Bank of Orange County Merger With PNB Dies in Legal Morass

The Bank of Orange County’s legal troubles over a now-closed San Jose subsidiary have scuttled its proposed merger into PNB Financial Group in Newport Beach.

PNB, parent of Pacific National Bank, said Wednesday that it is dropping its plan to acquire Orange Bancorp in Fountain Valley because the holding company was unable “to resolve certain contingent liabilities in a timely fashion.”

“The litigation in San Jose was the only thing that stopped us,” said Lawrence Luckey, Pacific National’s executive vice president. “The Bank of Orange County had cleaned out its problem assets and is a good little bank now. It would have been a good fit for us.”

Dr. Rudolph C. Baldoni, chairman of Orange Bancorp, could not be reached for comment, nor could other company officials.

“Uncertainty in the outcome of litigation can kill any deal,” said Gerry Findley, a Brea-based financial institutions consultant. He said that from the time the tentative merger was announced in mid-May, he believed that the legal turmoil in San Jose was so great that it would prevent a final agreement.

The Bank of Orange County’s founding president, Lawrence R. Holmes, started San Jose-based Bank of Northern California in 1983 and sold a 49% interest to investors from that area.

But Holmes was soon distracted by problems at home.

Mounting losses from bad loans and soaring executive salaries under Holmes had halted the steady growth of the Bank of Orange County--once touted as a model for aggressive independent banks in California. Holmes resigned in early 1984 under growing pressure both from regulators and from bank insiders.

In August, 1985, as losses began accumulating at the Bank of Northern California, Orange Bancorp sold its 51.3% interest to a group of San Jose-area investors.

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

Last September, minority shareholders of the San Jose bank sued Orange Bancorp and its directors and top officers, alleging, among other things, that the directors and officers 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 for irregularities. Both investigations are pending.