Danvers Bancorp (DNBK) 10-Q 2009 Q1 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2009

Commission file number: 001-33896

DANVERS BANCORP, INC.

(Exact Name of Registrant as Specified in Its Charter)

Delaware		04-3445675
(State or Other Jurisdiction of		(I.R.S Employer
Incorporation of Organization)		Identification No.)
One Conant Street, Danvers, Massachusetts		01923
(Address of Principal Executive Officers)		(Zip Code)
	(978) 777-2200
	(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. 

Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  (Check one):

Large accelerated filer  o Accelerated filer x

Non-accelerated filer o (Do not check if smaller reporting company) Smaller reporting companyo

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

Yes o No x

Shares outstanding of the registrant’s common stock, $0.01 par value, at May 5, 2009: 17,396,500

DANVERS BANCORP, INC.

TABLE OF CONTENTS

			Page
PART I.  FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)
	-	Consolidated Balance Sheets as of March 31, 2009 and December 31, 2008	3
	-	Consolidated Statements of Operations for the Three Months Ended
		March 31, 2009 and 2008	4
	-	Consolidated Statements of Changes in Stockholders' Equity for the
		Three Months Ended March 31, 2009 and 2008	5
	-	Consolidated Statements of Cash Flows for the Three Months Ended
		March 31, 2009 and 2008	6
	-	Notes to Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of
	Operations		14
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		27
Item 4.	Controls and Procedures		29
PART II.  OTHER INFORMATION
Item 1.	Legal Proceedings		30
Item 1A.	Risk Factors		30
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		30
Item 3.	Defaults Upon Senior Securities		31
Item 4.	Submission of Matters to a Vote of Security Holders		31
Item 5.	Other Information		31
Item 6.	Exhibits		32

2

DANVERS BANCORP, INC.

PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements (Unaudited)

CONSOLIDATED BALANCE SHEETS

(Unaudited)

	March 31,			December 31,
	2009			2008
	(In thousands)
ASSETS
Cash and cash equivalents	$	41,463		$	33,129
Certificates of deposit		10,406			10,291
Securities available for sale, at fair value		458,593			490,845
Loans held for sale		3,267			-
Loans		1,147,496			1,118,948
Less allowance for loan losses		(12,545	)		(12,133	)
Loans, net		1,134,951			1,106,815
Federal Home Loan Bank stock, at cost		14,001			14,001
Premises and equipment, net		25,835			22,877
Bank-owned life insurance		24,963			24,826
Other real estate owned		1,162			1,158
Accrued interest receivable		7,723			7,457
Deferred tax asset, net		7,822			6,955
Other assets		7,823			9,455
	$	1,738,009		$	1,727,809
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand deposits	$	133,298		$	123,414
Savings and NOW accounts		197,613			176,365
Money market accounts		482,558			440,931
Term certificates over $100,000		248,131			242,846
Other term certificates		145,604			134,727
Total deposits		1,207,204			1,118,283
Short-term borrowings		94,793			168,276
Long-term debt		162,639			163,022
Subordinated debt		29,965			29,965
Accrued expenses and other liabilities		12,767			15,255
Total liabilities		1,507,368			1,494,801
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 shares
issued and 17,502,600 shares outstanding at March 31, 2009 and 17,842,500
shares issued and outstanding at December 31, 2008		178			178
Additional paid-in capital		178,818			174,510
Retained earnings		68,908			67,854
Accumulated other comprehensive income		4,159			4,026
Unearned restricted shares		(8,040	)		-
Unearned compensation - ESOP, 1,338,188 shares and 1,356,030 shares at
March 31, 2009 and December 31, 2008, respectively		(13,382	)		(13,560	)
Total stockholders' equity		230,641			233,008
	$	1,738,009		$	1,727,809

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

3

DANVERS BANCORP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Three Months Ended
	March 31,
	2009		2008
	(Dollars in thousands,
	except per share amounts)
Interest and dividend income:
Interest and fees on loans	$	15,707	$	15,620
Interest on debt securities:
Taxable		5,422		4,792
Non-taxable		203		189
Dividends on equity securities		-		108
Interest on cash equivalents and certificates of deposit		97		528
Total interest and dividend income		21,429		21,237
Interest expense:
Interest on deposits:
Savings and NOW accounts		548		660
Money market accounts		2,923		3,329
Term certificates		3,027		4,273
Interest on short-term borrowings		128		121
Interest on long-term debt and subordinated debt		2,322		2,329
Total interest expense		8,948		10,712
Net interest income		12,481		10,525
Provision for loan losses		760		600
Net interest income, after provision for loan losses		11,721		9,925
Non-interest income:
Service charges on deposits		788		630
Loan servicing fees		10		59
Gain on sales of loans		341		61
Gain on sales of other real estate owned		29		-
Net gain on sales of securities		-		772
Net increase in cash surrender value of bank-owned life insurance		137		358
Other operating income		433		405
Total non-interest income		1,738		2,285
Non-interest expenses:
Salaries and employee benefits		6,973		10,036
Occupancy		1,504		1,310
Equipment		768		753
Outside services		243		282
Contribution to the Danversbank Charitable Foundation		-		6,850
Other real estate owned expense		125		794
Other operating expense		2,188		1,632
Total non-interest expenses		11,801		21,657
Income (loss) before income taxes		1,658		(9,447	)
Provision (benefit) for income taxes		275		(6,191	)
Net income (loss)	$	1,383	$	(3,256	)
Weighted-average shares outstanding:
Basic		16,376,388		N/A
Diluted		16,383,254		N/A
Earnings per share:
Basic	$	0.08		N/A
Diluted	$	0.08		N/A

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

4

DANVERS BANCORP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited)

											Accumulated
					Additional						Other			Unearned						Total
	Common Stock				Paid-In			Retained			Comprehensive			Restricted			Unearned			Stockholders'
	Shares		Amount		Capital			Earnings			Income			Shares			Compensation			Equity
	(Dollars in thousands)
Balance at December 31, 2007		-	$	-	$	-		$	71,213		$	2,283		$	-		$	-		$	73,496
Comprehensive 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		-		-		-			-			-			-			(14,274	)		(14,274	)
Common stock held by ESOP
committed to be released
(11,895 shares)		-		-		-			-			-			-			119			119
Balance at March 31, 2008		17,842,500	$	178	$	174,396		$	67,957		$	4,327		$	-		$	(14,155	)	$	232,703
Balance at December 31, 2008		17,842,500	$	178	$	174,510		$	67,854		$	4,026		$	-		$	(13,560	)	$	233,008
Comprehensive income:
Net income		-		-		-			1,383			-			-			-			1,383
Net unrealized gain on securities
available for sale, net of
reclassification adjustment
and tax effect		-		-		-			-			134			-			-			134
Change in fair value and
amortization of derivative used
for cash flow hedge, net of
tax effect		-		-		-			-			(1	)		-			-			(1	)
Total comprehensive income																					1,516
Purchase of shares for incentive
plans (339,900 shares)		-		-		(4,256	)		-			-			-			-			(4,256	)
Resticted stock awards
(639,807 shares)		-		-		8,317			-			-			(8,317	)		-			-
Equity incentive shares earned		-		-		196			-			-			277			-			473
Common stock held by ESOP
committed to be released
(17,843 shares)		-		-		51			-			-			-			178			229
Dividends declared
($.02 per share)		-		-		-			(329	)		-			-			-			(329	)
Balance at March 31, 2009		17,842,500	$	178	$	178,818		$	68,908		$	4,159		$	(8,040	)	$	(13,382	)	$	230,641

