# **UNITEDSTATES**

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

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

## ** **

# **FORM 10-Q**

# ** **

|       |       | **(Mark One)**                                                                                                                                                                                                                                                                                                                        |
|------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |       |                                                                                                                                                                                                                                                                                                                                  |
| **x**      | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934**                                                                                                                                                                                                                               |
|       |       |                                                                                                                                                                                                                                                                                                                                  |
|       |       | **For the quarterly period ended March 31, 2008**                                                                                                                                                                                                                                                                                |
|       |       |                                                                                                                                                                                                                                                                                                                                  |
| **OR**     |
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                            |
| **o**      | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934**                                                                                                                                                                                                                              |
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                            |
| ** ** | ** ** | **For  the transition period from                        to                        ** |

####  

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

### ** **

**DANVERS BANCORP, INC.**

(ExactName of Registrant as Specified in Its Charter)

 

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

 

**(978) 777-2200**

Registrant’stelephone number, including area code

 

Indicate by check mark whether the registrant (1) has filed allreports to be filed by Section 13 or 15(d) of the Securities Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. Yes x Noo

 

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

 

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

 

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

Yes o No x

 

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

 

 

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**DANVERS BANCORP, INC.**

**TABLE OF CONTENTS**

** **
| ** **                             | **Page**                                                                                                                                                      |
|----------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **PART I. FINANCIAL INFORMATION** | ** **                                                                                                                                                    |
|                                   |                                                                                                                                                          |
| Item 1.                                | Financial Statements  (Unaudited)                                                                                                                             |   |
|                                   |                                                                                                                                                          |   |
|                                   | ·  Consolidated Balance Sheets as  of March 31, 2008 and December 31, 2007                                                           | 3 |
|                                   |                                                                                                                                                          |   |
|                                   | ·  Consolidated Statements of  Operations for the Three Months Ended March 31, 2008 and 2007                                              | 4 |
|                                   |                                                                                                                                                          |   |
|                                   | ·  Consolidated Statements of  Changes in Stockholders’ Equity for the Three Months Ended March 31,  2008 and    2007 | 5 |
|                                   |                                                                                                                                                          |   |
|                                   | ·  Consolidated Statements of Cash  Flows for the Three Months Ended March 31, 2008 and 2007                                              | 6 |
|                                   |                                                                                                                                                          |   |
|                                   | ·  Notes to Consolidated Financial  Statements                                                                                                 | 8 |
|                                   |                                                                                                                                                          |   |
| Item  2.                               | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                                                   | 11 |
|                                   |                                                                                                                                                          |   |
| Item  3.                               | Quantitative  and Qualitative Disclosures About Market Risk                                                                                                   | 22 |
|                                   |                                                                                                                                                          |   |
| Item  4.                               | Controls and  Procedures                                                                                                                                      | 24 |
|                                   |                                                                                                                                                          |   |
| Item  4T.                              | Controls and  Procedures                                                                                                                                      | 24 |
|                                   |                                                                                                                                                          |   |
| **PART II.  OTHER INFORMATION**   |                                                                                                                                                          |
|                                   |                                                                                                                                                          |   |
| Item 1.                                | Legal Proceedings                                                                                                                                             | 24 |
|                                   |                                                                                                                                                          |   |
| Item 1A.                               | Risk Factors                                                                                                                                                  | 25 |
|                                   |                                                                                                                                                          |   |
| Item  2.                               | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                                                  | 25 |
|                                   |                                                                                                                                                          |   |
| Item  3.                               | Defaults  Upon Senior Securities                                                                                                                              | 25 |
|                                   |                                                                                                                                                          |   |
| Item  4.                               | Submission  of Matters to a Vote of Security Holders                                                                                                          | 25 |
|                                   |                                                                                                                                                          |   |
| Item 5.                                | Other Information                                                                                                                                             | 25 |
|                                   |                                                                                                                                                          |   |
| Item 6.                                | Exhibits                                                                                                                                                      | 26 |

 

2

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** **

**DANVERS BANCORP, INC.**

 

**PART I. FINANCIAL INFORMATION**

 

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

 

**CONSOLIDATEDBALANCE SHEETS**

**(Unaudited)**

 
| ** **                                                                                                                                                                     | ** ** | **March 31,**      | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                     | ** ** | **2008**                | ** ** | **2007**              | ** ** |
| ** **                                                                                                                                                                     | ** ** | **(In thousands)** | ** ** |
| **ASSETS**                                                                                                                                                                     | ** ** | ** **              | ** ** | ** **            | ** ** |
| Cash and cash equivalents                                                                                                                                                      |       | $                       | 79,634     |                  | $          | 65,862 |   |
| Securities available for sale                                                                                                                                                  |       | 457,998                 |       | 406,715               |       |
| Loans                                                                                                                                                                          |       | 970,789                 |       | 908,497               |       |
| Less allowance for loan losses                                                                                                                                                 |       | (9,443                  | )          | (9,096                | )          |
| Loans, net                                                                                                                                                                     |       | 961,346                 |       | 899,401               |       |
| Federal Home Loan Bank stock, at cost                                                                                                                                          |       | 10,021                  |       | 10,021                |       |
| Premises and equipment, net                                                                                                                                                    |       | 19,907                  |       | 19,706                |       |
| Bank-owned life insurance                                                                                                                                                      |       | 24,023                  |       | 23,665                |       |
| Other real estate owned                                                                                                                                                        |       | 3,187                   |       | 3,513                 |       |
| Accrued interest receivable                                                                                                                                                    |       | 7,169                   |       | 6,862                 |       |
| Deferred tax asset, net                                                                                                                                                        |       | 5,537                   |       | 5,908                 |       |
| Other assets                                                                                                                                                                   |       | 10,793                  |       | 6,650                 |       |
|                                                                                                                                                                           |       | $                       | 1,579,615  |                  | $          | 1,448,303 |   |
|                                                                                                                                                                           |       |                    |       |                  |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                                 | ** ** | ** **              | ** ** | ** **            | ** ** |
| Deposits:                                                                                                                                                                      |       |                    |       |                  |       |
| Demand deposits                                                                                                                                                                |       | $                       | 128,055    |                  | $          | 124,040 |   |
| Savings and NOW accounts                                                                                                                                                       |       | 178,017                 |       | 171,353               |       |
| Money market accounts                                                                                                                                                          |       | 453,206                 |       | 337,847               |       |
| Term certificates over $100,000                                                                                                                                                |       | 232,490                 |       | 228,793               |       |
| Other term certificates                                                                                                                                                        |       | 128,454                 |       | 136,115               |       |
| Total deposits                                                                                                                                                                 |       | 1,120,222               |       | 998,148               |       |
| Stock subscriptions                                                                                                                                                            |       | —                  |       | 162,859               |       |
| Short-term borrowings                                                                                                                                                          |       | 27,698                  |       | 23,800                |       |
| Long-term debt                                                                                                                                                                 |       | 159,258                 |       | 145,042               |       |
| Subordinated debt                                                                                                                                                              |       | 29,965                  |       | 29,965                |       |
| Accrued expenses and other liabilities                                                                                                                                         |       | 9,769                   |       | 14,993                |       |
| Total liabilities                                                                                                                                                              |       | 1,346,912               |       | 1,374,807             |       |
| Stockholders’ equity:                                                                                                                                                     |       |                    |       |                  |       |
| Preferred stock; $0.01 par value,  10,000,000 shares authorized; none issued and outstanding.                                                                                  |       | —                  |       | —                |       |
| Common stock, $0.01 par value, 60,000,000  shares authorized; 17,842,500 and 0 shares issued and outstanding at March 31,  2008 and December 31, 2007, respectively. |       | 178                     |       | —                |       |
| Additional paid-in capital                                                                                                                                                     |       | 174,396                 |       | —                |       |
| Retained earnings                                                                                                                                                              |       | 67,957                  |       | 71,213                |       |
| Accumulated other comprehensive income                                                                                                                                         |       | 4,327                   |       | 2,283                 |       |
| Unearned compensation - ESOP, 1,415,505  shares and 0 shares at March 31, 2008 and December 31, 2007,  respectively.                                                 |       | (14,155                 | )          | —                |       |
| Total stockholders’ equity                                                                                                                                                |       | 232,703                 |       | 73,496                |       |
|                                                                                                                                                                           |       | $                       | 1,579,615  |                  | $          | 1,448,303 |   |

 

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

 

3

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**DANVERS BANCORP, INC.**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**(Unaudited)**

