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Mr. CAVANAUGH. I see. Then the directors personally made these loans

Mr. HENDERSON. Made it in a corporate entity. But the directors all

Mr. CAVANAUGH. You formed Calhoun Uni-First.
Mr. HENDERSON. That is correct.
Mr. CAVANAUGH. And that is the borrower of the $400,000.
Mr. HENDERSON. Yes.
Mr. CAVANAUGH. And who was the subsequent purchaser.
Mr. HENDERSON. That is correct, yes.

Mr. CAVANAUGH. Of $400,000 of common stock which was the basis of the recapitalization in order to comply with article 2 of the agreement. Mr. HENDERSON. That is correct. Mr. CAVANAUGH. The additional $225,000 was procured from-Mr. HENDERSON. Mostly was retained earnings. Mr. CAVANAUGH. All right. And what is the total amount of that new capitalization to date? Mr. HENDERSON. It is greater now by retained earnings than the $625,000, which we promised to raise. But I feel we are in compliance with the $625,000.

Mr. CAVANAUGH. OK. Now, Mr. Tarleton, were you familiar with the procedure employed by the directors to achieve this recapitalization in compliance with section 2, article 2?

Mr. TARLETON. Are you referring to the loan from the Georgia Railroad Bank?

Mr. CAVANAUGH. Yes.
Mr. TARLETON. No, sir, I was not aware of that until today.

Mr. CAVANAUGH. So you were not aware of that on November 22 when you issued your release of the agreement?

Mr. TARLETON. I was not aware of the funds for the capitalization being borrowed funds from another bank.

Mr. CAVANAUGH. Would you consider that compliance with article 2?

Mr. TARLETON. Are you speaking with reference to the manner in which it was acquired, or the particular amount?

Mr. CAVANAUGH. Both.

Mr. TARLETON. OK. I don't see the manner in which it was acquired

Mr. CAVANAUGH. The borrowing of $400,000 particularly.

Mr. TARLETON. I don't see that as being a problem as far as compliance is concerned. We did not have the interpretation on the retained earnings that the Calhoun First National Bank had. In other words, we were seeking $625,000 in totally new funds aside from retained earnings. And it was apparently a misunderstanding between our office at the time of that agreement and the board of directors of the Calhoun First National Bank. But it became a moot question because the capital adequacy of that bank was achieved in other ways, two ways-pending bonding claim settlement on the Campbell defalcation, and probably more importantly, the volume of loans and discounts in the bank having been shrunk down to the point that it met the standards we have established for virtually all banks in that particular peer group.

Mr. CAVANAUGH. I yield to the chariman.

Chairman ST GERMAIN. Gentlemen, of the original loan for $400,000 from the Railroad Bank, among the guarantors, was Mr. Lance a guarantor on that one?

Mr. HENDERSON. Yes, he was.

Chairman ST GERMAIN. And then subsequently, when you turned it over, and borrowed from Citizens and Southern, he was again a guarantor.

Mr. HENDERSON. He was. Chairman ST GERMAIN. And that was January 1977? Mr. HENDERSON. December of 1976, I believe. Chairman ST GERMAIN. The guarantee was signed January 7, 1977.

Mr. HENDERSON. Right, at yearend, Mr. Chairman. I am not sure.

Chairman ST GERMAIN. And this is at the time when Mr. Lance's income went from a purported $200,000 a year down to $52,500; correct?

Mr. HENDERSON. I have no knowledge.

Chairman ST GERMAIN. He was paid the same as we are, $44,500; right? Then went up to $57,000 subsequently.

Mr. Henderson, on this guarantee, you are all guarantors of that loan?

Mr. HENDERSON. No, sir, we have three that jointly and severally guaranteed the whole loan. The rest of the group hypothecated some of their own bank capital stock.

Chairman ST GERMAIN. The stock that was purchased with the loan.

Mr. HENDERSON. Yes, in addition to the stock that was purchased.

Chairman ST GERMAIN. Thank you.

Mr. CAVANAUGH. What I am trying to determine, Mr. Tarleton, is at what point did you feel that article 2 had been complied with? And upon what facts did you make that judgment?

Mr. TARLETON. I can't give you an exact date that the judgment was made, but it became apparent right away that the loan volume was being reduced.

