2012 annual report - dif - depositors insurance fundthe liquidity fund did not pay a dividend in...

NO DEPOSITOR HAS EVER LOST A PENNY IN A BANK INSURED BY BOTH THE FDIC AND THE DIF.

2012 ANNUAL REPORT

Year ended October 31, 2012

TABLE OF CONTENTS

DIF Member Banks 1

Officers and Board of Directors 2

Depositors Insurance Fund Highlights 3

Industry Highlights 4

Letter from the President 6

2012 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


Statements of Condition 30

Statements of Loss 31

Statements of Changes in Fund Balance 32

Statements of Cash Flows 33

Notes to Financial Statements 34

DEPOSITORS INSURANCE FUND ANNUAL REPORT

ANNUAL MEETING

April 4, 2013; 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All historical references to industry financial data in this report reflect only current DIF member banks’ data.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.

THE FACE OF COMMUNITY BANKING

Across Massachusetts, the chief executive officers of DIF member banks are leaders in their communities. In addition to helping families save and businesses grow, Massachusetts savings banks pitch in with financial and volunteer support for everything from youth sports to cultural events. DIF member-bank CEOs know that strong banks and strong communities go together.

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DIF MEMBER BANKS

Adams Community Bank

Athol Savings Bank

Avidia Bank

Bank of Canton

BankFive

Barre Savings Bank

BayCoast Bank

Bay State Savings Bank

Belmont Savings Bank

Berkshire Bank

Blue Hills Bank

Bridgewater Savings Bank

Bristol County Savings Bank

Brookline Bank

Cambridge Savings Bank

Cape Ann Savings Bank

Cape Cod Five Cents Savings Bank

Chicopee Savings Bank

Clinton Savings Bank

Country Bank

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

Institution for Savings

Lee Bank

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

Salem Five Bank

The Savings Bank

Seamen’s Bank

South Coastal Bank

South Shore Bank

Southbridge Savings Bank

SpencerBANK

Stoneham Savings Bank

UniBank

Washington Savings Bank

Watertown Savings Bank

Webster Five

Winchester Savings Bank

AT APRIL 4, 2013

OFFICERS AND BOARD OF DIRECTORS

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OFFICERS

Charles P. O’BrienChairman

Norman S. SeppalaVice Chairman

David ElliottPresident and Chief Executive Officer

Mark S. MedvinExecutive Vice President, Chief Operating Officer and Treasurer

Edward J. Geary Senior Vice President

John J. D’AlessandroVice President

Kara M. McNamaraVice President

Maura O. BantaDirector of Global Citizenship Initiatives in Education IBM Corporation

John C. BoucherPresident and Chief Executive Officer South Shore Bank

Donna L. BoulangerPresident and Chief Executive Officer North Brookfield Savings Bank

Thomas R. BurtonVice Chairman and Chief Executive Officer Hampden Bank

Karl E. CaseProfessor Emeritus of Economics Wellesley College Senior Fellow Joint Center for Housing Studies Harvard University

William G. GothorpeTrustee Dedham Institution for Savings

John F. Heaps, Jr.President and Chief Executive Officer Florence Savings Bank

William H. MitchelsonChairman Salem Five Bank

Michael H. MulhernExecutive Director MBTA Retirement Fund

Charles P. O’BrienPresident and Chief Executive Officer Adams Community Bank

Mark R. O’ConnellPresident and Chief Executive Officer Avidia Bank

K. Michael RobbinsPresident and Chief Executive Officer SpencerBANK

Norman S. SeppalaPresident and Chief Executive Officer Granite Savings Bank

Marvin SiflingerChairman Housing Partners, Inc.

Arthur C. SpearsChief Executive Officer East Cambridge Savings Bank

William J. WagnerPresident and Chief Executive Officer Chicopee Savings Bank

AT OCTOBER 31, 2012

BOARD OF DIRECTORS

DEPOSIT INSURANCE FUND 2012 2011

Annual Assessments $ 1,441,629 $ 1,507,834Dividend (calendar year) 1.25% 1.70%Loss Reserve $ — $ 2,500,000Gross Funds Available $ 375,724,427 $ 374,032,173Net Funds Available $ 375,724,427 $ 371,532,173Insured Excess Deposits $ 8,055,080,780 $ 6,851,287,364Gross Coverage Ratio1 4.66% 5.46% Net Coverage Ratio2 4.66% 5.43% LIQUIDITY FUND 2012 2011

Fund Balance $ 6,438,967 $ 6,468,095

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

As of October 31, 2012

DEPOSITORS INSURANCE FUND HIGHLIGHTS

The DIF’s Co-Branded program enables member banks to communicate the benefits of full deposit insurance through posters, counter cards and statement stuffers featuring bank logo branding. Co-Branded materials are provided at no charge to member banks.

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(In thousands, calendar year)

INDUSTRY HIGHLIGHTS

2012* 2011

Balance Sheet Assets: Securities $12,268,018 $12,326,666 Loans (net) 39,331,970 32,683,891 Other 5,841,055 5,682,094

Total Assets $57,441,043 $50,692,651 Liabilities: Deposits $45,653,826 $40,455,087 Borrowed Funds 4,782,774 4,146,101 Other 761,687 592,648

Total Liabilities 51,198,287 45,193,836 Equity Capital: 6,242,756 5,498,815

Total Liabilities and Equity Capital $57,441,043 $50,692,651

Income Statement Total Interest Income $ 2,095,525 $ 1,982,200 Total Interest Expense 430,929 491,555

Net Interest Income 1,664,596 1,490,645 Total Noninterest Income 395,843 305,587 Total Noninterest Expense 1,496,208 1,333,885 Provision for Loan & Lease Losses 87,469 89,236 Taxes on Operations 151,303 117,323