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

5

DANVERS BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Three Months Ended
	March 31,
	2009			2008
	(In thousands)
Cash flows from operating activities:
Net income (loss)	$	1,383		$	(3,256	)
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Provision for loan losses		760			600
Write-down of other real estate owned		-			808
Depreciation and amortization		841			926
Accretion of net deferred loan fees and costs		(126	)		(138	)
Deferred tax benefit		(959	)		(1,066	)
Amortization of core deposit intangible and servicing rights		113			53
Amortization of stock-based compensation and ESOP expense		702			119
Amortization (accretion) of securities, net		60			(14	)
Net gain on sales of securities		-			(772	)
Gain on sales of other real estate owned		(29	)		-
Loans originated for sale		(27,404	)		(3,490	)
Proceeds from sales of loans originated for sale		24,137			3,232
Issuance of common stock to Danversbank Charitable Foundation		-			6,500
Changes in other assets and liabilities:
Accrued interest receivable		(266	)		(307	)
Other assets and bank-owned life insurance		1,380			(4,556	)
Accrued expenses and other liabilities		(2,488	)		(5,724	)
Net cash used in operating activities		(1,896	)		(7,085	)
Cash flows from investing activities:
Activity in available-for-sale securities:
Sales		-			32,945
Maturities, prepayments and calls		65,670			77,814
Purchases		(33,251	)		(157,273	)
Purchases of certificates of deposit		(115	)		-
Funds advanced on other real estate owned		(384	)		(482	)
Proceeds from sales of other real estate owned		1,209			-
Net loan originations		(29,570	)		(62,149	)
Purchase of premises and equipment		(3,799	)		(1,127	)
Net cash used in investing activities		(240	)		(110,272	)

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

6

DANVERS BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Concluded)

(Unaudited)

	Three Months Ended
	March 31,
	2009			2008
	(In thousands)
Cash flows from financing activities:
Net increase (decrease) in:
Term certificates	$	16,162		$	(3,964	)
Other deposits		72,759			126,038
Short-term borrowings		(73,483	)		3,898
Stock subscriptions		-			(162,859	)
Activity in long-term debt:
Proceeds from advances		-			15,000
Payment of advances		(383	)		(784	)
Net proceeds from issuance of common stock		-			168,074
Acquisition of common stock by ESOP		-			(14,274	)
Purchase of shares for incentive plans		(4,256	)		-
Dividends declared		(329	)		-
Net cash provided by financing activities		10,470			131,129
Change in cash and cash equivalents		8,334			13,772
Cash and cash equivalents at beginning of period		33,129			65,862
Cash and cash equivalents at end of period	$	41,463		$	79,634
Supplementary disclosure of cash flow information:
Cash paid during the period for:
Interest	$	8,721		$	10,042
Income taxes		46			215
Non-cash financing and investing activities:
Unsettled securities transactions		-			500
Transfers from loans to other real estate owned		800			-

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

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DANVERS BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation

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

In the opinion of management, all adjustments (consisting of only normal recurring adjustments) necessary for a fair presentation of the financial position, results of operations, and cash flows for the reporting interim periods have been included.  The consolidated balance sheet of the Company as of December 31, 2008 has been derived from the audited consolidated balance sheet of the Company as of that date.  The accompanying consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes thereto included in the Company’s most recent Securities and Exchange Commission Form 10-K filed by the Company for the year ended December 31, 2008.  The results of operation for the three months ended March 31, 2009 and 2008 are not necessarily indicative of the results to be obtained for a full year.

2. Derivative Financial Instruments

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of SFAS No. 133”, which changes the disclosure requirements for derivative instruments and hedging activities.  This Statement is intended to enhance the current disclosure framework in SFAS No. 133.  The Statement requires that objectives for using derivative instruments be disclosed in terms of underlying risk and accounting designation.  This Statement is effective for the Company’s consolidated financial statements issued for fiscal years and interim periods beginning after November 15, 2008 and did not have a material impact on the Company’s consolidated financial statements.

Derivative financial instruments are recognized as assets and liabilities on the consolidated balance sheet and measured at fair value.

Interest Rate Swap Agreements

For asset/liability management purposes, the Company uses interest rate swap agreements to manage interest rate risk.  Interest rate swaps are contracts in which a series of interest rate flows are exchanged over a prescribed period.  The notional amount on which the interest payments are based is not exchanged.  These swap agreements are derivative instruments and generally convert a portion of the Company’s variable-rate debt to a fixed rate (cash flow hedge), and convert a portion of its fixed-rate loans to a variable rate (fair value hedge).  Those swap agreements not designated as a hedge are generally used as economic hedges of overall changes in interest rates on interest earning assets and interest bearing liabilities. The gain or loss on a swap agreement not designated as a hedge is recognized currently in earnings.

8

DANVERS BANCORP, INC.

The following tables present the fair values of derivative instruments in the balance sheet and the effect of derivative instruments on the statement of operations.

	March 31, 2009
	Balance Sheet	Fair	Balance Sheet	Fair
	Location	Value	Location	Value
	(In thousands)
Derivatives not designated as hedging
instruments under Statement 133:
Interest rate swap agreements	Other assets	$1,698	Other liabilities	$1,730

Quarter Ended March 31, 2009
		Amount of
		Gain (Loss)
		Recognized
Derivatives Not Designated As Hedging	Location of Gain or (Loss) Recognized	in Income
Instruments Under Statement 133	in Income on Derivative	on Derivative
		(In thousands)
Interest rate swap agreements	Other income	$	3

3. Fair Value of Assets and Liabilities

In accordance with SFAS No. 157, the Company groups its financial assets and financial liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.  The three levels are defined as follows:

Level 1 – Valuation is based on quoted prices in active markets for identical assets or liabilities.  Level 1 assets and liabilities general include debt and equity securities that are traded in an active exchange market.  Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.  Currently, the Company does not have any items classified as Level 1.

Level 2 – Valuation is based on observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.  The fair value of fixed maturity investments included in the Level 2 category were based on market values obtained from an independent pricing service that were evaluated using pricing models that vary by asset class and incorporate available trade, bid and other market information and price quotes from well established independent broker-dealers.  The independent pricing service monitors market indicators, industry and economic events, and for broker-quoted only securities, obtains quotes from market makers or broker-dealers that it recognizes to be market participants.  The fair value of interest rate swap agreements are based on a valuation model that uses primarily observable inputs, such as benchmark yield curves and interest rates and also include the value associated with counterparty credit risk.  The Level 2 categories include U.S. Government and government-sponsored enterprises, mortgage-backed securities, corporate bonds, foreign government bonds, municipal bonds and interest rate swap agreements.

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DANVERS BANCORP, INC.

Level 3 – Valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.  Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.  This category generally includes certain asset-backed securities, certain private equity investments, residential mortgage servicing rights and long-term derivative contracts.  Currently, the Company does not have any items classified as Level 3.

Assets and liabilities measured at fair value on a recurring basis are summarized below:

							Total
	Level 1		Level 2		Level 3		Fair Value
	(In thousands)
March 31, 2009:
Assets
U.S. Government	$	-	$	1,004	$	-	$	1,004
Federal Home Loan Mortgage Corporation		-		1,141		-		1,141
Other government-sponsored enterprises		-		191,101		-		191,101
Mortgage-backed		-		244,107		-		244,107
Municipal bonds		-		20,990		-		20,990
Other bonds		-		250		-		250
Interest rate swap agreements		-		1,698		-		1,698
	$	-	$	460,291	$	-	$	460,291
Liabilities
Interest rate swap agreements	$	-	$	1,730	$	-	$	1,730

							Total
	Level 1		Level 2		Level 3		Fair Value
	(In thousands)
December 31, 2008:
Assets
U.S. Government	$	-	$	2,018	$	-	$	2,018
Federal Home Loan Mortgage Corporati<TABLE><CAPTION>on		-		1,148		-		1,148
Other government-sponsored enterprises		-		220,623		-		220,623
Mortgage-backed		-		247,990		-		247,990
Municipal bonds		-		18,816		-		18,816
Other bonds		-		250		-		250
Interest rate swap agreements		-		1,761		-		1,761
	$	-	$	492,606	$	-	$	492,606
Liabilities
Interest rate swap agreements	$	-	$	1,796	$	-	$	1,796

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DANVERS BANCORP, INC.

