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EX-31.1 - EXHIBIT 31.1 - MERIDIAN INTERSTATE BANCORP INCex31_1.htm


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, 2009

OR

¨
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:  001-33898

Meridian Interstate Bancorp, Inc.
(Exact name of registrant as specified in its charter)
Massachusetts
 
20-4652200
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)

10 Meridian Street, East Boston, Massachusetts 02128
(Address of principal executive offices)

(617) 567-1500
(Registrant’s telephone number, including area code)

Not Applicable
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes T     No ¨  

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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  ¨  No  ¨

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 definition of “large accelerated filer” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
(Check one): Large Accelerated Filer  ¨  Accelerated Filer  x  Non-accelerated Filer  ¨  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  £  No  x

At October 31, 2009, the registrant had 22,257,768 shares of no par value common stock outstanding.
 


 
 

 


FORM 10-Q

INDEX

PART I.
 
FINANCIAL INFORMATION
 
       
Item 1.
 
Page
       
   
1
       
   
2
       
   
3
       
   
4
       
   
6
       
Item 2.
 
15
       
Item 3.
 
26
       
Item 4.
 
27
       
PART II.
 
OTHER INFORMATION
 
       
Item 1.
 
28
       
Item 1A.
 
28
       
Item 2.
 
29
       
Item 3.
 
29
       
Item 4.
 
29
       
Item 5.
 
29
       
Item 6.
 
30
       
31

 
 

 
PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

MERIDIAN INTERSTATE BANCORP, INC.
Consolidated Balance Sheets
(Unaudited)

   
September 30,
   
December 31,
 
(Dollars in thousands)
 
2009
   
2008
 
ASSETS
 
Cash and due from banks
  $ 10,761     $ 10,354  
Federal funds sold
    16,654       9,911  
Total cash and cash equivalents
    27,415       20,265  
                 
Certificates of deposit - affiliate bank
    3,000       7,000  
Securities available for sale, at fair value
    319,787       252,529  
Federal Home Loan Bank stock, at cost
    4,454       4,303  
                 
Loans held for sale
    699       -  
Loans
    785,742       711,016  
Less allowance for loan losses
    (8,711 )     (6,912 )
Loans, net
    777,031       704,104  
                 
Bank-owned life insurance
    23,501       22,831  
Investment in affiliate bank
    10,468       10,376  
Premises and equipment, net
    23,381       22,710  
Accrued interest receivable
    5,523       6,036  
Foreclosed real estate, net
    2,658       2,604  
Deferred tax asset, net
    2,793       10,057  
Other assets
    1,597       2,537  
Total assets
  $ 1,202,307     $ 1,065,352  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
Deposits:
               
Noninterest-bearing
  $ 61,408     $ 55,216  
Interest-bearing
    860,605       741,636  
Total deposits
    922,013       796,852  
                 
Short-term borrowings - affiliate bank
    5,795       7,811  
Long-term debt
    57,200       57,675  
Accrued expenses and other liabilities
    18,167       13,174  
Total liabilities
    1,003,175       875,512  
                 
Stockholders' equity:
               
Common stock, no par value 50,000,000 shares authorized; 23,000,000
               
shares issued; 22,257,768 and 22,750,000 shares outstanding at
               
September 30, 2009 and December 31, 2008, respectively
    -       -  
Additional paid-in capital
    100,919       100,684  
Retained earnings
    107,168       105,426  
Treasury stock, 328,232 shares at September 30, 2009
    (2,902 )     -  
Accumulated other comprehensive income (loss)
    4,910       (6,205 )
Unearned compensation - ESOP, 755,550 and 786,600 shares at September 30, 2009 and December 31, 2008, respectively
    (7,555 )     (7,866 )
Unearned compensation - restricted shares, 414,000 and 250,000 shares at September 30, 2009 and December 31, 2008, respectively
    (3,408 )     (2,199 )
Total stockholders' equity
    199,132       189,840  
Total liabilities and stockholders' equity
  $ 1,202,307     $ 1,065,352  


See accompanying notes to unaudited consolidated financial statements.

 
1


MERIDIAN INTERSTATE BANCORP, INC.
Consolidated Statements of Operations
(Unaudited)

   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
(Dollars in thousands, except per share amounts)
 
2009
   
2008
   
2009
   
2008
 
Interest and dividend income:
                       
Interest and fees on loans
  $ 11,480     $ 9,938     $ 33,171     $ 28,455  
Interest on debt securities
    2,673       2,674       7,682       7,919  
Dividends on equity securities
    252       573       844       1,264  
Interest on certificates of deposit
    16       60       72       98  
Interest on federal funds sold
    5       99       23       1,640  
Total interest and dividend income
    14,426       13,344       41,792       39,376  
                                 
Interest expense:
                               
Interest on deposits
    4,404       6,045       14,605       19,382  
Interest on short-term borrowings
    5       -       47       115  
Interest on long-term debt
    502       534       1,501       1,363  
Total interest expense
    4,911       6,579       16,153       20,860  
                                 
Net interest income
    9,515       6,765       25,639       18,516  
Provision for loan losses
    694       403       1,808       2,731  
Net interest income, after provision for loan losses
    8,821       6,362       23,831       15,785  
                                 
Non-interest income:
                               
Customer service fees
    826       718       2,322       2,073  
Loan fees
    160       181       437       551  
Gain (loss) on sales of loans, net
    125       (10 )     424       17  
Other-than-temporary impairment losses on securities
    (56 )     -       (429 )     -  
Gain (loss) on sales of securities, net
    (290 )     2,779       (290 )     5,092  
Income from bank-owned life insurance
    216       209       670       624  
Equity income (loss) on investment in affiliate bank
    117       (69 )     92       (323 )
Total non-interest income
    1,098       3,808       3,226       8,034  
                                 