Operating Earnings 325,459 255,788

Other Income 44,375 33,976 Net Income $ 369,834 $ 289,764

*INCLUDES BROOKLINE BANK

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INDUSTRY HIGHLIGHTS

Net Interest Margin

09 10 11 12*

3.07 3.24 3.23 3.23

08

2.89

Operating Expense as % of Average Total Assets

09 10 11 12*

2.64 2.70 2.70 2.71

08

2.47

Return on Average Assets

09 10 11 12*

0.27 0.56 0.59 0.67

08

0.05

Tier 1 Leverage Capital Ratio

09 10 11 12*

9.55 9.79 10.19 10.08

08

9.52

Nonperforming Assets as % of Total Assets

09 10 11 12*

1.32 1.38 1.27 1.01

08

0.80

Nonperforming Assets as % of Equity Capital & Allowance

09 10 11 12*

12.15 12.28 11.00 8.69

08

7.73

*INCLUDES BROOKLINE BANK

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A familiar set of challenges confronted the global economy in 2012, from tepid growth rates and the European debt crisis to political gridlock over U.S. fiscal policy. But amid these

stubborn issues, signs of an improving U.S. economy were also evident. The stock market discounted much of the bad news and posted solid gains for the year. U.S. auto sales rose 13.4 percent, giving car-makers their best year since 2007. Closer to home, a stronger housing market and an improved lending environment provided a source of optimism for Massachusetts savings banks. The nation’s gross domestic product grew 2.2 percent in 2012, a slight improvement from 2011 yet still well under the pace of past recoveries. In its ongoing effort to spur economic growth, the Federal Reserve held interest rates at historically low levels and extended its program of buying mortgage-backed and longer-term Treasury securities, known as quantitative easing. The Fed pledged to keep the federal funds rate near zero until unemployment and inflation targets are reached. In a presidential election year, political gridlock maintained its hold on Washington. The partisan divide was on display in lawmakers’ debate over the so-called fiscal cliff of mandatory spending cuts and tax hikes scheduled to take effect in January 2013. Still, neither lackluster economic growth nor Washington gridlock could stop the rise of equity markets in 2012. The Dow Jones Industrial

Average added 7.3 percent, while the S&P 500 gained 13.4 percent and the NASDAQ jumped 15.9 percent. Stocks drew support from several key economic sectors that turned positive in 2012, including the long-dormant housing market. New home sales in the U.S. rose nearly 20 percent to a three-year high. Equities slipped late in the year in the face of the fiscal cliff, but quickly resumed their upward march after a Congressional agreement settled the tax side of the fiscal cliff and postponed spending cuts. Thanks largely to the Fed, fixed income investors also reaped healthy returns in 2012. With the 10-year Treasury yield falling to an all-time low of 1.40 percent in July, investors bid up prices on higher-yielding debt ranging from corporate bonds to emerging market debt. The Massachusetts economy again outperformed the nation in 2012 despite a late-year slowdown. The Commonwealth’s jobless rate was 6.7 percent at year-end compared with the U.S rate of 7.8 percent. The 2012 rate was an improvement from 6.9 percent at the end of 2011. A strong rebound in the housing market helped drive economic gains in Massachusetts. According to the Warren Group, sales of single-family homes in the Commonwealth rose 18.4 percent in 2012 to reach a post-crisis high. Condominium sales jumped 25 percent. The median single-family home price rose 1.8 percent to $290,000, while the median price for condominiums increased 2.6 percent to $277,000, according to the Warren Group.

LETTER FROM THE PRESIDENT

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The Massachusetts savings bank industry continued to strengthen in 2012 as key performance measures further improved. Return on average assets was 67 basis points, up from 59 basis points in 2011. All 62 DIF member banks were profitable in 2012. Reflecting the state’s healthier economy, lending by Massachusetts savings banks rose sharply in 2012. Nonperforming assets as a percentage of total assets fell to 1.01 percent in 2012 from 1.27 percent a year earlier. Despite the continued low-yield environment, the industry’s net interest margin held steady at 3.23 percent. The Tier 1 Leverage Capital Ratio fell slightly to 10.08 percent from 10.19 in 2011. Operating expense as a percentage of average total assets rose one basis point to 2.71 percent in 2012. At October 31, 2012, the Deposit Insurance Fund held $376 million in gross funds available for insurance of deposits. All investments held by the Fund were U.S. Treasury or agency obligations, or fully guaranteed as to principal and interest by the U.S. government. At fiscal year-end, the DIF insured $8.06 billion in excess deposits in member banks, compared to

$6.85 billion a year earlier. The DIF’s gross and net coverage ratios at fiscal year-end were both 4.66 percent. A year earlier, the gross coverage ratio was 5.46 percent, and the net coverage ratio was 5.43 percent. The DIF’s Board of Directors approved, and in December the Deposit Insurance Fund paid, a 1.25 percent dividend to all member banks. The dividend totaled $866,000 in the aggregate and was approved by the Commissioner of Banks. Due to the continued low-interest rate environment, the Liquidity Fund did not pay a dividend in 2012. The DIF continued to support member banks’ efforts to educate customers about the benefits of full deposit insurance. The amount reimbursed to member banks through the DIF’s reimbursement program rose to nearly $79,000 in 2012. Late in the year, the DIF offered a supplemental reimbursement for communications targeting concerns raised by the end of the FDIC’s Transaction Account Guarantee (TAG) program. The supplemental initiative was designed to help banks communicate to transaction account customers that their excess transaction account deposits would automatically become insured by the DIF upon the end of the TAG program on December 31, 2012.

PRESERVE & PROTECTMEMBER FDIC • MEMBER DIF

Since 1934, NO DEPOSITOR HAS EVER LOST A PENNY in a bank insured by both the FDIC and the DIF.

