depositors insurance fund annual report · 2019. 12. 26. · 2009 annual report since 1934, no...

2009 Annual Report

Since 1934, no depositor has ever lost a penny in a bank insured by both the FDIC and the DIF.

Years

One Linscott Road, Woburn, MA 01801-2000 • (781) 938-1984 • (800) 295-3500 • www.difxs.com

Depositors Insurance Fund Annual Report Year ended October 31, 2009

Table of ConTenTs

DIF Member Banks 1 DIF 75-Year Time Line 2Officers and Board of Directors 4Depositors Insurance Fund Highlights 5Industry Highlights 6Letter from the President 7

2009 finanCial sTaTemenTs

Deposit Insurance Fund Independent Auditors’ Report 10 Consolidated Statements of Condition 11 Consolidated Statements of Income 12 Consolidated Statements of Changes in Fund Balance 13 Consolidated Statements of Cash Flows 14 Notes to Consolidated Financial Statements 15

Liquidity Fund Independent Auditors’ Report 27 Statements of Condition 28 Statements of Income 29 Statements of Changes in Fund Balance 30 Statements of Cash Flows 31 Notes to Financial Statements 32

annual meeTing

April 1, 2010; Sheraton Framingham Hotel, Framingham, Massachusetts; 10:00 a.m.

bankers’ noTe

All historical references to industry financial data in this report reflect only current DIF member banks’ data.

DeposiTors insuranCe funD

The Depositors Insurance Fund (DIF) is a private, industry-sponsored insurance company that insures all deposits in Massachusetts-chartered savings banks over the FDIC insurance limits.

Athol Savings Bank

Avidia Bank

Bank of Canton

BankFive

Barre Savings Bank

Bay State Savings Bank

Belmont Savings Bank

Berkshire Bank

Bridgewater Savings Bank

Bristol County Savings Bank

Cambridge Savings Bank

Cape Ann Savings Bank

Cape Cod Five Cents Savings Bank

Chicopee Savings Bank

Citizens-Union Savings Bank

Clinton Savings Bank

Country Bank

Danversbank

Dedham Institution for Savings

Eagle Bank

East Boston Savings Bank

East Cambridge Savings Bank

Easthampton Savings Bank

Florence Savings Bank

Granite Savings Bank

Greenfield Savings Bank

Hampden Bank

Hingham Institution for Savings

Hoosac Bank

Hyde Park Savings Bank

Institution for Savings

Lee Bank

Legacy Banks

The Lowell Five Cent Savings Bank

Marblehead Bank

Marlborough Savings Bank

Martha’s Vineyard Savings Bank

Merrimac Savings Bank

Middlesex Savings Bank

Millbury Savings Bank

Monson Savings Bank

Newburyport Five Cents Savings Bank

North Brookfield Savings Bank

North Easton Savings Bank

North Middlesex Savings Bank

Pentucket Bank

PeoplesBank

The Provident Bank

Randolph Savings Bank

RiverBank

Salem Five Bank

The Savings Bank

Seamen’s Bank

South Adams Savings Bank

South Coastal Bank

South Shore Savings Bank

Southbridge Savings Bank

Spencer Savings Bank

Stoneham Savings Bank

UniBank

Washington Savings Bank

Watertown Savings Bank

Webster Five

Williamstown Savings Bank

Winchester Savings BankAt April 1, 2010

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DIF Member Banks

1934 The Deposit Insurance Fund (the “DIF” or the “Fund”) was created by the Massachusetts legislature in 1934. It was established within the Mutual Savings Central Fund, Inc., (the “Central Fund”), which had been created by the legislature two years earlier to make liquidity loans to savings banks amid the Great Depression. All 193 Massachusetts savings banks were accepted into membership, and the DIF began insuring deposits with about $5 million contributed by the banks. DIF insurance covered all deposits with no limit. The FDIC also began insuring deposits in 1934. The FDIC insurance limit initially was $2,500 per depositor, which was increased to $5,000 later that same year.

1930sOnly two Massachusetts savings banks failed during the Great Depression. Both failures predated the DIF, and depositors lost $2 million in the failures. While there were no further failures in the years immediately following the establishment of the DIF, the Fund’s authority to assist member banks proved valuable. During the Depression, several savings banks experienced financial difficulties due to problem mortgages and foreclosed real estate. In 1938, the DIF entered into the first in a series of assistance arrangements involving loans and purchases of real estate assets. These assistance arrangements continued into the mid 1940s, and maintained the solvency of seven member banks that were in danger of failing. In 1939, viewing the DIF as a success, the legislature authorized the Central Fund to collect annual premiums from member banks to provide for the Fund’s continued growth.

1940s - 1950sIn January 1941, Richard Symonds, then Treasurer of the North Adams Savings Bank, was hired as the Central Fund’s first “full-time representative” – a title soon changed to Executive Vice President. In April, the Central Fund took offices at 82 Devonshire Street in Boston. By the mid 1940s, the savings bank industry, with assistance from the DIF, had weathered the storm. Most of the assistance was repaid as the economy rebounded in the latter part of the decade. Prior to 1956, Massachusetts did not permit its savings banks to join the FDIC. That year, a change in law allowed savings banks to become members of the FDIC, but ensured that depositors would not lose the benefits of full deposit insurance. In banks that joined the FDIC, the DIF insured all deposits over the FDIC’s limit, then $10,000; in banks that were not insured by the FDIC, the DIF continued to insure all deposits in full.

In 2009, while America and the world endured the worst economic crisis in decades, the Depositors Insurance Fund marked its 75th anniversary of insuring deposits in Massachusetts savings banks. It was in 1934 during the Great Depression that

the DIF’s insurance fund was established. Through the years, the DIF has confronted many challenges to the health of the savings bank industry, always protecting depositors and maintaining its financial strength. In 75 years of insuring deposits, no depositor has ever lost a penny in a bank insured by the DIF.

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1960s - 1970sThe late 1960s ushered in an era of high interest rates that continued into the early 1980s. The high rates contributed to significant growth of the Fund. From 1960-1979, the DIF’s assets more than quintupled, growing from $46 million to $239 million. In 1972, the Brighton Five Cents Savings Bank was declared insolvent and was closed by the Commissioner of Banks. DIF assistance in the form of indemnification against losses on certain assets facilitated the Charlestown Savings Bank’s taking over the failed bank’s assets and liabilities. In 1978, DIF assistance was again required, this time to facilitate the merger of Warren Savings Bank, which was on the verge of failing, into Spencer Savings Bank. The DIF again provided indemnification against losses on assets to induce the transaction to take place.

1980sIn 1985, the Commissioner of Banks determined that all Massachusetts banks should have federal deposit insurance. Several DIF member banks were not able to meet the financial requirements for FDIC membership. The DIF provided $36 million of capital to 18 member banks, enabling them to meet the FDIC’s entrance requirements and become FDIC-insured institutions. With all DIF member banks federally insured, depositors in Massachusetts savings banks enjoyed a benefit not available in any other state – primary FDIC insurance and “excess insurance” for all deposits above the FDIC limit. The benefits of DIF excess insurance were soon realized. In 1989, First Service Bank became the first savings bank to fail since 1972. While headlines trumpeted losses absorbed by depositors in bank failures elsewhere in the country, all depositors in First Service Bank were paid in full through a cooperative effort between the FDIC and the DIF.

1990s - PresentThe recession of the early 1990s marked the worst period in Massachusetts savings banks’ history, as 19 DIF members failed. The DIF protected 6,500 depositors holding $250 million in excess deposits, yet emerged stronger than before the crisis began. In 1993, the Mutual Savings Central Fund was renamed the Depositors Insurance Fund. After the recession, the DIF focused on strengthening the Fund. The DIF expanded its sources of liquidity and negotiated reinsurance that continues to provide an additional $100 million for insuring deposits. The DIF also gained authority to levy risk-based premiums and more effectively manage risk. And the DIF has promoted an understanding of full deposit insurance through reimbursements for bank communications that include informative language on FDIC and DIF insurance coverage. The recession of 2007-2009 is the latest challenge for the DIF and its member banks. The increase in FDIC insurance coverage to $250,000 through 2013 enhances the DIF’s financial strength as it embarks on a new decade.

