##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2010
 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.
  Massachusetts
    
    20-4652200(State or other jurisdiction of incorporation or
    
    (I.R.S. Employer Identification No.)organization)
 10 Meridian Street, East Boston, Massachusetts 02128
 (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)
 þ o
 o o
  Large Accelerated Filer o
    
    Accelerated Filer þ
    
    Non-accelerated Filer o
    
    Smaller Reporting Company o
 o þ




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##### 



MERIDIAN INTERSTATE BANCORP, INC.
 FORM 10-Q
 INDEX
 PagePART I. FINANCIAL INFORMATIONItem 1. Financial StatementsConsolidated Balance Sheets at September 30, 2010 and December 31, 2009 (Unaudited)
    
    
    1Consolidated Statements of Operations for the three and nine months ended September 30, 2010 and 2009 (Unaudited)
    
    
    2Consolidated Statements of Changes in Stockholders Equity for the nine months ended September 30, 2010 and 2009 (Unaudited)
    
    
    3Consolidated Statements of Cash Flows for the nine months ended September 30, 2010 and 2009 (Unaudited)
    
    
    4Notes to Unaudited Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    16Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    29Item 4. Controls and Procedures
    
    
    30PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    31Item 1A. Risk Factors
    
    
    31Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    31Item 3. Defaults Upon Senior Securities
    
    
    31Item 4. [Removed and Reserved]
    
    
    31Item 5. Other Information
    
    
    31Item 6. Exhibits
    
    
    32Signatures
    
    
    33Exhibit 31.1Exhibit 31.2Exhibit 32




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 MERIDIAN INTERSTATE BANCORP, INC. AND SUBSIDIARIES
 
 Consolidated Balance Sheets
 (Unaudited)
 September 30,
    
    
    December 31,(Dollars in thousands)
    
    2010
    
    
    2009ASSETSCash and due from banks
    
    $
    120,761
    
    
    $
    9,010Federal funds sold
    
    
    213
    
    
    
    10,956Total cash and cash equivalents
    
    
    120,974
    
    
    
    19,966Certificates of deposit  affiliate bank
    
    
    
    
    
    
    3,000Securities available for sale, at fair value
    
    
    348,901
    
    
    
    293,367Federal Home Loan Bank stock, at cost
    
    
    12,538
    
    
    
    4,605Loans held for sale
    
    
    6,439
    
    
    
    955Loans
    
    
    1,203,165
    
    
    
    822,542Less allowance for loan losses
    
    
    (11,483
    )
    
    
    (9,242
    )Loans, net
    
    
    1,191,682
    
    
    
    813,300Bank-owned life insurance
    
    
    33,525
    
    
    
    23,721Foreclosed real estate, net
    
    
    3,215
    
    
    
    2,869Investment in affiliate bank
    
    
    11,326
    
    
    
    11,005Premises and equipment, net
    
    
    33,492
    
    
    
    23,195Accrued interest receivable
    
    
    6,880
    
    
    
    6,231Prepaid deposit insurance
    
    
    3,572
    
    
    
    5,114Deferred tax asset, net
    
    
    9,463
    
    
    
    1,523Goodwill
    
    
    11,138
    
    
    
    Other assets
    
    
    2,399
    
    
    
    2,535Total assets
    
    $
    1,795,544
    
    
    $
    1,211,386LIABILITIES AND STOCKHOLDERS EQUITYDeposits:Non interest-bearing
    
    $
    123,099
    
    
    $
    63,606Interest-bearing
    
    
    1,285,930
    
    
    
    858,869Total deposits
    
    
    1,409,029
    
    
    
    922,475Short-term borrowings  affiliate bank
    
    
    8,616
    
    
    
    3,102Short-term borrowings  other
    
    
    10,032
    
    
    
    22,108Long-term debt
    
    
    135,276
    
    
    
    50,200Accrued expenses and other liabilities
    
    
    20,378
    
    
    
    13,086Total liabilities
    
    
    1,583,331
    
    
    
    1,010,971Stockholders equity:Common stock, no par value 50,000,000 shares authorized;
23,000,000 shares issued; 22,461,927 and 22,098,565 shares
outstanding at September 30, 2010 and December 31, 2009, respectively
    
    
    
    
    
    
    Additional paid-in capital
    
    
    96,865
    
    
    
    100,972Retained earnings
    
    
    118,262
    
    
    
    109,189Accumulated other comprehensive income
    
    
    8,932
    
    
    
    5,583Treasury stock, at cost, 156,758 and 517,500 shares
at September 30, 2010 and December 31, 2009, respectively
    
    
    (1,740
    )
    
    
    (4,535
    )Unearned compensation  ESOP, 714,150 and 745,200 shares
at September 30, 2010 and December 31, 2009, respectively
    
    
    (7,141
    )
    
    
    (7,452
    )Unearned compensation  restricted shares, 381,315 and 383,935
shares at September 30, 2010 and December 31, 2009, respectively
    
    
    (2,965
    )
    
    
    (3,342
    )Total stockholders equity
    
    
    212,213
    
    
    
    200,415Total liabilities and stockholders equity
    
    $
    1,795,544
    
    
    $
    1,211,386
   1




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##### Table of Contents



MERIDIAN INTERSTATE BANCORP, INC. AND SUBSIDIARIES
 
 Consolidated Statements of Operations
 (Unaudited)
 Three Months Ended September 30,
    
    
    Nine Months Ended September 30,(Dollars in thousands, except per share amounts)
    
    2010
    
    
    2009
    
    
    2010
    
    
    2009Interest and dividend income:Interest and fees on loans
    
    $
    17,491
    
    
    $
    11,480
    
    
    $
    50,530
    
    
    $
    33,171Interest on debt securities
    
    
    3,461
    
    
    
    2,673
    
    
    
    10,291
    
    
    
    7,682Dividends on equity securities
    
    
    232
    
    
    
    252
    
    
    
    665
    
    
    
    844Interest on certificates of deposit
    
    
    8
    
    
    
    16
    
    
    
    42
    
    
    
    72Interest on other interest-earning assets
    
    
    36
    
    
    
    5
    
    
    
    84
    
    
    
    23Total interest and dividend income
    
    
    21,228
    
    
    
    14,426
    
    
    
    61,612
    
    
    
    41,792Interest expense:Interest on deposits
    
    
    4,355
    
    
    
    4,404
    
    
    
    12,864
    
    
    
    14,605Interest on short-term borrowings
    
    
    11
    
    
    
    5
    
    
    
    55
    
    
    
    47Interest on long-term debt
    
    
    868
    
    
    
    502
    
    
    
    2,649
    
    
    
    1,501Total interest expense
    
    
    5,234
    
    
    
    4,911
    
    
    
    15,568
    
    
    
    16,153Net interest income
    
    
    15,994
    
    
    
    9,515
    
    
    
    46,044
    
    
    
    25,639Provision for loan losses
    
    
    77
    
    
    
    694
    
    
    
    2,245
    
    
    
    1,808Net interest income, after provision
for loan losses
    
    
    15,917
    
    
    
    8,821
    
    
    
    43,799
    
    
    
    23,831Non-interest income:Customer service fees
    
    
    1,555
    
    
    
    826
    
    
    
    4,459
    
    
    
    2,322Loan fees
    
    
    238
    
    
    
    160
    
    
    
    536
    
    
    
    437Gain on sales of loans, net
    
    
    309
    
    
    
    125
    
    
    
    1,073
    
    
    
    424Other-than-temporary impairment losses
    
    
    
    
    
    
    (56
    )
    
    
    
    
    
    
    (429
    )Gain (loss) on sales of securities, net
    
    
    785
    
    
    
    (290
    )
    
    
    785
    
    
    
    (290
    )Income from bank-owned life insurance
    
    
    286
    
    
    
    216
    
    
    
    865
    
    
    
    670Equity income on investment in affiliate bank
    
    
    145
    
    
    
    117
    
    
    
    321
    
    
    
    92Total non-interest income
    
    
    3,318
    
    
    
    1,098
    
    
    
    8,039
    
    
    
    3,226Non-interest expenses:Salaries and employee benefits
    
    
    6,967
    
    
    