The Company may also be required, from time to time, to measure certain other financial assets on a nonrecurring basis in accordance with GAAP.  These adjustments to fair value usually result from application of lower-of-cost-or-market accounting or write-downs of individual assets.  There were no liabilities measured at fair value on a non-recurring basis at March 31, 2009 and December 31, 2008.  The following tables summarize the fair value hierarchy used to determine each adjustment and the carrying value of the related individual assets:

							Quarter Ended
							March 31,
	March 31, 2009						2009
							Total
	Level 1		Level 2		Level 3		Losses
	(In thousands)
Assets
Other real estate owned	$	-	$	1,162	$	-	$	-
Impaired loans		-		425		-		135
	$	-	$	1,587	$	-	$	135

							Quarter Ended
							March 31,
	December 31, 2008						2008
							Total
	Level 1		Level 2		Level 3		Losses
	(In thousands)
Assets
Other real estate owned	$	-	$	1,158	$	-	$	808
Impaired loans		-		1,481		-		186
	$	-	$	2,639	$	-	$	994

At March 31, 2009 and December 31, 2008, the amount of other real estate owned in Level 2 represents the carrying value and related charge-offs for which adjustments are based on appraised value of the collateral.  At March 31, 2009 and December 31, 2008, the amount of impaired loans in Level 2 represents the carrying value and related charge-offs and FASB Statement No. 114 allocated reserves on impaired loans for which adjustments are based on appraised value of the collateral.  Appraised values are typically based on a blend of (a) an income approach using observable cash flows to measure fair value, and (b) a market approach using observable market comparables.

4. Earnings Per Share

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

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DANVERS BANCORP, INC.

For the quarter ended March 31, 2009, potentially dilutive common stock equivalents totaled 6,866 shares, representing the dilutive effect of the restricted stock.  Earnings per share are not applicable for year to date and quarterly periods prior to June 30, 2008 as the Company did not issue stock until January 11, 2008.  Unallocated common shares held by the ESOP are shown as a reduction in stockholders’ equity and are not included in the weighted-average number of common shares outstanding for either basic or diluted earnings per share calculations.

The following table is the reconciliation of basic and diluted earnings per share for the three months ended March 31, 2009:

	Basic		Diluted
	(Dollars in thousands,
	except per share amounts)
Net income	$	1,383	$	1,383
Weighted average shares outstanding		16,376,388		16,376,388
Effect of dilutive shares		-		6,866
Adjusted weighted average shares outstanding		16,376,388		16,383,254
Earnings per share	$	0.08	$	0.08

5. Dividend Declared

On April 23, 2009, the Company declared a quarterly cash dividend on its common stock of $.02 per share. The dividend will be paid on or after May 22, 2009 to shareholders of record as of May 8, 2009.

Recent Accounting Pronouncements

In December 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 141 (revised), ‘‘Business Combinations’’, which replaces SFAS No. 141, and applies to all business entities, including mutual entities that previously used the pooling-of-interests method of accounting for certain business combinations. This Statement makes significant amendments to other Statements and other authoritative guidance, and applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008.

In April 2009, the FASB issued FASB Staff Position No. 141(R)-1 ("FSP 141(R)-1"), Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies.  FSP 141(R)-1 amends and clarifies FASB Statement No. 141 (revised 2007), Business Combinations, to address application issues raised by preparers, auditors, and members of the legal profession on initial recognition and measurement, subsequent measurement and accounting, and disclosure of assets and liabilities arising from contingencies in a business combination.  FSP 141(R)-1 is effective for assets or liabilities arising from contingencies in business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008.  Effective January 1, 2009, the ETIF was adopted by the Company and did not impact the Company’s consolidated financial statements.

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DANVERS BANCORP, INC.

In December 2007, the FASB issued SFAS No. 160, ‘‘Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51.’’ This Statement establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. This Statement is effective for fiscal years beginning on or after

December 15, 2008 and the adoption of this Statement is not expected to have a material impact on the Company’s consolidated financial statements.

In April 2009, the FASB issued FASB Staff Position No. 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly” (FSP FAS 157-4), provides guidance on how to determine the fair value of assets and liabilities in an environment where the volume and level of activity for the asset or liability have significantly decreased and re-emphasizes that the objective of a fair value measurement remains an exit price. The FSP is effective for periods ending after June 15, 2009, with earlier adoption permitted. The adoption of FSP FAS 157-4 in the quarter ending June 30, 2009 is not expected to have a material effect on the Company’s consolidated financial statements.

In January  2009, the FASB issued a FASB Staff Position on the Emerging Issues Task Force (“EITF”) Issue No. 03-06-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities,” (FSP EITF 03-06-1). Under FSP EITF 03-06-1, unvested share-based awards which include the right to receive nonforfeitable dividends or dividend equivalents are considered to participate with common stock in undistributed earnings. Companies that issue share-based awards considered to be participating securities under FSP EITF 03-06-1 are required to calculate basic and diluted earnings per common share amounts under the two-class method. The two-class method excludes from earnings per common share calculations any dividends paid or owed to participating securities and any undistributed earnings considered to be attributable to participating securities. FSP EITF 03-06-1 requires retrospective application to all prior-period earnings per share data presented.   The ETIF was adopted by the Company on January 1, 2009 and did not impact the Company’s consolidated financial statements.

In April 2009, the FASB issued FASB Staff Position No. 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Statements” (FSP FAS 107-1 and APB 28-1), requires companies to disclose the fair value of financial instruments within interim financial statements, adding to the current requirement to provide those disclosures annually. The FSP 107-1 is effective June 30, 2009 and is not expected to have a material impact on the Company’s consolidated financial statements.

In April 2009, the FASB issued FASB Staff Position No. 115-2 and 124-2, “Recognition and Presentation of Other-than-temporary Impairments” (FSP FAS 115-2 and 124-2), modifies the requirements for recognizing other-than-temporary-impairment on debt securities and significantly changes the impairment model for such securities. Under FSP FAS 115-2 and 124-2, a security is considered to be other-than-temporarily impaired if the present value of cash flows expected to be collected are less than the security’s amortized cost basis (the difference being defined as the credit loss) or if the fair value of the security is less than the security’s amortized cost basis and the investor intends, or more-likely-than-not will be required, to sell the security before recovery of the security’s amortized cost basis. If an other-than-temporary impairment exists, the charge to earnings is limited to the amount of credit loss if the investor does not intend to sell the security and it is more-likely-than-not that it will not be required to sell the security, before recovery of the security’s amortized cost basis. Any remaining difference between fair value and amortized cost is recognized in other comprehensive income, net of applicable taxes. Otherwise, the entire difference between fair value and amortized cost is charged to earnings. Upon adoption of the FSP, an entity reclassifies from retained earnings to other comprehensive income the non-credit portion of an other-than-temporary impairment loss previously recognized on a security it holds if the entity does not intend to sell the security, and it is more-likely-than-not that it will not be required to sell the security, before

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recovery of the security’s amortized cost basis. The FSP also modifies the presentation of other-than-temporary impairment losses and increases related disclosure requirements. FSP FAS 115-2 and 124-2 is effective for periods ending after June 15, 2009, with earlier adoption permitted. The Company is currently assessing the impact of adoption of FSP FAS 115-2 and 124-2 on its financial position and results of operations as of, and for the period ending, June 30, 2009.

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

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

Forward-Looking Statements

This report contains forward-looking statements, statements which are considered forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.

Forward-looking statements can be identified by the use of such words as estimate, project, believe, intend, anticipate, plan, seek, expect and similar expressions. These forward-looking statements include:

· statements of our goals, intentions and expectations;

· statements regarding our business plans and prospects and growth and operating strategies;

· statements regarding the asset quality of our loan and investment portfolios; and

· estimates of our risks and future costs and benefits.

These forward-looking statements are subject to significant risks, assumptions and uncertainties, including, among other things, the following important factors that could affect the actual outcome of future events:

· significantly increased competition among depository and other financial institutions;

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

· general economic conditions, whether national or regional, and conditions in the real estate markets that could affect the demand for our loans and other products and ability of borrowers to repay loans, lead to further declines in credit quality and increased loan losses, and continue to negatively affect the value and salability of the real estate that is the collateral for many of our loans or that we own directly;

· changing business, banking, or regulatory conditions or policies, or new legislation affecting the financial services industry, including the Emergency Economic Stabilization Act of 2008 and the American Recovery and Reinvestment Act of 2009 that could lead to changes in the competitive balance among financial institutions, restrictions on bank activities, changes in costs (including deposit insurance premiums), increased regulatory scrutiny, declines in consumer confidence in depository institutions, or changes in the secondary market for bank loan and other products;

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DANVERS BANCORP, INC.

