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Marlborough Savings Bank


RE: Marlborough Savings Bank Marlborough, 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 of the Federal Deposit Insurance Act, an application has been filed with the Federal Deposit Insurance Corporation by Marlborough Savings Bank, Marlborough, Massachusetts ("the Bank"). The Bank requests the FDIC's consent for its wholly-owned subsidiary, Marbro-Hudston, Inc. ("MHI"), to retain its interest in a joint venture, which owns a single residential building lot, located in Grafton, Massachusetts, until it is able to divest itself of its interest in the joint venture.

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. The Massachusetts General Code permits holding of real estate investments.

The Bank and MHI have been engaged in this activity since 1987, when MHI entered into a joint venture with Kendall Associates, Inc. to acquire and develop residential houses in the Homestead Farms subdivision, a location which is within the Bank's market area. The joint venture interest is MHI's sole impermissible real estate investment, and the Bank has expressed no intention of conducting further such real estate investment activities through MHI. Furthermore, no major additional expenditures in connection with the property are planned. The Bank has indicated that it plans the occasional transfer of real estate which it shall in the future acquire via debts previously classified to MHI for management and disposal. This activity is permissible for subsidiaries of national banks.

The Bank is attempting to sell the remaining lot, and requests permission to hold the investment until market conditions improve and the property can be sold without a loss. Currently, the market is soft, and near term divestiture under such conditions would likely result in further loss.

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 interest in the joint venture is only 0.260 of the Bank's Tier 1 capital, and the Bank would continue to be "well capitalized" in the event its entire interest in the venture were deducted. In connection with this application, the FDIC has taken into consideration the favorable financial and managerial resources and future earnings prospects of the Bank.

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 Bank's interest in the joint venture is now and is expected in the future to represent a nominal portion of the Bank's capital; that the Bank's financial condition and management are adequate; that the State authority authorizes the activity; and that the Bank is in compliance with applicable capital standards -- the FDIC concludes that the retention of the interest in the joint venture does not pose a significant risk to the Bank Insurance Fund, and therefore may be and hereby is approved subject to the following restrictions.

The Bank's real estate investments shall be limited to its current interests in the joint venture; the Bank shall continue to meet all applicable capital standards; the Bank shall obtain the FDIC's approval to continue to hold its interest in the joint venture if it has not divested itself of all its interests within five years of the date of the approval letter; and the FDIC shall have the right to alter, suspend or withdraw its approval if circumstances change significantly. In addition, transactions between the Bank and MHI that would be covered transactions for purposes of Section 23B of the Federal Reserve Act, 12 U.S.C. § 371c-1, if MHI were an affiliate of the Bank under Section 23B, shall be made in accordance with the restrictions of Section 23B to the same extent as though MHI were an affiliate of the Bank.

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