UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 WASHINGTON,
D.C. 20549
 
 FORM
10-Q
 
 (Mark One)
 
 x
                QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
 
 For
the quarterly period ended September 30,
2008
 
 OR
 
 o
                TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
 
 For
the transition period from __________________ to _______________
 
 Commission
file number: 001-33896
 
 DANVERS BANCORP,
INC.
 (Exact
Name of Registrant as Specified in Its Charter)
 
 Delaware
                04-3445675(State
      or Other Jurisdiction of
                (I.R.S
      EmployerIncorporation
      of Organization)
                Identification
      No.)One Conant Street,
      Danvers, Massachusetts
                01923(Address
      of Principal Executive Officers)
                (Zip
      Code)
  (978)
      777-2200(Registrant’s
      telephone number, including area code)
 
 Indicate
by check mark whether the registrant (1) has filed all reports to be filed by
Section 13 or 15(d) of the Securities Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.  Yes xNo ÿo
 
 Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See definition of “accelerated filer and large accelerated
filer” in Rule 12b-2 of the Exchange Act.(Check one):
 
 Large
      accelerated filer ÿo
              Accelerated
      filer oÿNon-accelerated
      filer x(Do not check if
      smaller reporting company)
              Smaller
      reporting company ÿo
  Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
 Yes oÿ No x
  Shares
outstanding of the registrant’s common stock, $0.01 par value, at November 14,
2008: 17,842,500







Table of Contents
 DANVERS
BANCORP, INC.


TABLE OF CONTENTS








PagePART
      I.  FINANCIAL INFORMATIONItem
      1.
            Financial
      Statements (Unaudited)-
            Consolidated Balance Sheets as of September 30,
      2008 and December 31, 2007
            3-
            Consolidated Statements of Operations for
      the Three and Nine Months Ended September 30, 2008 and
      2007
            4-
            Consolidated Statements of Changes in
      Stockholders' Equity for the Nine
      Months Ended September 30, 2008 and 2007
            5-
            Consolidated Statements of Cash Flows for the Nine
      Months Ended September
      30, 2008 and 2007
            6-
            Notes to Consolidated Financial
      Statements
            8Item
      2.
            Management’s Discussion and Analysis of Financial
      Condition and Results of Operations
            12Item
      3.
            Quantitative and Qualitative Disclosures About Market
      Risk
            27Item
      4.
            Controls and Procedures
            29Item
      4T.
            Controls and Procedures
            29PART
      II.  OTHER INFORMATIONItem
      1.
            Legal Proceedings
            29Item
      1A.
            Risk Factors
            29Item
      2.
            Unregistered Sales of Equity Securities and Use
      of Proceeds
            30Item
      3.
            Defaults Upon Senior Securities
            30Item
      4.
            Submission of Matters to a Vote of Security
      Holders
            30Item
      5.
            Other Information
            30Item
      6.
            Exhibits
            31







2
 Table of Contents
 DANVERS
BANCORP, INC.





PART
I.  FINANCIAL INFORMATION





Item
1.  Financial Statements (Unaudited)





CONSOLIDATED BALANCE SHEETS


(Unaudited)





September
      30,
            
            
            December
      31,2008
            
            
            2007(In
      thousands)ASSETSCash
      and cash equivalents
            
            $
            75,179
            
            
            $
            65,862Securities
      available for sale
            
            
            376,844
            
            
            
            406,715Loans
      held for sale
            
            
            822
            
            
            
            -Loans
            
            
            1,073,243
            
            
            
            908,497Less
      allowance for loan losses
            
            
            (11,046
            )
            
            
            (9,096
            )Loans,
      net
            
            
            1,062,197
            
            
            
            899,401Federal
      Home Loan Bank stock, at cost
            
            
            10,870
            
            
            
            10,021Premises
      and equipment, net
            
            
            23,055
            
            
            
            19,706Bank-owned
      life insurance
            
            
            24,506
            
            
            
            23,665Other
      real estate owned
            
            
            782
            
            
            
            3,513Accrued
      interest receivable
            
            
            6,675
            
            
            
            6,862Deferred
      tax asset, net
            
            
            9,665
            
            
            
            5,908Other
      assets
            
            
            9,717
            
            
            
            6,650$
            1,600,312
            
            
            $
            1,448,303LIABILITIES
      AND STOCKHOLDERS' EQUITYDeposits:Demand
      deposits
            
            $
            130,686
            
            
            $
            124,040Savings
      and NOW accounts
            
            
            174,317
            
            
            
            171,353Money
      market accounts
            
            
            426,880
            
            
            
            337,847Term
      certificates over $100,000
            
            
            252,544
            
            
            
            228,793Other
      term certificates
            
            
            140,945
            
            
            
            136,115Total
      deposits
            
            
            1,125,372
            
            
            
            998,148Stock
      subscriptions
            
            
            -
            
            
            
            162,859Due
      to broker
            
            
            5,500
            
            
            
            -Short-term
      borrowings
            
            
            35,041
            
            
            
            23,800Long-term
      debt
            
            
            163,708
            
            
            
            145,042Subordinated
      debt
            
            
            29,965
            
            
            
            29,965Accrued
      expenses and other liabilities
            
            
            12,157
            
            
            
            14,993Total
      liabilities
            
            
            1,371,743
            
            
            
            1,374,807Stockholders'
      equity:Preferred
      stock; $0.01 par value, 10,000,000 shares authorized;none
      issued and outstanding
            
            
            -
            
            
            
            -Common
      stock, $0.01 par value, 60,000,000 shares authorized;17,842,500
      and 0 shares issued and outstanding atSeptember
      30, 2008 and December 31, 2007, respectively
            
            
            178
            
            
            
            -Additional
      paid-in capital
            
            
            174,454
            
            
            
            -Retained
      earnings
            
            
            68,190
            
            
            
            71,213Accumulated
      other comprehensive income (loss)
            
            
            (455
            )
            
            
            2,283Unearned
      compensation - ESOP, 1,379,820 shares and 0 shares atSeptember
      30, 2008 and December 31, 2007, respectively
            
            
            (13,798
            )
            
            
            -Total
      stockholders' equity
            
            
            228,569
            
            
            
            73,496$
            1,600,312
            
            
            $
            1,448,303





The
accompanying notes are an integral part of these consolidated financial
statements.


3
 Table of Contents
 DANVERS
BANCORP, INC.


CONSOLIDATED
STATEMENTS OF OPERATIONS


(Unaudited)





Three
      Months Ended
            
            
            Nine
      Months EndedSeptember
      30,
            
            
            September
      30,2008
            
            
            2007
            
            
            2008
            
            
            2007(Dollars
      in thousands, except per share amounts)Interest
      and dividend income:Interest
      and fees on loans
            
            $
            16,247
            
            
            $
            16,064
            
            
            $
            47,665
            
            
            $
            47,818Interest
      on debt securities:Taxable
            
            
            4,183
            
            
            
            3,882
            
            
            
            13,863
            
            
            
            10,030Non-taxable
            
            
            195
            
            
            
            185
            
            
            
            578
            
            
            
            400Dividends
      on equity securities
            
            
            91
            
            
            
            171
            
            
            
            301
            
            
            
            532Interest
      on cash equivalents
            
            
            276
            
            
            
            119
            
            
            
            959
            
            
            
            377Total
      interest and dividend income
            
            
            20,992
            
            
            
            20,421
            
            
            
            63,366
            
            
            
            59,157Interest
      expense:Interest
      on deposits:Savings
      and NOW accounts
            
            
            551
            
            
            
            452
            
            
            
            1,762
            
            
            
            1,057Money
      market accounts
            
            
            2,692
            
            
            
            3,642
            
            
            
            8,716
            
            
            
            10,252Term
      certificates
            
            
            3,333
            
            
            
            4,273
            
            
            
            10,927
            
            
            
            12,771Interest
      on short-term borrowings
            
            
            108
            
            
            
            244
            
            
            
            427
            
            
            
            663Interest
      on long-term debt and subordinated debt
            
            
            2,423
            
            
            
            2,444
            
            
            
            7,035
            
            
            
            7,197Total
      interest expense
            
            
            9,107
            
            
            
            11,055
            
            
            
            28,867
            
            
            
            31,940Net
      interest income
            
            
            11,885
            
            
            
            9,366
            
            
            
            34,499
            
            
            
            27,217Provision
      for loan losses
            
            
            1,050
            
            
            
            225
            
            
            
            2,725
            
            
            
            450Net
      interest income, after provision for loan losses
            
            
            10,835
            
            
            
            9,141
            
            
            
            31,774
            
            
            
            26,767Non-interest
      income:Service
      charges on deposits
            
            
            686
            
            
            
            692
            
            
            
            1,972
            
            
            
            1,907Loan
      servicing fees
            
            
            56
            
            
            
            68
            
            
            
            167
            
            
            
            197Gain
      on sales of loans
            
            
            90
            
            
            
            13
            
            
            
            186
            
            
            
            186Net
      gain (loss) on sales of securities
            
            
            (26
            )
            
            
            -
            
            
            
            887
            
            
            
            (16
            )Net
      increase in cash surrender value of bank-owned life
    insurance
            
            
            241
            
            
            
            189
            
            
            
            841
            
            
            
            634Other
      operating income
            
            
            394
            
            
            
            359
            
            
            
            1,308
            
            
            
            1,055Total
      non-interest income
            
            
            1,441
            
            
            
            1,321
            
            
            
            5,361
            
            
            
            3,963Non-interest
      expenses:Salaries
      and employee benefits
            
            
            5,855
            
            
            
            5,239
            
            
            
            21,495
            
            
            
            15,972Occupancy
            
            
            1,270
            
            
            
            1,133
            
            
            
            3,765
            
            
            
            3,307Equipment
            
            
            811
            
            
            
            731
            
            
            
            2,358
            
            
            
            2,091Outside
      services
            
            
            295
            
            
            
            113
            
            
            
            846
            
            
            
            386Contribution
      to the Danversbank Charitable Foundation
            
            
            -
            
            
            
            -
            
            
            
            6,850
            
            
            
            -Other
      real estate owned expense
            
            
            225
            
            
            
            70
            
            
            
            1,911
            
            
            
            119Other
      operating expense
            
            
            2,197
            
            
            
            1,604
            
            
            
            5,821
            
            
            
            4,915Total
      non-interest expenses
            
            
            10,653
            
            
            
            8,890
            
            
            
            43,046
            
            
            
            26,790Income
      (loss) before  income taxes
            
            
            1,623
            
            
            
            1,572
            
            
            
            (5,911
            )
            
            
            3,940Provision
      (benefit) for income taxes
            
            
            1,575
            
            
            
            247
            
            
            
            (3,245
            )
            
            
            735Net
      income (loss)
            
            $
            48
            
            
            $
            1,325
            
            
            $
            (2,666
            )
            
            $
            3,205Weighted-average
      shares outstanding:Basic
            
            
            16,450,979
            
            
            
            N/A
            
            
            
            N/A
            
            
            
            N/ADiluted
            
            
            16,450,979
            
            
            
            N/A
            
            
            
            N/A
            
            
            
            N/AEarnings
      per share:Basic
            
            $
            0.003
            
            
            
            N/A
            
            
            
            N/A
            
            
            
            N/ADiluted
            
            $
            0.003
            
            
            
            N/A
            
            
            
            N/A
            
            
            
            N/A





The
accompanying notes are an integral part of these consolidated financial
statements.


