Danvers Bancorp (DNBK) 10-Q 2009 Q3 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 September 30, 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 or 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 company o

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 November 9, 2009: 21,897,232

DANVERS BANCORP, INC.

TABLE OF CONTENTS

			Page
PART I.  FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)
	-	Consolidated Balance Sheets as of September 30, 2009 and December 31, 2008	3
	-	Consolidated Statements of Operations for the Three and Nine Months Ended
		September 30, 2009 and 2008	4
	-	Consolidated Statements of Changes in Stockholders' Equity for the
		Nine Months Ended September 30, 2009 and 2008	5
	-	Consolidated Statements of Cash Flows for the Nine Months Ended
		September 30, 2009 and 2008	6
	-	Notes to Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of
	Operations		20
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		35
Item 4.	Controls and Procedures		37
PART II.  OTHER INFORMATION
Item 1.	Legal Proceedings		38
Item 1A.	Risk Factors		38
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		39
Item 3.	Defaults Upon Senior Securities		39
Item 4.	Submission of Matters to a Vote of Security Holders		40
Item 5.	Other Information		40
Item 6.	Exhibits		41

2

DANVERS BANCORP, INC.

PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements (Unaudited)

CONSOLIDATED BALANCE SHEETS

(Unaudited)

	September 30,			December 31,
	2009			2008
	(In thousands)
ASSETS
Cash and cash equivalents	$	37,603		$	33,129
Certificates of deposit		10,588			10,291
Securities available for sale, at fair value		509,091			490,845
Securities held to maturity, at cost		10,000			-
Loans held for sale		1,625			-
Loans		1,243,409			1,118,948
Less allowance for loan losses		(13,878	)		(12,133	)
Loans, net		1,229,531			1,106,815
Federal Home Loan Bank stock, at cost		14,001			14,001
Premises and equipment, net		26,616			22,877
Bank-owned life insurance		25,379			24,826
Other real estate owned		1,867			1,158
Accrued interest receivable		8,250			7,457
Deferred tax asset, net		7,312			6,955
Other assets		10,997			9,455
	$	1,892,860		$	1,727,809
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand deposits	$	132,910		$	123,414
Savings and NOW accounts		207,198			176,365
Money market accounts		568,177			440,931
Term certificates over $100,000		284,410			242,846
Other term certificates		181,354			134,727
Total deposits		1,374,049			1,118,283
Short-term borrowings		87,104			168,276
Long-term debt		161,867			163,022
Subordinated debt		29,965			29,965
Accrued expenses and other liabilities		13,731			15,255
Total liabilities		1,666,716			1,494,801
Stockholders' equity:
Preferred stock; $0.01 par value, 10,000,000 shares authorized;
none issued		-			-
Common stock; $0.01 par value, 60,000,000 shares authorized; 17,842,500 shares
issued		178			178
Additional paid-in capital		175,124			174,510
Retained earnings		69,558			67,854
Accumulated other comprehensive income		6,194			4,026
Unearned restricted shares		(7,209	)		-
Unearned compensation - ESOP; 1,302,503 and 1,356,030 shares at
September 30, 2009 and December 31, 2008, respectively		(13,025	)		(13,560	)
Treasury stock, at cost; 362,793 and 0 shares at September 30, 2009 and
December 31, 2008, respectively		(4,676	)		-
Total stockholders' equity		226,144			233,008
	$	1,892,860		$	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					Nine Months Ended
	September 30,					September 30,
	2009		2008			2009		2008
	(Dollars in thousands, except per share amounts)
Interest and dividend income:
Interest and fees on loans	$	17,448	$	16,247		$	49,767	$	47,665
Interest on debt securities:
Taxable		5,262		4,183			15,780		13,863
Non-taxable		235		195			658		578
Dividends on equity securities		-		91			1		301
Interest on cash equivalents and certificates of deposit		97		276			292		959
Total interest and dividend income		23,042		20,992			66,498		63,366
Interest expense:
Interest on deposits:
Savings and NOW accounts		647		551			1,842		1,762
Money market accounts		2,828		2,692			8,711		8,716
Term certificates		3,069		3,333			9,100		10,927
Interest on short-term borrowings		62		108			269		427
Interest on long-term debt and subordinated debt		2,291		2,423			6,916		7,035
Total interest expense		8,897		9,107			26,838		28,867
Net interest income		14,145		11,885			39,660		34,499
Provision for loan losses		1,400		1,050			3,360		2,725
Net interest income, after provision for loan losses		12,745		10,835			36,300		31,774
Non-interest income:
Service charges on deposits		869		686			2,503		1,972
Loan servicing fees		34		56			63		167
Gain on sales of loans		87		90			772		186
Net gain (loss) on sales of securities		4		(26	)		4		887
Net increase in cash surrender value of bank-owned life insurance		231		241			553		841
Other operating income		442		394			1,284		1,308
Total non-interest income		1,667		1,441			5,179		5,361
Non-interest expenses:
Salaries and employee benefits		7,397		5,855			21,618		21,495
Occupancy		1,372		1,270			4,254		3,765
Equipment		877		811			2,464		2,358
Outside services		328		295			1,140		846
Contribution to the Danversbank Charitable Foundation		-		-			-		6,850
Other real estate owned expense		159		225			426		1,911
Deposit insurance expense		415		179			2,115		521
Other operating expense		2,496		2,018			6,398		5,300
Total non-interest expenses		13,044		10,653			38,415		43,046
Income (loss) before income taxes		1,368		1,623			3,064		(5,911	)
Provision (benefit) for income taxes		205		1,575			383		(3,245	)
Net income (loss)	$	1,163	$	48		$	2,681	$	(2,666	)
Weighted-average shares outstanding:
Basic		15,662,796		16,450,979			15,993,596		N/A
Diluted		15,734,543		16,450,979			16,038,584		N/A
Earnings per share:
Basic	$	0.074	$	0.003		$	0.168		N/A
Diluted	$	0.074	$	0.003		$	0.167		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			Unearned						Total
	Common Stock				Paid-In			Retained			Comprehensive			Restricted			Compensation -			Treasury			Stockholders'
	Shares		Amount		Capital			Earnings			Income (Loss)			Shares			ESOP			Stock			Equity
	(Dollars in thousands)
Balance at December 31, 2007		-	$	-	$	-		$	71,213		$	2,283		$	-		$	-		$	-		$	73,496
Comprehensive loss:
Net loss		-		-		-			(2,666	)		-			-			-			-			(2,666	)
Net unrealized loss on securities
available for sale, net of
reclassification adjustment
and tax effect		-		-		-			-			(2,735	)		-			-			-			(2,735	)
Change in fair value and
amortization of derivative used
for cash flow hedge, net of
tax effect		-		-		-			-			(3	)		-			-			-			(3	)
Total comprehensive loss																								(5,404	)
Issuance of common stock for
initial public offering, net of
expenses of $3,850		17,192,500		172		167,902			-			-			-			-			-			168,074
Issuance of common stock to
the Danversbank Charitable
Foundation		650,000		6		6,494			-			-			-			-			-			6,500
Stock purchased by ESOP		-		-		-			-			-			-			(14,274	)		-			(14,274	)
Common stock held by ESOP
committed to be released
(47,580 shares)		-		-		58			-			-			-			476			-			534
Dividends paid
($.02 per share)		-		-		-			(357	)		-			-			-			-			(357	)
Balance at September 30, 2008		17,842,500	$	178	$	174,454		$	68,190		$	(455	)	$	-		$	(13,798	)	$	-		$	228,569
Balance at December 31, 2008		17,842,500	$	178	$	174,510		$	67,854		$	4,026		$	-		$	(13,560	)	$	-		$	233,008
Comprehensive income:
Net income		-		-		-			2,681			-			-			-			-			2,681
Net unrealized gain on securities
available for sale, net of
reclassification adjustment
and tax effect		-		-		-			-			2,171			-			-			-			2,171
Change in fair value and
amortization of derivative used
for cash flow hedge, net of
tax effect		-		-		-			-			(3	)		-			-			-			(3	)
Total comprehensive income																								4,849
Purchase of shares for incentive
plans (713,700 shares)		-		-		(8,667	)		-			-			-			-			(1,001	)		(9,668	)
Restricted stock awards
(639,807 shares)		-		-		8,317			-			-			(8,317	)		-			-			-
Purchase of shares for Stock
Repurchase plan (288,900 shares)		-		-		-			-			-			-			-			(3,675	)		(3,675	)
Equity incentive shares earned		-		-		786			-			-			1,108			-			-			1,894
Common stock held by ESOP
committed to be released
(53,527 shares)		-		-		178			-			-			-			535			-			713
Dividends paid
($.06 per share)		-		-		-			(977	)		-			-			-			-			(977	)
Balance at September 30, 2009		17,842,500	$	178	$	175,124		$	69,558		$	6,194		$	(7,209	)	$	(13,025	)	$	(4,676	)	$	226,144

