Toggle SGML Header (+)


Section 1: 8-K (FORM 8-K)

0001028918 false 0001028918 2020-05-27 2020-05-28 iso4217:USD xbrli:shares iso4217:USD xbrli:shares

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 8-K

 

CURRENT REPORT

Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

 

Date of Report (Date of earliest event reported): June 1, 2020 (May 28, 2020)

 

PACIFIC PREMIER BANCORP, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

(State or other jurisdiction

of incorporation)

000-22193

(Commission

File Number)

33-0743196

(I.R.S. Employer

Identification No.)

 

17901 Von Karman Avenue, Suite 1200, Irvine, CA 92614
(Address of principal executive offices) (Zip Code)

 

Registrant’s telephone number, including area code: (949) 864-8000

 

Not Applicable

(Former name or former address, if changed since last report.)

 

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

 

¨Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

 

¨ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

 

¨ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

 

¨ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class  Trading Symbol(s)   Name of each exchange on which registered
Common Stock, par value $0.01 per share PPBI NASDAQ Stock Market

 

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933(§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).

Emerging growth company ¨

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

 

 

 

 

 

 

ITEM 2.01.COMPLETION OF ACQUISITION OR DISPOSITION OF ASSETS

 

Effective June 1, 2020, Pacific Premier Bancorp, Inc., a Delaware corporation (“PPBI”), completed its acquisition of Opus Bank, a California-chartered commercial bank (“Opus”), pursuant to the terms of an Agreement and Plan of Reorganization, dated as of January 31, 2020 (the “Merger Agreement”), by and among PPBI, Pacific Premier Bank, a California-chartered commercial bank and wholly-owned subsidiary of PPBI (“Pacific Premier”), and Opus. At the effective time of the acquisition (the “Effective Time”), Opus was merged with and into Pacific Premier, with Pacific Premier as the surviving institution (the “Merger”).

 

Merger Consideration

 

Opus Common Stock and Opus Preferred Stock. Pursuant to the terms of the Merger Agreement, the consideration payable to Opus shareholders consists of whole shares of PPBI common stock, par value $0.01 per share (“PPBI Common Stock”), and cash in lieu of fractional shares of PPBI Common Stock (the “Merger Consideration”). Each holder of Opus common stock, no par value per share (“Opus Common Stock”), has the right to receive 0.9000 of a share of PPBI Common Stock (the “Exchange Ratio”) for each share of Opus Common Stock held immediately prior to the Effective Time of the Merger, with cash to be paid in lieu of fractional shares at a rate of $19.31 per share of PPBI Common Stock. Each holder of Opus Series A non-cumulative, non-voting preferred stock (“Opus Preferred Stock”) has the right to receive that number of shares of PPBI Common Stock equal to the product of (X) the number of shares of Opus Common Stock into which such share of Opus Preferred Stock was convertible into in connection with, and as a result of, the Merger, and (Y) the Exchange Ratio, plus cash to be paid in lieu of fractional shares at the rate described above.

 

Opus Options. At the Effective Time of the Merger, all outstanding Opus stock options were assumed by PPBI and substituted with awards pursuant to the Pacific Premier Bancorp, Inc. Amended and Restated 2012 Long-Term Incentive Plan, as amended (the “PPBI 2012 LTIP”) with terms substantially similar to the terms and conditions of the outstanding Opus stock options. Upon exercise, holders of such Opus stock options are entitled to receive the Merger Consideration, which would represent the issuance of up to approximately 9,538 additional shares of PPBI Common Stock, plus cash to be paid in lieu of fractional shares at the rate described above. The assumed Opus stock options expire on August 29, 2020.

 

Opus Warrants. At the Effective Time of the Merger, PPBI assumed warrants to purchase 140,625 shares of Opus Common Stock and warrants to purchase 6,227 shares of Opus Preferred Stock. Upon exercise, holders of such Opus warrants are entitled to receive the Merger Consideration, which would represent the issuance of up to approximately 406,778 additional shares of PPBI Common Stock, plus cash to be paid in lieu of fractional shares at the rate described above. The Opus warrants expire on September 30, 2020.

 

Opus Restricted Stock and Opus Time-Based Restricted Stock Units. At the Effective Time of the Merger, each outstanding award of restricted shares of Opus Common Stock (“Opus Restricted Stock”) and each outstanding award of time-based restricted stock units (“Opus RSUs”), other than Opus RSUs awarded in 2020 to Opus employees who became Pacific Premier employees, became fully vested (subject to tax withholdings) immediately prior to the Effective Time and were cancelled in exchange for the right to receive a number of shares of PPBI Common Stock equal to the number of shares of Opus Common Stock underlying such vested awards immediately prior to the Effective Time multiplied by the Exchange Ratio, plus cash to be paid in lieu of fractional shares at the rate described above.

 

At the Effective Time of the Merger, each holder of an Opus RSU awarded in 2020 who became a Pacific Premier employee received a substitute restricted stock unit from PPBI denominated in shares of PPBI Common Stock (“PPBI RSU”), with terms substantially similar to the terms and conditions (including the same vesting terms) that applied to the relevant Opus RSU immediately prior to the Effective Time.

 

2

 

 

Opus Performance-Based Restricted Stock Units. At the Effective Time, each outstanding award of performance-based restricted stock units (“Opus PRSUs”), other than any Opus PRSUs awarded in 2020 to Opus employees who became Pacific Premier employees, became fully vested (subject to tax withholdings) immediately prior to the Effective Time in a number of units in respect of such award as determined in accordance with the applicable award agreement or Opus equity incentive plan and were cancelled in exchange for the right to receive a number of shares of PPBI Common Stock equal to the number of shares of Opus Common Stock underlying such vested awards immediately prior to the Effective Time multiplied by the Exchange Ratio, plus cash to be paid in lieu of fractional shares at the rate described above.

 

At the Effective Time of the Merger, each holder of an Opus PRSU awarded in 2020 who became a Pacific Premier employee received a substitute PPBI RSU with terms substantially similar to the terms and conditions (including the same service-based vesting terms but excluding performance-based vesting terms) as were applicable to the relevant Opus PRSU immediately prior to the Effective Time.

 

PPBI will issue approximately 34.4 million shares of PPBI Common Stock valued at $21.62 per share, which was the closing price of PPBI Common Stock on May 29, 2020, the last trading day prior to the consummation of the Merger. The value of the total transaction consideration was approximately $743.9 million.

 

Assumption of Opus Subordinated Notes

 

At the Effective Time of the Merger, Pacific Premier assumed Opus’s obligations under its 5.5% fixed-to-floating rate subordinated notes due July 1, 2026, with a carrying value of $133.34 million as of March 30, 2020.

 

The foregoing description of the transactions contemplated by the Merger Agreement does not purport to be complete and is qualified in its entirety by reference to the complete text of the Merger Agreement, attached as Exhibit 2.1 to PPBI’s Current Report on Form 8-K filed with the Securities and Exchange Commission (the “SEC”) on February 6, 2020, and incorporated herein by reference.

 

ITEM 5.02.        DEPARTURE OF DIRECTORS OR CERTAIN OFFICERS; ELECTION OF DIRECTORS; APPOINTMENT OF CERTAIN OFFICERS; COMPENSATORY ARRANGEMENTS OF CERTAIN OFFICERS

 

On May 28, 2020, John Carona and Michael Morris resigned as directors of PPBI and Pacific Premier effective as of immediately prior to the Effective Time. Prior to his resignation, Mr. Morris served on the PPBI Board of Directors’ (the “PPBI Board”) Audit and Enterprise Risk Committees.

 

Pursuant to the terms of the Merger Agreement and in accordance with PPBI’s Amended and Restated Bylaws and Pacific Premier’s Amended and Restated Bylaws, the PPBI Board and the Pacific Premier Board of Directors appointed G. Malpass “Mal” Durkee and Richard C. Thomas, who previously served as directors of Opus, to serve as directors of PPBI and Pacific Premier, effective as of the Effective Time. Messrs. Durkee and Thomas will serve until PPBI’s 2021 Annual Meeting of Stockholders and until his respective successor is elected and qualified. Subject to the fiduciary duties of the PPBI Board, PPBI is required to include Messrs. Durkee and Thomas on the list of nominees for director presented by the PPBI Board and for which the PPBI Board will solicit proxies in connection with PPBI’s 2021 Annual Meeting of Stockholders.

 

3

 

 

The PPBI Board has appointed Mr. Durkee to serve on the PPBI Board’s Enterprise Risk Committee and Mr. Thomas to serve on its Governance Committee and the Audit Committee. Each of Mr. Durkee and Mr. Thomas will receive compensation consistent with that currently paid to other members of the PPBI Board and Pacific Premier Board of Directors. A description of PPBI’s standard non-employee director compensation arrangement is contained under the heading “Compensation of Non-Employee Directors” in PPBI’s definitive proxy statement on Schedule 14A filed with the SEC on April 8, 2020.

 

ITEM 7.01.REGULATION FD DISCLOSURE.

 

On June 1, 2020, PPBI issued a press release announcing the completion of the Merger. A copy of the press release is attached as Exhibit 99.1 to this Current Report on Form 8-K.

 

Information contained in this Item 7.01, including Exhibit 99.1, shall not be deemed filed for the purposes of the Securities Exchange Act of 1934, as amended, nor shall such information and Exhibit be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended, except as shall be expressly set forth by specific reference in such a filing.

 

ITEM 8.01.OTHER EVENTS.

 

Prior to the Merger, PENSCO Trust Company LLC, a Colorado-chartered non-depository trust company (“PENSCO”), operated as an indirect, wholly-owned subsidiary of Opus. PENSCO serves as a custodian for self-directed individual retirement accounts, the funds of which account owners use for self-directed investments in various alternative asset classes. Immediately following the Merger, PENSCO merged with and into Pacific Premier, with Pacific Premier as the surviving institution (the “Trust Company Merger”). Following the Trust Company Merger, Pacific Premier will operate PENSCO’s custodial business as a trust department within Pacific Premier. As of March 31, 2020, PENSCO had approximately $14 billion of custodial assets and approximately 45,000 client accounts.

 

ITEM 9.01.FINANCIAL STATEMENTS AND EXHIBITS.

 

(a)       Financial statements of businesses acquired

 

The audited consolidated balance sheets of Opus as of December 31, 2019 and 2018, the related audited consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows of Opus for the years ended December 31, 2019, 2018 and 2017, the notes related thereto and the Report of Independent Registered Public Accounting Firm were previously included as part of Amendment No. 1 to the Registration Statement on Form S-4, File No. 333-237188, as filed by PPBI with the SEC on April 6, 2020 and declared effective on April 7, 2020 (the “Registration Statement”).

 

The unaudited consolidated balance sheets of Opus as of March 31, 2020 and 2019, the related unaudited consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows of Opus for the three-month periods ended March 31, 2020 and 2019 and the related notes thereto are attached as Exhibit 99.2 to this Current Report on Form 8-K and are incorporated herein by reference.

 

(b)       Pro forma financial information

 

The unaudited pro forma combined consolidated balance sheet of PPBI and Opus for the year ended December 31, 2019, unaudited pro forma combined consolidated income statements of PPBI and Opus for the year ended December 31, 2019, and the notes related thereto were previously included in the Registration Statement under the heading “Unaudited Pro Forma Combined Condensed Consolidated Financial Data.”

 

4

 

 

The unaudited pro forma combined consolidated financial information as of and for the three-month period ended March 31, 2020 required by this item will be filed by amendment to this Current Report on Form 8-K no later than 71 days after the date on which this Current Report on Form 8-K is required to be filed.

 

(d)       Exhibits

 

  2.1 Agreement and Plan of Reorganization, dated as of January 31, 2020, by and between Pacific Premier Bancorp, Inc., Pacific Premier Bank and Opus Bank (incorporated by reference to Exhibit 2.1 to the Registrant's Form 8-K filed with the SEC on February 6, 2020)
     
  4.1 Form of Amended and Restated Warrant to purchase Opus Bank common stock
     
  4.2 Form of Amended and Restated Warrant to purchase Opus Bank Series A non-cumulative, non-voting preferred stock
     
  99.1 Press Release dated June 1, 2020
     
  99.2 Unaudited Consolidated Financial Statements of Opus as of March 31, 2020 and for the three months ended March 31, 2020 and 2019
     
  104

Cover Page Interactive Data File (embedded within the Inline XBRL document) 

 

5

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

 

 

  PACIFIC PREMIER BANCORP, INC.
   
Dated: June 1, 2020 By: /s/ Steven R. Gardner
    Steven R. Gardner
    Chairman, President and Chief Executive Officer

 

6

(Back To Top)

Section 2: EX-4.1 (EXHIBIT 4.1)

 

Exhibit 4.1

 

AMENDED AND RESTATED WARRANT TO PURCHASE SHARES OF COMMON STOCK OF OPUS BANKDATE OF INITIAL ISSUANCE: SEPTEMBER 30, 2010THIS CERTIFIES THAT, for value received, a (the "Holder"), is entitled to purchase, subject to the exercise and other provisions of this Amended and Restated Warrant (including any Warrants issued in exchange, transfer or replacement hereof, the "Warrant"), from Opus Bank (the "Bank") at any time prior tothe lOth anniversary of the date of initial issuance of this Warrant, up to ( )shares (as such number of shares may be adjusted in accordance with Section 2 hereof, the "Warrant Shares") of the Bank's common stock, no par value ("Common Stock"), at any time and from time to time, in whole or in part, at an exercise price of $20.00 (subject to adjustment as provided in Section 2 hereof, the "Exercise Price") per Warrant Share. The Holder may also, at any time and from time to time, in whole or in part, exercise this Warrant pursuant to a "Cashless Exercise," as defined and provided in Section 1.3(b). This Warrant shall expire at 5:00P.M., Eastern Time, on the tenth anniversary of the date of initial issuance of this Warrant (the "Expiration Time"). This Warrant is granted in connection with and pursuant to, and is entitled to the benefits of, the Stock Subscription Agreement, dated as of June 25, 2010, by and between the Bank and the Purchaser named therein, as amended by that certain First Amendment to the Stock Subscription Agreement, dated as of September 29, 2010, and that certain Second Amendment to the Stock Subscription Agreement, dated as of September 21, 2011 (collectively, the "Subscription Agreement"), and the Registration Rights Agreement related thereto (the "Registration Rights Agreement"), and is granted in exchange for and replaces the Warrant to Purchase Shares of Common Stock of the Bank dated September 30, 2010 (the "Original Warrant").SECTION 1. EXERCISE OF WARRANT.hereof.1.1. Vesting. The Holder's rights under this Warrant are fully vested as of the date1.2. Exercisability. This Warrant is exercisable, at any time and from time to time, in whole or in part, as of the date hereof and until the Expiration Time; provided, however, that the Holder shall not be entitled to exercise any portion of this Warrant prior to the receipt of any required regulatory approvals or consents to the extent required.5196223

 
 

 

1.3. Procedure for Exercise of Warrant.(a) Cash Exercise. The Holder may exercise this Warrant in whole or in part by delivering to the Bank at any time and from time to time prior to the Expiration Time: (i) a completed and signed Notice of Exercise, as attached hereto as Schedule A (including the Substitute Form W-9, which forms a part thereof, the "Notice of Exercise"); (ii) cash in an amount equal to the product of (x) the Exercise Price (as this may be adjusted pursuant to Section 2 hereof), and (y) the number of Warrant Shares being purchased pursuant to such Notice of Exercise (such product, the "Aggregate Exercise Price"); and (iii) this Warrant to the following address:Opus Bank 1333 South Pacific Coast Highway Redondo Beach, CA 90277 Attention: Corporate SecretaryUpon payment in good collected funds of the Aggregate Exercise Price (rounded up to the nearest dollar) for the Warrant Shares being purchased, the Holder shall be deemed to be the holder of record of such Warrant Shares for all purposes, notwithstanding that the stock transfer books of the Bank may then be closed or that certificates representing such Warrant Shares have not been issued or delivered to the Holder.The Bank shall, as promptly as practicable· after completion of the actions specified in this Section 1.3(a), cause to be executed, and shall deliver to the Holder, a certificate representing the aggregate number of Warrant Shares specified in the Notice of Exercise. Each certificate for shares of Common Stock so delivered shall be in such denomination as may be requested by the Holder and shall be registered in the name of the Holder. If this Warrant shall have been exercised only in part, then the Bank shall, at the time of delivery of said certificate or certificates, also deliver to the Holder a new Warrant evidencing the remaining outstanding unexercised balance of Warrant Shares. The Bank shall pay all expenses, stock transfer taxes and other charges payable in connection with the preparation, execution and delivery of such certificates for shares of Common Stock and new Warrants.(b) Cashless Exercise. The Holder hereof may elect to exercise this Warrant, in whole or in part, and to receive, without the payment by such Holder of any additional cash or other consideration (the "Cashless Exercise"), Warrant Shares equal to the value of this Warrant or any portion hereof by surrendering this Warrant, along with the Notice of Exercise providing such number of Warrant Shares to be surrendered in the Cashless Exercise, to the address provided above in Section 1.3(a). The Bank shall then issue to the Holder such number of validly issued, fully paid and non-assessable Warrant Shares as is computed using the following formula:X= Y*(A-B) A- 2-5196223