    4,084
    
    
    
    19,580
    
    
    
    14,499Occupancy and equipment
    
    
    1,347
    
    
    
    754
    
    
    
    4,208
    
    
    
    2,315Data processing
    
    
    779
    
    
    
    406
    
    
    
    2,282
    
    
    
    1,318Data processing contract termination cost
    
    
    3,075
    
    
    
    
    
    
    
    3,075
    
    
    
    Marketing and advertising
    
    
    373
    
    
    
    387
    
    
    
    1,419
    
    
    
    934Professional services
    
    
    465
    
    
    
    467
    
    
    
    1,940
    
    
    
    1,535Foreclosed real estate expense, net
    
    
    28
    
    
    
    15
    
    
    
    304
    
    
    
    493Deposit insurance
    
    
    578
    
    
    
    373
    
    
    
    1,670
    
    
    
    1,513Other general and administrative
    
    
    1,033
    
    
    
    681
    
    
    
    3,253
    
    
    
    1,921Total non-interest expenses
    
    
    14,645
    
    
    
    7,167
    
    
    
    37,731
    
    
    
    24,528Income before income taxes
    
    
    4,590
    
    
    
    2,752
    
    
    
    14,107
    
    
    
    2,529Provision for income taxes
    
    
    1,619
    
    
    
    864
    
    
    
    5,034
    
    
    
    787Net income
    
    $
    2,971
    
    
    $
    1,888
    
    
    $
    9,073
    
    
    $
    1,742Net income per share:Basic
    
    $
    0.13
    
    
    $
    0.09
    
    
    $
    0.41
    
    
    $
    0.08Diluted
    
    $
    0.13
    
    
    $
    0.09
    
    
    $
    0.41
    
    
    $
    0.08Weighted average shares:Basic
    
    
    22,033,643
    
    
    
    21,712,292
    
    
    
    22,096,747
    
    
    
    21,889,813Diluted
    
    
    22,037,561
    
    
    
    21,712,292
    
    
    
    22,103,406
    
    
    
    21,889,813
   2




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##### Table of Contents



MERIDIAN INTERSTATE BANCORP, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
 Nine Months Ended September 30, 2010 and 2009
 Shares of No
    
    
    
    
    
    
    
    
    
    
    Accumulated
    
    
    
    
    
    
    
    
    
    
    UnearnedPar Common
    
    
    Additional
    
    
    
    
    
    
    Other
    
    
    
    
    
    
    Unearned
    
    
    Compensation -Stock
    
    
    Paid-in
    
    
    Retained
    
    
    Comprehensive
    
    
    Treasury
    
    
    Compensation -
    
    
    Restricted(Dollars in thousands)
    
    Outstanding
    
    
    Capital
    
    
    Earnings
    
    
    Income (Loss)
    
    
    Stock
    
    
    ESOP
    
    
    Shares
    
    
    TotalNine Months Ended September 30, 2009Balance at December 31, 2008
    
    
    22,750,000
    
    
    $
    100,684
    
    
    $
    105,426
    
    
    $
    (6,205
    )
    
    $
    
    
    
    $
    (7,866
    )
    
    $
    (2,199
    )
    
    $
    189,840Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    1,742
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,742Change in net unrealized gain on securities available for
sale, net of reclassification adjustment and tax effects
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,133
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,133Change in prior service costs and
actuarial losses, net of tax effects
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (18
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (18
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,857Purchase of treasury stock
    
    
    (328,232
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,902
    )
    
    
    
    
    
    
    
    
    
    
    (2,902
    )ESOP shares earned (31,050 shares)
    
    
    
    
    
    
    (47
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    311
    
    
    
    
    
    
    
    264Purchase of 164,000 shares
for restricted share plan
    
    
    (164,000
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,468
    )
    
    
    (1,468
    )Share-based compensation expense
    
    
    
    
    
    
    282
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    259
    
    
    
    541Balance at September 30, 2009
    
    
    22,257,768
    
    
    $
    100,919
    
    
    $
    107,168
    
    
    $
    4,910
    
    
    $
    (2,902
    )
    
    $
    (7,555
    )
    
    $
    (3,408
    )
    
    $
    199,132Nine Months Ended September 30, 2010Balance at December 31, 2009
    
    
    22,098,565
    
    
    $
    100,972
    
    
    $
    109,189
    
    
    $
    5,583
    
    
    $
    (4,535
    )
    
    $
    (7,452
    )
    
    $
    (3,342
    )
    
    $
    200,415Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    9,073
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,073Change in net unrealized gain on securities available
for sale, net of reclassification adjustment and tax effects
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,247
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,247Change in prior service costs and
actuarial losses, net of tax effects
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    102
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    102Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,422ESOP shares earned (31,050 shares)
    
    
    
    
    
    
    17
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    311
    
    
    
    
    
    
    
    328Share-based compensation expense
    
    
    2,620
    
    
    
    381
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    377
    
    
    
    758Purchase of treasury stock
    
    
    (153,367
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,710
    )
    
    
    
    
    
    
    
    
    
    
    (1,710
    )Issuance of 514,109 shares to Meridian Financial Services,
Incorporated, the mutual holding company
    
    
    514,109
    
    
    
    (4,505
    )
    
    
    
    
    
    
    
    
    
    
    4,505
    
    
    
    
    
    
    
    
    
    
    
    Balance at September 30, 2010
    
    
    22,461,927
    
    
    $
    96,865
    
    
    $
    118,262
    
    
    $
    8,932
    
    
    $
    (1,740
    )
    
    $
    (7,141
    )
    
    $
    (2,965
    )
    
    $
    212,213
   3




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##### Table of Contents



MERIDIAN INTERSTATE BANCORP, INC. AND SUBSIDIARIES
 
 Consolidated Statements of Cash Flows
 (Unaudited)
 Nine Months Ended September 30,(In thousands)
    
    2010
    
    
    2009Cash flows from operating activities:Net income
    
    $
    9,073
    
    
    $
    1,742Adjustments to reconcile net income to net cash
provided by operating activities:Amortization of acquisition fair value adjustments
    
    
    (1,037
    )
    
    
    Earned ESOP shares
    
    
    328
    
    
    
    264Provision for loan losses
    
    
    2,245
    
    
    
    1,808Amortization of net deferred loan origination fees
    
    
    (855
    )
    
    
    (49
    )Net (accretion) amortization of securities available for sale
    
    
    (113
    )
    
    
    925Depreciation and amortization expense
    
    
    1,804
    
    
    
    972(Gain) loss on sales of securities, net
    
    
    (785
    )
    
    
    290Other-than-temporary impairment losses
    
    
    
    
    
    
    429Gain on sales of loans held in portfolio, net
    
    
    (352
    )
    
    
    (Gain) loss and provision for foreclosed real estate
    
    
    (125
    )
    
    
    369Deferred income tax benefit
    
    
    (2,358
    )
    
    
    (84
    )Income from bank-owned life insurance
    
    
    (865
    )
    
    
    (670
    )Equity income on investment in affiliate bank
    
    
    (321
    )
    
    
    (92
    )Share-based compensation expense
    
    
    758
    
    
    
    541Net changes in:Loans held for sale
    
    
    (565
    )
    
    
    (699
    )Accrued interest receivable
    
    
    724
    
    
    
    513Prepaid deposit insurance
    
    
    1,542
    
    
    
    Other assets
    
    
    3,735
    
    
    
    940Accrued expenses and other liabilities
    
    
    3,933
    
    
    
    4,975Net cash provided by operating activities
    
    
    16,766
    
    
    
    12,174Cash flows from investing activities:Cash provided by business combination
    
    
    14,422
    
    
    
    Maturities of certificates of deposit
    
    
    3,100
    
    
    
    4,000Activity in securities available for sale:Proceeds from maturities, calls and principal payments
    
    
    54,336
    
    
    
    39,744(Purchases) proceeds from redemption of mutual funds
    
    
    (6,130
    )
    
    
    12,116Proceeds from sales
    
    
    5,943
    
    
    
    392Purchases
    
    
    (58,314
    )
    
    
    (102,673
    )Loans originated, net of principal payments received
    
    
    (70,003
    )
    
