Table of Contents

 

 

 

# **UNITEDSTATES**

##### **SECURITIES AND EXCHANGECOMMISSION**

## **WASHINGTON, D.C. 20549**

## ** **

# **FORM 10-Q**

# ** **

**  (MarkOne)**

 

**x**      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934

** **

**For thequarterly period ended June 30, 2008**

 

### **OR**

### ** **

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

** **

#### **For the transition period from                                    to                                    **

####  

### **Commission file number: 001-33896**

### ** **

**DANVERSBANCORP, INC.**

(ExactName of Registrant as Specified in Its Charter)

 

| **Delaware**                                  | ** ** | **04-3445675**      |
|-----------------------------------------------|------------|---------------------|
| (State or Other Jurisdiction of               |       | (I.R.S Employer     |
| Incorporation of Organization)                |       | Identification No.) |
|                                          |       |                |
| **One Conant Street, Danvers, Massachusetts** | ** ** | **01923**           |
| (Address of Principal Executive Officers)     |       | (Zip Code)          |

 

**(978) 777-2200**

Registrant’stelephone number, including area code

 

Indicate by check mark whether the registrant (1) has filed allreports to be filed by Section 13 or 15(d) of the Securities Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. Yes x No o

 

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

 
| Large accelerated filer o                          |   | Accelerated filer o         |
|----------------------------------------------------|--------|-----------------------------|
| Non-accelerated filer x                            |   | Smaller reporting company o |
| **(**Do not check if a smaller reporting  company) |   |                        |

 

Indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act).

Yes o No x

 

Shares outstanding of the registrant’s common stock, $0.01 par value,at August 14, 2008: 17,842,500

 

 

 

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Tableof Contents

 

**DANVERS BANCORP, INC.**

**TABLE OF CONTENTS**

** **
| ** **                              | **Page**                                                                                    |
|-----------------------------------------|---------------------------------------------------------------------------------------------|
| **PART I.  FINANCIAL INFORMATION** | ** **                                                                                  |
|                                    |                                                                                        |
| Item 1.                                 | Financial Statements  (Unaudited)                                                           |   |
|                                    |                                                                                        | Consolidated  Balance Sheets as of June 30, 2008 and December 31, 2007 | 3 |
|                                    |                                                                                        |   |   |
|                                    |                                                                                        | Consolidated Statements of  Operations for the Three and Six Months Ended June 30, 2008 and 2007 | 4 |
|                                    |                                                                                        |   |   |
|                                    |                                                                                        | Consolidated Statements of  Changes in Stockholders’ Equity for the Six Months Ended June 30, 2008  and 2007 | 5 |
|                                    |                                                                                        |   |   |
|                                    |                                                                                        | Consolidated Statements of Cash Flows for the Six  Months Ended June 30, 2008 and 2007 | 6 |
|                                    |                                                                                        |   |   |
|                                    |                                                                                        | Notes to  Consolidated Financial Statements | 8 |
|                                    |                                                                                        |   |   |
| Item  2.                                | Management’s  Discussion and Analysis of Financial Condition and Results of Operations | 12 |
|                                    |                                                                                        |   |
| Item  3.                                | Quantitative  and Qualitative Disclosures About Market Risk                                 | 26 |
|                                    |                                                                                        |   |
| Item  4.                                | Controls and  Procedures                                                                    | 28 |
|                                    |                                                                                        |   |
| Item  4T.                               | Controls and  Procedures                                                                    | 28 |
|                                    |                                                                                        |   |
| **PART II.  OTHER INFORMATION**    | ** **                                                                                  |
|                                    |                                                                                        |
| Item 1.                                 | Legal Proceedings                                                                           | 28 |
|                                    |                                                                                        |   |
| Item 1A.                                | Risk Factors                                                                                | 28 |
|                                    |                                                                                        |   |
| Item  2.                                | Unregistered  Sales of Equity Securities and Use of Proceeds                                | 28 |
|                                    |                                                                                        |   |
| Item  3.                                | Defaults  Upon Senior Securities                                                            | 29 |
|                                    |                                                                                        |   |
| Item  4.                                | Submission  of Matters to a Vote of Security Holders                                        | 29 |
|                                    |                                                                                        |   |
| Item 5.                                 | Other Information                                                                           | 29 |
|                                    |                                                                                        |   |
| Item 6.                                 | Exhibits                                                                                    | 30 |

 

2

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Tableof Contents

 

**DANVERS BANCORP, INC.**

 

**PART I. FINANCIAL INFORMATION**

 

**Item 1. Financial Statements (Unaudited)**

 

**CONSOLIDATEDBALANCE SHEETS**

**(Unaudited)**

 
| ** **                                                                                                                                                                   | ** ** | **June 30,**       | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                   | ** ** | **2008**                | ** ** | **2007**              | ** ** |
| ** **                                                                                                                                                                   | ** ** | **(In thousands)** | ** ** |
| **ASSETS**                                                                                                                                                                   |
| Cash and cash equivalents                                                                                                                                                    |       | $                       | 66,028     |                  | $          | 65,862 |   |
| Securities available for sale                                                                                                                                                |       | 363,946                 |       | 406,715               |       |
| Loans held for sale                                                                                                                                                          |       | 224                     |       | —                |       |
| Loans                                                                                                                                                                        |       | 1,000,156               |       | 908,497               |       |
| Less allowance for loan losses                                                                                                                                               |       | (10,320                 | )          | (9,096                | )          |
| Loans, net                                                                                                                                                                   |       | 989,836                 |       | 899,401               |       |
|                                                                                                                                                                         |       |                    |       |                  |       |
| Federal Home Loan Bank stock, at cost                                                                                                                                        |       | 10,870                  |       | 10,021                |       |
| Premises and equipment, net                                                                                                                                                  |       | 22,366                  |       | 19,706                |       |
| Bank-owned life insurance                                                                                                                                                    |       | 24,265                  |       | 23,665                |       |
| Other real estate owned                                                                                                                                                      |       | 2,728                   |       | 3,513                 |       |
| Accrued interest receivable                                                                                                                                                  |       | 6,665                   |       | 6,862                 |       |
| Deferred tax asset, net                                                                                                                                                      |       | 6,492                   |       | 5,908                 |       |
| Other assets                                                                                                                                                                 |       | 13,931                  |       | 6,650                 |       |
|                                                                                                                                                                         |       | $                       | 1,507,351  |                  | $          | 1,448,303 |   |
|                                                                                                                                                                         |       |                    |       |                  |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                |
| Deposits:                                                                                                                                                                    |       |                    |       |                  |       |
| Demand deposits                                                                                                                                                              |       | $                       | 128,663    |                  | $          | 124,040 |   |
| Savings and NOW accounts                                                                                                                                                     |       | 182,518                 |       | 171,353               |       |
| Money market accounts                                                                                                                                                        |       | 405,815                 |       | 337,847               |       |
| Term certificates over $100,000                                                                                                                                              |       | 200,874                 |       | 228,793               |       |
| Other term certificates                                                                                                                                                      |       | 125,403                 |       | 136,115               |       |
| Total deposits                                                                                                                                                               |       | 1,043,273               |       | 998,148               |       |
| Stock subscriptions                                                                                                                                                          |       | —                  |       | 162,859               |       |
| Short-term borrowings                                                                                                                                                        |       | 30,053                  |       | 23,800                |       |
| Long-term debt                                                                                                                                                               |       | 164,505                 |       | 145,042               |       |
| Subordinated debt                                                                                                                                                            |       | 29,965                  |       | 29,965                |       |
| Accrued expenses and other liabilities                                                                                                                                       |       | 10,325                  |       | 14,993                |       |
| Total liabilities                                                                                                                                                            |       | 1,278,121               |       | 1,374,807             |       |
| Stockholders’ 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 at June 30,  2008 and December 31, 2007, respectively |       | 178                     |       | —                |       |
| Additional paid-in capital                                                                                                                                                   |       | 174,420                 |       | —                |       |
| Retained earnings                                                                                                                                                            |       | 68,499                  |       | 71,213                |       |
| Accumulated other comprehensive income                                                                                                                                       |       | 110                     |       | 2,283                 |       |
| Unearned compensation - ESOP, 1,397,663  shares and 0 shares at June 30, 2008 and December 31, 2007,  respectively                                                 |       | (13,977                 | )          | —                |       |
| Total stockholders’ equity                                                                                                                                              |       | 229,230                 |       | 73,496                |       |
|                                                                                                                                                                         |       | $                       | 1,507,351  |                  | $          | 1,448,303 |   |

 

The accompanying notes are an integral partof these consolidated financial statements.

 

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**DANVERS BANCORP, INC.**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**(Unaudited)**

** **
| ** **                                                         | ** ** | **Three Months Ended**                                                   | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------------------------------------|------------|------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                         | ** ** | **June 30,**                                                                  | ** ** | **June 30,**              | ** ** |
| ** **                                                         | ** ** | **2008**                                                                           | ** ** | **2007**                       | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                                         | ** ** | **(Dollars in thousands, except per share amounts)** | ** ** |
| Interest and dividend income:                                      |       |                                                                               |       |                           |       |   |   |   |   |
| Interest and fees on loans                                         |       | $                                                                                  | 15,798     |                           | $          | 16,236 |   | $ | 31,418 |   | $ | 31,754 |   |
| Interest on debt securities:                                       |       |                                                                               |       |                           |       |   |   |   |   |
| Taxable                                                            |       | 4,888                                                                              |       | 3,184                          |       | 9,680 |   | 6,148 |   |
| Non-taxable                                                        |       | 194                                                                                |       | 138                            |       | 383 |   | 215 |   |
| Dividends on equity securities                                     |       | 102                                                                                |       | 175                            |       | 210 |   | 361 |   |
| Interest on cash equivalents                                       |       | 155                                                                                |       | 67                             |       | 683 |   | 258 |   |
| Total interest and dividend income                                 |       | 21,137                                                                             |       | 19,800                         |       | 42,374 |   | 38,736 |   |
|                                                               |       |                                                                               |       |                           |       |   |   |   |   |
| Interest expense:                                                  |       |                                                                               |       |                           |       |   |   |   |   |
| Interest on deposits:                                              |       |                                                                               |       |                           |       |   |   |   |   |
| Savings and NOW accounts                                           |       | 551                                                                                |       | 345                            |       | 1,211 |   | 605 |   |
| Money market accounts                                              |       | 2,695                                                                              |       | 3,347                          |       | 6,024 |   | 6,610 |   |
| Term certificates                                                  |       | 3,321                                                                              |       | 4,146                          |       | 7,594 |   | 8,498 |   |
| Interest on short-term borrowings                                  |       | 198                                                                                |       | 250                            |       | 319 |   | 419 |   |
| Interest on long-term debt and subordinated  debt                  |       | 2,283                                                                              |       | 2,354                          |       | 4,612 |   | 4,753 |   |
| Total interest expense                                             |       | 9,048                                                                              |       | 10,442                         |       | 19,760 |   | 20,885 |   |
| Net interest income                                                |       | 12,089                                                                             |       | 9,358                          |       | 22,614 |   | 17,851 |   |
| Provision for loan losses                                          |       | 1,075                                                                              |       | 150                            |       | 1,675 |   | 225 |   |
| Net interest income, after provision for  loan losses              |       | 11,014                                                                             |       | 9,208                          |       | 20,939 |   | 17,626 |   |
|                                                               |       |                                                                               |       |                           |       |   |   |   |   |
| Non-interest income:                                               |       |                                                                               |       |                           |       |   |   |   |   |
| Service charges on deposits                                        |       | 656                                                                                |       | 669                            |       | 1,286 |   | 1,215 |   |
| Loan servicing fees                                                |       | 52                                                                                 |       | 63                             |       | 111 |   | 129 |   |
| Gain on sales of loans                                             |       | 35                                                                                 |       | 82                             |       | 96 |   | 173 |   |
| Net gain (loss) on sales of securities                             |       | 141                                                                                |       | —                         |       | 913 |   | (16 | ) |
| Net increase in cash surrender value of  bank-owned life insurance |       | 241                                                                                |       | 188                            |       | 600 |   | 445 |   |
| Other operating income                                             |       | 510                                                                                |       | 389                            |       | 914 |   | 696 |   |
| Total non-interest income                                          |       | 1,635                                                                              |       | 1,391                          |       | 3,920 |   | 2,642 |   |
|                                                               |       |                                                                               |       |                           |       |   |   |   |   |
| Non-interest expenses:                                             |       |                                                                               |       |                           |       |   |   |   |   |
| Salaries and employee benefits                                     |       | 5,604                                                                              |       | 5,290                          |       | 15,640 |   | 10,733 |   |
| Occupancy                                                          |       | 1,185                                                                              |       | 1,084                          |       | 2,495 |   | 2,174 |   |
| Equipment                                                          |       | 794                                                                                |       | 710                            |       | 1,547 |   | 1,360 |   |
| Outside services                                                   |       | 269                                                                                |       | 140                            |       | 551 |   | 273 |   |
| Contribution to the Danversbank Charitable  Foundation             |       | —                                                                             |       | —                         |       | 6,850 |   | — |   |
| Other real estate owned expense                                    |       | 892                                                                                |       | —                         |       | 1,686 |   | — |   |
| Other operating expense                                            |       | 1,992                                                                              |       | 1,696                          |       | 3,624 |   | 3,360 |   |
| Total non-interest expenses                                        |       | 10,736                                                                             |       | 8,920                          |       | 32,393 |   | 17,900 |   |
| Income (loss) before income taxes                                  |       | 1,913                                                                              |       | 1,679                          |       | (7,534 | ) | 2,368 |   |
| Provision (benefit) for income taxes                               |       | 1,371                                                                              |       | 328                            |       | (4,820 | ) | 488 |   |
| Net income (loss)                                                  |       | $                                                                                  | 542        |                           | $          | 1,351 |   | $ | (2,714 | ) | $ | 1,880 |   |
|                                                               |       |                                                                               |       |                           |       |   |   |   |   |
| Weighted-average shares outstanding:                               |       |                                                                               |       |                           |       |   |   |   |   |
| Basic                                                              |       | 16,433,139                                                                         |       | N/A                            |       | N/A |   | N/A |   |
| Diluted                                                            |       | 16,433,139                                                                         |       | N/A                            |       | N/A |   | N/A |   |
|                                                               |       |                                                                               |       |                           |       |   |   |   |   |
| Earnings per share:                                                |       |                                                                               |       |                           |       |   |   |   |   |
| Basic                                                              |       | $                                                                                  | 0.03       |                           | N/A        |   | N/A |   | N/A |   |
| Diluted                                                            |       | $                                                                                  | 0.03       |                           | N/A        |   | N/A |   | N/A |   |

