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IN THE UNITED STATES COURT OF FEDERAL CLAIMS No. 94-522C (Judge Williams) ___________________________________________________________________

FIRST ANNAPOLIS BANCORP, INC., Plaintiff, v. THE UNITED STATES, Defendant. ___________________________________________________________________ PLAINTIFF'S POST-TRIAL FINDINGS OF FACT AND LEGAL ARGUMENT REGARDING DAMAGES

___________________________________________________________________

Dale A. Cooter James E. Tompert COOTER, MANGOLD, TOMPERT & KARAS, L.L.P 5301 Wisconsin Avenue, N.W. Suite 500 Washington, D.C. 20015 (202) 537-0700 Attorneys for Plaintiff First Annapolis Bancorp, Inc. Dated: June 4, 2007

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TABLE OF CONTENTS

Table of Authorities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iii INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 FINDINGS OF FACT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 I. The Formation Of Bancorp . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 II. The Contract Between Bancorp And The Government . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 III. The Conversion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 IV. Contract Performance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6 V. Breach Of The Contract By The Government . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7 VI. The Impact of the Passage of Firrea on the Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17 VII. The Viability of the Bank "But For" Fierrea . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22 VIII. RAP versus GAAP Accounting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .31 IX. Damages Sustained By Bancorp . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .32 X. Procedural Status of the Defendant's Defenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .34 SUMMARY OF LEGAL ARGUMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .35 ARGUMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 3 I. PLAINTIFF IS ENTITLED TO $22,606,959 IN RESTITUTION . . . . . . . . . . . . . . . . . . . . . . 36 A. B. FIRREA Constituted a Total Breach of the Government's Agreement With Bancorp 36 The Government's Total Breach Cases- Admiral and Southwest are Distinguishable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .38

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1. Admiral is factually distinguishable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .39 2. Southwest is factually distinguishable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 C. Bancorp Is Entitled to $22,606,959 in Restitution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 1. 2. 3. Bancorp is entitled to recover its $13, 665,907 investment . . . . . . . . . . . . . 49 The Plaintiff is entitled to a tax gross-up on the award . . . . . . . . . . . . . . . . . 51 The Government has failed to prove that there should be an offset to Plaintiff's award . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54

III.

EVEN ASSUMING THAT THE BANK'S VIABILITY IS RELEVANT, THE GOVERNMENT HAS NOT SUSTAINED ITS BURDEN OF PROOF ON VIABILITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .57 A. B. The Burden of Proof is the Defendant's And It Has Failed to Meet It . . . . . . . . . . . 58 Even If It Was the Plaintiff's Burden to Demonstrate Viability, It Did So . . . . . . . . 63

CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 6

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TABLE OF AUTHORITIES

FEDERAL CASES Admiral Financial Corp v. United States , 57 Fed.Cl. 418 (2003) . . . . . . . . . . . . . . . . . . . . passim Admiral Financial Corp. v. United States , 378 F.3d 1336 (Fed. Cir. 2004) . . . . . . . . . . . . passim Admiral Financial Corp. v. United States , 329 F.3d 1372 (Fed. Cir. 2003) . . . . . . . . . . . . . . . . 40 Admiral Financial Corp. v. United States , 54 Fed. Cl. 247 (2002) . . . . . . . . . . . . . . . . . 14, 20, 41 Amber Resources Co. v. U.S. , 73 Fed.Cl. 738 (Fed.Cl.,2006) . . . . . . . . . . . . . . . . . . . . . . . . 50, 51 Amber Resources v. United States , 68 Fed. Cl. 535 (2005) . . . . . . . . . . . . . . . . . . . . . . . . . passim American Capital Corp. v. U.S. , 472 F.3d 859 (2006) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58, 59 American Capital Corp. v. U.S ., 65 Fed. Cl. 241 (2005) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58, 61 Caroline Hunt Trust v. United States , 470 F.3d 1044 (2006) . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 Caroline Hunt Trust Estate v. United States , 65 Fed. Cl. 271 (2005) . . . . . . . . . . . . . . . . . passim First Annapolis v. United States , 75 Fed. Cl. 280 (2007) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Glendale Fed. Bank, FSB v. United States , 239 F.3d 1374 (Fed. Cir. 2001)) . . . . . . . . . . . . . . . 48 Green v. C.I.R. , T.C. Memo. 2003-244, 2003 WL 21940722 . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 Hansen Bancorp, Inc. v. United States , 367 F.3d 1297 (Fed.Cir.2004) . . . . . . . . . . . . . . . . passim Home Savings of America v. US 399 F.3d 1356 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51, 52 Hughes v. United States , 71 Fed. Cl. 284 (2006) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim Kilburg v. C. I. R. , T.C. Summ. Op. 2004-36, 2004 WL 565952 (2004) . . . . . . . . . . . . . . . . . . . 53 Landmark Land Co. v. FDIC , 256 F.3d 1365 (Fed. Cir. 2001) . . . . . . . . . . . . . . . . . . . . . . . . . 55

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LaSalle Talman Bank, F.S.B. v. United States , 317 F.3d 1363 (Fed. Cir. 2003) . . . . . . . . . . . . . 62 Lisbon Contractors, Inc. v. United States , 828 F.2d 759 (Fed. Cir. 1987) . . . . . . . . . . . . . . . . . 54 Mobil Oil Exploration & Producing Southeast, Inc. v. United States , 530 U.S. 604 (2000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim Southwest Investment Co. v. United States , 63 Fed. Cl. 182 (2004) aff'd, 158 Fed.Appx. (2005) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim Westfed Holdings , Inc. v. United States , 407 F.3d 1352 (Fed. Cir. 2005) . . . . . . . . . . . . . . . . . 56

FEDERAL STATUTES 12 U.S.C. 1441a, 1811 et. seq.) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12 12 U.S.C. 1464(t)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13 12 U.S.C. 1464(t)(3)(A) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13 28 U.S.C. 172(b)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .53 Pub. L. 105-34 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 5

FEDERAL REGULATIONS 12 C.F.R. Part 563b.26(b)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .59 12 C.F.R. 563b.26 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3, 22 54 Fed. Reg. 46, 845 (11/8/89) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13, 15 Subpart C of 12 C.F.R. Part 563b . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3 TREATISES Restatement (Second) of Contracts, 243 (1979)) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36, 48 Restatement (Second) of Contracts, 349 (1979)) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 iv

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Restatement (Second) of Contracts, 373 (1979)) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .49 Restatement (Third) of Restitution and Unjust Enrichment, 37 (Tentative Draft No. 3, 2004)) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .37, 55

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IN THE UNITED STATES COURT OF FEDERAL CLAIMS FIRST ANNAPOLIS BANCORP, INC.,) ) ) ) v. ) ) THE UNITED STATES, ) ) Defendant. ) ____________________________________) Plaintiff,

No. 94-522C (Judge Williams)

PLAINTIFF'S POST-TRIAL FINDINGS OF FACT AND LEGAL ARGUMENT REGARDING DAMAGES Plaintiff, First Annapolis Bancorp, Inc. ("Bancorp"), by and through counsel, pursuant to the briefing schedule set by the Court at the conclusion of the trial on damages, hereby submits its Post-trial Findings of Fact and Legal Argument Regarding Damages, and states as follows: INTRODUCTION As set forth below, Bancorp submits that applying the proper legal analysis to the evidence adduced at trial demonstrates that Bancorp is entitled to restitution damages in the amount of the $13,665,907 that Bancorp invested in First Annapolis Savings Bank, F.S.B. ("First Annapolis"), plus a tax gross-up to compensate Bancorp for its total loss, for a total award of $22,609,959. FINDINGS OF FACT I. The Formation Of Bancorp. 1. On November 19, 1987, Bancorp was incorporated under the laws of the state of Delaware "to act as a savings and loan holding company." Plaintiff's Trial Exhibit ("PX") 11.