    
    (75,526
    )Proceeds from sales of fixed rate loans held in portfolio
    
    
    34,488
    
    
    
    Purchases of premises and equipment
    
    
    (1,396
    )
    
    
    (1,643
    )Purchase of Federal Home Loan Bank stock
    
    
    
    
    
    
    (151
    )Capitalized costs on foreclosed real estate
    
    
    (364
    )
    
    
    (1,132
    )Proceeds from sales of foreclosed real estate
    
    
    3,525
    
    
    
    1,549Net cash used in investing activities
    
    
    (20,393
    )
    
    
    (123,324
    )
    4




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##### Table of Contents



MERIDIAN INTERSTATE BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
 Nine Months Ended September 30,(In thousands)
    
    2010
    
    
    2009Cash flows from financing activities:Net increase in deposits
    
    
    107,330
    
    
    
    125,161Net change in borrowings with maturities
less than three months
    
    
    (6,410
    )
    
    
    (2,016
    )Proceeds from Federal Home Loan Bank advances
with maturities of three months or more
    
    
    15,475
    
    
    
    Repayment of Federal Home Loan Bank advances
with maturities of three months or more
    
    
    (10,050
    )
    
    
    (475
    )Purchase of stock for equity incentive plan
    
    
    
    
    
    
    (1,468
    )Purchase of treasury stock
    
    
    (1,710
    )
    
    
    (2,902
    )Net cash provided by financing activities
    
    
    104,635
    
    
    
    118,300Net change in cash and cash equivalents
    
    
    101,008
    
    
    
    7,150Cash and cash equivalents at beginning of period
    
    
    19,966
    
    
    
    20,265Cash and cash equivalents at end of period
    
    $
    120,974
    
    
    $
    27,415Supplemental cash flow information:Interest paid on deposits
    
    $
    12,807
    
    
    $
    14,936Interest paid on borrowings
    
    
    3,665
    
    
    
    1,555Income taxes paid
    
    
    5,430
    
    
    
    1,315Non-cash investing and financing activities:Transfers from loans to foreclosed real estate
    
    
    1,635
    
    
    
    840In conjunction with the purchase acquisition detailed in Note 6 to
the Consolidated Financial Statements, assets were acquired and
liabilities were assumed as follows:Fair value of assets acquired, net of cash acquired
    
    
    450,648
    
    
    
    Fair value of liabilities assumed
    
    
    465,070
    
    
    
    
   5




---



##### Table of Contents



NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 1. Basis of Presentation
  www.sec.gov
  2. Recent Accounting Pronouncements
    6




---



##### Table of Contents



3. Fair Value Hierarchy
       Cash and cash equivalents
 Certificates of deposit
 Securities available for sale
 Federal Home Loan Bank stock
 Loans held for sale
 Loans
 Deposits
  7




---



##### Table of Contents



Borrowings
 Accrued interest
 Off-balance sheet credit-related instruments
 Assets Measured at Fair Value on a Recurring Basis:
  September 30, 2010Total Fair(In thousands)
    
    Level 1
    
    
    Level 2
    
    
    Level 3
    
    
    ValueDebt securities:Corporate bonds
    
    $
    
    
    
    $
    222,468
    
    
    $
    
    
    
    $
    222,468Government-sponsored enterprises
    
    
    
    
    
    
    10,397
    
    
    
    
    
    
    
    10,397Municipal bonds
    
    
    
    
    
    
    4,432
    
    
    
    
    
    
    
    4,432Residential mortgage-backed securities:Government-sponsored enterprises
    
    
    
    
    
    
    37,741
    
    
    
    
    
    
    
    37,741Private label
    
    
    
    
    
    
    15,224
    
    
    
    
    
    
    
    15,224Other debt securities
    
    
    
    
    
    
    666
    
    
    
    
    
    
    
    666Total debt securities
    
    
    
    
    
    
    290,928
    
    
    
    
    
    
    
    290,928Marketable equity securities:Common stocks
    
    
    34,820
    
    
    
    
    
    
    
    
    
    
    
    34,820Money market mutual funds
    
    
    23,153
    
    
    
    
    
    
    
    
    
    
    
    23,153Total marketable equity securities
    
    
    57,973
    
    
    
    
    
    
    
    
    
    
    
    57,973Total securities available for sale
    
    $
    57,973
    
    
    $
    290,928
    
    
    $
    
    
    
    $
    348,901
 December 31, 2009Total Fair(In thousands)
    
    Level 1
    
    
    Level 2
    
    
    Level 3
    
    
    ValueDebt securities:Corporate bonds
    
    $
    
    
    
    $
    220,007
    
    
    $
    
    
    
    $
    220,007Government-sponsored residential
rmortgage-backed securities
    
    
    
    
    
    
    23,778
    
    
    
    
    
    
    
    23,778Total debt securities
    
    
    
    
    
    
    243,785
    
    
    
    
    
    
    
    243,785Marketable equity securities:Common stocks
    
    
    28,878
    
    
    
    
    
    
    
    
    
    
    
    28,878Money market mutual funds
    
    
    20,704
    
    
    
    
    
    
    
    
    
    
    
    20,704Total marketable equity securities
    
    
    49,582
    
    
    
    
    
    
    
    
    
    
    
    49,582Total securities available for sale
    
    $
    49,582
    
    
    $
    243,785
    
    
    $
    
    
    
    $
    293,367
   8




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##### Table of Contents



Assets Measured at Fair Value on a Non-recurring Basis:
   Three Months Ended
    
    
    Nine Months EndedSeptember 30, 2010
    
    
    September 30, 2010
    
    
    September 30, 2010(In thousands)
    
    Level 1
    
    
    Level 2
    
    
    Level 3
    
    
    Total Losses
    
    
    Total LossesImpaired loans
    
    $
    
    
    
    $
    
    
    
    $
    10,762
    
    
    $
    27
    
    
    $
    943Foreclosed real esate
    
    
    
    
    
    
    
    
    
    
    3,215
    
    
    
    51
    
    
    
    51$
    
    
    
    $
    
    
    
    $
    13,977
    
    
    $
    78
    
    
    $
    994Three Months Ended
    
    
    Nine Months EndedDecember 31, 2009
    
    
    September 30, 2009
    
    
    September 30, 2009(In thousands)
    
    Level 1
    
    
    Level 2
    
    
    Level 3
    
    
    Total Losses
    
    
    Total LossesImpaired loans
    
    $
    
    
    
    $
    
    
    
    $
    1,700
    
    
    $
    536
    
    
    $
    874Foreclosed real esate
    
    
    
    
    
    
    
    
    
    
    2,869
    
    
    
    150
    
    
    
    350$
    
    
    
    $
    
    
    
    $
    4,569
    
    
    $
    686
    
    
    $
    1,224
   September 30, 2010
    
    
    December 31, 2009Carrying
    
    
    Fair
    
    
    Carrying
    
    
    Fair(In thousands)
    
    Amount
    
    
    Value
    
    
    Amount
    
    
    ValueFinancial assets:Cash and cash equivalents
    
    $
    120,974
    
    
    $
    120,974
    
    
    $
    19,966
    
    
    $
    19,966Certificates of deposit  affiliate bank
    
    
    
    
    
    
    
    
    
    
    3,000
    
    
    
    3,028Securities available for sale
    
    
    348,901
    
    
    
    348,901
    
    
    
    293,367
    
    
    
    293,367Federal Home Loan Bank stock
    
    
    12,538
    
    
    
    12,538
    
    
    
    4,605
    
    
    
    4,605Loans and loans held for sale, net
    
    
    1,198,121
    
    
    
    1,211,911
    
    
    
    814,255
    
    
    
    813,393Accrued interest receivable
    
    
    6,880
    
    
    
    6,880
    
    
    
    6,231
    
    
    
    6,231Financial liabilities:Deposits
    
    
    1,409,029
    
    
    
    1,416,172
    
    
    
    922,475
    
    
    
    927,385Borrowings
    
    
    153,924
    
    
    
    161,070
    
    
    
    75,410
    
    
    
    76,782Accrued interest payable
    
    
    1,066
    
    
    
    1,066
    
    
    
    728
    
    
    