 

The accompanying notes are an integral partof these consolidated financial statements.

 

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**DANVERS BANCORP, INC.**

**CONSOLIDATEDSTATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY**

**(Unaudited)**

 
| ** **                                                                                                | ** ** | ** **                           | ** ** | ** **  | ** ** | ** **     | ** ** | ** **        | ** ** | **Accumulated**        | ** ** | ** **             | ** ** | ** ** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|-------------|------------|----------------|------------|-------------------|------------|------------------------|------------|------------------------|------------|------------|------------|
| ** **                                                                                                | ** ** | ** **                           | ** ** | ** **  | ** ** | **Additional** | ** ** | ** **        | ** ** | **Other**              | ** ** | ** **             | ** ** | **Total**  | ** ** |
| ** **                                                                                                | ** ** | **Common 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     | )          | $ | — |   | $ | 65,079 |   |
| Comprehensive  income:                                                                                    |       |                                 |       |        |       |           |       |              |       |                   |       |                   |       |       |       |
| Net income                                                                                                |       | —                               |       | —      |       | —         |       | 1,880             |       | —                 |       | —                 |       | 1,880      |       |
| Net unrealized  loss on securities available for sale, net of reclassification adjustment and  tax effect |       | —                               |       | —      |       | —         |       | —            |       | (1,056                 | )          | —                 |       | (1,056     | )          |
| Change in fair  value and amortization of derivative used for cash flow hedge, net of tax  effect         |       | —                               |       | —      |       | —         |       | —            |       | (31                    | )          | —                 |       | (31        | )          |
| Total  comprehensive income                                                                               |       |                                 |       |        |       |           |       |              |       |                   |       |                   |       | 793        |       |
| Balance at  June 30, 2007                                                                            |       | —                               |       | $           | —     |           | $          | —            |       | $                      | 68,739     |                   | $          | (2,867     | )          | $ | — |   | $ | 65,872 |   |
|                                                                                                      |       |                                 |       |        |       |           |       |              |       |                   |       |                   |       |       |       |
| Balance at  December 31, 2007                                                                        |       | —                               |       | $           | —     |           | $          | —            |       | $                      | 71,213     |                   | $          | 2,283      |       | $ | — |   | $ | 73,496 |   |
| Comprehensive  loss:                                                                                      |       |                                 |       |        |       |           |       |              |       |                   |       |                   |       |       |       |
| Net loss                                                                                                  |       | —                               |       | —      |       | —         |       | (2,714            | )          | —                 |       | —                 |       | (2,714     | )          |
| Net unrealized  loss on securities available for sale, net of reclassification adjustment and  tax effect |       | —                               |       | —      |       | —         |       | —            |       | (2,172                 | )          | —                 |       | (2,172     | )          |
| Change in fair  value and amortization of derivative used for cash flow hedge, net of tax  effect         |       | —                               |       | —      |       | —         |       | —            |       | (1                     | )          | —                 |       | (1         | )          |
| Total  comprehensive loss                                                                                 |       |                                 |       |        |       |           |       |              |       |                   |       |                   |       | (4,887     | )          |
| Issuance of  common stock for initial public offering, net of expenses of $3,850                          |       | 17,192,500                           |       | 172         |       | 167,902        |       | —            |       | —                 |       | —                 |       | 168,074    |       |
| Issuance of  common stock to the Danversbank Charitable Foundation                                        |       | 650,000                              |       | 6           |       | 6,494          |       | —            |       | —                 |       | —                 |       | 6,500      |       |
| Stock purchased  by ESOP                                                                                  |       | —                               |       | —      |       | —         |       | —            |       | —                 |       | (14,274                | )          | (14,274    | )          |
| Common stock held  by ESOP committed to be released (29,737 shares)                                       |       | —                               |       | —      |       | 24             |       | —            |       | —                 |       | 297                    |       | 321        |       |
| Balance at  June 30, 2008                                                                            |       | 17,842,500                           |       | $           | 178        |           | $          | 174,420           |       | $                      | 68,499     |                   | $          | 110        |       | $ | (13,977 | ) | $ | 229,230 |   |

 

The accompanying notes are an integral partof these consolidated financial statements.

 

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**DANVERS BANCORP, INC.**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(Unaudited)**

 
| ** **                                                                            | ** ** | **Six Months Ended** | ** ** |
|---------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                            | ** ** | **June 30,**              | ** ** |
| ** **                                                                            | ** ** | **2008**                       | ** ** | **2007** | ** ** |
| ** **                                                                            | ** ** | **(In thousands)**        | ** ** |
| Cash flows from operating activities:                                                 |       |                           |       |   |   |
| Net income (loss)                                                                     |       | $                              | (2,714     | ) | $ | 1,880 |   |
| Adjustments to reconcile net income (loss)  to net cash used in operating activities: |       |                           |       |   |   |
| Provision for loan losses                                                             |       | 1,675                          |       | 225 |   |
| Writedown of other real estate owned                                                  |       | 1,387                          |       | — |   |
| Depreciation and amortization                                                         |       | 1,809                          |       | 1,640 |   |
| Amortization of net deferred loan fees and  costs                                     |       | (271                           | )          | (434 | ) |
| Deferred tax provision (benefit)                                                      |       | 911                            |       | (380 | ) |
| Amortization of core deposit intangible and  servicing rights                         |       | 107                            |       | 116 |   |
| ESOP expense                                                                          |       | 321                            |       | — |   |
| Amortization (accretion) of securities, net                                           |       | 102                            |       | (18 | ) |
| Net (gain) loss on sales of securities                                                |       | (913                           | )          | 16 |   |
| Loans originated for sale                                                             |       | (5,835                         | )          | (8,725 | ) |
| Proceeds from sale of loans originated for  sale                                      |       | 5,611                          |       | 9,141 |   |
| Issuance of common stock to Danversbank  Charitable Foundation                        |       | 6,500                          |       | — |   |
| Changes in other assets and liabilities:                                              |       |                           |       |   |   |
| Accrued interest receivable                                                           |       | 197                            |       | 116 |   |
| Other assets and bank-owned life insurance                                            |       | (7,992                         | )          | (587 | ) |
| Accrued expenses and other liabilities                                                |       | (4,668                         | )          | (3,378 | ) |
| Net cash used in operating activities                                                 |       | (3,773                         | )          | (388 | ) |
| Cash flows from investing activities:                                                 |       |                           |       |   |   |
| Activity in available-for-sale securities:                                            |       |                           |       |   |   |
| Sales                                                                                 |       | 102,157                        |       | 85 |   |
| Maturities, prepayments and calls                                                     |       | 112,382                        |       | 98,225 |   |
| Purchases                                                                             |       | (174,623                       | )          | (134,711 | ) |
| Redemption (purchase) of Federal Home Loan  Bank stock                                |       | (849                           | )          | 921 |   |
| Funds advanced on other real estate owned                                             |       | (602                           | )          | — |   |
| Net loans (originations) payments                                                     |       | (91,839                        | )          | 20,626 |   |
| Purchase of premises and equipment                                                    |       | (4,469                         | )          | (3,256 | ) |
| Net cash used in investing activities                                                 |       | (57,843                        | )          | (18,110 | ) |
|                                                                                       |            |                                |            |  |  |  |  |

 

The accompanying notes are an integral partof these consolidated financial statements.

 

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**DANVERS BANCORP, INC.**

**CONSOLIDATED STATEMENTS OF CASH FLOWS(Concluded)**

**Unaudited)**

** **
| ** **                                          | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------------------|------------|--------------------------------|------------|
| ** **                                          | ** ** | **June 30,**              | ** ** |
| ** **                                          | ** ** | **2008**                       | ** ** | **2007** | ** ** |
| ** **                                          | ** ** | **(In thousands)**        | ** ** |
| Cash flows from financing activities:               |       |                           |       |   |   |
| Net increase (decrease) in:                         |       |                           |       |   |   |
| Term certificates                                   |       | $                              | (38,631    | ) | $ | (37,703 | ) |
| Other deposits                                      |       | 83,756                         |       | 56,307 |   |
| Short-term borrowings                               |       | 6,253                          |       | 2,149 |   |
| Stock subscriptions                                 |       | (162,859                       | )          | — |   |
| Activity in long-term debt:                         |       |                           |       |   |   |
| Proceeds from advances                              |       | 25,000                         |       | 5,200 |   |
| Payment of advances                                 |       | (5,537                         | )          | (23,089 | ) |
| Net proceeds from issuance of common stock          |       | 168,074                        |       | — |   |
| Acquisition of common stock by ESOP                 |       | (14,274                        | )          | — |   |
| Net cash provided by financing activities           |       | 61,782                         |       | 2,864 |   |
| Change in cash and cash equivalents                 |       | 166                            |       | (15,634 | ) |
| Cash and cash equivalents at beginning of  period   |       | 65,862                         |       | 45,120 |   |
| Cash and cash equivalents at end of period          |       | $                              | 66,028     |   | $ | 29,486 |   |
|                                                |       |                           |       |   |   |
| Supplementary disclosure of cash flow  information: |       |                           |       |   |   |
| Cash paid during the period for:                    |       |                           |       |   |   |
| Interest                                            |       | $                              | 20,084     |   | $ | 22,047 |   |
| Income taxes                                        |       | 1,151                          |       | 919 |   |

 

The accompanying notes are an integral partof these consolidated financial statements.

 

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**DANVERS BANCORP, INC.**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

 

***1.****              Basis of Presentation*

** **

The accompanying unauditedconsolidated interim financial statements include the accounts of DanversBancorp, Inc. (“the Company”) and its wholly-owned subsidiary Danversbank(the “Bank”).  These financial statementshave been prepared in accordance with accounting principles generally acceptedin the United States of America (“GAAP”) for interim financial information andwith the instructions to Form 10-Q and Rule 10-1 of RegulationS-X.  Accordingly, certain informationand note disclosures normally included in the Company’s annual financialstatements prepared in accordance with GAAP have been omitted.

 

Inthe opinion of management, all adjustments (consisting of only normal recurringadjustments) necessary for a fair presentation of the financial position,results of operations, and cash flows for the reporting interim periods havebeen included.  The consolidated balancesheet of the Company as of December 31, 2007 has been derived from theaudited consolidated balance sheet of the Company as of that date.  The accompanying consolidated financialstatements should be read in conjunction with the audited consolidated financialstatements and accompanying notes thereto included in the Company’s most recentSecurities and Exchange Commission Form 10-K filed by the Company for theyear ended December 31, 2007.  Theresults of operation for the six months ended June 30, 2008 and 2007 arenot necessarily indicative of the results to be obtained for a full year.

