UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549





FORM
10-Q


(Mark
One)





ý
            QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF
      1934





For the
quarterly period ended June 30, 2008





OR





o
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934





For the
transition period from ______________ to _____________




Commission
file number:  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
            (I.R.S.
      Employer Identification No.)organization)





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 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 £  Non-accelerated
Filer T   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
T





At July
31, 2008, the registrant had 23,000,000 shares of no par value common stock
outstanding.








MERIDIAN
INTERSTATE BANCORP, INC.





FORM
10-Q





INDEX





PART I.
            FINANCIAL INFORMATIONItem 1.
            Financial Statements
            PageConsolidated Balance Sheets at June 30, 2008 and December 31,
      2007 (Unaudited)
            1Consolidated Statements of Operations for the three and six
      months ended June 30, 2008 and 2007 (Unaudited)
            2Consolidated Statements of Changes in Stockholders’ Equity for
      the six months ended June 30, 2008 and 2007
(Unaudited)
            3Consolidated Statements of Cash Flows for the six months ended
      June 30, 2008 and 2007 (Unaudited)
            4Notes to Unaudited Consolidated Financial
      Statements
            6Item 2.
            Management’s Discussion and Analysis of Financial Condition and
      Results of Operations
            10Item 3.
            Quantitative and Qualitative Disclosures About Market
      Risk
            21Item 4.
            Controls and Procedures
            22PART II.
            OTHER INFORMATIONItem 1.
            Legal Proceedings
            23Item 1A.
            Risk Factors
            23Item 2.
            Unregistered Sales of Equity Securities and Use of
      Proceeds
            23Item 3.
            Defaults Upon Senior Securities
            23Item 4.
            Submission of Matters to a Vote of Security
      Holders
            23Item 5A.
            Other Information
            23Item 6.
            Exhibits
            24Signatures
            25








Index


PART
I – FINANCIAL INFORMATION





Item
1. Financial Statements





MERIDIAN INTERSTATE BANCORP, INC. AND SUBSIDIARIES


Consolidated
Balance Sheets


(Unaudited)





June
      30,
              
              
              December
      31,(Dollars
      in thousands)
              
              2008
              
              
              2007ASSETSCash
      and due from banks
              
              $
              11,956
              
              
              $
              11,821Federal
      funds sold
              
              
              31,594
              
              
              
              91,272Total
      cash and cash equivalents
              
              
              43,550
              
              
              
              103,093Certificates
      of deposit
              
              
              7,000
              
              
              
              -Securities
      available for sale, at fair value
              
              
              341,070
              
              
              
              267,058Federal
      Home Loan Bank stock, at cost
              
              
              4,303
              
              
              
              3,165Loans
              
              
              622,079
              
              
              
              571,741Less
      allowance for loan losses
              
              
              (5,961
              )
              
              
              (3,637
              )Loans,
      net
              
              
              616,118
              
              
              
              568,104Bank-owned
      life insurance
              
              
              22,418
              
              
              
              18,003Investment
      in affiliate bank
              
              
              10,518
              
              
              
              10,772Premises
      and equipment, net
              
              
              22,432
              
              
              
              22,816Accrued
      interest receivable
              
              
              6,174
              
              
              
              5,764Other
      assets
              
              
              5,675
              
              
              
              4,451Total
      assets
              
              $
              1,079,258
              
              
              $
              1,003,226LIABILITIES
      AND STOCKHOLDERS' EQUITYDeposits:Non
      interest-bearing
              
              $
              55,777
              
              
              $
              51,396Interest-bearing
              
              
              747,044
              
              
              
              723,050Total
      deposits
              
              
              802,821
              
              
              
              774,446Stock
      subscriptions
              
              
              -
              
              
              
              62,518Short-term
      borrowings
              
              
              -
              
              
              
              9,154Long-term
      debt
              
              
              62,823
              
              
              
              27,373Accrued
      expenses and other liabilities
              
              
              14,805
              
              
              
              14,051Total
      liabilities
              
              
              880,449
              
              
              
              887,542Stockholders'
      equity:Common
      stock, no par value 50,000,000 sharesauthorized;
      23,000,000 and 0 shares issued andoutstanding
      at June 30, 2008 and December 31, 2007
              
              
              -
              
              
              
              -Additional
      paid-in capital
              
              
              100,630
              
              
              
              -Retained
      earnings
              
              
              104,998
              
              
              
              109,177Accumulated
      other comprehensive income
              
              
              1,254
              
              
              
              6,507Unearned
      compensation - ESOP 807,300shares
      and 0 shares at June 30, 2008and
      December 31, 2007, respectively
              
              
              (8,073
              )
              
              
              -Total
      stockholders' equity
              
              
              198,809
              
              
              
              115,684Total
      liabilities and stockholders' equity
              
              $
              1,079,258
              
              
              $
              1,003,226




See
accompanying notes to unaudited consolidated financial statements.





1
 Index





MERIDIAN INTERSTATE BANCORP, INC. AND SUBSIDIARIES


Consolidated
Statements of Operations


(Unaudited)





Three
      Months Ended June 30,
              
              
              Six
      Months Ended June 30,(Dollars
      in thousands, except per share amounts)
              
              2008
              
              
              2007
              
              
              2008
              
              
              2007Interest
      and dividend income:Interest
      and fees on loans
              
              $
              9,334
              
              
              $
              8,815
              
              
              $
              18,517
              
              
              $
              17,487Interest
      on debt securities
              
              
              2,633
              
              
              
              2,792
              
              
              
              5,245
              
              
              
              5,549Dividends
      on equity securities
              
              
              434
              
              
              
              265
              
              
              
              691
              
              
              
              544Interest
      on certificates of deposit
              
              
              30
              
              
              
              -
              
              
              
              38
              
              
              
              -Interest
      on federal funds sold
              
              
              478
              
              
              
              208
              
              
              
              1,541
              
              
              
              395Total
      interest and dividend income
              
              
              12,909
              
              
              
              12,080
              
              
              
              26,032
              
              
              
              23,975Interest
      expense:Interest
      on deposits
              
              
              6,426
              
              
              
              6,307
              
              
              
              13,337
              
              
              
              12,423Interest
      on short-term borrowings
              
              
              53
              
              
              
              102
              
              
              
              115
              
              
              
              191Interest
      on long-term debt
              
              
              517
              
              
              
              391
              
              
              
              829
              
              
              
              778Total
      interest expense
              
              
              6,996
              
              
              
              6,800
              
              
              
              14,281
              
              
              
              13,392Net
      interest income
              
              
              5,913
              
              
              
              5,280
              
              
              
              11,751
              
              
              
              10,583Provision
      for loan losses
              
              
              2,197
              
              
              
              71
              
              
              
              2,328
              
              
              
              143Net
      interest income, after provisionfor
      loan losses
              
              
              3,716
              
              
              
              5,209
              
              
              
              9,423
              
              
              
              10,440Non-interest
      income:Customer
      service fees
              
              
              697
              
              
              
              710
              
              
              
              1,355
              
              
              
              1,312Loan
      fees
              
              
              154
              
              
              
              128
              
              
              
              370
              
              
              
              334Gain
      on sales of loans, net
              
              
              8
              
              
              
              8
              
              
              
              27
              
              
              
              25Gain
      on sales of securities, net
              
              
              47
              
              
              
              -
              
              
              
              2,313
              
              
              
              2,032Income
      from bank-owned life insurance
              
              
              230
              
              
              
              535
              
              
              
              415
              
              
              
              697Equity
      loss on investment in affiliate bank
              
              
              (86
              )
              
              
              (128
              )
              
              
              (254
              )
              
              
              (211
              )Total
      non-interest income
              
              
              1,050
              
              
              
              1,253
              
              
              
              4,226
              
              
              
              4,189Non-interest
      expenses:Salaries
      and employee benefits
              
              
              5,762
              
              
              
              3,414
              
              
              
              9,784
              
              
              
              7,086Occupancy
      and equipment
              
              
              699
              
              
              
              622
              
              
              
              1,479
              
              
              
              1,324Data
      processing
              
              
              406
              
              
              
              369
              
              
              
              793
              
              
              
              732Marketing
              
              
              293
              
              
              
              203
              
              
              
              539
              
              
              
              343Professional
      services
              
              
              623
              
              
              
              240
              
              
              
              967
              
              
              
              459Contribution to the MeridianCharitable
      Foundation
              
              
              -
              
              
              
              -
              
              
              
              3,000
              
              
              
              -Other
      general and administrative
              
              
              693
              
              
              
              389
              
              
              
              1,226
              
              
              
              829Total
      non-interest expenses
              
              
              8,476
              
              
              
              5,237
              
              
              
              17,788
              
              
              
              10,773Income
      (loss) before income taxes
              
              
              (3,710
              )
              
              
              1,225
              
              
              
              (4,139
              )
              
              
              3,856Provision
      (benefit) for income taxes
              
              
              (1,494
              )
              
              
              429
              
              
              
              (1,602
              )
              
              
              1,265Net
      income (loss)
              
              $
              (2,216
              )
              
              $
              796
              
              
              $
              (2,537
              )
              
              $
              2,591Loss
      per share:Basic
              
              $
              (0.10
              )
              
              
              N/A
              
              
              
              N/A
              
              
              
              N/ADiluted
              
              $
              (0.10
              )
              
              
              N/A
              
              
              
              N/A
              
              
              
              N/AWeighted
      Average Shares:Basic
              
              
              22,185,914
              
              
              
              N/A
              
              
              
              N/A
              
              
              
              N/ADiluted
              
              
              22,185,914
              
              
              
              N/A
              
              
              
              N/A
              
              
              
              N/A




See
accompanying notes to unaudited consolidated financial statements.





