MERIDIAN INTERSTATE BANCORP INC - FORM 10-Q

Attached files

file	filename
EX-32.0 - EXHIBIT 32.0 - MERIDIAN INTERSTATE BANCORP INC	c16834exv32w0.htm
EX-31.1 - EXHIBIT 31.1 - MERIDIAN INTERSTATE BANCORP INC	c16834exv31w1.htm
EX-31.2 - EXHIBIT 31.2 - MERIDIAN INTERSTATE BANCORP INC	c16834exv31w2.htm

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 March 31, 2011


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

For the transition period from to

Commission file number 001-33898

Meridian Interstate Bancorp, Inc.

(Exact name of registrant as specified in its charter)


Massachusetts		20-4652200
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

10 Meridian Street,
East Boston, Massachusetts		02128
(Address of Principal Executive Offices)		Zip Code

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

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o		Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ

At May 3, 2011, the registrant had 22,412,374 shares of no par value common stock outstanding.

MERIDIAN INTERSTATE BANCORP, INC.

FORM 10-Q

INDEX


	Page
PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Consolidated Balance Sheets at March 31, 2011 and December 31, 2010 (Unaudited)		3

Consolidated Statements of Income for the three months ended March 31, 2011 and 2010 (Unaudited)		4

Consolidated Statements of Changes in Stockholders’ Equity for the three months ended March 31, 2011 and 2010 (Unaudited)		5

Consolidated Statements of Cash Flows for the three months ended March 31, 2011 and 2010 (Unaudited)		6

Notes to Unaudited Consolidated Financial Statements		8

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		22

Item 3. Quantitative and Qualitative Disclosures About Market Risk		34

Item 4. Controls and Procedures		35

PART II. OTHER INFORMATION

Item 1. Legal Proceedings		36

Item 1A. Risk Factors		36

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		36

Item 3. Defaults Upon Senior Securities		36

Item 4. [Removed and Reserved]		36

Item 5. Other Information		36

Item 6. Exhibits		37

Signatures		38

Exhibit 31.1
Exhibit 31.2
Exhibit 32.0

PART I — FINANCIAL INFORMATION

Item 1. financial statements

MERIDIAN INTERSTATE BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(Unaudited)


	March 31,			December 31,
(Dollars in thousands)	2011			2010
ASSETS
Cash and due from banks	$	187,197		$	155,430
Federal funds sold		63			63

Total cash and cash equivalents		187,260			155,493

Certificates of deposit — affiliate bank		2,508			—
Securities available for sale, at fair value		395,034			360,602
Federal Home Loan Bank stock, at cost		12,538			12,538
Loans held for sale		2,815			13,013

Loans		1,190,510			1,183,717
Less allowance for loan losses		(10,323	)		(10,155	)

Loans, net		1,180,187			1,173,562

Bank-owned life insurance		34,146			33,829
Foreclosed real estate, net		4,966			4,080
Investment in affiliate bank		11,982			11,497
Premises and equipment, net		35,260			34,425
Accrued interest receivable		7,164			7,543
Prepaid deposit insurance		2,439			3,026
Deferred tax asset, net		5,792			5,441
Goodwill		13,687			13,687
Other assets		4,902			7,094


Total assets	$	1,900,680		$	1,835,830


LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Non interest-bearing	$	115,988		$	111,423
Interest-bearing		1,382,699			1,343,792

Total deposits		1,498,687			1,455,215

Short-term borrowings — affiliate bank		11,455			1,949
Short-term borrowings — other		10,042			10,037
Long-term debt		136,350			136,697
Accrued expenses and other liabilities		25,830			16,321

Total liabilities		1,682,364			1,620,219

Stockholders’ equity:
Common stock, no par value, 50,000,000 shares authorized; 23,000,000 shares issued		—			—
Additional paid-in capital		97,165			97,005
Retained earnings		125,774			122,563
Accumulated other comprehensive income		7,442			8,038
Treasury stock, at cost, 215,554 and 192,918 shares at March 31, 2011 and December 31, 2010, respectively		(2,425	)		(2,121	)
Unearned compensation — ESOP, 693,450 and 703,800 shares at March 31, 2011 and December 31, 2010, respectively		(6,934	)		(7,038	)
Unearned compensation — restricted shares, 321,645 and 326,905 at March 31, 2011 and December 31, 2010, respectively		(2,706	)		(2,836	)

Total stockholders’ equity		218,316			215,611


Total liabilities and stockholders’ equity	$	1,900,680		$	1,835,830

See accompanying notes to unaudited consolidated financial statements.

MERIDIAN INTERSTATE BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)


	Three Months Ended March 31,
(Dollars in thousands, except per share amounts)	2011		2010
Interest and dividend income:
Interest and fees on loans	$	16,446	$	16,210
Interest on debt securities		3,105		3,441
Dividends on equity securities		253		205
Interest on certificates of deposit		8		17
Interest on other interest-earning assets		85		12

Total interest and dividend income		19,897		19,885

Interest expense:
Interest on deposits		4,573		4,199
Interest on short-term borrowings		10		29
Interest on long-term debt		879		886

Total interest expense		5,462		5,114


Net interest income		14,435		14,771
Provision for loan losses		342		1,374

Net interest income, after provision for loan losses		14,093		13,397

Non-interest income:
Customer service fees		1,296		1,414
Loan fees		231		158
Gain on sales of loans, net		436		565
Gain on sales of securities, net		867		—
Income from bank-owned life insurance		317		292
Equity income on investment in affiliate bank		485		70

Total non-interest income		3,632		2,499

Non-interest expenses:
Salaries and employee benefits		7,101		6,167
Occupancy and equipment		2,216		1,783
Data processing		809		754
Marketing and advertising		541		466
Professional services		644		720
Foreclosed real estate		37		154
Deposit insurance		625		515
Other general and administrative		651		790

Total non-interest expenses		12,624		11,349

Income before income taxes		5,101		4,547
Provision for income taxes		1,890		1,687

Net income	$	3,211	$	2,860


Income per share:
Basic	$	0.15	$	0.13
Diluted	$	0.15	$	0.13

Weighted average shares:
Basic		21,982,714		22,133,155
Diluted		22,095,617		22,133,155

See accompanying notes to unaudited consolidated financial statements.

MERIDIAN INTERSTATE BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
Three Months Ended March 31, 2011 and 2010


	Shares of No								Accumulated
	Par Common			Additional					Other						Unearned			Unearned
	Stock			Paid-in			Retained		Comprehensive			Treasury			Compensation			Compensation
(Dollars in thousands)	Outstanding			Capital			Earnings		Income			Stock			ESOP			Restricted Shares			Total
*Three Months Ended March 31, 2010*
Balance at December 31, 2009		22,098,565		$	100,972		$	109,189	$	5,583		$	(4,535	)	$	(7,452	)	$	(3,342	)	$	200,415

Comprehensive income :
Net income		—			—			2,860		—			—			—			—			2,860
Change in net unrealized gain on securities available for sale, net of reclassification adjustment and tax effects		—			—			—		1,694			—			—			—			1,694
Change in defined benefit plan prior service costs and actuarial losses, net of reclassification adjustments and tax effects		—			—			—		102			—			—			—			102

Total comprehensive income																						4,656

ESOP shares earned (10,350 shares)		—			(3	)		—		—			—			103			—			100
Issuance of 514,109 shares to Meridian Financial Services, Incorporated, the mutual holding company		514,109			(4,505	)		—		—			4,505			—			—			—
Share-based compensation expense		2,620			121			—		—			—			—			120			241

Balance at March 31, 2010		22,615,294		$	96,585		$	112,049	$	7,379		$	(30	)	$	(7,349	)	$	(3,222	)	$	205,412


*Three Months Ended March 31, 2011*
Balance at December 31, 2010		22,480,877		$	97,005		$	122,563	$	8,038		$	(2,121	)	$	(7,038	)	$	(2,836	)	$	215,611

Comprehensive income :
Net income		—			—			3,211		—			—			—			—			3,211
Change in net unrealized gain on securities available for sale, net of reclassification adjustment and tax effects		—			—			—		(596	)		—			—			—			(596	)

Total comprehensive income																						2,615

Purchase of treasury stock		(23,336	)		—			—		—			(304	)		—			—			(304	)
ESOP shares earned (10,350 shares)		—			29			—		—			—			104			—			133
Share-based compensation expense		5,260			131			—		—			—			—			130			261

Balance at March 31, 2011		22,462,801		$	97,165		$	125,774	$	7,442		$	(2,425	)	$	(6,934	)	$	(2,706	)	$	218,316

See accompanying notes to unaudited consolidated financial statements.

MERIDIAN INTERSTATE BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)


	Three Months Ended March 31,
(In thousands)	2011			2010
Cash flows from operating activities:
Net income	$	3,211		$	2,860
Adjustments to reconcile net income to net cash provided by operating activities:
Accretion of acquisition fair value adjustments		(574	)		(533	)
Earned ESOP shares		133			100
Provision for loan losses		342			1,374
Amortization (accretion) of net deferred loan origination fees		181			(672	)
Net amortization of securities available for sale		221			309
Depreciation and amortization expense		597			591
Gain on sales of securities, net		(867	)		—
Gain on sales of loans held in portfolio, net		—			(352	)
Gain on sales and provision for foreclosed real estate, net		(118	)		(26	)
Deferred income tax provision (benefit)		66			(1,996	)
Income from bank-owned life insurance		(317	)		(292	)
Equity income on investment in affiliate bank		(485	)		(70	)
Share-based compensation expense		261			241
Net changes in:
Loans held for sale		10,198			1,842
Accrued interest receivable		379			706
Prepaid deposit insurance		587			321
Other assets		2,192			3,968
Accrued expenses and other liabilities		9,509			3,913

Net cash provided by operating activities		25,516			12,284


Cash flows from investing activities:
Cash provided by business combination		—			14,422
Purchases of certificates of deposit		(2,508	)		—
Activity in securities available for sale:
Proceeds from maturities, calls and principal payments		32,135			15,619
Net purchase of mutual funds		(10,435	)		—
Proceeds from sales		3,901			—
Purchases		(60,245	)		(24,270	)
Loans originated, net of principal payments received		(8,327	)		(19,088	)
Proceeds from sales of fixed-rate loans held in portfolio		—			34,488
Purchases of premises and equipment		(1,411	)		(78	)
Capitalized costs on foreclosed real estate		(13	)		(197	)
Proceeds from sales of foreclosed real estate		305			667

Net cash (used in) provided by investing activities		(46,598	)		21,563

(continued)

See accompanying notes to unaudited consolidated financial statements.