 

***2.******             ******Fair Valueof Assets and Liabilities***

 

Effective January 1, 2008, the Companyadopted Statement of Financial Accounting Standards (“SFAS”) No. 157, *Fair Value Measurements*, which provides aframework for measuring fair value under generally accepted accountingprinciples and the Company also adopted SFAS No. 159, *The Fair Value Option for Financial Assets andFinancial Liabilities, including an amendment of FASB Statement No. 115*,which allows an entity the irrevocable option to elect fair value for theinitial and subsequent measurement for certain financial assets and liabilitieson a contract-by-contract basis.  TheCompany did not elect fair value treatment for any financial assets or liabilitiesupon adoption.

 

In accordance with SFAS No. 157, theCompany groups its financial assets and financial liabilities measured at fairvalue in three levels, based on the markets in which the assets and liabilitiesare traded and the reliability of the assumptions used to determine fairvalue.  The three levels are defined asfollows:

 

Level 1 – Quoted prices in active markets foridentical assets or liabilities. Valuations are obtained from readily available pricing sources formarket transactions involving identical assets or liabilities.  Currently, the Company does not have anyitems classified as Level 1.

 

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Level 2 – Valuations based on observableinputs (other than Level 1 prices), such as quoted prices for similar assets orliabilities; quoted prices in markets that are not active; or other inputs thatare observable, either directly or indirectly, or can be corroborated byobservable market data for substantially the full term of the assets orliabilities.  The fair value of fixedmaturity investments included in the Level 2 category were based on marketvalues obtained from an independent pricing service that were evaluated usingpricing models that vary by asset class and incorporate available trade, bidand other market information and price quotes from well established independentbroker-dealers.  The independent pricingservice monitors market indicators, industry and economic events, and forbroker-quoted only securities, obtains quotes from market makers orbroker-dealers that it recognizes to be market participants.  The Level 2 categories include U.S. Governmentand government-sponsored enterprises, mortgage-backed securities, corporatebonds, foreign government bonds and municipal bonds.

 

Level 3 – Valuations based on inputs that areunobservable and significant to the overall fair value measurement of theassets or liabilities and involve management judgment.  Level 3 assets or liabilities includefinancial instruments whose value is determined using pricing models,discounted cash flow methodologies, or similar techniques, as well asinstruments for which the determination of fair value requires significantmanagement judgment or estimation.  TheLevel 3 categories include impaired consumer loans.

 

Assets measured at fair value on a recurringbasis as of June 30, 2008:

 
| ** **                       | ** ** | ** **              | ** ** | ** **       | ** ** | ** **       | ** ** | **Balance at** | ** ** |
|----------------------------------|------------|-------------------------|------------|------------------|------------|------------------|------------|---------------------|------------|
| ** **                       | ** ** | ** **              | ** ** | ** **       | ** ** | ** **       | ** ** | **June 30,**   | ** ** |
| ** **                       | ** ** | **Level 1**        | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **2008**            | ** ** |
| ** **                       | ** ** | **(In thousands)** | ** ** |
| ** **                       | ** ** | ** **              | ** ** | ** **       | ** ** | ** **       | ** ** | ** **          | ** ** |
| U.S. Government                  |       | $                       | —     |             | $          | 2,027            |       | $                   | —     |   | $ | 2,027 |   |
| Government-sponsored enterprises |       | —                  |       | 158,589          |       | —           |       | 158,589             |       |
| Mortgage-backed                  |       | —                  |       | 184,457          |       | —           |       | 184,457             |       |
| Municipal bonds                  |       | —                  |       | 18,624           |       | —           |       | 18,624              |       |
| Other bonds                      |       | —                  |       | 249              |       | —           |       | 249                 |       |
|                             |       | $                       | —     |             | $          | 363,946          |       | $                   | —     |   | $ | 363,946 |   |

 

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Also, the Company may be required, from time to time, to measurecertain other financial assets on a nonrecurring basis in accordance withGAAP.  These adjustments to fair valueusually result from application of lower-of-cost-or-market accounting orwrite-downs of individual assets.  Thefollowing table summarizes the fair value hierarchy used to determine eachadjustment and the carrying value of the related individual assets as of June 30,2008:

 
| ** **              | ** ** | ** **                  | ** ** | ** **       | ** ** | ** **       | ** ** | **Quarter Ended** | ** ** |
|-------------------------|------------|-----------------------------|------------|------------------|------------|------------------|------------|------------------------|------------|
| ** **              | ** ** | ** **                  | ** ** | ** **       | ** ** | ** **       | ** ** | **June 30,**      | ** ** |
| ** **              | ** ** | ** **                  | ** ** | ** **       | ** ** | ** **       | ** ** | **2008**               | ** ** |
| ** **              | ** ** | **June 30, 2008** | ** ** | **Total**        | ** ** |
| ** **              | ** ** | **Level 1**            | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Gains(Losses)**      | ** ** |
| ** **              | ** ** | **(In thousands)**     | ** ** |
| ** **              | ** ** | ** **                  | ** ** | ** **       | ** ** | ** **       | ** ** | ** **             | ** ** |
| Other real estate owned |       | $                           | —     |             | $          | 2,728            |       | $                      | —     |   | $ | (579 | ) |
| Loans                   |       | —                      |       | 7,998            |       | 22               |       | (75                    | )          |
|                    |       | $                           | —     |             | $          | 10,726           |       | $                      | 22         |   | $ | (654 | ) |

 

The amount of other realestate owned represents the carrying value and related write-downs based on wellestablished independent broker’sassessments of the current inventory of 1-4 family housing units in the market,costs to complete and the appraised value of the collateral.   The amount of loans in Level 2 representsthe carrying value and related write-downs of impaired loans for whichadjustments are based on appraised value of the collateral.  The amount of loans in Level 3 represents thecarrying value and related write-downs of impaired consumer loans.  As the individual balances are small, thecarrying amount of the loan has been reserved.

 

***3.******             ******EarningsPer Share***

 

Basic earnings per share (“EPS”)excludes dilution and is calculated by dividing net income available to commonstockholders by the weighted-average number of shares of common stockoutstanding during the period.  DilutedEPS is computed in a manner similar to that of basic EPS except that theweighted-average number of common shares outstanding is increased to includethe number of incremental common shares (computed using the treasury stockmethod) that would have been outstanding if all potentially dilutive commonstock equivalents (such as stock options and unvested restricted stock) wereissued during the period.

 

For the quarter ended June 30,2008, there were no potentially dilutive common stock equivalents.  Earnings per share are not applicable forperiods prior to June 30, 2008 as the Company did not issue stock until January 11,2008.  Unallocated common shares held bythe ESOP are shown as a reduction in stockholders’ equity and are not includedin the weighted-average number of common shares outstanding for either basic ordiluted earnings per share calculations.

 

***4.******             ******DefinedBenefit Pension Plan***

 

Employee benefits are provided to employees through participation inthe Savings Bank’s Employees Retirement Association’s Pension Plan (“SBERAPension Plan”).  The benefits areinterrelated with benefits provided under the 401(k) Plan and based onemployee’s years of service and annual compensation, as defined in the SBERAPension Plan.  Effective August 15,2003, the Company curtailed the benefits under the Plan, and no additionalemployees were eligible to participate in the Plan.  Effective June 30, 2007, the Companyvoted to terminate the Plan.

 

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The net pension expense forthe Plan included the following components:

 
| ** **                     | ** ** | **Three Months**        | ** ** | **Six Months**          | ** ** |
|--------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                     | ** ** | **Ended June 30,** | ** ** | **Ended June 30,** | ** ** |
| ** **                     | ** ** | **2008**                     | ** ** | **2007**                     | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                     | ** ** | **(In thousands)**      | ** ** | **(In thousands)**      | ** ** |
|                           |       |                         |       |                         |       |   |   |   |   |
| Interest cost                  |       | $                            | —     |                         | $          | 103 |   | $ | — |   | $ | 164 |   |
| Expected return on plan assets |       | —                       |       | (111                         | )          | — |   | (177 | ) |
| Actuarial Loss                 |       |                         |       | (87                          | )          |   |   | (10 | ) |
| Net pension (benefit) expense  |       | $                            | —     |                         | $          | (95 | ) | $ | — |   | $ | (23 | ) |

 

The Company previouslydisclosed in its consolidated financial statements for the year ended December 31,2007, estimated benefits of $253,000 are payable in 2008.

 

***5.******             ******DividendDeclared***

 

On July 28, 2008, theCompany declared quarterlycash dividend on its common stock of $.02 per share. The dividend will be paidon or after August 22, 2008 to shareholders of record as of August 8,2008.

 

***6.******             ******RecentAccounting Pronouncements***

 

In December 2007,the FASB issued SFAS No. 141 (revised), ‘‘Business Combinations’’, whichreplaces SFAS No. 141, and applies to all business entities, includingmutual entities that previously used the pooling-of-interests method ofaccounting for certain business combinations. This Statement makes significantamendments to other Statements and other authoritative guidance, and appliesprospectively to business combinations for which the acquisition date is on orafter 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 amendmentof ARB No. 51.’’ This Statement establishes accounting and reportingstandards for the noncontrolling interest in a subsidiary and for the deconsolidationof a subsidiary. It clarifies that a noncontrolling interest in a subsidiary isan ownership interest in the consolidated entity that should be reported asequity in the consolidated financial statements. This Statement is effectivefor fiscal years beginning on or after December 15, 2008 and the adoptionof this Statement is not expected to have a material impact on the Company’sconsolidated financial statements.

 

In March 2008, the FASB issued SFAS No. 161,“Disclosures about Derivative Instruments and Hedging Activities, an amendmentof SFAS No. 133”, which changes the disclosure requirements for derivativeinstruments and hedging activities.  ThisStatement is intended to enhance the current disclosure framework in SFAS No. 133.  The Statement requires that objectives forusing derivative instruments be disclosed in terms of underlying risk andaccounting designation.  This Statementis effective for the Company’s consolidated financial statements issued forfiscal years and interim periods beginning after November 15, 2008 and isnot expected to have a material impact on the Company’s consolidated financialstatements.

 

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**Item2.  Management’s Discussion and Analysisof Financial Condition and Results of Operations**

 

The following analysis discusses the changes in financial position andresults of operation of the Company, and should be read in conjunction withboth 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 beidentified by the use of such words as estimate, project, believe, intend,anticipate, plan, seek, expect and similar expressions. These forward-lookingstatements include statements of our goals, intentions and expectations,statements regarding our business plans and prospects and growth and operatingstrategies, statements regarding the asset quality of our loan and investmentportfolios; and estimates of our risks and future costs and benefits.  These forward-looking statements aresubject to significant risks, assumptions and uncertainties, including, amongother things, the following important factors that could affect the actualoutcome of future events significantly increased competition among depositoryand other financial institutions, inflation and changes in the interest rate environmentthat reduce our margins or reduce the fair value of financial instruments,general economic conditions, either nationally or in our market areas, that areworse than expected, adverse changes in the securities markets, legislative orregulatory changes that adversely affect our business, our ability to enter newmarkets successfully and take advantage of growth opportunities, changes inconsumer spending, borrowing and savings habits, changes in accounting policiesand practices, as may be adopted by the bank regulatory agencies and theFinancial Accounting Standards Board, and changes in our organization,compensation and benefit plans.  Becauseof these and other uncertainties, our actual future results may be materiallydifferent from the results indicated by these forward-looking statements.

 

***Critical AccountingPolicies***

 

The discussion and analysis of the Company’s financial condition andresults of operations is based upon the Company’s unaudited consolidatedfinancial statements, which have been prepared in conformity with accountingprinciples generally accepted in the United States of America for interimfinancial information and with the instructions for Form 10-Q.  In preparing the consolidatedfinancial statements in conformity with accounting principles generallyaccepted in the United States of America, management is required to makeestimates and assumptions that affect the reported amounts of assets andliabilities as of the date of the balance sheet and income and expenses during thereported period. Actual results could differ from those estimates.  Material estimates that are particularlysusceptible to change in the near term relate to the determination of theallowance for loan losses, the valuation of other real estate owned and thevaluation of the deferred tax assets.

 

***Comparison of FinancialCondition at June 30, 2008 and December 31, 2007***

*** ***

*TotalAssets.*******Total assets increased by $59.0 million, or 4.1%, to $1.51 billion at June 30,2008 from $1.45 billion at December 31, 2007. This increase was primarilydue to an increase in loans, which was partially offset by a decrease insecurities available for sale. The overall increase in the Company’s assets wasfunded primarily with an increase in deposits and to a lesser extent a combinationof short and long-term borrowings.

 

*Cash andCash Equivalents.*******Cash and cash equivalents increased slightlyby $166,000, or 0.3%, to $66.0 million at June 30, 2008 from $65.9 millionat December 31, 2007.