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

5

DANVERS BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Nine Months Ended
	September 30,
	2009			2008
	(In thousands)
Cash flows from operating activities:
Net income (loss)	$	2,681		$	(2,666	)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Provision for loan losses		3,360			2,725
Write-down of other real estate owned net of gain on sales of other real estate owned		74			1,387
Depreciation and amortization		2,629			2,682
Accretion of net deferred loan fees and costs		(465	)		(391	)
Deferred tax benefit		(1,867	)		(1,873	)
Amortization of core deposit intangible and servicing rights		311			157
Amortization of stock-based compensation and ESOP expense		2,607			534
Amortization of securities, net		282			209
Net gain on sales of securities		(4	)		(887	)
Loans originated for sale		(62,556	)		(14,341	)
Proceeds from sales of loans originated for sale		60,931			13,519
Issuance of common stock to Danversbank Charitable Foundation		-			6,500
Changes in other assets and liabilities:
Accrued interest receivable		(793	)		187
Other assets and bank-owned life insurance		(2,412	)		(4,071	)
Accrued expenses and other liabilities		(1,524	)		(2,836	)
Net cash provided by operating activities		3,254			835
Cash flows from investing activities:
Activity in available-for-sale securities:
Sales		6,803			106,014
Maturities, prepayments and calls		139,852			142,245
Purchases		(161,495	)		(216,826	)
Activity in held-to-maturity securities:
Purchases		(10,000	)		-
Purchases of certificates of deposit		(297	)		-
Purchase of Federal Home Loan Bank stock		-			(849	)
Funds advanced on other real estate owned		(384	)		(795	)
Proceeds from sales of other real estate owned		1,766			2,839
Net loan originations		(127,776	)		(165,830	)
Purchase of premises and equipment		(6,368	)		(6,131	)
Proceeds from sale of premises and equipment		-			100
Net cash used in investing activities		(157,899	)		(139,233	)

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

6

DANVERS BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Concluded)

(Unaudited)

	Nine Months Ended
	September 30,
	2009			2008
	(In thousands)
Cash flows from financing activities:
Net increase (decrease) in:
Term certificates	$	88,191		$	28,581
Other deposits		167,575			98,643
Short-term borrowings		(81,172	)		11,241
Stock subscriptions		-			(162,859	)
Activity in long-term debt:
Proceeds from advances		-			25,000
Payment of advances		(1,155	)		(6,334	)
Net proceeds from issuance of common stock		-			168,074
Acquisition of common stock by ESOP		-			(14,274	)
Purchase of shares for incentive plans		(13,343	)		-
Dividends paid		(977	)		(357	)
Net cash provided by financing activities		159,119			147,715
Change in cash and cash equivalents		4,474			9,317
Cash and cash equivalents at beginning of period		33,129			65,862
Cash and cash equivalents at end of period	$	37,603		$	75,179
Supplementary disclosure of cash flow information:
Cash paid during the period for:
Interest	$	26,768		$	28,675
Income taxes		1,068			1,141
Non-cash financing and investing activities:
Unsettled securities transactions		-			5,500
Transfers from loans to other real estate owned		2,165			700

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

7

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 and nine months ended September 30, 2009 and 2008 are not necessarily indicative of the results to be obtained for a full year.

2. Derivative Financial Instruments and Hedging Activities

The Financial Accounting Standards Board (the “FASB”) issued guidance Accounting Standards Codification (“ASC”) 815-S50 (“Topic 815”) regarding disclosures on derivative instruments and hedging activities.  The guidance provides users of financial statements with an enhanced understanding of: (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under ASC Topic 815 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows.  ASC Topic 815 requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about the fair value of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative instruments.

As required by ASC Topic 815, the Company records all derivatives on the balance sheet at fair value.  The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting.  Currently, none of the Company’s derivatives are designated as qualifying hedging relationships, as the derivatives are not used to manage risks within the Company’s assets or liabilities.  As such, all changes in fair value of the Company’s derivative assets and liabilities are recognized directly in earnings.

Risk Management Objective of Using Derivatives

The Company is exposed to certain risks arising from both its business operations and economic conditions.  The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities.  The Company manages economic risks, including interest rate, liquidity, and credit risk, primarily by managing the amount, sources, and duration of its assets and liabilities.  The Company’s existing interest rate derivatives result from a service provided to certain qualifying customers and, therefore, are not used to manage interest rate risk in the Company’s assets or liabilities.  The Company manages a matched book with respect to its derivative instruments in order to minimize its net risk exposure resulting from such transactions.

8

DANVERS BANCORP, INC.

Non-designated Hedges

None of the Company’s derivatives are designated as qualifying hedging relationships under ASC Topic 815.  Derivatives not designated as hedges are not speculative and result from a service the Company provides to certain customers.  The Company executes interest rate swaps and caps (“interest rate products”) with commercial banking customers to facilitate their respective risk management strategies.  Those interest rate products are simultaneously hedged by offsetting interest rate products that the Company executes with a third party, such that the Company minimizes its net risk exposure resulting from such transactions.  As the interest rate products associated with this program do not meet the strict hedge accounting requirements of ASC Topic 815, changes in the fair value of both the customer interest rate products and the offsetting interest rate products are recognized directly in earnings.  As of September 30, 2009, the Company had ten interest rate swaps and two caps with an aggregate notional amount of $42,908,000 and $50,000,000, respectively.  During the nine months ended September 30, 2009, the Company recognized a net gain of $22,000 related to changes in fair value of these interest rate products.

Fair Values of Derivative Instruments on the Balance Sheet

The table below presents the fair value of the Company’s derivative financial instruments as well as their balance sheet location as of September 30, 2009 and December 31, 2008.

	September 30, 2009			December 31, 2008
	Balance Sheet	Fair		Balance Sheet	Fair
	Location	Value		Location	Value
	(In thousands)
Derivatives not designated as hedging
Instruments Under ASC Topic 815:
Interest rate swap agreements	Other assets	$	1,350	Other assets	$	1,761
Interest rate cap agreements	Other assets		144	Other assets		-
Total interest rate products		$	1,494		$	1,761
Interest rate swap agreements	Other liabilities	$	1,368	Other liabilities	$	1,796
Interest rate cap agreements	Other liabilities		139	Other liabilities		-
Total interest rate products		$	1,507		$	1,796

Effect of Derivative Instruments on the Income Statement

The table below presents the effect of the Company’s derivative financial instruments on the Income Statement for the three and nine months ended September 30, 2009.

		Amount Recognized			Amount Recognized
		in Income on			in Income on
		Derivatives for the			Derivatives for the
Derivatives Not Designated as Hedging	Location of Gain (Loss) Recognized	Three Months Ended			Nine Months Ended
Instruments Under ASC Topic 815	in Income on Derivative	September 30, 2009			September 30, 2009
		(In thousands)
Interest rate swap agreements	Other income	$	1		$	18
Interest rate cap agreements	Other income		(1	)		4
Total income on interest rate products		$	-		$	22

9

DANVERS BANCORP, INC.

 3. Securities

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

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(In thousands)
September 30, 2009:
Debt securities:
Securities Available for Sale
Federal Home Loan Mortgage Corporation	$	500	$	-	$	(1	)	$	499
Other government-sponsored enterprises:
Federal National Mortgage Association		2,250		2		(4	)		2,248
Federal Home Loan Bank		106,791		1,965		(110	)		108,646
Federal Farm Credit Bank		106,869		757		(823	)		106,803
Mortgage-backed:
Federal Home Loan Mortgage Corporation		82,619		2,257		(181	)		84,695
Federal National Mortgage Association		108,134		3,475		(32	)		111,577
Government National Mortgage Association		66,805		2,111		(78	)		68,838
Municipal bonds		24,385		1,150		-			25,535
Other bonds		250		-		-			250
	$	498,603	$	11,717	$	(1,229	)	$	509,091
Securities Held to Maturity
Trust Preferred	$	10,000	$	-	$	-		$	10,000
December 31, 2008:
Debt securities:
Securities Available for Sale
U.S. Government	$	2,007	$	11	$	-		$	2,018
Federal Home Loan Mortgage Corporation		1,147		1		-			1,148
Other government-sponsored enterprises:
Federal Home Loan Bank		141,120		1,278		(129	)		142,269
Federal Farm Credit Bank		75,249		3,105		-			78,354
Mortgage-backed:
Federal Home Loan Mortgage Corporation		76,011		1,007		(366	)		76,652
Federal National Mortgage Association		101,237		1,445		(266	)		102,416
Government National Mortgage Association		67,841		1,097		(16	)		68,922
Municipal bonds		19,179		107		(470	)		18,816
Other bonds		250		-		-			250
	$	484,041	$	8,051	$	(1,247	)	$	490,845

