##### 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 June 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 June 30, 2010 and December 31, 2009 (Unaudited)
    
    
    1Consolidated Statements of Operationsfor the three and six months ended June 30, 2010 and 2009 (Unaudited)
    
    
    2Consolidated Statements of Changes in Stockholders Equity for the six months ended June 30, 2010 and 2009 (Unaudited)
    
    
    3Consolidated Statements of Cash Flowsfor the six months ended June 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
    
    
    32Item 3. Defaults Upon Senior Securities
    
    
    32Item 4. [Removed and Reserved]
    
    
    32Item 5. Other Information
    
    
    32Item 6. Exhibits
    
    
    33Signatures
    
    
    34Exhibit 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)
 June 30,
    
    
    December 31,(Dollars in thousands)
    
    2010
    
    
    2009ASSETSCash and due from banks
    
    $
    71,387
    
    
    $
    9,010Federal funds sold
    
    
    228
    
    
    
    10,956Total cash and cash equivalents
    
    
    71,615
    
    
    
    19,966Certificates of deposit  affiliate bank
    
    
    3,100
    
    
    
    3,000Securities available for sale, at fair value
    
    
    344,837
    
    
    
    293,367Federal Home Loan Bank stock, at cost
    
    
    12,538
    
    
    
    4,605Loans held for sale
    
    
    4,851
    
    
    
    955Loans
    
    
    1,184,031
    
    
    
    822,542Less allowance for loan losses
    
    
    (11,265
    )
    
    
    (9,242
    )Loans, net
    
    
    1,172,766
    
    
    
    813,300Bank-owned life insurance
    
    
    33,239
    
    
    
    23,721Foreclosed real estate, net
    
    
    4,221
    
    
    
    2,869Investment in affiliate bank
    
    
    11,181
    
    
    
    11,005Premises and equipment, net
    
    
    32,968
    
    
    
    23,195Accrued interest receivable
    
    
    7,625
    
    
    
    6,231Prepaid deposit insurance
    
    
    4,113
    
    
    
    5,114Deferred tax asset, net
    
    
    11,631
    
    
    
    1,523Goodwill
    
    
    11,230
    
    
    
    Other assets
    
    
    2,313
    
    
    
    2,535Total assets
    
    $
    1,728,228
    
    
    $
    1,211,386LIABILITIES AND STOCKHOLDERS EQUITYDeposits:Non interest-bearing
    
    $
    106,529
    
    
    $
    63,606Interest-bearing
    
    
    1,247,545
    
    
    
    858,869Total deposits
    
    
    1,354,074
    
    
    
    922,475Short-term borrowings  affiliate bank
    
    
    6,362
    
    
    
    3,102Short-term borrowings  other
    
    
    10,025
    
    
    
    22,108Long-term debt
    
    
    135,715
    
    
    
    50,200Accrued expenses and other liabilities
    
    
    15,584
    
    
    
    13,086Total liabilities
    
    
    1,521,760
    
    
    
    1,010,971Stockholders equity:Common stock, no par value 50,000,000 shares authorized;
23,000,000 shares issued; 22,505,594 and 22,098,565 shares
outstanding at June 30, 2010 and December 31, 2009,
respectively
    
    
    
    
    
    
    Additional paid-in capital
    
    
    96,728
    
    
    
    100,972Retained earnings
    
    
    115,291
    
    
    
    109,189Accumulated other comprehensive income
    
    
    6,055
    
    
    
    5,583Treasury stock, at cost, 113,091 and 517,500 shares
at June 30, 2010 and December 31, 2009, respectively
    
    
    (1,266
    )
    
    
    (4,535
    )Unearned compensation  ESOP, 724,500 and 745,200 shares
at June 30, 2010 and December 31, 2009, respectively
    
    
    (7,245
    )
    
    
    (7,452
    )Unearned compensation  restricted shares, 381,315 and 383,935
shares at June 30, 2010 and December 31, 2009, respectively
    
    
    (3,095
    )
    
    
    (3,342
    )Total stockholders equity
    
    
    206,468
    
    
    
    200,415Total liabilities and stockholders equity
    
    $
    1,728,228
    
    
    $
    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 June 30,
    
    
    Six Months Ended June 30,(Dollars in thousands, except per share amounts)
    
    2010
    
    
    2009
    
    
    2010
    
    
    2009Interest and dividend income:Interest and fees on loans
    
    $
    16,829
    
    
    $
    11,046
    
    
    $
    33,039
    
    
    $
    21,691Interest on debt securities
    
    
    3,389
    
    
    
    2,554
    
    
    
    6,830
    
    
    
    5,009Dividends on equity securities
    
    
    228
    
    
    
    299
    
    
    
    433
    
    
    
    592Interest on certificates of deposit
    
    
    17
    
    
    
    14
    
    
    
    34
    
    
    
    56Interest on other interest-earning assets
    
    
    36
    
    
    
    6
    
    
    
    48
    
    
    
    18Total interest and dividend income
    
    
    20,499
    
    
    
    13,919
    
    
    
    40,384
    
    
    
    27,366Interest expense:Interest on deposits
    
    
    4,310
    
    
    
    4,938
    
    
    
    8,509
    
    
    
    10,201Interest on short-term borrowings
    
    
    15
    
    
    
    7
    
    
    
    44
    
    
    
    42Interest on long-term debt
    
    
    895
    
    
    
    502
    
    
    
    1,781
    
    
    
    999Total interest expense
    
    
    5,220
    
    
    
    5,447
    
    
    
    10,334
    
    
    
    11,242Net interest income
    
    
    15,279
    
    
    
    8,472
    
    
    
    30,050
    
    
    
    16,124Provision for loan losses
    
    
    794
    
    
    
    568
    
    
    
    2,168
    
    
    
    1,114Net interest income, after provision
for loan losses
    
    
    14,485
    
    
    
    7,904
    
    
    
    27,882
    
    
    
    15,010Non-interest income:Customer service fees
    
    
    1,490
    
    
    
    799
    
    
    
    2,904
    
    
    
    1,496Loan fees
    
    
    140
    
    
    