Mr. CAVANAUGH. When you say “right away,when do you mean "right away"'?

Mr. TARLETON. Soon after implementation of the agreement. And the efforts by management of the bank at that point to start collecting some of the loans that had been of a fixed nature up to that point, they started programing the loans, getting reductions on them, the loan volume was coming down.

Mr. CAVANAUGH. All of that does not relate to compliance with article 2.

Mr. TARLETON. Well, it does in a sense, in that

Mr. CAVANAUGH. Does it relate to the board of directors having agreed to raise $625,000 of new capital funds?

Mr. TARLETON. It would not be reasonable to ask a board of directors to carry out such action-

Mr. CAVANAUGH. Excuse me. That is what you asked them to do in article 2; is that correct?

Mr. TARLETON. Yes, that is right. Subsequent factors

Mr. CAVANAUGH. Subsequent to your release of the Calhoun bank on November 22 from this agreement, you ascertained that article 2 had been complied with. That is the board of directors has met its agreement to raise $625,000 of new capital funds.

Did you make that judgment or did you not?

Mr. TARLETON. The judgment was made prior to the rescission of the agreement, November 22, 1976, that there was no longer the need for new additional capital, and to force the bank to go ahead with the strict adherence to that article would have worked an undue hardship on them. They had met capital adequacy in other ways.

Mr. CAVANAUGH. Well, they did go ahead, though?

Mr. TARLETON. Not by our interpretation of that agreement they did not.

In my statement I alluded to the fact that while the requirement was $625,000 and they raised $400,000, there was no additional requirement to raise more funds because the capital need was not there. They had changed the asset structure of the bank in such a way that there was no longer a need for that much capital, plus the pending settlement of the Campbell claim, which was ultimately $450,000, as I recall.

Mr. CAVANAUGH. I yield the remainder of my time, Mr. Chairman.

Chairman ST GERMAIN. Mr. Allen?

Mr. ALLEN. Thank you, Mr. Chairman. I came in rather late, and some of my questions won't be as technical as those that have been propounded

You gentlemen with the Calhoun bank, what has happened to the bank since all of this publicity with respect to Mr. Bert Lance and his questionable dealings and the fact the bank had to enter into this agreement that was rescinded 2 days before Mr. Lance was appointed to his position? What has been the effect on the bank? How has it affected your deposits? Let us start that way.

Mr. HENDERSON. In the past month we opened about twice as many accounts as we closed, and our deposits are holding very well.

Mr. ALLEN. All your deposits have not declined in any way since all of this publicity?

Mr. HENDERSON. No more than the normal fluctuation, Mr. Allen, no, sir. They fluctuate during the month, of course. We have quite a bit of manufacturing business in our community and they fluctuate during the month, but I don't see any significant change, no.

Mr. ALLEN. What has happened to the value of the stock of Calhoun bank?

Mr. HENDERSON. That is a little bit harder for me to answer. We have nothing but a street market where two fellows, head to head, decide on what they are going to do. I have seen no significant change. We don't have that many sales, Mr. Allen.

Mr. ALLEN. You are familiar with the sale of stock in that bank?
Mr. HENDERSON. Not really.
Mr. ALLEN. Nothing of consequence in the past 3 or 4 months?
Mr. HENDERSON. Not significant, no, sir.

Mr. ALLEN. I want to ask the same questions of the officials of the Atlanta bank.

What has happened in the Atlanta bank, the National Bank of Georgia, since this controversy has become a front-page story in the past 2 or 3 months?

Mr. GUYTON. Sir, we have not had but a few accounts that I know of that have closed on account of some of the publicity and some of the activities concerning the media that we have seen.

I do get concerned over the fact that the prolonging of the publicity will raise eyebrows and cause people to wonder whether or not they want to do business with the National Bank of Georgia.

I will also say, sir, with all of the senior management time, or so much of the senior management time being taken up and responding to questions of the press and to investigations by the various regulatory agencies, that we are not doing the kind of banking I would like to see us doing, that being, concentrating on running a good bank. I am concerned about it, but I see no real problems at this point.

Mr. ALLEN. What were the total deposits of the National Bank of Georgia as of January 1?

Mr. GUYTON. Those deposits at January 1, 1977, were approximately $334 million. They are slightly higher than that today.

