Out Of Order

Weststar Financial Services Corp. tried hard to put a happy face on Buddy Greenwood’s retirement as CEO of it and its lone subsidiary, Bank of Asheville. It lauded his triumphs – including increasing the bank’s assets from $40 million to $225 million during his 10-year tenure – and his character, noting, among other charitable endeavors, his chairing the local Habitat for Humanity. One fact, though, suggested something amiss: It was announced July 1, 2010, effective the day before.

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The press release, which came the day after the bank’s second quarter ended, said nothing about a lawsuit that recently had accused Greenwood of allowing misuse of customer funds or the depths to which its financial condition had sunk. Only the gloomiest of forecasters would have predicted that within a year Bank of Asheville would cease to exist and that Greenwood would be indicted on federal charges of fraud and money laundering.

In fact, on the day he retired, the bank seemed to be on the mend. It had netted $81,248 in the first quarter after losing $73,222 during 2009. But any illusion of recovery was shattered when it filed its second-quarter report Aug. 23. It had lost $14 million – mostly from $13.4 million in loan charge-offs, more than 30 times what it reported the year before. The resulting decline in capital and anticipated regulatory action, “potentially raise substantial doubt about the bank’s ability to continue as a going concern,” Weststar admitted for the first time. Its stock, which fetched $1.90 a share when Greenwood left, had fallen below $1. The state commissioner of banks issued a consent order Sept. 23 requiring, among other things, that it raise more capital.

Even then, few outsiders would have written it off. Since the financial maelstrom of late 2008, other sick North Carolina banks have been given lots of time to recuperate. Bank of Granite Corp., based in Granite Falls and once praised by investor Warren Buffett as the best little bank in America, had been operating under a cease-and-desist order – a severe regulatory warning that can foreshadow failure – since August 2009. Asheville based Blue Ridge Savings Bank Inc., owned by former congressman Charles Taylor , had begun operating under one in November 2008. No North Carolina bank had failed in more than a year, and regulators seemed to be grading on the curve, reluctant to close banks that might have been shut down in a more prosperous era as long as they showed some positive vital signs. The state would make it through 2010 without a single bank failure.

Certainly, Bank of Asheville had problems. But with so many other banks groaning under bad real-estate loans and weak capital ratios, there was little reason to think it was in for anything more than painful rehab or possibly a sale to a healthier buyer. But state and federal regulators shuttered it Jan. 21 – just five months after its troubled condition came to light and sold its assets to Troy-based First Bancorp. Why? As the smoke clears, lawsuits and criminal charges leveled against Greenwood paint a picture of a chief executive whose offenses went beyond making poor real-estate loans – one whose deeds may have driven regulators to kill his bank.

The official reasons for Bank of Asheville’s failure speak more to institutional woes. “As a result of bad loans, we expected their December call report had they filed it would’ve reflected insolvency. That compelled us to close it,” says says Ray Grace , deputy commissioner of banks. He won’t talk specifically about whether management’s troubles played a key role in the closing, but regulators’ assessment of management, and its ability to fix problems, plays a role in whether any troubled bank survives.

Greenwood’s bad loans and alleged transgressions intersected at two western North Carolina developments: Queens Gap and Seven Falls. Queens Gap was the brain child of Ohio businessman Devin McCarthy . In 2006, he bought 3,500 acres in Rutherford County, intending to build a 1,400-home development with an equestrian center, hiking trails, an outfitter’s lodge and a Jack Nicklaus -signature golf course. He told county officials and potential buyers that his personal fortune would pay for the development sans debt. Queens Gap’s marketing events featured the Golden Bear signing autographs.