Of special note, the DIF added a new member bank in 2012. I extend a warm welcome to Brookline Bank, which rejoined the Depositors Insurance Fund after more than a decade’s absence. Three directors with many years of service are leaving the Board with our annual meeting. Charlie O’Brien joined the Board in 2007 and served as Chairman in 2012. He also served as Vice Chairman from 2010-2011 and as a member of the Executive, Compensation, Long-Range Planning and Watch Bank Committees. Mike Robbins served on the Board for eight years starting in 2005. He was a member of the Investment, Long Range Planning, and

Nominating Committees during his tenure. Tom Burton joined the Board in 2009 and served on the Audit, Investment, and Nominating Committees. Each of these directors has played an important role in leading the DIF. I thank them for their wise counsel during their years of service. In closing, I extend my appreciation to the Board of Directors and staff for their dedication and hard work during 2012.

David Elliott President and Chief Executive Officer

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TABLE OF CONTENTS



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


Statements of Condition 30

Statements of Loss 31

Statements of Changes in Fund Balance 32

Statements of Cash Flows 33

Notes to Financial Statements 34

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2012 FINANCIAL STATEMENTS

To the Board of Directors of the Depositors Insurance Fund:

We have audited the consolidated statements of condition of the Deposit Insurance Fund and subsidiary as of October 31, 2012 and 2011, 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 Deposit Insurance 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. An audit also includes 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, 2012 and 2011, and the 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 4, 2013

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INDEPENDENT AUDITORS’ REPORTDEPOSIT INSURANCE FUND

October 31, 2012 and 2011

2012 2011Assets

Cash and cash equivalents $ 4,623,733 $ 3,427,147 Trading securities, at fair value 1,456,851 1,762,243 Securities available for sale, at fair value 369,293,689 368,364,086 Federal Home Loan Bank stock 1,070,900 1,181,500 Accrued interest receivable 1,810,208 2,229,144 Other assets 136,052 86,080

Total assets $378,391,433 $377,050,200

Liabilities and Fund Balance

Accrued liability for deposit insurance losses $ — $ 2,500,000 Accrued expenses and other liabilities 1,460,054 1,750,447

Total liabilities 1,460,054 4,250,447

Commitments and contingencies (Note 6)

Undistributed fund balance 373,263,316 368,253,484 Accumulated other comprehensive income 3,668,063 4,546,269

Total fund balance 376,931,379 372,799,753

Total liabilities and fund balance $378,391,433 $377,050,200

See accompanying notes to consolidated financial statements.

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CONSOLIDATED STATEMENTS OF CONDITIONDEPOSIT INSURANCE FUND

Years Ended October 31, 2012 and 2011 2012 2011 Income: Interest and dividends on investments $5,045,255 $ 8,665,987 Net gain on investments 1,007,061 855,212 Recovery of prior provision for anticipated deposit insurance losses 2,500,000 3,000,000

Total income 8,552,316 12,521,199

Expenses: Salaries, employee benefits and related expenses 2,185,653 2,107,288 Reinsurance — 656,250 Professional and contract services 495,973 473,138 Technology 202,264 189,586 Deposit insurance materials 225,193 214,509 Meetings and travel 186,093 189,405 Employee incentive plan 190,000 180,000 Legal 56,531 44,505 Occupancy 85,512 83,304 Other insurance 65,265 68,138 Other operating expenses 188,567 143,677

3,881,051 4,349,800

Expenses allocated to Liquidity Fund (41,263) (40,094)

Total expenses, net 3,839,788 4,309,706

Net income $4,712,528 $ 8,211,493


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CONSOLIDATED STATEMENTS OF INCOMEDEPOSIT INSURANCE FUND

Fund balance at October 31, 2010 $359,911,196 $9,580,914 $369,492,110

Net income 8,211,493 — 8,211,493 Other comprehensive income (loss): Net unrealized loss on securities available for sale, net of reclassification adjustment for gains realized in income of $897,299 — (4,457,603) (4,457,603) Unrecognized actuarial loss related to defined benefit plan, net of reclassification for losses and transition asset recognized of $28,444 — (577,042) (577,042)

Total comprehensive income 3,176,848

Assessments from member banks 1,507,834 — 1,507,834 Dividends to member banks (1,377,039) — (1,377,039)

Fund balance at October 31, 2011 368,253,484 4,546,269 372,799,753

Net income 4,712,528 — 4,712,528 Other comprehensive income (loss): Net unrealized loss on securities available for sale, net of reclassification adjustment for gains realized in income of $1,003,678 — (916,225) (916,225) Unrecognized actuarial gain related to defined benefit plan, net of reclassification for losses and transition asset recognized of $66,607 — 38,019 38,019

Total comprehensive income 3,834,322

Assessments from member banks 1,441,629 — 1,441,629 Dividends to member banks (1,144,325) — (1,144,325)

Fund balance at October 31, 2012 $373,263,316 $3,668,063 $376,931,379


Years Ended October 31, 2012 and 2011

Undistributed Fund Balance

Accumulated Other Comprehensive

IncomeTotal Fund Balance

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CONSOLIDATED STATEMENTS OF CHANGES IN FUND BALANCE DEPOSIT INSURANCE FUND

Years Ended October 31, 2012 and 2011 2012 2011Cash flows from operating activities: Net income $ 4,712,528 $ 8,211,493 Adjustments to reconcile net income to net cash provided by operating activities: Recovery of prior provision for anticipated deposit insurance losses (2,500,000) (3,000,000) Maturities and paydowns of trading securities 308,775 412,377 Net unrealized holding (gain) loss on trading securities (3,383) 42,087 Gain on sales of securities available for sale (1,003,678) (897,299) Net amortization of securities available for sale 4,334,893 2,695,425 Net change in: Accrued interest receivable 418,936 285,376 Other assets (49,972) 646,105 Accrued expenses and other liabilities (252,374) (84,895)