· our ability to enter new markets successfully and take advantage of growth opportunities;

· changes in consumer spending, borrowing and savings habits;

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

· changes in our organization, compensation and benefit plans.

Critical Accounting Policies

The discussion and analysis of the Company’s financial condition and results of operations is based upon the Company’s unaudited consolidated financial statements, which have been prepared in conformity with accounting principles generally accepted in the United States of America for interim financial information and with the instructions for Form 10-Q.  In preparing the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and income and expenses during the reported period. Actual results could differ from those estimates.  Material estimates that are particularly susceptible to change in the near term relate to the determination of the allowance for loan losses, other than temporary impairment of securities, the valuation of other real estate owned and the valuation of the deferred tax assets.

Comparison of Financial Condition at March 31, 2009 and December 31, 2008

Total Assets.Total assets increased by $10.2 million, or 0.6%, to $1.74 billion at March 31, 2009 from $1.73 billion at December 31, 2008. Net loans increased by $28.1 million, or 2.5% during the quarter and securities decreased by $32.2 million, or 6.6%. The overall increase in the Company’s assets was funded primarily with an increase in deposits.

Cash and Cash Equivalents.Cash and cash equivalents increased by $8.3 million, or 25.2%, to $41.4 million at March 31, 2009 from $33.1 million at December 31, 2008.

Securities Available for Sale.The securities portfolio aggregated $458.6 million at March 31, 2009, a decrease of $32.2 million, or 6.6%, from $490.8 million at December 31, 2008. The first quarter cash flow from investment calls and amortization from the Company’s mortgage-backed securities portfolio were utilized to fund our loan growth during the quarter. Within the portfolio, obligations of government-sponsored enterprises decreased by $30.5 million and mortgage-backed securities decreased by $3.9 million, as the Company also replaced some fixed-rate agency securities with adjustable-rate mortgage-backed securities.

At March 31, 2009 and December 31, 2008, our mortgage-backed securities (“MBS”) totaled 53.2% and 50.5%, respectively, of our investment portfolio and consisted of high quality rated pass-through securities that are directly insured or guaranteed by Freddie Mac, Fannie Mae or Ginnie Mae.  The MBS portfolio is primarily backed by pools of one-to-four family mortgages that have loans with interest rates that are within a set range and have varying maturities.  None of our MBS are privately issued or have sub-prime residential mortgages or home equity loans as part of their underlying loan pools.  We target instruments with four to twelve year weighted average lives, with expected average life extensions up to a maximum of fifteen years in a rising rate environment.  In an effort to protect against a rising interest rate environment, we increased our concentration of adjustable-rate MBS in the investment portfolio from 15.4% at December 31, 2007 to 74.9% at March 31, 2009.  All our MBS were rated AAA at March 31, 2009 and December 31, 2008.   Although unforeseeable changes in

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market conditions may affect future ratings, management does not expect to downgrade any ratings in our current MBS portfolio.

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

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized  Losses			Fair Value
	(In thousands)
March 31, 2009:
U.S. Government	$	1,002	$	2	$	-		$	1,004
Federal Home Loan Mortgage Corporation		1,147		-		(6	)		1,141
Other government-sponsored enterprises		189,111		3,119		(1,129	)		191,101
Mortgage-backed		238,455		5,737		(85	)		244,107
Municipal bonds		21,597		94		(701	)		20,990
Other bonds		250		-		-			250
	$	451,562	$	8,952	$	(1,921	)	$	458,593
December 31, 2008:
U.S. Government	$	2,007	$	11	$	-		$	2,018
Federal Home Loan Mortgage Corporation		1,147		1		-			1,148
Other government-sponsored enterprises		216,369		4,383		(129	)		220,623
Mortgage-backed		245,089		3,549		(648	)		247,990
Municipal bonds		19,179		107		(470	)		18,816
Other bonds		250		-		-			250
	$	484,041	$	8,051	$	(1,247	)	$	490,845

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DANVERS BANCORP, INC.

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

	Less Than Twelve Months				Over Twelve Months
	Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value
	(In thousands)
March 31, 2009:
Debt securities:
Federal Home Loan Mortgage Corporation	$	6	$	1,141	$	-	$	-
Other government-sponsored enterprises		1,129		42,561		-		-
Mortgage-backed		84		16,084		1		239
Municipal bonds		336		7,578		365		8,921
	$	1,555	$	67,364	$	366	$	9,160
December 31, 2008:
Debt securities:
Other government-sponsored enterprises	$	129	$	21,371	$	-	$	-
Mortgage-backed		642		57,114		6		942
Municipal bonds		25		1,135		445		11,349
	$	796	$	79,620	$	451	$	12,291

Management evaluates securities for other-than-temporary impairment on at least a quarterly basis, and more frequently when economic or market concerns warrant more frequent evaluation.  Consideration is given to (1) the length of time and the extent to which the fair value has remained less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issue for a period of time sufficient to allow for any anticipated recovery in fair value.  At March 31, 2009 and December 31, 2008, the Company determined that all unrealized losses from debt securities are temporary in nature.

Net Loans.Net loans as of March 31, 2009 were $1.13 billion, an increase of $28.1 million, or 2.5%, from net loan balances of $1.11 billion as of December 31, 2008. Most of the Company’s growth during the period is reflected in commercial real estate and commercial and industrial (“C&I”) loan balances.  Increases in commercial real estate and C&I loans of $32.1 million and $5.5 million, respectively were partially offset by a decline in the Company’s construction loan portfolio of $12.1 million.  While the rate of expansion in the portfolio slowed when compared to 2008, the loan pipeline remains strong and the Company continued to see larger and well diversified credit opportunities during the period.

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

	March 31, 2009						December 31, 2008
	Amount			Percent			Amount			Percent
	(Dollars in thousands)
Real estate mortgages:
Construction	$	110,915			9.6	%	$	122,974			11.0	%
Residential		190,682			16.6			189,242			16.9
Commercial		279,612			24.3			247,483			22.1
Home equity		44,455			3.9			41,660			3.7
C&I		515,823			44.9			510,359			45.5
Consumer		7,762			0.7			8,725			0.8
Total loans		1,149,249			100.0	%		1,120,443			100.0	%
Allowance for loan losses		(12,545	)					(12,133	)
Net deferred loan fees		(1,753	)					(1,495	)
Loans, net	$	1,134,951					$	1,106,815

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

	March 31,			December 31,
	2009			2008
	(Dollars in thousands)
Non-accrual loans:
Real estate mortgages:
Construction	$	984		$	1,925
Residential		2,635			2,184
Commercial		372			263
Home equity		302			227
Total real estate mortgages		4,293			4,599
C&I		932			1,295
Consumer		17			38
Total non-accrual loans	$	5,242		$	5,932
Restructured loans	$	3,147		$	-
Total non-performing loans	$	8,389		$	5,932
Other real estate owned		1,162			1,158
Total non-performing assets	$	9,551		$	7,090
Total non-performing loans to total loans		0.73	%		0.53	%
Total non-performing loans to total assets		0.48	%		0.34	%
Total non-performing assets to total assets		0.55	%		0.41	%

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DANVERS BANCORP, INC.

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

	At or For the Three Months
	Ended March 31,
	2009			2008
	(Dollars in thousands)
Allowance balance at beginning of period	$	12,133		$	9,096
Provision for loan losses		760			600
Charge-offs:
Real estate mortgages:
Construction		241			-
Residential		-			85
Commercial		-			-
Home equity		-			3
Total real estate mortgages		241			88
C&I		106			156
Consumer		35			24
Total charge-offs		382			268
Recoveries:
Real estate mortgages:
Construction		-			-
Residential		-			8
Commercial		-			-
Home equity		-			-
Total real estate mortgages		-			8
C&I		20			-
Consumer		14			7
Total recoveries		34			15
Net charge-offs		348			253
Allowance balance at end of period	$	12,545		$	9,443
Total loans outstanding	$	1,149,249		$	971,735
Average loans outstanding	$	1,126,097		$	927,932
Allowance for loan losses as a percent of
total loans outstanding		1.09	%		0.97	%
Net loans charged off as a percent of
average loans outstanding (annualized)		0.12	%		0.11	%
Allowance for loan losses to non-
performing loans		149.54	%		147.94	%

For further information, see “Provision for Loan Losses” of the Management Discussion and Analysis on page 21.