MERIDIAN INTERSTATE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)


	Three Months Ended March 31,
(In thousands)	2011			2010
Cash flows from financing activities:
Net increase in deposits		43,642			32,389
Net change in borrowings with maturities less than three months		9,511			(8,638	)
Proceeds from Federal Home Loan Bank advances with maturities of three months or more		—			15,000
Repayment of Federal Home Loan Bank advances with maturities of three months or more		—			(6,050	)
Purchase of treasury stock		(304	)		—

Net cash provided by financing activities		52,849			32,701


Net change in cash and cash equivalents		31,767			66,548

Cash and cash equivalents at beginning of period		155,493			19,966


Cash and cash equivalents at end of period	$	187,260		$	86,514


Supplemental cash flow information:
Interest paid on deposits	$	4,720		$	4,087
Interest paid on borrowings		1,235			607
Income taxes paid, net of refunds		40			15
Non-cash investing and financing activities:
Transfers from loans to foreclosed real estate		1,060			978
In conjunction with the purchase acquisition:
Fair value of assets acquired, net of cash acquired		—			453,031
Fair value of liabilities assumed		—			467,453

See accompanying notes to unaudited consolidated financial statements.

MERIDIAN INTERSTATE BANCORP, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION

Meridian Interstate Bancorp, Inc. (the “Company” or “Meridian Interstate”) is a Massachusetts mid-tier stock holding company that was formed in 2006 by East Boston Savings Bank (the “Bank”) to be its holding company. Meridian Interstate Bancorp owns all of East Boston Savings Bank’s capital stock and directs, plans and coordinates East Boston Savings Bank’s business activities. In addition, Meridian Interstate Bancorp owns approximately 40% of the capital stock of Hampshire First Bank, a New Hampshire chartered bank, organized in 2006 and headquartered in Manchester, New Hampshire. Meridian Financial Services, Incorporated is our Massachusetts-chartered mutual holding company parent. As a mutual holding company, Meridian Financial Services is a non-stock company. Meridian Financial Services owns 58.6% of Meridian Interstate Bancorp’s common stock.

The accompanying unaudited interim consolidated financial statements of Meridian Interstate Bancorp, Inc. have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Such adjustments were of a normal recurring nature. The results of operations for the three months ended March 31, 2011 are not necessarily indicative of the results that may be expected for the entire year or any other interim period. For additional information, refer to the financial statements and footnotes thereto of Meridian Interstate included in Meridian Interstate’s Form 10-K for the year ended December 31, 2010 which was filed with the Securities and Exchange Commission (“SEC”) on March 16, 2011, and is available through the SEC’s website at www.sec.gov.

In preparing consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated balance sheet and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the evaluation of goodwill for impairment, other-than-temporary impairment of securities and the valuation of deferred tax assets and foreclosed real estate.

2. RECENT ACCCOUNTING PRONOUNCEMENT

In April 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-02, Receivables (Topic 310), A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring. ASU 2011-02 provides additional guidance and clarification to help creditors in determining whether a creditor has granted a concession and whether a debtor is experiencing financial difficulties for purposes of determining whether a restructuring constitutes a troubled debt restructuring (“TDR”). ASU 2011-02 is effective for the first interim or annual period beginning on or after June 15, 2011, with retrospective application to the beginning of the annual period of adoption. The measurement of impairment should be done prospectively in the period of adoption for loans that are newly identified as TDRs upon adoption of ASU 2011-02. In addition, the TDR disclosures required by ASU 2010-20, Receivables (Topic 310), Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses should be provided beginning in the period of adoption of ASU 2011-02. The Company will adopt ASU 2011-02 on July 1, 2011 and is currently evaluating the impact of adoption on its consolidated financial statements.

3. FAIR VALUE HIERARCHY

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

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

Level 1 — Valuation is based on quoted prices in active markets for identical assets or liabilities. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.

Level 2 — Valuation is based on observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 — Valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using unobservable inputs to pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

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

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

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

Securities available for sale — All fair value measurements are obtained from a third party pricing service and are not adjusted by management, except for other debt securities. Due to the illiquid market for other debt securities, the Company determined that the prices obtained from a third party pricing service were not indicative of fair value. The Company uses an internal valuation model to determine the fair value of these securities. Securities available for sale are recorded at fair value on a recurring basis. Marketable equity securities are measured at fair value utilizing quoted market prices (Level 1). Corporate bonds, obligations of government-sponsored enterprises, municipal bonds and mortgage-backed securities are determined by pricing models that consider standard input factors such as observable market data, benchmark yields, reported trades, broker/dealer quotes, credit spreads, benchmark securities, as well as new issue data, monthly payment information, and collateral performance, among others (Level 2). Other debt securities are measured at fair value utilizing pricing models, discounted cash flow methodologies, or similar techniques that require significant management judgment or estimation (Level 3).

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

Loans held for sale — The fair value is based on commitments in effect from investors or prevailing market prices.

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

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

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

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

Off-balance sheet credit-related instruments — Fair values for off-balance-sheet, credit-related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. The fair value of these instruments is considered immaterial.

Assets Measured at Fair Value on a Recurring Basis

Assets measured at fair value on a recurring basis are summarized as follows:


	March 31, 2011
							Total Fair
(In thousands)	Level 1		Level 2		Level 3		Value
Debt securities:
Corporate bonds	$	—	$	203,338	$	—	$	203,338
Government-sponsored enterprises		—		83,757		—		83,757
Municipal bonds		—		7,424		—		7,424
Residential mortgage-backed securities:
Government-sponsored enterprises		—		31,276		—		31,276
Private label		—		9,557		—		9,557
Other debt securities		—		—		641		641

Total debt securities		—		335,352		641		335,993

Marketable equity securities:
Common stocks		34,719		—		—		34,719
Money market mutual funds		24,322		—		—		24,322

Total marketable equity securities		59,041		—		—		59,041

Total securities available for sale	$	59,041	$	335,352	$	641	$	395,034


	December 31, 2010
							Total Fair
(In thousands)	Level 1		Level 2		Level 3		Value
Debt securities:
Corporate bonds	$	—	$	222,038	$	—	$	222,038
Government-sponsored enterprises		—		35,900		—		35,900
Municipal bonds		—		6,493		—		6,493
Residential mortgage-backed securities:
Government-sponsored enterprises		—		34,542		—		34,542
Private label		—		10,334		—		10,334
Other debt securities		—		—		641		641

Total debt securities		—		309,307		641		309,948

Marketable equity securities:
Common stocks		36,765		—		—		36,765
Money market mutual funds		13,889		—		—		13,889

Total marketable equity securities		50,654		—		—		50,654

Total securities available for sale	$	50,654	$	309,307	$	641	$	360,602

There were no liabilities measured at fair value on a recurring basis. There were no transfers in or out of Levels 1, 2 and 3 for the three months ended March 31, 2011.

Assets Measured at Fair Value on a Non-recurring Basis

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

The following tables summarize the fair value hierarchy used to determine each adjustment and the carrying value of the related individual assets. The gain/loss represents the amount of write-down, charge-off or specific reserve recorded during the periods noted on the assets held at period end. There were no liabilities measured at fair value on a non-recurring basis.


							Three Months Ended
							March 31, 2011
	March 31, 2011						Total
(In thousands)	Level 1		Level 2		Level 3		Gains/(Losses)
Impaired loans	$	—	$	—	$	7,035	$	41
Foreclosed real esate		—		—		4,966		—

	$	—	$	—	$	12,001	$	41


							Three Months Ended
							March 31, 2010
	December 31, 2010						Total
(In thousands)	Level 1		Level 2		Level 3		Gains/(Losses)
Impaired loans	$	—	$	—	$	6,274	$	(239	)
Foreclosed real esate		—		—		4,080		—

	$	—	$	—	$	10,354	$	(239	)

Certain impaired loans were adjusted to fair value, less cost to sell, of the underlying collateral securing these loans resulting in losses. The loss is not recorded directly as an adjustment to current earnings, but rather as a component in determining the allowance for loan losses. Fair value was measured using appraised values of collateral and adjusted as necessary by management based on unobservable inputs for specific properties.

Certain properties in foreclosed real estate were adjusted to fair value using appraised values of collateral, less cost to sell, and adjusted as necessary by management based on unobservable inputs for specific properties. The loss on foreclosed assets represents adjustments in valuation recorded during the time period indicated and not for losses incurred on sales.

Summary of Fair Values of Financial Instruments

The estimated fair values, and related carrying amounts, of the Company’s financial instruments are as follows. Certain financial instruments and all nonfinancial instruments are exempt from disclosure requirements. Accordingly, the aggregate fair value amounts presented herein do not represent the underlying fair value of the Company.


