Subordinated Debentures

12 Months Ended

Dec. 31, 2019

As of December 31, 2019, the Company had three subordinated notes and two junior subordinated debt securities, with an aggregate carrying value of $215.1 million and a weighted interest rate of 5.37%, compared to $110.3 million with a weighted interest rate of 6.04% at December 31, 2018. The increase of $104.8 million, or 95.0%, is primarily driven by the issuance of $125.0 million subordinated notes, and slightly offset by the redemption of junior subordinated debt securities totaling $18.6 million during 2019.

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 made on March 3, 2015, and interest payable semiannually each March 3 and September 3 through September 3, 2024. At December 31, 2019, the carrying value of the Notes was $59.4 million, net of unamortized debt issuance costs of $568,000. The Notes 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). As of December 31, 2019, the Notes I qualify as Tier 2 Capital. Principal and interest are due upon early redemption.

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. At December 31, 2019, the carrying value of the Notes II was $122.6 million, net of unamortized debt issuance cost of $2.4 million. At December 31, 2019, the Notes II qualify as Tier 2 Capital. 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.

In connection with the Private Placement, 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 rating of A- for the Bank. The Company’s and Bank’s ratings were reaffirmed in February 2020 by KBRA following the announcement of the proposed acquisition of Opus.

In March 2004, the Corporation issued $10.3 million in Floating Rate Junior Subordinated Deferrable Interest Debentures (the “Subordinated Debentures”), due and payable on April 6, 2034, to PPBI Trust I, a statutory trust created under the laws of the State of Delaware. Interest is payable quarterly on the Subordinated Debentures at three-month LIBOR plus 2.75% per annum, for an effective rate of 5.35% as of December 31, 2019. The Subordinated Debentures are currently redeemable, in part or whole, at the option of the Corporation, at par. The Corporation also purchased a 3% minority interest totaling $310,000 in PPBI Trust I. The balance of the equity of PPBI Trust I is comprised of mandatorily redeemable preferred securities (“Trust Preferred Securities”) and is included in the Corporation’s other assets category. PPBI Trust I sold $10.0 million of trust preferred securities to investors in a private offering. On July 8, 2019, the Company used a portion of the proceeds from the issuance of the Notes II to redeem all $10.3 million outstanding principal amount of Subordinated Debentures. Prior to redemption, the Subordinated Debentures carried an interest rate of three-month LIBOR plus 2.75% per annum, for an effective rate of 5.35% per annum. The Subordinated Debentures were called at par, plus accrued and unpaid interest thereon through the date of redemption, for an aggregate amount of $10.4 million, and PPBI Trust I was dissolved.

On April 1, 2017, as part of the HEOP acquisition, the Corporation assumed $5.2 million of floating rate junior subordinated debt securities associated with Heritage Oaks Capital Trust II. Interest is payable quarterly at three-month LIBOR plus 1.72% per annum, for an effective rate of 3.82% per annum as of December 31, 2019. At December 31, 2019, the carrying value of these debentures was $4.1 million, which reflects purchase accounting fair value adjustments of $1.2 million. The Corporation also assumed $3.1 million and $5.2 million of floating rate junior subordinated debt associated with Mission Community Capital Trust I and Santa Lucia Bancorp (CA) Capital Trust, respectively. For Santa Lucia Bancorp (CA) Capital Trust, the carrying value of these debentures was $3.9 million at December 31, 2019, which reflects purchase accounting fair value adjustments of $1.3 million. Interest is payable quarterly at three-month LIBOR plus 1.48% per annum, for an effective rate of 3.47% per annum as of December 31, 2019. These debentures are callable by the Corporation at par.

