an extraordinary gain. Statement 142: o Eliminates the amortization of goodwill and other intangible assets that are deemed to have an indefinite life. o Requires, at a minimum, annual impairment tests for goodwill and other intangible assets that are determined to have an indefinite life. Upon adoption of these Statements, we are required to: o Re-evaluate goodwill and other intangible assets that arose from business combinations entered into before July 1, 2001. If the recorded other 7 VISTA BANCORP, INC. AND SUBSIDIARIES ---------------------------------------------- intangible assets do not meet the criteria for recognition, they should be classified to goodwill. Similarly, if there are other intangible assets that meet the criteria for recognition but were not separately recorded from goodwill, they should be reclassified from goodwill. o Reassess the useful lives of intangible assets and adjust the remaining amortization periods accordingly. o Write-off any remaining negative goodwill. These standards are required to be implemented in our 2002 financial statements. The adoption of these standards will not have a material impact on the financial statements. Statement of Financial Accounting Standards (SFAS) No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities - a replacement of FASB Statement No. 125". SFAS 140 revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures, but it carries over most of Statement 125's provisions without reconsideration. This Statement is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001. It is effective for disclosures about securitizations and collateral and for recognition and reclassification of collateral for fiscal years ending after December 15, 2000. Adoption of SFAS 140 is not expected to have a material impact on Vista. Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Certain Derivative Instruments and Certain Hedging Activities", as amended by SFAS 137 and SFAS 138, is effective for Vista's fiscal year beginning January 1, 2001. SFAS 133 requires that all derivative instruments be recognized on the balance sheet at their fair value. Accounting for changes in fair value of a derivative depends upon the specific use of the derivative and resulting designation. As of March 31, 2001, we did not hold or issue derivative instruments nor engage in hedging activities. Therefore, SFAS 133, as amended, has not had a material impact on Vista's financial condition or results of operation. NOTE 3. Earnings per Share Earnings per share amounts, weighted average shares outstanding and all per share amounts have been adjusted to reflect the 5 percent stock dividends declared in April 2001 and April 2000. On April 19, 2001, we declared a 5 percent stock dividend to shareholders of record May 11, 2001 and payable May 25, 2001. Following payment of this dividend, Vista had approximately 5.4 million shares outstanding. Accordingly, an amount equal to the fair market value of the additional shares issued was charged to retained earnings and credited to common stock and additional paid in capital based on the quoted market price on April 19, 2001. On April 21, 2000, we declared a 5 percent stock dividend to shareholders' of record May 12, 2000 and payable May 26, 2000. Following payment 8 VISTA BANCORP, INC. AND SUBSIDIARIES ---------------------------------------------- of this dividend, Vista had approximately 5.1 million shares outstanding. Accordingly, an amount equal to the fair market value of the additional shares issued was charged to retained earnings and credited to common stock and additional paid in capital based on the quoted market price on April 21, 2000. NOTE 4. Other Comprehensive Income Vista held securities classified as available for sale, which experienced net unrealized pre-tax appreciation in value of $1.297 million during the six months ended June 30, 2001 compared to a net unrealized pre-tax depreciation in value of $291 thousand one year ago. In compliance with SFAS No. 130, the before-tax and after-tax amount for this category as well as the tax benefit, is summarized below.

