UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 WASHINGTON,
D.C. 20549
 
 FORM
10-Q
 
 QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
 
 For
the quarterly period ended March 31,
2009
 
 
 Commission
file number: 001-33896
 
 DANVERS BANCORP,
INC.
 (Exact
Name of Registrant as Specified in Its Charter)
 
 
 Delaware
                  
                  
                  
                  04-3445675(State
      or Other Jurisdiction of
                  
                  
                  
                  (I.R.S
      EmployerIncorporation
      of Organization)
                  
                  
                  
                  Identification
      No.)One Conant Street, Danvers,
      Massachusetts
                  
                  
                  
                  01923(Address
      of Principal Executive Officers)
                  
                  
                  
                  (Zip
      Code)(978) 777-2200(Registrant’s
      telephone number, including area code)
 
 
 Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
 x  o
  Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
 o  o
  Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  (Check one):
 
 Large
      accelerated filer  o
              Accelerated
      filer x
 
 Non-accelerated
      filer o
      (Do not check if smaller reporting company)
              Smaller
      reporting companyo
 
 Indicate
by check mark whether the registrant is a shell company (as defined 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 May 5, 2009:
17,396,500
  DANVERS
BANCORP, INC.
  TABLEOF CONTENTS
 
 
 PagePART I.  FINANCIAL
      INFORMATIONItem 1.
                Financial Statements
    (Unaudited)-
                Consolidated Balance Sheets as of March 31, 2009
      and December 31, 2008
                3-
                Consolidated Statements of Operations
      for the Three Months EndedMarch 31, 2009 and
    2008
                4-
                Consolidated Statements of Changes in
      Stockholders' Equity for theThree Months Ended March 31, 2009 and
      2008
                5-
                Consolidated Statements of Cash Flows for the Three
      Months EndedMarch 31, 2009 and 2008
                6-
                Notes to Consolidated Financial
      Statements
                8Item 2.
                Management’s Discussion and Analysis of Financial
      Condition and Results ofOperations
                14Item 3.
                Quantitative and Qualitative Disclosures About
      Market Risk
                27Item 4.
                Controls and Procedures
                29PART II.  OTHER
      INFORMATIONItem 1.
                Legal Proceedings
                30Item 1A.
                Risk Factors
                30Item 2.
                Unregistered Sales of Equity
      Securities and Use of Proceeds
                30Item 3.
                Defaults Upon Senior
      Securities
                31Item 4.
                Submission of Matters to a Vote of
      Security Holders
                31Item 5.
                Other Information
                31Item 6.
                Exhibits
                32
 
  2
 Table of Contents
 DANVERS
BANCORP, INC.
  
 PART I.  FINANCIAL
INFORMATION
 
 Item 1.  Financial Statements
(Unaudited)
 
 CONSOLIDATED BALANCE SHEETS
 (Unaudited)
 
 March
      31,
                              
                              
                              December
      31,2009
                              
                              
                              2008(In
      thousands)ASSETSCash
      and cash equivalents
                              
                              $
                              41,463
                              
                              
                              $
                              33,129Certificates
      of deposit
                              
                              
                              10,406
                              
                              
                              
                              10,291Securities
      available for sale, at fair value
                              
                              
                              458,593
                              
                              
                              
                              490,845Loans
      held for sale
                              
                              
                              3,267
                              
                              
                              
                              -Loans
                              
                              
                              1,147,496
                              
                              
                              
                              1,118,948Less
      allowance for loan losses
                              
                              
                              (12,545
                              )
                              
                              
                              (12,133
                              )Loans,
      net
                              
                              
                              1,134,951
                              
                              
                              
                              1,106,815Federal
      Home Loan Bank stock, at cost
                              
                              
                              14,001
                              
                              
                              
                              14,001Premises
      and equipment, net
                              
                              
                              25,835
                              
                              
                              
                              22,877Bank-owned
      life insurance
                              
                              
                              24,963
                              
                              
                              
                              24,826Other
      real estate owned
                              
                              
                              1,162
                              
                              
                              
                              1,158Accrued
      interest receivable
                              
                              
                              7,723
                              
                              
                              
                              7,457Deferred
      tax asset, net
                              
                              
                              7,822
                              
                              
                              
                              6,955Other
      assets
                              
                              
                              7,823
                              
                              
                              
                              9,455$
                              1,738,009
                              
                              
                              $
                              1,727,809LIABILITIES
      AND STOCKHOLDERS' EQUITYDeposits:Demand
      deposits
                              
                              $
                              133,298
                              
                              
                              $
                              123,414Savings
      and NOW accounts
                              
                              
                              197,613
                              
                              
                              
                              176,365Money
      market accounts
                              
                              
                              482,558
                              
                              
                              
                              440,931Term
      certificates over $100,000
                              
                              
                              248,131
                              
                              
                              
                              242,846Other
      term certificates
                              
                              
                              145,604
                              
                              
                              
                              134,727Total
      deposits
                              
                              
                              1,207,204
                              
                              
                              
                              1,118,283Short-term
      borrowings
                              
                              
                              94,793
                              
                              
                              
                              168,276Long-term
      debt
                              
                              
                              162,639
                              
                              
                              
                              163,022Subordinated
      debt
                              
                              
                              29,965
                              
                              
                              
                              29,965Accrued
      expenses and other liabilities
                              
                              
                              12,767
                              
                              
                              
                              15,255Total
      liabilities
                              
                              
                              1,507,368
                              
                              
                              
                              1,494,801Stockholders'
      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
      sharesissued
      and 17,502,600 shares outstanding at March 31, 2009 and
      17,842,500shares
      issued and outstanding at December 31, 2008
                              
                              
                              178
                              
                              
                              
                              178Additional
      paid-in capital
                              
                              
                              178,818
                              
                              
                              
                              174,510Retained
      earnings
                              
                              
                              68,908
                              
                              
                              
                              67,854Accumulated
      other comprehensive income
                              
                              
                              4,159
                              
                              
                              
                              4,026Unearned
      restricted shares
                              
                              
                              (8,040
                              )
                              
                              
                              -Unearned
      compensation - ESOP, 1,338,188 shares and 1,356,030 shares
    atMarch
      31, 2009 and December 31, 2008, respectively
                              
                              
                              (13,382
                              )
                              
                              
                              (13,560
                              )Total
      stockholders' equity
                              
                              
                              230,641
                              
                              
                              
                              233,008$
                              1,738,009
                              
                              
                              $
                              1,727,809
 
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
  3
 Table of Contents
 DANVERS
BANCORP, INC.
  CONSOLIDATED STATEMENTS OF
OPERATIONS
 (Unaudited)
 
 Three
      Months EndedMarch
      31,2009
                                  
                                  
                                  2008(Dollars
      in thousands,except
      per share amounts)Interest
      and dividend income:Interest
      and fees on loans
                                  
                                  $
                                  15,707
                                  
                                  
                                  $
                                  15,620Interest
      on debt securities:Taxable
                                  
                                  
                                  5,422
                                  
                                  
                                  
                                  4,792Non-taxable
                                  
                                  
                                  203
                                  
                                  
                                  
                                  189Dividends
      on equity securities
                                  
                                  
                                  -
                                  
                                  
                                  
                                  108Interest
      on cash equivalents and certificates of deposit
                                  
                                  
                                  97
                                  
                                  
                                  
                                  528Total
      interest and dividend income
                                  
                                  
                                  21,429
                                  
                                  
                                  
                                  21,237Interest
      expense:Interest
      on deposits:Savings
      and NOW accounts
                                  
                                  
                                  548
                                  
                                  
                                  
                                  660Money
      market accounts
                                  
                                  
                                  2,923
                                  
                                  
                                  
                                  3,329Term
      certificates
                                  
                                  
                                  3,027
                                  
                                  
                                  
                                  4,273Interest
      on short-term borrowings
                                  
                                  
                                  128
                                  
                                  
                                  
                                  121Interest
      on long-term debt and subordinated debt
                                  
                                  
                                  2,322
                                  
                                  
                                  
                                  2,329Total
      interest expense
                                  
                                  
                                  8,948
                                  
                                  
                                  
                                  10,712Net
      interest income
                                  
                                  
                                  12,481
                                  
                                  
                                  
                                  10,525Provision
      for loan losses
                                  
                                  
                                  760
                                  
                                  
                                  
                                  600Net
      interest income, after provision for loan losses
                                  
                                  
                                  11,721
                                  
                                  
                                  
                                  9,925Non-interest
      income:Service
      charges on deposits
                                  
                                  
                                  788
                                  
                                  
                                  
                                  630Loan
      servicing fees
                                  
                                  
                                  10
                                  
                                  
                                  
                                  59Gain
      on sales of loans
                                  
                                  
                                  341
                                  
                                  
                                  
                                  61Gain
      on sales of other real estate owned
                                  
                                  
                                  29
                                  
                                  
                                  
                                  -Net
      gain on sales of securities
                                  
                                  
                                  -
                                  
                                  
                                  
                                  772Net
      increase in cash surrender value of bank-owned life
    insurance
                                  
                                  
                                  137
                                  
                                  
                                  
                                  358Other
      operating income
                                  
                                  
                                  433
                                  
                                  
                                  
                                  405Total
      non-interest income
                                  
                                  
                                  1,738
                                  
                                  
                                  
                                  2,285Non-interest
      expenses:Salaries
      and employee benefits
                                  
                                  
                                  6,973
                                  
                                  
                                  
                                  10,036Occupancy
                                  
                                  
                                  1,504
                                  
                                  
                                  
                                  1,310Equipment
                                  
                                  
                                  768
                                  
                                  
                                  
                                  753Outside
      services
                                  
                                  
                                  243
                                  
                                  
                                  
                                  282Contribution
      to the Danversbank Charitable Foundation
                                  
                                  
                                  -
                                  
                                  
                                  
                                  6,850Other
      real estate owned expense
                                  
                                  
                                  125
                                  
                                  
                                  
                                  794Other
      operating expense
                                  
                                  
                                  2,188
                                  
                                  
                                  
                                  1,632Total
      non-interest expenses
                                  
                                  
                                  11,801
                                  
                                  
                                  
                                  21,657Income
      (loss) before income taxes
                                  
                                  
                                  1,658
                                  
                                  
                                  
                                  (9,447
                                  )Provision
      (benefit) for income taxes
                                  
                                  
                                  275
                                  
                                  
                                  
                                  (6,191
                                  )Net
      income (loss)
                                  
                                  $
                                  1,383
                                  
                                  
                                  $
                                  (3,256
                                  )Weighted-average
      shares outstanding:Basic
                                  
                                  
                                  16,376,388
                                  
                                  
                                  
                                  N/ADiluted
                                  
                                  
                                  16,383,254
                                  
                                  
                                  
                                  N/AEarnings
      per share:Basic
                                  
                                  $
                                  0.08
                                  
                                  
                                  
                                  N/ADiluted
                                  
                                  $
                                  0.08
                                  
                                  
                                  
                                  N/A
 
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
  4
 Table of Contents
 DANVERS
BANCORP, INC.
  CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS’ EQUITY
 (Unaudited)
 
 AccumulatedAdditional
                                              
                                              
                                              
                                              
                                              
                                              Other
                                              
                                              
                                              Unearned
                                              
                                              
                                              
                                              
                                              
                                              TotalCommon
      Stock
                                              
                                              
                                              Paid-In
                                              
                                              
                                              Retained
                                              
                                              
                                              Comprehensive
                                              
                                              
                                              Restricted
                                              
                                              
                                              Unearned
                                              
                                              
                                              Stockholders'Shares
                                              
                                              
                                              Amount
                                              
                                              
                                              Capital
                                              
                                              
                                              Earnings
                                              
                                              
                                              Income
                                              
                                              
                                              Shares
                                              
                                              
                                              Compensation
                                              
                                              
                                              Equity(Dollars
      in thousands)Balance
      at December 31, 2007
                                              
                                              
                                              -
                                              
                                              
                                              $
                                              -
                                              
                                              
                                              $
                                              -
                                              
                                              
                                              $
                                              71,213
                                              
                                              
                                              $
                                              2,283
                                              
                                              
                                              $
                                              -
                                              
                                              
                                              $
                                              -
                                              
                                              
                                              $
                                              73,496Comprehensive
      loss:Net
      loss
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              (3,256
                                              )
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              (3,256
                                              )Net
      unrealized gain on securitiesavailable
      for sale, net ofreclassification
      adjustmentand
      tax effect
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              2,045
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              2,045Change
      in fair value andamortization
      of derivative usedfor
      cash flow hedge, net oftax
      effect
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              (1
                                              )
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              (1
                                              )Total
      comprehensive loss
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              (1,212
                                              )Issuance
      of common stock forinitial
      public offering, net ofexpenses
      of $3,850
                                              
                                              
                                              17,192,500
                                              
                                              
                                              
                                              172
                                              
                                              
                                              
                                              167,902
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              168,074Issuance
      of common stock tothe
      Danversbank CharitableFoundation
                                              
                                              
                                              650,000
                                              
                                              
                                              
                                              6
                                              
                                              
                                              
                                              6,494
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              6,500Stock
      purchased by ESOP
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              (14,274
                                              )
                                              
