To residents of this down-at-the-heels coal town, First National Bank of Keystone's sudden collapse Sept. 1 was almost as curious as its rise to national acclaim.

Circumstances surrounding the $1.1 billion-asset bank's demise remain blurry. Regulators allege massive fraud and claim half the bank's assets are missing. The bank's officers deny any wrongdoing, and beyond that are saving their explanations for the grand jury.

"I believe we have nothing to be ashamed of," said Billie J. Cherry, the bank's chairman and a past president. "It's hard for me not to talk. The attorneys all say, 'Don't say anything, Billie.' I just feel strongly that there hasn't been fraud."

Few in the town of 627 doubt her word, and all agree Keystone owed its life to First National Bank.

"We always joked that the bank and its rates were too good to be true a fairy tale, almost," said one customer. "Now we have to get used to the fact that it is gone." (See related story on page 4.)

Founded in 1904, First National Bank of Keystone by the late 1970s had grown to only $17 million of assets.

Then J. Knox McConnell came to town. He and two colleagues who came with him from Pittsburgh -- Ms. Cherry and Terry L. Church -- transformed the bank over a 20-year period into a national leader in profitability. Its motto: "Time-tried, panic-tested."

Mr. McConnell died of a heart attack in 1997, and Ms. Cherry succeeded him as chairman and president. Ms. Church was her chief lieutenant and a senior vice president.

A week after a small army of blue-suited government officials and federal marshals converged on the town to close the bank, crazy speculation swirled through the community.

Rumors flew that Ms. Cherry had been arrested, taken her own life, been institutionalized, or fled to any one of a number of countries, including China, Japan, Australia, Mexico, and Canada. One customer said she had heard that federal marshals were poised to storm Ms. Church's mountaintop estate, a la the Branch Davidians in Waco, Tex.

While Ms. Church was refusing interview requests, Ms. Cherry, who is also Keystone's mayor, appeared at a Sept. 9 city council meeting convened to cut the town's budget by two-thirds. Taxes on the bank provided the bulk of the town's revenue. "This is the most devastating thing I have ever experienced in my life," Ms. Cherry said at the meeting. "We'll all have to pull in our belts."

During the 1990s, First National Bank of Keystone grew by purchasing, securitizing, and selling loans. The company began with Small Business Administration-backed paper, later moving on to riskier home improvement loans and 125% loan-to-value loans.

The bank's thirst for deposits grew well beyond what rural Keystone could quench. High rates attracted funds via deposit brokers and the Internet. According to local lore, brokers flew into nearby Bluefield's single-runway airport, rushed off to Keystone in rented limousines, and returned later in the day after closing a deal.

The high rates also drew many local depositors, some of whom will lose uninsured dollars.

"For years now I have been lying up nights trying to figure out why I couldn't do what (Keystone) did," said the president of a nearby community bank, who asked to remain anonymous. "It was costing me a lot of business."

For a while, the strategy seemed to work. First National was the country's most profitable community bank for three straight years in the mid-1990s. Between 1992 and 1998, the bank grew from $100 million of assets to over $1 billion. At yearend 1996, return on equity was 65.16%, and return on assets was 7.97%, well above industry averages.

Meanwhile, the bank's rapid growth and allegedly dubious accounting practices were drawing the attention of bank regulators. In 1998, the Office of the Comptroller of the Currency levied civil money penalties on directors for call-report errors. Later that year, the OCC issued an enforcement order aimed at resolving some of the bank's problems, including a concentration of subprime assets and continued accounting problems.

The bank's entire board was summoned late in 1998 to the OCC offices in Washington, where, among other things, regulators forced them to oust Ms. Cherry as president and replace her with someone more experienced in asset securitization. The OCC also urged the board to cut her salary. Her successor, former OCC official Owen Carney, lasted only six weeks. His ouster raised speculation that he was pushed out because he was about to discover the alleged fraud.

"I was forced out," Mr. Carney said in a recent interview. "Near as I can tell, it was because I asked too many questions."

Ms. Cherry, who is in her 70s, remains defiant about the fraud allegations and lobbed criticism back at the OCC. "I am like the little boy who gets told to sit down three times and is beaten when he doesn't," Ms. Cherry said. "He may eventually sit down, but in his head he is still standing."

Two outside directors also backed the bank executives.

The OCC "closed that bank too soon," said Daniel T. Halsey, a local Honda dealer who was added to the board in April. He said the supposedly missing assets "were verified as being there as recently as Dec. 31," the end date of an audit conducted by the Grant Thornton accounting firm.

"A lot of good people have lost a lot of money," said J. Lewis Pais, another director of the failed company.

Few people interviewed in Keystone are ready to accuse the bank or its officers of wrongdoing.

"Billie has been a fixture in this community for years, not only as a political figure but as a social leader and philanthropist," said Cliff Moore, chief administrative officer for the McDowell County Action Network, a nonprofit community development group. "I would bet my next-born child that she's not responsible for this."

"These are good people, the kind that will do anything for you," said Debra Smith, who had worked as a teller at First National for about a year before it closed. "I just don't believe there is fraud here."

Residents were quick to cite Ms. Cherry's many charitable contributions, including volunteering for a local cancer group and providing scholarships to local students. Townsfolk also tell a tale, perhaps apocryphal, of Ms. Cherry helping purchase a home for a bank employee whose house was destroyed in a fire.

"That lady would just give you her heart," said Vera Rose, a family friend.

Last week, Ms. Cherry was subpoenaed to appear before a federal grand jury in Charleston, the state capital. The hearing date has not been announced.

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