 
 

 

where X = the number of shares of Common Stock to be issued to the Holder pursuant to this Section 1.3(b).Y = the number of Warrant Shares to be surrendered according to the Notice of Exercise delivered to the Bank pursuant to this Section 1.3(b).A= the Market Price of one share of Common Stock at the time the Notice of Exercise is made pursuant to this Section 1.3(b).B = the Exercise Price in effect under this Warrant at the time the Notice of Exercise is made pursuant to this Section 1.3(b).The term "Market Price" of a share of Common Stock shall mean the fair market value of a share, which shall be, (i) at any time such security is listed or traded on any securities exchange or quoted in an over-the-counter market, (A) the last reported sale price regular way of the Common Stock on the principal national securities exchange on which the Common Stock is listed or admitted to trading, or, if there have been no sales reported on any day, the average of the highest bid and lowest asked prices on such exchange, or (B) if on any day such security is not so listed and is instead quoted in the over-the-counter market, the average of the highest bid and lowest asked prices on such day in the domestic over-the-counter market as reported by the National Quotation Bureau, Incorporated, or any similar successor organization, in each of (A) and (B) of this paragraph, averaged over a period of the 20 consecutive trading days prior to the day as of which the Market Price is being determined, or (ii) at any time such security is not listed on any securities exchange or quoted in an over the counter market, as determined reasonably and in good faith by the Board of Directors of the Bank (the "Board"). The Holder may object in writing to the Board's determination of Market Price within seven days of receipt of written notice thereof. If the Holder and the Bank are unable to agree on the Market Price during the seven-day period following the delivery of the Holder's objection, the Appraisal Procedure may be invoked by either party to determine Market Price by delivering written notice thereof not later than the 20th day after delivery of the Holder's objection.The term "Appraisal Procedure" shall mean a procedure whereby two independent appraisers, one chosen by the Bank and one by the Holder, shall mutually agree upon the determinations then the subject of appraisal. Each party shall deliver a notice to the other appointing its appraiser within 10 days after the Appraisal Procedure is invoked. If within 15 days after appointment of the two appraisers they are unable to agree upon the amount in question, a third independent appraiser shall be chosen within 10 days thereafter by the mutual consent of such first two appraisers or, if such first two appraisers are unable to agree upon the appointment of a third appraiser, such appointment shall be made by the American Arbitration Association, or any organization successor thereto, from a panel of arbitrators having experience in the appraisal of the subject matter to be appraised. The decision of the third appraiser so appointed and chosen shall be given within 20 days after the selection of such third appraiser. If three appraisers shall be appointed and the determination of one appraiser is disparate from the- 3 -5196223

 
 

 

middle determination by more than twice the amount by which the other determination is disparate from the middle determination, then the determination of_ such appraiser shall be excluded, the remaining two determinations shall be averaged and such average shall be binding and conclusive upon the Bank and the Holder; otherwise, the average of all three determinations shall be binding upon the Bank and the Holder. The costs of conducting any Appraisal Procedure shall be borne equally by the Bank and the Holder.Upon receipt of the executed Notice of Exercise by the Bank, the Holder shall be deemed to be the holder of record of such Warrant Shares to be issued pursuant to the Cashless Exercise, notwithstanding that the Bank's stock transfer books may be closed or that certificates representing such Warrant Shares have not been issued or delivered to the Holder, provided, however, that in the event the Appraisal Procedure has been invoked in connection with a dispute regarding the Market Price, then the Holder shall be deemed to be the holder of record of the number of Warrant Shares that it would own if the Bank were to prevail in the Appraisal Procedure, pending the outcome of such proceeding, and the Bank shall deliver to the Holder, upon receipt of the executed Notice of Exercise, and, if applicable, following the outcome of the Appraisal Procedure, the number of Warrant Shares necessary to effect the foregoing.The Bank shall, as promptly as practicable after completion of the exercise of the Warrant as specified in this Section 1.3(b), cause to be executed, and delivered to the Holder exercising such Warrants, a certificate representing the aggregate number of Warrant Shares calculated pursuant to the Cashless Exercise formula described above. Each certificate so delivered shall be in such denomination as may be requested by the Holder and shall be registered in the name of the Holder. If this Warrant shall have been exercised only in part, then the Bank shall, at the time of delivery of said certificate or certificates, also deliver to the Holder a new Warrant evidencing the remaining outstanding unexercised balance of Warrant Shares. The Bank shall pay all expenses, stock transfer taxes and other charges payable in connection with the preparation, execution and delivery of such certificates for shares of Common Stock and new Warrants.SECTION 2. ADJUSTMENTS2.1. Adjustments and Other Rights. The Exercise Price and the number of Warrant Shares issuable shall be subject to adjustment from time to time as follows; provided, that if more than one subsection of this Section 2.1 is applicable to a single event, the subsection shall be applied that produces the largest adjustment and no single event shall cause an adjustment under more than one subsection of this Section 2.1 so as to result in duplication:(a) Stock Splits, Subdivisions, Reclassifications or Combinations. If the Bank shall (i) declare and pay a dividend or make a distribution on its Common Stock in shares of Common Stock, (ii) subdivide or reclassify the outstanding shares of Common Stock into a greater number of shares, or (iii) combine or reclassify the outstanding shares of Common Stock into a smaller number of shares, the number of Warrant Shares issuable at the time of the record date for such dividend or distribution or the effective date of such subdivision, combination or reclassification shall be proportionately adjusted so that- 4-5196223

 
 

 

the Holder after such date shall be entitled to purchase the number of shares of Common Stock which such Holder would have owned or been entitled to receive in respect of the shares of Common Stock subject to this Warrant after such date had this Warrant been exercised immediately prior to such date. In such event, the Exercise Price in effect at the time of the record date for such dividend or distribution or the effective date of such subdivision, combination or reclassification shall be adjusted to the number obtained by dividing (x) the product of (1) the number of Warrant Shares issuable before such adjustment and (2) the Exercise Price in effect immediately prior to the record or effective date, as the case may be, for the dividend, distribution, subdivision, combination or reclassification giving rise to this adjustment by (y) the new number of Warrant Shares issuable determined pursuant to the immediately preceding sentence.(b) Adjustments for Certain Dividends and Distributions. If while this Warrant, or any portion hereof, remains outstanding and unexpired, the holders of Common Stock shall have received, or, on or after the record date fixed for the determination of eligible stockholders, shall have become entitled to receive, without payment therefor, additional stock or other securities, assets or property (other than ordinary cash dividends or dividends paid or payable in shares of Common Stock, but including extraordinary cash dividends or distributions) of the Bank by way of dividend or distribution (other than as part of its dissolution, liquidation or the winding up of its affairs), then and in each case, the Exercise Price in effect prior to such record date (or if there is no record date, the date of receipt of such dividend or distribution) shall be reduced immediately thereafter to the price determined by multiplying the Exercise Price in effect immediately prior to such reduction by the quotient of (i) (A) the Market Price of the Common Stock on the last trading day preceding the first date on which the Common Stock trades regular way on the principal national securities exchange on which the Common Stock is listed or admitted to trading without the right to receive such distributions (or, if the Common Stock is not so listed or admitted to trading, the Market Price of the Common Stock on the last day prior to the record date for such dividend or distribution), minus (B) the amount of cash and/or the Fair Market Value of the additional stock or other securities, assets or property to be so distributed in respect of one share of Common Stock, divided by (ii) such Market Price specified in clause (i) (A); such adjustment shall be made successively whenever such a record date is fixed. In such event, the number of Warrant Shares issuable shall be increased to the number obtained by dividing (x) the product of (1) the number of Warrant Shares issuable before such adjustment and (2) the Exercise Price in effect immediately prior to the distribution giving rise to this adjustment by (y) the new Exercise Price determined in accordance with the immediately preceding sentence. "Fair Market Value" means, with respect to any additional stock or other securities, assets or property, the fair market value of such additional stock or other securities, assets or other property as determined by the Board, acting in good faith. For so long as the Holder holds this Warrant or any portion thereof, it may object in writing to the Board's calculation of fair market value within 10 days of receipt of written notice thereof. If the Holder and the Bank are unable to agree on the fair market value during the 10-day period following the delivery of the Holder's- 5-5196223

 
 

 

objection, the Appraisal Procedure may be invoked by either party to determine Fair Market Value by delivering written notification thereof not later than the 30th day after delivery of the Holder's objection.(c) If any event shall occur as to which the provisions of this Section 2.1 are not strictly applicable but the failure to make any adjustment would not fairly protect the purchase right represented by this Warrant in accordance with the essential intent and principles of Section 2.1, then, in each such case, the Board shall make such adjustment, if any, on a basis consistent with the essential intent and principles established in this Section 2.1 necessary to preserve,. without dilution, the purchase right represented by this Warrant.2.2. Adjustment Procedures. The following provisions shall be applicable to adjustments to be made pursuant to Section 2.1 hereof:(a) When Adjustments to be Made. The adjustments required by this Section 2 shall be made whenever and as often as any event requiring an adjustment shall occur. For the purpose of any such adjustment, any event shall be deemed to have occurred at the close of business on the date of its occurrence.(b) Fractional Interests. In computing adjustments under this Section 2, fractional interests in a Warrant Share shall be taken into account to the nearest 1/lOth of a Warrant Share. In no event, however, shall fractional interests or scrip representing fractional interests be issued upon the exercise of this Warrant. In lieu thereof, a cash payment shall be made to the Holder in an amount equal to such fraction multiplied by the Market Price per share of Common Stock.(c) When Adjustment Not Required.(i) If the Bank shall establish a record date for the determination of the holders of record of Common Stock for the purpose of entitling such holders to receive a dividend payable as provided in Section 2.1(a) and shall, thereafter and before the distribution to shareholders thereof, legally abandon its plan to pay or deliver such dividend, then no adjustment under Section 2.1(a) shall be required by reason of the establishment of such record date and any such adjustment previously made in respect thereof shall be rescinded and annulled.(ii) Notwithstanding anything herein to the contrary, no adjustment under Section 2.1 need be made to the Exercise Price and/or the number of Warrant Shares, as the case may be, unless such adjustment would require an increase or decrease of at least 1% of the Exercise Price and/or the number of Warrant Shares, as the case may be, then in effect. Any lesser adjustment(s) shall be carried forward and shall be made at the time of and together with the next subsequent adjustment, if any, which, together with any adjustment or adjustments so carried forward, shall amount to an increase or decrease of- 6-5196223

 
 

 

at least 1% of such Exercise Price and/or the number of Warrant Shares. Notwithstanding the foregoing, all such carried-forward adjustments shall be made in connection with any exercise of the Warrant.(d) Officers' Certificate Setting Forth Exercise Price Adjustment. Upon any increase or decrease in the Warrant Shares or the Exercise Price, as the case may be, pursuant to Section 2.1, the Bank promptly shall deliver to each Holder an officers' certificate signed by two duly authorized officers of the Bank ("Officers' Certificate") describing in reasonable detail the event requiring the increase or decrease in the Exercise Price and the method of calculation thereof and specifying the increased or decreased Warrant Shares or Exercise Price, as the case may be, in effect following · such adjustment.2.3. Consolidation, Merger and Sale of Assets.(a) In the event of (i) any consolidation or merger of the Bank with or into another Person or any merger of another Person (as defined below) with or into the Bank (other than a consolidation or merger in which the Bank is the resulting or surviving Person and which does not result in any reclassification or change of the outstanding Common Stock), (ii) a reorganization into a bank holding company form of organization ("Holding Company Reorganization"), (iii) any sale, lease or other disposition to another Person of all or substantially all of the assets of the Bank (computed on a consolidated basis), (iv) any statutory share exchange, spin off or split off involving the Bank, or (v) a reorganization or reclassification of the Common Stock (other than a change in par value, or from no par value to par value, or from par value to no par value, or as a result of a subdivision or a combination) (any of the foregoing, a "Corporate Change Transaction"), then the Holder shall thereafter be entitled to receive upon exercise of this Warrant in whole or in part, the same kind and number of shares of capital stock and other securities, cash or other property (and upon the same terms and with the same rights) as would have been distributed to the Holder upon consummation of such Corporate Change Transaction had the Holder exercised this Warrant immediately prior to the occurrence of such transaction (subject to subsequent adjustments under this Section 2), and the Exercise Price shall be adjusted appropriately to reflect such action and adjustment. If any Corporate Change Transaction set forth in this Section 2.3(a) results in a cash distribution in excess of the Exercise Price provided by this Warrant, then the Holder may, at the Holder's option, exercise this Warrant without making payment of the Exercise Price, and in such case, the Bank or its successors and assigns shall, upon distribution to such Holder, deduct the Aggregate Exercise Price from the cash payable to such Holder in full payment of the Exercise Price, and pay the balance of the distribution to such Holder. For purposes of this Section 2.3, "Person" shall mean an individual, partnership, association, limited liability company, trust, unincorporated organization, government or agency or political subdivision thereof, or any other legal entity.- 7-5196223

 
 

 

(b) Notwithstanding anything herein to the contrary, the Bank will not effect, and will not permit its subsidiaries to effect, any Corporate Change Transaction unless prior to the consummation thereof, every Person that may be required to deliver any shares of capital stock, other securities, cash or property upon the exercise of this Warrant shall agree by an instrument in writing to be bound by this Warrant and to deliver such shares of capital stock, other securities, cash or property to the Holder pursuant to the terms hereof. In the event of any Corporate Change Transaction as a result of a Holding Company Reorganization, any such newly formed bank holding company (the "Holding Company") shall as a condition to completing the Holding Company Reorganization, be required to issue to the Holder a new warrant ("New Warrant") in exchange for this Warrant. The New Warrant shall have terms, conditions and covenants that are substantially identical to the terms, conditions and covenants of this Warrant, including (i) an exercise price equal to the Warrant's then applicable Exercise Price and (ii) providing that the New Warrant shall be exercisable for an equivalent number of underlying shares of the Holding Company's common stock (or such other Holding Company capital stock that was issued by the Holding Company to the holders of Common Stock upon completion of the Holding Company Reorganization) as the number of Warrant Shares that remain unexercised immediately prior to the date the Warrant is exchanged for the New Warrant all in accordance with Section 2.3(a). The term of the New Warrant shall be the length of time that remains with respect to the term of the Warrant immediately prior to the exchange for the New Warrant. The Holder and the Bank shall work in good faith to cause the exchange of the Warrant for the New Warrant upon a Holding Company Reorganization as contemplated by this Section 2.3(b). Upon exchange of the Warrant for the New Warrant, this Warrant shall be cancelled and be of no further force or effect.(c) The foregoing provlSlons of this Section 2.3 shall similarly apply to successive reorganizations, consolidations, mergers, sales and transfers and to the stock or securities of any other corporation that are at the time receivable upon the exercise or exchange of this Warrant.2.4. Covenants. The Bank covenants and agrees as follows:(a) This Warrant has been duly authorized and validly issued, is not subject to assessment and has not been issued in violation of any preemptive rights. All Warrant Shares that may be issued upon the exercise of the rights represented by this Warrant will, upon issuance, be duly authorized and validly issued, will not be subject to assessment and will not be issued in violation of any preemptive rights.(b) The Bank represents, warrants and covenants that during the entire period this Warrant is outstanding and any part thereof remains unexercised, it has reserved and will at all times maintain and reserve a sufficient number of its authorized and unissued- 8-5196223

 
 