Net cash provided by operating activities 5,965,725 8,310,669

Cash flows from investing activities: Proceeds from sales of securities available for sale 83,334,266 113,631,739 Proceeds from maturities and paydowns of securities available for sale 50,761,029 117,231,360 Purchases of securities available for sale (139,272,338) (240,617,926) Change in Federal Home Loan Bank stock 110,600 (167)

Net cash used by investing activities (5,066,443) (9,754,994)

Cash flows from financing activities: Assessments from member banks 1,441,629 1,507,834 Dividends paid to member banks (1,144,325) (1,377,039)

Net cash provided by financing activities 297,304 130,795

Net change in cash and cash equivalents 1,196,586 (1,313,530)

Cash and cash equivalents at beginning of year 3,427,147 4,740,677

Cash and cash equivalents at end of year $ 4,623,733 $ 3,427,147


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CONSOLIDATED STATEMENTS OF CASH FLOWSDEPOSIT INSURANCE FUND

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 Deposit Insurance Fund and its subsidiary and the Liquidity Fund. The two funds may not be commingled and the assets of one do not stand behind the liabilities of the other. The Deposit Insurance Fund and the Liquidity 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 member 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.


The Deposit Insurance Fund (the “Fund”) was established in 1934 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 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 Fund and the assessment rate may vary based on risk classifications assigned to each bank.

The 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 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 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 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 Fund; and (ii) the 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.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The consolidated financial statements of the Fund include the accounts of the 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 Fund and its subsidiary are recognized on the accrual method of accounting.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDEPOSIT INSURANCE FUND

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 Deposit Insurance Losses.

Cash and 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.

Fair Value Hierarchy

The Fund groups its assets that are 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, 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.

Transfers between levels are recognized at the end of a reporting period, if applicable. Transfers into and out of levels are determined by a third-party pricing service based on inputs used in pricing models.

Securities Available for Sale and Trading Securities

Securities 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. Securities 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 in other comprehensive income. Premiums and discounts are recognized in income by a method that approximates the interest method over the terms of the securities. The cost of securities sold is determined on a specific-identification basis.

Each reporting period, the Fund evaluates all securities classified as available for sale with a fair value below amortized cost to determine whether or not the impairment is deemed to be other than temporary (“OTTI”). OTTI is required to be recognized if (1) the Fund intends to sell the security; (2) it is more likely than not that the Fund will be required to sell the security before recovery of its amortized cost basis; or (3) the present value of expected cash flows is not sufficient to recover the entire amortized cost basis. For impaired debt securities that the Fund intends to sell, or more likely than not will be required to sell, the full amount of the depreciation is recognized as OTTI through earnings. For all other impaired debt securities, credit-related OTTI is recognized through earnings and non-credit related OTTI is recognized in other comprehensive income.

The DIF has an agreement with an unrelated investment advisor whereby the advisor provides investment management services to the Fund. Investment authority has been granted to the investment advisor within prescribed limits on allowable investments. At October 31, 2012 and 2011, assets under management had a fair value of $268,988,000 and $265,889,000, respectively.

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Federal Home Loan Bank Stock

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

Assessments

Assessments are recorded as additions to the 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.

Dividends

The 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 deposit 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 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 the fund balance at October 31, 2012 and 2011, are as follows: 2012 2011

Net unrealized gain on securities available for sale $4,680,846 $5,597,071 Unrecognized actuarial loss pertaining to defined benefit pension plan (1,012,797) (1,057,112)Unrecognized transition asset pertaining to defined benefit pension plan 14 6,310

$3,668,063 $4,546,269

The following table summarizes the amounts included in accumulated other comprehensive income at October 31, 2012 that are expected to be recognized as components of net periodic pension cost in fiscal 2013.

Amortization of transition asset $ 14Amortization of actuarial loss $97,949

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Reinsurance

The DIF had entered into a reinsurance agreement to reduce the loss to the Fund that may have arisen in the event of one or more bank failures. Reinsurance expense had been recorded in the consolidated statement of income on a pro rata basis over the term of the policy to which it applied. The reinsurance agreement expired in July 2011.

Expense Allocation

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

Recent Accounting Pronouncements

In May 2011, the Financial Accounting Standards Board (“FASB”) amended its guidance related to fair value measurement and disclosure requirements in accordance with generally accepted accounting principles (“GAAP”) and International Financial Reporting Standards. The amendments (1) change the wording used to describe many of the requirements in GAAP for measuring fair value and for disclosing information about fair value measurement, (2) clarify the intent of the application of existing fair value measurement requirements and (3) change the requirements for measuring fair value and for disclosing information about fair value. The guidance is not intended to change the application of existing requirements for fair value measurement. The guidance is effective during the first annual period beginning after December 15, 2011 and is to be applied prospectively. The adoption of this guidance is not expected to have a material impact on the Fund’s consolidated financial statements.

In June 2011, the FASB amended its guidance related to the disclosure requirements for the presentation of comprehensive income, with no change in measurement. The amended guidance eliminates the option to present components of other comprehensive income as part of the statement of changes in fund balance. Under the amended guidance, all changes in comprehensive income are to be presented either in a single continuous statement of comprehensive income or in two separate but consecutive financial statements. The changes are effective for fiscal years ending after December 15, 2012 and are not expected to have a material impact on the Fund’s consolidated financial statements.

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3. INVESTMENTS

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. Of the mortgage- and asset-backed securities at October 31, 2012, approximately 68% are backed by residential mortgages.

