Tentative Approval Given Merger of Two Banks

The parent companies of Bank of Orange County and Pacific National Bank tentatively agreed Thursday to a merger that would make 5-year-old Pacific National one of the county’s larger independent banks.

And in an apparently unrelated move, it was confirmed Thursday that Edward Downer has resigned for unspecified health reasons as president and chief executive of Bank of Orange County, which he had rescued from a morass of bad loans and staggering losses.

Downer’s resignation, however, may make an acquisition more likely because it eliminates any battle for management control of the merged banks.

The combined operation would result in a bank with more than $105 million in assets, which would be run by the surviving company, PNB Financial Group--the Newport Beach owner of Pacific National.

For each share of its stock, under terms of the letter of intent, PNB Financial would get about two shares of Fountain Valley-based Orange Bancorp, the holding company for 7-year-old Bank of Orange County. Excluding loan loss reserves, PNB’s stock has a book value of $6.29 a share while Orange Bancorp’s book value is $2.93 a share.

“We think Bank of Orange County is a strong bank that has overcome its problems, and its business base is basically the same as ours,” said Donald L. Solsby, president and chief executive officer of PNB and its main subsidiary.

Real estate developer David Stein, PNB’s chairman and largest stockholder, said the company would “stabilize” after the acquisition as a $100-million operation, a size that would allow PNB to “do things we can’t do now,” such as make bigger loans to bigger companies.

At the end of last year, PNB had $64.5 million in assets and reported net income of $408,000 for the year. Orange Bancorp had $41.8 million in assets and a loss of $350,000.

Both banks have healthy capital funds, based on their ratios of capital to assets, which regulators use as one measure of financial well-being. At the end of the year, Pacific National’s ratio was 7.8% and Bank of Orange County’s ratio was 8.5%--both well above the 6% ratio that regulators like to see.

The tentative acquisition agreement is the result of a series of negotiations over the last two months, talks that began in earnest about the time Downer, 48, resigned late last month.

But Downer’s resignation had been in the works and was not related to the negotiations, Stein said.

Downer had helped turn Bank of Orange County around after its founding president, Lawrence R. Holmes, resigned early in 1984 under mounting pressure both from inside the bank and from banking regulators. Mounting losses from bad loans and soaring executive salaries under Holmes had halted the steady growth of the bank--once touted as a model for aggressive independent banks in California.

Downer declined to talk Thursday about his departure.

Rudolph C. Baldoni, a Fountain Valley anesthesiologist and chairman of Orange Bancorp, refused to discuss either the acquisition or Downer’s resignation.

Stein and Solsby said the major concern of PNB directors about the merger is litigation facing Orange Bancorp and its directors over the demise of Bank of Northern California.

Bancorp’s Interest Sold

Holmes started the San Jose bank in 1983, with Bank of Orange County owning a 51.3% stake.

In August, 1985, with Holmes gone and losses mounting at Bank of Northern California, Orange Bancorp sold its interest in the bank to a group of San Jose-area investors.

The company claimed that it did not need regulatory approval because of the way the deal was structured. The state disagreed and barred the new investors from voting their shares for three years.

In September, minority shareholders of the San Jose bank sued Orange Bancorp and its directors and top officers, claiming, among other things, that they breached their fiduciary duties in selling to the investor group.

The uproar in San Jose led to an FBI investigation into allegations that some of the majority owners took kickbacks on $1.6 million in loans to friends and others. A federal grand jury also began looking into alleged irregularities. Both investigations are pending.

Regulators closed the San Jose bank in November, and federal regulators sued Orange Bancorp and its directors along with Holmes and the new investors.