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MEMORANDUM
February 10, 2026
TO: Vivienne St. Claire, Responsible Partner, Capital Markets Robert Adeyemi, Billing Partner, Capital Markets Eric Johannsen, Lead Associate, Capital Markets Claire Dempsey, Working Associate, Capital Markets
FROM: Leonard Cross, Specialist Partner, Tax
RE: Tax Analysis — Debt vs. Equity Characterization of Belmont Ridge Bank, National Association 6.750% Fixed-to-Floating Rate Subordinated Notes due 2036
MATTER NO.: 1045-00001
Purpose. This memorandum analyzes whether the $350,000,000 aggregate principal amount of 6.750% Fixed-to-Floating Rate Subordinated Notes due 2036 (the "Notes") to be issued by Belmont Ridge Bank, National Association ("BRB") in a Rule 144A private placement will be characterized as indebtedness (rather than equity) for U.S. federal income tax purposes. This memorandum supports the tax opinion that Calderwood & Harkness LLP will deliver at closing, currently expected on February 24, 2026 (the "Closing Date"). The analysis addresses the multi-factor debt-equity tests derived from controlling judicial precedent, applicable high yield discount obligation ("AHYDO") considerations under Section 163(i) and Section 163(e)(5) of the Internal Revenue Code of 1986, as amended (the "Code"), and original issue discount ("OID") implications under Sections 1271 through 1275 of the Code and the Treasury Regulations promulgated thereunder.
This memorandum is based on our review of the following documents: (a) the draft Indenture, dated as of February 24, 2026, between BRB and Brindoval Trust Company, National Association, as trustee (the "Indenture"); (b) the draft Purchase Agreement, dated as of February 19, 2026, among BRB and the Initial Purchasers named therein (the "Purchase Agreement"); (c) the draft Offering Memorandum dated February 19, 2026 (the "Offering Memorandum"); (d) BRB's audited financial statements for the fiscal year ended December 31, 2025; (e) BRB's Call Reports filed with the Office of the Comptroller of the Currency ("OCC") for the quarters ended September 30, 2025 and December 31, 2025; and (f) certain factual representations made by officers of BRB in a management certificate dated February 7, 2026 (the "Management Certificate"). All capitalized terms used but not defined herein have the meanings ascribed to them in the Indenture or the Offering Memorandum, as applicable.
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I. EXECUTIVE SUMMARY
Based on our analysis of the relevant facts, the terms of the Notes, the applicable provisions of the Code and Treasury Regulations, published guidance of the Internal Revenue Service (the "IRS"), and controlling judicial precedent, we conclude that the Notes should be treated as indebtedness for U.S. federal income tax purposes based on the totality of the relevant factors. In reaching this conclusion, we have considered each of the traditional debt-equity factors identified in the leading case law and weighed them against one another in the manner prescribed by the courts.
The principal characteristics supporting this conclusion are as follows:
• The Notes have a fixed maturity date of March 1, 2036, imposing an unconditional obligation on BRB to repay the $350,000,000 aggregate principal amount in full on that date.
• The Notes bear a commercially reasonable fixed rate of interest of 6.750% per annum during the initial fixed rate period and a floating rate of Compounded SOFR plus 275 basis points during the subsequent floating rate period, both payable unconditionally and without regard to BRB's earnings or profitability.
• The Notes are being sold to unrelated third-party qualified institutional buyers ("QIBs") in a Rule 144A offering. No portion of the Notes is being acquired by Belmont Ridge Financial Group, Inc. ("BRFG"), BRB's sole shareholder, or any affiliate of BRB.
• The Notes are subordinated unsecured obligations of BRB but rank senior to all equity interests (common and preferred stock) and any junior subordinated indebtedness. While subordination is a factor that could weigh toward equity characterization, it is a standard feature of bank capital instruments and, when considered in the context of the totality of the other factors, is insufficient to overcome the overwhelmingly debt-like characteristics of the Notes.
• The Notes impose an unconditional obligation on BRB to repay principal at maturity and to pay interest on fixed dates. There is no provision permitting BRB to elect not to repay principal, to convert the Notes into equity, or to defer interest payments at its discretion.