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2. Bancorp was authorized to issue 30,000,000 shares of common stock. Id. 3. Bancorp was formed for the purpose of acquiring First Federal Savings and Loan Association of Annapolis ("First Federal") pursuant to its voluntary supervisory conversion into a stock savings bank. PX 8 (10/21/87 revised business plan). It was contemplated that First Federal would convert from a federal mutual savings and loan association into a federal capital stock savings bank by way of merger into a new entity, First Annapolis Savings Bank, F.S.B. ("First Annapolis") PX 8. Bancorp intended to sell at least 12,000,000 shares of its common stock at $1.00 per share through a private placement to accredited investors, and then use the net proceeds from the stock sale to purchase all of the stock in First Annapolis, in a minimum amount of $11,000,000, immediately prior to the conversion. PX 8. II. The Contract Between Bancorp And The Government. 4. The contract by and between Bancorp and the Government is memorialized in the following documents:1 A. FHLBB Resolution 88-602, dated July 21, 1988. PX 1. B. FHLBB Resolution 88-603, dated July 21, 1988. PX 2. C. July 21, 1988 forbearance letter. PX 3. D. August 5, 1988 forbearance letter. PX 4. E. August 11, 1988 forbearance letter. PX 5. F. August 12, 1988 forbearance letter

The documents listed above were also all attached to Bancorp's Short Form Motion for Summary Judgment as tabs A through I. 2

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(revising July 21, 1988 forbearance letter). PX 6. G. Regulatory Capital Maintenance/Dividend Agreement ("RCMA"), dated August 12, 1988. PX 7. H. First Annapolis Business Plan, dated 10/21/87. PX 8. I. October 28, 1998 letter from Deloitte Haskins & Sells (independent public accountants). PX 9. J. February 9, 1988 letter from Federal Home Loan Bank Board ("FHLBB"). PX 10. 5. In Resolution No. 88-603 the Federal Home Loan Bank Board ("FHLBB") made the express findings that (1) "the Old Association's [First Federal Savings and Loan Association of Annapolis'] liabilities exceed its assets, as calculated under generally accepted accounting principles on a going concern basis," (2) "there would be no value realizable by the mutual accountholders of the Old Association upon liquidation," (3) "severe financial conditions exist which threaten the stability of the Old Association and conversion from mutual to stock form of organization is likely to improve the financial condition of the Old Association," (4) "New Institution [First Annapolis] would be a viable entity following conversion, as determined under 12 C.F.R. 563b.26," and (5) the conversion is a "supervisory conversion within the meaning of Subpart C of 12 C.F.R. Part 563b." PX 2 at 2 (emphasis supplied). The Resolution further provides that: On the date of consummation of the acquisition, merger and conversion, [Bancorp] shall make a capital contribution to the New Institution [First Annapolis] through the purchase of common stock in a minimum amount equal to the greater of $11,000,000 or an amount sufficient to raise the net worth of the New Institution [First Annapolis] to 1% of the total liabilities on a GAAP basis as specified in 12 C.F.R. Part 563b.26(b)(2). Id. at 11 13 (emphasis supplied). 3

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6. As set forth in the foregoing documents, the terms of Bancorp's contract with the Government, which are relevant to the issue of damages, include three regulatory forbearances, namely: (1) a regulatory forbearance so that supervisory goodwill could be included as an intangible asset in the calculation of regulatory capital, to be amortized over a period of 25 years ("goodwill forbearance"); (2) a regulatory forbearance so that First Annapolis could meet its minimum capital requirements by complying with a series of annual capital benchmarks set forth in its business plan for a period of 5 years ("capital ratio forbearance"), and (3) a regulatory forbearance to exceed the limitation on investments in service corporations for existing projects as approved by the Supervisory Agent ("investment in service corporations forbearance"). The Government did not give any other consideration or any thing of value. Transcript of March 28, 2007 Trial Testimony of David Kennedy ("Kennedy 3/28/07 Tr."). at 2330; Parran 3/19/07 Tr. at 1044, 1045. 7. The foregoing forbearances were the "heart and soul" of the contract. Transcript of March 21, 2007 Trial Testimony of Edward J. Heiden ("Heiden 3/21/07 Tr.") at 1430, 1432, 1433. They were integral to the agreement. Heiden 3/21/07 Tr. at 1434. "[T]he agreement was completely grounded in the forbearances that FHLBB was giving under the agreement to Bancorp to basically create a viable firm that would have a context for operating in a way so as to be profitable." Heiden 3/21/07 Tr. at 1430. The forbearances "went to the three areas that were needed for Bancorp to be successful, eliminating the baggage of its past, giving it enough flexibility with a five-year chance to meet its benchmarks and giving one of the key ways it was going to meet the, namely its loan the obtaining of profitability from its loan portfolio, giving that more flexibility and the flexibility for [ ] Bancorp to pursue that." Heiden 3/21/07 Tr. at 1431-32. 4

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8. Dr. Heiden concluded that no investor would have invested in Bancorp if the forbearances (or something similar) had not been part of the agreement. Heiden 3/21/07 Tr. at 1437. Even if the identical forbearances were not part of the agreement, there would have to be some comparable provisions allowing Bancorp to remove the burden of past regulatory deficits, that would allow the Bank to work with its major asset - the loan portfolio - in a way that could make it part of normal business operations; and that would afford "some latitude and space to get its act together with respect to meeting relevant regulatory benchmarks in a five-year period." Heiden 3/21/07 Tr. at 1437. 9. In its letter dated February 9, 1988, the FHLBB confirmed "that all conditions precedent have been met and the Conversion has been completed in accordance with the foregoing Resolution [No. 88-602] and the effective date of the conversion was August 13, 1988." PX 10. III. The Conversion. 10. To fulfill its obligation under the foregoing contract, Bancorp offered outstanding shares of its common stock to certain investors for $1.00 per share. PX 8. 11. In reliance upon the promises made by the Government in the foregoing contract, including the regulatory forbearances, Bancorp sold 14,165,874 shares of its common stock and thereby raised $14,165,874.00 in capital. First Annapolis v. United States, 75 Fed. Cl. 280, 282 (2007). 12. In further reliance upon the promises made by the Government in the foregoing contract, including the regulatory forbearances, Bancorp then purchased 100% of the stock of First Annapolis, or 13,665,907 million shares, for $1.00 per share. First Annapolis, 75 Fed. Cl. at 282. Transcript of March 19, 2007 Trial Testimony of Douglas A. Parran ("Parran 3/19/07 Tr.") at 1045;Transcript of March 22, 2007 Trial Testimony of George Thomas Daugherty ("Daugherty 3/22/07 Tr.") at 1587. 5

