WHEREAS, Lincoln believes that its March 1986

examination does not present a fair portrayal of the

association's current financial condition or operations, but enters into this Memorandum of Understanding in a spirit of regulatory compliance and cooperation in order to resolve all issues outstanding as a result of the March 1986 examination and the enforcement investigation; and

WHEREAS, in light of Lincoln's transfer of its FHLBank membership to FHLBank - Seattle, Lincoln and the FHLBB enter into this Memorandum with the understanding that a new examination of Lincoln will be undertaken beginning in March 1988 by examiners from the FHLBank

Seattle; and

WHEREAS, the FHLBB agrees that it will not initiate any proceedings resulting from the March 1986 examination and enforcement investigation, and in full resolution of all issues outstanding between the parties as a result of the March 1986 examination and the enforcement investigation;

NOW, THEREFORE, the following understandings have

been reached:

Reserves and Classifications

1. Lincoln has booked or will book as of December

2. If pursuant to the December 31, 1987 audit of Lincoln by its auditors or if there is a change in

circumstances with respect to any such property for which a specific reserve has been established which makes all or part of such reserve no longer appropriate or which makes the existing reserve inadequate (9.9., a sale of the property or an increase or decrease in the value of the property), Lincoln will appropriately adjust that specific reserve and will promptly inform the FHLBank

Seattle.

3. Lincoln agrees that as long as it holds the following assets (as adjusted by any change pursuant to paragraph 4), it will increase its contingency factor

4. If there is a change in circumstances (e.z., repayment, sale or change in value) with respect to any asset for which Lincoln's contingency factor has been increased, Lincoln will make an appropriate adjustment to its

contingency factor (e.g., an increase or a decrease) and will promptly inform the FHLBank

Seattle.

5. Consistent with amended 12 C.F.R. 561.15c, Lincoln has established an Internal Reserve Committee responsible for reviewing Lincoln's assets on a regular basis, recommending establishment of prudent valuation

that by March 1, 1988, this Committee will have specifically reviewed the Pointe West and Dabney Joint Venture loans and established necessary reserves in accordance with GAAP.

Capital Requirement

6. American Continental Corporation, Lincoln's

parent, will contribute $10 million to Lincoln's capital by making a $10 million cash contribution on or before March 17, 1988.

7. Lincoln agrees that it will use its best efforts to sell before December 31, 1988, $50 million of preferred stock or subordinated debt, the terms and

conditions of which will be mutually acceptable to Lincoln and to the FHLBank Seattle, and which will qualify for inclusion as additional regulatory capital.

8. The additions to Lincoln's capital requirement provided for herein shall supersede the authority of the Principal Supervisory Agent of the Twelfth FHLBank District to establish an individual minimum capital requirement for Lincoln pursuant to 12 C.F.R. 563.14, so long as Lincoln is in material compliance with the provisions of this Memorandum as determined by the appropriate United States District court as set out in paragraph 22.

Direct Investments

9. Lincoln agrees that in calculating its

563.13,

regulatory capital requirement under 12 C.F.R. Lincoln will treat no more than $550 million of its equity risk investments as "grandfathered", the excess being, therefore, subject to a 10% addition to Lincoln's contingency factor. Other than as agreed to in paragraph 3, the increase in Lincoln's contingency factor resulting from compliance with this paragraph shall be in lieu of any incremental increase to Lincoln's capital requirement which might otherwise have been necessitated by Lincoln's aggregate equity risk investments.

Said contingency factor increase

shall be reduced to the extent that it causes Lincoln's 563.13 net worth requirement, to exceed six percent of total regulatory liabilities.

10.

Subject to compliance with paragraphs 9 and

12 herein, Lincoln will be permitted to maintain aggregate equity risk investments in amounts up to one-third of its total assets. In determining its compliance with paragraphs 9 and 10, Lincoln shall compute the amount of its aggregate equity risk investments in accordance with the compliance calculation procedures of 12 C.F.R. 563.9-8.