In addition, we have determined that:
• The Notes are not "applicable high yield discount obligations" ("AHYDOs") within the meaning of Section 163(i) of the Code because the yield to maturity of the Notes (approximately 6.78%) does not equal or exceed the applicable federal rate ("AFR") for the month of issuance plus five percentage points. Accordingly, the AHYDO limitations under Section 163(e)(5) of the Code do not apply, and BRB may deduct the interest on the Notes on an accrual basis as it accrues.
• The de minimis OID arising from the 99.750% issue price (resulting in total OID of $875,000) falls well below the statutory de minimis threshold (approximately $8,750,000) and does not alter the debt characterization. The de minimis OID will be included in income by holders on a pro-rata basis upon receipt of principal payments, generally as capital gain for holders that hold the Notes as capital assets.
• The fixed-to-floating rate structure of the Notes qualifies for treatment as a "variable rate debt instrument" ("VRDI") under Treasury Regulation § 1.1275-5 and does not create additional OID concerns or affect the debt characterization.
Based on the foregoing, Calderwood & Harkness LLP is comfortable rendering an opinion that the Notes will be treated as indebtedness for U.S. federal income tax purposes at a "will" level of confidence. The tax opinion will be delivered at closing on February 24, 2026.
II. BACKGROUND AND KEY TERMS OF THE NOTES
A. Issuer. Belmont Ridge Bank, National Association is a national banking association chartered under the National Bank Act, 12 U.S.C. §§ 21 et seq., OCC Charter No. 18742. BRB is headquartered at 600 Lexington Avenue, 38th Floor, New York, NY 10022. BRB is the sole subsidiary of Belmont Ridge Financial Group, Inc. ("BRFG"), a Delaware corporation that serves as BRB's bank holding company. BRFG is a publicly traded company whose common stock is listed on the New York Stock Exchange under the ticker symbol "BRFG."
As of December 31, 2025, based on BRB's audited financial statements and the Call Report filed with the OCC, BRB reported total consolidated assets of approximately $62.4 billion, making it one of the twenty-five largest commercial banks in the United States by total assets. BRB's regulatory capital ratios as of December 31, 2025 were as follows: Tier 1 capital ratio of 11.8% and total risk-based capital ratio of 14.2%. Both ratios exceed the minimum requirements for a "well-capitalized" institution under the prompt corrective action framework set forth in 12 C.F.R. § 6.4. BRB's Employer Identification Number is 13-4827156.
BRB's primary business activities include commercial banking, retail banking, wealth management, and treasury services. BRB operates through approximately 285 branches across the northeastern United States, with a growing digital banking platform known as "BRB Digital" that currently serves approximately 1.4 million digital customers. BRB holds significant portfolios of commercial real estate loans, commercial and industrial loans, residential mortgage loans, and investment securities.
B. Terms of the Notes
The following summarizes the material terms of the Notes as set forth in the draft Indenture and the draft Offering Memorandum:
Aggregate Principal Amount. $350,000,000.
Issue Price. 99.750% of par, resulting in gross proceeds to BRB (before the initial purchasers' discount and expenses) of $349,125,000.
Coupon — Fixed Rate Period. 6.750% per annum, payable semi-annually in arrears on March 1 and September 1 of each year, commencing September 1, 2026. The fixed rate period extends from the issue date through but not including March 1, 2031 (the "Reset Date").
Coupon — Floating Rate Period. Compounded SOFR (as defined in the Indenture, based on the Secured Overnight Financing Rate administered by the Federal Reserve Bank of New York) plus 275 basis points, payable quarterly in arrears on March 1, June 1, September 1, and December 1 of each year, commencing June 1, 2031. The floating rate period extends from and including March 1, 2031 through the maturity date. The Indenture includes customary SOFR fallback provisions consistent with the Alternative Reference Rates Committee ("ARRC") recommended fallback language, providing for the use of a replacement benchmark rate in the event that SOFR is discontinued or becomes unavailable.
Fixed-to-Floating Rate Reset Date. March 1, 2031.
Maturity Date. March 1, 2036.
