DANVERS BANCORP, INC.

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2011

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 April 30, 2011: 20,686,592

DANVERS BANCORP, INC.

TABLE OF CONTENTS


			Page
PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)
	-	Consolidated Balance Sheets as of March 31, 2011 and December 31, 2010	3

	-	Consolidated Statements of Income for the Three Months Ended
		March 31, 2011 and 2010	4

	-	Consolidated Statements of Changes in Stockholders' Equity for the
		Three Months Ended March 31, 2011 and 2010	5

	-	Consolidated Statements of Cash Flows for the Three Months Ended
		March 31, 2011 and 2010	6

	-	Notes to Unaudited Consolidated Financial Statements	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of
	Operations		31

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		41

Item 4.	Controls and Procedures		42

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings		43

Item 1A.	Risk Factors		44

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

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DANVERS BANCORP, INC.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

CONSOLIDATED BALANCE SHEETS

(Unaudited)

	March 31,			December 31,
	2011			2010
	(In thousands)
ASSETS
Cash and cash equivalents	$	30,292		$	30,282
Securities available for sale, at fair value		641,332			723,610
Securities held to maturity, at cost		148,267			152,731
Loans held for sale		192			2,881
Loans		1,791,291			1,782,741
Less allowance for loan losses		(18,930	)		(17,900	)
Loans, net		1,772,361			1,764,841

Restricted stock, at cost		18,172			18,172
Premises and equipment, net		41,198			39,793
Bank-owned life insurance		34,533			34,250
Other real estate owned		1,506			832
Accrued interest receivable		10,453			9,845
Deferred tax asset, net		16,977			15,675
Goodwill and intangible assets		32,616			33,119
Prepaid FDIC assessment		5,539			6,215
Other assets		20,987			21,099
	$	2,774,425		$	2,853,345

LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand deposits	$	258,426		$	246,973
Savings and NOW accounts		455,084			449,036
Money market accounts		860,203			837,647
Term certificates over $100,000		336,895			344,165
Other term certificates		214,629			222,205
Total deposits		2,125,237			2,100,026
Short-term borrowings		131,440			214,330
Long-term debt		187,946			196,778
Subordinated debt		19,655			29,965
Accrued expenses and other liabilities		24,032			26,972
Total liabilities		2,488,310			2,568,071

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		239,665			239,163
Retained earnings		90,489			88,067
Accumulated other comprehensive loss		(3,975	)		(2,102	)
Unearned restricted shares - 398,861 and 530,558 shares at March 31, 2011
and December 31, 2010, respectively		(4,902	)		(5,331	)
Unearned compensation - ESOP; 1,195,447 and 1,213,290 shares at
March 31, 2011 and December 31, 2010, respectively		(11,954	)		(12,133	)
Treasury stock, at cost; 1,629,533 and 1,592,382 shares at March 31, 2011
and December 31, 2010, respectively		(23,431	)		(22,613	)
Total stockholders' equity		286,115			285,274
	$	2,774,425		$	2,853,345

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

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DANVERS BANCORP, INC.

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

	Three Months Ended
	March 31,
	2011			2010
	(Dollars in thousands, except
Interest and dividend income:	per share amounts)
Interest and fees on loans	$	24,161		$	23,389
Interest on debt securities:
Taxable		6,357			5,381
Non-taxable		580			242
Dividends on equity securities		14			-
Interest on cash equivalents and certificates of deposit		3			47
Total interest and dividend income		31,115			29,059

Interest expense:
Interest on deposits:
Savings and NOW accounts		1,235			1,053
Money market accounts		2,105			2,255
Term certificates		2,476			2,597
Interest on short-term borrowings		171			96
Interest on long-term debt and subordinated debt		2,084			2,277
Total interest expense		8,071			8,278
Net interest income		23,044			20,781
Provision for loan losses		1,200			1,200
Net interest income, after provision for loan losses		21,844			19,581

Non-interest income:
Service charges on deposits		1,113			1,084
Loan servicing fees		119			58
Net gain on sales of loans		330			99
Net gain on sales of securities		300			71
Loss on limited partnerships, net		(180	)		(34	)
Increase in cash surrender value of bank-owned life insurance		283			316
Trust services		404			393
Other operating income		954			675
Total non-interest income		3,323			2,662

