Federal Banking Regulators Failed
                   To Move on Keystone Problems

                   By RICK BROOKS
                   Staff Reporter of THE WALL STREET JOURNAL

                   Federal banking regulators spotted internal control and audit deficiencies at
                   First National Bank of Keystone eight years ago but couldn't prevent the
                   eventual loss of $515 million and still have no idea where the money ended
                   up, according to officials.

                   Instead, bank officials managed to intimidate the Office of the Comptroller
                   of the Currency, the West Virginia bank's primary regulator, and fake
                   documents, making it impossible for the agency to do its job, Ronald G.
                   Schneck, director of the OCC's special supervision unit, said in an
                   interview. As late as July, two months before the bank was shut down, the
                   bank posted armed guards who made threatening comments to the
                   examiners working inside the bank, according to OCC records.

                   "Everybody wants to say something could have been done to prevent this,"
                   said Mr. Schneck. "In the end, I look at the people who were running this
                   institution [the bank] as being responsible for its failure."

                   Biggest Failure Since S&Ls

                   The Keystone seizure by regulators represents the largest bank failure
                   since the savings and loan crisis for the Federal Deposit Insurance Corp.
                   and could cost the government and taxpayers as much as $750 million, if
                   other assets on the bank's books also turn out to be lost. It has raised
                   serious questions about how well regulators and auditors can protect the
                   interests of the bank's customers and investors. Some banking experts
                   contend that the OCC and, to a lesser extent, the FDIC missed ominous
                   signs about the bank's financial health and then acted too slowly in
                   exposing the missing loans in late August.

                                        "They [the OCC] sat on their hands here,"
                                        said Bert Ely, an Alexandria, Va., bank
                                        consultant and a frequent critic of bank
                                        regulators, who has reviewed First National's
                   quarterly financial reports and details of the bank's dealings with regulators.
                   Those reports have also been turned over to Rep. Jim Leach, chairman of
                   the House Banking Committee, by the OCC and FDIC.

                   "You show any banker a balance sheet like that, and he'll say, 'This isn't a
                   bank. This is a crapshoot.' " said Mr. Ely.

                   Rep. Leach has "serious concerns about the way in which the review of the
                   bank has been handled over a pretty long period of time," says David
                   Runkel, a spokesman for Rep. Leach, an Iowa Republican. He added that
                   Rep. Leach is probing "the issue of regulatory cooperation and lack
                   thereof" between the OCC and FDIC, which disagreed at least a couple of
                   times about the financial condition of First National, according to
                   regulatory records. The Treasury Department's inspector general also is
                   reviewing the matter.

                   Regulators Aim to Improve

                   Officials from the OCC and FDIC say their regulatory policing of First
                   National was as efficient as it could have been. They acknowledge they are
                   attempting to improve their early-warning system for detecting potentially
                   shaky banks and double-checking the existence of certain loans in the
                   wake of the failure.

                   "It is very difficult to believe a small, country bank could intimidate the
                   federal government," said Charles Love, an attorney representing Terry L.
                   Church, a former First National executive.

                   Last week, Ms. Church and another First National executive were ordered
                   to stand trial on criminal charges that they buried at least three truckloads
                   of documents in order to hide the records from regulators.

                   Two civil lawsuits filed by depositors, one in U.S. District Court in
                   Charleston, W.Va., and one in McDowell County Circuit Court, charge
                   that hundreds of local depositors lost money. The FDIC protects
                   depositors for as much as $100,000 on each account.

                   The OCC's Mr. Schneck noted that over the eight years, examiners kept a
                   constant watch on the bank, issuing warnings and corrective orders. The
                   bank appears to have ignored many of them, according to the records.

                   Outside Auditors' Opinions

                   In addition, according to Mr. Schneck, the bank had two outside auditors
                   that examiners relied upon. Both accounting firms, first Herman &
                   Cormany of Charleston and later Grant Thornton LLP of Chicago, gave
                   First National "unqualified" endorsements of its financial statements for the
                   past two years.

                   Regulators claim Grant Thornton, hired after the OCC ordered the bank to
                   bring in experts in mortgage securitization, failed to detect large
                   discrepancies in loan transactions that would have revealed the missing
                   loans.

                   Stanley Parzen, an attorney representing Grant Thornton, said, "All the
                   work in connection with that audit was done in accordance with
                   professional standards."

                   Richard S. Williams, managing partner of Herman & Cormany, declined to
                   comment, except to confirm that his firm gave the bank an unqualified
                   opinion in 1997 but didn't do so in 1996.

                   First National grew at an unusually fast pace, mostly through high-risk
                   lending. In 1990, the bank, located in an economically withering
                   coal-mining area, had just $85 million in assets. By 1992, the bank had
                   started buying home-improvement loans made by other lenders, turning to
                   major Wall Street investment banks such as Lehman Brothers Holdings
                   Inc. to bundle the loans as asset-backed securities and sell the securities to
                   investors. By the end of last year, the bank's assets had ballooned to $1.1
                   billion.

                   By early this year, First National was feeling financial pressure, though it
                   isn't clear what triggered it. Profit in the quarter ended March 31 fell 60%
                   to $1.5 million, and the bank slashed its semiannual dividend payment by
                   one-third. The bank didn't indicate that it was having loan troubles,
                   reporting that troubled-asset levels remained low.