 

shares of Common Stock to provide for the issuance of Common Stock upon the exercise of this Warrant in full.(c) The Bank shall not effect any action, including closing its books against the transfer of this Warrant or of any shares of Common Stock issuable upon exercise of this Warrant in any manner, that interferes with the timely exercise of the Warrant in accordance with the express terms of this Warrant and the Subscription Agreement.(d) The Bank shall assist and cooperate with the Holder in making any required regulatory filings or obtaining any required regulatory approvals prior to or in connection with any exercise of this Warrant (including, without limitation, making any filings required to be made by the Bank).SECTION 3. OWNERSHIP AND TRANSFER.3.1. Ownership. The Bank may deem and treat the person in whose name this Warrant is registered as the sole Holder and the sole owner hereof (notwithstanding any notations of ownership or writing hereon made by anyone other than the Bank) for all purposes and shall not be affected by any notice to the contrary until presentation of this Warrant to the Bank for registration of transfer in accordance with its terms.3.2. Replacement. Upon receipt by the Bank of evidence reasonably satisfactory to it of the loss, theft or destruction of this Warrant, and of indemnity and/or security reasonably satisfactory to it, or upon surrender of this Warrant if mutilated, the Bank will make and deliver a new Warrant of like tenor, in lieu of this Warrant. This Warrant shall be promptly canceled by the Bank upon the surrender hereof in connection with any transfer or replacement. Except as otherwise provided above in the case of the loss, theft or destruction of a Warrant, the Bank shall pay all expenses, taxes and other charges payable in connection with any transfer or replacement of this Warrant.3.3. Restrictions on Transfer.(a) The Holder understands, acknowledges and agrees that this Warrant and the Warrant Shares for which it is exercisable have not been, and the Warrant and the Warrant Shares for which it is exercisable (except as may be set forth in the Registration Rights Agreement with respect to the Warrant Shares) will not be, registered under the Securities Act of 1933, as amended (the "1933 Act"), or any state securities laws, and may only be sold, offered for sale, pledged, hypothecated, transferred, assigned or otherwise disposed of in compliance with the then applicable resale requirements of the 1933 Act.(b) Subject to the provisions of this Section 3.3, this Warrant is transferable, in whole or in part, when the Holder shall surrender this Warrant with a properly executed assignment to the Bank at its principal office (or any other such office or agency- 9-5196223

 
 

 

as identified by the Bank) whereupon the Bank will forthwith issue and deliver, upon the order of the Holder, a new Warrant, registered as the Holder may request, representing the right to purchase the number of Warrant Shares being transferred by the Holder and, if less than the total number of Warrant Shares then underlying this Warrant is being transferred, a new Warrant to the Holder representing the right to purchase the number of Warrant Shares not being transferred.SECTION 4. MISCELLANEOUS.4.1 No Rights as Shareholder; Limitation of Liability. This Warrant shall not entitle the Holder to any of the rights of a shareholder of the Bank prior to exercise of this Warrant, and then only as to the Warrant Shares issuable as a result of such exercise of the Warrant. No Holder of a Warrant shall have liability or obligation as a shareholder as a result of holding this Warrant.4.2 Holder Entitled to Benefits of Other Agreements. This Warrant has been issued pursuant to the Subscription Agreement. The Holder of this Warrant is entitled to the benefits of the Subscription Agreement and the Registration Rights Agreement.4.3 No Dilution or Impairment. The Bank will not, by amendment of the Articles of Incorporation or through reorganization, consolidation, merger, dissolution, issue or sale of securities, sale of assets or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such actions as may be necessary or appropriate in order to protect the rights of the holders of this Warrant against dilution or other impairment. Without limiting the generality of the foregoing, the Bank (a) will take all such action as may be necessary or appropriate in order that the Bank may validly and legally issue fully paid and non-assessable shares of Common Stock upon the exercise of all Warrants at the time outstanding, and (b) will take no action to amend the Articles of Incorporation or bylaws of the Bank that would change to the detriment of the holders of Common Stock (whether or not any Common Stock be at the time outstanding) the dividend or voting rights of the Common Stock.4.4 Amendment and Waiver. This Warrant may only be modified or amended and any provision hereof only may be waived by a writing executed by the Bank and upon the written consent of the Holder.4.5 Successors and Assigns. This Warrant shall be binding upon, and inure to the benefit of, the parties hereto and their respective successors and assigns permitted hereunder, and no other parties shall have any rights hereunder.4.6 Governing Law, etc. This Warrant shall be governed by, and construed and enforced in accordance with, the laws of the State of New York. Any action or proceeding with- 10-5196223

 
 

 

respect to this Warrant shall be brought exclusively in any federal court in New York, New York. The parties waive any right to a jury trial.4.7 Amendment and Restatement. This Warrant amends and restates in its entirety the Original Warrant.4.8 Entire Agreement. This Warrant, the Subscription Agreement, the Articles of Incorporation and the Registration Rights Agreement, and any other documents and instruments referred to herein or therein, constitute the entire agreement between the parties hereto with respect to the transactions contemplated hereunder and supersede all prior arrangements or understandings with respect thereto, written or oral.[Signature page follows]- 11-5196223

 
 

 

IN WITNESS WHEREOF, the Bank has caused this Amended and Restated Warrant to be signed by its duly authorized officer on this 21st day of September, 2011.OPUS BANKBy: Name: Stephen H. Gordon Title: President and Chief Executive Officer[Signature Page to Amended and Restated Warrant of _5196223

 
 

 

SCHEDULE ANOTICE OF EXERCISE OF AMENDED AND RESTATED WARRANT TO PURCHASE COMMON STOCK OF OPUS BANKTo: Opus Bank(1) The undersigned, the registered owner of this Amended and Restated Warrant, hereby:(i) irrevocably elects to exercise the purchase rights represented thereby for, and to acquire as set forth in Section 1.3(a) thereunder, shares of Common Stock and herewith makes payment of$ therefor, or(ii) irrevocably elects to exercise without payment therefor the rights represented thereby to receive shares of Common Stock, calculated and made pursuant to the Cashless Exercise formula set forth in Section 1.3(b) thereunder;(2) The undersigned requests that the certificates evidencing such shares of Common Stock be issued in the name of and be delivered to:Name: Address:Social Security or Tax I.D. Number: -------------------and if such shares of Common Stock shall not be all of the Warrant Shares purchasable hereunder, that a new Warrant of like tenor for the balance of the Warrant Shares purchasable hereunder be delivered to the undersigned.(3) The undersigned confirms that the shares of Common Stock received pursuant to this Notice of Exercise are being acquired for the account of the undersigned for investment only andA-15196223

 
 

 

not with a view to, or in connection with, the distribution thereof and that the undersigned has no present intention of distributing such shares of Common Stock received.Capitalized terms used herein but not otherwise defined shall have the meaning ascribed to such terms in the Amended and Restated Warrant to Purchase Shares of Common Stock of Opus Bank.Dated: NAME OF HOLDER--------- By:Name: Title:SUBSTITUTE FORM W-9Under the penalties of perjury, I certify that:(1) the Social Security Number or Taxpayer Identification Number given above is correct; and(2) I am not subject to backup withholding either because I have not been notified that I am subject to backup withholding as a result of a failure to report all interest or dividends, or because the Internal Revenue Service has notified me that I am no longer subject to backup withholding.Important Instructions: You must cross out #2 above if you have been notified by the Internal Revenue Service that you are subject to backup withholding because of under reporting interest or dividends on your tax return and if you have not received a notice from the Internal Revenue Service advising you that backup withholding due to notified payee under reporting has terminated. For additional instructions, please refer to the attached "Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9."Signaturet: _ Date: _1 If a corporation, please sign in full corporate name by president or other authorized officer. When signing as officer, attorney, custodian, trustee, administrator, guardian, etc., please give your full title as such. In case of joint tenants, each person must sign.A-25196223

 

 

(Back To Top)

Section 3: EX-4.2 (EXHIBIT 4.2)

 

Exhibit 4.2

 

AMENDED AND RESTATED WARRANT TO PURCHASE SHARES OF SERIES A NON-CUMULATIVE NON-VOTING PREFERRED STOCK OF OPUS BANKDATE OF INITIAL ISSUANCE: SEPTEMBER 30, 2010THIS CERTIFIES THAT, for value received, a ---------(the "Holder"), is entitled to purchase, subject to the exercise and other provisions of this Amended and Restated Warrant (including any Warrants issued in exchange, transfer or replacement hereof, the "Warrant"), from Opus Bank (the "Bank") at any time prior tothe lOth anniversary of the date of initial issuance of this Warrant, up to ( )shares (as such number of shares may be adjusted in accordance with Section 2 hereof, the "Warrant Shares") of the Bank's Series A Non-Cumulative Non-Voting Preferred Stock ("Series A Preferred Stock"), at any time and from time to time, in whole or in part, at an exercise price of $1,000.00 (subject to adjustment as provided in Section 2 hereof, the "Exercise Price") per Warrant Share. The Holder may also, at any time and from time to time, in whole or in part, exercise this Warrant pursuant to a "Cashless Exercise," as defined and provided in Section 1.3(b). This Warrant shall expire at 5:00P.M., Eastern Time, on the lOth anniversary of the date of initial issuance of this Warrant (the "Expiration Time"). This Warrant is granted in connection with and pursuant to, and is entitled to the benefits of, the Amended and Restated Stock Subscription Agreement, dated as of June 25, 2010, by and between the Bank and the Purchasers named therein, as amended by that certain First Amendment to the Stock Subscription Agreement, dated as of August 27, 2010, and that certain Second Amendment to the Stock Subscription Agreement, dated as of September 21, 2011 (collectively, the "Subscription Agreement"), and the Registration Rights Agreement related thereto (the "Registration Rights Agreement"), and is granted in exchange for and replaces the Warrant to Purchase Shares of Series A Non-Cumulative Non-Voting Preferred Stock of the Bank dated September 30, 2010 (the "Original Warrant").SECTION 1. EXERCISE OF WARRANT.hereof.1.1. Vesting. The Holder's rights under this Warrant are fully vested as of the date1.2. Exercisability. This Warrant is exercisable, at any time and from time to time, in whole or in part, as of the date hereof and until the Expiration Time; provided, however, that the5196039

 
 

 

Holder shall not be entitled to exercise any portion of this Warrant prior to the receipt of any required regulatory approvals or consents to the extent required. Notwithstanding the foregoing, the Bank shall not effect any exercise of the Warrant, and the Holder shall not have the right to exercise any portion of the Warrant, into Warrant Shares to the extent such exercise would result in the Holder (together with the Holder's related persons and any persons with which the Holder is acting in concert) holding Shares or other equity interests in the Bank representing in excess of 24.9% of the Total Equity of the Bank. For purposes of the preceding sentence, "Total Equity" means the GAAP carrying value of all shares of common, preferred and other equity capital of the Bank outstanding as of the date of determination.1.3. Procedure for Exercise of Warrant.(a) Cash Exercise. The Holder may exercise this Warrant in whole or in part by delivering to the Bank at any time and from time to time prior to the Expiration Time: (i) a completed and signed Notice of Exercise, as attached hereto as Schedule A (including the Substitute Form W-9, which forms a part thereof, the "Notice of Exercise"); (ii) cash in an amount equal to the product of (x) the Exercise Price (as this may be adjusted pursuant to Section 2 hereof), and (y) the number of Warrant Shares being purchased pursuant to such Notice of Exercise (such product, the "Aggregate Exercise Price"); and (iii) this Warrant to the following address:Opus Bank 1333 South Pacific Coast Highway Redondo Beach, CA 90277 Attention: Corporate SecretaryUpon payment in good collected funds of the Aggregate Exercise Price (rounded up to the nearest dollar) for the Warrant Shares being purchased, the Holder shall be deemed to be the holder of record of such Warrant Shares for all purposes, notwithstanding that the stock transfer books of the Bank may then be closed or that certificates representing such Warrant Shares have not been issued o:r delivered to the Holder.The Bank shall, as promptly as practicable after completion of the actions specified in this Section 1.3(a), cause to be executed, and shall deliver to the Holder, a certificate representing the aggregate number of Warrant Shares specified in the Notice of Exercise. Each certificate for shares of Series A Preferred Stock so delivered shall be in such denomination as may be requested by the Holder and shall be registered in the name of the Holder. If this Warrant shall have been exercised only in part, then the Bank shall, at the time of delivery of said certificate or certificates, also deliver to the Holder a new Warrant evidencing the remaining outstanding unexercised balance of Warrant Shares. The Bank shall pay all expenses, stock transfer taxes and other charges payable in connection with the preparation, execution and delivery of such certificates for shares of Series A Preferred Stock and new Warrants.(b) Cashless Exercise. The Holder hereof may elect to exercise this Warrant, in whole or in part, and to receive, without the payment by such Holder of any additional cash or- 2-

 
 

 

other consideration (the "Cashless Exercise"), Warrant Shares equal to the value of this Warrant or any portion hereof by surrendering this Warrant, along with the Notice of Exercise providing such number of Warrant Shares to be surrendered in the Cashless Exercise, to the address provided above in Section 1.3(a). The Bank shall then issue to the Holder such number of validly issued, fully paid and non-assessable Warrant Shares as is computed using the following formula:X= Y*(A-B) Awhere X = the number of shares of Series A Preferred Stock to be issued to the Holder pursuant to this Section 1.3(b).Y = the number of Warrant Shares to be surrendered according to the Notice of Exercise delivered to the Bank pursuant to this Section 1.3(b).A= the Market Price of one share of Series A Preferred Stock at the time the Notice of Exercise is made pursuant to this Section 1.3(b).B = the Exercise Price in effect under this Warrant at the time the Notice of Exercise is made pursuant to this Section 1.3(b).The term "Market Price" of a share of Series A Preferred Stock shall mean the fair market value of a share, which shall be, (i) at any time such security is listed or traded on any securities exchange or quoted in an over-the-counter market, (A) the last reported sale price regular way of the Series A Preferred Stock on the principal national securities exchange on which the Series A Preferred Stock is listed or admitted to trading, or, if there have been no sales reported on any day, the average of the highest bid and lowest asked prices on such exchange, or (B) if on any day such security is not so listed and is instead quoted in the over-the-counter market, the average of the highest bid and lowest asked prices on such day in the domestic over-the-counter market as reported by the National Quotation Bureau, Incorporated, or any similar successor organization, in each of (A) and (B) of this paragraph, averaged over a period of the 20 consecutive trading days prior to the day as of which the Market Price is being determined, or (ii) at any time such security is not listed on any securities exchange or quoted in an over the counter market, as determined reasonably and in good faith by the Board of Directors of the Bank (the "Board"). The Holder may object in writing to the Board's determination of Market Price within seven days of receipt of written notice thereof. If the Holder and the Bank are unable to agree on the Market Price during the seven-day period following the delivery of the Holder's objection, the Appraisal Procedure may be invoked by either party to determine Market Price by delivering written notice thereof not later than the 20th day after delivery of the Holder's objection.The term "Appraisal Procedure" shall mean a procedure whereby two independent appraisers, one chosen by the Bank and one by the Holder, shall mutually agree upon the determinations then the subject of appraisal. Each party shall deliver a notice to the other appointing its appraiser within 10 days after the Appraisal Procedure is invoked. If within 15- 3-

 
 

 

days after appointment of the two appraisers they are unable to agree upon the amount in question, a third independent appraiser shall be chosen within 10 days thereafter by the mutual consent of such first two appraisers or, if such first two appraisers are unable to agree upon the appointment of a third appraiser, such appointment shall be made by the American Arbitration Association, or any organization successor thereto, from a panel of arbitrators having experience in the appraisal of the subject matter to be appraised. The decision of the third appraiser so appointed and chosen shall be given within 20 days after the selection of such third appraiser. If three appraisers shall be appointed and the determination of one appraiser is disparate from the middle determination by more than twice the amount by which the other determination is disparate from the middle determination, then the determination of such appraiser shall be excluded, the remaining two determinations shall be averaged and such average shall be binding and conclusive upon the Bank and the Holder; otherwise, the average of all three determinations shall be binding upon the Bank and the Holder. The costs of conducting any Appraisal Procedure shall be borne equally by the Bank and the Holder.Upon receipt of the executed Notice of Exercise by the Bank, the Holder shall be deemed to be the holder of record of such Warrant Shares to be issued pursuant to the Cashless Exercise, notwithstanding that the Bank's stock transfer books may be closed or that certificates representing such Warrant Shares have not been issued or delivered to the Holder, provided, however, that in the event the Appraisal Procedure has been invoked in connection with a dispute regarding the Market Price, then the Holder shall be deemed to be the holder of record of the number of Warrant Shares that it would own if the Bank were to prevail in the Appraisal Procedure, pending the outcome of such proceeding, and the Bank shall deliver to the Holder, upon receipt of the executed Notice of Exercise, and, if applicable, following the outcome of the Appraisal Procedure, the number of Warrant Shares necessary to effect the foregoing.The Bank shall, as promptly as practicable after completion of the exercise of the Warrant as specified in this Section 1.3(b), cause to be executed, and delivered to the Holder exercising such Warrants, a certificate representing the aggregate number of Warrant Shares calculated pursuant to the Cashless Exercise formula described above. Each certificate so delivered shall be in such denomination as may be requested by the Holder and shall be registered in the name of the Holder. If this Warrant shall have been exercised only in part, then the Bank shall, at the time of delivery of said certificate or certificates, also deliver to the Holder a new Warrant evidencing the remaining outstanding unexercised balance of Warrant Shares. The Bank shall pay all expenses, stock transfer taxes and other charges payable in connection with the preparation, execution and delivery of such certificates for shares of Series A Preferred Stock and new Warrants.SECTION 2. ADJUSTMENTS2.1. Adjustments and Other Rights. The Exercise Price and the number of Warrant Shares issuable shall be subject to adjustment from time to time as follows; provided, that if more than one subsection of this Section 2.1 is applicable to a single event, the subsection shall be applied that produces the largest adjustment and no single event shall cause an adjustment under more than one subsection of this Section 2.1 so as to result in duplication:- 4-