 
| ** **                                                         | ** ** | **Three Months Ended  March 31,** | ** ** |
|--------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                         | ** ** | **2008**                                         | ** ** | **2007** | ** ** |
| ** **                                                         | ** ** | **(In thousands)**                          | ** ** |
| Interest and dividend income:                                      |       |                                             |       |   |   |
| Interest and fees on loans                                         |       | $                                                | 15,620     |   | $ | 15,518 |   |
| Interest on debt securities:                                       |       |                                             |       |   |   |
| Taxable                                                            |       | 4,792                                            |       | 2,964 |   |
| Non-taxable                                                        |       | 189                                              |       | 77 |   |
| Dividends on equity securities                                     |       | 108                                              |       | 186 |   |
| Interest on cash equivalents                                       |       | 528                                              |       | 191 |   |
| Total interest and dividend income                                 |       | 21,237                                           |       | 18,936 |   |
|                                                               |       |                                             |       |   |   |
| Interest expense:                                                  |       |                                             |       |   |   |
| Interest on deposits:                                              |       |                                             |       |   |   |
| Savings and NOW accounts                                           |       | 660                                              |       | 260 |   |
| Money market accounts                                              |       | 3,329                                            |       | 3,263 |   |
| Term certificates                                                  |       | 4,273                                            |       | 4,352 |   |
| Interest on short-term borrowings                                  |       | 121                                              |       | 169 |   |
| Interest on long-term debt and subordinated  debt                  |       | 2,329                                            |       | 2,399 |   |
| Total interest expense                                             |       | 10,712                                           |       | 10,443 |   |
| Net interest income                                                |       | 10,525                                           |       | 8,493 |   |
| Provision for loan losses                                          |       | 600                                              |       | 75 |   |
| Net interest income, after provision for  loan losses              |       | 9,925                                            |       | 8,418 |   |
|                                                               |       |                                             |       |   |   |
| Non-interest income:                                               |       |                                             |       |   |   |
| Service charges on deposits                                        |       | 630                                              |       | 546 |   |
| Loan servicing fees                                                |       | 59                                               |       | 66 |   |
| Net gain on sales of loans                                         |       | 61                                               |       | 91 |   |
| Net gain (loss) on sales of securities                             |       | 772                                              |       | (16 | ) |
| Net increase in cash surrender value of  bank-owned life insurance |       | 358                                              |       | 257 |   |
| Other operating income                                             |       | 405                                              |       | 307 |   |
| Total non-interest income                                          |       | 2,285                                            |       | 1,251 |   |
|                                                               |       |                                             |       |   |   |
| Non-interest expense:                                              |       |                                             |       |   |   |
| Salaries and employee benefits                                     |       | 10,036                                           |       | 5,443 |   |
| Occupancy                                                          |       | 1,310                                            |       | 1,090 |   |
| Equipment                                                          |       | 753                                              |       | 650 |   |
| Outside services                                                   |       | 282                                              |       | 133 |   |
| Contribution to the Danversbank Charitable  Foundation             |       | 6,850                                            |       | — |   |
| Other real estate owned expense                                    |       | 794                                              |       | 29 |   |
| Other operating expense                                            |       | 1,632                                            |       | 1,635 |   |
| Total non-interest expense                                         |       | 21,657                                           |       | 8,980 |   |
| Income (loss) before provision (benefit)  for income taxes         |       | (9,447                                           | )          | 689 |   |
| Provision (benefit) for income taxes                               |       | (6,191                                           | )          | 160 |   |
| Net income (loss)                                                  |       | $                                                | (3,256     | ) | $ | 529 |   |

 

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

 

4

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** **

**DANVERS BANCORP, INC.**

**CONSOLIDATEDSTATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY**

**(Unaudited)**

 
| ** **                                                                                                | ** ** | **Common Stock**                                 | ** ** | **Additional  Paid-In** | ** ** | **Retained** | ** ** | **Accumulated  Other  Comprehensive** | ** ** | **Unearned**           | ** ** | **Total  Stockholders’** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|-------------------------|------------|--------------|------------|---------------------------------------|------------|------------------------|------------|-------------------------------|------------|
| ** **                                                                                                | ** ** | **Shares**                                            | ** ** | **Amount**              | ** ** | **Capital**  | ** ** | **Earnings**                          | ** ** | **Income (Loss)** | ** ** | **Compensation**              | ** ** | **Equity** | ** ** |
| ** **                                                                                                | ** ** | **(Dollars  in thousands, except per share amounts)** | ** ** |
| ** **                                                                                                | ** ** | ** **                                            | ** ** | ** **              | ** ** | ** **   | ** ** | ** **                            | ** ** | ** **             | ** ** | ** **                    | ** ** | ** ** | ** ** |
| Balance at  December 31, 2006                                                                        |       | —                                                |       | $                       | —     |         | $          | —                                |       | $                      | 66,859     |                          | $          | (1,780 | ) | $ | — |   | $ | 65,079 |   |
| Comprehensive  income:                                                                                    |       |                                                  |       |                    |       |         |       |                                  |       |                   |       |                          |       |   |   |
| Net income                                                                                                |       | —                                                |       | —                  |       | —       |       | 529                                   |       | —                 |       | —                        |       | 529 |   |
| Net unrealized  gain on securities available for sale, net of reclassification adjustment and  tax effect |       | —                                                |       | —                  |       | —       |       | —                                |       | 787                    |       | —                        |       | 787 |   |
| Change in fair  value and amortization of derivative used for cash flow hedge, net of tax  effect         |       | —                                                |       | —                  |       | —       |       | —                                |       | (45                    | )          | —                        |       | (45 | ) |
| Total  comprehensive income                                                                               |       |                                                  |       |                    |       |         |       |                                  |       |                   |       |                          |       | 1,271 |   |
| Balance at  March 31, 2007                                                                           |       | —                                                |       | $                       | —     |         | $          | —                                |       | $                      | 67,388     |                          | $          | (1,038 | ) | $ | — |   | $ | 66,350 |   |
|                                                                                                      |       |                                                  |       |                    |       |         |       |                                  |       |                   |       |                          |       |   |   |
| Balance at  December 31, 2007                                                                        |       | —                                                |       | $                       | —     |         | $          | —                                |       | $                      | 71,213     |                          | $          | 2,283 |   | $ | — |   | $ | 73,496 |   |
| Comprehensive  income (loss):                                                                             |       |                                                  |       |                    |       |         |       |                                  |       |                   |       |                          |       |   |   |
| Net loss                                                                                                  |       | —                                                |       | —                  |       | —       |       | (3,256                                | )          | —                 |       | —                        |       | (3,256 | ) |
| Net unrealized  gain on securities available for sale, net of reclassification adjustment and  tax effect |       | —                                                |       | —                  |       | —       |       | —                                |       | 2,045                  |       | —                        |       | 2,045 |   |
| Change in fair  value and amortization of derivative used for cash flow hedge, net of tax  effect         |       | —                                                |       | —                  |       | —       |       | —                                |       | (1                     | )          | —                        |       | (1 | ) |
| Total  comprehensive loss                                                                                 |       |                                                  |       |                    |       |         |       |                                  |       |                   |       |                          |       | (1,212 | ) |
| Issuance of  common stock for initial public offering, net of expenses of $3,850                     |       | 17,192,500                                            |       | 172                     |       | 167,902      |       | —                                |       | —                 |       | —                        |       | 168,074 |   |
| Issuance of  common stock to the Danversbank Charitable Foundation                                        |       | 650,000                                               |       | 6                       |       | 6,494        |       | —                                |       | —                 |       | —                        |       | 6,500 |   |
| Stock purchased  by ESOP                                                                                  |       | —                                                |       | —                  |       | —       |       | —                                |       | —                 |       | (14,155                       | )          | (14,155 | ) |
| Balance at  March 31, 2008                                                                           |       | 17,842,500                                            |       | $                       | 178        |         | $          | 174,396                               |       | $                      | 67,957     |                          | $          | 4,327 |   | $ | (14,155 | ) | $ | 232,703 |   |

 

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

 

5

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** **

**DANVERS BANCORP, INC.**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(Unaudited)**

** **
| ** **                                                                            | ** ** | **Three Months Ended  March 31,** | ** ** |
|---------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                            | ** ** | **2008**                                         | ** ** | **2007** | ** ** |
| ** **                                                                            | ** ** | **(In thousands)**                          | ** ** |
| Cash flows from operating activities:                                                 |       |                                             |       |   |   |
| Net income (loss)                                                                     |       | $                                                | (3,256     | ) | $ | 529 |   |
| Adjustments to reconcile net income (loss)  to net cash used in operating activities: |       |                                             |       |   |   |
| Provision for loan losses                                                             |       | 600                                              |       | 75 |   |
| Writedown of other real estate owned                                                  |       | 808                                              |       | — |   |
| Depreciation and amortization                                                         |       | 926                                              |       | 812 |   |
| Amortization of net deferred loan fees and  costs                                     |       | (138                                             | )          | (112 | ) |
| Deferred tax provision (benefit)                                                      |       | (1,066                                           | )          | 1,629 |   |
| Amortization of core deposit intangible and  servicing rights                         |       | 53                                               |       | 56 |   |
| Accretion of securities, net                                                          |       | (14                                              | )          | (9 | ) |
| Net loss (gain) on sales of securities                                                |       | (772                                             | )          | 16 |   |
| Change in fair value of derivative  financial instruments                             |       | —                                           |       | 60 |   |
| Loans originated for sale                                                             |       | (3,490                                           | )          | (3,533 | ) |
| Proceeds from sale of loans originated for  sale                                      |       | 3,232                                            |       | 4,077 |   |
| Issuance of common stock to Danversbank  Charitable Foundation                        |       | 6,500                                            |       | — |   |
| Changes in other assets and liabilities:                                              |       |                                             |       |   |   |
| Accrued interest receivable                                                           |       | (307                                             | )          | 219 |   |
| Other assets and bank-owned life insurance                                            |       | (4,556                                           | )          | (449 | ) |
| Accrued expenses and other liabilities                                                |       | (5,724                                           | )          | (4,578 | ) |
| Net cash used in operating activities                                                 |       | (7,204                                           | )          | (1,208 | ) |
| Cash flows from investing activities:                                                 |       |                                             |       |   |   |
| Activity in available-for-sale securities:                                            |       |                                             |       |   |   |
| Sales                                                                                 |       | 32,945                                           |       | 85 |   |
| Maturities, prepayments and calls                                                     |       | 77,814                                           |       | 41,491 |   |
| Purchases                                                                             |       | (157,273                                         | )          | (57,342 | ) |
| Redemption of Federal Home Loan Bank stock                                            |       | —                                           |       | 921 |   |
| Funds advanced on other real estate owned                                             |       | (482                                             | )          | — |   |
| Net loans (originations) payments                                                     |       | (62,149                                          | )          | 17,862 |   |
| Purchase of premises and equipment                                                    |       | (1,127                                           | )          | (989 | ) |
| Net cash provided by (used in) investing  activities                                  |       | (110,272                                         | )          | 2,028 |   |
|                                                                                       |            |                                                  |            |  |  |  |  |

 

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

 