2
 Index


MERIDIAN
INTERSTATE BANCORP, INC. AND SUBSIDIARIES


Consolidated Statements of Changes in Stockholders’
Equity


(Unaudited)


Six
Months Ended June 30, 2008 and 2007




(Dollars
      in thousands)
              
              Shares
      of Common Stock
              
              
              Common
      Stock
              
              
              Additional
      Paid-in Capital
              
              
              Retained
      Earnings
              
              Accumulated
      Other Comprehensive Income
              Unearned
      Compensation ESOP
              
              TotalSix
      months ended June 30, 2007Balance
      at December 31, 2006
              
              
              -
              
              
              $
              -
              
              
              $
              -
              
              
              $
              106,911
              
              
              $
              3,364
              
              
              $
              -
              
              
              $
              110,275Comprehensive
      income:Net
      income
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              2,591
              
              
              
              -
              
              
              
              -
              
              
              
              2,591Change
      in net unrealized gain on securities available forsale,
      net of reclassification adjustment and tax effects
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (164
              )
              
              
              -
              
              
              
              (164
              )Total
      comprehensive income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              2,427Balance
      at June 30, 2007
              
              
              -
              
              
              $
              -
              
              
              $
              -
              
              
              $
              109,502
              
              
              $
              3,200
              
              
              $
              -
              
              
              $
              112,702Six
      months ended June 30, 2008Balance
      at December 31, 2007
              
              
              -
              
              
              $
              -
              
              
              $
              -
              
              
              $
              109,177
              
              
              $
              6,507
              
              
              $
              -
              
              
              $
              115,684Comprehensive
      loss:Net
      loss
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (2,537
              )
              
              
              -
              
              
              
              -
              
              
              
              (2,537
              )Change
      in net unrealized gain on securities available forsale,
      net of reclassification adjustment and tax effects
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (4,909
              )
              
              
              -
              
              
              
              (4,909
              )Amortization
      of prior service cost, net of tax effects
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              9
              
              
              
              -
              
              
              
              9Total
      comprehensive loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (7,437
              )Adjustment
      to initially apply EITF 06-4
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (1,642
              )
              
              
              -
              
              
              
              -
              
              
              
              (1,642
              )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 publicoffering,
      net of expenses of $2,867
              
              
              10,050,000
              
              
              
              -
              
              
              
              97,633
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              97,633Contribution
      of common stock to the Meridian Charitable Foundation,
Inc.
              300,000
              
              
              
              -
              
              
              
              3,000
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              3,000Purchase
      of common stock by the ESOP
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (8,280
              )
              
              
              (8,280
              )Unallocated
      ESOP shares earned (20,700 shares)
              
              
              -
              
              
              
              -
              
              
              
              (3
              )
              
              
              -
              
              
              
              -
              
              
              
              207
              
              
              
              204Balance
      at June 30, 2008
              
              
              23,000,000
              
              
              $
              -
              
              
              $
              100,630
              
              
              $
              104,998
              
              
              $
              1,254
              
              
              $
              (8,073
              )
              
              $
              198,809





See
accompanying notes to unaudited consolidated financial statements.





3
 Index


MERIDIAN
INTERSTATE BANCORP, INC. AND SUBSIDIARIES


Consolidated Statements of Cash Flows


(Unaudited)








Six
      Months Ended June 30,(In
      thousands)
              2008
              
              2007Cash
      flows from operating activities:Net
      income (loss)
              
              $
              (2,537
              )
              
              $
              2,591Adjustments
      to reconcile net income (loss) to net cashprovided
      by operating activities:Contribution
      of stock to charitable foundation
              
              
              3,000
              
              
              
              -Earned
      ESOP shares
              
              
              204
              
              
              
              -Provision
      for loan losses
              
              
              2,328
              
              
              
              143Amortization
      of net deferred loan origination fees
              
              
              (146
              )
              
              
              (270
              )Net
      amortization of securities available for sale
              
              
              544
              
              
              
              408Depreciation
      and amortization expense
              
              
              642
              
              
              
              574Gain
      on sales of securities, net
              
              
              (2,313
              )
              
              
              (2,032
              )Loss
      on sale of foreclosed real estate
              
              
              5
              
              
              
              -Deferred
      income tax benefit
              
              
              (1,338
              )
              
              
              (110
              )Income
      from bank-owned life insurance
              
              
              (415
              )
              
              
              (697
              )Equity
      loss on investment in affiliate bank
              
              
              254
              
              
              
              211Net
      changes in:Accrued
      interest receivable
              
              
              (410
              )
              
              
              (17
              )Other
      assets
              
              
              3,087
              
              
              
              471Accrued
      expenses and other liabilities
              
              
              (1,227
              )
              
              
              557Net
      cash provided by operating activities
              
              
              1,678
              
              
              
              1,829Cash
      flows from investing activities:Purchases
      of certificates of deposit
              
              
              (7,000
              )
              
              
              -Activity
      in securities available for sale:Proceeds
      from maturities, calls and principal payments
              
              
              61,207
              
              
              
              67,364Proceeds
      from sales
              
              
              9,804
              
              
              
              4,290Purchases
              
              
              (151,701
              )
              
              
              (60,583
              )(Purchase)
      redemption of Federal Home Loan Bank stock
              
              
              (1,138
              )
              
              
              206Loans
      originated, net of principal payments received
              
              
              (51,104
              )
              
              
              (14,543
              )Purchase
      of bank-owned life insurance
              
              
              (4,000
              )
              
              
              -Proceeds
      from bank-owned life insurance
              
              
              -
              
              
              
              1,793Purchases
      of premises and equipment
              
              
              (258
              )
              
              
              (3,249
              )Proceeds
      from sales of foreclosed real estate
              
              
              1,463
              
              
              
              -Net
      cash used in investing activities
              
              
              (142,727
              )
              
              
              (4,722
              )





(continued)


4
 Index





MERIDIAN
INTERSTATE BANCORP, INC. AND SUBSIDIARY


Consolidated
Statements of Cash Flows


(Unaudited)





Six
      Months Ended June 30,(In
      thousands)
              2008
              
              2007Cash
      flows from financing activities:Net
      increase in deposits
              
              
              28,375
              
              
              
              8,624Proceeds
      from sale of common stock
              
              
              97,633
              
              
              
              -Common
      stock purchased by ESOP
              
              
              (8,280
              )
              
              
              -Decrease
      in stock subscriptions
              
              
              (62,518
              )
              
              
              -Net
      change in Federal Home Loan Bank advanceswith
      maturities of less than three months
              
              
              (9,154
              )
              
              
              238Proceeds
      from Federal Home Loan Bank advanceswith
      maturities of three months or more
              
              
              45,000
              
              
              
              -Repayment
      of Federal Home Loan Bank advanceswith
      maturities of three months or more
              
              
              (9,550
              )
              
              
              (1,570
              )Net
      cash provided by financing activities
              
              
              81,506
              
              
              
              7,292Net
      change in cash and cash equivalents
              
              
              (59,543
              )
              
              
              4,399Cash
      and cash equivalents at beginning of period
              
              
              103,093
              
              
              
              23,494Cash
      and cash equivalents at end of period
              
              $
              43,550
              
              
              $
              27,893Supplemental
      cash flow information:Interest
      paid on deposits
              
              
              13,472
              
              
              
              12,454Interest
      paid on borrowings
              
              
              843
              
              
              
              974Income
      taxes paid
              
              
              60
              
              
              
              87Non-cash
      investing and financing activities:Transfers
      from loans to foreclosed real estate
              
              
              908
              
              
              
              -





See
accompanying notes to unaudited consolidated financial statements


.


5
 Index


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 55% 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
(consisting only of normal recurring accruals) 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 six
months ended June 30, 2008 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, 2007 which was filed with the Securities and Exchange
Commission (“SEC”) on March 31, 2008, 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 and the fair values of financial instruments.





2.
            Stock
      Offering





The
Company completed its initial public stock offering on January 22, 2008 and sold
10,050,000 shares of its outstanding common stock to subscribers in the offering
at a price of $10.00 per share, including 828,000 shares sold to the company’s
employee stock ownership plan.  Concurrent with the initial public
offering, Meridian Financial Services was issued 12,650,000 shares, or 55.0% of
the Company’s outstanding common stock.   Because Meridian
Interstate did not have outstanding public shares of common stock for the entire
six months ended June 30, 2008, per share earnings data is not meaningful for
this period or prior comparative periods and is therefore not
presented.




Net
investable proceeds from the initial public offering were $89.4
million.   In connection with the initial public offering, the
Company also contributed 300,000 shares of common stock to the Meridian
Charitable Foundation, resulting in a pre-tax non-interest expense charge of
$3.0 million, in the quarter ended March 31, 2008.