 
 

 

(a) Stock Splits, Subdivisions, Reclassifications or Combinations. If the Bank shall (i) declare and pay a dividend or make a distribution on its Series A Preferred Stock in shares of Series A Preferred Stock, (ii) subdivide or reclassify the outstanding shares of Series A Preferred Stock into a greater number of shares, or (iii) combine or reclassify the outstanding shares of Series A Preferred Stock into a smaller number of shares, the number of Warrant Shares issuable at the time of the record date for such dividend or distribution or the effective date of such subdivision, combination or reclassification shall be proportionately adjusted so that the Holder after such date shall be entitled to purchase the number of shares of Series A Preferred Stock which such Holder would have owned or been entitled to receive in respect of the shares of Series A Preferred Stock subject to this Warrant after such date had this Warrant been exercised immediately prior to such date. In such event, the Exercise Price in effect at the time of the record date for such dividend or distribution or the effective date of such subdivision, combination or reclassification shall be adjusted to the number obtained by dividing (x) the product of (1) the number of Warrant Shares issuable before such adjustment and (2) the Exercise Price in effect immediately prior to the record or effective date, as the case may be, for the dividend, distribution, subdivision, combination or reclassification giving rise to this adjustment by (y) the new number of Warrant Shares issuable determined pursuant to the immediately preceding sentence.(b) Adjustments for Certain Dividends and Distributions. If while this Warrant, or any portion hereof, remains outstanding and unexpired, the holders of Series A Preferred Stock shall have received, or, on or after the record date fixed for the determination of eligible stockholders, shall have become entitled to receive, without payment therefor, additional stock or other securities, assets or property (other than ordinary cash dividends or dividends paid or payable in shares of Series A Preferred Stock, but including extraordinary cash dividends or distributions) of the Bank by way of dividend or distribution (other than as part of its dissolution, liquidation or the winding up of its affairs), then and in each case, the Exercise Price in effect prior to such record date (or if there is no record date, the date of receipt of such dividend or distribution) shall be reduced immediately thereafter to the price determined by multiplying the Exercise Price in effect immediately prior to such reduction by the quotient of (i) (A) the Market Price of the Series A Preferred Stock on the last trading day preceding the first date on which the Series A Preferred Stock trades regular way on the principal national securities exchange on which the Series A Preferred Stock is listed or admitted to trading without the right to receive such distributions (or, if the Series A Preferred Stock is not so listed or admitted to trading, the Market Price of the Series A Preferred Stock on the last day prior to the record date for such dividend or distribution), minus (B) the amount of cash and/or the Fair Market Value of the additional stock or other securities, assets or property to be so distributed in respect of one share of Series A Preferred Stock, divided by (ii) such Market Price specified in clause (i) (A); such adjustment shall be made successively whenever such a record date is fixed. In such event, the number of Warrant Shares issuable shall be increased to the number obtained by dividing (x) the product of (1) the number of Warrant Shares issuable before such adjustment and (2) the Exercise- 5-

 
 

 

Price in effect immediately prior to the distribution giving rise to this adjustment by (y) the new Exercise Price determined in accordance with the immediately preceding sentence. "Fair M arket Value" means, with respect to any additional stock or other securities, assets or property, the fair market value of such additional stock or other securities, assets or other property as determined by the Board, acting in good faith. For so long as the Holder holds this Warrant or any portion thereof, it may object in writing to the Board's calculation of fair market value within 10 days of receipt of written notice thereof. If the Holder and the Bank are unable to agree on the fair market value during the 10-day period following the delivery of the Holder's objection, the Appraisal Procedure may be invoked by either party to determine Fair Market Value by delivering written notification thereof not later than the 30th day after delivery of the Holder's objection.(c) If any event shall occur as to which the provisions of this Section 2.1 are not strictly applicable but the failure to make any adjustment would not fairly protect the purchase right represented by this Warrant in accordance with the essential intent and principles of Section 2.1, then, in each such case, the Board shall make such adjustment, if any, on a basis consistent with the essential intent and principles established in this Section 2.1 necessary to preserve, without dilution, the purchase right represented by this Warrant.(d) Upon exercise of the Warrant, the Holder will receive shares of Series A Preferred Stock that will have a "Conversion Rate" (as such term is defined in the Bank's Articles of Incorporation (the "Articles of Incorporation")). The Conversion Rate with respect to such shares of Series A Preferred Stock shall reflect any adjustments to the Conversion Price (as such term is defined in the Articles of Incorporation) pursuant to the Articles of Incorporation that may occur between the Issue Date and when shares of Series A Preferred Stock are issued to the Holder pursuant to the exercise of this Warrant.2.2. Adjustment Procedures. The following provisions shall be applicable to adjustments to be made pursuant to Section 2.1 hereof:(a) When Adjustments to be Made. The adjustments required by this Section 2 shall be made whenever and as often as any event requiring an adjustment shall occur. For the purpose of any such adjustment, any event shall be deemed to have occurred at the close of business on the date of its occurrence.(b) Fractional Interests. In computing adjustments under this Section 2, fractional interests in a Warrant Share shall be taken into account to the nearest 1/lOth of a Warrant Share. In no event, however, shall fractional interests or scrip representing fractional interests be issued upon the exercise of this Warrant. In lieu thereof, a cash payment shall be made to the Holder in an amount equal to such fraction multiplied by the Market Price per share of Series A Preferred Stock.(c) When Adjustment Not Required.- 6-

 
 

 

(i) If the Bank shall establish a record date for the determination of the holders of record of Series A Preferred Stock for the purpose of entitling such holders to receive a dividend payable as provided in Section 2.1(a) and shall, thereafter and before the distribution to shareholders thereof, legally abandon its plan to pay or deliver such dividend, then no adjustment under Section 2.1(a) shall be required by reason of the establishment of such record date and any such adjustment previously made in respect thereof shall be rescinded and annulled.(ii) Notwithstanding anything herein to the contrary, no adjustment under Section 2.1 need be made to the Exercise Price and/or the number of Warrant Shares, as the case may be, unless such adjustment would require an increase or decrease of at least 1% of the Exercise Price and/or the number of Warrant Shares, as the case may be, then in effect. Any lesser adjustment(s) shall be carried forward and shall be made at the time of and together with the next subsequent adjustment, if any, which, together with any adjustment or adjustments so carried forward, shall amount to an increase or decrease of at least 1% of such Exercise Price and/or the number of Warrant Shares. Notwithstanding the foregoing, all such carried-forward adjustments shall be made in connection with any exercise of the Warrant.(d) Officers' Certificate Setting Forth Exercise Price Adjustment. Upon any increase or decrease in the Warrant Shares or the Exercise Price, as the case may be, pursuant to Section 2.1, the Bank promptly shall deliver to each Holder an officers' certificate signed by two duly authorized officers of the Bank ("Officers' Certificate") describing in reasonable detail the event requiring the increase or decrease in the Exercise Price and the method of calculation thereof and specifying the increased or decreased Warrant Shares or Exercise Price, as the case may be, in effect following such adjustment.2.3. Consolidation, Merger and Sale of Assets.(a) In the event of (i) any consolidation or merger of the Bank with or into another Person or any merger of another Person (as defined below) with or into the Bank (other than a consolidation or merger in which the Bank is the resulting or surviving Person and which does not result in any reclassification or change of outstanding common stock of the Bank ("Common Stock")), (ii) a reorganization into a bank holding company form of organization ("Holding Company Reorganization"), (iii) any sale, lease or other disposition to another Person of all or substantially all of the assets of the Bank (computed on a consolidated basis), (iv) any statutory share exchange, spin off or split off involving the Bank, or (v) a reorganization or reclassification of the Series A Preferred Stock (other than a change in par value, or from no par value to par value, or from par value to no par value, or as a result of a subdivision or a combination) (any of the foregoing, a "Corporate Change Transaction"), then the Holder shall thereafter be entitled to receive upon exercise of this Warrant in whole or in part, the same kind and number of shares of capital stock and other securities, cash or other property (and upon the same- 7-

 
 

 

terms and with the same rights) as would have been distributed to the Holder upon consummation of such Corporate Change Transaction had the Holder exercised this Warrant immediately prior to the occurrence of such transaction (subject to subsequent adjustments under this Section 2), and the Exercise Price shall be adjusted appropriately to reflect such action and adjustment. If any Corporate Change Transaction set forth in this Section 2.3(a) results in a cash distribution in excess of the Exercise Price provided by this Warrant, then the Holder may, at the Holder's option, exercise this Warrant without making payment of the Exercise Price, and in such case, the Bank or its successors and assigns shall, upon distribution to such Holder, deduct the Aggregate Exercise Price from the cash payable to such Holder in full payment of the Exercise Price, and pay the balance of the distribution to such Holder. For purposes of this Section 2.3, "Person" shall mean an individual, partnership, association, limited liability company, trust, unincorporated organization, government or agency or political subdivision thereof, or any other legal entity.(b) Notwithstanding anything herein to the contrary, the Bank will not effect, and will not permit its subsidiaries to effect, any Corporate Change Transaction unless prior to the consummation thereof, every Person that may be required to deliver any shares of capital stock, other securities, cash or property upon the exercise of this Warrant shall agree by an instrument in writing to be bound by this Warrant and to deliver such shares of capital stock, other securities, cash or property to the Holder pursuant to the terms hereof. In the event of any Corporate Change Transaction as a result of a Holding Company Reorganization, any such newly formed bank holding company (the "Holding Company") shall as a condition to completing the Holding Company Reorganization, be required to issue to the Holder a new warrant ("New Warrant") in exchange for this Warrant. The New Warrant shall have terms, conditions and covenants that are substantially identical to the terms, conditions and covenants of this Warrant, including (i) an exercise price equal to the Warrant's then applicable Exercise Price and (ii) providing that the New Warrant shall be exercisable for an equivalent number of underlying shares of the Holding Company's preferred stock (or such other Holding Company capital stock that was issued by the Holding Company to the holders of Series A Preferred Stock upon completion of the Holding Company Reorganization) as the number of Warrant Shares that remain unexercised immediately prior to the date the Warrant is exchanged for the New Warrant all in accordance with Section 2.3(a). The term of the New Warrant shall be the length of time that remains with respect to the term of the Warrant immediately prior to the exchange for the New Warrant. The Holder and the Bank shall work in good faith to cause the exchange of the Warrant for the New Warrant upon a Holding Company Reorganization as contemplated by this Section 2.3(b). Upon exchange of the Warrant for the New Warrant, this Warrant shall be cancelled and be of no further force or effect.(c) The foregoing provisions of this Section 2.3 shall similarly apply to successive reorganizations, consolidations, mergers, sales and transfers and to the stock or securities of any other corporation that are at the time receivable upon the exercise or exchange of this Warrant.- 8-

 
 

 

2.4. Covenants. The Bank covenants and agrees as follows:(a) This Warrant has been duly authorized and validly issued, is not subject to assessment and has not been issued in violation of any preemptive rights. All Warrant Shares that may be issued upon the exercise of the rights represented by this Warrant will, upon issuance, be duly authorized and validly issued, will not be subject to assessment and will not be issued in violation of any preemptive rights.(b) The Bank represents, warrants and covenants that during the entire period this Warrant is outstanding and any part thereof remains unexercised, it has reserved and will at all times maintain and reserve a sufficient number of its authorized and unissued shares of Series A Preferred Stock to provide for the issuance of Series A Preferred Stock upon the exercise of this Warrant in full.(c) The Bank shall not effect any action, including closing its books against the transfer of this Warrant or of any shares of Series A Preferred Stock issuable upon exercise of this Warrant in any manner, that interferes with the timely exercise of the Warrant in accordance with the express terms of this Warrant and the Subscription Agreement.(d) The Bank shall assist and cooperate with the Holder in making any required regulatory filings or obtaining any required regulatory approvals prior to or in connection with any exercise of this Warrant (including, without limitation, making any filings required to be made by the Bank).(e) The Bank shall not alter, amend or repeal the prov1s1ons of Article FOURTH paragraph (D)(vii) of the Articles of Incorporation in a manner adverse to the Holder without the prior written consent of the Holder.SECTION 3. OWNERSHIP AND TRANSFER.3.1. Ownership. The Bank may deem and treat the person in whose name this Warrant is registered as the sole Holder and the sole owner hereof (notwithstanding any notations of ownership or writing hereon made by anyone other than the Bank) for all purposes and shall not be affected by any notice to the contrary until presentation of this Warrant to the Bank for registration of transfer in accordance with its terms.3.2. Replacement. Upon receipt by the Bank of evidence reasonably satisfactory to it of the loss, theft or destruction of this Warrant, and of indemnity and/or security reasonably satisfactory to it, or upon surrender of this Warrant if mutilated, the Bank will make and deliver a new Warrant of like tenor, in lieu of this Warrant. This Warrant shall be promptly canceled by the Bank upon the surrender hereof in connection with any transfer or replacement. Except as otherwise provided above in the case of the loss, theft or destruction of a Warrant, the Bank shall- 9-

 
 

 

pay all expenses, taxes and other charges payable in connection with any transfer or replacement of this Warrant.3.3. Restrictions on Transfer.(a) The Holder understands, acknowledges and agrees that this Warrant and the Warrant Shares for which it is exercisable have not been, and the Warrant and the Warrant Shares for which it is exercisable (except as may be set forth in the Registration Rights Agreement with respect to the Warrant Shares) will not be, registered under the Securities Act of 1933, as amended (the "1933 Act"), or any state securities laws, and may only be sold, offered for sale, pledged, hypothecated, transferred, assigned or otherwise disposed of in compliance with the then applicable resale requirements of the 1933 Act.(b) Subject to the provisions of this Section 3.3, this Warrant is transferable, in whole or in part, when the Holder shall surrender this Warrant with a properly executed assignment to the Bank at its principal office (or any other such office or agency as identified by the Bank) whereupon the Bank will forthwith issue and deliver, upon the order of the Holder, a new Warrant, registered as the Holder may request, representing the right to purchase the number of Warrant Shares being transferred by the Holder and, if less than the total number of Warrant Shares then underlying this Warrant is being transferred, a new Warrant to the Holder representing the right to purchase the number of Warrant Shares not being transferred.SECTION 4. MISCELLANEOUS.4.1 No Rights as Shareholder; Limitation of Liability. This Warrant shall not entitle the Holder to any of the rights of a shareholder of the Bank prior to exercise of this Warrant, and then only as to the Warrant Shares issuable as a result of such exercise of the Warrant. No Holder of a Warrant shall have liability or obligation as a shareholder as a result of holding this Warrant.4.2 Holder Entitled to Benefits of Other Agreements. This Warrant has been issued pursuant to the Subscription Agreement. The Holder of this Warrant is entitled to the benefits of the Subscription Agreement and the Registration Rights Agreement.4.3 No Dilution or Impairment. The Bank will not, by amendment of the Articles of Incorporation or through reorganization, consolidation, merger, dissolution, issue or sale of securities, sale of assets or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such actions as may be necessary or appropriate in order to protect the rights of the holders of this Warrant against dilution or other impairment. Without limiting the generality of the foregoing, the Bank (a) will take all such action as may be necessary or appropriate in order that the Bank may validly and legally issue fully paid and non-assessable shares of Series A Preferred Stock upon the exercise of all- 10-

 
 

 

Warrants at the time outstanding, and (b) will take no action to amend the Articles of Incorporation or bylaws that would change to the detriment of the holders of Series A Preferred Stock (whether or not any Common Stock be at the time outstanding) the dividend or voting rights of the Series A Preferred Stock.4.4 Amendment and Waiver. This Warrant may only be modified or amended and any provision hereof only may be waived by a writing executed by the Bank and upon the written consent of the Holders.4.5 Successors and Assigns. This Warrant shall be binding upon, and inure to the benefit of, the parties hereto and their respective successors and assigns permitted hereunder, and no other parties shall have any rights hereunder.4.6 Governing Law, etc. This Warrant shall be governed by, and construed and enforced in accordance with, the laws of the State of New York. Any action or proceeding with respect to this Warrant shall be brought exclusively in any federal court in New York, New York. The parties waive any right to a jury trial.4.7 Amendment and Restatement. This Warrant amends and restates in its entirety the Original Warrant.4.8 Entire Agreement. This Warrant, the Subscription Agreement, the Articles of Incorporation and the Registration Rights Agreement, and any other documents and instruments referred to herein or therein, constitute the entire agreement between the parties hereto with respect to the transactions contemplated hereunder and supersede all prior arrangements or understandings with respect thereto, written or oral.[Signature page follows]- 11-