	March 31, 2011				December 31, 2010
	Carrying		Fair		Carrying		Fair
(In thousands)	Amount		Value		Amount		Value

Financial assets:
Cash and cash equivalents	$	187,260	$	187,260	$	155,493	$	155,493
Certificates of deposit		2,508		2,523		—		—
Securities available for sale		395,034		395,034		360,602		360,602
Federal Home Loan Bank stock		12,538		12,538		12,538		12,538
Loans and loans held for sale, net		1,183,002		1,191,884		1,186,575		1,195,661
Accrued interest receivable		7,164		7,164		7,543		7,543

Financial liabilities:
Deposits		1,498,687		1,507,254		1,455,215		1,463,016
Borrowings		157,847		162,028		148,683		153,618
Accrued interest payable		1,154		1,154		1,131		1,131

4. EARNINGS PER SHARE

Basic earnings per share excludes dilution and is calculated by dividing net income available to common stockholders by the weighted-average number of common shares outstanding during the period. If rights to dividends on unvested options/awards are non-forfeitable, these unvested awards/options are considered outstanding in the computation of basic earnings per share. Diluted earnings per share is computed in a manner similar to that of basic earnings per share except that the weighted-average number of common shares outstanding is increased to include the number of incremental common shares (computed using the treasury method) that would have been outstanding if all potentially dilutive common stock equivalents (such as options) were issued during the period. Unallocated common shares held by the ESOP are shown as a reduction in stockholders’ equity and are not included in the weighted-average number of common shares outstanding for either basic or diluted earnings per share calculations.

Basic and diluted earnings per share have been computed based on the following:


	Three Months Ended March 31,
(Dollars in thousands, except per share amounts)	2011		2010

Net income available to common stockholders	$	3,211	$	2,860


Average number of common shares outstanding		21,773,621		21,866,229
Effect of unvested stock awards		209,093		266,926

Basic weighted average shares outstanding		21,982,714		22,133,155
Effect of dilutive stock options		112,903		—

Diluted weighted average shares outstanding		22,095,617		22,133,155


Earnings per share:
Basic	$	0.15	$	0.13
Diluted	$	0.15	$	0.13

Options for 7,500 and 889,440 shares, respectively, were not included in the computation of diluted earnings per share because to do so would have been anti-dilutive for the three months ended March 31, 2011 and 2010.

4. SECURITIES

All securities held by the Company as of March 31, 2011 and December 31, 2010 were classified as available for sale and are carried at fair value. Unrealized gains and losses, net of tax, are excluded from earnings and reported as a separate component of stockholders’ equity. Gains or losses on the sale of available-for-sale securities are determined using the specific identification method. Premiums and discounts are recognized in interest income using the effective interest method over the period to maturity.

At March 31, 2011, the securities portfolio was $395.0 million, or 20.8% of total assets. At that date, 51.5% of the securities portfolio, or $203.3 million, was invested in corporate bonds. As of March 31, 2011, the fair value of corporate debt and marketable equity securities in the financial services sector amounted to $86.2 million and $6.5 million, respectively.

The following table sets forth the amortized cost and fair value of securities, all of which at the dates indicated were available for sale.


			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
(In thousands)	Cost		Gains		Losses			Value
March 31, 2011
Debt securities:
Corporate bonds:
Financial services	$	84,405	$	2,063	$	(272	)	$	86,196
Industry and manufacturing		29,821		1,464		—			31,285
Consumer products and services		33,641		1,705		—			35,346
Technology		15,256		766		—			16,022
Healthcare		21,685		736		—			22,421
Other		11,686		382		—			12,068

Total corporate bonds		196,494		7,116		(272	)		203,338
Government-sponsored enterprises		84,111		75		(429	)		83,757
Municipal bonds		7,501		16		(93	)		7,424
Residential mortgage-backed securities:
Government-sponsored enterprises		30,492		786		(2	)		31,276
Private label		8,870		695		(8	)		9,557
Other debt securities		641		—		—			641

Total debt securities		328,109		8,688		(804	)		335,993

Marketable equity securities:
Common stocks		29,517		5,448		(246	)		34,719
Money market mutual funds		24,339		—		(17	)		24,322

Total marketable equity securities		53,856		5,448		(263	)		59,041


Total securities available for sale	$	381,965	$	14,136	$	(1,067	)	$	395,034


December 31, 2010
Debt securities:
Corporate bonds:
Financial services	$	79,896	$	1,983	$	(266	)	$	81,613
Industry and manufacturing		32,875		1,595		—			34,470
Consumer products and services		39,173		1,895		—			41,068
Technology		29,280		948		—			30,228
Healthcare		21,687		783		—			22,470
Other		11,714		475		—			12,189

Total corporate bonds		214,625		7,679		(266	)		222,038
Government-sponsored enterprises		36,062		77		(239	)		35,900
Municipal bonds		6,583		10		(100	)		6,493
Residential mortgage-backed securities:
Government-sponsored enterprises		33,625		927		(10	)		34,542
Private label		9,737		687		(90	)		10,334
Other debt securities		641		—		—			641

Total debt securities		301,273		9,380		(705	)		309,948

Marketable equity securities:
Common stocks		31,344		5,596		(175	)		36,765
Money market mutual funds		13,904		—		(15	)		13,889

Total marketable equity securities		45,248		5,596		(190	)		50,654


Total securities available for sale	$	346,521	$	14,976	$	(895	)	$	360,602

The amortized cost and fair value of debt securities by contractual maturity at March 31, 2011 are as follows. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without prepayment penalties.


	Within 1 year				Over 1 year to 5 years				Over 5 years				Total
	Amortized		Fair		Amortized		Fair		Amortized		Fair		Amortized		Fair
(In thousands)	Cost		Value		Cost		Value		Cost		Value		Cost		Value
Corporate bonds:
Financial services	$	17,011	$	17,429	$	58,442	$	59,938	$	8,952	$	8,829	$	84,405	$	86,196
Industry and manufacturing		6,611		6,800		23,210		24,485		—		—		29,821		31,285
Consumer products and services		8,946		9,256		24,695		26,090		—		—		33,641		35,346
Technology		7,281		7,511		7,975		8,511		—		—		15,256		16,022
Healthcare		3,010		3,037		18,675		19,384		—		—		21,685		22,421
Other		4,064		4,125		7,622		7,943		—		—		11,686		12,068

Total corporate bonds		46,923		48,158		140,619		146,351		8,952		8,829		196,494		203,338
Government-sponsored enterprises		—		—		42,866		42,823		41,245		40,934		84,111		83,757
Municipal bonds		—		—		2,580		2,574		4,921		4,850		7,501		7,424
Residential mortgage-backed securities:
Government-sponsored enterprises		—		—		7		7		30,485		31,269		30,492		31,276
Private label		—		—		—		—		8,870		9,557		8,870		9,557
Other debt securities		—		—		140		140		501		501		641		641


Total	$	46,923	$	48,158	$	186,212	$	191,895	$	94,974	$	95,940	$	328,109	$	335,993

For the three months ended March 31, 2011, proceeds from sales of securities available for sale amounted to $3.9 million. Gross gains and losses of $867,000 and $0, respectively, were realized on those sales.

Information pertaining to securities available for sale as of March 31, 2011 and December 31, 2010, with gross unrealized losses aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows:


	Less Than Twelve Months				Over Twelve Months
	Gross				Gross
	Unrealized		Fair		Unrealized		Fair
(In thousands)	Losses		Value		Losses		Value
March 31, 2011
Debt securities:
Corporate bonds — financial services	$	261	$	15,747	$	11	$	2,989
Government-sponsored enterprises		429		52,647		—		—
Municipal bonds		93		4,989		—		—
Residential mortgage-backed securities:
Government-sponsored enterprises		2		218		—		—
Private label		8		493		—		—

Total debt securities		793		74,094		11		2,989
Marketable equity securities:
Common stocks		193		3,794		53		492
Money market mutual funds		17		972		—		—

Total marketable equity securities		210		4,766		53		492


Total temporarily impaired securities	$	1,003	$	78,860	$	64	$	3,481


	Less Than Twelve Months				Over Twelve Months
	Gross				Gross
	Unrealized		Fair		Unrealized		Fair
(In thousands)	Losses		Value		Losses		Value
December 31, 2010
Debt securities:
Corporate bonds — financial services	$	213	$	18,533	$	53	$	5,947
Government-sponsored enterprises		239		25,254		—		—
Municipal bonds		100		4,983		—		—
Residential mortgage-backed securities:
Government-sponsored enterprises		10		271		—		—
Private label		90		1,933		—		—

Total debt securities		652		50,974		53		5,947
Marketable equity securities:
Common stocks		86		2,556		89		735
Money market mutual funds		15		968		—		—

Total marketable equity securities		101		3,524		89		735


Total temporarily impaired securities	$	753	$	54,498	$	142	$	6,682

The Company determined no securities were other-than-temporarily impaired for the three months ended March 31, 2011. Management evaluates securities for other-than-temporary impairment on a quarterly basis, with more frequent evaluation for selected issuers or when economic or market concerns warrant such evaluations.

As of March 31, 2011, the net unrealized gain on the total debt securities portfolio was $7.9 million. At March 31, 2011, 53 debt securities had unrealized losses with aggregate depreciation of 1.0% from the Company’s amortized cost basis. In analyzing a debt issuer’s financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, industry analysts’ reports and, to a lesser extent given the relatively insignificant levels of depreciation in the Company’s debt portfolio, spread differentials between the effective rates on instruments in the portfolio compared to risk-free rates. The unrealized losses are primarily caused by (a) recent declines in profitability and near-term profit forecasts by industry analysts resulting from a decline in the level of business activity and (b) recent downgrades by several industry analysts. The contractual terms of these investments do not permit the companies to settle the security at a price less than the par value of the investment. The Company currently does not believe it is probable that it will be unable to collect all amounts due according to the contractual terms of the investments. Therefore, it is expected that the bonds would not be settled at a price less than the par value of the investment. Because (1) the Company does not intend to sell the securities; (2) the Company does not believe it is “more likely than not” that the Company will be required to sell the securities before recovery of its amortized cost basis; and (3) the present value of expected cash flows is sufficient to recover the entire amortized cost basis of the securities, the Company does not consider these investments to be other-than-temporarily impaired at March 31, 2011.