9 VISTA BANCORP, INC. AND SUBSIDIARIES ---------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Certain statements in this Form 10-Q are forward-looking statements that involve a number of risks and uncertainties. A discussion of these factors, among others, which may cause actual results to differ materially from projected results appears under "Forward Looking Statements" in Vista's Annual Report and Form 10-K for the year-ended December 31, 2000. RECENT DEVELOPMENTS In July 2001, we announced plans to open a full-service office in the Greenwich Station Mall, Greenwich Township, New Jersey during the fourth quarter 2001. In addition to a full-service lobby, the branch will have safe deposit box facilities, drive-up tellers and 24-hour ATM banking. In July 2001, we also announced the acquisition of $8 million in deposits and certain loans of the Sovereign Bank office located at 117 Main Street in Flemington, New Jersey. All deposits and acquired loans will be transferred to Vista's Flemington Office at 309 Highway 202, Flemington, New Jersey. RESULTS OF OPERATIONS FOR THE QUARTER AND SIX MONTHS ENDED JUNE 30, 2001 AND 2000. EARNINGS SUMMARY Earnings highlights for the 2nd quarter 2001 compared to the 2nd quarter 2000 include: o Net income increased 12 percent to $1.949 million from $1.741 million. o Diluted earnings per share, adjusted for the 5 percent stock dividend, increased to $.36 from $.32. o Return on average assets improved to 1.13 percent from 1.02 percent. o Return on average equity increased to 14.23 percent from 13.77 percent. Net income for the second quarter reached a record level on strong fee income, higher net interest income, the recognition of security gains and a lower provision for loan losses. These gains were offset by higher operating expenses which included $142 thousand in expenses related to a proxy contest which was successfully defeated. Our earnings improved due in part to a shift in focus to improving efficiency and profitability on a lower balance sheet. This performance came on the back-drop of a weakened economy, a lower interest rate environment and soft loan demand. During the quarter, the Federal Reserve continued to lower interest rates in an attempt to stimulate the economy; however, the outlook remains uncertain. Management continued to implement the following strategies to maintain earnings and earnings per share growth: o Lowering the rates paid on savings, money market and time deposits. 10 VISTA BANCORP, INC. AND SUBSIDIARIES ---------------------------------------------- o Implementing cost control strategies to contain expense growth in a weakened business climate. o Authorizing a 275,000 share repurchase program to manage dilution and share count. o Maintaining a focus on growing fee income sources and minimizing our reliance on spread income. o Investing excess liquidity. Earnings highlights for the six months ended June 30, 2001 compared to the six months ended June 30, 2000 include: o Net income increased 7 percent to $3.745 million from $3.489 million. o Diluted earnings per share, adjusted for the 5 percent stock dividend, increased to $.70 from $.66. o Return on average assets improved to 1.09 percent from 1.04 percent. o Return on average equity equaled 13.87 percent compared to 13.99 percent. Net income for the six-months ended June 30, 2001 was driven by gains on security sales compared to losses in 2000, higher net interest income, a lower provision for loan loss and refunds of prior period income taxes. These revenue gains combined to offset higher operating expenses which included $191 thousand in expenses related to the proxy contest. We continue to focus on long-term earnings improvement and capital management strategies to create shareholder value that includes: o Expanding our franchise and market share by pursuing prudent asset and deposit growth initiatives while improving the mix of earning assets and funding sources to produce high quality predictable earnings. o Developing new sources of revenue growth to diversify our sources of income. o Investing in technology, facilities and personnel to increase efficiency and improve productivity to control the growth of operating expenses. o Following a disciplined approach to dividend policy and capital management to maximize returns to shareholders and maximize the use of our capital resources. NET INTEREST INCOME Tax-equivalent net interest income increased to $6.8 million for the quarter ended June 30, 2001 compared to $6.7 million in 2000 due to the recognition of $177 thousand in interest income on a non-performing loan which was returned to performing status based on improvement in the quality of the underlying credit and consistent payment history of the borrower. Excluding this item, net interest income would have been unchanged. Our tax-equivalent net interest margin declined slightly to 4.11 percent