 
 

 

IN WITNESS WHEREOF, the Bank has caused this Amended and Restated Warrant to be signed by its duly authorized officer on this 21st day of September, 2011.OPUS BANKBy: Narne: Stephen H. Gordon Title: President and Chief Executive Officer[Signature Page to Amended and Restated Warrant of _

 
 

 

SCHEDULE ANOTICE OF EXERCISE OF AMENDED AND RESTATED WARRANT TO PURCHASE SERIES A NON-CUMULATIVE NON-VOTING PREFERRED STOCK OF OPUS BANKTo: Opus Bank(1) The undersigned, the registered owner of this Amended and Restated Warrant, hereby:(i) irrevocably elects to exercise the purchase rights represented thereby for, and to acquire as set forth in Section 1.3(a) thereunder, shares of Series A Preferred Stock and herewith makes payment of $ therefore, or(ii) irrevocably elects to exercise without payment therefor the rights represented thereby to receive shares of Series A Preferred Stock, calculated and made pursuant to the Cashless Exercise formula set forth in Section 1.3(b) thereunder;(2) The undersigned requests that the certificates evidencing such shares of Series A Preferred Stock be issued in the name of and be delivered to:Name: Address:Social Security or Tax I.D. Number: -------------------and if such shares of Series A Preferred Stock shall not be all of the Warrant Shares purchasable hereunder, that a new Warrant of like tenor for the balance of the Warrant Shares purchasable hereunder be delivered to the undersigned.(3) The undersigned confirms that the shares of Series A Preferred Stock received pursuant to this Notice of Exercise are being acquired for the account of the undersigned for investment onlyA-1

 
 

 

and not with a view to, or in connection with, the distribution thereof and that the undersigned has no present intention of distributing such shares of Series A Preferred Stock received.Capitalized terms used herein but not otherwise defined shall have the meaning ascribed to such terms in the Amended and Restated Warrant to Purchase Shares of Series A Preferred Stock of Opus Bank.Dated: NAME OF HOLDER--------- By:Name: Title:SUBSTITUTE FORM W-9Under the penalties of perjury, I certify that:(1) the Social Security Number or Taxpayer Identification Number given above is correct; and(2) I am not subject to backup withholding either because I have not been notified that I am subject to backup withholding as a result of a failure to report all interest or dividends, or because the Internal Revenue Service has notified me that I am no longer subject to backup withholding.Important Instructions: You must cross out #2 above if you have been notified by the Internal Revenue Service that you are subject to backup withholding because of under reporting interest or dividends on your tax return and if you have not received a notice from the Internal Revenue Service advising you that backup withholding due to notified payee under reporting has terminated. For additional instructions, please refer to the attached "Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9."Signature!: _ Date: _1 If a corporation, please sign in full corporate name by president or other authorized officer. When signing as officer, attorney, custodian, trustee, administrator, guardian, etc., please give your full title as such. In case of joint tenants, each person must sign.A-2

 

 

(Back To Top)

Section 4: EX-99.1 (EXHIBIT 99.1)

Exhibit 99.1

 

Pacific Premier Bancorp, Inc. Announces Completion of Acquisition of Opus Bank

 

Irvine, Calif., June 1, 2020 – Pacific Premier Bancorp, Inc. (NASDAQ: PPBI) (the “Company” or “Pacific Premier”), the holding company of Pacific Premier Bank, announced today that it has completed the acquisition, effective as of June 1, 2020, of Opus Bank, a California-chartered commercial bank headquartered in Irvine, California (NASDAQ: OPB) (“Opus”).

 

Pursuant to the terms of the merger agreement by and among the Company, Pacific Premier Bank and Opus, each share of Opus common stock was converted into the right to receive 0.9000 of a share of Company common stock and each share of Opus preferred stock was converted into the right to receive that number of shares of Company common stock equal to the product of (X) the number of shares of Opus common stock into which such share of Opus preferred stock is convertible into, and (Y) 0.9000. The value of the total deal consideration was approximately $743.9 million, which is based upon the closing price of the Company’s common stock on May 29, 2020, the last trading day prior to the closing.

 

In connection with the acquisition, PENSCO Trust Company LLC, a Colorado-chartered non-depository trust company (“PENSCO”), which previously operated as an indirect, wholly-owned subsidiary of Opus and serves as a custodian for self-directed individual retirement accounts, was merged with and into Pacific Premier Bank, with Pacific Premier Bank surviving. Pacific Premier Bank will operate PENSCO’s custodial business as a trust department within Pacific Premier Bank. As of March 31, 2020, PENSCO had approximately $14 billion of custodial assets and approximately 45,000 client accounts.

 

Steven R. Gardner, Chairman, President and Chief Executive Officer of the Company, commented, “We are pleased to welcome the clients and employees of Opus Bank and PENSCO Trust. This strategic combination creates one of the premier commercial banks in the Western United States, provides us with a meaningful presence in attractive metropolitan markets, a broad offering of banking products, and improved diversification of our banking franchise. The combination expands our capital and liquidity resources, which enhances our ability to be a source of strength to our clients and communities impacted by the COVID-19 pandemic.

 

Mr. Gardner added, “We are excited to complete this transaction, the largest in the Company's history, in just under four months after announcement. I am particularly proud of this accomplishment given the challenges presented by the COVID-19 pandemic. Our ability to move through the complex process of regulatory approval, shareholder approval and integration planning in such a short period of time emphasizes the strength of our culture and the organization we have built. I want to personally thank the team members of Pacific Premier, Opus Bank and PENSCO for their hard work and commitment through these extraordinary circumstances. We have already made significant progress in integrating the two organizations and we will complete the Opus system conversion early in the fourth quarter of 2020. We expect this will result in a smooth transition for our clients and employees, and enable us to quickly begin realizing the benefits that drive shareholder value.”

 

With the addition of Opus, on a pro forma combined basis, the Company would have total assets of approximately $20.0 billion, total loans outstanding of approximately $14.6 billion and total deposits of approximately $15.8 billion as of March 31, 2020 (unaudited).

 

Advisors

 

D.A. Davidson & Co. acted as financial advisor to the Company in the transaction and delivered a fairness opinion to the Board of Directors of the Company. Holland & Knight LLP served as legal counsel to the Company. Piper Sandler & Co. acted as financial advisor to Opus in the transaction and delivered a fairness opinion to the Board of Directors of Opus. Sullivan & Cromwell LLP served as legal counsel to Opus.

 

 

 

 

About Pacific Premier Bancorp, Inc.

 

Pacific Premier Bancorp, Inc. (Nasdaq: PPBI) is the parent company of Pacific Premier Bank, a California-based commercial bank focused on serving small, middle-market, and corporate businesses throughout the Western US in major metropolitan markets in California, Washington, Oregon, Arizona, and Nevada. Founded in 1983, Pacific Premier has grown to become one of the largest banks in the western region of the United States, with over $20 billion in total assets as of June 1, 2020. We provide banking products and services, including deposit accounts, digital banking, and treasury management services, to businesses, professionals, entrepreneurs, real estate investors, and nonprofit organizations. We also offer a wide array of loan products, such as commercial business loans, lines of credit, SBA loans, commercial real estate loans, agribusiness loans, franchise lending, home equity lines of credit, and construction loans. Pacific Premier offers commercial escrow services through its Commerce Escrow division and facilitates 1031 Exchange transactions through its RPM Exchange divisions. Pacific Premier offers clients IRA custodial services through its Pacific Premier Trust division, which has approximately $14 billion of assets under custody and approximately 45,000 client accounts comprised of self-directed investors, financial institutions, capital syndicators, and financial advisors. Additionally, Pacific Premier provides nationwide customized banking solutions to HOA and Property Management companies. Pacific Premier Bank is an Equal Housing Lender and Member FDIC. For additional information about Pacific Premier Bancorp, Inc. and Pacific Premier Bank, visit our website: www.ppbi.com.

 

Forward-Looking Statements

 

This press release contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 regarding the financial condition, results of operations, business plans and the future performance of Pacific Premier Bancorp. Words such as “anticipates,” “believes,” “estimates,” “expects,” “forecasts,” “intends,” “plans,” “projects,” “could,” “may,” “should,” “will” or other similar words and expressions are intended to identify these forward-looking statements. Such statements involve inherent risks and uncertainties, many of which are difficult to predict and are generally beyond the control of the Company. There can be no assurance that future developments affecting the Company will be the same as those anticipated by management. The Company cautions readers that a number of important factors could cause actual results to differ materially from those expressed in, or implied or projected by, such forward-looking statements. The COVID-19 pandemic is adversely affecting us, our customers, counterparties, employees and third-party service providers, and the ultimate extent of the impacts on our business, financial position, results of operations, liquidity and prospects is uncertain. Continued deterioration in general business and economic conditions, including further increases in unemployment rates, or turbulence in domestic or global financial markets could adversely affect our revenues and the values of our assets and liabilities, reduce the availability of funding, lead to a tightening of credit, and further increase stock price volatility, which could result in impairment to our goodwill in future periods. In addition, changes to statutes, regulations, or regulatory policies or practices as a result of, or in response to COVID-19, could affect us in substantial and unpredictable ways, including the potential adverse impact of loan modifications and payment deferrals implemented consistent with recent regulatory guidance. Other risks and uncertainties include, but are not limited to, the following: the strength of the United States economy in general and the strength of the local economies in which we conduct operations; the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System; inflation/deflation, interest rate, market and monetary fluctuations; the effect of acquisitions we may make, such as our acquisition of Opus, including, without limitation, the failure to achieve the expected revenue growth and/or expense savings from such acquisitions, and/or the failure to effectively integrate an acquisition target into our operations; the timely development of competitive new products and services and the acceptance of these products and services by new and existing customers; the impact of changes in financial services policies, laws and regulations, including those concerning taxes, banking, securities and insurance, and the application thereof by regulatory bodies; the effectiveness of our risk management framework and quantitative models; changes in the level of our nonperforming assets and charge-offs; uncertainty regarding the future of LIBOR; the effect of changes in accounting policies and practices or accounting standards, as may be adopted from time-to-time by bank regulatory agencies, the SEC, the Public Company Accounting Oversight Board, the Financial Accounting Standards Board or other accounting standards setters, including ASU 2016-13 (Topic 326), “Measurement of Credit Losses on Financial Instruments,” commonly referenced as the CECL model, which has changed how we estimate credit losses and may further increase the required level of our allowance for credit losses in future periods; possible credit related impairments of securities held by us; possible impairment charges to goodwill; the impact of current governmental efforts to restructure the U.S. financial regulatory system, including any amendments to the Dodd-Frank Wall Street Reform and Consumer Protection Act; changes in consumer spending, borrowing and savings habits; the effects of our lack of a diversified loan portfolio, including the risks of geographic and industry concentrations; our ability to attract deposits and other sources of liquidity; the possibility that we may reduce or discontinue the payments of dividends on common stock; changes in the financial performance and/or condition of our borrowers; changes in the competitive environment among financial and bank holding companies and other financial service providers; geopolitical conditions, including acts or threats of terrorism, actions taken by the United States or other governments in response to acts or threats of terrorism and/or military conflicts, which could impact business and economic conditions in the United States and abroad; public health crisis and pandemics, including the COVID-19 pandemic, and their effects on the economic and business environments in which we operate, including on our credit quality and business operations, as well as the impact on general economic and financial market conditions; cybersecurity threats and the cost of defending against them, including the costs of compliance with potential legislation to combat cybersecurity at a state, national or global level; unanticipated regulatory or legal proceedings; and our ability to manage the risks involved in the foregoing. Additional factors that could cause actual results to differ materially from those expressed in the forward-looking statements are discussed in our 2019 Annual Report on Form 10-K and our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020 filed with the SEC and available at the SEC’s Internet site (http://sec.gov).

 

2

 

 

Pacific Premier specifically disclaims any obligation to update any factors or to publicly announce the result of revisions to any of the forward-looking statements included herein to reflect future events or developments.

 

Contact:

 

Pacific Premier Bancorp, Inc.

 

Steven R. Gardner

Chairman, President and Chief Executive Officer

(949) 864-8000

 

Ronald J. Nicolas, Jr.

Senior Executive Vice President and Chief Financial Officer

(949) 864-8000

 

3

 

(Back To Top)

Section 5: EX-99.2 (EXHIBIT 99.2)

 

Exhibit 99.2

 

Unaudited Consolidated Financial Statements of

 

OPUS BANK

 

as of March 31, 2020 and for the three months ended March 31, 2020 and 2019

 

 

 

 

CONTENTS

 

UNAUDITED FINANCIAL INFORMATION PAGE
   
Consolidated Balance Sheets 3
   
Consolidated Statements of Income and Comprehensive Income 4
   
Consolidated Statements of Changes in Stockholders’ Equity 6
   
Consolidated Statements of Cash Flows 7
   
Notes to Interim Consolidated Financial Statements 8

 

2

 

 

OPUS BANK AND SUBSIDIARIES

Consolidated Balance Sheets

(Unaudited)

 

($ in thousands, except share amounts)  March 31,
2020
   December 31, 2019 
Assets          
Cash and due from banks  $30,808   $30,451 
Due from banks – interest-bearing   768,107    317,190 
Cash and cash equivalents   798,915    347,641 
Investment securities, available-for-sale, at fair value   991,261    1,039,596 
Loans   5,990,190    5,900,520 
Less allowance for credit losses on loans (1)   (51,424)   (40,844)
Loans, net of allowance for credit losses   5,938,766    5,859,676 
Premises and equipment, net   20,803    21,339 
Goodwill   235,603    331,832 
Other intangible assets, net   32,866    33,875 
Deferred tax assets, net   21,958    8,107 
Cash surrender value of bank-owned life insurance, net   188,808    190,435 
Accrued interest receivable   26,163    25,690 
Federal Home Loan Bank stock   17,250    17,250 
Other assets   110,801    116,959 
Total assets  $8,383,194   $7,992,400 
Liabilities and Stockholders’ Equity          
Liabilities:          
Deposits:          
Noninterest-bearing demand  $836,301   $768,936 
Interest-bearing demand   2,686,803    2,680,793 
Money market and savings   2,332,912    2,196,603 
Time deposits   846,805    827,261 
Total deposits   6,702,821    6,473,593 
Federal Home Loan Bank advances   450,000    200,000 
Subordinated debt, net   133,342    133,275 
Accrued interest payable   2,299    4,175 
Other liabilities   88,432    82,210 
Total liabilities   7,376,894    6,893,253 
Stockholders’ equity:          
Preferred stock:          
Authorized 200,000,000 shares; issued 31,111 and 31,111 shares, respectively   29,110    29,110 
Common stock, no par value per share:          
Authorized 200,000,000 shares; issued 37,640,279 and 37,571,545 shares, respectively   700,220    700,220 
Additional paid-in capital   90,241    87,702 
Retained earnings   213,588    305,399 
Treasury stock, at cost; 1,265,361 and 1,223,930 shares, respectively   (30,721)   (29,611)
Accumulated other comprehensive income   3,862    6,327 
Total stockholders’ equity   1,006,300    1,099,147 
Total liabilities and stockholders’ equity  $8,383,194   $7,992,400 

 

(1) The allowance for credit losses on loans as of March 31, 2020 reflects adoption of the current expected credit losses (“CECL”) model under Accounting Standards Codification (“ASC”) 326, Financial Instruments - Credit Losses, that the Company adopted on January 1, 2020. Prior periods reflect the incurred loss methodology.
 
See accompanying notes to consolidated financial statements.

