Danvers Bancorp (DNBK) 10-Q 2010 Q2 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 June 30, 2010

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 July 31, 2010: 21,136,686

DANVERS BANCORP, INC.

TABLE OF CONTENTS

			Page
PART I.  FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)
	-	Consolidated Balance Sheets as of June 30, 2010 and December 31, 2009	3
	-	Consolidated Statements of Income for the Three and Six Months Ended
		June 30, 2010 and 2009	4
	-	Consolidated Statements of Changes in Stockholders' Equity for the
		Six Months Ended June 30, 2010 and 2009	5
	-	Consolidated Statements of Cash Flows for the Six Months Ended
		June 30, 2010 and 2009	6
	-	Notes to Unaudited Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of
	Operations		25
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		41
Item 4.	Controls and Procedures		43
PART II.  OTHER INFORMATION
Item 1.	Legal Proceedings		43
Item 1A.	Risk Factors		43
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		44
Item 3.	Defaults Upon Senior Securities		44
Item 4.	[Removed and Reserved]		45
Item 5.	Other Information		45
Item 6.	Exhibits		46

2

DANVERS BANCORP, INC.

PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements (Unaudited)

CONSOLIDATED BALANCE SHEETS

(Unaudited)

	June 30,			December 31,
	2010			2009
	(In thousands)
ASSETS
Cash and cash equivalents	$	98,012		$	71,757
Certificates of deposit		-			10,679
Securities available for sale, at fair value		492,439			481,100
Securities held to maturity, at cost		130,537			110,932
Loans held for sale		9,971			1,948
Loans		1,642,014			1,666,164
Less allowance for loan losses		(16,244	)		(14,699	)
Loans, net		1,625,770			1,651,465
Restricted stock, at cost		18,172			18,726
Premises and equipment, net		38,347			36,764
Bank-owned life insurance		33,558			32,900
Other real estate owned		1,020			1,427
Accrued interest receivable		9,249			9,998
Deferred tax asset, net		3,005			9,619
Goodwill and intangibles assets		33,984			35,094
Prepaid FDIC assessment		7,357			8,515
Prepaid taxes		9,769			6,348
Other assets		18,083			12,477
	$	2,529,273		$	2,499,749
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand deposits	$	241,868		$	224,776
Savings and NOW accounts		425,345			376,975
Money market accounts		713,524			621,683
Term certificates over $100,000		324,120			314,097
Other term certificates		228,467			228,272
Total deposits		1,933,324			1,765,803
Short-term borrowings		38,012			172,829
Long-term debt		209,528			218,475
Subordinated debt		29,965			29,965
Accrued expenses and other liabilities		24,390			27,011
Total liabilities		2,235,219			2,214,083
Commitments and contingencies
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; 22,316,125 shares
issued		223			223
Additional paid-in capital		238,347			237,577
Retained earnings		80,242			71,864
Accumulated other comprehensive income		6,961			3,650
Unearned restricted shares - 545,558 and 639,807 shares at June 30, 2010 and
December 31, 2009, respectively		(6,368	)		(6,793	)
Unearned compensation - ESOP; 1,248,975 and 1,284,660 shares at
June 30, 2010 and December 31, 2009, respectively		(12,489	)		(12,846	)
Treasury stock, at cost; 941,339 and 610,593 shares at June 30, 2010 and
December 31, 2009, respectively		(12,862	)		(8,009	)
Total stockholders' equity		294,054			285,666
	$	2,529,273		$	2,499,749

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

3

DANVERS BANCORP, INC.

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2010		2009				2010		2009
	(Dollars in thousands, except per share amounts)
Interest and dividend income:
Interest and fees on loans	$	24,206	$	16,612			$	47,595	$	32,319
Interest on debt securities:
Taxable		4,975		5,096				10,356		10,518
Non-taxable		205		220				447		423
Dividends on equity securities		4		1				4		1
Interest on cash equivalents and certificates of deposit		28		98				75		195
Total interest and dividend income		29,418		22,027				58,477		43,456
Interest expense:
Interest on deposits:
Savings and NOW accounts		1,215		647				2,268		1,195
Money market accounts		2,377		2,960				4,632		5,883
Term certificates		2,448		3,004				5,045		6,031
Interest on short-term borrowings		43		79				139		207
Interest on long-term debt and subordinated debt		2,197		2,303				4,474		4,625
Total interest expense		8,280		8,993				16,558		17,941
Net interest income		21,138		13,034				41,919		25,515
Provision for loan losses		1,300		1,200				2,500		1,960
Net interest income, after provision for loan losses		19,838		11,834				39,419		23,555
Non-interest income:
Service charges on deposits		1,223		846				2,307		1,634
Loan servicing fees		68		19				126		29
Net gain on sales of loans		144		344				243		685
Net gain on sales of securities		1,192		-				1,263		-
Increase in cash surrender value of bank-owned life insurance		342		185				658		322
Trust services		443		-				836		-
Other operating income		662		409				1,303		842
Total non-interest income		4,074		1,803				6,736		3,512
Non-interest expenses:
Salaries and employee benefits		9,349		7,248				19,205		14,221
Occupancy		1,979		1,378				4,068		2,882
Equipment		1,034		819				2,054		1,587
Outside services		526		569				1,072		812
Other real estate owned expense		189		171		��		375		296
Deposit insurance expense		699		1,254				1,281		1,700
Advertising expense		433		144				642		320
Other operating expense		3,072		2,016				6,070		3,553
Total non-interest expenses		17,281		13,599				34,767		25,371
Income before income taxes		6,631		38				11,388		1,696
Provision (benefit) for income taxes		1,688		(97	)			2,194		178
Net income	$	4,943	$	135			$	9,194	$	1,518
Weighted-average shares outstanding:
Basic		20,295,687		15,949,439				20,359,202		16,161,734
Diluted		20,310,621		15,949,439				20,366,669		16,161,734
Earnings per share:
Basic	$	0.24	$	0.01			$	0.45	$	0.09
Diluted	$	0.24	$	0.01			$	0.45	$	0.09

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			Shares			ESOP			Stock			Equity
	(Dollars in thousands)
Balance at December 31, 2008		17,842,500	$	178	$	174,510		$	67,854		$	4,026		$	-		$	(13,560	)	$	-		$	233,008
Comprehensive income:
Net income		-		-		-			1,518			-			-			-			-			1,518
Net unrealized loss on securities
available for sale, net of
reclassification adjustment
and tax effect		-		-		-			-			(606	)		-			-			-			(606	)
Change in fair value and
amortization of derivative used
for cash flow hedge, net of
tax effect		-		-		-			-			(2	)		-			-			-			(2	)
Total comprehensive income																								910
Purchase of shares for incentive
plans (713,700 shares)		-		-		(9,668	)		-			-			-			-			-			(9,668	)
Restricted stock awards
(639,807 shares)		-		-		8,317			-			-			(8,317	)		-			-			-
Equity incentive shares earned		-		-		490			-			-			693			-			-			1,183
Common stock held by ESOP
committed to be released
(36,685 shares)		-		-		123			-			-			-			357			-			480
Dividends paid
($.04 per share)		-		-		-			(650	)		-			-			-			-			(650	)
Balance at June 30, 2009		17,842,500	$	178	$	173,772		$	68,722		$	3,418		$	(7,624	)	$	(13,203	)	$	-		$	225,263
Balance at December 31, 2009		22,316,125	$	223	$	237,577		$	71,864		$	3,650		$	(6,793	)	$	(12,846	)	$	(8,009	)	$	285,666
Comprehensive income:
Net income		-		-		-			9,194			-			-			-			-			9,194
Net unrealized gain on securities
available for sale, net of
reclassification adjustment
and tax effect		-		-		-			-			3,313			-			-			-			3,313
Change in fair value and
amortization of derivative used
for cash flow hedge, net of
tax effect		-		-		-			-			(2	)		-			-			-			(2	)
Total comprehensive income																								12,505
Restricted stock awards
(33,715 shares)		-		-		(12	)		-			-			(444	)		-			456			-
Purchase of shares for Stock
Repurchase plan (364,461 shares)		-		-		-			-			-			-			-			(5,309	)		(5,309	)
Equity incentive shares earned		-		-		619			-			-			869			-			-			1,488
Common stock held by ESOP
committed to be released
(35,685 shares)		-		-		163			-			-			-			357			-			520
Dividends paid
($.04 per share)		-		-		-			(816	)		-			-			-			-			(816	)
Balance at June 30, 2010		22,316,125	$	223	$	238,347		$	80,242		$	6,961		$	(6,368	)	$	(12,489	)	$	(12,862	)	$	294,054

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

5

DANVERS BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Six Months Ended
	June 30,
	2010			2009
	(In thousands)
Cash flows from operating activities:
Net income	$	9,194		$	1,518
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses		2,500			1,960
Write-down of other real estate owned		-			82
Depreciation and amortization of premises and equipment and acquisition accounting, net		881			1,718
Accretion of net deferred loan fees and costs		(542	)		(292	)
Deferred tax provision (benefit)		4,284			(1,934	)
Amortization of core deposit intangible and servicing rights		1,183			222
Amortization of stock-based compensation and ESOP expense		2,008			1,663
Amortization of securities, net		714			157
Net gain on sales of securities		(1,263	)		-
Change in fair value of derivative financial instruments		7			(22	)
Net (gain) loss on sales of other real estate owned		91			(29	)
Loans originated for sale		(23,503	)		(56,138	)
Proceeds from sales of loans originated for sale		15,480			54,710
Changes in other assets and liabilities:
Accrued interest receivable		749			529
Other assets and bank-owned life insurance		(8,657	)		2,038
Accrued expenses and other liabilities		(2,574	)		(661	)
Net cash provided by operating activities		552			5,521
Cash flows from investing activities:
Purchases of certificates of deposit		(119	)		(208	)
Maturities of certificates of deposit		10,798			-
Activity in available-for-sale securities:
Sales		38,298			5,019
Maturities, prepayments and calls		136,281			104,316
Purchases		(179,744	)		(61,240	)
Activity in held-to-maturity securities:
Maturities, prepayments and calls		18,644			-
Purchases		(38,230	)		-
Redemptions of restricted stock		554			-
Funds advanced on other real estate owned		-			(384	)
Proceeds from sales of other real estate owned		879			1,365
Net loan payments (originations)		23,157			(72,103	)
Purchase of premises and equipment		(3,768	)		(5,419	)
Net cash provided (used) by investing activities		6,750			(28,654	)