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13. First Federal thereby converted from a mutual savings and loan association, and merged into First Annapolis, as a federal stock savings bank. PX 2. 14. The effective date of the conversion, as determined by the FHLBB, was August 13, 1988. PX 10. 15. As of August 13, 1988, the total liabilities of the bank were in the range of $750,000,000, and 1% of that amount would have been $7,500,000. See PX 9 at 4. Therefore, pursuant to Resolution No. 88-603, dated July 21, 1988, the minimum amount of the capital Bancorp had to raise was $11,000,000, which it had exceeded by $3,165,874 (14,165,874.00 - 11,000,000 = 3,165,874). PX 2. By the same token, the minimum amount that Bancorp was required to invest in First Annapolis was $11,000,00, which it had exceeded by $2,665,907 (13,665,907 - 11,000,000 = 2,665,907). 16. On February 9, 1989, the FHLBB confirmed "that all conditions precedent have been met and the Conversion has been completed in accordance with" Resolution No. 88-602. PX 10. IV. Contract Performance. 17. Gregory Jones was the supervisory agent for the Bank during the period from the August 1988 conversion through December 1989. Transcript of March 23, 2007 Trial Testimony of Gregory Jones ("Jones 3/23/07 Tr.") at 1802. 18. By the last quarter of 1988, the Bank was on track and had made a profit. Parran 3/19/07 Tr. at 1047; Transcript of March 20, 2007 Trial Testimony of Douglas A. Parran ("Parran 3/20/07 Tr.") at 1202. 19. It was the meeting of the capital benchmarks, though, not whether the Bank was profitable or unprofitable, that was important under the contract. Parran 3/20/07 Tr. at 1144. On June 30, 6

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1989, First Annapolis had satisfied its first capital benchmark of 1.80% as set forth in the Business Plan. PX 8; Parran 3/19/07 Tr. at 1064; Parran 3/20/07 Tr. at 1144, 1225; Heiden 3/21/07 Tr. at 1478-79; Jones 3/23/07 Tr. at 1823-24, 1850; Kennedy 3/28/07 Tr. at 2307. 20. Through the Spring and Summer of 1989, the Bank was continuing to fund its service corporation investments as it had agreed in August 1988. Parran 3/20/07 Tr. at 1125. Regulatory capital continued to increase over the next six months. Jones 3/23/07 Tr. at 1850. V. Breach Of The Contract By The Government. 21. In early 1989, the news that FIRREA was coming was well publicized. Transcript of March 19, 2007 Trial Testimony of David F. Cook ("Cook 3/19/07 Tr.") at 960-61, 1048-1049; Jones 3/23/07 Tr. at 1812-13; Transcript of March 26, 2007 Trial Testimony of William Burl Crompton III ("Crompton 3/26/07 Tr.") at 2012. It was well known throughout th the banking industry that Congress was unhappy with what the FHLBB had done with the thrifts in the supervisory conversions. Jones 3/23/07 Tr. at 1813. Jones spoke about the proposed legislation with his colleagues in Atlanta, with the members of the management of the banks he was supervising, and, in particular, with the management of the banks he was supervising that would be impacted by the legislation. Jones 3/23/07 Tr. at 1813-14. 22. It would be reasonable for the management of a thrift that was expected to be impacted by FIRREA to adjust its practices to the upcoming legislation is that is what the management believed it needed to do. Jones 3/23/07 Tr. at 1815. Management of First Annapolis met with Jones and others in Atlanta in or about November to discuss FIRREA. Jones 3/23/07 Tr. at 1819.

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23. When the proposed legislation was first announced, it was anticipated that the legislation would have a serious negative impact. Cook 3/19/07 Tr. at 962. Mr. Cook testified: [O]ne of the things that First Annapolis had to contemplate doing was building up its capital account, and [the proposed legislation] could have a chilling effect on potential investors in the thrift industry because there were a multitude of thrifts around that had obtained new, fresh capital, had converted from a thrift to a stock-owned, and some of these might not survive. ***** Over time, [the announcement of the proposed legislation] cast a negative cloud over the bank. It was something that no one quite understood what would happen, but there was a premonition that it would just scare away all potential good customers, additional sources of capital, the thrifts possibly our thrift was not looked upon as a growth institution any longer, because we were cast in that definition of a bank that could be dealt severely with under the FIRREA proposal. . . . It affected core deposits. Cook 3/19/07 Tr. at 962, 965. 24. In the Spring of 1989, the news of the coming of FIRREA as disseminated through the United States Savings and Loan League, the Maryland League and through conversations with the Federal Home Loan Bank was that the regulatory forbearances would not be honored. Cook 3/19/07 Tr. at 1047-48. 25. The specter of the FIRREA legislation also affected lending relationships. Cook 3/19/07 Tr. at 966. The strongest borrowers gravitated away from the thrifts towards the commercial banks which would not be affected by the legislation. Id. at 966, 971. Borrowers need to have a banking relationship which would allow them to go back to a bank, borrow again, pay down, and reborrow and that could not be done with a bank that might not be there a year or six months later. Id. at 966-67, 971-972. See also Jones 3/23/07 Tr. at 1821 (if developer/borrower heard that bank would not be able to fund a construction loan through buyout, the developer might have a disincentive to pay on the loan); Transcript of March 27, 8

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2007 Trial Testimony of William Burl Crompton III ("Crompton 3/27/07 Tr.") at 2013-14 (Crompton would expect that developers would be aware of the proposed legislation and that they would react to it somehow). 26. The pendency of the FIRREA legislation also negatively effected the real estate loans at the service corporation level because it meant the real estate had to be turned to cash quickly and with real estate that means a deeper discount. Cook 3/19/07 Tr. at 969-70. 27. By April 1989, the Board of Directors was already discussing, and planning for, the coming of FIRREA. Joint Trial Exhibit ("JX") 46 (Minutes of 4/28/89 Board of Directors meeting) at p. 0053364. Again in September, 1989, the Board took up the issue of the impact of FIRREA ("[t]he purpose of the meeting was to discuss the impact of the loans to one borrower limitation imposed by [FIRREA]. . . .At the last Loan Review Committee meeting, it was decided to discuss this limitation with counsel and Deloitte, Haskins and Sells. The Committee request this advice to provide them with a sound path to follow during this confusing period"). JX 54 (Minutes of 9/25/89 Board of Directors meeting) at p. 0053736. 28. By late Spring/early Summer 1989, the specter of FIRREA effected the service corporation projects because Bancorp knew that if the regulations were passed as suggested, the bank would have to revert back to maximum loan amounts of $500,000 and then the bank would be unable to finish 90 percent of the projects it had in the subsidiary companies where it had been anticipated all of the income would come from. Cook 3/19/07 Tr. at 1049. Mr. Parran met with the majority of the joint venture partners in the service corporations to make them aware that FIRREA was coming and that it might prohibit the Bank from continuing to fund the projects. Parran 3/19/07 Tr. at 1061. Some of those joint venture partners were able to obtain financing elsewhere, but others were not able to do so because the projects 9