10

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)
September 30, 2009:
Debt securities:
Securities Available for Sale
Federal Home Loan Mortgage Corporation	$	1	$	499	$	-	$	-
Other government-sponsored enterprises:
Federal National Mortgage Association		4		496		-		-
Federal Home Loan Bank		110		6,840		-		-
Federal Farm Credit Bank		823		65,177		-		-
Mortgage-backed:
Federal Home Loan Mortgage Corporation		173		16,533		8		1,169
Federal National Mortgage Association		32		4,928		-		-
Government National Mortgage Association		78		10,791		-		-
	$	1,221	$	105,264	$	8	$	1,169
December 31, 2008:
Debt securities:
Securities Available for Sale
Other government-sponsored enterprises:
Federal Home Loan Bank	$	1	$	20,372	$	-	$	-
Federal Farm Credit Bank		128		999		-		-
Mortgage-backed:
Federal Home Loan Mortgage Corporation		365		26,879		1		484
Federal National Mortgage Association		261		26,056		5		458
Government National Mortgage Association		16		4,179		-		-
Municipal bonds		25		1,135		445		11,349
	$	796	$	79,620	$	451	$	12,291

Management evaluates securities for other-than-temporary impairment (“OTTI”) on at least a quarterly basis, and more frequently if economic or market concerns warrant more frequent evaluation.  In accordance with ASC 320-10-35 (“Topic 320”), guidance on subsequent measurement of debt and equity securities, the Company would recognize OTTI on debt securities 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 Company intends, or more-likely-than-not will be required to sell the security before recovery of the security's amortized cost basis.  If OTTI exists, the charge to earnings would be limited to the amount of credit loss, if the Company does not intend to sell the security and it is more-likely-than-not that the Company will not be required to sell the security before recovery of the security's amortized cost.  Any remaining difference between the 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.  To determine which individual securities are at risk for OTTI, consideration is given to (1) the length of time and the extent to which the fair value has remained less than amortized cost, (2) adverse conditions specifically related to the security, and industry or geographic area, (3) the historical and implied

11

DANVERS BANCORP, INC.

volatility of the fair value of the security, (4) the payment structure of the debt security, (5) failure of the issuer of the security to make scheduled interest or principal payments, (6) any changes to the rating of the security by a rating agency and (7) recoveries or additional declines in fair value subsequent to the balance sheet date.

The unrealized losses on the Company’s debt securities portfolio were caused by current dislocations in the market resulting in spreads increasing significantly over historic levels.  Ongoing analysis of these securities indicates no significant deterioration in the underlying credit supporting these securities.  Therefore, it is expected that these securities would not be settled at a price less than the par value of the security.  The Company does not intend to sell any of these securities nor is it more-likely-than-not that the Company will be required to sell any of these securities before their anticipated recovery.  As a result of these evaluations, the Company determined that all unrealized losses from debt securities are not OTTI as of September 30, 2009 and December 31, 2008.

4. Fair Value of Assets and Liabilities

Fair Value Hierarchy

In accordance with ASC Topic 820 “Fair Value Measurements and Disclosures”, 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 generally 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 products 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 and cap agreements.

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, other real estate owned, impaired loans, residential mortgage servicing rights and long-term derivative contracts.

12

DANVERS BANCORP, INC.

The following methods and assumptions were used by the Company in estimating fair value disclosures:

Cash and cash equivalents – The carrying amounts for cash and cash equivalents approximate fair value because they mature in 90 days or less and do not present unanticipated valuation risk.

Certificates of deposit – The carrying amounts for certificates of deposit approximate fair value because they do not present unanticipated valuation risk.

Securities – The available for sale securities measured at fair value in Level 2 are 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-quotes on securities, obtains quotes from market makers or broker-dealers that it recognizes to be market participants. These securities include U.S. Government and government-sponsored enterprises, mortgage-backed securities, corporate bonds, foreign government bonds and municipal bonds.  The securities measured at fair value in Level 3 are based on target prices obtained from independent third party services using dividend discount models and peer group analysis.  The securities held in Level 3 are held to maturity trust preferred securities.  At September 30, 2009, the Company did not have any securities classified as Level 1.

Federal Home Loan Bank stock – The fair value of Federal Home Loan Bank stock is equal to cost based on redemption provisions.

Loans and loans held for sale – Fair values are estimated for portfolios of loans with similar financial and credit characteristics.  The loan portfolio was evaluated in the following segments: commercial, residential real estate, commercial real estate, construction, home equity and other consumer loans.  The fair value of performing commercial and commercial real estate loans is estimated by discounting cash flows through the estimated maturity using discount rates that reflect the expected maturity and the credit and interest rate risk inherent in such loans.  The fair value of residential mortgage loans is estimated by discounting contractual cash flows, adjusted for prepayment estimates using discount rates based on secondary market sources.  The fair value of home equity and other consumer loans is estimated based on secondary market prices for asset-backed securities with similar characteristics.  The fair values of loans held for sale is based on observable market prices.  Fair values for non-performing loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable.

Servicing rights – Fair value is based on the present value of estimated future net servicing income.

Deposits – The fair value of deposits with no stated maturity, such as non-interest-bearing demand deposits, savings and NOW accounts, and money market accounts, is equal to the amount payable on demand as of the reporting date.  The fair value of term certificates is based on the discounted value of contractual cash flows.  The discount rate used is based on market interest rates currently offered for funding sources of similar remaining maturities.

Short-term borrowings – The carrying amount of short-term borrowings approximate fair value because they mature in 90 days or less and do not present unanticipated valuation risk.

Long-term borrowings – The fair value of these borrowings is based on the discounted value of contractual cash flows.  The discount rate used is based on the estimated market rates currently offered for borrowings of similar remaining maturities.

13

DANVERS BANCORP, INC.

Subordinated debt – The fair value of these borrowings is based on the discounted value of contractual cash flows.  The carrying amount of adjustable rate borrowings approximates fair value as they reprice quarterly.  The discount rate used is based on the 3 Month LIBOR plus a market index.

Accrued interest – The carrying amounts approximate fair value.

Interest rate products – The fair value of interest rate swap and cap 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.

Off-balance sheet credit related instruments – The fair value of commitments to extend credit is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties.  The fair value of these fees at September 30, 2009 and December 31, 2008 was immaterial to the consolidated financial statements.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

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)
September 30, 2009:
Assets
Securities	$	-	$	509,091	$	-	$	509,091
Interest rate products		-		1,494		-		1,494
	$	-	$	510,585	$	-	$	510,585
Liabilities
Interest rate products	$	-	$	1,507	$	-	$	1,507

							Total
	Level 1		Level 2		Level 3		Fair Value
	(In thousands)
December 31, 2008:
Assets
Securities	$	-	$	490,845	$	-	$	490,845
Interest rate products		-		1,761		-		1,761
	$	-	$	492,606	$	-	$	492,606
Liabilities
Interest rate products	$	-	$	1,796	$	-	$	1,796

Assets Measured at Fair Value on a Non-recurring Basis

The Company may also be required, from time to time, to measure certain other financial assets on a non-recurring 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 September 30, 2009 and December 31, 2008.

14

DANVERS BANCORP, INC.

The following tables summarize the fair value hierarchy used to determine each adjustment and the carrying value of the related individual assets:

							Quarter		Nine Months
							Ended		Ended
							September 30,		September 30,
	September 30, 2009						2009		2009
							Total		Total
	Level 1		Level 2		Level 3		Losses		Losses
	(In thousands)
Assets
Other real estate owned	$	-	$	-	$	1,867	$	-	$	82
Impaired loans		-		-		1,260		327		1,188
	$	-	$	-	$	3,127	$	327	$	1,270

							Quarter		Nine Months
							Ended		Ended
							September 30,		September 30,
	December 31, 2008						2008		2008
							Total		Total
	Level 1		Level 2		Level 3		Losses		Losses
	(In thousands)
Assets
Other real estate owned	$	-	$	1,158	$	-	$	-	$	1,387
Impaired loans		-		1,481		-		280		541
	$	-	$	2,639	$	-	$	280	$	1,928

At September 30, 2009, the amount of other real estate owned in Level 3 represents the carrying value and related charge-offs for which adjustments are based on current appraised value of the collateral or where current appraised value is not obtained, management’s discounted estimate of the collateral.  At September 30, 2009, the amount of impaired loans in Level 3 represents the carrying value and related charge-offs and ASC Topic 310 “Receivables” allocated reserves on impaired loans for which adjustments are based on current appraised value of the collateral or where current appraised value is not obtained, management’s discounted estimate 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.

At 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 December 31, 2008, the amount of impaired loans in Level 2 represents the carrying value and related charge-offs and ASC Topic 310 “Receivables” 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.

15

DANVERS BANCORP, INC.

As required under ASC 825-10-50 (“Topic 825”) guidance regarding disclosures about fair value of financial instruments, the estimated fair values, and related carrying or notional amounts, of the Company’s financial instruments are as follows.  ASC Topic 825 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements.  Accordingly, the aggregate fair value amounts presented herein may not necessarily represent the underlying fair value of the Company.