4
 Table of Contents
 DANVERS
BANCORP, INC.


CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’EQUITY


(Unaudited)





AccumulatedAdditional
            
            
            
            
            
            Other
            
            
            
            
            
            TotalCommon
      Stock
            
            
            Paid-In
            
            
            Retained
            
            
            Comprehensive
            
            
            Unearned
            
            
            Stockholders'Shares
            
            
            Amount
            
            
            Capital
            
            
            Earnings
            
            
            Income
      (Loss)
            
            
            Compensation
            
            
            Equity(Dollars
      in thousands)Balance
      at December 31, 2006
            
            
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            66,859
            
            
            $
            (1,780
            )
            
            $
            -
            
            
            $
            65,079Comprehensive
      income:Net
      income
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            3,205
            
            
            
            -
            
            
            
            -
            
            
            
            3,205Net
      unrealized gain on securitiesavailable
      for sale, net ofreclassification
      adjustmentand
      tax effect
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            1,644
            
            
            
            -
            
            
            
            1,644Change
      in fair value andamortization
      of derivativeused
      for cash flow hedge,net
      of tax effect
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            27
            
            
            
            -
            
            
            
            27Total comprehensive  income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            4,876Balance
      at September 30, 2007
            
            
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            70,064
            
            
            $
            (109
            )
            
            $
            -
            
            
            $
            69,955Balance
      at December 31, 2007
            
            
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            71,213
            
            
            $
            2,283
            
            
            $
            -
            
            
            $
            73,496Comprehensive
      loss:Net
      loss
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (2,666
            )
            
            
            -
            
            
            
            -
            
            
            
            (2,666
            )Net
      unrealized loss on securitiesavailable
      for sale, net ofreclassification
      adjustmentand
      tax effect
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (2,735
            )
            
            
            -
            
            
            
            (2,735
            )Change
      in fair value andamortization
      of derivative usedfor
      cash flow hedge, net oftax
      effect
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (3
            )
            
            
            -
            
            
            
            (3
            )Total
      comprehensive loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (5,404
            )Issuance
      of common stock forinitial
      public offering, net ofexpenses
      of $3,850
            
            
            17,192,500
            
            
            
            172
            
            
            
            167,902
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            168,074Issuance
      of common stock tothe
      Danversbank CharitableFoundation
            
            
            650,000
            
            
            
            6
            
            
            
            6,494
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            6,500Stock
      purchased by ESOP
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (14,274
            )
            
            
            (14,274
            )Common
      stock held by ESOPcommitted
      to be released(47,580
      shares)
            
            
            -
            
            
            
            -
            
            
            
            58
            
            
            
            -
            
            
            
            -
            
            
            
            476
            
            
            
            534Dividends
      declared($.02
      per share)
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (357
            )
            
            
            -
            
            
            
            -
            
            
            
            (357
            )Balance
      at September 30, 2008
            
            
            17,842,500
            
            
            $
            178
            
            
            $
            174,454
            
            
            $
            68,190
            
            
            $
            (455
            )
            
            $
            (13,798
            )
            
            $
            228,569











The
accompanying notes are an integral part of these consolidated financial
statements.


5
 Table of Contents
 DANVERS
BANCORP, INC.




CONSOLIDATED
STATEMENTS OF CASH FLOWS


(Unaudited)








Nine
      Months EndedSeptember
      30,2008
            
            
            2007(In
      thousands)Cash
      flows from operating activities:Net
      income (loss)
            
            $
            (2,666
            )
            
            $
            3,205Adjustments
      to reconcile net income (loss) to net cash provided byoperating
      activities:Provision
      for loan losses
            
            
            2,725
            
            
            
            450Writedown
      of other real estate owned
            
            
            1,387
            
            
            
            -Depreciation
      and amortization
            
            
            2,682
            
            
            
            2,516Amortization
      of net deferred loan fees and costs
            
            
            (391
            )
            
            
            (588
            )Deferred
      tax benefit
            
            
            (1,873
            )
            
            
            (355
            )Amortization
      of core deposit intangible and servicing rights
            
            
            157
            
            
            
            161ESOP
      expense
            
            
            534
            
            
            
            -Amortization
      (accretion) of securities, net
            
            
            209
            
            
            
            (42
            )Net
      (gain) loss on sales of securities
            
            
            (887
            )
            
            
            16Loans
      originated for sale
            
            
            (14,341
            )
            
            
            (9,250
            )Proceeds
      from sale of loans originated for sale
            
            
            13,519
            
            
            
            10,001Issuance
      of common stock to Danversbank Charitable Foundation
            
            
            6,500
            
            
            
            -Changes
      in other assets and liabilities:Accrued
      interest receivable
            
            
            187
            
            
            
            (502
            )Other
      assets and bank-owned life insurance
            
            
            (4,071
            )
            
            
            (1,609
            )Accrued
      expenses and other liabilities
            
            
            (2,836
            )
            
            
            (1,091
            )Net
      cash provided by operating activities
            
            
            835
            
            
            
            2,912Cash
      flows from investing activities:Activity
      in available-for-sale securities:Sales
            
            
            106,014
            
            
            
            85Maturities,
      prepayments and calls
            
            
            142,245
            
            
            
            138,935Purchases
            
            
            (216,826
            )
            
            
            (218,156
            )Redemption
      (purchase) of Federal Home Loan Bank stock
            
            
            (849
            )
            
            
            820Funds
      advanced on other real estate owned
            
            
            (795
            )
            
            
            (383
            )Proceeds
      from sale of other real estate owned
            
            
            2,839
            
            
            
            -Net
      loan (originations) payments
            
            
            (165,830
            )
            
            
            1,097Purchase
      of premises and equipment
            
            
            (6,131
            )
            
            
            (3,593
            )Proceeds
      from sale of premises and equipment
            
            
            100
            
            
            
            -Net
      cash used in investing activities
            
            
            (139,233
            )
            
            
            (81,195
            )











The
accompanying notes are an integral part of these consolidated financial
statements.





6
 Table of Contents
 DANVERS
BANCORP, INC.


CONSOLIDATED
STATEMENTS OF CASH FLOWS (Concluded)


(Unaudited)








Nine
      Months EndedSeptember
      30,2008
            
            
            2007(In
      thousands)Cash
      flows from financing activities:Net
      increase (decrease) in:Term
      certificates
            
            $
            28,581
            
            
            $
            (26,821
            )Other
      deposits
            
            
            98,643
            
            
            
            58,907Short-term
      borrowings
            
            
            11,241
            
            
            
            45,023Stock
      subscriptions
            
            
            (162,859
            )
            
            
            -Activity
      in long-term debt:Proceeds
      from advances
            
            
            25,000
            
            
            
            5,200Payment
      of advances
            
            
            (6,334
            )
            
            
            (24,549
            )Net
      proceeds from issuance of common stock
            
            
            168,074
            
            
            
            -Acquisition
      of common stock by ESOP
            
            
            (14,274
            )
            
            
            -Dividends
      declared
            
            
            (357
            )
            
            
            -Net
      cash provided by financing activities
            
            
            147,715
            
            
            
            57,760Change
      in cash and cash equivalents
            
            
            9,317
            
            
            
            (20,523
            )Cash
      and cash equivalents at beginning of period
            
            
            65,862
            
            
            
            45,120Cash
      and cash equivalents at end of period
            
            $
            75,179
            
            
            $
            24,597Supplementary
      disclosure of cash flow information:Cash
      paid during the period for:Interest
            
            $
            28,675
            
            
            $
            32,859Income
      taxes
            
            
            1,141
            
            
            
            1,209Non-cash
      financing and investing activities:Unsettled
      securities transactions
            
            
            5,500
            
            
            
            -Transfers
      from loans to other real estate owned
            
            
            700
            
            
            
            2,494











The
accompanying notes are an integral part of these consolidated financial
statements.


7
 Table of Contents
 DANVERS
BANCORP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS


1.
              Basis
      of Presentation
 
 The
accompanying unaudited consolidated interim financial statements include the
accounts of Danvers Bancorp, Inc. (“the Company”) and its wholly-owned
subsidiary Danversbank (the “Bank”).  These financial statements have
been prepared in accordance with accounting principles generally accepted in the
United States of America (“GAAP”) for interim financial information and with the
instructions to Form 10-Q and Rule 10-1 of Regulation
S-X.  Accordingly, certain information and note disclosures normally
included in the Company’s annual financial statements prepared in accordance
with GAAP have been omitted.
 
 In the
opinion of management, all adjustments (consisting of only normal recurring
adjustments) necessary for a fair presentation of the financial position,
results of operations, and cash flows for the reporting interim periods have
been included.  The consolidated balance sheet of the Company as of
December 31, 2007 has been derived from the audited consolidated balance sheet
of the Company as of that date.  The accompanying consolidated
financial statements should be read in conjunction with the audited consolidated
financial statements and accompanying notes thereto included in the Company’s
most recent Securities and Exchange Commission Form 10-K filed by the Company
for the year ended December 31, 2007.  The results of operation for
the nine months ended September 30, 2008 and 2007 are not necessarily indicative
of the results to be obtained for a full year.
 
 2.
              Fair
      Value of Assets and Liabilities
 
 Effective
January 1, 2008, the Company adopted Statement of Financial Accounting Standards
(“SFAS”) No. 157, Fair ValueMeasurements, which provides a framework for measuring fair value under
generally accepted accounting principles and the Company also adopted SFAS No.
159, The Fair Value Option for
Financial Assets and Financial Liabilities, including an amendment of FASB
Statement No. 115, which allows an entity the irrevocable option to elect
fair value for the initial and subsequent measurement for certain financial
assets and liabilities on a contract-by-contract basis.  The Company
did not elect fair value treatment for any financial assets or liabilities upon
adoption.
 
 In
accordance with SFAS No. 157, the Company groups its financial assets and
financial liabilities measured at fair value in three levels, based on the
markets in which the assets and liabilities are traded and the reliability of
the assumptions used to determine fair value.  The three levels are
defined as follows:
 
 In
October, 2008, the FASB issued FASB Staff Position No. FAS 157-3, Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active(“FSP
157-3”).  FSP 157-3 clarifies the application of SFAS 157 in a market
that is not active and provides an example to illustrate key considerations in
determining the fair value of a financial asset when the market for that
financial asset is not active. FSP 157-3 was effective immediately upon
issuance, and includes prior periods for which financial statements have not
been issued.  The Company applied the guidance contained in FSP 157-3
in determining fair values at September 30, 2008, and it did not have a
material impact on the consolidated financial statements.
 
 Level 1 –
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.  Currently, the Company does not have any items
classified as Level 1.
 
  8
 Table of Contents
 DANVERS
BANCORP, INC.
  
 Level 2 –
Valuations 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, either directly or
indirectly, or can be corroborated by observable market data for substantially
the full term of the assets or liabilities.  The fair value of fixed
maturity investments included in the Level 2 category were based on market
values obtained from an independent pricing service that were evaluated using
pricing models that vary by asset class and incorporate available trade, bid and
other market information and price quotes from well established independent
broker-dealers.  The independent pricing service monitors market
indicators, industry and economic events, and for broker-quoted only securities,
obtains quotes from market makers or broker-dealers that it recognizes to be
market participants.  The Level 2 categories include U.S. Government
and government-sponsored enterprises, mortgage-backed securities, corporate
bonds, foreign government bonds and municipal bonds.
 
 Level 3 –
Valuations based on inputs that are unobservable and significant to the overall
fair value measurement of the assets or liabilities and involve management
judgment.  Level 3 assets or liabilities include financial instruments
whose value is determined using 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 Level 3 categories include impaired consumer
loans.
 
 Assets
measured at fair value on a recurring basis as of September 30,
2008:
 
 
 Balance
      atSeptember
      30,Level
      1
              
              
              Level
      2
              
              
              Level
      3
              
              
              2008(In
      thousands)U.S.
      Government
              
              $
              -
              
              
              $
              2,025
              
              
              $
              -
              
              
              $
              2,025Government-sponsored
      enterprises
              
              
              -
              
              
              
              162,587
              
              
              
              -
              
              
              
              162,587Mortgage-backed
              
              
              -
              
              
              
              194,541
              
              
              
              -
              
              
              
              194,541Municipal
      bonds
              
              
              -
              
              
              
              17,442
              
              
              
              -
              
              
              
              17,442Other
      bonds
              
              
              -
              
              
              
              249
              
              
              
              -
              
              
              
              249$
              -
              
              
              $
              376,844
              
              
              $
              -
              
              
              $
              376,844
 
 
  9
 Table of Contents
 DANVERS
BANCORP, INC.
  
 Also, the
Company may be required, from time to time, to measure certain other financial
assets on a nonrecurring basis in accordance with GAAP.  These
adjustments to fair value usually result from application of
lower-of-cost-or-market accounting or write-downs of
individual assets.  The following table summarizes the fair value
hierarchy used to determine each adjustment and the carrying value of the
related individual assets as of September 30, 2008:
 
 
 Quarter
      EndedSeptember
      30,September
      30, 2008
              
              
              2008TotalLevel
      1
              
              
              Level
      2
              
              
              Level
      3
              
              
              Gains(Losses)(In
      thousands)Other
      real estate owned
              
              $
              -
              
              
              $
              782
              
              
              $
              -
              
              
              $
              -Impaired
      loans
              
              
              -
              
              
              
              745
              
              
              
              -
              
              
              
              280$
              -
              
              
              $
              1,527
              
              
              $
              -
              
              
              $
              280
 
 The
amount of other real estate owned represents the carrying value and related
write-downs based on a purchase and sale agreement with a third party or the
appraised value of the collateral.   The amount of impaired loans
in Level 2 represents the carrying value and related charge-offs and FAS 114
allocated reserves on impaired loans for which adjustments are based on
appraised value of the collateral.  The amount of loans in Level 3
represents the carrying value and related FAS 114 allocated reserves write-downs
of impaired consumer loans.  As the individual balances are small, the
carrying amount of the loan has been reserved.
 