6

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**DANVERS BANCORP, INC.**

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

**(Unaudited)**

** **
| ** **                                                                | ** ** | **Three Months Ended  March 31,** | ** ** |
|---------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                | ** ** | **2008**                                         | ** ** | **2007** | ** ** |
| ** **                                                                | ** ** | **(In thousands)**                          | ** ** |
| Cash flows from financing activities:                                     |       |                                             |       |   |   |
| Net increase (decrease) in:                                               |       |                                             |       |   |   |
| Term certificates                                                         |       | $                                                | (3,964     | ) | $ | (31,339 | ) |
| Other deposits                                                            |       | 126,038                                          |       | 21,693 |   |
| Short-term borrowings                                                     |       | 3,898                                            |       | 11,645 |   |
| Stock subscriptions                                                       |       | (162,859                                         | )          | — |   |
| Activity in long-term debt:                                               |       |                                             |       |   |   |
| Proceeds from advances                                                    |       | 15,000                                           |       | — |   |
| Payment of advances                                                       |       | (784                                             | )          | (21,440 | ) |
| Net proceeds from issuance of common stock                                |       | 168,074                                          |       | — |   |
| Acquisition of common stock by ESOP                                       |       | (14,155                                          | )          | — |   |
| Net cash provided by (used in) financing  activities                      |       | 131,248                                          |       | (19,441 | ) |
| Change in cash and cash equivalents                                       |       | 13,772                                           |       | (18,621 | ) |
| Cash and cash equivalents at beginning of  period                         |       | 65,862                                           |       | 45,120 |   |
| Cash and cash equivalents at end of period                                |       | $                                                | 79,634     |   | $ | 26,499 |   |
|                                                                      |       |                                             |       |   |   |
| Supplementary disclosure of cash flow  information:                       |       |                                             |       |   |   |
| Cash paid during the period for:                                          |       |                                             |       |   |   |
| Interest                                                                  |       | $                                                | 10,042     |   | $ | 10,075 |   |
| Income taxes                                                              |       | 215                                              |       | 378 |   |
| Supplementary disclosure of non-cash  financing and investing activities: |       |                                             |       |   |   |
| Unsettled securities transactions                                         |       | 500                                              |       | 1,511 |   |

 

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

 

7

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**DANVERSBANCORP, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

***1.****             **Basis ofPresentation*

** **

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

 

In the opinion of management, all adjustments(consisting of only normal recurring adjustments) necessary for a fairpresentation of the financial position, results of operations, and cash flowsfor the reporting interim periods have been included.  The consolidated balance sheet of the Companyas of December 31, 2007 has been derived from the audited consolidatedbalance sheet of the Company as of that date. The accompanying consolidated financial statements should be read inconjunction with the audited consolidated financial statements and accompanyingnotes thereto included in the Company’s most recent Securities and ExchangeCommission Form 10-K filed by the Company for the year ended December 31,2007.  The results of operation for thethree months ended March 31, 2008 and 2007 are not necessarily indicativeof the results to be obtained for a full year.

 

***2.******             ******Conversionand Change in Corporate Form***

 

The conversion to a public stock holdingcompany closed on January 9, 2008. The Company issued 17,192,500 shares ofcommon stock to subscribers (including tax-qualified employee benefit plans) atthe offering price of $10.00 per share. The Company also contributed $350,000 in cash and 650,000 shares ofcommon stock to the Foundation.  Conversioncosts amounting to $3,850,000 have been netted against the offering proceeds.  Theoffering was oversubscribed by qualifyingdepositors of the Bank. Accordingly, qualifying depositors had valid ordersfilled in accordance with the allocation procedures and there were no remainingshares to be offered in a community offering.

 

***3.******             ******FairValue of Assets and Liabilities***

 

EffectiveJanuary 1, 2008, the Company adopted Statement of Financial AccountingStandards No. 157 (“SFAS No. 157”), *FairValue Measurements*, which provides a framework for measuring fairvalue under generally accepted accounting principles.

 

TheCompany also adopted SFAS No. 159, *TheFair Value Option for Financial Assets and Financial Liabilities, including anamendment of FASB Statement No. 115. *SFAS No. 159 allows an entity the irrevocable option toelect fair value for the initial and subsequent measurement for certainfinancial assets and liabilities on a contract-by-contract basis.  The Company did not elect fair valuetreatment for any financial assets or liabilities upon adoption.

 

Inaccordance with SFAS 157, the Company groups it financial assets and financialliabilities measured at fair value in three levels, based on the markets inwhich the assets and liabilities are traded and the reliability of theassumptions used to determine fair value. The three levels are defined as follows:

 

Level1 – Quoted prices in active markets for identical assets or liabilities.  Valuations are obtained from readilyavailable pricing sources for market transactions involving identical assets orliabilities.  Currently, the Company doesnot have any items classified as Level 1.

 

8

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Level2 – Valuations based on observable inputs (other than Level 1 prices), such asquoted prices for similar assets or liabilities; quoted prices in markets thatare not active; or other inputs that are observable, either directly orindirectly, or can be corroborated by observable market data for substantiallythe full term of the assets or liabilities. The fair value of fixed maturity investments included in the Level 2category were based on market values obtained from an independent pricingservice that were evaluated using pricing models that vary by asset class andincorporate available trade, bid and other market information and price quotesfrom well established independent broker-dealers.  The independent pricing service monitorsmarket indicators, industry and economic events, and for broker-quoted onlysecurities, obtains quotes from market makers or broker-dealers that itrecognizes to be market participants. The Level 2 categories include U.S. Government and government-sponsoredenterprises, mortgage-backed securities, corporate bonds, foreign governmentbonds and municipal bonds.

 

Level3 – Valuations based on inputs that are unobservable and significant to theoverall fair value measurement of the assets or liabilities and involvemanagement judgment.  Level 3 assets orliabilities include financial instruments whose value is determined using pricingmodels, discounted cash flow methodologies, or similar techniques, as well asinstruments for which the determination of fair value requires significantmanagement judgment or estimation.  TheLevel 3 categories include impaired consumer loans.

 

Assetsmeasured at fair value on a recurring basis as of March 31, 2008:

 
| ** **                       | ** ** | ** **              | ** ** | ** **       | ** ** | ** **       | ** ** | **Balance at** | ** ** |
|----------------------------------|------------|-------------------------|------------|------------------|------------|------------------|------------|---------------------|------------|
| ** **                       | ** ** | ** **              | ** ** | ** **       | ** ** | ** **       | ** ** | **March 31,**  | ** ** |
| ** **                       | ** ** | **Level 1**        | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **2008**            | ** ** |
| ** **                       | ** ** | **(In thousands)** | ** ** |
| ** **                       | ** ** | ** **              | ** ** | ** **       | ** ** | ** **       | ** ** | ** **          | ** ** |
| U.S. Government                  |       | $                       | —     |             | $          | 2,031            |       | $                   | —     |   | $ | 2,031 |   |
| Government-sponsored enterprises |       | —                  |       | 179,686          |       | —           |       | 179,686             |       |
| Mortgage-backed                  |       | —                  |       | 256,908          |       | —           |       | 256,908             |       |
| Municipal bonds                  |       | —                  |       | 19,042           |       | —           |       | 19,042              |       |
| Other bonds                      |       | —                  |       | 331              |       | —           |       | 331                 |       |
|                             |       | $                       | —     |             | $          | 457,998          |       | $                   | —     |   | $ | 457,998 |   |

 

9

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Also, the Companymay be required, from time to time, to measure certain other financial assetson a nonrecurring basis in accordance with GAAP.  These adjustments to fair value usuallyresult from application of lower-of-cost-or-market accounting or write-downs ofindividual assets.  The following tablesummarizes the fair value hierarchy used to determine each adjustment and thecarrying value of the related individual assets as of March 31, 2008:

 
| ** **              | ** ** | ** **                   | ** ** | ** **       | ** ** | ** **       | ** ** | **Quarter Ended** | ** ** |
|-------------------------|------------|------------------------------|------------|------------------|------------|------------------|------------|------------------------|------------|
| ** **              | ** ** | ** **                   | ** ** | ** **       | ** ** | ** **       | ** ** | **March 31,**     | ** ** |
| ** **              | ** ** | **March 31, 2008** | ** ** | **2008**         | ** ** |
| ** **              | ** ** | ** **                   | ** ** | ** **       | ** ** | ** **       | ** ** | **Total**              | ** ** |
| ** **              | ** ** | **Level 1**             | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Gains(Losses)**      | ** ** |
| ** **              | ** ** | **(In thousands)**      | ** ** |
| ** **              | ** ** | ** **                   | ** ** | ** **       | ** ** | ** **       | ** ** | ** **             | ** ** |
| Other real estate owned |       | $                            | —     |             | $          | 3,187            |       | $                      | —     |   | $ | (808 | ) |
| Loans                   |       | —                       |       | 6,369            |       | 14               |       | (186                   | )          |
|                    |       | $                            | —     |             | $          | 9,556            |       | $                      | 14         |   | $ | (994 | ) |

 

The amount of other real estate owned represents the carrying value andrelated write-downs based on well established independent broker’s assessments of the currentinventory of 1-4 family housing units in the market, costs to complete and theappraised value of the collateral.   Theamount of loans in Level 2 represents the carrying value and relatedwrite-downs of impaired loans for which adjustments are based on appraisedvalue of the collateral.  The amount ofloans in Level 3 represents the carrying value and related write-downs ofimpaired consumer loans.  As the individualbalances are small, the carrying amount of the loan has been reserved.

 

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

 

Employee benefitsare provided to employees through participation in the Savings Bank’s EmployeesRetirement Association’s Pension Plan (“SBERA Pension Plan”).  The benefits are interrelated with benefitsprovided under the 401(k) Plan and based on employee’s years of serviceand annual compensation, as defined in the SBERA Pension Plan.  Effective August 15, 2003, the Companycurtailed the benefits under the Plan, and no additional employees wereeligible to participate in the Plan. Effective June 30, 2007, the Company voted to terminate the Plan.