Optional Redemption. BRB may redeem the Notes, in whole or in part, at its option, at a redemption price equal to 100% of the principal amount of the Notes to be redeemed plus accrued and unpaid interest to, but excluding, the redemption date, at any time on or after March 1, 2031 (the Reset Date), subject to the prior approval of the OCC. In addition, BRB may redeem the Notes, in whole but not in part, at a redemption price equal to 100% of the principal amount plus accrued and unpaid interest to, but excluding, the redemption date, at any time upon the occurrence of a "Tax Event" (as defined in the Indenture, generally relating to a change in applicable tax law that would result in the loss of deductibility of interest on the Notes or that would require BRB to pay additional amounts to holders) or a "Regulatory Capital Treatment Event" (as defined in the Indenture, generally relating to a change in applicable regulatory capital rules that would result in the Notes no longer qualifying as Tier 2 capital), in each case subject to the prior approval of the OCC. There is no "make-whole" premium or other prepayment penalty.
Ranking. The Notes are subordinated unsecured obligations of BRB. In terms of payment priority, the Notes: (i) rank junior to all senior indebtedness of BRB (including, without limitation, BRB's obligations to depositors, obligations to the Federal Deposit Insurance Corporation, obligations in respect of federal funds purchased, securities sold under agreements to repurchase, and other senior unsecured and secured borrowings); (ii) rank pari passu with BRB's existing 5.250% Subordinated Notes due 2027 ($200,000,000 aggregate principal amount outstanding) and any future indebtedness that by its terms ranks pari passu with the Notes; and (iii) rank senior to any junior subordinated debt of BRB and all equity interests of BRB (including common stock and preferred stock, if any).
Regulatory Capital Treatment. The Notes are intended to qualify as Tier 2 capital of BRB under 12 C.F.R. Part 3 (the OCC's capital adequacy standards implementing the Basel III capital framework).
Minimum Denomination. $150,000 and integral multiples of $1,000 in excess thereof.
Form. The Notes will be issued in the form of one or more global notes in book-entry form, deposited with The Depository Trust Company ("DTC") and registered in the name of Cede & Co., as DTC's nominee. Beneficial interests in the global notes will be shown on, and transfers will be effected only through, the book-entry records maintained by DTC and its participants. CUSIP: 082651 AB7; ISIN: US082651AB73.
Governing Law. The Indenture and the Notes are governed by, and will be construed in accordance with, the laws of the State of New York.
Events of Default. The Indenture provides for customary events of default, including failure to pay principal when due, failure to pay interest within 30 days after the applicable payment date, and certain insolvency or receivership events. In the event of a default by BRB in the payment of principal of or interest on the Notes, the trustee or holders of at least 25% in aggregate principal amount of the outstanding Notes may declare the principal of and accrued interest on the Notes to be immediately due and payable; provided, however, that in the event BRB becomes the subject of a proceeding under the Federal Deposit Insurance Act (12 U.S.C. § 1811 et seq.), the payment of principal may be delayed in accordance with applicable law and the terms of the Indenture.
C. Offering Structure
The Notes are being offered and sold in a private placement pursuant to Rule 144A under the Securities Act of 1933, as amended (the "Securities Act"), to QIBs as defined in Rule 144A(a)(1). The offering is exempt from registration under the Securities Act pursuant to Section 4(a)(2) thereof. No public offering of the Notes is being made. BRB has agreed to certain transfer restrictions and has not agreed to register the Notes under the Securities Act or to provide holders with any registration rights.
The following firms have been engaged as initial purchasers of the Notes pursuant to the Purchase Agreement:
The initial purchasers' discount (i.e., the underwriting spread) is 0.650% of the aggregate principal amount, or $2,275,000. The initial purchasers are purchasing the Notes as principals for resale to QIBs and are not acting as agents for BRB.
Net proceeds to BRB, after deducting the initial purchasers' discount, are $346,850,000. After deducting estimated offering expenses (including legal fees, trustee fees, accounting fees, rating agency fees, and miscellaneous expenses estimated at approximately $1,150,000), net proceeds to BRB are approximately $345,700,000.