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were in the beginning or middle stages of development. Parran 3/19/07 Tr. at 1062. See also Transcript of March 21, 2007 Trial Testimony of Douglas A. Parran ("Parran 3/21/07 Tr.") at 1328-30 (Solomon's Landing was one of the projects where the borrower stopped paying because of FIRREA because the loan was halfway through its development stage and the Bank could not continue to fund it because the loan amount exceeded $500,000 and the borrower had to go elsewhere to borrow funds); Jones 3/23/07 Tr. at 1819-20 (Mr. Jones had no knowledge of what as to what happened to any of the loans that became non-performing). Mr. Parran testified regarding the impact this had on the Bank: [I]t had a severe impact, because first off, we stopped the origination of larger loans. And one of the major sources of income is fee income, the points you charge on those loans. We didn't try to generate additional savings, and obviously, the less savings accounts you have or deposits you have, the less amount of money you have to leverage out and produce income on. And then I guess the major effect was really going back to what everybody counting on as the subsidiary income from these joint ventures. We basically went into a very slow, slow period. . . . But not that we predicted a tremendous amount of income in `89 from those subsidiary companies anyway, but when this happened, it just cut off the future. . . . [I]t wasn't possible for us to ever think about obtaining earnings from those subsidiary companies again. And that's what the financial future of the bank was based on. Parran 3/19/07 Tr. at 1063. 29. Because of the anticipation of FIRREA, which choked off growth, the bank was not profitable in the spring and summer of 1989. Cook 3/19/07 Tr. at 972. Bancorp was not able to go out and obtain new capital. Id. at 1023. 30. Prior to and in anticipation of the passage of FIRREA in August 1989, Mr. Parran had six to eight conversations with Gregory Jones who had taken over the supervisory position from Mrs. Betsy Trump. Parran 3/19/07 Tr. at 1051. During those conversations, Mr. Jones told Mr. Parran that he

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believed FIRREA would be passed; that it would be effective in August; that the forbearances would go away; and that Bancorp should submit a new business plan to the FHLBB early on. Parran 3/19/07 Tr. at 1053-54. The Bank did develop and submit a new business plan in June 1989. Parran 3/21/07 Tr. at 1380. Mr. Jones was aware of the pending legislation on the Bank and inquired of Parran as to whether the Bank could survive. Parran 3/19/07 Tr. at 1063. Mr. Parran told Mr. Jones that if FIRREA went into effect, the Bank would not survive. Parran 3/19/07 Tr. at 1064. 31. In preparation for the passage of FIRREA, the Bank sought advice from its counsel regarding what it could and could not do and it spoke with its supervisory agent in Atlanta and it then slowed down its loan program; slowed down its growth in savings; attempted to deal with (by way of refinancing, work out or sale) some of its loans which would become problems because of FIRREA. Cook 3/19/07 Tr. at 1054-55; Parran 3/21/07 Tr. at 1373; Defendant's Trial Exhibit ("DX") 2467. In anticipation of FIRREA, the Bank did not enter into any new projects in 1989. Parran 3/21/07 Tr. at 1375-76, 1377; JX 54 at 0053739 (9/25/89 Board minutes noting that "in anticipation of the new FIRREA regulation, no additional projects have been entered into in 1989"). 32.There was no evidence to dispute Parran's testimony that in anticipation of FIRREA, he spoke with the bank's borrowers to tell them that bank not be able to finish funding the loans. See Kennedy 3/28/07 Tr. at 2312-13 ("I don't know whether he did or didn't talk to specific borrowers"); Crompton 3/27/07 Tr. at 2014-15. Mr. Kennedy testified that the most obvious way to determine what the impact of FIRREA was on the bank over the course of 1989 would be to speak with someone who was at the bank in 1989. Kennedy 3/28/07 Tr. at 2313-14. Mr. Kennedy also testified, however, that in preparing his Report, he did not speak with anyone who was at the bank at the time the news was being disseminated 11

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that FIRREA was coming; he did not speak with Mr. Parran, with Mr. Cook, or with anyone else who had been at the bank at the time (early 1989). Kennedy 3/28/07 Tr. at 2314-15. Although Mr. Kennedy spoke with Mr. Crompton for about one hour, Mr. Crompton was not at the bank in 1989. Kennedy 3/28/07 Tr. at 2314-15. See Crompton 3/27/07 Tr. at 1999 (other than being perhaps being present at the Bank to attend one or two board meetings, Mr. Crompton was not at the Bank between the summer of 1988 and January 1990). Mr. Crompton was not a party to any conversations within that time period between the Bank's management and the supervisory staff in Atlanta. Crompton 3/27/07 Tr. at 2000-01. 33. FIRREA effected the Bank as early as the Spring of 1989 because the Bank's management realized it could not continue "with overinvestment in subsidiary companies, joint ventures, loans to one borrower" and it started to pull back on those investments. Parran 3/20/07 Tr. at 1295. By Spring 1989, the Bank had begun to implement a policy of a maximum loan to one borrower of $500,000. Parran 3/21/07 Tr. at 1373-74. In anticipation of FIRREA, the Bank did not enter into any additional projects in 1989. Parran 3/21/07 Tr. at 1376-77. 34. On August 9, 1989, FIRREA was enacted. Pub. L. No. 101-73, 103 Stat. 188 (codified as amended at 12 U.S.C. 1441a, 1811 et. seq.). FIRREA replaced the FHLBB with the Office of Thrift Supervision ("OTS") and established new capital requirements for savings and loan associations. 12 U.S.C. 1464(t)(2); 54 Fed. Reg. 46,845 (11/8/89). 35. The passage of FIRREA had impact in August (prior to the passage of the implementing regulations) and people were reacting and trying to figure out what would happen once the implementing regulations were passed. Kennedy 3/28/07 Tr. at 2323-24. Mr. Kennedy testified, for example, that a

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banker's behavior in August would have been impacted by knowledge that as a result of FIRREA his loan limit would be reduced to $500,000. Kennedy 3/28/07 Tr. at 2324-25. 36. Pursuant to FIRREA, supervisory goodwill could not be included in satisfying the tangible capital requirement. 12 U.S.C. 1464(t)(2); 54 Fed. Reg. 46,845 (11/8/89). In addition, supervisory goodwill had to be phased out by December 1994 when calculating core capital, and had to be amortized over a maximum of twenty years when calculating both risk-based and core capital. Id.; 12 U.S.C. 1464(t)(3)(A), (9)(B) and (c). 37. By the Fall of 1989, the Bank was no longer funding its service corporation investment projects because of FIRREA. Parran 3/20/07 Tr. at 1125. By November 1989, the Bank was already making other changes in anticipation of the implementing regulations. See DX 389 (Minutes of 11/7/89 at FHLBB in Atlanta and attended by representatives of Bank and FHLBB); DX 379 (11/14/89 Parran letter to Gregory Jones). 38. For purposes of determining the damages sustained by Bancorp, the date of the breach of the contract by the Government should at least be as early as August 9, 1989, the date of the enactment of FIRREA, as agreed to by the Government. See Southwest Investment Co. v. United States, 63 Fed. Cl. 182, 194 (2004), aff'd, 158 Fed.Appx. (2005) ("The Defendant's position is that, assuming arguendo it breached the contract, the date of the breach would be August 9, 1989, the date of FIRREA's enactment"); see also Admiral Fin. Corp v. United States, 57 Fed.Cl. 418, 423-24 (2003) (the Court discussed the issue of whether in date of the breach was the enactment of FIRREA on August 9, 1989 or when regulations under FIRREA became effective on December 7, 1989, and concluded "in the course of this case we have treated the critical date [of the breach] as the enactment [August 9, 1989], and the 13

