7. Fulton acted as a major correspondent

to Calhoun from sometime prior to January 1972
until mid-1975. An examiner-prepared table
(Exhibit 9) summarizes the activity in Calhoun's
correspondent deposit account with Fulton during
this time period. In addition to the collected
balances in this account, in November 1973 Calhoun
placed with Fulton $250,000 in a non-interest
bearing certificate of deposit. In March 1974,
the amount of this certificate of deposit was
reduced to $100,000, where it remained until
September 1975 when the account was closed.
(Exhibit 9)

8. Fulton account officers from time to time during
the period September 10, 1970 through January

15, 1975 prepared memoranda of conversations with
Mr. Lance in which Fulton officers expressed the
view that Fulton was providing correspondent
services to Calhoun at "no profit" because of
inadequate average collected balances in Calhoun's
correspondent account. (Exhibit 10)

In a memorandum to the file dated August 28, 1973,
John W. Aldridge, Fulton account officer, commented
as follows:

Atkins Henderson called me yesterday to
discuss the analysis loss which has been
consistently occurring on their account.
He stated that he, Bert and Lamar Harrison
had reviewed the situation and believe they
have made the necessary adjustments to put
the account on a profitable basis. In addition,
we agreed to sell Calhoun First National a
$250,000 non-interest bearing CD for 90 days.

I agreed to sell Calhoun First National
federal funds on a when needed basis to get
the proper balance in the account. If the
adjustments which are made do not at least
result in daily collected balance, I will get

in touch with Atkins to discuss further adjustments
necessary. (Exhibit 11)

9.

On July 12, 1974, a number of outstanding loans
to Mr. and Mrs. Lance were consolidated into
(1) a $570,000 demand loan at prime interest
rate to Lancelot secured by 29,554 shares of
Calhoun and guaranteed by Mr. and Mrs. Lance,
and (2) a $275,000 demand loan at prime interest
rate to Bert Lance secured by 7,598 shares of
Calhoun and other stocks. According to Fulton
records (which are summarized in an examiner-
prepared table), the $570,000 loan was to be
repaid with the proceeds of a sale of stock.
(Exhibit 12) A Fulton loan rating sheet dated
October 31, 1974 listed both loans, assigned
a numerical rating of 4, and explained the
rating as follows:

The loan is excessive in relationship to
book value of stock held as collateral.
Mr. Lance anticipates sending us additional
collateral, and he also anticipates definite
repayment program. When additional collateral
is received and repayment program starts,
this rating would improve. (Exhibit 13)

A subsequent Fulton loan rating sheet dated
March 7, 1975 changed the numerical rating to 3.

A memorandum prepared by Fulton Senior Vice

President J. L. Phillips dated April 15, 1975

noted his belief that the rating should remain 3

"although our collateral position is greatly
2/

improved." (Exhibits 10, 13, 14, and 15)

The Fulton line sheet entries on these

consolidation loans do not contain any

references to balances being maintained by

Calhoun; however, the Fulton loan rating sheet

2/ An undated bank policy statement included as part of Exhibit 15 provided to OCC examiners explains these internal bank loan ratings.

10.

dated October 31, 1974, in a section titled
"BAL" contains a penciled entry in the box
labeled AFTER TAX RETURN ON CAPITAL of 11.85

percent. (Exhibit 13) Fulton Senior Vice
President J. L. Phillips, who prepared the
October 31, 1974 rating sheet, stated under
oath that he "did not know what balances were
considered in the formula for computing the
after-tax returns." According to Mr. Phillips,
the bank generally looked "at balances that were
direct from the borrower and the balances that

[the] borrower was influential in placing with
3/

us.

A memorandum dated January 13, 1975 to

Gordon Jones, Fulton President, from Mr. Phillips
provided "an update on Bert Lance's picture with"
Fulton. Mr. Phillips attached schedules showing
participations and direct loans made "at Bert's
request" as well as loans to individuals secured
by stock in the Calhoun, Cohutta, and Ringgold
banks. After commenting upon a need for
collateral or plan for repayment of the loans
made to Messrs. Mathews, Dobbs, and Langford
to purchase the stock of the Ringgold bank,

the memo continued as follows:

3/ Mr. Phillips provided examiners with Fulton internal instructions concerning the calculation of return on capital in connection with loans and investments made by the bank. (Exhibit 16) These instructions explain the calculations, in part, as follows:

In calculating return on capital, we are attempting to obtain the
yield after cost on those funds provided by invested capital, after
income taxes.

The cost associated with borrowed funds is the weighted average cost
of all funds used. These funds include time deposits, Fed Funds and
notes payable. To use the average cost of all borrowed funds as the
cost factor for a new loan, however, would be misleading. New loans
require new or recently borrowed funds, so the cost that should be
applied to the new loan should be the average cost of the recently
borrowed funds.

The cost rate of these recently borrowed funds is known as the
'pool rate.' This rate is determined by the weighted average rate
for a month charged for Fed Funds or 90 day certificates of deposit,
whichever is higher.

Two other very important considerations must be taken into account.
These are the amount of the borrower's compensating balance, and
the percentage of demand deposits required to be kept on reserve
with the Federal Reserve Bank.

The instructions attach charts from which Fulton officers "can
determine what combination of rate and balances is required in order
to obtain the same return on capital as a prime rate loan with adequate
compensating balances."