 3.
              Earnings
      Per Share
 
 Basic
earnings per share (“EPS”) excludes dilution and is calculated by dividing net
income available to common stockholders by the weighted-average number of shares
of common stock outstanding during the period.  Diluted EPS is
computed in a manner similar to that of basic EPS except that the
weighted-average number of common shares outstanding is increased to include the
number of incremental common shares (computed using the treasury stock method)
that would have been outstanding if all potentially dilutive common stock
equivalents (such as stock options and unvested restricted stock) were issued
during the period.
 
 For the
quarter ended September 30, 2008, there were no potentially dilutive common
stock equivalents.  Earnings per share are not applicable for year to
date and quarterly periods prior to June 30, 2008 as the Company did not issue
stock until January 11, 2008.  Unallocated common shares held by the
ESOP are shown as a reduction in stockholders’ equity and are not included in
the weighted-average number of common shares outstanding for either basic or
diluted earnings per share calculations.
 
 4.
              Defined
      Benefit Pension Plan
 
 Employee
benefits are provided to employees through participation in the Savings Bank’s
Employees Retirement Association’s Pension Plan (“SBERA Pension
Plan”).  The benefits are interrelated with benefits provided under
the 401(k) Plan and based on employee’s years of service and annual
compensation, as defined in the SBERA Pension Plan.  Effective August
15, 2003, the Company curtailed the benefits under the Plan, and no additional
employees were eligible to participate in the Plan.  Effective June
30, 2007, the Company voted to terminate the Plan.
 
  10
 Table of Contents
 DANVERS
BANCORP, INC.
  
 The net
pension expense for the Plan included the following components:
 
 
 Three
      Months Ended
              
              
              Nine
      Months EndedSeptember
      30,
              
              
              September
      30,2008
              
              
              2007
              
              
              2008
              
              
              2007(In
      thousands)Interest
      cost
              
              $
              -
              
              
              $
              62
              
              
              $
              -
              
              
              $
              226Expected
      return on plan assets
              
              
              -
              
              
              
              (67
              )
              
              
              -
              
              
              
              (244
              )Settlement
      loss
              
              
              -
              
              
              
              180
              
              
              
              -
              
              
              
              180Actuarial
      gain (loss)
              
              
              -
              
              
              
              5
              
              
              
              -
              
              
              
              (5
              )Net
      pension expense
              
              $
              -
              
              
              $
              180
              
              
              $
              -
              
              
              $
              157
 
 The
Company previously disclosed in its consolidated financial statements for the
year ended December 31, 2007, estimated benefits of $253,000 were payable in
2008.  As of October 1, 2008, the Plan was terminated and benefits in
the amount of $178,000 less termination fees of $34,000 were paid to
participants.
 
 5.
              Dividend
      Declared
 
 On
October 23, 2008, the Company declared a quarterly cash dividend on its common
stock of $.02 per share. The dividend will be paid on or after November 21, 2008
to shareholders of record as of November 7, 2008.
 
 6.
              Recent
      Accounting Pronouncements
 
 In
December 2007, the FASB issued SFAS No. 141 (revised), ‘‘Business
Combinations’’, which replaces SFAS No. 141, and applies to all business
entities, including mutual entities that previously used the
pooling-of-interests method of accounting for certain business combinations.
This Statement makes significant amendments to other Statements and other
authoritative guidance, and applies prospectively to business combinations for
which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2008.
 
 In
December 2007, the FASB issued SFAS No. 160, ‘‘Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51.’’ This Statement
establishes accounting and reporting standards for the noncontrolling interest
in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a
noncontrolling interest in a subsidiary is an ownership interest in the
consolidated entity that should be reported as equity in the consolidated
financial statements. This Statement is effective for fiscal years beginning on
or after December 15, 2008 and the adoption of this Statement is not expected to
have a material impact on the Company’s consolidated financial
statements.
 
 In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities, an amendment of SFAS No. 133”, which changes the
disclosure requirements for derivative instruments and hedging
activities.  This Statement is intended to enhance the current
disclosure framework in SFAS No. 133.  The Statement requires that
objectives for using derivative instruments be disclosed in terms of underlying
risk and accounting designation.  This Statement is effective for the
Company’s consolidated financial statements issued for fiscal years and interim
periods beginning after November 15, 2008 and is not expected to have a material
impact on the Company’s consolidated financial statements.
 
  11
 Table of Contents
 DANVERS
BANCORP, INC.
  
 Item 2.Management’s Discussion and Analysis of
Financial Condition and Results of Operations
 
 The
following analysis discusses the changes in financial position and results of
operation of the Company, and should be read in conjunction with both the
unaudited consolidated interim financial statements and notes thereto, appearing
in Part 1, Item 1 of this report.
 
 Forward-Looking
Statements
 
 This Form
10-Q contains forward-looking statements, which can be identified by the use of
such words as estimate, project, believe, intend, anticipate, plan, seek, expect
and similar expressions. These forward-looking statements include statements of
our goals, intentions and expectations, statements regarding our business plans
and prospects and growth and operating strategies, statements regarding the
asset quality of our loan and investment portfolios; and estimates of our risks
and future costs and benefits.  These forward-looking statements are
subject to significant risks, assumptions and uncertainties, including, among
other things, the following important factors that could affect the actual
outcome of future events significantly increased competition among depository
and other financial institutions, inflation and changes in the interest rate
environment that reduce our margins or reduce the fair value of financial
instruments, general economic conditions, either nationally or in our market
areas, that are worse than expected, adverse changes in the securities markets,
legislative or regulatory changes that adversely affect our business, our
ability to enter new markets successfully and take advantage of growth
opportunities, changes in consumer spending, borrowing and savings habits,
changes in accounting policies and practices, as may be adopted by the bank
regulatory agencies and the Financial Accounting Standards Board, and changes in
our organization, compensation and benefit plans.  Because of these
and other uncertainties, our actual future results may be materially different
from the results indicated by these forward-looking statements.
 
 Critical
Accounting Policies
 
 The
discussion and analysis of the Company’s financial condition and results of
operations is based upon the Company’s unaudited consolidated financial
statements, which have been prepared in conformity with accounting principles
generally accepted in the United States of America for interim financial
information and with the instructions for Form 10-Q.  In preparing the
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 balance sheet and income and expenses during
the reported period. Actual results could differ from those
estimates.  Material estimates that are particularly susceptible to
change in the near term relate to the determination of the allowance for loan
losses, other than temporary impairment of securities, the valuation of other
real estate owned and the valuation of the deferred tax assets.
 
 Comparison
of Financial Condition at September 30, 2008 and December 31, 2007
 
 Total
Assets.Total
assets increased by $152.0 million, or 10.5%, to $1.60 billion at September 30,
2008 from $1.45 billion at December 31, 2007. This increase was primarily due to
an increase in loans, which was partially offset by a decline in securities
available for sale. The overall increase in the Company’s assets was funded
primarily with an increase in deposits and to a lesser extent a combination of
short and long-term borrowings.
 
 Cash and
Cash Equivalents.Cash
and cash equivalents increased by $9.3 million, or 14.1%, to $75.2 million at
September 30, 2008 from $65.9 million at December 31, 2007.
 
  12
 Table of Contents
 DANVERS
BANCORP, INC.
  
 Securities.The
securities portfolio aggregated $376.8 million at September 30, 2008, a decrease
of $29.9 million, or 7.3%, from $406.7 million at December 31, 2007. As a result
of the excellent credit opportunities that continue to present themselves to the
Company, we sold some securities from the investment portfolio and used the
proceeds to fund our loan growth. Within the portfolio, obligations of
government-sponsored enterprises decreased by $58.2 million and mortgage-backed
securities increased by $29.5 million, as the Company also replaced some
fixed-rate agency securities with adjustable-rate mortgage-backed
securities.
 
 At
September 30, 2008 and December 31, 2007, our mortgage-backed securities (“MBS”)
totaled 51.6% and 40.6%, respectively, of our investment portfolio and consisted
of high quality rated pass-through securities that are directly insured or
guaranteed by Freddie Mac, Fannie Mae or Ginnie Mae.  The MBS
portfolio is primarily backed by pools of 1-4 family mortgages that have loans
with interest rates that are within a set range and have varying
maturities.  None of our MBS are privately issued or have sub-prime
residential mortgages or home equity loans as part of their underlying loan
pools.  We target instruments with four to twelve year weighted
average lives, with expected average life extensions up to a maximum of fifteen
years in a rising rate environment.  In an effort to protect against a
rising interest rate environment, we increased our concentration of
adjustable-rate MBS in the investment portfolio from 15.4% at December 31, 2007
to 35.1% at September 30, 2008.  All our MBS were rated AAA at
September 30, 2008 and December 31, 2007.   Although
unforeseeable changes in market conditions may affect future ratings, management
does not expect to downgrade any ratings in our current MBS
portfolio.
 
 The
amortized cost and fair value of securities available for sale, with gross
unrealized gains and losses follows:
 
 
 Amortized
      Cost
              
              
              Gross
                Unrealized
      Gains
              
              
              Gross
      Unrealized Losses
              
              
              Fair
      Value(In
      thousands)September
      30, 2008:U.S.
      Government
              
              $
              2,011
              
              
              $
              14
              
              
              $
              -
              
              
              $
              2,025Government-sponsored
      enterprises
              
              
              162,098
              
              
              
              1,073
              
              
              
              (584
              )
              
              
              162,587Mortgage-backed
              
              
              194,091
              
              
              
              1,407
              
              
              
              (957
              )
              
              
              194,541Municipal
      bonds
              
              
              19,183
              
              
              
              1
              
              
              
              (1,742
              )
              
              
              17,442Other
      bonds
              
              
              250
              
              
              
              -
              
              
              
              (1
              )
              
              
              249$
              377,633
              
              
              $
              2,495
              
              
              $
              (3,284
              )
              
              $
              376,844December
      31, 2007:U.S.
      Government
              
              $
              2,000
              
              
              $
              21
              
              
              $
              -
              
              
              $
              2,021Government-sponsored
      enterprises
              
              
              217,929
              
              
              
              3,010
              
              
              
              (109
              )
              
              
              220,830Mortgage-backed
              
              
              164,062
              
              
              
              1,240
              
              
              
              (211
              )
              
              
              165,091Municipal
      bonds
              
              
              18,569
              
              
              
              64
              
              
              
              (191
              )
              
              
              18,442Other
      bonds
              
              
              328
              
              
              
              4
              
              
              
              (1
              )
              
              
              331$
              402,888
              
              
              $
              4,339
              
              
              $
              (512
              )
              
              $
              406,715
 
 
  13
 Table of Contents
 DANVERS
BANCORP, INC.
  
 Information
pertaining to securities 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 MonthsGross
                Unrealized
      Losses
              
              
              Fair Value
              
              
              Gross
                Unrealized
      Losses
              
              
              Fair Value(In
      thousands)September
      30, 2008:Government-sponsored
      enterprises
              
              $
              567
              
              
              $
              50,410
              
              
              $
              17
              
              
              $
              5,483Mortgage-backed
              
              
              848
              
              
              
              72,574
              
              
              
              109
              
              
              
              13,063Municipal
      bonds
              
              
              227
              
              
              
              3,534
              
              
              
              1,515
              
              
              
              13,255Other
      bonds
              
              
              -
              
              
              
              -
              
              
              
              1
              
              
              
              149$
              1,642
              
              
              $
              126,518
              
              
              $
              1,642
              
              
              $
              31,950December
      31, 2007:Government-sponsored
      enterprises
              
              $
              1
              
              
              $
              256
              
              
              $
              108
              
              
              $
              21,392Mortgage-backed
              
              
              118
              
              
              
              35,879
              
              
              
              93
              
              
              
              13,042Municipal
      bonds
              
              
              160
              
              
              
              10,378
              
              
              
              31
              
              
              
              2,303Other
      bonds
              
              
              -
              
              
              
              -
              
              
              
              1
              
              
              
              174$
              279
              
              
              $
              46,513
              
              
              $
              233
              
              
              $
              36,911
 
 Management
evaluates securities for other-than-temporary impairment on at least a quarterly
basis, and more frequently when economic or market concerns warrant more
frequent evaluation. Consideration is given to (1) the length of time and the
extent to which the fair value has remained less than cost, (2) the financial
condition and near-term prospects of the issuer, and (3) the intent and ability
of the Company to retain its investment in the issue for a period of time
sufficient to allow for any anticipated recovery in fair value.  At
September 30, 2008 and December 31, 2007, the Company determined that all
unrealized losses from debt securities are temporary in nature.
 