Early on, sales were good. A complaint filed by the trust of a Queens Gap lot owner says they reached $40 million, and tax records show that 92 of 201 lots in the development’s first phase were purchased. But in 2008, demand waned. McCarthy says he also developed health problems. In 2009, he sold his stake to Keith Vinson , the developer of Seven Falls Golf and River Club in Etowah. The deal stipulated that McCarthy place $4.25 million in a Bank of Asheville account. Vinson was supposed to use the money to develop Queens Gap, which was under a $12 million bond insuring that roads and public water and sewer lines were built, according to Danny Searcy , Rutherford County’s planning director.

Under terms of the joint account, no money could be withdrawn without the approval of both Vinson and McCarthy. But a lawsuit filed by McCarthy contends that Greenwood allowed the transfer of $2 million into Vinson’s personal account on June 19, 2009, without McCarthy’s consent. Vinson then wired $1.37 million to an outside party – not named in the suit – that had nothing to do with Queens Gap. Furthermore, McCarthy says, Bank of Asheville accepted part of the funds “in payment of other obligations owed to Bank of Asheville by Vinson.” McCarthy sued the bank 12 days before Greenwood left. The suit was settled after he was gone.

Greenwood also let Vinson overdraft a different Bank of Asheville account by $300,000, according to a complaint against Greenwood filed in November by Weststar to recover damages from the Queens Gap affair. It delves deeper into Greenwood’s alleged misdeeds concerning the joint account. When Vinson first tried to access McCarthy’s money, the transfer was stopped because of the two-signature restriction. But after Vinson spoke with him in person, Greenwood approved it. Then he removed McCarthy’s name from the account, going so far as to create a new signature card and place the changes on file at the bank, the suit contends. When McCarthy’s lawyer asked to see the account balance on Nov. 9, 2009, Greenwood rejected the inquiry.

Meanwhile, Seven Falls Golf and River Club was struggling – despite sales that, at one point, topped $50 million, says a suit against Vinson – and would go on to file for Chapter 11 bankruptcy protection in December 2009. Since then, the FDIC has sued Vinson, saying he failed to pay on a $1.4 million promissory note to Bank of Asheville. Two months ago, he was arrested on three counts of insurance fraud for allegedly accepting money from employees for health care but not paying the premiums. Neither Greenwood, Vinson, McCarthy, contacted through their attorneys, nor any of the Weststar board of directors agreed to be interviewed for this story.

Bank of Asheville stumbled to the end of 2010 – in far worse shape than it started. Its loss swelled to $19.3 million for the year, more than 25% of its loans were nonperforming, and its Texas ratio – a measure of asset quality – soared to 485.4%, among the highest in the state. But not the highest. Though other banks were arguably in worse financial shape, regulators decided to put Bank of Asheville out of its misery, selling it to First Bancorp for $23.9 million and giving the buyer an 80% loan-loss guarantee from the FDIC of up to $163.3 million. Assets had dwindled from $225 million when Greenwood retired to $195 million.

His troubles continued after the bank failed. In February, he was indicted on federal charges of fraud and money laundering. Though the Justice Department won’t comment on specifics, the cryptically worded indictment alleges that, through Bank of Asheville, he lent $500,000 in March 2009 to “C.B.” – a straw borrower for another party. The indictment is also vague about details of the money-laundering charge: Loan proceeds were used by Greenwood in a “series of financial transactions for the benefit of K.V., R.C., A.C., G.G. and the straw borrower, C.B.”

The practical effects of what happened to Bank of Asheville can be seen at Queens Gap. Despite repeated promises by Vinson to finish the development, little has been done even to build its infrastructure. “Insufficient is kind of an understatement,” Searcy says. Roads were supposed to be finished in June 2009. Once started, a county report says, construction would take 18 to 24 months. The Nicklaus-signature golf course does not exist. Searcy says one house in Queens Gap is habitable, but only because its owners dug their own well and septic tank. Rutherford County is readying a case against the bond companies, attempting to get roads and a water-and-sewer system installed. “We’re trying to watch out for the folks who bought in this community” Searcy says. He’s had enough of Vinson’s promises. “The only thing that would mean anything is physical improvements.”