Depositors Insurance Fund Annual Report

2009 Annual Report
Years
Since 1934, no depositor has ever lost a penny in a bank insured by both the FDIC and the DIF.
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Depositors Insurance Fund Annual Report
Year ended October 31, 2009
Table of Contents
DIF Member Banks
DIF 75-Year Time Line
Officers and Board of Directors
Depositors Insurance Fund Highlights
Industry Highlights
Letter from the President
1
2
4
5
6
7
2009 Financial Statements
Deposit Insurance Fund
Independent Auditors’ Report
Consolidated Statements of Condition
Consolidated Statements of Income
Consolidated Statements of Changes
in Fund Balance
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Liquidity Fund
Independent Auditors’ Report Statements of Condition
Statements of Income
Statements of Changes in Fund Balance
Statements of Cash Flows
Notes to Financial Statements
10
11
12
13
14
15
27
28
29
30
31
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All historical references to industry financial data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.
DIF Member Banks
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 Bank
At April 1, 2010
1
I
n 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.
1934
1930s
1940s - 1950s
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.
Only 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.
In 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.
2
Celebrating 75 years of protecting depositors
in the Commonwealth’s savings banks.
1960s - 1970s
1980s
1990s - Present
The 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.
In 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 FDICinsured 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.
The 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.
3
Officers and Board of Directors
Officers
Board of Directors
William G. Gothorpe
Maura O. Banta
Chairman
E. Dennis Kelly, Jr.
Vice Chairman
David Elliott
President and Chief Executive Officer
Mark S. Medvin
Regional Manager, Corporate Citizenship
and Corporate Affairs
IBM Corporation
Kevin T. Bottomley
Chairman, President and
Chief Executive Officer
Danversbank
Executive Vice President,
Chief Operating Officer
and Treasurer
Thomas R. Burton
Edward J. Geary
Karl E. Case
Senior Vice President
John J. D’Alessandro
Vice President
Kara M. McNamara
Assistant Vice President
President and Chief Executive Officer
Hampden Bank
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
Salem 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
Chairman of Legacy Banks
Chairman and Chief Executive Officer
Legacy Bancorp
Marvin Siflinger
William G. Gothorpe
Arthur C. Spears
Chairman
Dedham Institution for Savings
E. Dennis Kelly, Jr.
President and Chief Executive Officer
Bristol County Savings Bank
4
William H. Mitchelson
Chairman
Housing Partners, Inc.
President and Chief Executive Officer
East Cambridge Savings Bank
Depositors Insurance Fund Highlights
As of October 31, 2009
Deposit Insurance Fund
2009
1,164,252
Annual Assessments $
Dividend (calendar year)
2.20%
Loss Reserve $
5,500,000
1
Gross Funds Available $ 366,386,186
2
Net Funds Available $ 360,886,186
Insured Excess Deposits $6,075,279,846
1,3
6.03%
Gross Coverage Ratio 2,4
5.96%
Net Coverage Ratio 2008
$
1,895,801
2.40%
$
—
$ 351,671,036
$ 351,671,036
$5,703,119,807
6.17%
6.17%
1
The Gross Coverage Ratio is equal to the DIF’s liquid assets available for theinsurance 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
Fund Balance $
Dividend (calendar year)
6,490,587
3.57%
2008
$
6,495,638
6.86%
DIF Executives 1941-Present
Richard Symonds, 1941-1951
Edmund Trowbridge, 1951-1960
William Petersen, 1960-1966
Albert A. Conrad, Jr., 1966-1981
Leonard Lapidus, 1981-1993
David Elliott, 1993-
5
Industry Highlights
(In thousands, calendar year)
Assets:
Securities
Loans (net)
Other 2009
2008
$11,567,205
32,484,855
5,684,140
$11,244,537
32,201,319
4,458,000
Total Assets
$49,736,200
Liabilities:
Deposits
$38,192,432
Borrowed Funds
6,030,050
Other
515,742
$47,903,856
Total Liabilities
Equity Capital:
$35,412,444
7,290,088
513,110
44,738,224
43,215,642
4,997,976
4,688,214
$49,736,200
$47,903,856
Selected Ratios:
Operating Expense/Average Total Assets
2.63%
Operating Earnings/Average Total Assets
0.34%
Return on Average Total Assets
0.28%
Nonperforming Assets/Equity Capital & Allowance
11.71%
Nonperforming Assets/Total Assets
1.26%
2.49%
0.40%
0.05%
7.50%
0.78%
Total Liabilities and Equity Capital
Return on Average
Total Assets
6