 Net
Loans.Net
loans as of September 30, 2008 were $1.1 billion, an increase of $162.8 million,
or 18.1%, from net loan balances of $899.4 million as of December 31, 2007. The
Company continued to experience significant growth particularly in commercial
and industrial (C&I) loan balances. For the first nine months of 2008, a
modest decline in the Company’s permanent residential real estate loan portfolio
of $2.7 million was offset by increases in C&I, construction and commercial
real estate loans of $135.2 million, $18.7 million and $12.7 million,
respectively.  A significant portion of the C&I originations are
associated with the asset based lending group that joined the Company during the
fourth quarter of 2007 and continue to transition their former clients over from
their prior institution.
 
 
  14
 Table of Contents
 DANVERS
BANCORP, INC.
  
 The
following table sets forth the composition of the loan portfolio at the dates
indicated:
 
 
 September
      30, 2008
              
              
              December
      31, 2007Amount
              
              
              Percent
              
              
              Amount
              
              
              Percent(Dollars
      in thousands)Real
      estate mortgages:Construction
              
              $
              127,315
              
              
              
              11.9
              %
              
              $
              108,638
              
              
              
              11.9
              %Residential
              
              
              177,780
              
              
              
              16.5
              
              
              
              180,511
              
              
              
              19.9Commercial
              
              
              247,170
              
              
              
              23.0
              
              
              
              234,425
              
              
              
              25.8Home
      equity
              
              
              38,533
              
              
              
              3.6
              
              
              
              36,679
              
              
              
              4.0C&I
              
              
              474,906
              
              
              
              44.2
              
              
              
              339,669
              
              
              
              37.4Consumer
              
              
              9,049
              
              
              
              0.8
              
              
              
              9,564
              
              
              
              1.0Total
      loans
              
              
              1,074,753
              
              
              
              100.0
              %
              
              
              909,486
              
              
              
              100.0
              %Allowance
      for loan losses
              
              
              (11,046
              )
              
              
              
              
              
              
              (9,096
              )Net
      deferred loan fees
              
              
              (1,510
              )
              
              
              
              
              
              
              (989
              )Loans,
      net
              
              $
              1,062,197
              
              
              
              
              
              
              $
              899,401
 
 
 The
following table sets forth the amounts and categories of our non-performing
assets at the dates indicated:
 
 September
      30,
              
              
              December
      31,2008
              
              
              2007(Dollars
      in thousands)Nonaccrual
      loans:Real
      estate mortgages:Construction
              
              $
              2,856
              
              
              $
              2,618Residential
              
              
              3,051
              
              
              
              1,225Commercial
              
              
              263
              
              
              
              -Home
      equity
              
              
              227
              
              
              
              64Total
      real estate mortgages
              
              
              6,397
              
              
              
              3,907C&I
              
              
              832
              
              
              
              451Consumer
              
              
              14
              
              
              
              29Total
              
              $
              7,243
              
              
              $
              4,387Total
      non-performing loans
              
              $
              7,243
              
              
              $
              4,387Other
      real estate owned
              
              
              782
              
              
              
              3,513Total
      non-performing assets
              
              $
              8,025
              
              
              $
              7,900Total
      non-performing loans to total loans
              
              
              0.67
              %
              
              
              0.48
              %Total
      non-performing loans to total assets
              
              
              0.45
              %
              
              
              0.30
              %Total
      non-performing assets to total assets
              
              
              0.50
              %
              
              
              0.55
              %
 
 
  15
 Table of Contents
 DANVERS
BANCORP, INC.
  
 The
following table sets forth the activity in the allowance for loan losses for the
periods indicated:
 
 At
      or For the Three Months
              
              
              At
      or For the Nine MonthsEnded
      September 30,
              
              
              Ended
      September 30,2008
              
              
              2007
              
              
              2008
              
              
              2007(Dollars
      in thousands)
              
              
              (Dollars
      in thousands)Allowance
      balance at beginning of period
              
              $
              10,320
              
              
              $
              10,359
              
              
              $
              9,096
              
              
              $
              10,412Provision
      for loan losses
              
              
              1,050
              
              
              
              225
              
              
              
              2,725
              
              
              
              450Charge-offs:Real
      estate mortgages:Construction
              
              
              -
              
              
              
              1,400
              
              
              
              -
              
              
              
              1,400Residential
              
              
              20
              
              
              
              -
              
              
              
              105
              
              
              
              5Commercial
              
              
              210
              
              
              
              -
              
              
              
              210
              
              
              
              -Home
      equity
              
              
              -
              
              
              
              -
              
              
              
              14
              
              
              
              1Total
      real estate mortgages
              
              
              230
              
              
              
              1,400
              
              
              
              329
              
              
              
              1,406C&I
              
              
              78
              
              
              
              314
              
              
              
              349
              
              
              
              613Consumer
              
              
              27
              
              
              
              21
              
              
              
              125
              
              
              
              41Total
      charge-offs
              
              
              335
              
              
              
              1,735
              
              
              
              803
              
              
              
              2,060Recoveries:Real
      estate mortgages:Construction
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Residential
              
              
              -
              
              
              
              -
              
              
              
              8
              
              
              
              -Commercial
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Home
      equity
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              1Total
      real estate mortgages
              
              
              -
              
              
              
              -
              
              
              
              8
              
              
              
              1C&I
              
              
              10
              
              
              
              9
              
              
              
              10
              
              
              
              27Consumer
              
              
              1
              
              
              
              13
              
              
              
              10
              
              
              
              41Total
      recoveries
              
              
              11
              
              
              
              22
              
              
              
              28
              
              
              
              69Net
      charge-offs
              
              
              324
              
              
              
              1,713
              
              
              
              775
              
              
              
              1,991Allowance
      balance at end of period
              
              $
              11,046
              
              
              $
              8,871
              
              
              $
              11,046
              
              
              $
              8,871Total
      loans outstanding
              
              $
              1,074,753
              
              
              $
              875,970
              
              
              $
              1,074,753
              
              
              $
              875,970Average
      loans outstanding
              
              $
              1,035,109
              
              
              $
              866,509
              
              
              $
              982,235
              
              
              $
              863,593Allowance
      for loan losses as a percent oftotal
      loans outstanding
              
              
              1.03
              %
              
              
              1.01
              %
              
              
              1.03
              %
              
              
              1.01
              %Net
      loans charged off as a percent ofaverage
      loans outstanding (annualized)
              
              
              0.13
              %
              
              
              0.79
              %
              
              
              0.11
              %
              
              
              0.31
              %Allowance
      for loan losses to non-performing
      loans
              
              
              152.51
              %
              
              
              692.51
              %
              
              
              152.51
              %
              
              
              692.51
              %
 
 
  16
 Table of Contents
 DANVERS
BANCORP, INC.
  
 Deposits.The
Company’s deposit growth remained strong through the first nine months of
2008.  Total deposits increased by $127.2 million to $1,125.4 million
at September 30, 2008, an increase of 12.7% from a balance of $998.1 million at
December 31, 2007. The Company saw increases across all deposit categories, the
largest increase was in the money market accounts which increased by $89.0
million, and to a lesser extent in demand deposit, savings and NOW accounts and
total term certificates, which increased by $6.6 million, $3.0 million and $28.6
million, respectively. The Company’s deposit gathering activities have benefited
from some of the turmoil in the broader capital markets.  The
Company’s Snap Deposit (our commercial remote deposit capture initiative)
promotion continues to gain acceptance as well; we now have over 100
installations.
 
 The
following table sets forth the Company’s deposit accounts at the dates
indicated:
 
 
 September
      30, 2008
              
              
              December
      31, 2007Amount
              
              
              Percent
              
              
              Amount
              
              
              Percent(Dollars
      in thousands)Demand
      deposits
              
              $
              130,686
              
              
              
              11.6
              %
              
              $
              124,040
              
              
              
              12.4
              %Savings
      and NOW accounts
              
              
              174,317
              
              
              
              15.5
              
              
              
              171,353
              
              
              
              17.2Money
      market accounts
              
              
              426,880
              
              
              
              37.9
              
              
              
              337,847
              
              
              
              33.8Total
      non-certificate accounts
              
              
              731,883
              
              
              
              65.0
              
              
              
              633,240
              
              
              
              63.4Term
      certificates over $100,000
              
              
              252,544
              
              
              
              22.5
              
              
              
              228,793
              
              
              
              22.9Other
      term certificates
              
              
              140,945
              
              
              
              12.5
              
              
              
              136,115
              
              
              
              13.7Total
      certificate accounts
              
              
              393,489
              
              
              
              35.0
              
              
              
              364,908
              
              
              
              36.6Total
      deposits
              
              $
              1,125,372
              
              
              
              100.0
              %
              
              $
              998,148
              
              
              
              100.0
              %
 
 Borrowed
Funds.The
Company relies on borrowings from the Federal Home Loan Bank of Boston, or
FHLBB, as an additional funding source as liquidity needs arise. The balance of
these borrowings will fluctuate depending on the Company’s ability to attract
deposits, coupled with the amount of loan demand in the market and other
investment opportunities. Funds borrowed from the FHLBB increased by $18.7
million to $163.7 million at September 30, 2008, a 12.9% increase from a balance
of $145.0 million at December 31, 2007. The Company chose to take advantage of
the lower rate environment and fund some of the loan originations with
attractively priced FHLBB advances.
 
 The
Company’s borrowings include securities sold under agreements to repurchase,
which are contracts for the sale of securities owned by the Company with an
agreement to repurchase those securities at an agreed upon price and date. The
Company uses repurchase agreements as an alternative funding tool and as a means
of offering commercial deposit customers a commercial sweep checking product. As
of September 30, 2008, the Company had $35.0 million outstanding in overnight
repurchase agreements, an increase of $11.2 million or 47.2% from $23.8 million
December 31, 2007.
 
 Total
Stockholders’ Equity.Total
stockholders’ equity increased by $155.1 million to $228.6 million at September
30, 2008 from a balance of $73.5 million as of December 31, 2007. This increase
was due to the completion of our stock conversion that resulted in an addition
to capital of $174.6 million. Stockholders’ equity was reduced by $13.8 million
in unallocated common shares held by the Employee Stock Ownership Plan, a $2.7
million decrease in accumulated other comprehensive income (loss) and a net loss
for the first nine months of $2.7 million.
    17
 Table of Contents
 DANVERS
BANCORP, INC.
  
 Comparison
of Operating Results for the Three and Nine Months Ended September 30, 2008 and
2007
 
 Net
Income (loss).The
Company recorded net income for the three months ended September 30, 2008 of
$48,000, a decrease of $1.3 million from net income of $1.3 million for the
three months ended September 30, 2007. The decline was due to higher provision
for loan losses, non-interest expense and a provision for income taxes. The
Company reported a net loss for the nine months ended September 30, 2008 of $2.7
million, a decrease of $5.9 million from net income of $3.2 million for the same
period in 2007.  The net loss was primarily due to two non-recurring
items; a $6.9 million pretax charge related to the establishment of the
Danversbank Charitable Foundation and a $3.7 million pretax charge related to
the acceleration of the Bank’s phantom stock plan. The “change of control”
provisions in the phantom stock plan triggered the accelerated
payout.  Both charges are directly related to the Company’s stock
conversion.  In addition, higher than anticipated provision for loan
losses and foreclosure expense contributed to the net loss for the same period
in 2008.
 
 Net
Interest Income.Net
interest income for the three months ended September 30, 2008 increased to $11.9
million from $9.4 million for the three months ended September 30, 2007. The
increase was directly related to an increase in volume.  Average
interest-earning assets increased $243.6 million between the two
periods.  This increase of $2.5 million or 26.9% in net interest
income was the combination of a $3.4 million increase due to volume and a
$865,000 decrease due to rate.  The Company’s net interest margin was
3.25% for the three months ended September 30, 2008 compared to 3.05% for the
three months ended September 30, 2007.  The Company’s improved margins
were directly related to the capital infusion as a result of the Company’s stock
conversion.
 