Celebrating 75 years of protecting depositors in the Commonwealth’s savings banks.

Officers and Board of Directors

Officers

William G. GothorpeChairman

E. Dennis Kelly, Jr. Vice Chairman

David Elliott President and Chief Executive Officer

Mark S. Medvin Executive Vice President, Chief Operating Officer and Treasurer

Edward J. Geary Senior Vice President

John J. D’Alessandro Vice President

Kara M. McNamara Assistant Vice President

Board of DirectorsMaura O. Banta Regional Manager, Corporate Citizenship and Corporate Affairs IBM Corporation

Kevin T. Bottomley Chairman, President and Chief Executive Officer Danversbank

Thomas R. Burton President and Chief Executive Officer Hampden Bank

Karl E. Case Katharine Coman and A. Barton Hepburn Professor of Economics Wellesley College

Richard M. Donovan President and Chief Executive Officer Stoneham Savings Bank

J. Williar Dunlaevy Chairman of Legacy Banks Chairman and Chief Executive Officer Legacy Bancorp

William G. Gothorpe Chairman Dedham Institution for Savings

E. Dennis Kelly, Jr. President and Chief Executive Officer Bristol County Savings Bank

William H. Mitchelson ChairmanSalem Five Bank

Michael H. Mulhern Executive Director MBTA Retirement Fund

Charles P. O’Brien President and Chief Executive Officer South Adams Savings Bank

Mark R. O’Connell President and Chief Executive Officer Avidia Bank

K. Michael Robbins President and Chief Executive Officer Spencer Savings Bank

Norman S. Seppala President and Chief Executive Officer Granite Savings Bank

Marvin Siflinger Chairman Housing Partners, Inc.

Arthur C. Spears President and Chief Executive Officer East Cambridge Savings Bank

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Deposit Insurance Fund 2009 2008

Annual Assessments $ 1,164,252 $ 1,895,801 Dividend (calendar year) 2.20% 2.40%Loss Reserve $ 5,500,000 $ —Gross Funds Available1 $ 366,386,186 $ 351,671,036Net Funds Available2 $ 360,886,186 $ 351,671,036Insured Excess Deposits $6,075,279,846 $5,703,119,807 Gross Coverage Ratio1,3 6.03% 6.17%Net Coverage Ratio2,4 5.96% 6.17% 1 The Gross Coverage Ratio is equal to the DIF’s liquid assets available for the insurance of deposits (Gross Funds Available) divided by its Insured Excess Deposits.2 The Net Coverage Ratio is equal to the DIF’s Net Funds Available (Gross Funds Available minus the Loss Reserve) divided by the Insured Excess Deposits of banks for which no specific loss reserve has been established. 3 Including $100 million of reinsurance, the Gross Coverage Ratio was 7.68% in 2009 and 7.92% in 2008.4 Including $100 million of reinsurance, the Net Coverage Ratio was 7.61% in 2009 and 7.92% in 2008.

Liquidity Fund 2009 2008

Fund Balance $ 6,490,587 $ 6,495,638 Dividend (calendar year) 3.57% 6.86%

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As of October 31, 2009

Depositors Insurance Fund Highlights

DIF ExEcutIvEs 1941-PresentRichard Symonds, 1941-1951Edmund Trowbridge, 1951-1960William Petersen, 1960-1966Albert A. Conrad, Jr., 1966-1981Leonard Lapidus, 1981-1993David Elliott, 1993-

2009 2008Assets: Securities $11,567,205 $11,244,537 Loans (net) 32,484,855 32,201,319 Other 5,684,140 4,458,000

Total Assets $49,736,200 $47,903,856 Liabilities: Deposits $38,192,432 $35,412,444 Borrowed Funds 6,030,050 7,290,088 Other 515,742 513,110

Total Liabilities 44,738,224 43,215,642 Equity Capital: 4,997,976 4,688,214

Total Liabilities and Equity Capital $49,736,200 $47,903,856

Selected Ratios: Operating Expense/Average Total Assets 2.63% 2.49% Operating Earnings/Average Total Assets 0.34% 0.40% Return on Average Total Assets 0.28% 0.05% Nonperforming Assets/Equity Capital & Allowance 11.71% 7.50% Nonperforming Assets/Total Assets 1.26% 0.78%

Return on Average Total Assets

Net Interest Margin

6

Industry Highlights

(In thousands, calendar year)

Operating Expense as % of Average Total Assets

Nonperforming Assets as % of Total Assets

Tier 1 Leverage Capital Ratio

7

Letter from the President

In 2009, the United States confronted the worst recession since the DIF began insuring deposits 75 years ago amid the Great Depression.

The downturn, which started in 2007, gained force with the global financial crisis in late 2008. Consumer spending plunged, credit markets froze, and unemployment soared. In October 2009, the U.S. unemployment rate topped 10 percent, but the true jobless rate was closer to 17 percent when underemployed and discouraged workers are included. The stock market, however, staged a remarkable rally after bottoming out in early March. Buoyed by thawing credit markets, major stock indices surged in anticipation of an economic recovery. For the year, the Dow Jones Industrial Average rose 18.8 percent, while the broader S&P 500 gained 23.5 percent. By the close of 2009, two consecutive quarters of GDP growth had raised optimism about the economy. Yet as 2010 began, unemployment remained stubbornly high amid growing fears of a jobless recovery. Massachusetts suffered with the rest of the nation in 2009, as businesses, universities and the health care sector all cut back. The state’s unemployment rate reached 9.3 percent in December, slightly below the national rate. The housing market, however, showed improvement as single-family home sales reversed their long decline, rising 3 percent for the year, according to the Warren Group. The median home price for December was up 10.4 percent from a year earlier, the first year-to-year increase since September 2007. Condominium sales rose in late 2009, but were down for the full year. The financial sector was among the hardest hit by the credit crisis and recession. Thanks to conservative lending practices, Massachusetts banks for the most part avoided the calamities that befell many banks, large and small, in other regions of the country. Regulators seized 140 banks in 2009 – none of them in Massachusetts or New England. Return on assets for Massachusetts savings banks

was 28 basis points in 2009, up from five basis points in 2008 when results were heavily impacted by losses on investment securities. Tier 1 Leverage Capital remained strong at 9.51 percent, down only slightly from 9.54 percent a year earlier. The net interest margin increased for the second consecutive year, to 3.06 percent from 2.90 percent in 2008, as banks benefited from a steepening yield curve. Nonperforming assets at year-end increased from .78 percent of total assets in 2008 to 1.26 percent, still relatively low compared to other regions of the country. Operating expense as a percentage of average total assets increased to 2.63 percent in 2009 from 2.49 percent in 2008. The increase largely reflected higher deposit insurance costs, which totaled $80 million in 2009 compared to $19 million the previous year. The Depositors Insurance Fund remains financially strong. At October 31, 2009, the Deposit Insurance Fund held $366 million in gross funds available for insurance of deposits. All investments held by the Fund were U.S. Treasury or Agency obligations, or were fully guaranteed as to principal and interest by the U.S. government. The DIF has not taken any write-downs on investments due to impairment of value. In May 2009, the temporary increase in the FDIC’s insurance limit from $100,000 to $250,000 per depositor was extended through 2013. At October 31, 2009, the DIF insured $6.1 billion in excess deposits in member banks, up from $5.7 billion a year earlier when the temporary FDIC increase was first reflected in the insured excess deposit total. The DIF’s coverage ratios continue to benefit from the increase in the FDIC insurance limit. The gross coverage ratio at fiscal year-end was 6.03 percent, while the net coverage ratio was 5.96 percent. At fiscal year-end 2008, both the gross and net coverage ratios were 6.17 percent. The DIF’s Board of Directors approved, and in December the Deposit Insurance Fund paid, a 2.20

percent dividend to all member banks. The dividend totaled $1.5 million in the aggregate and was approved by the Commissioner of Banks. The Board also declared two semi-annual dividends from the Liquidity Fund: a 2.18 percent dividend totaling $68,000 was paid in May, and a 1.38 percent dividend totaling $43,000 was paid in November. Amid the recession and well-publicized bank failures elsewhere in the country, demand for DIF brochures, posters, and other materials for depositors remained strong throughout 2009. After the FDIC’s $250,000 limit was extended through 2013, the DIF provided updated consumer brochures and fiduciary kits to member banks. With support from the DIF, banks continued to promote full deposit insurance during 2009. The DIF’s reimbursement program returned over $95,000 to member banks that included the DIF logo and informational deposit insurance language in their communications. Effective with our annual meeting, Bill Dunlaevy and Bill Mitchelson will be leaving the Board. I wish to express my appreciation to both of them for their dedicated service to the DIF.