 

3

 

 

OPUS BANK AND SUBSIDIARIES

Consolidated Statements of Income and Comprehensive Income (Loss)

(Unaudited)

 

   For the three months ended March 31, 
($ in thousands, except share data)  2020   2019 
Interest income:          
Loans  $60,148   $57,007 
Investment securities   7,694    8,577 
Due from banks   1,057    1,324 
Total interest income   68,899    66,908 
Interest expense:          
Deposits   14,696    13,425 
Federal Home Loan Bank advances   1,204    756 
Subordinated debt   1,923    1,923 
Total interest expense   17,823    16,104 
Net interest income   51,076    50,804 
Provision for credit losses (1)   7,557    2,197 
Net interest income after provision for credit losses   43,519    48,607 
Noninterest income:          
Fees and service charges on deposit accounts   1,328    1,440 
Escrow and exchange fees   1,502    1,353 
Trust administrative fees   7,366    6,685 
Bank-owned life insurance, net   1,046    980 
Loss on sale of loans       (111)
Gain on sale of assets   3     
Gain on sale of investment securities       113 
Other income   2,655    640 
Total noninterest income   13,900    11,100 
Noninterest expense:          
Compensation and benefits   22,803    26,875 
Professional services   4,325    2,216 
Occupancy expense   3,814    3,830 
Depreciation and amortization   1,599    1,833 
Deposit insurance and regulatory assessments   28    773 
Insurance expense   335    344 
Data processing   1,010    565 
Software licenses and maintenance   1,277    1,301 
Office services   1,630    1,639 
Amortization of other intangible assets   1,009    1,415 
Advertising and marketing   952    723 
Goodwill impairment loss   96,229     
Other expenses   4,025    3,896 
Total noninterest expense   139,036    45,410 
(Loss) income before income tax expense   (81,617)   14,297 
Income tax expense   3,226    3,436 

 

4

 

 

   For the three months ended March 31, 
($ in thousands, except share data)  2020   2019 
Net (loss) income   (84,843)   10,861 
(1) The provision for credit losses for reporting periods after January 1, 2020 reflects the Company's adoption of CECL.  
See accompanying notes to consolidated financial statements.  
Less: Dividends on Series A Preferred Stock   171    171 
Net (loss) income available to common stockholders  $(85,014)  $10,690 
Net (loss) income per common share, basic  $(2.34)  $0.29 
Net (loss) income per common share, diluted   (2.34)   0.28 
Weighted average common shares outstanding, basic   36,373,280    36,187,431 
Weighted average common shares outstanding, diluted   36,373,280    38,133,705 
           
Net (loss) income  $(84,843)  $10,861 
Other comprehensive income (loss), net of tax:          
Unrealized net holding (losses) gains on investment securities, available-for-sale   (3,455)   696 
Income tax benefit (expense) related to net unrealized holding gains (losses) on investment securities, available-for-sale   990    (192)
Unrealized net holding (losses) gains  on investment securities, securities available-for-sale, net of tax   (2,465)   504 
Reclassification adjustment for net gains included in net income       (113)
Income tax expense related to reclassification adjustment       31 
Reclassification adjustment for net gains included in net income, net of tax       (82)
Other comprehensive (loss) income net of tax   (2,465)   422 
Comprehensive (loss) income  $(87,308)  $11,283 

 

See accompanying notes to consolidated financial statements.

 

5

 

 

 

OPUS BANK AND SUBSIDIARIES

Consolidated Statements of Changes in Stockholders’ Equity

For the three months ended March 31, 2020 and 2019

(Unaudited)

 

($ in thousands, except share data)  Common stock shares   Preferred stock shares   Common stock   Preferred stock   Treasury stock   Additional paid-in capital   Accumulated other comprehensive income (loss)   Retained earnings   Total stockholders' equity 
Balance, December 31, 2018   36,060,375    31,111   $700,220   $29,110   $(14,983)  $69,954   $(3,792)  $260,304   $1,040,813 
Net income                               10,861    10,861 
Other comprehensive income, net of tax                           422        422 
Net issuance of common stock under share-based compensation plans   118,605                (10,420)   9,514            (906)
Dividends paid:                                             
Common stock ($0.11 per share)                               (3,973)   (3,973)
Preferred stock ($5.50 per share)                               (171)   (171)
Share-based compensation                        1,060            1,060 
Balance, March 31, 2019   36,178,980    31,111   $700,220   $29,110   $(25,403)  $80,528   $(3,370)  $267,021   $1,048,106 
Balance, December 31, 2019   36,347,615    31,111   $700,220   $29,110   $(29,611)  $87,702   $6,327   $305,399   $1,099,147 
Impact of adoption of CECL, net of the related tax effect                               (2,744)   (2,744)
Net loss                               (84,843)   (84,843)
Other comprehensive loss, net of tax                           (2,465)       (2,465)
Net issuance of common stock under share-based compensation plans   27,303                (1,110)   976            (134)
Dividend & dividend equivalents:                                             
Common stock ($0.11 per share)                       34        (4,053)   (4,019)
Preferred stock ($5.50 per share)                               (171)   (171)
Share-based compensation                       1,529            1,529 
Balance, March 31, 2020   36,374,918    31,111   $700,220   $29,110   $(30,721)  $90,241   $3,862   $213,588   $1,006,300 

 

See accompanying notes to consolidated financial statements.

 

6

 

 

OPUS BANK AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited)

 

   For the three months ended March 31, 
($ in thousands)  2020   2019 
Cash flows from operating activities:          
Net income (loss)  $(84,843)  $10,861 
Adjustments to reconcile net income to net cash provided by operating activities:          
Depreciation and amortization   2,523    3,121 
Goodwill impairment   96,229     
Amortization of low income housing tax credit investments   1,417    1,608 
Provision for credit losses on loans   7,557    2,197 
Increase in cash surrender value of bank-owned life insurance   (1,046)   (980)
Amortization of deferred loan fees and costs   (2,316)   (1,683)
Share-based compensation expense   1,529    1,059 
Accretion and amortization of discounts and premiums, net   365    387 
Decrease (increase) in net deferred tax assets   (11,758)   8,086 
Gain on sale of investment securities       (113)
Gain on sale or disposition of assets   (3)    
Loss on sale of loans       111 
Decrease (increase) in accrued interest receivable and other assets   4,267    (46,414)
Increase (decrease) in accrued expenses and other liabilities   5,483    48,465 
Net cash provided by operating activities   19,404    26,705 
Cash flows from investing activities:          
Proceeds from pay down/maturity/redemption/calls of investment securities, available-for-sale   44,132    37,428 
Proceeds from sale of investment securities, available-for-sale       19,875 
Purchase of investment securities, available-for-sale       (69,520)
Net increase in loans   (86,443)   (304,136)
Proceeds from loan sales       11,134 
Investment in low-income housing tax credits   (2,304)   (3,391)
Purchase of bank-owned life insurance       (28)
Proceeds to fund liquidation of deferred compensation plan   2,673     
Purchase of premises and equipment   (1,063)   (998)
Proceeds from sale of premises and equipment   3     
Net cash used in investing activities   (43,002)   (309,636)
Cash flows from financing activities:          
Net increase in deposits   229,229    124,878 
Net increase in short-term Federal Home Loan Bank advances   50,000    130,000 
Increase in long-term Federal Home Loan Bank advances   200,000    200,000 
Proceeds from exercise of stock options       9,514 
Purchase of treasury shares   (134)   (10,420)
Cash dividends paid to stockholders   (4,223)   (4,144)
Net cash provided by financing activities   474,872    449,828 
Net increase in cash and cash equivalents   451,274    166,897 
Cash and cash equivalents at beginning of period   347,641    254,636 
Cash and cash equivalents at end of period  $798,915   $421,533 
See accompanying notes to consolidated financial statements.          
Supplemental disclosures of cash flow information:          
Cash paid during the period for:        
Interest   $19,699   $17,434 
Income taxes, net of refunds    8    10 
Noncash investing and financing activities:           
Transfer of loan receivables to loans held-for-sale   $   $10,111 

 

See accompanying notes to consolidated financial statements.

 

7

 

 

 

Notes to Interim Consolidated Financial Statements (unaudited)

 

(1)Description of Business

 

Opus Bank is a publicly traded California state-chartered commercial bank headquartered in Irvine, California, which, together with its subsidiaries, is referred to as the Company, we, our, or us. Opus Bank offers a wide range of loan products, which primarily includes multifamily residential, commercial real estate, and commercial business loan products, as well as a suite of treasury and cash management and depository solutions. We serve our clients through our headquarters and 46 banking offices located in major metropolitan markets within California, Washington, Oregon, and Arizona. Our primary focus is to serve our clients by offering a variety of financial products, services, and solutions, while maintaining a disciplined approach to risk management. We service our clients through our lines of business which include Commercial Real Estate Banking, Commercial Banking, Retail Banking, and our Alternative Asset IRA Custodian subsidiary, PENSCO Trust Company (“PENSCO”).

 

(2)Summary of Significant Accounting Policies

 

The following is a summary of the significant accounting policies used in preparing the Company’s consolidated financial statements:

 

(a)      Basis of Presentation

 

The accompanying unaudited interim consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q adopted by the Federal Deposit Insurance Corporation (“FDIC”) and conform to general practices within the Company’s industry. Accordingly, the financial statements do not include all of the information and footnotes required by GAAP for complete financial statements and should be read in conjunction with the Company’s audited consolidated financial statements, and notes thereto, as of and for the year ended December 31, 2019 (“2019 Consolidated Financial Statements”) included in the Annual Report on Form 10-K filed with the FDIC on February 28, 2020, as amended by the Amendment No. 1 to Annual Report on Form 10-K/A filed with the FDIC on March 24, 2020 (collectively, our “2019 Form 10-K”).

 

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. These estimates are based on information available as of the date of the consolidated financial statements. Actual results could differ from those estimates.

 

Our financial statements reflect all adjustments (consisting of only normal recurring adjustments) that are, in the opinion of management, necessary to present a fair statement of the results for the interim periods presented. The results of operations for the three months ended March 31, 2020 are not necessarily indicative of results to be expected for any future periods.

 

Certain items in prior periods were reclassified to conform to the current presentation. For further information, refer to the 2019 Consolidated Financial Statements – Note 2, “Summary of Significant Accounting Policies.”

 

(b)       Risks and Uncertainties related to the COVID-19 pandemic

 

We considered the impact of the COVID-19 pandemic on the assumptions and estimates used in the determination of our allowance for credit losses. In addition, given the volatility in the stock market triggered by the COVID-19 pandemic, we performed an evaluation of goodwill for potential impairment, which resulted in a $96.2 million goodwill impairment loss for the three months ended March 31, 2020.

 

8

 

 

If COVID-19 is not successfully eradicated, or if it takes longer than expected to contain and manage the spread of COVID-19, we may experience additional material adverse impacts on our business, financial condition, results of operations, and prospects. Unexpected and significant changes or events may result in the need for additional provision for credit losses in order to maintain an allowance for credit losses that complies with our credit risk and accounting policies. Further and prolonged deterioration of the economic environment and the Company’s stock price could cause additional non-cash goodwill impairment losses. Prolonged effects of COVID-19 would also result in increased demand for liquidity from our clients.

 

It is difficult to predict the full impact that the COVID-19 pandemic, and the measures taken by federal, state and local governments in response thereto, will have on our operations. While our on-balance sheet liquidity as of March 31, 2020 was strong and, when combined with our contingent liquidity resources, was sufficient to meet the liquidity needs of our clients, no assurance can be given that these resources will be sufficient to meet our clients’ demands, or will be available at all, in the future.

 

(c)       Principles of Consolidation

 

The consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries, and variable interest entities (“VIEs”) where the Company is the primary beneficiary. All significant intercompany accounts and transactions with consolidated entities have been eliminated. The Company evaluates its associations with VIEs, both at inception and when there is a change in circumstance that requires reconsideration, to determine if the Company is the primary beneficiary and consolidation is required. A primary beneficiary is defined as a variable interest holder that has a controlling financial interest. A controlling financial interest requires both: (a) the power to direct the activities that most significantly impact the VIEs economic performance, and (b) the obligation to absorb losses or receive benefits of a VIE that could potentially be significant to a VIE. During the periods presented we did not provide financial or other support to any VIE that we were not previously contractually required to provide.

 

(d)       Recent Accounting Pronouncements

 

The following is a summary of Accounting Standards Updates (“ASU”) issued by the Financial Accounting Standards Board (“FASB”) applicable to the Company that were adopted or became effective during the three months ended March 31, 2020:

 

Adopted

 

ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 was issued to change the way entities recognize impairment of financial instruments by requiring immediate recognition of estimated credit losses expected to occur over their remaining life. In addition to ASU 2016-13, there have been additional amendments that relate to Topic 326, including ASU 2018-19, ASU 2019-04, ASU 2019-05, ASU 2019-10, ASU 2019-11, ASU 2020-02, and ASU 2020- 03.

 

On January 1, 2020, the Company adopted ASC 326 using the modified retrospective method for all financial assets measured at amortized cost and off-balance sheet credit exposures. Results for reporting periods beginning after January 1, 2020 are presented under ASC 326, while prior period amounts continue to be reported in accordance with previously applicable GAAP standards. The Company recorded a net decrease to retained earnings of $2.7 million, net of tax as of January 1, 2020 for the cumulative effect of adopting ASC 326. The transition adjustment relates to changes in the estimation of credit losses required under ASC 326, net of the related tax effect. Under the prior accounting standards, the allowance for loan losses was estimated based upon an incurred loss methodology for credit losses deemed to be “probable” and “estimable.” Under ASC 326, the current expected credit losses (“CECL”) model requires entities to establish an allowance for credit losses (“ACL”) that reflects expected credit losses, regardless of whether they have reached the “probable” and “estimable” thresholds, taking into consideration a broad range of information that includes historical data as well as forward-looking information.

 

9

 

 

The Company adopted ASC 326 using the prospective transition approach for debt securities available-for-sale. The Company had not recorded any other-than-temporary impairment prior to the adoption of ASC 326, and the amortized cost basis as well as the effective interest rate did not change on our debt securities, and no allowance for credit losses was recorded on the Company’s debt securities, available-for-sale with the adoption of ASC 326.

 

The following table summarizes the financial statement impact of ASC 326:

 

   January 1, 2020 
($ in thousands)  As reported under ASC 326   Pre-ASC 326 adoption   Impact of ASC 326 adoption 
Assets:            
Loans            
Single-family residential  $415   $114   $301 
Multifamily residential   14,266    14,191    75 
Commercial real estate   8,962    6,598    2,364 
Construction   2,276    602    1,674 
Commercial and industrial   16,714    18,799    (2,085)
Small Business Administration   593    538    55 
Consumer and other   15    2    13 
Allowance for credit losses on loans  $43,241   $40,844   $2,397 
                
Deferred tax assets  $9,209   $8,107   $1,102 
                
Liabilities:               
Allowance for credit losses on unfunded loan commitments  $2,463   $1,014   $1,449 
                
Stockholders’ equity:               
Retained earnings  $302,655   $305,399   $(2,744)

 

In connection with the Company’s adoption of ASC 326, we considered the following areas in our ACL:

 

Loans

 

Upon adoption of ASC 326, the Company made an accounting policy election to exclude accrued interest receivable from its estimated ACL on loans. The balance of accrued interest receivable is not included in loans, and is instead separately reported on the consolidated balance sheet as of each reporting date.

 

The calculation of ACL under ASC 326 is inherently subjective as it requires management to exercise judgment in determining appropriate factors and assumptions used to determine the allowance. The Company’s established framework over ACL includes a systematic, risk-based, and consistently-applied methodology, with underlying data to support key assumptions. Specifically, our methodology is predominantly segregated as follows:

 

10

 

 

Pooled loans

 

The majority of our loan portfolio is reserved using loan pools established by the Company, taking into consideration common credit risk attributes, including loan product type and risk ratings. Loan product types, including multifamily, owner-occupied commercial real estate, non-owner occupied commercial real estate, commercial and industrial, reflect common characteristics of underwriting, collateral security, and sources of repayment, all of which are relevant in assessing risk characteristics. Additionally, risk ratings (i.e. pass, special mention, substandard, doubtful, loss), are individually assigned to all loans within our portfolio using predefined risk rating definitions that are derived from regulatory guidance and loan policies.

 

Our methodology utilizes a loss-rate based approach to estimate credit losses, taking into consideration company-specific historical loss experience and predefined peer historical loss experience for pools that lack loss history. The historical loss rates are adjusted for qualitative environmental factors, based upon management's analysis of current and expected economic conditions, lending environment, underwriting standards, and trends in relevant credit metrics. Additionally, we utilize a reasonable and supportable economic forecast to estimate future credit losses for each loan pool, derived from a third party provider of historical and forecasted state and national macroeconomic and demographic data. Such credit loss estimates cover the estimated weighted-average remaining contractual maturities of the loan portfolio, adjusted for expected prepayments derived from the Company's actual historical prepayment experience. Our reasonable and supportable forecast generally extends for two years, followed by a one year straight-line reversion to historical average loss rates.

