FDIC
Division of Supervision

March 17,1998

Board of Trustees
Watertown Savings Bank
111 Clinton Street
Watertown, New York 13601

Members of the Board:

We have reviewed your request to indirectly continue real estate investment activities through the Bank's wholly-owned subsidiary 145 Clinton Street Corporation ("Subsidiary"), that may not be permissible for a subsidiary of a national bank. The application, dated November 21, 1997, was filed pursuant to Section 362.4(d)(4)(iii) of the Federal Deposit Insurance Corporation ("FDIC") Rules and Regulations and was accepted as a substantially complete application by the New York Regional Office on December 8, 1997.

The Bank has applied to indirectly continue to engage in a real estate investment activity through its Subsidiary by holding a 50% interest in College Heights Apartments LLC, a limited liability corporation which owns an apartment complex in Watertown, New York, known as College Heights Apartments. This application addresses this particular real estate investment activity only. In the future it is expected that any necessary application or notice pursuant to Part 362 will be filed with the New York Regional Office prior to the Bank indirectly engaging in any impermissible activity.

For the reasons set forth in the attached Statement, the application was approved today subject to the following conditions:

(1) The Bank shall take the necessary steps to operate the subsidiary in a manner so as to ensure its separate corporate existence as a wholly-owned subsidiary that:

(a) is adequately capitalized;

(b) is physically separate and distinct in its operations from the operations of the Bank;

(c) maintains separate accounting and other corporate records;

(d) observes such formalities as holding separate board of directors' meetings;

(e) maintains a board of directors with management expertise capable of conducting activities in a safe and sound manner;

(f) contracts with the bank for any service on terms and conditions comparable to those available to or from independent entities; and

(g) conducts business pursuant to separate policies and procedures designed to inform customers and prospective customers of the subsidiary that it is a separate organization from the bank, including the placement of specific language on any debt instrument or contract with a third party disclosing that the bank itself is not responsible for payment or performance.

(2) That the Bank shall maintain a "well-capitalized" status pursuant to Part 325 of the FDIC's Rules and Regulations after deducting from its Tier I capital the investment in equity securities of the subsidiary as well as any pro-rata share of any retained earnings of the subsidiary, provided that the capital deduction shall not be used for purposes of determining whether the bank is "critically undercapitalized," and that this deduction shall be reflected on the appropriate schedule of Watertown's consolidated report of income and condition;

(3) That the Bank's indirect real estate investment activities, including equity interest, debt obligations of the Subsidiary held by the Bank, bank guaranties of debt obligations issued by the Subsidiary, extensions of credit or commitments of credit to the Subsidiary or to any third party for the purpose of making a direct investment in the Subsidiary, or making an investment in any investment in which the Subsidiary has an interest, shall be limited to that which is currently held;

(4) That the Bank or the Subsidiary shall not extend credit to finance the sale of assets by the Subsidiary unless it is consistent with safe and sound banking practices, does not involve more than a normal degree of risk of repayment, and is extended on terms and under circumstances, including credit standards, that are substantially the same, or at least as favorable to the bank, as those prevailing at the time for comparable transactions;

(5) That the Bank or the Subsidiary shall not engage in any transactions with insiders of the bank or their related interests which relate to the Subsidiary's real estate investment activities without the prior written consent of the appropriate DOS Regional Director;

(6) That the Bank or the Subsidiary shall not condition any transaction on the purchase of real estate or use of a service by the other;

(7) That consent is granted based on the facts and circumstances presented or otherwise known to the FDIC in connection with this request. The Bank shall notify the FDIC of any significant change in facts or circumstances, and the FDIC shall have the right to alter, suspend, or withdraw its approval.

Questions relating to this matter may be referred to Regional Director Daryl P. Stum of the New, York Regional Office at (212) 704-1200.

Sincerely,

Mark S. Schmidt
Associate Director

FEDERAL DEPOSIT INSURANCE CORPORATION

RE: Watertown Savings Bank
Watertown, New York

Application Pursuant to Section 24 of the Federal Deposit Insurance Act to Indirectly Continue Activity That May Not Be Permissible for a National Bank

STATEMENT

Pursuant to the provisions of Section 24 of the Federal Deposit Insurance Act, an application has been filed with the Federal Deposit Insurance Corporation by Watertown Savings Bank, Watertown, New York ("the Bank"). The Bank requests FDIC's consent to allow its wholly-owned subsidiary, 145 Clinton Street Corporation ("the Subsidiary"), to continue to hold its 50 percent ownership interest in College Heights Apartments LLC, a limited liability corporation which owns College Heights Apartments, a 30-unit apartment complex located in Watertown, New York. The Bank also has a mortgage loan outstanding to College Heights Apartments LLC secured by the apartment complex.