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Deposits.The Company’s deposit growth remained strong for the first three months of 2009.  Total deposits increased by $88.9 million to $1.21 billion at March 31, 2009, an increase of 8.0% from a balance of $1.12 billion at December 31, 2008. The Company experienced increases across all deposit categories with the largest increase in money market accounts which increased by $41.6 million, and to a lesser extent in savings and NOW accounts, total term certificates, and demand deposit, which increased by $21.2 million, $16.2 million and $9.9 million, respectively. The Company’s deposit gathering activities continue to benefit from some of the turmoil in the broader capital markets.  New deposit balances emanated from a variety of outlets during the quarter.  The Company’s online checking and savings product initiatives were very productive and in conjunction with a number of other retail and commercial deposit gathering activities, the Company had very healthy deposit growth.

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

	March 31, 2009					December 31, 2008
	Amount		Percent			Amount		Percent
	(Dollars in thousands)
Demand deposits	$	133,298		11.0	%	$	123,414		11.0	%
Savings and NOW accounts		197,613		16.4			176,365		15.8
Money market accounts		482,558		40.0			440,931		39.4
Total non-certificate accounts		813,469		67.4			740,710		66.2
Term certificates over $100,000		248,131		20.5			242,846		21.7
Other term certificates		145,604		12.1			134,727		12.1
Total certificate accounts		393,735		32.6			377,573		33.8
Total deposits	$	1,207,204		100.0	%	$	1,118,283		100.0	%

Borrowed Funds.The Company relies on borrowings from the Federal Home Loan Bank of Boston, or FHLBB, as an alternative funding source to deposits and to augment the Company’s short-term liquidity needs. The balance of these borrowings fluctuates depending upon our ability to attract deposits, coupled with the overall level of loan demand and other investment opportunities. Funds borrowed from the FHLBB decreased by $71.6 million to $230.4 million at March 31, 2009, a 23.7% decrease from a balance of $302.0 million at December 31, 2008. The Company’s success at raising deposit balances during the quarter allowed the Company to pay down a large portion of our overnight FHLBB advances.

Included in the Company’s borrowings are securities sold under agreements to repurchase, which are contracts for the sale of securities owned by the Company with an agreement to repurchase those securities at an agreed upon price and date. The Company uses repurchase agreements as a secondary funding source and as a means of offering commercial deposit customers a commercial sweep checking product. As of March 31, 2009, the Company had $27.0 million outstanding in overnight repurchase agreements, an decrease of $2.3 million or 7.8% from $29.3 million December 31, 2008.

Total Stockholders’ Equity.Total stockholders’ equity decreased by $2.4 million to $230.6 million at March 31, 2009 from a balance of $233.0 million at December 31, 2008. This decrease was primarily due to stock repurchases as the Company purchased 339,900 shares of common stock at an average price of $12.52 per share during the first three months of 2009.  These purchases are part of the Stock Repurchase Program announced in January of 2009. This decrease was offset by net income of $1.4 million and a decline in the unallocated common shares held by the Employee Stock Ownership Plan.

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DANVERS BANCORP, INC.

Comparison of Operating Results for the Three Months Ended March 31, 2009 and 2008

Net Income (loss).The Company recorded net income for the three months ended March 31, 2009 of $1.4 million, an increase of $4.6 million from a net loss of $3.2 million for the three months ended March 31, 2008.  The increase is primarily due to the increase in net interest income and a sizeable reduction in non-interest expenses between the comparable periods.  Net interest income during the 2009 quarter improved $2.0 million or 18.6% from the comparable three-month period in 2008.  The decline in non-interest expense relates to two non-recurring items that the Company incurred during the first quarter of 2008; a $6.9 million pretax charge related to the establishment of the Danversbank Charitable Foundation, Inc. (the “Foundation”) and a $3.7 million pretax charge related to the acceleration of the Company’s phantom stock plan.  Both charges are directly related to the Company’s conversion from a mutual form of organization to a public stock holding company.

Net Interest Income.Net interest income for the three months ended March 31, 2009 increased to $12.5 million from $10.5 million for the three months ended March 31, 2008. Average interest-earning assets increased $226.5 million between the two periods. This increase of $2.0 million in net interest income resulted from a $2.5 million increase due to volume and a $511,000 decrease due to the rates on interest-earning assets and interest-bearing liabilities. The Company’s net interest margin was 3.06% for the three months ended March 31, 2009 compared to 3.01% for the three months ended March 31, 2008.

Interest and Dividend Income.Interest income increased $192,000, or 0.9%, to $21.4 million for the three months ended March 31, 2009 from $21.2 million for the three months ended March 31, 2008. The increase was primarily due to a higher balance of average interest-earning assets. Loans increased on average by $198.2 million between the two periods combined with an increase in the average balances of debt securities of $65.3 million and a decrease in cash equivalents of $40.9 million. The average yield on loans decreased from 6.73% for the three months ended March 31, 2008 to 5.58% for the same period in 2009, and the overall yield on interest-earning assets decreased from 6.08% to 5.25% for the 2008 and 2009 periods, respectively. The overall decline in asset yields is directly related to the declining trend of the current interest rate environment.

Interest Expense.Interest expense for the three months ended March 31, 2009 decreased by $1.8 million, or 16.5%, to $8.9 million compared to interest expense of $10.7 million for the three months ended March 31, 2008. Average interest-bearing liabilities increased by $217.2 million between the two periods and this resulted in a $1.5 million increase in interest expense. A decrease of 114 basis points, or 30.1%, in the average cost of the Company’s interest-bearing liabilities resulted in a decrease in interest expense of $3.3 million. The overall rates on interest-bearing liabilities decreased from 3.79% to 2.65% for the 2008 and 2009 periods, respectively, and the average cost of deposits decreased from 3.56% for the period ended March 31, 2008 compared to 2.52% for the same period in 2009. The overall decline in deposit and overall liability costs is directly related to the declining trend of the current rate environment.

Provision for Loan Losses.The Company records a provision for loan losses as a charge to its earnings when necessary in order to maintain the allowance for loan losses at a level sufficient to absorb losses inherent in the loan portfolio. The Company recorded $760,000 and $600,000 in loan loss provisions during the three months ended March 31, 2009 and 2008, respectively. Provisions in both periods were reflective of portfolio growth, change to the loan portfolio composition, an evaluation of the quality of the loan portfolio, and net charge offs, the difference between loan charge-offs net of recoveries on loans previously charged off. Net charge-offs were $348,000 and $253,000 for the three months ended March 31, 2009 and 2008, respectively.  At March 31, 2009, the allowance for loan losses totaled $12.5 million, or 1.09% of the loan portfolio, compared to $9.4 million, or 0.97%, of total loans at March 31, 2008.  The allowance as a percentage of non-performing loans represented 149.54% and 147.94% at March 31, 2009 and 2008, respectively.

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Non-interest Income.Non-interest income for the three months ended March 31, 2009 decreased by $547,000 or 23.9% to $1.7 million, compared to $2.3 million for the three months ended March 31, 2008. This decrease was attributable to a $772,000 decrease in the gain on sales of securities as management chose to sell some fixed-rate investment securities and replace them with adjustable-rate investments in an effort to protect against a rising interest rate environment during the quarter ended March 31, 2008.  The decrease was also due to a $222,000 decrease in income on our bank-owned life insurance holdings, or BOLI, offset by increases in service charges on deposit accounts of $158,000 and in the gain on sale of loans of $280,000 compared to the same quarter in 2008.

Non-interest Expense.Non-interest expense reflected a significant decrease of $9.9 million or 45.5% from $21.7 million at quarter ended March 31, 2008 to $11.8 million at quarter ended March 31, 2009. As noted above this decrease relates primarily to two non-recurring charges associated with the conversion to a public stock holding company during the first quarter of 2008.  In addition, the Company experienced a decrease in other real estate owned expense of $669,000 and an increase in other operating expense of $556,000 compared to the same quarter in 2008. Increases in general and administrative expenses, most notably in the areas of deposit insurance, legal, marketing, and investor relations were the primary reasons for the increase in other operating expense between the comparable periods.