The amortized cost, fair value, and unrealized gains and losses on securities classified as available for sale at October 31, 2012 and 2011, by contractual maturity, are presented in the following tables:

2012U.S. Treasury obligations and guarantees: Due in one year or less $ 7,411,415 $ 73,361 $ (4) $ 7,484,772 Due after one year through five years 120,320,507 1,489,696 (95,161) 121,715,042 Due after five years through ten years 5,735,475 124,337 (19,117) 5,840,695 Due after ten years 4,642,686 7,544 — 4,650,230 138,110,083 1,694,938 (114,282) 139,690,739

U.S. government-sponsored enterprise obligations: Due in one year or less 46,090,382 335,685 (3) 46,426,064 Due after one year through five years 132,687,466 982,940 (10,618) 133,659,788 178,777,848 1,318,625 (10,621) 180,085,852

Mortgage- and asset-backed securities: Due in one year or less 382,175 12,430 (136) 394,469 Due after one year through five years 6,040,554 92,810 (6,174) 6,127,190 Due after five years through ten years 11,332,368 603,632 (5,504) 11,930,496 Due after ten years 29,969,815 1,146,611 (51,483) 31,064,943 47,724,912 1,855,483 (63,297) 49,517,098

Total securities available for sale $364,612,843 $4,869,046 $(188,200) $369,293,689

2011U.S. Treasury obligations and guarantees: Due in one year or less $ 18,011,352 $ 179,246 $ — $ 18,190,598 Due after one year through five years 103,707,259 2,220,148 (108,945) 105,818,462 Due after five years through ten years 4,912,309 104,071 (47,989) 4,968,391 Due after ten years 2,701,717 — (74,500) 2,627,217 129,332,637 2,503,465 (231,434) 131,604,668

U.S. government-sponsored enterprise obligations: Due in one year or less 14,294,775 160,184 — 14,454,959 Due after one year through five years 156,436,101 1,441,746 (187,185) 157,690,662 170,730,876 1,601,930 (187,185) 172,145,621 Mortgage- and asset-backed securities: Due in one year or less — — — — Due after one year through five years 5,011,215 91,654 (30,756) 5,072,113 Due after five years through ten years 15,261,691 625,087 (44,040) 15,842,738 Due after ten years 42,430,596 1,542,410 (274,060) 43,698,946 62,703,502 2,259,151 (348,856) 64,613,797 Total securities available for sale $362,767,015 $6,364,546 $(767,475) $368,364,086

19


Amortized Cost Unrealized Gains Unrealized Losses Fair Value

Amortized Cost Unrealized Gains Unrealized Losses Fair Value

Proceeds from sales of securities available for sale during fiscal 2012 and 2011 were $83,334,266 and $113,631,739, respectively, with gross gains of $1,003,678 and $897,299, respectively, being realized. No losses were realized during these years.

The components of the net gain on investments included in the consolidated statements of income for the years ended October 31, 2012 and 2011 are as follows:

2012 2011

Gain on sales of securities available for sale, net $1,003,678 $897,299 Unrealized holding gain (loss) on trading securities, net 3,383 (42,087)

Net gain on investments $1,007,061 $855,212

Gross unrealized losses on securities available for sale and the fair value of the related securities, aggregated by category and length of time that individual securities have been in a continuous unrealized loss position, at October 31, 2012 and 2011, are as follows:

2012

U.S. Treasury obligations and guarantees $10,276,834 $ (95,027) $3,252,127 $(19,255) $13,528,961 $(114,282) U.S. government-sponsored enterprise obligations 9,147,473 (10,621) — — 9,147,473 (10,621) Mortgage- and asset-backed securities 6,821,131 (43,308) 519,990 (19,989) 7,341,121 (63,297)

$26,245,438 $(148,956) $3,772,117 $(39,244) $30,017,555 $(188,200)

2011

U.S. Treasury obligations and guarantees $15,231,947 $(231,434) $ — $ — $15,231,947 $(231,434)U.S. government-sponsored enterprise obligations 44,181,904 (187,185) — — 44,181,904 (187,185)Mortgage- and asset-backed securities 16,842,152 (229,425) 3,102,056 (119,431) 19,944,208 (348,856)

$76,256,003 $(648,044) $3,102,056 $(119,431) $79,358,059 $(767,475)

At October 31, 2012, twenty-one debt securities have unrealized losses with aggregate depreciation of 1% from the Fund’s amortized cost basis.

The unrealized losses on the Fund’s securities were caused by interest rate changes. The principal and accrued interest on all of the securities are 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 securities to be other-than-temporarily impaired at October 31, 2012.

20

UnrealizedLosses

Fair Value

UnrealizedLosses

Fair Value

UnrealizedLosses

Fair Value

Less Than Twelve Months Over Twelve Months Total

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

UnrealizedLosses

Fair Value

UnrealizedLosses

Fair Value

UnrealizedLosses

Fair Value


DEPOSIT INSURANCE FUND

Trading Securities

Trading securities are comprised entirely of mortgage-backed securities issued by U.S. government-sponsored enterprises. The fair values of securities classified as trading at October 31, 2012 and 2011, by contractual maturity, are as follows: 2012 2011

Due in one year or less $18 $13,954 Due after one year through five years 5,329 37,828 Due after ten years 1,451,504 1,710,461

$1,456,851 $1,762,243


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 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. The DIF reviews its investment for impairment based on the ultimate recoverability of the cost basis in the FHLBB stock. As of October 31, 2012, no impairment has been recognized.

At October 31, 2012, the DIF’s investment in FHLBB stock was $1,092,600, of which $1,070,900 was allocated to the Fund. At October 31, 2011, the DIF’s investment in FHLBB stock was $1,203,500, of which $1,181,500 was allocated to the Fund. The amount allocated to the Fund is based on the Fund’s 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 Fund and the Liquidity Fund.