Bill Dunlaevy joined the Board in 2003. During his tenure, he served on the Investment, Executive, and Watch Bank Committees. Bill Mitchelson was first elected to the Board in 1997, and served on the Audit, Compensation, Executive, Long Range Planning, and Watch Bank Committees. Both of these long-serving directors have played an important role in the DIF. I will miss their wise counsel, and I thank them for their many years of service.

The DIF’s 75th year of providing deposit insurance brought extraordinary challenges to the banking industry, and we are not yet out of the storm. Still, the resiliency of Massachusetts savings banks is testimony to sound business practices and the hard work of bank management and employees. In turn, the relative strength of our industry has enabled the Depositors Insurance Fund to remain financially sound and ready to help should the need arise. So, in closing, I extend my thanks to our Board of Directors, member banks, and the DIF staff for their diligent efforts and loyal service in the past year.

David Elliott President and Chief Executive Officer

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2009 Financial Statements

Table of Contents

Deposit Insurance Fund

Independent Auditors’ Report 10

Consolidated Statements of Condition 11

Consolidated Statements of Income 12

Consolidated Statements of Changes in Fund Balance 13

Consolidated Statements of Cash Flows 14

Notes to Consolidated Financial Statements 15

Liquidity Fund

Independent Auditors’ Report 27

Statements of Condition 28

Statements of Income 29

Statements of Changes in Fund Balance 30

Statements of Cash Flows 31

Notes to Financial Statements 32

9

To the Board of Directors of the Depositors Insurance Fund:

We have audited the consolidated statements of condition of the Deposit Insurance Fund (the “Fund”) and subsidiary as of October 31, 2009 and 2008, and the related consolidated statements of income, changes in fund balance and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Deposit Insurance Fund and subsidiary as of October 31, 2009 and 2008, and the consolidated results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

Boston, Massachusetts January 8, 2010

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Independent Auditors’ ReportDeposit Insurance Fund

October 31, 2009 and 2008

2009 2008AssEts Cash and cash equivalents $ 3,025,738 $ 5,773,172 Trading securities, at fair value 2,833,438 3,277,784 Investment securities available for sale, at fair value 359,099,928 340,454,518 Federal Home Loan Bank stock 1,181,043 1,181,170 Accrued interest receivable 3,020,181 3,719,256 Other assets 781,755 642,322

Total assets $369,942,083 $355,048,222

LIABILItIEs AND FuND BALANcE

Accrued liability for deposit insurance losses $ 5,500,000 $ —Accrued expenses and other liabilities 1,593,099 1,553,694

Total liabilities 7,093,099 1,553,694

Commitments and contingencies (Note 6)

Undistributed fund balance 353,666,566 349,776,925 Accumulated other comprehensive income 9,182,418 3,717,603

Total fund balance 362,848,984 353,494,528

Total liabilities and fund balance $369,942,083 $355,048,222

See accompanying notes to consolidated financial statements.

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Consolidated Statements of ConditionDeposit Insurance Fund

Years Ended October 31, 2009 and 2008

2009 2008 Income: Interest and dividends on investments $13,229,440 $15,160,286 Net gain on investments 1,063,422 57,412

Total income 14,292,862 15,217,698

Expenses: Provision for anticipated deposit insurance losses 5,500,000 — Salaries, employee benefits and related expenses 1,941,240 1,802,004 Reinsurance 673,750 780,000 Professional and contract services 466,843 464,496 Technology 270,000 238,537 Deposit insurance materials 332,806 325,949 Meetings and travel 177,557 173,884 Employee incentive plan 165,000 159,000 Legal 160,104 30,410 Occupancy 86,574 84,637 Other insurance 67,591 64,505 Other operating expenses 157,161 116,939

9,998,626 4,240,361 Expenses allocated to Liquidity Fund (40,330) (35,886)

Total expenses, net 9,958,296 4,204,475

Net income $4,334,566 $11,013,223


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Consolidated Statements of IncomeDeposit Insurance Fund

Fund balance at October 31, 2007 $339,883,528 $2,009,289 $341,892,817 Net income 11,013,223 — 11,013,223 Other comprehensive income: Net unrealized gain on investment securities available for sale, net of reclassification adjustment for gains realized in income of $114,025 — 2,292,945 2,292,945 Net change in unrecognized defined benefit plan losses and transition asset — (584,631) (584,631)

Total comprehensive income 12,721,537

Assessments from member banks 1,895,801 — 1,895,801 Dividends to member banks (3,015,627) — (3,015,627)

Fund balance at October 31, 2008 349,776,925 3,717,603 353,494,528

Net income 4,334,566 — 4,334,566 Other comprehensive income: Net unrealized gain on investment securities available for sale, net of reclassification adjustment for gains realized in income of $918,564 — 5,724,549 5,724,549 Net change in unrecognized defined benefit plan losses and transition asset — (259,734) (259,734)

Total comprehensive income 9,799,381

Assessments from member banks 1,164,252 — 1,164,252Dividends to member banks (1,609,177) — (1,609,177)

Fund balance at October 31, 2009 $353,666,566 $9,182,418 $362,848,984



Undistributed Fund Balance

Accumulated Other Comprehensive

IncomeTotal Fund

Balance

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Consolidated Statements of Changes in Fund BalanceDeposit Insurance Fund


2009 2008

Cash flows from operating activities: Net income $ 4,334,566 $ 11,013,223 Adjustments to reconcile net income to net cash provided by operating activities: Provision for anticipated deposit insurance losses 5,500,000 — Maturities and paydowns on trading securities 589,204 10,255,400 Net unrealized (gain) loss on trading securities (144,858) 56,613 Net gain on sale of investment securities available for sale (918,564) (114,025) Net amortization of investment securities available for sale 1,256,377 88,885 (Increase) decrease in accrued interest receivable 699,075 (69,022) (Increase) decrease in other assets (139,433) 687,998 Decrease in accrued expenses and other liabilities (220,330) (128,619)

Net cash provided by operating activities 10,956,037 21,790,453

Cash flows from investing activities: Proceeds from sales of investment securities available for sale 63,053,773 29,939,538 Proceeds from maturities and paydowns of investment securities available for sale 73,315,738 120,741,622 Purchases of investment securities available for sale (149,628,184) (168,885,100) Change in Federal Home Loan Bank stock 127 (1,260)

Net cash used by investing activities (13,258,546) (18,205,200)

Cash flows from financing activities: Assessments from member banks 1,164,252 1,895,801 Dividends paid to member banks (1,609,177) (3,015,627)

Net cash used by financing activities (444,925) (1,119,826)

Net increase (decrease) (2,747,434) 2,465,427

Cash and cash equivalents at beginning of year 5,773,172 3,307,745

Cash and cash equivalents at end of year $ 3,025,738 $ 5,773,172


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Consolidated Statements of Cash FlowsDeposit Insurance Fund

1. DESCRIPTION OF BUSINESSDepositors Insurance Fund

The Depositors Insurance Fund (the “DIF”), which did business under the name Mutual Savings Central Fund, Inc. until February 1993, was established by the Massachusetts Legislature in 1932 and is now comprised of the Liquidity Fund and the Deposit Insurance Fund and its subsidiary. The two Funds may not be commingled and the assets of one do not stand behind the liabilities of the other. The Liquidity Fund and the Deposit Insurance Fund share office space and personnel. Costs incurred are generally paid by the Deposit Insurance Fund and allocated to the Liquidity Fund. The DIF is an organization described under Section 501(c)(14) of the Internal Revenue Code and is exempt from taxes on related income under Section 501(a) of the Code.