for the second quarter 2001 from 4.12 percent in 2000, but increased from 3.99 percent in the first quarter of 2001. Adjusted for the one-time non-recurring interest income mentioned above, our tax-equivalent net interest margin was 4.01 percent. During the second quarter we lowered savings, money market and CD deposit rates in response to continued Federal Reserve rate reductions and lower market rates on loans and investments. As a result, we lowered the cost of funding our earning assets by 30 basis 11 VISTA BANCORP, INC. AND SUBSIDIARIES ---------------------------------------------- points to 3.56 percent while our yield on earning assets fell only 18 basis points to 7.68 percent thus strengthening our margin compared to the first quarter. For the first half of 2001, our tax equivalent net interest margin decreased 10 basis points to 4.05 percent compared to 4.15 percent a year ago due to flat net interest income on a larger earning asset base. Tax equivalent net interest income remained unchanged at $13.3 million compared to the prior year, while earning assets increased $20.9 million. Our yield on earning assets declined 3 basis points to 7.77 percent for the first six months of 2001 compared to 7.80 percent in 2000, despite six Federal Reserve rate reductions totaling 275 basis points so far this year. Each Federal Reserve rate decrease resulted in an immediate re-pricing of our prime-based loans; however, the re-pricing of our deposits tends to lag behind the re-pricing of our assets. Consequently, we expect the reduction in the prime rate to reduce the yield on earning-assets in the short-term and be more than offset by a lower cost of deposits and borrowings in the second half of 2001. We were able to sustain the yield on earning assets by effectively managing the reinvestment of cash flows into an improved mix of earning assets emphasizing commercial lending growth. The cost of funding our earning assets increased 7 basis points to 3.72 percent in 2001 compared to a year ago. This was due to rising interest rates during the first half of 2000 and deposit customers transferring money market and savings balances into higher yielding certificates of deposit (CDs). Unification-related deposit promotions in the third quarter also contributed to this higher cost of funds. We expect margin improvement during the second half of 2001 as CDs mature and re-price lower. Average interest earning assets increased $20.9 million to $663.3 million due to growth in commercial loans during 2000. Challenging economic and yield curve conditions limited lending and investment opportunities during the early part of 2001. Consequently, since year-end 2000, federal funds have increased as excess liquidity is invested on an overnight basis until re-deployed into higher yielding loans or securities. Also, our funding mix has improved since year-end with growth in checking and savings balances and a shift away from time deposits and Federal Home Loan Bank advance funding. The table, "Consolidated Average Balances, Net Interest Income and Average Rates," presents Vista's average assets, liabilities and shareholders' equity. Net interest income, net interest spreads, and net interest income as a percentage of interest-earning assets for the periods ended June 30, 2001 and 2000, are also reflected. The table, "Volume/Rate Analysis of Changes in Net Interest Income," analyzes net interest income by segregating the volume and rate components of the changes in net interest income resulting from changes in the volume of various interest-earning assets and interest-bearing liabilities and the changes in the rates earned and paid. 12 VISTA BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED AVERAGE BALANCES, NET INTEREST INCOME AND AVERAGE RATES (TAX-EQUIVALENT BASIS) -------------------------------------------------------------------------------- (Unaudited)

(1) Interest on loans includes fee income. (2) Rates have been annualized and computed on a tax-equivalent basis using the federal income tax statutory rate of 34%. (3) Tax-equivalent adjustments were $402 thousand for 2001 and $519 thousand for 2000. (4) Includes nonaccrual loans. (5) Net interest income as a percent of average interest-earning assets on a tax-equivalent basis. 13 VISTA BANCORP, INC. AND SUBSIDIARIES VOLUME/RATE ANALYSIS OF CHANGES IN NET INTEREST INCOME (TAX-EQUIVALENT BASIS) -------------------------------------------------------------------------------- (Unaudited)