 

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*Securities.*******The securities portfolio aggregated $363.9million at June 30, 2008, a decrease of $42.8 million, or 10.5%, from$406.7 million at December 31, 2007. As a result of the excellent creditopportunities that continue to present themselves to the Company, we sold somesecurities from the investment portfolio and used the proceeds to fund our loangrowth. Within the portfolio, obligations of government-sponsored enterprisesdecreased by $62.2 million and mortgage-backed securities increased by $19.4million, as the Company also replaced some fixed-rate agency securities withadjustable-rate mortgage-backed securities.

 

At June 30, 2008 and December 31, 2007, our mortgage-backedsecurities (“MBS”) totaled 50.7% and 40.6%, respectively, of our investmentportfolio and consisted of high quality rated pass-through securities that aredirectly insured or guaranteed by Freddie Mac, Fannie Mae or Ginnie Mae.  The MBS portfolio is primarily backed by 1-4family pools of mortgages that have loans with interest rates that are within aset range and have varying maturities. None of our MBS are privately issued or have sub-prime residentialmortgages or home equity loans as part of their underlying loan pools.  We target instruments with five to twelveyear weighted average lives, with expected average life extensions up to amaximum of fifteen years in a rising rate environment.  In an effort to protect against a risinginterest rate environment, we increased our concentration of adjustable-rateMBS in the investment portfolio from 15.4% at December 31, 2007 to 32.7%at June 30, 2008.  All our MBS wererated AAA at June 30, 2008 and December 31, 2007.   Although unforeseeable changes in marketconditions may affect future ratings, management does not expect to downgradeany ratings in our current MBS portfolio.

 

The amortized cost and fair value ofsecurities available for sale, with gross unrealized gains and losses follows:

 
| ** **                       | ** ** | **Amortized   Cost** | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair Value** | ** ** |
|----------------------------------|------------|---------------------------|------------|------------------------------|------------|-------------------------------|------------|---------------------|------------|
| ** **                       | ** ** | **(In thousands)**   | ** ** |
| ***June 30, 2008:***        |       |                      |       |                         |       |                          |       |                |       |
| U.S. Government                  |       | $                         | 2,016      |                         | $          | 13                            |       | $                   | (2         | ) | $ | 2,027 |   |
| Government-sponsored enterprises |       | 157,343                   |       | 1,581                        |       | (335                          | )          | 158,589             |       |
| Mortgage-backed                  |       | 184,987                   |       | 846                          |       | (1,376                        | )          | 184,457             |       |
| Municipal bonds                  |       | 19,187                    |       | 16                           |       | (579                          | )          | 18,624              |       |
| Other bonds                      |       | 250                       |       | —                       |       | (1                            | )          | 249                 |       |
|                             |       | $                         | 363,783    |                         | $          | 2,456                         |       | $                   | (2,293     | ) | $ | 363,946 |   |
|                             |       |                      |       |                         |       |                          |       |                |       |
| ***December 31, 2007:***    |       |                      |       |                         |       |                          |       |                |       |
| U.S. Government                  |       | $                         | 2,000      |                         | $          | 21                            |       | $                   | —     |   | $ | 2,021 |   |
| Government-sponsored enterprises |       | 217,929                   |       | 3,010                        |       | (109                          | )          | 220,830             |       |
| Mortgage-backed                  |       | 164,062                   |       | 1,240                        |       | (211                          | )          | 165,091             |       |
| Municipal bonds                  |       | 18,569                    |       | 64                           |       | (191                          | )          | 18,442              |       |
| Other bonds                      |       | 328                       |       | 4                            |       | (1                            | )          | 331                 |       |
|                             |       | $                         | 402,888    |                         | $          | 4,339                         |       | $                   | (512       | ) | $ | 406,715 |   |

 

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Information pertaining to securities with gross unrealized lossesaggregated by investment category and length of time that individual securitieshave been in a continuous loss position follows:

 
| ** **                       | ** ** | **Less Than Twelve   Months** | ** ** | **Over Twelve Months** | ** ** |
|----------------------------------|------------|----------------------------------------------|------------|----------------------------------|------------|
| ** **                       | ** ** | **Gross  Unrealized  Losses**                | ** ** | **Fair  Value**                  | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair  Value** | ** ** |
| ** **                       | ** ** | **(In thousands)**                      | ** ** |
| ***June 30, 2008:***        |       |                                         |       |                             |       |   |   |   |   |
| U.S Government                   |       | $                                            | 2          |                             | $          | 1,013 |   | $ | — |   | $ | — |   |
| Government-sponsored enterprises |       | 335                                          |       | 48,706                           |       | — |   | — |   |
| Mortgage-backed                  |       | 1,349                                        |       | 99,469                           |       | 27 |   | 1,036 |   |
| Municipal bonds                  |       | 143                                          |       | 7,336                            |       | 436 |   | 9,106 |   |
| Other bonds                      |       | —                                       |       | —                           |       | 1 |   | 99 |   |
|                             |       | $                                            | 1,829      |                             | $          | 156,524 |   | $ | 464 |   | $ | 10,241 |   |
|                             |       |                                         |       |                             |       |   |   |   |   |
| ***December 31, 2007:***    |       |                                         |       |                             |       |   |   |   |   |
| Government-sponsored enterprises |       | $                                            | 1          |                             | $          | 256 |   | $ | 108 |   | $ | 21,392 |   |
| Mortgage-backed                  |       | 118                                          |       | 35,879                           |       | 93 |   | 13,042 |   |
| Municipal bonds                  |       | 160                                          |       | 10,378                           |       | 31 |   | 2,303 |   |
| Other bonds                      |       | —                                       |       | —                           |       | 1 |   | 174 |   |
|                             |       | $                                            | 279        |                             | $          | 46,513 |   | $ | 233 |   | $ | 36,911 |   |

 

Management evaluatessecurities for other-than-temporary impairment on at least a quarterly basis,and more frequently when economic or market concerns warrant more frequentevaluation. Consideration is given to (1) the length of time and theextent to which the fair value has remained less than cost, (2) thefinancial condition and near-term prospects of the issuer, and (3) theintent and ability of the Company to retain its investment in the issue for aperiod of time sufficient to allow for any anticipated recovery in fairvalue.  At June 30, 2008 and December 31,2007, the Company determined that the unrealized losses from debt securitiesare temporary in nature.

 

*Net Loans.*******Net loans as of June 30, 2008 were$989.8 million, an increase of $90.4 million, or 10.1%, from net loan balancesof $899.4 million as of December 31, 2007. The Company continued toexperience significant growth in commercial and industrial (C&I) loanbalances. For the first half of 2008, a decrease in the Company’s permanentcommercial real estate loan portfolio of $7.1 million was offset by increasesin C&I, construction and residential loans of $77.6 million, $13.6 millionand $8.2 million, respectively.

 

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The following table setsforth the composition of the loan portfolio at the dates indicated:

 
| ** **                | ** ** | **June 30, 2008**          | ** ** | **December 31, 2007** | ** ** |
|---------------------------|------------|--------------------------------------|------------|---------------------------------|------------|
| ** **                | ** ** | **Amount**                           | ** ** | **Percent**                     | ** ** | **Amount** | ** ** | **Percent** | ** ** |
| ** **                | ** ** | **(Dollars in thousands)** | ** ** |
| Real estate mortgages:    |       |                                 |       |                            |       |   |   |   |   |
| Construction              |       | $                                    | 122,189    |                            | 12.2       | % | $ | 108,638 |   | 11.9 | % |
| Residential               |       | 188,716                              |       | 18.9                            |       | 180,511 |   | 19.9 |   |
| Commercial                |       | 227,367                              |       | 22.7                            |       | 234,425 |   | 25.8 |   |
| Home equity               |       | 36,233                               |       | 3.6                             |       | 36,679 |   | 4.0 |   |
| C&I                   |       | 417,299                              |       | 41.7                            |       | 339,669 |   | 37.4 |   |
| Consumer                  |       | 9,378                                |       | 0.9                             |       | 9,564 |   | 1.0 |   |
| Total loans               |       | 1,001,182                            |       | 100.0                           | %          | 909,486 |   | 100.0 | % |
| Allowance for loan losses |       | (10,320                              | )          |                            |       | (9,096 | ) |   |   |
| Net deferred loan fees    |       | (1,026                               | )          |                            |       | (989 | ) |   |   |
| Loans, net                |       | $                                    | 989,836    |                            |       |   | $ | 899,401 |   |   |   |

 

The following table sets forth the amountsand categories of our non-performing assets at the dates indicated:

 
| ** **                                  | ** ** | **June 30,**                    | ** ** | **December 31,** | ** ** |
|---------------------------------------------|------------|--------------------------------------|------------|-----------------------|------------|
| ** **                                  | ** ** | **2008**                             | ** ** | **2007**              | ** ** |
| ** **                                  | ** ** | **(Dollars in thousands)** | ** ** |
| Nonaccrual loans:                           |       |                                 |       |                  |       |
| Real estate mortgages:                      |       |                                 |       |                  |       |
| Construction                                |       | $                                    | 3,561      |                  | $          | 2,618 |   |
| Residential                                 |       | 2,547                                |       | 1,225                 |       |
| Commercial                                  |       | 910                                  |       | —                |       |
| Home equity                                 |       | 385                                  |       | 64                    |       |
| Total real estate mortgages                 |       | 7,403                                |       | 3,907                 |       |
| C&I                                     |       | 595                                  |       | 451                   |       |
| Consumer                                    |       | 22                                   |       | 29                    |       |
| Total                                       |       | $                                    | 8,020      |                  | $          | 4,387 |   |
|                                        |       |                                 |       |                  |       |
| Total non-performing loans                  |       | $                                    | 8,020      |                  | $          | 4,387 |   |
| Other real estate owned                     |       | 2,728                                |       | 3,513                 |       |
| Total non-performing assets                 |       | $                                    | 10,748     |                  | $          | 7,900 |   |
| Total non-performing loans to total loans   |       | 0.80                                 | %          | 0.48                  | %          |
| Total non-performing loans to total assets  |       | 0.53                                 | %          | 0.30                  | %          |
| Total non-performing assets to total assets |       | 0.71                                 | %          | 0.55                  | %          |

 

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The followingtable sets forth the activity in the allowance for loan losses for the periodsindicated:

 
| ** **                                                                    | ** ** | **At or For the Three**        | ** ** | **At or For the Six**          | ** ** |
|-------------------------------------------------------------------------------|------------|--------------------------------|------------|--------------------------------|------------|
| ** **                                                                    | ** ** | **Months Ended June 30,** | ** ** | **Months Ended June 30,** | ** ** |
| ** **                                                                    | ** ** | **2008**                       | ** ** | **2007**                       | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                                                    | ** ** | **(Dollars in thousands)**     | ** ** | **(Dollars in thousands)**     | ** ** |
|                                                                          |       |                           |       |                           |       |   |   |   |   |
| Allowance balance at beginning of period                                      |       | $                              | 9,443      |                           | $          | 10,453 |   | $ | 9,096 |   | $ | 10,412 |   |
| Provision for loan losses                                                     |       | 1,075                          |       | 150                            |       | 1,675 |   | 225 |   |
| Charge-offs:                                                                  |       |                           |       |                           |       |   |   |   |   |
| Real estate mortgages:                                                        |       |                           |       |                           |       |   |   |   |   |
| Construction                                                                  |       | —                         |       | —                         |       | — |   | — |   |
| Residential                                                                   |       | —                         |       | —                         |       | 85 |   | 5 |   |
| Commercial                                                                    |       | —                         |       | —                         |       | — |   | — |   |
| Home equity                                                                   |       | 11                             |       | —                         |       | 14 |   | 1 |   |
| Total real estate mortgages                                                   |       | 11                             |       | —                         |       | 99 |   | 6 |   |
| C&I                                                                       |       | 115                            |       | 243                            |       | 271 |   | 299 |   |
| Consumer                                                                      |       | 74                             |       | 17                             |       | 98 |   | 20 |   |
| Total charge-offs                                                             |       | 200                            |       | 260                            |       | 468 |   | 325 |   |
| Recoveries:                                                                   |       |                           |       |                           |       |   |   |   |   |
| Real estate mortgages:                                                        |       |                           |       |                           |       |   |   |   |   |
| Construction                                                                  |       | —                         |       | —                         |       | — |   | — |   |
| Residential                                                                   |       | —                         |       | —                         |       | 8 |   | — |   |
| Commercial                                                                    |       | —                         |       | —                         |       | — |   | — |   |
| Home equity                                                                   |       | —                         |       | 1                              |       | — |   | 1 |   |
| Total real estate mortgages                                                   |       | —                         |       | 1                              |       | 8 |   | 1 |   |
| C&I                                                                       |       | —                         |       | —                         |       | — |   | 18 |   |
| Consumer                                                                      |       | 2                              |       | 15                             |       | 9 |   | 28 |   |
| Total recoveries                                                              |       | 2                              |       | 16                             |       | 17 |   | 47 |   |
| Net charge-offs                                                               |       | 198                            |       | 244                            |       | 451 |   | 278 |   |
| Allowance balance at end of period                                            |       | $                              | 10,320     |                           | $          | 10,359 |   | $ | 10,320 |   | $ | 10,359 |   |
|                                                                          |       |                           |       |                           |       |   |   |   |   |
| Total loans outstanding                                                       |       | $                              | 1,001,182  |                           | $          | 862,004 |   | $ | 1,001,182 |   | $ | 862,004 |   |
| Average loans outstanding                                                     |       | $                              | 983,556    |                           | $          | 872,691 |   | $ | 955,683 |   | $ | 862,472 |   |
|                                                                          |       |                           |       |                           |       |   |   |   |   |
| Allowance for loan losses as a percent of total  loans outstanding            |       | 1.03                           | %          | 1.20                           | %          | 1.03 | % | 1.20 | % |
| Net loans charged off as a percent of average  loans outstanding (annualized) |       | 0.08                           | %          | 0.11                           | %          | 0.09 | % | 0.06 | % |
| Allowance for loan losses to non- performing  loans                           |       | 128.68                         | %          | 197.80                         | %          | 128.68 | % | 197.80 | % |