                                              
                                              (14,274
                                              )Common
      stock held by ESOPcommitted
      to be released(11,895
      shares)
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              119
                                              
                                              
                                              
                                              119Balance
      at March 31, 2008
                                              
                                              
                                              17,842,500
                                              
                                              
                                              $
                                              178
                                              
                                              
                                              $
                                              174,396
                                              
                                              
                                              $
                                              67,957
                                              
                                              
                                              $
                                              4,327
                                              
                                              
                                              $
                                              -
                                              
                                              
                                              $
                                              (14,155
                                              )
                                              
                                              $
                                              232,703Balance
      at December 31, 2008
                                              
                                              
                                              17,842,500
                                              
                                              
                                              $
                                              178
                                              
                                              
                                              $
                                              174,510
                                              
                                              
                                              $
                                              67,854
                                              
                                              
                                              $
                                              4,026
                                              
                                              
                                              $
                                              -
                                              
                                              
                                              $
                                              (13,560
                                              )
                                              
                                              $
                                              233,008Comprehensive
      income:Net
      income
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              1,383
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              1,383Net
      unrealized gain on securitiesavailable
      for sale, net ofreclassification
      adjustmentand
      tax effect
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              134
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              134Change
      in fair value andamortization
      of derivative usedfor
      cash flow hedge, net oftax
      effect
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              (1
                                              )
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              (1
                                              )Total
      comprehensive income
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              1,516Purchase
      of shares for incentiveplans
      (339,900 shares)
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              (4,256
                                              )
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              (4,256
                                              )Resticted
      stock awards(639,807
      shares)
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              8,317
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              (8,317
                                              )
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -Equity
      incentive shares earned
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              196
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              277
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              473Common
      stock held by ESOPcommitted
      to be released(17,843
      shares)
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              51
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              178
                                              
                                              
                                              
                                              229Dividends
      declared($.02
      per share)
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              (329
                                              )
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              (329
                                              )Balance
      at March 31, 2009
                                              
                                              
                                              17,842,500
                                              
                                              
                                              $
                                              178
                                              
                                              
                                              $
                                              178,818
                                              
                                              
                                              $
                                              68,908
                                              
                                              
                                              $
                                              4,159
                                              
                                              
                                              $
                                              (8,040
                                              )
                                              
                                              $
                                              (13,382
                                              )
                                              
                                              $
                                              230,641
 
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
  5
 Table of Contents
 DANVERS
BANCORP, INC.
  CONSOLIDATEDSTATEMENTS OF CASH FLOWS
 (Unaudited)
 
 
 Three
      Months EndedMarch
      31,2009
                    
                    
                    2008(In
      thousands)Cash
      flows from operating activities:Net
      income (loss)
                    
                    $
                    1,383
                    
                    
                    $
                    (3,256
                    )Adjustments
      to reconcile net income (loss) to net cash used inoperating
      activities:Provision
      for loan losses
                    
                    
                    760
                    
                    
                    
                    600Write-down
      of other real estate owned
                    
                    
                    -
                    
                    
                    
                    808Depreciation
      and amortization
                    
                    
                    841
                    
                    
                    
                    926Accretion
      of net deferred loan fees and costs
                    
                    
                    (126
                    )
                    
                    
                    (138
                    )Deferred
      tax benefit
                    
                    
                    (959
                    )
                    
                    
                    (1,066
                    )Amortization
      of core deposit intangible and servicing rights
                    
                    
                    113
                    
                    
                    
                    53Amortization
      of stock-based compensation and ESOP expense
                    
                    
                    702
                    
                    
                    
                    119Amortization
      (accretion) of securities, net
                    
                    
                    60
                    
                    
                    
                    (14
                    )Net
      gain on sales of securities
                    
                    
                    -
                    
                    
                    
                    (772
                    )Gain
      on sales of other real estate owned
                    
                    
                    (29
                    )
                    
                    
                    -Loans
      originated for sale
                    
                    
                    (27,404
                    )
                    
                    
                    (3,490
                    )Proceeds
      from sales of loans originated for sale
                    
                    
                    24,137
                    
                    
                    
                    3,232Issuance
      of common stock to Danversbank Charitable Foundation
                    
                    
                    -
                    
                    
                    
                    6,500Changes
      in other assets and liabilities:Accrued
      interest receivable
                    
                    
                    (266
                    )
                    
                    
                    (307
                    )Other
      assets and bank-owned life insurance
                    
                    
                    1,380
                    
                    
                    
                    (4,556
                    )Accrued
      expenses and other liabilities
                    
                    
                    (2,488
                    )
                    
                    
                    (5,724
                    )Net
      cash used in operating activities
                    
                    
                    (1,896
                    )
                    
                    
                    (7,085
                    )Cash
      flows from investing activities:Activity
      in available-for-sale securities:Sales
                    
                    
                    -
                    
                    
                    
                    32,945Maturities,
      prepayments and calls
                    
                    
                    65,670
                    
                    
                    
                    77,814Purchases
                    
                    
                    (33,251
                    )
                    
                    
                    (157,273
                    )Purchases
      of certificates of deposit
                    
                    
                    (115
                    )
                    
                    
                    -Funds
      advanced on other real estate owned
                    
                    
                    (384
                    )
                    
                    
                    (482
                    )Proceeds
      from sales of other real estate owned
                    
                    
                    1,209
                    
                    
                    
                    -Net
      loan originations
                    
                    
                    (29,570
                    )
                    
                    
                    (62,149
                    )Purchase
      of premises and equipment
                    
                    
                    (3,799
                    )
                    
                    
                    (1,127
                    )Net
      cash used in investing activities
                    
                    
                    (240
                    )
                    
                    
                    (110,272
                    )
 
 
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
  6
 Table of Contents
 DANVERS
BANCORP, INC.
  CONSOLIDATED
STATEMENTS OF CASH FLOWS (Concluded)
 (Unaudited)
 
 
 Three
      Months EndedMarch
      31,2009
                    
                    
                    2008(In
      thousands)Cash
      flows from financing activities:Net
      increase (decrease) in:Term
      certificates
                    
                    $
                    16,162
                    
                    
                    $
                    (3,964
                    )Other
      deposits
                    
                    
                    72,759
                    
                    
                    
                    126,038Short-term
      borrowings
                    
                    
                    (73,483
                    )
                    
                    
                    3,898Stock
      subscriptions
                    
                    
                    -
                    
                    
                    
                    (162,859
                    )Activity
      in long-term debt:Proceeds
      from advances
                    
                    
                    -
                    
                    
                    
                    15,000Payment
      of advances
                    
                    
                    (383
                    )
                    
                    
                    (784
                    )Net
      proceeds from issuance of common stock
                    
                    
                    -
                    
                    
                    
                    168,074Acquisition
      of common stock by ESOP
                    
                    
                    -
                    
                    
                    
                    (14,274
                    )Purchase
      of shares for incentive plans
                    
                    
                    (4,256
                    )
                    
                    
                    -Dividends
      declared
                    
                    
                    (329
                    )
                    
                    
                    -Net
      cash provided by financing activities
                    
                    
                    10,470
                    
                    
                    
                    131,129Change
      in cash and cash equivalents
                    
                    
                    8,334
                    
                    
                    
                    13,772Cash
      and cash equivalents at beginning of period
                    
                    
                    33,129
                    
                    
                    
                    65,862Cash
      and cash equivalents at end of period
                    
                    $
                    41,463
                    
                    
                    $
                    79,634Supplementary
      disclosure of cash flow information:Cash
      paid during the period for:Interest
                    
                    $
                    8,721
                    
                    
                    $
                    10,042Income
      taxes
                    
                    
                    46
                    
                    
                    
                    215Non-cash
      financing and investing activities:Unsettled
      securities transactions
                    
                    
                    -
                    
                    
                    
                    500Transfers
      from loans to other real estate owned
                    
                    
                    800
                    
                    
                    
                    -
 
 
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
  7
 Table of Contents
 DANVERS
BANCORP, INC.
  NOTESTO CONSOLIDATED FINANCIAL
STATEMENTS
 
 1.
              Basis
      of Presentation
 
 The
accompanying unaudited consolidated interim financial statements include the
accounts of Danvers Bancorp, Inc. (“the Company”) and its wholly-owned
subsidiary Danversbank (the “Bank”).  These financial statements have
been prepared in accordance with accounting principles generally accepted in the
United States of America (“GAAP”) for interim financial information and with the
instructions to Form 10-Q and Rule 10-1 of Regulation
S-X.  Accordingly, certain information and note disclosures normally
included in the Company’s annual financial statements prepared in accordance
with GAAP have been omitted.
 
 In the
opinion of management, all adjustments (consisting of only normal recurring
adjustments) necessary for a fair presentation of the financial position,
results of operations, and cash flows for the reporting interim periods have
been included.  The consolidated balance sheet of the Company as of
December 31, 2008 has been derived from the audited consolidated balance sheet
of the Company as of that date.  The accompanying consolidated
financial statements should be read in conjunction with the audited consolidated
financial statements and accompanying notes thereto included in the Company’s
most recent Securities and Exchange Commission Form 10-K filed by the Company
for the year ended December 31, 2008.  The results of operation for
the three months ended March 31, 2009 and 2008 are not necessarily indicative of
the results to be obtained for a full year.
 
 2.
              Derivative
      Financial Instruments
 
 In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities, an amendment of SFAS No. 133”, which changes the
disclosure requirements for derivative instruments and hedging
activities.  This Statement is intended to enhance the current
disclosure framework in SFAS No. 133.  The Statement requires that
objectives for using derivative instruments be disclosed in terms of underlying
risk and accounting designation.  This Statement is effective for the
Company’s consolidated financial statements issued for fiscal years and interim
periods beginning after November 15, 2008 and did not have a material impact on
the Company’s consolidated financial statements.
 
 Derivative
financial instruments are recognized as assets and liabilities on the
consolidated balance sheet and measured at fair value.
  Interest
Rate Swap Agreements
  For
asset/liability management purposes, the Company uses interest rate swap
agreements to manage interest rate risk.  Interest rate swaps are
contracts in which a series of interest rate flows are exchanged over a
prescribed period.  The notional amount on which the interest payments
are based is not exchanged.  These swap agreements are derivative
instruments and generally convert a portion of the Company’s variable-rate debt
to a fixed rate (cash flow hedge), and convert a portion of its fixed-rate loans
to a variable rate (fair value hedge).  Those swap agreements not
designated as a hedge are generally used as economic hedges of overall changes
in interest rates on interest earning assets and interest bearing liabilities.
The gain or loss on a swap agreement not designated as a hedge is recognized
currently in earnings.
   8
 Table of Contents
 DANVERS
BANCORP, INC.
  
 The
following tables present the fair values of derivative instruments in the
balance sheet and the effect of derivative instruments on the statement of
operations.
 
 
 March
      31, 2009Balance
      Sheet
                  
                  Fair
                  
                  Balance
      Sheet
                  
                  FairLocation
                  
                  Value
                  
                  Location
                  
                  Value(In
      thousands)Derivatives
      not designated as hedginginstruments
      under Statement 133:Interest
      rate swap agreements
                  Other
      assets
                  
                  $1,698
                  
                  Other
      liabilities
                  
                  $1,730
 Quarter
      Ended March 31, 2009Amount
      ofGain
      (Loss)RecognizedDerivatives
      Not Designated As Hedging
                                    
                                    Location
      of Gain or (Loss) Recognized
                                    
                                    in
      IncomeInstruments
      Under Statement 133
                                    
                                    in
      Income on Derivative
                                    
                                    on
      Derivative(In
      thousands)Interest
      rate swap agreements
                                    
                                    Other
      income
                                    
                                    $
                                    3
 3.
              Fair
      Value of Assets and Liabilities
 
 In
accordance with SFAS No. 157, the Company groups its financial assets and
financial liabilities measured at fair value in three levels, based on the
markets in which the assets and liabilities are traded and the reliability of
the assumptions used to determine fair value.  The three levels are
defined as follows:
 
 Level 1 –
Valuation is based on quoted prices in active markets for identical assets or
liabilities.  Level 1 assets and liabilities general include debt and
equity securities that are traded in an active exchange
market.  Valuations are obtained from readily available pricing
sources for market transactions involving identical assets or
liabilities.  Currently, the Company does not have any items
classified as Level 1.
 
 Level 2 –
Valuation is based on observable inputs other than Level 1 prices, such as
quoted prices for similar assets or liabilities; quoted prices in markets that
are not active; or other inputs that are observable or can be corroborated by
observable market data for substantially the full term of the assets or
liabilities.  The fair value of fixed maturity investments included in
the Level 2 category were based on market values obtained from an independent
pricing service that were evaluated using pricing models that vary by asset
class and incorporate available trade, bid and other market information and
price quotes from well established independent broker-dealers.  The
independent pricing service monitors market indicators, industry and economic
events, and for broker-quoted only securities, obtains quotes from market makers
or broker-dealers that it recognizes to be market participants.  The
fair value of interest rate swap agreements are based on a valuation model that
uses primarily observable inputs, such as benchmark yield curves and interest
rates and also include the value associated with counterparty credit
risk.  The Level 2 categories include U.S. Government and
government-sponsored enterprises, mortgage-backed securities, corporate bonds,
foreign government bonds, municipal bonds and interest rate swap
agreements.
 
