(7) Subordinated Debentures and Trust Preferred Securities

At both March 31, 2014 and December 31, 2013, the balance of the Company’s outstanding subordinated debentures was $25,774,000 with a weighted average cost of funds of 3.07%. During the first quarter 2013, the Company redeemed the subordinated debentures issued by CenBank Trusts I and II. As a result of the early redemption of these instruments, the Company recognized an aggregate prepayment penalty of $629,000. Prior to their early redemption on March 7, 2013 and February 22, 2013, the CenBank Trusts I and II accrued interest at 10.60% and 10.20%, respectively.

The Company’s remaining subordinated debentures were issued in two separate series. Each issuance has a maturity of 30 years from its date of issuance. The subordinated debentures were issued to trusts established by the Company, which in turn issued $25,000,000 of trust preferred securities (TruPS”). Generally, and with certain limitations, the Company is permitted to call the debentures subsequent to the first five or ten years, as applicable, after issuance, if certain conditions are met, or at any time upon the occurrence and continuation of certain changes in either the tax treatment or the capital treatment of the trusts, the debentures or the preferred securities. The Guaranty Capital Trust III TruPS became callable at each quarterly interest payment date starting on July 7, 2008. The CenBank Trust III TruPS became callable at each quarterly interest payment date starting on April 15, 2009.

As of March 31, 2014, the Company was in compliance with all financial covenants of these remaining subordinated debentures.

At March 31, 2014 the Company had accrued, unpaid interest on its subordinated debentures of approximately $198,000 compared to $202,000 at December 31, 2013. Interest payable on subordinated debentures is included in interest payable and other liabilities on the consolidated balance sheets.

The Company is not considered the primary beneficiary of the trusts that issued the TruPS (variable interest entities); therefore, the trusts are not consolidated in the Company’s financial statements and the subordinated debentures are shown as liabilities. The Company’s investment in the common stock of each trust is included in other assets in the Company’s consolidated balance sheets.

Although the securities issued by each of the trusts are not included as a component of stockholders’ equity in the consolidated balance sheets, they are treated as capital for regulatory purposes. Specifically, under applicable regulatory guidelines, the $25,000,000 of TruPS issued by the trusts qualify as Tier 1 capital, up to a maximum of 25% of capital on an aggregate basis. Any amount that exceeds 25% qualifies as Tier 2 capital. At March 31, 2014, the full $25,000,000 of the TruPS qualified as Tier 1 capital.

Under the Dodd-Frank Act and a recent joint rule from the Federal Reserve Board, the Office of the Comptroller of Currency, and the FDIC, certain TruPS are no longer eligible to be included as Tier 1 capital for regulatory purposes. However, an exception to this statutory prohibition applies to securities issued prior to May 19, 2010 by bank holding companies with less than $15 billion of total assets. As we have less than $15 billion in total

assets and issued all of our TruPS prior to May 19, 2010, we expect that our TruPS will continue to be eligible to be treated as Tier 1 capital, subject to other rules and limitations.

The following table summarizes the terms of each outstanding subordinated debenture issuance at March 31, 2014 (dollars in thousands):



	Date Issued	Amount	Maturity Date	Call Date *	Fixed or Variable	Rate Adjuster		Current Rate		Next Rate Reset Date**

CenBank Trust III	4/8/2004	15,464	4/15/2034	7/15/2014	Variable	LIBOR + 2.65	%	2.89	%	7/15/2014
Guaranty Capital Trust III	6/30/2003	10,310	7/7/2033	7/7/2014	Variable	LIBOR + 3.10	%	3.34	%	7/7/2014

* Call date represents the earliest or next date the Company can call the debentures

** On April 7, 2014, the rate on the Guaranty Capital Trust III subordinated debentures reset to 3.33%. On April 15, 2014, the rate on the CenBank Trust III subordinated debentures reset to 2.88%.