 

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*Deposits.*****TheCompany’s deposit growth remained strong through the first six months of2008.  Total deposits increased by $45.1million to $1,043.3 million at June 30, 2008, an increase of 4.5% from abalance of $998.1 million at December 31, 2007. The largest increase wasexperienced in the money market category, which increased by $68.0 million, andto a lesser extent in demand deposit accounts and savings and NOW accounts,which increased by $4.6 million and $11.2 million, respectively. The increasesin these three deposit categories were partially offset by a reduction in thetotal term certificates of $38.6 million. The Company’s deposit activities havebenefited from the current rate environment as some of the more aggressive localproduct promotions and pricing initiatives have subsided. The Company’s RewardsChecking (a retail checking product) and Snap Deposit (our commercial remotedeposit capture initiative) promotions continue to gain acceptance as well.

 

The followingtable sets forth the Company’s deposit accounts at the dates indicated:

 
| ** **                      | ** ** | **June 30, 2008**     | ** ** | **December 31, 2007** | ** ** |
|---------------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                      | ** ** | **Amount**                 | ** ** | **Percent**                | ** ** | **Amount** | ** ** | **Percent** | ** ** |
| ** **                      | ** ** | **(Dollars in thousands)** | ** ** |
| ** **                      | ** ** | ** **                 | ** ** | ** **                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Demand deposits                 |       | $                          | 128,663    |                       | 12.3       | % | $ | 124,040 |   | 12.4 | % |
| Savings and NOW accounts        |       | 182,518                    |       | 17.5                       |       | 171,353 |   | 17.2 |   |
| Money market accounts           |       | 405,815                    |       | 38.9                       |       | 337,847 |   | 33.8 |   |
| Total non-certificate accounts  |       | 716,996                    |       | 68.7                       |       | 633,240 |   | 63.4 |   |
| Term certificates over $100,000 |       | 200,874                    |       | 19.3                       |       | 228,793 |   | 22.9 |   |
| Other term certificates         |       | 125,403                    |       | 12.0                       |       | 136,115 |   | 13.7 |   |
| Total certificate accounts      |       | 326,277                    |       | 31.3                       |       | 364,908 |   | 36.6 |   |
| Total deposits                  |       | $                          | 1,043,273  |                       | 100.0      | % | $ | 998,148 |   | 100.0 | % |

 

*BorrowedFunds.*******The Company relies on borrowings from the Federal Home Loan Bank ofBoston, or FHLBB, as an additional funding source as liquidity needs arise. Thebalance of these borrowings will fluctuate depending on the Company’s abilityto attract deposits, coupled with the amount of loan demand in the market andother investment opportunities. Funds borrowed from the FHLBB increased by$19.5 million to $164.5 million at June 30, 2008, a 13.4% increase from abalance of $145.0 million at December 31, 2007. The Company chose to takeadvantage of the lower rate environment and fund some of the loan originationswith attractively priced FHLBB advances.

 

The Company’s borrowingsinclude securities sold under agreements to repurchase, which are contracts forthe sale of securities owned by the Company with an agreement to repurchasethose securities at an agreed upon price and date. The Company uses repurchaseagreements as an alternative funding tool and as a means of offering commercialdeposit customers a commercial sweep checking product. As of June 30,2008, the Company had $30.1 million outstanding in overnight repurchaseagreements, an increase of $6.3 million or 26.3% from $23.8 million December 31,2007.

 

*TotalStockholders’ Equity.*******Total stockholders’ equity increased by$155.7 million to $229.2 million at June 30, 2008 from a balance of $73.5million as of December 31, 2007. This increase was due to the completionof our stock conversion that resulted in an addition to capital of $174.5million. Stockholders’ equity was reduced by $13.9 million in unallocatedcommon shares held by the Employee Stock Ownership Plan, a $2.2 milliondecrease in the net unrealized gain on available for sale securities and a netloss for the first six months of $2.7 million.

 

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***Table of Contents***

*** ***

***Comparison of Operating Results for the Threeand Six Months Ended June 30, 2008 and 2007***

*** ***

*Net Income(loss).*******The Companyrecorded net income for thethree months ended June 30, 2008 of $542,000, a decrease of $809,000 fromnet income of $1.4 million for the three months ended June 30, 2007. Thedecrease was due to higher provision for loan losses and other real estateowned expense. The Company reported a net loss for the six months ended June 30,2008 of $2.7 million, a decrease of $4.6 million from net income of $1.9million for the same period in 2007.  Thenet loss was primarily due to two extraordinary and non-recurring items; a $6.9million pretax charge related to the establishment of the DanversbankCharitable Foundation and a $3.7 million pretax charge related to theacceleration 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 theCompany’s stock conversion.  In addition,higher than anticipated provision for loan losses and foreclosure expensecontributed to the net loss for the same period in 2008.

 

*NetInterest Income.*******Net interest income for the three monthsended June 30, 2008 increased to $12.1 million from $9.4 million for thethree months ended June 30, 2007. The increase was directly related to anincrease in volume.  Averageinterest-earning assets increased $255.7 million between the two periods.  This increase of $2.7 million or 29.2% in netinterest income was the combination of a $3.2 million increase due to volumeand a $427,000 decrease due to rate.  TheCompany’s net interest margin was 3.38% for the three months ended June 30,2008 compared to 3.18% for the three months ended June 30, 2007.  The improved margins were related to thecapital infusion as a result of the conversion.

 

Net interest income for thesix months ended June 30, 2008 increased to $22.6 million from $17.9million for the six months ended June 30, 2007. Average interest-earningassets increased $252.1 million between the two periods.  This increase of $4.8 million in net interestincome resulted from a $6.2 million increase due to volume and a $1.4 milliondecrease due to the rates on our interest-earning assets and interest-bearingliabilities.  Our net interest margin was3.19% for the six months ended June 30, 2008 compared to 3.08% for the sixmonths ended June 30, 2007.  Whilethe Company continues to see opportunities to lower its overall funding costs,the margin improvement for the first six months is attributable to theaforementioned capital infusion.

 

*Interestand Dividend Income.*******Interest income increased $1.3 million, or6.8%, to $21.1 million for the three months ended June 30, 2008 from $19.8million for the three months ended June 30, 2007. The increase wasprimarily due to a higher average balance of our interest-earning assets,offset by a decrease in yield.  Inparticular, average loans increased by $110.9 million between the two periods.  The Company also experienced an increase inthe average balances of securities of $128.9 million and cash equivalents of$16.0 million. The average yield on loans decreased from 7.46% for the threemonths ended June 30, 2007 to 6.44% for the same period in 2008, and theoverall yield on interest-earning assets decreased from 6.73% to 5.90% for the2007 and 2008 periods, respectively.  Theoverall decline in asset yields is directly related to the downward trend ofthe current interest rate environment.

 

Interest income increased$3.6 million, or 9.4 %, to $42.4 million for the six months ended June 30,2008 from $38.7 million for the six months ended June 30, 2007.  The increase was primarily due to a higherbalance of average interest-earning assets. Loans, securities and cashequivalents increased on average by $93.2 million,  $123.4 million and $35.4 million,respectively between the two periods. The average yield on loans decreased from 7.42% for the six months endedJune 30, 2007 to 6.59% for the same period in 2008 and the overall yieldon interest-earning assets decreased from 6.69% to 5.97% for the 2007 and 2008periods, respectively.  Despite asignificant increase in the Company’s Commercial and Industrial lendingactivities and the transition of a segment of the securities portfolio intoloan originations, the overall decline in asset yields is the byproduct of thedeclining trend of the current interest rate environment.

 

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*InterestExpense.*******Interest expense for the three months ended June 30, 2008decreased by $1.4 million, or 13.3%, to $9.0 million compared to interestexpense of $10.4 million for the three months ended June 30, 2007.  Average interest-bearing liabilitiesincreased by $114.8 million between the two periods and resulted in a $1.0million increase in interest expense. A decrease of 87 basis points, or 21.9%,in the average cost of the Company’s interest-bearing liabilities resulted in adecrease in interest expense of $2.4 million. The overall rates oninterest-bearing liabilities decreased from 3.97% to 3.10% for the 2007 and2008 periods, respectively, and the average cost of deposits decreased from3.76% for the three months ended June 30, 2007 to 2.82% for the sameperiod in 2008. The decline in deposit and other interest-bearing liabilitycosts relates to the overall decline in interest rates during the period.

 

Interest expense for the sixmonths ended June 30, 2008 decreased by $1.1 million, or 5.4%, to $19.8million compared to interest expense of $20.9 million for the six months ended June 30,2007. Average interest-bearing liabilities increased by $104.7 million betweenthe two periods and this resulted in a $1.9 million increase in interestexpense. A decrease of 59 basis points, or 14.8%, in the average cost of theCompany’s interest-bearing liabilities resulted in a decrease in interestexpense of $3.0 million. The overall rates on interest-bearing liabilitiesdecreased from 4.02% to 3.43% for the 2007 and 2008 periods, respectively, andthe average cost of deposits decreased from 3.81% for the six months ended June 30,2007 to 3.18% for the same period in 2008. The overall decrease in deposit andinterest-bearing liability costs is a byproduct of the current rateenvironment.

 

*Provisionfor Loan Losses.*******The Company records a provision for loanlosses as a charge to its earnings when necessary in order to maintain theallowance for loan losses at a level sufficient to absorb losses inherent inthe loan portfolio. The Company recorded provision expense of $1.1 million and$150,000 during the three months ended June 30, 2008 and 2007,respectively. The Company recorded $1.7 million and $225,000 in provisionexpense during the six months ended June 30, 2008 and 2007, respectively.Provisions in all periods are reflective of portfolio growth, changes to theloan portfolio composition, an evaluation of the quality of the loan portfolio,and net charge offs, the difference between loan charge-offs net of recoverieson loans previously charged off. In particular, the Company’s loan portfolioincreased by more than $90 million during the first six months of 2008.  Net charge-offs were $198,000 and $244,000for the three months ended June 30, 2008 and 2007, respectively and$451,000 and $279,000 for the six months ended June 30, 2008 and 2007,respectively.  At June 30, 2008, theallowance for loan losses totaled $10.3 million, or 1.03% of the loanportfolio.

 

*Non-interestIncome.*******Non-interest income for the three months ended June 30, 2008increased by $244,000 or 17.5% to $1.6 million, compared to $1.4 million forthe three months ended June 30, 2007. This increase was primarily theresult of gains on the sale of securities totaling $141,000 and an increase of$105,000 in loan swap fee income.

 

Non-interest income for thesix months ended June 30, 2008 increased by $1.3 million or 48.4% to $3.9million, compared to $2.6 million for the six months ended June 30, 2007.This increase was attributable to gains on sales of securities, income on ourbank-owned life insurance holdings, or BOLI and loan swap fee income of$929,000, $155,000 and $105,000, respectively. During the first six months, management chose to sell some fixed-rateinvestment securities and replace them with adjustable-rate investments in aneffort to protect the portfolio against a rising interest rate environment.While the Company has experienced some success at increasing its non-interestrevenues to varying degrees and across a variety of categories, developingreliable and stable sources of non-interest income to complement the Company’sprimary lines of business continues to be an area of focus.

 

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*Non-interestExpense.*******Non-interest expense increased $1.8 million, or 20.4%, for the secondquarter of 2008 when compared to the same period of 2007. The most significantfactor contributing to this increase was an increase in other real estate ownedexpense of $892,000.  The largestcomponent of this line item was a $579,000 write-down of a residentialsubdivision being held in Other Real Estate Owned. The Company also experiencedincreases in salaries and benefits, outside services and occupancy of $314,000,$129,000 and $101,000, during the period. The increases are commensurate with the overall growth of the franchise.