	September 30, 2009				December 31, 2008
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
	(In thousands)
Financial assets:
Cash and cash equivalents	$	37,603	$	37,603	$	33,129	$	33,129
Certificates of deposit		10,588		10,588		10,291		10,291
Securities available for sale		509,091		509,091		490,845		490,845
Securities held to maturity		10,000		10,000		-		-
Federal Home Loan Bank stock		14,001		14,001		14,001		14,001
Loans and loans held for sale, net		1,231,156		1,237,727		1,106,815		1,118,521
Accrued interest receivable		8,250		8,250		7,457		7,457
Servicing rights		441		793		473		473
Financial liabilities:
Deposits:
Demand deposits		132,910		132,910		123,414		123,414
Savings and NOW accounts		207,198		207,198		176,365		176,365
Money market accounts		568,177		568,177		440,931		440,931
Term certificates		465,764		468,391		377,573		379,840
Short-term borrowings		87,104		87,104		168,276		168,276
Long-term debt		161,867		162,679		163,022		165,822
Subordinated debt		29,965		12,201		29,965		9,608
Accrued interest payable		1,379		1,379		1,309		1,309
On-balance sheet derivative
financial instruments:
Interest rate products:
Assets		1,494		1,494		1,761		1,761
Liabilities		1,507		1,507		1,796		1,796

5. Earnings Per Share

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

For the three and nine months ended September 30, 2009, potentially dilutive common stock equivalents totaled 71,747 and 44,988 shares, respectively, representing the dilutive effect of the restricted stock.  There was no restricted stock at September 30, 2008.  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 10, 2008.  Unallocated common shares held by the Employee Stock Ownership Plan (“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.

16

DANVERS BANCORP, INC.

The following table is the reconciliation of diluted earnings per share for the periods indicated:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2009		2008		2009			2008
Basic weighted average common shares outstanding		15,662,796		16,450,979		15,993,596			N/A
Dilutive shares		71,747		-		44,988			N/A
Diluted weighted average common shares outstanding		15,734,543		16,450,979		16,038,584			N/A
Basic earnings per share	$	0.074	$	0.003	$	0.168			N/A
Effect of dilutive shares		-		-		(0.001	)		N/A
Diluted earnings per share	$	0.074	$	0.003	$	0.167			N/A

6. Dividend Declared

On October 22, 2009, the Company declared a quarterly cash dividend on its common stock of $.02 per share. The dividend will be paid on or after November 20, 2009 to shareholders of record as of November 6, 2009.

7. Recent Accounting Pronouncements

In June 2009, the FASB issued Statement No. 168 “The FASB Accounting Standards Codification TM and the Hierarchy of Generally Accepted Accounting Principles—a replacement of FASB Statement No. 162” (the “Codification”), and subsequently incorporated into ASC Topic 105 “Generally Accepted Accounting Principles”, which became the source of authoritative U.S. generally accepted accounting principles (GAAP) recognized by the FASB to be applied by nongovernmental entities.  Rules and interpretive releases of the Securities and Exchange Commission (SEC) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants.  On the effective date of this Statement, the Codification will supersede all then-existing non-SEC accounting and reporting standards.  All other nongrandfathered non-SEC accounting literature not included in the Codification will become nonauthoritative.  Following this Statement, the FASB will not issue new standards in the form of Statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts.  Instead, it will issue Accounting Standards Updates. The FASB will not consider Accounting Standards Updates as authoritative in their own right.  Accounting Standards Updates will serve only to update the Codification, provide background information about the guidance and provide the bases for conclusions on the change(s) in the Codification.  This Statement is effective for financial statements issued for interim and annual periods ending after September 15, 2009 and did not have a material impact of the Company’s consolidate financial statements.

In December 2007, the FASB issued SFAS No. 141 (revised), “Business Combinations”, which replaces SFAS No. 141 and subsequently incorporated into ASC Topic 805 “Business Combinations”.  ASC Topic 805 applies to all business entities, including mutual entities that previously used the pooling-of-interests method of accounting for certain business combinations.  ASC Topic 805 makes significant amendments to previous 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.  The Company adopted this guidance and on October 30, 2009, completed its merger with Beverly National Corporation in accordance with the guidance incorporated in ASC Topic 805.

In April 2009, the FASB issued FASB Staff Position No. 141(R)-1, “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies”, and subsequently incorporated

17

DANVERS BANCORP, INC.

into ASC Topic 805.  ASC Topic 805 amends and clarifies previous guidance for 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.  This guidance 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.   The Company adopted this guidance and on October 30, 2009 completed its merger with Beverly National Corporation in accordance with the guidance incorporated in ASC Topic 805.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51”, and subsequently incorporated into ASC Topic 810 “Consolidations”.  ASC Topic 810 guidance establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary.  This guidance 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 guidance is effective for fiscal years beginning on or after December 15, 2008 and the adoption of this Statement did not have an 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”, and subsequently incorporated into ASC Topic 820 “Fair Value Measurements and Disclosures”.  ASC Topic 820 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 guidance is effective for periods ending after June 15, 2009, and the adoption of this guidance did not have an impact 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”, and subsequently incorporated into ASC Topic 260 “Earnings Per Share”.  Under ASC Topic 260 guidance, 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 the guidance 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.  The guidance requires retrospective application to all prior-period earnings per share data presented.   The guidance was adopted by the Company on January 1, 2009 and did not have an 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”, and subsequently incorporated into ASC Topic 825 “Financial Instruments”.  ASC Topic 825 guidance 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 guidance was effective June 30, 2009 and did not have an 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”, and subsequently incorporated into ASC Topic 320 “Investments – Debt and Equity Securities”, modifies the requirements for recognizing other-than-temporary-impairment on debt securities and significantly changes the impairment model for such securities.  Under ASC Topic 320 guidance, a security is considered to be other-than-temporarily impaired if the present value of cash flows expected to be collected are

18

DANVERS BANCORP, INC.

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 guidance, 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 recovery of the security’s amortized cost basis.  The guidance also modifies the presentation of other-than-temporary impairment losses and increases related disclosure requirements.  The guidance is effective for periods ending after June 15, 2009 and the adoption did not have an impact on the Company’s consolidated financial statements.

In May 2009, the FASB issued Statement No. 165, “Subsequent Events”, and subsequently incorporated into ASC Topic 855 “Subsequent Events”, which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statement are issued or are available to be issued.  Specifically, ASC Topic 855 guidance defines: (1) the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, (2) the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements and (3) the disclosures that an entity should make about events or transactions that occurred after the balance sheet date.  The adoption of this guidance, effective for interim or annual financial periods ending after June 15, 2009, did not have a material impact the Company’s consolidated financial statements.

In June 2009, the FASB issued Statement No. 166, “Accounting for Transfers of Financial Assets – an amendment of FASB No. 140”, which is currently being processed for inclusion into the ASC, improves the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement, if any, in transferred financial assets.   This Statement addresses: (1) practices that have developed since the issuance of FASB Statement No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”, that are not consistent with the original intent and key requirements of that Statement and (2) concerns of financial statement users that many of the financial assets (and related obligations) that have been derecognized should continue to be reported in the financial statements of transferors.  This Statement must be applied as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter.  Earlier application is prohibited.  

This Statement must be applied to transfers occurring on or after the effective date.  Additionally, on and after the effective date, the concept of a qualifying special-purpose entity is no longer relevant for accounting purposes.  Therefore, formerly qualifying special-purpose entities (as defined under previous accounting standards) should be evaluated for consolidation by reporting entities on and after the effective date in accordance with the applicable consolidation guidance.   If the evaluation on the effective date results in consolidation, the reporting entity should apply the transition guidance provided in the pronouncement that requires consolidation.  Additionally, the disclosure provisions of this Statement should be applied to transfers that occurred both before and after the effective date of this Statement.  The adoption of this Statement is not expected to have a material impact on the Company’s consolidated financial statements.

19

DANVERS BANCORP, INC.

In June 2009, the FASB issued Statement No. 167, “Amendments to FASB Interpretation No. 46(R)”, which is currently being processed for inclusion into the ASC, improves financial reporting by enterprises involved with variable interest entities.  The Statement addresses (1) the effects on certain provisions of FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities, as a result of the elimination of the qualifying special-purpose entity concept in FASB Statement No. 166, “Accounting for Transfers of Financial Assets”, and (2) constituent concerns about the application of certain key provisions of Interpretation 46(R), including those in which the accounting and disclosures under the Interpretation do not always provide timely and useful information about an enterprise’s involvement in a variable interest entity.  This Statement shall be effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter.  Earlier application is prohibited.  The adoption of this Statement is not expected to have a material impact on the Company’s consolidated financial statements.

8. Subsequent Events

In accordance with ASC Topic 855, the Company reviewed the events occurring through November 9, 2009, the date the accompanying financial statements were issued, noting that on October 9, 2009, the Company’s stockholders voted to approve the merger of Beverly National Corporation (“Beverly”) with and into the Company, and on October 30, 2009, the merger was consummated.  Pursuant to the Agreement and Plan of Merger by and between the Company and Beverly, dated as of June 16, 2009, Beverly stockholders received 1.66 shares of the Company’s common stock in exchange for each common share of Beverly.  Based on the closing price of the Company’s common stock on October 29, 2009, the transaction is valued at approximately $62.1 million in the aggregate.  For more information about the merger with Beverly, refer to the Company’s registration statement on Form S-4, including exhibits, filed on August 28, 2009, with the SEC and available at the SEC’s website at www.sec.gov.  Also see “Submission of Matters to a Vote of Security Holders” on page 40.  No other subsequent events occurred that required accrual or disclosure.

