The Provident Bank touts Depositors Insurance Fund competitive advantage

Granite State customers get access to extended guarantee protection

The Provident Bank has most of its branches, makes most of its loans and expects most of its growth to be in New Hampshire but retains its headquarters just a four-minute drive away in Amesbury, Mass.

A “key reason” that the headquarters – and the jobs that go along with it – will stay put is a little-known program that dates back to the Great Depression that is unique to Massachusetts’s charter banks, according to The Provident’s CEO Dave Mansfield.

The Depositors Insurance Fund automatically extends the Federal Deposit Insurance Corporation guarantee beyond the $250,000 federal limits imposed on each deposit. These “excess deposits,” as they are known, would be at risk if the bank failed.

“This covers every single penny,” said Mansfield “It’s a very powerful tool.”

That tool can be accessed by New Hampshire residents in a bank branch located in the Granite State, as long as it is chartered by the Bay State.

“That’s extremely generous to their neighbors,” commented NH Bank Commissioner Jerry Little.

New Hampshire used to have its own such fund, said Little, who remembered seeing an old poster when he was at the NH Bankers Association, but it folded shortly after Franklin Roosevelt signed the FDIC into law in 1933. Massachusetts’s DIF – created around the same time – remained and now, has $377 million in assets and insures assets up to $12.2 billion in “excess deposits” in some 56 community banks.  (Larger banks are charged an extra fee, and do have the option to opt out of the program.) 

In addition to The Provident Bank – which has New Hampshire branches in Bedford, Exeter, Hampton, Portsmouth and Seabrook – are Pentucket Bank in Hampstead and Salem, Lowell Five Center Savings Bank in Nashua and two Newburyport Five Cents Savings Bank locations in Portsmouth.

New Hampshire chartered banks can offer to insure excess deposits, but it is not a default service for the customer and can be a complicated process for the bank. It involves farming out the excess deposits in $250,000 chunks to numerous participating banks though two national programs. One program, Insured Cash Sweep, does this for money market and cash deposits. The other, the Certificate of Deposit Account Registry Service, does the same for certificate of deposits. Some 16 New Hampshire banks participate in CDARS, and nine of those participate in ICS as well.

The advantage of such programs is that all of the money is backed by the full faith and credit of the federal government. But the FDIC charges about five times as much as DIF for its service, plus there is an extra fee for administering the program.

Although Massachusetts created the DIF, requires that all savings banks of a certain size belong to it and examines it, it doesn’t stand behind it like the United States does for the FDIC. Thus far, this hasn’t been a problem. Although DIF capital would only cover about three percent of the capital insured, it boasts on its annual report, in bold letters: “NO DEPOSITOR HAS EVER LOST A PENNY in a bank insured by both the FDIC and the DIF.”

In the early 90s, DIF paid out more than $50 million to protect 6,500 depositors in 19 failed banks, but emerged stronger than before, it claims on its website.

That’s partly because the FDIC does much of the heavy lifting when a bank fails  – covering most of the deposits, and salvaging much of the good assets – that it keeps losses to about 20 percent. Of course, DIF wouldn’t be able to cover all losses if most banks failed, but DIF Executive Vice President Norman Seppala said that such a “catastrophic failure” is unlikely. 

DIF has been able to offer this fairly cheaply because the fund has been around so long, has grown so much and is usually not needed. During the last fiscal year, which ended on October 31, 2015, banks contributed $3.3 million, but the investment income was $2.6 million, so even after the company spent $4 million in other expenses, the fund still grew another $2 million, with no payouts. 

So that’s why for a “very little fees, and no forms, deposits are protected,” said Seppala.

There has not been any effort in New Hampshire to duplicate DIF here, said Little. The state doesn’t have enough money to capitalize such a fund at this late date, and the assessment on the banks would simply be too high. Nor could New Hampshire banks join DIF unless the Massachusetts legislature changed the law.  

Mansfield thought the latter made more sense than the Granite State creating its own, although advocating for that “would undercut our own competitive advantage.”