Non-interest expenses:
                               
Salaries and employee benefits
    4,084       4,009       14,499       13,793  
Occupancy and equipment
    754       719       2,315       2,198  
Data processing
    406       450       1,318       1,243  
Marketing and advertising
    387       293       934       832  
Professional services
    467       595       1,535       1,562  
Contribution to the Meridian Charitable Foundation
    -       -       -       3,000  
Foreclosed real estate expense
    15       31       493       74  
Deposit insurance
    373       172       1,513       382  
Other general and administrative
    681       530       1,921       1,503  
Total non-interest expenses
    7,167       6,799       24,528       24,587  
                                 
Income (loss) before income taxes
    2,752       3,371       2,529       (768 )
                                 
Provision (benefit) for income taxes
    864       1,228       787       (374 )
                                 
Net income (loss)
  $ 1,888     $ 2,143     $ 1,742     $ (394 )
                                 
Earnings per common share:
                               
Basic
  $ 0.09     $ 0.10     $ 0.08       N/A  
Diluted
  $ 0.09     $ 0.10     $ 0.08       N/A  
Weighted average common shares outstanding:
                               
Basic
    21,542,287       22,196,225       21,704,968       N/A  
Diluted
    21,713,948       22,196,225       21,889,813       N/A  

See accompanying notes to unaudited consolidated financial statements.

 
2


MERIDIAN INTERSTATE BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
Nine Months Ended September 30, 2009 and 2008

(Dollars in thousands)
 
Shares of No Par Common Stock Outstanding
   
Additional Paid-in Capital
   
Retained Earnings
   
Treasury Stock
   
Accumulated Other Comprehensive Income (Loss)
   
Unearned Compensation ESOP
   
Unearned Compensation Restricted Shares
   
Total
 
Nine Months Ended September 30, 2008
                                               
Balance at December 31, 2007
    -     $ -     $ 109,177     $ -     $ 6,507     $ -     $ -     $ 115,684  
Adjustment to initially apply EITF 06-4
    -       -       (1,642 )     -       -       -       -       (1,642 )
Comprehensive loss:
                                                               
Net loss
    -       -       (394 )     -       -       -       -       (394 )
Change in net unrealized loss on securities available for sale, net of reclassification adjustment and tax effects
    -       -       -       -       (10,914 )     -       -       (10,914 )
Change in prior service costs and actuarial losses, net of tax effects
    -       -       -       -       15       -       -       15  
Total comprehensive loss
                                                            (11,293 )
Adjustment to initially apply FAS 158 for
                                                               
long-term health care plan
    -       -       -       -       (353 )     -       -       (353 )
Issuance of 12,650,000 shares to the mutual holding company
    12,650,000       -       -       -       -       -       -       -  
Issuance of 10,050,000 shares in the initial public offering, net of expenses of $2,867
    10,050,000       97,633       -       -       -       -       -       97,633  
Issuance and contribution of 300,000 shares
                                                               
to the Meridian Charitable Foundation
    300,000       3,000       -       -       -       -       -       3,000  
Purchase of common stock by the ESOP
    -       -       -       -       -       (8,280 )     -       (8,280 )
ESOP shares earned (31,050 shares)
    -       (5 )     -       -       -       310       -       305  
Balance at September 30, 2008
    23,000,000     $ 100,628     $ 107,141     $ -     $ (4,745 )   $ (7,970 )   $ -     $ 195,054  
Nine Months Ended September 30, 2009
                                                               
Balance at December 31, 2008
    22,750,000     $ 100,684     $ 105,426     $ -     $ (6,205 )   $ (7,866 )   $ (2,199 )   $ 189,840  
Comprehensive income :
                                                               
Net income
    -       -       1,742       -       -       -       -       1,742  
Change in net unrealized gain/loss on securities available for sale, net of reclassification adjustment and tax effects
    -       -       -       -       11,133       -       -       11,133  
Change in prior service costs and actuarial losses, net of tax effects
    -       -       -       -       (18 )     -       -       (18 )
Total comprehensive income
                                                            12,857  
Repurchase of 328,232 shares (treasury stock)
    (328,232 )     -       -       (2,902 )     -       -       -       (2,902 )
ESOP shares earned (31,050 shares)
    -       (47 )     -       -       -       311       -       264  
Purchase of 164,000 shares for restricted share plan
    (164,000 )     -       -       -       -       -       (1,468 )     (1,468 )
Share-based compensation expense
    -       282       -       -       -       -       259       541  
Balance at September 30, 2009
    22,257,768     $ 100,919     $ 107,168     $ (2,902 )   $ 4,910     $ (7,555 )   $ (3,408 )   $ 199,132  

See accompanying notes to unaudited consolidated financial statements.

 
3


MERIDIAN INTERSTATE BANCORP, INC.
Consolidated Statements of Cash Flows
(Unaudited)

             
   
Nine Months Ended September 30,
 
(In thousands)
 
2009
   
2008
 
Cash flows from operating activities:
           
Net income (loss)
  $ 1,742     $ (394 )
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
               
Contribution to the Meridian Charitable Foundation
    -       3,000  
Earned ESOP shares
    264       305  
Provision for loan losses
    1,808       2,731  
Amortization of net deferred loan origination fees
    (49 )     (242 )
Net amortization of securities available for sale
    925       828  
Depreciation and amortization expense
    972       950  
Loss (gain) on sales of securities, net
    290       (5,092 )
Other-than-temporary impairment losses on securities
    429       -  
Loss and provision for foreclosed real estate
    369       5  
Deferred income tax benefit
    (84 )     (1,522 )
Loans originated for sale
    (62,049 )     (8,041 )
Principal balance of mortgage loans sold
    61,350       8,041  
Income from bank-owned life insurance
    (670 )     (624 )
Equity (income) loss on investment in affiliate bank
    (92 )     323  
Share-based compensation expense
    541       -  
Net changes in:
               
