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A West Virginia coal town's boom turns to bust

Wednesday, October 20, 1999

By Jeffrey Cohan and Jonathan D. Silver, Post-Gazette Staff Writers

KEYSTONE, W. Va. -- McKeesport native J. Knox McConnell could hardly have picked a more unlikely place to make a fortune. Wedged into a narrow valley, this town and its 600 residents suffer from double-digit unemployment; coal-mining jobs, once the backbone of the economy, have almost disappeared; and even the post office has closed. Three-bedroom homes sell for $12,000.

But in this Appalachian isolation, McConnell prospered.

Employing an all-female work force he dubbed "Knox's Foxes," he took over tiny First National Bank of Keystone in 1977 and turned it into a billion-dollar institution.

A close friend of Pittsburgh boxing legend Billy Conn, McConnell became a heavyweight in his own right, forging personal ties with a former president and winning praise from national banking journals.

"His goal from the time I knew him was to be the No. 1 banker in the country," said Steve Day, a Charleston, W.Va., businessman.

McConnell died after a heart attack at age 70 two years ago this month, but the bank stuck to his strategy and continued to grow.

Until last month.

On Sept. 1, federal regulators closed it, alleging massive fraud. Investigators are trying to figure out what happened to $515 million in missing assets. It likely will rank among the 10 biggest bank failures of the past 20 years. One of McConnell's top lieutenants is charged with conspiring to obstruct a federal investigation.

McConnell received credit for the bank's astounding rise. Investigators don't yet know whether he set the stage for its equally shocking fall.

McConnell grew up during the Depression in McKeesport as the only child of J. Knox Sr. and Marie Rice McConnell. His father operated a wholesale candy business and was on the board of directors of People's Union Bank & Trust Co.

But McConnell credited Conn with steering him toward a banking career. Their long friendship inspired McConnell to write a 109-page autobiography titled "The Boxer and the Banker," published in 1984.

McConnell met Conn at the age of 8 when his father took him to a fight in Pittsburgh. The boy became a regular at Conn's bouts, and the boxer took a shine to him.

Conn achieved lasting fame for a 1941 fight in which he was knocked out in the 13th round by heavyweight champ Joe Louis.

McConnell's parents, meanwhile, had sent him to Hargrave Military Academy in Chatham, Va. He spent 10 months in the Army immediately after World War II, then graduated from Waynesburg College in 1949.

All the while, he stayed friends with Conn.

In his book, McConnell recounted numerous times he sought Conn's guidance. The boxer, he wrote, gave him the idea to become a banker.

"Out of the clear blue sky, he said, 'If I were you, kid, I would be a banker. They go to work at 9 a.m. and leave at 2 p.m. and all day long they sit and look at the most wonderful stuff in the world -- money.' "

In 1949, McConnell took a job in the credit department of People's First National Bank in Pittsburgh then worked at banks in Oil City and Indiana, Pa. He returned to Pittsburgh in 1958 to manage Franklin Federal in Squirrel Hill.

Eventually, McConnell sought the help of another Pittsburgh sports icon, the late Art Rooney, founder of the Steelers.

In 1960, McConnell wanted to open a bank in Indiana County but found himself in a court fight that went all the way to the state Supreme Court.

McConnell turned to Conn, who arranged a meeting with Rooney in late 1962 or early 1963. Rooney had known former NFL Commissioner Bert Bell, whose brother was state Supreme Court Chief Justice John C. Bell Jr.

McConnell wrote that Rooney told him, "Young man, something like this cannot be fixed ...but I do believe you are worth working with. Now leave me alone and let me see what I can do."

Fourteen weeks later, McConnell wrote, the Supreme Court ruled in his favor. In 1963, he opened Conemaugh Valley Bank.

He later sold it and moved on to a vice president's position at First National Bank of Washington, Pa., where he arranged financing for Uptown's Central Medical Pavillion, now St. Francis Central Hospital.

Anxious to enter the world of international banking, he shipped out in 1975 to the island of Saipan in Micronesia, then a United Nations trusteeship administered by the United States. The U.S. Department of Interior hired McConnell to run a development bank there.