As of March 31, 2011, the net unrealized gain on the total equity portfolio was $5.2 million. At March 31, 2011, 12 marketable equity securities had unrealized losses with aggregate depreciation of 4.7% from the Company’s cost basis. Although the issuers have shown declines in earnings as a result of the weakened economy, no credit issues have been identified that cause management to believe the decline in market value is other than temporary, and the Company has the ability and intent to hold these investments until a recovery of fair value. In analyzing an equity issuer’s financial condition, management considers industry analysts’ reports, financial performance and projected target prices of investment analysts within a one-year time frame. A decline of 10% or more in the value of an acquired equity security is generally the triggering event for management to review individual securities for liquidation and/or classification as other-than-temporarily impaired. Impairment losses are recognized when management concludes that declines in the value of equity securities are other than temporary, or when they can no longer assert that they have the intent and ability to hold depreciated equity securities for a period of time sufficient to allow for any anticipated recovery in fair value. Unrealized losses on marketable equity securities that are in excess of 25% of cost and that have been sustained for more than twelve months are generally considered-other-than temporary and charged to earnings as impairment losses, or realized through sale of the security.

5. LOANS

The Company’s loan portfolio consists primarily of residential real estate, commercial real estate, construction, commercial and consumer segments. The residential real estate loans include classes for one-to four-family, multi-family and home equity lines of credit. There are no foreign loans outstanding. Interest rates charged on loans are affected principally by the demand for such loans, the supply of money available for lending purposes and the rates offered by our competitors. Loan detail by category was as follows:


	March 31, 2011						December 31, 2010
(Dollars in thousands)	Amount			%			Amount			%
Real estate loans:
Residential real estate:
One-to four-family	$	390,832			32.7	%	$	402,887			34.0	%
Multi-family		160,533			13.5			135,290			11.4
Home equity lines of credit		62,666			5.3			62,750			5.3
Commercial real estate		451,305			37.9			433,504			36.6
Construction		87,756			7.4			113,142			9.6

Total real estate loans		1,153,092			96.8			1,147,573			96.9
Commercial business loans		31,843			2.7			30,189			2.6
Consumer		5,659			0.5			6,043			0.5

Total loans		1,190,594			100.0	%		1,183,805			100.0	%

Allowance for loan losses		(10,323	)					(10,155	)
Net deferred loan origination fees		(84	)					(88	)


Loans, net	$	1,180,187					$	1,173,562

The Company has transferred a portion of its originated commercial real estate loans to participating lenders. The amounts transferred have been accounted for as sales and are therefore not included in the Company’s accompanying balance sheets. The Company and participating lenders share ratably in any gains or losses that may result from a borrower’s lack of compliance with contractual terms of the loan. The Company continues to service the loans on behalf of the participating lenders and, as such, collects cash payments from the borrowers, remits payments to participating lenders and disburses required escrow funds to relevant parties. At March 31, 2011 and December 31, 2010, the Company was servicing loans for participants aggregating $23.1 million and $22.5 million, respectively.

As a result of the Mt. Washington Co-operative Bank (“Mt. Washington”) acquisition in January 2010, the Company acquired loans at fair value of $345.3 million. Included in this amount was $27.7 million of loans with evidence of deterioration of credit quality since origination for which it was probable, at the time of the acquisition, that the Company would be unable to collect all contractually required payments receivable. The Company’s evaluation of loans with evidence of credit deterioration as of the acquisition date resulted in a nonaccretable discount of $7.6 million, which is defined as the loan’s contractually required payments receivable in excess of the amount of its cash flows expected to be collected. The Company considered factors such as payment history, collateral values, and accrual status when determining whether there was evidence of deterioration of the loan’s credit quality at the acquisition date.

The following is a summary of the outstanding balance of the acquired loans with evidence of credit deterioration:


	March 31,			December 31,
(In thousands)	2011			2010
Residential real estate:
One-to four-family	$	9,027		$	10,685
Multi-family		2,109			2,120
Home equity lines of credit		393			667
Commercial real estate		3,586			4,769
Construction		2,426			2,361

Total mortgage loans on real estate		17,541			20,602

Other loans:
Commercial business loans		106			111
Consumer		5			5

		111			116


Outstanding principal balance		17,652			20,718
Nonaccretable discount		(3,870	)		(4,216	)


Carrying amount	$	13,782		$	16,502

Changes in the allowance for loan losses during the periods indicated were as follows:


	At or For the Three Months Ended March 31, 2011
						Home
	One-to			Multi-		equity lines			Commercial						Commercial
(In thousands)	four-family			family		of credit			real estate			Construction			business			Consumer			Unallocated		Total
Beginning Balance	$	1,130		$	1,038	$	227		$	5,238		$	2,042		$	448		$	32		$	—	$	10,155
Provision for loan loss		50			233		(24	)		812			(806	)		63			14			—		342
Charge-offs		(104	)		—		(27	)		(74	)		(194	)		(19	)		(30	)		—		(448	)
Recoveries		2			2		1			—			254			—			15			—		274

Ending Balance	$	1,078		$	1,273	$	177		$	5,976		$	1,296		$	492		$	31		$	—	$	10,323


Amount of allowance for loan losses for loans deemed to be impaired	$	12		$	—	$	8		$	59		$	—		$	—		$	—		$	—	$	79
Amount of allowance for loan losses for loans not deemed to be impaired		1,066			1,273		169			5,917			1,296			492			31			—		10,244

	$	1,078		$	1,273	$	177		$	5,976		$	1,296		$	492		$	31		$	—	$	10,323


Amount of allowance for loan losses for loans acquired with deteriored credit quality included above	$	—		$	—	$	—		$	5		$	—		$	—		$	—		$	—	$	5


Loans deemed to be impaired as of March 31, 2011	$	3,836		$	4,393	$	125		$	13,842		$	25,871		$	59		$	—		$	—	$	48,126
Loans not deemed to be impaired as of March 31, 2011		386,996			156,140		62,541			437,463			61,885			31,784			5,659			—		1,142,468

	$	390,832		$	160,533	$	62,666		$	451,305		$	87,756		$	31,843		$	5,659		$	—	$	1,190,594


	At December 31, 2010
Amount of allowance for loan losses for loans deemed to be impaired	$	37	$	—	$	8	$	38	$	18	$	19	$	—	$	—	$	120
Amount of allowance for loan losses for loans not deemed to be impaired		1,093		1,038		219		5,200		2,024		429		32		—		10,035

	$	1,130	$	1,038	$	227	$	5,238	$	2,042	$	448	$	32	$	—	$	10,155


Amount of allowance for loan losses for loans acquired with deteriored credit quality as of December 31, 2010	$	—	$	—	$	—	$	10	$	—	$	—	$	—	$	—	$	10


Loans deemed to be impaired as of December 31, 2010	$	4,200	$	3,732	$	125	$	11,794	$	18,474	$	186	$	—	$	—	$	38,511
Loans not deemed to be impaired as of December 31, 2010		398,687		131,558		62,625		421,710		94,668		30,003		6,043		—		1,145,294

	$	402,887	$	135,290	$	62,750	$	433,504	$	113,142	$	30,189	$	6,043	$	—	$	1,183,805


	At or For the Three Months Ended March 31, 2010
						Home
	One-to			Multi-		equity lines		Commercial				Commercial
(In thousands)	four-family			family		of credit		real estate		Construction		business			Consumer			Unallocated		Total
Beginning Balance	$	1,730		$	467	$	128	$	4,435	$	1,859	$	586		$	37		$	—	$	9,242
Provision for loan loss		179			451		1		434		527		(329	)		111			—		1,374
Charge-offs		(1	)		—		—		—		—		—			(21	)		—		(22	)
Recoveries		23			—		—		—		—		—			12			—		35

Ending Balance	$	1,931		$	918	$	129	$	4,869	$	2,386	$	257		$	139		$	—	$	10,629


Amount of allowance for loan losses for loans deemed to be impaired	$	576		$	11	$	—	$	195	$	320	$	60		$	—		$	—	$	1,162
Amount of allowance for loan losses for loans not deemed to be impaired		1,355			907		129		4,674		2,066		197			139			—		9,467

	$	1,931		$	918	$	129	$	4,869	$	2,386	$	257		$	139		$	—	$	10,629


Amount of allowance for loan losses for loans acquired with deteriored credit quality included above	$	—		$	—	$	—	$	—	$	—	$	—		$	—		$	—	$	—


Loans deemed to be impaired as of March 31, 2010	$	3,535		$	2,862	$	100	$	7,382	$	15,176	$	4		$	4		$	—	$	29,063
Loans not deemed to be impaired as of March 31, 2010		422,801			119,005		72,797		367,414		105,989		28,817			7,791			—		1,124,614

	$	426,336		$	121,867	$	72,897	$	374,796	$	121,165	$	28,821		$	7,795		$	—	$	1,153,677

The following table sets forth the breakdown of the allowance for loan losses by loan category at the periods indicated:


	March 31, 2011									December 31, 2010
							% of									% of
				% of			Loans in						% of			Loans in
				Allowance			Category						Allowance			Category
				to Total			of Total						to Total			of Total
(Dollars in thousands)	Amount			Allowance			Loans			Amount			Allowance			Loans
Real estate loans:
Residential real estate:
One-to four-family	$	1,078			10.4	%		32.7	%	$	1,130			11.1	%		34.0	%
Multi-family		1,273			12.3			13.5			1,038			10.2			11.4
Home equity lines of credit		177			1.7			5.3			227			2.2			5.3
Commercial real estate		5,976			57.9			37.9			5,238			51.7			36.6
Construction		1,296			12.6			7.4			2,042			20.1			9.6

Total real estate loans		9,800			94.9			96.8			9,675			95.3			96.9

Commercial business loans		492			4.8			2.7			448			4.4			2.6
Consumer		31			0.3			0.5			32			0.3			0.5


Total loans	$	10,323			100.0	%		100.0	%	$	10,155			100.0	%		100.0	%


Allowance to non-accrual loans		20.32	%								23.54	%
Allowance to total loans outstanding		0.87	%								0.86	%
Net charge-offs to average loans outstanding (annualized)		0.06	%								0.19	%

The allowance consists of general and allocated components. The general component relates to pools of non-impaired loans and is based on historical loss experience adjusted for qualitative factors. The allocated component relates to loans that are classified as impaired, whereby an allowance is established when the discounted cash flows, collateral value or observable market price of the impaired loan is lower than the carrying value of that loan

The following table provides information about delinquencies in the Company’s loan portfolio at the dates indicated.