Accrued interest receivable
    513       137  
Other assets
    940       2,808  
Accrued expenses and other liabilities
    4,975       1,438  
Net cash provided by operating activities
    12,174       4,651  
                 
 Cash flows from investing activities:
               
Maturities (purchases) of certificates of deposit
    4,000       (7,000 )
Activity in securities available for sale:
               
Proceeds from maturities, calls and principal payments
    39,744       90,363  
Proceeds from redemption of mutual funds
    12,116       25,000  
Proceeds from sales
    392       16,947  
Purchases
    (102,673 )     (168,579 )
Purchase of Federal Home Loan Bank stock
    (151 )     (1,138 )
Loans originated, net of principal payments received
    (75,526 )     (99,228 )
Purchase of bank-owned life insurance
    -       (4,000 )
Purchases of premises and equipment
    (1,643 )     (709 )
Capitalized cost on foreclosed real estate
    (1,132 )     -  
Proceeds from sales of foreclosed real estate
    1,549       1,463  
Net cash used in investing activities
    (123,324 )     (146,881 )

(continued)

 
4


MERIDIAN INTERSTATE BANCORP, INC.
Consolidated Statements of Cash Flows
(Unaudited)

   
Nine Months Ended Septmeber 30,
 
(In thousands)
 
2009
   
2008
 
Cash flows from financing activities:
           
Net increase in deposits
    125,161       30,638  
Proceeds from sale of common stock
    -       97,633  
Common stock purchased by ESOP
    -       (8,280 )
Decrease in stock subscriptions
    -       (62,518 )
Purchase of stock for equity incentive plan
    (1,468 )     -  
Purchase of treasury stock
    (2,902 )     -  
Net change in borrowings with maturities less than three months
    (2,016 )     (9,154 )
Proceeds from Federal Home Loan Bank advances with maturities of three months or more
    -       45,000  
Repayment of Federal Home Loan Bank advances with maturities of three months or more
    (475 )     (14,698 )
Net cash provided by financing activities
    118,300       78,621  
                 
Net change in cash and cash equivalents
    7,150       (63,609 )
                 
Cash and cash equivalents at beginning of period
    20,265       103,093  
                 
Cash and cash equivalents at end of period
  $ 27,415     $ 39,484  
                 
Supplemental cash flow information:
               
Interest paid on deposits
  $ 14,936       19,583  
Interest paid on borrowings
    1,555       1,427  
Income taxes paid
    1,315       180  
Non-cash investing and financing activities:
               
Transfers from loans to foreclosed real estate
    840       2,953  

See accompanying notes to unaudited consolidated financial statements.

 
5


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1.
Basis of Presentation

Meridian Interstate Bancorp, Inc.  (the “Company” or “Meridian Interstate”) is a Massachusetts mid-tier stock holding company that was formed in 2006 by East Boston Savings Bank (the “Bank”) to be its holding company.  Meridian Interstate owns all of East Boston Savings Bank’s capital stock and directs, plans and coordinates East Boston Savings Bank’s business activities.  In addition, Meridian Interstate owns 40% of the capital stock of Hampshire First Bank, a New Hampshire chartered bank, organized in 2006 and headquartered in Manchester, New Hampshire.  Meridian Financial Services, Inc. (“Meridian Financial Services”) is the mutual holding company for Meridian Interstate and holds 12,650,000 shares or 57% of Meridian Interstate’s outstanding common stock.

The accompanying unaudited interim consolidated financial statements of Meridian Interstate Bancorp, Inc. have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.  In the opinion of management, all adjustments considered necessary for a fair presentation have been included.  Such adjustments were of a normal recurring nature.  The results of operations for the three and nine months ended September 30, 2009 are not necessarily indicative of the results that may be expected for the entire year or any other interim period.  For additional information, refer to the financial statements and footnotes thereto of Meridian Interstate included in Meridian Interstate’s Form 10-K for the year ended December 31, 2008 which was filed with the Securities and Exchange Commission (“SEC”) on March 15, 2009, as subsequently amended, and is available through the SEC’s website at www.sec.gov.

In preparing financial statements in conformity with U. S. generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and income and expenses during the reporting period. Actual results could differ significantly from those estimates.  Material estimates that are particularly susceptible to significant change in the near term relate to determination of the allowance for loan losses, other-than-temporary impairment of securities, foreclosed real estate, and income taxes.

2.
Recent Accounting Pronouncements

In June 2009, the Financial Accounting Standards Board (“FASB”) issued an accounting standard which established the FASB Accounting Standards Codification (the “Codification”) to become the single source of authoritative generally accepted accounting principles (“GAAP”) for nongovernmental entities, with the exception of guidance issued by the U.S. Securities and Exchange Commission (the “SEC”) and its staff.  The Codification does not change GAAP. Instead, it takes the thousands of individual pronouncements that currently comprise GAAP and reorganizes them into approximately 90 accounting Topics, and displays all Topics using a consistent structure.  Contents in each Topic are further organized first by Subtopic, then Section and finally Paragraph. The Paragraph level is the only level that contains substantive content. Citing particular content in the Codification involves specifying the unique numeric path to the content through the Topic, Subtopic, Section and Paragraph structure. FASB suggests that all citations begin with “FASB ASC,” where ASC stands for Accounting Standards Codification. Changes to the ASC subsequent to June 30, 2009 are referred to as Accounting Standards Updates (“ASU”).  In conjunction with the issuance of this standard, the FASB also issued its first Accounting Standards Update No. 2009-1, “Topic 105 —Generally Accepted Accounting Principles” (“ASU 2009-1”).    ASU 2009-1 is effective for interim and annual periods ending after September 15, 2009 and did not have an impact on the Company’s consolidated financial statements but changed the referencing system for accounting standards.
 