The trustee under the Indenture is Brindoval Trust Company, National Association, a national banking association with trust offices in New York, New York.
The anticipated timeline is as follows: Pricing Date of February 19, 2026 (on which date the Purchase Agreement will be executed and delivered); Closing Date of February 24, 2026 (on which date the Notes will be delivered to the initial purchasers against payment and the closing deliverables, including the tax opinion, will be delivered).
D. Use of Proceeds
BRB intends to use the net proceeds from the offering of the Notes for general corporate purposes, including the support and expansion of BRB's digital banking platform (BRB Digital) and, potentially, the future redemption of BRB's existing 5.250% Subordinated Notes due 2027. As of the date of this memorandum, BRB has not yet given formal notice of redemption with respect to the 2027 subordinated notes, and no decision to redeem those notes has been finalized. Any future redemption of the 2027 subordinated notes would be subject to the prior approval of the OCC under 12 C.F.R. § 3.22.
E. Existing Subordinated Debt
BRB currently has one series of subordinated notes outstanding: the 5.250% Subordinated Notes due 2027, in an aggregate principal amount of $200,000,000, issued on November 15, 2017, maturing on November 15, 2027, callable at par at BRB's option at any time since November 15, 2022 (subject to OCC approval). The existing 2027 subordinated notes were issued under a separate Indenture dated November 15, 2017 between BRB and Brindoval Trust Company, National Association, as trustee, and were offered and sold in a Rule 144A/Regulation S offering. The existing 2027 subordinated notes are treated as indebtedness of BRB for U.S. federal income tax purposes, and BRB has deducted the interest thereon without challenge by the IRS. The existing 2027 subordinated notes also qualify as Tier 2 capital under 12 C.F.R. Part 3, subject to the regulatory capital amortization provisions applicable in the final five years before maturity.
Upon the issuance of the Notes, BRB's total outstanding subordinated debt will be $550,000,000 ($200,000,000 of existing 2027 subordinated notes plus $350,000,000 of the Notes), representing approximately 0.88% of BRB's total consolidated assets.
III. LEGAL FRAMEWORK — DEBT VS. EQUITY CLASSIFICATION
A. Statutory Framework
Section 163(a) of the Code provides that "[t]here shall be allowed as a deduction all interest paid or accrued within the taxable year on indebtedness." The Code does not comprehensively define the term "indebtedness" for this purpose, though it is generally understood to refer to an unconditional and legally enforceable obligation to pay a sum certain, with interest, at a fixed maturity date or on demand. The characterization of an instrument as indebtedness or equity is one of the most fundamental and frequently litigated issues in federal income taxation, affecting not only the deductibility of interest by the issuer but also the character of the income received by holders and the treatment of payments in range contexts.
Section 385 of the Code authorizes the Secretary of the Treasury to prescribe regulations setting forth factors to be taken into account in determining whether an interest in a corporation is to be treated as stock or indebtedness, or as in part stock and in part indebtedness. Section 385(b) identifies five illustrative factors that the Secretary may consider:
(1) whether there is a written unconditional promise to pay on demand or on a specified date a sum certain in money in return for an adequate consideration in money or money's worth, and to pay a fixed rate of interest;
(2) whether there is subordination to or preference over any indebtedness of the corporation;
(3) the ratio of debt to equity of the corporation;
(4) whether there is convertibility into the stock of the corporation; and
(5) the relationship between holdings of stock in the corporation and holdings of the interest in question.
The Treasury has exercised its authority under Section 385 on a limited basis. The most significant regulatory action in recent years was the promulgation in 2016 of final and temporary regulations under Section 385 (specifically, Treasury Regulation § 1.385-3 and related provisions), which address the treatment of certain related-party debt instruments in the context of corporate transactions. These regulations are generally inapplicable to the Notes because the Notes are being issued to unrelated third-party QIBs, not to BRFG (BRB's sole shareholder) or any other affiliate of BRB. The Notes are not "covered debt instruments" within the meaning of Treasury Regulation § 1.385-3(g)(3) because they are not issued to a "member" of BRB's "expanded group" as those terms are defined in the regulations. Accordingly, the Section 385 related-party debt regulations do not govern the characterization of the Notes.