 

The net pension expense for the Plan included the following components:

 
| ** **                     | ** ** | **Three Months**         | ** ** |
|--------------------------------|------------|-------------------------------|------------|
| ** **                     | ** ** | **Ended March 31,** | ** ** |
| ** **                     | ** ** | **2008**                      | ** ** | **2007** | ** ** |
| ** **                     | ** ** | **(In thousands)**       | ** ** |
|                           |       |                          |       |   |   |
| Interest cost                  |       | $                             | —     |   | $ | 61 |   |
| Expected return on plan assets |       | —                        |       | (66 | ) |
| Settlement loss                |       | —                        |       | 77 |   |
| Net pension expense            |       | $                             | —     |   | $ | 72 |   |

 

The Company previously disclosed in its consolidated financial statementsfor the year ended December 31, 2007, estimated benefits of $253,000 arepayable in 2008.

 

10

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***5.     RecentAccounting Pronouncements***

 

In December 2007, the FASB issuedStatement No. 141 (revised), ‘‘Business Combinations’’, which replacesFASB Statement No. 141, and applies to all business entities, includingmutual entities that previously used the pooling-of-interests method ofaccounting for certain business combinations. This Statement makes significantamendments to other Statements and other authoritative guidance, and appliesprospectively to business combinations for which the acquisition date is on orafter the beginning of the first annual reporting period beginning on or after December 15,2008.

 

In December 2007, the FASB issued Statement No. 160, ‘‘NoncontrollingInterests in Consolidated Financial Statements, an amendment of ARB No. 51.’’This Statement establishes accounting and reporting standards for thenoncontrolling interest in a subsidiary and for the deconsolidation of asubsidiary. It clarifies that a noncontrolling interest in a subsidiary is anownership interest in the consolidated entity that should be reported as equityin the consolidated financial statements. This Statement is effective forfiscal years beginning on or after December 15, 2008 and the adoption ofthis Statement is not expected to have a material impact on the Company’sconsolidated financial statements.

 

**Item 2.  Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

 

The following analysis discusses the changesin financial position and results of operation of the Company, and should beread in conjunction with both the unaudited consolidated interim financialstatements and notes thereto, appearing in Part 1, Item 1 of this report.

 

***Forward-LookingStatements***

*** ***

Thisform 10-Q contains forward-looking statements, which can be identified by theuse of such words as estimate, project, believe, intend, anticipate, plan,seek, expect and similar expressions. These forward-looking statements includestatements of our goals, intentions and expectations, statements regarding ourbusiness plans and prospects and growth and operating strategies, statementsregarding the asset quality of our loan and investment portfolios; andestimates of our risks and future costs and benefits.  These forward-looking statements are subject tosignificant risks, assumptions and uncertainties, including, among otherthings, the following important factors that could affect the actual outcome offuture events significantly increased competition among depository and otherfinancial institutions, inflation and changes in the interest rate environmentthat reduce our margins or reduce the fair value of financial instruments,general economic conditions, either nationally or in our market areas, that areworse than expected, adverse changes in the securities markets, legislative orregulatory changes that adversely affect our business, our ability to enter newmarkets successfully and take advantage of growth opportunities, changes inconsumer spending, borrowing and savings habits, changes in accounting policiesand practices, as may be adopted by the bank regulatory agencies and theFinancial Accounting Standards Board, and changes in our organization,compensation and benefit plans.  Becauseof these and other uncertainties, our actual future results may be materiallydifferent from the results indicated by these forward-looking statements.

 

11

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***Critical Accounting Policies***

 

The discussion and analysis of the Company’sfinancial condition and results of operations is based upon the Company’sunaudited consolidated financial statements, which have been prepared inconformity with accounting principles generally accepted in the United Statesof America for interim financial information and with the instructions for Form 10-Q.  In preparing the consolidated financial statements inconformity with accounting principles generally accepted in the United Statesof America, management is required to make estimates and assumptions thataffect the reported amounts of assets and liabilities as of the date of thebalance sheet and income and expenses during the reported period. Actual resultscould differ from those estimates. Material estimates that are particularly susceptible to change in thenear term relate to the determination of the allowance for loan losses, thevaluation of other real estate owned and the valuation of the deferred taxassets.

 

***Comparison of FinancialCondition at March 31, 2008 and December 31, 2007***

*** ***

*Total Assets.*******Total assets increased by $131.3 million,or 9.1%, to $1.58 billion at March 31, 2008 from $1.45 billion at December 31,2007. This increase was primarily due to an increase in loans and securitiesavailable for sale. The increase was funded by a significant increase indeposits during the quarter.

 

*Cash and Cash Equivalents.*******Cash and cash equivalents increased by$13.8 million, or 20.9%, to $79.6 million at March 31, 2008 from $65.9million at December 31, 2007, as some of the increase in deposits waspartially invested in overnight investments for liquidity purposes.

 

*Securities.*******The securities portfolio aggregated$458.0 million at March 31, 2008, an increase of $51.3 million, or 12.6%,from $406.7 million at December 31, 2007. This increase was due to theCompany’s decision to take advantage of favorable yields available onmortgage-backed securities and municipal bonds. Within the portfolio, obligationsof government-sponsored enterprises decreased by $41.1 million andmortgage-backed securities increased by $91.8, as the Company replaced somefixed-rate agency securities with adjustable-rate mortgage-backed securities.

 

At March 31, 2008 and December 31,2007, our mortgage-backed securities (“MBS”) totaled 56.1% and 40.6%,respectively, of our investment portfolio and consisted of high quality ratingpass-through securities that are directly insured or guaranteed by Freddie Mac,Fannie Mae or Ginnie Mae.  The MBSportfolio is primarily backed by 1-4 family pools of mortgages that have loanswith interest rates that are within a set range and have varyingmaturities.  None of our MBS havesub-prime residential mortgages or home equity loans as part of theirunderlying loan pools.  We targetinstruments with five to twelve year weighted average lives, with expectedaverage life extensions up to a maximum of fifteen years in a rising rateenvironment.  In an effort to protectagainst a rising interest rate environment, we increased our concentration ofadjustable-rate MBS in the investment portfolio from 15.44% at December 31,2007 to 30.32% at March 31, 2008. All our MBS were rated AAA at March 31, 2008 and December 31,2007.   Although unforeseeable changes inmarket conditions may affect future ratings, management does not expect todowngrade any ratings in our current MBS portfolio.

 

12

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Theamortized cost and fair value of securities available for sale, with grossunrealized gains and losses follows:

 
| ** **                       | ** ** | **Amortized  Cost**     | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair Value** | ** ** |
|----------------------------------|------------|-------------------------|------------|------------------------------|------------|-------------------------------|------------|---------------------|------------|
| ** **                       | ** ** | **(In thousands)** | ** ** |
| ***March 31, 2008:***       |       |                    |       |                         |       |                          |       |                |       |
| U.S. Government                  |       | $                       | 2,000      |                         | $          | 31                            |       | $                   | —     |   | $ | 2,031 |   |
| Government-sponsored enterprises |       | 174,887                 |       | 4,799                        |       | —                        |       | 179,686             |       |
| Mortgage-backed                  |       | 254,282                 |       | 3,047                        |       | (421                          | )          | 256,908             |       |
| Municipal bonds                  |       | 19,191                  |       | 120                          |       | (269                          | )          | 19,042              |       |
| Other bonds                      |       | 328                     |       | 4                            |       | (1                            | )          | 331                 |       |
|                             |       | $                       | 450,688    |                         | $          | 8,001                         |       | $                   | (691       | ) | $ | 457,998 |   |
|                             |       |                    |       |                         |       |                          |       |                |       |
| ***December 31, 2007:***    |       |                    |       |                         |       |                          |       |                |       |
| U.S. Government                  |       | $                       | 2,000      |                         | $          | 21                            |       | $                   | —     |   | $ | 2,021 |   |
| Government-sponsored enterprises |       | 217,929                 |       | 3,010                        |       | (109                          | )          | 220,830             |       |
| Mortgage-backed                  |       | 164,062                 |       | 1,240                        |       | (211                          | )          | 165,091             |       |
| Municipal bonds                  |       | 18,569                  |       | 64                           |       | (191                          | )          | 18,442              |       |
| Other bonds                      |       | 328                     |       | 4                            |       | (1                            | )          | 331                 |       |
|                             |       | $                       | 402,888    |                         | $          | 4,339                         |       | $                   | (512       | ) | $ | 406,715 |   |

 

Informationpertaining to securities with gross unrealized losses aggregated by investmentcategory and length of time that individual securities have been in acontinuous loss position follows:

 
| ** **                       | ** ** | **Less Than Twelve  Months** | ** ** | **Over Twelve Months** | ** ** |
|----------------------------------|------------|----------------------------------------|------------|----------------------------------|------------|
| ** **                       | ** ** | **Gross  Unrealized  Losses**          | ** ** | **Fair  Value**                  | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair  Value** | ** ** |
| ** **                       | ** ** | **(In thousands)**                | ** ** |
| ***March 31, 2008:***       |       |                                   |       |                             |       |   |   |   |   |
| Mortgage-backed                  |       | $                                      | (402       | )                                | $          | 68,191 |   | $ | (19 | ) | $ | 1,722 |   |
| Municipal bonds                  |       | (30                                    | )          | 4,374                            |       | (239 | ) | 6,376 |   |
| Other bonds                      |       | —                                 |       | —                           |       | (1 | ) | 224 |   |
|                             |       | $                                      | (432       | )                                | $          | 72,565 |   | $ | (259 | ) | $ | 8,322 |   |
|                             |       |                                   |       |                             |       |   |   |   |   |
| ***December 31, 2007:***    |       |                                   |       |                             |       |   |   |   |   |
| Government-sponsored enterprises |       | $                                      | (1         | )                                | $          | 256 |   | $ | (108 | ) | $ | 21,392 |   |
| Mortgage-backed                  |       | (118                                   | )          | 35,879                           |       | (93 | ) | 13,042 |   |
| Municipal bonds                  |       | (160                                   | )          | 10,378                           |       | (31 | ) | 2,303 |   |
| Other bonds                      |       | —                                 |       | —                           |       | (1 | ) | 174 |   |
|                             |       | $                                      | (279       | )                                | $          | 46,513 |   | $ | (233 | ) | $ | 36,911 |   |

 

13

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Management evaluates securities for other-than-temporary impairment onat least a quarterly basis, and more frequently when economic or marketconcerns warrant more frequent evaluation. Consideration is given to (1) thelength of time and the extent to which the fair value has remained less thancost, (2) the financial condition and near-term prospects of the issuer,and (3) the intent and ability of the Company to retain its investment inthe issue for a period of time sufficient to allow for any anticipated recoveryin fair value.  At March 31, 2008and December 31, 2007, the Company determined that the unrealized lossesfrom debt securities are temporary in nature.