The FASB issued ASU 2009—05, “Fair Value Measurements and Disclosures (Topic 820) — Measuring Liabilities at Fair Value” in August 2009 to provide guidance when estimating the fair value of a liability.  When a quoted price in an active market for the identical liability is not available, fair value should be measured using (a) the quoted price of an identical liability when traded as an asset; (b) quoted prices for similar liabilities or similar liabilities when traded as assets; or (c) another valuation technique consistent with the principles of Topic 820 such as an income approach or a market approach.  If a restriction exists that prevents the transfer of the liability, a

 
6


separate adjustment related to the restriction is not required when estimating fair value.  The adoption of this guidance did not have any impact on the Company’s consolidated financial statements.
 
ASU 2009-12, “Fair Value Measurements and Disclosures (Topic 820) - Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent),” issued in September 2009, allows a company to measure the fair value of an investment that has no readily determinable fair market value on the basis of the investee’s net asset value per share as provided by the investee. This allowance assumes that the investee has calculated net asset value in accordance with the GAAP measurement principles of Topic 946 as of the reporting entity’s measurement date.   Examples of such investments include investments in hedge funds, private equity funds, real estate funds and venture capital funds. The update also provides guidance on how the investment should be classified within the fair value hierarchy based on the value for which the investment can be redeemed.  The amendment is effective for interim and annual periods ending after December 15, 2009 with early adoption permitted.  The adoption of this guidance is not expected to have an impact on the Company’s consolidated financial statements.
 
Issued October 2009, ASU 2009-15, “Accounting for Own-Share Lending Arrangements in Contemplation of Convertible Debt Issuance or Other Financing” amends ASC Topic 470 and provides guidance for accounting and reporting for own-share lending arrangements issued in contemplation of a convertible debt issuance.  At the date of issuance, a share-lending arrangement entered into on an entity’s own shares should be measured at fair value in accordance with Topic 820 and recognized as an issuance cost, with an offset to additional paid-in capital.  Loaned shares are excluded from basic and diluted earnings per share unless default of the share-lending arrangement occurs.  The amendments also require several disclosures including a description and the terms of the arrangement and the reason for entering into the arrangement.  The effective dates of the amendments are dependent upon the date the share-lending arrangement was entered into and include retrospective application for arrangements outstanding as of the beginning of fiscal years beginning on or after December 15, 2009.   The adoption of this guidance is not expected to have an impact on the Company’s consolidated financial statements.
 
Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

3. Fair Value Hierarchy

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures.  The fair value of a financial instrument is 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.  Fair value is best determined based upon quoted market prices.  However, in many instances, there are no quoted market prices for the Company’s various financial instruments.   In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques.  Those techniques are significantly affected by the assumptions used including the discount rate and estimates of future cash flows.  Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.

In accordance with GAAP, the Company groups its financial assets and financial liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.

Level 1:  Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2:  Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; or other inputs that are observable or can be derived from or corroborated by observable market data by correlation or other means for substantially the full term of the asset.

Level 3:  Significant unobservable inputs that reflect the reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

 
7


The following methods and assumptions were used by the Company in estimating fair value disclosures:

Cash and cash equivalents - The carrying amounts of cash and short-term instruments approximate fair values, based on the short-term nature of the assets.

Certificates of deposit –  Fair values of certificates of deposit are estimated using discounted cash flow analyses based on current market rates for similar types of deposits.

Securities available for sale - Securities available for sale are recorded at fair value on a recurring basis.  Fair value measurement is based on quoted prices, when available.  If quoted prices are not available, fair values are measured using pricing models.  The Company utilizes a third-party pricing service to obtain fair values for securities.

Marketable equity securities are measured at fair value utilizing quoted market prices (Level 1).  Corporate bonds, obligations of government-sponsored enterprises, including mortgage-backed securities are determined by pricing models that consider standard input factors such as observable market data, benchmark yields, reported trades, broker/dealer quotes, credit spreads, benchmark securities, as well as new issue data, monthly payment information, and collateral performance, among others (Level 2).  The Company does not currently have any securities in its portfolio that are measured using Level 3 inputs.

Federal Home Loan Bank stock - The carrying value of Federal Home Loan Bank stock approximates fair value based on the redemption provisions of the Federal Home Loan Bank.

Loans held for sale – The fair value is determined using market prices currently being offered for loans with similar terms to borrowers of similar credit quality.

Loans - For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values.  Fair values for other loans are estimated using discounted cash flow analyses, using market interest rates currently being offered for loans with similar terms to borrowers of similar credit quality.  Fair values for non-performing loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable.

Deposits - The fair values disclosed for non-certificate accounts, by definition, equal to the amount payable on demand at the reporting date which is their carrying amounts.  Fair values for certificates of deposit are estimated using a discounted cash flow calculation that applies market interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits.

Borrowings - The fair value is estimated using discounted cash flow analyses based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements.

Accrued interest - The carrying amounts of accrued interest approximate fair value.

Off-balance sheet credit-related 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.  The fair value of these instruments is considered immaterial.

 
8


Assets Measured at Fair Value on a Recurring Basis:

Assets measured at fair value on a recurring basis are summarized as follows.  There were no liabilities measured at fair value on a recurring basis.
 
September 30, 2009
       
(In thousands)
 
Level 1
   
Level 2
   
Level 3
   
Total
 
Securities available for sale
  $ 71,869     $ 247,918       -     $ 319,787  
                                 
                                 
 
December 31, 2008
         
(In thousands)
 
Level 1
   
Level 2
   
Level 3
   
Total
 
Securities available for sale
  $ 47,799     $ 204,730       -     $ 252,529  
 
Assets Measured at Fair Value on a Non-recurring Basis:

The Company may also be required, from time to time, to measure certain other financial assets and non-financial assets on a non-recurring basis in accordance with generally accepted accounting principles.  These adjustments to fair value usually result from the application of lower-of-cost-or market accounting or write-downs of individual assets.

