Regulators Stymie Bank President’s Quest for Control

Mission Valley Bank, long Orange County’s smallest independent bank, is growing up fast under the aggressive, abrasive style of its president, Jack R. Barnes. And that has federal regulators worried.

They’re so worried, in fact, that they recently forced Barnes to halt his 18-month effort to take control of the sleepy institution in San Clemente. Barnes, who owns 10% of the bank and can’t buy more without federal approval, says he now is on “good behavior” and hopes to revive his quest for majority control within a year.

“I plan to run a nice ordinary bank for the next year,” he said. “I don’t plan to double our growth. The regulators would have a conniption fit.”

Barnes said he withdrew his application to take control of Mission Valley last month because he “sensed that regulators wouldn’t approve it.” He had agreed in the fall of 1988 to put $1.4 million into Mission Valley for 51% of the stock, and he needed only regulatory approval to complete the deal. He was allowed, in the meantime, to start running the bank.

In one year, Barnes turned around the 7-year-old bank’s performance to post a net income of $643,732 last year, contrasted with a $589,073 loss the previous year. He converted the bank to a new data processing system and started mortgage banking, escrow and small business loan divisions.

Assets nearly tripled to $44.1 million at the end of December from $16.7 million a year earlier. That alone rang alarms at offices of federal examiners.

“Regulators are a little bit upset with how fast he grew the bank,” said Gerry Findley, a banking consultant in Brea. “They don’t trust him. They’re worried about what he’s doing that might jeopardize the bank in the long run.”

The fast growth strained the quality of the bank’s loans. At the end of last year, Mission Valley’s slow-paying and non-paying loans amounted to 8.6% of its total loans, contrasted with a 1.1% ratio a year earlier.

The ratio of non-performing loans to total loans is a key indicator of possible future problems. Bankers like to keep that ratio below 1% and figure that they’re in trouble when it gets over 3%.

Barnes’ style also hasn’t sat well with his government overseers.

“Regulators don’t like him,” Findley said. “He has a tendency to tell them to go to hell.”

Barnes makes no bones about his gruff style. He said he is applying the same cost-cutting, hard-driving approach that he used to rescue Mission Viejo National Bank from the regulatory death knell in the mid-1980s.

He took over Mission Viejo National in 1985, a year in which the bank had lost $1.9 million. He cut some jobs and reduced salaries, but he implemented an incentive plan to reward good work, and he expected employees to put in long hours. He also formed a mortgage banking division, which makes home loans and sells them to investors, as his major effort to revive the bank. The bank earned $1.4 million in 1986 and has since turned in profitable years.

Barnes’ manner, however, did not endear him to many of his employees or colleagues, and he quit at the end of September, 1988, in a dispute with the bank’s chairman and largest stockholder, William T. Brady.

Despite Barnes’ manner, regulators approved him as Mission Valley’s president and chief executive.

“It’s kind of stupid when they say they have no objection to him running the bank but they do have one to him owning it,” Findley said.

Regulators would not comment.