    127
    
    
    
    298
    
    
    
    277Gain on sales of loans, net
    
    
    199
    
    
    
    116
    
    
    
    764
    
    
    
    299Other-than-temporary impairment losses
    
    
    
    
    
    
    (249
    )
    
    
    
    
    
    
    (373
    )Income from bank-owned life insurance
    
    
    287
    
    
    
    240
    
    
    
    579
    
    
    
    454Equity income (loss) on investment in
affiliate bank
    
    
    106
    
    
    
    2
    
    
    
    176
    
    
    
    (25
    )Total non-interest income
    
    
    2,222
    
    
    
    1,035
    
    
    
    4,721
    
    
    
    2,128Non-interest expenses:Salaries and employee benefits
    
    
    6,446
    
    
    
    4,101
    
    
    
    12,613
    
    
    
    10,415Occupancy and equipment
    
    
    1,377
    
    
    
    697
    
    
    
    2,861
    
    
    
    1,561Data processing
    
    
    749
    
    
    
    474
    
    
    
    1,503
    
    
    
    912Marketing and advertising
    
    
    580
    
    
    
    313
    
    
    
    1,046
    
    
    
    547Professional services
    
    
    755
    
    
    
    416
    
    
    
    1,475
    
    
    
    1,068Foreclosed real estate expense, net
    
    
    122
    
    
    
    223
    
    
    
    276
    
    
    
    478Deposit insurance
    
    
    577
    
    
    
    830
    
    
    
    1,092
    
    
    
    1,140Other general and administrative
    
    
    1,131
    
    
    
    630
    
    
    
    2,220
    
    
    
    1,240Total non-interest expenses
    
    
    11,737
    
    
    
    7,684
    
    
    
    23,086
    
    
    
    17,361Income (loss) before income taxes
    
    
    4,970
    
    
    
    1,255
    
    
    
    9,517
    
    
    
    (223
    )Provision (benefit) for income taxes
    
    
    1,728
    
    
    
    293
    
    
    
    3,415
    
    
    
    (77
    )Net income (loss)
    
    $
    3,242
    
    
    $
    962
    
    
    $
    6,102
    
    
    $
    (146
    )Income (loss) per share:Basic
    
    $
    0.15
    
    
    $
    0.04
    
    
    $
    0.28
    
    
    $
    (0.01
    )Diluted
    
    $
    0.15
    
    
    $
    0.04
    
    
    $
    0.28
    
    
    $
    (0.01
    )Weighted average shares:Basic
    
    
    22,124,539
    
    
    
    22,024,179
    
    
    
    22,128,822
    
    
    
    21,991,924Diluted
    
    
    22,140,597
    
    
    
    22,024,179
    
    
    
    22,136,851
    
    
    
    21,991,924
   2




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##### Table of Contents



MERIDIAN INTERSTATE BANCORP, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
 Six Months Ended June 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
    
    
    TotalSix Months Ended June 30, 2009Balance at December 31, 2008
    
    
    22,750,000
    
    
    $
    100,684
    
    
    $
    105,426
    
    
    $
    (6,205
    )
    
    $
    
    
    
    $
    (7,866
    )
    
    $
    (2,199
    )
    
    $
    189,840Comprehensive income:Net loss
    
    
    
    
    
    
    
    
    
    
    (146
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (146
    )Change in net unrealized loss on securities available for
sale, net of reclassification adjustment and tax effects
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,968
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,968Change in prior service costs and
actuarial losses, net of tax effects
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (18
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (18
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,804Purchase of treasury stock
    
    
    (228,451
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,971
    )
    
    
    
    
    
    
    
    
    
    
    (1,971
    )ESOP shares earned (20,700 shares)
    
    
    
    
    
    
    (36
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    207
    
    
    
    
    
    
    
    171Purchase of 164,000 shares
for restricted share plan
    
    
    (164,000
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,468
    )
    
    
    (1,468
    )Share-based compensation expense
    
    
    
    
    
    
    194
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    183
    
    
    
    377Balance at June 30, 2009
    
    
    22,357,549
    
    
    $
    100,842
    
    
    $
    105,280
    
    
    $
    (255
    )
    
    $
    (1,971
    )
    
    $
    (7,659
    )
    
    $
    (3,484
    )
    
    $
    192,753Six Months Ended June 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
    
    
    
    
    
    
    
    
    
    
    6,102
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,102Change in net unrealized gain on securities available
for sale, net of reclassification adjustment and tax
effects
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    370
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    370Change in prior service costs and
actuarial losses, net of tax effects
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    102
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    102Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,574ESOP shares earned (20,700 shares)
    
    
    
    
    
    
    10
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    207
    
    
    
    
    
    
    
    217Share-based compensation expense
    
    
    2,620
    
    
    
    251
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    247
    
    
    
    498Purchase of treasury stock
    
    
    (109,700
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,236
    )
    
    
    
    
    
    
    
    
    
    
    (1,236
    )Issuance of 514,109 shares to Meridian Financial Services,
Incorporated, the mutual holding company
    
    
    514,109
    
    
    
    (4,505
    )
    
    
    
    
    
    
    
    
    
    
    4,505
    
    
    
    
    
    
    
    
    
    
    
    Balance at June 30, 2010
    
    
    22,505,594
    
    
    $
    96,728
    
    
    $
    115,291
    
    
    $
    6,055
    
    
    $
    (1,266
    )
    
    $
    (7,245
    )
    
    $
    (3,095
    )
    
    $
    206,468
   3




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##### Table of Contents



MERIDIAN INTERSTATE BANCORP, INC. AND SUBSIDIARIES
 
 Consolidated Statements of Cash Flows
 (Unaudited)
 Six Months Ended June 30,(In thousands)
    
    2010
    
    
    2009Cash flows from operating activities:Net income (loss)
    
    $
    6,102
    
    
    $
    (146
    )Adjustments to reconcile net income (loss) to net cash
provided by operating activities:Amortization of acquisition fair value adjustments
    
    
    (744
    )
    
    
    Earned ESOP shares
    
    
    217
    
    
    