But the U.S. government questioned just how much work he did. An audit criticized him for excessive travel and poor loan collections and for issuing too few development loans. He had planned to stay until 1981 but left four years early.

While the U.S. government was dissolving the development bank, McConnell was starting a new job -- vice president and chief executive officer of the First National Bank of Keystone.

Going to Keystone might have seemed reasonable in the 1940s but not in the late 1970s.

For the first half of this century, little Keystone -- 1.2 miles long and half that wide -- quenched the thirsts and lusts of thousands of coal miners. A section of town called Cinder Bottom was notorious for taverns and brothels.

But by the time McConnell arrived, coal mining had begun its disastrous decline. He took over a bank that was founded in 1904 and had survived the runs of the Depression. "Time Tried, Panic Tested," bragged a sign outside the bank.

It had just $17 million in assets in 1977, having relied almost exclusively on local customers for loans and deposits.

McConnell persuaded two Pittsburgh-area women to help him run the bank: Billie Cherry, who was comptroller at Washington Plaza, an Uptown apartment building, and Terry Lee Church, a bookkeeper at Washington Plaza.

Cherry had gone to Micronesia with the idea of marrying McConnell, but they never wed. Church had managed his affairs in the U.S. while he was in the South Pacific.

McConnell, promoted to president soon after arriving, quickly recognized that the bank had to reach beyond southern West Virginia to make money. Capitalizing on the contacts he made in the Central Medical Pavillion deal, he provided discount mortgages to hundreds of Pittsburgh-area doctors.

"I wore out a couple of cars driving up to Pittsburgh every single weekend and Monday for two straight years," McConnell told American Banker, a trade journal, in 1993. He would eventually open a loan office on Campbells Run Road in Robinson.

At the same time, McConnell fought for a bigger share of the southern West Virginia market. He offered new cars in lieu of interest on certificates of deposit. Scores of depositors drove home in new Pintos and Mustangs, Cadillacs and Continentals.

The interest payments went to car dealers, who were happy to unload excess inventory.

"His bank was small, in a depressed area, not worthy of a whole lot of attention. He had a lot of drive to overcome that image," said Michael Gibson, a Princeton, W.Va., attorney and longtime member of the bank's board.

"He was energetic. He was very gregarious. He was unconventional."

McConnell, a lifelong bachelor, assembled his all-female work force to stave off romances among his employees.

"I'm not afraid of women dating women," he told American Banker. "It's a guy from the loan department dating some teller that I don't want."

A relentless networker, McConnell traveled to banking conferences and seminars, always hunting for new contacts and ideas, said Day, the Charleston businessman.

"He was extremely outgoing. He was very animated, a lot of hand gestures," Day said. "If Knox was drinking a cup of coffee and telling a story, you'd have to be at least five or six feet away, because he would always spill coffee on himself and half the people he was talking to."

He spiced conversations with exaggerations about his own past.

"He could twist a story pretty good," said Day.

One possible example: McConnell claimed to have a master's degree from Stanford, but the California university has no record of him.

As McConnell's bank grew, he took an interest in politics. In a 1980 letter to American Banker, he wrote, "If I am fortunate, one of my desires is to run for governor of this great state."

He never did run, but he cultivated relationships with the state's political leaders, winning gubernatorial appointments to the state racing and boxing commissions.

But his most cherished ties were with former President George Bush.

McConnell plastered his office walls with photos of himself with Bush.

Bob Johnson, executive director of the National Association of Review Appraisers and Mortgage Underwriters, marveled at McConnell's connections.

"I've been in the White House when George and Barbara Bush were there. I would be standing next to Knox, and Barbara saw him and said, 'Knoxie, how are you? You need to get up here more often.' "

While McConnell had friends in the highest places, he felt comfortable with people in one of the lowest. His customers and employees in Keystone liked him.

Around town, he called older men "uncle" and other men "cousin."

"He'd make a joke about everything," said Mack Oliver, a lifelong Keystone resident and a former city manager. "He just got along with everybody."

He never installed an automatic teller machine at the bank, explaining to American Banker, "This isn't ATM country. If one of those things broke, someone would pull out a shotgun and shoot it."

Employees say he showed uncommon concern for their welfare. He set up an employee stock ownership plan.