    728
  9




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##### Table of Contents



4. Earnings Per Share
   Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,(Dollars in thousands, except per share amounts)
    
    2010
    
    
    2009
    
    
    2010
    
    
    2009Net income available to common stockholders
    
    $
    2,971
    
    
    $
    1,888
    
    
    $
    9,073
    
    
    $
    1,742Average number of common shares outstanding
    
    
    21,766,532
    
    
    
    21,542,287
    
    
    
    21,830,598
    
    
    
    21,704,968Effect of dilutive unvested stock awards
    
    
    267,111
    
    
    
    170,005
    
    
    
    266,149
    
    
    
    184,845Basic weighted average shares outstanding
    
    
    22,033,643
    
    
    
    21,712,292
    
    
    
    22,096,747
    
    
    
    21,889,813Effect of dilutive stock options
    
    
    3,918
    
    
    
    
    
    
    
    6,659
    
    
    
    Diluted weighted average shares outstanding
    
    
    22,037,561
    
    
    
    21,712,292
    
    
    
    22,103,406
    
    
    
    21,889,813Earnings per share:Basic
    
    $
    0.13
    
    
    $
    0.09
    
    
    $
    0.41
    
    
    $
    0.08Diluted
    
    $
    0.13
    
    
    $
    0.09
    
    
    $
    0.41
    
    
    $
    0.08
 5. Securities
    10




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##### Table of Contents



Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    Fair(In thousands)
    
    Cost
    
    
    Gains
    
    
    Losses
    
    
    ValueSeptember 30, 2010Debt securities:Corporate bonds:Financial services
    
    $
    69,195
    
    
    $
    2,711
    
    
    $
    (180
    )
    
    $
    71,726Industry and manufacturing
    
    
    40,935
    
    
    
    2,281
    
    
    
    
    
    
    
    43,216Consumer products and services
    
    
    39,214
    
    
    
    2,518
    
    
    
    
    
    
    
    41,732Other
    
    
    62,767
    
    
    
    3,027
    
    
    
    
    
    
    
    65,794Total corporate bonds
    
    
    212,111
    
    
    
    10,537
    
    
    
    (180
    )
    
    
    222,468Government-sponsored enterprises
    
    
    10,334
    
    
    
    74
    
    
    
    (11
    )
    
    
    10,397Municipal bonds
    
    
    4,380
    
    
    
    52
    
    
    
    
    
    
    
    4,432Residential mortgage-backed securities:Government-sponsored enterprises
    
    
    36,562
    
    
    
    1,186
    
    
    
    (7
    )
    
    
    37,741Private label
    
    
    14,168
    
    
    
    1,166
    
    
    
    (110
    )
    
    
    15,224Other debt securities
    
    
    666
    
    
    
    
    
    
    
    
    
    
    
    666Total debt securities
    
    
    278,221
    
    
    
    13,015
    
    
    
    (308
    )
    
    
    290,928Marketable equity securities:Common stocks
    
    
    32,048
    
    
    
    3,463
    
    
    
    (691
    )
    
    
    34,820Money market mutual funds
    
    
    23,153
    
    
    
    
    
    
    
    
    
    
    
    23,153Total marketable equity securities
    
    
    55,201
    
    
    
    3,463
    
    
    
    (691
    )
    
    
    57,973Total securities available for sale
    
    $
    333,422
    
    
    $
    16,478
    
    
    $
    (999
    )
    
    $
    348,901December 31, 2009Debt securities:Corporate bonds:Financial services
    
    $
    59,219
    
    
    $
    1,786
    
    
    $
    (282
    )
    
    $
    60,723Industry and manufacturing
    
    
    54,522
    
    
    
    2,106
    
    
    
    (481
    )
    
    
    56,147Consumer products and services
    
    
    50,402
    
    
    
    2,205
    
    
    
    
    
    
    
    52,607Other
    
    
    48,136
    
    
    
    2,394
    
    
    
    
    
    
    
    50,530Total corporate bonds
    
    
    212,279
    
    
    
    8,491
    
    
    
    (763
    )
    
    
    220,007Government-sponsored residential
rmortgage-backed securities
    
    
    23,659
    
    
    
    148
    
    
    
    (29
    )
    
    
    23,778Total debt securities
    
    
    235,938
    
    
    
    8,639
    
    
    
    (792
    )
    
    
    243,785Marketable equity securities:Common stocks
    
    
    26,698
    
    
    
    3,001
    
    
    
    (821
    )
    
    
    28,878Money market mutual funds
    
    
    20,704
    
    
    
    
    
    
    
    
    
    
    
    20,704Total marketable equity securities
    
    
    47,402
    
    
    
    3,001
    
    
    
    (821
    )
    
    
    49,582Total securities available for sale
    
    $
    283,340
    
    
    $
    11,640
    
    
    $
    (1,613
    )
    
    $
    293,367
  11




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##### Table of Contents



Within 1 year
    
    
    Over 1 year to 5 years
    
    
    Over 5 years
    
    
    TotalAmortized
    
    
    Fair
    
    
    Amortized
    
    
    Fair
    
    
    Amortized
    
    
    Fair
    
    
    Amortized
    
    
    Fair(In thousands)
    
    Cost
    
    
    Value
    
    
    Cost
    
    
    Value
    
    
    Cost
    
    
    Value
    
    
    Cost
    
    
    ValueCorporate bonds:Financial services
    
    $
    9,497
    
    
    $
    9,484
    
    
    $
    48,547
    
    
    $
    50,953
    
    
    $
    11,151
    
    
    $
    11,289
    
    
    $
    69,195
    
    
    $
    71,726Industry and manufacturing
    
    
    5,002
    
    
    
    5,006
    
    
    
    35,933
    
    
    
    38,210
    
    
    
    
    
    
    
    
    
    
    
    40,935
    
    
    
    43,216Consumer products and services
    
    
    7,736
    
    
    
    7,889
    
    
    
    31,478
    
    
    
    33,843
    
    
    
    
    
    
    
    
    
    
    
    39,214
    
    
    
    41,732Other
    
    
    22,135
    
    
    
    22,486
    
    
    
    40,632
    
    
    
    43,308
    
    
    
    
    
    
    
    
    
    
    
    62,767
    
    
    
    65,794Total corporate bonds
    
    
    44,370
    
    
    
    44,865
    
    
    
    156,590
    
    
    
    166,314
    
    
    
    11,151
    
    
    
    11,289
    
    
    
    212,111
    
    
    
    222,468Government-sponsored
enterprises
    
    
    
    
    
    
    
    
    
    
    4,339
    
    
    
    4,367
    
    
    
    5,995
    
    
    
    6,030
    
    
    
    10,334
    
    
    
    10,397Municipal bonds
    
    
    1,366
    
    
    
    1,371
    
    
    
    500
    
    
    
    505
    
    
    
    2,514
    
    
    
    2,556
    
    
    
    4,380
    
    
    
    4,432Residential mortgage-
backed securities:Government-sponsored
enterprises
    
    
    
    
    
    
    
    
    
    
    8
    
    
    
    8
    
    
    
    36,554
    
    
    
    37,733
    
    
    
    36,562
    
    
    
    37,741Private label
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,168
    
    
    
    15,224
    
    
    
    14,168
    
    
    
    15,224Other debt securities
    
    
    
    
    
    
    
    
    
    
    140
    
    
    
    140
    
    
    
    526
    
    
    
    526
    
    
    
    666
    
    
    
    666Total
    
    $
    45,736
    
    
    $
    46,236
    
    
    $
    161,577
    
    
    $
    171,334
    
    
    $
    70,908
    
    
    $
    73,358
    
    
    $
    278,221
    
    
    $
    290,928
  Less Than Twelve Months
    
    
    Over Twelve MonthsGross
    
    
    
    
    
    
    GrossUnrealized
    
    
    Fair
    
    
    Unrealized
    
    
    Fair(In thousands)
    
    Losses
    
    
    Value
    
    
    Losses
    
    
    ValueSeptember 30, 2010Debt securities:Corporate bonds  financial services
    
    $
    80
    
    
    $
    4,918
    
    
    $
    100
    
    
    $
    5,900Government-sponsored enterprises
    
    
    11
    
    
    