In the event a member bank obtains a federal charter or merges into a nonmember, its membership in the DIF is terminated and the DIF retains all amounts paid into the DIF by the bank. Banks whose membership in the DIF has been terminated as a result of obtaining a federal charter may reapply for excess deposit insurance. There are currently no federal member banks in the DIF.

Deposit Insurance Fund

The Deposit Insurance Fund was established in 1934, two years after the DIF was chartered, for the insurance of all deposits in Massachusetts savings banks. All Massachusetts savings banks are now members of the Federal Deposit Insurance Corporation (the “FDIC”). Therefore, the Deposit Insurance Fund currently insures only those deposits in excess of the FDIC limit as defined by the FDIC (“excess deposits”).

In consideration for the insurance provided, the Deposit Insurance Fund charges assessments at rates determined by the Board of Directors and approved by the Commissioner of Banks of the Commonwealth of Massachusetts (the “Commissioner”). The assessments are based upon the excess deposits of each bank insured by the Deposit Insurance Fund and the assessment rate may vary based on risk classifications assigned to each bank.

The Deposit Insurance Fund insures depositors for the amount of their excess deposits plus accrued interest in the event the Commissioner determines a member bank to be insolvent. In addition, the Deposit Insurance Fund is empowered to provide assistance to a member bank when the Commissioner determines it is inadvisable or inexpedient for the member bank to continue to transact business without receiving financial assistance from the Deposit Insurance Fund.

A member bank that is determined by the Board of Directors of the DIF to pose a greater than normal loss exposure risk to the Deposit Insurance Fund can, with the approval of the Commissioner, be required to take action(s) to mitigate the risk. As an alternative to taking any such action(s), the bank can withdraw from membership in the DIF. In such event (i) the DIF retains all amounts paid into the DIF by the bank, and the bank retains its rights to share in any dividends paid by the DIF and the proceeds of any liquidation of the Deposit Insurance Fund; and (ii) the Deposit Insurance Fund continues to insure the term excess deposits in the bank as of the date of withdrawal until their maturity and all other excess deposits in the bank on such date for one year.


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Notes to Consolidated Financial StatementsDeposit Insurance Fund

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESBasis of Presentation

The consolidated financial statements of the Deposit Insurance Fund include the accounts of the Deposit Insurance Fund and its wholly-owned subsidiary, JAE Corporation, organized to hold and liquidate certain assets of a failed institution. All intercompany balances have been eliminated. Income and expenses of the Deposit Insurance Fund and its subsidiary are recognized on the accrual method of accounting.

The accounting and reporting policies of the DIF conform to accounting principles generally accepted in the United States of America.

In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. A material estimate that is particularly susceptible to significant change in the near term relates to the determination of the reserve for insurance losses. See Note 4 – Anticipated Insurance Losses.

Cash and Cash Equivalents

For purposes of the statements of cash flows, the Deposit Insurance Fund considers all highly liquid debt instruments with original maturities of three months or less to be cash equivalents.

Investment Securities Available for Sale and Trading Securities

Investments that are purchased and held principally for the purpose of selling them in the near term are classified as “trading” and carried at fair value, with unrealized gains and losses included in earnings. Investments not classified as “trading” are classified as “available for sale” and carried at fair value, with unrealized gains and losses excluded from earnings and reported as a separate component of the fund balance. Premiums and discounts are recognized in income by the interest method over the terms of the securities. The cost of securities sold is determined on a specific-identification basis.

Effective for the year ending October 31, 2009, in accordance with the new accounting guidance issued (See “Recent Accounting Pronouncements”), if the fair value of a debt security is less than its amortized cost basis, the full amount of the depreciation is recognized as other-than-temporary impairment through earnings if the DIF intends to sell the security or if it is “more likely than not” that the DIF will be required to sell the security before recovery of its amortized cost basis. If neither of the aforementioned criteria are met and the present value of expected cash flows is not sufficient to recover the entire amortized cost basis, this credit loss is recognized as other-than-temporary impairment through earnings, with the non-credit related portion of the unrealized loss recognized in accumulated other comprehensive income or loss.

The DIF has an agreement with an unrelated investment advisor whereby the advisor provides investment management services to the Deposit Insurance Fund. Investment authority has been granted to the investment advisor within prescribed limits on allowable investments. At October 31, 2009 and 2008, assets under management had a fair value of $252,287,000 and $234,758,000, respectively.

Assessments

Assessments are recorded as additions to fund balance in the statement of changes in fund balance in the year in which the insurance to which they apply is provided to depositors.

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Dividends

The Deposit Insurance Fund pays an annual discretionary dividend which requires approval from the DIF Board of Directors and Commissioner of Banks. Dividends are accrued by a charge to the undistributed fund balance when all approvals are received.

Anticipated Deposit Insurance Losses on Member Banks

An accrued liability for anticipated insurance losses may be recorded with respect to certain banks determined by DIF management, in consultation with regulatory authorities, to be experiencing serious financial difficulties, as well as general losses based on many factors such as historical experience and current economic conditions. Substantial weight is accorded to indications from regulatory authorities that a member bank has an extremely high or near-term possibility of failure. See Note 4 - Anticipated Deposit Insurance Losses.

Pension Plan

The compensation cost of an employee’s pension benefit is recognized on the net periodic pension cost method over the employee’s approximate service period. The aggregate cost method is utilized for funding purposes. The Deposit Insurance Fund recognizes in its statement of condition the funded status of the pension plan, measures the plan’s assets and its obligations that determine its funded status as of the end of the DIF’s fiscal year, and recognizes, through other comprehensive income, changes in the funded status of the pension plan that are not recognized as net periodic benefit cost.

Comprehensive Income

Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities and unrecognized pension benefit cost elements, are reported as a separate component of the fund balance section of the statement of condition, such items, along with net income, are components of comprehensive income.

The components of accumulated other comprehensive income, included in fund balance, at October 31, 2009 and 2008 are as follows: 2009 2008

Net unrealized gain on securities available for sale $9,851,420 $4,126,871 Unrecognized actuarial loss pertaining to defined benefit pension plan (687,904) (434,466)Unrecognized transition asset pertaining to defined benefit pension plan 18,902 25,198

$9,182,418 $3,717,603

The following table summarizes the amounts included in accumulated other comprehensive income at October 31, 2009 that are expected to be recognized as components of net periodic pension benefit cost in the next year.

Amortization of transition asset to be recognized in fiscal 2010 $ 6,296Amortization of loss to be recognized in fiscal 2010 45,863

Reinsurance

The DIF has entered into a reinsurance agreement to reduce the loss to the Deposit Insurance Fund that may arise in the event of one or more bank failures. Reinsurance expense is recorded in the consolidated statement of income on a pro rata basis over the term of the policy to which it applies. See Note 7 – Reinsurance Agreement.

17


Expense Allocation

Expenses of the Deposit Insurance Fund are allocated to the Liquidity Fund based on a formula of 2% of all expenses, excluding those expenses directly related only to the Deposit Insurance Fund.