    171Provision for loan losses
    
    
    2,168
    
    
    
    1,114Amortization of net deferred loan origination fees
    
    
    (781
    )
    
    
    (53
    )Net amortization of securities available for sale
    
    
    85
    
    
    
    616Depreciation and amortization expense
    
    
    1,229
    
    
    
    661Other-than-temporary impairment losses
    
    
    
    
    
    
    373Gains on sales of loans held in portfolio, net
    
    
    (352
    )
    
    
    (Gain) loss and provision for foreclosed real estate
    
    
    (29
    )
    
    
    322Deferred income tax benefit
    
    
    (2,178
    )
    
    
    (40
    )Income from bank-owned life insurance
    
    
    (579
    )
    
    
    (454
    )Equity (income) loss on investment in affiliate bank
    
    
    (176
    )
    
    
    25Share-based compensation expense
    
    
    498
    
    
    
    377Net changes in:Loans held for sale
    
    
    1,023
    
    
    
    (5,911
    )Accrued interest receivable
    
    
    (21
    )
    
    
    (153
    )Prepaid deposit insurance
    
    
    1,001
    
    
    
    Other assets
    
    
    3,822
    
    
    
    1,142Accrued expenses and other liabilities
    
    
    (774
    )
    
    
    2,465Net cash provided by operating activities
    
    
    10,511
    
    
    
    509Cash flows from investing activities:Cash provided by business combination
    
    
    14,422
    
    
    
    Maturities of certificates of deposit
    
    
    
    
    
    
    5,000Activity in securities available for sale:Proceeds from maturities, calls and principal payments
    
    
    29,030
    
    
    
    29,878Proceeds from redemption of mutual funds
    
    
    5,254
    
    
    
    5,257Purchases
    
    
    (40,030
    )
    
    
    (75,421
    )Loans originated, net of principal payments received
    
    
    (50,400
    )
    
    
    (58,917
    )Proceeds from sales of fixed rate loans held in portfolio
    
    
    34,488
    
    
    
    Purchases of premises and equipment
    
    
    (318
    )
    
    
    (1,463
    )Purchase of Federal Home Loan Bank stock
    
    
    
    
    
    
    (91
    )Capitalized costs on foreclosed real estate
    
    
    (322
    )
    
    
    (776
    )Proceeds from sales of foreclosed real estate
    
    
    1,603
    
    
    
    643Net cash used in investing activities
    
    
    (6,273
    )
    
    
    (95,890
    )
    4




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##### Table of Contents



MERIDIAN INTERSTATE BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
 Six Months Ended June 30,(In thousands)
    
    2010
    
    
    2009Cash flows from financing activities:Net increase in deposits
    
    
    52,044
    
    
    
    116,927Net change in borrowings with maturities
less than three months
    
    
    (8,822
    )
    
    
    (2,008
    )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
    
    
    (1,236
    )
    
    
    (1,971
    )Net cash provided by financing activities
    
    
    47,411
    
    
    
    111,005Net change in cash and cash equivalents
    
    
    51,649
    
    
    
    15,624Cash and cash equivalents at beginning of period
    
    
    19,966
    
    
    
    20,265Cash and cash equivalents at end of period
    
    $
    71,615
    
    
    $
    35,889Supplemental cash flow information:Interest paid on deposits
    
    $
    8,452
    
    
    $
    10,398Interest paid on borrowings
    
    
    1,545
    
    
    
    1,048Income taxes paid
    
    
    2,820
    
    
    
    190Non-cash investing and financing activities:Transfers from loans to foreclosed real estate
    
    
    951
    
    
    
    635In 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
    
    
    450,561
    
    
    
    Fair value of liabilities assumed
    
    
    464,983
    
    
    
    
   5




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##### Table of Contents



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




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##### 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
  7




---



##### Table of Contents



Deposits
 Borrowings
 Accrued interest
 Off-balance sheet credit-related instruments
 Assets Measured at Fair Value on a Recurring Basis:
  June 30, 2010Total Fair(In thousands)
    
    Level 1
    
    
    Level 2
    
    
    Level 3
    
    
    ValueDebt securities:Corporate bonds
    
    $
    
    
    
    $
    230,167
    
    
    $
    
    
    
    $
    230,167Government-sponsored enterprises
    
    
    
    
    
    
    10,925
    
    
    
    
    
    
    
    10,925Municipal bonds
    
    
    
    
    
    
    4,396
    
    
    
    
    
    
    
    4,396Residential mortgage-backed securities:Government-sponsored enterprises
    
    
    
    
    
    
    41,180
    
    
    
    
    
    
    
    41,180Private label
    
    
    
    
    
    
    15,617
    
    
    
    
    
    
    
    15,617Other debt securities
    
    
    
    
    
    
    666
    
    
    
    
    
    
    
    666Total debt securities
    
    
    
    
    
    
    302,951
    
    
    
    
    
    
    
    302,951Marketable equity securities:Common stocks
    
    
    30,132
    
    
    
    
    
    
    
    
    
    
    
    30,132Money market mutual funds
    
    
    11,754
    
    
    
    
    
    
    
    
    
    
    
    11,754Total marketable equity securities
    
    
    41,886
    
    
    
    
    
    
    
    
    
    
    
    41,886Total securities available for sale
    
    $
    41,886
    
    
    $
    302,951
    
    
    $
    
    
    
    $
    344,837
 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
    
    
    Six Months EndedJune 30, 2010
    
    
    June 30, 2010
    
    
    June 30, 2010(In thousands)
    
    Level 1
    
    
    Level 2
    
    
    Level 3
    
    
    Total Losses
    
    
    Total LossesImpaired loans
    
    $
    
    
    
    $
    
    
    
    $
    9,222
    
    
    $
    (358
    )
    
    $
    (752
    )Foreclosed real esate
    
    
    
    
    
    
    
    
    
    
    4,221
    
    
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    $
    13,443
    
    
    $
    (358
    )
    
    $
    (752
    )
 Three Months Ended
    
    
    Six Months EndedDecember 31, 2009
    
    
    June 30, 2009
    
    
    June 30, 2009(In thousands)
    