The DIF also has a master agreement with the FHLBB for advances from the FHLBB. Advances are secured by the DIF’s FHLBB stock and specifically-pledged securities. As of October 31, 2012 and 2011, the DIF had no outstanding advances from the FHLBB and, accordingly, no securities were specifically pledged. FHLBB advances would be allocated to the Fund and the Liquidity Fund based on the portion of advances applicable to each fund.

21


4. ANTICIPATED DEPOSIT INSURANCE LOSSES

In fulfilling its insurance responsibilities described in Note 1, the 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 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 to the 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 deposit insurance losses).

Assessing the adequacy of the accrued liability for deposit insurance 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, 2012 and 2011, the accrued liability amounted to $0 and $2,500,000, respectively. During the years ended October 31, 2012 and 2011, the recovery of prior provisions for anticipated deposit insurance losses amounted to $2,500,000 and $3,000,000, respectively.

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 12-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 18-month period.

During fiscal 2012 and 2011, no member banks were closed by the Commissioner, and no deposit insurance payments were made by the DIF from the Fund.

5. EMPLOYEE BENEFIT PLANS

Defined Benefit Pension Plan

All 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, 2012 and 2011 is as follows:

2012 2011Change in benefit obligation: Benefit obligation at beginning of year $4,567,463 $ 3,820,953 Service cost 91,910 105,441 Interest cost 188,155 210,152 Actuarial loss 93,445 454,002 Benefits paid (5,337) (23,085)

Benefit obligation at end of year 4,935,636 4,567,463

Change in plan assets: Fair value of plan assets at beginning of year 3,326,176 2,996,059 Actual return on plan assets 294,593 88,202 Employer contribution 400,000 265,000 Benefits paid (5,337) (23,085)

Fair value of plan assets at end of year 4,015,432 3,326,176

Funded status at end of year $ (920,204) $(1,241,287)

Accrued pension cost recognized in statement of condition $ 920,204 $ 1,241,287

Accumulated benefit obligation $4,100,744 $ 3,759,929

The following table presents certain assumptions used in determining the benefit obligation at October 31, 2012 and 2011 and the benefit cost for the years then ended: 2012 2011

Discount rate - funded status at year-end 4.00% 4.75%Discount rate - benefit cost 4.75 5.50 Rate of increase in compensation levels - funded status at year-end 4.00 4.00 Rate of increase in compensation levels - benefit cost 4.00 4.00 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.

In 2012, the Fund, with the guidance of its consulting actuaries, changed the assumptions for termination and retirement rates based on historical analysis of SBERA plan participants. The termination rate assumption was increased to reflect a higher level of terminations. The assumption that all participants retire at age 65 was changed to reflect varying retirement dates between age bands 55 to 70. The revision to these assumptions is a change in estimate that decreased the pension benefit obligation and resulted in an actuarial gain in fiscal 2012 in the amount of $503,007, which is more than offset by the actuarial loss for the decrease in the discount rate.

23


The components of net periodic pension cost for the years ended October 31, 2012 and 2011 are as follows:

2012 2011

Service cost $ 91,910 $105,441 Interest cost 188,155 210,152 Expected return on plan assets (229,733) (239,685)Amortization of transition asset (6,296) (6,296)Recognized net actuarial loss 72,903 34,740

$116,939 $104,352

The fair value of major categories of pension plan assets, and the measurement levels within the fair value hierarchy, are summarized below. October 31, 2012

Asset Category Level 1 Level 2 Level 3 Total

Collective funds $1,392,003 $748,223 $ — $2,140,226 Equity securities 989,804 — — 989,804 Mutual funds 567,782 — — 567,782 Hedge funds — — 291,520 291,520 Short-term investments — 26,100 — 26,100

$2,949,589 $774,323 $291,520 $4,015,432

October 31, 2011

Asset Category Level 1 Level 2 Level 3 Total

Collective funds $1,059,228 $659,740 $ — $1,718,968 Equity securities 786,973 — — 786,973 Mutual funds 480,632 — — 480,632 Hedge funds — — 247,135 247,135 Short-term investments — 92,468 — 92,468

$2,326,833 $752,208 $247,135 $3,326,176

The plan assets measured at fair value in Level 1 are based on quoted market prices in an active exchange market. Plan assets measured at fair value in Level 2 are based on pricing models that consider standard input factors such as observable market data, benchmark yields, interest rate volatilities, broker/dealer quotes, credit spreads and new issue data. Plan assets measured at fair value in Level 3 are based on unobservable inputs to pricing models, which includes SBERA’s assumptions and the best information available under the circumstances.

The following is a reconciliation of hedge fund investments, which are measured in Level 3, for which significant unobservable inputs were used to determine fair value:

Balance at November 1, 2010 $221,109 Unrealized appreciation 26,026

Balance at October 31, 2011 247,135 Unrealized appreciation 44,385

Balance at October 31, 2012 $291,520

24



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

2013 $497,133 2014 757,255 2015 952,318 2016 326,679 2017 279,473 2018-2022 774,095

The DIF expects to contribute $200,000 to the plan during the year ending October 31, 2013.

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 assistance 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, 2012 and 2011 is as follows: 2012 2011

Fixed income (including money market) 16.7% 22.4%Equity investments 52.9 50.2 Other investments 30.4 27.4

Total 100.0% 100.0%

Defined Contribution Pension Plan

All 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, 2012 and 2011, the DIF’s matching contribution expense for the defined contribution pension plan was $50,168 and $46,888, respectively.

25

6. COMMITMENTS, CONTINGENCIES, AND OTHER MATTERS

In the normal course of business, there are outstanding commitments and contingencies which are not reflected in the Fund’s consolidated 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. Employment may be terminated for cause, as defined, without incurring any continuing obligations. The agreement has a continual expiration date of one year.

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 for the years ended October 31, 2012 and 2011.