 Net
interest income for the nine months ended September 30, 2008 increased to $34.5
million from $27.2 million for the nine months ended September 30, 2007. Average
interest-earning assets increased $249.3 million between the two
periods.  This increase of $7.3 million in net interest income
resulted from a $9.6 million increase due to volume and a $2.3 million decrease
due to the rates on our interest-earning assets and interest-bearing
liabilities.  Our net interest margin was 3.21% for the nine months
ended September 30, 2008 compared to 3.07% for the nine months ended September
30, 2007.  While the Company continues to see opportunities to lower
its overall funding costs, the margin improvement for the first nine months is
attributable to the aforementioned capital infusion.
 
 Interest
and Dividend Income.Interest
income increased $571,000, or 2.8%, to $21.0 million for the three months ended
September 30, 2008 from $20.4 million for the three months ended September 30,
2007. The increase was primarily due to a higher average balance of our
interest-earning assets, partially offset by a decrease in yields.  In
particular, average loans increased by $168.6 million between the two
periods.  The Company also experienced an increase in the average
balances of securities of $34.6 million and cash equivalents of $40.3 million.
The average yield on loans decreased from 7.42% for the three months ended
September 30, 2007 to 6.28% for the same period in 2008, and the overall yield
on interest-earning assets decreased from 6.65% to 5.75% for the 2007 and 2008
periods, respectively.  The overall decline in asset yields is
directly related to the downward trend of the current interest rate
environment.
 
 Interest
income increased $4.2 million, or 7.1 %, to $63.4 million for the nine months
ended September 30, 2008 from $59.2 million for the nine months ended September
30, 2007.  The increase was directly related to a higher balance of
average interest-earning assets. Loans, securities and cash equivalents
increased on average by $118.6 million, $93.6 million and $37.0 million,
respectively between the two periods.  The average yield on loans
decreased from 7.38% for the nine months ended September 30, 2007 to 6.47% for
the same period in 2008 and the overall yield on interest-earning assets
decreased from 6.68% to 5.90% for the 2007 and 2008 periods,
respectively.  Despite a significant increase in the Company’s
Commercial and Industrial lending activities and the shift of a segment of the
securities portfolio into loan originations, the overall decline in asset yields
is the byproduct of the declining trend of the current interest rate
environment.
   18
 Table of Contents
 DANVERS
BANCORP, INC.
 Interest
Expense.Interest
expense for the three months ended September 30, 2008 decreased by $2.0 million,
or 17.6%, to $9.1 million compared to interest expense of $11.1 million for the
three months ended September 30, 2007.  Average interest-bearing
liabilities increased by $94.3 million between the two periods and the balance
increase translated into a $1.0 million increase in interest expense. A decrease
of 95 basis points, or 23.6%, in the average cost of the Company’s
interest-bearing liabilities resulted in a decrease in interest expense of $2.9
million. The overall rates on interest-bearing liabilities decreased from 4.03%
to 3.08% for the 2007 and 2008 periods, respectively, and the average cost of
deposits decreased from 3.84% for the three months ended September 30, 2007 to
2.76% for the same period in 2008. The decline in deposit and other
interest-bearing liability costs relates to the overall decline in interest
rates during the period.
 
 Interest
expense for the nine months ended September 30, 2008 decreased by $3.1 million,
or 9.6%, to $28.9 million compared to interest expense of $31.9 million for the
nine months ended September 30, 2007. Average interest-bearing liabilities
increased by $101.1 million between the two periods and this resulted in a $2.8
million increase in interest expense. A decrease of 72 basis points, or 17.9%,
in the average cost of the Company’s interest-bearing liabilities resulted in a
decrease in interest expense of $5.9 million. The overall rates on
interest-bearing liabilities decreased from 4.03% to 3.31% for the 2007 and 2008
periods, respectively, and the average cost of deposits decreased from 3.82% for
the nine months ended September 30, 2007 to 3.04% for the same period in 2008.
The overall decrease in deposit and interest-bearing liability costs is a
byproduct of the current rate environment.
 
 Provision for Loan
Losses.The Company records a provision for loan losses as a charge to
its earnings when necessary in order to maintain the allowance for loan losses
at a level sufficient to absorb losses inherent in the loan portfolio. The
Company recorded provision expense of $1.1 million and $225,000 during the three
months ended September 30, 2008 and 2007, respectively. The Company recorded
$2.7 million and $450,000 in provision expense during the nine months ended
September 30, 2008 and 2007, respectively. Provisions in all periods are
reflective of portfolio growth, changes to the loan portfolio composition, an
evaluation of the quality of the loan portfolio, and net charge offs, the
difference between loan charge-offs net of recoveries on loans previously
charged off. In particular, the Company’s loan portfolio increased by more than
$162 million during the first nine months of 2008.  The Company’s
allowance for loan losses increased by $1.95 million over the past nine months
commensurate with the growth and composition of the portfolio.  Net
charge-offs were $324,000 and $1.7 million for the three months ended September
30, 2008 and 2007, respectively and $775,000 and $2.0 million for the nine
months ended September 30, 2008 and 2007, respectively.  At September
30, 2008, the allowance for loan losses totaled $11.0 million, or 1.03% of the
loan portfolio compared to 1.00% at December 31, 2007 and 1.01% at September 30,
2007.
 
 Non-interest
Income. Non-interest income for the three months ended September 30, 2008
increased by $120,000 or 9.1% to $1.4 million, compared to $1.3 million for the
three months ended September 30, 2007. This increase was primarily the result of
gains on the sale of securities totaling $77,000 and an increase of $52,000 in
cash surrender value income for the Company’s bank-owned life
insurance.
 
 Non-interest
income for the nine months ended September 30, 2008 increased by $1.4 million or
35.3% to $5.4 million, compared to $4.0 million for the nine months ended
September 30, 2007. This overall increase was attributable to increases in gains
on sales of securities, income on our bank-owned life insurance holdings, or
BOLI and loan swap fee income of $903,000, $207,000 and $129,000,
respectively.  During the first nine months, management chose to sell
some fixed-rate investment securities and replace them with adjustable-rate
investments in an effort to protect the portfolio against a rising interest rate
environment. While the Company has experienced some success at increasing its
non-interest revenues to varying degrees and across a variety of categories,
developing reliable and stable sources of non-interest income to complement the
Company’s primary lines of business continues to be an area of
focus.
   19
 Table of Contents
  DANVERS
BANCORP, INC.
  Non-interest Expense.Non-interest expense increased $1.8 million, or 19.8%, for the third
quarter of 2008 when compared to the same period of 2007. The most notable
factors contributing to this increase relate to increases in salaries and
benefits expense of $616,000 and other operating expense of
$593,000.  Increases in general and administrative expenses, most
notably in the areas of deposit insurance, legal, marketing, investor relations
and Delaware Corporation franchise taxes were the primary reasons for the
increases between comparable periods.
 
 Non-interest
expense increased by $16.3 million between the nine months ended September 30,
2008 and 2007. The increase was primarily due to two non-recurring items; a $6.9
million pretax charge related to the establishment of the Danversbank Charitable
Foundation and a $3.7 million pretax charge related to the acceleration of the
Bank’s phantom stock plan. There was also a substantial increase in other real
estate owned expense of $1.8 million, which relates to a housing subdivision
that the Company foreclosed on in 2007. The charges taken against this project
relate to write-downs in the carrying value of the property and the estimated
costs to complete the project.  The property was sold during the third
quarter of 2008.
 
 Income Taxes.The
Company recorded an income tax expense of $1.6 million for the three months
ended September 30, 2008; an increase of $1.3 million when compared to a
$247,000 expense for the three months ended September 30, 2007. The effective
tax rate for the three months period ended September 30, 2008 was 97.0% compared
to 15.7% for the same period in 2007.  The change in the effective tax
rate for the three months period ended September 30, 2008 reflects the
recognition of a reduction in the Massachusetts statutory tax rate enacted in
July 2008 from 10.5% to 9.0% for deferred taxes amounting to
$180,000.  In addition, due to a reduction in income before taxes for
the period the projection of the annual effective tax results resulted in a 97%
effective tax rate.
 
 The
Company recorded an income tax benefit of $3.2 million for the nine months ended
September 30, 2008; a decrease of $4.0 million, compared to a $735,000 expense
for the nine months ended September 30, 2007. The effective tax rate for the
nine months period ended September 30, 2008 was 54.9% compared to 18.7% for the
same period in 2007.  The effective tax rate for the nine month period
ended September 30, 2008 is a result of the level of income associated with
permanent differences relating principally to BOLI and tax exempt securities and
income from the securities corporations compared to the loss before
taxes.  The benefit in the nine month period was reduced by the
$180,000 expense associated with the change in the Massachusetts statutory tax
rate.
 
 The
following tables set forth average balance sheets, average yields and costs, and
certain other information for the periods indicated. All average balances are
daily average balances. The yields set forth below include the effect of
deferred fees, and discounts and premiums that are amortized or accreted to
interest income or expense. Tax-exempt income and yields have not been adjusted
to a tax-equivalent basis.  The Company does not accrue interest on
loans on non-accrual status; however, the balance of these loans is included in
the total average balance, which has the effect of lowering average loan
yields.
  20
 Table of Contents
 DANVERS
BANCORP, INC.
  
 
 Three Months EndedSeptember 30, 2008
              
              
              September 30, 2007Average
                Outstanding
      Balance
              
              Interest Earned/Paid
              
              Average
      Yield/Rate (1)
              
              
              Average
                Outstanding Balance
              
              Interest Earned/Paid
              
              
              Average
      Yield/Rate (1)(Dollars in thousands)Interest-earning
      assets:Interest-earning
      cash equivalents
              
              $
              50,212
              
              $
              276
              
              2.20
              %
              
              $
              9,869
              
              $
              119
              
              
              4.80
              %Debt
      securities: (2)U.S.
      Government
              
              
              2,014
              
              
              17
              
              3.38
              
              
              
              2,005
              
              
              24
              
              
              4.67Government-sponsored 
      enterprises
              
              
              153,981
              
              
              1,876
              
              4.87
              
              
              
              203,492
              
              
              2,423
              
              
              4.72Mortgage-backed
              
              
              188,771
              
              
              2,288
              
              4.85
              
              
              
              106,548
              
              
              1,431
              
              
              5.33Municipal
      bonds
              
              
              19,186
              
              
              195
              
              4.07
              
              
              
              18,246
              
              
              185
              
              
              4.03Other
              
              
              250
              
              
              2
              
              3.20
              
              
              
              328
              
              
              4
              
              
              5.11Equity
      securities
              
              
              11,528
              
              
              91
              
              3.16
              
              
              
              10,495
              
              
              171
              
              
              6.46Real
      estate mortgages (3)
              
              
              589,204
              
              
              9,134
              
              6.20
              
              
              
              554,118
              
              
              9,889
              
              
              7.08C&I
      loans (3)
              
              
              379,419
              
              
              6,231
              
              6.57
              
              
              
              258,510
              
              
              5,434
              
              
              8.34IRBs
      (3)
              
              
              57,123
              
              
              694
              
              4.86
              
              
              
              44,310
              
              
              549
              
              
              4.92Consumer
      loans  (3)
              
              
              9,363
              
              
              188
              
              8.03
              
              
              
              9,571
              
              
              192
              
              
              7.95Total
      interest-earning assets
              
              
              1,461,051
              
              
              20,992
              
              5.75
              
              
              
              1,217,492
              
              
              20,421
              
              
              6.65Allowance
      for loan losses
              
              
              (10,653
              )
              
              
              
              
              
              
              
              (9,680
              )Total
      earning assets
      lessallowance
      for loan losses
              
              
              1,450,398
              
              
              
              
              
              
              
              
              1,207,812Non-interest-earning
      assets
              
              
              98,660
              
              
              
              
              
              
              
              
              82,350Total
      assets
              
              $
              1,549,058
              
              
              
              
              
              
              
              $
              1,290,162Interest-bearing
      liabilities:Deposits:Savings
      and NOW accounts
              
              $
              180,041
              
              
              551
              
              1.22
              
              
              $
              166,948
              
              
              452
              
              
              1.07Money
      market accounts
              
              
              420,442
              
              
              2,692
              
              2.56
              
              
              