    Level 1
    
    
    Level 2
    
    
    Level 3
    
    
    Total Losses
    
    
    Total LossesImpaired loans
    
    $
    
    
    
    $
    
    
    
    $
    1,700
    
    
    $
    (195
    )
    
    $
    (304
    )Foreclosed real esate
    
    
    
    
    
    
    
    
    
    
    2,869
    
    
    
    (226
    )
    
    
    (286
    )$
    
    
    
    $
    
    
    
    $
    4,569
    
    
    $
    (421
    )
    
    $
    (590
    )
   June 30, 2010
    
    
    December 31, 2009Carrying
    
    
    Fair
    
    
    Carrying
    
    
    Fair(In thousands)
    
    Amount
    
    
    Value
    
    
    Amount
    
    
    ValueFinancial assets:Cash and cash equivalents
    
    $
    71,615
    
    
    $
    71,615
    
    
    $
    19,966
    
    
    $
    19,966Certificates of deposit
    
    
    3,100
    
    
    
    3,107
    
    
    
    3,000
    
    
    
    3,028Securities available for sale
    
    
    344,837
    
    
    
    344,837
    
    
    
    293,367
    
    
    
    293,367Federal Home Loan Bank stock
    
    
    12,538
    
    
    
    12,538
    
    
    
    4,605
    
    
    
    4,605Loans and loans held for sale, net
    
    
    1,177,617
    
    
    
    1,192,988
    
    
    
    814,255
    
    
    
    813,393Accrued interest receivable
    
    
    7,625
    
    
    
    7,625
    
    
    
    6,231
    
    
    
    6,231Financial liabilities:Deposits
    
    
    1,354,074
    
    
    
    1,359,412
    
    
    
    922,475
    
    
    
    927,385Borrowings
    
    
    152,102
    
    
    
    158,681
    
    
    
    75,410
    
    
    
    76,782Accrued interest payable
    
    
    1,065
    
    
    
    1,065
    
    
    
    728
    
    
    
    728
  9




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##### Table of Contents



4. Earnings Per Share
   Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,(Dollars in thousands, except per share amounts)
    
    2010
    
    
    2009
    
    
    2010
    
    
    2009Net income (loss) available to common stockholders
    
    $
    3,242
    
    
    $
    962
    
    
    $
    6,102
    
    
    $
    (146
    )Basic weighted average shares outstanding
    
    
    22,124,539
    
    
    
    22,024,179
    
    
    
    22,128,822
    
    
    
    21,991,924Effect of dilutive securities
    
    
    16,058
    
    
    
    
    
    
    
    8,029
    
    
    
    Diluted weighted average shares outstanding
    
    
    22,140,597
    
    
    
    22,024,179
    
    
    
    22,136,851
    
    
    
    21,991,924Earnings (loss) per share:Basic
    
    $
    0.15
    
    
    $
    0.04
    
    
    $
    0.28
    
    
    $
    (0.01
    )Diluted
    
    $
    0.15
    
    
    $
    0.04
    
    
    $
    0.28
    
    
    $
    (0.01
    )
 5. Securities
    10




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##### Table of Contents



Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    Fair(In thousands)
    
    Cost
    
    
    Gains
    
    
    Losses
    
    
    ValueJune 30, 2010Debt securities:Corporate bonds:Financial services
    
    $
    65,669
    
    
    $
    1,937
    
    
    $
    (660
    )
    
    $
    66,946Industry and manufacturing
    
    
    46,042
    
    
    
    2,178
    
    
    
    
    
    
    
    48,220Consumer products and services
    
    
    46,790
    
    
    
    2,530
    
    
    
    
    
    
    
    49,320Other
    
    
    62,852
    
    
    
    2,845
    
    
    
    (16
    )
    
    
    65,681Total corporate bonds
    
    
    221,353
    
    
    
    9,490
    
    
    
    (676
    )
    
    
    230,167Government-sponsored enterprises
    
    
    10,901
    
    
    
    57
    
    
    
    (33
    )
    
    
    10,925Municipal bonds
    
    
    4,382
    
    
    
    21
    
    
    
    (7
    )
    
    
    4,396Residential mortgage-backed securities:Government-sponsored enterprises
    
    
    40,073
    
    
    
    1,114
    
    
    
    (7
    )
    
    
    41,180Private label
    
    
    15,044
    
    
    
    828
    
    
    
    (255
    )
    
    
    15,617Other debt securities
    
    
    666
    
    
    
    
    
    
    
    
    
    
    
    666Total debt securities
    
    
    292,419
    
    
    
    11,510
    
    
    
    (978
    )
    
    
    302,951Marketable equity securities:Common stocks
    
    
    30,086
    
    
    
    1,849
    
    
    
    (1,803
    )
    
    
    30,132Money market mutual funds
    
    
    11,756
    
    
    
    
    
    
    
    (2
    )
    
    
    11,754Total marketable equity securities
    
    
    41,842
    
    
    
    1,849
    
    
    
    (1,805
    )
    
    
    41,886Total securities available for sale
    
    $
    334,261
    
    
    $
    13,359
    
    
    $
    (2,783
    )
    
    $
    344,837December 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
    
    $
    11,543
    
    
    $
    11,718
    
    
    $
    48,559
    
    
    $
    49,606
    
    
    $
    5,567
    
    
    $
    5,622
    
    
    $
    65,669
    
    
    $
    66,946Industry and manufacturing
    
    
    10,055
    
    
    
    10,234
    
    
    
    33,972
    
    
    
    35,902
    
    
    
    2,015
    
    
    
    2,084
    
    
    
    46,042
    
    
    
    48,220Consumer products and services
    
    
    15,293
    
    
    
    15,594
    
    
    
    31,497
    
    
    
    33,726
    
    
    
    
    
    
    
    
    
    
    
    46,790
    
    
    
    49,320Other
    
    
    18,078
    
    
    
    18,359
    
    
    
    43,741
    
    
    
    46,270
    
    
    
    1,033
    
    
    
    1,052
    
    
    
    62,852
    
    
    
    65,681Total corporate bonds
    
    
    54,969
    
    
    