	March 31, 2011								December 31, 2010
	30-59		60-89		90 Days				30-59		60-89		90 Days
	Days		Days		or Greater		Total		Days		Days		or Greater		Total
(In thousands)	Past Due		Past Due		Past Due		Past Due		Past Due		Past Due		Past Due		Past Due
Real estate loans:
Residential real estate:
One-to four-family	$	4,378	$	679	$	4,878	$	9,935	$	4,434	$	799	$	7,400	$	12,633
Multi-family		—		—		710		710		2,630		—		860		3,490
Home equity lines of credit		954		186		1,156		2,296		1,129		322		1,769		3,220
Commercial real estate		616		541		2,154		3,311		1,265		534		2,735		4,534
Construction		—		—		11,822		11,822		—		—		6,969		6,969

Total real estate loans		5,948		1,406		20,720		28,074		9,458		1,655		19,733		30,846

Commercial business loans		617		164		437		1,218		15		48		385		448
Consumer		364		179		—		543		293		245		5		543


Total	$	6,929	$	1,749	$	21,157	$	29,835	$	9,766	$	1,948	$	20,123	$	31,837

The following table provides information with respect to the Company’s non-performing assets at the dates indicated.


	March 31,			December 31,
(Dollars in thousands)	2011			2010
Loans accounted for on a non-accrual basis:
Real estate loans:
Residential real estate:
One-to four family	$	11,737		$	11,529
Multi-family		4,158			2,246
Home equity lines of credit		2,484			2,408
Commercial real estate		9,535			11,290
Construction		22,852			15,326

Total real estate loans		50,766			42,799

Commercial business loans		44			335
Consumer		—			—


Total non-accrual loans		50,810			43,134

Foreclosed assets		4,966			4,080


Total nonperforming assets	$	55,776		$	47,214


Non-performing loans to total loans		4.27	%		3.64	%
Non-performing loans to total assets		2.67	%		2.35	%
Non-performing assets to total assets		2.93	%		2.57	%

The following tables provide information with respect to the Company’s impaired loans at the dates and for the periods indicated.


							Three Months Ended March 31, 2011
	March 31, 2011										Interest
			Unpaid				Average		Interest		Income
	Recorded		Principal		Related		Recorded		Income		Recognized
(In thousands)	Investment		Balance		Allowance		Investment		Recognized		on Cash Basis
Impaired loans without a valuation allowance:
Residential real estate:
One-to four-family	$	3,104	$	3,104	$	—	$	3,274	$	59	$	47
Multi-family		4,393		4,393		—		4,063		152		145
Home equity lines of credit		100		100		—		100		—		—
Commercial real estate		7,327		7,444		—		6,347		182		136
Construction		25,009		25,871		—		21,647		660		443
Commercial business loans		59		59		—		113		13		13
Consumer		—		—		—		—		—		—

Total		39,992		40,971		—		35,544		1,066		784


Impaired loans with a valuation allowance:
Residential real estate:
One-to four-family		720		732		12		720		11		9
Multi-family		—		—		—		—		—		—
Home equity lines of credit		16		25		8		17		—		—
Commercial real estate		6,299		6,398		59		6,344		104		71
Construction		—		—		—		86		8		—
Commercial business loans		—		—		—		—		—		—
Consumer		—		—		—		—		—		—

Total		7,035		7,155		79		7,167		123		80


Total impaired loans	$	47,027	$	48,126	$	79	$	42,711	$	1,189	$	864


							Three Months Ended March 31, 2010
	December 31, 2010										Interest
			Unpaid				Average		Interest		Income
	Recorded		Principal		Related		Recorded		Income		Recognized
(In thousands)	Investment		Balance		Allowance		Investment		Recognized		on Cash Basis
Impaired loans without a valuation allowance:
Residential real estate:
One-to four-family	$	3,255	$	3,255	$	—	$	2,295	$	41	$	28
Multi-family		3,732		3,732		—		4,755		128		83
Home equity lines of credit		100		100		—		118		2		5
Commercial real estate		6,494		6,578		—		852		23		7
Construction		17,422		18,285		—		14,669		259		173
Commercial business loans		167		167		—		2		—		—
Consumer		—		—		—		3		1		1

Total		31,170		32,117		—		22,694		454		297


Impaired loans with a valuation allowance:
Residential real estate:
One-to four-family		908		945		37		1,897		33		29
Multi-family		—		—		—		796		12		10
Home equity lines of credit		17		25		8		—		—		—
Commercial real estate		5,178		5,216		38		2,839		77		39
Construction		171		189		18		742		14		—
Commercial business loans		—		19		19		—		—		—
Consumer		—		—		—		—		—		—

Total		6,274		6,394		120		6,274		136		78


Total impaired loans	$	37,444	$	38,511	$	120	$	28,968	$	590	$	375

The Company utilizes a nine grade internal loan rating system for multi-family, commercial real estate, construction and commercial loans as follows:

•

Loans rated 1, 2, 3 and 3A: Loans in these categories are considered “pass” rated loans with low to average risk.

•

Loans rated 4 and 4A: Loans in this category are considered “special mention.” These loans are starting to show signs of potential weakness and are being closely monitored by management.

•

Loans rated 5: Loans in this category are considered “substandard.” Generally, a loan is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligors and/or the collateral pledged. There is a distinct possibility that the Company will sustain some loss if the weakness is not corrected.

•

Loans rated 6: Loans in this category are considered “doubtful.” Loans classified as doubtful have all the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, highly questionable and improbable.

•

Loans rated 7: Loans in this category are considered uncollectible (“loss”) and of such little value that their continuance as loans is not warranted.

On an annual basis, or more often if needed, the Company formally reviews the ratings on all multi-family, commercial real estate, construction and commercial loans. The Company also engages an independent third-party to review a significant portion of loans within these segments on at least an annual basis. Management uses the results of these reviews as part of its annual review process.

The following tables provide information with respect to the Company’s risk rating at the dates indicated.


	March 31, 2011
	Multi-family
	residential		Commercial				Commercial
(In thousands)	real estate		real estate		Construction		business
Loans rated 1 - 4	$	152,847	$	443,338	$	68,916	$	31,543
Loans rated 5		7,686		7,967		18,840		300
Loans rated 6		—		—		—		—
Loans rated 7		—		—		—		—


Total	$	160,533	$	451,305	$	87,756	$	31,843


	December 31, 2010
	Multi-family
	residential		Commercial				Commercial
(In thousands)	real estate		real estate		Construction		business
Loans rated 1 - 4	$	132,176	$	425,010	$	93,092	$	29,872
Loans rated 5		3,114		8,494		20,050		317
Loans rated 6		—		—		—		—
Loans rated 7		—		—		—		—


Total	$	135,290	$	433,504	$	113,142	$	30,189

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management’s discussion and analysis of the financial condition and results of operations is intended to assist in understanding the financial condition and results of operations of Meridian Interstate Bancorp. The following discussion should be read in conjunction with the consolidated financial statements, notes and tables included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010, filed with the Securities and Exchange Commission.

Forward Looking Statements

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

•

general economic conditions, either nationally or in our market area, that are worse than expected;

•

inflation and changes in the interest rate environment that reduce our interest margins or reduce the fair value of financial instruments;

•

increased competitive pressures among financial services companies;

•

changes in consumer spending, borrowing and savings habits;

•

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;

•

legislative or regulatory changes that adversely affect our business;

•

adverse changes in the securities markets;

•

changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board or the Securities and Exchange Commission;

•

inability of third-party providers to perform their obligations to us; and

•

changes in our organization, compensation and benefit plans.

Management’s ability to predict results or the effect of future plans or strategies is inherently uncertain. These factors include, but are not limited to, general economic conditions, changes in the interest rate environment, legislative or regulatory changes that may adversely affect our business, changes in accounting policies and practices, changes in competition and demand for financial services, adverse changes in the securities markets and changes in the quality or composition of Meridian Interstate Bancorp’s loan or investment portfolios. Additional factors that may affect our results are discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2010 filed with the Securities and Exchange Commission on March 16, 2011, under “Risk Factors,” which is available through the SEC’s website at www.sec.gov, as updated by subsequent filings with the SEC. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Except as required by applicable law or regulation, Meridian Interstate Bancorp does not undertake, and specifically disclaims any obligation, to release publicly the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of the statements or to reflect the occurrence of anticipated or unanticipated events.

Critical Accounting Policies

The Company’s summary of significant accounting policies are described in Note 1 to the Consolidated Financial Statements included in the 2010 Annual Report on Form 10-K for the year ended December 31, 2010. The preparation of financial statements in accordance with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Management has identified accounting for the allowance for loan losses, the valuation of goodwill and analysis for impairment, other-than-temporary impairment of securities and the valuation of deferred tax assets and foreclosed real estate as the Company’s critical accounting policies.

Comparison of Financial Condition at March 31, 2011 and December 31, 2010

Assets

Total assets increased $64.9 million, or 3.5%, to $1.901 billion at March 31, 2011 from $1.836 billion at December 31, 2010. Cash and cash equivalents increased $31.8 million, or 20.4% to $187.3 million at March 31, 2011 from $155.5 million at December 31, 2010. Securities available for sale increased $34.4 million, or 9.5%, to $395.0 million at March 31, 2011 from $360.6 million at December 31, 2010. Net loans increased $6.6 million, or 0.6%, to $1.180 billion at March 31, 2011 from $1.174 billion at December 31, 2010.

Asset Quality

Credit Risk Management

Our strategy for credit risk involves management to focus on having well-defined credit policies and uniform underwriting criteria and providing prompt attention to potential problem loans.