    207
    
    
    
    
    
    
    
    Residential mortgage-backed securities:Government-sponsored enterprises
    
    
    7
    
    
    
    443
    
    
    
    
    
    
    
    Private label
    
    
    110
    
    
    
    2,063
    
    
    
    
    
    
    
    Total debt securities
    
    
    208
    
    
    
    7,631
    
    
    
    100
    
    
    
    5,900Common stocks
    
    
    274
    
    
    
    5,307
    
    
    
    417
    
    
    
    3,340Total
    
    $
    482
    
    
    $
    12,938
    
    
    $
    517
    
    
    $
    9,240
  12




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##### Table of Contents



Less Than Twelve Months
    
    
    Over Twelve MonthsGross
    
    
    
    
    
    
    GrossUnrealized
    
    
    Fair
    
    
    Unrealized
    
    
    Fair(In thousands)
    
    Losses
    
    
    Value
    
    
    Losses
    
    
    ValueDecember 31, 2009Debt securities:Corporate bonds:Financial services
    
    $
    24
    
    
    $
    6,059
    
    
    $
    258
    
    
    $
    6,736Industry and manufacturing
    
    
    
    
    
    
    
    
    
    
    481
    
    
    
    5,519Total corporate bonds
    
    
    24
    
    
    
    6,059
    
    
    
    739
    
    
    
    12,255Government-sponsored residential
rmortgage-backed securities
    
    
    26
    
    
    
    8,163
    
    
    
    3
    
    
    
    9Total debt securities
    
    
    50
    
    
    
    14,222
    
    
    
    742
    
    
    
    12,264Common stock
    
    
    
    
    
    
    
    
    
    
    821
    
    
    
    6,890Total
    
    $
    50
    
    
    $
    14,222
    
    
    $
    1,563
    
    
    $
    19,154
     13




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##### Table of Contents



6. Acquisition
    (In thousands)Assets acquired and liabilities assumed:Cash and cash equivalents
    
    $
    14,422Certificates of deposit
    
    
    100Securities available for sale
    
    
    45,516Federal Home Loan Bank Stock, at cost
    
    
    7,933Loans held for sale
    
    
    4,919Loans, net
    
    
    345,917Bank -owned life insurance
    
    
    8,939Foreclosed real estate, net
    
    
    1,747Premises and equipment, net
    
    
    10,618Accrued interest receivable
    
    
    1,373Deferred tax asset, net
    
    
    8,849Goodwill
    
    
    11,138Other assets
    
    
    3,599Total assets acquired
    
    $
    465,070Deposits
    
    $
    380,550FHLB Borrowings
    
    
    80,932Accrued expenses and other liabilities
    
    
    3,588Total liabilities assumed
    
    $
    465,070
  14




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##### Table of Contents



Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,(In thousands, except per share amounts)
    
    2010
    
    
    2009
    
    
    2010
    
    
    2009Net interest income
    
    $
    15,994
    
    
    $
    13,368
    
    
    $
    46,201
    
    
    $
    37,341Net income
    
    
    2,971
    
    
    
    1,494
    
    
    
    9,282
    
    
    
    608Net income per share  Basic
    
    $
    0.13
    
    
    $
    0.07
    
    
    $
    0.42
    
    
    $
    0.03Net income per share  Diluted
    
    
    0.13
    
    
    
    0.07
    
    
    
    0.42
    
    
    
    0.03
  15




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##### Table of Contents



Managements Discussion and Analysis of Financial Condition and Results of Operations
  Forward-Looking Statements
  
    
    significantly increased competition among depository and other financial
institutions;
    
    inflation and changes in the interest rate environment or other changes that reduce
our interest margins or reduce the fair value of financial instruments;
    
    general economic conditions, either nationally or in our market areas, that are
worse than expected;
    
    adverse changes in the securities markets;
    
    legislative or regulatory changes that adversely affect our business;
    
    our ability to enter new markets successfully and take advantage of growth
opportunities, and the possible dilutive effect of potential acquisitions or de novo
branches, if any;
    
    changes in consumer spending, borrowing and savings habits;
    
    changes in accounting policies and practices, as may be adopted by bank regulatory
agencies, the Financial Accounting Standards Board, the Public Company Accounting
Oversight Board and other promulgating authorities;
    
    inability of third-party providers to perform their obligations to us;
    
    changes in our organization, compensation and benefit plans;
    
    changes in real estate values in our market areas;
    
    the effect of recent legislation restructuring of the U.S. financial and regulatory
system;
    
    the effect of developments in the secondary market affecting our loan pricing;
    
    the level of future deposit premiums; and
    
    the effect of the current financial crisis on our loan portfolio and our investment
portfolio, and our deposit and other customers.
 www.sec.gov
  16




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##### Table of Contents



Critical Accounting Policies
  Comparison of Financial Condition at September 30, 2010 and December 31, 2009
    Loan Portfolio Analysis
  September 30, 2010
    
    
    December 31, 2009(Dollars in thousands)
    
    Amount
    
    
    %
    
    
    Amount
    
    
    %Real estate loans:One-to four-family
    
    $
    428,549
    
    
    
    35.6
    %
    
    $
    276,122
    
    
    
    33.5
    %Multi-family
    
    
    128,168
    
    
    
    10.7
    
    
    
    53,402
    
    
    
    6.5Commercial real estate
    
    
    408,898
    
    
    
    33.9
    
    
    
    350,648
    
    
    
    42.6Construction
    
    
    127,629
    
    
    
    10.6
    
    
    
    94,102
    
    
    
    11.4Home equity lines
of credit
    
    
    73,580
    
    
    
    6.1
    
    
    
    29,979
    
    
    
    3.6Total real estate loans
    
    
    1,166,824
    
    
    
    96.9
    
    
    
    804,253
    
    
    
    97.6Commercial business loans
    
    
    29,522
    
    
    
    2.5
    
    
    
    18,029
    
    
    
    2.2Consumer loans
    
    
    6,909
    
    
    
    0.6
    
    
    
    1,205
    
    
    
    0.2Total loans
    
    
    1,203,255
    
    
    
    100.0
    %
    
    
    823,487
    
    
    
    100.0
    %Net deferred loan origination fees
    
    
    (90
    )
    
    
    
    
    
    
    (945
    )Allowance for loan losses
    
    
    (11,483
    )
    
    
    
    
    
    
    (9,242
    )Loans, net
    
    $
    1,191,682
    
    
    
    
    
    
    $
    813,300
  17




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##### Table of Contents



Asset Quality
 Non-Performing Assets.
  September 30,
    
    
    December 31,(Dollars in thousands)
    
    2010
    
    
    2009Loans accounted for on a non-accrual basis:Real estate loans:One-to four-family
    
    $
    11,476
    
    
    $
    4,098Multi-family
    
    
    3,128
    
    
    
    850Commercial real estate
    
    
    6,104
    
    
    
    7,388Home equity lines of credit
    
    
    2,155
    
    
    
    Construction
    
    
    14,220
    
    
    
    9,224Total real estate loans
    
    
    37,083
    
    
    
    21,560Commercial business loans
    
    
    228
    
    
    
    Consumer loans
    
    
    3
    
    
    
    138Total non-accrual loans
    
    
    37,314
    
    
    
    21,698Foreclosed assets
    
    
    3,215
    
    
    
    2,869Total nonperforming assets
    
    $
    40,529
    
    
    $
    24,567Non-accrual loans to total loans
    
    
    3.10
    %
    
    
    2.63
    %Non-accrual loans to total assets
    
    
    2.08
    %
    
    
    1.79
    %Non-performing assets to total assets
    
    
    2.26
    %
    
    
    2.03
    %
  Troubled Debt Restructurings.
 September 30,
    
    
    December 31,(In thousands)
    
    2010
    
    
    2009TDRs on accrual status:One-to four-family real estate
    
    $
    1,103
    
    
    $
    189Commercial real estate
    
    
    4,797
    
    
    
    5,900
    
    
    
    189TDRs on non-accrual status:One-to four-family real estate
    
    
    566
    
    
    
    1,148Construction
    
    
    
    
    