 

Non-pooled loans

 

As part of the Company’s risk management and credit administration processes, the Company continually evaluates the credit quality and ongoing performance of the loan portfolio. When individual loan relationships no longer share common credit risk characteristics of the established loan pools, the Company removes them from the loan pools and evaluates them on an individual basis. This typically occurs when borrowers have experienced financial difficulty, including, but not limited to, delinquent loan payments, troubled debt restructurings, non-accrual payment status, bankruptcy, delinquent taxes, and previous charge offs. Such individually identified loan relationships are evaluated to determine whether they are collateral dependent by considering whether repayment is expected to be provided substantially through the operation or sale of the underlying collateral. For loan relationships deemed collateral dependent, credit losses are estimated using collateral valuations, which are generally supported by various data points, including, but not limited to, independent appraisal valuations, terms of sale transactions executed with willing buyers, or independent broker price opinions that reflect actual sales transactions for similar collateral types. For loan relationships that are not deemed collateral dependent, the Company estimates credit losses using a discounted cash flow approach, which generally captures all estimated future loan payments anticipated from the borrower, discounted using the effective interest rate at the time of origination.

 

Unfunded loan commitments

 

Management follows a methodology to estimate the ACL on unfunded loan commitments. The Company applies a probability of funding to the unfunded commitment amount for each portfolio and the loss factors estimated for pooled loans. Such allowance is recorded to other liabilities and the corresponding provision is recorded to other non-interest expense.

 

11

 

 

Debt securities, available-for-sale

 

Debt securities that are in an unrealized loss position as of each reporting date are evaluated to assess the nature of decline in fair value. Specifically, management first evaluates whether it intends, or it is more likely than not that it will be required to sell the security prior to recovery of its amortized cost basis. If either one of the aforementioned conditions are met, the cost basis of the security is written down to its fair value, and the impact is recognized in the consolidated statement of income. For securities that do not meet the aforementioned conditions, management evaluates the decline in fair value to assess whether such decline resulted from credit- or non-credit related factors. Such considerations include, but are not limited to, changes in the rating of the security, quality of the underlying collateral, repayment capacity of the issuer, and extent of decline in fair value below the amortized cost basis. If the decline in fair value is attributable to credit-related factors, the amount of impairment is measured using the present value of expected cash flows as compared to the amortized cost basis of the security. The amount of shortfall in cash flows driven by credit-related factors is recognized as an ACL, limited by the amount that fair value is less than amortized cost basis. For all periods following the initial recognition of ACL, management will record changes in the ACL through the provision for credit losses on the consolidated statement of income.

 

Unanticipated economic events that affect the U.S. economy could cause a change in expectations for current conditions and economic forecasts that could result in an increase to the ACL. In addition, changes in our portfolio mix or credit characteristics could also increase the ACL. Unexpected and significant changes or events may result in the need for additional provision for credit losses in order to maintain an ACL that complies with our credit risk and accounting policies.

 

ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. ASU 2017-04 was issued to require that entities no longer perform a hypothetical purchase price allocation to measure goodwill impairment. Instead, impairment will be measured using the difference between the carrying amount and the fair value of the reporting unit. For public business entities, the ASU was effective for annual and interim periods in fiscal years beginning after December 15, 2019. The Company adopted this guidance on January 1, 2020. Refer to Note 6, “Goodwill and other intangibles” for further information on the Company’s goodwill and intangible assets.

 

ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. ASU 2018-13 was issued to improve the effectiveness of disclosure requirements on a narrow set of concepts relating to fair value measurements. For public business entities, the ASU was effective for annual and interim periods in fiscal years beginning after December 15, 2019. The Company adopted this guidance on January 1, 2020. Adoption of this guidance did not have a material impact on the consolidated financial statements.

 

ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. ASU 2018-15 was issued to align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license). For public business entities, the ASU was effective for annual and interim periods in fiscal years beginning after December 15, 2019. The Company adopted this guidance on January 1, 2020. Adoption of this guidance did not have a material impact on the consolidated financial statements given that (1) the changes under the ASU were generally in line with the Company's existing accounting treatment of implementation costs incurred in a hosting arrangement that is a service contract and (2) the Company has not incurred a material amount of implementation costs in a hosting arrangement.

 

12

 

 

Issued but Not Yet Adopted

 

ASU 2020-01, Clarifying interactions between Investments—Equity Securities (Topic 321), Investments— Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815). ASU 2020-01 was issued to clarify that an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting for the purposes of applying the measurement alternative in accordance with Topic 321. The amendment also clarifies scope considerations for forward contracts and purchased options on certain securities. For public business entities, this ASU is effective for annual and interim periods in fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Adoption of this guidance is not expected to have a material impact on the consolidated financial statements. This update clarifies the accounting for certain equity securities upon the application or discontinuation of the equity method of accounting and will be applied if that situation arises. The update regarding forward contracts and purchased options on certain securities is not applicable, as the Company does not have any forward contracts and purchased options.

 

ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. ASU 2020-04 was issued to provide optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. The amendments in this update apply to contract modifications that replace a reference rate affected by reference rate reform (including rates referenced in fallback provisions) and contemporaneous modifications of other contract terms related to the replacement of the reference rate (including contract modifications to add or change fallback provisions). Modifications of contracts within the scope of Receivables (Topics 310) and Debt (Topic 470) should be accounted for prospectively by adjusting the effective interest rate. The amendments in this ASU are effective for all entities as of March 12, 2020 through December 31, 2022. The Company is currently assessing the impact of the adoption of this guidance.

 

(3)Fair Value

 

Fair value is defined as the exchange price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (that is not a forced transaction) between willing market participants at the measurement date. Financial instruments recorded at fair value on a recurring basis include the Company’s debt securities available-for-sale and equity warrant assets. Additionally, the Company may be required to record other assets and liabilities at fair value on a nonrecurring basis, such as impaired loans or other repossessed assets. These nonrecurring fair value measurements typically involve write-downs of individual assets or application of lower of cost or fair value accounting.

 

Fair value is best determined based upon quoted market prices; however, in many instances, there are no quoted market prices for the Company’s various financial instruments available. In cases where quoted market prices are not available, fair values are estimated using present value or other valuation techniques. These valuation techniques require considerable judgement and the resulting estimates of fair value can be significantly affected by the assumptions used, including the discount rate and estimates of future cash flows.

 

Refer to Note 2, “Summary of Significant Accounting Policies.” in the 2019 Consolidated Financial Statements for information on the fair value hierarchy, valuation methodologies, and key inputs used to measure financial assets and liabilities recorded at fair value, as well as the significant assumptions used to estimate fair value disclosures for financial instruments not recorded at fair value in their entirety on a recurring basis.

 

13

 

 

 

The following tables present information about the significant unobservable inputs used in the Level 3 fair value measurements of financial instruments recorded at fair value on a recurring and nonrecurring basis as of March 31, 2020 and December 31, 2019.

 

($ in thousands)  Fair value as
of March 31, 2020
  Valuation
Technique
  Significant
Unobservable Inputs
  Range
(Weighted Average)
Collateral-dependent impaired loans  $ 543  Market  - Adjustments to external
  appraised values
- Probability weighting of    broker price opinions
  (1)
Equity warrants  $ 5,169  Black-Scholes
option pricing
model
  - Volatility
- Risk-free interest rate
- Marketability discount
  30.00% to 74.04% (31.3%)
 0.11% to 0.37% (0.31%)
 6% to 33% (13.62%)

 

(1) Adjustments to appraised values and probability weighting of broker price opinions vary depending on the type of property, geographic region, recent trends in comparable sales, and management’s assessment of the valuation of the property. These factors are specific to each type of property and a weighted average or range of values of the unobservable inputs is not meaningful.

 

($ in thousands)  Fair value as of
December 31, 2019
  Valuation
Technique
  Significant
Unobservable Inputs
  Range
(Weighted Average)
Collateral-dependent impaired loans  $ 1,805  Market  - Adjustments to external
  appraised values
- Probability weighting of   broker price opinions
  (1)
Equity warrants  $ 3,755  Black-Scholes
option pricing
model
  - Volatility
- Risk-free interest rate
- Marketability discount
  27.69% to 60.60% (44.88%)
1.55% to 1.76% (1.62%)
6% to 33% (11.83%)

 

(1) Adjustments to appraised values and probability weighting of broker price opinions vary depending on the type of property, geographic region, recent trends in comparable sales, and management’s assessment of the valuation of the property. These factors are specific to each type of property and a weighted average or range of values of the unobservable inputs is not meaningful.

 

Financial Instruments Recorded at Fair Value on a Recurring Basis

 

The following tables present the financial instruments that are measured at fair value on a recurring basis by fair value hierarchy as of March 31, 2020 and December 31, 2019:

 

   Fair value measurement 
($ in thousands)  Balance as of
March 31,
2020
   Quoted Prices
in Active
Markets
(Level 1)
   Significant
Observable
Inputs
(Level 2)
   Significant
Unobservable
Inputs
(Level 3)
 
Assets:                
Fair value through other comprehensive income:                    
Debt securities available-for-sale:                    
Government-sponsored entities mortgage backed securities  $583,933   $   $583,933   $ 
Government-sponsored entities notes   7,987        7,987     
Corporate debt   301,350        301,350     
Collateralized loan obligations   97,991        97,991     
Fair value through net income:                    
Equity warrants   5,169            5,169 
Total assets at fair value  $996,430   $   $991,261   $5,169 

 

14

 

 

   Fair value measurement 
($ in thousands)  Balance as of
December 31,
2019
   Quoted
Prices
in Active
Markets
(Level 1)
   Significant
Observable
 Inputs
(Level 2)
   Significant
Unobservable
Inputs
(Level 3)
 
Assets:                    
Fair value through other comprehensive income:                    
Debt securities available-for-sale:                    
Government-sponsored entities mortgage-backed securities  $622,134   $   $622,134   $ 
Government-sponsored entities notes   8,640        8,640     
Corporate debt   304,450        304,450     
Collateralized loan obligations   104,372        104,372     
Fair value through net income:                    
Equity warrants   3,755            3,755 
Total assets at fair value  $1,043,351   $   $1,039,596   $3,755 

 

There were no transfers of assets or liabilities recorded at fair value on a recurring basis into or out of Level 1, Level 2, or Level 3 during the three months ended March 31, 2020 and 2019.

 

The following table is a reconciliation of the fair value of the Company’s assets that are classified as Level 3 and measured on a recurring basis:

 

($ in thousands)  Beginning
balance
   Receipt or
purchases
   Sales   Changes in
fair value (1)
   Ending
balance
 
Three Months Ended March 31, 2020                         
Equity warrants  $3,755   $   $   $1,414   $5,169 
Total Level 3 assets  $3,755   $   $   $1,414   $5,169 
Three Months Ended March 31, 2019                         
Equity warrants  $3,773   $   $   $49   $3,822 
SBIC Fund investments   17,160                17,160 
Total Level 3 assets  $20,933   $   $   $49   $20,982 

 

(1) The changes in fair value are included in other income on the consolidated statement of income.

 

Financial Instruments Recorded at Fair Value on a Nonrecurring Basis

 

The following table presents financial instruments recorded at fair value on a nonrecurring basis as of March 31, 2020 and December 31, 2019.

 

   Fair value measurement 
($ in thousands)  Balance as of
March 31,
2020
   Quoted
Prices
in Active
Markets 
(Level 1)
   Significant
Observable
Inputs
(Level 2)
   Significant
Unobservable
Inputs
(Level 3)
 
Assets:                
Fair value through net income:                    
Collateral-dependent impaired loans (1)  $543   $   $   $543 
Total assets at fair value  $543   $   $   $543 

 

(1) Balances exclude estimated selling costs.

 

15

 

 

   Fair value measurement 
($ in thousands)  Balance as of
December 31,
2019
   Quoted
Prices
in Active
Markets
(Level 1)
   Significant
Observable
 Inputs
(Level 2)
   Significant
Unobservable
Inputs
(Level 3)
 
Assets:                
Fair value through net income:                    
Collateral-dependent impaired loans (1)  $1,805   $   $   $1,805 
Total assets at fair value  $1,805   $   $   $1,805 

 

(1) Balances exclude estimated selling costs.

 

Gains or losses from fair value adjustments related to nonrecurring fair value measurements reflect changes in the underlying values of collateral-dependent impaired loans and are valued using external appraised values or business assets that may include adjustments for assumptions of market conditions that are not directly observable.

 

For collateral-dependent impaired loans measured on a nonrecurring basis, fair value adjustments through specific reserve or charge-off resulted in losses of $18,000 and $210,000 for the three months ended March 31, 2020 and 2019, respectively.

 

Estimated Fair Values of Financial Instruments Not Recorded at Fair Value on a Recurring Basis

 

The carrying amounts and estimated fair values of the Company’s financial instruments not carried at fair value on a recurring basis as of March 31, 2020 and December 31, 2019 were as follows:

 

   March 31, 2020 
   Carrying    Estimated fair    Fair value measurements using 
($ in thousands)  amount   value   Level 1   Level 2   Level 3 
Financial assets:                         
Cash and cash equivalents  $798,915   $798,915   $798,915   $   $ 
Loans, net   5,938,766    5,932,516            5,932,516 
Financial liabilities:                         
Time deposits   846,805    855,638            855,638 
Federal Home Loan Bank advances   450,000    451,232            451,232 
Subordinated debt, net   133,342    133,980            133,980 

 

   December 31, 2019 
   Carrying    Estimated fair    Fair value measurements using 
($ in thousands)  amount   value   Level 1   Level 2   Level 3 
Financial assets:                         
Cash and cash equivalents  $347,641   $347,641   $347,641   $   $ 
Loans, net   5,859,676    5,853,022            5,853,022 
Financial liabilities:                         
Time deposits   827,261    828,929            828,929 
Federal Home Loan Bank advances   200,000    202,271            202,271 
Subordinated debt, net   133,275    134,060            134,060 

 

16

 

 

 

(4)Investment Securities Available-for-Sale

 

The following table summarizes the amortized cost and estimated fair value for the major categories of the Company’s investment securities as of March 31, 2020 and December 31, 2019:

 

($ in thousands)  Amortized
cost
   Gross
unrealized
gains
   Gross
unrealized
losses
   Fair value 
March 31, 2020                    
Debt securities, available-for-sale:                    
Government-sponsored entities mortgage-backed securities  $575,274   $13,379   $(4,720)  $583,933 
Government-sponsored entities notes   8,008        (21)   7,987 
Corporate debt   298,298    3,455    (403)   301,350 
Collateralized loan obligations   104,268        (6,277)   97,991 
Total investment securities  $985,848   $16,834   $(11,421)  $991,261 
December 31, 2019                    
Debt securities, available-for-sale:                    
Government-sponsored entities mortgage-backed securities  $619,757   $7,110   $(4,733)  $622,134 
Government-sponsored entities notes   8,671        (31)   8,640 
Corporate debt   298,095    6,528    (173)   304,450 
Collateralized loan obligations   104,205    363    (196)   104,372 
Total investment securities  $1,030,728   $14,001   $(5,133)  $1,039,596 

 

Excluded from the amortized cost basis disclosed above is accrued interest receivable on debt securities, available-for-sale of $4.6 million and $5.7 million as of March 31, 2020 and December 31, 2020, respectively. Upon adoption of ASC 326, the Company elected to exclude applicable accrued interest from debt securities, which is reported in accrued interest receivable on our consolidated balance sheets.

 

The following table provides a summary of the gross unrealized losses and fair value of investment securities that were not deemed to be other-than-temporarily impaired and the corresponding length of time that the securities have been in a continuous unrealized loss position as of March 31, 2020 and December 31, 2019:

 

   Less than 12 months   12 months or greater   Total 
($ in thousands)  Fair value   Estimated
unrealized
losses
   Fair value   Estimated
unrealized
losses
   Fair value   Estimated
unrealized
losses
 
March 31, 2020                        
Debt securities, available-for-sale:                              
Government-sponsored entities mortgage-backed securities  $140,751   $1,356   $151,253   $3,364   $292,004   $4,720 
Government-sponsored entities notes   7,987    21            7,987    21 
Corporate debt   52,545    403            52,545    403 
Collateralized loan obligations   97,991    6,277            97,991    6,277 
Total investment securities  $299,274   $8,057   $151,253   $3,364   $450,527   $11,421 
December 31, 2019                              
Debt securities, available-for-sale:                              
Government-sponsored entities mortgage-backed securities  $205,452   $3,337   $159,693   $1,396   $365,145   $4,733 
Government-sponsored entities notes   8,640    31            8,640    31 
Corporate debt   14,827    173            14,827    173 
Collateralized loan obligations   34,614    61    14,271    135    48,885    196 
Total investment securities  $263,533   $3,602   $173,964   $1,531   $437,497   $5,133 

 

17

 

 

As of March 31, 2020, the Company had 38 debt securities, available-for-sale totaling $450.5 million that were in an unrealized loss position. The securities in an unrealized loss position included one government-sponsored entity note totaling $8.0 million, 16 government-sponsored entities mortgage-backed securities totaling $292.0 million, five corporate debt securities totaling $52.5 million, and 16 collateralized loan obligations totaling $98.0 million. Of the 38 securities, three government-sponsored entity mortgage-backed securities totaling $151.3 million had been in a continuous unrealized loss position for over 12 months as of March 31, 2020.