Non-interest expenses:
Salaries and employee benefits		10,459			9,856
Occupancy		2,531			2,089
Equipment		1,022			1,020
Outside services		819			546
Other real estate owned expense		108			186
Deposit insurance expense		729			582
Advertising expense		138			209
Merger expense		2,288			-
Other operating expense		3,188			2,998
Total non-interest expenses		21,282			17,486
Income before income taxes		3,885			4,757
Provision for income taxes		684			506
Net income	$	3,201		$	4,251

Weighted-average shares outstanding:
Basic		19,495,533			20,423,418
Diluted		19,843,457			20,423,418

Earnings per share:
Basic	$	0.16		$	0.21
Diluted	$	0.16		$	0.21

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

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DANVERS BANCORP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited)

											Accumulated
					Additional						Other			Unearned			Unearned						Total
	Common Stock				Paid-In			Retained			Comprehensive			Restricted			Compensation -			Treasury			Stockholders'
	Shares		Amount		Capital			Earnings			Income (Loss)			Shares			ESOP			Stock			Equity
	(Dollars in thousands)

Balance at December 31, 2009		22,316,125	$	223	$	237,577		$	71,864		$	3,650		$	(6,793	)	$	(12,846	)	$	(8,009	)	$	285,666
Comprehensive income:
Net income		-		-		-			4,251			-			-			-			-			4,251
Net unrealized gain on securities
available for sale, net of
reclassification adjustments
and tax effect		-		-		-			-			674			-			-			-			674
Change in fair value and
amortization of derivative used
for cash flow hedge, net of
tax effect		-		-		-			-			(1	)		-			-			-			(1	)
Total comprehensive income																								4,924
Restricted stock awards
(33,715 shares)		-		-		(12	)		-			-			(444	)		-			456			-
Purchase of shares for stock
repurchase plan (67,340 shares)		-		-		-			-			-			-			-			(951	)		(951	)
Equity incentive shares earned
(81,002 shares)		-		-		307			-			-			431			-			-			738
Common stock held by ESOP
committed to be released
(17,843 shares)		-		-		70			-			-			-			178			-			248
Dividends paid
($.02 per share)		-		-		-			(411	)		-			-			-			-			(411	)
Balance at March 31, 2010		22,316,125	$	223	$	237,942		$	75,704		$	4,323		$	(6,806	)	$	(12,668	)	$	(8,504	)	$	290,214

Balance at December 31, 2010		22,316,125	$	223	$	239,163		$	88,067		$	(2,102	)	$	(5,331	)	$	(12,133	)	$	(22,613	)	$	285,274
Comprehensive income:
Net income		-		-		-			3,201			-			-			-			-			3,201
Net unrealized loss on securities
available for sale, net of
reclassification adjustments
and tax effect		-		-		-			-			(1,872	)		-			-			-			(1,872	)
Change in fair value and
amortization of derivative used
for cash flow hedge, net of
tax effect		-		-		-			-			(1	)		-			-			-			(1	)
Total comprehensive income																								1,328
Purchase of shares for stock
repurchase plan (37,151 shares)		-		-		-			-			-			-			-			(818	)		(818	)
Equity incentive shares earned
(82,385 shares)		-		-		311			-			-			429			-			-			740
Common stock held by ESOP
committed to be released
(17,843 shares)		-		-		191			-			-			-			179			-			370
Dividends paid
($.04 per share)		-		-		-			(779	)		-			-			-			-			(779	)
Balance at March 31, 2011		22,316,125	$	223	$	239,665		$	90,489		$	(3,975	)	$	(4,902	)	$	(11,954	)	$	(23,431	)	$	286,115

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

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DANVERS BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Three Months Ended
	March 31,
	2011			2010
	(In thousands)
Cash flows from operating activities:
Net income	$	3,201		$	4,251
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses		1,200			1,200
Depreciation and amortization of premises and equipment and acquisition accounting, net		842			543
Accretion of net deferred loan fees and costs		(237	)		(291	)
Deferred tax provision		-			3,973
Amortization of core deposit intangible and servicing rights		486			596
Amortization of stock-based compensation and ESOP expense		1,110			986
Amortization of securities, net		225			227
Net gain on sales of securities		(300	)		(71	)
Change in fair value of derivative financial instruments		(2	)		3
Net loss on sales of other real estate owned		-			72
Loans originated for sale		(26,625	)		(5,103	)
Proceeds from sales of loans originated for sale		29,314			6,836
Changes in other assets and liabilities:
Accrued interest receivable		(608	)		556
Other assets and bank-owned life insurance		385			(4,585	)
Accrued expenses and other liabilities		(2,803	)		(5,832	)
Net cash provided by operating activities		6,188			3,361