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.

20

DANVERS BANCORP, INC.

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 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;

· 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.

21

DANVERS BANCORP, INC.

Comparison of Financial Condition at September 30, 2009 and December 31, 2008

Total Assets.Total assets increased by $165.1 million, or 9.6%, to $1.89 billion at September 30, 2009 from $1.73 billion at December 31, 2008.  Net loans (including loans held for sale) increased by $124.3 million, or 11.2%, during the nine months and securities increased by $28.2 million, or 5.8%.  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 $4.5 million, or 13.5%, to $37.6 million at September 30, 2009 from $33.1 million at December 31, 2008.  The increase is attributable to the aforementioned deposit inflows during the first nine months of 2009.

Securities.The securities portfolio aggregated $519.1 million at September 30, 2009, an increase of $28.2 million, or 5.8%, from $490.8 million at December 31, 2008.  A portion of the cash flows from investment calls and amortization from the Company’s mortgage-backed securities (“MBS”) portfolio were utilized to fund loan growth and purchase additional securities during the nine months ended September 30, 2009.  Within the portfolio, MBS and municipal bonds increased by $17.1 million and $6.7 million, respectively.  During the third quarter of 2009, the Company invested in a $10.0 million single-issue trust preferred security issued by Smithtown Bancorp.  The trust preferred securities are classified as held to maturity.

At September 30, 2009 and December 31, 2008, MBS totaled 51.1% 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% beginning January 1, 2008 to 35.9% at September 30, 2009.  Adjustable-rate MBS make up 71.8% of the Company’s MBS.   All our MBS were rated AAA at September 30, 2009 and December 31, 2008.   Although unforeseeable changes in market conditions may affect future ratings, management does not expect a ratings downgrade to any of the Company’s MBS holdings.

The Company holds municipal bonds due to the tax advantages they provide.  At September 30, 2009 and December 31, 2008, all our municipal bonds were rated B or better by a nationally recognized rating agency and mature in thirty years or less.  All of the Company’s holdings with the exception of four issues from the Town of Danvers are privately insured.

Net Loans (Excluding Loans Held for Sale).Net loans as of September 30, 2009 were $1.23 billion, an increase of $122.7 million, or 11.1%, from net loan balances of $1.11 billion as of December 31, 2008.  The largest increases during the period were in the commercial and industrial (“C&I”) and commercial real estate loan segments and to a lesser extent the residential real estate and home equity loan segments.  Increases in C&I, commercial real estate, and residential loans of $59.9 million, $47.2 million and $15.4 million, respectively, were partially offset by a decline in the Company’s construction loan portfolio of $6.3 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.

22

DANVERS BANCORP, INC.

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

	September 30, 2009						December 31, 2008
	Amount			Percent			Amount			Percent
	(Dollars in thousands)
Real estate mortgages:
Construction	$	116,663			9.4	%	$	122,974			11.0	%
Residential		204,605			16.4			189,242			16.9
Commercial		294,648			23.7			247,483			22.1
Home equity		50,133			4.0			41,660			3.7
C&I		570,223			45.8			510,359			45.5
Consumer		8,912			0.7			8,725			0.8
Total loans		1,245,184			100.0	%		1,120,443			100.0	%
Allowance for loan losses		(13,878	)					(12,133	)
Net deferred loan fees		(1,775	)					(1,495	)
Loans, net	$	1,229,531					$	1,106,815

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

	September 30,			December 31,
	2009			2008
	(Dollars in thousands)
Non-accrual loans:
Real estate mortgages:
Construction	$	400		$	1,925
Residential		3,947			2,184
Commercial		1,155			263
Home equity		1,146			227
Total real estate mortgages		6,648			4,599
C&I		1,550			1,295
Consumer		8			38
Total non-accrual loans (1)	$	8,206		$	5,932
Restructured loans (2)	$	3,787		$	-
Total non-performing loans	$	11,993		$	5,932
Other real estate owned		1,867			1,158
Total non-performing assets	$	13,860		$	7,090
Total non-performing loans to total loans		0.96	%		0.53	%
Total non-performing loans to total assets		0.63	%		0.34	%
Total non-performing assets to total assets		0.73	%		0.41	%

(1) All loans on non-accrual status are considered non-performing.

(2) Restructured loans that have been performing in accordance with their modified terms for a period of less than 12 months are considered non-performing.

23

DANVERS BANCORP, INC.

It is the Company’s policy to cease accrual of interest on loans when the loan is delinquent in excess of 90 days (based on contractual terms), unless the timing of collections are reasonably estimable and collection is probable.  When a loan is placed on non-accrual status, all previously accrued but uncollected interest is reversed against current period income.  The interest on non-accrual loans is accounted for on the cash-basis or cost-recovery method, until the borrower has demonstrated performance in accordance with the contractual terms of the note which is generally six months.  The Company recognized $137,000, on the cash-basis, in interest income on non-accrual loans during 2009.

Restructured loans represent loans for which concessions are granted due to the borrower’s financial condition.  Such concessions may include modifications of repayment terms and/or a reduction of interest rates to below market rates.  At September 30, 2009, the Company had nine restructured loans totaling $3.8 million with a combined appraised value of $6.1 million.   Six of the restructured loan modifications included a reduction in the interest rate on the loan and interest only payments for a period of up to twelve months; one loan was placed on interest only payments for twelve months; the term of one loan was extended; and the principal and interest was reduced on another loan.  All restructured loans were on accrual status at the time of the restructure and at September 30, 2009, and as of the date of this report, all restructured loans were performing in accordance with their modified terms and conditions.  The Company recognized $159,000, on the accrual-basis, in interest income on restructured loans during 2009.

The Company had $1.9 million in other real estate owned (“OREO”) at September 31, 2009.  The OREO balance consists of four properties with no particular business segment or industry concentration represented.

24

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						At or For the Nine
	Months Ended September 30,						Months Ended September 30,
	2009			2008			2009			2008
	(Dollars in thousands)
Allowance balance at beginning of period	$	12,719		$	10,320		$	12,133		$	9,096
Provision for loan losses		1,400			1,050			3,360			2,725
Charge-offs:
Real estate mortgages:
Construction		110			-			585			-
Residential		1			20			50			105
Commercial		-			210			-			210
Home equity		-			-			-			14
Total real estate mortgages		111			230			635			329
C&I		135			78			966			349
Consumer		5			27			73			125
Total charge-offs		251			335			1,674			803
Recoveries:
Real estate mortgages:
Construction		5			-			5			-
Residential		-			-			-			8
Commercial		-			-			-			-
Home equity		-			-			-			-
Total real estate mortgages		5			-			5			8
C&I		-			10			25			10
Consumer		5			1			29			10
Total recoveries		10			11			59			28
Net charge-offs		241			324			1,615			775
Allowance balance at end of period	$	13,878		$	11,046		$	13,878		$	11,046
Total loans outstanding (1)	$	1,246,809		$	1,075,575		$	1,246,809		$	1,075,575
Average loans outstanding	$	1,213,788		$	1,035,109		$	1,168,888		$	982,235
Allowance for loan losses as a percent of
total loans outstanding		1.11	%		1.03	%		1.11	%		1.03	%
Net loans charged off as a percent of
average loans outstanding (annualized)		0.08	%		0.13	%		0.18	%		0.11	%
Allowance for loan losses to non-
performing loans		115.72	%		152.51	%		115.72	%		152.51	%

(1) Includes loans held for sale.

For further information, see “Provision for Loan Losses” of the Management Discussion and Analysis on page 28.

25

DANVERS BANCORP, INC.

Deposits.The Company’s deposit growth remained strong for the first nine months of 2009.  Total deposits increased by $255.8 million to $1.37 billion at September 30, 2009, an increase of 22.9% 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 $127.2 million, and to a lesser extent in total certificates, savings and NOW accounts, and demand deposit, which increased by $88.2 million, $30.8 million and $9.5 million, respectively.  This growth is attributable to shifts in the competitive marketplace and recent changes and additions to the Company’s retail branch network.  In 2008, the Company opened a new branch location in Salem and relocated two existing branch locations.  Additionally, the Company opened a new branch location in Cambridge during the second quarter of this year.  The two new branch locations and the relocation of the two existing branches have contributed $66.7 million in new deposit growth.

The Company expects to continue with the expansion of its retail branch network and plans to open a new branch location in Waltham by the end of this year, in Boston by early next year, and in two other western suburbs by mid to late next year.  Despite the low levels of short-term interest rates, the Company has experienced considerable success at raising “core” deposit balances.