  9
 Table of Contents
 DANVERS
BANCORP, INC.
  
 Level 3 –
Valuation is based on unobservable inputs that are supported by little or no
market activity and that are significant to the fair value of the assets or
liabilities.  Level 3 assets and liabilities include financial
instruments whose value is determined using pricing models, discounted cash flow
methodologies, or similar techniques, as well as instruments for which the
determination of fair value requires significant management judgment or
estimation.  This category generally includes certain asset-backed
securities, certain private equity investments, residential mortgage servicing
rights and long-term derivative contracts.  Currently, the Company
does not have any items classified as Level 3.
 
 Assets
and liabilities measured at fair value on a recurring basis are summarized
below:
 
 
 TotalLevel
      1
                    
                    
                    Level
      2
                    
                    
                    Level
      3
                    
                    
                    Fair
      Value(In
      thousands)March
      31, 2009:AssetsU.S.
      Government
                    
                    $
                    -
                    
                    
                    $
                    1,004
                    
                    
                    $
                    -
                    
                    
                    $
                    1,004Federal
      Home Loan Mortgage Corporation
                    
                    
                    -
                    
                    
                    
                    1,141
                    
                    
                    
                    -
                    
                    
                    
                    1,141Other
      government-sponsored enterprises
                    
                    
                    -
                    
                    
                    
                    191,101
                    
                    
                    
                    -
                    
                    
                    
                    191,101Mortgage-backed
                    
                    
                    -
                    
                    
                    
                    244,107
                    
                    
                    
                    -
                    
                    
                    
                    244,107Municipal
      bonds
                    
                    
                    -
                    
                    
                    
                    20,990
                    
                    
                    
                    -
                    
                    
                    
                    20,990Other
      bonds
                    
                    
                    -
                    
                    
                    
                    250
                    
                    
                    
                    -
                    
                    
                    
                    250Interest
      rate swap agreements
                    
                    
                    -
                    
                    
                    
                    1,698
                    
                    
                    
                    -
                    
                    
                    
                    1,698$
                    -
                    
                    
                    $
                    460,291
                    
                    
                    $
                    -
                    
                    
                    $
                    460,291LiabilitiesInterest
      rate swap agreements
                    
                    $
                    -
                    
                    
                    $
                    1,730
                    
                    
                    $
                    -
                    
                    
                    $
                    1,730
 
 
 
 TotalLevel
      1
                    
                    
                    Level
      2
                    
                    
                    Level
      3
                    
                    
                    Fair
      Value(In
      thousands)December
      31, 2008:AssetsU.S.
      Government
                    
                    $
                    -
                    
                    
                    $
                    2,018
                    
                    
                    $
                    -
                    
                    
                    $
                    2,018Federal
      Home Loan Mortgage Corporati<TABLE><CAPTION>on
                    
                    
                    -
                    
                    
                    
                    1,148
                    
                    
                    
                    -
                    
                    
                    
                    1,148Other
      government-sponsored enterprises
                    
                    
                    -
                    
                    
                    
                    220,623
                    
                    
                    
                    -
                    
                    
                    
                    220,623Mortgage-backed
                    
                    
                    -
                    
                    
                    
                    247,990
                    
                    
                    
                    -
                    
                    
                    
                    247,990Municipal
      bonds
                    
                    
                    -
                    
                    
                    
                    18,816
                    
                    
                    
                    -
                    
                    
                    
                    18,816Other
      bonds
                    
                    
                    -
                    
                    
                    
                    250
                    
                    
                    
                    -
                    
                    
                    
                    250Interest
      rate swap agreements
                    
                    
                    -
                    
                    
                    
                    1,761
                    
                    
                    
                    -
                    
                    
                    
                    1,761$
                    -
                    
                    
                    $
                    492,606
                    
                    
                    $
                    -
                    
                    
                    $
                    492,606LiabilitiesInterest
      rate swap agreements
                    
                    $
                    -
                    
                    
                    $
                    1,796
                    
                    
                    $
                    -
                    
                    
                    $
                    1,796
 
 
  10
 Table of Contents
 DANVERS
BANCORP, INC.
  
 The
Company may also be required, from time to time, to measure certain other
financial assets on a nonrecurring basis in accordance with
GAAP.  These adjustments to fair value usually result from application
of lower-of-cost-or-market accounting or write-downs of individual
assets.  There were no liabilities measured at fair value on a
non-recurring basis at March 31, 2009 and December 31, 2008.  The
following tables summarize the fair value hierarchy used to determine each
adjustment and the carrying value of the related individual assets:
 
 
 Quarter
      EndedMarch
      31,March
      31, 2009
                  
                  
                  2009TotalLevel
      1
                  
                  
                  Level
      2
                  
                  
                  Level
      3
                  
                  
                  Losses(In
      thousands)AssetsOther
      real estate owned
                  
                  $
                  -
                  
                  
                  $
                  1,162
                  
                  
                  $
                  -
                  
                  
                  $
                  -Impaired
      loans
                  
                  
                  -
                  
                  
                  
                  425
                  
                  
                  
                  -
                  
                  
                  
                  135$
                  -
                  
                  
                  $
                  1,587
                  
                  
                  $
                  -
                  
                  
                  $
                  135
 
 
 
 Quarter
      EndedMarch
      31,December
      31, 2008
                  
                  
                  2008TotalLevel
      1
                  
                  
                  Level
      2
                  
                  
                  Level
      3
                  
                  
                  Losses(In
      thousands)AssetsOther
      real estate owned
                  
                  $
                  -
                  
                  
                  $
                  1,158
                  
                  
                  $
                  -
                  
                  
                  $
                  808Impaired
      loans
                  
                  
                  -
                  
                  
                  
                  1,481
                  
                  
                  
                  -
                  
                  
                  
                  186$
                  -
                  
                  
                  $
                  2,639
                  
                  
                  $
                  -
                  
                  
                  $
                  994
 
 
 At March
31, 2009 and December 31, 2008, the amount of other real estate owned in Level 2
represents the carrying value and related charge-offs for which adjustments are
based on appraised value of the collateral.  At March 31, 2009 and
December 31, 2008, the amount of impaired loans in Level 2 represents the
carrying value and related charge-offs and FASB Statement No. 114 allocated
reserves on impaired loans for which adjustments are based on appraised value of
the collateral.  Appraised values are typically based on a blend of
(a) an income approach using observable cash flows to measure fair value, and
(b) a market approach using observable market comparables.
 
 4.
              Earnings
      Per Share
 
 Basic
earnings per share (“EPS”) excludes dilution and is calculated by dividing net
income available to common stockholders by the weighted-average number of shares
of common stock outstanding during the period.  Diluted EPS is
computed in a manner similar to that of basic EPS except that the
weighted-average number of common shares outstanding is increased to include the
number of incremental common shares (computed using the treasury stock method)
that would have been outstanding if all potentially dilutive common stock
equivalents (such as stock options and unvested restricted stock) were issued
during the period.
 
  11
 Table of Contents
 DANVERS
BANCORP, INC.
  
 For the
quarter ended March 31, 2009, potentially dilutive common stock equivalents
totaled 6,866 shares, representing the dilutive effect of the restricted
stock.  Earnings per share are not applicable for year to date and
quarterly periods prior to June 30, 2008 as the Company did not issue stock
until January 11, 2008.  Unallocated common shares held by the ESOP
are shown as a reduction in stockholders’ equity and are not included in the
weighted-average number of common shares outstanding for either basic or diluted
earnings per share calculations.
 
 The
following table is the reconciliation of basic and diluted earnings per share
for the three months ended March 31, 2009:
 
 Basic
                    
                    
                    Diluted(Dollars
      in thousands,except
      per share amounts)Net
      income
                    
                    $
                    1,383
                    
                    
                    $
                    1,383Weighted
      average shares outstanding
                    
                    
                    16,376,388
                    
                    
                    
                    16,376,388Effect
      of dilutive shares
                    
                    
                    -
                    
                    
                    
                    6,866Adjusted
      weighted average shares outstanding
                    
                    
                    16,376,388
                    
                    
                    
                    16,383,254Earnings
      per share
                    
                    $
                    0.08
                    
                    
                    $
                    0.08
 
 
 5.
              Dividend
      Declared
 
 On April
23, 2009, the Company declared a quarterly cash dividend on its common stock of
$.02 per share. The dividend will be paid on or after May 22, 2009 to
shareholders of record as of May 8, 2009.
 
 Recent
Accounting Pronouncements
 
 In
December 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No.
141 (revised), ‘‘Business Combinations’’, which replaces SFAS No. 141, and
applies to all business entities, including mutual entities that previously used
the pooling-of-interests method of accounting for certain business combinations.
This Statement makes significant amendments to other Statements and other
authoritative guidance, and applies prospectively to business combinations for
which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2008.
  In April
2009, the FASB issued FASB Staff Position No. 141(R)-1 ("FSP 141(R)-1"),
Accounting for Assets Acquired and Liabilities Assumed in a Business Combination
That Arise from Contingencies.  FSP 141(R)-1 amends and clarifies FASB
Statement No. 141 (revised 2007), Business Combinations, to address application
issues raised by preparers, auditors, and members of the legal profession on
initial recognition and measurement, subsequent measurement and accounting, and
disclosure of assets and liabilities arising from contingencies in a business
combination.  FSP 141(R)-1 is effective for assets or liabilities
arising from contingencies in business combinations for which the acquisition
date is on or after the beginning of the first annual reporting period beginning
on or after December 15, 2008.  Effective January 1, 2009, the ETIF
was adopted by the Company and did not impact the Company’s consolidated
financial statements.
 
  12
 Table of Contents
 DANVERS
BANCORP, INC.
  
 In
December 2007, the FASB issued SFAS No. 160, ‘‘Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51.’’ This Statement
establishes accounting and reporting standards for the noncontrolling interest
in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a
noncontrolling interest in a subsidiary is an ownership interest in the
consolidated entity that should be reported as equity in the consolidated
financial statements. This Statement is effective for fiscal years beginning on
or after
 December
15, 2008 and the adoption of this Statement is not expected to have a material
impact on the Company’s consolidated financial statements.
  In April
2009, the FASB issued FASB Staff Position No. 157-4, “Determining Fair
Value When the Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions That Are Not Orderly” (FSP
FAS 157-4), provides guidance on how to determine the fair value of assets and
liabilities in an environment where the volume and level of activity for the
asset or liability have significantly decreased and re-emphasizes that the
objective of a fair value measurement remains an exit price. The FSP is
effective for periods ending after June 15, 2009, with earlier adoption
permitted. The adoption of FSP FAS 157-4 in the quarter ending June 30,
2009 is not expected to have a material effect on the Company’s consolidated
financial statements.
  In
January  2009, the FASB issued a FASB Staff Position on the Emerging Issues
Task Force (“EITF”) Issue No. 03-06-1, “Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating Securities,” (FSP
EITF 03-06-1). Under FSP EITF 03-06-1, unvested share-based awards which include
the right to receive nonforfeitable dividends or dividend equivalents are
considered to participate with common stock in undistributed earnings. Companies
that issue share-based awards considered to be participating securities under
FSP EITF 03-06-1 are required to calculate basic and diluted earnings per common
share amounts under the two-class method. The two-class method excludes from
earnings per common share calculations any dividends paid or owed to
participating securities and any undistributed earnings considered to be
attributable to participating securities. FSP EITF 03-06-1 requires
retrospective application to all prior-period earnings per share data
presented.   The ETIF was adopted by the Company on January 1,
2009 and did not impact the Company’s consolidated financial
statements.
  In April
2009, the FASB issued FASB Staff Position No. 107-1 and APB 28-1, “Interim
Disclosures about Fair Value of Financial Statements” (FSP FAS 107-1 and APB
28-1), requires companies to disclose the fair value of financial instruments
within interim financial statements, adding to the current requirement to
provide those disclosures annually. The FSP 107-1 is effective June 30,
2009 and is not expected to have a material impact on the Company’s consolidated
financial statements.
  In April
2009, the FASB issued FASB Staff Position No. 115-2 and 124-2, “Recognition
and Presentation of Other-than-temporary Impairments” (FSP FAS 115-2 and 124-2),
modifies the requirements for recognizing other-than-temporary-impairment on
debt securities and significantly changes the impairment model for such
securities. Under FSP FAS 115-2 and 124-2, a security is considered to be
other-than-temporarily impaired if the present value of cash flows expected to
be collected are less than the security’s amortized cost basis (the difference
being defined as the credit loss) or if the fair value of the security is less
than the security’s amortized cost basis and the investor intends, or
more-likely-than-not will be required, to sell the security before recovery of
the security’s amortized cost basis. If an other-than-temporary impairment
exists, the charge to earnings is limited to the amount of credit loss if the
investor does not intend to sell the security and it is more-likely-than-not
that it will not be required to sell the security, before recovery of the
security’s amortized cost basis. Any remaining difference between fair value and
amortized cost is recognized in other comprehensive income, net of applicable
taxes. Otherwise, the entire difference between fair value and amortized cost is
charged to earnings. Upon adoption of the FSP, an entity reclassifies from
retained earnings to other comprehensive income the non-credit portion of an
other-than-temporary impairment loss previously recognized on a security it
holds if the entity does not intend to sell the security, and it is
more-likely-than-not that it will not be required to sell the security,
before
  13
 Table of Contents
 DANVERS
BANCORP, INC.
   recovery
of the security’s amortized cost basis. The FSP also modifies the presentation
of other-than-temporary impairment losses and increases related disclosure
requirements. FSP FAS 115-2 and 124-2 is effective for periods ending after
June 15, 2009, with earlier adoption permitted. The Company is currently
assessing the impact of adoption of FSP FAS 115-2 and 124-2 on its financial
position and results of operations as of, and for the period ending,
June 30, 2009.
 