              349,224
              
              
              3,642
              
              
              4.14Term
      certificates (4)
              
              
              353,383
              
              
              3,333
              
              3.77
              
              
              
              348,146
              
              
              4,273
              
              
              4.87Total
      deposits
              
              
              953,866
              
              
              6,576
              
              2.76
              
              
              
              864,318
              
              
              8,367
              
              
              3.84Borrowed
      funds:Short-term
      borrowings
              
              
              34,973
              
              
              108
              
              1.24
              
              
              
              45,089
              
              
              244
              
              
              2.15Long-term
      debt
              
              
              164,000
              
              
              1,865
              
              4.55
              
              
              
              149,110
              
              
              1,782
              
              
              4.74Subordinated
      debt
              
              
              29,965
              
              
              558
              
              7.45
              
              
              
              29,965
              
              
              662
              
              
              8.76Total
      interest-bearing liabilities
              
              
              1,182,804
              
              
              9,107
              
              3.08
              
              
              
              1,088,482
              
              
              11,055
              
              
              4.03Non-interest-bearing
      deposits
              
              
              132,442
              
              
              
              
              
              
              
              
              125,433Other
      non-interest-bearing liabilities
              
              
              6,055
              
              
              
              
              
              
              
              
              9,122Total
      non-interest-bearing liabilities
              
              
              138,497
              
              
              
              
              
              
              
              
              134,555Total
      liabilities
              
              
              1,321,301
              
              
              
              
              
              
              
              
              1,223,037Stockholders'
      equity
              
              
              227,757
              
              
              
              
              
              
              
              
              67,125Total
      liabilities and stockholders' equity
              
              $
              1,549,058
              
              
              
              
              
              
              
              $
              1,290,162Net
      interest income
              
              
              
              
              $
              11,885
              
              
              
              
              
              
              
              $
              9,366Net
      interest rate spread (5)
              
              
              
              
              
              
              
              2.67
              %
              
              
              
              
              
              
              
              
              2.62
              %Net
      interest-earning assets (6)
              
              $
              278,247
              
              
              
              
              
              
              
              $
              129,010Net
      interest margin (7)
              
              
              
              
              
              
              
              3.25
              %
              
              
              
              
              
              
              
              
              3.05
              %Ratio
      of interest-earning assetsto
      total interest-bearing liabilities
              
              
              1.24
              x
              
              
              
              
              
              
              
              1.12
              x
 _______________________
 (1)
Yields are annualized.
 (2)
Average balances are presented at average amortized cost.
 (3)
Average loans include non-accrual loans and are net of average deferred loan
fees/costs.
 (4) Term
certificates include brokered and non-brokered CDs.
 (5) Net
interest rate spread represents the difference between the yield on
interest-earning assets and the cost of interest-bearing liabilities at the
period indicated.
 (6) Net
interest-earning assets represent total interest-earning assets less total
interest-bearing liabilities.
 (7) Net
interest margin represents net interest income divided by average total
interest-earning assets.
  21
 Table of Contents
 DANVERS
BANCORP, INC.
  
 
 Nine Months EndedSeptember
      30, 2008
              
              September
      30, 2007Average
                Outstanding
      Balance
              
              Interest
      Earned/ Paid
              
              Average
      Yield/ Rate (1)
              
              Average
                Outstanding
      Balance
              
              Interest
      Earned/ Paid
              
              
              Average
      Yield/ Rate (1)(Dollars
      in thousands)Interest-earning
      assets:Interest-earning
      cash equivalents
              
              $
              46,166
              
              $
              959
              
              2.77
              %
              $
              9,129
              
              $
              377
              
              
              5.53
              %Debt
      securities: (2)U.S.
      Government
              
              
              2,032
              
              
              62
              
              4.07
              
              
              2,456
              
              
              86
              
              
              4.66Government-sponsored
      enterprises
              
              
              170,022
              
              
              6,183
              
              4.85
              
              
              204,296
              
              
              6,710
              
              
              4.39Mortgage-backed
              
              
              202,225
              
              
              7,607
              
              5.02
              
              
              80,209
              
              
              3,219
              
              
              5.37Municipal
      bonds
              
              
              18,950
              
              
              578
              
              4.07
              
              
              13,280
              
              
              400
              
              
              4.03Other
              
              
              295
              
              
              11
              
              4.97
              
              
              369
              
              
              15
              
              
              5.51Equity
      securities
              
              
              11,196
              
              
              301
              
              3.58
              
              
              10,493
              
              
              532
              
              
              6.77Real
      estate mortgages (3)
              
              
              573,119
              
              
              27,232
              
              6.34
              
              
              552,891
              
              
              29,636
              
              
              7.17C&I
      loans (3)
              
              
              347,930
              
              
              17,965
              
              6.88
              
              
              258,539
              
              
              16,051
              
              
              8.30IRBs
      (3)
              
              
              51,799
              
              
              1,899
              
              4.89
              
              
              42,192
              
              
              1,546
              
              
              4.90Consumer
      loans  (3)
              
              
              9,387
              
              
              569
              
              8.08
              
              
              9,971
              
              
              585
              
              
              7.84Total
      interest-earning assets
              
              
              1,433,121
              
              
              63,366
              
              5.90
              
              
              1,183,825
              
              
              59,157
              
              
              6.68Allowance
      for loan losses
              
              
              (9,871
              )
              
              
              
              
              
              
              (10,147
              )Total earning
      assets lessallowance
      for loan losses
              
              
              1,423,250
              
              
              
              
              
              
              
              1,173,678Non-interest-earning
      assets
              
              
              101,998
              
              
              
              
              
              
              
              78,725Total
      assets
              
              $
              1,525,248
              
              
              
              
              
              
              $
              1,252,403Interest-bearing
      liabilities:Deposits:Savings
      and NOW accounts
              
              $
              179,717
              
              
              1,762
              
              1.31
              
              $
              163,189
              
              
              1,057
              
              
              0.87Money
      market accounts
              
              
              408,529
              
              
              8,716
              
              2.84
              
              
              329,497
              
              
              10,252
              
              
              4.16Term
      certificates (4)
              
              
              351,537
              
              
              10,927
              
              4.14
              
              
              349,486
              
              
              12,771
              
              
              4.89Total
      deposits
              
              
              939,783
              
              
              21,405
              
              3.04
              
              
              842,172
              
              
              24,080
              
              
              3.82Borrowed
      funds:Short-term
      borrowings
              
              
              35,767
              
              
              427
              
              1.59
              
              
              39,753
              
              
              663
              
              
              2.23Long-term
      debt
              
              
              156,385
              
              
              5,299
              
              4.52
              
              
              148,895
              
              
              5,211
              
              
              4.68Subordinated
      debt
              
              
              29,965
              
              
              1,736
              
              7.72
              
              
              29,965
              
              
              1,986
              
              
              8.86Total
      interest-bearing liabilities
              
              
              1,161,900
              
              
              28,867
              
              3.31
              
              
              1,060,785
              
              
              31,940
              
              
              4.03Non-interest-bearing
      deposits
              
              
              141,450
              
              
              
              
              
              
              
              116,926Other
      non-interest-bearing liabilities
              
              
              8,303
              
              
              
              
              
              
              
              9,185Total
      non-interest-bearing liabilities
              
              
              149,753
              
              
              
              
              
              
              
              126,111Total
      liabilities
              
              
              1,311,653
              
              
              
              
              
              
              
              1,186,896Stockholders'
      equity
              
              
              213,595
              
              
              
              
              
              
              
              65,507Total
      liabilities and stockholders' equity
              
              $
              1,525,248
              
              
              
              
              
              
              $
              1,252,403Net
      interest income
              
              
              
              
              $
              34,499
              
              
              
              
              
              
              $
              27,217Net
      interest rate spread (5)
              
              
              
              
              
              
              
              2.59
              %
              
              
              
              
              
              
              
              2.65
              %Net
      interest-earning assets (6)
              
              $
              271,221
              
              
              
              
              
              
              $
              123,040Net
      interest margin (7)
              
              
              
              
              
              
              
              3.21
              %
              
              
              
              
              
              
              
              3.07
              %Ratio
      of interest-earning assetsto
      total interest-bearing liabilities
              
              
              1.23
              x
              
              
              
              
              
              
              1.12
              x
 _______________________
 (1)
Yields are annualized.
 (2)
Average balances are presented at average amortized cost.
 (3)
Average loans include non-accrual loans and are net of average deferred loan
fees/costs.
 (4) Term
certificates include brokered and non-brokered CDs.
 (5) Net
interest rate spread represents the difference between the yield on
interest-earning assets and the cost of interest-bearing liabilities at the
period indicated.
 (6) Net
interest-earning assets represent total interest-earning assets less total
interest-bearing liabilities.
 (7) Net
interest margin represents net interest income divided by average total
interest-earning assets.
  22
 Table of Contents
 DANVERS
BANCORP, INC.
  
 The
following tables present the dollar amount of changes in interest income and
interest expense for the major categories of the Company’s interest-earning
assets and interest-bearing liabilities.  Information is provided for
each category of interest-earning assets and interest-bearing liabilities with
respect to (i) changes attributable to changes in volume (i.e., changes in
average balances multiplied by the prior-period average rate) and (ii) changes
attributable to rate (i.e., changes in average rate multiplied by prior-period
average balances).
 
 Three
      Months Ended September 30,2008
      vs. 2007Increase
      (Decrease)Due to
              
              
              TotalVolume
              
              
              Rate
              
              
              Increase
      (Decrease)(In
      thousands)Interest-earning
      assets:Interest-earning
      cash equivalents
              
              $
              486
              
              
              $
              (329
              )
              
              $
              157Debt
      securities:(1)U.S.
      Government
              
              
              -
              
              
              
              (7
              )
              
              
              (7
              )Government-sponsored
      enterprises
              
              
              (590
              )
              
              
              43
              
              
              
              (547
              )Mortgage-backed
              
              
              1,104
              
              
              
              (247
              )
              
              
              857Municipal
      bonds
              
              
              10
              
              
              
              -
              
              
              
              10Other
              
              
              (1
              )
              
              
              (1
              )
              
              
              (2
              )Equity
      securities
              
              
              17
              
              
              
              (97
              )
              
              
              (80
              )Real
      estate mortgages (2)
              
              
              626
              
              
              
              (1,381
              )
              
              
              (755
              )C&I
      loans (2)
              
              
              2,542
              
              
              
              (1,745
              )
              
              
              797IRBs
      (2)
              
              
              159
              
              
              
              (14
              )
              
              
              145Consumer
      loans (2)
              
              
              (4
              )
              
              
              -
              
              
              
              (4
              )Total
      interest-earning assets
              
              
              4,349
              
              
              
              (3,778
              )
              
              
              571Interest-bearing
      liabilities:Deposits:Savings
      and NOW accounts
              
              
              35
              
              
              
              64
              
              
              
              99Money
      market accounts
              
              
              743
              
              
              
              (1,693
              )
              
              
              (950
              )Term
      certificates (3)
              
              
              64
              
              
              
              (1,004
              )
              
              
              (940
              )Total
      Deposits
              
              
              842
              
              
              
              (2,633
              )
              
              
              (1,791
              )Borrowed
      funds:Short-term
      borrowings
              
              
              (55
              )
              
              
              (81
              )
              
              
              (136
              )Long-term
      debt
              
              
              178
              
              
              
              (95
              )
              
              
              83Subordinated
      debt
              
              
              -
              
              
              
              (104
              )
              
              
              (104
              )Total
      interest-bearing liabilities
              
              
              965
              
              
              
              (2,913
              )
              
              
              (1,948
              )Increase
      (decrease) in net interest income
              
              $
              3,384
              
              
              $
              (865
              )
              
              $
              2,519
 
 _______________________
 (1)
Average balances are presented at average amortized cost.
 (2)
Average loans include non-accrual loans and are net of average deferred loan
fees/costs.
 (3) Term
certificates include brokered and non-brokered certificates of
deposit.
 