 

*Net Loans.*******Net loans as of March 31, 2008 were$961.1 million, an increase of $61.7 million, or 6.9%, from net loan balancesof $899.4 million as of December 31, 2007. The Company experiencedsignificant growth in commercial and industrial (C&I) loan balances as aresult of the addition of an asset-based lending group in the fourth quarter of2007. For the first quarter of 2008, a decrease in Danverbank’s commercial realestate loan portfolio of $5.6 million was offset by an increase in C&Iloans of $49.1 million.

 

The following table sets forth the composition of the loan portfolio atthe dates indicated:

 
| ** **                | ** ** | **March 31, 2008**         | ** ** | **December 31, 2007** | ** ** |
|---------------------------|------------|--------------------------------------|------------|---------------------------------|------------|
| ** **                | ** ** | **Amount**                           | ** ** | **Percent**                     | ** ** | **Amount** | ** ** | **Percent** | ** ** |
| ** **                | ** ** | **(Dollars in thousands)** | ** ** |
| Real estate mortgages:    |       |                                 |       |                            |       |   |   |   |   |
| Construction              |       | $                                    | 123,987    |                            | 12.7       | % | $ | 108,638 |   | 11.9 | % |
| Residential               |       | 184,835                              |       | 19.0                            |       | 180,511 |   | 19.9 |   |
| Commercial                |       | 228,859                              |       | 23.6                            |       | 234,425 |   | 25.8 |   |
| Home equity               |       | 35,570                               |       | 3.7                             |       | 36,679 |   | 4.0 |   |
| C&I                   |       | 388,747                              |       | 40.0                            |       | 339,669 |   | 37.4 |   |
| Consumer                  |       | 9,737                                |       | 1.0                             |       | 9,564 |   | 1.0 |   |
| Total loans               |       | 971,735                              |       | 100.0                           | %          | 909,486 |   | 100.0 | % |
| Allowance for loan losses |       | (9,443                               | )          |                            |       | (9,096 | ) |   |   |
| Net deferred loan fees    |       | (946                                 | )          |                            |       | (989 | ) |   |   |
| Loans, net                |       | $                                    | 961,346    |                            |       |   | $ | 899,401 |   |   |   |

 

14

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The following table sets forth the amounts and categories of ournon-performing assets at the dates indicated:

 
| ** **                                  | ** ** | **March 31,**                   | ** ** | **December 31,** | ** ** |
|---------------------------------------------|------------|--------------------------------------|------------|-----------------------|------------|
| ** **                                  | ** ** | **2008**                             | ** ** | **2007**              | ** ** |
| ** **                                  | ** ** | **(Dollars in thousands)** | ** ** |
| Nonaccrual loans:                           |       |                                 |       |                  |       |
| Real estate mortgages:                      |       |                                 |       |                  |       |
| Construction                                |       | $                                    | 3,789      |                  | $          | 2,618 |   |
| Residential                                 |       | 1,548                                |       | 1,225                 |       |
| Commercial                                  |       | —                               |       | —                |       |
| Home equity                                 |       | 395                                  |       | 64                    |       |
| Total real estate mortgages                 |       | 5,732                                |       | 3,907                 |       |
| C&I                                     |       | 637                                  |       | 451                   |       |
| Consumer                                    |       | 14                                   |       | 29                    |       |
| Total                                       |       | $                                    | 6,383      |                  | $          | 4,387 |   |
|                                        |       |                                 |       |                  |       |
| Total non-performing loans                  |       | $                                    | 6,383      |                  | $          | 4,387 |   |
| Other real estate owned                     |       | 3,187                                |       | 3,513                 |       |
| Total non-performing assets                 |       | $                                    | 9,570      |                  | $          | 7,900 |   |
| Total non-performing loans to total loans   |       | 0.66                                 | %          | 0.48                  | %          |
| Total non-performing loans to total assets  |       | 0.40                                 | %          | 0.30                  | %          |
| Total non-performing assets to total assets |       | 0.61                                 | %          | 0.55                  | %          |

 

15

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The following table sets forth the activityin the allowance for loan losses for the periods indicated:

 
| ** **                                                                    | ** ** | **At or For the Three** | ** ** |
|-------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                    | ** ** | **Months Ended March 31,**   | ** ** |
| ** **                                                                    | ** ** | **2008**                                    | ** ** | **2007** | ** ** |
| ** **                                                                    | ** ** | **(Dollars in thousands)**        | ** ** |
| ** **                                                                    | ** ** | ** **                                  | ** ** | ** ** | ** ** |
| Allowance balance at beginning of period                                      |       | $                                           | 9,096      |   | $ | 10,412 |   |
| Provision for loan losses                                                     |       | 600                                         |       | 75 |   |
| Charge-offs:                                                                  |       |                                        |       |   |   |
| Real estate mortgages:                                                        |       |                                        |       |   |   |
| Construction                                                                  |       | —                                      |       | — |   |
| Residential                                                                   |       | 85                                          |       | 5 |   |
| Commercial                                                                    |       | —                                      |       | — |   |
| Home equity                                                                   |       | 3                                           |       | 1 |   |
| Total real estate mortgages                                                   |       | 88                                          |       | 6 |   |
| C&I                                                                       |       | 156                                         |       | 56 |   |
| Consumer                                                                      |       | 24                                          |       | 3 |   |
| Total charge-offs                                                             |       | 268                                         |       | 65 |   |
| Recoveries:                                                                   |       |                                        |       |   |   |
| Real estate mortgages:                                                        |       |                                        |       |   |   |
| Construction                                                                  |       | —                                      |       | — |   |
| Residential                                                                   |       | 8                                           |       | — |   |
| Commercial                                                                    |       | —                                      |       | — |   |
| Home equity                                                                   |       | —                                      |       | — |   |
| Total real estate mortgages                                                   |       | 8                                           |       | — |   |
| C&I                                                                       |       | —                                      |       | 18 |   |
| Consumer                                                                      |       | 7                                           |       | 13 |   |
| Total recoveries                                                              |       | 15                                          |       | 31 |   |
| Net charge-offs                                                               |       | 253                                         |       | 34 |   |
| Allowance balance at end of period                                            |       | $                                           | 9,443      |   | $ | 10,453 |   |
|                                                                          |       |                                        |       |   |   |
| Total loans outstanding                                                       |       | $                                           | 971,735    |   | $ | 864,968 |   |
| Average loans outstanding                                                     |       | $                                           | 927,932    |   | $ | 872,270 |   |
|                                                                          |       |                                        |       |   |   |
| Allowance for loan losses as a percent of total loans outstanding             |       | 0.97                                        | %          | 1.21 | % |
| Net loans charged off as a percent of average loans outstanding  (annualized) |       | 0.11                                        | %          | 0.02 | % |
| Allowance for loan losses to non-performing loans                             |       | 147.94                                      | %          | 238.27 | % |

 

16

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*Deposits.*******The Company’s deposit growthremained strong through the first three months of 2008.  Total deposits increased by $122.1 million to$1,120.2 million at March 31, 2008, an increase of 12.2% from a balance of$998.1 million at December 31, 2007. The largest increase was experiencedin the money market category, which increased by $115.4 million, and to alesser extent in demand deposit accounts and savings and NOW accounts, whichincreased by $4.0 million and $6.7 million, respectively. The increases inthese three deposit categories were partially offset by a reduction in thetotal term certificates of $4.0 million. The Company’s deposit activities havebenefited from the current rate environment as some of the more aggressivelocal product promotions and pricing initiatives have subsided. The Company’sRewards Checking (a retail checking product) and Snap Deposit (our commercialremote deposit capture initiative) product promotions continue to gainacceptance as well.

 

The following table sets forth the Company’sdeposit accounts at the dates indicated:

 
| ** **                      | ** ** | **March 31, 2008** | ** ** | **December 31, 2007** | ** ** |
|---------------------------------|------------|------------------------------|------------|---------------------------------|------------|
| ** **                      | ** ** | **Amount**                   | ** ** | **Percent**                     | ** ** | **Amount** | ** ** | **Percent** | ** ** |
| ** **                      | ** ** | **(In thousands)**      | ** ** |
| ** **                      | ** ** | ** **                   | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Demand deposits                 |       | $                            | 128,055    |                            | 11.4       | % | $ | 124,040 |   | 12.4 | % |
| Savings and NOW accounts        |       | 178,017                      |       | 15.9                            |       | 171,353 |   | 17.2 |   |
| Money market accounts           |       | 453,206                      |       | 40.5                            |       | 337,847 |   | 33.8 |   |
| Total non-certificate accounts  |       | 759,278                      |       | 67.8                            |       | 633,240 |   | 63.4 |   |
| Term certificates over $100,000 |       | 232,490                      |       | 20.8                            |       | 228,793 |   | 22.9 |   |
| Other term certificates         |       | 128,454                      |       | 11.4                            |       | 136,115 |   | 13.7 |   |
| Total certificate accounts      |       | 360,944                      |       | 32.2                            |       | 364,908 |   | 36.6 |   |
| Total deposits                  |       | $                            | 1,120,222  |                            | 100.0      | % | $ | 998,148 |   | 100.0 | % |

 

*Borrowed Funds.*******The Company relies on borrowings from theFederal Home Loan Bank of Boston, or FHLBB, as an additional funding source asliquidity needs arise. The balance of these borrowings will fluctuate dependingon the Company’s ability to attract deposits, coupled with the amount of loandemand in the market and other investment opportunities. Funds borrowed fromthe FHLBB increased by $14.2 million to $159.9 million at March 31, 2008,a 9.8% increase from a balance of $145.0 million at December 31, 2007. TheCompany chose to take advantage of the lower rate environment and fund some ofthe first quarter loan originations with some attractively priced FHLBadvances.

