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to this Service Corporation Agreement was approved on April !S, 1985. As modified, this entity's primary authorized functions were to originate and service mortgage loars and deeds of trust; to act as a mortgage loan broker or mortgage banker in connection with real estate transactions; to acquire, develop or otherwise participate in real estate owned by savings and loan associations and others; and to originate, buy, sell or otherwise participace in real estate and home improvement loans. Authorized miscellaneous activities included travel agency services, mutual ticket agency services and bill paying services to savings and loan associations or their customers.

N. The coast Construction Service Corporation of California was originally organized on March 11, 1969 and its name changed to SSFLC. An amandment to its Service Corporation Agreement was authorized by the Callfomnia Department in September 20, 1983, authorizing SSPLC to carry on and conduct a securities brokerage business, and to conduct a general engineering and contracting business in connection with properties held for investment, acquired through foreclosure or otherwise constituting an asset of a domestic savings and loan corporation.

Lincoln's Operating Plan also described Lincoln's plans to expand its mortgago-banking operations, including the development of a progran to enhance profit and expand its mortgage servicing portfolio to increase current earnings. The Operating Plan expressly described blacoln's Intent to pool loans in mortgage-backed securities or pledge thai. loans as collateral for mortgage-backed bonds, and later to use mortgage-backed securities as collatoral for mortgage-backed bonds or for sale in the secondary market. Managemont bolleved that this practice would provide a more markotable and less expensive financed loan product and thoroby would increase the quality of Lincoln's loan asiots. In addition, mortgago-backed bonds would allow Lincoln to match mortgage Instrument maturities with bond maturitios.

Although Lincoln retained a conai tnent to maintain a traditional residential mortgage progras, direct investment in residential real estato (Including master-planned communities), equity securities and service corporations was viewed by Lincoln's now management as essential to Lincoln's long-term survival, particularly la light of Lincoln's unsuccessful past history and the rocaat tailor or financial distross of hundreds of savings and loan associations throughout the United States. Most of these institutions had only a small porcentage of their assets in direct investments and had rolled on residential mortgage lending, almost exclusively, for their Income, with the bulk of their assets in low interest rato loans with long maturities. ACC's provious financial success had been directly linked to its management's

years of experience in real property, land development and securities, and Lincoln, therefore, was uniquely qualified to rely more heavily than other institutions on direct investments as a means to suitructure its portfolio prudently with less incremental risks. The Operating Plan specifically described Lincoln's Intention to acquire and develop residential real property either directly or indirectly through its service corporations described above.

The Operating Plan also set forth Lincoln's plans to invest in commercial land developaont, including in hotel projects through its subsidiary CHG. ACC had successful earlier experience in the acquisition and development of commercial property Through Its wholly owned subsidiary, American Continental Properties, Inc., and had particular experience in the Arizona and Colorado cual estate markots. The operating Plan specifically stated Wincoln's Intention that such commercial dovelopment would include buildings and complexes, shopping and mixed-use centers and industrial dovelopments, which are the bases for its nastor-planned communities.

Lincoln also planned to invest in the communications Industry, for example, through its authorized Investment in Lincoan. This lavestment furthor would diversity Lincoln's portfolio by incorporating non-laterust rato sensitive assets, an Important objective of AcČ in its restructuring plans. Management considered broadcast companies generally to have unique value based upon their strong cash flow experience and, generally, the nood for only modest investment after purchase, and equity accounting rules would permit Lincoln to share in the oamings of its Investment target. other Insusthonts in service corporacions outlined in the operating Plan included investment in LAPICO, which Lincoln latended to use for lavestment in securities, and the ownership by Wacoln of two Lasurance agencies, Oxford and IWI, in which entities Lincoln lntended to have a combined investment of approxinately $2 million.

Lincola's planned deposit, savings and borrowing goals provided for controlled growth in order to maintain financial stability. Wacola Initially intended to increase liabilities primarily through muall deposits acquired from branch office communstle. Ithough Wacoln planned to poly primarily on retail doposits, bt planned to continue to pulso deposits through na jor Lavestreat bankors with maturitius ranging from three to twelve rusi. Management latended that this progra could be accelerated or teminated depending on laterest rate fluctuations. Lincoln also structured various collateralized deposit programs, including the placement of $500 uillon La collateralized Floating rate comercial paper through a subsidiary of Morrill Lynch.

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Investmonts by Lincoln of $1,532,000 in PTS and $20 million in Provident, both authorized investments, were also set forth in the Operating Plan as potential long-term investments. To maintain màximum liquidity protection against fluctuacions in deposits, lending activities and other investments, Lincoln planned to use credit facilities, giving it the ability to match assets and liabilities at minimum borrowing costs.

The Operating Plan reflected management's increased emphasis on closely monitoring asset and liability quality and interest rate sensitivity:. Lincoln intensified its efforts to diversify its asset portfolio through lending and direct investments in land and equity securities and intended to seek acceptable real property, personal guaranties or other security with respect to loan assets. Lincoln planned to monitor its exposure to interest rate changes continually to enable it to plan or make appropriate adjustments in its portfolio.