In general, real estate investment may not be a permissible activity for a national bank or a subsidiary of a national bank. Subsidiaries of state-chartered, FDIC-insured banks may not engage as principal in an activity prohibited to subsidiaries of nationally chartered banks unless they obtain consent from the FDIC. Consent may not be granted unless the bank is in compliance with applicable capital standards and the FDIC determines that the activity poses no significant risk to the deposit insurance fund. New York State Law permits the holding of the subject real estate investment. The Bank does not engage in impermissible real estate activities beyond the subject investment, and Bank management has indicated that it has no intention of engaging in any additional real estate activities.

The Bank meets the definition of "well-capitalized" within the meaning of Part 325 of the FDIC's Rules and Regulations. The Bank would continue to be "well-capitalized" in the event its entire investment in the Subsidiary was deducted from capital. In connection with this application, the FDIC has also taken into consideration the favorable financial and managerial resources and future earnings prospects of the Bank.

Real estate investment is subject to a high degree of market risk and other specialized risks specific to real estate ownership and may also be of questionable benefit in the diversification of a financial institution's portfolio of assets. Due to these risks, real estate investment activities appear suitable to a financial institution only on a very limited scale and under restrictive conditions designed to control the various risks posed to the financial institution and the deposit insurance fund.

As prudential limitations and restrictions addressing the risks posed by real estate investment activities will be imposed, the Subsidiary's real estate investment activities will not constitute a significant risk to the Bank Insurance Fund or present material safety and soundness concerns.

Based upon careful evaluation of all available facts and information, the Associate Director, acting under delegated authority, has concluded that approval of the application is appropriate subject to the conditions specified below. The conditions are imposed for prudential reasons due to the volatility and other risks that are inherent in the subject real estate activity as well as to mitigate any potential insider conflicts of interests or risks associated with transactions between the Bank and the Subsidiary:

(1) The Bank shall take the necessary steps to operate the subsidiary in a manner so as to ensure its separate corporate existence as a wholly-owned subsidiary that:

(a) is adequately capitalized;

(b) is physically separate and distinct in its operations from the operations of the Bank;

(c) maintains separate accounting and other corporate records;

(d) observes such formalities as holding separate board of directors' meetings;

(e) maintains a board of directors with management expertise capable of conducting activities in a safe and sound manner;

(f) contracts with the bank for any service on terms and conditions comparable to those available to or from independent entities; and

(g) conducts business pursuant to separate policies and procedures designed to inform customers and prospective customers of the subsidiary that it is a separate organization from the bank, including the placement of specific language on any debt instrument or contract with a third party disclosing that the bank itself is not responsible for payment or performance.

(2) That the Bank shall maintain a "well-capitalized" status pursuant to Part 325 of the FDIC's Rules and Regulations after deducting from its Tier I capital the investment in equity securities of the subsidiary as well as any pro-rata share of any retained earnings of the subsidiary, provided that the capital deduction shall not be used for purposes of determining whether the bank is "critically undercapitalized," and that this deduction shall be reflected on the appropriate schedule of Watertown's consolidated report of income and condition;

(3) That the Bank's indirect real estate investment activities, including equity interest, debt obligations of the Subsidiary held by the Bank, bank guaranties of debt obligations issued by the Subsidiary, extensions of credit or commitments of credit to the Subsidiary or to any third party for the purpose of making a direct investment in the Subsidiary, or making an investment in any investment in which the Subsidiary has an interest, shall be limited to that which is currently held;

(4) That the Bank or the Subsidiary shall not extend credit to finance the sale of assets by the Subsidiary unless it is consistent with safe and sound banking practices, does not involve more than a normal degree of risk of repayment, and is extended on terms and under circumstances, including credit standards, that are substantially the same, or at least as favorable to the bank, as those prevailing at the time for comparable transactions;

(5) That the Bank or the Subsidiary shall not engage in any transactions with insiders of the bank or their related interests which relate to the Subsidiary's real estate investment activities without the prior written consent of the appropriate DOS Regional Director;

(6) That the Bank or the Subsidiary shall not condition any transaction on the purchase of real estate or use of a service by the other;

(7) That consent is granted based on the facts and circumstances presented or otherwise known to the FDIC in connection with this request. The Bank shall notify the FDIC of any significant change in facts or circumstances, and the FDIC shall have the right to alter, suspend, or withdraw its approval.

Finally, the FDIC notes that the foregoing approval is unique to this application and that its view of a proposed acquisition of another real estate interest by Watertown might well be different depending upon the nature and particular circumstances of that proposal.

ASSOCIATE DIRECTOR
DIVISION OF SUPERVISION