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Government `agrees'"), aff'd, Admiral Fin. Corp. v. United States, 378 F.3d 1336, 1339 (Fed. Cir. 2004) (acknowledging the ruling by the trial court in Admiral Fin. Corp v. United States, 54 Fed.Cl. 247 (2002), that the Government breached the contract with the enactment of FIRREA). 39. The effect of FIRREA took place long before the implementing regulations. Parran 3/19/07 Tr. at 1100. First Annapolis was not permitted to operate from the August 12, 1988 conversion through the December 7, 1989 enactment of the implementing regulations with the advantage of the forbearances. Parran 3/19/07 Tr. at 1101. Prior to the effective date of the implementing regulations, the Bank was advised by the Government, because of the pendency of those regulations, that it should not continue to exceed the level of service corporation investments. Parran 3/19/07 Tr. at 1102. Between the August 1989 enactment of FIRREA and the December 1989 effective date of the implementing regulations, the OTS took actions in its capacity as a regulator to bring the banks, including First Annapolis, into compliance with what it knew the regulations would ultimately look like. Jones 3/23/07 Tr. at 1840, 1843. In the fall of 1989, OTS required First Annapolis to propose a new capital plan and the Bank was being encouraged by the regulators to take actions to come into compliance. Jones 3/23/07 Tr. at 1840, 1843. The regulators expected First Annapolis to begin taking steps or develop a plan between August and December; i.e., the regulators expected First Annapolis to act before the December 1989 effective date of the implementing regulations. Jones 3/23/07 Tr. at 1843-44. The Bank did propose a new capital plan, as requested. Jones 3/23/07 Tr. at 1845. 40. Following the enactment of FIRREA, the Government did not allow First Annapolis to include supervisory goodwill as regulatory capital; imposed regulatory capital requirements greater than those contained in the Business Plan; did not permit First Annapolis to invest in its service corporation at the 14

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agreed upon levels; and did not otherwise honor the regulatory forbearances that it had granted as part of the contract. Jones 3/23/07 Tr. at 1805-06 (FIRREA took away each and every forbearance); Parran 3/19/07 Tr. at 1046 (FIRREA took away all of the forbearances; the Bank did not "keep one item, not a hint of one item"); Kennedy 3/28/07 Tr. at 2330 (as a result of FIRREA, the government took away all of the forbearances). After taking away the forbearances, the Government did not return any of Bancorp's investment. Parran 3/19/07 Tr. at 1046. The passage of FIRREA "completely and totally broke the contract" the Bank had with the Government. Parran 3/19/07 Tr. at 1045-46; Parran 3/20/07 Tr. at 1118. Dr. Heiden testified that the "forbearances were the heart and soul of the operation of Bancorp." Heiden 3/21/07 Tr. at 1558; see Heiden 3/21/07 at 1430 (same). 41. On December 7, 1989, the regulations issued by the OTS under FIRREA became effective. 54 Fed. Reg. 46,845 (11/8/89). 42. FIRREA created "a situation of a complete imbalance in profit and loss and assets and liabilities for Bancorp, and the replacement of these benchmarks with new requirements that completely superseded and invalidated those benchmarks and prevented, in fact, prevented Bancorp from being profitable from the opportunity to be [ ] profitable . . . ." Heiden 3/21/07 Tr. at 1432-33. FIRREA caused Bancorp to lose "the heart and soul of the contract." Heiden 3/21/07 Tr. at 1433. 43. Dr. Heiden concluded as follows: The bottom line of all that is that since these were so integral to the agreement, these three forbearances were so integral to it and all were breached, I think it is the conclusion that is could be reached, that but for these forbearances and knowing that they wouldn't be put into effect, there would have been no investment by this group of investors who were, for the most part, many of them, savvy, sophisticated investors who had other opportunities to invest their money.

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Heiden 3/21/07 Tr. at 1434. Dr. Heiden concluded, within a reasonable degree of certainty, that the damage to Bancorp as a result of the government's breach, is $53.9 million. Heiden 3/21/07 Tr. at 144142. 44. By December 31, 1989, the OTS was probably measuring capital against FIRREA standards. Jones 3/23/07 Tr. at 1845. See also Jones 3/23/07 Tr. at 1846-47 (Mr. Crompton's January 1990 examination report probably evaluated the Bank on a post-FIRREA basis); Crompton 3/27/07 Tr. at 2004-05 (Mr. Crompton's January 1990 Examination was a snapshot of the Bank and its assets as of December 31, 1989 and no other date, with the possible addition of some events after December 31, 1989 that came to Crompton's attention) . The January 1990 Examination was limited in scope. Crompton 3/27/07 Tr. at 2006-07. 45. Because First Annapolis could not meet FIRREA's new capital requirements, on January 5, 1990, it submitted a capital plan to OTS for review. PX 32. 46. On February 27, 1990, the FHLBB informed First Annapolis that it was rejecting the proposed capital plan. DX 406. 47. Because First Annapolis failed to meet FIRREA's new capital requirements, the OTS placed First Annapolis into receivership. Kennedy 3/28/07 Tr. at 2305. 48. On June 1, 1990, or thereabouts, the Resolution Trust Corporation ("RTC") took possession of First Annapolis. The OTS recommended that the RTC take possession primarily because the Bank's tangible capital was negative $53 million when the mandatory FIRREA standards were applied. Jones 3/23/07 Tr. at 1793; Jones 3/23/07 Tr. at 1862.

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49. Once the Bank went into receivership, Government workers were actually present in the Bank and running it. Jones 3/23/07 Tr. at 1862. VI. The Impact of the Passage of Firrea on the Bank 50. The Government's expert, David Kennedy, agrees that the passage of FIRREA significantly impacted the thrift industry, including First Annapolis. Kennedy 3/28/07 Tr. at 2304. 51.With FIRREA, the Bank's contractual arrangement with FHLBB was breached and the Bank was required "to accomplish virtually overnight what it otherwise had five years to accomplish." Cook 3/19/07 Tr. at 974-75. Mr. Cook testified: [The enactment of FIRREA in August 1989] only solidified everything that had preceded and was tending towards a perfect storm . And the bill was enacted, and there was a perception and a recognition that the bank was likely to not be able to pull itself out . Cook 3/19/07 Tr. at 973 (emphasis added). Mr. Parran testified that the passage of FIRREA in August 1989 was "devastating" to the Bank. Parran 3/19/07 Tr. at 1045, 1065, 1080. FIRREA put the Bank out of business. Parran 3/19/07 Tr. at 1080. 52. As a result of FIRREA, investors who had capitalized at the Bank at minimum permitted standards lost their investments. Cook 3/19/07 Tr. at 975. 53. Although changes at the Bank beginning in August 1989 due to FIRREA did not abruptly happen all in one day and were gradual, the changes were meaningful. Cook 3/19/07 Tr. at 1026. 54. Although the Bank did not lose depositors as a result of FIRREA, the Bank was able to maintain its deposit number only by paying higher amounts of interest or converting them to noncore deposits. Cook 3/19/07 Tr. at 1026, 1028.