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

6

DANVERS BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Concluded)

(Unaudited)

	Six Months Ended
	June 30,
	2010			2009
	(In thousands)
Cash flows from financing activities:
Net increase (decrease) in:
Term certificates		10,833			70,789
Other deposits		157,303			111,367
Short-term borrowings		(134,817	)		(93,454	)
Activity in long-term debt:
Proceeds from advances		1,561			-
Payment of advances		(9,802	)		(768	)
Purchase of shares for incentive plans		(5,309	)		(9,668	)
Dividends paid		(816	)		(650	)
Net cash provided by financing activities		18,953			77,616
Change in cash and cash equivalents		26,255			54,483
Cash and cash equivalents at beginning of period		71,757			33,129
Cash and cash equivalents at end of period	$	98,012		$	87,612
Supplementary disclosure of cash flow information:
Cash paid during the period for:
Interest	$	16,773		$	18,111
Income taxes		2,132			923
Non-cash financing and investing activities:
Transfers from loans to other real estate owned		563			1,550

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

7

DANVERS BANCORP, INC.

NOTES TO UNAUDITED 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, 2009 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 Annual Report on Form 10-K for the year ended December 31, 2009 filed by the Company with the Securities and Exchange Commission on March 16, 2010.  The results of operations for the three and six months ended June 30, 2010 and 2009 are not necessarily indicative of the results to be obtained for a full year.

Effective October 30, 2009, the Company acquired Beverly National Corporation (“Beverly National”), parent of Beverly National Bank (“Beverly”) and on February 12, 2010, Beverly merged with and into Danversbank.  On February 16, 2010, the eight former Beverly branches reopened as Danversbank branches.

2. Derivative Financial Instruments and Hedging Activities

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.  As the Company’s existing derivatives do not meet specified hedging criteria, all changes in fair value of the Company’s derivative assets and liabilities are recognized directly in earnings.

Risk Management Objective of Using Derivatives

As part of the Company’s risk management strategy, the Company enters into interest rate swap agreements to mitigate the interest rate risk inherent in certain of the Company’s assets and liabilities.  Interest rate swap agreements involve the risk of dealing with both Bank customers and institutional derivative counterparties and their ability to meet contractual terms.  The agreements entered into with counterparties meet established credit standards and contain master netting and collateral provisions protecting the at-risk party.  Based on adherence to the Company’s credit standards and the presence of the netting and collateral provisions, the Company believes that the credit risk inherent in these contracts was not significant at June 30, 2010 and December 31, 2009.

Non-designated Hedges

Certain derivative instruments do not meet the requirements to be accounted for as hedging instruments.  These derivative instruments are recognized on the consolidated balance sheet at fair value, with changes in fair value recorded in noninterest income.  Fees earned in connection with the execution of derivatives related to this program are recognized in other non-interest income.

8

DANVERS BANCORP, INC.

As of June 30, 2010, the Company had five interest rate swaps and one cap (“interest rate products”) with an aggregate notional amount of $40,911,000 and $50,000,000, respectively, with a variable pay rate of the 1 Month LIBOR and a fixed receive rate ranging from 4.10% through 7.29%.  These interest rate products mature at various dates ranging from December 31, 2010 through May 1, 2015.  During the six months ended June 30, 2010 and 2009, the Company recognized a net (loss) gain of ($7,000) and $22,000, respectively, 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 values of the Company’s derivatives not designated as hedging instruments as well as their balance sheet location as of June 30, 2010 and December 31, 2009.

	Balance Sheet	Fair		Balance Sheet	Fair
	Location	Value		Location	Value
	(In thousands)
Derivatives not designated as hedging
instruments:
June 30, 2010:
Interest rate swap agreements	Other assets	$	1,219	Other liabilities	$	1,232
Interest rate cap agreements	Other assets		12	Other liabilities		12
Total interest rate products		$	1,231		$	1,244
December 31, 2009:
Interest rate swap agreements	Other assets	$	1,176	Other liabilities	$	1,185
Interest rate cap agreements	Other assets		109	Other liabilities		106
Total interest rate products		$	1,285		$	1,291

Effect of Derivative Instruments on the Income Statement

The table below presents the effect of the Company’s derivatives not designated as hedging instruments on the income statement for the three and six months ended June 30, 2010 and 2009.

		Gain (Loss)					Gain (Loss)
		Recognized					Recognized
		in Income on					in Income on
		Derivatives for the					Derivatives for the
	Location of Gain (Loss)	Three Months Ended					Six Months Ended
Derivatives Not Designated	Recognized in	June 30,					June 30,
as Hedging Instruments	Income on Derivative	2010			2009		2010			2009
		(In thousands)
Interest rate swap agreements	Other income	$	(3	)	$	14	$	(4	)	$	17
Interest rate cap agreements	Other income		(1	)		5		(3	)		5
Total income (loss) on interest rate products		$	(4	)	$	19	$	(7	)	$	22

9

DANVERS BANCORP, INC.

3. Securities

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

			Gross		Gross
	Amortized		Unrealized		Unrealized
	Cost		Gains		Losses			Fair Value
	(In thousands)
June 30, 2010:
Securities Available for Sale
Debt securities:
Other government-sponsored enterprises:
Federal Home Loan Mortgage Corporation	$	500	$	3	$	-		$	503
Federal National Mortgage Association		2,250		16		-			2,266
Federal Home Loan Bank		181,579		2,687		-			184,266
Federal Farm Credit Bank		55,803		953		-			56,756
Residential mortgage-backed:
Federal Home Loan Mortgage Corporation		69,418		2,656		(31	)		72,043
Federal National Mortgage Association		95,427		3,904		(38	)		99,293
Government National Mortgage Association		45,594		1,702		(4	)		47,292
Municipal bonds		28,120		548		(69	)		28,599
Other bonds and notes		250		-		-			250
Total debt securities		478,941		12,469		(142	)		491,268
Marketable equity securities:
Warrants		779		-		(234	)		545
Mutual funds		612		14		-			626
Total equity securities		1,391		14		(234	)		1,171
Total securities available for sale	$	480,332	$	12,483	$	(376	)	$	492,439

			Gross		Gross
	Amortized		Unrealized		Unrealized
	Cost		Gains		Losses			Fair Value
	(In thousands)
June 30, 2010:
Securities Held to Maturity
Debt securities:
Other government-sponsored enterprises:
Federal Home Loan Bank	$	50,130	$	588	$	-		$	50,718
Federal Farm Credit Bank		6,540		101		-			6,641
Residential mortgage-backed:
Federal Home Loan Mortgage Corporation		22,756		327		-			23,083
Federal National Mortgage Association		24,326		499		(10	)		24,815
Government National Mortgage Association		17,295		97		(20	)		17,372
Subordinated note		9,290		-		(2,290	)		7,000
Other bonds		200		-		-			200
Total securities held to maturity	$	130,537	$	1,612	$	(2,320	)	$	129,829

10

DANVERS BANCORP, INC.

			Gross		Gross
	Amortized		Unrealized		Unrealized
	Cost		Gains		Losses			Fair Value
	(In thousands)
December 31, 2009:
Securities Available for Sale
Debt securities:
U.S. Government	$	15,488	$	-	$	(8	)	$	15,480
Other government-sponsored enterprises:
Federal Home Loan Mortgage Corporation		6,038		-		(26	)		6,012
Federal National Mortgage Association		7,803		2		(76	)		7,729
Federal Home Loan Bank		107,048		1,048		(542	)		107,554
Federal Farm Credit Bank		57,855		165		(1,182	)		56,838
Residential mortgage-backed:
Federal Home Loan Mortgage Corporation		84,306		2,203		(88	)		86,421
Federal National Mortgage Association		110,941		3,202		(202	)		113,941
Government National Mortgage Association		59,397		1,857		(39	)		61,215
Municipal bonds		24,125		363		(124	)		24,364
Other bonds and notes		250		-		-			250
Total debt securities		473,251		8,840		(2,287	)		479,804
Marketable equity securities:
Warrants		779		-		(87	)		692
Mutual funds		602		-		(3	)		599
Other equities		5		-		-			5
Total equity securities		1,386		-		(90	)		1,296
Total securities available for sale	$	474,637	$	8,840	$	(2,377	)	$	481,100

			Gross		Gross
	Amortized		Unrealized		Unrealized
	Cost		Gains		Losses			Fair Value
	(In thousands)
December 31, 2009:
Securities Held to Maturity
Debt securities:
Other government-sponsored enterprises:
Federal Home Loan Mortgage Corporation	$	1,698	$	6	$	(17	)	$	1,687
Federal Home Loan Bank		49,773		-		(776	)		48,997
Federal Farm Credit Bank		2,042		-		(89	)		1,953
Residential mortgage-backed:
Federal Home Loan Mortgage Corporation		21,927		98		(440	)		21,585
Federal National Mortgage Association		11,079		-		(132	)		10,947
Government National Mortgage Association		14,962		-		(134	)		14,828
Subordinated note		9,251		-		(751	)		8,500
Other bonds		200		-		-			200
Total securities held to maturity	$	110,932	$	104	$	(2,339	)	$	108,697

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DANVERS BANCORP, INC.