Separately, Section 1275(a)(1)(A) of the Code defines a "debt instrument" for OID purposes as "any instrument or contractual arrangement that constitutes indebtedness under general principles of Federal income tax law." Treasury Regulation § 1.1275-1(d) further provides that the term "debt instrument" means any instrument or contractual arrangement that constitutes indebtedness under general principles of federal income tax law (including, for example, a certificate of deposit or a loan). The analysis of whether the Notes constitute "indebtedness" under these general principles is the core inquiry of this memorandum.
B. Multi-Factor Case Law Test
In the absence of a comprehensive statutory definition, the determination of whether an instrument constitutes debt or equity for federal income tax purposes is made based on the economic substance of the transaction, viewed in light of all the relevant facts and circumstances. The courts have developed a multi-factor balancing test for this purpose. No single factor is dispositive, and the weight accorded to each factor varies depending on the facts of the particular case. The inquiry is fundamentally one of substance over form, though the form of the instrument is itself a relevant factor.
The leading judicial decisions in this area have identified a series of factors that are commonly considered. While the precise number and articulation of these factors vary somewhat among the circuits, the following factors are widely recognized and have been applied in substantially all of the major debt-equity decisions:
1. Unconditional obligation to repay. Whether there is an unconditional promise to pay a sum certain on demand or on a fixed maturity date.
2. Fixed rate of interest. Whether there is a fixed rate of interest (or a commercially reasonable variable rate).
3. Subordination. Whether the obligation is subordinated to or has preference over other indebtedness of the issuer.
4. Debt-to-equity ratio. The ratio of debt to equity of the issuer.
5. Convertibility. Whether the instrument is convertible into stock of the issuer.
6. Relationship between holders and the issuer. The relationship between the holders of the instrument and the shareholders of the issuer — specifically, whether the instrument is held in proportion to equity interests (a hallmark of equity) or is held by unrelated parties at arm's length (a hallmark of debt).
7. Payments dependent on earnings. Whether payments on the instrument are contingent on or dependent upon the issuer's earnings or profitability.
8. Ability to obtain outside credit. Whether the issuer has the ability to obtain credit from outside lending institutions.
9. Use of proceeds. Whether the instrument is used to acquire capital assets or, conversely, to fund operations in a manner consistent with the use of borrowed funds.
10. Intent of the parties. The intent of the parties, as evidenced by the terms of the instrument, the transactional documents, and the overall structure.
11. Repayment history. Whether the issuer has failed to repay on the maturity date or has sought an extension of the maturity date, which would suggest the instrument is not a bona fide obligation.
12. Source of payments. Whether interest and principal payments are expected to come from the issuer's operating income (consistent with debt) or from additional capital contributions (consistent with equity).
13. Adequacy of income stream. The adequacy and reliability of the issuer's income stream to service the obligation.
Courts have emphasized that the analysis requires a weighing of all relevant factors and that no mechanical formula can be applied. The question is ultimately whether the instrument, in substance, represents an investment with a reasonable expectation of repayment and a reasonable return for the use of money (debt), or an investment that puts capital at the risk of the business in exchange for a participation in the enterprise's gains and losses (equity).
C. IRS Guidance
In addition to the statutory framework and case law, the IRS has published guidance relevant to the debt-equity analysis. IRS Notice 94-47, 1994-1 C.B. 357, identifies a number of factors that the IRS considers in evaluating whether purported debt should be recharacterized as equity for federal income tax purposes. The factors identified in Notice 94-47 are substantially consistent with those derived from the case law and include, among others: (i) whether there is an unconditional promise to pay a sum certain; (ii) whether the obligation bears a reasonable rate of interest; (iii) the degree of subordination; (iv) the debt-to-equity ratio; (v) convertibility; (vi) the relationship between debt and equity holdings; (vii) whether the purported creditor could have obtained a comparable loan from an unrelated party; and (viii) the form of the instrument.
While Notice 94-47 is not binding authority, it provides useful insight into the IRS's analytical approach and reinforces the multi-factor balancing test employed by the courts.