Recent Accounting Pronouncements

In June 2009, the Financial Accounting Standards Board (“FASB”) approved the FASB Accounting Standards Codification (“Codification”) as the single source of authoritative nongovernmental U.S. Generally Accepted Accounting Principles (“U.S. GAAP”). The Codification did not change current U.S. GAAP but was intended to simplify user access to all authoritative U.S. GAAP by providing all the authoritative literature related to a particular topic in one place. All existing accounting standard documents were superseded and all other accounting literature not included in the Codification was considered non-authoritative. The Codification became effective for the Fund on July 1, 2009 and did not have a material impact on the Fund’s consolidated financial statements.

In September 2006, the FASB issued an accounting pronouncement relating to fair value measurements. This pronouncement defined fair value, established a framework for measuring fair value in accordance with generally accepted accounting principles, and expanded disclosures about fair value measurements. In February 2008, the FASB issued another accounting pronouncement, which delayed the effective date of the original pronouncement for non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis, to fiscal years beginning after November 15, 2008. The Fund adopted this pronouncement, except for items not required until a later date, as of November 1, 2008 and the adoption did not have a material impact on the Fund’s consolidated financial statements. See Note 9.

In December 2008, the FASB issued an accounting pronouncement relating to employers’ disclosures about postretirement benefit plan assets to provide guidance on an employer’s disclosures about plan assets of a defined benefit pension or other postretirement plan. This pronouncement required disclosure of information about how investment allocation decisions are made, the fair value of each major category of plan assets and the inputs and valuation techniques used to develop fair value measurements. In addition, it required a nonpublic entity that sponsors one or more defined benefit pension or postretirement plans to disclose the net periodic benefit cost recognized for each annual period for which an annual statement of income is presented. Lastly, an employer must provide users of financial statements with an understanding of significant concentrations of risk in plan assets. Expanded disclosures about plan assets will be required for fiscal years ending after December 15, 2009. All other disclosures have been provided in Note 5 to these consolidated financial statements.

In April 2009, the FASB issued two accounting pronouncements relating to financial instruments. One pronouncement related to determining fair value when the volume and level of activity for the asset or liability have significantly decreased, and to identifying transactions that are not orderly, and the other pronouncement related to the recognition and presentation of other-than-temporary impairments. These pronouncements provided additional guidance for estimating fair value and recognition of other-than-temporary impairment on debt securities as well as additional disclosures. These pronouncements were adopted for the year ended October 31, 2009 and did not have a material impact on the Fund’s consolidated financial statements. See the “Investment Securities Available for Sale and Trading Securities” section of this Note.

In May 2009, the FASB issued an accounting pronouncement which established general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued. The Fund’s adoption of this pronouncement as of October 31, 2009 did not have a material impact on the Fund’s consolidated financial statements. See Note 10.

18


3. INVESTMENTSInvestment Securities Available for Sale

Mortgage- and asset-backed securities are issued by government-sponsored enterprises or federal agencies, or are fully guaranteed by the U.S. government. The amortized cost, fair value, and unrealized gains and losses on investment securities classified as available for sale at October 31, 2009 and 2008, by contractual maturity, are presented in the following tables:

2009

U.S. Treasury obligations and guarantees: Due in one year or less $ 24,196,921 $ 375,432 $ — $ 24,572,353 Due after one year through five years 96,368,391 2,775,322 (197) 99,143,516 Due after five years through ten years 4,534,095 74,171 (13,360) 4,594,906

125,099,407 3,224,925 (13,557) 128,310,775

U.S. government-sponsored enterprise obligations: Due in one year or less 42,804,379 702,609 — 43,506,988 Due after one year through five years 119,798,746 3,185,469 (16,497) 122,967,718

162,603,125 3,888,078 (16,497) 166,474,706

Mortgage- and asset-backed securities: Due after one year through five years 4,161,796 102,655 (16,260) 4,248,191 Due after five years through ten years 20,834,569 968,738 — 21,803,307 Due after ten years 36,549,611 1,713,839 (501) 38,262,949

61,545,976 2,785,232 (16,761) 64,314,447

Total Securities available for sale $349,248,508 $9,898,235 $(46,815) $359,099,928

2008

U.S. Treasury obligations and guarantees: Due in one year or less $ 45,601,632 $ 571,721 $ (1,560) $ 46,171,793 Due after one year through five years 68,077,214 2,920,177 (129,490) 70,867,901 Due after five years through ten years 7,621,451 20,892 (9,208) 7,633,135

121,300,297 3,512,790 (140,258) 124,672,829

U.S. government-sponsored enterprise obligations: Due in one year or less 34,353,095 281,281 (2,172) 34,632,204 Due after one year through five years 120,169,868 1,308,130 (497,787) 120,980,211

154,522,963 1,589,411 (499,959) 155,612,415

Mortgage- and asset-backed securities: Due after one year through five years 3,241,529 9,663 (8,102) 3,243,090 Due after five years through ten years 18,169,193 46,100 (214,291) 18,001,002 Due after ten years 39,093,665 153,552 (322,035) 38,925,182

60,504,387 209,315 (544,428) 60,169,274

Total Securities available for sale $336,327,647 $5,311,516 $(1,184,645) $340,454,518

19


Amortized Cost

Unrealized Gains

Unrealized Losses

Fair Value

Amortized Cost

Unrealized Gains

Unrealized Losses

Fair Value

Proceeds from sales of investment securities available for sale during 2009 and 2008 were $63,053,773, and $29,939,538, respectively. For the years ended October 31, 2009 and 2008, gross gains of $918,564 and $121,401 and gross losses of $0 and $7,376 were realized, respectively.

The components of the net gain on investments included in the consolidated statements of income for the years ended October 31, 2009 and 2008 are as follows:

2009 2008

Gain on sale of securities available for sale, net $ 918,564 $114,025Unrealized holding gain (loss) on trading securities, net 144,858 (56,613)

Net gain on investments $1,063,422 $ 57,412

Gross unrealized losses on investment securities available for sale and the fair value of the related securities, aggregated by investment category and length of time that individual securities have been in continuous unrealized loss position, at October 31, 2009 and 2008, are as follows:

2009

U.S. Treasury obligations and guarantees $5,621,155 $ (13,557) $ — $ — $ 5,621,155 $ (13,557) U.S. government-sponsored enterprise obligations 8,142,587 (16,497) — — 8,142,587 (16,497) Mortgage- and asset-backed securities 34,202 (500) 1,954,622 (16,261) 1,988,824 (16,761)

$13,797,944 $ (30,554) $1,954,622 $(16,261) $ 15,752,566 $ (46,815)

2008

U.S. Treasury obligations and guarantees $13,121,055 $ (140,258) $ — $ — $ 13,121,055 $ 140,258 U.S. government-sponsored enterprise obligations 48,425,981 (499,959) — — 48,425,981 499,959 Mortgage- and asset-backed securities 35,850,445 (383,797) 6,243,685 (160,631) 42,094,130 544,428

$97,397,481 $(1,024,014) $6,243,685 $(160,631) $103,641,166 $1,184,645

The unrealized losses on the Fund’s investment securities were caused by interest rate increases. The principal and accrued interest on all of the securities is guaranteed by the U.S. Government, an agency of the U.S. Government, or both. Because the Fund does not intend to sell the securities and it is unlikely that it will be required to sell the securities before recovery of their amortized cost bases (which may be at maturity), management does not consider these investments to be other-than-temporarily impaired at October 31, 2009.

20

Unrealized Losses

Fair Value

Unrealized Losses

Fair Value

Unrealized Losses

Fair Value

Less Than Twelve Months Over Twelve Months Total


Unrealized Losses

Fair Value

Unrealized Losses

Fair Value

Unrealized Losses

Fair Value

Less Than Twelve Months Over Twelve Months Total

Trading Securities

Trading securities are comprised entirely of U.S. Treasury obligations and mortgage-backed securities issued by U.S. government-sponsored enterprises. The fair values of investment securities classified as trading at October 31, 2009 and 2008, by contractual maturity, are as follows: 2009 2008

Due after one year through five years $ 354,675 $ 378,343 Due after five years through ten years — 211,408 Due after ten years 2,478,763 2,688,033

$2,833,438 $3,277,784

Federal Home Loan Bank Stock

The DIF is a member of the Federal Home Loan Bank of Boston (“FHLBB”). As a condition of membership, the DIF is required to maintain an investment in FHLBB stock determined based on the DIF’s holdings of U.S. Treasury and government-sponsored enterprise obligations. Additional stock purchases are required based on growth of the DIF’s holdings of U.S. Treasury and government-sponsored enterprise obligations and/or usage of FHLBB advances and related services. In December 2008, as part of a capital restoration initiative, the FHLBB established a moratorium on the repurchase of excess stock, and effective February 26, 2009, the FHLBB suspended the payment of dividends. The DIF reviews its investment for impairment based on the ultimate recoverability of the cost basis in the FHLB stock. As of October 31, 2009, no impairment has been recognized.