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

	Less Than Twelve Months				Over Twelve Months
	Gross				Gross
	Unrealized		Fair		Unrealized		Fair
	Losses		Value		Losses		Value
	(In thousands)
June 30, 2010:
Securities Available for Sale
Debt securities:
Residential mortgage-backed:
Federal Home Loan Mortgage Corporation	$	31	$	5,801	$	-	$	-
Federal National Mortgage Association		18		4,553		20		1,517
Government National Mortgage Association		4		1,021		-		-
Municipal bonds		11		2,198		58		3,938
Total debt securities		64		13,573		78		5,455
Marketable equity securities:
Warrants		234		545		-		-
	$	298	$	14,118	$	78	$	5,455
Securities Held to Maturity
Debt securities:
Residential mortgage-backed:
Federal National Mortgage Association	$	10	$	1,269	$	-	$	-
Government National Mortgage Association		20		1,543		-		-
Subordinated note		2,290		7,000		-		-
	$	2,320	$	9,812	$	-	$	-

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DANVERS BANCORP, INC.

	Less Than Twelve Months				Over Twelve Months
	Gross				Gross
	Unrealized		Fair		Unrealized		Fair
	Losses		Value		Losses		Value
	(In thousands)
December 31, 2009:
Securities Available for Sale
Debt securities:
U.S. Government	$	8	$	15,480	$	-	$	-
Other government-sponsored enterprises:
Federal Home Loan Mortgage Corporation		26		6,012		-		-
Federal National Mortgage Association		76		5,727		-		-
Federal Home Loan Bank		542		37,681		-		-
Federal Farm Credit Bank		1,046		38,698		136		3,364
Residential mortgage-backed:
Federal Home Loan Mortgage Corporation		88		20,481		-		-
Federal National Mortgage Association		202		24,193		-		-
Government National Mortgage Association		39		9,369		-		-
Municipal bonds		15		968		109		7,132
Total debt securities		2,042		158,609		245		10,496
Marketable equity securities:
Warrants		87		692		-		-
Mutual funds		3		599		-		-
Total marketable equity securities		90		1,291		-		-
	$	2,132	$	159,900	$	245	$	10,496
Securities Held to Maturity
Debt securities:
Other government-sponsored enterprises:
Federal Home Loan Mortgage Corporation	$	17	$	983	$	-	$	-
Federal Home Loan Bank		776		48,997		-		-
Federal Farm Credit Bank		89		1,953		-		-
Residential mortgage-backed:
Federal Home Loan Mortgage Corporation		440		18,801		-		-
Federal National Mortgage Association		132		10,947		-		-
Government National Mortgage Association		134		14,828		-		-
Subordinated note		751		8,500		-		-
	$	2,339	$	105,009	$	-	$	-

Each reporting period, the Company evaluates all securities classified as available-for-sale or held-to-maturity, with a decline in fair value below the amortized cost of the investment to determine whether or not the impairment is deemed to be other-than-temporary (“OTTI”).

Marketable equity securities are evaluated for OTTI based on the severity and duration of impairment and, if deemed to be other than temporary, the declines in fair values are reflected in earnings as realized losses.  For debt securities, OTTI is required to be recognized if (1) the Company intends to sell the security; (2) it is “more likely than not” that the Company will be required to sell the security before recovery of its amortized cost basis; or (3) the present value of expected cash flows is not sufficient to recover the entire amortized cost basis.   For all impaired debt securities that the Company intends to sell, or more likely than not will be required to sell, the full

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DANVERS BANCORP, INC.

amount of the depreciation is recognized as OTTI through earnings.  Non-credit related OTTI for such debt securities is recognized in other comprehensive income, net of applicable taxes. 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 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 sh eet date.

The unrealized losses on the Company’s investment in other government sponsored enterprises and residential mortgage-backed securities were caused by current dislocations in the market resulting in spreads increasing significantly over historic levels.  This spread increase in combination with generally illiquid markets is responsible for a significant portion of the price declines experienced by these securities.  These securities are guaranteed by the U.S. Government or a government-sponsored enterprise.  Accordingly, it is expected that the securities would not be settled at a price less than the par value of the investment.  Because declines in the market value is attributable to changes in interest rates and not to credit quality, and because the Company does not intend to sell the sec urities and it is more likely than not that the Company will not be required to sell the securities before recovery of their amortized cost bases, which may be maturity, the Company does not consider these securities to be other-than-temporarily impaired at June 30, 2010.

The unrealized losses on the Company’s investment in municipal bonds were caused by current dislocations in the market resulting in spreads increasing significantly over historic levels.  This spread increase in combination with generally illiquid markets is responsible for a significant portion of the price declines experienced by these securities.  Ongoing analysis of these securities indicates no significant deterioration in the underlying credit supporting these securities.  Therefore, it is expected that these bonds would not be settled at a price less than the par value of the investment.  Because the Company does not intend to sell the securities and it is more likely than not that, the Company will not be required to sell the securities before recovery of their amortized costs basis , it does not consider these securities to be other-than-temporarily impaired at June 30, 2010.

At June 30, 2010, one marketable equity security has an unrealized loss with depreciation of 30.0% from the Company’s amortized cost basis.  The unrealized loss has existed for less than twelve months and is a result of declines in the earnings of the issuer as a result of the weakened economy, no credit issues have been identified that cause management to believe the declines in market value are other than temporary and the Company has the ability and intent to hold these investments until a recovery of fair value.  In analyzing the issuer’s financial condition, management considers industry analysts’ reports, financial performance and projected target prices of investment analysts within a one-year timeframe.   The Company does not consider this security to be other-than-temporaril y impaired at June 30, 2010.

4. Fair Value of Assets and Liabilities

Fair Value Hierarchy

The Company groups its assets and 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.

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.

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DANVERS BANCORP, INC.

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.

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 1 are based on quoted market prices in an active market.  These securities include marketable equity securities.  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. Governm ent 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 warrants.

Restricted stock – The fair value of Federal Home Loan Bank (“FHLB”) and Federal Reserve Bank (“FRB”) 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

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DANVERS BANCORP, INC.

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 debt – 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.

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 June 30, 2010 and December 31, 2009 was immaterial to the consolidated financial statements.

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DANVERS BANCORP, INC.

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:

	June 30, 2010
	Level 1		Level 2		Level 3		Fair Value
	(In thousands)
Assets
Securities Available for Sale:
Debt securities:
Other government-sponsored enterprises:
Federal Home Loan Mortgage Corporation	$	-	$	503	$	-	$	503
Federal National Mortgage Association		-		2,266		-		2,266
Federal Home Loan Bank		-		184,266		-		184,266
Federal Farm Credit Bank		-		56,756		-		56,756
Residential mortgage-backed:
Federal Home Loan Mortgage Corporation		-		72,043		-		72,043
Federal National Mortgage Association		-		99,293		-		99,293
Government National Mortgage Association		-		47,292		-		47,292
Municipal bonds		-		28,599		-		28,599
Other bonds and notes		-		250		-		250
Marketable equity securities:
Warrants		-		-		545		545
Mutual funds		-		626		-		626
Other:
Interest rate products		-		1,231		-		1,231
Total assets	$	-	$	493,125	$	545	$	493,670
Liabilities
Interest rate products	$	-	$	1,244	$	-	$	1,244

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DANVERS BANCORP, INC.

	December 31, 2009
	Level 1		Level 2		Level 3		Fair Value
	(In thousands)
Assets
Securities Available for Sale:
Debt securities:
U.S. Government	$	-	$	15,480	$	-	$	15,480
Other government-sponsored enterprises:
Federal Home Loan Mortgage Corporation		-		6,012		-		6,012
Federal National Mortgage Association		-		7,729		-		7,729
Federal Home Loan Bank		-		107,554		-		107,554
Federal Farm Credit Bank		-		56,838		-		56,838
Residential mortgage-backed:
Federal Home Loan Mortgage Corporation		-		86,421		-		86,421
Federal National Mortgage Association		-		113,941		-		113,941
Government National Mortgage Association		-		61,215		-		61,215
Municipal bonds		-		24,364		-		24,364
Other bonds and notes		-		250		-		250
Marketable equity securities:
Warrants		-		-		692		692
Mutual funds		-		599		-		599
Other equities		5		-		-		5
Other:
Interest rate products		-		1,285		-		1,285
Total assets	$	5	$	481,688	$	692	$	482,385
Liabilities
Interest rate products	$	-	$	1,291	$	-	$	1,291

There were no transfers between Level 1 and Level 2 assets and liabilities for the period ended June 30, 2010 and December 31, 2009.

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DANVERS BANCORP, INC.

The table below presents, for the period ended June 30, 2010 and 2009, the changes in Level 3 assets measured at fair value on a recurring basis.

	Assets
	Securities Available for Sale
	(In thousands)
Balance as of December 31, 2008	$	-
Total unrealized losses included in other comprehensive income		-
Purchases		-
Balance as of June 30, 2009	$	-
Change in unrealized losses relating to instruments still held at
June 30, 2009	$	-
Balance as of December 31, 2009	$	692
Total unrealized losses included in other comprehensive income		(147	)
Purchases		-
Balance as of June 30, 2010	$	545
Change in unrealized losses relating to instruments still held at
June 30, 2010	$	(234	)

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 June 30, 2010 and 2009.