 Item 2.  Management’s Discussion and Analysis
of Financial Condition and Results of Operations
 
 The
following analysis discusses the changes in financial position and results of
operation of the Company, and should be read in conjunction with both the
unaudited consolidated interim financial statements and notes thereto, appearing
in Part 1, Item 1 of this report.
 
 Forward-Looking
Statements
 
 This
report contains forward-looking statements, statements which are considered
forward-looking within the meaning of the Private Securities Litigation Reform
Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934.
 
 Forward-looking
statements can be identified by the use of such words as estimate, project,
believe, intend, anticipate, plan, seek, expect and similar expressions. These
forward-looking statements include:
 
 ·
              statements
      of our goals, intentions and
expectations;
 
 ·
              statements
      regarding our business plans and prospects and growth and operating
      strategies;
 
 ·
              statements
      regarding the asset quality of our loan and investment portfolios;
      and
 
 ·
              estimates
      of our risks and future costs and
benefits.
 
 These
forward-looking statements are subject to significant risks, assumptions and
uncertainties, including, among other things, the following important factors
that could affect the actual outcome of future events:
 
 ·
              significantly
      increased competition among depository and other financial
      institutions;
 
 ·
              inflation
      and changes in the interest rate environment that reduce our margins or
      reduce the fair value of financial
instruments;
 
 ·
              general
      economic conditions, whether national or regional, and conditions in the
      real estate markets that could affect the demand for our loans and other
      products and ability of borrowers to repay loans, lead to further declines
      in credit quality and increased loan losses, and continue to negatively
      affect the value and salability of the real estate that is the collateral
      for many of our loans or that we own
directly;
  ·
              changing
      business, banking, or regulatory conditions or policies, or new
      legislation affecting the financial services industry, including the
      Emergency Economic Stabilization Act of 2008 and the American Recovery and
      Reinvestment Act of 2009 that could lead to changes in the competitive
      balance among financial institutions, restrictions on bank activities,
      changes in costs (including deposit insurance premiums), increased
      regulatory scrutiny, declines in consumer confidence in depository
      institutions, or changes in the secondary market for bank loan and other
      products;
   14
 Table of Contents
 DANVERS
BANCORP, INC.
  
 ·
              our
      ability to enter new markets successfully and take advantage of growth
      opportunities;
 
 ·
              changes
      in consumer spending, borrowing and savings
  habits;
 
 ·
              changes
      in accounting policies and practices, as may be adopted by the bank
      regulatory agencies and the Financial Accounting Standards Board;
      and
 
 ·
              changes
      in our organization, compensation and benefit
  plans.
 
 Critical
Accounting Policies
 
 The
discussion and analysis of the Company’s financial condition and results of
operations is based upon the Company’s unaudited consolidated financial
statements, which have been prepared in conformity with accounting principles
generally accepted in the United States of America for interim financial
information and with the instructions for Form 10-Q.  In preparing the
consolidated financial statements in conformity with accounting principles
generally accepted in the United States of America, management is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the balance sheet and income and expenses during
the reported period. Actual results could differ from those
estimates.  Material estimates that are particularly susceptible to
change in the near term relate to the determination of the allowance for loan
losses, other than temporary impairment of securities, the valuation of other
real estate owned and the valuation of the deferred tax assets.
 
 Comparison
of Financial Condition at March 31, 2009 and December 31, 2008
 
 Total
Assets.Total
assets increased by $10.2 million, or 0.6%, to $1.74 billion at March 31, 2009
from $1.73 billion at December 31, 2008. Net loans increased by $28.1 million,
or 2.5% during the quarter and securities decreased by $32.2 million, or 6.6%.
The overall increase in the Company’s assets was funded primarily with an
increase in deposits.
 
 Cash and
Cash Equivalents.Cash
and cash equivalents increased by $8.3 million, or 25.2%, to $41.4 million at
March 31, 2009 from $33.1 million at December 31, 2008.
 
 Securities
Available for Sale.The
securities portfolio aggregated $458.6 million at March 31, 2009, a decrease of
$32.2 million, or 6.6%, from $490.8 million at December 31, 2008. The first
quarter cash flow from investment calls and amortization from the Company’s
mortgage-backed securities portfolio were utilized to fund our loan growth
during the quarter. Within the portfolio, obligations of government-sponsored
enterprises decreased by $30.5 million and mortgage-backed securities decreased
by $3.9 million, as the Company also replaced some fixed-rate agency securities
with adjustable-rate mortgage-backed securities.
 
 At March
31, 2009 and December 31, 2008, our mortgage-backed securities (“MBS”) totaled
53.2% and 50.5%, respectively, of our investment portfolio and consisted of high
quality rated pass-through securities that are directly insured or guaranteed by
Freddie Mac, Fannie Mae or Ginnie Mae.  The MBS portfolio is primarily
backed by pools of one-to-four family mortgages that have loans with interest
rates that are within a set range and have varying maturities.  None
of our MBS are privately issued or have sub-prime residential mortgages or home
equity loans as part of their underlying loan pools.  We target
instruments with four to twelve year weighted average lives, with expected
average life extensions up to a maximum of fifteen years in a rising rate
environment.  In an effort to protect against a rising interest rate
environment, we increased our concentration of adjustable-rate MBS in the
investment portfolio from 15.4% at December 31, 2007 to 74.9% at March 31,
2009.  All our MBS were rated AAA at March 31, 2009 and December 31,
2008.   Although unforeseeable changes in
  15
 Table of Contents
 DANVERS
BANCORP, INC.
  
 market
conditions may affect future ratings, management does not expect to downgrade
any ratings in our current MBS portfolio.
 
 The
amortized cost and fair value of securities available for sale, with gross
unrealized gains and losses follows:
 
 
 Amortized
      Cost
                      
                      
                      Gross
                        Unrealized
                        Gains
                      
                      
                      Gross
                        Unrealized
                        Losses
                      
                      
                      Fair
      Value(In
      thousands)March
      31, 2009:U.S.
      Government
                      
                      $
                      1,002
                      
                      
                      $
                      2
                      
                      
                      $
                      -
                      
                      
                      $
                      1,004Federal
      Home Loan Mortgage Corporation
                      
                      
                      1,147
                      
                      
                      
                      -
                      
                      
                      
                      (6
                      )
                      
                      
                      1,141Other
      government-sponsored enterprises
                      
                      
                      189,111
                      
                      
                      
                      3,119
                      
                      
                      
                      (1,129
                      )
                      
                      
                      191,101Mortgage-backed
                      
                      
                      238,455
                      
                      
                      
                      5,737
                      
                      
                      
                      (85
                      )
                      
                      
                      244,107Municipal
      bonds
                      
                      
                      21,597
                      
                      
                      
                      94
                      
                      
                      
                      (701
                      )
                      
                      
                      20,990Other
      bonds
                      
                      
                      250
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      250$
                      451,562
                      
                      
                      $
                      8,952
                      
                      
                      $
                      (1,921
                      )
                      
                      $
                      458,593December
      31, 2008:U.S.
      Government
                      
                      $
                      2,007
                      
                      
                      $
                      11
                      
                      
                      $
                      -
                      
                      
                      $
                      2,018Federal
      Home Loan Mortgage Corporation
                      
                      
                      1,147
                      
                      
                      
                      1
                      
                      
                      
                      -
                      
                      
                      
                      1,148Other
      government-sponsored enterprises
                      
                      
                      216,369
                      
                      
                      
                      4,383
                      
                      
                      
                      (129
                      )
                      
                      
                      220,623Mortgage-backed
                      
                      
                      245,089
                      
                      
                      
                      3,549
                      
                      
                      
                      (648
                      )
                      
                      
                      247,990Municipal
      bonds
                      
                      
                      19,179
                      
                      
                      
                      107
                      
                      
                      
                      (470
                      )
                      
                      
                      18,816Other
      bonds
                      
                      
                      250
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      250$
                      484,041
                      
                      
                      $
                      8,051
                      
                      
                      $
                      (1,247
                      )
                      
                      $
                      490,845
 
 
  16
 Table of Contents
 DANVERS
BANCORP, INC.
  
 Information
pertaining to securities with gross unrealized losses aggregated by investment
category and length of time that individual securities have been in a continuous
loss position follows:
 
 
 Less
      Than Twelve Months
                  
                  
                  Over
      Twelve MonthsGross
                    Unrealized
                    Losses
                  
                  
                  Fair Value
                  
                  
                  Gross
                    Unrealized
                    Losses
                  
                  
                  Fair Value(In
      thousands)March
      31, 2009:Debt
      securities:Federal
      Home Loan Mortgage Corporation
                  
                  $
                  6
                  
                  
                  $
                  1,141
                  
                  
                  $
                  -
                  
                  
                  $
                  -Other
      government-sponsored enterprises
                  
                  
                  1,129
                  
                  
                  
                  42,561
                  
                  
                  
                  -
                  
                  
                  
                  -Mortgage-backed
                  
                  
                  84
                  
                  
                  
                  16,084
                  
                  
                  
                  1
                  
                  
                  
                  239Municipal
      bonds
                  
                  
                  336
                  
                  
                  
                  7,578
                  
                  
                  
                  365
                  
                  
                  
                  8,921$
                  1,555
                  
                  
                  $
                  67,364
                  
                  
                  $
                  366
                  
                  
                  $
                  9,160December
      31, 2008:Debt
      securities:Other
      government-sponsored enterprises
                  
                  $
                  129
                  
                  
                  $
                  21,371
                  
                  
                  $
                  -
                  
                  
                  $
                  -Mortgage-backed
                  
                  
                  642
                  
                  
                  
                  57,114
                  
                  
                  
                  6
                  
                  
                  
                  942Municipal
      bonds
                  
                  
                  25
                  
                  
                  
                  1,135
                  
                  
                  
                  445
                  
                  
                  
                  11,349$
                  796
                  
                  
                  $
                  79,620
                  
                  
                  $
                  451
                  
                  
                  $
                  12,291
 
 
 Management
evaluates securities for other-than-temporary impairment on at least a quarterly
basis, and more frequently when economic or market concerns warrant more
frequent evaluation.  Consideration is given to (1) the length of time
and the extent to which the fair value has remained less than cost, (2) the
financial condition and near-term prospects of the issuer, and (3) the intent
and ability of the Company to retain its investment in the issue for a period of
time sufficient to allow for any anticipated recovery in fair
value.  At March 31, 2009 and December 31, 2008, the Company
determined that all unrealized losses from debt securities are temporary in
nature.
 
 Net
Loans.Net
loans as of March 31, 2009 were $1.13 billion, an increase of $28.1 million, or
2.5%, from net loan balances of $1.11 billion as of December 31, 2008. Most of
the Company’s growth during the period is reflected in commercial real estate
and commercial and industrial (“C&I”) loan balances.  Increases in
commercial real estate and C&I loans of $32.1 million and $5.5 million,
respectively were partially offset by a decline in the Company’s construction
loan portfolio of $12.1 million.  While the rate of expansion in the
portfolio slowed when compared to 2008, the loan pipeline remains strong and the
Company continued to see larger and well diversified credit opportunities during
the period.
  17
 Table of Contents
 DANVERS
BANCORP, INC.
  