As part
of the offering, Meridian Interstate established a liquidation account of
$114,216,000, which is equal to the net worth of Meridian Interstate as of the
date of the latest consolidated balance sheet appearing in the final prospectus
distributed in connection with the offering.  The liquidation account
will be maintained for the benefit of the eligible account holders and
supplemental eligible account holders who maintain their accounts at East Boston
Savings Bank after the offering.  The liquidation account will be
reduced annually to the extent that such account holders have reduced their
qualifying deposits as of each anniversary date.  Subsequent increases
will not restore an account holder’s interest in the liquidation
account.  In the event of a complete liquidation, each eligible
account holder will be entitled to receive balances for accounts held
then.





6
 Index





Meridian
Interstate may not declare or pay dividends on, and may not repurchase, any of
its shares of common stock if the effect thereof would cause stockholders’
equity to be reduced below applicable regulatory capital maintenance
requirements or if such declaration, payment or repurchase would otherwise
violate regulatory requirements.








3.
            Recent
      Accounting Pronouncements





Effective January 1, 2008, the Company
adopted Statement of Financial Accounting Standards No. 157 (“SFAS 157”), "Fair
Value Measurements," which provides a framework for measuring fair value in
accordance with generally accepted accounting principles, and expands
disclosures about fair value measurements.Statement No. 157 does not
require any new fair value measurements.  The Company’s disclosures
relating to SFAS No. 157 are set forth in Note 4.  In February 2008,
the FASB issued FASB Staff Position (FSP) FAS 157-2, which defers the effective
date of SFAS No. 157 until January 1, 2009 for nonfinancial assets and
nonfinancial liabilities except those items recognized or disclosed at fair
value on an annual or more frequently recurring basis.  The adoption
of the SFAS No. 157 did not have a material affect on the Company's consolidated
financial statements.





Effective
January 1, 2008, the Company also adopted SFAS No. 159, “The Fair Value Option
for Financial Assets and Financial Liabilities – Including an amendment of FASB
Statement No. 115.”   SFAS 159 allows an entity the irrevocable
option to elect fair value for the initial and subsequent measurement for
certain financial assets and liabilities on a contract-by-contract
basis.  The Company did not elect fair value treatment for any
financial assets or liabilities upon adoption.





Effective
January 1, 2008, the Company adopted EITF 06-4, “Accounting for Deferred
Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life
Insurance Arrangements.”  The Company is the sole owner of life
insurance policies pertaining to certain of the Company’s
employees.  The Company has entered into agreements with these
individuals whereby the Company will pay to the individual’s estate or
beneficiaries a portion of the death benefit that the Company will receive as
beneficiary of such policies.  EITF 06-4 addresses accounting for
split-dollar life insurance arrangements whereby the employer purchases a policy
to insure the life of an employee, and separately enters into an agreement to
split the policy benefits between the employer and the employee.  This
EITF states that an obligation arises as a result of a substantive agreement
with an employee to provide future postretirement benefits.  Under
EITF 06-4, the obligation is not settled upon entering into an insurance
arrangement.  Since the obligation is not settled, a liability should
be recognized in accordance with applicable authoritative
guidance.  The implementation of this guidance on January 1, 2008
resulted in other liabilities increasing by $1.6 million with a corresponding
decrease in retained earnings on the consolidated balance sheet.





In
December 2007, the FASB issued Statement No. 141 (revised), “Business
Combinations,” which replaces FASB Statement No. 141, and applies to all
business entities, including mutual entities that previously used the
pooling-of-interests method of accounting for certain business combinations,
which makes significant amendments to other Statements and other authoritative
guidance, and applies prospectively to business combinations for which the
acquisition date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008.  An entity may not
apply it before that date.





In
December 2007, the FASB issued Statement No. 160, “Non-controlling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51,” which
establishes accounting and reporting standards for the non-controlling interest
in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a
non-controlling interest in a subsidiary is an ownership interest in the
consolidated entity that should be reported as equity in the consolidated
financial statements. This Statement is effective for fiscal years beginning on
or after December 15, 2008 and is not expected to have a material impact on the
consolidated financial statements of the Company.








7
 Index







In March
of 2008, the FASB issued Statement No. 161, “Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FASB Statement No. 133,”
which changes the disclosure requirements for derivative instruments and hedging
activities.  Entities are required to provide enhanced disclosures
about (a) how and why an entity uses derivative instruments, (b) how derivative
instruments and related hedged items are accounted for under Statement No. 133
and its related interpretations, and (c) how derivative instruments and related
hedged items affect an entity’s financial position, financial performance, and
cash flows.  This Statement is effective for fiscal years and interim
periods beginning after November 15, 2008 and is not expected to have a material
impact on the consolidated financial statements of the Company.





In
May 2008, the FASB issued Statement No. 162, “The Hierarchy of
Generally Accepted Accounting Principles” (SFAS 162), which identifies the
sources of accounting principles and the framework for selecting the principles
to be used in the preparation of financial statements of nongovernmental
entities that are presented in conformity with GAAP in the United States (the
GAAP Hierarchy). The Board issued this Statement because it is the entity (not
its auditor) that is responsible for selecting accounting principles for
financial statements that are presented in conformity with GAAP. 
Accordingly, the Board concluded that the GAAP hierarchy should reside in the
accounting literature established by the FASB as opposed to auditing literature
established by the American Institute of Certified Public Accountants and Public
Company Accounting Oversight Board (PCAOB).  SFAS 162 is effective 60 days
following the SEC’s approval of the PCAOB’s amendments to AU Section 411,
“The Meaning of Present Fairly in Conformity With Generally Accepted Accounting
Principles”.  The Company does not expect the adoption to have a material
impact on its consolidated financial statements.








4.
            Fair
      Value Measurement





As
discussed in Note 3, SFAS No. 157 was implemented by the Company effective
January 1, 2008.  SFAS No. 157 establishes a hierarchy that
prioritizes the use of fair value inputs used in valuation methodologies into
the following three levels:





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.





The
following is a description of the Company's valuation methodologies used to
measure and disclose the fair values of its financial assets and liabilities on
a recurring or nonrecurring basis:





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
investment securities.  The pricing service utilizes the following
method to value the security portfolio.





The
securities measured at fair value utilizing Level 1 inputs are marketable
equity securities and utilizing Level 2 inputs are corporate obligations,
obligations of the U.S. Treasury, agencies and corporations of the U.S.
government, including mortgage-backed securities.  The fair values
represent either quoted market prices for the identical securities (Level 1
inputs) or fair values 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.   The Company does not currently have any Level 3
securities in its portfolio.


8
 Index





Loans:The Company does not record
loans at fair value on a recurring basis.  However, from time to time,
non-recurring fair value adjustments to collateral dependent loans are recorded to reflect
partial write-downs based on the observable market price or current appraised
value of the collateral.





The
balances of assets and liabilities measured at fair value on a recurring basis
as of June 30, 2008 were as follows:





Assets
      at Fair Value
                    
                    
                    Quoted
      Prices in
                      Active
      Markets for
                      Identical
      Assets
                      (Level
      1)
                    
                    
                    Significant
                      Other
                      Observable
      Inputs
                      (Level
      2)(In
      thousands)Securities
      available for sale
                    
                    $
                    341,070
                    
                    
                    $
                    89,481
                    
                    
                    $
                    251,589


The
balances of assets and liabilities measured at fair value on a nonrecurring
basis as of June 30, 2008 were as follows:





Assets
      at Fair Value
              
              
              Significant
                Unobservable
                Inputs
                (Level
      3)
              
              
              Total
      Gains
                (Losses)(In
      thousands)Impaired
      loans (1)
              
              $
              3,310
              
              
              $
              3,310
              
              
              $
              (1,069)





(1) Represents carrying value and
related write-downs for which adjustments are based on the appraised
value of the
collateral.





The
Company did not have any significant changes in valuation methodology during the
quarters ended June 30, 2008 or 2007.  The Company will apply the fair
value measurement and disclosure provisions of SFAS No. 157 effective January 1,
2009 to nonfinancial assets and liabilities measured on a nonrecurring
basis.  The Company measures the fair value of the following on a
nonrecurring basis:  (1) long-lived assets and (2) foreclosed
assets.








5.
            Employee
      Benefits





Employee Stock
Ownership Plan (“ESOP”)—The Company established an ESOP for its eligible
employees effective January 1, 2008.  Employees are eligible to
participate in the ESOP after attainment of age 18 and completion of three
months of employment.  The ESOP acquired 828,000 shares in the stock
offering with the proceeds of a loan totaling $8.3 million from the Company’s
subsidiary, Meridian Funding Corporation. Company contributions to the ESOP are
at the discretion of the Company’s Board of Directors but at a minimum will be
sufficient to service the annual debt of the ESOP.  The Company
accounts for its ESOP in accordance with Statement of Position 93-6 “Employers’
Accounting for Employee Stock Ownership Plans”.  Accordingly, the
shares pledged as collateral are reported as unallocated ESOP shares in the
consolidated balance sheets.  Shares will be released from collateral
to settle the Company’s obligation under the ESOP at the ESOP’s year
end.  The number of shares to be released will be based on the fair
value of the shares at that date required to settle the liability.  As
shares are released from collateral, the shares become outstanding for EPS
computations.





