The Office of the Comptroller of the Currency is defending itself against charges it should have acted sooner to rein in $1.1 billion-asset First National Bank of Keystone, W.Va., which was closed Wednesday amid charges of fraud.

Critics said the bank's balance sheets from the last several years revealed severe problems unrelated to any deception.

"There's more than fraud here," said Alexandria, Va., consultant Bert Ely, citing First National call reports which showed a concentration of high-risk, high-loan-to-value mortgages. "I have a feeling that the uninsured depositors have a basis for a lawsuit against the government."

OCC officials said they had been monitoring the fast-growing bank since mid-1997, when examiners discovered problems with its loan administration and accounting practices. A May 1998 enforcement action required the bank to hire an external auditor and file quarterly reports with the agency. In December, the agency imposed cash penalties on six First National directors.

OCC officials cited what they described as a hostile environment at the bank. The agency took the unusual step of asking federal marshals to escort agency examiners in and out of the bank this week.

But nothing, officials said, prepared examiners for the deception they discovered last week upon visiting two loan servicers -- Advanta of San Diego and Compulink Loan Service of Lansing, Mich.

According to an OCC official, records provided by the servicers showed that $515 million of loans the bank still claimed as assets were actually sold in 1997 and 1998. Until then, First National had allegedly duped OCC examiners by providing them with doctored data they passed off as coming directly from the servicers. Bank officials failed to return phone calls seeking comment.

Prior to uncovering the alleged fraud, the OCC was comforted by a yearend 1998 external audit by the Grant Thornton accounting firm, which reportedly gave the bank an "unqualified," or problem-free, opinion. "We are confident that all work performed for the client (First National) adhered to generally accepted auditing standards," the firm said in a statement Thursday.

But one observer says the OCC may have been intimidated by former First National chairman J. Knox McConnell, a politically connected critic of government oversight who died two years ago.

"Regulators backed off of them because McConnell was a made man in banking," said Kenneth H. Thomas, a Miami-based bank consultant and author who studied First National for a book on the Community Reinvestment Act.

Millions of uninsured bank deposits are in jeopardy, as are other creditors' funds. On Wednesday night, 400 concerned bank customers showed up at a town meeting hosted by the Federal Deposit Insurance Corp., which hopes to sell the bank's three branches, deposits, and liquid assets to bidders on Friday.

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