 

The Company’s borrowings include securities sold under agreements torepurchase, which are contracts for the sale of securities owned by the Companywith an agreement to repurchase those securities at an agreed upon price anddate. The Company uses repurchase agreements as an alternative funding tool andas a means of offering some of our commercial deposit customers a commercialsweep checking product. As of March 31, 2008, the Company had outstanding$27.7 million in overnight repurchase agreements, an increase of $3.9 millionor 16.4% from $23.8 million December 31, 2007.

 

*Total Stockholders’ Equity.*******Total stockholders’ equity increased by$159.2 million to $232.7 million at March 31, 2008 from a balance of $73.5million as of December 31, 2007. This increase in was due to thecompletion of our stock conversion that resulted in an addition to capital of$160.4 million. Stockholders’ equity was also augmented by a $2.0 millionincrease in the net unrealized gain on available for sale securities. Theincrease was offset by a net loss for the first three months of $3.3 million.

 

17

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***Comparisonof Operating Results for the Three Ended March 31, 2008 and March 31,2007***

*** ***

*Net Income (loss).*******The Company recorded a net loss for the three months ended March 31, 2008of $3.3 million, a decrease of $3.8 million from net income of $529,000 for thethree months ended March 31, 2007. The net loss was due to twoextraordinary and non-recurring items; a $6.9 million pretax charge related tothe establishment of the Danversbank Charitable Foundation and a $3.7 millionpretax charge related to the acceleration of the Bank’s phantom stock plan. The“change of control” provisions in the phantom stock plan triggered theaccelerated payout.  Both charges aredirectly related to the Company’s stock conversion.

 

*Net Interest Income.*******Net interest income for the three monthsended March 31, 2008 increased to $10.5 million from $8.5 million for thethree months ended March 31, 2007. Average interest-earning assetsincreased $221.7 million between the two periods. This increase of $2.0 millionin net interest income resulted from a $2.7 million increase due to volume anda $665,000 decrease due to rate of interest-earning assets and interest-bearingliabilities. Our net interest margin was 3.01% for the three months ended March 31,2008 compared to 2.91% for the three months ended March 31, 2007.

 

*Interest and Dividend Income.*******Interest income increased $2.3 million,or 12.2%, to $21.2 million for the three months ended March 31, 2008 from$18.9 million for the three months ended March 31, 2007. The increase wasprimarily due to a higher balance of average interest-earning assets. Loansincreased on average by $55.7 million between the two periods, along with anincrease in the average balances of securities of $113.1 million and anincrease in cash equivalents of $53.0 million. The average yield on loansdecreased from 7.21% for the three months ended March 31, 2007 to 6.77%for the same period in 2008, and the overall yield on interest-earning assetsdecreased from 6.49% to 6.08% for the 2007 and 2008 periods, respectively. Theoverall decline in asset yields is directly related to the declining trend ofthe current interest rate environment.

 

*Interest Expense.*******Interest expense for the three monthsended March 31, 2008 increased by $269,000, or 2.6%, to $10.7 millioncompared to interest expense of $10.4 million for the three months ended March 31,2007. Average interest-bearing liabilities increased by $71.1 million betweenthe two periods and this resulted in a $602,000 increase in interest expense. Adecrease of 19 basis points, or 4.8%, in the average cost of the Company’sinterest-bearing liabilities resulted in a decrease in interest expense of$333,000. The overall rates on interest-bearing liabilities decreased from3.98% to 3.79% for the 2007 and 2008 periods, respectively, and the averagecost of deposits decreased from 3.76% for the three months ended March 31,2007 to 3.56% for the same period in 2008. The overall decline in deposit andoverall liability costs is directly related to the declining trend of thecurrent rate environment.

 

*Provision for Loan Losses.*******The Company records a provision for loanlosses as a charge to its earnings when necessary in order to maintain theallowance for loan losses at a level sufficient to absorb losses inherent inthe loan portfolio. The Company recorded $600,000 and $75,000 in loan lossprovisions during the three months ended March 31, 2008 and 2007,respectively. Provisions in both periods were reflective of portfolio growth,change to the loan portfolio composition, an evaluation of the quality of theloan portfolio, and net charge offs, the difference between loan charge-offsnet of recoveries on loans previously charged off. Net charge-offs were$253,000 and $34,000 for the three months ended March 31, 2008 and 2007,respectively.  At March 31, 2008,the allowance for loan losses totaled $9.4 million, or .97% of the loanportfolio, compared to $9.1 million, or 1.00%, of total loans at December 31,2007.

 

*Non-interest Income.*******Non-interest income for the three monthsended March 31, 2008 increased by $1.0 million or 82.7% to $2.3 million,compared to $1.3 million for the three months ended March 31, 2007. Thisincrease was attributable to a $788,000 increase in the gain on sales ofsecurities, an increase of $102,000 in income on our bank-owned life insuranceholdings, or BOLI and an increase in service charges on deposit accounts of$84,000.

 

18

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** **

Management chose to sell some fixed-rate investment securities andreplace them with adjustable rate investments in an effort to protect against arising interest rate environment. The increase in deposit account servicecharges was directly related to changes in the Company’s deposit accountpricing matrix that were implemented in May of 2007. Developing reliableand stable sources of non-interest income to complement the Company’s primarylines of business has been an area of particular focus over the past twelvemonths.

 

*Non-interest Expense.*******Non-interest expense had a significantincrease of $12.7 million between the three months ended March 31, 2008and 2007. The increase was primarily due to two extraordinary and non-recurringitems; a $6.9 million pretax charge related to the establishment of theDanversbank Charitable Foundation and a $3.7 million pretax charge related tothe acceleration of the Bank’s phantom stock plan. There was also a largeincrease in other real estate owned expense of $765,000, which relates to thehousing subdivision that the Company foreclosed on in 2007. The increase wasdirectly related to a write down in the value of the subdivision and was basedon well established independent broker’s most recent assessment of the currentinventory of 1-4 family housing units in the market and the costs to completethe project.

 

*Income Taxes.*******The Company recorded an income taxbenefit of $6.2 million for the three months ended March 31, 2008; adecrease of $6.4 million, compared to a $160,000 expense for the three monthsended March 31, 2007. The effective tax rate for the three months periodended March 31, 2008 was 63.3 % compared to 23.2% for the same period in2007. The increase is a result of the tax effect of the extraordinary chargesthe Company recorded in the first quarter of 2008.

 

The following table sets forth averagebalance sheets, average yields and costs, and certain other information for theperiods indicated. All average balances are daily average balances. The yieldsset forth below include the effect of deferred fees, and discounts and premiumsthat are amortized or accreted to interest income or expense. Tax-exempt incomeand yields have not been adjusted to a tax-equivalent basis.  The Company does not accrue interest on loanson non-accrual status; however, the balance of these loans is included in thetotal average balance, which has the effect of lowering average loan yields.

 