(1) The volume/rate variance is allocated based on the percentage relationship of changes in volume and changes in rate to the "Total Change." (2) Includes nonaccrual loans. 14 VISTA BANCORP, INC. AND SUBSIDIARIES ---------------------------------------------- NONINTEREST INCOME Total noninterest income increased 27 percent to $1.27 million for the quarter-ended June 30, 2001 compared to $1.0 million a year ago. Excluding gains on the sales of securities and SBA loans, noninterest income increased 20 percent to $1.2 million from $1.0 million reflecting a positive trend over the prior four quarters. Factors contributing to the growth in quarterly noninterest income include: o Strong mortgage origination fees due to increased refinancing activity as borrowers consolidated their debt levels in response to a weakened economy. o Increased levels of fees assessed to customers for nonsufficient funds paid on checking accounts (NSF fees). o A tighter focus on fees charged for bank services through a strengthened waiver policy. o Higher levels of electronic access fees and debit card interchange fees on increased transaction volume. o Increased Trust Department revenue due to the collection of an estate fee. During the quarter we sold $7.6 million of fixed rate - fixed term investment securities consisting mainly of Treasuries, U.S. Agency Debt and Corporate Bonds at a net gain of $89 thousand. The securities were sold in response to a steepening yield curve with most of the proceeds reinvested into current coupon mortgage securities with better cash flow characteristics and structure for potential change in market conditions. For the six-months ended June 30, 2001, noninterest income increased 15 percent to $2.3 million from $2.0 million a year ago due primarily to $175 thousand in security gains compared to $222 thousand in losses recognized a year ago. Excluding the impact of security and SBA loan sales, noninterest income increased 5 percent to $2.1 million. In response to the challenging economic environment seen during the first half of 2001, we repositioned a nominal portion of our investment portfolio to compensate for weak loan demand. During the first quarter, we sold a combination of low balance high yield mortgage-backed securities, tax-exempt investments, and several corporate bonds for credit quality concerns. These transactions reduced prepayment and re-investment risk in our portfolio in response to the declining interest rate environment of 2001. During the first half of 2000, security losses were recognized in order to reinvest the proceeds into higher yielding assets at the time. In addition to the security gains recognized during the six months ended June 30, 2001, strong mortgage origination fees, higher NSF fees and increased debit card interchange income offset the effects of deferring annual ATM user fees. SBA loan sales and investment services continue to be adversely impacted by the weakened economic environment and slow equity and credit market activity. 15 VISTA BANCORP, INC. AND SUBSIDIARIES ---------------------------------------------- NONINTEREST EXPENSE Total noninterest expense increased 6 percent to $4.9 million for the quarter-ended June 30, 2001 from the comparable quarter in 2000 and reflected a 3 percent increase over the first quarter 2001. Excluding the costs related to a proxy fight which we successfully defeated, quarterly noninterest expense increased 3 percent over the prior year. Increases were due to higher salary and benefits expenses due to salary increases, lower pension income accruals, higher medical benefit costs and higher incentive compensation accruals. Occupancy and furniture and equipment expenses were unchanged. Other expenses during the quarter increased due to costs of the proxy-contest, home equity loan promotion expenses, volume driven ATM and debit card expenses, investment banking fees and other miscellaneous office printing and supplies. For the six months ended June 30, 2001, total noninterest expense increased 7 percent to $9.6 million compared to $9.0 million in 2000. During 2000, we expanded our in-house processing capability by moving into an expanded and modernized technology and operations center. This move increased occupancy and furniture and equipment expense and accounted for the majority of the operating expense increase. Expenses increased in all major categories as we continued to invest in personnel, facilities and technology. Salary and benefits expense increased due to higher salaries and lower pension income accruals. Occupancy expenses increased due to amortization of leasehold improvements on the new Operations center plus utility and maintenance expenses incurred. Higher furniture and equipment expenses were driven by equipment leasing costs and depreciation charges at the new facility. Other expense increased due to the home equity loan promotion, costs associated with defense in a proxy contest and volume driven ATM/debit card fees. A committee calling itself, "The Committee to Preserve Shareholder Value" proposed a slate of three independent directors for election at the Company's 2001 Annual Meeting of Shareholders held on April 26, 2001. Vista's incumbent directors were chosen by a decisive margin and were re-elected to serve for a 3-year