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

	September 30, 2009					December 31, 2008
	Amount		Percent			Amount		Percent
	(Dollars in thousands)
Demand deposits	$	132,910		9.7	%	$	123,414		11.0	%
Savings and NOW accounts		207,198		15.1			176,365		15.8
Money market accounts		568,177		41.3			440,931		39.4
Total non-certificate accounts		908,285		66.1			740,710		66.2
Term certificates over $100,000		284,410		20.7			242,846		21.7
Other term certificates		181,354		13.2			134,727		12.1
Total certificate accounts		465,764		33.9			377,573		33.8
Total deposits	$	1,374,049		100.0	%	$	1,118,283		100.0	%

Borrowed Funds.The Company relies on borrowings from the Federal Home Loan Bank of Boston (“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 $105.2 million to $196.8 million at September 30, 2009, or 34.8%, from a balance of $302.0 million at December 31, 2008.  Management has replaced some of the Company’s short-term borrowing with the aforementioned deposit inflows and in the process has lessened the Company’s reliance on any single short-term funding source.  The Company had approximately $161.9 million in various FHLBB term advances and $87 million in short-term borrowings at September 30, 2009.  The Company’s short-term borrowings consisted of $20 million in 84-day FRB term auction facility (“TAF”) funding, $35 million in overnight FHLBB borrowings and $32 million in overnight customer repurchase agreements (“REPO’s”).  From a funding and liquidity perspective, the Company has ready access to a number of large and well-diversified short-term funding sources and these alternatives are available at highly competitive rates given the current rate environment.

The Company’s REPO’s 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 account product.  As of September 30, 2009, the Company

26

DANVERS BANCORP, INC.

had $32.1 million outstanding in overnight repurchase agreements, an increase of $2.8 million, or 9.6%, from $29.3 million December 31, 2008.

Total Stockholders’ Equity.Total stockholders’ equity decreased by $6.9 million to $226.1 million at September 30, 2009 from a balance of $233.0 million at December 31, 2008.  This decrease was primarily due to stock repurchases as the Company purchased 1,002,600 shares of common stock in the open market at an average price of $13.31 per share during the first nine months of 2009.  These purchases are part of the stock repurchase programs announced in January and May of 2009.  See Item 2 of Part II of this 10-Q for a further discussion of these purchases.  This decrease was offset by net income of $2.7 million and a decline in the unallocated common shares held by the ESOP.

Comparison of Operating Results for the Three and Nine Months Ended September 30, 2009 and 2008

Net Income (Loss).The Company recorded net income for the three months ended September 30, 2009 of $1.2 million, an increase of $1.1 million from net income of $48,000 for the three months ended September 30, 2008.  A significant increase in net interest income and a slight increase in non-interest income more than offset higher provision for loan losses, increased salaries and benefits expense and expenses associated with the Beverly National Corporation merger in the third quarter.  The Company reported net income for the nine months ended September 30, 2009 of $2.7 million, an increase of $5.4 million from a net loss of $2.7 million for the same period in 2008.  The loss for the first nine months of 2008 was due primarily to two non-recurring items: a $6.9 million pretax charge related to the establishment of the Danversbank Charitable Foundation (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 in January 2008 from a mutual form of organization to a public stock holding company.  In addition, higher foreclosure expense contributed to the net loss for the same period in 2008.

Net Interest Income.Net interest income for the three months ended September 30, 2009 increased to $14.1 million from $11.8 million for the three months ended September 30, 2008.  Average interest-earning assets increased $292.6 million between the two periods.  The increase of $2.3 million or 19.0% in net interest income was the combination of a $2.0 million increase due to an increase in volume of earning assets over interest bearing liabilities and a $273,000 decrease due to lower margin.  The Company’s net interest margin was 3.23% for the three months ended September 30, 2009 compared to 3.25% for the three months ended September 30, 2008.

Net interest income for the nine months ended September 30, 2009 increased to $39.7 million from $34.5 million for the nine months ended September 30, 2008. Average interest-earning assets increased $251.8 million between the two periods.  The increase of $5.2 million in net interest income resulted from a $6.1 million increase due to an increase in volume of earning assets over interest bearing liabilities and a $950,000 decrease due to the rates on our interest-earning assets and interest-bearing liabilities.  Our net interest margin was 3.14% for the nine months ended September 30, 2009 compared to 3.21% for the nine months ended September 30, 2008.  While the Company had opportunities to lower its overall funding costs, the yield on our earning assets declined at a faster pace, reflective of changes in the interest rate environment.

Interest and Dividend Income.Interest income increased $2.0 million, or 9.8%, to $23.0 million for the three months ended September 30, 2009 from $21.0 million for the three months ended September 30, 2008.  The increase was primarily due to a higher average balance of our interest-earning assets, offset by a decrease in yield.  In particular, average loans increased by $178.7 million between the two periods.  The Company also experienced an increase in the average balances of securities of $100.4 million and cash equivalents of $10.4 million.  The average yield on loans decreased from 6.28% for the three months ended September 30, 2008 to 5.75% for the same period in 2009, and the overall yield on interest-earning assets decreased from 5.75% to 5.26% for the 2008

27

DANVERS BANCORP, INC.

and 2009 periods, respectively.  The decline in asset yields is directly related to the downward repricing of assets in this lower interest rate environment.

Interest income increased $3.1 million, or 4.9%, to $66.5 million for the nine months ended September 30, 2009 from $63.4 million for the nine months ended September 30, 2008.  The increase was primarily due to higher average balances of interest-earning assets. Loans and securities increased on average by $186.7 million and $67.7 million, respectively, and cash equivalents decreased on average by $2.5 million between the two periods.  The average yield on loans decreased from 6.47% for the nine months ended September 30, 2008 to 5.68% for the same period in 2009 and the overall yield on interest-earning assets decreased from 5.90% to 5.26% for the 2008 and 2009 periods, respectively.  Despite a significant increase in the Company’s C&I lending activities and the transition of a segment of the securities portfolio into loan originations, the overall decline in asset yields is the byproduct of asset repricing in this lower interest rate environment.

Interest Expense.Interest expense for the three months ended September 30, 2009 decreased by $210,000, or 2.3%, when compared to the same three-month period in 2008.  Average interest-bearing liabilities increased by $295.7 million between the two periods and resulted in a $2.01 million increase in interest expense.  A decrease of 67 basis points, or 21.8%, in the average cost of the Company’s interest-bearing liabilities resulted in an offsetting decrease in interest expense of $2.2 million.  The average cost of deposits decreased from 2.76% for the three months ended September 30, 2008 to 2.14% for the same period in 2009 and rates on interest-bearing liabilities decreased from 3.08% to 2.41% between the comparable periods.  The respective decline in deposit and interest-bearing liability costs relates to the continued low level of interest rates during the period.

Interest expense for the nine months ended September 30, 2009 decreased by $2.0 million, or 7.0%, to $26.8 million compared to interest expense of $28.8 million for the nine months ended September 30, 2008.  Average interest-bearing liabilities increased by $246.4 million between the two periods and this resulted in a $5.2 million increase in interest expense.  A decrease of 77 basis points, or 23.3%, in the average cost of the Company’s interest-bearing liabilities resulted in a decrease in interest expense of $7.3 million.  The average cost of deposits decreased from 3.04% for the nine months ended September 30, 2008 to 2.33% for the same period in 2009 and rates on interest-bearing liabilities decreased from 3.31% to 2.54% between the periods.  The overall decrease in deposit and interest-bearing liability costs is a byproduct of the current rate environment.  

Provision for Loan Losses.The Company records a provision for loan losses as a charge to its earnings when necessary in order to maintain the allowance for loan losses at a level sufficient, in management’s judgment, to absorb losses inherent in the loan portfolio.  The Company recorded provision expense of $1.4 million and $1.1 million during the three months ended September 30, 2009 and 2008, respectively.  The Company recorded $3.4 million and $2.7 million in provision expense during the nine months ended September 30, 2009 and 2008, respectively. Provisions in all periods are reflective of portfolio growth, changes to the loan portfolio composition, management’s evaluation of the quality of the loan portfolio and net charge-offs.

The Company continued to experience strong loan demand during the third quarter of 2009.  The major increases occurred in the residential real estate and C&I loan segments with growth of $9.9 million and $43.1 million, respectively.  Gross loans have increased $125 million for the first nine months of the year.  The continued growth of the portfolio has required higher levels of provision expense.  Net charge-offs were $241,000 and $324,000 for the three months ended September 30, 2009 and 2008, respectively, and $1.6 million and $775,000 for the nine months ended September 30, 2009 and 2008, respectively.  Net charge-offs as a percent of average loans outstanding were approximately 14 basis points for the first nine months of 2009.  The increase in the Company’s net charge-offs, combined with management’s decision to increase its specific reserves because of concerns with a few credits, is indicative of some of the challenges in both the local and national economy and resulted in some additions to the provision for the three and nine-month periods, respectively.  At September 30, 2009, the allowance for loan losses totaled $13.9 million, or 1.11% of the loan portfolio.

28

DANVERS BANCORP, INC.

