Because of a production error in some editions, several words were omitted from a front-page article yesterday on the shutdown of a bank in West Virginia. The sentences that were affected should have read: Regulators have not talked publicly about the motive for the alleged coverup, and one federal official said they don't really know yet what happened. But it's clear Church and Graham were engaged in a mad scramble in the months leading up to the bank's closure to hide truckloads of documents from examiners stationed in the bank, according to an affidavit filed with the U.S. District Court in Charleston by FBI Special Agent Robert B. Selbe. (Published 10/20/1999)

Residents of this isolated Appalachian hamlet know Terry Church as the richest person in town. Church, a top officer of the only local bank and owner of a sprawling mountaintop estate, enjoyed riding in and out of town with her husband, Hermie, on one of their two dozen classic Harley-Davidsons.

But nothing of her reputation prepared the 600 souls of Keystone for what happened last Friday, when federal agents issued a warrant for her arrest and unearthed tens of thousands of pages of mortgage documents secretly buried on her ranch -- key evidence in what bank regulators say is a half-billion-dollar fraud.

Church was president of Keystone Mortgage Co., a subsidiary of First National Bank of Keystone. The bank was taken over Sept. 1 when federal bank examiners determined that more than $500 million worth of mortgages the bank had on its books didn't exist. Church and Michael Graham, another company executive, were charged Friday with criminally obstructing bank regulators in their investigation of the bank's condition.

Regulators have not talked publicly about the motive for the alleged coverup, and one federal official said they don't really know yet what happened. But it's clear Church and Graham were engaged in a mad scramble in the months leading up to the bank's closure to hide truckloads of documents from examiners stationed in the bank, according to an affidavit filed with the U.S. District Court in Charleston by FBI Special Agent Robert B. Selbe. Graham directed workers to throw boxes of bank documents out of a third-story window onto a waiting truck bed. The boxes were taken to Church's ranch, where they were dumped into a 100-foot trench that was then filled with dirt and seeded, Selbe said, based on his interviews with people who allegedly participated in the events.

Graham spent the weekend in jail in Charleston, and Church turned herself in to the FBI yesterday after attending her stepmother's funeral, two U.S. marshals at her side.

The bank's failure will cost the Federal Deposit Insurance Corp., the federal agency that resolves bank failures, $750 million, the largest loss since the savings and loan crisis of the early 1990s.

It's a cataclysmic end to this town's 20-year love affair with First National Bank of Keystone, a period that brought relative prosperity to a desperately poor county in which 36 percent of the populace currently lives below the poverty line.

The smallest of a string of towns running along Norfolk Southern Railway tracks that in better times were choked with coal cars, Keystone lies at the bottom of a starkly beautiful valley with a few dozen ragged homes perched on steep hillsides.

"It's just a little hard to believe," said Steve Powers, a salesman at the Heilig-Meyers furniture store, expressing a pervasive and deep mistrust here of the government's actions regarding First National, despite the scandal. "I'm just not sure I believe any of it."

Indeed, Powers and other townspeople here over the weekend appeared to still be in a state of shock that began when 65 FDIC personnel descended on the town in early September and closed First National. The bank and its two top officers virtually ran the town, owning every significant business in it. "Between them, they signed about every paycheck in the town," said one FDIC official on the scene.

But those fortunes appear to have been built on a foundation as thin as the coal dust that still settles on cars at the calm end of the day.

Without the bank, Keystone will have almost no economy to speak of. Since the bank's closing, the city has cut its budget by two-thirds and laid off five of its 10 employees. Of the $600,000 in taxes generated in 1998 in Keystone, $400,000 of it was from the bank. According to the local newspaper, the mayor said at a recent City Council meeting that the whole affair "was the most devastating thing I have ever experienced in my life."

Such a sentiment is understandable. Besides being the mayor, Billie Cherry was also chairman of First National.

Cherry and Church did not return phone calls requesting comment. Graham could not be reached.

Charleston U.S. Attorney Rebecca A. Betts declined to say yesterday whether she expects any other arrests, but she said the First National investigation is continuing.

First National was founded in 1905 and would never have attracted much notice had Pittsburgh banker J. Knox McConnell not taken it over in 1977. McConnell, Church and Cherry came to town and proceeded to remake the bank, eventually giving it a national presence and unbelievable profits.

By the time of McConnell's death of a heart attack in 1997, First National had gained a national reputation as the most profitable bank in the country, earning more than 5 cents from every dollar of assets on its books. In a good year, most banks make no more than 2 cents.

McConnell built the bank's success on two pillars: national home-equity lending and rock-bottom expenses. The bank employed 68 people at its peak, all of them female, besides McConnell -- to cut down on distracting office romances, he said. He also made certain that every employee had four or five jobs to do at once, and he made sure they owned stock -- 60 percent of the bank was owned by an employee stock plan. That stock, given the bank's failure, is now worthless.

Church and Cherry had worked with McConnell at several Pittsburgh area banks in the early 1970s, he said in a 1996 interview, and he was comfortable letting them run the Keystone bank. Church ran the mortgage operation; Cherry ran the community-banking operation.