The following tables summarize the fair value hierarchy used to determine each adjustment and the carrying value of the related individual assets as of June 30, 2010 and 2009.  The losses represent the amount of write-down recorded during the three-month period on the assets held at June 30, 2010 and 2009, respectively:

							Quarter		Six Months
							Ended		Ended
							June 30,		June 30,
	June 30, 2010						2010		2010
							Total		Total
	Level 1		Level 2		Level 3		Losses		Losses
	(In thousands)
Assets
Other real estate owned	$	-	$	-	$	1,020	$	-	$	-
Impaired loans		-		-		423		160		837
	$	-	$	-	$	1,443	$	160	$	837

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DANVERS BANCORP, INC.

							Quarter		Six Months
							Ended		Ended
							June 30,		June 30,
	December 31, 2009						2009		2009
							Total		Total
	Level 1		Level 2		Level 3		Losses		Losses
	(In thousands)
Assets
Other real estate owned	$	-	$	-	$	1,427	$	82	$	82
Impaired loans	��	-		-		653		726		861
	$	-	$	-	$	2,080	$	808	$	943

At June 30, 2010 and December 31, 2009, the amount of other real estate owned 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 June 30, 2010 and December 31, 2009, the amount of impaired loans represents the carrying value and related charge-offs and 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 obs ervable market comparables.

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DANVERS BANCORP, INC.

The estimated fair values, and related carrying or notional amounts, of the Company’s financial instruments are as follows.  Certain financial instruments and all nonfinancial instruments are exempt from its disclosure requirements.  Accordingly, the aggregate fair value amounts presented herein may not necessarily represent the underlying fair value of the Company.

	June 30, 2010				December 31, 2009
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
	(In thousands)
Financial assets:
Cash and cash equivalents	$	98,012	$	98,012	$	71,757	$	71,757
Certificates of deposit		-		-		10,679		10,679
Securities available for sale		492,439		492,439		481,100		481,100
Securities held to maturity		130,537		129,829		110,932		108,697
Loans and loans held for sale, net		1,635,741		1,644,096		1,653,413		1,660,176
Restricted stock		18,172		18,172		18,726		18,726
Accrued interest receivable		9,249		9,249		9,998		9,998
Financial liabilities:
Deposits:
Demand deposits		241,868		241,868		224,776		224,776
Savings and NOW accounts		425,345		425,345		376,975		376,975
Money market accounts		713,524		713,524		621,683		621,683
Term certificates		552,587		556,914		542,369		545,740
Short-term borrowings		38,012		38,012		172,829		172,829
Long-term debt		209,528		220,720		218,475		222,122
Subordinated debt		29,965		24,014		29,965		12,402
Accrued interest payable		1,231		1,231		1,838		1,838
On-balance sheet derivative
financial instruments:
Interest rate products:
Assets		1,231		1,231		1,285		1,285
Liabilities		1,244		1,244		1,291		1,291

5. Goodwill and Intangible Assets

The Company has recorded goodwill and core deposit intangible (“CDI”) assets in connection with the acquisition of financial institutions.  The Company’s goodwill represents the excess purchase price over the fair value of the assets acquired and liabilities assumed arising from the Company’s acquisition of Beverly National on October 30, 2009.  The Company’s CDI represents the long-term value of depositor relationships arising from the contractual rights acquired in the Company’s acquisition of Revere Federal Savings Bank (“Revere”) on September 26, 2001 and the Beverly National acquisition on October 30, 2009.

Goodwill

Goodwill is not amortized, but tested for impairment at least annually, subsequent to the date of acquisition, or when events or changes in circumstances indicate the asset might be impaired.   At June 30, 2010 and December 31, 2009, the gross carrying amount of the Company’s goodwill was $23,646,000.  As of June 30, 2010 and December 31, 2009, the Company did not need to record any goodwill adjustments related to the Beverly National acquisition nor record any impairment of goodwill.

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DANVERS BANCORP, INC.

Intangible Assets

The Company amortizes CDI premiums over a 10-year period, from the date of acquisition, on an accelerated basis.  The Company periodically evaluates the realizability of intangible assets based on the value of the underlying depositor relationships.  If the value is less than the carrying amount of the intangible asset, the Company would recognize an impairment loss.  At June 30, 2010 and December 31, 2009, the Company has not recorded any impairment of its CDI assets.

The gross carrying amount, accumulated amortization, net carrying amount and weighted average amortization period of intangible assets, by major class, is as follows:

								Weighted
						Net		Average
	Gross Carrying		Accumulated			Carrying		Amortization
	Amount		Amortization			Amount		Period
	(In thousands)
June 30, 2010:
Revere acquisition, September 26, 2001	$	1,603	$	(1,425	)	$	178	10 years
Beverly National acquisition, October 30, 2009		11,561		(1,401	)		10,160	10 years
	$	13,164	$	(2,826	)	$	10,338
December 31, 2009:
Revere acquisition, September 26, 2001	$	1,603	$	(1,366	)	$	237	10 years
Beverly National acquisition, October 30, 2009		11,561		(350	)		11,211	10 years
	$	13,164	$	(1,716	)	$	11,448

The current period and estimated amortization expense for intangible assets in the succeeding years is as follows:

	Quarter		Six Months
	Ended		Ended
Aggregate Amortization Expense:	June 30, 2010		June 30, 2010
	(In thousands)
Amortization expense	$	555	$	1,110
Estimated Amortization Expense for the Years Ending December 31,			Amount
			(In thousands)
2010			$	2,186
2011				1,976
2012				1,647
2013				1,436
2014				1,226
Thereafter				2,977
			$	11,448

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DANVERS BANCORP, INC.

6. Securities Sold Under Agreements to Repurchase

Securities sold under agreements to repurchase mature on a daily basis and amounted to $38,012,000 and $52,829,000 at June 30, 2010 and December 31, 2009, respectively.  These agreements are secured by obligations of government-sponsored enterprises with a carrying value of $40,930,000 and $72,709,000 at June 30, 2010 and December 31, 2009, respectively.  The obligations to repurchase the securities sold are reflected as a liability in the consolidated balance sheets.  The dollar amount of the securities underlying the agreements remain in the asset accounts.  The securities pledged are registered in the Company’s name; however, the securities are held by the designated trustee of the broker.  Upon maturity of the agreements, the identical securities pledged as collateral are retu rned to the Company.

7. Post Retirement Benefits

Defined Benefit Plan

The Company provides pension benefits to eligible former Beverly employees through a defined benefit plan.  Effective January 1, 2006, the plan was suspended so that participating employees no longer earn additional defined benefits for future services.

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

	Three Months					Six Months
	Ended June 30,					Ended June 30,
	2010			2009		2010			2009
	(In thousands)
Interest cost	$	123		$	-	$	247		$	-
Expected return on plan assets		(127	)		-		(255	)		-
Unrecognized actuarial loss		-			-		-			-
Net pension benefit	$	(4	)	$	-	$	(8	)	$	-

The plan’s contribution requirement for the fiscal year ending December 31, 2010 has not been determined.

Supplemental Retirement Plan

The Company provides a Supplemental Retirement Plan for two retired Beverly executive officers.  The plan provides nonfunded retirement benefits designed to supplement benefits available through Beverly’s retirement plan for employees.   The supplemental retirement agreements under the retirement plan provide that the officers do not have any right, title or interest in or to any specified assets of the Company or any trust or escrow arrangement.  In connection with the retirement agreements, two trust agreements were established.  The Company is not the trustee of the trusts.

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DANVERS BANCORP, INC.

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

	Three Months				Six Months
	Ended June 30,				Ended June 30,
	2010		2009		2010		2009
	(In thousands)
Interest cost	$	15	$	-	$	30	$	-
Expected return on plan assets		-		-		-		-
Unrecognized actuarial loss		-		-		-		-
Net pension expense	$	15	$	-	$	30	$	-

The Company expects to contribute $123,000 to its supplemental retirement plan in 2010.  As of June 30, 2010, the Company has contributed $62,000 to its supplemental retirement plan.

8. 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.  If rights to dividends on unvested awards are non-forfeitable, these unvested awards are considered outstanding in the computation of basic earnings per share.  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, as well as any adjustments t o income that would result from the assumed issuance.

Unallocated common shares held by the Employee Stock Ownership Plan (“ESOP”) and treasury shares 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.

Earnings per common share have been computed based on the following:

	Three Months Ended June 30,						Six Months Ended June 30,
	2010			2009			2010			2009
Average number of common shares issued		22,316,125			17,842,500			22,316,125			17,842,500
Less:  Average treasury shares		(759,763	)		(561,016	)		(687,379	)		(339,852	)
Less:  Average unallocated ESOP shares		(1,260,675	)		(1,332,045	)		(1,269,544	)		(1,340,914	)
Average number of common shares outstanding used to
calculate basic earnings per common share		20,295,687			15,949,439			20,359,202			16,161,734
Effect of dilutive unvested stock awards		14,934			-			7,467			-
Average number of common shares outstanding used to
calculate basic and diluted earnings per common share		20,310,621			15,949,439			20,366,669			16,161,734

At June 30, 2010 and 2009, options for 1,663,000 and 1,575,000 shares, respectively, were not included in the computation for dilutive earnings per share because to do so would have been antidilutive.

9. Dividend Declared

On July 28, 2010, the Company declared a cash dividend on its common stock of $.02 per share. The dividend will be paid on or after August 27, 2010 to shareholders of record as of August 13, 2010.

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10. Recent Accounting Pronouncements

In June 2009, the Financial Accounting Standards Board (“FASB”) issued two related accounting pronouncements changing the accounting principles and disclosures requirements related to securitizations and special purpose entities. Specifically, these pronouncements eliminate the concept of a “qualifying special-purpose entity”, change the requirements for derecognizing financial assets and change how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated.  For situations in which only a portion of a financial asset is transferred, such as for a participation loan or the government guaranteed portion of a loan, if the transfer of the portion of the loan does not meet the criteria of a participating interest, th en it must be accounted for as a secured borrowing rather than as a sale.