    
    591566
    
    
    
    1,739Total TDRs
    
    $
    6,466
    
    
    $
    1,928
  18




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##### Table of Contents



Potential Problem Loans.
 Allowance for Loan Losses.
  Three Months Ended September 30,
    
    
    Nine Months Ended September 30,(Dollars in thousands)
    
    2010
    
    
    2009
    
    
    2010
    
    
    2009Beginning balance
    
    $
    11,265
    
    
    $
    8,120
    
    
    $
    9,242
    
    
    $
    6,912Provision for loan losses
    
    
    77
    
    
    
    694
    
    
    
    2,245
    
    
    
    1,808Charge offs:Real estate loans
    
    
    105
    
    
    
    51
    
    
    
    263
    
    
    
    216Commercial business loans
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Consumer loans
    
    
    33
    
    
    
    57
    
    
    
    83
    
    
    
    58Total charge-offs
    
    
    138
    
    
    
    108
    
    
    
    346
    
    
    
    274Recoveries:Real estate loans
    
    
    268
    
    
    
    
    
    
    
    314
    
    
    
    260Commercial business
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Consumer loans
    
    
    11
    
    
    
    5
    
    
    
    28
    
    
    
    5Total recoveries
    
    
    279
    
    
    
    5
    
    
    
    342
    
    
    
    265Net (charge-offs) recoveries
    
    
    141
    
    
    
    (103
    )
    
    
    (4
    )
    
    
    (9
    )Ending balance
    
    $
    11,483
    
    
    $
    8,711
    
    
    $
    11,483
    
    
    $
    8,711Allowance to non-accrual loans
    
    
    30.77
    %
    
    
    45.14
    %
    
    
    30.77
    %
    
    
    45.14
    %Allowance to total loans outstanding
    
    
    0.95
    %
    
    
    1.11
    %
    
    
    0.95
    %
    
    
    1.11
    %Net (charge-offs) recoveries to average
loans outstanding (annualized)
    
    
    0.05
    %
    
    
    (0.01
    )%
    
    
    0.00
    %
    
    
    0.00
    %
   19




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##### Table of Contents



September 30, 2010
    
    
    December 31, 2009% of
    
    
    
    
    
    
    
    
    
    
    % of%  of
    
    
    Loans in
    
    
    
    
    
    
    %  of
    
    
    Loans inAllowance
    
    
    Category
    
    
    
    
    
    
    Allowance
    
    
    Categoryto Total
    
    
    to Total
    
    
    
    
    
    
    to Total
    
    
    to Total(Dollars in thousands)
    
    Amount
    
    
    Allowance
    
    
    Loans
    
    
    Amount
    
    
    Allowance
    
    
    LoansReal estate loans:One- to four-family
    
    $
    2,054
    
    
    
    17.9
    %
    
    
    35.6
    %
    
    $
    1,730
    
    
    
    18.7
    %
    
    
    33.5
    %Multi-family
    
    
    1,078
    
    
    
    9.4
    
    
    
    10.7
    
    
    
    467
    
    
    
    5.1
    
    
    
    6.5Commercial real estate
    
    
    5,106
    
    
    
    44.5
    
    
    
    33.9
    
    
    
    4,435
    
    
    
    48.0
    
    
    
    42.6Home equity lines of credit
    
    
    133
    
    
    
    1.2
    
    
    
    6.1
    
    
    
    128
    
    
    
    1.4
    
    
    
    3.6Construction
    
    
    2,624
    
    
    
    22.8
    
    
    
    10.6
    
    
    
    1,859
    
    
    
    20.1
    
    
    
    11.4Total real estate loans
    
    
    10,995
    
    
    
    95.8
    
    
    
    96.9
    
    
    
    8,619
    
    
    
    93.3
    
    
    
    97.6Commercial business loans
    
    
    356
    
    
    
    3.1
    
    
    
    2.5
    
    
    
    586
    
    
    
    6.3
    
    
    
    2.2Consumer loans
    
    
    132
    
    
    
    1.1
    
    
    
    0.6
    
    
    
    37
    
    
    
    0.4
    
    
    
    0.2Total
    
    $
    11,483
    
    
    
    100.0
    %
    
    
    100.0
    %
    
    $
    9,242
    
    
    
    100.0
    %
    
    
    100.0
    %
      20




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##### Table of Contents



Residential loans:
    
    When a loan becomes seriously delinquent, generally 60 days past due, internal valuations
are completed by the Companys in-house appraiser who is a Massachusetts certified residential
appraiser. The Company obtains third party appraisals, which are generally the basis for
charge-offs when a loss is indicated, prior to the foreclosure sale. The Company generally is
able to complete the foreclosure process within nine to 12 months from receipt of the internal
valuation.
    
    The Company makes adjustments to appraisals based on updated economic information, if
necessary, prior to the foreclosure sale. The Company reviews current market factors to
determine whether, in managements opinion, downward adjustments to the most recent appraised
values may be warranted. If so, management uses their best estimate to apply an estimated
discount rate to the appraised values to reflect current market factors.
    
    Appraisals received by the Company are based on comparable property sales.
    
    Loans that are partially charged off generally remain on non-accrual status until
foreclosure or such time that they are performing in accordance with the terms of the loan and
have a sustained payment history of at least six months.
    
    The accrual of interest is generally discontinued when the contractual payment of principal
or interest has become 90 days past due or management has serious doubts about further
collectibility of principal or interest, even though the loan is currently performing. Loan
losses are charged against the allowance when we believe the uncollectibility of a loan
balance is confirmed; generally when third party appraised values, less estimated costs to
sell, are less than the Companys carrying values.Commercial loans:
    
    The Company obtains a third party appraisal at the time a loan is deemed to be in a workout
situation and there is no indication that the loan will return to performing status, generally
when the loan is 90 days or more past due. One or more updated third party appraisals are
obtained prior to foreclosure depending on the foreclosure timeline. In general the Company
orders new appraisals every 180 days on loans in the process of foreclosure.
    
    The Company makes downward adjustments to appraisals when conditions warrant. Adjustments
are made by applying a discount to the appraised value based on occupancy, recent changes in
condition to the property and certain other factors. Adjustments are also made to appraisals
for construction projects involving residential properties based on recent sales of units.
Losses are recognized if the appraised value less estimated costs to sell is less than the
Companys carrying value of the loan.
    
    Appraisals received by the Company are generally based on a reconciliation of comparable
property sales and income capitalization approaches. For loans on construction projects
involving residential properties, appraisals are generally based on a discounted cash flow
analysis assuming a bulk sale to a single buyer.
    
    Loans that are partially charged off generally remain on non-accrual status until
foreclosure or such time that they are performing in accordance with the terms of the loan and
have a sustained payment history of at least six months.
    
    The accrual of interest is generally discontinued when the contractual payment of principal
or interest has become 90 days past due or management has serious doubts about further
collectibility of principal or interest, even though the loan is currently performing. Loan
losses are charged against the allowance when we believe the uncollectibility of a loan
balance is confirmed, generally when appraised values (as adjusted values, if applicable) less
estimated costs to sell, are less than the Companys carrying values.
 Deposits
   September 30, 2010
    
    
    December 31, 2009(Dollars in thousands)
    
    Amount
    
    
    Percent
    
    
    Amount
    
    
    PercentNOW and demand deposits
    
    $
    247,431
    
    
    
    17.6
    %
    
    $
    102,386
    
    
    
    11.1
    %Money market deposits
    
    
    314,772
    
    
    
    22.3
    
    
    
    247,006
    
    
    
    26.8Regular and other deposits
    
    
    184,129
    
    
    
    13.1
    
    
    
    128,016
    
    
    
    13.9Certificates of deposit
    
    
    662,697
    
    
    
    47.0
    
    
    
    445,067
    
    
    
    48.2Total
    
    $
    1,409,029
    
    
    
    100.0
    %
    
    $
    922,475
    
    
    
    100.0
    %
  21




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##### Table of Contents



Borrowings
  Results of Operations for the Three and Nine Months Ended September 30, 2010 and September 30, 2009
 Overview
      22