The following tables summarize the fair value hierarchy used to determine each adjustment and the carrying value of the related individual assets.  There were no liabilities measured at fair value on a non-recurring basis.

 
September 30, 2009
   
Nine Months Ended September 30, 2009
 
(In thousands)
 
Level 1
   
Level 2
   
Level 3
   
Total Losses
 
Impaired loans
  $ -     $ -     $ 5,850     $ 894  
Foreclosed real estate
    -       -       2,658       286  
    $ -     $ -     $ 8,508     $ 1,180  
                                 
                                 
 
December 31, 2008
   
Nine Months Ended September 30, 2008 Total Losses
 
(In thousands)
 
Level 1
   
Level 2
   
Level 3
   
Total Losses
 
Impaired loans
  $ -     $ -     $ 1,511     $ 2,284  
Foreclosed real estate
    -       -       2,604       -  
    $ -     $ -     $ 4,115     $ 2,284  
 
 
9


At September 30, 2009 and December 31, 2008, the amount of foreclosed real estate in Level 3 represents the carrying value and related charge-offs for which adjustments are based on appraised value of the collateral, considering discounting factors and adjusted for selling costs.  The loss on foreclosed real estate represents the adjustment in valuation recorded during the time periods indicated, and not for losses incurred on the sale of the property.  At September 30, 2009 and December 31, 2008, the amount of impaired loans in Level 3 represents the carrying value and related allocated reserves on impaired loans for which adjustments are based on the appraised value of the underlying collateral, considering discounting factors and adjusted for selling costs.  The loss on impaired loans is not recorded directly as an adjustment to current earnings or comprehensive income, but rather as a component in determining the overall adequacy of the allowance for loan losses.  Adjustments to the estimated fair value of impaired loans may result in increases or decreases to the provision for loan losses.

Carrying amounts and fair value of financial assets and liabilities are as follows:

   
September 30, 2009
   
December 31, 2008
 
(In thousands)
 
Carrying Amount
   
Fair Value
   
Carrying Amount
   
Fair Value
 
Financial assets:
                       
Cash and cash equivalents
  $ 27,415     $ 27,415     $ 20,265     $ 20,265  
Certificates of deposit
    3,000       3,006       7,000       7,010  
Securities available for sale
    319,787       319,787       252,529       252,529  
Federal Home Loan Bank stock
    4,454       4,454       4,303       4,303  
Loans held for sale
    699       717       -       -  
Loans
    777,031       776,296       704,104       705,956  
Accrued interest receivable
    5,523       5,523       6,036       6,036  
                                 
Financial liabilities:
                               
Deposits
    922,013       927,136       796,852       799,378  
Borrowings
    62,995       64,721       65,486       66,509  
Accrued interest payable
    579       579       1,081       1,081  

 
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4.
Earnings Per Share  

Basic earnings per share (“EPS”) excludes dilution and is calculated by dividing net income available to common stockholders by the weighted-average number of shares of common stock outstanding during the period.  Diluted EPS is computed in a manner similar to that of basic EPS except that the weighted-average number of common shares outstanding is increased to include the number of incremental common shares (computed using the treasury stock method) that would have been outstanding if all potentially dilutive common stock equivalents such as stock options and unvested restricted shares were issued during the period.
 
For the three and nine months ended September 30, 2009, potentially dilutive common stock equivalents totaled 171,661 and 184,845 shares, respectively.  The dilutive share effect is a result of issuance of shares of restricted stock and stock options.  There were no potentially dilutive common stock equivalents for the quarter ended September 30, 2008.    Earnings per share are not applicable for the nine months ended September 30, 2008 as the Company did not issue stock until January 23, 2008.  Unallocated common shares held by the ESOP are shown as a reduction in stockholders’ equity and are not included in the weighted-average number of common shares outstanding for either basic or diluted earnings per share calculations.

The following table is the reconciliation of basic and diluted earnings per share for the three and nine months ended September 30, 2009 and 2008.

   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
 (Dollars in thousands, except per share amounts)
 
2009
   
2008
   
2009
   
2008
 
                         
Net income (loss) available to common stockholders
  $ 1,888     $ 2,143     $ 1,742     $ (394 )
                                 
Basic weighted average shares outstanding
    21,542,287       22,196,225       21,704,968       N/A  
                                 
Effect of dilutive securities
    171,661       -       184,845       N/A  
                                 
Diluted weighted average shares outstanding
    21,713,948       22,196,225       21,889,813       N/A  
                                 
Earnings per share:
                               
                                 
Basic
  $ 0.09     $ 0.10     $ 0.08     $ N/A  
Diluted
  $ 0.09     $ 0.10     $ 0.08     $ N/A  

5.
Securities

All securities held by the Company as of September 30, 2009 and December 31, 2008 were classified as available-for-sale and are carried at fair value. Unrealized gains and losses, net of tax, are excluded from earnings and reported as a separate component of stockholders’ equity. Gains or losses on the sale of available-for-sale securities are determined using the specific identification method. Premiums and discounts are recognized in interest income using the effective interest method over the period to maturity.

As of September 30, 2009, 72.3% of the securities portfolio, or $224.98 million, was invested in corporate bonds.  The carrying and fair value of corporate bonds in the financial services sector was $57.3 million, and $56.8 million, respectively.  The remainder of the corporate bond portfolio includes companies from a variety of industries. The portfolio also includes debt securities issued by government-sponsored enterprises, mortgage backed securities and marketable equity securities.  Included in marketable equity securities are money market mutual funds and equity securities.  The equity securities portfolio includes issuers from various industries, with the largest concentration in consumer product companies, which had a carrying and market value of $7.8 million and $8.4 million, respectively.