Non-interest Income.Non-interest income for the three months ended September 30, 2009 increased by $226,000 to $1.6 million, compared to $1.4 million for the three months ended September 30, 2008.  This increase was primarily the result of an increase of $183,000 in service charges on deposits offset by decreases in loan servicing fees and income on bank-owned life insurance of $22,000 and $10,000, respectively.

Non-interest income for the nine months ended September 30, 2009 decreased by $182,000, or 3.4%, to $5.2 million, compared to $5.4 million for the nine months ended September 30, 2008.  Decreases in loan servicing revenue directly related to the accelerated amortization of the Company’s mortgage servicing rights and the absence of gains from securities sales were slightly offset by increases in gains on sales of loans and service charges on deposits.  While the Company has experienced some success at increasing its non-interest revenues to varying degrees and across a variety of categories, developing reliable and stable sources of non-interest income to complement the Company’s primary lines of business continues to be an area of focus.

Non-interest Expense.Non-interest expense increased $2.4 million, or 22.4%, for the third quarter of 2009 when compared to the same period of 2008.  The Company experienced increases in salaries and employee benefits, deposit insurance, outside services, occupancy and other operating expense during the third quarter.  The increase in salaries and employee benefits during the quarter was the result of additions to staff as the Company continues to expand its branch footprint and lending activities and general salary administration related to the expansion of the franchise since conversion.

Non-interest expense decreased by $4.6 million between the nine months ended September 30, 2009 and 2008. The decrease was primarily due to two non-recurring items; a $6.9 million pretax charge related to the establishment of the Foundation and a $3.7 million pretax charge related to the acceleration of the Bank’s phantom stock plan.  There was also a large decrease of $1.5 million in other real estate owned expense.  These decreases were partially offset by an increase in deposit insurance expense, occupancy, and salaries and benefits expense related to the Company’s expanding operations and transaction expenses in conjunction with the Beverly transaction.  Also see “Recent Economic Developments” on page 35 for further discussion of deposit insurance expense.

Income Taxes.The Company recorded an income tax expense of $205,000 for the three months ended September 30, 2009; a decrease in income tax expense of $1.4 million when compared to $1.6 million in income tax expense for the three months ended September 30, 2008.  The effective tax rate for the three months period ended September 30, 2009 was 15.0% compared to 97.0% for the same period in 2008.

The Company recorded an income tax expense of $383,000 for the nine months ended September 30, 2009; an increase in income tax expense of $3.6 million, compared to an income tax benefit of $3.2 million for the nine months ended September 30, 2008.  The effective tax rate for the nine months period ended September 30, 2009 was 12.5% compared to 54.9% for the same period in 2008.  The rate for 2009 reflects the effects of the increase in permanent differences relating to life insurance income, municipal bond income and incentive stock option expense.  The increased benefit for 2008 relates to the two non-recurring entries noted previously.

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

29

DANVERS BANCORP, INC.

	Three Months Ended September 30,
	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	$	60,633		$	97		0.64	%	$	50,212		$	276		2.20	%
Debt securities: (2)
U.S. Government		-			-		-			2,014			17		3.38
Gov't-sponsored enterprises and
FHLMC		187,896			2,241		4.77			153,981			1,876		4.87
Mortgage-backed		246,167			2,823		4.59			188,771			2,288		4.85
Municipal bonds		23,071			235		4.07			19,186			195		4.07
Other		7,454			198		10.63			250			2		3.20
Equity securities		14,626			-		-			11,528			91		3.16
Real estate mortgages (3)		660,559			9,483		5.74			589,204			9,134		6.20
C&I loans (3)		456,742			6,748		5.91			379,419			6,231		6.57
IRBs (3)		89,087			1,073		4.82			57,123			694		4.86
Consumer loans  (3)		7,400			144		7.78			9,363			188		8.03
Total interest-earning assets		1,753,635			23,042		5.26			1,461,051			20,992		5.75
Allowance for loan losses		(12,939	)							(10,653	)
Total earning assets less allowance
for loan losses		1,740,696								1,450,398
Non-interest-earning assets		105,848								98,660
Total assets	$	1,846,544							$	1,549,058
Interest-bearing liabilities:
Deposits:
Savings and NOW accounts	$	210,558			647		1.23		$	180,041			551		1.22
Money market accounts		553,428			2,828		2.04			420,442			2,692		2.56
Term certificates		459,363			3,069		2.67			353,383			3,333		3.77
Total deposits		1,223,349			6,544		2.14			953,866			6,576		2.76
Borrowed funds:
Short-term borrowings		63,215			62		0.39			34,973			108		1.24
Long-term debt		162,006			1,823		4.50			164,000			1,865		4.55
Subordinated debt		29,965			468		6.25			29,965			558		7.45
Total interest-bearing liabilities		1,478,535			8,897		2.41			1,182,804			9,107		3.08
Non-interest-bearing deposits		131,408								132,442
Other non-interest-bearing liabilities		14,677								6,055
Total non-interest-bearing liabilities		146,085								138,497
Total liabilities		1,624,620								1,321,301
Stockholders' equity		221,924								227,757
Total liabilities and stockholders' equity	$	1,846,544							$	1,549,058
Net interest income				$	14,145							$	11,885
Net interest rate spread (4)							2.85	%							2.67	%
Net interest-earning assets (5)	$	275,100							$	278,247
Net interest margin (6)							3.23	%							3.25	%
Ratio of interest-earning assets
to total interest-bearing liabilities		1.19	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) 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.
(5) Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.
(6) Net interest margin represents net interest income divided by average total interest-earning assets.

30

DANVERS BANCORP, INC.

	Nine Months Ended September 30,
	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	$	43,678		$	292		0.89	%	$	46,166		$	959		2.77	%
Debt securities: (2)
U.S. Government		681			13		2.55			2,032			62		4.07
Gov't-sponsored enterprises and
FHLMC		191,469			6,991		4.87			170,022			6,183		4.85
Mortgage-backed		241,350			8,574		4.74			202,225			7,607		5.02
Municipal bonds		21,583			658		4.06			18,950			578		4.07
Other		2,668			202		10.09			295			11		4.97
Equity securities		14,626			1		0.01			11,196			301		3.58
Real estate mortgages (3)		634,383			26,814		5.64			573,119			27,232		6.34
C&I loans (3)		445,032			19,571		5.86			347,930			17,965		6.88
IRBs (3)		81,684			2,930		4.78			51,799			1,899		4.89
Consumer loans  (3)		7,789			452		7.74			9,387			569		8.08
Total interest-earning assets		1,684,943			66,498		5.26			1,433,121			63,366		5.90
Allowance for loan losses		(12,623	)							(9,871	)
Total earning assets less allowance
for loan losses		1,672,320								1,423,250
Non-interest-earning assets		103,532								101,998
Total assets	$	1,775,852							$	1,525,248
Interest-bearing liabilities:
Deposits:
Savings and NOW accounts	$	201,511			1,842		1.22		$	179,717			1,762		1.31
Money market accounts		504,418			8,711		2.30			408,529			8,716		2.84
Term certificates (4)		419,597			9,100		2.89			351,537			10,927		4.14
Total deposits		1,125,526			19,653		2.33			939,783			21,405		3.04
Borrowed funds:
Short-term borrowings		90,414			269		0.40			35,767			427		1.59
Long-term debt		162,391			5,417		4.45			156,385			5,299		4.52
Subordinated debt		29,965			1,499		6.67			29,965			1,736		7.72
Total interest-bearing liabilities		1,408,296			26,838		2.54			1,161,900			28,867		3.31
Non-interest-bearing deposits		128,132								141,450
Other non-interest-bearing liabilities		13,923								8,303
Total non-interest-bearing liabilities		142,055								149,753
Total liabilities		1,550,351								1,311,653
Stockholders' equity		225,501								213,595
Total liabilities and stockholders' equity	$	1,775,852							$	1,525,248
Net interest income				$	39,660							$	34,499
Net interest rate spread (5)							2.72	%							2.59	%
Net interest-earning assets (6)	$	276,647							$	271,221
Net interest margin (7)							3.14	%							3.21	%
Ratio of interest-earning assets
to total interest-bearing liabilities		1.20	x							1.23	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) In 2008, term certificates include brokered and non-brokered certificates of deposit.
(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.

31

DANVERS BANCORP, INC.

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

	Three Months Ended September 30,
	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	$	57		$	(236	)	$	(179	)
Debt securities (1):
U.S. Government		(17	)		-			(17	)
Gov't-sponsored enterprises and FHLMC		413			(48	)		365
Mortgage-backed		696			(161	)		535
Municipal bonds		39			1			40
Other		58			138			196
Equity securities		24			(115	)		(91	)
Real estate mortgages (2)		1,106			(757	)		349
C&I loans (2)		1,270			(753	)		517
IRBs (2)		388			(9	)		379
Consumer loans (2)		(39	)		(5	)		(44	)
Total interest-earning assets		3,995			(1,945	)		2,050
Interest-bearing liabilities:
Deposits:
Savings and NOW accounts		93			3			96
Money market accounts		851			(715	)		136
Term certificates		1,000			(1,264	)		(264	)
Total deposits		1,944			(1,976	)		(32	)
Borrowed funds:
Short-term borrowings		87			(133	)		(46	)
Long-term debt		(23	)		(19	)		(42	)
Subordinated debt		-			(90	)		(90	)
Total interest-bearing liabilities		2,008			(2,218	)		(210	)
Increase (decrease) in net interest income	$	1,987		$	273		$	2,260
(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.