 

As of December 31, 2019, the Company had 30 securities totaling $437.5 million that were in an unrealized loss position. The securities in an unrealized loss position included one government-sponsored entity note totaling $8.6 million, 20 government-sponsored entity mortgage-backed securities totaling $365.1 million, two corporate debt securities totaling $14.8 million, and seven collateralized loan obligations totaling $48.9 million. Of the 30 securities, 17 had been in a continuous unrealized loss position for over 12 months as of December 31, 2019.

 

The securities with an unrealized loss position have fluctuated in value since their purchase dates as market interest rates have fluctuated. The Company does not currently intend to sell these securities, and it is not more likely than not that the Company will be required to sell the securities before recovery of the amortized cost basis. Based upon our evaluation of the securities, we do not believe the decline in fair value was driven by credit related factors, and we expect that the fair value will recover prior to maturity. Therefore, no allowance for credit losses or other-than-temporary impairment was recognized as of March 31, 2020 and December 31, 2019, respectively.

 

The scheduled maturities of investment securities as of March 31, 2020 are presented in the table below:

 

   March 31, 2020 
($ in thousands)  Amortized cost   Estimated fair
value
 
Debt securities, available-for-sale:          
Due within one year  $53,823   $54,219 
Due after one year through five years   118,475    119,833 
Due after five years through ten years   167,391    166,708 
Due after ten years   646,159    650,501 
Total investment securities  $985,848   $991,261 

 

Actual maturities of mortgage-backed securities can differ from contractual maturities due to borrowers’ rights to prepay loans. Prepayments and interest rates can affect the yields on the carrying value of mortgage-backed securities.

 

During the three months ended March 31, 2020, there were neither any purchases nor sales of investment securities.

 

During the three months ended March 31, 2019, the Company purchased three government-sponsored mortgage-backed securities totaling $44.8 million, one corporate debt security totaling $20.0 million, and one collateralized loan obligation totaling $6.0 million. During the three months ended March 31, 2019, the Company sold one corporate debt security for which it received proceeds of $19.9 million and recognized a gain of $113,000.

 

There were no securities pledged to secure Federal Home Loan Bank (“FHLB”) advances as of March 31, 2020 and December 31, 2019.

 

18

 

 

(5)Loans and Allowance for Loan Losses

 

The following is a summary of the carrying value of major loan categories, including originated and acquired loans:

 

($ in thousands)  March 31,
2020
   December 31,
2019
 
Real estate mortgage loans:          
Single-family residential  $47,908   $49,949 
Multifamily residential   3,912,287    3,784,461 
Commercial   1,076,482    1,072,568 
Construction and land loans   49,253    55,739 
Commercial business loans   867,038    901,006 
Small Business Administration loans   34,038    33,641 
Consumer and other loans   3,184    3,156 
Total loans  $5,990,190   $5,900,520 

 

There were $6.0 billion and $5.9 billion in loans as of March 31, 2020 and December 31, 2019, respectively. Included in consumer and other loans above are overdraft deposit accounts that were reclassified to loans totaling $14,000 and $38,000 as of March 31, 2020 and December 31, 2019, respectively. The loan carrying values above included unamortized deferred loan origination costs, net of unamortized deferred loan origination fees, of $27.3 million and $25.9 million as of March 31, 2020 and December 31, 2019, respectively. Accrued interest receivable on loans totaled $20.5 million and $19.9 million as of March 31, 2020 and December 31, 2019, respectively, and was reported in accrued interest receivable on our consolidated balance sheets.

 

As discussed in Note 2, “Summary of Significant Accounting Policies,” the Company adopted ASU 2016-13 Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments on January 1, 2020, which replaced the incurred loss methodology with an expected loss methodology, CECL. The Company adopted ASC 326 using the modified retrospective method for all financial assets measured at amortized cost and off-balance sheet credit exposures. Results for reporting periods beginning after January 1, 2020 are presented in accordance with ASC 326, while prior periods continue to be presented in accordance with previously applicable GAAP standards.

 

As of March 31, 2020 and December 31, 2019, the loan portfolio included acquired loans reported at carrying value of $106.8 million and $109.8 million, respectively, net of unamortized fair value discount of $1.4 million and $1.7 million, respectively. Acquired loans that were deemed purchase credit deteriorated (“PCD”) subsequent to the adoption of ASC 326 had a carrying value of $65.4 million and an outstanding balance of $67.0 million as of March 31, 2020. The Company did not reassess classification of acquired impaired assets, and all such assets were classified as PCD upon adoption of ASC 326. Acquired impaired loans as of December 31, 2019 had a carrying value of $65.7 million and an outstanding balance of $67.6 million.

 

19

 

 

The Company had pledged $4.0 billion and $3.8 billion of its loans to the FHLB and Federal Reserve Bank of San Francisco as of March 31, 2020 and December 31, 2019, respectively.

 

(a)       Loan Portfolio Aging Analysis

 

A loan is considered past due if the required contractual principal and interest payment has not been received as of the day after such payment was due. The following tables present an aging analysis of loans and loans reported as nonaccrual by class as of March 31, 2020 and December 31, 2019.

 

($ in thousands)

  30-59 days
past due
   60-89
days
past due
   90+ days
past due
   Total past
due
   Current   Total loans   90+ days
past due and
accruing
   Nonaccrual 
March 31, 2020                                        
Real estate mortgage loans:                                        
Single-family residential  $503   $   $   $503   $47,405   $47,908   $   $75 
Multifamily residential           1,636    1,636    3,910,651    3,912,287        1,636 
Commercial                   1,076,482    1,076,482        2,396 
Construction and land loans                   49,253    49,253         
Commercial business loans   184            184    866,854    867,038         
Small Business Administration loans   42        710    752    33,286    34,038        1,177 
Consumer and other loans   117            117    3,067    3,184        483 
Total loan portfolio  $846   $   $2,346   $3,192   $5,986,998   $5,990,190   $   $5,767 

 

($ in thousands)  30-59 days
past due
   60-89
days
past due
   90+ days
past due
   Total
 past due
   Current   Total loans   90+ days
past due and
accruing
   Nonaccrual 
December 31, 2019                                        
Real estate mortgage loans:                                        
Single-family residential  $674   $   $138   $812   $49,137   $49,949   $   $215 
Multifamily residential   2,914            2,914    3,781,547    3,784,461         
Commercial                   1,072,568    1,072,568        2,409 
Construction and land loans                   55,739    55,739         
Commercial business loans   724            724    900,282    901,006         
Small Business Administration loans   42        2,361    2,403    31,238    33,641        2,842 
Consumer and other loans   98    38        136    3,020    3,156        508 
Total loan portfolio  $4,452   $38   $2,499   $6,989   $5,893,531   $5,900,520   $   $5,974 

 

The accrual of interest income on loans is discontinued when the full collection of principal and interest is in doubt. When a loan is placed on nonaccrual, previously accrued but unpaid interest is reversed and charged against interest income, and future accruals of interest are discontinued. Payments received from borrowers for loans on nonaccrual are applied to the unpaid principal balance. A loan is returned to accrual status when, in management’s judgement, the borrower’s ability to satisfy principal and interest obligations under the loan agreement has improved sufficiently to reasonably assure recovery of principal and the borrower has demonstrated a sustained period of repayment performance. In general, the Company requires a minimum of six consecutive months of timely payments in accordance with the contractual terms prior to returning a loan to accrual status.

 

Of the $5.8 million and $6.0 million of loans reported as nonaccrual as of March 31, 2020 and December 31, 2019, respectively, $3.2 million and $3.2 million, respectively, were current.

 

Loans reported as nonaccrual as of March 31, 2020 and December 31, 2019 contributed $14,000 and $25,000 of interest income during the three months ended March 31, 2020 and December 31, 2019, respectively.

 

20

 

 

(b)      Troubled Debt Restructurings (“TDRs”)

 

The adoption of ASC 326 impacts the timing of recognition for TDRs, advancing the recognition to when a TDR is reasonably expected, which may result in recognition before the concessions have been granted.

 

As of both March 31, 2020 and December 31, 2019, there were no loans reported as TDRs. There was no allowance for loan loss recorded for any loans modified as TDRs for the periods presented.

 

There were no loans modified as TDRs during the three months ended March 31, 2020 and March 31, 2019.

 

There were no TDR loans with payment defaults during the three months ended March 31, 2020. There was one commercial business loan with a payment default during the three months ended March 31, 2019 that was modified as a TDR in the previous 12 months, and had a recorded investment of $3.7 million as of March 31, 2019.

 

(c)       Credit Quality Monitoring

 

As part of the Company’s credit policies, the Company monitors contractual payments and performs annual or more frequent reviews of multifamily, commercial real estate, construction, and commercial business loans. Commercial business loans are more typically reviewed on a quarterly basis. As part of the annual review of borrowers, financial statements of the property and/or borrowing entity are reviewed, including occupancy levels, revenue, and expenses to determine any variation from expected performance or deterioration in the underlying credit risk of the loan. The risk rating assigned to each loan is adjusted based on the updated information. The Company actively monitors loans that management believes indicate increased potential credit risk. Each acquired loan portfolio is reviewed within a short period of time following its acquisition to determine whether the loan portfolio classification is consistent with the Company’s internal risk rating standards.

 

The Company’s internal loan risk ratings apply to all loans and are as follows:

 

Pass – Loans are performing substantially as agreed with no current identified weakness in the borrower’s ability to repay.

 

Special Mention – Loans have a potential weakness and deserve management’s attention. If left uncorrected, the potential weakness could result in additional deterioration of the borrower’s ability to repay. These loans have not experienced credit deterioration to the point that exposes the Company to a level of risk to warrant adverse classification.

 

Substandard – Loans are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. These loans have a well-defined weakness or weaknesses that jeopardize the timely liquidation of the loan.

 

Doubtful – Loans have weaknesses that make repayment in full from collection or liquidation highly improbable. The possibility of some loss is highly likely but certain factors are outstanding, which impact the quantification of loss that is deferring downgrade to a risk rating of “loss.”

 

Loss – Loans are considered uncollectible and of such little value that their continuance as assets without establishment of a specific reserve or charge off is not warranted.

 

Loans assigned an internal risk rating of “substandard” or worse are considered classified loans. Loans assigned an internal risk rating of “special mention” or worse are considered criticized loans.

 

Classified loans and other portions of the portfolio specifically identified by management are reviewed at least quarterly. This includes evaluating market conditions, collateral conditions, and borrower or guarantor financial status to determine the appropriateness of the risk rating, accrual/nonaccrual status designations, and pooled/non-pooled designations under ASC 326. The Company’s Credit Review Department also performs a review of loans throughout the year, including classified loans, based upon scoping criteria that considers various credit risk-related factors. The results of the loan reviews are presented on a quarterly basis to the Credit Risk Management Committee (“CRMC”), as well as the Risk Oversight Committee of the Board of Directors. The CRMC is made up of members of senior management involved in various credit risk-related activities and is responsible for the authorization and evaluation of credit policies, lending authorities, credit risk reporting, reporting from the special credits group, and lending concentrations to facilitate an appropriate level of oversight and management of credit risk related processes.

 

The Company evaluates whether a modification, extension, or renewal of a loan is a current period origination in accordance with GAAP. Renewals that are subject to a full credit evaluation are considered current year originations for purposes of the table below. The following table presents the loan portfolio by vintage and risk rating as of March 31, 2020, in conformance with the adoption of ASC 326.

 

21

 

 

 

As of March 31, 2020  Term Loans Amortized Cost Basis by Origination Year   Revolving loans amortized   Revolving loans converted     
($ in thousands)  2020   2019   2018   2017   2016   Prior   cost basis   to term   Total 
Real estate mortgage loans:                                             
Single-family residential  $   $   $   $   $   $47,908   $   $   $47,908 
Pass                       47,551            47,551 
Special Mention                       67            67 
Substandard                       290            290 
Doubtful                                    
Loss                                    
Multi-family residential  $306,545   $1,556,718   $786,469   $595,961   $239,768   $426,826   $   $   $3,912,287 
Pass   306,545    1,555,082    786,469    595,961    239,768    425,960            3,909,785 
Special Mention                                    
Substandard       1,636                866            2,502 
Doubtful                                    
Loss                                    
Commercial real estate  $100,845   $329,869   $161,388   $64,748   $135,671   $280,944   $3,017   $   $1,076,482 
Pass   93,292    312,966    161,388    64,062    135,119    277,614    2,994        1,047,435 
Special Mention   7,553    16,903        686            23        25,165 
Substandard                   552    3,330            3,882 
Doubtful                                    
Loss                                    
Construction  $3,792   $3,853   $30,111   $11,203   $   $294   $   $   $49,253 
Pass   3,792    3,853    10,814    11,203        294            29,956 
Special Mention           19,297                        19,297 
Substandard                                    
Doubtful                                    
Loss                                    
Commercial and industrial  $8,510   $257,358   $235,275   $222,316   $48,631   $3,238   $91,634   $76   $867,038 
Pass   8,510    257,213    229,709    222,223    41,764    1,428    83,383        844,230 
Special Mention       145    2,565        1,445        1,951        6,106 
Substandard           3,001    93    5,422    1,810    6,300    76    16,702 
Doubtful                                    
Loss                                    
Small Business Administration  $1,027   $8,250   $5,930   $3,799   $616   $11,769   $2,647   $   $34,038 
Pass   1,027    8,250    5,930    790    448    8,883    2,647        27,975 
Special Mention               1,818        152            1,970 
Substandard               1,191    168    2,734            4,093 
Doubtful                                    
Loss                                    
Consumer and other  $   $   $9   $11   $1,235   $1,657   $272   $   $3,184 
Pass           9    11    1,068    1,186    272        2,546 
Special Mention                       52            52 
Substandard                   167    419            586 
Doubtful                                    
Loss                                    
Total Loans  $420,719   $2,156,048   $1,219,182   $898,038   $425,921   $772,636   $97,570   $76   $5,990,190 
Pass   413,166    2,137,364    1,194,319    894,250    418,167    762,916    89,296        5,909,478 
Special Mention   7,553    17,048    21,862    2,504    1,445    271    1,974        52,657 
Substandard       1,636    3,001    1,284    6,309    9,449    6,300    76    28,055 
Doubtful                                    
Loss                                    

 

22

 

 

The following table presents the loan portfolio by risk rating and by class as of December 31, 2019:

 

($ in thousands)

  Pass   Special
mention
   Substandard   Doubtful   Loss   Total   Criticized
total
 
As of December 31, 2019                            
Real estate mortgage loans:                                   
Single-family residential  $49,442   $69   $438   $   $   $49,949   $507 
Multifamily residential   3,783,589        872            3,784,461    872 
Commercial   1,052,918    12,753    6,897            1,072,568    19,650 
Construction and land loans   36,983    18,756                55,739    18,756 
Commercial business loans   874,118    8,471    18,417            901,006    26,888 
Small Business Administration loans   27,525    154    5,962            33,641    6,116 
Consumer and other loans   2,489    53    614            3,156    667 
Total  $5,827,064   $40,256   $33,200   $   $   $5,900,520   $73,456 

 

(d)       Allowance for Credit Losses (ASC 326)

 

The Company adopted ASC 326, Financial Instruments - Credit Losses, on January 1, 2020, as prescribed in ASC 326-10-65, Transition and Open Effective Date Information. The adoption impact of ASC 326 was based upon our ACL methodology, as discussed in the Company’s significant accounting policies in Note 2, “Summary of Significant Accounting Policies,” and was recorded using the cumulative-effect adjustment to the Company’s beginning retained earnings as of January 1, 2020. This resulted in an adjustment to the allowance for credit losses on loans of $2.4 million and a $1.4 million increase in our allowance for credit losses on unfunded loan commitments. Collectively, our allowance for credit losses on loans and unfunded loan commitments increased by $3.8 million as of January 1, 2020.

 

($ in thousands)  Loans   Unfunded loan
commitments
   Total 
Balance at 12/31/2019   $40,844   $1,014   $41,858 
Cumulative Adjustment    2,397    1,449    3,846 
Balance at 1/1/2020    43,241    2,463    45,704 
Provision for credit losses    7,557        7,557 
Provision for unfunded loan commitments        1,185    1,185 
Total provision    7,557    1,185    8,742 
Loan charged-off    (202)       (202)
Recoveries collected    828        828