When a borrower fails to make a required loan payment, we take a number of steps to have the borrower cure the delinquency and restore the loan to current status, including contacting the borrower by letter and phone at regular intervals. When the borrower is in default, we may commence collection proceedings. If a foreclosure action is instituted and the loan is not brought current, paid in full, or refinanced before the foreclosure sale, the real property securing the loan generally is sold at foreclosure. Management informs the Executive Committee monthly of the amount of loans delinquent more than 30 days. Management provides detailed information to the Board of Directors on loans 60 or more days past due and all loans in foreclosure and repossessed property that we own.

Delinquencies

The following table provides information about delinquencies in our loan portfolio at the dates indicated.


	March 31, 2011								December 31, 2010
	30-59		60-89		90 Days				30-59		60-89		90 Days
	Days		Days		or Greater		Total		Days		Days		or Greater		Total
(In thousands)	Past Due		Past Due		Past Due		Past Due		Past Due		Past Due		Past Due		Past Due
Real estate loans:
Residential real estate:
One-to four-family	$	4,378	$	679	$	4,878	$	9,935	$	4,434	$	799	$	7,400	$	12,633
Multi-family		—		—		710		710		2,630		—		860		3,490
Home equity lines of credit		954		186		1,156		2,296		1,129		322		1,769		3,220
Commercial real estate		616		541		2,154		3,311		1,265		534		2,735		4,534
Construction		—		—		11,822		11,822		—		—		6,969		6,969

Total real estate loans		5,948		1,406		20,720		28,074		9,458		1,655		19,733		30,846

Commercial business loans		617		164		437		1,218		15		48		385		448
Consumer		364		179		—		543		293		245		5		543


Total	$	6,929	$	1,749	$	21,157	$	29,835	$	9,766	$	1,948	$	20,123	$	31,837

Delinquent loans at March 31, 2011 included $11.7 million of loans acquired in the Mt. Washington merger, including $4.5 million that were 30 to 59 days past due, $839,000 that were 60 to 89 days past due and $6.4 million that were 90 days or more past due. At March 31, 2011, non-accrual loans exceed loans 90 days or more past due primarily due to loans which were placed on non-accrual status based on a determination that the ultimate collection of all principal and interest due was not expected.

Non-performing Assets

Non-performing assets include loans that are 90 or more days past due or on non-accrual status and real estate and other loan collateral acquired through foreclosure and repossession. Loans 90 days or more past due may remain on an accrual basis if adequately collateralized and in the process of collection. At March 31, 2011, the Company did not have any accruing loans past due 90 days or more. For non-accrual loans, interest previously accrued but not collected is reversed and charged against income at the time a loan is placed on non-accrual status. Interest income is not recognized until the loan is returned to accrual status. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Real estate that we acquire as a result of foreclosure or by deed-in-lieu of foreclosure is classified as foreclosed real estate until it is sold. When property is acquired, it is initially recorded at the fair value less costs to sell at the date of foreclosure, establishing a new cost basis. Holding costs and declines in fair value after acquisition of the property result in charges against income.

The following table provides information with respect to our non-performing assets at the dates indicated.


	March 31,			December 31,
(Dollars in thousands)	2011			2010
Loans accounted for on a non-accrual basis:
Real estate loans:
Residential real estate:
One-to four family	$	11,737		$	11,529
Multi-family		4,158			2,246
Home equity lines of credit		2,484			2,408
Commercial real estate		9,535			11,290
Construction		22,852			15,326

Total real estate loans		50,766			42,799

Commercial business loans		44			335
Consumer		—			—


Total non-accrual loans		50,810			43,134

Foreclosed assets		4,966			4,080


Total nonperforming assets	$	55,776		$	47,214


Non-performing loans to total loans		4.27	%		3.64	%
Non-performing loans to total assets		2.67	%		2.35	%
Non-performing assets to total assets		2.93	%		2.57	%

Non-performing loans increased to $50.8 million, or 4.27% of total loans outstanding at March 31, 2011, from $43.1 million, or 3.64% of total loans outstanding at December 31, 2010 primarily due to an increase of $7.5 million in non-accrual construction loans and $1.9 million in non-accrual multi-family loans. Non-performing assets increased to $55.8 million, or 2.93% of total assets, at March 31, 2011, from $47.2 million, or 2.57% of total assets, at December 31, 2010. Non-performing assets at March 31, 2011 included $16.2 million acquired in the Mt. Washington merger, comprised of $13.2 million of non-performing loans and $3.0 million of foreclosed real estate. Interest income that would have been recorded for the three months ended March 31, 2011 had nonaccruing loans and accruing loans past due 90 days or more been current according to their original terms amounted to $524,000 as compared to $734,000 for the three months ended March 31, 2010.

Impaired Loans

A loan is considered impaired when, based on current information and events, it is probable that we will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Impairment is measured on a loan by loan basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.

Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, we do not separately identify individual one-to four-family residential and consumer loans for impairment disclosures, unless such loans are subject to a troubled debt restructuring (“TDR”). The Company periodically may agree to modify the contractual terms of loans. When a loan is modified and a concession is made to a borrower experiencing financial difficulty, the modification is considered a TDR. All TDRs are initially classified as impaired.

We review residential and commercial loans for impairment based on the fair value of collateral, if collateral-dependent, or expected cash flows. Management has reviewed the collateral value for all impaired and non-accrual loans that were collateral-dependent as of March 31, 2011 and considered any probable loss in determining the allowance for loan losses.

For residential loans measured for impairment based on the collateral value, we will do the following:

•

When a loan becomes seriously delinquent, generally 60 days past due, internal valuations are completed by our in-house appraiser who is a Massachusetts certified residential appraiser. We obtain third party appraisals, which are generally the basis for charge-offs when a loss is indicated, prior to the foreclosure sale. We generally are able to complete the foreclosure process within nine to 12 months from receipt of the internal valuation.

•

We make adjustments to appraisals based on updated economic information, if necessary, prior to the foreclosure sale. We review current market factors to determine whether, in management’s opinion, downward adjustments to the most recent appraised values may be warranted. If so, we use our best estimate to apply an estimated discount rate to the appraised values to reflect current market factors.

•

Appraisals we receive are based on comparable property sales.

For commercial loans measured for impairment based on the collateral value, we will do the following:

•

We obtain 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 we order new appraisals every 180 days on loans in the process of foreclosure.

•

We make 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 our carrying value of the loan.

•

Appraisals we receive 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.

Troubled Debt Restructurings

In the course of resolving non-performing loans, the Bank may choose to restructure the contractual terms of certain loans, with terms modified to fit the ability of the borrower to repay in line with its current financial status. A loan is considered a troubled debt restructure if, for reasons related to the debtor’s financial difficulties, a concession is granted to the debtor that would not otherwise be considered.

The following table summarizes the Company’s TDRs at the dates indicated.


	March 31,		December 31,
(In thousands)	2011		2010
TDRs on accrual status:
One-to four-family	$	659	$	1,289

		659		1,289
TDRs on non-accrual status:
One-to four-family		586		288
Multi-family		3,448		—
Commercial real estate		4,770		4,797
Construction		5,032		3,487

		13,836		8,572


Total TDRs	$	14,495	$	9,861

The increase in multi-family TDRs during the first three months of 2011 was due to a $3.5 million loan which was originated to consolidate five loans of an existing six-loan relationship. Of this amount, $375,000 was utilized to pay delinquent real estate taxes and other fees. The restructure and consolidation of this relationship reflected a slight increase in the monthly payment amount based on the combined monthly payment of the loans prior to consolidation and a slight increase in the interest rate to 6.875% (previous blended rate was 6.60%). The interest rate is equal to the Five Year Federal Home Loan Bank Advance Rate plus 275 basis points and the loan term is 30 years. No charge offs have been incurred on this loan.

The increase in construction TDRs was due to a $1.9 million loan which was originated to consolidate a two-loan relationship. The restructure and consolidation of this relationship reflects a six month interest only balloon note with a fixed interest rate of 6% (a reduction of 50 basis points from the original loan). The Bank incurred charge offs totaling $194,000 on this loan during the first three months of 2011.

Modifications of one-to four-family TDRs consist of either rate reductions, loan term extensions or provisions for interest-only payments for specified periods up to 12 months. The Company has generally been successful with the concessions it has offered to borrowers to date. The Company generally returns TDRs to accrual status when they have sustained payments for six months based on the restructured terms.

Potential Problem Loans

Certain loans are identified during the Company’s loan review process that are currently performing in accordance with their contractual terms and we expect to receive payment in full of principal and interest, but it is deemed probable that we will be unable to collect all the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. This may result from deteriorating conditions such as cash flows, collateral values or creditworthiness of the borrower. These loans are classified as impaired but are not accounted for on a non-accrual basis. There were no potential problem loans identified at March 31, 2011 other than those already classified as non-performing, impaired or troubled debt restructurings.

Allowance for Loan Losses

The allowance for loan losses is maintained at levels considered adequate by management to provide for probable loan losses inherent in the loan portfolio as of the consolidated balance sheet reporting dates. The allowance for loan losses is based on management’s assessment of various factors affecting the loan portfolio, including portfolio composition, delinquent and non-accrual loans, national and local business conditions and loss experience and an overall evaluation of the quality of the underlying collateral.

The Company’s provision for loan losses was $342,000 for the three months ended March 31, 2011 compared to $1.4 million for the three months ended March 31, 2010. This change was based primarily on management’s assessment of loan portfolio growth and composition changes, an ongoing evaluation of credit quality and current economic conditions. The allowance for loan losses was $10.3 million or 0.87% of total loans outstanding at March 31, 2011, compared to $10.2 million, or 0.86% of total loans outstanding at December 31, 2010. The Company continues to assess the adequacy of its allowance for loan losses in accordance with established policies.

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.

Although we believe that we use the best information available to establish the allowance for loan losses, future adjustments to the allowance for loan losses may be necessary and our results of operations could be adversely affected if circumstances differ substantially from the assumptions used in making the determinations. Furthermore, while we believe we have established our allowance for loan losses in conformity with generally accepted accounting principles in the United States of America, there can be no assurance that regulators, in reviewing our loan portfolio, will not require us to increase our allowance for loan losses. In addition, because future events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that the existing allowance for loan losses is adequate or that increases will not be necessary should the quality of any loans deteriorate as a result of the factors discussed above. Any material increase in the allowance for loan losses may adversely affect our financial condition and results of operations.

