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East Cambridge Savings Bank


RE: East Cambridge Savings Bank Cambridge, Massachusetts

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


Pursuant to the provisions of section 24(d) of the Federal Deposit Insurance Act, an application has been filed with the FDIC by East Cambridge Savings Bank, Cambridge, Massachusetts (the "Bank"). The Bank requests the FDIC's consent to continue to hold, via a wholly-owned subsidiary, a parcel of commercial real estate.

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. The FDIC may not grant its consent unless the bank is in compliance with applicable capital standards and the FDIC determines that the activity poses no significant risk to the appropriate deposit insurance fund. State law authorizes the activity.

The property involved in this proposal is a three story building containing four residential and two commercial units and a small, contiguous parcel of raw land. The subsidiary has owned the property since August 1975.

In connection with this application, the FDIC has reviewed available information and has also taken into consideration the financial and managerial resources and future earnings prospects of the institution associated with the continued holding of this real estate property and the risks associated with owning and leasing the particular property.

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.

The Bank, which meets the definition of "well capitalized" within the meaning of Part 325 of the FDIC's Rules and Regulations, is in compliance with applicable capital standards. The Bank's investment in the subsidiary is less than 1% of its Tier 1 capital, and the Bank would continue to be well capitalized in the event the entire investment were deducted. The Bank is in overall sound condition and is satisfactorily managed, and the Bank does not plan to acquire additional real estate investments. Based on the foregoing, the FDIC has determined that retention of the investment does not present a significant risk to the Bank Insurance Fund.

Having found that the activity in question involves the retention of an investment that did not require FDIC review or consent at inception, but does now because of statutory revision; that State law authorizes the activity; that the Bank is in compliance with applicable capital standards; and that retention of the real estate investment does not pose any significant risk to the Bank Insurance Fund, the FDIC concludes that approval of the Bank's request to continue to retain its interest in the real estate via the subsidiary is warranted, subject to the conditions described below. These conditions are imposed due to the volatility and risk presented by real estate investment activities. In addition, we have imposed certain corporate structural requirements on the subsidiary with the goal of insulating the Bank from risks associated with real estate investment activities.

The Bank shall limit the subsidiary's real estate investments to those currently held and the Bank shall not engage in any additional real estate investment activity or make any additional investment (including equity, debt, or extensions of credit) in the subsidiary without the prior written consent of the FDIC; the Bank shall continue to meet applicable capital standards; transactions between the Bank and the subsidiary will be subject to the same restrictions under Sections 23A and 23B of the Federal Reserve Act that would otherwise apply if the subsidiary were considered an affiliate of the Bank; the Bank shall prohibit the involvement of insiders or their related interests in the real estate activity conducted by the subsidiary without the prior, written approval of the FDIC; the subsidiary shall be satisfactorily capitalized and conduct separate and distinct operations from the Bank, utilizing separate records, policies and procedures, conducting separate Board meetings, and maintaining one or more independent Director (s) ; and, 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 in the event the facts and circumstances presented in the application change significantly.

Finally, the FDIC notes that the foregoing approval is unique to this application, that it was significantly influenced by the subsidiary's acquisition of the real estate investment prior to the effective date of Section 24(d), and that its view of de novo acquisition of such interest might well be different.