Mr. John G. Fallon
Executive Vice President, Treasurer,
and Chief Financial Officer
Affiliated Community Bancorp, Inc.
716 Main Street
Waltham, Massachusetts 02154

Dear Mr. Fallon:

This is in regard to the request of Affiliated Community Bancorp, Waltham, Massachusetts ("ACB"), for relief from certain commitments made in connection with ACB's acquisition of Lexington Savings Bank, Lexington, Massachusetts ("Savings Bank"), a qualified savings bank within the meaning of the Bank Holding Company Act ("BHC Act"), and The Federal Savings Bank, Waltham, Massachusetts, ("Thrift"), a federally chartered savings bank.¹ The Federal Reserve Bank of Boston approved ACB's application to become a bank holding company by acquiring Savings Bank and Thrift on June 28, 1995, and the acquisition was consummated on October 17, 1995. At the time that ACB acquired Savings Bank, Savings Bank was engaged in the sale of savings bank life insurance ("SBLI") under Massachusetts law. Because ACB did not qualify as a "savings bank holding company"² at the time that it became a bank holding company, and consistent with Board precedent, ACB committed that Savings Bank would cease to engage in SBLI activities within two years of consummation of the acquisition of Savings Bank and Thrift.

Section 3(f)(3) of the BHC Act permits a qualified savings bank controlled by a bank holding company, subject to certain restrictions, to engage in the sale and underwriting of SBLI.³ Savings Bank is a qualified savings bank for purposes of this provision. Section 3(f)(4) of the BHC Act provides that a qualified savings bank must cease its activities under section 3(f)(3) if the savings bank is acquired by a company other than a savings bank holding company, "unless such activity is otherwise authorized pursuant [the BHC Act].⁴

The legislative history of section 3(f) of the BHC Act indicates that Congress intended to allow savings banks that lost qualification under section 3(f) to engage in activities "otherwise permissible under the BHC Act," including relevant Board precedent.⁵ Since the enactment of section 3(f), the courts have found that the nonbanking prohibitions of section 4 of the BHC Act do not apply to the direct activities of banks and, consequently, that the BHC Act permits a state bank owned by a bank holding company to engage directly in any activity permissible under state law.⁶

Absent section 3(f), it would otherwise be permissible under the BHC Act for a state bank to engage in the sale of SBLI in accordance with state law. In this case, Massachusetts law permits state chartered savings banks to engage directly in the sale or underwriting of SBLI.⁷ It would be inconsistent with the purpose of section 3(f) to conclude that a savings bank that qualified for the section 3(f) exemption and subsequently loses that qualification is prohibited from conducting SBLI and other activities while a competing savings bank that never qualified for the section 3(f) exemption is permitted to continue those activities under the BHC Act. Such an interpretation also would treat savings banks differently from other banks.

Based on the terms and legislative history and purposes of section 3(f), it is our opinion that SBLI activities that are conducted directly by a bank pursuant to state law are "otherwise authorized pursuant to the [BHC Act]" within the meaning of section 3(f)(4) of the BHC Act.

This determination is based on the facts and circumstances of this case and does not apply to the performance of other insurance activities by Savings Bank.⁸ Any changes to the proposal, the surrounding circumstances, or the facts relied on by the Legal Division should be presented to the Board as soon as possible, and may require revision of this determination.

Sincerely,

(Signed) J. Virgil Mattingly

J. Virgil Mattingly

cc: Federal Reserve Bank of Boston

1. Section 2(m) of the BHC Act defines a term "qualified savings bank" as a state-chartered savings bank that was organized on or before March 5, 1987. 12 U.S.C. § 1841(m). Savings Bank is a qualified savings bank for purposes of the BHC Act; however, Thrift is not a qualified savings bank for purposes of the BHC Act because it was chartered under federal not state law. Return to text

2. Section 2(1) of the BHC Act defines the term "savings bank holding company" as any company that controls one or more qualified savings banks if the aggregate total assets of such savings banks constitute, upon formation of the holding company and at all times thereafter, at least 70 percent of the total assets of such company. See 12 U.S.C. 1841(l).Return to text

3. See 12 U.S.C. § 1842(f)(3).Return to text

4. See 12 U.S.C. § 1842(f)(4).Return to text

5. See Competitive Equality Banking Act of 1987, House Rept. No. 100-261, 100th Cong., 1st Sess. 130-132 (1987).Return to text

6. See Merchants National Corporation, 75 Federal Reserve Bulletin 388 (1989), aff'd Independent Insurance Agents of America, et al. v. Board of Governors, 890 F. 2d 1275 (2d Cir. 1989), cert. denied 498 U.S. 810 (1990) ("Merchants").Return to text

7. See Mass. Gen. Laws Ann. ch. 178A § 4 (Supp. 1996).Return to text

8. This rationale would not permit Savings Bank to engage in insurance activities other than SBLI activities. Section 3(f)(2) requires a qualified savings bank that is controlled by a bank holding company to limit all of its insurance activities, other than the performance of SBLI activities pursuant to paragraph (3), to insurance activities allowed under section 4(c)(8) of the BHC Act. See 12 U.S.C. § 1842(f)(2). This limitation operates separately from and in addition to the prohibitions contained in section 4 of the BHC Act. Merchants provides that the non banking provisions of section 4 do not limit the direct activities of banks, but does not address the express limitation contained in paragraph (2), which specifically applies to all insurance activities conducted directly by a qualified savings bank.Return to text