Consistent with the terms of his
employment agreement, the Bank entered into a Separation Agreement with its
President upon his retirement during the quarter ended June 30,
2008.  The Separation Agreement provided for the payment of any
accrued  compensation,  24 months salary continuation
payments at his rate of salary
of  $30,961  per  month,  the lump
sum  payment  of benefits  under his
existing  supplemental  executive  retirement  plan
totaling $2,351,591 to be paid on December 7, 2008, the continuation of an
existing split-dollar  life  insurance  policy and
a bank-owned life  insurance  policy, both of
which  had been  fully  paid, and
the  maintenance  of


9
 Index


existing  long-term
care insurance  policies for the President and his spouse at a current
annual premium of $2,723.  During the quarter ended June 30, 2008, the
Company recorded pre-tax charges of $1.5 million as a result of the Separation
Agreement.





Upon reviewing the long-term health
care policies paid by the Company’s mutual holding company for the retiring
President, as well as certain directors and executives, the Bank was determined
to be a party to the agreement to pay the policies.  The policies will
thus be paid by the Bank in the future.  In accordance with SFAS No.
158, “Employers' Accounting for Defined Benefit Pension and Other Postretirement
Plans—an amendment of FASB Statements No. 87, 88, 106, and 132(R),” the Bank
established a liability for the present value of the premiums due for the
long-term care policies during the quarter.  The adjustment to
stockholders’ equity was an after-tax reduction of $353,000.








Item
2.    Management’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, 2007, 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, changes in interest rates, national and regional economic
conditions, legislative and regulatory changes, monetary and fiscal policies of
the U.S. government, including policies of the U.S. Treasury and the Federal
Reserve Board, the quality and composition of the loan or investment portfolios,
demand for loan products, deposit flows, competition, demand for financial
services in East Boston Savings Bank’s market area, changes in real estate
market values in East Boston Savings Bank’s market area, and changes in relevant
accounting principles and guidelines.





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 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 in our Annual Report on Form 10-K
for the fiscal year ended December 31, 2007filed with the
Securities and Exchange Commission on March 31, 2008, under “Risk Factors,”
which is available through the SEC’s website at www.sec.gov.  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.


10
 Index





Critical
Accounting Policies




The
Company’s significant accounting policies are described in Note 1 to the
consolidated financial statements included in the 2007 Annual Report on Form
10-K.  Management has identified accounting for the allowance for
credit losses and income taxes as the Company’s most critical accounting
policies.  The Company’s critical accounting policies have not changed
since December 31, 2007.





General





Selected
Financial Data





The
      following is a summary of operating and financial condition highlights as
      of and for the periods indicated:








Financial
      Condition AtJune
      30,
              
              
              December
      31,(In
      thousands)
              
              2008
              
              
              2007Total
      assets
              
              $
              1,079,258
              
              
              $
              1,003,226Secuities
      available for sale
              
              
              341,070
              
              
              
              267,058Net
      loans
              
              
              616,118
              
              
              
              568,104Deposits
              
              
              802,821
              
              
              
              774,446Borrowed
      funds
              
              
              62,823
              
              
              
              36,527Stockholders'
      equity
              
              
              198,809
              
              
              
              115,684
  Six
      Months EndedJune
      30,(Dollars
      in thousands)
              
              2008
              
              
              2007Net
      interest income
              
              $
              11,751
              
              
              $
              10,583Provision
      for loan losses
              
              
              2,328
              
              
              
              143Non-interest
      income
              
              
              4,226
              
              
              
              4,189Non-interest
      expenses
              
              
              17,788
              
              
              
              10,773Provision
      (benefit) for income taxes
              
              
              (1,602
              )
              
              
              1,265Net
      income (loss)
              
              
              (2,537
              )
              
              
              2,591Interest
      rate spread
              
              
              1.70
              %
              
              
              2.07
              %Net
      interest margin
              
              
              2.35
              %
              
              
              2.54
              %


11
 Index





Comparison
of Financial Condition at June 30, 2008 and December 31, 2007





The
Company’s total assets increased by $76.0 million, or 7.6%, to $1.1 billion at
June 30, 2008 from December 31, 2007.  Net loans increased by $48.0
million, or 8.5%, and securities available for sale increased $74.0 million, or
27.7%.  For the six months ended June 30, 2008, growth in one- to
four-family real estate loans was $30.4 million, or 13.6%.  An
increase in commercial real estate loans of $25.0 million, or 14.3%, was offset
by a decrease in the balance of construction loans of $11.9 million, or
10.6%.





Deposits
increased by $28.4 million, or 3.7%, for the six months ended June 30, 2008,
with increases in all deposit categories.   Federal Home Loan
Bank of Boston borrowings also increased $26.3 million, to $62.8 million, as the
Company opted to replace some higher rate maturing advances with lower cost
borrowings.





Stockholders’ equity increased by $83.1
million, to $198.8 million at June 30, 2008 from $115.7 million at December 31,
2007, mainly due to the stock offering.  As a result of the offering,
the Company has 23,000,000 shares outstanding, including 10,050,000 shares of
common stock sold in the offering, (including shares sold to the Company’s
employee stock ownership plan), 300,000 shares contributed to the Meridian
Charitable Foundation, Inc. and 12,650,000 shares issued to the Company's mutual
holding company parent, Meridian Financial Services,
Incorporated.








Securities





All securities held by the Company as
of June 30, 2008 and December 31, 2007 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. Carrying amounts and fair values at June 30, 2008 and
December 31, 2007 were as follows:





At
      June 30, 2008
              
              
              At
      December 31, 2007Amortized
              
              
              Fair
              
              
              Amortized
              
              
              Fair(In
      thousands)
              Cost
              
              
              Value
              
              
              Cost
              
              
              ValueSecurities
      available for sale:U.S.
      Government – sponsored enterprises
              
              $
              40,466
              
              
              $
              40,430
              
              
              $
              7,002
              
              
              $
              6,975Corporate
      bonds
              
              
              212,300
              
              
              
              211,117
              
              
              
              219,626
              
              
              
              220,629Mortgage-backed
      securities
              
              
              42
              
              
              
              42
              
              
              
              43
              
              
              
              43Total
      debt securities
              
              
              252,808
              
              
              
              251,589
              
              
              
              226,671
              
              
              
              227,647Marketable
      equity securities
              
              
              85,161
              
              
              
              89,481
              
              
              
              28,843
              
              
              
              39,411Total
      securities available for sale
              $
              337,969
              
              
              $
              341,070
              
              
              $
              255,514
              
              
              $
              267,058





The
available for sale securities portfolio increased $74.0 million, or 27.7%, as
the Company replaced some federal funds sold with mutual fund investments and
agency securities.   At June 30, 2008, unrealized losses in our
debt portfolio ranged from 0% to 22%, and unrealized losses in our equity
portfolio ranged from 0% to 29%.  Management continues to monitor the
securities that have been determined to have temporary market
declines.





Management
evaluates securities for other-than-temporary impairment on a semi-monthly
basis.  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.


12
 Index




Loan
Portfolio Analysis





Our loan
portfolio consists primarily 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 June 30, 2008 and December 31, 2007 were as follows:





At
      June 30, 2008
                
                
                At
      December 31, 2007(Dollars
      in thousands)
                Amount
                
                
                %
                
                
                Amount
                
                
                %Real
      estate loans:One-to
      four-family
                
                $
                254,492
                
                
                
                40.8
                %
                
                $
                224,109
                
                
                
                39.1
                %Multi-family
                
                
                29,045
                
                
                
                4.8
                
                
                
                26,855
                
                
                
                4.7Commercial
      real estate
                
                
                200,064
                
                
                
                32.1
                
                
                
                175,072
                
                
                
                30.5Construction
                
                
                99,900
                
                
                
                16.0
                
                
                
                111,796
                
                
                
                19.5Home
      equity linesof
      credit
                
                24,576
                
                
                
                3.9
                
                
                
                21,541
                
                
                
                3.8Total
      real estate loans
                
                608,077
                
                
                
                97.6
                
                
                
                559,373
                
                
                
                97.6Commercial
      business loans
                
                
                13,603
                
                
                
                2.2
                
                
                
                11,859
                
                
                
                2.1Consumer
      loans
                
                1,444
                
                
                
                0.2
                
                
                
                1,576
                
                
                
                0.3Total
      loans
                
                623,124
                
                
                
                100.0
                %
                
                
                572,808
                
                
                
                100.0
                %Net
      deferred origination fees
                
                
                (1,045
                )
                
                
                
                
                
                
                (1,067
                )Allowance
      for loan losses
                
                (5,961
                )
                
                
                
                
                
                
                (3,637
                )Loans,
      net
                $
                616,118
                
                
                
                
                
                
                $
                568,104


Analysis
of Loan Loss Experience





The
allowance for loan losses is maintained at a level adequate to absorb possible
losses inherent in the loan portfolio.  The allowance for loan losses
is based on management’s assessment of various factors affecting the loan
portfolio, including portfolio composition, delinquency and non-accrual levels,
economic conditions, loss experience, and an evaluation of underlying collateral
quality.  Changes in the allowance for loan losses during the six
months ended June 30, 2008 and 2007 were as follows:





Six
      Months Ended June 30,(Dollars
      in thousands)
              2008
              
              
              2007Beginning
      balance
              
              $
              3,637
              
              
              $
              3,362Provision
      for loan losses
              
              
              2,328
              
              
              