 
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The amortized cost and fair values of securities available for sale, with gross unrealized gains and losses follows:
 
 (In thousands)
 
Amortized Cost
   
Gross Unrealized Gains
   
Gross Unrealized Losses
   
Fair Value
 
September 30, 2009
     
                         
Debt securities:
                       
Government-sponsored enterprises
  $ 15     $ -     $ (4 )   $ 11  
Corporate bonds
    224,979       9,008       (2,068 )     231,919  
Residential mortgage-backed securities
    15,916       72       -       15,988  
Total debt securities
    240,910       9,080       (2,072 )     247,918  
                                 
Marketable equity securities:
                               
Common stocks
    28,565       3,029       (1,234 )     30,360  
Money market mutual funds
    41,509       -       -       41,509  
Total marketable equity securities
    70,074       3,029       (1,234 )     71,869  
Total securities available for sale
  $ 310,984     $ 12,109     $ (3,306 )   $ 319,787  

 (In thousands)
 
Amortized Cost
   
Gross Unrealized Gains
   
Gross Unrealized Losses
   
Fair Value
 
December 31, 2008
     
                         
Debt securities:
                       
Government-sponsored enterprises
  $ 1,000     $ 3     $ -     $ 1,003  
Corporate bonds
    210,079       1,404       (7,796 )     203,687  
Residential mortgage-backed securities
    40       3       (3 )     40  
Total debt securities
    211,119       1,410       (7,799 )     204,730  
                                 
 Marketable equity securities:
                               
Common stocks
    26,142       1,185       (4,473 )     22,854  
Money market mutual funds
    24,945       -       -       24,945  
Total marketable equity securities
    51,087       1,185       (4,473 )     47,799  
Total securities available for sale
  $ 262,206     $ 2,595     $ (12,272 )   $ 252,529  

 
12


The amortized cost and fair value of debt securities by contractual maturity at September 30, 2009 and December 31, 2008 follows.  Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without prepayment penalties.

   
September 30, 2009
   
December 31, 2008
 
   
Amortized
   
Fair
   
Amortized
   
Fair
 
(In thousands)
 
Cost
   
Value
   
Cost
   
Value
 
             
1 year or less
  $ 28,717     $ 28,946     $ 48,533     $ 48,430  
Over 1 year to 5 years
    196,264       202,974       162,546       156,260  
Over 5 years to ten years
    13       10       15       13  
Over 10 years
    15,916       15,988       25       27  
                                 
    $ 240,910     $ 247,918     $ 211,119     $ 204,730  

Information pertaining to securities available for sale, with gross unrealized losses aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows:

   
Less Than Twelve Months
   
Twelve Months or More
 
(In thousands)
 
Gross Unrealized Losses
   
Fair Value
   
Gross Unrealized Losses
   
Fair Value
 
                         
September 30, 2009
                       
Debt securities:
                       
Government-sponsored enterprises
  $ -     $ -     $ 4     $ 10  
Corporate bonds
    1,924       18,519       144       9,028  
Total debt securities
    1,924       18,519       148       9,038  
                                 
 Common stock
    181       3,753       1,053       10,245  
Total temporarily impaired securities
  $ 2,105     $ 22,272     $ 1,201     $ 19,283  
 
   
Less Than Twelve Months
   
Twelve Months or More
 
(In thousands)
 
Gross Unrealized Losses
   
Fair Value
   
Gross Unrealized Losses
   
Fair Value
 
December 31, 2008
                       
Debt securities:
                       
Corporate bonds
  $ 4,431     $ 77,145     $ 3,365     $ 36,102  
Residential mortgage-backed securities
    -       -       3       11  
Total debt securities
    4,431       77,145       3,368       36,113  
                                 
Common stock
    3,728       14,979       745       2,281  
Total temporarily impaired securities
  $ 8,159     $ 92,124     $ 4,113     $ 38,394  

 
13


For the nine months ended September 30, 2009 and 2008, proceeds from sales of securities available for sale were $392,000 and $16.9 million, respectively.  In 2009, gross losses of $290,000 were realized on those sales, and in 2008, and gross gains of $5.1 million and gross losses of $41,000 were realized.

The Company also recorded a write-down to fair value of $429,000 on equity securities determined to be other-than-temporarily impaired during the nine months ended September 30, 2009. Management evaluates securities for other-than-temporary impairment on a monthly basis, with more frequent evaluation for selected issues.  Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

At September 30, 2009, 24 marketable equity securities have unrealized losses with an aggregate depreciation of 8.1% from the Company’s cost basis.  No equity securities had market value declines of 20% or more.  The most significant market valuation decrease related to any one equity security at September 30, 2009 is $125,000, or 19.0% of the cost basis.  Although the issuers have shown declines in earnings as a result of the weakened economy, no credit issues have been identified that cause management to believe the decline in market value is other than temporary, and the Company has the ability and intent to hold these investments until a recovery of fair value.  In analyzing an equity issuer’s financial condition, management considers industry analysts’ reports, financial performance and projected target prices of investment analysts within a one-year time frame.