 

Non-interest expenseincreased by $14.5 million between the six months ended June 30, 2008 and2007. The increase was primarily due to two extraordinary and non-recurringitems; a $6.9 million pretax charge related to the establishment of theDanversbank Charitable Foundation and a $3.7 million pretax charge related tothe acceleration of the Bank’s phantom stock plan. There was also a largeincrease in other real estate owned expense of $1.7 million, which relates tothe aforementioned housing subdivision that the Company foreclosed on in 2007.The charges taken against this project relate to write-downs in the carryingvalue of the property and the estimated costs to complete the project and arebased on well-established independent market assessments of the current inventory of 1-4 family housingunits in the Company’s primary lending area.

 

*IncomeTaxes.*******The Company recorded an income tax expense of $1.4 million for thethree months ended June 30, 2008; an increase of $1.0 million whencompared to a $328,000 expense for the three months ended June 30, 2007.The effective tax rate for the three months period ended June 30, 2008 was71.7 % compared to 19.5% for the same period in 2007.

 

The Company recorded anincome tax benefit of $4.8 million for the six months ended June 30, 2008;a decrease of $5.3 million, compared to a $488,000 expense for the six monthsended June 30, 2007. The effective tax rate for the six months periodended June 30, 2008 was 64.0% compared to 20.6% for the same period in2007.

 

The increase for the threeand six month periods relates to the cumulative tax effect of the extraordinarycharges that the Company recorded during the first quarter of 2008,specifically, relating to permanent tax benefits as a percentage of bookincome/loss.

 

OnJuly 3, 2008, the state of Massachusetts enacted a law that includedreducing the tax rate on net income applicable to financial institutions.  The rate drops from the current rate of 10.5%to 10.0% for tax years beginning on January 1, 2010, 9.5% for tax yearsbeginning on or after January 1, 2011, and to 9.0% for tax years beginningon or after January 1, 2012 and thereafter.  The Company continues to analyze the impactof this law and, as a result of revaluing its net deferred tax asset, weestimate the impact to be additional tax expense of approximately$200,000.  This charge is expected to berecognized during the third quarter of 2008.

 

The followingtables set forth average balance sheets, average yields and costs, and certainother information for the periods indicated. All average balances are dailyaverage balances. The yields set forth below include the effect of deferredfees, and discounts and premiums that are amortized or accreted to interestincome or expense. Tax-exempt income and yields have not been adjusted to atax-equivalent basis.  The Company doesnot accrue interest on loans on non-accrual status; however, the balance ofthese loans is included in the total average balance, which has the effect oflowering average loan yields.

 

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** **
| ** **                                                              | ** ** | **Three Months Ended**            | ** ** |
|-------------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                              | ** ** | **June 30, 2008**            | ** ** | **June 30, 2007** | ** ** |
| ** **                                                              | ** ** | **Average  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                                       |       | $                                 | 19,933     |   | $ | 155 |   | 3.11 | % | $ | 3,910 |   | $ | 67 |   | 6.85 | % |
| Debt securities: (2)                                                    |       |                              |       |   |   |   |   |   |   |   |   |   |   |
| U.S. Government                                                         |       | 2,083                             |       | 22 |   | 4.22 |   | 2,941 |   | 34 |   | 4.62 |   |
| Government-sponsored enterprises                                        |       | 174,698                           |       | 2,112 |   | 4.84 |   | 190,416 |   | 2,094 |   | 4.40 |   |
| Mortgage-backed                                                         |       | 221,759                           |       | 2,750 |   | 4.96 |   | 82,478 |   | 1,054 |   | 5.11 |   |
| Municipal bonds                                                         |       | 19,068                            |       | 194 |   | 4.07 |   | 13,755 |   | 138 |   | 4.01 |   |
| Other                                                                   |       | 307                               |       | 4 |   | 5.21 |   | 354 |   | 2 |   | 2.26 |   |
| Equity securities                                                       |       | 11,366                            |       | 102 |   | 3.59 |   | 10,476 |   | 175 |   | 6.68 |   |
| Real estate mortgages (3)                                               |       | 571,348                           |       | 9,035 |   | 6.33 |   | 562,309 |   | 10,094 |   | 7.18 |   |
| C&I loans (3)                                                       |       | 351,522                           |       | 5,952 |   | 6.77 |   | 257,354 |   | 5,417 |   | 8.42 |   |
| IRBs (3)                                                                |       | 51,247                            |       | 622 |   | 4.85 |   | 42,855 |   | 525 |   | 4.90 |   |
| Consumer loans (3)                                                      |       | 9,439                             |       | 189 |   | 8.01 |   | 10,173 |   | 200 |   | 7.86 |   |
| Total interest-earning assets                                           |       | 1,432,770                         |       | 21,137 |   | 5.90 |   | 1,177,021 |   | 19,800 |   | 6.73 |   |
| Allowance for loan losses                                               |       | (9,720                            | )          |   |   |   |   | (10,445 | ) |   |   |   |   |
| Total earning assets less allowance for  loan losses                    |       | 1,423,050                         |       |   |   |   |   | 1,166,576 |   |   |   |   |   |
| Non-interest-earning assets                                             |       | 101,510                           |       |   |   |   |   | 78,374 |   |   |   |   |   |
| Total assets                                                            |       | $                                 | 1,524,560  |   |   |   |   |   | $ | 1,244,950 |   |   |   |   |   |
|                                                                    |       |                              |       |   |   |   |   |   |   |   |   |   |   |
| **Interest-bearing liabilities:**                                       | ** ** | ** **                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Deposits:                                                               |       |                              |       |   |   |   |   |   |   |   |   |   |   |
| Savings and NOW accounts                                                |       | $                                 | 182,872    |   | 551 |   | 1.21 |   | $ | 166,423 |   | 345 |   | 0.83 |   |
| Money market accounts                                                   |       | 418,972                           |       | 2,695 |   | 2.57 |   | 325,156 |   | 3,347 |   | 4.12 |   |
| Term certificates (4)                                                   |       | 330,434                           |       | 3,321 |   | 4.02 |   | 343,353 |   | 4,146 |   | 4.83 |   |
| Total deposits                                                          |       | 932,278                           |       | 6,567 |   | 2.82 |   | 834,932 |   | 7,838 |   | 3.76 |   |
| Borrowed funds:                                                         |       |                              |       |   |   |   |   |   |   |   |   |   |   |
| Short-term borrowings                                                   |       | 45,449                            |       | 198 |   | 1.74 |   | 39,954 |   | 250 |   | 2.50 |   |
| Long-term debt                                                          |       | 159,628                           |       | 1,745 |   | 4.37 |   | 147,698 |   | 1,692 |   | 4.58 |   |
| Subordinated debt                                                       |       | 29,965                            |       | 538 |   | 7.18 |   | 29,965 |   | 662 |   | 8.84 |   |
| Total interest-bearing liabilities                                      |       | 1,167,320                         |       | 9,048 |   | 3.10 |   | 1,052,549 |   | 10,442 |   | 3.97 |   |
| Non-interest-bearing deposits                                           |       | 125,416                           |       |   |   |   |   | 117,449 |   |   |   |   |   |
| Other non-interest-bearing liabilities                                  |       | 393                               |       |   |   |   |   | 8,545 |   |   |   |   |   |
| Total non-interest-bearing liabilities                                  |       | 125,809                           |       |   |   |   |   | 125,994 |   |   |   |   |   |
| Total liabilities                                                       |       | 1,293,129                         |       |   |   |   |   | 1,178,543 |   |   |   |   |   |
| Stockholders’ equity                                               |       | 231,431                           |       |   |   |   |   | 66,407 |   |   |   |   |   |
| Total liabilities and stockholders’ equity                         |       | $                                 | 1,524,560  |   |   |   |   |   | $ | 1,244,950 |   |   |   |   |   |
|                                                                    |       |                              |       |   |   |   |   |   |   |   |   |   |   |
| Net interest income                                                     |       |                              |       | $ | 12,089 |   |   |   |   |   | $ | 9,358 |   |   |   |
| Net interest rate spread (5)                                            |       |                              |       |   |   | 2.80 | % |   |   |   |   | 2.76 | % |
| Net interest-earning assets (6)                                         |       | $                                 | 265,450    |   |   |   |   |   | $ | 124,472 |   |   |   |   |   |
| Net interest margin (7)                                                 |       |                              |       |   |   | 3.38 | % |   |   |   |   | 3.18 | % |
| Ratio of interest-earning assets to total  interest-bearing liabilities |       | 1.23                              | x          |   |   |   |   | 1.12 | x |   |   |   |   |

 

----

(1)          Yields are annualized.

(2)          Average balances arepresented at average amortized cost.

(3)          Average loans includenon-accrual loans and are net of average deferred loan fees/costs.

(4)          Term certificatesinclude brokered and non-brokered CDs.

(5)          Net interest rate spreadrepresents the difference between the yield on interest-earning assets and thecost of interest-bearing liabilities at the period indicated.

(6)          Net interest-earningassets represent total interest-earning assets less total interest-bearingliabilities.

(7)          Net interest marginrepresents net interest income divided by average total interest-earningassets.

 

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| ** **                                                              | ** ** | **Six Months Ended**              | ** ** |
|-------------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                              | ** ** | **June 30, 2008**            | ** ** | **June 30, 2007** | ** ** |
| ** **                                                              | ** ** | **Average  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                                       |       | $                                 | 44,142     |   | $ | 683 |   | 3.09 | % | $ | 8,721 |   | $ | 258 |   | 5.97 | % |
| Debt securities: (2)                                                    |       |                              |       |   |   |   |   |   |   |   |   |   |   |
| U.S. Government                                                         |       | 2,042                             |       | 45 |   | 4.41 |   | 2,685 |   | 62 |   | 4.66 |   |
| Government-sponsored enterprises                                        |       | 178,128                           |       | 4,307 |   | 4.84 |   | 204,734 |   | 4,287 |   | 4.22 |   |
| Mortgage-backed                                                         |       | 209,039                           |       | 5,319 |   | 5.09 |   | 66,881 |   | 1,788 |   | 5.39 |   |
| Municipal bonds                                                         |       | 18,831                            |       | 383 |   | 4.07 |   | 10,756 |   | 215 |   | 4.03 |   |
| Other                                                                   |       | 317                               |       | 9 |   | 5.68 |   | 390 |   | 11 |   | 5.69 |   |
| Equity securities                                                       |       | 11,029                            |       | 210 |   | 3.81 |   | 10,492 |   | 361 |   | 6.94 |   |
| Real estate mortgages (3)                                               |       | 565,553                           |       | 18,098 |   | 6.40 |   | 551,383 |   | 19,747 |   | 7.22 |   |
| C&I loans (3)                                                       |       | 331,587                           |       | 11,734 |   | 7.08 |   | 259,794 |   | 10,617 |   | 8.24 |   |
| IRBs (3)                                                                |       | 49,145                            |       | 1,205 |   | 4.90 |   | 41,120 |   | 997 |   | 4.89 |   |
| Consumer loans (3)                                                      |       | 9,398                             |       | 381 |   | 8.11 |   | 10,175 |   | 393 |   | 7.79 |   |
| Total interest-earning assets                                           |       | 1,419,211                         |       | 42,374 |   | 5.97 |   | 1,167,131 |   | 38,736 |   | 6.69 |   |
| Allowance for loan losses                                               |       | (9,478                            | )          |   |   |   |   | (10,383 | ) |   |   |   |   |
| Total earning assets less allowance for  loan losses                    |       | 1,409,733                         |       |   |   |   |   | 1,156,748 |   |   |   |   |   |
| Non-interest-earning assets                                             |       | 97,477                            |       |   |   |   |   | 76,178 |   |   |   |   |   |
| Total assets                                                            |       | $                                 | 1,507,210  |   |   |   |   |   | $ | 1,232,926 |   |   |   |   |   |
|                                                                    |       |                              |       |   |   |   |   |   |   |   |   |   |   |
| **Interest-bearing liabilities:**                                       |       |                              |       |   |   |   |   |   |   |   |   |   |   |
| Deposits:                                                               |       |                              |       |   |   |   |   |   |   |   |   |   |   |
| Savings and NOW accounts                                                |       | $                                 | 179,542    |   | 1,211 |   | 1.35 |   | $ | 161,281 |   | 605 |   | 0.76 |   |
| Money market accounts                                                   |       | 402,571                           |       | 6,024 |   | 2.99 |   | 319,515 |   | 6,610 |   | 4.17 |   |
| Term certificates (4)                                                   |       | 350,738                           |       | 7,594 |   | 4.33 |   | 350,183 |   | 8,498 |   | 4.89 |   |
| Total deposits                                                          |       | 932,851                           |       | 14,829 |   | 3.18 |   | 830,979 |   | 15,713 |   | 3.81 |   |
| Borrowed funds:                                                         |       |                              |       |   |   |   |   |   |   |   |   |   |   |
| Short-term borrowings                                                   |       | 36,163                            |       | 319 |   | 1.76 |   | 36,242 |   | 419 |   | 2.33 |   |
| Long-term debt                                                          |       | 152,534                           |       | 3,434 |   | 4.50 |   | 149,620 |   | 3,429 |   | 4.62 |   |
| Subordinated debt                                                       |       | 29,965                            |       | 1,178 |   | 7.86 |   | 29,965 |   | 1,324 |   | 8.91 |   |
| Total interest-bearing liabilities                                      |       | 1,151,513                         |       | 19,760 |   | 3.43 |   | 1,046,806 |   | 20,885 |   | 4.02 |   |
| Non-interest-bearing deposits                                           |       | 145,999                           |       |   |   |   |   | 112,412 |   |   |   |   |   |
| Other non-interest-bearing liabilities                                  |       | 3,260                             |       |   |   |   |   | 9,023 |   |   |   |   |   |
| Total non-interest-bearing liabilities                                  |       | 149,259                           |       |   |   |   |   | 121,435 |   |   |   |   |   |
| Total liabilities                                                       |       | 1,300,772                         |       |   |   |   |   | 1,168,241 |   |   |   |   |   |
| Stockholders’ equity                                               |       | 206,438                           |       |   |   |   |   | 64,685 |   |   |   |   |   |
| Total liabilities and stockholders’ equity                         |       | $                                 | 1,507,210  |   |   |   |   |   | $ | 1,232,926 |   |   |   |   |   |
|                                                                    |       |                              |       |   |   |   |   |   |   |   |   |   |   |
| Net interest income                                                     |       |                              |       | $ | 22,614 |   |   |   |   |   | $ | 17,851 |   |   |   |
| Net interest rate spread (5)                                            |       |                              |       |   |   | 2.54 | % |   |   |   |   | 2.67 | % |
| Net interest-earning assets (6)                                         |       | $                                 | 267,698    |   |   |   |   |   | $ | 120,325 |   |   |   |   |   |
| Net interest margin (7)                                                 |       |                              |       |   |   | 3.19 | % |   |   |   |   | 3.08 | % |
| Ratio of interest-earning assets to total  interest-bearing liabilities |       | 1.23                              | x          |   |   |   |   | 1.11 | x |   |   |   |   |