Income Taxes.The Company recorded an income tax expense of $275,000 for the three months ended March 31, 2009; an increase of $6.5 million when compared to a $6.2 million income tax benefit for the three months ended March 31, 2008. The effective tax rate for the three months period ended March 31, 2009 was 16.6 % which is below the statutory tax rate of 34% due to the amount of book income that is not taxable under federal tax law.  The effective tax rate for the three months end March 31, 2008 was 63.3% which is the result of the non-recurring charges associated with the conversion to a public stock holding company during the first quarter of 2008.

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

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	Three Months Ended March 31,
	2009								2008
	Average			Interest		Average			Average			Interest		Average
	Outstanding			Earned/		Yield/			Outstanding			Earned/		Yield/
	Balance			Paid		Rate (1)			Balance			Paid		Rate (1)
	(Dollars in thousands)
Interest-earning assets:
Interest-earning cash equivalents and
certificates of deposit	$	27,475		$	97		1.41	%	$	68,368		$	528		3.11	%
Debt securities: (2)
U.S. Government		1,538			11		2.86			2,000			23		4.63
Gov't-sponsored enterprises and
FHLMC		198,460			2,439		4.92			181,540			2,195		4.86
Mortgage-backed		243,959			2,970		4.87			196,370			2,569		5.26
Municipal bonds		19,960			203		4.07			18,592			189		4.09
Other		250			2		3.20			328			5		6.13
Equity securities		14,626			-		-			10,689			108		4.06
Real estate mortgages (3)		605,871			8,425		5.56			559,754			9,063		6.51
C&I loans (3)		436,752			6,225		5.70			311,801			5,782		7.46
IRBs (3)		74,833			890		4.76			47,019			583		4.99
Consumer loans  (3)		8,641			167		7.73			9,358			192		8.25
Total interest-earning assets		1,632,365			21,429		5.25			1,405,819			21,237		6.08
Allowance for loan losses		(12,341	)							(9,237	)
Total earning assets less allowance
for loan losses		1,620,024								1,396,582
Non-interest-earning assets		100,126								93,252
Total assets	$	1,720,150							$	1,489,834
Interest-bearing liabilities:
Deposits:
Savings and NOW accounts (7)	$	185,714			548		1.18		$	176,223			660		1.51
Money market accounts		466,267			2,923		2.51			386,187			3,329		3.47
Term certificates (4) (7)		379,904			3,027		3.19			371,088			4,273		4.63
Total deposits		1,031,885			6,498		2.52			933,498			8,262		3.56
Borrowed funds:
Short-term borrowings		128,388			128		0.40			26,834			121		1.81
Long-term debt		162,781			1,789		4.40			145,482			1,689		4.67
Subordinated debt		29,965			533		7.11			29,965			640		8.59
Total interest-bearing liabilities		1,353,019			8,948		2.65			1,135,779			10,712		3.79
Non-interest-bearing deposits (8)		124,656								166,503
Other non-interest-bearing liabilities		13,572								6,120
Total non-interest-bearing liabilities		138,228								172,623
Total liabilities		1,491,247								1,308,402
Stockholders' equity		228,903								181,432
Total liabilities and stockholders' equity	$	1,720,150							$	1,489,834
Net interest income				$	12,481							$	10,525
Net interest rate spread (5)							2.60	%							2.29	%
Net interest-earning assets (6)	$	279,346							$	270,040
Net interest margin (7)							3.06	%							3.01	%
Ratio of interest-earning assets
to total interest-bearing liabilities		1.21	x							1.24	x
_____________________________
(1)  Yields are annualized.
(2)  Average balances are presented at average amortized cost.
(3)  Average loans include non-accrual loans and are net of average deferred loan fees/costs.
(4)  Term certificates include brokered and non-brokered CDs.
(5)  Net interest rate spread represents the difference between the yield on interest-earning assets and the cost of interest-bearing
liabilities at the period indicated.
(6)  Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.
(7)  Net interest margin represents net interest income divided by average total interest-earning assets.

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DANVERS BANCORP, INC.

The following table presents the dollar amount of changes in interest income and interest expense for the major categories of the Company’s interest-earning assets and interest-bearing liabilities.  Information is provided for each category of interest-earning assets and interest-bearing liabilities with respect to (i) changes attributable to changes in volume (i.e., changes in average balances multiplied by the prior-period average rate) and (ii) changes attributable to rate (i.e., changes in average rate multiplied by prior-period average balances).

	Three Months Ended March 31,
	2009 vs. 2008
	Increase (Decrease)						Total
	Due to						Increase
	Volume			Rate			(Decrease)
	(In thousands)
Interest-earning assets:
Interest-earning cash equivalents and
certificates of deposit	$	(316	)	$	(115	)	$	(431	)
Debt securities (1):
U.S. Government		(5	)		(7	)		(12	)
Gov't-sponsored enterprises and FHLMC		205			39			244
Mortgage-backed		623			(222	)		401
Municipal bonds		14			-			14
Other		(1	)		(2	)		(3	)
Equity securities		40			(148	)		(108	)
Real estate mortgages (2)		747			(1,385	)		(638	)
C&I loans (2)		2,317			(1,874	)		443
IRBs (2)		345			(38	)		307
Consumer loans (2)		(15	)		(10	)		(25	)
Total interest-earning assets		3,954			(3,762	)		192
Interest-bearing liabilities:
Deposits:
Savings and NOW accounts		36			(148	)		(112	)
Money market accounts		690			(1,096	)		(406	)
Term certificates (3)		102			(1,348	)		(1,246	)
Total deposits		828			(2,592	)		(1,764	)
Borrowed funds:
Short-term borrowings		458			(451	)		7
Long-term debt		201			(101	)		100
Subordinated debt		-			(107	)		(107	)
Total interest-bearing liabilities		1,487			(3,251	)		(1,764	)
Increase (decrease) in net interest income	$	2,467		$	(511	)	$	1,956

_______________________

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

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

(3) Term certificates include brokered and non-brokered certificates of deposit.

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DANVERS BANCORP, INC.

Liquidity and Capital Resources

The Company’s primary sources of funds are from deposits, amortization and repayment of loans and mortgage-backed securities, the sale or maturity of securities, advances from the FHLBB, the Federal Reserve Bank (“FRB”) discount window, repurchase agreements and cash flows generated by operations.  While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage loan prepayments can be greatly influenced by interest rate trends, economic conditions and competition.  The Company maintains excess cash and short-term interest bearing assets with original maturities of less than 90 days that provide additional liquidity.

The Company uses its liquidity to fund existing and future loan commitments, to fund maturing certificates of deposit and advances from the FHLBB or FRB, to fund other deposit withdrawals, to meet operating expenses and to invest in other interest-bearing assets.

Contractual Obligations.  The following table presents information indicating various contractual obligations and commitments of the Company as of the date indicated and their respective maturity dates:

	March 31, 2009
			More than		More than
			One Year		Three Years
	One Year		Through		Through		Over
	or Less		Three Years		Five Years		Five Years		Total
	(In thousands)
Federal Home Loan Bank advances	$	72,600	$	42,048	$	15,000	$	100,791	$	230,439
Repurchase agreements (1)		26,993		-		-		-		26,993
Subordinated debt		-		-		-		29,965		29,965
Operating leases		2,271		4,301		3,277		7,429		17,278
Total contractual obligations	$	101,864	$	46,349	$	18,277	$	138,185	$	304,675

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

Loan Commitments.  Loan commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract and generally have fixed expiration dates or other termination clauses.  The following table presents information indicating various loan commitments of the Company as of the date indicated and their respective maturity dates:

	March 31, 2009
			More than		More than
			One Year		Three Years
	One Year		Through		Through		Over
	or Less		Three Years		Five Years		Five Years		Total
	(In thousands)
Commitments to grant loans	$	20,922	$	-	$	-	$	-	$	20,922
Unfunded commitments under lines of credit		276,739		-		-		-		276,739
Unadvanced funds on construction loans		11,973		12,670		7,979		-		32,622
Commercial and standby letters of credit		2,744		297		65		4,805		7,911
Total contractual obligations	$	312,378	$	12,967	$	8,044	$	4,805	$	338,194

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DANVERS BANCORP, INC.