Deposits

Deposits are a major source of our funds for lending and other investment purposes. Deposit inflows and outflows are significantly influenced by general interest rates and money market conditions. Our deposit base is comprised of demand, NOW, money market, regular and other deposits, and certificates of deposit. We consider demand, NOW, money market, and regular and other deposits to be core deposits. At March 31, 2011, core deposits were 53.1% of total deposits. Deposits increased $43.5 million, or 3.0%, to $1.499 billion at March 31, 2011 from $1.455 million at December 31, 2010, primarily as a result of growth of $38.1 million in core deposits. The growth for the quarter ended March 31, 2011 also reflects $18.2 million of new deposits in the two branches opened in January 2011.

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


	March 31, 2011					December 31, 2010
			Percent of					Percent of
(Dollars in thousands)	Balance		Total Deposits			Balance		Total Deposits
Demand deposits	$	115,988		7.7	%	$	111,423		7.7	%
NOW deposits		127,848		8.5			134,677		9.3
Money market deposits		354,947		23.7			323,619		22.2
Regular and other deposits		197,191		13.2			188,178		12.9
Certificates of deposit		702,713		46.9			697,318		47.9


Total	$	1,498,687		100.0	%	$	1,455,215		100.0	%

Borrowings

We use borrowings from the Federal Home Loan Bank of Boston to supplement our supply of funds for loans and investments. In addition, we also purchase federal funds from local banking institutions as an additional funding source for the Bank. At March 31, 2011, total borrowings increased $9.2 million, or 6.2%, to $157.8 million at March 31, 2011 from $148.7 million at December 31, 2010, reflecting a $9.5 million increase in short-term borrowings. At March 31, 2011 and December 31, 2010, FHLB advances totaled $136.4 million and $136.7 million, respectively, with a weighted average rate of 2.63% at the end of each period. At March 31, 2011 and December 31, 2010, federal funds purchased totaled $21.5 million and $12.0 million, respectively, with a weighted average rate of 0.20% at the end of each of the period. At March 31, 2011, we also had an available line of credit of $9.4 million with the Federal Home Loan Bank of Boston at an interest rate that adjusts daily, none of which was outstanding at that date.

Stockholders’ Equity

Total stockholders’ equity increased $2.7 million, or 1.3%, to $218.3 million at March 31, 2011, from $215.6 million at December 31, 2010. The increase was due primarily to $3.2 million in net income partially offset by a $596,000 decrease in accumulated other comprehensive income reflecting a decrease in the fair value of available for sale securities, net of tax. Stockholders’ equity to assets was 11.49% at March 31, 2011, compared to 11.74% at December 31, 2010. Book value per share increased to $9.72 at March 31, 2011 from $9.59 at December 31, 2010. Tangible book value per share increased to $9.11 at March 31, 2011 from $8.98 at December 31, 2010. Market price per share increased $2.26, or 19.2%, to $14.05 at March 31, 2011 from $11.79 at December 31, 2010. At March 31, 2011, the Company and the Bank continued to exceed all regulatory capital requirements.

Average Balance Sheets and Related Yields and Rates

The following table presents information regarding average balances of assets and liabilities, the total dollar amounts of interest income and dividends from average interest-earning assets, the total dollar amounts of interest expense on average interest-bearing liabilities and the resulting annualized average yields and costs. The yields and costs for the periods indicated are derived by dividing income or expense by the average balances of assets or liabilities, respectively, for the periods presented. For purposes of these tables, average balances have been calculated using daily average balances, and non-accrual loans are included in average balances but are not deemed material. Loan fees are included in interest income on loans but are not material. None of the income reflected in the following table is tax-exempt income.


	Three Months Ended March 31,
	2011								2010
	Average					Yield/			Average					Yield/
(Dollars in thousands)	Balance		Interest			Cost (4)			Balance		Interest			Cost (4)
Assets:
Interest-earning assets:
Loans (1)	$	1,194,169	$	16,446			5.59	%	$	1,151,328	$	16,210			5.71	%
Securities and certificates of deposits		372,945		3,366			3.66			341,330		3,663			4.35
Other interest-earning assets		154,304		85			0.22			35,279		12			0.14

Total interest-earning assets		1,721,418		19,897			4.69			1,527,937		19,885			5.28

Noninterest-earning assets		137,038								138,229

Total assets	$	1,858,456							$	1,666,166


Liabilities and stockholders’ equity:
Interest-bearing liabilities:
NOW deposits	$	129,029		148			0.47		$	107,768		128			0.48
Money market deposits		336,768		867			1.04			300,778		893			1.20
Regular and other deposits		191,668		260			0.55			178,937		246			0.56
Certificates of deposit		699,128		3,298			1.91			611,717		2,932			1.94

Total interest-bearing deposits		1,356,593		4,573			1.37			1,199,200		4,199			1.42
Borrowings		156,151		889			2.31			156,537		915			2.37

Total interest-bearing liabilities		1,512,744		5,462			1.46			1,355,737		5,114			1.53

Noninterest-bearing demand deposits		113,209								95,943
Other noninterest-bearing liabilities		14,399								10,970

Total liabilities		1,640,352								1,462,650
Total stockholders’ equity		218,104								203,516

Total liabilities and stockholders’ equity	$	1,858,456							$	1,666,166


Net interest-earning assets	$	208,674							$	172,200

Net interest income			$	14,435							$	14,771

Interest rate spread (2)							3.23	%							3.75	%
Net interest margin (3)							3.40	%							3.92	%
Average interest-earning assets to average interest-bearing liabilities				113.79	%							112.70	%


(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.

Rate/Volume Analysis

The following table sets forth the effects of changing rates and volumes on our net interest income. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The net column represents the sum of the prior columns. For purposes of this table, changes attributable to changes in both rate and volume that cannot be segregated have been allocated proportionally based on the changes due to rate and the changes due to volume.


	Three Months Ended March 31,
	2011 Compared to 2010
	Increase (Decrease) Due to
(In thousands)	Volume			Rate			Net
Interest Income:
Loans	$	595		$	(359	)	$	236
Securities and certificates of deposits		319			(616	)		(297	)
Other interest-earning assets		62			11			73

Total		976			(964	)		12

Interest Expense:
Deposits		555			(181	)		374
Borrowings		(2	)		(24	)		(26	)

Total		553			(205	)		348


Change in net interest income	$	423		$	(759	)	$	(336	)

Results of Operations for the Three Months Ended March 31, 2011 and 2010

Net Income

Our primary source of income is net interest income. Net interest income is the difference between interest income, which is the income that we earn on our loans and investments, and interest expense, which is the interest that we pay on our deposits and borrowings. Changes in levels of interest rates affect our net interest income. A secondary source of income is non-interest income, which includes revenue that we receive from providing products and services. The majority of our non-interest income generally comes from customer service fees, loan fees, bank-owned life insurance and gains on sales of loans and securities.

For the three months ended March 31, 2011, net income was $3.2 million, or $0.15 per share (basic and diluted) compared to net income of $2.9 million, or $0.13 per share (basic and diluted), for the three months ended March 31, 2010. Income before income tax expense increased $554,000 to $5.1 million, the net result of a decrease in the provision for loan loss of $1.0 million and an increase in non-interest income of $1.1 million, partially offset by a decrease in net interest income of $336,000 and an increase in non-interest expense of $1.3 million.

The return on average assets was 0.69% for each of the quarters ended March 31, 2011 and March 31, 2010. For the quarter ended March 31, 2011, the return on average equity increased to 5.89% from 5.62% for the quarter ended March 31, 2010.

Net Interest Income

Net interest income decreased $336,000, or 2.3%, to $14.4 million for the quarter ended March 31, 2011 from $14.8 million for the quarter ended March 31, 2010. The net interest rate spread and net interest margin were 3.23% and 3.40%, respectively, for the quarter ended March 31, 2011, compared to 3.75% and 3.92%, respectively, for the quarter ended March 31, 2010. The decrease in net interest income was due primarily to deposit growth that was in excess of loan growth along with declines in yields on loans and securities for the quarter ended March 31, 2011 compared to the quarter ended March 31, 2010. The average balance of the Company’s loan portfolio increased $42.8 million, or 3.7%, to $1.194 billion, which was partially offset by a decline in the yield on loans of 12 basis points to 5.59% for the quarter ended March 31, 2011 compared to the quarter ended March 31, 2010. The average balance of the Company’s interest-bearing deposits increased $157.4 million, or 13.1%, to $1.357 billion, which was partially offset by a decline in the cost of deposits of five basis points to 1.37% for the quarter ended March 31, 2011 compared to the quarter ended March 31, 2010. The Company’s average balance of interest-earning assets increased $193.5 million, or 12.7%, to $1.721 billion, which was substantially offset by a decline in the yield on interest-earning assets of 59 basis points to 4.69% for the quarter ended March 31, 2011 compared for the quarter ended March 31, 2010. The Company’s cost of interest-bearing liabilities declined seven basis points to 1.46%, which was which was partially offset by an increase in the average balance of interest-bearing liabilities, which increased $157.0 million, or 11.6%, to $1.513 billion for the quarter ended March 31, 2011 compared to the quarter ended March 31, 2010.

Provision for Loan Losses

The Company’s provision for loan losses was $342,000 for the quarter ended March 31, 2011 compared to $1.4 million for the quarter ended March 31, 2010. An analysis of the changes in the allowance for loan losses including the provision for loans losses is presented under “Management’s Discussion and Analysis of Results of Operations and Financial Condition -Allowance for Loan Losses.”

Non-Interest Income

Non-interest income increased $1.1 million, or 45.3%, to $3.6 million for the quarter ended March 31, 2011 from $2.5 million for the quarter ended March 31, 2010, primarily due to increases of $867,000 in gain on sales of securities and $415,000 in equity income on investment from the Company’s Hampshire First Bank affiliate, partially offset by decreases of $118,000 in customer service fees and $129,000 in gain on sales of loans.

