Danvers Bancorp, Inc. Reports Results for the Three and Six Months Ended June 30, 2010

Danvers Bancorp, Inc. (the "Company”) (NASDAQ: DNBK), the holding company for Danversbank, today reported net income of $4.9 million for the quarter ended June 30, 2010 compared to net income of $135,000 for the same quarter in 2009. Net income for the comparable six month periods in 2010 and 2009 was $9.2 million and $1.5 million, respectively. The combination of the acquisition of Beverly National Corporation ("Beverly”), organic growth, particularly within the loan portfolio, and the overall improvement of the Company’s net interest margin resulted in a significant increase in net interest income and a lesser increase in non-interest income. These increases were partially offset by higher provision for loan losses, increased salaries and benefits expense and other operating expenses. Specifically, net interest income for the three and six months ended June 30, 2010 improved by $8.1 million, or 62.2% and $16.4 million, or 64.3%, respectively, compared to the comparable periods in 2009.

Compared to the quarter ended March 31, 2010, net income increased by $692,000, or 16.3%. Increases in non-interest income, primarily securities gains and deposit account service charges, and net interest income were offset by increases in the provision for loan losses and income taxes.

2010 second quarter financial highlights include:

• 15% annualized growth in total deposits during the second quarter;
• Non-performing assets to total assets of 0.81% compared to 0.79% for Q2 ‘09 and 0.68% for Q1 ‘10;
• Net interest margin of 3.66% compared to 3.13% for Q2 ‘09 and 3.66% for Q1 ‘10;
• Net interest income increased 62.18% compared to Q2 ‘09 and 1.72% compared to Q1 ‘10; and
• Non-interest income increased 125.96% compared to Q2 ‘09 and 53.04% compared to Q1 ‘10.

"Our core operations remained stable during the second quarter which was also marked by continued robust growth in deposits,” noted Kevin T. Bottomley, President and CEO.

Earnings per share basic and diluted for the second quarter of 2010 and 2009 were $0.24 and $0.01, respectively. Earnings per share basic and diluted for the quarter ended March 31, 2010 were $0.21. Earnings per share basic and diluted for the six months ended June 30, 2010 and 2009 were $0.45 and $0.09, respectively.

2010 Earnings Summary

The Company’s net interest income increased $8.1 million, or 62.2%, during the second quarter of 2010 compared to the same period in 2009. For the comparable six month period ended June 30, 2010 and 2009, net interest income increased $16.4 million, or 64.3%. These increases are attributable to the overall growth of the Company and in particular, the growth of the loan portfolio and the overall improvement in the Company’s net interest margin ("NIM”). The Company’s NIM improved by 53 basis points from 3.13% for the second quarter of 2009 to 3.66% for the second quarter of 2010 mainly due to an increase in average loan balances of $488.8 million and an 89 basis point decline in overall funding costs.

The Company’s second quarter net interest income increased $357,000, or 1.7%, compared to the first quarter of 2010. We experienced a 2 basis point decline in both the yield on earning assets and the cost of interest-bearing liabilities during the quarter. As a result, the Company’s NIM was 3.66% for both the first and second quarters of 2010.

Non-interest income for the second quarter of 2010 totaled $4.1 million, an increase of $2.3 million, or 126.0%, compared to the second quarter of 2009. The improvement was primarily due to an increase of $1.2 million in gains on sale of securities, $443,000 in trust services fees, $377,000 in additional deposit account service fees and a $157,000 increase in the cash surrender value of bank-owned life insurance. These increases were partially offset by a $200,000 decline in gains on sales of loans. For the six months ended June 30, 2010, non-interest income increased $3.2 million, or 91.8%, compared to the same period in 2009. Gains on sales of securities and trust services revenue were the two largest contributors to the increase.