Cash flows from investing activities:
Purchases of certificates of deposit		-			(119	)
Maturities of certificates of deposit		-			10,798
Activity in available-for-sale securities:
Sales		33,210			5,769
Maturities, prepayments and calls		46,093			57,919
Purchases		-			(47,688	)
Activity in held-to-maturity securities:
Maturities, prepayments and calls		4,341			7,883
Purchases		-			(5,743	)
Proceeds from sales of other real estate owned		-			647
Net loan payments (originations)		(9,150	)		5,817
Purchase of premises and equipment		(2,558	)		(1,746	)
Net cash provided by investing activities		71,936			33,537

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

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DANVERS BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Concluded)

(Unaudited)

	Three Months Ended
	March 31,
	2011			2010
	(In thousands)
Cash flows from financing activities:
Net increase (decrease) in:
Term certificates		(14,846	)		25,704
Other deposits		40,057			72,163
Short-term borrowings		(82,890	)		(133,099	)
Activity in long-term debt:
Proceeds from advances		-			1,080
Payment of advances		(8,528	)		(8,884	)
Purchase of shares for incentive plans		(818	)		(951	)
Repayment of subordinated debt		(10,310	)		-
Dividends paid		(779	)		(411	)
Net cash used in financing activities		(78,114	)		(44,398	)
Change in cash and cash equivalents		10			(7,500	)
Cash and cash equivalents at beginning of period		30,282			71,757
Cash and cash equivalents at end of period	$	30,292		$	64,257

Supplementary disclosure of cash flow information:
Cash paid during the period for:
Interest	$	7,836		$	7,923
Income taxes		1,435			1,000
Non-cash financing and investing activities:
Transfers from loans to other real estate owned		674			563

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

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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, 2010 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, 2010 filed by the Company with the Securities and Exchange Commission (“SEC”) on March 15, 2011. The results of operations for the three months ended March 31, 2011 and 2010 are not necessarily indicative of the results to be obtained for a full year.

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 other non-interest income.

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 March 31, 2011 and December 31, 2010.

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 sheets at fair value, with changes in fair value recorded in non-interest income. Fees earned in connection with the execution of derivatives related to this program are recognized in other non-interest income.

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DANVERS BANCORP, INC.

As of March 31, 2011, the Company had two interest rate swaps and one cap (“interest rate products”) with an aggregate notional amount of $19,812,000 and $50,000,000, respectively, with a variable pay rate of the 1 Month LIBOR and a fixed receive rate ranging from 6.20% through 6.80%. These interest rate products mature at various dates ranging from April 17, 2012 through May 1, 2015. During the three months ended March 31, 2011 and 2010, the Company recognized a net gain (loss) of $2,000 and ($3,000), 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 March 31, 2011 and December 31, 2010.

	Balance Sheet	Fair		Balance Sheet	Fair
	Location	Value		Location	Value
	(In thousands)
Derivatives not designated as hedging
instruments:

March 31, 2011:
Interest rate swap agreements	Other assets	$	605	Other liabilities	$	609
Interest rate cap agreements	Other assets		1	Other liabilities		1
Total interest rate products		$	606		$	610

December 31, 2010:
Interest rate swap agreements	Other assets	$	737	Other liabilities	$	743
Interest rate cap agreements	Other assets		4	Other liabilities		4
Total interest rate products		$	741		$	747

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 months ended March 31, 2011 and 2010.