Regulatory Capital Requirements.  At March 31, 2009, the most recent notification from the FDIC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action.  To be well capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios of 10.0%, 6.0% and 5.0%, respectively.  Prompt corrective action provisions are not applicable to bank holding companies.  At March 31, 2009, the Bank’s total risk-based, Tier 1 risk-based and Tier 1 leverage ratios were 14.98%, 13.98% and 10.12%, respectively.  At March 31, 2009, the Company’s total risk-based, Tier 1 risk-based and Tier 1 leverage ratios were 21.31%, 20.31% and 14.76%, respectively.

Recent Economic Developments

On October 3, 2008 the Emergency Economic Stabilization Act of 2008 (“EESA”) was enacted.  Among other things, the EESA immediately raised the FDIC insurance limit from $100,000 to $250,000 to be effective through December 31, 2009.

U.S. bank regulatory authorities and international bank supervisory organizations, principally the Basel Committee on Banking Supervision the (“Basel Committee”), continue to consider changes to the risk-based capital adequacy framework which ultimately could affect the appropriate capital guidelines to which the Company and Danversbank are subject. The federal banking Agencies issued a final rule entitled “Risk-Based Capital Standards: Advanced Capital Adequacy Framework - Basel II” (“Basel II”) which became effective on April 1, 2008 and “core banks” (“core banks” are the approximately 20 largest U.S. bank holding companies) were required to adopt a board-approved plan, by October 1, 2008, to implement Basel II. Basel II is expected to result in significant changes to the risk based capital standards for “core” banks subject to Basel II and other banks that elect to use such rules to calculate their risk-based capital requirements. In connection with Basel II, the federal banking agencies published a joint notice of proposed rulemaking entitled “Risk-Based Capital Guidelines; Capital Adequacy Guidelines: Standardized Framework” on July 29, 2008 (the “Standardized Approach Proposal”).  The Standardized Approach Proposal, if adopted by the federal banking agencies, would provide all non-core banks with an optional framework, based upon the standardized approach under the international Basel II Accord, for calculating their risk-based capital requirements. Moreover, during the first quarter of 2009, in light of the global economic downturn, the Basel Committee announced that it was commencing an initiative designed to increase the level of capital held by banks through the use of “a combination of measures such as introducing standards to promote the build up of capital buffers that can be drawn down in periods of stress, strengthening the quality of bank capital, improving the risk coverage of the capital framework and introducing a non-risk based supplementary measure” of capital.  The Company and Danversbank do not currently expect to calculate their capital ratios under Basel II or in accordance with the Standardized Approach Proposal. Accordingly, Danversbank is not yet in a position to determine the effect of such rules, or potential modifications to such rules, on its risk capital requirements.

In 2008, the U.S. Department of the Treasury (the “Treasury”) instituted the TARP in response to adverse economic conditions in the financial markets, particularly the inability of creditworthy borrowers to obtain credit. Under the TARP, the Treasury developed the Capital Purchase Program (“CPP”), whereby it purchased non-voting senior preferred shares (“CPP Senior Preferred Shares”) of participating financial institutions.  Neither the Company nor Danversbank elected to participate in the TARP or the CPP.

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DANVERS BANCORP, INC.

Danversbank pays deposit insurance premiums to the FDIC based on an assessment rate established by the FDIC.  In 2006, the FDIC enacted various rules to implement the provisions of the Federal Deposit Insurance Reform Act of 2005 (the “FDI Reform Act”). Pursuant to the FDI Reform Act, in 2006 the FDIC merged the Bank Insurance Fund with the Savings Association Insurance Fund to create a newly named Deposit Insurance Fund (the “DIF”) that covers both banks and savings associations. The FDIC also revised, effective January 1, 2008, the risk-based premium system under which the FDIC classifies institutions based on the factors described below and generally assesses higher rates on those institutions that tend to pose greater risks to the DIF. For most banks, including Danversbank, FDIC rates depend upon a combination of CAMELS component ratings and financial ratios. CAMELS ratings reflect the applicable bank regulatory agency’s evaluation of the financial institution’s capital, asset quality, management, earnings liquidity and sensitivity to risk. For large banks and savings associations that have long-term debt issuer ratings, assessment rates depend upon such ratings, CAMELS component ratings and financial ratios. For institutions, such as Danversbank, which are currently in the lowest risk category, assessment rates varied initially from 5 to 7 basis points per $100 of insured deposits. Commencing January 1, 2009, the FDIC assessment rates were raised 7 basis points and varied initially from 12 to 14 basis points per $100 of insured deposits.  Further rate changes took effect on April 1, 2009, and caused assessment rates to vary initially from 12 to 16 basis points per $100 of insured deposits.  After the FDIC, if applicable, makes certain risk-related adjustments to specific financial institutions’ total minimum and maximum base assessment rates, such rates vary from 12 basis points to 45 basis points per $100 of insured deposits.  One such adjustment, among others, is an increase of up to 10 basis points for financial institutions, other than those in the lowest risk category, that have brokered deposits that exceed 10% of their domestic deposits.  In addition, the FDIC expects to impose a one-time special assessment on June 30, 2009 (which would be collected on September 30, 2009) that, although it is subject to change, is currently expected to be 10 basis points per $100 of deposits.  The FDIC has discretion to impose additional assessments thereafter.  In 2008, the level of FDIC deposit insurance was temporarily increased from $100,000 to $250,000 per depositor through December 31, 2009. The foregoing temporary increase in FDIC insurance may be extended or modified.

We cannot predict whether, as a result of the adverse change in U.S. economic conditions and, in particular, declines in the value of real estate in the markets served by Danversbank, the FDIC will in the future further increase deposit insurance assessment levels. The aggregate 2008 FDIC insurance premiums paid by Danversbank was $735,000. The Company estimates that its aggregate 2009 FDIC insurance premiums (paid by Danversbank) will be approximately $1.5 million, excluding the special assessment.

Danversbank has elected to participate in the Transaction Account Guarantee Program (“TAGP”) which is part of the FDIC’s Temporary Liquidity Guarantee Program (“TLGP”). Danversbank declined to participate in the Debt Guarantee Program (“DGP”), another facility available under TLGP.  Through the TAGP, the FDIC provides unlimited deposit insurance coverage for all non-interest-bearing transaction accounts through December 31, 2009. This includes traditional non-interest bearing checking accounts, certain types of attorney trust accounts and NOW accounts as long as the interest rate does not exceed 0.50 percent.

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

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

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DANVERS BANCORP, INC.

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

The primary method that ALCO uses for measuring and evaluating interest rate risk is an income simulation analysis. This analysis considers the maturity and interest rate repricing characteristics of all of our interest-earning assets and interest-bearing liabilities, as well as the relative sensitivities of these balance sheet components over a range of interest rate scenarios. Interest rate scenarios tested generally include parallel and flattening/steepening rate ramps over a one-year period, and static, or flat, rates. The simulation analysis is used to measure the exposure of net interest income to changes in interest rates over a specified time horizon, usually a two-year period. The simulations also show the net interest income volatility for up to five years.

For March 31, 2009, the Company used a simulation model to project changes for three rising rate scenarios. No simulation was run for the falling rate scenarios given that the Federal Funds rate is currently in a range between 0 and 25 basis points.  This analysis calculates the difference between net interest income forecasts for these scenarios compared to the net interest income forecast using a flat rate scenario. In each of these instances, the Federal Funds rate is used as the driving rate.

