Subordinated Debentures

6 Months Ended

Jun. 30, 2021

Debt Disclosure [Abstract]

Subordinated Debentures

Subordinated Debentures

On April 15, 2021, the Company redeemed the subordinated notes totaling $25.0 million that the Company assumed as part of the acquisition of Plaza Bancorp, Inc. in 2017. Prior to redemption, such subordinated notes carried a fixed interest rate of 7.125% and were scheduled to mature on June 26, 2025. These subordinated notes were called at 103% of the principal amount of the notes, plus accrued and unpaid interest, for an aggregate amount of $25.8 million. The Company recorded a loss on early debt extinguishment of $647,000 after considering a $103,000 fair value mark related to purchase accounting adjustments.

As of June 30, 2021, the Company had four issuances of subordinated notes and two issuances of junior subordinated debt securities, with an aggregate carrying value of $476.6 million and a weighted interest rate of 5.29%, compared with five issuances of subordinated notes and two issuances of junior subordinated debt securities, with an aggregate carrying value of $501.5 million and a weighted interest rate of 5.38% at December 31, 2020.

The following table summarizes our outstanding subordinated debentures as of the dates indicated:

						June 30, 2021		December 31, 2020
(Dollars in thousands)	Stated Maturity	Current Interest Rate		Current Principal Balance		Carrying Value
Subordinated notes
Subordinated notes due 2024, 5.75% per annum	September 3, 2024	5.75	%	$	60,000	$	59,611	$	59,552
Subordinated notes due 2029, 4.875% per annum until May 15, 2024, 3-month LIBOR +2.5% thereafter	May 15, 2029	4.875	%	125,000		123,004		122,877
Subordinated notes due 2030, 5.375% per annum until June 15, 2025, 3-month SOFR +5.170% thereafter	June 15, 2030	5.375	%	150,000		147,633		147,501
Subordinated notes due 2025, 7.125% per annum	June 26, 2025	—	%	—		—		25,109
Subordinated notes due 2026, 5.50% per annum until June 30 2021, 3-month LIBOR +4.285% thereafter	July 1, 2026	5.50	%	135,000		138,201		138,371
Total subordinated notes				470,000		468,449		493,410
Subordinated debt
Heritage Oaks Capital Trust II (junior subordinated debt), 3-month LIBOR+1.72%	January 1, 2037	1.92	%	5,248		4,155		4,121
Santa Lucia Bancorp (CA) Capital Trust (junior subordinated debt), 3-month LIBOR+1.48%	July 7, 2036	1.66	%	5,155		4,018		3,980
Total subordinated debt				10,403		8,173		8,101
Total subordinated debentures				$	480,403	$	476,622	$	501,511

In connection with the various issuances of subordinated notes, the Corporation obtained ratings from Kroll Bond Rating Agency (“KBRA”). KBRA assigned investment grade ratings of BBB+ and BBB for the Corporation’s senior unsecured debt and subordinated debt, respectively, and a deposit and senior unsecured debt rating of A- and subordinated debt of BBB+ for the Bank. The Corporation’s and Bank’s ratings were reaffirmed in June 2021 by KBRA.

As of June 30, 2021, the Corporation has two unconsolidated Delaware statutory trust subsidiaries, Heritage Oaks Capital Trust II and Santa Lucia Bancorp (CA) Capital Trust. Both are used as business trusts for the purpose of issuing trust preferred securities to third party investors. The junior subordinated debt was issued in connection with the trust preferred securities offerings. The Corporation is not allowed to consolidate any trust preferred securities into the Company’s consolidated financial statements. The resulting effect on the Company’s consolidated financial statements is to report the subordinated debentures as a component of the Company’s liabilities, and its ownership interest in the trusts as a component of other assets on the Company’s consolidated financial statements.

For additional information on the Company’s subordinated debentures, see “Note 14 — Subordinated Debentures” to the consolidated financial statements of the Company’s 2020 Form 10-K. 

For regulatory capital purposes, the trust preferred securities are included in Tier 2 capital at June 30, 2021. Provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 require that if a depository institution holding company exceeds $15 billion in total consolidated assets due to an acquisition, then trust preferred securities are to be excluded from Tier 1 capital beginning in the period in which the transaction occurred. During the second quarter of 2020, the Company’s acquisition of Opus resulted in total consolidated assets exceeding $15 billion; accordingly, trust preferred securities are excluded from the Company’s Tier 1 capital. The Company and the Bank also have subordinated notes that qualify as Tier 2 capital. The redemption of subordinated notes totaling $25 million during the second quarter of 2021 reduced the Company’s Tier 2 capital by approximately $20 million. Following the redemption, the Company’s regulatory capital ratios continued to exceed regulatory minimums to be well-capitalized and the fully phased-in capital conservation buffer.