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The Operating Plan contemplated the possibility of selling United States Treasury bond futures or purchasing puts on United States Treasury bond futures 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. For example, Lincoln's application seeking approval to compensate ACMC for servicing Lincoln's home loans was approved by the FHLBB on June 22, 1984, and Lincoln indicated its intent to continue subcontracting its servicing through ACMC consistent with the terms of that approval. Lincoln described its contemplated purchase from ACC of "Garden Lakes" and "The Islands," real property located near Phoenix, Arizona, pursuant to its application filed on September 20, 1984. Lincoln also anticipated filing an application requesting approval to sell to CHC various parcels of real property and planned to engage in additional transactions with affiliates as required by business need in a manner consistent with regulatory restrictions and approvals.

The Operating Plan also confirmed Lincoln's intent to satisfy the requirements of the Community Reinvestment Act of 1977 through investments 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 Lincoln with respect to direct investments in real estate and securities to the regulators prior to implementation. The three year Operating Plan was reviewed and extensively discussed with the regulators, and revised to meet the expressed concerns and suggestions of those regulators.

The FHLBB acknowledged its awareness of these plans in an undated memorandum from the General Counsel and Director, Examinations and Supervision, to the FELBB recommending that the decision dated May 17, 1985 denying Lincoln's application for exemption from provisions of the Direct Investment Rule be affirmed. 247 In that memorandum, the authors noted that

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Memorandum from Norman H. Raiden and William J. Schilling to
Edwin J. Gray, Chairman, and Mary A. Grigsby and Donald Ï.
Hovde, Board Members.

In the first year following its acquisition by ACC, (Lincoln) grew by over 100%. The association plans to continue to grow at a rapid rate. Its November 1984 operating plan projects asset growth of 41% during 1985, to a total of $3.16 billion, 50% in 1986, to a total of $4.7 billion, and 33% 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, development 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 rate mortgages. It has acquired (or committed to the acquisition of) over $1 billion in new direct investments and ADC (Acquisition Development and Construction] loans since its acquisition by ACC. Between March 1984 and March 1985, its investment in ADC loans rose by 999.9% to $315.7 million, its construction loans increased by 378.6% to $28.1 million, its investments in service corporations increased by 999.9% to $311.7 million.

According to its operating plan, Lincoln does not intend to expand its portfolio of home mortgages, but will generate only those that can be pooled in mortgage-backed securities. It projects the disposition of its existing portfolio of residential mortgages. As a percentage of assets, its home mortgages portfolio will greatly

diminish. Its asset growth will focus instead on mortgage-backed bonds, direct investments in residential and commercial property, ADC loans and corporate bonds.

Lincoln's earnings from 1984 through 198725/ reflect the positive benefit of these changes in business objectives before Lincoln's management was required to devote substantially all of its time, to responding to the regulatory examination process.

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Lincoln's net worth also increased substantially under ACC's control from 1984 through 1988, whether calculated under GAAP or regulatory accounting principles ("RAP"):

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All financial data regarding ACC, Lincoln or any consolidated subsidiary appearing in this paper for all fiscal years through 1987 are taken or derived from audited financial statements, unless calculated for the purpose of this paper. All such financial data for any period commencing or ending after December 31, 1987 is unaudited and subject to year-end adjustments normally made in connection with an audit.

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Lincoln's aggregate return on investment from 1984 through 1988 also exceeded industry standards: 26/

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ACC's financial results of operation were certified without qualification in 1984 and 1985 by Arthur Andersen and Company ("Arthur Andersen"), and in 1986 and 1987 by Arthur Young & Company ("Arthur Young"), Lincoln's and ACC's independent certified public accountants during those years.

Lincoln's reported performance from 1984 through 1988, when Lincoln was severely burdened by the effects of what was then almost three years of regulatory examinations, demonstrates the success of the Operating Plan:

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In every quarter from ACC's acquisition of Lincoln until
the third quarter of 1988, Lincoln's return on assets
far exceeded its cost of funds.

Prior to ACC's acquisition of Lincoln, at the end of 1983,
Lincoln's return on average assets was approximately .321.
Following ACC's acquisition, Lincoln's return on average
assets was .74% in 1984, 2.92% in 1985, 1.38% in 1986, .95%
in 1987, and .05% in 1988 (through September 30, annualized)
The industry's average return on assets was .12% in 1984,
.39% in 1985, .02% in 1986, -.64% in 1987 and -.94% in 1988.
United States League of Savings Institutions, 89 Savings
Institutions Sourcebook, (1989) at 55.

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Through September 1988, Lincoln was profitable in 16 of the 19 quarters following its acquisition by ACC.

Lincoln's return on assets consistently and
substantially exceeded the return it could have earned
had it invested in single family residential mortgages.

Lincoln's reported earnings and net worth showed
sustained growth.

Lincoln consistently outperformed the industry as a
whole in a broad group of traditionally operated
thrifts.2
27/

Under ACC's management, regulatory net worth, a key indicator of financial health for regulatory purposes, increased to an amount far in excess of the regulatory requirements.

ACC transformed Lincoln from an ailing and undiversified savings and loan association into a diversified financial institution equipped to respond to future interest rate fluctuations and changes in the financial services marketplace.

The foregoing discussion demonstrates not only the wisdom of ACC's Operating Plan but the openness with which that Plan was pursued. To suggest that ACC or Lincoln attempted, at any time, to cloak its plans from disclosure to federal or state regulators is simply without factual support.

VII. The 1984 Regulatory Examination

The FHLBB conducted its first regulatory examinations of ACC and Lincoln in 1984. These examinations were brief and resulted in reports only several pages long which raised few issues, none of any particular significance.

On December 6, 1984, the FHLBB completed its holding company examination of ACC as of September 19, 1984. The FHLBB reviewed ACC's business activities, ACC's acquisition of Lincoln and its

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For example, the industry average profit margin (net
after-tax income divided by total income) was .97% in 1984,
3.16 in 1985, .110 in 1986, -6.86% in 1987 and -10.17% in
1988 (United States League of Savings Institutions,

89 Savings Institutions Sourcebook, (1989) at 55) as compared
to Lincoln's profit margin of 6.18 in 1984, 14.910 in 1985,
6.87% in 1986, 6.33% in 1987 and .44% in 1988 (through

September 30, annualized).

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