19

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| ** **                                                              | ** ** | **Three Months Ended**     | ** ** |
|-------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                              | ** ** | **March 31, 2008**         | ** ** | **March 31, 2007** | ** ** |
| ** **                                                              | ** ** | **Average  Outstanding  Balance**    | ** ** | **Interest  Earned/  Paid** | ** ** | **Average  Yield/  Rate (1)** | ** ** | **Average  Outstanding  Balance** | ** ** | **Interest  Earned/  Paid** | ** ** | **Average  Yield/  Rate (1)** | ** ** |
| ** **                                                              | ** ** | **(Dollars in thousands)** | ** ** |
| **Interest-earning  assets:**                                           |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Interest-earning  cash equivalents                                      |       | $                                    | 68,368     |   | $ | 528 |   | 3.11 | % | $ | 15,343 |   | $ | 191 |   | 5.05 | % |
| Debt securities:  (2)                                                   |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| U.S. Government                                                         |       | 2,000                                |       | 23 |   | 4.63 |   | 2,418 |   | 28 |   | 4.70 |   |
| Government-sponsored  enterprises                                       |       | 181,540                              |       | 2,195 |   | 4.86 |   | 219,863 |   | 2,193 |   | 4.05 |   |
| Mortgage-backed                                                         |       | 196,370                              |       | 2,569 |   | 5.26 |   | 55,220 |   | 734 |   | 5.39 |   |
| Municipal bonds                                                         |       | 18,592                               |       | 189 |   | 4.09 |   | 7,707 |   | 77 |   | 4.05 |   |
| Other                                                                   |       | 328                                  |       | 5 |   | 6.13 |   | 492 |   | 9 |   | 7.42 |   |
| Equity securities                                                       |       | 10,689                               |       | 108 |   | 4.06 |   | 10,801 |   | 186 |   | 6.98 |   |
| Real estate  mortgages (3)                                              |       | 559,754                              |       | 9,063 |   | 6.51 |   | 560,427 |   | 9,653 |   | 6.99 |   |
| C&I loans (3)                                                       |       | 311,801                              |       | 5,782 |   | 7.46 |   | 262,211 |   | 5,200 |   | 8.04 |   |
| IRBs (3)                                                                |       | 47,019                               |       | 583 |   | 4.99 |   | 39,312 |   | 472 |   | 4.87 |   |
| Consumer loans  (3)                                                     |       | 9,358                                |       | 192 |   | 8.25 |   | 10,320 |   | 193 |   | 7.58 |   |
| Total  interest-earning assets                                          |       | 1,405,819                            |       | 21,237 |   | 6.08 |   | 1,184,114 |   | 18,936 |   | 6.49 |   |
| Allowance for  loan losses                                              |       | (9,237                               | )          |   |   |   |   | (10,404 | ) |   |   |   |   |
| Total earning  assets less allowance for loan losses                    |       | 1,396,582                            |       |   |   |   |   | 1,173,710 |   |   |   |   |   |
| Non-interest-earning  assets                                            |       | 93,252                               |       |   |   |   |   | 76,237 |   |   |   |   |   |
| Total assets                                                            |       | $                                    | 1,489,834  |   |   |   |   |   | $ | 1,249,947 |   |   |   |   |   |
|                                                                    |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| **Interest-bearing  liabilities:**                                      |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Deposits:                                                               |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Savings and NOW  accounts                                               |       | $                                    | 176,223    |   | 660 |   | 1.51 |   | $ | 158,352 |   | 260 |   | 0.67 |   |
| Money market  accounts                                                  |       | 386,187                              |       | 3,329 |   | 3.47 |   | 323,059 |   | 3,263 |   | 4.10 |   |
| Term certificates  (4)                                                  |       | 371,088                              |       | 4,273 |   | 4.63 |   | 366,923 |   | 4,352 |   | 4.81 |   |
| Total deposits                                                          |       | 933,498                              |       | 8,262 |   | 3.56 |   | 848,334 |   | 7,875 |   | 3.76 |   |
| Borrowed funds:                                                         |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Short-term  borrowings                                                  |       | 26,834                               |       | 121 |   | 1.81 |   | 34,023 |   | 169 |   | 2.01 |   |
| Long-term debt                                                          |       | 145,482                              |       | 1,689 |   | 4.67 |   | 152,320 |   | 1,737 |   | 4.62 |   |
| Subordinated debt                                                       |       | 29,965                               |       | 640 |   | 8.59 |   | 29,965 |   | 662 |   | 8.96 |   |
| Total  interest-bearing liabilities                                     |       | 1,135,779                            |       | 10,712 |   | 3.79 |   | 1,064,642 |   | 10,443 |   | 3.98 |   |
| Non-interest-bearing  deposits                                          |       | 166,503                              |       |   |   |   |   | 109,783 |   |   |   |   |   |
| Other  non-interest-bearing liabilities                                 |       | 6,120                                |       |   |   |   |   | 9,939 |   |   |   |   |   |
| Total  non-interest-bearing liabilities                                 |       | 172,623                              |       |   |   |   |   | 119,722 |   |   |   |   |   |
| Total liabilities                                                       |       | 1,308,402                            |       |   |   |   |   | 1,184,364 |   |   |   |   |   |
| Stockholders’  equity                                              |       | 181,432                              |       |   |   |   |   | 65,583 |   |   |   |   |   |
| Total liabilities  and stockholders’ equity                        |       | $                                    | 1,489,834  |   |   |   |   |   | $ | 1,249,947 |   |   |   |   |   |
|                                                                    |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Net interest  income                                                    |       |                                 |       | $ | 10,525 |   |   |   |   |   | $ | 8,493 |   |   |   |
| Net interest rate  spread (5)                                           |       |                                 |       |   |   | 2.29 | % |   |   |   |   | 2.51 | % |
| Net  interest-earning assets (6)                                        |       | $                                    | 270,040    |   |   |   |   |   | $ | 119,472 |   |   |   |   |   |
| Net interest  margin (7)                                                |       |                                 |       |   |   | 3.01 | % |   |   |   |   | 2.91 | % |
| Ratio of  interest-earning assets to total interest-bearing liabilities |       | 1.24                                 | x          |   |   |   |   | 1.11 | x |   |   |   |   |

 

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(1)          Yields are annualized.

(2)          Average balances are presented at average amortizedcost.

(3)          Average loans include non-accrual loans and are netof average deferred loan fees/costs.

(4)          Term certificates include brokered and non-brokeredCDs.

(5)          Net interest rate spread represents the differencebetween the yield on interest-earning assets and the cost of interest-bearingliabilities at the period indicated.

(6)          Net interest-earning assets represent totalinterest-earning assets less total interest-bearing liabilities.

(7)          Net interest margin represents net interest incomedivided by average total interest-earning assets.

 

20

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

 
| ** **                                 | ** ** | **Three Months Ended March 31,  2008 vs. 2007** | ** ** |
|--------------------------------------------|------------|-------------------------------------------------------------------------------|------------|
| ** **                                 | ** ** | **Increase (Decrease)  Due to**                                     | ** ** | **Total  Increase** | ** ** |
| ** **                                 | ** ** | **Volume**                                                                    | ** ** | **Rate** | ** ** | **(Decrease)** | ** ** |
| ** **                                 | ** ** | **(In thousands)**                                                       | ** ** |
| **Interest-earning  assets:**              |       |                                                                          |       |   |   |   |   |
| Interest-earning cash equivalents          |       | $                                                                             | 660        |   | $ | (323 | ) | $ | 337 |   |
| Debt securities:(1)                        |       |                                                                          |       |   |   |   |   |
| U.S. Government                            |       | (5                                                                            | )          | — |   | (5 | ) |
| Government-sponsored enterprises           |       | (382                                                                          | )          | 384 |   | 2 |   |
| Mortgage-backed                            |       | 1,876                                                                         |       | (41 | ) | 1,835 |   |
| Municipal bonds                            |       | 109                                                                           |       | 3 |   | 112 |   |
| Other                                      |       | (3                                                                            | )          | (1 | ) | (4 | ) |
| Equity securities                          |       | (2                                                                            | )          | (76 | ) | (78 | ) |
| Real estate mortgages (2)                  |       | (12                                                                           | )          | (578 | ) | (590 | ) |
| C&I loans (2)                          |       | 983                                                                           |       | (401 | ) | 582 |   |
| IRBs (2)                                   |       | 93                                                                            |       | 18 |   | 111 |   |
| Consumer loans (2)                         |       | (18                                                                           | )          | 17 |   | (1 | ) |
| Total interest-earning assets              |       | 3,299                                                                         |       | (998 | ) | 2,301 |   |
|                                       |       |                                                                          |       |   |   |   |   |
| **Interest-bearing  liabilities:**         |       |                                                                          |       |   |   |   |   |
| Deposits:                                  |       |                                                                          |       |   |   |   |   |
| Savings and NOW accounts                   |       | 29                                                                            |       | 371 |   | 400 |   |
| Money market accounts                      |       | 638                                                                           |       | (572 | ) | 66 |   |
| Term certificates (3)                      |       | 49                                                                            |       | (128 | ) | (79 | ) |
| Total Deposits                             |       | 716                                                                           |       | (329 | ) | 387 |   |
| Borrowed funds:                            |       |                                                                          |       |   |   |   |   |
| Short-term borrowings                      |       | (36                                                                           | )          | (12 | ) | (48 | ) |
| Long-term debt                             |       | (78                                                                           | )          | 30 |   | (48 | ) |
| Subordinated debt                          |       | —                                                                        |       | (22 | ) | (22 | ) |
| Total interest-bearing liabilities         |       | 602                                                                           |       | (333 | ) | 269 |   |
|                                       |       |                                                                          |       |   |   |   |   |
| Increase (decrease) in net interest income |       | $                                                                             | 2,697      |   | $ | (665 | ) | $ | 2,032 |   |

 

----

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

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

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

 

21

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***Liquidity and Capital Resources***

*** ***

The Company’s primarysources of funds are from deposits, amortization and repayment of loans andmortgage-backed securities, the sale or maturity of investment securities,advances from the FHLBB, repurchase agreements and cash flows generated byoperations.  While maturities andscheduled amortization of loans and investment securities are predictablesources of funds, deposit flows and mortgage loan prepayments can be greatlyinfluenced by interest rate trends, economic conditions and competition.  The Company maintains excess cash andshort-term interest bearing assets with original maturities of less than 90days that provide additional liquidity.

 

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

 

Loan commitments to extendcredit are agreements to lend to a customer as long as there is no violation ofany condition established in the contract. At March 31, 2008, total loan commitments to extend credit amountedto $263 million, the majority expiring within one year or less.

 

At March 31, 2008, themost recent notification from the FDIC categorized the Bank as well capitalizedunder the regulatory framework for prompt corrective action.  To be well capitalized, the Bank mustmaintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratiosof 10.0%, 6.0% and 5.0%, respectively. Prompt corrective action provisions are not applicable to bank holdingcompanies.  At March 31, 2008, totalrisk-based, Tier 1 risk-based and Tier 1 leverage ratios were 16.91%, 16.02%and 11.44%, respectively.

 

**Item 3. Quantitative and Qualitative Disclosures About Market Risk**

 

Exposure to market interestrate risk is managed by the Company through periodic evaluations of the currentinterest rate risk inherent in its rate-sensitive assets and liabilities,primarily deposits, borrowings, loans and investment securities, coupled withdeterminations of the level of risk considered appropriate given the Company’scapital and liquidity requirements, business strategy and performanceobjectives. Through such management, the Company seeks to manage thevulnerability of its net interest income to changes in interest rates.

 

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

 

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

 

22

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For March 31, 2008, we used a simulation model toproject changes for three rising and three falling rate scenarios. Thisanalysis calculates the difference between net interest income forecasts forthese scenarios compared to the net interest income forecast using a flat ratescenario. In each of these instances, Federal Funds is used as the drivingrate. The table below sets forth, as of March 31, 2008, the estimatedchanges in the Company’s net interest income that would result.

 
| ** **                              | ** ** | **Net Portfolio Value(2)** | ** ** | **Net Interest Income**           | ** ** |
|-----------------------------------------|------------|--------------------------------------|------------|---------------------------------------------|------------|
| **Change in  Interest Rates** | ** ** | **Estimated**                        | ** ** | **Estimated Increase (Decrease)** | ** ** | **Estimated  Net Interest** | ** ** | **Increase (Decrease)  in Estimated  Net Interest Income** | ** ** |
| **(basis points)(1)**              | ** ** | **NPV**                              | ** ** | **Amount**                                  | ** ** | **Percent** | ** ** | **Income** | ** ** | **Amount** | ** ** | **Percent** | ** ** |
| ** **                              | ** ** | **(Dollars in thousands)** | ** ** |
| +300bp                                  |       | $                                    | 177,791    |                                        | $          | (51,171 | ) | -22.3 | % | $ | 45,410 |   | $ | (4,462 | ) | -8.9 | % |
| +200bp                                  |       | 199,588                              |       | (29,374                                     | )          | -12.8 | % | 48,175 |   | (1,697 | ) | -3.4 | % |
| +100bp                                  |       | 218,160                              |       | (10,802                                     | )          | -4.7 | % | 49,685 |   | (187 | ) | -0.4 | % |
| 0bp                                     |       | 228,962                              |       | —                                      |       | 0.0 | % | 49,872 |   | — |   | 0.0 | % |
| -100bp                                  |       | 231,962                              |       | 3,000                                       |       | 1.3 | % | 49,975 |   | 103 |   | 0.2 | % |
| -200bp                                  |       | 228,555                              |       | (407                                        | )          | -0.2 | % | 49,323 |   | (549 | ) | -1.1 | % |
| -300bp                                  |       | 228,961                              |       | (1                                          | )          | 0.0 | % | 46,373 |   | (3,499 | ) | -7.0 | % |
|                                         |            |                                      |            |                                             |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

(1)            Assumesan instantaneous uniform change in interest rates at all maturities.