At October 31, 2009, the DIF’s investment in FHLBB stock was $1,203,500, of which $1,181,043 was allocated to the Deposit Insurance Fund. At October 31, 2008, the DIF’s required investment in FHLBB stock was $1,203,500, of which $1,181,170 was allocated to the Deposit Insurance Fund. The amount allocated to the Deposit Insurance Fund represents the Deposit Insurance Fund’s required FHLBB stock based on its holdings of U.S. Treasury and government-sponsored enterprise obligations and its use of FHLBB services, plus all stock held by the DIF in excess of the required holdings of the Deposit Insurance Fund and the Liquidity Fund.

The DIF also has a master agreement with the FHLBB to provide advances. Advances are secured by the DIF’s FHLBB stock and specifically pledged securities. As of October 31, 2009 and 2008, the DIF had no outstanding advances from the FHLBB and, accordingly, no securities have been specifically pledged. FHLBB advances would be allocated to the Liquidity Fund and the Deposit Insurance Fund based on the portion of advances applicable to each fund.

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4. ANTICIPATED DEPOSIT INSURANCE LOSSESIn fulfilling its insurance responsibilities described in Note 1, the Deposit Insurance Fund may sustain losses in subsequent accounting periods as a result of honoring claims associated with excess deposits in insolvent banks. In addition, there are several types of assistance which may be given when it appears that a bank should not continue to transact business unaided or as an independent institution. It is possible that the Deposit Insurance Fund could sustain losses in subsequent accounting periods as a result of providing assistance to members. Any such losses could be material. Because many of the factors that might contribute to future losses in the Deposit Insurance Fund are beyond the DIF’s control, the amount of such losses, if any, generally cannot be determined or reasonably estimated (and, accordingly, are not reflected in the accrued liability for anticipated losses).

Assessing the adequacy of the accrued liability for anticipated losses on member banks involves substantial uncertainties and is based upon management’s evaluation, after weighing various factors, of the amount required to meet estimated future losses for payment to depositors in insolvent banks having excess deposits. DIF management monitors the condition of insured member banks by reviewing their financial statements and regulatory examination reports and by meeting regularly with officials of the FDIC and the Commonwealth of Massachusetts Division of Banks to discuss industry conditions and specific problem banks. Substantial weight is accorded to indications from regulatory authorities that a member bank has an extremely high or near-term possibility of failure. Among the other factors management may consider regarding member banks are the amount of excess deposits, the amount of nonperforming assets in relation to regulatory capital and total loans and leases, the capital ratio, the recency of regulatory examinations, current economic conditions, and trends in the amount of excess deposits at banks which have failed. Ultimate losses may vary from current estimates. At October 31, 2009 and for the year then ended, the accrued liability and provision for anticipated deposit insurance losses amounted to $5,500,000.

The DIF has no independent authority to examine member banks, nor does it have independent authority to pay depositors or provide assistance unless the Commissioner has acted to close the member bank or to approve the assistance, respectively. Examinations of DIF members are conducted by the Massachusetts Division of Banks and the FDIC. Regulatory policy has generally been for an examination to be performed at least once within every twelve-month period, except that banks with assets not exceeding $500 million that are considered to be “well-capitalized” under FDIC regulations are generally examined once within every eighteen-month period.

During fiscal 2009 and 2008, no member banks were closed by the Commissioner, and no deposit insurance payments were made by the DIF from the Deposit Insurance Fund.

5. EMPLOYEE BENEFIT PLANSDefined Benefit Pension Plan

Certain employees of the DIF participate in a defined benefit pension plan offered and administered by the Savings Banks Employees Retirement Association (“SBERA” or the “Association”). Employees become eligible to participate in the plan after reaching 21 years of age and completing one year of service, and become 100% vested after completing three years of service. The DIF’s policy is to fund the plan within the allowable range under current law, determined on a discretionary basis. Contributions are intended to provide not only for benefits attributed to service to date, but also for those expected to be earned in the future.

22


Information pertaining to the activity in the plan for the years ended October 31, 2009 and 2008 is as follows:

2009 2008Change in benefit obligation: Benefit obligation at beginning of year $ 3,077,867 $ 3,106,880 Service cost 112,337 158,221 Interest cost 215,451 186,413 Actuarial loss (gain) 448,485 (265,848) Benefits paid (107,799) (107,799)

Benefit obligation at end of year 3,746,341 3,077,867

Change in plan assets: Fair value of plan assets at beginning of year 1,958,349 2,456,760 Actual return (loss) on plan assets 347,837 (661,480) Employer contribution 388,000 270,868 Benefits paid (107,799) (107,799)

Fair value of plan assets at end of year 2,586,387 1,958,349

Funded status at end of year $(1,159,954) $(1,119,518)

Accrued pension cost recognized in statement of condition $ 1,159,954 $ 1,119,518

Accumulated benefit obligation $ 2,574,682 $ 2,368,622

The following table presents certain assumptions used in determining the benefit obligation at October 31, 2009 and 2008 and the benefit cost for the years then ended: 2009 2008

Discount rate - funded status 5.25% 7.00% Discount rate - benefit cost 7.00 6.00 Rate of increase in compensation levels 5.00 5.00 Expected long-term rate of return 8.00 8.00

In general, the DIF’s assumption with respect to the expected long-term rate of return is based on prevailing yields on high-quality, fixed-income investments increased by a premium for equity return expectations.

23


The components of teh net periodic pension cost for the years ended October 31, 2009 and 2008 are as follows:

2009 2008

Service cost $112,337 $158,221 Interest cost 215,451 186,413 Expected return on plan assets (179,948) (196,541)Amortization of transition obligation (6,296) (6,296)Recognized net actuarial loss (gain) 27,157 (13,139)

$168,701 $128,658

The benefits expected to be paid for each of the following five fiscal years and the aggregate for the five fiscal years thereafter are as follows: Year Ending October 31, Amount

2010 $814,549 2011 107,720 2012 527,389 2013 5,881 2014 42,659 2015-2019 1,420,665

The DIF expects to contribute $287,000 to the plan during the year ending October 31, 2010.

SBERA offers a common and collective trust as the underlying investment structure for pension plans participating in the Association. The target allocation mix for the common and collective trust portfolio calls for an equity-based investment deployment range from 40% to 64% of total portfolio assets. The remainder of the portfolio is allocated to fixed income from 15% to 25% and other investments including global asset allocation and hedge funds from 20% to 36%. The approximate investment allocation of the portfolio is shown in the table below. The Trustees of SBERA, through the Association’s Investment Committee, select investment managers for the common and collective trust portfolio. A professional investment advisory firm is retained by the Investment Committee to provide allocation analysis, performance measurement and to assist with manager searches. The overall investment objective is to diversify equity investments across a spectrum of investment types (e.g., small cap, large cap, international, etc.) and styles (e.g., growth, value, etc.).