In order to meet the criteria for a participating interest, all cash flows from the loan must be divided proportionately, the rights of each loan holder must have the same priority, the loan holders must have no recourse to the transferor other than standard representations and warranties and no loan holder has the right to pledge or exchange the entire loan.  These pronouncements also expand existing disclosure requirements.  These pronouncements became effective for the Company as of January 1, 2010 and did not have a material impact on the Company’s consolidated financial statements.

In July 2010, the FASB issued an Accounting Standards Update, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.  The objective of this Update is for an entity to provide disclosures that facilitate financial statement users’ evaluation of (1) the nature of credit risk inherent in the entity’s portfolio of financing receivables, (2) how that risk is analyzed and assessed in arriving at the allowance for credit losses and (3) the changes and reasons for those changes in the allowance for credit losses.  For public entities, the disclosures as of the end of a reporting period are effective for interim and annual reporting periods ending on or after December 15, 2010 and the disclosures about activity th at occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010 will have a material impact on the Company’s consolidated financial statements.

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

The following analysis discusses the changes in financial condition 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

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DANVERS BANCORP, INC.

· estimates of our risks and future costs and benefits.

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

· significantly increased competition among depository and other financial institutions;

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

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

· changing business, banking, or regulatory conditions or policies, or new legislation affecting the financial services industry, such as the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, 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 FASB; and

· changes in our organization, compensation and benefit plans.

Because of these and other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements. We discuss these and other uncertainties in Part 1, Item 1A, “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2009 and in “Risk Factors” on page 43. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

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 cha nge 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, goodwill and intangibles and the valuation of the deferred tax asset.

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Comparison of Financial Condition at June 30, 2010 and December 31, 2009

Total Assets.Total assets increased by $29.5 million, or 1.2%, during the six months ended June 30, 2010.  Net loans (including loans held for sale) decreased $17.7 million, or 1.1%, securities increased by $20.3 million, or 3.4%, and cash and cash equivalents increased $26.3 million, or 36.6%, during the six months ended June 30, 2010.  The strong growth of the balance sheet that the Company experienced in 2008 and 2009, and in particular, the market transfer of large and well-diversified credit opportunities from some of the larger institutions in the area to some of the community banking franchises, slowed substantially during the first six months of 2010.   At the same time, the Company experienced strong deposit growth during the period.  Deposit balances increased by $167.5 million, or 9.5%, for the six months ended June 30, 2010.  The Company utilized these deposit cash flows to fund some securities purchases and to retire all of its overnight FHLB borrowing.

Cash and Cash Equivalents.Cash and cash equivalents increased by $26.3 million, or 36.6%, to $98.0 million at June 30, 2010 from $71.8 million at December 31, 2009.  The increase is primarily attributable to the large inflow of customer deposits and to a lesser extent, the slowdown in loan demand.

Securities.The securities portfolio, including certificates of deposit, aggregated $623.0 million at June 30, 2010, an increase of $20.3 million, or 3.4%, from $602.7 million at December 31, 2009.  The cash flows from deposit inflows, investment calls and amortization from the Company’s mortgage-backed securities (“MBS”) portfolio were utilized to purchase additional securities during the period.

At June 30, 2010 and December 31, 2009, MBS totaled 44.1% and 52.3%, 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 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 five- to twelve-year weighted average lives, with expected average life extensions up to a maximum of fifteen years in a rising rate environment.  We continue to invest in adjustable rate MBS portfolio to protect against a rising interest rate environment.  As of June 30, 2010, our adjustable rate MBS portfolio made up 58.5% of the Company’s total MBS portfolio.  All our MBS were rated AAA at June 30, 2010 and December 31, 2009.   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 June 30, 2010 and December 31, 2009, 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 June 30, 2010 were $1.63 billion, a decrease of $25.7 million, or 1.6%, from net loan balances of $1.65 billion as of December 31, 2009.  The loan portfolio experienced increases in the commercial and industrial (“C&I”) and residential real estate loan segments.  The largest increase was in C&I lending of $81.6 million, or 11.9%, and a lesser increase in residential real estate loans of $1.7 million, or 0.6%.  These increases were offset by a decline in the Company’s commercial real estate and construction loan portfolios of $20.0 million, or 15.9%, and $86.0 million, or 18.1%, respectively.  A slowdown in loan demand and increased competition from some of the larger banks in our market area continue to be a challenge.

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DANVERS BANCORP, INC.

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

	June 30, 2010						December 31, 2009
	Amount			Percent			Amount			Percent
	(Dollars in thousands)
Real estate mortgages:
Construction	$	105,940			6.5	%	$	125,952			7.5	%
Residential		292,628			17.8			290,894			17.4
Commercial		387,280			23.6			473,075			28.4
Home equity		85,390			5.1			86,269			5.2
C&I		769,390			46.8			687,808			41.2
Consumer		3,625			0.2			4,523			0.3
Total loans		1,644,253			100.0	%		1,668,521			100.0	%
Allowance for loan losses		(16,244	)					(14,699	)
Net deferred loan fees		(2,239	)					(2,357	)
Loans, net	$	1,625,770					$	1,651,465

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

		June 30,			December 31,
		2010			2009
		(Dollars in thousands)
Non-accrual loans:
Real estate mortgages:
Construction	$	80		$	$935
Residential (1)		6,767			3,332
Commercial (2)		533			926
Home equity		1,413			1,139
Total real estate mortgages		8,793			6,332
C&I (3)		3,206			2,286
Consumer		15			6
Total non-accrual loans (4)	$	12,014		$	8,624
Non-performing accrual loans (5)	$	-		$	1,495
Restructured loans (6)	$	7,379		$	7,700
Total non-performing loans	$	19,393		$	17,819
Other real estate owned		1,020			1,427
Total non-performing assets	$	20,413		$	19,246
Total non-performing loans to total loans (7)		1.17	%		1.01	%
Total non-performing loans to total assets		0.77	%		0.71	%
Total non-performing assets to total assets		0.81	%		0.77	%

(1) Included in non-accrual residential loans is one troubled debt restructure in the amount of $423,000 at June 30, 2010.

(2) Included in non-accrual commercial loans is one troubled debt restructure in the amount of $133,000 at June 30, 2010.

(3) Included in non-accrual C&I loans is one troubled debt restructure in the amount of $780,000 at June 30, 2010.

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

(5) At December 31, 2009, non-performing accrual loans consisted of six loans adequately secured and in the process of collection.

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

(7) Total loans includes loans held for sale.

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 $136,000 on the cash-basis in interest income on non-accrual loans during 2010.  The Company did not have any loans in the portfolio over 90 days and still accruing at June 30, 2010.

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 June 30, 2010, the Company had 17 restructured loans totaling $8.7 million with a combined appraised value of $15.6 million.   Two 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;  ten loans were placed on interest only payments for twelve months; the term and amortization on two loans was extended; the interest rate and principal and interest payment on one loan was reduced; another note was accepted for payment of interest on a loan and the pr incipal and interest payment was reduced on another loan.  Of the 17 restructured loans, 14 were on accrual status at the time of the restructure and at June 30, 2010, and as of the date of this report, all restructured loans were performing in accordance with their modified terms and conditions.  The Company recognized $190,000 on the accrual-basis in interest income on restructured loans during the first six months of 2010.

The Company had $1.0 million in other real estate owned (“OREO”) at June 30, 2010.  The OREO balance consists of three properties with no particular business segment or industry concentration represented.  Management does not anticipate any material losses on any of the remaining properties at this time.

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DANVERS BANCORP, INC.

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

													At or For the
	At or For the Three						At or For the Six						Year Ended
	Months Ended June 30,						Months Ended June 30,						December 31,
	2010			2009			2010			2009			2009
	(Dollars in thousands)
Allowance balance at beginning of period	$	15,509		$	12,545		$	14,699		$	12,133		$	12,133
Provision for loan losses		1,300			1,200			2,500			1,960			5,110
Charge-offs:
Real estate mortgages:
Construction		149			234			480			475			585
Residential		-			49			-			49			298
Commercial		-			-			-			-			-
Home equity		-			-			-			-			207
Total real estate mortgages		149			283			480			524			1,090
C&I		474			725			509			831			1,411
Consumer		14			33			43			68			106
Total charge-offs		637			1,041			1,032			1,423			2,607
Recoveries:
Real estate mortgages:
Construction		33			-			33			-			6
Residential		-			-			-			-			-
Commercial		-			-			-			-			-
Home equity		-			-			-			-			-
Total real estate mortgages		33			-			33			-			6
C&I		30			5			35			25			26
Consumer		9			10			9			24			31
Total recoveries		72			15			77			49			63
Net charge-offs		565			1,026			955			1,374			2,544
Allowance balance at end of period	$	16,244		$	12,719		$	16,244		$	12,719		$	14,699
Total loans outstanding (1)	$	1,654,224		$	1,191,675		$	1,654,224		$	1,191,675		$	1,668,521
Average loans outstanding	$	1,654,934		$	1,166,114		$	1,658,768		$	1,146,218		$	1,252,625
Allowance for loan losses as a percent of
total loans outstanding		0.98	%		1.07	%		0.98	%		1.07	%		0.88	%	(2)
Net loans charged off as a percent of
average loans outstanding (3)		0.14	%		0.35	%		0.12	%		0.24	%		0.20	%
Allowance for loan losses to non-
performing loans		83.76	%		101.40	%		83.76	%		101.40	%		82.49	%

(1) Includes loans held for sale.