At September 30, 2009, 17 debt securities have unrealized losses with an aggregate depreciation of 7.0% from the Company’s cost basis.  The Company’s most significant unrealized losses on corporate bonds relate to investments in companies within the financial services sector, including two corporate bonds, from one issuer, which had a market decline of greater than 20% of amortized cost, for approximately eight months.  The amortized cost of these bonds was $3.0 million, and the aggregate unrealized loss was $1.0 million.  The bonds, which mature in July 2011 and February 2012, were issued by a commercial and lease finance company impacted by the availability and pricing of borrowings to fund operations.  The unrealized losses were primarily caused by (a) recent declines in profitability and near-term profit forecasts by industry analysts and (b) recent credit-rating downgrades by several industry analysts.  The contractual terms of these investments do not permit the companies to settle the security at a price less than the par value of the investment.  Because the Company did not intend to sell the investments and considered it not “more likely than not” that the Company would be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company did not consider these investments to be other-than-temporarily impaired at September 30, 2009.   In November 2009, the issuer of these bonds declared bankruptcy after failing to receive approval of a debt restructuring plan by a majority of creditors.  As a result of the bankruptcy filing and increased uncertainty regarding future operations of the issuer, the Company may sell the securities or record an impairment loss in the fourth quarter of 2009.

 
14


6.
Acquisition

On November 4, 2009, the Company announced that the Bank has received all required regulatory approvals to acquire Mt. Washington Bank (“Mt. Washington”).  Mt. Washington’s existing customer deposits in Suffolk County will increase East Boston Savings Bank’s market share to 5th in the County.  The combined organization will have 19 branches and over $1.2 billion in deposits.

7.
Subsequent Events

Subsequent events have been evaluated through November 9, 2009, which is the date the financial statements were filed with the SEC.  As disclosed in Note 6, in November the Company received regulatory approval to acquire Mt. Washington Bank.  As disclosed in Note 5, in the fourth quarter of 2009, the Company may sell, or record an impairment loss on, two corporate bonds issued by a commercial and lease finance company that declared bankruptcy in November 2009. At September 30, 2009, the amortized cost of these bonds was $3.0 million, and the aggregate unrealized loss was $1.0 million.

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

Management’s discussion and analysis of the financial condition and results of operations is intended to assist in understanding the financial condition and results of operations of Meridian Interstate.  The following discussion should be read in conjunction with the consolidated financial statements, notes and tables included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008, filed with the Securities and Exchange Commission.

Forward-Looking Statements

This report contains forward-looking statements that are based on assumptions and may describe future plans, strategies and expectations of Meridian Interstate Bancorp.  These forward-looking statements are generally identified by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project” or similar expressions.  Meridian Interstate Bancorp’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain.  Factors which could have a material adverse effect on the operations of Meridian Interstate Bancorp and its subsidiaries include, but are not limited to:

 
·
significantly increased competition among depository and other financial institutions;
 
·
inflation and changes in the interest rate environment or other changes that reduce our interest margins or reduce the fair value of financial instruments;
 
·
general economic conditions, either nationally or in our market areas, that are worse than expected;
 
·
adverse changes in the securities markets;
 
·
legislative or regulatory changes that adversely affect our business;
 
·
our ability to enter new markets successfully and take advantage of growth opportunities, and the possible dilutive effect of potential acquisitions or de novo branches, if any;
 
·
changes in consumer spending, borrowing and savings habits;
 
·
changes in accounting policies and practices, as may be adopted by bank regulatory agencies, the Financial Accounting Standards Board, the Public Company Accounting Oversight Board and other promulgating authorities;
 
·
inability of third-party providers to perform their obligations to us;
 
·
changes in our organization, compensation and benefit plans;
 
·
changes in real estate values in our market areas;
 
·
the effect of the current governmental effort to restructure the U.S. financial and regulatory system;
 
·
the effect of developments in the secondary market affecting our loan pricing;
 
·
the level of future deposit premiums; and
 
·
the effect of the current financial crisis on our loan portfolio and our investment portfolio, and our deposit and other customers.

Management’s ability to predict results or the effect of future plans or strategies is inherently uncertain.  These factors include, but are not limited to, general economic conditions, changes in the interest rate environment, legislative or regulatory changes that may adversely affect our business, changes in accounting policies and

 
15


practices, changes in competition and demand for financial services, adverse changes in the securities markets and changes in the quality or composition of Meridian Interstate Bancorp’s loan or investment portfolios.  Additional factors that may affect our results are discussed elsewhere in this quarterly report, in our Annual Report on Form 10-K for the fiscal year ended December 31, 2008 filed with the Securities and Exchange Commission on March 15, 2009, under “Risk Factors,” as subsequently amended, which is available through the SEC’s website at www.sec.gov, and in other filings we make with the SEC.  These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements.  Except as required by applicable law or regulation, Meridian Interstate Bancorp does not undertake, and specifically disclaims any obligation, to release publicly the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of the statements or to reflect the occurrence of anticipated or unanticipated events.
 
Critical Accounting Policies
 
The Company’s significant accounting policies are described in Note 1 to the consolidated financial statements included in the 2008 Annual Report on Form 10-K. The preparation of financial statements in accordance with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes.  Actual results could differ from those estimates.  Management has identified accounting for the allowance for loan losses, other-than-temporary impairment of securities, foreclosed real estate and income taxes as the Company’s most critical accounting policies.  The Company’s critical accounting policies have not changed since December 31, 2008.

Comparison of Financial Condition at September 30, 2009 and December 31, 2008

Total assets increased by $137.0 million, or 12.9%, to $1.2 billion at September 30, 2009, from December 31, 2008.  Securities available for sale increased by $67.3 million, or 26.6%, from December 31, 2008, as the Company invested excess cash from deposit growth in money market mutual funds and debt securities.  Loan growth also continued in 2009, with total loans increasing by $74.7 million, or 10.5% from December 31, 2008.  Multi-family loans increased by $20.0 million, or 64.0%, and the commercial real estate portfolio increased by $35.1 million, or 13.0%.