              143Charge
      offs:Real
      estate loans
              
              
              5
              
              
              
              16Commercial
      business loans
              
              
              -
              
              
              
              -Consumer
      loans
              
              
              -
              
              
              
              61Total
      charge-offs
              
              
              5
              
              
              
              77Recoveries:Real
      estate loans
              
              
              1
              
              
              
              16Commercial
      business loans
              
              
              -
              
              
              
              -Consumer
      loans
              
              
              -
              
              
              
              59Total
      recoveries
              
              
              1
              
              
              
              75Net
      charge-offs
              
              
              (4
              )
              
              
              (2
              )Ending
      balance
              
              $
              5,961
              
              
              $
              3,503Allowance
      to non-accrual loans
              
              
              78.64
              %
              
              
              49.95
              %Allowance
      to total loans outstanding
              
              
              0.96
              %
              
              
              0.64
              %Net
      charge-offs/average loans outstanding
              
              0.00
              %
              
              
              0.00
              %


13
 Index





Provision
for Loan Losses




The Company’s loan loss provision
amounted to $2.2 million and $2.3 million for the three and six months ended
June 30, 2008, compared to $71,000 and $143,000 for the same periods in 2007.Most of the increase in
the provision related to specific impairment reserves taken for two residential
construction projects determined to be impaired during the second quarter, as
well asgrowth in the loan
portfolio and management’s assessment of various factors affecting the
portfolio, including, among others, an ongoing evaluation of credit quality,
local real estate market conditions, and general economic factors.  As
a result of the increased provision taken during the second quarter, the
allowance for loan losses was $6.0 million, or 0.96% of total loans outstanding
as of June 30, 2008, as compared to $3.6 million, or 0.63% of total loans
outstanding as of December 31, 2007.   We recorded net
charge-offs of $4,000 and $2,000 in the six months ending June 30, 2008 and
2007, respectively.




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.  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 June 30, 2008
and December 31, 2007.





At
      June 30,
              
              
              At
      December 31,(In
      thousands)
              2008
              
              
              2007Loans
      accounted for on a non-accrual basis:Real
      estate loans:One-to
      four-family
              
              $
              1,465
              
              
              $
              2,059Multi-family
              
              
              -
              
              
              
              -Commercial
      real estate
              
              
              2,986
              
              
              
              1,561Home
      equity lines of credit
              
              
              -
              
              
              
              98Construction
              
              
              3,124
              
              
              
              1,218Total
      real estate loans
              
              
              7,575
              
              
              
              4,936Commercial
      business loans
              
              
              -
              
              
              
              45Consumer
      loans
              
              
              5
              
              
              
              1Total
      non-accrual loans
              
              
              7,580
              
              
              
              4,982Foreclosed
      assets
              
              
              -
              
              
              
              560Total
      nonperforming assets
              
              $
              7,580
              
              
              $
              5,542Non-accrual
      loans to total loans
              
              
              1.22
              %
              
              
              0.87
              %Non-accrual
      loans to total assets
              
              
              0.70
              %
              
              
              0.50
              %Non-performing
      assets to total assets
              
              0.70
              %
              
              
              0.55
              %





Non-performing
assets (non-accrual loans and property acquired through foreclosure) were $7.6
million, or 0.70% of total assets at June 30, 2008, compared to $5.5 million, or
0.55% at December 31, 2007, and $7.0 million, or 0.77% at June 30,
2007.  The increase in non-performing assets from December resulted
primarily from one $2.4 million residential construction lending
relationship.  We held no property acquired through foreclosure at
June 30, 2008 or 2007, compared to $560,000 of such property at December 31,
2007.  Interest income that would have been recorded for the six
months ended June 30, 2008 had nonaccruing loans and accruing loans past due 90
days or more been current according to their original terms amounted to
$397,000.  The Company recorded a $5,000 loss on the sale of
foreclosed real estate for the six months ending June 30, 2008.


14
 Index





At June
30, 2008, there was $14.4 million of impaired loans, including loans of $11.9
million with an impairment allowance of $2.2 million.  Impaired loans totaling
$621,000 had a valuation allowance of $89,000 at December 31,
2007.The June 30, 2008 impaired loan balance
includes a $7.5 million troubled debt restructuring.  A modification
of loan terms constitutes a troubled debt restructuring if, for reasons related
to the debtor’s financial difficulties, a concession is granted to the debtor
that would not otherwise be considered.    The Company’s
average investment in impaired loans was $7.7 million and $2.8 million for the
six months ended June 30, 2008 and 2007, respectively.





Deposits





Deposits
are a major source of our funds for lending and other investment
purposes.  Deposit inflows and outflows are significantly influenced
by general interest rates and money market conditions.


The
following table summarizes the period end balance and the composition of
deposits:





At
      June 30, 2008
              
              
              At
      December 31, 2007(Dollars
      in thousands)
              Amount
              
              
              Percent
              
              
              Amount
              
              
              PercentNOW
      and demand deposits
              
              $
              96,117
              
              
              
              12.0
              %
              
              $
              85,045
              
              
              
              11.0
              %Money
      market deposits
              
              
              144,571
              
              
              
              18.0
              
              
              
              138,688
              
              
              
              17.9Regular
      and other deposits
              
              
              121,071
              
              
              
              15.1
              
              
              
              118,837
              
              
              
              15.3Certificates
      of deposit
              
              
              441,062
              
              
              
              54.9
              
              
              
              431,876
              
              
              
              55.8Total
              $
              802,821
              
              
              
              100.0
              %
              
              $
              774,446
              
              
              
              100.0
              %





Borrowings





Federal
Home Loan Bank (“FHLB”) advances maturing within one year totaled $9.2 million
at December 31, 2007, at a weighted average rate of 4.52%.  No short
term advances were outstanding at June 30, 2008.




At June
30, 2008, long-term FHLB advances totaling $62.8 million mature through April
2013, with a weighted average yield of 3.56%.  As of December 31,
2007, long-term FHLB advances totaling $27.4 million were outstanding, with a
weighted average yield of 4.48%.










15
 Index








Results
of Operations for the Three and Six Months Ended June 30, 2008 and June 30,
2007





Average
Balance Table


The
following table sets forth average balance sheets, average yields and costs, and
certain other information at and for the periods indicated.





MERIDIAN
      INTERSTATE BANCORP, INC. AND SUBSIDIARIESNet
      Interest Income Analysis(Unaudited)For
      The Three Months Ended June 30,2008
              2007(Dollars
      in thousands)
              
              Average
                Balance
              
              Interest
      Earned/Paid
              
              Yield/ Cost
      (4)
              Average
      Balance
              
              Interest
      Earned/Paid
              
              Yield/ Cost
      (4)Assets:Interest-earning
      assets:Loans
      (1)
              
              $
              604,227
              
              
              $
              9,334
              
              
              
              6.21
              %
              
              $
              538,720
              
              
              $
              8,815
              
              
              
              6.56
              %Securities
      and certificates of deposit
              
              
              310,094
              
              
              
              3,097
              
              
              
              4.02
              
              
              
              278,410
              
              
              
              3,057
              
              
              
              4.40Other
      interest-earning assets
              
              
              96,801
              
              
              478
              
              
              
              1.99
              
              
              
              16,076
              
              
              208
              
              
              
              5.19Total
      interest-earning assets
              
              
              1,011,122
              
              
              
              12,909
              
              
              
              5.13
              
              
              
              833,206
              
              
              
              12,080
              
              
              
              5.82Noninterest-earning
      assets
              
              
              76,288
              
              
              
              
              
              
              
              
              
              
              
              68,230Total
      assets
              
              $
              1,087,410
              
              
              
              
              
              
              
              
              
              
              $
              901,436Liabilities
      and stockholders' equity:Interest-bearing
      liabilities:NOW  deposits
              
              $
              39,530
              
              
              
              79
              
              
              
              0.80
              
              
              $
              34,289
              
              
              
              33
              
              
              
              0.39Money
      market deposits
              
              
              143,566
              
              
              
              885
              
              
              
              2.48
              
              
              
              103,936
              
              
              
              891
              
              
              
              3.44Savings
      and other deposits
              
              
              123,801
              
              
              
              351
              
              
              
              1.14
              
              
              
              132,958
              
              
              
              380
              
              
              
              1.15Certificates
      of deposit
              
              
              448,618
              
              
              5,111
              
              
              
              4.58
              
              
              
              414,495
              
              
              5,003
              
              
              
              4.84Total
      interest-bearing deposits
              
              
              755,515
              
              
              
              6,426
              
              
              
              3.42
              
              
              
              685,678
              
              
              
              6,307
              
              
              
              3.69FHLB
      advances
              
              
              64,070
              
              
              570
              
              
              
              3.58
              
              
              
              41,263
              
              
              493
              
              
              
              4.79Total
      interest-bearing liabilities
              
              
              819,585
              
              
              
              6,996
              
              
              
              3.43
              
              
              
              726,941
              
              
              
              6,800
              
              
              
              3.75Non-interest-bearing
      demand deposits
              
              
              55,299
              
              
              
              
              
              
              
              
              
              
              
              53,890Other
      non-interest-bearing liabilities
              
              
              9,647
              
              
              
              
              
              
              
              
              
              
              
              7,598Total
      liabilities
              
              
              884,531
              
              
              
              
              
              
              
              
              
              
              
              788,429Total
      stockholders' equity
              
              
              202,879
              
              
              
              
              
              
              
              
              
              
              
              113,007Total
      liabilities and stockholders' equity
              
              $
              1,087,410
              
              
              
              
              
              
              
              
              
              
              $
              901,436Net
      interest income
              
              
              
              
              
              $
              5,913
              
              
              
              
              
              
              
              
              
              
              $
              5,280Interest
      rate spread  (2)
              
              
              
              
              
              
              
              
              
              
              1.70
              %
              
              
              
              
              
              
              
              
              
              
              2.07
              %Net
      interest margin  (3)
              
              
              
              
              
              
              
              
              
              
              2.35
              %
              
              
              
              
              
              
              
              
              
              
              2.54
              %Average
      interest-earning assets to average interest-bearing
      liabilities
              
              
              
              
              
              123.37
              %
              
              
              
              
              
              
              
              
              
              
              114.62
              %





(1)
      Loans on non accrual status are included in average
    balances.(2)
      Interest rate spread represents the difference betweent the yield on
      interest-earning assets and the cost of interest-bearing
      liabilities.(3)
      Net interest margin represents net interest income divided by average
      interest-earning assets.(4)
      Annualized.