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55. Once FIRREA passed, the Bank's management could not do anything and became "babysitters for a physical structure[.]" Parran 3/19/07 Tr. at 1065; see Parran 3/21/07 Tr. at 1384 (management was just babysitting; it could not perform any function other than make a single-family loan to a single homeowner); Jones 3/23/07 Tr. at 1858 (by no later than February 1990, the Government was in effective control of the Bank and the Bank's management had no power to control the bank); Jones 3/23/07 Tr. at 1863 (agreeing that by February, "babysitters" was an accurate description of the Bank's management); Kennedy 3/28/07 Tr. at 2329 (same); Kennedy 3/28/07 Tr. at 2364 (by February 1990 the government, not management, had effective control of the Bank) . See also DX 406 (2/27/90 letter from John E. Ryan to the First Annapolis Board of Directors and its attached Consent Agreement (subjecting Bank to restrictions on activities); Parran 3/19/07 Tr. at 1074-75 (under restrictions of letter, Bank would not sell, refinance, extend, modify, purchase, invest in, letters of credit; except for making single-family loans, the Bank's management had to now obtain permission for any growth activity); Jones 3/23/07 Tr. at 1855 ( Bank could not make large loan even if it would have been a profitable loan big enough to increase the asset base). The Government had effectively taken control of the Bank. Parran 3/19/07 Tr. at 1075-76. 56. One of the effects of the regulators imposing their control over the bank as a result of FIRREA was that it deprived management of the ability to ride out the real estate slump. Kennedy 3/28/07 Tr. at 2337. When the RTC took control of the Bank's assets, it liquidated them when the real estate market was a buyers' market. Kennedy 3/28/07 Tr. at 2338. Mr. Kennedy testified that in hindsight, the Bank, with enough capital, might have been able to ride out the real estate slump to the point where the loans turned around. Kennedy 3/28/07 Tr. at 2338. All of the real estate was sold. Kennedy 3/28/07 Tr. at 2342. Although Mr. Kennedy did not inquire as to the price at which the real estate sold, he assumed the land 18

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values were low at the time they were sold. Kennedy 3/28/07 Tr. at 2343. It was the Government, not the Bank's management, that sold the assets. Transcript of March 29, 2007 Trial Testimony of Alan C. Shapiro ("Shapiro 3/29/07 Tr.") at 2486. 57. Mr. Parran perceived the consent agreement (DX 406) as a cease-and-desist order. Parran 3/21/07 Tr. at 1383-84. At an April 1990 Bank Board meeting attended by members of the OTS, Mr. Jones stated that not signing the Consent Agreement would not change the OTS' point of view as reflected therein. See JX 67 at Bates numbered page 1735. The terms of the consent agreement were in force as of February 1990 whether or not First Annapolis signed the consent because the Government simply directed the Bank to conform its behavior to the terms of the Consent Agreement.. Jones 3/23/07 Tr. at 1854-55. 58. Mr. Parran further explained FIRREA's impact: We were down to $500,000 loan limit. We couldn't increase our savings, couldn't add any branches, couldn't buy and sell loans. FIRREA said we're now going to expense you, you can't have goodwill at 25 years anymore, which came out to about 2.4 million expense a year, you have to do it over five years, so that's like 12 million a year. So you've got an additional almost $10 million hit because the contract was broken, just on that one item. Nobody can survive that. That's why we had a contract, that's why we had a business plan. The contract was based on that business plan. Parran 3/19/07 Tr. at 1065 (emphasis added). See Parran 3/1907 Tr. at 1068 (without the 25-year straight line amortization, the Bank's annual expenses were increased by an additional $10 million creating an impossible situation). 59. FIRREA caused the Bank to be undercapitalized which triggered the imposition of the $500,000 loan limit which definitely effected the Bank because it limited the amount of large loans and their 19

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concomitant fee and interest income. Parran 3/19/07 Tr. at 1076. See Parran 3/21/07 Tr. at 1321-25, 1359 (post-FIRREA, the Bank could loan no more than $500,000 to more than one borrower because the Bank no longer met the regulatory capital requirements); Jones 3/23/07 Tr. at 1806 (the loss of the regulatory capital forbearance caused the Bank to be out of capital compliance therefore subjecting the Bank to the $500,000 loan limit). See also Parran 3/21/07 Tr. at 1374-75 regarding DX 2467 (9/25/89 letter (at page 4) to Mr. Parran from the Bank's lawyers at advising that any loan issued after FIRREA's enactment would be limited to $500,000). The Bank instituted a policy of limiting loans to $500,000 sometime between midsummer 1989 and early September 1989. Parran 3/21/07 Tr. at 1374, 1375; JX 54 (9/25/89 Board Minutes reflecting adoption of policy to use a $500,000 loan limit). 60. Without the growth which had been predicted to come from the service corporations, First Annapolis would have to shrink its balance sheet to maintain its capital ratio. Jones 3/23/07 Tr. at 1738. 61. FIRREA prevented the Bank from managing the economic reality of its loan portfolio and from utilizing the normal process of dealing with defaulted loans (including loan work outs; placing loans in special asset categories for problem loans; attempting to collect loans that had been written off) even though First Annapolis could have done so under its forbearances. Heiden 3/21/07 Tr. at 1448; Transcript of March 22, 2007 Trial Testimony of Edward J. Heiden ("Heiden 3/22/07 Tr.") at 1533, 1534. Mr. Jones agreed that just because a loan is written of the books - even if it reflects a loss and diminution in capital - does not mean that the loan is worthless. Jones 3/23/07 Tr. at 1835-38. That a loan is written off does not mean that the Bank no longer had an interest in the real estate underlying the loan. Jones 3/23/07 Tr. at 1835-38. In his January 1990 Examination Report, however, Mr. Crompton did not value the real estate. Crompton 3/27/07 Tr. at 2005-06. 20

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62. As summarized by Dr. Heiden, FIRREA breached the contract in the following ways: it implemented a new goodwill amortization schedule requiring a 5 year rather than a 25-year write-off life; it introduced new benchmarks replacing the interim and five-year regulatory capital requirement under which Bancorp had been operating; it imposed new ratios for tangible capital, core capital and risk-based capital which "upped the ante, were considerably more draconian than what Bancorp was operating under" pursuant to its contract with the FHLBB; and it caused the Bank to operate in an environment where the Bank could no longer manage any of its projects. Heiden 3/21/07 Tr. at 1556-57. 63. As reflected on DX 3001, "First Annapolis Regulatory Capital Ratio As of Month's End," after about six months (from September 1988 through March 1989) of increasing regulatory capital and compliance through the end of the third quarter of 1989 , there was significant drop in capital at the end of 1989. Jones 3/23/07 Tr. at 1849-51. See Kennedy 3/28/07 Tr. at 2318, 2319 (most of the losses which impacted Mr. Kennedy's report were in late 1989 or early 1990); Transcript of March 29, 2007 Trial Testimony of Alan C. Shapiro ("Shapiro 3/29/07 Tr.") at 2499 (agreeing that the magnitude of the Bank's losses increased substantially in the last quarter of 1989 and the first quarter of 1990). The most precipitous drop was in December 1989 after the FIRREA regulations became effective. Jones 3/23/07 Tr. at 1849-52. 64. Mr. Jones agreed that the most significant event for the Bank in December 1989 was the implementation of FIRREA. Jones 3/23/07 Tr. at 1852. If the Government had honored the terms of the contract, including the regulatory forbearances, First Annapolis would have been a viable entity following the conversion, as the Government had previously determined under 12 C.F.R. 563b.26, set forth in Resolution No. 88-603. PX 2 at 2. 21