Tier 1 Leverage
Capital Ratio
Net Interest Margin
Nonperforming
Assets as % of Total
Assets
Operating Expense
as % of Average
Total Assets
Letter from the President
I
n 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
7
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
8
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
Deposit Insurance Fund
Independent Auditors’ Report
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
10
Deposit Insurance Fund
Consolidated Statements of Condition
October 31, 2009 and 2008
ASSETS
Cash and cash equivalents
Trading securities, at fair value Investment securities available for sale, at fair value
Federal Home Loan Bank stock Accrued interest receivable
Other assets
2009
2008
$ 3,025,738 2,833,438 359,099,928 1,181,043 3,020,181 781,755 $ 5,773,172
3,277,784
340,454,518
1,181,170
3,719,256
642,322
Total assets $369,942,083
$355,048,222
LIABILITIES AND FUND BALANCE
Accrued liability for deposit insurance losses
Accrued expenses and other liabilities
Total liabilities
$ 5,500,000 1,593,099 7,093,099 $
—
1,553,694
1,553,694
Commitments and contingencies (Note 6)
Undistributed fund balance Accumulated other comprehensive income Total fund balance
Total liabilities and fund balance
353,666,566 9,182,418 349,776,925
3,717,603
362,848,984 353,494,528
$369,942,083 $355,048,222
See accompanying notes to consolidated financial statements.
11
Deposit Insurance Fund
Consolidated Statements of Income
Years Ended October 31, 2009 and 2008
2009
Income:
Interest and dividends on investments
$13,229,440 Net gain on investments 1,063,422 Total income 2008
$15,160,286
57,412
14,292,862 15,217,698
Expenses:
Provision for anticipated deposit insurance losses
Salaries, employee benefits and related expenses
Reinsurance Professional and contract services
Technology
Deposit insurance materials
Meetings and travel
Employee incentive plan
Legal Occupancy
Other insurance
Other operating expenses
5,500,000 1,941,240 673,750 466,843 270,000 332,806 177,557 165,000 160,104 86,574 67,591 157,161 —
1,802,004
780,000
464,496
238,537
325,949
173,884
159,000
30,410
84,637
64,505
116,939
Expenses allocated to Liquidity Fund 9,998,626 (40,330)
4,240,361
(35,886)
Total expenses, net 9,958,296 4,204,475
Net income
$4,334,566 $11,013,223
See accompanying notes to consolidated financial statements.
12
Deposit Insurance Fund
Consolidated Statements of Changes in Fund Balance
Years Ended October 31, 2009 and 2008
Undistributed
Fund Balance
Accumulated Other
Comprehensive
Income
Total Fund
Balance
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
—
(584,631)
(584,631)
plan losses and transition asset
Total comprehensive income
Assessments from member banks
Dividends to member banks
Fund balance at October 31, 2008
1,895,801 (3,015,627)
—
—
349,776,925 3,717,603 12,721,537
1,895,801
(3,015,627)
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
Assessments from member banks
Dividends to member banks
Fund balance at October 31, 2009
1,164,252 (1,609,177)
$353,666,566 —
—
9,799,381
1,164,252
(1,609,177)
$9,182,418 $362,848,984
See accompanying notes to consolidated financial statements.
13
Deposit Insurance Fund
Consolidated Statements of Cash Flows
Years Ended October 31, 2009 and 2008
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
63,053,773
29,939,538
73,315,738 (149,628,184)
127
120,741,622
(168,885,100)
(1,260)
(13,258,546)
(18,205,200)
Cash flows from financing activities:
Assessments from member banks
1,164,252
Dividends paid to member banks
(1,609,177)
1,895,801
(3,015,627)
Cash flows from investing activities:
Proceeds from sales of investment securities available for sale
Proceeds from maturities and paydowns of investment
securities available for sale Purchases of investment securities available for sale
Change in Federal Home Loan Bank stock
Net cash used by investing activities
Net cash used by financing activities
Net increase (decrease) Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
See accompanying notes to consolidated financial statements.
14
(444,925)
(1,119,826)
(2,747,434)
2,465,427
5,773,172
3,307,745
$ 3,025,738
$ 5,773,172
Deposit Insurance Fund
Notes to Consolidated Financial Statements
Years Ended October 31, 2009 and 2008
1. DESCRIPTION OF BUSINESS
Depositors 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.
15
Deposit Insurance Fund
Notes to Consolidated Financial Statements
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis 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.