We are not aware of any published revenue ruling that specifically addresses the debt-equity classification of subordinated debt instruments issued by national banking associations in the precise structure contemplated here. However, subordinated bank debt qualifying as Tier 2 regulatory capital has been widely and consistently treated as indebtedness for federal income tax purposes across the banking industry, and we are not aware of any instance in which the IRS has successfully challenged the debt characterization of such an instrument where, as here, the instrument was sold to unrelated third-party investors in an arm's-length transaction and possessed the customary features of debt.
As noted above, the Treasury Regulations under Section 385, particularly Treasury Regulation § 1.385-3, address certain related-party debt instruments and are designed to prevent the use of intercompany indebtedness to effect distributions or acquisitions in a manner that creates inappropriate interest deductions. These regulations are inapplicable to the Notes because the Notes are being issued to unrelated QIBs, not to related parties within BRB's expanded group. We mention these regulations here solely to distinguish them from the analysis that follows.
IV. APPLICATION OF DEBT-EQUITY FACTORS TO THE NOTES
We now apply each of the traditional debt-equity factors to the Notes. For each factor, we set forth the relevant facts, analyze their significance, and assess whether the factor weighs in favor of debt treatment, equity treatment, or is neutral.
A. Unconditional Obligation to Repay Principal
The Indenture requires BRB to repay the $350,000,000 aggregate principal amount of the Notes in full on March 1, 2036 (the Maturity Date). This is a fixed, unconditional obligation. The obligation to repay principal is not subject to any condition precedent, including the profitability of BRB, the declaration of dividends, or the exercise of any discretion by BRB's board of directors. The only condition to repayment is that BRB not be in receivership or conservatorship under the Federal Deposit Insurance Act at the time of maturity, which is a regulatory condition imposed by operation of law on all obligations of FDIC-insured depository institutions and does not reflect a voluntary reservation of discretion by BRB.
There is no provision in the Indenture permitting BRB to elect not to repay principal. There is no conversion feature that would permit BRB to satisfy its repayment obligation by issuing equity securities. There is no equity participation feature that would give holders any claim on BRB's residual value or profits beyond the stated interest.
The optional redemption provisions of the Notes — which permit BRB to redeem the Notes at par plus accrued interest beginning March 1, 2031 or upon a Tax Event or Regulatory Capital Treatment Event, in each case subject to OCC approval — are early repayment features, not deferral mechanisms. These provisions accelerate, rather than delay, the return of principal to holders. The requirement of OCC approval for optional redemption is a regulatory condition applicable to all Tier 2 capital instruments under 12 C.F.R. § 3.22 and reflects a regulatory limitation on the issuer's ability to reduce its capital base, not a discretionary right of BRB to avoid repayment. Indeed, the very fact that BRB requires regulatory permission to repay early underscores the debt-like character of the obligation: it is BRB that wishes to repay, and the regulator that may restrict it from doing so.
Assessment: This factor weighs strongly in favor of debt characterization.
B. Fixed Maturity Date
The Notes have a stated maturity of March 1, 2036, which is approximately ten years from the expected issue date of February 24, 2026. The maturity date is fixed and unconditional. There is no provision for extension of the maturity date at BRB's option or by mutual agreement. The Notes must be repaid on the stated maturity date (subject only to the regulatory constraints described above applicable to all bank obligations).
A ten-year maturity is a standard and commercially reasonable term for subordinated bank capital instruments intended to qualify as Tier 2 capital. Under 12 C.F.R. § 3.20(d), subordinated debt must have an original maturity of at least five years to qualify as Tier 2 capital. The ten-year maturity of the Notes satisfies this requirement and falls within the range of maturities commonly seen in comparable bank subordinated debt offerings. The Notes are not perpetual obligations; they have a definite end date on which the principal must be returned to holders.
Courts have consistently held that the existence of a fixed maturity date is a significant indicator of debt character. Perpetual instruments, or instruments with indefinite maturities, are more likely to be treated as equity because they lack the temporal limitation that is characteristic of a creditor's claim. The Notes' ten-year maturity represents a definite, finite term that is well within the range of instruments consistently treated as debt.