Non-interest income for the second quarter of 2010 increased $1.4 million, or 53.0%, compared to the first quarter of 2010. This increase was primarily due to $1.2 million increase in gains on sale of securities and a $139,000 increase in deposit account service charges. In the current rate environment, management elected to sell approximately $30 million in available for sale securities and in the process somewhat shortened the duration of the overall investment portfolio. While the Company’s general levels of non-interest revenues have shown incremental improvement, developing additional and meaningful sources of non-interest income remains a significant challenge.

Non-interest expense increased $3.7 million, or 27.1%, between the quarters ended June 30, 2010 and 2009, respectively, due primarily to increases in salaries and employee benefits and occupancy and equipment expense as a result of the additional personnel and branches related to the Beverly acquisition and the overall expansion of the branch network. Other operating expense increased $1.1 million, or 52.4%, due primarily to the amortization of the core deposit intangible related to the acquisition. For the six month period ended June 30, 2010, non-interest expense increased $9.4 million, or 37.0%, from the comparable period in 2009. Salaries and benefits, occupancy and general other operating expense, related to operating the larger combined franchise, were the largest contributors to the increase in non-interest expense.

Non-interest expense decreased slightly by $205,000, or 1.2%, for the second quarter of 2010 compared to the first quarter of 2010.

Since the fully taxable components of the Company’s revenues have increased as a result of the Beverly acquisition and organic growth of the franchise, the Company booked a higher tax provision for the second quarter of 2010 compared to the first quarter of 2010.

Balance Sheet Summary

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, during the period ended June 30, 2010. The strong growth of the balance sheet that the Company experienced in 2008 and 2009, 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 cash flows to fund some securities purchases and to retire all of its overnight Federal Home Loan Bank ("FHLB”) borrowing.

"Prepayments and increasing competition for loans resulted in a small decline in our loan portfolio during the second quarter when compared to the first quarter. We expect that it will remain a challenge, but that it is still possible to return to our historic growth rates during the remainder of 2010,” said Bottomley.

All of the Company’s loan portfolio categories were relatively flat during the first six months of 2010. The trend, as it has been for the better part of the past three years, has been to systematically wind down much of the Company’s construction lending activities in favor of commercial and industrial ("C&I”) and selected permanent commercial real estate opportunities.

The Company experienced some deterioration in its asset quality metrics for the quarter ended June 30, 2010. Total non-performing assets ("NPA’s”) increased to $20.4 million at June 30, 2010 compared to $16.8 million at March 31, 2010 and $19.2 million at December 31, 2009. NPA’s, as a percentage of total assets, increased to 81 basis points at the end of the quarter. This compares to NPA metrics of 68 basis points, 77 basis points and 73 basis points for the quarters ended March 31, 2010, December 31, 2009 and September 30, 2009. At June 30, 2010, total NPA’s consisted of $12.0 million in loans considered impaired and on non-accrual, $7.4 million in performing troubled debt restructures and $1.0 million in other real estate owned ("OREO”). The number of problem credits being resolved continues to be offset by an equal number of new problem credits from quarter to quarter. The majority of the Company’s problem credits have emanated from the pre-merger Danversbank loan portfolio. The OREO balance consists of three properties with no particular business segment or industry concentration represented.

"Rising delinquencies in our residential lending area, in owner-occupied properties, was a source of some concern in the second quarter. In that sense, many of the issues in our local markets are more revenue-driven than credit-driven as individuals have become unemployed and experienced difficulty returning to work. We believe that ultimately any losses in this portfolio will be modest,” stated Bottomley.

Despite concerns over employment and some softening of the local economy, the Company’s asset quality metrics and delinquency trends continue to be stable and favorable when compared to many industry peers. The second quarter provision for loan losses was $1.3 million compared to $1.2 million for the same period in 2009 and $1.2 million for the first quarter of 2010. Despite slower than anticipated loan growth, the commercial profile of the Company’s loan portfolio and concerns over the economy are the reasons that management continues to augment the reserve. The allowance for loan losses increased $1.5 million, or 10.5%, for the first six months of 2010 and represented 0.98% of total loans at June 30, 2010. The acquisition of Beverly in the fourth quarter of 2009 and the related "purchase accounting” considerations are the reasons that the reserve represents a lower percentage of gross loans than in quarters prior to the acquisition. Net charge-offs for the quarter and six months ended June 30, 2010 were $566,000 and $955,000, respectively. By comparison, net charge-offs were $1.0 million and $1.4 million for the comparable periods in 2009. The allowance represents 83.8% of non-performing loans at June 30, 2010 compared to 82.5% at December 31, 2009.