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65. The Bank's proposed post-FIRREA revised business plan (PX 36) was not approved by the Government. Parran 3/19/07 Tr. at 1067; Jones 3/23/07 Tr. at 1853. The OTS letter disapproving the plan (DX 406) stated, in part: "As mandated by FIRREA, these forbearances are no longer in effect." Mr. Jones agreed that among the reasons the OTS was unable to approve the proposed plan was that FIRREA made an approval of such a plan illegal. Jones 3/23/07 Tr. at 1854. VII. The Viability of the Bank "But For" FIRREA 66. Mr. David Cook had experience and success in turning troubled banks around prior to his tenure at First Annapolis. Mr. Cook believed First Annapolis could gain complete regulatory capital compliance within five years. Cook 3/19/07 Tr. at 960. Mr. Cook hired a new chief financial officer for the bank. Cook 3/19/07 Tr. at 964. Because Mr. Cook also wanted to establish an internal loan review function, he also hired a new banker who Mr. Cook believed was very effective in changing internal policies. Cook 3/19/07 Tr. at 964. Mr. Cook also hired a career commercial banker with whom Mr. Cook had worked for four years turning around a bank in New Jersey. Cook 3/19/07 Tr. at 964-65. That banker was retained to visit all the First Annapolis branches to put in place controls, procedures and training for the Bank's staff. Cook 3/19/07 Tr. at 964-65. 67. With Mr. Cook's prior banking experiences, the banks were on a quicker time schedule for improvement. Cook 3/19/07 Tr. at 973. First Annapolis, however, had five years due to the agreement with the Government. Cook 3/19/07 Tr. at 974. In Mr. Cook's experience: [F]ive years is a very long time to deal with the problems of a loan portfolio, the problems of a branch network, the problems of appropriate policies and procedures, the problems of the right mix of loan officers, the right mix of staff people. And once you put those things together in a meaningful way, then that interests investors, that interests people who invest in banks, and additional capital, in [his] view, could have been obtained. 22

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Cook 3/19/07 Tr. at 974. See also Jones 3/23/07 Tr. at 1805 (the transaction contemplated that the Bank would have five years to bring its regulatory capital up to par). The infusion of the $13 million and the Government's commitment to give First Annapolis five years to meet its regulatory capital requirements provided a rescue plan to cure the problems First Annapolis had experienced prior to Mr. Cook's arrival. Cook 3/19/07 Tr. at 1024. 68. Mr. Cook testified that during his tenure, First Annapolis did not lose any customers, it did not lose deposits and the customers stood by the Bank. Cook 3/19/07 Tr. at 1029. Mr. Cook testified that the Bank could have survived. Cook 3/19/07 Tr. at 1029. The Bank knew that it might lose money during the first two or three years because the majority of the income was going to come in from the service corporations in the last 3, 4 or 5 years. Parran 3/20/07 Tr. at 1145; Parran 3/19/07 Tr. at 1056, 1057 (it would take about 3 to 5 years to develop the Northampton Park project). At least one of the projects, Solomons Landing, was expected to take about 7-8 years to develop. Parran 3/19/07 Tr. at 1058. In 1989, most of these projects were just getting started. Parran 3/19/07 Tr. at 1056, 1057, 1058. One of the projects, Bayside, encountered unexpected water and sewer problems that would cause a time delay of about 18 months. Parran 3/19/07 Tr. at 1059. The Bank and its regulators knew there would be peaks and valleys. Parran 3/20/07 Tr. at 1145; Jones 5/23/07 Tr. at 1815. Subsidiary income comes in only when a project is completed. Parran 3/20/07 Tr. at 1145; Jones 5/23/07 Tr. at 1815-16. A project might not result in any income for three years and then suddenly it results in millions of dollars in income. Parran 3/20/07 Tr. at 1145. See also Heiden Tr. 3/21/07 Tr. at 1507 (initially projects, by their very nature, would not earn very much and would not produce income until completion); Jones 3/23/07 Tr. at 1816 (acknowledging that it might take years before some of the service corporation projects resulted in 23

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earnings).

During the pre-FIRREA period when Bancorp was developing is business plan, the FHLBB

was not concerned about the projections for the service corporation projects. Parran 3/20/07 Tr. at 1176. Mr. Parran never received any information from the FHLBB during that time indicating the FHLBB doubted the projected results of income from the subsidiary companies. Parran 3/20/07 Tr. at 1177. In fact, after the conversion, Mrs. Trump and a group of her examiners visited the Bank, reviewed each individual service corporation activity and joint venture and, in Mr. Parran's words, "blessed it." Parran 3/20/07 Tr. at 1180. They expressed no concerns. Parran 3/20/07 Tr. at 1180. Mr. Kennedy assumed that all of the projects were good projects. Kennedy 3/28/07 Tr. at 2341. 69. By the last quarter of 1988, the Bank was on track and had made a profit. Parran 3/19/07 Tr. at 1047; Parran 3/20/07 Tr. at 1202. It was the meeting of the capital benchmarks, though, not whether the Bank was profitable or unprofitable, that was important under the contract. Parran 3/20/07 Tr. at 1144. As already noted above, in June 1989 the Bank met its first capital benchmark. Parran 3/19/07 Tr. at 1064. Through the Spring and Summer of 1989, the Bank was continuing to fund its service corporation investments as it had agreed in August 1988. Parran 3/20/07 Tr. at 1125. Regulatory capital continued to increase over the next six months. Jones 3/23/07 Tr. at 1850. Mr. Parran testified that without question, the Bank absolutely would have been viable but for FIRREA. Parran 3/19/07 Tr. at 1079. Mr. Jones conceded the passage of FIRREA in August 1989 was a significant event in the Bank's viability. Jones 3/23/07 Tr. at 1839. 70. In general, there are certain financial conditions that have to be met by banks which are measured at regular time intervals, for instance, quarterly or annually. Jones 3/23/07 Tr. at 1824-26. It is common for banks to "manage their balance sheets" such that they take certain actions (e.g., buying 24