"He used to say it was his desire to make every one of his employees a millionaire," Gibson said.

Although McConnell amassed a multimillion-dollar personal fortune, he didn't live like a millionaire.

He wore old suits, drove Buicks and rented a modest dwelling in Bluewell, a town in the next county over.

McConnell worked long hours at the bank and rarely vacationed.

"He lived, ate and slept that bank," Gibson said.

"He never had any other interests that I was aware of," said Day. "Boxing was the only sporting activity he ever talked about."

Actually, McConnell had a passion for another type of combat: clashes with federal banking regulators. While many bankers abhor regulators, McConnell displayed an unusually virulent disdain.

The mere mention of regulators outraged him.

"He would use the 'F' word quite a bit," said Michael Graham, executive vice president of Keystone Mortgage Co., a bank subsidiary.

Gibson described McConnell's relationship with banking regulators as "very acrimonious."

McConnell didn't hesitate to publicize his contempt for banking regulators.

In 1992, he told the State Journal, a West Virginia business weekly, "I don't care for examiners at all. I think they ought to do away with them."

Some of McConnell's friends feared his open hostility for regulators would lead to trouble.

Throughout the 1980s, the First National Bank of Keystone continued to soar, even as the local economy slid.

In 1987, the unemployment rate in McDowell County, where Keystone is located, hit 33 percent. The same year, the bank reported $65 million in assets, representing a 380 percent increase during McConnell's first decade at the helm.

By 1992, the assets had swelled to $90 million.

McConnell was just getting started. He came to see the entire United States as his market area, and in the early 1990s, he came up with an idea that would make his bank a major player.

The federal government insures home-improvement loans in an ongoing effort to improve the nation's housing stock. Known as FHA Title One loans, they provide up to $25,000 to improve a home.

McConnell's bank began purchasing Title One loans from other lenders, bundling them in big groups, and then reselling them at a profit -- a concept called "securitization."

He formed a subsidiary, Keystone Mortgage Corp., to handle this new enterprise, and hired a consultant to travel the country and make Title One purchases.

In 1996 alone, the bank bought and sold $725 million worth of the loans, accounting for about half of the Title One securitizations in the nation, according to the National Mortgage News.

With such a massive load of loans, McConnell needed to attract more depositors to keep his books balanced. On the Internet, he offered CDs with interest rates 2 points about the market rate. Deposit brokers, who scour the country for the best rates for wealthy customers, pumped hundreds of millions into the Keystone bank.

American Banker named his institution the most profitable community bank in the country for three straight years in the mid 1990s. It was zooming toward $1 billion in assets.

Banking regulators were taking notice.

"We were concerned about the rate of growth of this bank, the risks it was taking on, the expertise," said Robert Garsson, spokesman for the Office of the Comptroller of the Currency, the regulator of federally chartered banks.

The bank began to move into riskier enterprises, securitizing not just Title Ones but also debt-consolidation loans, the kind geared toward consumers with crushing debt levels.

The OCC, after a 1997 examination of Keystone's books, forced the bank to hire an outside accounting firm.

But McConnell remained bullish on the bank's future.

In March 1997, McConnell told American Banker, "We're going to keep it up. I don't see us making any less money in the foreseeable future, and I know we're going to do better this year."

McConnell died Oct. 26, 1997, while in Morgantown, W. Va., for a state Racing Commission meeting.

Bank customers and directors alike wondered how the bank would cope with the loss.

"I didn't know whether the people left could handle it," said Joe Stanley, 81, a retired electrician from the adjacent town of Eckman. "I should have taken my money out."

"Knox's Foxes" inherited control. Billie Cherry, a grandmotherly figure with a knack for public relations, became bank president. Terry Church, a detail-oriented banker whom McConnell trusted to execute his estate, took charge of the securitizations.

"There was a concern that an awful lot of responsibility had immediately fallen on the shoulders of Terry Church," said Gibson.

Bank officials, however, were optimistic that McConnell's death would lead to improved relations with regulators.

"We had hoped the regulatory pressure would be released a little bit, but just the opposite happened. It was ratcheted up," Gibson said.

At the same time, financial turmoil abroad was beginning to hurt the securitization market. The loans Keystone was bundling and marketing were no longer fetching high prices.