    55,905
    
    
    
    157,769
    
    
    
    165,504
    
    
    
    8,615
    
    
    
    8,758
    
    
    
    221,353
    
    
    
    230,167Government-sponsored
enterprises
    
    
    
    
    
    
    
    
    
    
    7,168
    
    
    
    7,158
    
    
    
    3,733
    
    
    
    3,767
    
    
    
    10,901
    
    
    
    10,925Municipal bonds
    
    
    1,368
    
    
    
    1,382
    
    
    
    500
    
    
    
    502
    
    
    
    2,514
    
    
    
    2,512
    
    
    
    4,382
    
    
    
    4,396Residential mortgage-backed securities:Government-sponsored
enterprises
    
    
    
    
    
    
    
    
    
    
    146
    
    
    
    147
    
    
    
    39,927
    
    
    
    41,033
    
    
    
    40,073
    
    
    
    41,180Private label
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,044
    
    
    
    15,617
    
    
    
    15,044
    
    
    
    15,617Other debt securities
    
    
    
    
    
    
    
    
    
    
    140
    
    
    
    140
    
    
    
    526
    
    
    
    526
    
    
    
    666
    
    
    
    666Total
    
    $
    56,337
    
    
    $
    57,287
    
    
    $
    165,723
    
    
    $
    173,451
    
    
    $
    70,359
    
    
    $
    72,213
    
    
    $
    292,419
    
    
    $
    302,951
  Less Than Twelve Months
    
    
    Over Twelve MonthsGross
    
    
    
    
    
    
    GrossUnrealized
    
    
    Fair
    
    
    Unrealized
    
    
    Fair(In thousands)
    
    Losses
    
    
    Value
    
    
    Losses
    
    
    ValueJune 30, 2010Debt securities:Corporate bonds:Financial services
    
    $
    451
    
    
    $
    4,701
    
    
    $
    209
    
    
    $
    6,792Other
    
    
    16
    
    
    
    3,965
    
    
    
    
    
    
    
    Total corporate bonds
    
    
    467
    
    
    
    8,666
    
    
    
    209
    
    
    
    6,792Government-sponsored enterprises
    
    
    33
    
    
    
    3,235
    
    
    
    
    
    
    
    Municipal bonds
    
    
    7
    
    
    
    1,507
    
    
    
    
    
    
    
    Residential mortgage-backed securities:Government-sponsored enterprises
    
    
    7
    
    
    
    567
    
    
    
    
    
    
    
    Private label
    
    
    255
    
    
    
    3,485
    
    
    
    
    
    
    
    Total debt securities
    
    
    769
    
    
    
    17,460
    
    
    
    209
    
    
    
    6,792Marketable equity securities:Common stocks
    
    
    1,383
    
    
    
    12,764
    
    
    
    420
    
    
    
    2,892Money market mutual funds
    
    
    2
    
    
    
    1,324
    
    
    
    
    
    
    
    Total marketable equity securities
    
    
    1,385
    
    
    
    14,088
    
    
    
    420
    
    
    
    2,892Total
    
    $
    2,154
    
    
    $
    31,548
    
    
    $
    629
    
    
    $
    9,684
  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




---



##### 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
    
    
    345,784Bank -owned life insurance
    
    
    8,939Foreclosed real estate, net
    
    
    1,653Premises and equipment, net
    
    
    10,618Accrued interest receivable
    
    
    1,373Deferred tax asset, net
    
    
    8,896Goodwill
    
    
    11,230Other assets
    
    
    3,600Total assets acquired
    
    $
    464,983Deposits
    
    $
    380,550FHLB Borrowings
    
    
    80,932Accrued expenses and other liabilities
    
    
    3,501Total liabilities assumed
    
    $
    464,983
   14




---



##### Table of Contents



Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,(In thousands, except per share amounts)
    
    2010
    
    
    2009
    
    
    2010
    
    
    2009Net interest income
    
    $
    15,279
    
    
    $
    12,312
    
    
    $
    30,207
    
    
    $
    23,973Net income (loss)
    
    
    3,242
    
    
    
    72
    
    
    
    6,311
    
    
    
    (886
    )Income (loss) per share  Basic
    
    $
    0.15
    
    
    $
    
    
    
    $
    0.29
    
    
    $
    (0.04
    )Income (loss) per share  Diluted
    
    
    0.15
    
    
    
    
    
    
    
    0.29
    
    
    
    (0.04
    )
  15




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##### Table of Contents



Managements Discussion and Analysis of Financial Condition and Results of
Operations
  Forward-Looking Statements
 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 June 30, 2010 and December 31, 2009
    Loan Portfolio Analysis
   June 30, 2010
    
    
    December 31, 2009(Dollars in thousands)
    
    Amount
    
    
    %
    
    
    Amount
    
    
    %Real estate loans:One-to four-family
    
    $
    425,163
    
    
    
    35.8
    %
    
    $
    276,122
    
    
    
    33.5
    %Multi-family
    
    
    123,876
    
    
    
    10.5
    
    
    
    53,402
    
    
    
    6.5Commercial real estate
    
    
    396,265
    
    
    
    33.4
    
    
    
    350,648
    
    
    
    42.6Construction
    
    
    127,418
    
    
    
    10.8
    
    
    
    94,102
    
    
    
    11.4Home equity lines
of credit
    
    
    72,937
    
    
    
    6.2
    
    
    
    29,979
    
    
    
    3.6Total real estate loans
    
    
    1,145,659
    
    
    
    96.7
    
    
    
    804,253
    
    
    
    97.6Commercial business loans
    
    
    30,635
    
    
    
    2.6
    
    
    
    18,029
    
    
    
    2.2Consumer loans
    
    
    7,901
    
    
    
    0.7
    
    
    
    1,205
    
    
    
    0.2Total loans
    
    
    1,184,195
    
    
    
    100.0
    %
    
    
    823,487
    
    
    
    100.0
    %Net deferred loan
origination fees
    
    
    (164
    )
    
    
    
    
    
    
    (945
    )Allowance for loan losses
    
    
    (11,265
    )
    