(2) The acquisition of Beverly National into the Company and the attendant acquisition accounting considerations are the reasons that the reserve represents a lower percentage of gross loans.

(3) Ratios for the three and six months ended June 30, 2010 and 2009 are annualized.

For further information, see “Provision for Loan Losses” of the Management Discussion and Analysis on page 34.

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DANVERS BANCORP, INC.

Deposits.The Company’s deposit growth remained strong for the six months ended June 30, 2010.  Total deposits increased by $167.5 million to $1.93 billion at June 30, 2010, an increase of 9.5% from a balance of $1.77 billion at December 31, 2009.  During the first six months, the Company experienced increases in all deposit categories.  This growth is primarily attributable to the Company’s expanded retail branch presence and on-line banking initiatives.  The Company opened its Cambridge and Waltham locations in the third and fourth quarters of 2009 and its first retail Boston location at 86 Massachusetts Avenue in the f irst quarter of 2010.  These new locations have already attracted $90.9 million in new deposit balances.  Despite the low levels of short-term interest rates, the Company has experienced considerable success at raising “core” deposit balances.

The Company expects to continue with the expansion of its retail branch network and plans to open a new branch in Needham and Lexington in the third and fourth quarters of 2010, respectively, along with a second Boston location in the financial district.

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

	June 30, 2010					December 31, 2009
	Amount		Percent			Amount		Percent
	(Dollars in thousands)
Demand deposits	$	241,868		12.5	%	$	224,776		12.7	%
Savings and NOW accounts		425,345		22.0			376,975		21.4
Money market accounts		713,524		36.9			621,683		35.2
Total non-certificate accounts		1,380,737		71.4			1,223,434		69.3
Term certificates over $100,000		324,120		16.8			314,097		17.8
Other term certificates		228,467		11.8			228,272		12.9
Total certificate accounts		552,587		28.6			542,369		30.7
Total deposits	$	1,933,324		100.0	%	$	1,765,803		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 on a short-term and long-term basis decreased by $120.0 million, or 100%, and $8.9 million or 4.1%, at June 30, 2010.  Management has replaced all of the Company’s short-term FHLBB borrowings with the aforementioned de posit inflows and in the process has lessened the Company’s reliance on any single short-term funding source.  The Company had $209.5 million in various FHLBB term advances borrowings at June 30, 2010.

At June 30, 2010, the Company’s short-term borrowings consisted of $38.0 million in overnight customer repurchase agreements (“REPOs”), a decrease of $14.8 million, or 28.0% from $52.8 million at December 31, 2009.  The Company’s REPOs 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.

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.

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DANVERS BANCORP, INC.

The following table sets forth the Company’s short-term borrowings and long-term debt for the dates indicated:

	June 30,		December 31,
	2010		2009
	(In thousands)
Short-term borrowings:
Repurchase agreements	$	38,012	$	52,829
FHLB advances		-		120,000
Total short-term borrowings		38,012		172,829
Long-term debt:
FHLB advances		209,528		218,475
Total borrowed funds	$	247,540	$	391,304

Total Stockholders’ Equity.Total stockholders’ equity increased by $8.4 million to $294.1 million, or 2.9% at June 30, 2010 from a balance of $285.7 million at December 31, 2009.  This increase was primarily due to net income of $9.2 million, $3.3 million increase in net unrealized gain on securities available for sale, $1.5 million of equity incentive shares earned and a decline in the unallocated common shares held by the ESOP of $520,000, offset by stock repurchases as the Company purchased 364,461 shares of its common stock in the open market at an average price of $14.57 per share during the six months of 2010.  These purchases are par t of the stock repurchase programs announced in January of 2009 and May of 2010.  See Item 2 of Part II of this 10-Q for a further discussion of these purchases.

Comparison of Operating Results for the Three and Six Months Ended June 30, 2010 and 2009

The Company’s operating results for the three and six months ended June 30, 2010 are impacted by the Beverly National acquisition.  The acquisition occurred on October 30, 2009; accordingly, the acquisition does not impact the operating results for the three and six months ended June 30, 2009.

Net Income.The Company recorded net income for the three months ended June 30, 2010 of $4.9 million, an increase of $4.8 million from net income of $135,000 for the three months ended June 30, 2009.  This increase is attributable to the overall growth of the Company and in particular, the growth of the loan portfolio and the improvement in the Company’s net interest margin.  The Company reported net income for the six months ended June 30, 2010 of $9.2 million, an increase of $7.7 million from net income of $1.5 million for the same period in 2009.  A significant increase in net interest income and non-interest income more than offset h igher provision for loan losses and increased non-interest expenses for the comparable six month periods.

Net Interest Income.  Overall, average interest-earning assets and average interest-bearing liabilities increased for the comparable three and six month periods due to the acquisition of Beverly National during the fourth quarter of 2009.

Net interest income for the three months ended June 30, 2010 increased to $21.1 million from $13.0 million for the three months ended June 30, 2009.  Average interest-earning assets increased by $639.8 million between the two periods.  The increase of $8.1 million or 62.2% in net interest income was the combination of a $5.1 million increase due to volume and a $3.0 million increase due to rate.  The Company’s net interest margin was 3.66% for the three months ended June 30, 2010 compared to 3.13% for the three months ended June 30, 2009.

Net interest income for the six months ended June 30, 2010 increased to $41.9 million from $25.5 million for the six months ended June 30, 2009.  Average interest-earning assets increased $639.0 million between the two periods.  The increase of $16.4 million in net interest income resulted from a $9.8 million increase due to volume

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and a $6.6 million increase due to rate.  Our net interest margin was 3.66% for the six months ended June 30, 2010 compared to 3.09% for the six months ended June 30, 2009. The Company experienced a 91 basis point decline in funding costs between the comparable periods.

Interest and Dividend Income.Interest income increased $7.4 million, or 33.6%, to $29.4 million for the three months ended June 30, 2010 from $22.0 million for the three months ended June 30, 2009.  The increase was primarily due to a higher average balance of our interest-earning assets, offset by a decrease in yields, reflective of the interest rate environment.  In particular, average loans increased by $488.8 million between the two comparable periods.  The Company also experienced an increase in the average balances of securities of $136.2 million and interest earning cash equivalents of $7.4 million. The average yield on securities decr eased from 4.78% for the three months ended June 30, 2009 to 3.57% for the same period in 2010.  The decline in the securities portfolio yield directly related to redeploying cash flows from maturities, calls and sales in this lower interest rate environment.  This decrease was partially offset by the increase in loan yield.  The average yield on loans increased from 5.70% for the three months ended June 30, 2009 to 5.85% for the same period in 2010, and the overall yield on interest-earning assets decreased from 5.28% to 5.10% for the 2009 and 2010 periods, respectively.

Interest income increased $15.0 million, or 34.6%, to $58.5 million for the six months ended June 30, 2010 from $43.5 million for the six months ended June 30, 2009.  The increase was primarily due to higher average balances of interest-earning assets, offset by a decrease in yield.  Loans and securities increased on average by $512.6 million and $117.7 million, respectively, and interest earning cash equivalents increased on average by $4.4 million between the two periods. The average yield on securities decreased from 4.82% for the six months ended June 30, 2009 to 3.78% for the same period in 2010. This decrease was partially offset by the increase in loan yield.  The average yield on loans increased from 5.64% for the six months ended June 30, 2009 to 5.74% for the same period in 2010 and the overall y ield on interest-earning assets decreased from 5.27% to 5.11% for the 2009 and 2010 comparable periods, respectively.  Despite a significant increase in the Company’s real estate mortgages and C&I lending activities, the overall decline in asset yields is the byproduct of reinvesting investment maturities, calls and sales in this lower interest rate environment.

Interest Expense.  Interest expense for the three months ended June 30, 2010 decreased by $713,000, or 7.9%, when compared to the same three-month period in 2009.  Average interest-bearing liabilities increased by $571.1 million between the two comparable periods and resulted in a $3.4 million increase in interest expense.  A decrease of 89 basis points, or 34.5%, in the average cost of the Company’s interest-bearing liabilities resulted in an offsetting decrease in interest expense of $4.1 million.  The average cost of deposits decreased from 2.36% for the three months ended June 30, 2009 to 1.44% for the same period in 2010 and rates on interest-bearing liabilities decreased from 2.58% to 1.69% for the co mparable 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 six months ended June 30, 2010 decreased by $1.4 million, or 7.7%, to $16.6 million compared to interest expense of $18.0 million for the six months ended June 30, 2009.  Average balances of interest-bearing liabilities increased by $579.8 million between the two periods and this resulted in a $7.2 million increase in interest expense.  A decrease of 91 basis points, or 34.9%, in the average cost of the Company’s interest-bearing liabilities resulted in a decrease in interest expense of $8.6 million.  The overall rates on interest-bearing liabilities decreased from 2.61% to 1.70% for the 2009 and 2010 periods, respectively, and the average cost of deposits decreased from 2.44% for the six months ended June 30, 2009 to 1.45% for the same period in 2010. The overall decrease in deposit and interest-bearing liability costs is a byproduct of the current rate environment.

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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 for loan losses of $1.3 million and $1.2 million during the three months ended June 30, 2010 and 2009, respectively.  Provisions in all periods are reflective of loan balance fluctuations, changes to the loan portfolio composition, management’s evaluation of certain qualitative attributes of the portfolio and net charge-offs.  The Company recorded $2.5 million and $2.0 million in provision for loan losses during the six months ended June 30, 2010 and 2009, respectively.