16
 Index





MERIDIAN
      INTERSTATE BANCORP, INC. AND SUBSIDIARIESNet
      Interest Income Analysis(Unaudited)For
      The Six Months Ended June 30,2008
              2007(Dollars
      in thousands)
              
              AverageBalance
              
              Interest
      Earned/Paid
              
              Yield/ Cost
      (4)
              Average
      Balance
              
              Interest
      Earned/Paid
              
              Yield/ Cost
      (4)Assets:Interest-earning
      assets:Loans
      (1)
              
              $
              585,481
              
              
              $
              18,517
              
              
              
              6.36
              %
              
              $
              538,719
              
              
              $
              17,487
              
              
              
              6.49
              %Securities
      and certificates of deposit
              
              
              285,088
              
              
              
              5,974
              
              
              
              4.21
              
              
              
              279,757
              
              
              
              6,093
              
              
              
              4.36Other
      interest-earning assets
              
              
              117,636
              
              
              1,541
              
              
              
              2.63
              
              
              
              15,214
              
              
              395
              
              
              
              5.23Total
      interest-earning assets
              
              
              988,205
              
              
              
              26,032
              
              
              
              5.30
              
              
              
              833,690
              
              
              
              23,975
              
              
              
              5.75Noninterest-earning
      assets
              
              
              75,438
              
              
              
              
              
              
              
              
              
              
              
              65,911Total
      assets
              
              $
              1,063,643
              
              
              
              
              
              
              
              
              
              
              $
              899,601Liabilities
      and stockholders' equity:Interest-bearing
      liabilities:NOW  deposits
              
              $
              37,225
              
              
              
              147
              
              
              
              0.79
              
              
              $
              64,040
              
              
              
              47
              
              
              
              0.15Money
      market deposits
              
              
              141,844
              
              
              
              2,038
              
              
              
              2.89
              
              
              
              101,208
              
              
              
              1,709
              
              
              
              3.40Savings
      and other deposits
              
              
              132,122
              
              
              
              746
              
              
              
              1.14
              
              
              
              133,149
              
              
              
              771
              
              
              
              1.17Certificates
      of deposit
              
              
              447,243
              
              
              10,406
              
              
              
              4.68
              
              
              
              417,620
              
              
              9,896
              
              
              
              4.78Total
      interest-bearing deposits
              
              
              758,434
              
              
              
              13,337
              
              
              
              3.54
              
              
              
              716,017
              
              
              
              12,423
              
              
              
              3.50FHLB
      advances
              
              
              49,992
              
              
              944
              
              
              
              3.80
              
              
              
              40,823
              
              
              969
              
              
              
              4.79Total
      interest-bearing liabilities
              
              
              808,426
              
              
              
              14,281
              
              
              
              3.55
              
              
              
              756,840
              
              
              
              13,392
              
              
              
              3.57Non-interest-bearing
      demand deposits
              
              
              53,550
              
              
              
              
              
              
              
              
              
              
              
              23,851Other
      non-interest-bearing liabilities
              
              
              9,215
              
              
              
              
              
              
              
              
              
              
              
              7,002Total
      liabilities
              
              
              871,191
              
              
              
              
              
              
              
              
              
              
              
              787,693Total
      stockholders' equity
              
              
              192,452
              
              
              
              
              
              
              
              
              
              
              
              111,908Total
      liabilities and stockholders' equity
              
              $
              1,063,643
              
              
              
              
              
              
              
              
              
              
              $
              899,601Net
      interest income
              
              
              
              
              
              $
              11,751
              
              
              
              
              
              
              
              
              
              
              $
              10,583Interest
      rate spread  (2)
              
              
              
              
              
              
              
              
              
              
              1.75
              %
              
              
              
              
              
              
              
              
              
              
              2.18
              %Net
      interest margin  (3)
              
              
              
              
              
              
              
              
              
              
              2.39
              %
              
              
              
              
              
              
              
              
              
              
              2.54
              %Average
      interest-earning assets toaverage interest-bearing
    liabilities
              
              
              
              
              
              122.24
              %
              
              
              
              
              
              
              
              
              
              
              110.15
              %





(1)
      Loans on non accrual status are included in average
    balances.(2)
      Interest rate spread represents the difference betweent the yield on
      interest-earning assets and the cost of interest-bearing
      liabilities.(3)
      Net interest margin represents net interest income divided by average
      interest-earning assets.


(4)
Annualized.


17
 Index





Financial
Summary





The
Company recorded a net loss of $2.2 million for the quarter ended June 30, 2008,
compared to net income of $796,000 for the quarter ended June 30,
2007.  The 2008 quarter reflects pre-tax compensation charges of $1.5
million as a result of the retirement of the Bank’s president and a provision
for loan losses of $2.2 million.  The net loss per basic and diluted
share for the second quarter of 2008 was $0.10.





For the
six months ended June 30, 2008, the Company recorded a net loss of $2.5 million,
compared to net income of $2.6 million for the six months ended June 30,
2007.  In addition to the retirement charge and loan loss provision,
the 2008 loss includes a $3.0 million pre-tax contribution of stock to the
Company’s charitable foundation, which was made as part of the Company’s
minority stock offering, completed on January 22, 2008.  Earnings per
share for the six months ended June 30, 2008 is not applicable, as shares were
not outstanding for the entire period.





Analysis
of Net Interest Income





Net interest income for the quarter
ended June 30, 2008 was $5.9 million, an increase of $633,000, or 12.0%, from
the quarter ended June 30, 2007, primarily due to an increase in interest earned
on loans.   Net interest income for the six months ended June 30,
2008 was $11.8 million, an increase of $1.2 million, or 11.0%, from the six
months ended June 30, 2007.  Interest income increased by $2.1
million, or 8.6%, while interest expense increased $889,000, or 6.6%, due to
increased loan and deposit balances.





The Company’s net interest margin was
2.35% and 2.54% for the quarters ended June 30, 2008 and 2007,
respectively.  For the six months ended June 30, 2008 the net interest
margin was 2.39%, compared to 2.54% for the same period in 2007.  The
decline in net interest margin reflects decreases in yields on prime-related
assets, resulting from Federal Reserve actions to reduce short-term interest
rates, offsetting an overall decrease in rates paid on interest-bearing
liabilities.





Growth in the loan portfolio resulted
in increased interest income in 2008, from $8.8 million for the quarter ended
June 30, 2007, to $9.3 million for the quarter ended June 30,
2008.  For the six months ended June 30, total loan interest income
was $18.5 million, compared to $17.5 million for the six months ended June 30,
2007.





The Company continues to monitor
deposit pricing to encourage the retention of deposits obtained under
promotional rates in 2007, while managing overall deposit expense.  As
a result, the average balance of interest-bearing deposits increased $69.8
million, or 10.2%, while deposit interest expense increased $119,000, or 1.9%
for the quarter ended June 30, 2008. For the six months ended June 30,
2008, deposit interest expense increased $914,000, or 7.4%, from the same period
in 2007, also mainly as a result of an increase in the average balance of
interest-bearing deposits.





Borrowing expense increased $77,000, or
15.6%, for the quarter ended June 30, 2008 compared to the same period in 2007
due to higher average outstanding borrowings, which increased from $41.3 million
to $64.1 million. The average rate paid on borrowings decreased from 4.79% to
3.58%.  Comparing the six months ended June 30, 2008 and 2007,
borrowing expense decreased by $25,000, or 2.6%, due to lower
rates.




Non-interest
Income




Non-interest
income for the second quarter of 2008 was $1.0 million, a decrease of $203,000,
or 16.2%, compared to the second quarter of 2007.  The Bank received
$382,000 of bank-owned life insurance income in the second quarter of 2007 due
to policy proceeds for one insured individual, compared to no policy proceeds in
2008.  Non-interest income was $4.2 million for six months ended June
30, 2008 and 2007, as a $282,000 decrease in income from bank-owned life
insurance was offset by an increase in gains on sale of securities of
$281,000.