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mortgage loans) in anticipation of one of those measurement dates to ensure that the balance sheet will meet the benchmarks being measured. Jones 3/23/07 Tr. at 1826-27, 1832. It is not illegal or improper. Jones 3/23/07 Tr. at 1832, 1833. After the benchmark is met, it is common for banks to reverse whatever action was taken to gain compliance. Jones 3/23/07 Tr. at 1827-28. 71. First Annapolis' compliance with the regulatory capital benchmarks was to be measured on specific dates and there was no term in the contract which required ongoing or increasing compliance in between periods. Parran 3/20/07 Tr. at 1224, 1225; Jones 3/23/07 Tr. at 1824. Capital could fluctuate in between benchmark dates and even though capital fell after the first benchmark was met, the Bank believed it would be able to meet the next benchmark in June 1990. Parran 3/20/07 Tr. at 1225. 72. Increasing profits is "absolutely not" the only way to meet regulatory capital compliance. Jones 3/23/07 Tr. at 1829. Another way to do it is to manage the balance sheet. Jones 3/23/07 Tr. at 1829, 1830-31. 73. The service corporation projects (for example, Bayside, White Rocks, Northapmton, and Forest Mills) were ultimately "completed and perfect." Parran 3/20/07 Tr. at 1295. Mr. Parran had actual information as to how the projects actually did over time. Parran 3/21/07 Tr. at 1360-61. See also Heiden Tr. 3/21/07 Tr. at 1507 (the projects were in potentially valuable locations and most have since become successful). The Government, through its trial counsel, stipulated that the real estate projects are each valuable today. 3/21/07 Tr. at 1370, 1371. The Government's attempt to isolate the viability of the projects "to a snapshot in time" was not realistic; "the realistic thing is that [Bancorp.] had a contract for five years[.]" Parran 3/20/07 Tr. at 1295. Mr. Parran testified that had Bancorp been given the full five year period, the projects would have been developed and money would have been made. Parran 3/20/07 25

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Tr. at 1296. Mr. Parran testified that with real estate, if it is held long enough, it will not go down in value. Parran 3/20/07 Tr. at 1296. 74. It was implicit in the business plan that the Bank needed time - at least five years - to work out its real estate projects. Jones 3/23/07 Tr. at 1822-23. 75. The regulatory forbearances gave the bank the "ability to operate their loans in a way that could have given them as large an economic shot as they could get at making a profit." Heiden 3/22/07 Tr. at 1447. 76. The inclusion of goodwill in the regulatory capital calculations permitted First Annapolis to conduct its business as a viable firm and to try to make a profit. Heiden 3/22/07 Tr. at 1447. 77. As of the end of September 1989, the 13.6 million that had been invested by Bancorp at the time of the conversion had grown to 14.4 million from a regulatory capital basis. Parran 3/21/07 Tr. at 1381-82. 78. With the forbearances in place, First Annapolis had a good chance at being viable. Heiden 3/21/07 Tr. at 1477-78. Dr. Heiden testified: The question really is was for purposes of economic analysis, was First Annapolis a viable firm in this period, with these forbearances? And the accounting losses, I think, have to be looked at in that context. The [FHLLB] thought that it had strong potential for viability, because it entered into a contract with them. The conservator thought that it had strong potential for viability when it indicated that there was considerable value to be had in what here is presented as a real loser but which is not a loser in the sense of having a great deal of promise in the form of very, very solid, substantial loan assets it was holding for income-producing purposes after the conversion and was holding under forbearances that let it do something with those. It had very, very strong possibilities. It had high franchise value, as I said, as the conservator said, in the form of a very stable depositor base, a very hard to enter market 26

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in which submarket in which it had a very dominant not very dominant, but a very significant position in the Anne Arundel market, a wealthy wealthy depositors and loyal depositors, and a market that the conservator though gave it a very significant overall franchise value. Heiden Tr. 3/21/07 Tr. at 1477-78; see also Heiden Tr. 3/21/07 Tr. at 1479-80 (numbers have to be looked at within the management plan and in a regulatory context; FHLBB entered into the agreement understanding that the Bank was a viable firm that could perform); Heiden Tr. 3/21/07 Tr. at 1480 (the FHLBB "looked at the evidence of what its portfolio was and kicked the tires of its assets, as Betsy Trump did, going around to look at these things, and had extensive discussions. The regulators thought that this was a viable firm"); Kennedy 3/28/07 Tr. at 2305 (at the time of the supervisory conversion in 1988, the government believed that after the conversion the Bank would be viable); Jones 3/23/07 Tr. at 1810 (assumed that Mrs. Trump would have gone to actually look at the service corporation projects); Parran 3/21/07 Tr. at 1360 (Mr. Parran accompanied Mrs. Trump on her visit to at least five or six of the projects). 79. The losses through then end of 1989 were relatively small and were not inconsistent with First Annapolis meeting its benchmarks. Heiden Tr. 3/21/07 Tr. at 1478-79. It was always envisioned that there would be some temporary losses. Heiden Tr. 3/21/07 Tr. at 1479. 80. To enter into the deal, the FHLBB necessarily must have concluded that the Bank was "sufficiently viable to have ta reasonable certainty of pulling off recovery, and they gave them all this supervisory time and worked with them and interacted with them to come up with a forbearance plan under the assumption that that would work and that they had the they had the juice, the assets, to make it work." Heiden Tr. 3/21/07 Tr. at 1481. See Heiden Tr. 3/21/07 Tr. at 1482 (FHLBB must have thought

27

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it was a very viable situation), 1507-08 ("[t]he high quality service corporation assets and the other asset picture is what convinced the [FHLBB] that this was a viable company. It had to be. That was their main asset, that and the franchise value that they had from having been a historical presence for so long, with a good record of growth and all I'm saying is that the accounting numbers don't tell the story don't tell the real story of viability"); Jones3/23/07 Tr. at 1802 (agreeing that the FHLBB would have concluded, as of the August 1988 conversion, that First Annapolis, with the forbearances, would have been viable); Crompton 3/27/07 Tr. at 1999 (assuming that FHLLB's approval of the plan of conversion meant the Government had concluded that the plan was viable); Kennedy 3/28/07 Tr. at 2305 (at the time of the supervisory conversion in 1988, all involved, including the Government, believed that after conversion, the Bank was viable). It was anticipated that the viability of the Bank over time would be primarily driven by profits from the service corporations. Jones 3/23/07 Tr. at 1809-10. 81. If the forbearances had remained in effect, First Annapolis would not have failed and it would have made money. Heiden Tr. 3/21/07 Tr. at 1533 (testifying to opinion within a reasonable degree of certainty). 82. The Bank and the service corporation did not disburse millions of dollars into the marina in excess of its value. Cook 3/19/07 Tr. at 999-1000. As Mr. Cook explained, there is a difference between an as-is or current value and a projected (or built-out or completed) value. Cook 3/19/07 Tr. at 999-1000. 83. The January 1990 Examination Report's determination that 35 commercial loans were at least 90 days past due is not an accurate measurement of the Bank's financial condition prior to the December 7, 1989 effective date of the implementing regulations. Parran 3/21/07 Tr. at 1318-19. As Mr. Parran 28

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explained, the Bank was, during that time period, already operating under different regulations. Parran 3/21/07 Tr. at 1319, 1320. See also DX 2276 (11/17/89 letter from Mr. Jones to Mr. Parran regarding new regulations passed November 7, 1989 and concluding that on the date the regulations go into effect, First Annapolis will fail all three capital requirements). "The reason a majority of these loans were now delinquent 90 days is because we had stopped funding the joint ventures and loans to one borrower loans over 500,000, a majority of those loans, because of the new regulations. So come January when this report is done, hello, we're in a different world. " Parran 3/21/07 Tr. at 1320 (emphasis added). 84. To determine whether, but for FIRREA, the Bank would have been viable, it would be appropriate to measure viability between August 1988 and, at the