term by approximately 80 percent of the votes cast. Vista filed a Form 8-K with the SEC announcing the voting results on April 27, 2001. Expenses incurred in fighting this proxy contest totaled $191 thousand through June 30, 2001 and included legal fees and proxy solicitation fees. Our ability to grow the franchise while effectively controlling and monitoring expenses can be quantified using two benchmarks. One benchmark, which considers noninterest expense as a percent of average assets, equaled 2.78 percent for the six months ended June 30, 2001 compared to 2.68 percent a year ago. Second, the efficiency ratio which measures the cost of generating one incremental dollar of revenue, equaled 61.72 percent compared to 58.17 percent a year ago. Excluding expenses related to the proxy contest, noninterest expense 16 VISTA BANCORP, INC. AND SUBSIDIARIES ---------------------------------------------- as a percent of average assets equaled 2.73 percent while our efficiency ratio equaled 60.49 percent. Expense growth during the six month period exceeded revenue growth which in-turn accounted for the adverse year over year comparison. The provision for income taxes decreased 6 percent to $1.51 million for the first half of 2001 due to the receipt of $94 thousand from the amended filing of prior years' federal income tax returns. Our effective tax rate equaled 28.8 percent for the six months ended June 30, 2001 and 31.4 percent for 2000. FINANCIAL CONDITION - JUNE 30, 2001 VERSUS DECEMBER 31, 2000 Total consolidated assets equaled $693.5 million at June 30, 2001, a decrease of $1.8 million from December 31, 2000. Weakened economic conditions throughout the first six months of 2001 have resulted in soft loan demand and reduced reinvestment opportunities; however, we have seen a favorable deposit mix shift and expect favorable profit growth in the second half of the year. Total loans declined $14.3 million from year-end levels to $437.1 million. Decreases were seen in all categories led by a $6.7 million reduction in mortgages, a $6.3 million decline in consumer loans and a $1.3 million drop in commercial loans. Mortgage loan balances fell by design as we maintained a strategy of originating loans for third parties for a fee rather than placing these low-rate loans in our portfolio. The Consumer portfolio continues to experience high prepayment rates in the indirect auto portfolio which we have allowed to decline $5.9 million since year-end, as competitive rates did not compensate for the risks incurred. Commercial demand remains low as the economic environment remains weak. Total deposits declined $6.0 million from year-end as we implemented a strategy of aggressively lowering time deposit rates. This strategy, plus a lower market rate environment and a weakened economy have resulted in an improved deposit mix as we have seen growth in core checking and savings accounts. The net cash flow from loans and deposits funded the increase in securities available for sale and short-term investments. Due to limited reinvestment opportunities, we continue to maintain excess liquidity in overnight fed funds until favorable economic conditions return. Total capital increased to $56.2 million at June 30, 2001 compared to $54.0 million at December 31, 2000. Net income of $3.7 million, plus capital flows from Vista's stock plans combined to fund the cash dividends and stock repurchase program. A lower market interest rate environment compared to December 31, 2000 accounted for the appreciation in value of our available for sale security portfolio which flows through shareholders equity on a tax-effected basis. The ratio of shareholders' equity to assets strengthened to 8.11 percent at June 30, 2001 compared to 7.76 percent at year-end 2000. 17 VISTA BANCORP, INC. AND SUBSIDIARIES ---------------------------------------------- ASSET QUALITY Non-performing assets, consisting of nonaccrual loans plus other real estate acquired through foreclosure (OREO), increased slightly to $4.2 million at June 30, 2001 from $4.1 million at the end of 2000. The increase from the end of 2000 was due to the addition of non-performing commercial loans. OREO decreased $32 thousand to $672 thousand due to liquidation and sale of foreclosed properties offset in part by the addition of new loans to OREO. Despite the challenging economic environment non-performing assets equaled less than one percent of total loans and OREO at June 30, 2001 and December 31, 2000. Non-performing loans increased 6 percent to $3.6 million at June 30, 2001 compared to $3.4 million at December 31, 2000. This increase consisted primarily of commercial non-performing loans which equaled $1.7 million and represent 47 percent of the total non-performing loans. Mortgage and consumer non-performing loans decreased from year-end and represented 39 percent and 14 percent of the total, respectively.