18
 Index








Non-interest Expenses




Non-interest
expenses increased from $5.2 million for the quarter ended June 30,
2007 to $8.5 million for the quarter ended June 30, 2008. Salary and
employee benefit costs increased from $3.4 million to $5.8 million, primarily as
a result of the $1.5 million pre-tax expense associated with the retirement of
the Bank’s former President in June 2008, as well as additional expense incurred
in connection with the Company’s ESOP and bank-owned life insurance
policies.  The Company also incurred an increase in professional
service fees of $383,000 due mainly to legal and audit expenses related to
being a public company.  Marketing expense was $293,000, an increase
of $90,000 from 2007, as the Company utilized radio media to promote the
availability of commercial and residential mortgage credit in its local market
area.  Contributing to the increase in other expense is higher FDIC
insurance costs, as a one-time credit issued to banks in existence prior to 1997
was exhausted during the first quarter of 2008. FDIC expense for the second
quarter of 2008 was $188,000, an increase of $166,000 from the same period in
2007.




Non-interest
expenses increased $7.0 million, from $10.8 million to $17.8 million for
the six months ended June 30, 2007 and 2008 respectively, as a result of the
$1.5 million retirement charge and a contribution of $3.0 million to the
Meridian Charitable Foundation.  The Company also incurred an increase
in professional service fees of $508,000 due mainly to legal and audit
expenses related to being a public company.  Marketing expense was
$539,000, an increase of $196,000 from 2007, due to radio
media promotions.  Other expense increased by $397,000 primarily
as a result of increased FDIC insurance costs.




Income Tax
Expense





We
recorded a tax benefit of $1.5 million, or a 40.3% effective tax rate, for the
quarter ended June 30, 2008 compared to a tax expense of $429,000, or a 35.0%
effective tax rate, for the same 2007 period.  We recorded a tax
benefit of $1.6 million, or a 38.7% effective tax rate,  for the six
months ended June 30, 2008 compared to a tax expense of $1.3 million, or a 32.8%
effective tax rate,  for the same 2007 period.  The tax
benefit recorded in 2008 was due to the net operating loss, and the increase in
the effective tax rate is due to changes in the components of non-taxable income
and non-deductible expense as a percentage of pre-tax income or
loss.





The
Company contributed 300,000 shares of common stock to the Meridian Charitable
Foundation, resulting in a pre-tax non-interest expense charge of $3.0 million
in the first quarter of 2008.  Under current Federal income tax
regulations, charitable contribution deductions are limited to 10% of taxable
income.   Accordingly, our $3.0 million contribution created a
carry-forward for income tax purposes and a deferred tax asset for financial
statement purposes.





Liquidity
and Capital Management





Liquidity
Management.Liquidity is
the ability to meet current and future financial obligations of a short-term
nature. Our primary sources of funds consist of deposit inflows, loan
repayments, maturities of and payments on investment securities and borrowings
from the Federal Home Loan Bank of Boston.  While maturities and
scheduled amortization of loans and securities are predictable sources of funds,
deposit flows and mortgage prepayments are greatly influenced by general
interest rates, economic conditions and competition.





We regularly adjust our investments in
liquid assets based upon our assessment of (1) expected loan demand,
(2) expected deposit flows, (3) yields available on interest-earning
deposits and securities and (4) the objectives of our asset/liability management
policy.





Our most liquid assets are cash and
cash equivalents.  The levels of these assets depend on our operating,
financing, lending and investing activities during any given
period.  At June 30, 2008, cash and cash equivalents totaled $43.6
million.  In addition, at June 30, 2008, we had $91.5 million of
available borrowing capacity with the Federal Home Loan Bank of Boston,
including a $9.4 million line of credit.  On June 30, 2008, we had
$62.8 million of advances outstanding.





A significant use of our liquidity is
the funding of loan originations.  At June 30, 2008, we had $181.5
million in total loan commitments outstanding.  Unused portions of
existing loans include $77.7 million in unadvanced portions of construction
loans, $25.7 million in unused home equity lines of credit, $2.0 million in
unused business lines of credit, $1.2 million in unused commercial letters of
credit, and $527,000 in unadvanced revolving lines of credit. Commitments to
fund new loans include $7.4 million in commitments to fund one- to
four-


19
 Index





family
residential real estate loans, $32.6 million in commitments to fund commercial
real estate loans, $33.2 million in commitments to originate construction loans,
$394,000 in commitments to originate home equity lines of credit, and $813,000
in commitments to originate residential construction
loans.    Historically, some of the commitments expire
without being fully drawn; therefore, the total amount of commitment does not
necessarily represent future cash requirements.  We also have a seven
year contract with our core data processing provider with an outstanding
commitment of approximately $6.7 million as of June 30, 2008, and an annual
payment of approximately $1.3 million.  The Company entered into an
agreement for design and renovation services for the new Wakefield,
Massachusetts branch.  The outstanding commitment for the project at
June 30, 2008 is $725,000, with expected completion in the fourth quarter of
2008.  The Company will fund the project from cash on
hand.





Another significant use of our
liquidity is the funding of deposit withdrawals.  Certificates of
deposit due within one year of June 30, 2008 totaled $345.0 million, or 78%
of certificates of deposit.   If these maturing deposits do not
remain with us, we will be required to utilize other sources of
funds.  Historically, a significant portion of certificates of deposit
that mature have remained at the Company.   We have the ability
to attract and retain deposits by adjusting the interest rates offered, and all
deposit categories have continued to increase in 2008 despite the end of our
offering promotional pricing.





Our primary investing activities are
the origination of loans and the purchase of securities.  Our primary
financing activities consist of activity in deposit accounts and Federal Home
Loan Bank advances.  Deposit flows are affected by the overall level
of interest rates, the interest rates and products offered by us and our local
competitors and other factors.  We generally manage the pricing of our
deposits to be competitive.  Occasionally, we offer promotional rates
on certain deposit products to attract deposits.




Capital
Management.Both Meridian
Interstate Bancorp and East Boston Savings Bank are subject to various
regulatory capital requirements administered by the Federal Reserve Board and
Federal Deposit Insurance Corporation, respectively, including a risk-based
capital measure.  The risk-based capital guidelines include both a
definition of capital and a framework for calculating risk-weighted assets by
assigning balance sheet assets and off-balance sheet items to broad risk
categories.  At June 30, 2008, both Meridian Interstate Bancorp and
East Boston Savings Bank exceeded all of their respective regulatory capital
requirements.





The proceeds from the stock offering
significantly increased our liquidity and capital resources.  The
initial level of liquidity is being reduced as net proceeds are used for general
corporate purposes, including the funding of loan originations.  Due
to the increase in equity that resulted from the net proceeds of the stock
offering, our return on equity ratios have been adversely affected.





We may use capital management tools
such as cash dividends and common share repurchases.  However,
Massachusetts Commissioner of Banks regulations restrict stock repurchases by
Meridian Interstate Bancorp within three years of the stock offering unless the
repurchase: (i) is part of a general repurchase made on a pro rata basis
pursuant to an offering approved by the Commissioner of the Banks and made to
all stockholders of Meridian Interstate Bancorp (other than Meridian Financial
Services with the approval of the Commissioner of Banks); (ii) is limited to the
repurchase of qualifying shares of a director; (iii) is purchased in the open
market by a tax-qualified or nontax-qualified employee stock benefit plan of
Meridian Interstate Bancorp or East Boston Savings Bank in an amount reasonable
and appropriate to fund the plan; or (iv) is limited to stock repurchases of no
greater than 5% of the outstanding capital stock of Meridian Interstate Bancorp
where compelling and valid business reasons are established to the satisfaction
of the Commissioner of Banks.  In addition, pursuant to Federal
Reserve Board approval conditions imposed in connection with the formation of
Meridian Interstate Bancorp, Meridian Interstate Bancorp has committed (i) to
seek the Federal Reserve Board’s prior approval before repurchasing any equity
securities from Meridian Financial Services and (ii) that any repurchases of
equity securities from stockholders other than Meridian Financial Services will
be at the current market price for such stock repurchases.  Meridian
Interstate Bancorp will also be subject to the Federal Reserve Board’s notice
provisions for stock repurchases.






20
 Index





Off-Balance
Sheet Arrangements.In the normal course of operations, we
engage in a variety of financial transactions that, in accordance with generally
accepted accounting principles are not recorded in our financial
statements.  These transactions involve, to varying degrees, elements
of credit, interest rate and liquidity risk. Such transactions are used
primarily to manage customers’ requests for funding and take the form of loan
commitments and lines of credit.  We had no investment in derivative
securities at June 30, 2008.





For the six months ended June 30, 2008,
we engaged in no off-balance sheet transactions reasonably likely to have a
material effect on our financial condition, results of operations or cash
flows.