16
Deposit Insurance Fund
Notes to Consolidated Financial Statements
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
Unrecognized actuarial loss pertaining to defined benefit pension plan
Unrecognized transition asset pertaining to defined benefit pension plan
$9,851,420
(687,904)
18,902
$4,126,871
(434,466)
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
Amortization of loss to be recognized in fiscal 2010
$ 6,296
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
Deposit Insurance Fund
Notes to Consolidated Financial Statements
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
Deposit Insurance Fund
Notes to Consolidated Financial Statements
3. INVESTMENTS
Investment 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:
Amortized
Cost
2009
Unrealized
Gains
Unrealized
Losses
U.S. Treasury obligations and guarantees:
Due in one year or less
$ 24,196,921 $ 375,432 $
—
Due after one year through five years
96,368,391 2,775,322 (197)
Due after five years through ten years
4,534,095 74,171 (13,360)
125,099,407 3,224,925 (13,557)
Fair
Value
$ 24,572,353
99,143,516
4,594,906
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
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)
Due after five years through ten years
20,834,569 968,738 —
Due after ten years
36,549,611 1,713,839
(501)
4,248,191
21,803,307
38,262,949
Total Securities available for sale
162,603,125
61,545,976 2,785,232 (16,761)
64,314,447
$349,248,508 $9,898,235 $(46,815)
$359,099,928
Amortized
Cost
2008
Unrealized
Gains
Unrealized
Losses
Fair
Value
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
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)
Due after five years through ten years
18,169,193 46,100 (214,291)
Due after ten years
39,093,665 153,552 (322,035)
3,243,090
18,001,002
38,925,182
Total Securities available for sale
154,522,963
60,504,387 209,315 (544,428)
60,169,274
$336,327,647 $5,311,516 $(1,184,645)
$340,454,518
19
Notes to Consolidated Financial Statements
Deposit Insurance Fund
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
Unrealized holding gain (loss) on trading securities, net
$ 918,564
144,858
$114,025
(56,613)
$1,063,422
$ 57,412
Net gain on investments
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:
Less Than Twelve Months
2009
Fair
Value
Unrealized
Losses
Total
Over Twelve Months
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
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
Less Than Twelve Months
2008
Fair
Value
Unrealized
Losses
Total
Over Twelve Months
Fair
Value
Unrealized
Losses
$ (46,815)
Fair
Value
Unrealized
Losses
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 otherthan-temporarily impaired at October 31, 2009.
20
Deposit Insurance Fund
Notes to Consolidated Financial Statements
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
Due after five years through ten years
Due after ten years
$ 354,675
—
2,478,763
$ 378,343
211,408
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.
21
Deposit Insurance Fund
Notes to Consolidated Financial Statements
4. anticipated deposit insurance Losses
In 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 plans
Defined 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
Deposit Insurance Fund
Notes to Consolidated Financial Statements
Information pertaining to the activity in the plan for the years ended October 31, 2009 and 2008 is as follows:
2009
2008
Change in benefit obligation:
$ 3,077,867 $ 3,106,880
Benefit obligation at beginning of year
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
Discount rate - benefit cost
Rate of increase in compensation levels
Expected long-term rate of return
5.25%
7.00
5.00
8.00
7.00%
6.00
5.00
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
Deposit Insurance Fund
Notes to Consolidated Financial Statements
The components of teh net periodic pension cost for the years ended October 31, 2009 and 2008 are as follows:
2009
2008
Service cost Interest cost Expected return on plan assets
Amortization of transition obligation
Recognized net actuarial loss (gain)
$112,337 215,451 (179,948)
(6,296)
27,157 $158,221
186,413
(196,541)
(6,296)
(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
2011
2012
2013
2014
2015-2019
$814,549
107,720
527,389
5,881
42,659
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)
Equity investments
Other investments
23.9%
47.4 28.7 25.8%
45.8
28.4
100.0% 100.0%
Total
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
Deposit Insurance Fund
Notes to Consolidated Financial Statements
6. Commitments, contingencies, and other matters
In 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 Agreement
The 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 transactions
A majority of the DIF’s sixteen directors are associated with member banks.