On October 7, 2019, the Company used a portion of the proceeds from the issuance of the Notes II in May 2019 to redeem all outstanding principal amount of floating rate junior subordinated debt securities associated with Mission Community Capital Trust I. Prior to redemption, the junior subordinated debt securities carried an interest rate of three-month LIBOR plus 2.95% per annum, for an effective rate of 5.25% per annum, and were scheduled to mature on October 7, 2033. The junior subordinated debt securities were called at par, plus accrued and unpaid interest, for an aggregate amount of $3.1 million, and the associated business trust was dissolved. The Company recorded a loss on early debt extinguishment of $290,000 related to purchase accounting fair value adjustments.

On November 1, 2017, as part of the PLZZ acquisition, the Company assumed three subordinated notes totaling $25.0 million at a fixed interest rate of 7.125% payable in arrears on a quarterly basis. The notes have a maturity date of June 26, 2025 and are also redeemable in whole, or in part, from time to time beginning in June 26, 2020 at an amount equal to 103.0% of principal plus accrued unpaid interest. The redemption price decreases 50 basis points each subsequent year. At December 31, 2019, the carrying value of these subordinated notes was $25.1 million, which reflects purchase accounting fair value adjustments of $133,000.

On July 1, 2018, as part of the Grandpoint acquisition, the Corporation assumed $5.2 million of floating rate junior subordinated debt securities associated with First Commerce Bancorp Statutory Trust I. On September 17, 2019, the Company used a portion of the proceeds from the issuance of the Notes II in May 2019 to redeem all outstanding principal amount of these floating rate junior subordinated debt securities at par, plus accrued and unpaid interest thereon through the date of redemption, for an aggregate amount of $5.2 million. Prior to redemption, the junior subordinated debt securities carried an interest rate of three-month LIBOR plus 2.95% per annum, for an effective rate of 5.36% per annum. The Company recorded a loss on early debt extinguishment of $214,000 related to purchase accounting fair value adjustments, and First Commerce Bancorp Statutory Trust I was dissolved.

The Corporation is not allowed to consolidate the statutory business trusts, which were formed for the purpose of issuing junior subordinated debentures, 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. The redemption of Tier 1 capital instruments associated with PPBI Trust I, First Commerce Bancorp Statutory Trust I and Mission Community Capital Trust I during the year ended December 31, 2019 reduced the Company’s Tier 1 capital by a total of $17.6 million. The Company’s regulatory capital ratios continued to exceed regulatory minimums to be well-capitalized and the fully phased-in capital conservation buffer, following these redemptions.

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



						2019		2018
	Stated Maturity	Current Interest Rate		Current Principal Balance		Carrying Value
				(dollars in thousands)
Subordinated notes
Subordinated notes due 2024, 5.75% per annum	September 3, 2024	5.75	%	$	60,000	$	59,432	$	59,312
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		122,622		—
Subordinated notes due 2025, 7.125% per annum	June 26, 2025	7.125	%	25,000		25,133		25,158
Total subordinated notes				210,000		207,187		84,470
Subordinated debt
PPBI Trust I, 3-month LIBOR+2.75%	April 6, 2034			—		—		10,310
Heritage Oaks Capital Trust II (junior subordinated debt), 3-month LIBOR+1.72%	January 1, 2037	3.82	%	5,248		4,054		3,986
Santa Lucia Bancorp (CA) Capital Trust (junior subordinated debt), 3-month LIBOR+1.48%	July 7, 2036	3.47	%	5,155		3,904		3,829
Mission Community Capital Trust (junior subordinated debt), 3-month LIBOR+2.95%	October 7, 2033			—		—		2,787
First Commerce Bancorp Statutory Trust I (junior subordinated debt), 3-month LIBOR+2.95%	September 17, 2033			—		—		4,931
Total subordinated debt				10,403		7,958		25,843
Total subordinated debentures				$	220,403	$	215,145	$	110,313

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



	Year Ended December 31,
	2019			2018
	(dollars in thousands)
Average balance outstanding	$	183,383		$	107,732
Weighted average rate	5.82		%	6.23		%
Maximum amount outstanding at any month-end during the year	233,119			110,313
Balance outstanding at end of year	215,145			110,313
Weighted average interest rate at year-end	5.37		%	6.04		%