Mr. ALLEN. Did they start going up immediately after Mr. Lance became Budget Director? Did you possibly pick up $100 million?

Mr. GUYTON. No, sir. In fact, I think they slid off for a period of time. Some of that was by design. The economy in Atlanta slowed during the past few months. There was not as much growth as we had been seeing.

Mr. Cleveland, when he came in, recognized that we probably did not need at that particular time as much in time moneys as we had in the bank and began to move those totals down somewhat and, of course, those are totals we cannot control.

Mr. ALLEN. What was the situation at the close of business in August?

Mr. GUYTON. September 1, 1977?
Mr. ALLEN. Yes.

Mr. GUYTON. They were on the average for the month approximately $330 million to $340 million, about the same as they were at the first of the year.

Mr. ALLEN. You are saying this publicity had no adverse effect upon the bank?

Mr. GUYTON. I would say that is correct at this point.

Mr. ALLEN. What has happened to the sale value of the stock of the bank since January 1? What was the selling price of the stock at January 1?

Mr. GUYTON. I don't know. I would guess $15 to $17, somewhere in that area.

Mr. ALLEN. For what are the shares selling today?
Mr. GUYTON. $11 to $12.

Mr. ALLEN. Have the other banks in Atlanta suffered a similar decline in the value of their stock?

Mr. GUYTON. One other one has. The other two major banks in Atlanta, or three, I suppose, remain fairly stable in their stock prices during this year.

Mr. ALLEN. As to the one whose stock declined, is that one of the smaller banks or one of the major banks?

Mr. GUYTON. It is one of the major banks.
Mr. ALLEN. Which is that?
Mr. GUYTON. That is the C. & S. National Bank.

Mr. ALLEN. Is that one of the banks with which your bank has had a considerable amount of dealings?

Mr. GUYTON. We have a correspondent relationship with them.

Mr. DERRICK. Has the Citizens and Southern Bank had substantial writeoffs recently?

Mr. GUYTON. The decline in the Citizens and Southern stock price was due primarily to the fact they cut their dividend from 13 cents a quarter to 6 cents a quarter due to problem loans in the portfolio.

Mr. DERRICK. They have written off a good bit on real estate?
Mr. GUYTON. That is true.
Mr. DERRICK. That was basically the reason for the decline?

Mr. GUYTON. And relatively stable earnings as a result of that; that is right.

Mr. ALLEN. Without going into the matter of Mr. Bert Lance at all, I am concerned about what the effect is of this publicity upon the largest bank in Georgia, around Calhoun, and also one of the large banks in Atlanta. Many people have their savings invested there and deposit there. As a member of this subcommittee, I am concerned about what effect it will have. I shall not address the question of Mr. Bert Lance. I am going to leave that to Mr. Bert Lance when he appears before the Senate committee tomorrow.

Mr. GUYTON. Your concern is well taken, sir. I appreciate that.
Mr. HENDERSON. I would concur in that too.
Mr. ALLEN. I am concerned very much.

Mr. Davis. We are too. We are basically a consumer bank and we have been very gratified with the support we have been given n these unusual times.

Mr. ALLEN. You gentlemen know nearly everyone in the town and the county and they have confidence in you gentlemen personally.

Mr. HENDERSON. That is correct.
Mr. Davis. That is correct.

Mr. ALLEN. That would not be true in a metropolitan area as large as Atlanta. There is no single individual perhaps other than major politicians who would have that kind of contacts in Atlanta, and even he wouldn't have the person-to-person contact you bankers have in a town of 5,000 population.

I am concerned about it and I am gratified to hear that you do not feel that the National Bank of Georgia is in any kind of jeopardy as a result of this adverse publicity. Am I correct?

Mr. GUYTON. You are correct at this point, yes, sir.

Mr. HYDE. I certainly share the concern of my colleague from Tennessee about what all of this exposure is doing to some of the banks in Georgia. I am also concerned about confidence in the Office of Management and Budget, the President's Cabinet and the efficacy of the Comptroller of the Currency and how well this Office has been doing its job.

Along those lines, here is a popular book-more or less popularthat came out in 1974, "Bankers," by Martin Mayer.

Mr. Tarleton, did you read that?

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