9. fair value of assets and liabilities
Determination 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
Deposit Insurance Fund
Notes to Consolidated Financial Statements
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
—
$2,833,438 $
—
$ 2,833,438
Trading securities
$
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 $128,310,775 230,789,153 $233,622,591 $
—
359,099,928
—
$ 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 events
Management 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
Liquidity Fund
Independent Auditors’ Report
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
Liquidity Fund
Statements of Condition
October 31, 2009 and 2008
2009
ASSETS Cash
Investment securities available for sale, at fair value
Federal Home Loan Bank stock
Accrued interest receivable
Total assets
2008
$114,914
6,338,300 22,457 57,664 $114,745
6,352,064
22,330
101,284
$6,533,335 $6,590,423
LIABILITIES AND FUND BALANCE
Dividends payable
$42,748 $94,785
42,748 94,785
Undistributed fund balance Accumulated other comprehensive income 6,440,820 49,767 6,440,775
54,863
Total fund balance
6,490,587 6,495,638
Total liabilities and fund balance
$6,533,335 $6,590,423
Total liabilities
See accompanying notes to consolidated financial statements.
28
Liquidity Fund
Statements of Income
Years Ended October 31, 2009 and 2008
2009
2008
$150,905 $251,499
40,330 35,886
$110,575 $215,613
Income:
Interest and dividends on investments
Expenses:
Expenses allocated from the Deposit Insurance Fund Net income See accompanying notes to consolidated financial statements.
29
Liquidity Fund
Statements of Changes in Fund Balance
Years Ended October 31, 2009 and 2008
Undistributed
Fund Balance
Fund balance at October 31, 2007
$6,440,736 Accumulated Other
Comprehensive
Income
$20,052
Total Fund
Balance
$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
Dividends declared to member banks
Fund balance at October 31, 2008
(215,574)
6,440,775
—
54,863 250,424
(215,574)
6,495,638
Net income 110,575 ­— 110,575
Other comprehensive income:
—
(5,096)
(5,096)
Unrealized loss on investment securities available for sale
Total comprehensive income
Dividends declared to member banks
Fund balance at October 31, 2009
See accompanying notes to consolidated financial statements.
30
(110,530)
—
$6,440,820 $49,767 105,479
(110,530)
$6,490,587
Liquidity Fund
Statements of Cash Flows
Years Ended October 31, 2009 and 2008
2009
Cash flows from operating activities:
$ 110,575 Net income Adjustments to reconcile net income to net cash provided by operating activities:
Net amortization of investment securities
79,944 (Increase) decrease in accrued interest receivable
43,619 Net cash provided by operating activities
234,138 Cash flows from investing activities:
Maturities of investment securities available for sale
3,394,000 Purchases of investment securities available for sale
(3,465,275)
Change in Federal Home Loan Bank stock
(127)
Net cash provided (used) by investing activities
(71,402)
2008
$ 215,613
31,972
(11,641)
235,944
3,977,000
(3,958,650)
(14,240)
4,110
Cash flows from financing activities:
(162,567)
Dividends paid to member banks
(253,244)
Net cash used by financing activities
(162,567)
(253,244)
Net increase (decrease) 169 (13,190)
Cash at beginning of year
Cash at end of year
114,745 127,935
$ 114,914 $ 114,745
See accompanying notes to consolidated financial statements.
31
Liquidity Fund
Notes to Financial Statements
1. Description of Business
Depositors 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 policies
Basis 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 specificidentification 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
Federal Home Loan bank stock is a restricted equity security and is carried at cost.
32
Liquidity Fund
Notes to Financial Statements
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.
33
Notes to Financial Statements
Liquidity Fund
3. INVESTMENTS
Investment 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:
Amortized
Unrealized
Unrealized
Fair
2009
Cost
Gains
Losses
Value
U.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
Total securities available for sale 2,266,825 28,404 $6,288,533 $49,767 $
—
2,295,229
—
$6,338,300
Amortized
Unrealized
Unrealized
Fair
2008
Cost
Gains
Losses
Value
U.S. Treasury obligations:
Due in one year or less
$1,037,922 $10,781 $
—
$1,048,703
2,896,859 32,014 —
2,928,873
Due after one year through five years
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 There were no sales of securities during the years ended October 31, 2009 or 2008.
34
$
—
$6,352,064
Liquidity Fund
Notes to Financial Statements
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 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 transactions
A majority of the DIF’s sixteen directors are associated with member banks.
5. Fair value of assets and liabilities
Determination 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.
35
Notes to Financial Statements
Liquidity Fund
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 events
Management 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.
36
2009 Annual Report
Years
Since 1934, no depositor has ever lost a penny in a bank insured by both the FDIC and the DIF.
One Linscott Road, Woburn, MA 01801-2000 • (781) 938-1984 • (800) 295-3500 • www.difxs.com