Lincoln's proacquisition portfolio consisted largely of non-diversified calliomia hone loans, many of which were secured by risky second trust deeds, and a significant number of discounted adjustable rate mortgages which ultimatoly suffered dolinquency probleas and created extreme mismatching of liabilities and assets. After its acquisition by Acc, Lincoln created secured loan assots, diversified on a geographic and Industry basis and closely watched with 11abflitio, without sacrificing an excellent delinquency rato 2370 .204 in 1984, .628 in 1985 and .438 in 1986. Those rates compare favorably with the ratos experienced by Lincoln prior to ACC'; acquisition, .676 in 1981, .898 in 1982, and .671 in 1983. The post-acquisition portfolio was much less sensitive to interest rate fluctuations than the proacquisition portfolio. The Operatiаg Plan included Lincoln's specific plans to develop a high-yield bond portfolio with a variable rato component that would provide increased returns as ratas rise, and branch deposits with maturities from one to ton yours with caphasis at the same time on liabilities with maturities of five to seven years. Wincoln's post-acquisition portfolio would be Insulated from interest risk due to Lincola's ottorts to effect favorable matching. Interest rate swaps were also considered as a means to transton some short-tea deposits into flxed-rato deposits and to help minimize intorust rato lacrusos. Lincoln's direct investmont authority was soon as critical to Lincoln's ability to offset the effects of any upward Latorust rate surge.


Ratio of 'scheduled items, ' under applicable regulations, to total assets.

The Operating plan contemplaced the possibility of selling United States Treasury bond futures or purchasing puts on United States Treasury bond Cuturo to hedge against interest rate fluctuation. Also contemplated was the sale of treasury bill or certificate of deposit contracts to hedge against increases in short-term rates. Such a program was consistent with ACC's management's extensive experience in using the futures and option markets to manage the substantial mortgage portfolio of ACMC, its mortgage banking subsidiary.

The Operating Plan also detailed Lincoln's other anticipated operations, upon the receipt of approval of applications filed with the appropriate federal and state regulatory authorities. Por example, Lincoln's application seeking approval to compensate ACMC for servicing Lincoln'. home loans was approved by the PHLBB on June 22, 1984, and Lincoln indicated its latent to continue subcontracting its servicing through ACMC consistent with the terms of that approval. Lincoln described its contemplated purchase from ACC of "Garden Lakos" and "The Islands, * real property located near Phoenix, Arizona, pursuant to its application filed on September 20, 1984. Wacoln also anticipated filing an application requesting approval to soll to CRC various percals of real property and planned to engage la additional transactions with alrillatos as required by business need in a Meanor consistent with regulatory restrictions and approvals.

The Operating Plan also confirmed Lincoln's Intent to satisfy the requirements of the Community Roiavostmont Act of 1977 through Investients in local community programs which serve the credit and housing needs of lower socio-economic groups.

As the foregoing clearly demonstrates, ACC and Lincoln candidly disclosed their plans and programs for wincoln with respect to direct investments in cal estate and securities to the regulators prior to implementation. The three your Operating Plan was reviewed and extensively discussed with the regulators, and rovised to meet the expressed concerns and suggestions of those regulators,

The MLBB acknowledged its awareness of those plans in an undated morandu trou the General Counsel and Director, Examinations and supervision, to the FHLAB recommanding that the decision dated nay 11, 1989 denying Lincola's application for excaption for provisions of the direct Investnant Rule be aftled. 217 In that neaorandwa, the authors noted that

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Memorandum fron Norman H. Raidon and willian J. Schilling to
Edwin J. Gray, Chairman, and Mary A. Grigsby and Donald i.
Hovde, Board Members.

In the first year following its acquisition by ACC, (Lincolnl grow by over 1001. The association plans to continue to grow at a rapid rate. Its November 1984 operating plan projects asset growth of 410 during 1985, to a total of $3.16 billion, sot in 1986, to a total of $4.7 billion, and 331 for 1987, to a total of $6.3 billion.

Virtually none of Lincoln's asset growth since its acquisition is attributable to its home mortgage portfolio, but is instead comprised of investments in non-investment grade bonds, equity securities, purchases of raw land and ADC (acquisition, developaent and construction) loans. ' ACC's proposed registration statement for a $30 million subordinated debt offering states that: 'Lincoln Savings has withdrawn almost entirely from traditional lending activities, such as financing the purchase of residential real estate with fixed rate and adjustable rato mortgages.' It has acquired (or committed to the acquisition of) over $1 billion in new direct lavestments and ADC (Acquisition Development and Construction, loans since its acquisition by ACC. Between March 1984 and March 1985, its lavestnant in ADC loans ros. by 999.91 to $313.7 million, its construction loans Lacrused by 378.61 to $28.1 million, its investments la service corporations Increased by 999.91 to $311.7 million.

According to its operating plan, Lincoln does not Latand to expand its portfolio of hono mortgages, but will generate only those that can be pooled In mortgago-backed securities. It projects the disposition of Its aisting portfolio of residential portgages. As a percentage of assets, its homo portgagoportfolio will greatly dlalaish. Its assot growth will focus instead on bortgage-backed bonds, direct lavestmonts La residential and commercial property, ADC loans and corporate bonds.

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