Deposits increased by $167.5 million, or 9.5%, to $1.9 billion at June 30, 2010 compared to $1.8 billion at December 31, 2009. During the first six months of 2010, the Company experienced increases in all deposit categories. This growth is attributable to the Company’s expanded retail branch presence and online banking initiatives. The Company opened its Cambridge and Waltham locations in 2009 and its first retail Boston location in the first quarter of 2010 and these branches have already attracted $90.9 million in new deposit balances. Despite the low levels of short-term interest rates, the Company has experienced success in raising core deposit balances.

The Company expects to continue with the expansion of its retail branch network and in addition to its previously announced plans to open branch locations in Needham and Lexington, it plans to open a second Boston location in the financial district.

"We are pleased that the expansion of our branch network will now include a second Boston location at 50 Milk Street, which we hope to open during the fourth quarter of 2010,” mentioned Bottomley.

Short-term advances from the FHLB decreased by $120.0 million at June 30, 2010 compared to December 31, 2009. As a result, the Company had no overnight borrowing with the FHLB at June 30, 2010. Management continues to replace short and long-term borrowing with the aforementioned deposit inflows and in the process has lessened the Company’s reliance on any single funding source. The Company had approximately $209.5 million in various FHLB term advances outstanding and $38.0 million in short-term borrowings at June 30, 2010. The Company’s short-term borrowings consist of overnight customer repurchase agreements. From a funding and liquidity perspective, the Company has ready access to a number of large, stable and well-diversified short-term funding sources and these alternatives are available at competitive rates given the current rate environment.

Company Profile

Danvers Bancorp, Inc., the holding company for Danversbank, is headquartered in Danvers, Massachusetts. The Company has grown to $2.5 billion in assets through acquisitions and internal growth, including de novo branching. We conduct business from our main office located at One Conant Street, Danvers, Massachusetts, and our 26 other branch offices located in Andover, Beverly, Boston, Cambridge, Chelsea, Danvers, Hamilton, Malden, Manchester, Middleton, Peabody, Reading, Revere, Salem, Saugus, Topsfield, Waltham, Wilmington and Woburn, Massachusetts. Our business consists primarily of making loans to our customers, including C&I loans, commercial real estate loans, owner-occupied residential mortgages and consumer loans and investing in a variety of investment securities. We fund these lending and investment activities with deposits from our customers, funds generated from operations and selected borrowings. We also provide wealth management and trust services, treasury management, debit and credit card products and online banking services. Additional information about the Company and its subsidiaries is available at www.danversbank.com.

Forward Looking Statements

Certain statements herein constitute "forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on the beliefs and expectations of management, as well as the assumptions made using information currently available to management. Since these statements reflect the views of management concerning future events, these statements involve risks, uncertainties and assumptions. As a result, actual results may differ from those contemplated by these statements. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. They often include words like "believe,” "expect,” "anticipate,” "estimate,” and "intend” or future or conditional verbs such as "will,” "would,” "should,” "could,” or "may.” Certain factors that could cause actual results to differ materially from expected results include changes in the interest rate environment, changes in general economic conditions, legislative and regulatory changes and the risk factors described in the Company’s December 31, 2009 Form 10-K, issued March 16, 2010, as updated by our Quarterly Reports on Form 10-Q, that adversely affect the business in which Danvers Bancorp, Inc. is engaged and changes in the securities market. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this release and the associated conference call. The Company disclaims any intent or obligation to update any forward-looking statements, whether in response to new information, future events or otherwise.