		Gain (Loss)
		Recognized
		in Income on
		Derivatives for the
	Location of Gain (Loss)	Quarter Ended
Derivatives Not Designated	Recognized in	March 31,
as Hedging Instruments	Income on Derivatives	2011		2010
		(In thousands)
Interest rate swap agreements	Other income	$	2	$	(1	)
Interest rate cap agreements	Other income		-		(2	)
Total income (loss) on interest rate products		$	2	$	(3	)

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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)
March 31, 2011:
Securities Available for Sale
Debt securities:
Government-sponsored enterprises:
Federal National Mortgage Association	$	1,235	$	-	$	(55	)	$	1,180
Federal Home Loan Bank		252,854		637		(5,607	)		247,884
Federal Farm Credit Bank		88,120		287		(2,208	)		86,199
Residential mortgage-backed:
Federal Home Loan Mortgage Corporation		78,829		1,430		(763	)		79,496
Federal National Mortgage Association		116,290		2,764		(2,452	)		116,602
Government National Mortgage Association		55,855		1,503		(163	)		57,195
Municipal bonds		53,624		349		(2,076	)		51,897
Other bonds and notes		250		-		-			250
Total debt securities		647,057		6,970		(13,324	)		640,703
Marketable equity securities:
Mutual funds		612		17		-			629
Total securities available for sale	$	647,669	$	6,987	$	(13,324	)	$	641,332

Securities Held to Maturity
Debt securities:
Government-sponsored enterprises:
Federal Home Loan Bank	$	60,698	$	33	$	(2,370	)	$	58,361
Federal Farm Credit Bank		26,940		98		(991	)		26,047
Residential mortgage-backed:
Federal Home Loan Mortgage Corporation		18,649		55		(93	)		18,611
Federal National Mortgage Association		25,548		200		(164	)		25,584
Government National Mortgage Association		16,232		105		(31	)		16,306
Other bonds		200		-		-			200
Total securities held to maturity	$	148,267	$	491	$	(3,649	)	$	145,109

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DANVERS BANCORP, INC.

			Gross		Gross
	Amortized		Unrealized		Unrealized
	Cost		Gains		Losses			Fair Value
	(In thousands)
December 31, 2010:
Securities Available for Sale
Debt securities:
Government-sponsored enterprises:
Federal National Mortgage Association	$	1,235	$	-	$	(52	)	$	1,183
Federal Home Loan Bank		300,922		1,362		(4,348	)		297,936
Federal Farm Credit Bank		104,670		598		(1,767	)		103,501
Residential mortgage-backed:
Federal Home Loan Mortgage Corporation		83,460		1,618		(450	)		84,628
Federal National Mortgage Association		122,674		3,053		(1,906	)		123,821
Government National Mortgage Association		59,375		1,665		(133	)		60,907
Municipal bonds		53,576		197		(3,016	)		50,757
Other bonds and notes		250		-		-			250
Total debt securities		726,162		8,493		(11,672	)		722,983
Marketable equity securities:
Mutual funds		612		15		-			627
Total securities available for sale	$	726,774	$	8,508	$	(11,672	)	$	723,610

Securities Held to Maturity
Debt securities:
Government-sponsored enterprises:
Federal Home Loan Bank	$	64,727	$	126	$	(2,020	)	$	62,833
Federal Farm Credit Bank		23,912		68		(836	)		23,144
Residential mortgage-backed:
Federal Home Loan Mortgage Corporation		19,708		74		(56	)		19,726
Federal National Mortgage Association		27,093		289		(123	)		27,259
Government National Mortgage Association		17,091		186		(12	)		17,265
Other bonds and notes		200		-		-			200
Total securities held to maturity	$	152,731	$	743	$	(3,047	)	$	150,427

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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)
March 31, 2011:
Securities Available for Sale
Debt securities:
Government-sponsored enterprises:
Federal National Mortgage Association	$	55	$	1,180	$	-	$	-
Federal Home Loan Bank		5,607		207,168		-		-
Federal Farm Credit Bank		2,208		73,555		-		-
Residential mortgage-backed:
Federal Home Loan Mortgage Corporation		760		30,594		3		778
Federal National Mortgage Association		2,452		45,246		-		-
Government National Mortgage Association		163		17,437		-		-
Municipal bonds		1,766		29,622		310		6,579
	$	13,011	$	404,802	$	313	$	7,357


Securities Held to Maturity
Debt securities:
Government-sponsored enterprises:
Federal Home Loan Bank	$	2,370	$	56,828	$	-	$	-
Federal Farm Credit Bank		991		20,884		-		-
Residential mortgage-backed:
Federal Home Loan Mortgage Corporation		93		12,269		-		-
Federal National Mortgage Association		164		8,121
Government National Mortgage Association		31		3,524		-		-
	$	3,649	$	101,626	$	-	$	-