Gross loans (including loans held for sale) declined $7.9 million and $16.1 million during the three and six months ended June 30, 2010.  Net charge-offs for the six months ended June 30, 2010 and 2009 were $1.0 million and $1.4 million, respectively.  Net charge-offs as a percent of average loans outstanding (annualized) for the three and six months period ending June 30, 2010 were approximately 14 basis points and 12 basis points, respectively.  Although charge-offs declined in both the three and six months periods ended June 30, 2010 compared to the same periods in 2009, management increased both its general and specific reserves because of continued concerns regarding both the local and national economy.  At June 30, 2010, the allowance for loan losses totaled $16.2 million, or 0.98% of total loans outstanding.

Non-interest Income.Non-interest income for the three months ended June 30, 2010 increased by $2.3 million, or 126.0%, to $4.1 million, compared to $1.8 million for the three months ended June 30, 2009.  This increase was primarily the result of gains on the sales of securities of $1.2 million.  As a function of the Asset Liability Committee (“ALCO”) process, management chose to sell approximately $30 million in securities during the quarter and in the process shorten the duration of the portfolio.  The Company also experienced an increase of $443,000 in trust service fees and $377,000 in service charges on deposits.  Th e increase in service charges on deposits resulted from both higher volumes and changes to the Company’s service charge matrix.  All of these increases were somewhat offset by decreases in gains on sales of loans of $200,000.

Non-interest income for the six months ended June 30, 2010 increased by $3.2 million, or 91.8%, to $6.7 million, compared to $3.5 million for the six months ended June 30, 2009.  The increase was mainly due to increases in net gain on sales of securities of $1.3 million, trust services revenue of $836,000, service charges on deposits of $673,000, other operating income of $461,000 and the increase in the cash surrender value of bank-owned life insurance of $336,000, offset by a decrease in net gain on sales of loans of $442,000.  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 that complement the Company’s primary lines of business continues to be a challen ge.

Non-interest Expense.Non-interest expense increased $3.7 million, or 27.1%, during the second quarter of 2010 when compared to the same period in 2009.  The Company experienced increases in salaries and employee benefits, occupancy and equipment, advertizing and other operating expense, offset by a decrease in deposit insurance expense during the second quarter.  Increases in salaries and employee benefits and occupancy and equipment expense are the result of the additional personnel and branches related to the Beverly National acquisition and the expansion of the branch footprint undertaken prior to the acquisition.  Other operating expense increased $1.1 million, or 52.4%, due primarily to the amortization of the core deposit intangible related to the acquisition, increases in general operating expenses related to the Beverly National acquisition and de novo branching activities.  In the absence of another special assessment from the Federal Deposit Insurance Corporation (“FDIC”), deposit insurance decreased by $1.1 million when compared to the second quarter of 2009.

Non-interest expense increased by $9.4 million between the six months ended June 30, 2010 and 2009.  The Company experienced increases in salaries and employee benefits, occupancy and equipment and other operating

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DANVERS BANCORP, INC.

expense, offset by a decrease in deposit insurance expense during the six month period.  Increases in salaries and employee benefits, occupancy and equipment expense was a result of the additional personnel, the impact of the Company’s stock based incentive plans and branches related to the Beverly National acquisition and the expansion of the branch footprint undertaken prior to the acquisition.  Other operating expense increased $2.5 million, or 70.8%, due primarily to the amortization of the core deposit intangible related to the acquisition, increases in general operating expenses related to the Beverly National acquisition and de novo branching activities.  Deposit insurance decreased by $419,000, in the absence of any additional FDIC special assessments.

Income Taxes.The Company recorded an income tax provision of $1.7 million for the three months ended June 30, 2010, an increase in income tax expense of $1.8 million when compared to an income tax benefit of $97,000 for the three months ended June 30, 2009.  The tax provision between the two periods changed as a result of the combination with Beverly National and the resulting change in the taxable and tax deferred elements of the Company’s revenues.  The effective tax rate for the three months period ended June 30, 2010 was 25.5% compared to (255.3%) for the same period in 2009.

The Company recorded an income tax provision of $2.2 million for the six months ended June 30, 2010, an increase in income tax expense of $2.0 million, compared to a provision of $178,000 for the six months ended June 30, 2009.  The tax provision between the two periods changed as a result of the combination with Beverly National and the resulting change in the taxable and tax deferred elements of the Company’s revenues.  The effective tax rate for the six months period ended June 30, 2010 was 19.3% compared to 10.5% for the same period in 2009.

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.

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DANVERS BANCORP, INC.

	Three Months Ended June 30,
	2010								2009
	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	$	49,979		$	28		0.22	%	$	42,563		$	98		0.92	%
Debt securities: (2)
U.S. Government		3,616			1		0.11			520			3		2.31
Gov't-sponsored enterprises		252,143			2,207		3.50			188,332			2,311		4.91
Mortgage-backed		287,398			2,464		3.43			234,042			2,780		4.75
Municipal bonds		27,530			205		2.98			21,692			220		4.06
Other		10,336			303		11.73			250			2		3.20
Restricted stock		22,047			4		0.07			14,626			1		0.30
Real estate mortgages (3)		911,286			13,689		6.01			639,596			8,961		5.60
C&I loans (3)		614,753			8,968		5.84			441,482			6,599		5.98
IRBs (3)		125,408			1,506		4.80			81,037			966		4.77
Consumer loans  (3)		3,487			43		4.93			3,999			86		8.60
Total interest-earning assets		2,307,983			29,418		5.10			1,668,139			22,027		5.28
Allowance for loan losses		(15,849	)							(12,583	)
Total earning assets less allowance
for loan losses		2,292,134								1,655,556
Non-interest-earning assets		205,784								104,369
Total assets	$	2,497,918							$	1,759,925
Interest-bearing liabilities:
Deposits:
Savings and NOW accounts	$	418,564			1,215		1.16		$	208,005			647		1.24
Money market accounts		693,127			2,377		1.37			492,968			2,960		2.40
Term certificates		570,550			2,448		1.72			418,722			3,004		2.87
Total deposits		1,682,241			6,040		1.44			1,119,695			6,611		2.36
Borrowed funds:
Short-term borrowings		41,308			43		0.42			80,205			79		0.39
Long-term debt		209,849			1,813		3.46			162,391			1,805		4.45
Subordinated debt		29,965			384		5.13			29,965			498		6.65
Total interest-bearing liabilities		1,963,363			8,280		1.69			1,392,256			8,993		2.58
Non-interest-bearing deposits		223,340								128,361
Other non-interest-bearing liabilities		20,085								13,565
Total non-interest-bearing liabilities		243,425								141,926
Total liabilities		2,206,788								1,534,182
Stockholders' equity		291,130								225,743
Total liabilities and stockholders' equity	$	2,497,918							$	1,759,925
Net interest income				$	21,138							$	13,034
Net interest rate spread (4)							3.41	%							2.70	%
Net interest-earning assets (5)	$	344,620							$	275,883
Net interest margin (6)							3.66	%							3.13	%
Ratio of interest-earning assets
to total interest-bearing liabilities		1.18	x							1.20	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 for the periods 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.

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DANVERS BANCORP, INC.

	Six Months Ended June 30,
	2010								2009
	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	$	39,449		$	75		0.38	%	$	35,043		$	195		1.11	%
Debt securities: (2)
U.S. Government		9,502			7		0.15			1,027			14		2.73
Gov't-sponsored enterprises		235,569			4,150		3.52			193,378			4,749		4.91
Mortgage-backed		290,765			5,592		3.85			238,959			5,751		4.81
Municipal bonds		25,987			447		3.44			20,830			423		4.06
Other		10,323			607		11.72			250			4		3.20
Restricted stock		18,951			4		0.04			14,626			1		0.01
Real estate mortgages (3)		939,312			27,339		5.82			624,526			17,445		5.59
C&I loans (3)		590,987			17,183		4.76			439,138			12,823		5.84
IRBs (3)		125,014			2,974		5.73			77,952			1,857		4.76
Consumer loans  (3)		3,455			99		5.73			4,602			194		8.43
Total interest-earning assets		2,289,314			58,477		5.11			1,650,331			43,456		5.27
Allowance for loan losses		(15,469	)							(12,464	)
Total earning assets less allowance
for loan losses		2,273,845								1,637,867
Non-interest-earning assets		205,314								102,310
Total assets	$	2,479,159							$	1,740,177
Interest-bearing liabilities:
Deposits:
Savings and NOW accounts	$	407,663			2,268		1.11		$	196,923			1,195		1.21
Money market accounts		673,166			4,632		1.38			479,715			5,883		2.45
Term certificates		564,620			5,045		1.79			399,410			6,031		3.02
Total deposits		1,645,449			11,945		1.45			1,076,048			13,109		2.44
Borrowed funds:
Short-term borrowings		63,783			139		0.44			104,246			207		0.39
Long-term debt		213,400			3,648		3.42			162,585			3,594		4.42
Subordinated debt		29,965			826		5.51			29,965			1,031		6.88
Total interest-bearing liabilities		1,952,597			16,558		1.70			1,372,844			17,941		2.61
Non-interest-bearing deposits		218,328								126,514
Other non-interest-bearing liabilities		18,723								13,508
Total non-interest-bearing liabilities		237,051								140,022
Total liabilities		2,189,648								1,512,866
Stockholders' equity		289,511								227,311
Total liabilities and stockholders' equity	$	2,479,159							$	1,740,177
Net interest income				$	41,919							$	25,515
Net interest rate spread (4)							3.41	%							2.66	%
Net interest-earning assets (5)	$	336,717							$	277,487
Net interest margin (6)							3.66	%							3.09	%
Ratio of interest-earning assets
to total interest-bearing liabilities		1.17	x							1.20	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 for the periods 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.

