A California business bank's pending merger with Portland, Ore.-based U.S. Bancorp is back on track two months after a botched proxy mailing put it in jeopardy.

Last Wednesday, U.S. Bancorp withdrew a declaration of a "material adverse change" in its merger agreement with Business & Professional Bank. That move, coming after strenuous efforts by the smaller bank to assuage angry customers, let the $36 million cash transaction proceed on schedule.

"We're ecstatic," said William J. Martin, president and chief executive of $210 million-asset Business & Professional. "There was a lot of work that was done. Now we just have to close it."

The deal, which is still awaiting approval by the Federal Deposit Insurance Corp., is expected to close by the end of the second quarter.

The problem with the deal, which was announced Dec. 27, began in late January when Woodland-based Business & Professional sent out a proxy statement to shareholders detailing the merger agreement. Inexplicably, the statement included a confidential list of 76 problem borrowers, complete with names and loan amounts, that had been intended only for the eyes of U.S. Bancorp executives.

What followed was a public relations nightmare for Business & Professional as press coverage of the foul-up embarrassed both the bank and the borrowers. The incident also raised concerns about potential legal liability for the bank.

In response, $33.3 billion-asset U.S. Bancorp declared the material adverse change Feb. 14, giving Business & Professional officials 45 days to resolve the problem or the deal would be terminated.

"We were faced with a crisis," said James M. Rockett, an attorney at McCutchen, Doyle, Brown & Enersen in San Francisco, who represented Business & Professional in talks with U.S. Bancorp to revive the deal. "Given the potential legal entanglements and the short period of time, we needed to find a way to get the merger back on track."

Mr. Rockett said U.S. Bancorp's main concern was that any potential legal claim be managed quickly so that no lingering problem would shadow either bank.

The bank paid cash to or forgave part of the debt of about half the problem borrowers listed in the proxy statement, and it obtained signed releases from them freeing the bank from further liability. The bank is still working with other borrowers and may make further payments, though negotiations beyond today would likely be referred directly to the bank's insurance carriers.

Any such payments will be covered by the bank's insurance companies, Mr. Rockett said. No lawsuits have been filed.

Mr. Martin declined to say how much the bank paid in total to settle potential claims but said it shouldn't affect earnings because of the insurance coverage.

He declined to discuss who may have been at fault in the proxy blunder, though much speculation has spotlighted the bank's former law firm, Graham James.

The firm resigned as the bank's counsel shortly after the mistake was revealed, citing a potential conflict-of-interest should Business & Professional decide to sue. However, Mr. Martin said no litigation is planned at the moment.

"It's not productive to figure out where the problem occurred," Mr. Rockett said. "It would seem to me that if the transaction gets done, and nobody gets harmed, I don't think there's going to be a lot of litigation."

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