    
    
    
    
    
    (9,242
    )Loans, net
    
    $
    1,172,766
    
    
    
    
    
    
    $
    813,300
  17




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##### Table of Contents



Asset Quality
 Non-Performing Assets.
  June 30,
    
    
    December 31,(Dollars in thousands)
    
    2010
    
    
    2009Loans accounted for on a non-accrual basis:Real estate loans:One-to four-family
    
    $
    11,686
    
    
    $
    4,098Multi-family
    
    
    3,141
    
    
    
    850Commercial real estate
    
    
    3,050
    
    
    
    7,388Home equity lines of credit
    
    
    1,114
    
    
    
    Construction
    
    
    13,104
    
    
    
    9,224Total real estate loans
    
    
    32,095
    
    
    
    21,560Commercial business loans
    
    
    209
    
    
    
    Consumer loans
    
    
    14
    
    
    
    138Total non-accrual loans
    
    
    32,318
    
    
    
    21,698Foreclosed assets
    
    
    4,221
    
    
    
    2,869Total nonperforming assets
    
    $
    36,539
    
    
    $
    24,567Non-accrual loans to total loans
    
    
    2.73
    %
    
    
    2.63
    %Non-accrual loans to total assets
    
    
    1.87
    %
    
    
    1.79
    %Non-performing assets to total assets
    
    
    2.11
    %
    
    
    2.03
    %
  Troubled Debt Restructurings.
 June 30,
    
    
    December 31,(In thousands)
    
    2010
    
    
    2009TDRs on accrual status:One-to four-family real estate
    
    $
    185
    
    
    $
    189Commercial real estate
    
    
    4,784
    
    
    
    4,969
    
    
    
    189TDRs on non-accrual status:One-to four-family real estate
    
    
    721
    
    
    
    1,148Construction
    
    
    
    
    
    
    591721
    
    
    
    1,739Total TDRs
    
    $
    5,690
    
    
    $
    1,928
  18




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##### Table of Contents



Potential Problem Loans.
 Allowance for Loan Losses.
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,(Dollars in thousands)
    
    2010
    
    
    2009
    
    
    2010
    
    
    2009Beginning balance
    
    $
    10,629
    
    
    $
    7,456
    
    
    $
    9,242
    
    
    $
    6,912Provision for loan losses
    
    
    794
    
    
    
    568
    
    
    
    2,168
    
    
    
    1,114Charge offs:Real estate loans
    
    
    157
    
    
    
    164
    
    
    
    158
    
    
    
    166Commercial business loans
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Consumer loans
    
    
    29
    
    
    
    
    
    
    
    50
    
    
    
    Total charge-offs
    
    
    186
    
    
    
    164
    
    
    
    208
    
    
    
    166Recoveries:Real estate loans
    
    
    23
    
    
    
    260
    
    
    
    46
    
    
    
    260Commercial business
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Consumer loans
    
    
    5
    
    
    
    
    
    
    
    17
    
    
    
    Total recoveries
    
    
    28
    
    
    
    260
    
    
    
    63
    
    
    
    260Net (charge-offs) recoveries
    
    
    (158
    )
    
    
    96
    
    
    
    (145
    )
    
    
    94Ending balance
    
    $
    11,265
    
    
    $
    8,120
    
    
    $
    11,265
    
    
    $
    8,120Allowance to non-accrual loans
    
    
    34.86
    %
    
    
    47.61
    %
    
    
    34.86
    %
    
    
    47.61
    %Allowance to total loans outstanding
    
    
    0.95
    %
    
    
    1.06
    %
    
    
    0.95
    %
    
    
    1.06
    %Net (charge-offs) recoveries to average
loans outstanding (annualized)
    
    
    (0.05
    )%
    
    
    0.05
    %
    
    
    (0.02
    )%
    
    
    0.03
    %
   19




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##### Table of Contents



June 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
    
    $
    2,328
    
    
    
    20.7
    %
    
    
    35.9
    %
    
    $
    1,730
    
    
    
    18.7
    %
    
    
    33.5
    %Multi-family
    
    
    1,046
    
    
    
    9.3
    
    
    
    10.4
    
    
    
    467
    
    
    
    5.1
    
    
    
    6.5Commercial real
estate
    
    
    4,877
    
    
    
    43.3
    
    
    
    33.5
    
    
    
    4,435
    
    
    
    48.0
    
    
    
    42.6Home equity lines
of credit
    
    
    129
    
    
    
    1.1
    
    
    
    6.2
    
    
    
    128
    
    
    
    1.4
    
    
    
    3.6Construction
    
    
    2,388
    
    
    
    21.2
    
    
    
    10.7
    
    
    
    1,859
    
    
    
    20.1
    
    
    
    11.4Total real estate
loans
    
    
    10,768
    
    
    
    95.6
    
    
    
    96.7
    
    
    
    8,619
    
    
    
    93.3
    
    
    
    97.6Commercial business
loans
    
    
    345
    
    
    
    3.1
    
    
    
    2.6
    
    
    
    586
    
    
    
    6.3
    
    
    
    2.2Consumer loans
    
    
    152
    
    
    
    1.3
    
    
    
    0.7
    
    
    
    37
    
    
    
    0.4
    
    
    
    0.2Total
    
    $
    11,265
    
    
    
    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 nonaccrual 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 nonaccrual 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.
  21




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##### Table of Contents



Deposits
   June 30, 2010
    
    
    December 31, 2009(Dollars in thousands)
    
    Amount
    
    
    Percent
    
    
    Amount
    
    
    PercentNOW and demand deposits
    
    $
    227,762
    
    
    
    16.8
    %
    
    $
    102,386
    
    
    
    11.1
    %Money market deposits
    
    
    303,656
    
    
    
    22.4
    
    
    
    247,006
    
    
    
    26.8Regular and other deposits
    
    
    186,232
    
    
    
    13.8
    
    
    
    128,016
    
    
    
    13.9Certificates of deposit
    
    
    636,424
    
    
    
    47.0
    
    
    
    445,067
    
    
    
    48.2Total
    
    $
    1,354,074
    
    
    