 

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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 June 30,
		2010 vs. 2009
		Increase (Decrease)					Total
		Due to					Increase
		Volume		Rate			(Decrease)
	(In thousands)
Interest-earning assets:
Interest-earning cash equivalents and certificates of deposit	$	17		$	(87	)	$	(70	)
Debt securities (1):
U.S. Government		18			(20	)		(2	)
Gov't-sponsored enterprises and FHLMC		783			(887	)		(104	)
Mortgage-backed		634			(950	)		(316	)
Municipal bonds		59			(74	)		(15	)
Other		81			220			301
Equity securities		1			2			3
Real estate mortgages (2)		3,806			922			4,728
C&I loans (2)		2,590			(221	)		2,369
IRBs (2)		529			11			540
Consumer loans (2)		(11	)		(32	)		(43	)
Total interest-earning assets		8,507			(1,116	)		7,391
Interest-bearing liabilities:
Deposits:
Savings and NOW accounts		655			(87	)		568
Money market accounts		1,202			(1,785	)		(583	)
Term certificates		1,089			(1,645	)		(556	)
Total deposits		2,946			(3,517	)		(571	)
Borrowed funds:
Short-term borrowings		(38	)		2			(36	)
Long-term debt		528			(520	)		8
Subordinated debt		-			(114	)		(114	)
Total interest-bearing liabilities		3,436			(4,149	)		(713	)
Increase in net interest income	$	5,071		$	3,033		$	8,104
(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.

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DANVERS BANCORP, INC.

	Six Months Ended June 30,
	2010 vs. 2009
	Increase (Decrease)						Total
	Due to						Increase
	Volume			Rate			(Decrease)
	(In thousands)
Interest-earning assets:
Interest-earning cash equivalents and certificates of deposit	$	25		$	(145	)	$	(120	)
Debt securities (1):
U.S. Government		116			(123	)		(7	)
Gov't-sponsored enterprises and FHLMC		1,036			(1,635	)		(599	)
Mortgage-backed		1,247			(1,406	)		(159	)
Municipal bonds		105			(81	)		24
Other		161			442			603
Equity securities		-			3			3
Real estate mortgages (2)		8,793			1,101			9,894
C&I loans (2)		4,434			(74	)		4,360
IRBs (2)		1,121			(4	)		1,117
Consumer loans (2)		(48	)		(47	)		(95	)
Total interest-earning assets		16,990			(1,969	)		15,021
Interest-bearing liabilities:
Deposits:
Savings and NOW accounts		1,279			(206	)		1,073
Money market accounts		2,372			(3,623	)		(1,251	)
Term certificates		2,495			(3,481	)		(986	)
Total deposits		6,146			(7,310	)		(1,164	)
Borrowed funds:
Short-term borrowings		(82	)		14			(68	)
Long-term debt		1,123			(1,069	)		54
Subordinated debt		-			(205	)		(205	)
Total interest-bearing liabilities		7,187			(8,570	)		(1,383	)
Increase (decrease) in net interest income	$	9,803		$	6,601		$	16,404
(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.

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.

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DANVERS BANCORP, INC.

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:

	June 30, 2010
			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	$	40,175	$	37,330	$	13,314	$	118,709	$	209,528
Repurchase agreements (1)		38,012		-		-		-		38,012
Subordinated debt		-		-		-		29,965		29,965
Operating leases		3,320		6,150		5,072		15,395		29,937
Total contractual obligations	$	81,507	$	43,480	$	18,386	$	164,069	$	307,442

(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:

	June 30, 2010
			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	$	13,152	$	-	$	-	$	-	$	13,152
Unfunded commitments under lines of credit		376,823		-		-		-		376,823
Unadvanced funds on construction loans		11,897		19,470		-		-		31,367
Commercial and standby letters of credit		3,270		621		44		-		3,935
Total contractual obligations	$	405,142	$	20,091	$	44	$	-	$	425,277

Regulatory Capital Requirements.  At June 30, 2010, 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 June 30, 2010, the Bank’s total risk-based, Tier 1 risk-based and Tier 1 leverage ratios were 11.69%, 10.78% and 7.78%, respectively.  At June 30, 2010, the Company’s total risk-based, Tier 1 risk-based and Tier 1 leverage ratios were 16.70%, 15.79% and 11.4 2%, respectively.

Financial Regulatory Reform Legislation

On July 21, 2010, the President signed the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Act”) into law.  The Act comprehensively reforms the regulation of financial institutions, products and services.  Among other things, the Act provides for new capital standards that eliminate the treatment of trust preferred securities as Tier 1 capital.  Existing trust preferred securities are grandfathered for banking entities with less than $15 billion of assets, such as the Company.  The Act permanently raises deposit insurance levels to

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DANVERS BANCORP, INC.

$250,000, retroactive to January 1, 2008, and extends for two years the Transaction Account Guarantee Program, which will become mandatory for all insured depository institutions.  Pursuant to modifications under the Act, deposit insurance assessments will be calculated based on an insured depository institution’s assets rather than its insured deposits and the minimum reserve ratio will be raised to 1.35%.  In addition, the Act authorizes the FRB to regulate interchange fees for debit card transactions and establishes new minimum mortgage underwriting standards for residential mortgages.  The Act also establishes the Bureau of Consumer Financial Protection (“CFPB”) as an independent bureau of the FRB.  The CFPB has the exclusive authority to prescribe rules governing the provis ion of consumer financial products and services.

The Act grants the SEC express authority to adopt rules granting proxy access for shareholder nominees, and grants shareholders a non-binding vote on executive compensation and “golden parachute” payments.  Pursuant to modifications of the proxy rules under the Act, the Company will be required to disclose the relationship between executive pay and financial performance, the ratio of the median pay of all employees to the pay of the chief executive officer, and employee and director hedging activities.  The Act also requires that stock exchanges amend their listing rules (i) to require, among other things, that each listed company’s compensation committee be granted the authority and funding to retain independent advisors and (ii) to prohibit the listing of any security of an issuer that does not a dopt policies governing the claw back of excess executive compensation based on inaccurate financial statements.

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

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

For June 30, 2010, 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.

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DANVERS BANCORP, INC.

The following table sets forth, as of June 30, 2010, 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	$	203,315	$	(61,990	)		-23.4	%	$	75,040	$	(8,424	)		-10.1	%
+200	bp		234,065		(31,240	)		-11.8	%		79,666		(3,798	)		-4.6	%
+100	bp		254,937		(10,368	)		-3.9	%		81,091		(2,373	)		-2.8	%
0	bp		265,305		-			0.0	%		83,464		-			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 dissemi nating data into appropriate repricing buckets.  Assets and liabilities are then assigned a multiplier to simulate how much that particular balance sheet item will reprice when interest rates change.  The final step is to simulate the timing effect of assets and liabilities with a month-by-month simulation to estimate the change in interest income and expense over the next 12 months.

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

For the rising and falling interest rate scenarios, the base market interest rate forecast was increased on an instantaneous and sustained basis, by 100, 200 and 300 basis points.  At June 30, 2010, 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 a nd may differ from actual results.

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DANVERS BANCORP, INC.

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 in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, 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 r equired 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 Control Over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended June 30, 2010, identified in connection with management’s evaluation required by paragraph (d) of Rules 13a-15 and 15d-15 under the Exchange Act, that have materially affected, or that are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

PART II.  OTHER INFORMATION

Item 1.  Legal Proceedings

Neither the Company nor the Bank is 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

For the six months ended June 30, 2010, there have been no material changes to the risk factors set forth in Item 1A to Part I of our Annual Report on Form 10-K for the year ended December 31, 2009, filed on March 16, 2010, except to the extent factual information disclosed elsewhere in this Form 10-Q relates to such risk factors.

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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 Company’s Board of Directors adopted a stock repurchase program to purchase up to 5% of the Company’s outstanding common stock.  Repurchases under this program were 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 Exchange Act.  This authority was exercised from time to time and in such amounts as market conditions warranted and were subject to regulatory considerations.  The timing and actual number of shares repurchased depended on a variety of factors including price, corporate and regulatory requirements, market conditions, and other corporate liquidity requirements and priorities.  Open market purchases were subject to the limitations set forth in Rule 10b-18 of t he Exchange Act and other applicable legal requirements.  The stock repurchase program expired on May 18, 2010.

On May 24, 2010, the Company’s Board of Directors adopted a stock repurchase program to purchase up to 5% of the Company’s outstanding common stock.  Repurchases under this program have been and 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 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 depends on a variety of factors including price, corporate and regulatory requirements, market conditions, and other corporate liquidity requirements and priorities.  Open market purchases are 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 by the Company at any time without prior notice.

As of June 30, 2010, total repurchases under the stock repurchase plans were 901,161 at an average price of $13.67.  In the second quarter of 2010, the Company purchased 297,121 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
April 1-30		116,021	$	14.44		116,021		357,733
May 1-31		-	$	-		-		357,733
June 1-30		181,100	$	14.81		181,100		176,633
Total		297,121	$	14.67		297,121

Item 3.  Defaults Upon Senior Securities

Not applicable.

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DANVERS BANCORP, INC.

Item 4.  [Removed and Reserved]

Item 5.  Other Information

Not applicable.

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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.

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DANVERS BANCORP, INC.

Signatures

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

Danvers Bancorp, Inc.,

Date:	August 6, 2010	By:	/s/	Kevin T. Bottomley
				Kevin T. Bottomley
				President and Chief Executive Officer
Date:	August 6, 2010	By:	/s/	James J. McCarthy
				James J. McCarthy
				Executive Vice President and Chief
				Operating Officer
Date:	August 6, 2010	By:	/s/	L. Mark Panella
				L. Mark Panella
				Executive Vice President and Chief
				Financial Officer