 

----

(1)          Yields are annualized.

(2)          Average balances arepresented at average amortized cost.

(3)          Average loans includenon-accrual loans and are net of average deferred loan fees/costs.

(4)          Term certificatesinclude brokered and non-brokered CDs.

(5)          Net interest rate spreadrepresents the difference between the yield on interest-earning assets and thecost of interest-bearing liabilities at the period indicated.

(6)          Net interest-earningassets represent total interest-earning assets less total interest-bearingliabilities.

(7)          Net interest marginrepresents net interest income divided by average total interest-earningassets.

 

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The following tables presentthe dollar amount of changes in interest income and interest expense for themajor categories of the Company’s interest-earning assets and interest-bearingliabilities.  Information is provided foreach category of interest-earning assets and interest-bearing liabilities withrespect to (i) changes attributable to changes in volume (i.e., changes inaverage balances multiplied by the prior-period average rate) and (ii) changesattributable to rate (i.e., changes in average rate multiplied by prior-periodaverage balances).

 
| ** **                                 | ** ** | **Three Months Ended June 30,** | ** ** |
|--------------------------------------------|------------|--------------------------------------|------------|
| ** **                                 | ** ** | **2008 vs. 2007**                    | ** ** |
| ** **                                 | ** ** | **Increase (Decrease)**              | ** ** | **Total** | ** ** |
| ** **                                 | ** ** | **Due to**                           | ** ** | **Increase** | ** ** |
| ** **                                 | ** ** | **Volume**                           | ** ** | **Rate** | ** ** | **(Decrease)** | ** ** |
| ** **                                 | ** ** | **(In  thousands)**                  | ** ** |
| **Interest-earning assets:**               | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest-earning cash equivalents          |       | $                                    | 275        |   | $ | (187 | ) | $ | 88 |   |
| Debt securities:(1)                        |       |                                 |       |   |   |   |   |
| U.S. Government                            |       | (10                                  | )          | (2 | ) | (12 | ) |
| Government-sponsored enterprises           |       | (173                                 | )          | 191 |   | 18 |   |
| Mortgage-backed                            |       | 1,780                                |       | (84 | ) | 1,696 |   |
| Municipal bonds                            |       | 53                                   |       | 3 |   | 56 |   |
| Other                                      |       | —                               |       | 2 |   | 2 |   |
| Equity securities                          |       | 15                                   |       | (88 | ) | (73 | ) |
| Real estate mortgages (2)                  |       | 162                                  |       | (1,221 | ) | (1,059 | ) |
| C&I loans (2)                          |       | 1,982                                |       | (1,447 | ) | 535 |   |
| IRBs (2)                                   |       | 103                                  |       | (6 | ) | 97 |   |
| Consumer loans (2)                         |       | (14                                  | )          | 3 |   | (11 | ) |
| Total interest-earning assets              |       | 4,173                                |       | (2,836 | ) | 1,337 |   |
|                                       |       |                                 |       |   |   |   |   |
| **Interest-bearing liabilities:**          | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Deposits:                                  |       |                                 |       |   |   |   |   |
| Savings and NOW accounts                   |       | 34                                   |       | 172 |   | 206 |   |
| Money market accounts                      |       | 966                                  |       | (1,618 | ) | (652 | ) |
| Term certificates (3)                      |       | (156                                 | )          | (669 | ) | (825 | ) |
| Total Deposits                             |       | 844                                  |       | (2,115 | ) | (1,271 | ) |
| Borrowed funds:                            |       |                                 |       |   |   |   |   |
| Short-term borrowings                      |       | 34                                   |       | (86 | ) | (52 | ) |
| Long-term debt                             |       | 137                                  |       | (84 | ) | 53 |   |
| Subordinated debt                          |       | —                               |       | (124 | ) | (124 | ) |
| Total interest-bearing liabilities         |       | 1,015                                |       | (2,409 | ) | (1,394 | ) |
|                                       |       |                                 |       |   |   |   |   |
| Increase (decrease) in net interest income |       | $                                    | 3,158      |   | $ | (427 | ) | $ | 2,731 |   |

 

----

(1)          Average balances are presented at average amortized cost.

(2)          Average loans include non-accrual loans and are net of average deferredloan fees/costs.

(3)          Term certificates include brokered and non-brokered certificates ofdeposit.

 

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***Table of Contents***

 
| ** **                                 | ** ** | **Six Months Ended June 30,** | ** ** |
|--------------------------------------------|------------|------------------------------------|------------|
| ** **                                 | ** ** | **2008 vs. 2007**                  | ** ** |
| ** **                                 | ** ** | **Increase (Decrease)**            | ** ** | **Total** | ** ** |
| ** **                                 | ** ** | **Due to**                         | ** ** | **Increase** | ** ** |
| ** **                                 | ** ** | **Volume**                         | ** ** | **Rate** | ** ** | **(Decrease)** | ** ** |
| ** **                                 | ** ** | **(In  thousands)**                | ** ** |
| **Interest-earning assets:**               | ** ** | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest-earning cash equivalents          |       | $                                  | 1,048      |   | $ | (623 | ) | $ | 425 |   |
| Debt securities:(1)                        |       |                               |       |   |   |   |   |
| U.S. Government                            |       | (15                                | )          | (2 | ) | (17 | ) |
| Government-sponsored enterprises           |       | (557                               | )          | 577 |   | 20 |   |
| Mortgage-backed                            |       | 3,800                              |       | (269 | ) | 3,531 |   |
| Municipal bonds                            |       | 161                                |       | 7 |   | 168 |   |
| Other                                      |       | (2                                 | )          | — |   | (2 | ) |
| Equity securities                          |       | 18                                 |       | (169 | ) | (151 | ) |
| Real estate mortgages (2)                  |       | 507                                |       | (2,156 | ) | (1,649 | ) |
| C&I loans (2)                          |       | 2,934                              |       | (1,817 | ) | 1,117 |   |
| IRBs (2)                                   |       | 195                                |       | 13 |   | 208 |   |
| Consumer loans (2)                         |       | (30                                | )          | 18 |   | (12 | ) |
| Total interest-earning assets              |       | 8,059                              |       | (4,421 | ) | 3,638 |   |
|                                       |       |                               |       |   |   |   |   |
| **Interest-bearing liabilities:**          | ** ** | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Deposits:                                  |       |                               |       |   |   |   |   |
| Savings and NOW accounts                   |       | 69                                 |       | 537 |   | 606 |   |
| Money market accounts                      |       | 1,718                              |       | (2,304 | ) | (586 | ) |
| Term certificates (3)                      |       | 13                                 |       | (917 | ) | (904 | ) |
| Total Deposits                             |       | 1,800                              |       | (2,684 | ) | (884 | ) |
| Borrowed funds:                            |       |                               |       |   |   |   |   |
| Short-term borrowings                      |       | (1                                 | )          | (99 | ) | (100 | ) |
| Long-term debt                             |       | 67                                 |       | (62 | ) | 5 |   |
| Subordinated debt                          |       | —                             |       | (146 | ) | (146 | ) |
| Total interest-bearing liabilities         |       | 1,866                              |       | (2,991 | ) | (1,125 | ) |
|                                       |       |                               |       |   |   |   |   |
| Increase (decrease) in net interest income |       | $                                  | 6,193      |   | $ | (1,430 | ) | $ | 4,763 |   |

*** ***

----

(1)          Average balances are presented at average amortized cost.

(2)          Average loans include non-accrual loans and are net of average deferredloan fees/costs.

(3)          Term certificates include brokered and non-brokered certificates ofdeposit.

 

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***Table of Contents***

 

***Liquidity andCapital Resources***

*** ***

The Company’s primarysources of funds are from deposits, amortization and repayment of loans andmortgage-backed securities, the sale or maturity of securities, advances fromthe FHLBB, repurchase agreements and cash flows generated by operations.  While maturities and scheduled amortizationof loans and securities are predictable sources of funds, deposit flows andmortgage loan prepayments can be greatly influenced by interest rate trends,economic conditions and competition.  TheCompany maintains excess cash and short-term interest bearing assets withoriginal maturities of less than 90 days that provide additional liquidity.

 

The Company uses itsliquidity to fund existing and future loan commitments, to fund maturingcertificates of deposit and advances from the FHLBB, to fund other depositwithdrawals, to meet operating expenses and to invest in other interest-bearingassets.

 

*ContractualObligations**. *The following table presents informationindicating various contractual obligations and commitments of the Company as ofthe date indicated and their respective maturity dates:

 
| ** **                      | ** ** | **June 30, 2008**     | ** ** |
|---------------------------------|------------|----------------------------|------------|
| ** **                      | ** ** | ** **                 | ** ** | **More than** | ** ** | **More than** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                      | ** ** | ** **                 | ** ** | **One Year** | ** ** | **Three Years** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                      | ** ** | **One Year**               | ** ** | **Through** | ** ** | **Through** | ** ** | **Over** | ** ** | ** ** | ** ** |
| ** **                      | ** ** | **or Less**                | ** ** | **Three Years** | ** ** | **Five Years** | ** ** | **Five Years** | ** ** | **Total** | ** ** |
| ** **                      | ** ** | **(Dollars in thousands)** | ** ** |
| Federal Home Loan Bank advances |       | $                          | 726        |   | $ | 37,970 |   | $ | 25,000 |   | $ | 100,809 |   | $ | 164,505 |   |
| Repurchase agreements (1)       |       | 30,053                     |       | — |   | — |   | — |   | 30,053 |   |
| Subordinated debt               |       | —                     |       | — |   | — |   | 29,965 |   | 29,965 |   |
| Operating leases                |       | 1,976                      |       | 3,910 |   | 3,036 |   | 8,288 |   | 17,210 |   |
| Total contractual obligations   |       | $                          | 32,755     |   | $ | 41,880 |   | $ | 28,036 |   | $ | 139,062 |   | $ | 241,733 |   |

 

----

(1)          All repurchase agreements mature on a dailybasis and are secured by obligations of government-sponsored enterprises.

