Poor Town, Rich Bank

By Timothy Roche/Keystone, W.Va.

Rimmed by steep ridges and mountain shanties, the hamlet of Keystone, W. Va. (pop. 627), looks like a movie set left over from Coal Miner's Daughter. Main Street, all four blocks of it, has not a single traffic light. Yet the local bank in recent years has boasted one of the highest profit margins in the U.S., and reached $1 billion in assets in 1998. You might wonder how such a bank could thrive in one of the poorest counties in the U.S. And you'd be in good company, because bank examiners and the FBI wondered too.

On Oct. 15, federal agents issued a warrant for the arrest of Terry Church, 46, the flamboyant, Harley-riding president of Keystone Mortgage Co., a subsidiary of First National Bank of Keystone. The agents excavated hundreds of cartons of mortgage documents buried in a corner of Church's mountaintop ranch. They alleged that she and one of her company's vice presidents, Michael Graham, obstructed bank regulators who were investigating a fraudulent scheme that left First National insolvent and forced bank regulators to take it over on Sept. 1. The bank's losses are expected to cost the Federal Deposit Insurance Corporation some $800 million--the largest loss since the savings-and-loan crisis of the early 1990s.

It's the most excitement anyone here can remember since the days when the brothels and taverns of Keystone lured coal miners on payday and when trains stopped here to give G.I.s one last fling on their way to World War I. But the town's most enduring legend is its 95-year-old bank. As it boasts on the side of its building, the institution is "time-tried, panic-tested," a survivor of the Great Depression.

In 1977 the bank had only $15 million in deposits. Then along came a miserly Pittsburgh, Pa., financier named J. Knox McConnell, who drove an old Buick and wore threadbare suits but was worth $23 million. He hired only women--"Knox's Foxes," they were called--to discourage distracting office romances. His longtime companion was Billie Cherry, a woman who worked for him. Cherry and her friend Terry Church followed Knox from Pittsburgh to Keystone. The bank moved aggressively into the national market for "subprime" home-equity loans, which are riskier than first mortgages but generate higher interest payments. Keystone was earning about 5% profit on its assets--more than double the industry average--by the time McConnell died in 1997.

Cherry took over as bank president. Church, who, with her husband Hermie has a collection of two dozen Harley-Davidsons, became president of Keystone Mortgage. The trio own almost every business in town, including the hardware store, gas station and motorcycle-repair shop. The bank's $400,000 in annual taxes provide two-thirds of the town's revenue.

It all began tumbling down, though, after the subprime lending market collapsed last year, leaving the bank undercapitalized. Federal regulators came to review the books but were overwhelmed by chaotic records that filled much of the bank, a warehouse and an old schoolhouse.

In August, according to an FBI affidavit, Keystone executive Graham supervised several men who hastily hurled boxes of records from a third-floor window of the old school building into a truck owned by Hermie Church's construction company. Several truckloads of records were buried in a 100-ft.-long trench on the Churches' ranch. By the time bank auditors found out, the trench had been disked and seeded.

The drama heightened last week after Church paid $2.5 million bail and was confined to her ranch. Cherry has not been charged, but is offering something of a hillbilly defense around town, claiming auditors have attempted to oust her and Church because the women are not Ivy Leaguers.

That plays to local resentment of federal agents, which is running high, in part because almost everybody will suffer from the bank's shutdown. The town government has already laid off a third of its workers, including the town manager, and is down to two police officers. During the town-council meeting last Thursday, Cherry, who is also mayor, doubled her fists and vowed that if anyone tried to make her resign her city post, "I'll give 'em some knuckle puddin'." She had a request for the council. Now that she has lost her job and her $4 million in bank stock is worthless, she would like a permit to open a bakery.