IMPAIRED LOANS A loan is considered impaired when, after we have considered current information and events, it is probable that we will be unable to collect all amounts, including principal and interest, according to the contractual terms of the loan agreement. We consider the following in identifying impaired loans: o A default has occurred or is expected to occur, o The payment of principal and/or interest or other cash flows is greater than 90 days past due, or o We have serious doubts about the ability to collect future cash flows, even if the loan is currently performing. Once we identify a loan as impaired, management measures impairment in accordance with Statement of Financial Accounting Standards (SFAS) No. 114, as amended by SFAS No. 118. We measure impairment of a loan based on the present value of expected future cash flows, or on the fair value of any collateral. If the resulting value is less than the recorded investment (book value) in the impaired loan, an allowance is established for the amount deemed not collectible. Generally, when a loan becomes impaired, interest stops accruing and any previously accrued but unpaid interest on the loan is reversed in the 18 VISTA BANCORP, INC. AND SUBSIDIARIES ---------------------------------------------- current period. When it is doubtful that we will collect the remaining recorded investment, any interest received is applied first against the recorded investment until paid in full, second as a recovery to the allowance up to any previously charged off amounts on the impaired loan, and third as interest revenue. When we deem it highly likely that we will collect the remaining recorded investment, interest revenue is recorded on a cash basis as payments are received. An impaired loan is restored to performing status when principal and interest are deemed to be fully collectible in accordance with the contractual terms of the loan agreement. Once an impaired loan is returned to performing status, any previous allowance allocated is removed, interest accrues according to the original terms of the contract, and principal payments are applied first to the loan balance until paid in full, then as recoveries of charge-offs, and finally as interest income. At June 30, 2001, total impaired loans equaled $4.5 million, of which $3.6 million are non-performing loans. Impaired loans decreased $900 thousand from year-end 2000 due to the sale, payoff or transfer to OREO and the removal of several loans from impaired status since they are paying according to the contractual terms and are no longer deemed impaired. A total specific reserve allocation of $233 thousand has been established for all impaired loans. ALLOWANCE FOR LOAN LOSSES The allowance for loan losses increased to $6.4 million or 1.46 percent of total loans at June 30, 2001 from $6.2 million or 1.37 percent of total loans at December 31, 2000. The allowance increased due to a provision for loan loss of $450 thousand less charge-offs, net of recoveries, totaling $232 thousand. The provision for loan losses decreased $181 thousand or 29 percent to $450 thousand for the first half of 2001 compared to a year ago. We reduced the loan loss provision due to lower levels of loan growth, historically low net charge-offs, non-performing assets to total loans less than one percent, and our belief in the adequacy of the loan loss reserve. For the quarter ended June 30, 2001, the reserve for loan losses increased $159 thousand due to a provision for loan loss of $225 thousand less charge-offs, net of recoveries, totaling $66 thousand. Despite the challenging economic environment our charge-offs, net of recoveries, declined from the prior three quarters. Because our loan portfolio contains a significant number of commercial loans with relatively large balances the deterioration of one or several of these loans may result in a possible significant increase in non-performing loans. An increase in non-performing loans could result in a loss of interest income, higher carrying costs, and an increase in the provision for loan losses and loan charge-offs. We maintain an allowance for loan losses to absorb any loan losses based on our historical experience, an evaluation of economic conditions, and 19 VISTA BANCORP, INC. AND SUBSIDIARIES ---------------------------------------------- regular reviews of delinquencies and loan portfolio quality. In evaluating our allowance for loan losses, we segment our loans into the following categories: o Commercial (including investment property mortgages), o Residential mortgages, and o Consumer. We evaluate some loans as a homogeneous group and others on an individual basis. Commercial loans with balances exceeding $200 thousand are reviewed individually. After our evaluation of these loans, we determine the required allowance for loan losses based upon the following considerations: o Historical loss levels, o Prevailing economic conditions, o Delinquency trends, o Changes in the nature and volume of the portfolio, o Concentrations of credit risk, and o Changes in loan policies or underwriting standards. Management and the Board of Directors review the adequacy of the reserve on a quarterly basis and adjustments, if needed, are made accordingly. For The Six Months Ended June 30, Amounts in thousands 2001 2000 -------------------- ---- ---- Average loans outstanding $444,404 $430,444 Total loans at end of period 437,072 452,095 Allowance for loan losses: Balance at beginning of period 6,166 5,266 Charge-offs: Commercial 42 26 Real estate - mortgage 104 24 Installment 181 98 ---- ---- Total charge-offs 327 148 Recoveries: Commercial 71 30 Real estate - mortgage 1 1 Installment 23 28 ---- ---- Total recoveries 95 59 ---- ---- Net charge-offs: 232 89 Provision for loan losses 450 631 ---- ---- Balance at end of period $6,384 $ 5,808 Net charge-offs as a percent of average 0.05% 0.02% loans outstanding during period Allowance for loan losses as a percent 1.46% 1.28% of total loans 20 VISTA BANCORP, INC. AND SUBSIDIARIES ---------------------------------------------- LIQUIDITY At June 30, 2001, cash and cash equivalents equaled $47.2 million representing an increase of $9.4 million from the $37.8 million in cash and cash equivalents at December 31, 2000. Changes in cash are measured by the three major classifications of cash flow defined as operating, investing and financing activities. During the six-months ended June 30, 2001, the $9.4 million increase in cash and cash equivalents was due to $15.4 million provided by operating and investing activities, while $6.0 million was used by financing activities. Net cash provided by operating activities equaled $3.4 million and consisted of net income adjusted for noncash charges and the net change in other assets and other liabilities. Net cash provided by investing activities totaled $12.0 million. This consisted of $13.2 million in cash flow from our loan portfolio plus $800 thousand in proceeds from loan sales which offset $1.5 million in net security purchases and $500 thousand in net capital expenditures. Net cash used by financing activities totaled $6.0 million. During the six-months ended June 30, 2001, there was a $6.0 million net outflow of deposits as time deposit balances declined $20.8 million and offset the $14.8 million increase in core checking and savings account balances. Other financing activities included a $2.5 million increase in long term debt plus $663 thousand proceeds from the issuance of common stock which offset cash dividends paid and share repurchases. CAPITAL RESOURCES Total shareholders' equity increased $2.2 million to $56.2 million at June 30, 2001 from $54.0 million at December 31, 2000. Changes in shareholders' equity included: o $3.7 million in net income, o $930 thousand appreciation in the market value of securities available for sale (after-taxes), o $663 thousand in proceeds from the issuance of common stock, o $1.6 million in cash dividends paid, and o $1.4 million in share repurchases. Our dividend payout ratio equaled 43.3 percent for the six months ended June 30, 2001 and 41.1 percent for 2000. At June 30, 2001, a $958 thousand unrealized after tax gain existed in our available for sale security portfolio compared to a $28 thousand unrealized 21 VISTA BANCORP, INC. AND SUBSIDIARIES ---------------------------------------------- after tax gain at December 31, 2000. The portfolio's market value appreciated during the first six months of 2001 due to the lower absolute level of market interest rates at June 30, 2001 compared to year-end. During the