The composition of pension assets as of October 31, 2009 and 2008 is as follows: 2009 2008

Fixed income (including money market) 23.9% 25.8%Equity investments 47.4 45.8 Other investments 28.7 28.4

Total 100.0% 100.0%

Defined Contribution Pension Plan

In addition, certain employees of the DIF participate in a defined contribution pension plan offered and administered by SBERA. Employees become eligible to participate in the plan upon employment. Participating employees make contributions to the plan based on a percentage of their income. The DIF matches a percentage of the amounts contributed by employees. Employees become 100% vested in the DIF’s matching contributions immediately. For the years ended October 31, 2009 and 2008, the DIF’s matching contribution expenses for the defined contribution pension plan were $47,124 and $45,372, respectively.

24



6. COMMITMENTS, CONTINGENCIES, AND OTHER MATTERSIn the normal course of business, there are outstanding commitments and contingencies which are not reflected in the DIF’s financial statements, as follows.

Employment Agreement

The DIF has entered into an employment agreement with its President and Chief Executive Officer that generally provides for a specified minimum annual compensation. However, such employment may be terminated for cause, as defined, without incurring any continuing obligations. The agreement has a continual expiration date of three years until January 17, 2010, at which time the continual expiration date will be one year, as set forth in the agreement.

Severance Program

The DIF has a Severance Program that covers substantially all employees of the DIF. The program provides salary and benefits to employees in the event of “triggering events” related to a liquidation, mandated downsizing, change of control, merger, or reorganization of the DIF. Benefit amounts are dependent upon years of service and salary grade levels, with a maximum benefit of one year’s salary and qualifying benefits.

Operating Lease Agreements

The DIF has a lease providing for the use of its office space. The lease is cancelable by the DIF or the lessor. Total rent expense amounted to $72,504 and $74,276 for the years ended October 31, 2009 and 2008, respectively.

7. REINSURANCE AGREEMENTThe DIF has a reinsurance agreement pursuant to which the reinsurer will pay up to $100,000,000 of the Deposit Insurance Fund’s excess deposit insurance liability arising as a result of one or more “covered failures of scheduled financial institutions” in which the Deposit Insurance Fund’s combined ultimate aggregate net loss exceeds $150,000,000. The Deposit Insurance Fund is primarily liable to an insured bank’s depositors for any losses that are incurred to the extent the reinsurer is unable to meet its obligations. The reinsurance agreement expires in July 2010. Insurance premiums are expensed over the term of the policy.

8. RELATED PARTY TRANSACTIONSA majority of the DIF’s sixteen directors are associated with member banks.

9. FAIR VALUE OF ASSETS AND LIABILITIESDetermination of Fair Value

The Fund uses fair value measurements to record fair value adjustments to certain assets. The fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Fund’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.

25

Fair Value Hierarchy

The Fund groups its financial assets generally measured at fair value in three levels, based on the markets in which the assets 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. Level 1 assets generally include debt securities that are traded in an active exchange market. Valuations are obtained from readily available pricing sources for market transactions involving identical assets.

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.

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. Level 3 assets 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.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

Assets measured at fair value on a recurring basis at October 31, 2009 are summarized below. There were no liabilities measured at fair value on a recurring basis at October 31, 2009.

Level 1 Level 2 Level 3 Total Fair Value

Trading securities $ — $2,833,438 $ — $ 2,833,438 Securities available for sale: U.S. Treasury obligations and guarantees 128,310,775 — — 128,310,775 U.S. government-sponsored enterprise obligations — 166,474,706 — 166,474,706 Mortgage- and asset-backed securities — 64,314,447 — 64,314,447

Total securities available for sale 128,310,775 230,789,153 — 359,099,928

$128,310,775 $233,622,591 $ — $ 361,933,366

Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis

There were no assets or liabilities measured at fair value on a non-recurring basis at October 31, 2009.

10. SUBSEqUENT EVENTSManagement has evaluated subsequent events through January 8, 2010, which is the date the financial statements were available to be issued. There were no subsequent events that required adjustment to or disclosure in the consolidated financial statements.


26

To the Board of Directors of the Depositors Insurance Fund:

We have audited the statements of condition of the Liquidity Fund (the “Fund”) as of October 31, 2009 and 2008, and the related statements of income, changes in fund balance and cash flows for the years then ended. These financial statements are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Liquidity Fund as of October 31, 2009 and 2008, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

Boston, Massachusetts January 8, 2010

27

Independent Auditors’ ReportLiquidity Fund

28

Statements of ConditionLiquidity Fund

October 31, 2009 and 2008

2009 2008AssEts

Cash $114,914 $114,745 Investment securities available for sale, at fair value 6,338,300 6,352,064 Federal Home Loan Bank stock 22,457 22,330 Accrued interest receivable 57,664 101,284

Total assets $6,533,335 $6,590,423

LIABILItIEs AND FuND BALANcE

Dividends payable $42,748 $94,785

Total liabilities 42,748 94,785

Undistributed fund balance 6,440,820 6,440,775 Accumulated other comprehensive income 49,767 54,863

Total fund balance 6,490,587 6,495,638

Total liabilities and fund balance $6,533,335 $6,590,423


29

Statements of IncomeLiquidity Fund


2009 2008

Income:

Interest and dividends on investments $150,905 $251,499

Expenses:

Expenses allocated from the Deposit Insurance Fund 40,330 35,886

Net income $110,575 $215,613


30

Statements of Changes in Fund BalanceLiquidity Fund

Fund balance at October 31, 2007 $6,440,736 $20,052 $6,460,788

Net income 215,613 — 215,613 Other comprehensive income: Unrealized gain on investment securities available for sale — 34,811 34,811

Total comprehensive income 250,424

Dividends declared to member banks (215,574) — (215,574)

Fund balance at October 31, 2008 6,440,775 54,863 6,495,638

Net income 110,575 — 110,575 Other comprehensive income: Unrealized loss on investment securities available for sale — (5,096) (5,096)

Total comprehensive income 105,479

Dividends declared to member banks (110,530) — (110,530)

Fund balance at October 31, 2009 $6,440,820 $49,767 $6,490,587



Undistributed Fund Balance

Accumulated Other Comprehensive

IncomeTotal Fund

Balance

31

Statements of Cash FlowsLiquidity Fund


2009 2008

Cash flows from operating activities: Net income $ 110,575 $ 215,613 Adjustments to reconcile net income to net cash provided by operating activities: Net amortization of investment securities 79,944 31,972 (Increase) decrease in accrued interest receivable 43,619 (11,641)

Net cash provided by operating activities 234,138 235,944

Cash flows from investing activities: Maturities of investment securities available for sale 3,394,000 3,977,000 Purchases of investment securities available for sale (3,465,275) (3,958,650) Change in Federal Home Loan Bank stock (127) (14,240)

Net cash provided (used) by investing activities (71,402) 4,110

Cash flows from financing activities: Dividends paid to member banks (162,567) (253,244)

Net cash used by financing activities (162,567) (253,244)

Net increase (decrease) 169 (13,190)

Cash at beginning of year 114,745 127,935

Cash at end of year $ 114,914 $ 114,745


1. DESCRIPTION OF BUSINESSDepositors Insurance Fund

The Depositors Insurance Fund (the “DIF”), which did business under the name Mutual Savings Central Fund, Inc. until February 1993, was established by the Massachusetts Legislature in 1932 and is now comprised of the Liquidity Fund and the Deposit Insurance Fund and its subsidiary. The two Funds may not be commingled and the assets of one do not stand behind the liabilities of the other. The Liquidity Fund and the Deposit Insurance Fund share office space and personnel. Costs incurred are generally paid by the Deposit Insurance Fund and allocated to the Liquidity Fund. The DIF is an organization described under Section 501(c)(14) of the Internal Revenue Code (the “Code”) and is exempt from taxes on related income under Section 501(a) of the Code.

Liquidity Fund

The Liquidity Fund was established in 1932 for the purpose of providing temporary liquidity to member banks by making loans to them secured by assets of the borrowing banks.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESBasis of Presentation and Use of Estimates

Income and expenses of the Liquidity Fund are recognized on the accrual method of accounting.

In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Cash Equivalents

For purposes of the statements of cash flows, the Fund considers all highly liquid debt instruments with original maturities of three months or less to be cash equivalents.