    100.0
    %
    
    $
    922,475
    
    
    
    100.0
    %
 Borrowings
   22




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##### Table of Contents



Results of Operations for the Three and Six Months Ended June 30, 2010 and June 30, 2009
 Overview
    Net Interest Income
      23




---



##### Table of Contents



Three Months Ended June 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)
    
    $
    1,171,274
    
    
    $
    16,829
    
    
    
    5.76
    %
    
    $
    757,131
    
    
    $
    11,046
    
    
    
    5.85
    %Securities and certificates of deposit
    
    
    351,891
    
    
    
    3,634
    
    
    
    4.14
    
    
    
    290,433
    
    
    
    2,867
    
    
    
    3.96Other interest-earning assets
    
    
    67,882
    
    
    
    36
    
    
    
    0.21
    
    
    
    22,125
    
    
    
    6
    
    
    
    0.11Total interest-earning assets
    
    
    1,591,047
    
    
    
    20,499
    
    
    
    5.17
    
    
    
    1,069,689
    
    
    
    13,919
    
    
    
    5.22Noninterest-earning assets
    
    
    134,686
    
    
    
    
    
    
    
    
    
    
    
    82,769Total assets
    
    $
    1,725,733
    
    
    
    
    
    
    
    
    
    
    $
    1,152,458Liabilities and stockholders equity:Interest-bearing liabilities:NOW deposits
    
    $
    114,469
    
    
    
    136
    
    
    
    0.48
    %
    
    $
    37,913
    
    
    
    37
    
    
    
    0.39
    %Money market deposits
    
    
    307,323
    
    
    
    888
    
    
    
    1.16
    
    
    
    226,777
    
    
    
    1,074
    
    
    
    1.90Savings and other deposits
    
    
    186,255
    
    
    
    256
    
    
    
    0.55
    
    
    
    128,148
    
    
    
    293
    
    
    
    0.92Certificates of deposit
    
    
    632,873
    
    
    
    3,030
    
    
    
    1.92
    
    
    
    432,899
    
    
    
    3,534
    
    
    
    3.27Total interest-bearing deposits
    
    
    1,240,920
    
    
    
    4,310
    
    
    
    1.39
    
    
    
    825,737
    
    
    
    4,938
    
    
    
    2.40FHLB advances and other borrowings
    
    
    156,160
    
    
    
    910
    
    
    
    2.34
    
    
    
    64,212
    
    
    
    509
    
    
    
    3.18Total interest-bearing liabilities
    
    
    1,397,080
    
    
    
    5,220
    
    
    
    1.50
    
    
    
    889,949
    
    
    
    5,447
    
    
    
    2.45Noninterest-bearing demand deposits
    
    
    104,493
    
    
    
    
    
    
    
    
    
    
    
    61,772Other noninterest-bearing liabilities
    
    
    16,497
    
    
    
    
    
    
    
    
    
    
    
    10,853Total liabilities
    
    
    1,518,070
    
    
    
    
    
    
    
    
    
    
    
    962,574Total stockholders equity
    
    
    207,663
    
    
    
    
    
    
    
    
    
    
    
    189,884Total liabilities and stockholders equity
    
    $
    1,725,733
    
    
    
    
    
    
    
    
    
    
    $
    1,152,458Net interest-earning assets
    
    $
    193,967
    
    
    
    
    
    
    
    
    
    
    $
    179,740Net interest income
    
    
    
    
    
    $
    15,279
    
    
    
    
    
    
    
    
    
    
    $
    8,472Interest rate spread (2)
    
    
    
    
    
    
    
    
    
    
    3.67
    %
    
    
    
    
    
    
    
    
    
    
    2.77
    %Net interest margin (3)
    
    
    
    
    
    
    
    
    
    
    3.85
    %
    
    
    
    
    
    
    
    
    
    
    3.18
    %Average interest-earning assets to
average interest-bearing liabilities
    
    
    
    
    
    
    113.88
    %
    
    
    
    
    
    
    
    
    
    
    120.20
    %
 (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



Six Months Ended June 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)
    
    $
    1,161,329
    
    
    $
    33,039
    
    
    
    5.74
    %
    
    $
    742,085
    
    
    $
    21,691
    
    
    
    5.89
    %Securities and certificates of deposit
    
    
    346,640
    
    
    
    7,297
    
    
    
    4.25
    
    
    
    272,016
    
    
    
    5,657
    
    
    
    4.19Other interest-earning assets
    
    
    53,551
    
    
    
    48
    
    
    
    0.18
    
    
    
    26,220
    
    
    
    18
    
    
    
    0.14Total interest-earning assets
    
    
    1,561,520
    
    
    
    40,384
    
    
    
    5.22
    
    
    
    1,040,321
    
    
    
    27,366
    
    
    
    5.30Noninterest-earning assets
    
    
    136,662
    
    
    
    
    
    
    
    
    
    
    
    83,764Total assets
    
    $
    1,698,182
    
    
    
    
    
    
    
    
    
    
    $
    1,124,085Liabilities and stockholders equity:Interest-bearing liabilities:NOW deposits
    
    $
    111,137
    
    
    
    265
    
    
    
    0.48
    %
    
    $
    37,265
    
    
    
    83
    
    
    
    0.45
    %Money market deposits
    
    
    304,069
    
    
    
    1,781
    
    
    
    1.18
    
    
    
    205,108
    
    
    
    2,101
    
    
    
    2.07Savings and other deposits
    
    
    182,616
    
    
    
    502
    
    
    
    0.55
    
    
    
    125,584
    
    
    
    595
    
    
    
    0.96Certificates of deposit
    
    
    622,354
    
    
    
    5,961
    
    
    
    1.93
    
    
    
    430,232
    
    
    
    7,422
    
    
    
    3.48Total interest-bearing deposits
    
    
    1,220,176
    
    
    
    8,509
    
    
    
    1.41
    
    
    
    798,189
    
    
    
    10,201
    
    
    
    2.58FHLB advances and other borrowings
    
    
    156,040
    
    
    
    1,825
    
    
    
