NOTE 10 - SUBORDINATED DEBENTURES

Subordinated debentures were issued in connection with three separate trust preferred securities and totaled $15.5 million and $15.4 million as of June 30, 2026 and December 31, 2025. Under the terms of our subordinated debentures issued in connection with the issuance of trust preferred securities, we are not permitted to declare or pay any dividends on our capital stock if an event of default occurs under the terms of the long-term debt. In addition, we have the option to defer interest payments on the subordinated debentures from time to time for a period not to exceed five consecutive years. The subordinated debentures may be included in Tier 1 capital (with certain limitations applicable) under current regulatory guidelines and interpretations. We  may redeem the subordinated debentures, subject to prior approval by the Board of Governors of the Federal Reserve System at 100% of the principal amount, plus accrued and unpaid interest. These subordinated debentures consist of the following at June 30, 2026 and are described in detail after the table below:

In 2016, we acquired TFC Statutory Trust (the “TFC Trust”) through the acquisition of Tomato Bank and its holding company, TFC Holding Company. At the close of this acquisition, a $1.9 million valuation reserve was recorded to arrive at its fair market value, which is treated as a yield adjustment and amortized over the life of the security. The unamortized valuation reserve was $1.0 million at June 30, 2026 and  December 31, 2025. The subordinated debentures have a variable rate of interest equal to three-month CME Term SOFR plus applicable tenor spread adjustment of 0.26% plus 1.65%, which was 5.58% as of June 30, 2026 and 5.63% at December 31, 2025.

In October 2018, we acquired First American International Statutory Trust I (“FAIC Trust”) through the acquisition of First American International Corp. (“FAIC”). At the close of this acquisition, a $1.2 million valuation reserve was recorded to arrive at its fair market value, which is treated as a yield adjustment and amortized over the life of the security. The unamortized valuation reserve was $649,000 at June 30, 2026 and $688,000 at December 31, 2025. The subordinated debentures have a variable rate of interest equal to three-month CME Term SOFR plus applicable tenor spread adjustment of 0.26% plus 2.25%, which was 6.18% as of June 30, 2026 and 6.23% at December 31, 2025.

In January 2020, we acquired Pacific Global Bank Trust I (“PGBH Trust”) through the acquisition of PGB Holdings, Inc. At the close of this acquisition, a $763,000 valuation reserve was recorded to arrive at its fair market value, which is treated as a yield adjustment and amortized over the life of the security. The unamortized valuation reserve was $431,000 at June 30, 2026 and $456,000 at December 31, 2025. The subordinated debentures have a variable rate of interest equal to three-month CME Term SOFR plus applicable tenor spread adjustment of 0.26% plus 2.10%, which was 6.03% as of June 30, 2026 and 6.08% at December 31, 2025.

We recognized interest expense on the subordinated debentures of $255,000, $255,000, and $283,000 for the three months ended June 30, 2026, March 31, 2026, and June 30, 2025, and $510,000 and $565,000 for the six months ended June 30, 2026 and 2025. The aggregate amount of amortization expense was $55,000 for each of the three months ended June 30, 2026, March 31, 2026, and June 30, 2025, and $110,000 for each of the six months ended June 30, 2026 and 2025. We were in compliance with all covenants under the subordinated debentures as of June 30, 2026.

For regulatory reporting purposes, the Federal Reserve has indicated that the capital of trust preferred securities qualify as Tier 1 capital of the Company subject to previously specified limitations (including that the asset size of the issuer did not exceed $15 billion). If regulators make a determination that the capital securities can no longer be considered in regulatory capital, the securities become callable and we may redeem them.