Investment Securities Available for Sale

All investment securities are classified as “available for sale” and carried at fair value, with unrealized gains and losses excluded from earnings and reported as a separate component of the fund balance. Premiums and discounts are recognized in income by the interest method over the terms of the securities. The cost of securities sold is determined on a specific-identification basis. A charge to operations is recognized on investment securities when a decline in value is considered other than temporary.

Effective for the year ending October 31, 2009, in accordance with the new accounting guidance issued (See “Recent Accounting Pronouncements”), if the fair value of a debt security is less than its amortized cost basis, the full amount of the depreciation is recognized as other-than-temporary impairment through earnings if the DIF intends to sell the security or if it is “more likely than not” that the DIF will be required to sell the security before recovery of its amortized cost basis. If neither of the aforementioned criteria are met and the present value of expected cash flows is not sufficient to recover the entire amortized cost basis, this credit loss is recognized as other-than-temporary impairment through earnings, with the non-credit related portion of the unrealized loss recognized in accumulated other comprehensive income or loss.


Federal Home Loan bank stock is a restricted equity security and is carried at cost.

32

Notes to Financial StatementsLiquidity Fund

Dividends

The Fund pays discretionary dividends on a semi-annual basis which are accrued by a charge to the undistributed fund balance when approved by the DIF Board of Directors.

Comprehensive Income

Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component of the fund balance section of the statement of condition, such items, along with net income, are components of comprehensive income.

Expense Allocation

The Fund shares office space and personnel with the Deposit Insurance Fund, and 2% of the Deposit Insurance Fund’s expenses, excluding those expenses directly related only to the Deposit Insurance Fund, are allocated to the Liquidity Fund.

Recent Accounting Pronouncements

In June 2009, the Financial Accounting Standards Board (“FASB”) approved the FASB Accounting Standards Codification (“Codification”) as the single source of authoritative nongovernmental U.S. Generally Accepted Accounting Principles (“U.S. GAAP”). The Codification did not change current U.S. GAAP but was intended to simplify user access to all authoritative U.S. GAAP by providing all the authoritative literature related to a particular topic in one place. All existing accounting standard documents were superseded and all other accounting literature not included in the Codification was considered non-authoritative. The Codification became effective for the Fund on July 1, 2009 and did not have a material impact on the Fund’s financial statements.

In September 2006, the FASB issued an accounting pronouncement relating to fair value measurements. This pronouncement defined fair value, established a framework for measuring fair value in accordance with U.S. GAAP, and expanded disclosures about fair value measurements. In February 2008, the FASB issued another accounting pronouncement which delayed the effective date of the original pronouncement for non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis, to fiscal years beginning after November 15, 2008. The Fund adopted this pronouncement, except for items not required until a later date, as of November 1, 2008 and the adoption did not have a material impact on the Fund’s financial statements. See Note 5.

In April 2009, the FASB issued two accounting pronouncements relating to financial instruments. One pronouncement related to determining fair value when the volume and level of activity for the asset or liability have significantly decreased, and to identifying transactions that are not orderly, and the other pronouncement related to the recognition and presentation of other-than-temporary impairments. These pronouncements provided additional guidance for estimating fair value and recognition of other-than-temporary impairment on debt securities as well as additional disclosures. These pronouncements were adopted for the year ended October 31, 2009 and did not have a material impact on the Fund’s financial statements. See the “Investment Securities Available for Sale” section of this Note.

In May 2009, the FASB issued an accounting pronouncement which established general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued. The Fund’s adoption of this pronouncement as of October 31, 2009 did not have a material impact on the Fund’s financial statements. See Note 6.

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3. INVESTMENTSInvestment Securities Available for Sale

The amortized cost, fair value, and unrealized gains and losses of investment securities classified as available for sale at October 31, 2009 and 2008, by contractual maturity, are as follows:

2009U.S. Treasury obligations: Due in one year or less $4,021,708 $21,363 $ — $4,043,071 U.S. government-sponsored enterprise obligations: Due in one year or less 901,020 18,181 — 919,201 Due after one year through five years 1,365,805 10,223 — 1,376,028

2,266,825 28,404 — 2,295,229

Total securities available for sale $6,288,533 $49,767 $ — $6,338,300

2008U.S. Treasury obligations: Due in one year or less $1,037,922 $10,781 $ — $1,048,703 Due after one year through five years 2,896,859 32,014 — 2,928,873

3,934,781 42,795 — 3,977,576

U.S. government-sponsored enterprise obligations: Due in one year or less 2,362,420 12,068 — 2,374,488

Total securities available for sale $6,297,201 $54,863 $ — $6,352,064

There were no sales of securities during the years ended October 31, 2009 or 2008.

Amortized Cost

Unrealized Gains

Unrealized Losses

Fair Value

Amortized Cost

Unrealized Gains

Unrealized Losses

Fair Value


The DIF is a member of the Federal Home Loan Bank of Boston (“FHLBB”). As a condition of membership, the DIF is required to maintain an investment in FHLBB stock determined based on the DIF’s holdings of U.S. Treasury and government-sponsored enterprise obligations. Additional stock purchases are required based on growth of the DIF’s holdings of U.S. Treasury and government-sponsored enterprise obligations and/or usage of FHLBB advances and related services. In December 2008, as part of a capital restoration initiative, the FHLBB established a moratorium on the repurchase of excess stock, and effective February 26, 2009, the FHLBB suspended the payment of dividends. The DIF reviews its investment for impairment based on the ultimate recoverability of the cost basis in the FHLBB stock. As of October 31, 2009, no impairment has been recognized.

At October 31, 2009 and 2008, the DIF’s investment in FHLBB stock was $1,203,500 and $1,203,500 of which $22,457 and $22,330, respectively, was allocated to the Liquidity Fund. The amount allocated to the Liquidity Fund represents the Liquidity Fund’s required FHLBB stock based on its holdings of U.S. Treasury and government–sponsored enterprise obligations and its use of FHLBB services; all FHLBB stock held in excess of required stock is allocated to the Deposit Insurance Fund.

The DIF also has a master agreement with the FHLBB to provide advances. Advances are secured by the DIF’s FHLBB stock and specifically pledged securities. As of October 31, 2009 and 2008, the DIF had no outstanding advances from the FHLBB and, accordingly, no securities have been specifically pledged. FHLBB advances would be allocated to the Liquidity Fund and the Deposit Insurance Fund based on the portion of advances applicable to each.

4. RELATED PARTY TRANSACTIONSA majority of the DIF’s sixteen directors are associated with member banks.

5. FAIR VALUE OF ASSETS AND LIABILITIESDetermination of Fair Value

The Fund uses fair value measurements to record fair value adjustments to certain assets. The fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Fund’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.

Fair Value Hierarchy

The Fund groups its financial assets generally measured at fair value in three levels, based on the markets in which the assets 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. Level 1 assets generally include debt securities that are traded in an active exchange market. Valuations are obtained from readily available pricing sources for market transactions involving identical assets.

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.

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Fair Value Hierarchy (continued)

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. Level 3 assets 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.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

Assets measured at fair value on a recurring basis at October 31, 2009 are summarized below. There were no liabilities measured at fair value on a recurring basis at October 31, 2009.

Level 1 Level 2 Level 3 Total Fair Value

Securities available for sale: U.S. Treasury obligations $4,043,071 $ — $ — $4,043,071 U.S. government-sponsored enterprise obligations — 2,295,229 — 2,295,229

$4,043,071 $2,295,229 $ — $6,338,300

Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis

There were no assets or liabilities measured at fair value on a non-recurring basis at October 31, 2009.

6. SUBSEqUENT EVENTSManagement has evaluated subsequent events through January 8, 2010, which is the date the financial statements were available to be issued. There were no subsequent events that required adjustment or disclosure in the financial statements.

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2009 Annual Report

Since 1934, no depositor has ever lost a penny in a bank insured by both the FDIC and the DIF.

Years

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