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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, 2010:
Securities Available for Sale
Debt securities:
Government-sponsored enterprises:
Federal National Mortgage Association	$	52	$	1,183	$	-	$	-
Federal Home Loan Bank		4,348		190,677		-		-
Federal Farm Credit Bank		1,767		74,747		-		-
Residential mortgage-backed:
Federal Home Loan Mortgage Corporation		448		24,892		2		921
Federal National Mortgage Association		1,906		43,822		-		-
Government National Mortgage Association		133		20,825		-		-
Municipal bonds		2,854		41,198		162		1,214
	$	11,508	$	397,344	$	164	$	2,135

Securities Held to Maturity
Debt securities:
Government-sponsored enterprises:
Federal Home Loan Bank	$	2,020	$	58,178	$	-	$	-
Federal Farm Credit Bank		836		21,038		-		-
Residential mortgage-backed:
Federal Home Loan Mortgage Corporation		56		14,109		-		-
Federal National Mortgage Association		123		12,057		-		-
Government National Mortgage Association		12		3,604		-		-
	$	3,047	$	108,986	$	-	$	-

Gross unrealized losses on available for sale and held to-maturity securities increased $1.7 million, or 14.2% and $602,000 million, or 19.8%, respectively, during the three-month period ended March 31, 2011. The change is due to interest rate risk and is not related to credit quality. The Company continues to ladder the securities portfolio to fund loan growth, balance duration risk and improve yield, as appropriate.

Each reporting period, the Company evaluates all securities 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”). 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) for debt securities, the present value of expected cash flows is not sufficient to recover the entire amortized cost basis. 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 impaired debt securities that the Company intends to sell, or more likely than not will be required to sell, the full amount of the depreciation is recognized as OTTI through earnings. For all other impaired debt securities, credit-related OTTI is recognized through earnings and non-credit related OTTI is recognized in other comprehensive income, net of applicable taxes.

The unrealized losses on the Company’s investment in government-sponsored enterprises were primarily caused by interest rate risk. 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

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DANVERS BANCORP, INC.

quality, and 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 cost basis, which may be maturity, the Company does not consider these securities to be other-than-temporarily impaired at March 31, 2011.

The unrealized losses on the Company’s investment in 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 are attributable to changes in interest rates and not to credit quality, and 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 cost bases, which may be maturity, the Company does not consider these securities to be other-than-temporarily impaired at March 31, 2011.

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 March 31, 2011.

4. Loans and Allowance for Loan Losses

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

	March 31, 2011						December 31, 2010
	Amount			Percent			Amount			Percent
	(Dollars in thousands)
Real estate mortgages:
Construction	$	121,891			6.8	%	$	122,550			6.9	%
Residential		294,398			16.4			305,233			17.1
Commercial		402,592			22.4			403,937			22.6
Home equity		82,641			4.6			83,837			4.7
C&I		889,490			49.6			866,445			48.5
Consumer		2,941			0.2			3,355			0.2
Total loans		1,793,953			100.0	%		1,785,357			100.0	%
Allowance for loan losses		(18,930	)					(17,900	)
Net deferred loan fees		(2,662	)					(2,616	)
Loans, net	$	1,772,361					$	1,764,841

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Loans obtained as the result of an acquisition are excluded from the collective evaluation for impairment. Further information pertaining to the allowance for loan losses and principal balance of loan financing receivables follows:

	At or For the Three Months Ended March 31,
	2011																					2010
	Real Estate Mortgages											Other
	Construction			Residential			Commercial			Home Equity		C&I		Consumer			Unallocated		Total			Amount
	(In thousands)
Allowance for loan losses:
Balance at beginning of period	$	2,134		$	824		$	4,267		$	343	$	9,826	$	25		$	481	$	17,900		$	14,699
Provisions		(12	)		347			414			4		404		(6	)		49		1,200			1,200
Recoveries of loans previously charged-off		-			2			1			-		10		7			-		20			5
		2,122			1,173			4,682			347		10,240		26			530		19,120			15,904
Loans charged off		-			(143	)		(42	)		-		-		(5	)		-		(190	)		(395	)
Balance at end of period	$	2,122		$	1,030		$	4,640		$	347	$	10,240	$	21		$	530	$	18,930		$	15,509

