Subordinated Debentures

12 Months Ended

Dec. 31, 2022

Debt Disclosure [Abstract]

Subordinated Debentures

Note 13 – Subordinated Debentures

As of December 31, 2022, the Company had three subordinated notes with an aggregate carrying value of $331.2 million and a weighted interest rate of 5.32%, compared to $330.6 million with a weighted interest rate of 5.33% at December 31, 2021. The increase of $637,000 was primarily due to amortization of debt issuance costs.

In August 2014, the Corporation issued $60.0 million in aggregate principal amount of 5.75% Subordinated Notes Due 2024 (the “Notes I”) in a private placement transaction to institutional accredited investors (the “Private Placement”). The Notes I bear interest at an annual fixed rate of 5.75%, with the first interest payment on the Notes I made on March 3, 2015, and interest payable semiannually each March 3 and September 3 through September 3, 2024. At December 31, 2022, the carrying value of the Notes I was $59.8 million, net of unamortized debt issuance costs of $209,000. The Notes I can only be redeemed, in whole or in part, prior to the maturity date if the notes do not constitute Tier 2 Capital (for purposes of capital adequacy guidelines of the Board of Governors of the Federal Reserve). Principal and interest are due upon early redemption. As of December 31, 2022, 20% of the Notes I qualify as Tier 2 Capital as the remaining maturity is less than two years pursuant to regulatory capital rule.

In May 2019, the Corporation issued $125.0 million in aggregate principal amount of 4.875% Fixed-to-Floating Rate Subordinated Notes due May 15, 2029 (the “Notes II”), at a public offering price equal to 100% of the aggregate principal amount of the Notes II. The Corporation may redeem the Notes II on or after May 15, 2024. From and including the issue date, but excluding May 15, 2024, the Notes II will bear interest at an initial fixed rate of 4.875% per annum, payable semi-annually. From and including May 15, 2024, but excluding the maturity date or the date of earlier redemption, the Notes II will bear interest at a floating rate equal to the then-current three-month LIBOR plus a spread of 2.50% per annum, payable quarterly in arrears. Principal and interest are due upon early redemption at any time, including prior to May 15, 2024 at our option, in whole but not in part, under the occurrence of special events defined within the trust indenture. At December 31, 2022, the Notes II qualify as Tier 2 Capital. At December 31, 2022, the carrying value of the Notes II was $123.4 million, net of unamortized debt issuance cost of $1.6 million.

In June 2020, the Corporation issued $150.0 million aggregate principal amount of its 5.375% fixed-to-floating rate subordinated notes due 2030 (the “Notes III”) at a public offering price equal to 100% of the aggregate principal amount of the Notes III. The Corporation may redeem the Notes III on or after June 14, 2025. Interest on the Notes III accrue at a rate equal to 5.375% per annum from and including June 15, 2020 to, but excluding, June 15, 2025, payable semiannually in arrears. From and including June 15, 2025 to, but excluding, June 15, 2030 or the earlier redemption date, interest will accrue at a floating rate per annum equal to a benchmark rate, which is expected to be Three-Month Term SOFR, plus a spread of 517 basis points, payable quarterly in arrears. Principal and interest are due upon early redemption at any time, including prior to June 15, 2025 at our option, in whole but not in part, under the occurrence of special events defined within the trust indenture. At December 31, 2022, the Notes III qualified as Tier 2 capital. At December 31, 2022, the carrying value of the Notes III was $148.0 million, net of unamortized debt issuance cost of $2.0 million.

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 in 2021.

On July 1, 2021, the Company redeemed $135.0 million subordinated notes acquired from Opus and $5.2 million junior subordinated debt associated with Heritage Oaks Capital Trust II. Prior to redemption, the subordinated notes and junior subordinated debt securities carried an interest rate of 5.50% and 1.92%, respectively. On July 7, 2021, the Company redeemed $5.2 million junior subordinated debt associated with Santa Lucia Bancorp (CA) Capital Trust. Prior to redemption, the junior subordinated debt securities carried an interest rate of 1.66%. The subordinated notes and junior subordinated debt were redeemed at par, plus accrued and unpaid interest, for an aggregate amount of $149.2 million. The Company recorded a net gain on early debt extinguishment of $970,000 related to purchase accounting adjustments in 2021. Subsequent to the redemptions of these junior subordinated debt securities, the Company’s unconsolidated Delaware statutory trust subsidiaries, Heritage Oaks Capital Trust II and Santa Lucia Bancorp (CA) Capital Trust, that were used as business trusts for the purpose of issuing trust preferred securities to third party investors were dissolved.

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 rating of BBB+ for the Bank. The Corporation’s and Bank’s ratings were reaffirmed in June 2022 by KBRA.

For regulatory capital purposes, the trust preferred securities are included in Tier 2 capital. The redemption of subordinated notes totaling $25.0 million during the second quarter of 2021 reduced the Company’s Tier 2 capital by approximately $20.0 million. The redemption of subordinated notes and trust preferred securities totaling $145.4 million during the third quarter of 2021 reduced the Company’s Tier 2 capital by approximately $146.0 million. Following these redemptions, the regulatory total capital ratios of the Company and the Bank continued to exceed regulatory minimums, inclusive of the fully phased-in capital conservation buffer.

The following table summarizes our outstanding subordinated debentures as of December 31:

						2022		2021
(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	$	59,791	$	59,671
Subordinated notes due 2029, 4.875% per annum until May 15, 2024, 3-month LIBOR +4.9% thereafter	May 15, 2029	4.875	%	125,000		123,386		123,132
Subordinated notes due 2030, 5.375% per annum until June 15, 2025, 3-month SOFR +5.17% thereafter	June 15, 2030	5.375	%	150,000		148,027		147,764
Total subordinated debentures				$	335,000	$	331,204	$	330,567

The following table summarizes activities for our subordinated debentures for the periods indicated:

	Year Ended December 31,
(Dollars in thousands)	2022			2021
Average balance outstanding	$	330,885		$	410,067
Weighted average rate	5.51		%	5.47		%
Maximum amount outstanding at any month-end during the year	$	331,204		$	501,647
Balance outstanding at end of year	$	331,204		$	330,567
Weighted average interest rate at year-end	5.32		%	5.33		%