Federal Regulators Seize Mission Valley Bank : * Insolvency: Its insured deposits have been transferred to another institution and its assets will be liquidated.

Federal regulators seized and closed tiny Mission Valley Bank on Friday after declaring the long-struggling institution insolvent.

The Office of the Comptroller of the Currency, which took the action, said the single-branch bank’s troubles began nearly three years ago when regulators spotted “substantial deterioration” in loans. The comptroller blamed liberal lending practices and ineffective supervision both by the bank’s directors and top managers.

Federally insured deposits of $40.2 million in nearly 2,300 accounts were transferred to Mid City Bank, which will open the office Monday as one of its branches. Checks drawn on Mission Valley Bank will continue to be honored up to the insured amount.

An additional $746,000 in deposits in 39 accounts exceed the insured amount of $100,000 per account holder, according to the Federal Deposit Insurance Corp., which will liquidate the bank’s assets. Few, if any, of the uninsured deposits will likely be refunded as those depositors must stand in line with the FDIC for anything left over after the liquidation.

Mid City, which has moved its headquarters to Brea from Los Angeles and wants to establish a presence in South County, also picked up $9.6 million of Mission Valley’s $42.7 million in assets. With the acquisition, Mid City now has a total of three branches and more than $115 million in assets.

The federal takeover came barely a week after the 8-year-old bank’s second-quarter results were released. The bank had a six-month loss of $830,000 and capital of only $250,000 at the end of June. Capital is a bank’s final reserve against losses.

Continued losses wiped out that capital, the comptroller’s office said. Neither the Office of the Comptroller of the Currency nor the FDIC would say how far that bank had gone into the red.

The comptroller’s action was not a surprise, even though the bank had a tentative offer from a Las Vegas investor to provide it with half the money it needed.

Jack Barnes, who bought 10% of the bank near the end of 1988, tried to increase his stake last year to 51%, but federal regulators refused to permit it. They were upset over the fast growth of the bank.

Through his aggressive, abrasive style, Barnes tripled the bank’s assets in one year to $44.1 million. Initial profits in 1989 turned into a $1.2 million loss last year and additional deficits this year.

In an interview last week, Barnes, the bank’s president, insisted that current shareholders and a new investor, Earl L. Gross, who owned a mortgage servicing company, could raise up to $4 million to recapitalize the bank. The OCC evidently did not think the deal was feasible.

“We’re holding up by our chinny chin chin,” Barnes said last week. He could not be reached for comment Friday.