But First National's real business was buying and selling what are known as sub-prime home-equity loans. Typically made up of second, third or fourth mortgages, the loans are riskier than first mortgages but generate much higher interest payments. Through its own loan-production offices and through several brokers in other parts of the country, First National would make tens of millions of dollars worth of these loans each year. It would then bundle the loans and sell them to investors in the form of securities. In this way, the bank racked up huge interest payments and fees and, at least in theory, kept its risk profile low.

When McConnell died, the bank's slow growth curve went into a steep climb. The bank was making so many home-equity loans that its asset base doubled, hitting a peak of $1.1 billion before the FDIC took over. During this period -- from 1995 through 1998 -- First National had an increasingly adversarial relationship with its regulators at the Office of the Comptroller of the Currency (OCC) over its bookkeeping practices.

Evidence of the size and scope of First National's mortgage business is everywhere inside the bank's three-story brown stucco headquarters in Keystone. On the third floor, two rows of desks six deep were occupied by employees buying and selling home-equity loans made on properties as far away as California. Much of the bank building is crammed with paperwork -- whole rooms full of mortgage documents and servicing agreements, in addition to the entire third floor of the town's schoolhouse and a large document-storage building up the road.

An FDIC official on the scene said the volume and array of paperwork is "bewildering," even for agency personnel experienced in unraveling the records of failed banks.

This summer, the OCC began what would become the final examination of First National. According to regulatory and court documents, on June 21 examiners began to discover discrepancies in the books. At a fateful Aug. 30 meeting, OCC officials confronted the bank's board with the news that First National didn't actually own $515 million in mortgages that its balance sheet said it owned. When Church and Cherry couldn't come up with an explanation, the bank was closed.

Although there is still much they don't know, some federal officials speculate privately that the bank may have had to sell off a large portion of its mortgage portfolio at a steep discount during financial market turmoil last year to raise cash. But the bank didn't change its books to reflect the sale because the reduction in the value of its assets could have made the bank insolvent. Examiners also point out that because the records of the sale were likely buried in Church's yard, they don't know what happened to the proceeds.

The unsuccessful attempt to hide the bank records began sometime in the second week of August when a tandem-axle truck owned by Hermie Church's construction company pulled up to the schoolhouse, where hundreds of boxes of bank records had been stowed. Graham, an accountant working for the bank's mortgage company even though his CPA license had been revoked in West Virginia, directed four or five men who threw boxes from the window to the truck bed three floors below. The men were told the boxes were records from a doctor's office.

The full truck was driven up Burke Mountain to the C&H Ranch, Church's mountaintop abode, according to the affidavit filed by the FBI's Selbe. There, the records were dumped into a trench 10 feet deep, 100 feet long and 20 to 30 feet wide. A second load was taken up, as was another pickup truck full of bank documents. All ended up in the trench, which was filled in with dirt and seeded.

The last set of documents were removed by Church herself from her office on Aug. 29, two days before the bank was shut down. That's when investigators got their first inkling that records had been removed: Several employees saw her removing the boxes. On Sept. 2, the FBI, which had been notified by the OCC of possible fraud, obtained a search warrant and found 22 boxes of bank records in Church's home.

In the weeks following First National's failure, the people of the town haven't tried to hide their anger at the FDIC-ordered shutdown. James McInelly, a craggy-faced Texan with bloodshot eyes, has been in town for six weeks trying to unravel the bank's real estate holdings for the FDIC. He's tired of being here.

"We're used to there being bad feelings about a bank closure," he said, squinting into the late-afternoon Saturday sun. "But this place has been hateful. I've had people cuss at me from dinner tables next to me at a diner in [nearby] Princeton. Everybody knows who we are. Any outsider stands out here."

Not everyone in Keystone is defending the bank's officers.

"I figured it would happen," said Virginia Dickerson, a former city councilwoman who was voted out two years ago when a slate sponsored by Cherry took control of the council. "Certain things have been going on for a long time."

She became suspicious when the taxes paid by the bank to the town went from $4,000 a year to $400,000 the year Cherry became mayor.

Yet even Dickerson said Cherry, Church and the late McConnell did wonders for Keystone. "Miss Cherry did a lot for the town," Dickerson said.

What's certain is that Church and Cherry have a great deal to lose. Along the town's main drag -- about four blocks long -- is a document-storage company owned by Cherry, a hardware store owned by Church and a warehouse filled with Harley-Davidsons owned by Church with a placard reading "Hog-pen Enterprises" on the side. Cherry also owns the town's only hotel -- a richly appointed bed and breakfast with a Shakespearean theater attached.

Under banking law, directors and officers of a failed bank are held personally liable for losses to the FDIC fund.

And the losses, at least on the local level, will be heavy. First National's headquarters were lavish, far beyond the means of its community. It went through an expansion and renovation three years ago that created a vast new boardroom and lobby decorated with rose tile floors and green Formica teller windows. But it is highly unlikely that any other bank in West Virginia would want to support a branch of that size in such a poor community.

And so the bank's motto will remain on the side of the building for the foreseeable future, right around the corner from the state troopers who have been guarding the bank 24 hours a day for six weeks:

"Time tried -- panic tested."