WASHINGTON — The Office of the Comptroller of the Currency was not tough enough in targeting problems at First National Bank Holding Co. of Scottsdale, Ariz., before its subsidiaries failed in July, an oversight report said Tuesday.

OCC officials did delay an order against First National in part because an investor was weighing a capital injection, but overall the agency "should have taken formal enforcement action much sooner," said the report from the Treasury Department's inspector general. "We believe that OCC did not issue formal enforcement action for any of the banks in a timely manner and was not aggressive enough in its supervision of the banks in light of their weak management practices."

Two of the banks — the $3.4 billion-asset First National Bank of Nevada in Reno and the $250 million-asset First Heritage Bank in Newport Beach, Calif. — failed July 25 after a string of mortgage and commercial real estate losses. A large chunk of their problems was tied to a third bank, First National Bank of Arizona, which was combined with the Nevada bank before the failures.

The inspector general praised the OCC's exams of the institutions as timely and comprehensive. However, even though lending problems were cited by examiners at the Nevada and Arizona banks in 2002, the report said no enforcement action came until the second quarter of last year — not long before the failures — and the banks maintained high supervisory ratings through 2006. Exams from 2004 to 2006 revealed continuing problems, but "during those years, OCC assigned the banks composite Camels ratings of 2."

The report granted the OCC some latitude by noting that the banks' managers resisted the agency's recommendations to reform its practices, and that OCC officials were correct to base their decision to delay action until the spring of last year in part on an effort to keep a potential investor interested. That deal ultimately fell through. "While it could be argued that OCC allowed the investor too much time to consider the capital injection before OCC started taking enforcement action, we recognized the dilemma facing OCC in this matter," the report said.

The inspector general recommended that the OCC reiterate the importance of responding quickly to examiner findings, and that it urge examiners to improve the preparation of exam documents.

In a Feb. 25 letter, Comptroller John Dugan agreed that "based on our experience with these two banks, it is appropriate to take additional measures to reinforce certain expectations and requirements to our examining staff."

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