Legal Claims

Various legal claims arise from time to time in the normal course of business which, in the opinion of management, will have no material effect on the Fund’s consolidated financial statements.

7. RELATED PARTY TRANSACTIONS

A majority of the DIF’s sixteen directors are associated with member banks.

8. 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. All fair value measurements are obtained from a third-party pricing service and are not adjusted by management.


26

DEPOSIT INSURANCE FUND

Assets and Liabilities Measured at Fair Value on a Recurring Basis

Assets measured at fair value on a recurring basis at October 31, 2012 and 2011 are summarized below. There were no liabilities measured at fair value on a recurring basis at October 31, 2012 or 2011.

2012 Level 1 Level 2 Level 3 Total Fair Value

Trading securities $ — $ 1,456,851 $ — $ 1,456,851 Securities available for sale: U.S. Treasury obligations and guarantees 110,823,461 27,184,626 1,682,652 139,690,739 U.S. government-sponsored enterprise obligations — 180,085,852 — 180,085,852 Mortgage- and asset-backed securities — 49,517,098 — 49,517,098

Total securities available for sale 110,823,461 256,787,576 1,682,652 369,293,689

Total $110,823,461 $258,244,427 $1,682,652 $370,750,540


Trading securities $ — $ 1,762,243 $ — $ 1,762,243 Securities available for sale: U.S. Treasury obligations and guarantees 90,351,735 39,959,298 1,293,635 131,604,668 U.S. government-sponsored enterprise obligations — 172,145,621 — 172,145,621 Mortgage- and asset-backed securities — 64,613,797 — 64,613,797

Total securities available for sale 90,351,735 276,718,716 1,293,635 368,364,086

Total $ 90,351,735 $278,480,959 $1,293,635 $370,126,329

The table below presents, for the years ended October 31, 2012 and 2011, the changes in Level 3 assets that are measured at fair value on a recurring basis.

Balance as of October 31, 2010 $4,415,522

Total unrealized gains included in other comprehensive income 30,603 Transfers into Level 2 (3,152,490)

Balance as of October 31, 2011 1,293,635

Sales (1,293,635) Purchases 1,682,652

Balance as of October 31, 2012 $1,682,652

Assets



27

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, 2012 or 2011.

9. SUBSEQUENT EVENTS

Management has evaluated subsequent events through January 4, 2013, 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.


28

DEPOSIT INSURANCE FUND(CONCLUDED)

To the Board of Directors of the Depositors Insurance Fund:

We have audited the statements of condition of the Liquidity Fund as of October 31, 2012 and 2011, and the related statements of loss, changes in fund balance and cash flows for the years then ended. These financial statements are the responsibility of the Liquidity 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. An audit also includes 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 Liquidity Fund as of October 31, 2012 and 2011, 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 4, 2013

29

INDEPENDENT AUDITORS’ REPORTLIQUIDITY FUND

30

STATEMENTS OF CONDITION

October 31, 2012 and 2011

2012 2011Assets

Cash $ 27,252 $ 177,318 Securities available for sale, at fair value 6,379,056 6,235,884 Federal Home Loan Bank stock 21,700 22,000 Accrued interest receivable 10,959 32,893

Total assets $6,438,967 $6,468,095

Fund Balance

Undistributed fund balance 6,436,860 6,440,764 Accumulated other comprehensive income 2,107 27,331

Total fund balance 6,438,967 6,468,095

Total liabilities and fund balance $6,438,967 $6,468,095

See accompanying notes to financial statements.

LIQUIDITY FUND

31

STATEMENTS OF LOSSLIQUIDITY FUND


2012 2011

Income: Interest and dividends on investments $37,359 $40,007 Expenses: Expenses allocated from the Deposit Insurance Fund 41,263 40,094

Net loss $(3,904) $ (87)


32

STATEMENTS OF CHANGES IN FUND BALANCE

Fund balance at October 31, 2010 $6,440,851 $ 30,310 $6,471,161

Net loss (87) — (87) Other comprehensive loss: Unrealized loss on securities available for sale — (2,979) (2,979)

Total comprehensive loss (3,066)

Fund balance at October 31, 2011 6,440,764 27,331 6,468,095

Net loss (3,904) — (3,904) Other comprehensive loss: Unrealized loss on securities available for sale — (25,224) (25,224)

Total comprehensive loss (29,128)

Fund balance at October 31, 2012 $6,436,860 $ 2,107 $6,438,967



Undistributed Fund Balance

Accumulated Other Comprehensive

IncomeTotal Fund Balance

LIQUIDITY FUND

33

STATEMENTS OF CASH FLOWSLIQUIDITY FUND


2012 2011

Cash flows from operating activities: Net loss $ (3,904) $ (87) Adjustments to reconcile net loss to net cash provided by operating activities: Net amortization of securities 60,135 74,739 Decrease (increase) in accrued interest receivable 21,934 (13,416)

Net cash provided by operating activities 78,165 61,236

Cash flows from investing activities: Maturities of securities available for sale 3,773,000 2,631,000 Purchases of securities available for sale (4,001,531) (2,626,560) Change in Federal Home Loan Bank stock 300 167

Net cash provided (used) by investing activities (228,231) 4,607

Cash flows from financing activities: Dividends paid to member banks — (15,177)

Net cash used by financing activities — (15,177)

Net change in cash (150,066) 50,666

Cash at beginning of year 177,318 126,652

Cash at end of year $ 27,252 $ 177,318


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 (the “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 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.

Fair Value Hierarchy

The Fund groups its assets that are 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, 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.

34

NOTES TO FINANCIAL STATEMENTS


LIQUIDITY FUND


All investment securities are classified as “available for sale” and carried at fair value, with unrealized gains and losses excluded from earnings and reported in other comphrehensive income. Premiums and discounts are recognized in income by a method that approximates the interest method over the terms of the securities. The cost of securities sold is determined on a specific-identification basis.