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##### Table of Contents



Net Interest Income
      23




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##### Table of Contents



Three Months Ended September 30,2010
    
    
    2009Average
    
    
    Interest
    
    
    Yield/
    
    
    Average
    
    
    Interest
    
    
    Yield/(Dollars in thousands)
    
    Balance
    
    
    Earned/Paid
    
    
    Cost (4)
    
    
    Balance
    
    
    Earned/Paid
    
    
    Cost (4)Assets:Interest-earning assets:Loans (1)
    
    $
    1,200,946
    
    
    $
    17,491
    
    
    
    5.78
    %
    
    $
    777,674
    
    
    $
    11,480
    
    
    
    5.86
    %Securities and certificates of deposit
    
    
    349,691
    
    
    
    3,701
    
    
    
    4.20
    
    
    
    314,130
    
    
    
    2,941
    
    
    
    3.71Other interest-earning assets
    
    
    62,513
    
    
    
    36
    
    
    
    0.23
    
    
    
    35,346
    
    
    
    5
    
    
    
    0.06Total interest-earning assets
    
    
    1,613,150
    
    
    
    21,228
    
    
    
    5.22
    
    
    
    1,127,150
    
    
    
    14,426
    
    
    
    5.08Noninterest-earning assets
    
    
    130,999
    
    
    
    
    
    
    
    
    
    
    
    77,101Total assets
    
    $
    1,744,149
    
    
    
    
    
    
    
    
    
    
    $
    1,204,251Liabilities and stockholders equity:Interest-bearing liabilities:NOW deposits
    
    $
    116,282
    
    
    
    129
    
    
    
    0.44
    %
    
    $
    37,912
    
    
    
    22
    
    
    
    0.23
    %Money market deposits
    
    
    309,486
    
    
    
    837
    
    
    
    1.07
    
    
    
    267,049
    
    
    
    1,084
    
    
    
    1.61Savings and other deposits
    
    
    184,920
    
    
    
    254
    
    
    
    0.54
    
    
    
    128,816
    
    
    
    238
    
    
    
    0.73Certificates of deposit
    
    
    647,554
    
    
    
    3,135
    
    
    
    1.92
    
    
    
    439,967
    
    
    
    3,060
    
    
    
    2.76Total interest-bearing deposits
    
    
    1,258,242
    
    
    
    4,355
    
    
    
    1.37
    
    
    
    873,744
    
    
    
    4,404
    
    
    
    2.00FHLB advances and other borrowings
    
    
    151,071
    
    
    
    879
    
    
    
    2.31
    
    
    
    62,612
    
    
    
    507
    
    
    
    3.21Total interest-bearing liabilities
    
    
    1,409,313
    
    
    
    5,234
    
    
    
    1.47
    
    
    
    936,356
    
    
    
    4,911
    
    
    
    2.08Noninterest-bearing demand deposits
    
    
    110,210
    
    
    
    
    
    
    
    
    
    
    
    61,203Other noninterest-bearing liabilities
    
    
    13,916
    
    
    
    
    
    
    
    
    
    
    
    11,260Total liabilities
    
    
    1,533,439
    
    
    
    
    
    
    
    
    
    
    
    1,008,819Total stockholders equity
    
    
    210,710
    
    
    
    
    
    
    
    
    
    
    
    195,432Total liabilities and stockholders equity
    
    $
    1,744,149
    
    
    
    
    
    
    
    
    
    
    $
    1,204,251Net interest-earning assets
    
    $
    203,837
    
    
    
    
    
    
    
    
    
    
    $
    190,794Net interest income
    
    
    
    
    
    $
    15,994
    
    
    
    
    
    
    
    
    
    
    $
    9,515Interest rate spread (2)
    
    
    
    
    
    
    
    
    
    
    3.75
    %
    
    
    
    
    
    
    
    
    
    
    3.00
    %Net interest margin (3)
    
    
    
    
    
    
    
    
    
    
    3.93
    %
    
    
    
    
    
    
    
    
    
    
    3.35
    %Average interest-earning assets to
average interest-bearing liabilities
    
    
    
    
    
    
    114.46
    %
    
    
    
    
    
    
    
    
    
    
    120.38
    %
 (1)
    
    Loans on non-accrual status are included in average balances.(2)
    
    Interest rate spread represents the difference between 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.  24




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##### Table of Contents



Nine Months Ended September 30,2010
    
    
    2009Average
    
    
    Interest
    
    
    Yield/
    
    
    Average
    
    
    Interest
    
    
    Yield/(Dollars in thousands)
    
    Balance
    
    
    Earned/Paid
    
    
    Cost (4)
    
    
    Balance
    
    
    Earned/Paid
    
    
    Cost (4)Assets:Interest-earning assets:Loans (1)
    
    $
    1,175,322
    
    
    $
    50,530
    
    
    
    5.75
    %
    
    $
    754,770
    
    
    $
    33,171
    
    
    
    5.90
    %Securities and certificates of deposit
    
    
    347,711
    
    
    
    10,998
    
    
    
    4.23
    
    
    
    286,433
    
    
    
    8,598
    
    
    
    4.03Other interest-earning assets
    
    
    55,549
    
    
    
    84
    
    
    
    0.20
    
    
    
    29,295
    
    
    
    23
    
    
    
    0.11Total interest-earning assets
    
    
    1,578,582
    
    
    
    61,612
    
    
    
    5.22
    
    
    
    1,070,498
    
    
    
    41,792
    
    
    
    5.24Noninterest-earning assets
    
    
    134,497
    
    
    
    
    
    
    
    
    
    
    
    80,603Total assets
    
    $
    1,713,079
    
    
    
    
    
    
    
    
    
    
    $
    1,151,101Liabilities and stockholders equity:Interest-bearing liabilities:NOW deposits
    
    $
    112,462
    
    
    
    394
    
    
    
    0.47
    %
    
    $
    37,483
    
    
    
    105
    
    
    
    0.38
    %Money market deposits
    
    
    305,669
    
    
    
    2,617
    
    
    
    1.14
    
    
    
    225,982
    
    
    
    3,184
    
    
    
    1.89Savings and other deposits
    
    
    183,406
    
    
    
    756
    
    
    
    0.55
    
    
    
    126,673
    
    
    
    833
    
    
    
    0.88Certificates of deposit
    
    
    631,157
    
    
    
    9,097
    
    
    
    1.93
    
    
    
    433,512
    
    
    
    10,483
    
    
    
    3.24Total interest-bearing deposits
    
    
    1,232,694
    
    
    
    12,864
    
    
    
    1.40
    
    
    
    823,650
    
    
    
    14,605
    
    
    
    2.38FHLB advances and other borrowings
    
    
    154,384
    
    
    
    2,704
    
    
    
    2.34
    
    
    
    64,840
    
    
    
    1,548
    
    
    
    3.20Total interest-bearing liabilities
    
    
    1,387,078
    
    
    
    15,568
    
    
    
    1.50
    
    
    
    888,490
    
    
    
    16,153
    
    
    
    2.44Noninterest-bearing demand deposits
    
    
    102,880
    
    
    
    
    
    
    
    
    
    
    
    60,569Other noninterest-bearing liabilities
    
    
    15,665
    
    
    
    
    
    
    
    
    
    
    
    10,412Total liabilities
    
    
    1,505,623
    
    
    
    
    
    
    
    
    
    
    
    959,471Total stockholders equity
    
    
    207,456
    
    
    
    
    
    
    
    
    
    
    
    191,630Total liabilities and stockholders equity
    
    $
    1,713,079
    
    
    
    
    
    
    
    
    
    
    $
    1,151,101Net interest-earning assets
    
    $
    191,504
    
    
    
    
    
    
    
    
    
    
    $
    182,008Net interest income
    
    
    
    
    
    $
    46,044
    
    
    
    
    
    
    
    
    
    
    $
    25,639Interest rate spread (2)
    
    
    
    
    
    
    
    
    
    
    3.72
    %
    
    
    
    
    
    
    
    
    
    
    2.80
    %Net interest margin (3)
    
    
    
    
    
    
    
    
    
    
    3.90
    %
    
    
    
    
    
    
    
    
    
    
    3.21
    %Average interest-earning assets to
average interest-bearing liabilities
    