(2)            NPVis the discounted present value of expected cash flows from interest-earningassets, interest-bearing liabilities and off-balance sheet contracts.

 

The income simulation modelincludes various assumptions regarding the re-pricing relationships for each ofour products. Many of our assets are floating rate loans tied to the Primelending rate, which are assumed to re-price immediately and to the same extentas the change in market rates, according to their contracted index. Conversely,we have various transaction account products that would not increase ordecrease in the same increments or at the same speed. Money market accounts, asan example, are assumed to increase sooner and in larger increments thansavings and NOW accounts.  Theseassumptions are based on our prior experience with the changes in rates paid onthese non-maturity deposits coincident with changes in market interest rates.The model begins by disseminating data into appropriate repricing buckets.Assets and liabilities are then assigned a multiplier to simulate how much thatparticular balance sheet item will reprice when interest rates change. Thefinal step is to simulate the timing effect of assets and liabilities with a month-by-monthsimulation to estimate the change in interest income and expense over the next12 months.

 

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

 

For the rising and fallinginterest rate scenarios, the base market interest rate forecast was increasedor decreased, on an instantaneous and sustained basis, by 100, 200 and 300basis points.   At March 31, 2008,our net interest income exposure related to these hypothetical changes inmarket interest rates was within our established guidelines.  There are inherent shortcomings to incomesimulations, given the number and variety of assumptions that must be made inperforming the analysis. The assumptions relied upon in making these calculationsof

 

23

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interest rate sensitivityinclude the level of market interest rates, the shape of the yield curve, thedegree to which certain assets and liabilities with similar attributes react tochanges in market interest rates, and the degree to which non-maturitydeposits, such as checking accounts, react to changes in market rates. Althoughthe analysis shown above provides an indication of the Company’s sensitivity tointerest rate changes at a point in time, these estimates are not intended toand do not provide a precise forecast of the effect of changes in marketinterest rates on the Company’s net interest income and may differ from actualresults.

 

**Item 4.  Controls and Procedures**

 

See Item 4T below.

 

**Item 4T.  Controls and Procedures**

 

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

 

The Company’s President andChief Executive Officer, its Executive Vice President and Chief OperatingOfficer, its Senior Vice President and Chief Financial Officer, and othermembers of its senior management team have evaluated the effectiveness of theCompany’s disclosure controls and procedures as defined under the Securitiesand Exchange Act of 1934 Rules 13a-15(e), as amended, (the “Exchange Act”).  Based upon their evaluation they haveconcluded that the Company’s disclosure controls and procedures, as for the endof the period covered by this report, were adequate and effective to providereasonable assurance that the information required to be disclosed by theCompany, including its consolidated subsidiaries, in reports that are filed orsubmitted under the Exchange Act, is recorded, processed, summarized, andreported, within the time periods specified in the SEC’s rules and forms.

 

The effectiveness of a systemof disclosure controls and procedures is subject to various inherentlimitations, including cost limitations, judgments used in decision making,assumptions about the likelihood of future events, the soundness of oursystems, the possibility of human error, and the risk of fraud.  Moreover, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls maybecome inadequate because of changes in condition and the risk that the degreeof compliance with policies or procedures may deteriorate over time.  Due to such inherent limitations, there canbe no assurance that any system of disclosure controls and procedures will besuccessful in preventing all errors or fraud, or in making all materialinformation known in a timely manner to the appropriate levels of management.

 

***(b) Changes in Internal Controls OverFinancial Reporting***

 

There were no changes in ourinternal control over financial reporting during the quarter ended March 31,2008 that have materially affected, or that are reasonably likely to materiallyaffect, the Company’s internal controls over financial reporting.

 

**PART II.  OTHER INFORMATION**

** **

**Item 1.  Legal Proceedings**

** **

The Company or the Bank is not involved in any legalproceedings other than routine legal proceedings occurring in the ordinarycourse of business. Management believes that such proceedings are, in theaggregate, immaterial to our financial condition and results of operations.

 

24

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**Item 1A.  Risk Factors**

** **

For information regarding the Company’s risk factors, see “Risk Factors”,at pages 36-41 of the Company’s 2007 Annual Report on Form 10-K.  There has been no material change in theCompany’s risk factors during the three months ended March 31, 2008.

 

**Item 2.    Unregistered Sales of Equity Securities andUse of Proceeds**

 

Not applicable.

 

**Item 3.  Defaults Upon SeniorSecurities**

** **

Not applicable.

 

**Item 4.    Submission of Mattersto a Vote of Security Holders**

** **

Not applicable.

 

**Item 5.  Other Information**

** **

Not applicable.

 

25

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**Item 6.    Exhibits**

 
| **Exhibit No.** | ** ** | **Description**                                                                                                    |
|----------------------|------------|--------------------------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                               |
| 2.1                  |       | Danvers Bancorp, Inc.  Plan of Conversion*                                                                    |
| 3.1                  |       | Certificate of  Incorporation of Danvers Bancorp, Inc.*                                                       |
| 3.2                  |       | Bylaws of Danvers Bancorp, Inc.*                                                                              |
| 4.1                  |       | Form of Common Stock  Certificate of Danvers Bancorp, Inc.*+                                             |
| 10.1                 |       | Amended and Restated  Danversbank Supplemental Executive Retirement Plan dated as of April 11,  2008+         |
| 10.2                 |       | Supplemental Pension  Agreement for L. Mark Panella*+                                                              |
| 10.3                 |       | Phantom Stock Plan*+                                                                                               |
| 10.4                 |       | Nonqualified Deferred  Compensation Plan*+                                                                         |
| 10.5                 |       | Danversbank SBERA Pension  Plan*+                                                                                  |
| 10.6                 |       | Financial Advisory  Agreement*                                                                                     |
| 10.7                 |       | Form of Employment  Agreement by and among Danvers Bancorp, Inc., Danversbank and Kevin T.  Bottomley*+  |
| 10.8                 |       | Form of Employment  Agreement by and among Danvers Bancorp, Inc., Danversbank and James J.  McCarthy*+   |
| 10.9                 |       | Form of Employment  Agreement by and among Danvers Bancorp, Inc., Danversbank and L. Mark  Panella*+     |
| 10.10                |       | Form of Employment  Agreement by and among Danvers Bancorp, Inc., Danversbank and John J.  O’Neil*+ |
| 10.11                |       | Form of Change in  Control Agreement*+                                                                        |
| 10.12                |       | Form of Employee  Stock Ownership Plan*+                                                                      |
| 10.13                |       | Form of Employee  Stock Ownership Restoration Plan*+                                                          |
| 10.14                |       | Form of Danvers  Bancorp, Inc. Change in Control Severance Pay Plan*+                                    |
| 10.15                |       | Form of Danvers  Bancorp, Inc. 2008 Stock Option and Incentive Plan*+                                    |
| 14.1                 |       | Code of Ethics**                                                                                                   |
| 21.1                 |       | Subsidiaries of  Registrant*                                                                                       |
| 24.1                 |       | Power of Attorney (set  forth on signature page)**                                                                 |
| 31.1                 |       | Section 302 Certification  of President and Chief Executive Officer                                           |
| 31.2                 |       | Section 302  Certification of Executive Vice President and Chief Operating Officer                            |
| 31.3                 |       | Section 302  Certification of Senior Vice President and Chief Financial Officer                               |
| 32.1                 |       | Section 906  Certification of President and Chief Executive Officer                                           |
| 32.2                 |       | Section 906  Certification of Executive Vice President and Chief Operating Officer                            |
| 32.3                 |       | Section 906  Certification of Senior Vice President and Chief Financial Officer                               |

 

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| *      |   | Previously filed as an  exhibit to the Registration Statement on Form S-1 (No. 333-145875)  and incorporated herin by reference. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------|
| **     |   | Previously filed as an  exhibit to the Annual Report pursuant to Section 13 or 15(d) of the  Securities                          |
|   |   | Exchange Act of 1934  Form 10-K (No. 001-33896) and incorporated herin by reference.                                             |
| +      |   | Represents mangement  contract or compensatory plan or agreement.                                                                          |

 

 

26

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**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 theundersigned thereunto duly authorized.

 
|                               | **Danvers Bancorp, Inc.** |
|------------------------------------|--------------------------------|
|                               |                           |   |
| Date:  May 15, 2008 | By:                            | /s/ |  Kevin  T. Bottomley |
|                               |                           |  Kevin  T. Bottomley |
|                               |                           |  President  and Chief Executive Officer |
|                               |                           |   |
|                               |                           |   |
| Date:  May 15, 2008 | By:                            | /s/ |  James  J. McCarthy |
|                               |                           |  James  J. McCarthy |
|                               |                           |  Executive  Vice President and Chief Operating  Officer |
|                               |                           |   |
|                               |                           |   |
| Date:  May 15, 2008 | By:                            | /s/ |  L.  Mark Panella |
|                               |                           |  L.  Mark Panella |
|                               |                           |  Senior  Vice President and Chief Financial  Officer |

 

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