Individually evaluated for impairment	$	-		$	400		$	1,060		$	-	$	605	$	9		$	-	$	2,074			N/A
Collectively evaluated for impairment		2,122			610			3,580			299		9,635		12			530		16,788			N/A
Acquired with deteriorated credit quality		-			20			-			48		-		-			-		68			N/A
	$	2,122		$	1,030		$	4,640		$	347	$	10,240	$	21		$	530	$	18,930			N/A

Principal balance of loan financing receivables:
Individually evaluated for impairment	$	-		$	6,496		$	1,202		$	1,031	$	4,417	$	10				$	13,156			N/A
Collectively evaluated for impairment		120,061			243,875			325,355			59,802		801,079		2,358					1,552,530			N/A
	$	120,061		$	250,371		$	326,557		$	60,833	$	805,496	$	2,368				$	1,565,686			N/A

Acquired with deteriorated credit quality	$	-		$	419		$	-		$	48	$	-	$	-				$	467			N/A

	December 31, 2010
	Real Estate Mortgages								Other
	Construction		Residential		Commercial		Home Equity		C&I		Consumer		Unallocated		Total
	(In thousands)
Allowance for loan losses:
Individually evaluated for impairment	$	-	$	125	$	656	$	-	$	474	$	13	$	-	$	1,268
Collectively evaluated for impairment		2,134		629		3,611		296		9,337		12		481		16,500
Acquired with deteriorated credit quality		-		70		-		47		15		-		-		132
	$	2,134	$	824	$	4,267	$	343	$	9,826	$	25	$	481	$	17,900

Principal balance of loan financing receivables:
Individually evaluated for impairment	$	-	$	5,497	$	1,204	$	975	$	3,829	$	13			$	11,518
Collectively evaluated for impairment		120,954		251,644		328,203		59,180		775,388		2,499				1,537,868
	$	120,954	$	257,141	$	329,407	$	60,155	$	779,217	$	2,512			$	1,549,386

Acquired with deteriorated credit quality	$	-	$	2,168	$	-	$	68	$	175	$	-			$	2,411

At March 31, 2011 and December 31, 2010, loans accounted for at fair value were $227,800,000 and $233,560,000, respectively.

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DANVERS BANCORP, INC.

							At or For the
	At or For the Three						Year Ended
	Months Ended March 31,						December 31,
	2011			2010			2010
	(Dollars in thousands)

Total loans outstanding (1)	$	1,794,145		$	1,662,202		$	1,785,622
Average loans outstanding	$	1,802,824		$	1,662,729		$	1,691,942

Allowance for loan losses as a percent of total
loans outstanding		1.06	%		0.93	%		1.00	%
Net loans charged off as a percent of average
loans outstanding (2)		0.04	%		0.09	%		0.12	%
Allowance for loan losses to non-performing
loans		138.22	%		99.80	%		127.75	%

(1) Includes loans held for sale.

(2)	Ratios for the three months ended March 31, 2011 and 2010 are annualized.

For further information, see “Provision for Loan Losses” of the Management Discussion and Analysis on page 37.

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DANVERS BANCORP, INC.

The following is a summary of information pertaining to impaired and non-accrual loans:

	March 31, 2011						December 31, 2010
			Unpaid		Related				Unpaid		Related
	Recorded		Principal		Valuation		Recorded		Principal		Valuation
	Investment		Balance		Allowance		Investment		Balance		Allowance
	(In thousands)
Impaired loans without a valuation allowance:
Construction	$	-	$	-	$	-	$	-	$	-	$	-
Residential real estate		5,170		5,119		-		5,694		5,644		-
Commercial real estate		51		51		-		456		457		-
Home equity real estate		1,031		1,031		-		995		995		-
C&I		3,433		3,432		-		3,339		3,337		-
Consumer		-		-		-		-		-		-
	$	9,685	$	9,633	$	-	$	10,484	$	10,433	$	-

Impaired loans with a valuation allowance:
Construction	$	-	$	-	$	-	$	-	$	-	$	-
Residential real estate		1,819		1,796		420		2,054		2,021		195
Commercial real estate		1,151		1,151		1,060		747		747		656
Home equity real estate		47		48		48		47		48		47
C&I		985		985		604		667		667		489
Consumer		10		10		10		13		13		13
	$	4,012	$	3,990	$	2,142	$	3,528	$	3,496	$	1,400

Total impaired loans:
Construction	$	-	$	-	$	-	$	-	$	-	$	-
Residential real estate		6,989		6,915		420		7,748		7,665		195
Commercial real estate		1,202		1,202		1,060		1,203		1,204		656
Home equity real estate		1,078		1,079		48		1,042		1,043		47
C&I		4,418		4,417		604		4,006		4,004		489
Consumer		10		10		10		13		13		13
	$	13,697	$	13,623	$	2,142	$	14,012	$	13,929	$	1,400

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DANVERS BANCORP, INC.