 The
following table sets forth the composition of the loan portfolio at the dates
indicated:
 
 
 March
      31, 2009
                  
                  
                  December
      31, 2008Amount
                  
                  
                  Percent
                  
                  
                  Amount
                  
                  
                  Percent(Dollars
      in thousands)Real
      estate mortgages:Construction
                  
                  $
                  110,915
                  
                  
                  
                  9.6
                  %
                  
                  $
                  122,974
                  
                  
                  
                  11.0
                  %Residential
                  
                  
                  190,682
                  
                  
                  
                  16.6
                  
                  
                  
                  189,242
                  
                  
                  
                  16.9Commercial
                  
                  
                  279,612
                  
                  
                  
                  24.3
                  
                  
                  
                  247,483
                  
                  
                  
                  22.1Home
      equity
                  
                  
                  44,455
                  
                  
                  
                  3.9
                  
                  
                  
                  41,660
                  
                  
                  
                  3.7C&I
                  
                  
                  515,823
                  
                  
                  
                  44.9
                  
                  
                  
                  510,359
                  
                  
                  
                  45.5Consumer
                  
                  
                  7,762
                  
                  
                  
                  0.7
                  
                  
                  
                  8,725
                  
                  
                  
                  0.8Total
      loans
                  
                  
                  1,149,249
                  
                  
                  
                  100.0
                  %
                  
                  
                  1,120,443
                  
                  
                  
                  100.0
                  %Allowance
      for loan losses
                  
                  
                  (12,545
                  )
                  
                  
                  
                  
                  
                  
                  (12,133
                  )Net
      deferred loan fees
                  
                  
                  (1,753
                  )
                  
                  
                  
                  
                  
                  
                  (1,495
                  )Loans,
      net
                  
                  $
                  1,134,951
                  
                  
                  
                  
                  
                  
                  $
                  1,106,815
 
 
 The
following table sets forth the amounts and categories of our non-performing
assets at the dates indicated:
 
 
 March
      31,
                      
                      
                      December
      31,2009
                      
                      
                      2008(Dollars
      in thousands)Non-accrual
      loans:Real
      estate mortgages:Construction
                      
                      $
                      984
                      
                      
                      $
                      1,925Residential
                      
                      
                      2,635
                      
                      
                      
                      2,184Commercial
                      
                      
                      372
                      
                      
                      
                      263Home
      equity
                      
                      
                      302
                      
                      
                      
                      227Total
      real estate mortgages
                      
                      
                      4,293
                      
                      
                      
                      4,599C&I
                      
                      
                      932
                      
                      
                      
                      1,295Consumer
                      
                      
                      17
                      
                      
                      
                      38Total
      non-accrual loans
                      
                      $
                      5,242
                      
                      
                      $
                      5,932Restructured
      loans
                      
                      $
                      3,147
                      
                      
                      $
                      -Total
      non-performing loans
                      
                      $
                      8,389
                      
                      
                      $
                      5,932Other
      real estate owned
                      
                      
                      1,162
                      
                      
                      
                      1,158Total
      non-performing assets
                      
                      $
                      9,551
                      
                      
                      $
                      7,090Total
      non-performing loans to total loans
                      
                      
                      0.73
                      %
                      
                      
                      0.53
                      %Total
      non-performing loans to total assets
                      
                      
                      0.48
                      %
                      
                      
                      0.34
                      %Total
      non-performing assets to total assets
                      
                      
                      0.55
                      %
                      
                      
                      0.41
                      %
 
 
  18
 Table of Contents
 DANVERS
BANCORP, INC.
  
 The
following table sets forth the activity in the allowance for loan losses for the
periods indicated:
 
 
 At
      or For the Three MonthsEnded
      March 31,2009
                              
                              
                              2008(Dollars
      in thousands)Allowance
      balance at beginning of period
                              
                              $
                              12,133
                              
                              
                              $
                              9,096Provision
      for loan losses
                              
                              
                              760
                              
                              
                              
                              600Charge-offs:Real
      estate mortgages:Construction
                              
                              
                              241
                              
                              
                              
                              -Residential
                              
                              
                              -
                              
                              
                              
                              85Commercial
                              
                              
                              -
                              
                              
                              
                              -Home
      equity
                              
                              
                              -
                              
                              
                              
                              3Total
      real estate mortgages
                              
                              
                              241
                              
                              
                              
                              88C&I
                              
                              
                              106
                              
                              
                              
                              156Consumer
                              
                              
                              35
                              
                              
                              
                              24Total
      charge-offs
                              
                              
                              382
                              
                              
                              
                              268Recoveries:Real
      estate mortgages:Construction
                              
                              
                              -
                              
                              
                              
                              -Residential
                              
                              
                              -
                              
                              
                              
                              8Commercial
                              
                              
                              -
                              
                              
                              
                              -Home
      equity
                              
                              
                              -
                              
                              
                              
                              -Total
      real estate mortgages
                              
                              
                              -
                              
                              
                              
                              8C&I
                              
                              
                              20
                              
                              
                              
                              -Consumer
                              
                              
                              14
                              
                              
                              
                              7Total
      recoveries
                              
                              
                              34
                              
                              
                              
                              15Net
      charge-offs
                              
                              
                              348
                              
                              
                              
                              253Allowance
      balance at end of period
                              
                              $
                              12,545
                              
                              
                              $
                              9,443Total
      loans outstanding
                              
                              $
                              1,149,249
                              
                              
                              $
                              971,735Average
      loans outstanding
                              
                              $
                              1,126,097
                              
                              
                              $
                              927,932Allowance
      for loan losses as a percent oftotal
      loans outstanding
                              
                              
                              1.09
                              %
                              
                              
                              0.97
                              %Net
      loans charged off as a percent ofaverage
      loans outstanding (annualized)
                              
                              
                              0.12
                              %
                              
                              
                              0.11
                              %Allowance
      for loan losses to non-performing
      loans
                              
                              
                              149.54
                              %
                              
                              
                              147.94
                              %
 
 
 For
further information, see “Provision for Loan Losses” of the Management
Discussion and Analysis on page 21.
  19
 Table of Contents
 DANVERS
BANCORP, INC.
  
 Deposits.The
Company’s deposit growth remained strong for the first three months of
2009.  Total deposits increased by $88.9 million to $1.21 billion at
March 31, 2009, an increase of 8.0% from a balance of $1.12 billion at December
31, 2008. The Company experienced increases across all deposit categories with
the largest increase in money market accounts which increased by $41.6 million,
and to a lesser extent in savings and NOW accounts, total term certificates, and
demand deposit, which increased by $21.2 million, $16.2 million and $9.9
million, respectively. The Company’s deposit gathering activities continue to
benefit from some of the turmoil in the broader capital markets.  New
deposit balances emanated from a variety of outlets during the
quarter.  The Company’s online checking and savings product
initiatives were very productive and in conjunction with a number of other
retail and commercial deposit gathering activities, the Company had very healthy
deposit growth.
 
 The
following table sets forth the Company’s deposit accounts at the dates
indicated:
 
 
 March
      31, 2009
                      
                      
                      December
      31, 2008Amount
                      
                      
                      Percent
                      
                      
                      Amount
                      
                      
                      Percent(Dollars
      in thousands)Demand
      deposits
                      
                      $
                      133,298
                      
                      
                      
                      11.0
                      %
                      
                      $
                      123,414
                      
                      
                      
                      11.0
                      %Savings
      and NOW accounts
                      
                      
                      197,613
                      
                      
                      
                      16.4
                      
                      
                      
                      176,365
                      
                      
                      
                      15.8Money
      market accounts
                      
                      
                      482,558
                      
                      
                      
                      40.0
                      
                      
                      
                      440,931
                      
                      
                      
                      39.4Total
      non-certificate accounts
                      
                      
                      813,469
                      
                      
                      
                      67.4
                      
                      
                      
                      740,710
                      
                      
                      
                      66.2Term
      certificates over $100,000
                      
                      
                      248,131
                      
                      
                      
                      20.5
                      
                      
                      
                      242,846
                      
                      
                      
                      21.7Other
      term certificates
                      
                      
                      145,604
                      
                      
                      
                      12.1
                      
                      
                      
                      134,727
                      
                      
                      
                      12.1Total
      certificate accounts
                      
                      
                      393,735
                      
                      
                      
                      32.6
                      
                      
                      
                      377,573
                      
                      
                      
                      33.8Total
      deposits
                      
                      $
                      1,207,204
                      
                      
                      
                      100.0
                      %
                      
                      $
                      1,118,283
                      
                      
                      
                      100.0
                      %
 
 
 Borrowed
Funds.The
Company relies on borrowings from the Federal Home Loan Bank of Boston, or
FHLBB, as an alternative funding source to deposits and to augment the Company’s
short-term liquidity needs. The balance of these borrowings fluctuates depending
upon our ability to attract deposits, coupled with the overall level of loan
demand and other investment opportunities. Funds borrowed from the FHLBB
decreased by $71.6 million to $230.4 million at March 31, 2009, a 23.7% decrease
from a balance of $302.0 million at December 31, 2008. The Company’s success at
raising deposit balances during the quarter allowed the Company to pay down a
large portion of our overnight FHLBB advances.
 
 Included
in the Company’s borrowings are securities sold under agreements to repurchase,
which are contracts for the sale of securities owned by the Company with an
agreement to repurchase those securities at an agreed upon price and date. The
Company uses repurchase agreements as a secondary funding source and as a means
of offering commercial deposit customers a commercial sweep checking product. As
of March 31, 2009, the Company had $27.0 million outstanding in overnight
repurchase agreements, an decrease of $2.3 million or 7.8% from $29.3 million
December 31, 2008.
 
 Total
Stockholders’ Equity.Total
stockholders’ equity decreased by $2.4 million to $230.6 million at March 31,
2009 from a balance of $233.0 million at December 31, 2008. This decrease was
primarily due to stock repurchases as the Company purchased 339,900 shares of
common stock at an average price of $12.52 per share during the first three
months of 2009.  These purchases are part of the Stock Repurchase
Program announced in January of 2009. This decrease was offset by net income of
$1.4 million and a decline in the unallocated common shares held by the Employee
Stock Ownership Plan.
  20
 Table of Contents
 DANVERS
BANCORP, INC.
  
 Comparison
of Operating Results for the Three Months Ended March 31, 2009 and
2008
 
 Net
Income (loss).The Company recorded
net income for the three months ended March 31, 2009 of $1.4 million, an
increase of $4.6 million from a net loss of $3.2 million for the three months
ended March 31, 2008.  The increase is primarily due to the increase
in net interest income and a sizeable reduction in non-interest expenses between
the comparable periods.  Net interest income during the 2009 quarter
improved $2.0 million or 18.6% from the comparable three-month period in
2008.  The decline in non-interest expense relates to two
non-recurring items that the Company incurred during the first quarter of 2008;
a $6.9 million pretax charge related to the establishment of the Danversbank
Charitable Foundation, Inc. (the “Foundation”) and a $3.7 million pretax charge
related to the acceleration of the Company’s phantom stock plan.  Both
charges are directly related to the Company’s conversion from a mutual form of
organization to a public stock holding company.
 
 Net
Interest Income.Net
interest income for the three months ended March 31, 2009 increased to $12.5
million from $10.5 million for the three months ended March 31, 2008. Average
interest-earning assets increased $226.5 million between the two periods. This
increase of $2.0 million in net interest income resulted from a $2.5 million
increase due to volume and a $511,000 decrease due to the rates on
interest-earning assets and interest-bearing liabilities. The Company’s net
interest margin was 3.06% for the three months ended March 31, 2009 compared to
3.01% for the three months ended March 31, 2008.
 
 Interest
and Dividend Income.Interest
income increased $192,000, or 0.9%, to $21.4 million for the three months ended
March 31, 2009 from $21.2 million for the three months ended March 31, 2008. The
increase was primarily due to a higher balance of average interest-earning
assets. Loans increased on average by $198.2 million between the two periods
combined with an increase in the average balances of debt securities of $65.3
million and a decrease in cash equivalents of $40.9 million. The average yield
on loans decreased from 6.73% for the three months ended March 31, 2008 to 5.58%
for the same period in 2009, and the overall yield on interest-earning assets
decreased from 6.08% to 5.25% for the 2008 and 2009 periods, respectively. The
overall decline in asset yields is directly related to the declining trend of
the current interest rate environment.
 
 Interest
Expense.Interest
expense for the three months ended March 31, 2009 decreased by $1.8 million, or
16.5%, to $8.9 million compared to interest expense of $10.7 million for the
three months ended March 31, 2008. Average interest-bearing liabilities
increased by $217.2 million between the two periods and this resulted in a $1.5
million increase in interest expense. A decrease of 114 basis points, or 30.1%,
in the average cost of the Company’s interest-bearing liabilities resulted in a
decrease in interest expense of $3.3 million. The overall rates on
interest-bearing liabilities decreased from 3.79% to 2.65% for the 2008 and 2009
periods, respectively, and the average cost of deposits decreased from 3.56% for
the period ended March 31, 2008 compared to 2.52% for the same period in 2009.
The overall decline in deposit and overall liability costs is directly related
to the declining trend of the current rate environment.
 
 Provision
for Loan Losses.The
Company records a provision for loan losses as a charge to its earnings when
necessary in order to maintain the allowance for loan losses at a level
sufficient to absorb losses inherent in the loan portfolio. The Company recorded
$760,000 and $600,000 in loan loss provisions during the three months ended
March 31, 2009 and 2008, respectively. Provisions in both periods were
reflective of portfolio growth, change to the loan portfolio composition, an
evaluation of the quality of the loan portfolio, and net charge offs, the
difference between loan charge-offs net of recoveries on loans previously
charged off. Net charge-offs were $348,000 and $253,000 for the three months
ended March 31, 2009 and 2008, respectively.  At March 31, 2009, the
allowance for loan losses totaled $12.5 million, or 1.09% of the loan portfolio,
compared to $9.4 million, or 0.97%, of total loans at March 31,
2008.  The allowance as a percentage of non-performing loans
represented 149.54% and 147.94% at March 31, 2009 and 2008,
respectively.
  21
 Table of Contents
 DANVERS
BANCORP, INC.
  
