Alleging massive fraud, the Office of the Comptroller of the Currency abruptly shut down a $1.1 billion-asset West Virginia bank on Wednesday.

Nearly half the assets claimed by First National Bank of Keystone are phony, according to the OCC. Examiners discovered last week that First National had sold and securitized $515 million of loans but had pretended they were still income-producing assets.

OCC declared the bank, the fourth to fail this year and the biggest since November 1992, insolvent. Its reported capital ratio as of March 31 was 16.5%, and in past years it ranked among the most profitable banks in the country.

First National's problems first surfaced during an exam in the summer of 1997, and the OCC issued two enforcement actions last year. Still, OCC spokesman Robert M. Garsson admitted that the agency did not know the loans had been sold.

"Obviously, we have had very major concerns about this bank for several years," he said. "The idea that the loans might not exist was a really major surprise."

Various law enforcement agencies are said to be investigating wrongdoing by bank officials.

The Federal Deposit Insurance Corp. is trying to sell First National's insured deposits to a healthy bank. If the agency fails to locate a buyer by Sept. 7, it will begin making payouts, the agency said. Depositor losses could be exceptionally high, however.

Neither the FDIC nor OCC was able to estimate the level of uninsured deposits. But as of March 31, 415 First National accounts, many of them long-term certificates of deposit, had balances above $100,000. Their average balance was $1.4 million.

Account holders from the coal town of approximately 600 people, located in one of the nation's poorest counties, lined up outside the closed bank Wednesday seeking their funds.

In May 1998, First National consented to resolve problems discovered during examinations the prior summer. Among other things, it agreed to get an outside audit of its mortgage purchases and securitizations. First National subsequently hired the Grant Thornton accounting firm, which later gave the bank an "unqualified opinion," according to the OCC. Grant Thornton refused to comment Wednesday.

Another examination of the three-branch bank was completed Aug. 31, 1998. Concerns about the quality and performance of securitized assets, many of which were apparently subprime, led the OCC to make an on-site visit in March and to ask FDIC examiners to join in on the most recent exam, which wrapped up in June.

Last December, the OCC fined six First National directors and officers including chairman Billie J. Cherry -- who agreed to pay civil money penalties of $2,000 each.

Some observers raised questions about the effectiveness of those OCC actions.

"This is a giant fraud," said consultant Bert Ely of Alexandria, Va. "The question is, why the hell didn't they catch it sooner? "

According to Mr. Ely, First National's March 31 balance sheet showed a "very unhealthy asset concentration in interest-only strips on mortgage loans" and in junior mortgages. "This is a very strange balance sheet that should have been ringing all kinds of alarms."

Between yearend 1994 and yearend 1998, the bank's assets grew seven-fold, from $163 million to $1.14 billion.

But Mr. Garsson said, "Fraud is the most difficult thing for examiners to detect. This is a case where it really was the persistence and the diligence of our examiners." They discovered the fraud after a visit to the company that was servicing the loans, he said. Mr. Garsson would not name the servicer.

Before these problems surfaced, First National and its former chairman, the late J. Knox McConnell, enjoyed a somewhat charmed existence. Between 1993 and 1996, the bank had the best return-on-asset and return-on-equity ratios of any community bank.

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

Mr. McConnell suffered a fatal heart attack seven months later. He was replaced by Ms. Cherry, a former employee who came out of retirement. Calls to her home and the bank went unanswered.

Louis Whiteman contributed to this story.

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