PANAMA CITY — There was no way executives on trial didn’t know they’d signed over their banks as collateral on a loan they’d received to placate regulators who felt they were undercapitalized, a government witness said Wednesday.
A narrative began to emerge amid all the talk of unsecured debt and generally accepted accounting principals Wednesday during the second day of testimony in the trial of Frank Baker, Terry Dubose and Elwood West.
The three former leaders of Coastal Community Investments, the holding company that owned now-failed Coastal Community Bank and Bayside Savings, are on trial for a dozen felony counts stemming from their alleged conspiracy to defraud the Federal Insurance Deposit Corporation out of nearly $4 million.
One of the banks had paid dividends that ran afoul with regulators when, in December of 2007, West, Coastal’s chief financial officer, and Coastal CEO Dubose sought and obtained a short-term loan of $3 million from the predecessor of Royal Bank of Canada. Coastal put up the company as collateral.
Robert Aland, a Birmingham-based banker who oversaw RBC’s loan to Coastal, said Wednesday RBC was growing concerned about Coastal’s ability to repay the loan after signing off on several extensions.
In cases where RBC had to work closely with borrowers to be repaid and avoid foreclosing on the borrower’s collateral, Aland would’ve expected and preferred to have a face-to-face meeting with the CEO. Aland had to settle for a conference call on Nov. 14, 2008.
On the call, West and Dubose explained they were exploring a deal for a loan under the FDIC’s Temporary Liquidity Guarantee Program (TLGP).
After the call, Jim Powell, the RBC banker working with West and Dubose and Coastal’s repayment plan, heard from Dubose that Center State would loan Coastal $3.75 but that the loan from RBC “had to be unsecured,” meaning that RBC didn’t hold Coastal shares as collateral.
Powell had to pause. There’s no way Coastal didn’t know RBC held the bank as collateral, right?
“He’s a smart guy and a chairman of a bank, and I didn’t have the information in front of me, so I thought maybe I better check something before I correct him,” Powell said.
Powell confirmed that RBC’s loan to Coastal was secured by collateral and sent West an email saying as much. The next morning, Powell emailed Aland to say the Coastal deal looked like it was back at square one; the fact that the RBC loan was secured by Coastal stock made Coastal ineligible for the TLGP.
Aland’s reaction to the news that Coastal executives didn’t know the status of the loan: “Dad-gum! How did they not know the loan was unsecured?”
Not exactly dad-gum, Aland explained, but “I’ve got ladies in the audience.”
“Everyone knew it was secured,” Aland said. “It’s just not something you’d have to talk about.”
Ten minutes later, on a conference call with Aland, Dubose said Center State would lend Coastal the $3.75 million without collateral, but he didn’t say FDIC would guarantee the loan.
After the conference call, Powell called Center State to confirm they would lend Coastal the money. Center State didn’t indicate the loan was guaranteed by the FDIC.
Powell called it “an oversight” that RBC records didn’t indicate the bank had taken Coastal stock as collateral.
Assistant U.S. Attorney Gayle Littleton told Judge Richard Smoak after the afternoon recess that she had fallen behind where she expected to be at that point in the trial, and that it is unlikely she will finish presenting the government’s case this week.