The following table sets forth, as of March 31, 2009, the estimated changes in the Company’s net interest income that would result:

			Net Portfolio Value(2)								Net Interest Income
													Increase (Decrease)
Change in			Estimated								Estimated		in Estimated
Interest Rates			Net Portfolio		Estimated Increase (Decrease)						Net Interest		Net Interest Income
(basis points)(1)			Value		Amount			Percent			Income		Amount			Percent
			(Dollars in thousands)
	+300	bp	$	201,500	$	(56,091	)		-21.8	%	$	50,651	$	(2,880	)		-5.4	%
	+200	bp		228,537		(29,054	)		-11.3	%		53,157		(374	)		-0.7	%
	+100	bp		245,779		(11,812	)		-4.6	%		53,555		24			0.0	%
	0	bp		257,591		-			0.0	%		53,531		-			0.0	%

________________________

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

(2) Net portfolio value is the discounted present value of expected cash flows from interest-earning assets, interest-bearing liabilities and off-balance sheet contracts.

The income simulation model includes various assumptions regarding the re-pricing relationships for each of our products. Many of our assets are floating rate loans tied to the Prime lending rate, which are assumed to re-price immediately and to the same extent as the change in market rates, according to their contracted index. Conversely, the Company has various transaction account products that would not increase or decrease in the same increments or at the same speed. Money market accounts, as an example, are assumed to increase sooner and in larger increments than savings and NOW accounts.  These assumptions are based on our prior experience with the changes in rates paid on these non-maturity deposits coincident with changes in market interest rates. The model

28

DANVERS BANCORP, INC.

begins by disseminating data into appropriate repricing buckets. Assets and liabilities are then assigned a multiplier to simulate how much that particular balance sheet item will reprice when interest rates change. The final step is to simulate the timing effect of assets and liabilities with a month-by-month simulation to estimate the change in interest income and expense over the next 12 months.

This analysis indicates the impact of changes in net interest income for the given set of rate changes and assumptions. It does not incorporate any balance sheet growth, and it assumes that the structure and composition of the balance sheet will remain comparable to the structure at the start of the simulation. It does not account for other factors that might impact this analysis, including changes by management to mitigate the impact of interest rate changes or secondary impacts such as changes to our credit risk profile as interest rates change. Furthermore, loan prepayment rate estimates and spread relationships change regularly. Interest rate changes create changes in actual loan prepayment rates that differ from the market estimates incorporated in this analysis. Changes that vary significantly from the assumptions may have significant effects on our net interest income.

For the rising and falling interest rate scenarios, the base market interest rate forecast was increased on an instantaneous and sustained basis, by 100, 200 and 300 basis points.  At March 31, 2009, our net interest income exposure related to these hypothetical changes in market interest rates was within our established guidelines.

There are inherent shortcomings to income simulations, given the number and variety of assumptions that must be made in performing the analysis. The assumptions relied upon in making these calculations of interest rate sensitivity include the level of market interest rates, the shape of the yield curve, the degree to which certain assets and liabilities with similar attributes react to changes in market interest rates, and the degree to which non-maturity deposits, such as checking accounts, react to changes in market rates. Although the analysis shown above provides an indication of the Company’s sensitivity to interest rate changes at a point in time, these estimates are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on the Company’s net interest income and may differ from actual results.

Item 4.  Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures

The Company’s President and Chief Executive Officer, its Executive Vice President and Chief Operating Officer, and other members of its senior management team have evaluated the effectiveness of the Company’s disclosure controls and procedures as defined under the Securities and Exchange Act of 1934 Rules 13a-15(e), as amended, (the “Exchange Act”).  Based upon their evaluation the President and Chief Executive Officer, the Executive Vice President and Chief Operating Officer and the Executive Vice President and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures, as of the end of the period covered by this report, were effective to provide reasonable assurance that the information required to be disclosed by the Company, including its consolidated subsidiaries, in reports that are filed or submitted under the Exchange Act, is recorded, processed, summarized, and reported, within the time periods specified in the SEC’s rules and forms.

The effectiveness of a system of disclosure controls and procedures is subject to various inherent limitations, including cost limitations, judgments used in decision making, assumptions about the likelihood of future events, the soundness of our systems, the possibility of human error, and the risk of fraud.  Moreover, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in condition and the risk that the degree of compliance with policies or procedures may deteriorate over time.  Due to such inherent limitations, there can be no assurance that any system of disclosure controls and procedures will be successful in preventing all errors or fraud, or in making all material information known in a timely manner to the appropriate levels of management.

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DANVERS BANCORP, INC.

(b) Changes in Internal Controls Over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended March 31, 2009, which were identified in connection with management’s evaluation required by paragraph (d) of Rules 13a-15 and 15d-15 under the Exchange Act, that have materially affected, or that are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

PART II.  OTHER INFORMATION

Item 1.  Legal Proceedings

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

Item 1A.  Risk Factors

There have been no material changes to the risk factors set forth in Item 1A to Part I of our Form 10-K, filed on March 16, 2009, for the three months ended March 31, 2009, except to the extent factual information disclosed elsewhere in this Form 10-Q relates to such risk factors.

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

(a)           Unregistered Sales of Equity Securities.  Not applicable.

(b)           Use of Proceeds.  Not applicable.

(c)           Repurchase of Equity Securities.

At the Company’s Annual Meeting of Stockholders held on September 12, 2008, the Company’s stockholders approved the Danvers Bancorp, Inc. 2008 Stock Option and Incentive Plan (the “Stock Plan”).  Up to 2,497,950 shares of Company common stock may be granted under the Stock Plan.

On February 9, 2009 the Compensation Committee of the Board of Directors implemented the Stock Plan, approved the restricted stock and stock option grants and authorized management to take the necessary steps to carry out the implementation of the Stock Plan, including the purchase of up to 713,700 shares of the Company’s outstanding common shares to fund the restricted stock portion of the Stock Plan through open market transactions or negotiated block transactions.  The purchases were made from time to time, based on open market conditions.

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DANVERS BANCORP, INC.

As of May 5, 2009, total repurchases under the Stock Plan were 446,000 shares at an average price of $12.99.  In the first quarter of 2009, the Company purchased 339,900 shares, as follows:

					Total Number of		Maximum Number of
	Total				Shares Purchased		Shares That May
	Number		Average		as Part of Publicly		Yet be Purchased
	of Shares		Price Paid		Announced Plans		Under the Plans
Period	Purchased		per Share		or Programs		or Programs
January 1-31		-	$	-		-		-
February 1-28		160,200	$	12.45		160,200		553,500
March 1-31		179,700	$	12.58		179,700		373,800
Total		339,900	$	12.52		339,900

Item 3.  Defaults Upon Senior Securities

Not applicable.

Item 4.  Submission of Matters to a Vote of Security Holders

Not applicable.

Item 5.  Other Information

Not applicable.

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DANVERS BANCORP, INC.

Item 6.                        Exhibits

Exhibit No.	Description
10.16	Incentive Stock Option Agreement Under the Danvers Bancorp, Inc. 2008 Stock Option and Incentive Plan+*
10.17	Restricted Stock Award Agreement Under the Danvers Bancorp, Inc. 2008 Stock Option and Incentive Plan+*
10.18	Non-Qualified Stock Option Agreement for Company Employees Under the Danvers Bancorp, Inc. 2008
	Stock Option and Incentive Plan+*
10.19	Non-Qualified Stock Option Agreement for Non-Employee Directors Under the Danvers Bancorp, Inc. 2008
	Stock Option and Incentive Plan+*
31.1	Section 302 Certification of President and Chief Executive Officer*
31.2	Section 302 Certification of Executive Vice President and Chief Operating Officer*
31.3	Section 302 Certification of Executive Vice President and Chief Financial Officer*
32.1	Section 906 Certification of President and Chief Executive Officer**
32.2	Section 906 Certification of Executive Vice President and Chief Operating Officer**
32.3	Section 906 Certification of Executive Vice President and Chief Financial Officer**
+    Represents management contract or compensatory plan or agreement.
*    Filed herewith.
** Furnished herewith.

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DANVERS BANCORP, INC.

Signatures

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

Danvers Bancorp, Inc.

Date:	May 8, 2009	By:	/s/	Kevin T. Bottomley
				Kevin T. Bottomley
				President and Chief Executive Officer

Date:	May 8, 2009	By:	/s/	James J. McCarthy
				James J. McCarthy
				Executuve Vice President and Chief Operating Officer

Date:	May 8, 2009	By:	/s/	L. Mark Panella
				L. Mark Panella
				Executive Vice President and Chief Financial Officer

33