Deposits increased by $125.2 million, or 15.7%, from December 31, 2008, with increases in all deposit types.   In 2009, marketing efforts emphasized the safety provided by the Company’s full deposit insurance coverage and the range of our products, which provide customers an alternative to larger competitors.  Money market deposits increased by $85.6 million, or 49.5%, to $258.5 million at September 30, 2009.  The Company successfully established an online deposit gathering website during 2009, EBSB Direct, which contributed to the increase in money market account balances.

Stockholders’ equity increased from $189.8 million as of December 31, 2008 to $199.1 million as of September 30, 2009.  In addition to net income of $1.7 million, improved market pricing on the securities portfolio contributed to the increase. The Company had accumulated other comprehensive income of $4.9 million at September 30, 2009, compared to a comprehensive loss of $6.2 million at December 31, 2008 due to substantial fair value increases for some corporate bond issues and general improvement in fair value of the equity securities.  In 2009, the Company also repurchased $4.4 million of the Company’s common stock.

 
16


Loan Portfolio Analysis

Our loan portfolio consists of residential, multi-family and commercial real estate, construction and land development, commercial, and consumer loans and home equity lines of credit originated primarily in our market area. There are no foreign loans outstanding. Interest rates charged on loans are affected principally by the demand for such loans, the supply of money available for lending purposes and the rates offered by our competitors.


Loan detail by category as of September 30, 2009 and December 31, 2008 was as follows:

             
   
At September 30, 2009
   
At December 31, 2008
 
(Dollars in thousands)
 
Amount
   
%
   
Amount
   
%
 
Real estate loans:
                       
One- to four-family
  $ 283,466       36.0 %   $ 274,716       38.6 %
Multi-family
    51,183       6.5       31,212       4.4  
Commercial real estate
    304,579       38.7       269,454       37.7  
Construction
    96,701       12.3       91,652       12.9  
Home equity lines of credit
    31,417       4.0       28,253       4.0  
Total real estate loans
    767,346       97.5       695,287       97.6  
                                 
Commercial business loans
    18,071       2.3       15,355       2.2  
Consumer loans
    1,281       0.2       1,379       0.2  
Total loans
    786,698       100.0 %     712,021       100.0 %
Net deferred loan origination fees
    (956 )             (1,005 )        
Allowance for loan losses
    (8,711 )             (6,912 )        
Loans, net
  $ 777,031             $ 704,104          

 
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Analysis of Loan Loss Experience

The allowance for loan losses is maintained at levels considered adequate by management to provide for loan losses as of the consolidated balance sheet reporting dates.  The allowance for loan losses is based on management’s assessment of various factors affecting the loan portfolio, including portfolio composition, delinquent and non-accrual loans, national and local business conditions and loss experience, and an overall evaluation of the quality of the underlying collateral.  Changes in the allowance for loan losses during the three and nine months ended September 30, 2009 and 2008 were as follows:

   
Three Months Ended September 30,
   
Nine Months Ended Septmeber 30,
 
(Dollars in thousands)
 
2009
   
2008
   
2009
   
2008
 
Beginning balance
  $ 8,120     $ 5,961     $ 6,912     $ 3,637  
                                 
Provision for loan losses
    694       403       1,808       2,731  
Charge offs:
                               
Real estate loans
    51       647       216       650  
Commercial business loans
    -       -       -       -  
Consumer loans
    57       -       58       2  
Total charge-offs
    108       647       274       652  
                                 
Recoveries:
                               
Real estate loans
    -       -       260       1  
Commercial business loans
    -       -       -       -  
Consumer loans
    5       1       5       1  
Total recoveries
    5       1       265       2  
Net recoveries (charge-offs)
    (103 )     (646 )     (9 )     (650 )
                                 
Ending balance
  $ 8,711     $ 5,718     $ 8,711     $ 5,718  
                                 
Allowance to non-accrual loans
    45.14 %     92.51 %     45.14 %     92.51 %
Allowance to total loans outstanding
    1.11 %     0.86 %     1.11 %     0.86 %
Net charge-offs to average loans outstanding
    0.01 %     0.10 %     0.00 %     0.11 %
 
Provision for Loan Losses

The Company’s loan loss provision was $694,000 and $1.8 million for the three and nine months ended September 30, 2009, compared to $403,000 and $2.7 million for the same periods in 2008.  The decrease in the level of provision for the nine months was due primarily to lower specific reserves required for loans that became impaired in 2009 versus those in 2008.  During 2008, the Company had two loans that became impaired for which it recorded specific reserves of $1.7 million.

A loan is considered impaired when, based on current information and events, it is probable that we 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.  Impairment is measured on a loan by loan basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.

The allowance for loan losses was $8.7 million, or 1.11% of total loans outstanding as of September 30, 2009, compared to $6.9 million, or 0.97% of total loans outstanding as of December 31, 2008, and $5.7 million, or

 
18


0.86% of total loans outstanding as of September 30, 2008.  The increase in the allowance for loan losses relates to loan growth and management’s assessment of various factors affecting the portfolio, including, among others, an ongoing evaluation of credit quality, local real estate market conditions, local and national economic factors, and non-performing and delinquent loan trends. The Company continues to assess the adequacy of its allowance for loan losses in accordance with established policies.

Management’s Assessment of Asset Quality
 
Non-performing assets include loans that are 90 or more days past due or on non-accrual status and real estate and other loan collateral acquired through foreclosure and repossession.  Loans 90 days or more past due may remain on an accrual basis if adequately collateralized and in the process of collection.  For non-accrual loans, interest previously accrued but not collected is reversed and charged against income at the time a loan is placed on non-accrual status.  Payments received at the time a loan is on non-accrual status are applied to principal or recognized as interest income at the time of collection.  Interest income is not recognized until the loan is returned to accrual status.  Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
The following table summarizes the non-performing assets at September 30, 2009 and December 31, 2008.
             
   
At September 30,