  23
 Table of Contents
 DANVERS
BANCORP, INC.
  
 Nine
      Months Ended September 30,2008
      vs. 2007Increase
      (Decrease)Due
      to
              
              
              TotalVolume
              
              
              Rate
              
              
              Increase
      (Decrease)(In
      thousands)Interest-earning
      assets:Interest-earning
      cash equivalents
              
              $
              1,530
              
              
              $
              (948
              )
              
              $
              582Debt
      securities:(1)U.S.
      Government
              
              
              (15
              )
              
              
              (9
              )
              
              
              (24
              )Government-sponsored
      enterprises
              
              
              (1,126
              )
              
              
              599
              
              
              
              (527
              )Mortgage-backed
              
              
              4,897
              
              
              
              (509
              )
              
              
              4,388Municipal
      bonds
              
              
              171
              
              
              
              7
              
              
              
              178Other
              
              
              (3
              )
              
              
              (1
              )
              
              
              (4
              )Equity
      securities
              
              
              36
              
              
              
              (267
              )
              
              
              (231
              )Real
      estate mortgages (2)
              
              
              1,084
              
              
              
              (3,488
              )
              
              
              (2,404
              )C&I
      loans (2)
              
              
              5,550
              
              
              
              (3,636
              )
              
              
              1,914IRBs
      (2)
              
              
              352
              
              
              
              1
              
              
              
              353Consumer
      loans (2)
              
              
              (34
              )
              
              
              18
              
              
              
              (16
              )Total
      interest-earning assets
              
              
              12,442
              
              
              
              (8,233
              )
              
              
              4,209Interest-bearing
      liabilities:Deposits:Savings
      and NOW accounts
              
              
              107
              
              
              
              598
              
              
              
              705Money
      market accounts
              
              
              2,459
              
              
              
              (3,995
              )
              
              
              (1,536
              )Term
      certificates (3)
              
              
              75
              
              
              
              (1,919
              )
              
              
              (1,844
              )Total
      Deposits
              
              
              2,641
              
              
              
              (5,316
              )
              
              
              (2,675
              )Borrowed
      funds:Short-term
      borrowings
              
              
              (66
              )
              
              
              (170
              )
              
              
              (236
              )Long-term
      debt
              
              
              262
              
              
              
              (174
              )
              
              
              88Subordinated
      debt
              
              
              -
              
              
              
              (250
              )
              
              
              (250
              )Total
      interest-bearing liabilities
              
              
              2,837
              
              
              
              (5,910
              )
              
              
              (3,073
              )Increase
      (decrease) in net interest income
              
              $
              9,605
              
              
              $
              (2,323
              )
              
              $
              7,282
 
 _______________________
 (1)
Average balances are presented at average amortized cost.
 (2)
Average loans include non-accrual loans and are net of average deferred loan
fees/costs.
 (3) Term
certificates include brokered and non-brokered certificates of
deposit.
 
  24
 Table of Contents
 DANVERS
BANCORP, INC.
  Liquidity
and Capital Resources
 
 The
Company’s primary sources of funds are from deposits, amortization and repayment
of loans and mortgage-backed securities, the sale or maturity of securities,
advances from the FHLBB, repurchase agreements and cash flows generated by
operations.  While maturities and scheduled amortization of loans and
securities are predictable sources of funds, deposit flows and mortgage loan
prepayments can be greatly influenced by interest rate trends, economic
conditions and competition.  The Company maintains excess cash and
short-term interest bearing assets with original maturities of less than 90 days
that provide additional liquidity.
 
 The
Company uses its liquidity to fund existing and future loan commitments, to fund
maturing certificates of deposit and advances from the FHLBB, to fund other
deposit withdrawals, to meet operating expenses and to invest in other
interest-bearing assets.
 
 Contractual
Obligations. The following table presents information
indicating various contractual obligations and commitments of the Company as of
the date indicated and their respective maturity dates:
 
 
 September
      30, 2008More
      than
              
              
              More
      thanOne
      Year
              
              
              Three
      YearsOne
      Year
              
              
              Through
              
              
              Through
              
              
              Overor
      Less
              
              
              Three
      Years
              
              
              Five
      Years
              
              
              Five
      Years
              
              
              Total(In
      thousands)Federal
      Home Loan Bank advances
              
              $
              307
              
              
              $
              37,598
              
              
              $
              25,000
              
              
              $
              100,803
              
              
              $
              163,708Repurchase
      agreements (1)
              
              
              35,041
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              35,041Subordinated
      debt
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              29,965
              
              
              
              29,965Operating
      leases
              
              
              2,256
              
              
              
              4,617
              
              
              
              3,788
              
              
              
              9,485
              
              
              
              20,146Total contractual obligations
              
              $
              37,604
              
              
              $
              42,215
              
              
              $
              28,788
              
              
              $
              140,253
              
              
              $
              248,860
 ______________________
 (1)  All
repurchase agreements mature on a daily basis and are secured by obligations of
government-sponsored enterprises.
  Loan
Commitments.  Loan commitments to extend credit are agreements
to lend to a customer as long as there is no violation of any condition
established in the contract and generally have fixed expiration dates or other
termination clauses.  The following table presents information
indicating various loan commitments of the Company as of the date indicated and
their respective maturity dates:
 September
      30, 2008More
      than
              
              
              More
      thanOne
      Year
              
              
              Three
      YearsOne
      Year
              
              
              Through
              
              
              Through
              
              
              Overor
      Less
              
              
              Three
      Years
              
              
              Five
      Years
              
              
              Five
      Years
              
              
              Total(In
      thousands)Commitments
      to grant loans
              
              $
              40,544
              
              
              $
              -
              
              
              $
              -
              
              
              $
              -
              
              
              $
              40,544Unfunded
      commitments under lines of credit
              
              
              256,602
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              256,602Unadvanced
      funds on construction loans
              
              
              19,284
              
              
              
              5,117
              
              
              
              13,101
              
              
              
              6,318
              
              
              
              43,820Commercial
      and stanby letters of credit
              
              
              1,411
              
              
              
              339
              
              
              
              40
              
              
              
              4,998
              
              
              
              6,788Total
      contractual obligations
              
              $
              317,841
              
              
              $
              5,456
              
              
              $
              13,141
              
              
              $
              11,316
              
              
              $
              347,754
   25
 Table of Contents
 DANVERS
BANCORP, INC.
  
 Regulatory Capital
Requirements. At September 30, 2008, the most recent
notification from the FDIC categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action.  To be well
capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based
and Tier 1 leverage ratios of 10.0%, 6.0% and 5.0%,
respectively.  Prompt corrective action provisions are not applicable
to bank holding companies.  At September 30, 2008, the Bank’s total
risk-based, Tier 1 risk-based and Tier 1 leverage ratios were 15.68%, 14.73% and
11.26%, respectively.  At September 30, 2008, the Company’s total
risk-based, Tier 1 risk-based and Tier 1 leverage ratios were 22.96%, 22.01% and
16.86%, respectively.
 
 Management
has been closely monitoring the progress of the federal government’s proposed
TARP program.  Given the Company’s available capital resources and the
proposed structure of the TARP, management does not anticipate participating in
the program at this time.
  Recent
Economic Developements
  On
October 3, 2008 the Emergency Economic Stabilization Act of 2008 (“EESA”) was
enacted.  Among other things, the EESA immediately raised the FDIC
insurance limit from $100,000 to $250,000 to be effective through December 31,
2009.  On October 14, 2008, the FDIC announced a new program, the
Temporary Liquidity Guarantee Program (“TLGP”).  The TLGP is a
voluntary and time limited program that will be funded through special
fees.  The program consists of two basic components: (i) a temporary
unlimited guarantee of funds in non-interest-bearing transaction accounts at
FDIC-insured institutions not otherwise covered by the existing deposit
insurance limit of $250,000 (the Transaction Account Guarantee Program); and
(ii) a temporary guarantee of newly-issued senior unsecured debt (the Debt
Guarantee Program).
  Subject
to any restrictions that might be imposed by the FDIC, the Company is eligible
to participate in the TLGP.  For the first 30 days of the program, all
eligible entities are covered under the TLGP, and the guarantees provided by the
TLGP will be offered at no cost to eligible entities.  On or before
December 5, 2008, however, eligible entities must inform the FDIC whether they
will opt out of the TLGP.  An eligible entity may elect to opt out of
either the Debt Guarantee Program or the Transaction Account Guarantee Program
or of both components of the TLGP.  All eligible entities within a
U.S. Banking Holding Company structure must make the same decision regarding
continued participation in each component of the TLGP.
  Although
the Company has not reached a final decision on whether to participate in the
Transaction Account Guarantee Program of the TLGP, the Company believes the
benefits of the program could be worth the incremental costs.  After
the initial period, participating institutions will be assessed a ten basis
point surcharge on balances in accounts covered by the Transaction Account
Guarantee Program.
  On
October 14, 2008, the U.S. Department of the Treasury (the “Treasury”) announced
a voluntary Capital Purchase Program (“CPP”) to encourage U.S. financial
institutions to build capital, to increase the flow of financing to U.S.
businesses and consumers, and to support the U.S. economy. To be eligible for
the CPP, the applicant must receive approval of the Treasury. In addition, the
applicant must agree to a number of terms and restrictions including, but not
limited to, certain limitations on executive compensation and prohibitions on
increasing dividends payable to its common shareholders and conducting share
repurchase without the Treasury’s prior approval. The subscription amount
available to a participating financial institution is a minimum of one percent
of the institution’s risk weighted assets to a maximum of three percent of risk
weighted assets.
  
 26
 Table of Contents
  DANVERS
BANCORP, INC.
 
 The
non-voting senior preferred shares purchased by the Treasury will have a
dividend rate of five percent per year until the fifth anniversary of the date
of the investment and a dividend rate of nine percent per year thereafter. The
Treasury will also receive warrants for common stock of the applicant equivalent
in value to 15 percent of the amount of the preferred shares purchased by the
Treasury from the applicant under the CPP.
 
 Management
has been closely monitoring the progress of CPP.  Given the Company’s
available capital resources and the proposed structure of CPP, management does
not anticipate participating in the program at this time.
 
 Item 3. Quantitative and Qualitative Disclosures
About Market Risk
 
 Exposure
to market interest rate risk is managed by the Company through periodic
evaluations of the current interest rate risk inherent in its rate-sensitive
assets and liabilities, primarily deposits, borrowings, loans and securities,
coupled with determinations of the level of risk considered appropriate given
the Company’s capital and liquidity requirements, business strategy and
performance objectives. Through such management, the Company seeks to manage the
vulnerability of its net interest income to changes in interest
rates.
 
 The
Asset/Liability Committee, or ALCO, chaired by the Chief Financial Officer and
comprised of several members of senior management and selected members of the
board of directors, is responsible for managing interest rate risk. On a
quarterly basis, this committee reviews with the full board of directors its
analysis of our exposure to interest rate risk, the effect subsequent changes in
interest rates could have on the Company’s future net interest income, key
interest rate risk strategies and other activities, and the effect of those
strategies on the Company’s operating results. This committee is also actively
involved in the Company’s planning and budgeting process as well as in
determining pricing strategies for deposits and loans. Management is aided in
these efforts by the use of an independent third party that convenes with
management on a quarterly basis for a complete asset/liability analysis and
review.
 
 The
primary method that ALCO uses for measuring and evaluating interest rate risk is
an income simulation analysis. This analysis considers the maturity and interest
rate repricing characteristics of all of our interest-earning assets and
interest-bearing liabilities, as well as the relative sensitivities of these
balance sheet components over a range of interest rate scenarios. Interest rate
scenarios tested generally include parallel and flattening/steepening rate ramps
over a one-year period, and static, or flat, rates. The simulation analysis is
used to measure the exposure of net interest income to changes in interest rates
over a specified time horizon, usually a two-year period. The simulations also
show the net interest income volatility for up to five years.
 
 For
September 30, 2008, the Company used a simulation model to project changes
for three rising and one declining rate (because of the already low level of
interest rates) scenarios. This analysis calculates the difference between net
interest income forecasts for these scenarios compared to the net interest
income forecast using a flat rate scenario. In each of these instances, Federal
Funds is used as the driving rate. The following table sets forth, as of
September 30, 2008, the estimated changes in the Company’s net interest income
that would result.
 