first quarter 2001, Vista announced successful completion of a 200,000 share repurchase program where it repurchased shares for a total cost of $3.7 million. The initial repurchase program was announced in August 1998 and all 100,000 shares were repurchased by March 31, 1999 for a total of $2.0 million or an average of $20.18 per share. On March 31, 1999, the program was extended to include an additional 100,000 shares which were repurchased by February 2001 for a total of $1.76 million or an average of $17.65 per share. These purchases were made pursuant to section 10b-18 from time to time in open market transactions at the discretion of management and stock availability. During the second quarter 2001, Vista announced that its Board of Directors has authorized a new 275,000 share repurchase program or approximately 5 percent of the company's outstanding shares. These purchases will be conducted in accordance with Rule 10b-18 from time to time in open market transactions at the discretion of management and stock availability. Through August 8, 2001, 70,000 shares were purchased for $1.4 million at an average price of $20.04 per share. Vista maintained a Tier I risk-based capital ratio of 12.15 percent and a total risk-based capital ratio of 13.40 percent at June 30, 2001, compared to 11.83 percent and 13.08 percent, respectively, at December 31, 2000. Vista maintained a leverage capital ratio of 7.99 percent at June 30, 2001 and 7.74 percent at December 31, 2000. 22 VISTA BANCORP, INC. AND SUBSIDIARIES ---------------------------------------------- PART II OTHER INFORMATION ITEM 1. Legal Proceedings Not Applicable ITEM 2. Changes in Securities Not Applicable ITEM 3. Defaults Upon Senior Securities Not Applicable ITEM 4. Submission of Matters to a Vote of Not Applicable Security Holders The annual meeting of shareholders was held on Thursday, April 26, 2001. The following vote tabulation has not been adjusted for the 5 percent stock dividend paid in May 2001. (a) Election of Directors The following Class C directors, whose terms expire in 2004, were re-elected based on the following votes:

The following Class A directors terms continue until 2002: Barbara A. Harding Mark A. Reda J. Marshall Wolff The following Class B directors terms continue until 2003: Harold J. Curry Dale F. Falcinelli Barry L. Hajdu Marc S. Winkler (b) Nominees for Class C director, submitted by the Committee to Preserve Shareholder Value, received the following vote: For Against Abstained ------- ------- --------- Peter R. Bray 851,377 12,268 0 Richard Baer 764,774 12,268 0 Dennis Pollack 851,377 12,268 0 23 VISTA BANCORP, INC. AND SUBSIDIARIES ---------------------------------------------- (c) Ratification of the appointment of McGladrey & Pullen, LLP as our independent auditors for the year ending December 31, 2001: For the: 4,189,743 Against: 10,949 Abstain: 29,880 ITEM 5. Other Information Not Applicable ITEM 6. Exhibits and Reports on form 8-K (a) Exhibits required by Item 601 of Regulation S-K: Exhibit Number Description of Exhibit -------------- ----------------------- 2 Not Applicable 4 Not Applicable 10 Not Applicable 11 Not Applicable 15 Not Applicable 18 Not Applicable 19 Not Applicable 22 Not Applicable 23 Not Applicable 24 Not Applicable 27 Not Applicable 99 Not Applicable (b) Reports on Form 8-K On April 12, 2001, we filed Form 8-K stating that we had retained the investment firm of Keefe, Bruyette & Woods to advise the Board of Directors on opportunities that will maximize value for shareholders. On April 27, 2001, we filed Form 8-K announcing our press release which presented the results of the contested election for directors. On May 18, 2001, we filed Form 8-K announcing an increase in the cash dividend and a new share repurchase program. 24 VISTA BANCORP, INC. AND SUBSIDIARIES ---------------------------------------------- SIGNATURE 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. Vista Bancorp, Inc. ------------------------------ (REGISTRANT) Dated: August 14, 2001 --------------- By /s/ William F. Keefe ---------------------- William F. Keefe Executive Vice President and Chief Financial Officer (Mr. Keefe is the Principal Accounting Officer and has been duly authorized to sign on behalf of the registrant.) 25

VISTA BANCORP INC 10-Q