Each reporting period, the Fund evaluates all securities classified as available for sale with a fair value below amortized cost to determine whether or not the impairment is deemed to be other than temporary (“OTTI”). OTTI is required to be recognized if (1) the Fund intends to sell the security; (2) it is more likely than not that the Fund will be required to sell the security before recovery of its amortized cost basis; or (3) the present value of expected cash flows is not sufficient to recover the entire amortized cost basis. For impaired debt securities that the Fund intends to sell, or more likely than not will be required to sell, the full amount of the depreciation is recognized as OTTI through earnings. For all other impaired debt securities, credit-related OTTI is recognized through earnings and non-credit related OTTI is recognized in other comprehensive income.


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

Dividends

The Fund may pay 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 May 2011, the Financial Accounting Standards Board (“FASB”) amended its guidance related to fair value measurement and disclosure requirements in accordance with generally accepted accounting principles (“GAAP”) and International Financial Reporting Standards. The amendments (1) change the wording used to describe many of the requirements in GAAP for measuring fair value and for disclosing information about fair value measurement, (2) clarify the intent of the application of existing fair value measurement requirements and (3) change the requirements for measuring fair value and for disclosing information about fair value. The guidance is not intended to change the application of existing requirements for fair value measurement. The guidance is effective during the first annual period beginning after December 15, 2011 and is to be applied prospectively. The adoption of this guidance is not expected to have a material impact on the Fund’s financial statements.

35

NOTES TO FINANCIAL STATEMENTSLIQUIDITY FUND

3. INVESTMENTS


The amortized cost, fair value, and unrealized gains and losses of securities classified as available for sale at October 31, 2012 and 2011, by contractual maturity, are as follows:

2012

U.S. Treasury obligations: Due in one year or less $2,163,002 $ 2,168 $ (531) $2,164,639 Due after one year through five years 1,956,330 — (2,257) 1,954,073

4,119,332 2,168 (2,788) 4,118,712

U.S. government-sponsored enterprise obligations: Due in one year or less 1,271,717 2,612 — 1,274,329 Due after one year through five years 985,900 115 — 986,015

2,257,617 2,727 — 2,260,344

Total securities available for sale $6,376,949 $ 4,895 $(2,788) $6,379,056

2011

U.S. Treasury obligations: Due in one year or less $2,919,792 $ 7,360 $ — $2,927,152 Due after one year through five years 1,113,610 12,307 — 1,125,917

4,033,402 19,667 — 4,053,069

U.S. government-sponsored enterprise obligations: Due in one year or less 885,262 1,200 — 886,462 Due after one year through five years 1,289,889 6,464 — 1,296,353

2,175,151 7,664 — 2,182,815

Total securities available for sale $6,208,553 $27,331 $ — $6,235,884

There were no sales of securities during the years ended October 31, 2012 or 2011.

36


In June 2011, the FASB amended its guidance related to the disclosure requirements for the presentation of comprehensive income, with no change in measurement. The amended guidance eliminates the option to present components of other comprehensive income as part of the statement of changes in fund balance. Under the amended guidance, all changes in comprehensive income are to be presented either in a single continuous statement of comprehensive income or in two separate but consecutive financial statements. The changes are effective for fiscal years ending after December 15, 2012 and are not expected to have a material impact on the Fund’s financial statements.

Amortized Cost

UnrealizedGains

UnrealizedLosses

Fair Value

Amortized Cost

UnrealizedGains

UnrealizedLosses

Fair Value

Gross unrealized losses on securities available for sale and the fair values of the related securities aggregated by category and length of time that individual securities have been in a continuous unrealized loss position at October 31, 2012 follow:

U.S. Treasury obligations $3,005,936 $(2,788) $ — $ — $3,005,936 $(2,788)

At October 31, 2012, three debt securities have unrealized losses with aggregate depreciation of less than 1% from the Fund’s amortized cost basis.


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 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. The DIF reviews its investment for impairment based on the ultimate recoverability of the cost basis in the FHLBB stock. As of October 31, 2012, no impairment has been recognized.

At October 31, 2012, the DIF’s investment in FHLBB stock was $1,092,600, of which $21,700 was allocated to the Fund. The amount allocated to the Fund represents the 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, 2012 and 2011, the DIF had no outstanding advances from the FHLBB and, accordingly, no securities have been specifically-pledged. FHLBB advances would be allocated to the Fund and the Deposit Insurance Fund based on the portion of advances applicable to each fund.

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.

37


UnrealizedLosses

Fair Value

UnrealizedLosses

Fair Value

UnrealizedLosses

Fair Value


Assets and Liabilities Measured at Fair Value on a Recurring Basis

Assets measured at fair value on a recurring basis at October 31, 2012 and 2011 are summarized below. There were no liabilities measured at fair value on a recurring basis at October 31, 2012 or 2011.


Securities available for sale: U.S. Treasury obligations $4,118,712 $ — $ — $4,118,712 U.S. government-sponsored enterprise obligations — 2,260,344 — 2,260,344

$4,118,712 $2,260,344 $ — $6,379,056


Securities available for sale: U.S. Treasury obligations $4,053,069 $ — $ — $4,053,069 U.S. government-sponsored enterprise obligations — 2,182,815 — 2,182,815

$4,053,069 $2,182,815 $ — $6,235,884

There were no assets or liabilities measured at fair value on a non-recurring basis at October 31, 2012 or 2011.

6. SUBSEQUENT EVENTS

Management has evaluated subsequent events through January 4, 2013, 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.

38

NOTES TO FINANCIAL STATEMENTSLIQUIDITY FUND(CONCLUDED)

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

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