The Office of the Comptroller of the Currency insisted that the bank demote Cherry and hire a president better versed in the complex world of securitizations. Keystone directors chose Owen Carney, who had spent 28 years in the OCC's employ.

Carney started work Feb. 1, 1998, but lasted just two months. Bank officials told him that employees unhappy with his management style controlled enough stock to keep him off the board of trustees.

In hindsight, Carney said in an interview, he believes bank officials forced him out for reasons that had nothing to do with his management style: They feared he would discover the alleged fraud.

With regulatory scrutiny intensifying, Keystone trustees named the bank's fourth president in less than two years -- Gary Ellis, previously the president of another West Virginia bank.

Tensions continued to mount in Keystone.

The OCC assembled an unusually large team of regulators for the bank's annual examination. At least nine officials came to Keystone to comb through records, beginning in June.

In July, Graham, the subsidiary's vice president, purported to make a startling discovery: He produced copies of memos in which a former OCC regulator made veiled death threats against Cherry and Church.

OCC officials have questioned the authenticity of the memos but have turned them over to the Treasury Department's Office of Inspector General for investigation.

The memos prompted the bank to hire two armed guards, Garsson said.

OCC examiners, in turn, complained that bank officials and employees were harassing them. In late August, three armed U.S. marshals protected the regulators.

Sometime in mid-August, Graham and five other men gathered on the third floor of an old schoolhouse that the bank used for document storage, according to FBI Agent Brian Selbe. They dropped boxes from a window into the bed of a truck parked below, Selbe said in an affidavit.

The driver headed to the C&H Ranch, the home of Terry Church and her husband, Hermie. The boxes of bank records were dumped into a 10-foot-deep trench and buried, Selbe's affidavit said.

Back in town, regulators found $515 million worth of discrepancies between the bank's reports and those of companies processing loans for Keystone, according to the OCC.

Keystone, the OCC concluded, must have sold or otherwise disposed of the loans but continued to list them as assets.

"The bank was very significantly insolvent," said Garsson of the OCC. "As a result, we really had no choice [but to shut it down]. I don't think anybody knows right now what happened to the loans."

Depositors lined up for blocks outside the bank the morning of Sept. 1. The Federal Deposit Insurance Corp. had shut the bank hours before.

" 'Time Tried and Panic Tested' and all. It just leaves you wondering," said Stanley, the Eckman retiree who has an autographed Billy Conn photo, given to him by McConnell.

Stanley stands to lose about $100,000 in the bank failure -- he had about $200,000 in one account, double the $100,000 insured by the FDIC.

Joe Constantino, a retired hardware-store manager, lost $122,000 from a $222,000 retirement account.

"I did have my account there for the high interest. But I never dreamed it wasn't safe," said Constantino.

Bank employees are suffering the most, since they not only lost their jobs but the stock holdings they counted on for their retirements.

McConnell had counseled his employees that "the stock was the way to go. The dividends would be a perfect retirement. Always hold on to your stock,' " Terry Church testified Jan. 21 in a probate case involving McConnell's estate.

Today, that stock is worthless.

City workers have joined bank employees in the unemployment line. Keystone depended on the bank for two-thirds of its tax revenue. Since the bank closure, the city has laid off seven of its 15 employees, including two of the four police officers.

"It's pitiful," said Oliver, who laid himself off as manager. "Right now, we have two policemen and three police cars."

Last Friday, the federal government accused Terry Church and Michael Graham of conspiring to obstruct federal regulators in connection with the buried bank records. They face up to five years in prison and a $250,000 fine if convicted.

Billie Cherry, who has been Keystone's mayor for the past six years, has been subpoenaed by a federal grand jury but has not been charged.

Church, Cherry, Michael Gibson, and other bank directors could be sued by the FDIC, which might have to pay out hundreds of millions to Keystone depositors, according to preliminary estimates. If the total bill to the FDIC surpasses $526 million, Keystone would rank among the 10 biggest bank failures of the past 20 years.

McConnell rests in peace at Mount Vernon Cemetery in McKeesport.

But as federal investigators dig for the roots of the Keystone failure, they will write a new ending to the story of the boxer and the banker.

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