 Non-interest
Income.Non-interest
income for the three months ended March 31, 2009 decreased by $547,000 or 23.9%
to $1.7 million, compared to $2.3 million for the three months ended March 31,
2008. This decrease was attributable to a $772,000 decrease in the gain on sales
of securities as management chose to sell some fixed-rate investment securities
and replace them with adjustable-rate investments in an effort to protect
against a rising interest rate environment during the quarter ended March 31,
2008.  The decrease was also due to a $222,000 decrease in income on
our bank-owned life insurance holdings, or BOLI, offset by increases in service
charges on deposit accounts of $158,000 and in the gain on sale of loans of
$280,000 compared to the same quarter in 2008.
 
 Non-interest
Expense.Non-interest
expense reflected a significant decrease of $9.9 million or 45.5% from $21.7
million at quarter ended March 31, 2008 to $11.8 million at quarter ended March
31, 2009. As noted above this decrease relates primarily to two non-recurring
charges associated with the conversion to a public stock holding company during
the first quarter of 2008.  In addition, the Company experienced a
decrease in other real estate owned expense of $669,000 and an increase in other
operating expense of $556,000 compared to the same quarter in 2008. Increases in
general and administrative expenses, most notably in the areas of deposit
insurance, legal, marketing, and investor relations were the primary reasons for
the increase in other operating expense between the comparable
periods.
 
 Income
Taxes.The
Company recorded an income tax expense of $275,000 for the three months ended
March 31, 2009; an increase of $6.5 million when compared to a $6.2 million
income tax benefit for the three months ended March 31, 2008. The effective tax
rate for the three months period ended March 31, 2009 was 16.6 % which is below
the statutory tax rate of 34% due to the amount of book income that is not
taxable under federal tax law.  The effective tax rate for the three
months end March 31, 2008 was 63.3% which is the result of the non-recurring
charges associated with the conversion to a public stock holding company during
the first quarter of 2008.
 
 The
following table sets forth average balance sheets, average yields and costs, and
certain other information for the periods indicated. All average balances are
daily average balances. The yields set forth below include the effect of
deferred fees, and discounts and premiums that are amortized or accreted to
interest income or expense. Tax-exempt income and yields have not been adjusted
to a tax-equivalent basis.  The Company does not accrue interest on
loans on non-accrual status; however, the balance of these loans is included in
the total average balance, which has the effect of lowering average loan
yields.
  22
 Table of Contents
 DANVERS
BANCORP, INC.
  
 Three
      Months Ended March 31,2009
                                  
                                  
                                  2008Average
                                  
                                  
                                  
                                  Interest
                                  
                                  
                                  Average
                                  
                                  
                                  Average
                                  
                                  
                                  
                                  Interest
                                  
                                  
                                  AverageOutstanding
                                  
                                  
                                  
                                  Earned/
                                  
                                  
                                  Yield/
                                  
                                  
                                  Outstanding
                                  
                                  
                                  
                                  Earned/
                                  
                                  
                                  Yield/Balance
                                  
                                  
                                  
                                  Paid
                                  
                                  
                                  Rate
      (1)
                                  
                                  
                                  Balance
                                  
                                  
                                  
                                  Paid
                                  
                                  
                                  Rate
      (1)(Dollars
      in thousands)Interest-earning
      assets:Interest-earning
      cash equivalents andcertificates
      of deposit
                                  
                                  $
                                  27,475
                                  
                                  
                                  
                                  $
                                  97
                                  
                                  
                                  
                                  1.41
                                  %
                                  
                                  $
                                  68,368
                                  
                                  
                                  
                                  $
                                  528
                                  
                                  
                                  
                                  3.11
                                  %Debt
      securities: (2)U.S.
      Government
                                  
                                  
                                  1,538
                                  
                                  
                                  
                                  
                                  11
                                  
                                  
                                  
                                  2.86
                                  
                                  
                                  
                                  2,000
                                  
                                  
                                  
                                  
                                  23
                                  
                                  
                                  
                                  4.63Gov't-sponsored
      enterprises andFHLMC
                                  
                                  
                                  198,460
                                  
                                  
                                  
                                  
                                  2,439
                                  
                                  
                                  
                                  4.92
                                  
                                  
                                  
                                  181,540
                                  
                                  
                                  
                                  
                                  2,195
                                  
                                  
                                  
                                  4.86Mortgage-backed
                                  
                                  
                                  243,959
                                  
                                  
                                  
                                  
                                  2,970
                                  
                                  
                                  
                                  4.87
                                  
                                  
                                  
                                  196,370
                                  
                                  
                                  
                                  
                                  2,569
                                  
                                  
                                  
                                  5.26Municipal
      bonds
                                  
                                  
                                  19,960
                                  
                                  
                                  
                                  
                                  203
                                  
                                  
                                  
                                  4.07
                                  
                                  
                                  
                                  18,592
                                  
                                  
                                  
                                  
                                  189
                                  
                                  
                                  
                                  4.09Other
                                  
                                  
                                  250
                                  
                                  
                                  
                                  
                                  2
                                  
                                  
                                  
                                  3.20
                                  
                                  
                                  
                                  328
                                  
                                  
                                  
                                  
                                  5
                                  
                                  
                                  
                                  6.13Equity
      securities
                                  
                                  
                                  14,626
                                  
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  10,689
                                  
                                  
                                  
                                  
                                  108
                                  
                                  
                                  
                                  4.06Real
      estate mortgages (3)
                                  
                                  
                                  605,871
                                  
                                  
                                  
                                  
                                  8,425
                                  
                                  
                                  
                                  5.56
                                  
                                  
                                  
                                  559,754
                                  
                                  
                                  
                                  
                                  9,063
                                  
                                  
                                  
                                  6.51C&I
      loans (3)
                                  
                                  
                                  436,752
                                  
                                  
                                  
                                  
                                  6,225
                                  
                                  
                                  
                                  5.70
                                  
                                  
                                  
                                  311,801
                                  
                                  
                                  
                                  
                                  5,782
                                  
                                  
                                  
                                  7.46IRBs
      (3)
                                  
                                  
                                  74,833
                                  
                                  
                                  
                                  
                                  890
                                  
                                  
                                  
                                  4.76
                                  
                                  
                                  
                                  47,019
                                  
                                  
                                  
                                  
                                  583
                                  
                                  
                                  
                                  4.99Consumer
      loans  (3)
                                  
                                  
                                  8,641
                                  
                                  
                                  
                                  
                                  167
                                  
                                  
                                  
                                  7.73
                                  
                                  
                                  
                                  9,358
                                  
                                  
                                  
                                  
                                  192
                                  
                                  
                                  
                                  8.25Total
      interest-earning assets
                                  
                                  
                                  1,632,365
                                  
                                  
                                  
                                  
                                  21,429
                                  
                                  
                                  
                                  5.25
                                  
                                  
                                  
                                  1,405,819
                                  
                                  
                                  
                                  
                                  21,237
                                  
                                  
                                  
                                  6.08Allowance
      for loan losses
                                  
                                  
                                  (12,341
                                  )
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  (9,237
                                  )Total
      earning assets less allowancefor
      loan losses
                                  
                                  
                                  1,620,024
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  1,396,582Non-interest-earning
      assets
                                  
                                  
                                  100,126
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  93,252Total
      assets
                                  
                                  $
                                  1,720,150
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  $
                                  1,489,834Interest-bearing
      liabilities:Deposits:Savings
      and NOW accounts (7)
                                  
                                  $
                                  185,714
                                  
                                  
                                  
                                  
                                  548
                                  
                                  
                                  
                                  1.18
                                  
                                  
                                  $
                                  176,223
                                  
                                  
                                  
                                  
                                  660
                                  
                                  
                                  
                                  1.51Money
      market accounts
                                  
                                  
                                  466,267
                                  
                                  
                                  
                                  
                                  2,923
                                  
                                  
                                  
                                  2.51
                                  
                                  
                                  
                                  386,187
                                  
                                  
                                  
                                  
                                  3,329
                                  
                                  
                                  
                                  3.47Term
      certificates (4) (7)
                                  
                                  
                                  379,904
                                  
                                  
                                  
                                  
                                  3,027
                                  
                                  
                                  
                                  3.19
                                  
                                  
                                  
                                  371,088
                                  
                                  
                                  
                                  
                                  4,273
                                  
                                  
                                  
                                  4.63Total
      deposits
                                  
                                  
                                  1,031,885
                                  
                                  
                                  
                                  
                                  6,498
                                  
                                  
                                  
                                  2.52
                                  
                                  
                                  
                                  933,498
                                  
                                  
                                  
                                  
                                  8,262
                                  
                                  
                                  
                                  3.56Borrowed
      funds:Short-term
      borrowings
                                  
                                  
                                  128,388
                                  
                                  
                                  
                                  
                                  128
                                  
                                  
                                  
                                  0.40
                                  
                                  
                                  
                                  26,834
                                  
                                  
                                  
                                  
                                  121
                                  
                                  
                                  
                                  1.81Long-term
      debt
                                  
                                  
                                  162,781
                                  
                                  
                                  
                                  
                                  1,789
                                  
                                  
                                  
                                  4.40
                                  
                                  
                                  
                                  145,482
                                  
                                  
                                  
                                  
                                  1,689
                                  
                                  
                                  
                                  4.67Subordinated
      debt
                                  
                                  
                                  29,965
                                  
                                  
                                  
                                  
                                  533
                                  
                                  
                                  
                                  7.11
                                  
                                  
                                  
                                  29,965
                                  
                                  
                                  
                                  
                                  640
                                  
                                  
                                  
                                  8.59Total
      interest-bearing liabilities
                                  
                                  
                                  1,353,019
                                  
                                  
                                  
                                  
                                  8,948
                                  
                                  
                                  
                                  2.65
                                  
                                  
                                  
                                  1,135,779
                                  
                                  
                                  
                                  
                                  10,712
                                  
                                  
                                  
                                  3.79Non-interest-bearing
      deposits (8)
                                  
                                  
                                  124,656
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  166,503Other
      non-interest-bearing liabilities
                                  
                                  
                                  13,572
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  6,120Total
      non-interest-bearing liabilities
                                  
                                  
                                  138,228
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  172,623Total
      liabilities
                                  
                                  
                                  1,491,247
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  1,308,402Stockholders'
      equity
                                  
                                  
                                  228,903
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  181,432Total
      liabilities and stockholders' equity
                                  
                                  $
                                  1,720,150
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  $
                                  1,489,834Net
      interest income
                                  
                                  
                                  
                                  
                                  
                                  
                                  $
                                  12,481
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  $
                                  10,525Net
      interest rate spread (5)
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  2.60
                                  %
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  2.29
                                  %Net
      interest-earning assets (6)
                                  
                                  $
                                  279,346
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  $
                                  270,040Net
      interest margin (7)
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  3.06
                                  %
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  3.01
                                  %Ratio
      of interest-earning assetsto
      total interest-bearing liabilities
                                  
                                  
                                  1.21
                                  x
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  1.24
                                  x_____________________________(1)  Yields
      are annualized.(2) 
      Average balances are presented at average amortized cost.(3) 
      Average loans include non-accrual loans and are net of average deferred
      loan fees/costs.(4) 
      Term certificates include brokered and non-brokered CDs.(5) 
      Net interest rate spread represents the difference between the yield on
      interest-earning assets and the cost of interest-bearingliabilities
      at the period indicated.(6) 
      Net interest-earning assets represent total interest-earning assets less
      total interest-bearing liabilities.(7) 
      Net interest margin represents net interest income divided by average
      total interest-earning assets.
  23
 Table of Contents
 DANVERS
BANCORP, INC.
  
 The
following table presents the dollar amount of changes in interest income and
interest expense for the major categories of the Company’s interest-earning
assets and interest-bearing liabilities.  Information is provided for
each category of interest-earning assets and interest-bearing liabilities with
respect to (i) changes attributable to changes in volume (i.e., changes in
average balances multiplied by the prior-period average rate) and (ii) changes
attributable to rate (i.e., changes in average rate multiplied by prior-period
average balances).
 