 

*LoanCommitments**. *Loan commitments to extend credit areagreements to lend to a customer as long as there is no violation of anycondition established in the contract and generally have fixed expiration datesor other termination clauses.  Thefollowing table presents information indicating various loan commitments of theCompany as of the date indicated and their respective maturity dates:

 
| ** **                                 | ** ** | **June 30, 2008**     | ** ** |
|--------------------------------------------|------------|----------------------------|------------|
| ** **                                 | ** ** | ** **                 | ** ** | **More than** | ** ** | **More than** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                 | ** ** | ** **                 | ** ** | **One Year** | ** ** | **Three Years** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                 | ** ** | **One Year**               | ** ** | **Through** | ** ** | **Through** | ** ** | **Over** | ** ** | ** ** | ** ** |
| ** **                                 | ** ** | **or Less**                | ** ** | **Three Years** | ** ** | **Five Years** | ** ** | **Five Years** | ** ** | **Total** | ** ** |
| ** **                                 | ** ** | **(Dollars in thousands)** | ** ** |
| Commitments to grant loans                 |       | $                          | 14,456     |   | $ | — |   | $ | — |   | $ | — |   | $ | 14,456 |   |
| Unfunded Commitments under lines of credit |       | 237,064                    |       | — |   | — |   | — |   | 237,064 |   |
| Unadvanced funds on construction loans     |       | 13,209                     |       | 16,627 |   | 12 |   | 7,969 |   | 37,817 |   |
| Commercial and stanby letters of credit    |       | 5,937                      |       | 183 |   | 40 |   | 4,998 |   | 11,158 |   |
| Total contractual obligations              |       | $                          | 270,666    |   | $ | 16,810 |   | $ | 52 |   | $ | 12,967 |   | $ | 300,495 |   |

 

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*RegulatoryCapital Requirements.*  At June 30, 2008, the mostrecent notification from the FDIC categorized the Bank as well capitalizedunder the regulatory framework for prompt corrective action.  To be well capitalized, the Bank mustmaintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratiosof 10.0%, 6.0% and 5.0%, respectively. Prompt corrective action provisions are not applicable to bank holdingcompanies.  At June 30, 2008, theBank’s total risk-based, Tier 1 risk-based and Tier 1 leverage ratios were 16.59%,15.64% and 11.38%, respectively.  At June 30,2008, the Company’s total risk-based, Tier 1 risk-based and Tier 1 leverageratios were 24.99%, 24.10% and 17.22%, respectively.

 

**Item3.  Quantitative and QualitativeDisclosures About Market Risk**

 

Exposure to market interestrate risk is managed by the Company through periodic evaluations of the currentinterest rate risk inherent in its rate-sensitive assets and liabilities,primarily deposits, borrowings, loans and securities, coupled with determinationsof the level of risk considered appropriate given the Company’s capital andliquidity requirements, business strategy and performance objectives. Throughsuch management, the Company seeks to manage the vulnerability of its netinterest income to changes in interest rates.

 

The Asset/LiabilityCommittee, or ALCO, chaired by the Chief Financial Officer and comprised ofseveral members of senior management and selected members of the board ofdirectors, is responsible for managing interest rate risk. On a quarterlybasis, this committee reviews with the full board of directors its analysis ofour exposure to interest rate risk, the effect subsequent changes in interestrates could have on the Company’s future net interest income, key interest raterisk strategies and other activities, and the effect of those strategies on theCompany’s operating results. This committee is also actively involved in theCompany’s planning and budgeting process as well as in determining pricingstrategies for deposits and loans. Management is aided in these efforts by theuse of an independent third party that convenes with management on a quarterlybasis for a complete asset/liability analysis and review.

 

The primary method that ALCOuses for measuring and evaluating interest rate risk is an income simulationanalysis. This analysis considers the maturity and interest rate repricingcharacteristics of all of our interest-earning assets and interest-bearingliabilities, as well as the relative sensitivities of these balance sheetcomponents over a range of interest rate scenarios. Interest rate scenariostested generally include parallel and flattening/steepening rate ramps over aone-year period, and static, or flat, rates. The simulation analysis is used tomeasure the exposure of net interest income to changes in interest rates over aspecified time horizon, usually a two-year period. The simulations also showthe net interest income volatility for up to five years.

 

For June 30, 2008, we used a simulation model to project changesfor three rising and three falling rate scenarios. This analysis calculates thedifference between net interest income forecasts for these scenarios comparedto the net interest income forecast using a flat rate scenario. In each ofthese instances, Federal Funds is used as the driving rate. The following tablesets forth, as of June 30, 2008, the estimated changes in the Company’snet interest income that would result.

 

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| ** **            | ** ** | **Net Portfolio Value(2)** | ** ** | **Net Interest Income**           | ** ** |
|-----------------------|------------|----------------------------|------------|-----------------------------------|------------|
| ** **            | ** ** | ** **                 | ** ** | ** **                        | ** ** | ** ** | ** ** | ** ** | ** ** | **Increase (Decrease)** | ** ** |
| **Change in**         | ** ** | ** **                 | ** ** | **Estimated**                     | ** ** | **in Estimated** | ** ** |
| **Interest Rates**    | ** ** | **Estimated**              | ** ** | **Estimated Increase (Decrease)** | ** ** | **Net Interest** | ** ** | **Net Interest Income** | ** ** |
| **(basis points)(1)** | ** ** | **NPV**                    | ** ** | **Amount**                        | ** ** | **Percent** | ** ** | **Income** | ** ** | **Amount** | ** ** | **Percent** | ** ** |
| ** **            | ** ** | **(Dollars in thousands)** | ** ** |
|                  |       |                       |       |                              |       |   |   |   |   |   |   |   |   |
| +300bp                |       | $                          | 193,961    |                              | $          | (50,034 | ) | -20.5 | % | $ | 44,033 |   | $ | (5,232 | ) | -10.6 | % |
| +200bp                |       | 213,748                    |       | (30,247                           | )          | -12.4 | % | 47,157 |   | (2,108 | ) | -4.3 | % |
| +100bp                |       | 231,044                    |       | (12,951                           | )          | -5.3 | % | 48,815 |   | (450 | ) | -0.9 | % |
| 0bp                   |       | 243,995                    |       | —                            |       | 0.0 | % | 49,265 |   | — |   | 0.0 | % |
| -100bp                |       | 246,655                    |       | 2,660                             |       | 1.1 | % | 49,068 |   | (197 | ) | -0.4 | % |
|                       |            |                            |            |                                   |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

(1)            Assumes an instantaneous uniform change in interestrates at all maturities.

(2)            NPV is the discounted present value ofexpected cash flows from interest-earning assets, interest-bearing liabilitiesand off-balance sheet contracts.

 

The income simulation modelincludes various assumptions regarding the re-pricing relationships for each ofour products. Many of our assets are floating rate loans tied to the Primelending rate, which are assumed to re-price immediately and to the same extentas the change in market rates, according to their contracted index. Conversely,we have various transaction account products that would not increase ordecrease in the same increments or at the same speed. Money market accounts, asan example, are assumed to increase sooner and in larger increments thansavings and NOW accounts.  Theseassumptions are based on our prior experience with the changes in rates paid onthese 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 thatparticular balance sheet item will reprice when interest rates change. Thefinal step is to simulate the timing effect of assets and liabilities with amonth-by-month simulation to estimate the change in interest income and expenseover the next 12 months.

 

This analysis indicates theimpact of changes in net interest income for the given set of rate changes andassumptions. It does not incorporate any balance sheet growth, and it assumesthat the structure and composition of the balance sheet will remain comparableto the structure at the start of the simulation. It does not account for otherfactors that might impact this analysis, including changes by management tomitigate the impact of interest rate changes or secondary impacts such aschanges to our credit risk profile as interest rates change. Furthermore, loanprepayment rate estimates and spread relationships change regularly. Interestrate changes create changes in actual loan prepayment rates that differ fromthe market estimates incorporated in this analysis. Changes that varysignificantly from the assumptions may have significant effects on our netinterest income.

 

For the rising and fallinginterest rate scenarios, the base market interest rate forecast was increased onan instantaneous and sustained basis, by 100, 200 and 300 basis points anddecreased by 100 basis points.   At June 30,2008, our net interest income exposure related to these hypothetical changes inmarket interest rates was within our established guidelines.  There are inherent shortcomings to incomesimulations, given the number and variety of assumptions that must be made inperforming the analysis. The assumptions relied upon in making thesecalculations of interest rate sensitivity include the level of market interestrates, the shape of the yield curve, the degree to which certain assets andliabilities with similar attributes react to changes in market interest rates,and the degree to which non-maturity deposits, such as checking accounts, reactto changes in market rates. Although the analysis shown above provides anindication of the Company’s sensitivity to interest rate changes at a point intime, these estimates are not intended to and do not provide a precise forecastof the effect of changes in market interest rates on the Company’s net interestincome and may differ from actual results.

 

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**Item 4. Controls and Procedures**

 

See Item 4T below.

 

**Item 4T. Controls and Procedures**

 

***(a) Evaluationof Disclosure Controls and Procedures***

 

The Company’s President and Chief ExecutiveOfficer, its Executive Vice President and Chief Operating Officer, its SeniorVice President and Chief Financial Officer, and other members of its seniormanagement team have evaluated the effectiveness of the Company’s disclosurecontrols and procedures as defined under the Securities and Exchange Act of1934 Rules 13a-15(e), as amended, (the “Exchange Act”).  Based upon their evaluation they haveconcluded that the Company’s disclosure controls and procedures, as for the endof the period covered by this report, were adequate and effective to providereasonable assurance that the information required to be disclosed by theCompany, including its consolidated subsidiaries, in reports that are filed orsubmitted under the Exchange Act, is recorded, processed, summarized, andreported, within the time periods specified in the SEC’s rules and forms.

 

The effectiveness of a system of disclosurecontrols and procedures is subject to various inherent limitations, includingcost limitations, judgments used in decision making, assumptions about thelikelihood of future events, the soundness of our systems, the possibility ofhuman error, and the risk of fraud. Moreover, projections of any evaluation of effectiveness to futureperiods are subject to the risk that controls may become inadequate because ofchanges in condition and the risk that the degree of compliance with policiesor procedures may deteriorate over time. Due to such inherent limitations, there can be no assurance that anysystem of disclosure controls and procedures will be successful in preventingall errors or fraud, or in making all material information known in a timelymanner to the appropriate levels of management.

 

***(b) Changes inInternal Controls Over Financial Reporting***

 

There were no changes in our internal controlover financial reporting during the quarter ended June 30, 2008 that havematerially affected, or that are reasonably likely to materially affect, theCompany’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 otherthan routine legal proceedings occurring in the ordinary course of business.Management believes that such proceedings are, in the aggregate, immaterial toour financial condition and results of operations.

 

**Item 1A. Risk Factors**

** **

For information regarding the Company’s risk factors, see “Risk Factors”,at pages 36-41 of the Company’s 2007 Annual Report on Form 10-K.  There has been no material change in theCompany’s risk factors during the three and six months ended June 30,2008.

 

**Item 2.    UnregisteredSales of Equity Securities and Use of Proceeds**

 

Not applicable.

 

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**Item 3. Defaults Upon Senior Securities**

** **

Not applicable.

 

**Item 4.    Submissionof Matters to a Vote of Security Holders**

** **

Not applicable.

 

**Item 5. Other Information**

** **

Not applicable.

 

29

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**Item 6.    Exhibits**

 
| **Exhibit No.** | ** ** | **Description**                                                                                                      |
|----------------------|------------|----------------------------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                                 |
| 2.1                  |       | 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(1)+                                    |
| 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 Officer                                             |
| 31.2                 |       | Section 302  Certification of Executive Vice President and Chief Operating Officer                              |
| 31.3                 |       | Section 302  Certification of Senior Vice President and Chief Financial Officer                                 |
| 32.1                 |       | Section 906  Certification of President and Chief Executive Officer                                             |
| 32.2                 |       | Section 906  Certification of Executive Vice President and Chief Operating Officer                              |
| 32.3                 |       | Section 906  Certification of Senior Vice President and Chief Financial Officer                                 |

 

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| +   | 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 incorporated herin by reference.                                                                       |
| (2) | Previously filed as an  exhibit to the Annual Report pursuant to Section 13 or 15(d) of the  Securities Exchange 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.                                                                                          |

 

30

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**Table of Contents**

 

**Signatures**

** **

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

 
|                       | **Danvers Bancorp, Inc.** |
|----------------------------|--------------------------------|
|                       |                           |
| Date: August 14, 2008 | By:                            | /s/ Kevin T. Bottomley |
|                       |                           |  Kevin  T. Bottomley |
|                       |                           |  President  and Chief Executive Officer |
|                       |                           |   |
|                       |                           |   |
| Date: August 14, 2008 | By:                            | /s/ James J. McCarthy |
|                       |                           |  James  J. McCarthy |
|                       |                           |  Executive  Vice President and Chief Operating  Officer |
|                       |                           |   |
|                       |                           |   |
| Date: August 14, 2008 | By:                            | /s/ L. Mark Panella |
|                       |                           |  L.  Mark Panella |
|                       |                           |  Senior  Vice President and Chief Financial

 Officer |

 

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