	Three Months Ended March 31, 2011						Year Ended December 31, 2010
	Average						Average
	Recorded		Interest Income Recognized				Recorded		Interest Income Recognized
	Investment		Total		Cash Basis		Investment		Total		Cash Basis
	(In thousands)
Impaired loans without a valuation allowance:
Construction	$	-	$	-	$	-	$	-	$	-	$	-
Residential real estate		5,536		66		66		5,131		237		237
Commercial real estate		52		1		1		2,867		192		6
Home equity real estate		1,008		9		9		1,201		35		35
C&I		3,961		16		3		4,897		137		15
Consumer		-		-		-		-		-		-
	$	10,557	$	92	$	79	$	14,096	$	601	$	293

Impaired loans with a valuation allowance:
Construction	$	-	$	-	$	-	$	182	$	-	$	-
Residential real estate		1,797		10		10		1,098		58		54
Commercial real estate		1,151		24		24		738		44		5
Home equity real estate		48		1		1		195		2		2
C&I		318		1		1		1,237		18		8
Consumer		1,349		-		-		56		2		2
	$	4,663	$	36	$	36	$	3,506	$	124	$	71

Total impaired loans:
Construction	$	-	$	-	$	-	$	182	$	-	$	-
Residential real estate		7,333		76		76		6,229		295		291
Commercial real estate		1,203		25		25		3,605		236		11
Home equity real estate		1,056		10		10		1,396		37		37
C&I		4,279		17		4		6,134		155		23
Consumer		1,349		-		-		56		2		2
	$	15,220	$	128	$	115	$	17,602	$	725	$	364

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DANVERS BANCORP, INC.

The following is a summary of past due and non-accrual loans at the dates indicated:

	March 31, 2011
													Recorded
													Investment
													Greater than
					Greater than								90 Days		Total
	30-59 Days		60-89 Days		90 Days		Total				Total		Past Due and		Non-Accrual
	Past Due		Past Due		Past Due		Past Due		Current		Loans		Still Accruing		Loans
	(In thousands)
Real estate mortgages
Construction	$	395	$	-	$	-	$	395	$	121,496	$	121,891	$	-	$	-
Residential		2,892		5		3,356		6,253		288,145		294,398		-		6,989
Commercial		625		51		-		676		401,916		402,592		-		1,202
Home equity real estate		356		28		38		422		82,219		82,641		-		1,078
Total real estate mortgages		4,268		84		3,394		7,746		893,776		901,522		-		9,269
C&I		2,045		2,058		2,496		6,599		882,891		889,490		-		3,539
Consumer		6		1		-		7		2,934		2,941		-		9
	$	6,319	$	2,143	$	5,890	$	14,352	$	1,779,601	$	1,793,953	$	-	$	12,817

	December 31, 2010
													Recorded
													Investment
													Greater than
					Greater than								90 Days		Total
	30-59 Days		60-89 Days		90 Days		Total				Total		Past Due and		Non-Accrual
	Past Due		Past Due		Past Due		Past Due		Current		Loans		Still Accruing		Loans
	(In thousands)
Real estate mortgages
Construction	$	-	$	-	$	-	$	-	$	122,550	$	122,550	$	-	$	-
Residential		2,872		714		3,710		7,296		297,937		305,233		-		7,748
Commercial		-		-		-		-		403,937		403,937		-		1,203
Home equity real estate		64		427		-		491		83,346		83,837		-		1,042
Total real estate mortgages		2,936		1,141		3,710		7,787		907,770		915,557		-		9,993
C&I		143		82		2,787		3,012		863,433		866,445		-		3,079
Consumer		10		-		1		11		3,344		3,355		-		13

Danvers Bancorp, Inc. 10-Q