    2.36
    
    
    
    65,973
    
    
    
    1,041
    
    
    
    3.18Total interest-bearing liabilities
    
    
    1,376,216
    
    
    
    10,334
    
    
    
    1.51
    
    
    
    864,162
    
    
    
    11,242
    
    
    
    2.62Noninterest-bearing demand deposits
    
    
    99,701
    
    
    
    
    
    
    
    
    
    
    
    60,247Other noninterest-bearing liabilities
    
    
    16,664
    
    
    
    
    
    
    
    
    
    
    
    9,979Total liabilities
    
    
    1,492,581
    
    
    
    
    
    
    
    
    
    
    
    934,388Total stockholders equity
    
    
    205,601
    
    
    
    
    
    
    
    
    
    
    
    189,697Total liabilities and stockholders equity
    
    $
    1,698,182
    
    
    
    
    
    
    
    
    
    
    $
    1,124,085Net interest-earning assets
    
    $
    185,304
    
    
    
    
    
    
    
    
    
    
    $
    176,159Net interest income
    
    
    
    
    
    $
    30,050
    
    
    
    
    
    
    
    
    
    
    $
    16,124Interest rate spread (2)
    
    
    
    
    
    
    
    
    
    
    3.71
    %
    
    
    
    
    
    
    
    
    
    
    2.68
    %Net interest margin (3)
    
    
    
    
    
    
    
    
    
    
    3.88
    %
    
    
    
    
    
    
    
    
    
    
    3.13
    %Average interest-earning assets to
average interest-bearing liabilities
    
    
    
    
    
    
    113.46
    %
    
    
    
    
    
    
    
    
    
    
    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.  25




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##### Table of Contents



Three Months Ended June 30,
    
    
    Six Months Ended June 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
    
    $
    5,948
    
    
    $
    (165
    )
    
    $
    5,783
    
    
    $
    11,911
    
    
    $
    (563
    )
    
    $
    11,348Securities
    
    
    630
    
    
    
    137
    
    
    
    767
    
    
    
    1,570
    
    
    
    70
    
    
    
    1,640Other interest-earning assets
    
    
    21
    
    
    
    9
    
    
    
    30
    
    
    
    23
    
    
    
    7
    
    
    
    30Total
    
    
    6,599
    
    
    
    (19
    )
    
    
    6,580
    
    
    
    13,504
    
    
    
    (486
    )
    
    
    13,018Interest expense:Deposits
    
    
    (3,777
    )
    
    
    3,149
    
    
    
    (628
    )
    
    
    (12,033
    )
    
    
    10,341
    
    
    
    (1,692
    )Borrowings
    
    
    492
    
    
    
    (91
    )
    
    
    401
    
    
    
    967
    
    
    
    (183
    )
    
    
    784Total
    
    
    (3,285
    )
    
    
    3,058
    
    
    
    (227
    )
    
    
    (11,066
    )
    
    
    10,158
    
    
    
    (908
    )Change in net interest income
    
    $
    9,884
    
    
    $
    (3,077
    )
    
    $
    6,807
    
    
    $
    24,570
    
    
    $
    (10,644
    )
    
    $
    13,926
 Non-interest Income
  Non-interest Expense
   26




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##### Table of Contents



Income Tax
  Liquidity and Capital Management
 Liquidity Management.
    June 30,
    
    
    December 31,(In thousands)
    
    2010
    
    
    2009Unadvanced portion of existing loans:Construction
    
    $
    54,658
    
    
    $
    72,218Home equity line of credit
    
    
    45,248
    
    
    
    25,623Other lines and letters of credit
    
    
    5,807
    
    
    
    4,038Commitments to originate:One- to four-family
    
    
    9,180
    
    
    
    1,844Commercial real estate
    
    
    63,956
    
    
    
    18,711Construction
    
    
    14,140
    
    
    
    27,460Other loans
    
    
    10,750
    
    
    
    4,457Total loan commitments outstanding
    
    $
    203,739
    
    
    $
    154,351
     27




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Capital Management.
   Off-Balance Sheet Arrangements.
   28




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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
    
    $
    52,795
    
    
    $
    (7,495
    )
    
    
    (12.43)
    %Flat
    
    
    60,290-50
    
    
    60,940
    
    
    
    650
    
    
    
    1.08
  29




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Item 4. Controls and Procedures
      30




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PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  Financial reform legislation recently enacted will, among other things, create a new Consumer
Financial Protection Bureau, tighten capital standards and result in new laws and regulations that
are expected to increase our costs of operations.
       31




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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  (c.) The following table sets forth information with respect to any purchase made by or on behalf
of the Company during the indicated periods:
 (a)
    
    
    (b)
    
    
    (c)
    
    
    (d)Maximum Number(or ApproximateTotal Number
    
    
    Dollar Value) ofof Shares (or Units)
    
    
    Shares (or Units)Purchased as Part
    
    
    that May Yet BeTotal Number
    
    
    Average Price
    
    
    of Publicly
    
    
    Purchased Underof Shares (or Units)
    
    
    Paid Per Share
    
    
    Announced Plans
    
    
    the Plans orPeriod
    
    Purchased
    
    
    (or Unit)
    
    
    or Programs (1)
    
    
    ProgramsApril 1  30, 2010 (1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    472,428May 1  31, 2010
    
    
    
    
    
    $
    
    
    
    
    
    
    
    
    472,428June 1  30, 2010
    
    
    109,700
    
    
    $
    11.27
    
    
    
    109,700
    
    
    
    362,728Total
    
    
    109,700
    
    
    $
    11.27
    
    
    
    109,700
    
    
    
    362,728
 (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
   32




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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.  33




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SIGNATURES
  MERIDIAN INTERSTATE BANCORP, INC.(Registrant)Dated:  August 9, 2010
    /s/ Richard J. GavegnanoRichard J. GavegnanoChairman and Chief Executive Officer
(Principal Executive Officer)Dated:  August 9, 2010
    /s/ Mark L. AbbateMark L. AbbateSenior Vice President, Treasurer and Chief Financial Officer
(Principal Financial and Accounting Officer)  34