32

DANVERS BANCORP, INC.

	Nine Months Ended September 30,
	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	$	(52	)	$	(615	)	$	(667	)
Debt securities (1):
U.S. Government		(41	)		(8	)		(49	)
Gov't-sponsored enterprises and FHLMC		780			28			808
Mortgage-backed		1,472			(505	)		967
Municipal bonds		80			-			80
Other		88			103			191
Equity securities		92			(392	)		(300	)
Real estate mortgages (2)		2,911			(3,329	)		(418	)
C&I loans (2)		5,014			(3,408	)		1,606
IRBs (2)		1,096			(65	)		1,031
Consumer loans (2)		(97	)		(20	)		(117	)
Total interest-earning assets		11,343			(8,211	)		3,132
Interest-bearing liabilities:
Deposits:
Savings and NOW accounts		214			(134	)		80
Money market accounts		2,046			(2,051	)		(5	)
Term certificates (3)		2,116			(3,943	)		(1,827	)
Total deposits		4,376			(6,128	)		(1,752	)
Borrowed funds:
Short-term borrowings		652			(810	)		(158	)
Long-term debt		204			(86	)		118
Subordinated debt		-			(237	)		(237	)
Total interest-bearing liabilities		5,232			(7,261	)		(2,029	)
Increase (decrease) in net interest income	$	6,111		$	(950	)	$	5,161
(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) In 2008, term certificates include brokered and non-brokered certificates of deposit.

33

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 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:

	September 30, 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	$	43,588	$	42,500	$	10,000	$	100,779	$	196,867
Federal Reserve Bank borrowings		20,000		-		-		-		20,000
Repurchase agreements (1)		32,104		-		-		-		32,104
Subordinated debt		-		-		-		29,965		29,965
Operating leases		2,333		4,362		3,312		6,926		16,933
Total contractual obligations	$	98,025	$	46,862	$	13,312	$	137,670	$	295,869

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

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

	September 30, 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	$	63,734	$	-	$	-	$	-	$	63,734
Unfunded commitments under lines of credit		309,117		-		-		-		309,117
Unadvanced funds on construction loans		11,463		4,708		810		-		16,981
Commercial and standby letters of credit		5,382		37		39		-		5,458
Total contractual obligations	$	389,696	$	4,745	$	849	$	-	$	395,290

34

DANVERS BANCORP, INC.

Regulatory Capital Requirements.  At September 30, 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 September 30, 2009, the Bank’s total risk-based, Tier 1 risk-based and Tier 1 leverage ratios were 14.04%, 13.02% and 9.63%, respectively.  At September 30, 2009, the Company’s total risk-based, Tier 1 risk-based and Tier 1 leverage ratios were 18.72%, 17.70% and 13.14%, respectively.

Recent Economic Developments

Danversbank pays deposit insurance premiums to the FDIC based on an assessment rate established by the FDIC.  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 institutions, such as Danversbank, which are currently in the lowest risk category, assessment rates vary initially from 12 to 16 basis points per $100 of insured deposits.  In addition, the FDIC imposed a one-time special assessment on June 30, 2009 (which would be collected on September 30, 2009) of 5 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 temporary increase in FDIC insurance has been extended to December 31, 2013.

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 $1.8 million, excluding the special assessment.

Initially, Danversbank 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.  The Company has chosen to opt out of the TAGP beginning January 1, 2010.

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

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

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

35

DANVERS BANCORP, INC.

by the use of an independent third party that convenes with management on a quarterly basis for a complete asset/liability analysis and review.

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

For September 30, 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 September 30, 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	$	166,543	$	(70,379	)		(29.7	%	)	$	54,038	$	(6,699	)		(11.0	%	)
	+200	bp		193,177		(43,745	)		(18.5	%	)		57,356		(3,381	)		(5.6	%	)
	+100	bp		223,132		(13,790	)		(5.8	%	)		60,106		(631	)		(1.0	%	)
	0	bp		236,922		-			0.0	%			60,737		-			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 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

36

DANVERS BANCORP, INC.

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 September 30, 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, Executive Vice President and Chief Operating Officer,  Executive Vice President and Chief Financial Officer and other members of its senior management team have evaluated the effectiveness of the Company’s disclosure controls and procedures as defined under the Securities 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.

(b) Changes in Internal Controls Over Financial Reporting

There were no changes in our internal controls over financial reporting during the quarter ended September 30, 2009, which were identified in connection with management’s evaluation required by paragraph (d) of Rules 13a-15(f) and 15d-15(f) under the Exchange Act, that have materially affected, or that are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

37

DANVERS BANCORP, INC.

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 and nine months ended September 30, 2009, except as noted below and except to the extent factual information disclosed elsewhere in this Form 10-Q relates to such risk factors.

Unanticipated costs relating to the merger with Beverly could reduce the Company’s future earnings per share.

The Company believes that it has reasonably estimated the likely costs of integrating the operations of the Company and Beverly, and the incremental costs of operating as a combined company.  However, it is possible that unexpected transaction costs such as taxes, fees or professional expenses or unexpected future operating expenses such as increased personnel costs or increased taxes, as well as other types of unanticipated adverse developments, could have a material adverse effect on the results of operations and financial condition of the Company.  If unexpected costs are incurred, the merger could have a significant dilutive effect on the Company’s earnings per share.

The Company may be unable to successfully integrate Beverly’s operations and retain Beverly’s key employees.

The merger of Beverly into the Company involves the integration of two companies that previously operated independently.  The difficulties of combining the companies’ operations include:

· integrating personnel with diverse business backgrounds;

· integrating departments, systems, operating procedures and information technologies;

· combining different corporate cultures;

· retaining existing customers and attracting new customers; and

· retaining key employees.

The process of integrating operations could cause an interruption of, or loss of momentum in, the activities of the Company’s businesses and the loss of key personnel.  The integration of the two companies will require the experience and expertise of certain of Beverly’s key employees.  We cannot assure you, however, that the Company will be successful in retaining these employees for the time period necessary to successfully integrate Beverly’s operations with those of the Company.  The diversion of management’s attention and any delays or difficulties encountered in connection with the merger and the integration of the two companies’ operations could have a material adverse effect on the business and results of operations of the Company.

38

DANVERS BANCORP, INC.

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.

On May 18, 2009, the Board of Directors adopted a stock repurchase program to purchase up to 5% of the Company’s outstanding common stock.  Repurchases under this program will be made in open market transactions, through block trades, and pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934 (the “Exchange Act”).  This authority may be exercised from time to time and in such amounts as market conditions warrant and subject to regulatory considerations.  The timing and actual number of shares repurchased will depend on a variety of factors including price, corporate and regulatory requirements, market conditions, and other corporate liquidity requirements and priorities.  Open market purchases will be subject to the limitations set forth in Rule 10b-18 of the Exchange Act and other applicable legal requirements.  The stock repurchase program may be suspended or terminated at any time without prior notice.

As of September 30, 2009, total repurchases under the Stock Repurchase Plan were 288,900 at an average price of $12.72.  In the third quarter of 2009, the Company purchased 288,900 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 (1)
July 1-31			17,500	$	12.95		17,500		856,485
August 1-31			271,400	$	12.71		271,400		585,085
September 1-30			-	$	-		-		585,085
	Total		288,900	$	12.72		288,900
(1) Maximum number of shares based upon the Company's common stock outstanding as of September 30, 2009.

Item 3.  Defaults Upon Senior Securities

Not applicable.

39

DANVERS BANCORP, INC.

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

At a special meeting on October 9, 2009, the Company’s stockholders voted to approve the Agreement and Plan of Merger by and between the Company and Beverly National Corporation, dated as of June 16, 2009, pursuant to which Beverly would merge with and into the Company, with the Company being the surviving corporation.  The Beverly stockholders approved the transaction at a special meeting on October 8, 2009.  The transaction closed on October 30, 2009.

FOR		AGAINST		ABSTAIN		BROKER NON-VOTE
	13,740,717		180,508		7,049		-

Item 5.  Other Information

Not applicable.

40

DANVERS BANCORP, INC.

Item 6.                        Exhibits

Exhibit No.	Description
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**
*    Filed herewith.
** Furnished herewith.

41

DANVERS BANCORP, INC.

Signatures

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

Danvers Bancorp, Inc.,

Date:	November 9, 2009	By:	/s/	Kevin T. Bottomley
				Kevin T. Bottomley
				President and Chief Executive Officer
Date:	November 9, 2009	By:	/s/	James J. McCarthy
				James J. McCarthy
				Executive Vice President and Chief
				Operating Officer
Date:	November 9, 2009	By:	/s/	L. Mark Panella
				L. Mark Panella
				Executive Vice President and Chief
				Financial Officer

42