 
 Three
      Months Ended March 31,2009
      vs. 2008Increase
      (Decrease)
                      
                      
                      TotalDue
      to
                      
                      
                      IncreaseVolume
                      
                      
                      Rate
                      
                      
                      (Decrease)(In
      thousands)Interest-earning
      assets:Interest-earning
      cash equivalents andcertificates
      of deposit
                      
                      $
                      (316
                      )
                      
                      $
                      (115
                      )
                      
                      $
                      (431
                      )Debt
      securities (1):U.S.
      Government
                      
                      
                      (5
                      )
                      
                      
                      (7
                      )
                      
                      
                      (12
                      )Gov't-sponsored
      enterprises and FHLMC
                      
                      
                      205
                      
                      
                      
                      39
                      
                      
                      
                      244Mortgage-backed
                      
                      
                      623
                      
                      
                      
                      (222
                      )
                      
                      
                      401Municipal
      bonds
                      
                      
                      14
                      
                      
                      
                      -
                      
                      
                      
                      14Other
                      
                      
                      (1
                      )
                      
                      
                      (2
                      )
                      
                      
                      (3
                      )Equity
      securities
                      
                      
                      40
                      
                      
                      
                      (148
                      )
                      
                      
                      (108
                      )Real
      estate mortgages (2)
                      
                      
                      747
                      
                      
                      
                      (1,385
                      )
                      
                      
                      (638
                      )C&I
      loans (2)
                      
                      
                      2,317
                      
                      
                      
                      (1,874
                      )
                      
                      
                      443IRBs
      (2)
                      
                      
                      345
                      
                      
                      
                      (38
                      )
                      
                      
                      307Consumer
      loans (2)
                      
                      
                      (15
                      )
                      
                      
                      (10
                      )
                      
                      
                      (25
                      )Total
      interest-earning assets
                      
                      
                      3,954
                      
                      
                      
                      (3,762
                      )
                      
                      
                      192Interest-bearing
      liabilities:Deposits:Savings
      and NOW accounts
                      
                      
                      36
                      
                      
                      
                      (148
                      )
                      
                      
                      (112
                      )Money
      market accounts
                      
                      
                      690
                      
                      
                      
                      (1,096
                      )
                      
                      
                      (406
                      )Term
      certificates (3)
                      
                      
                      102
                      
                      
                      
                      (1,348
                      )
                      
                      
                      (1,246
                      )Total
      deposits
                      
                      
                      828
                      
                      
                      
                      (2,592
                      )
                      
                      
                      (1,764
                      )Borrowed
      funds:Short-term
      borrowings
                      
                      
                      458
                      
                      
                      
                      (451
                      )
                      
                      
                      7Long-term
      debt
                      
                      
                      201
                      
                      
                      
                      (101
                      )
                      
                      
                      100Subordinated
      debt
                      
                      
                      -
                      
                      
                      
                      (107
                      )
                      
                      
                      (107
                      )Total
      interest-bearing liabilities
                      
                      
                      1,487
                      
                      
                      
                      (3,251
                      )
                      
                      
                      (1,764
                      )Increase
      (decrease) in net interest income
                      
                      $
                      2,467
                      
                      
                      $
                      (511
                      )
                      
                      $
                      1,956
 _______________________
 (1)
                Average
      balances are presented at average amortized
  cost.
 (2)
                Average
      loans include non-accrual loans and are net of average deferred loan
      fees/costs.
 (3)
                Term
      certificates include brokered and non-brokered certificates of
      deposit.
 
  24
 Table of Contents
 DANVERS
BANCORP, INC.
  
 Liquidity
and Capital Resources
 
 The
Company’s primary sources of funds are from deposits, amortization and repayment
of loans and mortgage-backed securities, the sale or maturity of securities,
advances from the FHLBB, the Federal Reserve Bank (“FRB”) discount window,
repurchase agreements and cash flows generated by operations.  While
maturities and scheduled amortization of loans and securities are predictable
sources of funds, deposit flows and mortgage loan prepayments can be greatly
influenced by interest rate trends, economic conditions and
competition.  The Company maintains excess cash and short-term
interest bearing assets with original maturities of less than 90 days that
provide additional liquidity.
 
 The
Company uses its liquidity to fund existing and future loan commitments, to fund
maturing certificates of deposit and advances from the FHLBB or FRB, to fund
other deposit withdrawals, to meet operating expenses and to invest in other
interest-bearing assets.
 
 Contractual
Obligations.The following
table presents information indicating various contractual obligations and
commitments of the Company as of the date indicated and their respective
maturity dates:
 
 
 March
      31, 2009More
      than
                    
                    
                    More
      thanOne
      Year
                    
                    
                    Three
      YearsOne
      Year
                    
                    
                    Through
                    
                    
                    Through
                    
                    
                    Overor
      Less
                    
                    
                    Three
      Years
                    
                    
                    Five
      Years
                    
                    
                    Five
      Years
                    
                    
                    Total(In
      thousands)Federal
      Home Loan Bank advances
                    
                    $
                    72,600
                    
                    
                    $
                    42,048
                    
                    
                    $
                    15,000
                    
                    
                    $
                    100,791
                    
                    
                    $
                    230,439Repurchase
      agreements (1)
                    
                    
                    26,993
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    26,993Subordinated
      debt
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    29,965
                    
                    
                    
                    29,965Operating
      leases
                    
                    
                    2,271
                    
                    
                    
                    4,301
                    
                    
                    
                    3,277
                    
                    
                    
                    7,429
                    
                    
                    
                    17,278Total
      contractual obligations
                    
                    $
                    101,864
                    
                    
                    $
                    46,349
                    
                    
                    $
                    18,277
                    
                    
                    $
                    138,185
                    
                    
                    $
                    304,675
 
 (1)
              All
      repurchase agreements mature on a daily basis and are secured by
      obligations of government-sponsored
enterprises.
 
 Loan
Commitments.Loan commitments
to extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract and generally have fixed
expiration dates or other termination clauses.  The following table
presents information indicating various loan commitments of the Company as of
the date indicated and their respective maturity dates:
 
 March
      31, 2009More
      than
                    
                    
                    More
      thanOne
      Year
                    
                    
                    Three
      YearsOne
      Year
                    
                    
                    Through
                    
                    
                    Through
                    
                    
                    Overor
      Less
                    
                    
                    Three
      Years
                    
                    
                    Five
      Years
                    
                    
                    Five
      Years
                    
                    
                    Total(In
      thousands)Commitments
      to grant loans
                    
                    $
                    20,922
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    20,922Unfunded
      commitments under lines of credit
                    
                    
                    276,739
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    276,739Unadvanced
      funds on construction loans
                    
                    
                    11,973
                    
                    
                    
                    12,670
                    
                    
                    
                    7,979
                    
                    
                    
                    -
                    
                    
                    
                    32,622Commercial
      and standby letters of credit
                    
                    
                    2,744
                    
                    
                    
                    297
                    
                    
                    
                    65
                    
                    
                    
                    4,805
                    
                    
                    
                    7,911Total
      contractual obligations
                    
                    $
                    312,378
                    
                    
                    $
                    12,967
                    
                    
                    $
                    8,044
                    
                    
                    $
                    4,805
                    
                    
                    $
                    338,194
 
  25
 Table of Contents
 DANVERS
BANCORP, INC.
  
 Regulatory
Capital Requirements.  At March 31, 2009, the most recent
notification from the FDIC categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action.  To be well
capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based
and Tier 1 leverage ratios of 10.0%, 6.0% and 5.0%,
respectively.  Prompt corrective action provisions are not applicable
to bank holding companies.  At March 31, 2009, the Bank’s total
risk-based, Tier 1 risk-based and Tier 1 leverage ratios were 14.98%, 13.98% and
10.12%, respectively.  At March 31, 2009, the Company’s total
risk-based, Tier 1 risk-based and Tier 1 leverage ratios were 21.31%, 20.31% and
14.76%, respectively.
 
 Recent
      Economic Developments
  On
October 3, 2008 the Emergency Economic Stabilization Act of 2008 (“EESA”) was
enacted.  Among other things, the EESA immediately raised the FDIC
insurance limit from $100,000 to $250,000 to be effective through December 31,
2009.
  U.S. bank
regulatory authorities and international bank supervisory organizations,
principally the Basel Committee on Banking Supervision the (“Basel Committee”),
continue to consider changes to the risk-based capital adequacy framework which
ultimately could affect the appropriate capital guidelines to which the Company
and Danversbank are subject. The federal banking Agencies issued a final rule
entitled “Risk-Based Capital Standards: Advanced Capital Adequacy Framework -
Basel II” (“Basel II”) which became effective on April 1, 2008 and “core banks”
(“core banks” are the approximately 20 largest U.S. bank holding companies) were
required to adopt a board-approved plan, by October 1, 2008, to implement Basel
II. Basel II is expected to result in significant changes to the risk based
capital standards for “core” banks subject to Basel II and other banks that
elect to use such rules to calculate their risk-based capital requirements. In
connection with Basel II, the federal banking agencies published a joint notice
of proposed rulemaking entitled “Risk-Based Capital Guidelines; Capital Adequacy
Guidelines: Standardized Framework” on July 29, 2008 (the “Standardized Approach
Proposal”).  The Standardized Approach Proposal, if adopted by the
federal banking agencies, would provide all non-core banks with an optional
framework, based upon the standardized approach under the international Basel II
Accord, for calculating their risk-based capital requirements. Moreover, during
the first quarter of 2009, in light of the global economic downturn, the Basel
Committee announced that it was commencing an initiative designed to increase
the level of capital held by banks through the use of “a combination of measures
such as introducing standards to promote the build up of capital buffers that
can be drawn down in periods of stress, strengthening the quality of bank
capital, improving the risk coverage of the capital framework and introducing a
non-risk based supplementary measure” of capital.  The Company and
Danversbank do not currently expect to calculate their capital ratios under
Basel II or in accordance with the Standardized Approach Proposal. Accordingly,
Danversbank is not yet in a position to determine the effect of such rules, or
potential modifications to such rules, on its risk capital
requirements.
 
 In 2008,
the U.S. Department of the Treasury (the “Treasury”) instituted the TARP in
response to adverse economic conditions in the financial markets, particularly
the inability of creditworthy borrowers to obtain credit. Under the TARP, the
Treasury developed the Capital Purchase Program (“CPP”), whereby it purchased
non-voting senior preferred shares (“CPP Senior Preferred Shares”) of
participating financial institutions.  Neither the Company nor
Danversbank elected to participate in the TARP or the CPP.
 
  26
 Table of Contents
 DANVERS
BANCORP, INC.
  
 Danversbank
pays deposit insurance premiums to the FDIC based on an assessment rate
established by the FDIC.  In 2006, the FDIC enacted various rules to
implement the provisions of the Federal Deposit Insurance Reform Act of 2005
(the “FDI Reform Act”). Pursuant to the FDI Reform Act, in 2006 the FDIC merged
the Bank Insurance Fund with the Savings Association Insurance Fund to create a
newly named Deposit Insurance Fund (the “DIF”) that covers both banks and
savings associations. The FDIC also revised, effective January 1, 2008, the
risk-based premium system under which the FDIC classifies institutions based on
the factors described below and generally assesses higher rates on those
institutions that tend to pose greater risks to the DIF. For most banks,
including Danversbank, FDIC rates depend upon a combination of CAMELS component
ratings and financial ratios. CAMELS ratings reflect the applicable bank
regulatory agency’s evaluation of the financial institution’s capital, asset
quality, management, earnings liquidity and sensitivity to risk. For large banks
and savings associations that have long-term debt issuer ratings, assessment
rates depend upon such ratings, CAMELS component ratings and financial ratios.
For institutions, such as Danversbank, which are currently in the lowest risk
category, assessment rates varied initially from 5 to 7 basis points per $100 of
insured deposits. Commencing January 1, 2009, the FDIC assessment rates were
raised 7 basis points and varied initially from 12 to 14 basis points per $100
of insured deposits.  Further rate changes took effect on April 1,
2009, and caused assessment rates to vary initially from 12 to 16 basis points
per $100 of insured deposits.  After the FDIC, if applicable, makes
certain risk-related adjustments to specific financial institutions’ total
minimum and maximum base assessment rates, such rates vary from 12 basis points
to 45 basis points per $100 of insured deposits.  One such adjustment,
among others, is an increase of up to 10 basis points for financial
institutions, other than those in the lowest risk category, that have brokered
deposits that exceed 10% of their domestic deposits.  In addition, the
FDIC expects to impose a one-time special assessment on June 30, 2009 (which
would be collected on September 30, 2009) that, although it is subject to
change, is currently expected to be 10 basis points per $100 of
deposits.  The FDIC has discretion to impose additional assessments
thereafter.  In 2008, the level of FDIC deposit insurance was
temporarily increased from $100,000 to $250,000 per depositor through December
31, 2009. The foregoing temporary increase in FDIC insurance may be extended or
modified.
 
 We cannot
predict whether, as a result of the adverse change in U.S. economic conditions
and, in particular, declines in the value of real estate in the markets served
by Danversbank, the FDIC will in the future further increase deposit insurance
assessment levels. The aggregate 2008 FDIC insurance premiums paid by
Danversbank was $735,000. The Company estimates that its aggregate 2009 FDIC
insurance premiums (paid by Danversbank) will be approximately $1.5 million,
excluding the special assessment.
 
 Danversbank
has elected to participate in the Transaction Account Guarantee Program (“TAGP”)
which is part of the FDIC’s Temporary Liquidity Guarantee Program (“TLGP”).
Danversbank declined to participate in the Debt Guarantee Program (“DGP”),
another facility available under TLGP.  Through the TAGP, the FDIC
provides unlimited deposit insurance coverage for all non-interest-bearing
transaction accounts through December 31, 2009. This includes traditional
non-interest bearing checking accounts, certain types of attorney trust accounts
and NOW accounts as long as the interest rate does not exceed 0.50
percent.
 
 Item 3.  Quantitative and Qualitative
Disclosures About Market Risk
 
 Exposure
to market interest rate risk is managed by the Company through periodic
evaluations of the current interest rate risk inherent in its rate-sensitive
assets and liabilities, primarily deposits, borrowings, loans and securities,
coupled with determinations of the level of risk considered appropriate given
the Company’s capital and liquidity requirements, business strategy and
performance objectives. Through such management, the Company seeks to manage the
vulnerability of its net interest income to changes in interest
rates.
  27
 Table of Contents
 DANVERS
BANCORP, INC.
  