    
    
    
    
    
    113.81
    %
    
    
    
    
    
    
    
    
    
    
    120.49
    %
 (1)
    
    Loans on non-accrual status are included in average balances.(2)
    
    Interest rate spread represents the difference between 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.  25




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##### Table of Contents



Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2010 Compared to 2009
    
    
    2010 Compared to 2009Increase (Decrease) Due to
    
    
    
    
    
    
    Increase (Decrease) Due to(In thousands)
    
    Volume
    
    
    Rate
    
    
    Net
    
    
    Volume
    
    
    Rate
    
    
    NetInterest income:Loans
    
    $
    6,167
    
    
    $
    (156
    )
    
    $
    6,011
    
    
    $
    18,213
    
    
    $
    (854
    )
    
    $
    17,359Securities
    
    
    353
    
    
    
    407
    
    
    
    760
    
    
    
    1,964
    
    
    
    436
    
    
    
    2,400Other interest-earning assets
    
    
    6
    
    
    
    25
    
    
    
    31
    
    
    
    34
    
    
    
    27
    
    
    
    61Total
    
    
    6,526
    
    
    
    276
    
    
    
    6,802
    
    
    
    20,211
    
    
    
    (391
    )
    
    
    19,820Interest expense:Deposits
    
    
    1,492
    
    
    
    (1,541
    )
    
    
    (49
    )
    
    
    5,290
    
    
    
    (7,031
    )
    
    
    (1,741
    )Borrowings
    
    
    548
    
    
    
    (176
    )
    
    
    372
    
    
    
    1,667
    
    
    
    (511
    )
    
    
    1,156Total
    
    
    2,040
    
    
    
    (1,717
    )
    
    
    323
    
    
    
    6,957
    
    
    
    (7,542
    )
    
    
    (585
    )Change in net interest income
    
    $
    4,486
    
    
    $
    1,993
    
    
    $
    6,479
    
    
    $
    13,254
    
    
    $
    7,151
    
    
    $
    20,405
 Non-interest Income
  Non-interest Expense
   26




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##### Table of Contents



Income Tax
  Liquidity and Capital Management
 Liquidity Management.
    September 30,
    
    
    December 31,(In thousands)
    
    2010
    
    
    2009Unadvanced portion of existing loans:Construction
    
    $
    45,477
    
    
    $
    72,218Home equity line of credit
    
    
    42,294
    
    
    
    25,623Other lines and letters of credit
    
    
    9,032
    
    
    
    4,038Commitments to originate:One- to four-family
    
    
    19,700
    
    
    
    1,844Commercial real estate
    
    
    60,494
    
    
    
    18,711Construction
    
    
    19,519
    
    
    
    27,460Other loans
    
    
    3,946
    
    
    
    4,457Total loan commitments outstanding
    
    $
    200,462
    
    
    $
    154,351
   27




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##### Table of Contents



Capital Management.
   Off-Balance Sheet Arrangements.
   28




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##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures about Market Risk
 Interest Rate Risk Management.
  Net Interest Income Simulation Analysis.
     Interest Rate SensitivityIncrease (Decrease)in Market Interest
    
    Net Interest IncomeRates (Rate Shock)
    
    Amount
    
    
    Change
    
    
    Percent(Dollars in Thousands)300
    
    $
    55,950
    
    
    $
    (5,362
    )
    
    
    (8.75
    )%Flat
    
    
    61,312-50
    
    
    61,856
    
    
    
    544
    
    
    
    0.89
  29




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##### Table of Contents



Item 4. Controls and Procedures
      30




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##### Table of Contents



PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 (a.)  (b.) Not applicable.(c.) The following table sets forth information with respect to any purchase made by or on behalf
of the Company during the indicated periods:
 (d)Maximum Number(c)
    
    
    (or ApproximateTotal Number of
    
    
    Dollar Value) ofShares (or Units)
    
    
    Shares (or Units)(a)
    
    
    (b)
    
    
    Purchased as Part
    
    
    that May Yet BeTotal Number of
    
    
    Average Price
    
    
    of Publicly
    
    
    Purchased UnderShares (or Units)
    
    
    Paid Per Share (or
    
    
    Announced Plans
    
    
    the Plans orPeriod
    
    Purchased
    
    
    Unit)
    
    
    or Programs (1)
    
    
    ProgramsJuly 1  31, 2010
    
    
    400
    
    
    $
    10.78
    
    
    
    400
    
    
    
    362,328August 1  31, 2010
    
    
    31,615
    
    
    $
    10.83
    
    
    
    31,615
    
    
    
    330,713September 1  30, 2010
    
    
    11,652
    
    
    $
    10.86
    
    
    
    11,652
    
    
    
    319,061Total
    
    
    43,667
    
    
    $
    10.84
    
    
    
    43,667
    
    
    
    319,061
 (1)
    
    In April 2010, the Commonwealth of Massachusetts Office of the Commissioner of Banks
approved the Companys application to repurchase up to 5% of its outstanding common stock not held
by its mutual holding company parent, or 472,428 shares of its common stock. 
 Item 3. Defaults Upon Senior Securities
  
 Item 4. [Removed and Reserved]
 
 Item 5. Other Information
   31




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##### Table of Contents



Item 6. Exhibits
 3.1
    
    
    Amended and Restated Articles of Organization of Meridian Interstate Bancorp, Inc.*3.2
    
    
    Amended and Restated Bylaws of Meridian Interstate Bancorp, Inc.*3.3
    
    
    Articles of Correction 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, 200810.8
    
    
    Form of Separation Agreement with Leonard V. Siuda incorporated by reference to the Form 8-K
filed on April 7, 200910.9
    
    
    Form of Separation Agreement with Philip F. Freehan incorporated by reference to the Form 8-K
filed on April 7, 200910.10
    
    
    Form of Supplemental Executive Retirement Agreement with Richard J. Gavegnano filed as an
exhibit to Form 10-Q filed on May 14, 200810.11
    
    
    Form of Employment Agreement with Richard J. Gavegnano incorporated by reference to the Form
8-K filed on January 12, 200910.12
    
    
    Form of Employment Agreement with Deborah J. Jackson incorporated by reference to the Form
8-K filed on January 22, 200910.13
    
    
    Form of Supplemental Executive Retirement Agreement with Deborah J. Jackson incorporated by
reference to the Form 8-K filed on January 22, 200910.14
    
    
    2008 Equity Incentive Plan**10.15
    
    
    Amendment to Supplemental Executive Retirement Agreements with Certain Directors
incorporated by reference to the Form 10-K/A filed on April 8, 200910.16
    
    
    Agreement and Plan of Merger incorporated by reference to the
Form 8-K filed on July 24, 200910.17
    
    
    Employment Agreement between Edward J. Merritt and East Boston Savings Bank***10.18
    
    
    Supplemental Executive Retirement Agreement between East Boston Savings Bank
and Edward J. Merritt***10.19
    
    
    Joint Beneficiary Designation Agreement between Edward J. Merritt and Mt. Washington
Cooperative Bank***10.20
    
    
    First Amendment to Joint Beneficiary Designation Agreement between Edward J. Merritt and Mt. Washington
Cooperative Bank***10.21
    
    
    Change in Control Agreement between Mark Abbate and East Boston Savings Bank incorporated by reference
to the Form 8-K filed on December 15, 200921
    
    
    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.**
    
    Incorporated by reference to Appendix A to the Companys Definitive Proxy Statement for its
2008 Annual Meeting, as filed with the Securities and Exchange Commission on July 11, 2008.***
    
    Incorporated by reference to the Companys Annual Report on Form 10-K as filed with the
Securities and Exchange Commission on March 16, 2010.  32




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##### Table of Contents



SIGNATURES
  MERIDIAN INTERSTATE BANCORP, INC.
(Registrant)Dated:  November 9, 2010
    /s/ Richard J. GavegnanoRichard J. GavegnanoChairman and Chief Executive Officer
(Principal Executive Officer)Dated:  November 9, 2010
    /s/ Mark L. AbbateMark L. Abbate 
Senior Vice President, Treasurer and Chief Financial Officer(Principal Financial and Accounting Officer)  33