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Everett Savings Bank


RE: Everett Savings Bank Everett, 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 Everett Savings Bank, Everett, Massachusetts (the "Bank"). The Bank requests the FDIC's consent for its wholly owned subsidiary, Rett Corporation, to retain its interest in a limited partnership which owns a commercial real estate property located in Andover, Massachusetts.

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 commercial rental property. The subsidiary has owned its limited partnership interest since 1983.

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 such interest.

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. Although the Bank maintains an indirect interest in the limited partnership, the Bank's book value of this interest is zero. Nonetheless, the Bank must apply to retain its indirect interest in the limited partnership. 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 limited partnership 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, the FDIC considered the Bank's recent history of significant charges to the provision for loan losses and the resulting negative impact on capital, and has accordingly imposed an additional condition requiring quarterly capital calculations as noted below.

The Bank shall limit the subsidiary's real estate investments to those currently held, and must obtain the FDIC's prior, written consent to engage in additional real estate activity or make additional investments in the subsidiary; the Bank shall continue to meet applicable capital standards; the Bank shall conduct quarterly calculations to ensure that it meets the definition of a "well capitalized" institution, and, in the event the Bank falls below the "well capitalized" level, the Bank shall notify the FDIC within 15 days and submit the FDIC an acceptable plan for restoring capital to the "well capitalized" level; 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 unless the FDIC's prior, written approval is obtained; the subsidiary shall be satisfactorily capitalized and conduct separate and distinct operations from the Bank, utilizing separate records, policies and procedures; 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.