 The
Asset/Liability Committee, or ALCO, chaired by the Chief Financial Officer and
comprised of several members of senior management and selected members of the
board of directors, is responsible for managing interest rate risk. On a
quarterly basis, this committee reviews with the full board of directors its
analysis of our exposure to interest rate risk, the effect subsequent changes in
interest rates could have on the Company’s future net interest income, key
interest rate risk strategies and other activities, and the effect of those
strategies on the Company’s operating results. This committee is also actively
involved in the Company’s planning and budgeting process as well as in
determining pricing strategies for deposits and loans. Management is aided in
these efforts by the use of an independent third party that convenes with
management on a quarterly basis for a complete asset/liability analysis and
review.
 
 The
primary method that ALCO uses for measuring and evaluating interest rate risk is
an income simulation analysis. This analysis considers the maturity and interest
rate repricing characteristics of all of our interest-earning assets and
interest-bearing liabilities, as well as the relative sensitivities of these
balance sheet components over a range of interest rate scenarios. Interest rate
scenarios tested generally include parallel and flattening/steepening rate ramps
over a one-year period, and static, or flat, rates. The simulation analysis is
used to measure the exposure of net interest income to changes in interest rates
over a specified time horizon, usually a two-year period. The simulations also
show the net interest income volatility for up to five years.
 
 For March
31, 2009, the Company used a simulation model to project changes for three
rising rate scenarios. No simulation was run for the falling rate scenarios
given that the Federal Funds rate is currently in a range between 0 and 25 basis
points.  This analysis calculates the difference between net interest
income forecasts for these scenarios compared to the net interest income
forecast using a flat rate scenario. In each of these instances, the Federal
Funds rate is used as the driving rate.
 
 The
following table sets forth, as of March 31, 2009, the estimated changes in the
Company’s net interest income that would result:
 
 
 Net
      Portfolio Value(2)
                            
                            
                            Net
      Interest IncomeIncrease
      (Decrease)Change
      in
                            
                            
                            Estimated
                            
                            
                            
                            
                            
                            
                            
                            
                            Estimated
                            
                            
                            in
      EstimatedInterest
      Rates
                            
                            
                            Net
      Portfolio
                            
                            
                            Estimated
      Increase (Decrease)
                            
                            
                            Net
      Interest
                            
                            
                            Net
      Interest Income(basis
      points)(1)
                            
                            
                            Value
                            
                            
                            Amount
                            
                            
                            Percent
                            
                            
                            Income
                            
                            
                            Amount
                            
                            
                            Percent(Dollars
      in thousands)+300
                            bp
                            
                            $
                            201,500
                            
                            
                            $
                            (56,091
                            )
                            
                            
                            -21.8
                            %
                            
                            $
                            50,651
                            
                            
                            $
                            (2,880
                            )
                            
                            
                            -5.4
                            %+200
                            bp
                            
                            
                            228,537
                            
                            
                            
                            (29,054
                            )
                            
                            
                            -11.3
                            %
                            
                            
                            53,157
                            
                            
                            
                            (374
                            )
                            
                            
                            -0.7
                            %+100
                            bp
                            
                            
                            245,779
                            
                            
                            
                            (11,812
                            )
                            
                            
                            -4.6
                            %
                            
                            
                            53,555
                            
                            
                            
                            24
                            
                            
                            
                            0.0
                            %0
                            bp
                            
                            
                            257,591
                            
                            
                            
                            -
                            
                            
                            
                            0.0
                            %
                            
                            
                            53,531
                            
                            
                            
                            -
                            
                            
                            
                            0.0
                            %
 
 (1)
                  Assumes
      an instantaneous uniform change in interest rates at all
      maturities.
 (2)
                Net portfolio value is the
      discounted present value of expected cash flows from interest-earning
      assets, interest-bearing liabilities and off-balance sheet
      contracts.
 
 The
income simulation model includes various assumptions regarding the re-pricing
relationships for each of our products. Many of our assets are floating rate
loans tied to the Prime lending rate, which are assumed to re-price immediately
and to the same extent as the change in market rates, according to their
contracted index. Conversely, the Company has various transaction account
products that would not increase or decrease in the same increments or at the
same speed. Money market accounts, as an example, are assumed to increase sooner
and in larger increments than savings and NOW accounts.  These
assumptions are based on our prior experience with the changes in rates paid on
these non-maturity deposits coincident with changes in market interest rates.
The model
  28
 Table of Contents
 DANVERS
BANCORP, INC.
  
 begins by
disseminating data into appropriate repricing buckets. Assets and liabilities
are then assigned a multiplier to simulate how much that particular balance
sheet item will reprice when interest rates change. The final step is to
simulate the timing effect of assets and liabilities with a month-by-month
simulation to estimate the change in interest income and expense over the next
12 months.
 
 This
analysis indicates the impact of changes in net interest income for the given
set of rate changes and assumptions. It does not incorporate any balance sheet
growth, and it assumes that the structure and composition of the balance sheet
will remain comparable to the structure at the start of the simulation. It does
not account for other factors that might impact this analysis, including changes
by management to mitigate the impact of interest rate changes or secondary
impacts such as changes to our credit risk profile as interest rates change.
Furthermore, loan prepayment rate estimates and spread relationships change
regularly. Interest rate changes create changes in actual loan prepayment rates
that differ from the market estimates incorporated in this analysis. Changes
that vary significantly from the assumptions may have significant effects on our
net interest income.
 
 For the
rising and falling interest rate scenarios, the base market interest rate
forecast was increased on an instantaneous and sustained basis, by 100, 200 and
300 basis points.  At March 31, 2009, our net interest income exposure
related to these hypothetical changes in market interest rates was within our
established guidelines.
 
 There are
inherent shortcomings to income simulations, given the number and variety of
assumptions that must be made in performing the analysis. The assumptions relied
upon in making these calculations of interest rate sensitivity include the level
of market interest rates, the shape of the yield curve, the degree to which
certain assets and liabilities with similar attributes react to changes in
market interest rates, and the degree to which non-maturity deposits, such as
checking accounts, react to changes in market rates. Although the analysis shown
above provides an indication of the Company’s sensitivity to interest rate
changes at a point in time, these estimates are not intended to and do not
provide a precise forecast of the effect of changes in market interest rates on
the Company’s net interest income and may differ from actual
results.
 
 Item 4.  Controls and Procedures
 
 (a)
Evaluation of Disclosure Controls and Procedures
 
 The
Company’s President and Chief Executive Officer, its Executive Vice President
and Chief Operating Officer, and other members of its senior management team
have evaluated the effectiveness of the Company’s disclosure controls and
procedures as defined under the Securities and Exchange Act of 1934 Rules
13a-15(e), as amended, (the “Exchange Act”).  Based upon their
evaluation the President and Chief Executive Officer, the Executive Vice
President and Chief Operating Officer and the Executive Vice President and Chief
Financial Officer have concluded that the Company’s disclosure controls and
procedures, as of the end of the period covered by this report, were effective
to provide reasonable assurance that the information required to be disclosed by
the Company, including its consolidated subsidiaries, in reports that are filed
or submitted under the Exchange Act, is recorded, processed, summarized, and
reported, within the time periods specified in the SEC’s rules and
forms.
 
 The
effectiveness of a system of disclosure controls and procedures is subject to
various inherent limitations, including cost limitations, judgments used in
decision making, assumptions about the likelihood of future events, the
soundness of our systems, the possibility of human error, and the risk of
fraud.  Moreover, projections of any evaluation of effectiveness to
future periods are subject to the risk that controls may become inadequate
because of changes in condition and the risk that the degree of compliance with
policies or procedures may deteriorate over time.  Due to such
inherent limitations, there can be no assurance that any system of disclosure
controls and procedures will be successful in preventing all errors or fraud, or
in making all material information known in a timely manner to the appropriate
levels of management.
  29
 Table of Contents
 DANVERS
BANCORP, INC.
  
 (b)
Changes in Internal Controls Over Financial Reporting
 
 There
were no changes in our internal control over financial reporting during the
quarter ended March 31, 2009, which were identified in connection with
management’s evaluation required by paragraph (d) of Rules 13a-15 and 15d-15
under the Exchange Act, that have materially affected, or that are reasonably
likely to materially affect, the Company’s internal controls over financial
reporting.
 
 PARTII.  OTHER INFORMATION
 
 Item 1.  Legal Proceedings
 
 The
Company or the Bank is not involved in any legal proceedings other than routine
legal proceedings occurring in the ordinary course of business. Management
believes that such proceedings are, in the aggregate, immaterial to our
financial condition and results of operations.
 
 Item 1A.  Risk Factors
 
 There
have been no material changes to the risk factors set forth in Item 1A to
Part I of our Form 10-K, filed on March 16, 2009, for the three months
ended March 31, 2009, except to the extent factual information disclosed
elsewhere in this Form 10-Q relates to such risk factors.
 
 Item 2.  Unregistered Sales of
Equity Securities and Use of Proceeds
 
 (a)           Unregistered
Sales of Equity Securities.Not applicable.
 
 (b)           Use of
Proceeds.Not applicable.
 
 (c)           Repurchase
of Equity Securities.
 
 At the
Company’s Annual Meeting of Stockholders held on September 12, 2008, the
Company’s stockholders approved the Danvers Bancorp, Inc. 2008 Stock Option and
Incentive Plan (the “Stock Plan”).  Up to 2,497,950 shares of Company
common stock may be granted under the Stock Plan.
 
 On
February 9, 2009 the Compensation Committee of the Board of Directors
implemented the Stock Plan, approved the restricted stock and stock option
grants and authorized management to take the necessary steps to carry out the
implementation of the Stock Plan, including the purchase of up to 713,700 shares
of the Company’s outstanding common shares to fund the restricted stock portion
of the Stock Plan through open market transactions or negotiated block
transactions.  The purchases were made from time to time, based on
open market conditions.
  30
 Table of Contents
 DANVERS
BANCORP, INC.
  
 As of May
5, 2009, total repurchases under the Stock Plan were 446,000 shares at an
average price of $12.99.  In the first quarter of 2009, the Company
purchased 339,900 shares, as follows:
 
 
 Total
      Number of
                      
                      
                      Maximum
      Number ofTotal
                      
                      
                      
                      
                      
                      Shares
      Purchased
                      
                      
                      Shares
      That MayNumber
                      
                      
                      Average
                      
                      
                      as
      Part of Publicly
                      
                      
                      Yet
      be Purchasedof
      Shares
                      
                      
                      Price
      Paid
                      
                      
                      Announced
      Plans
                      
                      
                      Under
      the PlansPeriod
                      
                      Purchased
                      
                      
                      per
      Share
                      
                      
                      or
      Programs
                      
                      
                      or
      ProgramsJanuary
      1-31
                      
                      
                      -
                      
                      
                      $
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -February
      1-28
                      
                      
                      160,200
                      
                      
                      $
                      12.45
                      
                      
                      
                      160,200
                      
                      
                      
                      553,500March
      1-31
                      
                      
                      179,700
                      
                      
                      $
                      12.58
                      
                      
                      
                      179,700
                      
                      
                      
                      373,800Total
                      
                      
                      339,900
                      
                      
                      $
                      12.52
                      
                      
                      
                      339,900
 
 
 Item 3.  Defaults Upon Senior
Securities
 
 Not
applicable.
 
 Item 4.  Submission of Matters to
a Vote of Security Holders
 
 Not
applicable.
 
 Item 5.  Other Information
 
 Not
applicable.
 
  31
 Table of Contents
 DANVERS
BANCORP, INC.
  
 Item
6.                        Exhibits
 
 Exhibit
      No.
                    
                    Description10.16
                    
                    Incentive Stock Option Agreement Under the Danvers
      Bancorp, Inc. 2008 Stock Option and Incentive
Plan+*10.17
                    
                    Restricted Stock Award Agreement Under the Danvers
      Bancorp, Inc. 2008 Stock Option and Incentive
Plan+*10.18
                    
                    Non-Qualified Stock Option Agreement for Company
      Employees Under the Danvers Bancorp, Inc. 2008Stock Option and Incentive
Plan+*10.19
                    
                    Non-Qualified Stock Option Agreement for Non-Employee
      Directors Under the Danvers Bancorp, Inc. 2008Stock Option and Incentive
Plan+*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 Executive 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 Executive Vice President
      and Chief Financial Officer**+    Represents
      management contract or compensatory plan or agreement.*    Filed
      herewith.**
      Furnished
herewith.
 
 
 
  32
 DANVERS
BANCORP, INC.
  Signatures
 
 Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
 
 Danvers
Bancorp, Inc.
  
 Date:
                                May 8, 2009
                                
                                
                                By:
                                /s/
                                Kevin
      T. BottomleyKevin
      T. BottomleyPresident
      and Chief Executive Officer
 
 Date:
              May 8, 2009
              
              
              By:
              /s/
              James
      J. McCarthyJames
      J. McCarthyExecutuve
      Vice President and Chief Operating Officer
  Date:
              May 8, 2009
              
              
              By:
              /s/
              L.
      Mark PanellaL.
      Mark PanellaExecutive
      Vice President and Chief Financial Officer
 
 33