Non-Interest Expense

Non-interest expense increased $1.3 million, or 11.2%, to $12.6 million for the quarter ended March 31, 2011 from $11.3 million for the quarter ended March 31, 2010. This increase was due primarily to increases of $934,000 in salaries and employee benefits, $433,000 in occupancy and equipment expenses, and $110,000 in deposit insurance premiums, partially offset by decreases of $117,000 in foreclosed real estate expenses and $139,000 in other general and administrative expenses. The increases in non-interest expenses include employee, occupancy and equipment expenses associated with two new branches opened during the quarter ended March 31, 2011 and costs associated with the expansion of residential and commercial lending capacity. The Company’s efficiency ratio was 73.40% for the quarter ended March 31, 2011 as compared to 65.72% for the quarter ended March 31, 2010.

Income Tax Provision

The Company recorded a provision for income taxes of $1.9 million for the quarter ended March 31, 2011, reflecting an effective tax rate of 37.1%, compared to $1.7 million, or 37.1%, for the quarter ended March 31, 2010. The increase in the income tax provision was primarily due to an increase in pre-tax income.

Liquidity and Capital Management

Liquidity Management

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

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

Our most liquid assets are cash and cash equivalents. The levels of these assets depend on our operating, financing, lending and investing activities during any given period. At March 31, 2011, cash and cash equivalents totaled $187.3 million. In addition, at March 31, 2011, we had $58.2 million of available borrowing capacity with the Federal Home Loan Bank of Boston, including a $9.4 million line of credit. On March 31, 2011, we had $136.4 million of advances outstanding.

A significant use of our liquidity is the funding of loan originations. At March 31, 2011 and December 31, 2010, we had total loan commitments outstanding, as follows:


	March 31,		December 31,
(In thousands)	2011		2010
Unadvanced portion of existing loans:
Construction	$	58,185	$	64,722
Home equity line of credit		38,878		39,791
Other lines and letters of credit		9,473		7,095
Commitments to originate:
One-to four-family		6,324		15,362
Commercial real estate		71,138		65,187
Construction		17,940		12,625
Other loans		2,986		2,783

Total loan commitments outstanding	$	204,924	$	207,565

Historically, many of the commitments expire without being fully drawn; therefore the total amount of commitments does not necessarily represent future cash requirements. The Bank provided participating checking accounts with overdraft account protection covering $14.3 million of balances as of March 31, 2011. We also have a seven year contract with our core data processing provider with an outstanding commitment of $15.1 million as of March 31, 2011, with total annual payments of $2.2 million. In addition, we had outstanding commitments as of March 31, 2011 totaling $583,000 for the construction of a new branch on leased property in the South End area of Boston, Massachusetts. The Bank is also developing plans to open a new branch on leased property in Cambridge, Massachusetts later in 2011.

Another significant use of our liquidity is the funding of deposit withdrawals. Certificates of deposit due within one year of March 31, 2011 totaled $438.4 million, or 62.4% of total certificates of deposit. If these maturing deposits do not remain with us, we will be required to utilize other sources of funds. Historically, a significant portion of certificates of deposit that mature have remained at the Company. We have the ability to attract and retain deposits by adjusting the interest rates offered.

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

Capital Management

Both Meridian Interstate Bancorp and East Boston Savings Bank are subject to various regulatory capital requirements administered by the Federal Reserve Board and Federal Deposit Insurance Corporation, respectively, including a risk-based capital measure. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories. At March 31, 2011, both Meridian Interstate Bancorp and East Boston Savings Bank exceeded all of their respective regulatory capital requirements.

We may use capital management tools such as cash dividends and common share repurchases. However, Massachusetts Commissioner of Banks regulations restrict stock repurchases by Meridian Interstate Bancorp within three years of the stock offering completed in January 2008 unless the repurchase: (i) is part of a general repurchase made on a pro rata basis pursuant to an offering approved by the Commissioner of the Banks and made to all stockholders of Meridian Interstate Bancorp (other than Meridian Financial Services with the approval of the Commissioner of Banks); (ii) is limited to the repurchase of qualifying shares of a director; (iii) is purchased in the open market by a tax-qualified or non tax-qualified employee stock benefit plan of Meridian Interstate Bancorp or East Boston Savings Bank in an amount reasonable and appropriate to fund the plan; or (iv) is limited to stock repurchases of no greater than 5% of the outstanding capital stock of Meridian Interstate Bancorp where compelling and valid business reasons are established to the satisfaction of the Commissioner of Banks. In addition, pursuant to Federal Reserve Board approval conditions imposed in connection with the formation of Meridian Interstate Bancorp, Meridian Interstate Bancorp has committed (i) to seek the Federal Reserve Board’s prior approval before repurchasing any equity securities from Meridian Financial Services and (ii) that any repurchases of equity securities from stockholders other than Meridian Financial Services will be at the current market price for such stock repurchases. Meridian Interstate Bancorp will also be subject to the Federal Reserve Board’s notice provisions for stock repurchases.

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. As of March 31, 2011, the Company had repurchased 212,163 shares of its stock at an average price of $11.29 per share as included in treasury stock, or 44.9% of the shares authorized for repurchase under the Company’s third stock repurchase program. The Company has repurchased 1,143,663 shares since December 2008.

Off-Balance Sheet Arrangements

In the normal course of operations, we engage in a variety of financial transactions that, in accordance with generally accepted accounting principles in the United States of America are not recorded in our financial statements. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are used primarily to manage customers’ requests for funding and take the form of loan commitments and lines of credit.

For the three months ended March 31, 2011, we engaged in no off-balance sheet transactions reasonably likely to have a material effect on our financial condition, results of operations or cash flows.

Item 3. quantitative and qualitative disclosures about market risk

Interest Rate Risk Management

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

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

Net Interest Income Simulation Analysis

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

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

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

The simulation uses projected repricing of assets and liabilities on the basis of contractual maturities, anticipated repayments and scheduled rate adjustments. Prepayment rates can have a significant impact on interest income simulation. Because of the large percentage of loans we hold, rising or falling interest rates have a significant impact on the prepayment speeds of our earning assets that in turn affect the rate sensitivity position. When interest rates rise, prepayments tend to slow. When interest rates fall, prepayments tend to rise. Our asset sensitivity would be reduced if prepayments slow and vice versa. While we believe such assumptions to be reasonable, there can be no assurance that assumed prepayment rates will approximate actual future mortgage-backed security and loan repayment activity.

The following table reflects changes in estimated net interest income for the Bank at April 1, 2011 through March 31, 2012.


Increase (Decrease)
in Market Interest	Net Interest Income
Rates (Rate Shock)	Amount		Change			Percent
(Dollars in Thousands)
300	$	54,703	$	(4,787	)		(8.05	)%
Flat		59,490
-50		57,956		(1,534	)		(2.58	)

Item 4. Controls and Procedures

(a)

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

(b)

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

PART II — OTHER INFORMATION

Item 1. legal proceedings

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

Item 1a. risk factors

For information regarding our risk factors, see “Risk Factors,” in our 2010 Annual Report on Form 10-K, filed with the SEC on March 16, 2011, which is available through the SEC’s website at www.sec.gov. As of March 31, 2011, our risk factors have not changed materially from those reported in the annual report. The risks described in our annual report are not the only risks that we face. Additional risks not presently known to us, or that we currently deem immaterial, may also adversely affect our business, financial condition or results of operations.

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:


	(a)		(b)		(c)		(d)
							Maximum Number
							(or Approximate
					Total Number of		Dollar Value) of
					Shares (or Units)		Shares (or Units)
					Purchased as Part		that May Yet Be
	Total Number of		Average Price		of Publicly		Purchased Under
	Shares (or Units)		Paid Per Share (or		Announced Plans		the Plans or
Period	Purchased		Unit)		or Programs (1)		Programs
January 1 – 31, 2011		—	$	—		—		283,601
February 1 – 28, 2011		12,934	$	12.96		12,934		270,667
March 1 – 31, 2011		10,402	$	13.07		10,402		260,265

Total		23,336	$	13.01		23,336		260,265


(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 secutiries

Not applicable.

Item 4. [removed and reserved]

Item 5. other information

None.

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			[Reserved]
	10.8			Form of Separation Agreement with Leonard V. Siuda incorporated by reference to the Form 8-K filed on April 7, 2009
	10.9			Form of Separation Agreement with Philip F. Freehan incorporated by reference to the Form 8-K filed on April 7, 2009
	10.10			Form of Supplemental Executive Retirement Agreement with Richard J. Gavegnano filed as an exhibit to Form 10-Q filed on May 14, 2008
	10.11			Form of Employment Agreement with Richard J. Gavegnano incorporated by reference to the Form 8-K filed on January 12, 2009
	10.12			Form of Employment Agreement with Deborah J. Jackson incorporated by reference to the Form 8-K filed on January 22, 2009
	10.13			Form of Supplemental Executive Retirement Agreement with Deborah J. Jackson incorporated by reference to the Form 8-K filed on January 22, 2009
	10.14			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, 2009
	10.16			Agreement and Plan of Merger incorporated by reference to the Form 8-K filed on July 24, 2009
	10.17			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 Co-operative Bank***
	10.20			First Amendment to Joint Beneficiary Designation Agreement between Edward J. Merritt and Mt. Washington Co-operative 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, 2009
	21			Subsidiaries of Registrant*
	31.1			Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	31.2			Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	32			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.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


	MERIDIAN INTERSTATE BANCORP, INC. (Registrant)
Dated: May 10, 2011	/s/ Richard J. Gavegnano
	Richard J. Gavegnano
	Chairman and Chief Executive Officer (Principal Executive Officer)

Dated: May 10, 2011	/s/ Mark L. Abbate
	Mark L. Abbate
	Senior Vice President, Treasurer and Chief Financial Officer (Principal Financial and Accounting Officer)

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