Item
3.  Quantitative and Qualitative Disclosures about Market Risk





Interest
Rate Risk Management.Our earnings and the market value of our
assets and liabilities are subject to fluctuations caused by changes in the
level of interest rates.  We manage the interest rate sensitivity of
our interest-bearing liabilities and interest-earning assets in an effort to
minimize the adverse effects of changes in the interest rate
environment.  Deposit accounts typically react more quickly to changes
in market interest rates than mortgage loans because of the shorter maturities
of deposits.  As a result, sharp increases in interest rates may
adversely affect our earnings while decreases in interest rates may beneficially
affect our earnings.  To reduce the potential volatility of our
earnings, we have sought to improve the match between asset and liability
maturities and rates, while maintaining an acceptable interest rate
spread.  Our strategy for managing interest rate risk
emphasizes:  originating loans with adjustable interest rates; selling
the residential real estate fixed-rate loans with terms greater than 15 years
that we originate; and promoting core deposit products and short-term time
deposits.





We have an Asset/Liability Management
Committee to coordinate all aspects involving asset/liability
management.  The committee establishes and monitors the volume,
maturities, pricing and mix of assets and funding sources with the objective of
managing assets and funding sources to provide results that are consistent with
liquidity, growth, risk limits and profitability goals.





Net
Interest Income Simulation Analysis.We analyze our interest rate
sensitivity position to manage the risk associated with interest rate movements
through the use of interest income simulation. The matching of assets and
liabilities may be analyzed by examining the extent to which such assets and
liabilities are “interest sensitive.” An asset or liability is said to be
interest rate sensitive within a specific time period if it will mature or
reprice within that time period.





Our goal is to manage asset and
liability positions to moderate the effects of interest rate fluctuations on net
interest income.  Interest income simulations are completed quarterly
and presented to the Asset/Liability Committee and the board of directors. The
simulations provide an estimate of the impact of changes in interest rates on
net interest income under a range of assumptions. The numerous assumptions used
in the simulation process are reviewed by the Asset/Liability Committee and the
Executive Committee on a quarterly basis. Changes to these assumptions can
significantly affect the results of the simulation. The simulation incorporates
assumptions regarding the potential timing in the repricing of certain assets
and liabilities when market rates change and the changes in spreads between
different market rates. The simulation analysis incorporates management’s
current assessment of the risk that pricing margins will change adversely over
time due to competition or other factors.





Simulation analysis is only an estimate
of our interest rate risk exposure at a particular point in time. We continually
review the potential effect changes in interest rates could have on the
repayment of rate sensitive assets and funding requirements of rate sensitive
liabilities.





The simulation uses projected repricing
of assets and liabilities at June 30, 2008 on the basis of contractual
maturities, anticipated repayments and scheduled rate adjustments. Prepayment
rates can have a significant impact on interest income simulation. Because of
the large percentage of loans we hold, rising or falling interest rates have a
significant impact on the prepayment speeds of our earning assets that in turn
affect the rate sensitivity position.





When
interest rates rise, prepayments tend to slow. When interest rates fall,
prepayments tend to rise. Our asset sensitivity would be reduced if prepayments
slow and vice versa. While we believe such assumptions to be reasonable, there
can be no assurance that assumed prepayment rates will approximate actual future
mortgage-backed security and loan repayment activity.


21
 Index





The
following table reflects changes in estimated net interest income for the
Company for the twelve-month period beginning June 30, 2008 and ending June 30,
2009:





Increase
      (Decrease)in
      Market Interest
              
              Net
      Interest Income
              
              
              Net
      Portfolio Value EstimateRates
      (Rate Shock)
              
              Amount
              
              
              Change
              
              
              Percent
              
              
              Amount
              
              
              Change
              
              
              Percent(Dollars
      in thousands)200
              
              
              $
              38,609
              
              
              $
              4,597
              
              
              
              13.52
              %
              
              $
              148,280
              
              
              $
              (39,090
              )
              
              
              (20.86
              )%100
              
              
              
              36,451
              
              
              
              2,439
              
              
              
              7.17
              
              
              
              168,823
              
              
              
              (18,547
              )
              
              
              (9.90
              )0
              
              
              
              34,012
              
              
              
              
              
              
              
              
              
              
              
              187,370(100
              )
              
              
              31,049
              
              
              
              (2,963
              )
              
              
              (8.71
              )
              
              
              198,799
              
              
              
              11,429
              
              
              
              6.10(200
              )
              
              
              27,449
              
              
              
              (6,563
              )
              
              
              (19.30
              )
              
              
              204,731
              
              
              
              17,361
              
              
              
              9.27





The basis
point changes in rates in the above table are assumed to occur evenly over the
following 12 months.





Item
4.  Controls and Procedures





(a)
            Disclosure
      Controls and Procedures





Meridian Interstate Bancorp’s
management, including Meridian Interstate Bancorp’s principal executive officer
and principal financial officer, have evaluated the effectiveness of Meridian
Interstate Bancorp’s “disclosure controls and procedures,” as such term is
defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934,
as amended (the “Exchange Act”).  Based upon their evaluation, the
principal executive officer and principal financial officer concluded that, as
of the end of the period covered by this report, Meridian Interstate Bancorp’s
disclosure controls and procedures were effective for the purpose of ensuring
that the information required to be disclosed in the reports that Meridian
Interstate Bancorp files or submits under the Exchange Act with the Securities
and Exchange Commission (the “SEC”) (1) is recorded, processed, summarized and
reported within the time periods specified in the SEC’s rules and forms and (2)
is accumulated and communicated to Meridian Interstate Bancorp’s management,
including its principal executive and principal financial officers, as
appropriate to allow timely decisions regarding required
disclosure.





(b)
              Internal
      Control over Financial
Reporting





There have not been any changes in
Meridian Interstate Bancorp’s internal control over financial reporting (as such
term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during
the fiscal quarter to which this report relates that have materially affected,
or are reasonably likely to materially affect, Meridian Interstate Bancorp’s
internal control over financial reporting.





22
 Index


PART II – OTHER INFORMATION





Item
1.  Legal Proceedings





Periodically,
there have been various claims and lawsuits against us, such as claims to
enforce liens, condemnation proceedings on properties in which we hold security
interests, claims involving the making and servicing of real property loans and
other issues incident to our business.  We are not a party to any
pending legal proceedings that we believe would have a material adverse effect
on our financial condition, results of operations or cash flows.





Item
1A.  Risk Factors





For information regarding our risk
factors, see “Risk Factors,” in our 2007 Annual Report on Form 10-K, filed with
the SEC on June 30, 2008, which is available through the SEC’s website at www.sec.gov.   As
of June 30, 2008, the risk factors of Meridian Interstate Bancorp have not
changed materially from those reported in the prospectus.  The risks
described in Meridian Interstate Bancorp’s prospectus are not the only risks
that we face.  Additional risks and uncertainties not currently known
to us or that we currently deem to be immaterial also may materially adversely
affect our business, financial condition and/or operating results.





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





(a.) –
(c.) Not applicable.








Item
3.  Defaults Upon Senior Securities





Not
applicable.





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





None.





Item
5A.  Other Information





None.








23
 Index





Item
      6.
            Exhibits3.1
            Amended
      and Restated Articles of Organization of Meridian Interstate Bancorp,
      Inc.*3.2
            Amended
      and Restated Bylaws of Meridian Interstate Bancorp,
  Inc.*4
            Form
      of Common Stock Certificate of Meridian Interstate Bancorp,
      Inc.*10.1
            Form
      of East Boston Savings Bank Employee Stock Ownership
  Plan*10.2
            Form
      of East Boston Savings Bank Employee Stock Ownership Plan Trust
      Agreement*10.3
            East
      Boston Savings Bank Employee Stock Ownership Plan Loan Agreement, Pledge
      Agreement and Promissory Note*10.4
            Form
      of Amended and Restated Employment Agreement*10.5
            Form
      of East Boston Savings Bank Employee Severance Compensation
      Plan*10.6
            Form
      of Supplemental Executive Retirement Agreements with certain
      directors*10.7
            Form
      of Separation Agreement with Robert F. Verdonck incorporated by reference
      to the Form 8-K filed on June 11, 2008.10.8
            Form
      of Amended and Restated Supplemental Executive Retirement Agreement with
      Leonard V. Siuda filed as an exhibit to Form 10-Q filed on May 14,
      2008.10.9
            Form
      of Amended and Restated Supplemental Executive Retirement Agreement with
      Philip F. Freehan filed as an exhibit to Form 10-Q filed on May 14,
      2008.10.10
            Form
      of Supplemental Executive Retirement Agreement with Richard J. Gavegnano
      filed as an exhibit to Form 10-Q filed on May 14, 2008.21
            Subsidiaries
      of Registrant*31.1
            Certification
      of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 200231.2
            Certification
      of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 200232
            Certification
      of Chief Executive Officer and Chief Financial Officer pursuant to Section
      906 of the Sarbanes-Oxley Act of 2002_______________________________*
            Incorporated
      by reference to the Registration Statement on Form S-1 of Meridian
      Interstate Bancorp, Inc. (File No. 333-146373), originally filed with the
      Securities and Exchange Commission on September 28,
  2007.














24
 Index








SIGNATURES





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








MERIDIAN INTERSTATE
      BANCORP, INC.(Registrant)Dated:  August
      13, 2008
            /s/
      Richard J. GavegnanoRichard
      J. GavegnanoChairman
      and Chief Executive Officer(Principal
      Executive Officer)Dated:  August
      13, 2008
            /s/
      Leonard V. SiudaLeonard
      V. SiudaChief
      Financial Officer and Treasurer(Principal
      Financial and Accounting Officer)





25