  27
 Table of Contents
 DANVERS
BANCORP, INC.
  
 
 Net
      Portfolio Value(2)
              
              
              Net
      Interest IncomeIncrease
      (Decrease)Change
      in
              
              
              
              
              
              
              
              
              
              
              
              Estimated
              
              
              in
      EstimatedInterest
      Rates
              
              
              Estimated
              
              
              Estimated
      Increase (Decrease)
              
              
              Net
      Interest
              
              
              Net
      Interest Income(basis
      points)(1)
              
              
              NPV
              
              
              Amount
              
              
              Percent
              
              
              Income
              
              
              Amount
              
              
              Percent(Dollars
      in thousands)+300
              bp
              
              $
              202,506
              
              
              $
              (56,443
              )
              
              
              -21.8
              %
              
              $
              44,973
              
              
              $
              (5,659
              )
              
              
              -11.2
              %+200
              bp
              
              
              223,642
              
              
              
              (35,307
              )
              
              
              -13.6
              %
              
              
              48,326
              
              
              
              (2,306
              )
              
              
              -4.6
              %+100
              bp
              
              
              242,508
              
              
              
              (16,441
              )
              
              
              -6.3
              %
              
              
              50,065
              
              
              
              (567
              )
              
              
              -1.1
              %0
              bp
              
              
              258,949
              
              
              
              -
              
              
              
              0.0
              %
              
              
              50,632
              
              
              
              -
              
              
              
              0.0
              %-100
              bp
              
              
              263,531
              
              
              
              4,582
              
              
              
              1.8
              %
              
              
              49,933
              
              
              
              (699
              )
              
              
              -1.4
              %
 _______________________
 (1)
Assumes an instantaneous uniform change in interest rates at all
maturities.
 (2) NPV
is the discounted present value of expected cash flows from interest-earning
assets, interest-bearing liabilities and off-balance sheet
contracts.
 
 The
income simulation model includes various assumptions regarding the re-pricing
relationships for each of our products. Many of our assets are floating rate
loans tied to the Prime lending rate, which are assumed to re-price immediately
and to the same extent as the change in market rates, according to their
contracted index. Conversely, the Company has various transaction account
products that would not increase or decrease in the same increments or at the
same speed. Money market accounts, as an example, are assumed to increase sooner
and in larger increments than savings and NOW accounts.  These
assumptions are based on our prior experience with the changes in rates paid on
these non-maturity deposits coincident with changes in market interest rates.
The model begins by disseminating data into appropriate repricing buckets.
Assets and liabilities are then assigned a multiplier to simulate how much that
particular balance sheet item will reprice when interest rates change. The final
step is to simulate the timing effect of assets and liabilities with a
month-by-month simulation to estimate the change in interest income and expense
over the next 12 months.
 
 This
analysis indicates the impact of changes in net interest income for the given
set of rate changes and assumptions. It does not incorporate any balance sheet
growth, and it assumes that the structure and composition of the balance sheet
will remain comparable to the structure at the start of the simulation. It does
not account for other factors that might impact this analysis, including changes
by management to mitigate the impact of interest rate changes or secondary
impacts such as changes to our credit risk profile as interest rates change.
Furthermore, loan prepayment rate estimates and spread relationships change
regularly. Interest rate changes create changes in actual loan prepayment rates
that differ from the market estimates incorporated in this analysis. Changes
that vary significantly from the assumptions may have significant effects on our
net interest income.
 
 For the
rising and falling interest rate scenarios, the base market interest rate
forecast was increased on an instantaneous and sustained basis, by 100, 200 and
300 basis points and decreased by 100 basis points.   At
September 30, 2008, our net interest income exposure related to these
hypothetical changes in market interest rates was within our established
guidelines.  There are inherent shortcomings to income simulations,
given the number and variety of assumptions that must be made in performing the
analysis. The assumptions relied upon in making these calculations of interest
rate sensitivity include the level of market interest rates, the shape of the
yield curve, the degree to which certain assets and liabilities with similar
attributes react to changes in market interest rates, and the degree to which
non-maturity deposits, such as checking accounts, react to changes in market
rates. Although the analysis shown above provides an indication of the Company’s
sensitivity to interest rate changes at a point in time, these estimates are not
intended to and do not provide a precise forecast of the effect of changes in
market interest rates on the Company’s net interest income and may differ from
actual results.
  28
 Table of Contents
 DANVERS
BANCORP, INC.
  
 Item 4.Controls and
Procedures
 
 See Item
4T below.
 
 Item 4T. Controls and
Procedures
 
 (a)
Evaluation of Disclosure Controls and Procedures
 
 The
Company’s President and Chief Executive Officer, its Executive Vice President
and Chief Operating Officer, its Senior Vice President and Chief Financial
Officer, and other members of its senior management team have evaluated the
effectiveness of the Company’s disclosure controls and procedures as defined
under the Securities and Exchange Act of 1934 Rules 13a-15(e), as amended, (the
“Exchange Act”).  Based upon their evaluation they have concluded that
the Company’s disclosure controls and procedures, as for the end of the period
covered by this report, were adequate and effective to provide reasonable
assurance that the information required to be disclosed by the Company,
including its consolidated subsidiaries, in reports that are filed or submitted
under the Exchange Act, is recorded, processed, summarized, and reported, within
the time periods specified in the SEC’s rules and forms.
 
 The
effectiveness of a system of disclosure controls and procedures is subject to
various inherent limitations, including cost limitations, judgments used in
decision making, assumptions about the likelihood of future events, the
soundness of our systems, the possibility of human error, and the risk of
fraud.  Moreover, projections of any evaluation of effectiveness to
future periods are subject to the risk that controls may become inadequate
because of changes in condition and the risk that the degree of compliance with
policies or procedures may deteriorate over time.  Due to such
inherent limitations, there can be no assurance that any system of disclosure
controls and procedures will be successful in preventing all errors or fraud, or
in making all material information known in a timely manner to the appropriate
levels of management.
 
 (b)
Changes in Internal Controls Over Financial Reporting
 
 There
were no changes in our internal control over financial reporting during the
quarter ended September 30, 2008 that have materially affected, or that are
reasonably likely to materially affect, the Company’s internal controls over
financial reporting.
 
 PART
II.  OTHER INFORMATION
 
 Item 1.  Legal Proceedings
 
 The
Company or the Bank is not involved in any legal proceedings other than routine
legal proceedings occurring in the ordinary course of business. Management
believes that such proceedings are, in the aggregate, immaterial to our
financial condition and results of operations.
  Item 1A. Risk Factors
  There
have been no material changes to the risk factors set forth in Item 1A to
Part I of our Form 10-K, filed on March 28, 2008, for the three and nine
months ended September 30, 2008, except as noted below and except to the extent
factual information disclosed elsewhere in this Form 10-Q relates to such risk
factors.
 29
 Table of Contents
 DANVERS
BANCORP, INC.
  Recent Market Volatility May Impact
our Business and the Value of our Common Stock.
  The
performance of the Company’s business and the trading price of the shares of its
common stock may be affected by many factors including the recent volatility in
the credit, mortgage and housing markets, the markets for securities relating to
mortgages or housing, and with respect to financial institutions generally.
Government action, such as the Emergency Economic Stabilization Act of 2008, may
also impact the Company and the value of its common stock.  Given the
unprecedented nature of this volatility the Company cannot predict what impact,
if any, this volatility will have on its business or share price and for these
and other reasons the Company’s shares of common stock may trade at a price
lower than that at which they were purchased.
 Item
2.  Unregistered Sales of Equity Securities
and Use of Proceeds
 
 Not
applicable.
 
 Item
3.  Defaults Upon Senior Securities
 
 Not
applicable.
 
 Item
4.  Submission of Matters to a Vote of
Security Holders
 
 The
annual meeting of the stockholders of the Company was held on September 12,
2008.
 
 The
following individuals were elected as directors, each for a three-year term by
the following vote:
 
 FOR
              
              
              WITHHELDNeal
      H. Goldman
              
              
              15,918,371
              
              
              
              300,860J.
      Michael O'Brien
              
              
              15,936,601
              
              
              
              282,630John
      J. O'Neil
              
              
              15,962,691
              
              
              
              256,540John
      M. Pereira
              
              
              15,959,014
              
              
              
              260,217Diane
      T. Stringer
              
              
              15,752,028
              
              
              
              467,203
 
 
 The
approval of the Danvers Bancorp, Inc. 2008 Stock Option and Incentive
Plan:
 
 
 FOR
              
              
              AGAINST
              
              
              ABSTAIN
              
              
              BROKER
      NON-VOTE10,025,924
              
              
              
              1,859,394
              
              
              
              64,726
              
              
              
              4,269,187
 
 
 The
appointment of Wolf & Company, P.C., as the Danvers Bancorp, Inc.’s
independent registered public accounting firm for the fiscal year ending
December 31, 2008 was ratified by the stockholders by the following
vote:
 
 
 FOR
              
              
              AGAINST
              
              
              ABSTAIN15,866,945
              
              
              
              222,124
              
              
              
              130,162
 
 
 Item
5.  OtherInformation
 
 Not
applicable.
 
  30
 Table of Contents
 DANVERS
BANCORP, INC.
  
 Item
6.  Exhibits
 
 
 Exhibit
      No.
              
              Description2.1
              
              Danvers
      Bancorp, Inc. Plan of Conversion (1)3.1
              
              Certificate
      of Incorporation of Danvers Bancorp, Inc.(1)3.2
              
              Bylaws
      of Danvers Bancorp, Inc.(1)4.1
              
              Form
      of Common Stock Certificate of Danvers Bancorp,
Inc.(1)+10.1
              
              Amended
      and Restated Danversbank Supplemental Executive Retirement Plan dated as
      of April 11, 2008(3)+10.3
              
              Phantom
      Stock Plan(1)+10.4
              
              Nonqualified
      Deferred Compensation Plan(1)+10.5
              
              Danversbank
      SBERA Pension Plan(1)+10.6
              
              Financial
      Advisory Agreement(1)10.7
              
              Form
      of Employment Agreement by and among Danvers Bancorp, Inc., Danversbank
      and Kevin T. Bottomley(1)+10.8
              
              Form
      of Employment Agreement by and among Danvers Bancorp, Inc., Danversbank
      and James J. McCarthy(1)+10.9
              
              Form
      of Employment Agreement by and among Danvers Bancorp, Inc., Danversbank
      and L. Mark Panella(1)+10.10
              
              Form
      of Employment Agreement by and among Danvers Bancorp, Inc., Danversbank
      and John J. O'Neil(1)+10.11
              
              Form
      of Change in Control Agreement(1)+10.12
              
              Form
      of Employee Stock Ownership Plan(1)+10.13
              
              Form
      of Employee Stock Ownership Restoration Plan(1)+10.14
              
              Form
      of Danvers Bancorp, Inc. Change in Control Severance Pay
      Plan(1)+10.15
              
              Form
      of Danvers Bancorp, Inc. 2008 Stock Option and Incentive
      Plan(4)+14.1
              
              Code
      of Ethics(2)21.1
              
              Subsidiaries
      of Registrant(1)24.1
              
              Power
      of Attorney (set forth on signature page)(2)31.1
              
              Section
      302 Certification of President and Chief Executive
  Officer31.2
              
              Section
      302 Certification of Executive Vice President and Chief Operating
      Officer31.3
              
              Section
      302 Certification of Senior Vice President and Chief Financial
      Officer32.1
              
              Section
      906 Certification of President and Chief Executive
  Officer32.2
              
              Section
      906 Certification of Executive Vice President and Chief Operating
      Officer32.3
              
              Section
      906 Certification of Senior Vice President and Chief Financial
      Officer+    Represents
      mangement contract or compensatory plan or agreement.(1)  Previously
      filed as an exhibit to the Registration Statement on Form S-1 (No.
      333-145875) and incorporatedherin
      by reference.(2)
      Previously filed as an exhibit to the Annual Report  pursuant to
      Section 13 or 15(d) of the SecuritiesExchange
      Act of 1934 Form 10-K (No. 001-33896) and incorporated herin by
      reference.(3)
      Previously filed as an exhibit to the Registrant's Current Report on Form
      8-K filed on April 16, 2008.(4)
      Previously filed as an exhibit to the Registrant's Current Report on Form
      8-K filed on September 16, 2008.
 
 
 
  DANVERS
BANCORP, INC.
  Signatures
 
 Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
 
 Danvers
Bancorp, Inc.
 
 Date:  November
14,
2008                                                                                                By:
/s/                      Kevin T.
Bottomley_________________
 Kevin T.
Bottomley
 President and Chief
Executive Officer
 
 
 Date:  November
14,
2008                                                                                                 By:
/s/                      James J.
McCarthy__________________
 James J. McCarthy
 Executive Vice
President and Chief Operating
 Officer
 
 
 Date:  November
14,
2008                                                                                                By:
/s/                      L. Mark
Panella____________________
 L. Mark
Panella
 Senior Vice President and
Chief Financial
 Officer