Assessment: This factor weighs strongly in favor of debt characterization.
C. Fixed and Commercially Reasonable Interest Rate
The Notes bear interest at a rate that is both fixed (during the initial period) and commercially reasonable, given BRB's creditworthiness and the subordinated nature of the obligation.
During the Fixed Rate Period (from the issue date through but not including March 1, 2031), the Notes bear interest at 6.750% per annum, payable semi-annually in arrears on March 1 and September 1. During the Floating Rate Period (from and including March 1, 2031 through the maturity date), the Notes bear interest at a floating rate equal to Compounded SOFR plus 275 basis points, payable quarterly in arrears on March 1, June 1, September 1, and December 1.
The 6.750% fixed rate and the SOFR + 275 basis point floating rate are commercially reasonable for the following reasons:
(i) Credit profile of BRB. BRB has been assigned credit ratings of BBB by Meridian Ratings Group, Inc. ("Meridian") and Baa2 by Archer Bond Analytics LLC ("Archer"), in each case for the Notes specifically and for BRB's subordinated debt generally. These are investment-grade ratings in the lower range of the investment-grade spectrum, which is typical for subordinated bank debt (which ordinarily receives ratings one or two notches below the issuer's senior unsecured rating). The coupon on the Notes is consistent with prevailing market yields for comparably rated bank subordinated debt at the time of pricing.
(ii) Subordinated nature of the obligation. Because the Notes rank junior to all senior indebtedness and deposits of BRB, the coupon appropriately reflects a higher yield than would be required for senior unsecured obligations of BRB, compensating holders for the additional credit risk associated with subordination.
(iii) Prevailing market conditions. Based on the pricing data set forth in the Offering Memorandum and our review of comparable bank subordinated debt offerings in the first quarter of 2026, the coupon on the Notes is within the range of yields on newly issued ten-year non-call five subordinated notes of similarly rated banking institutions. The 275 basis point spread over SOFR for the floating rate period is likewise consistent with market practice for similar instruments.
Critically, interest on the Notes is payable regardless of BRB's earnings, profitability, or cash flow. There is no provision in the Indenture conditioning the payment of interest on BRB's having sufficient earnings, on the declaration of a dividend by BRB's board of directors, or on the exercise of any discretion by BRB or any other party. This stands in contrast to preferred stock, trust preferred securities, and certain other hybrid instruments on which dividends or distributions may be deferred or eliminated at the issuer's discretion or are payable only out of legally available funds. The unconditional nature of the interest obligation on the Notes is a hallmark of indebtedness.
The floating rate — Compounded SOFR plus a fixed spread — is tied to a widely used, objective market benchmark rate administered by the Federal Reserve Bank of New York. The use of SOFR as a benchmark is standard commercial practice following the transition from LIBOR and does not introduce any earnings-contingent or equity-like features into the interest computation.
Assessment: This factor weighs strongly in favor of debt characterization.
D. Subordination. The Notes are subordinated unsecured obligations of BRB. In the event of BRB's liquidation, dissolution, receivership, or insolvency, holders of the Notes would receive payment only after all depositors, general creditors, and holders of senior indebtedness of BRB have been paid in full. The Notes rank pari passu with BRB's existing 5.250% Subordinated Notes due 2027 and any future obligations that by their terms rank equally with the Notes. The Notes rank senior to any junior subordinated debt of BRB and all equity interests of BRB.
Subordination is the most significant factor that could weigh in favor of equity characterization. An instrument that is subordinated to all other creditors of the issuer bears more risk than senior debt and, to that extent, has a more equity-like risk profile. However, the courts have consistently held that subordination alone does not convert a debt instrument into equity. The critical question is not whether the instrument is subordinated, but whether, in light of all relevant circumstances, the instrument represents a genuine debtor-creditor relationship rather than an equity investment.
Several considerations mitigate the significance of subordination in this context:
First, subordinated debt is a well-recognized and widely used category of indebtedness under both general commercial law and federal income tax law. Banks and other financial institutions routinely issue subordinated debt for regulatory capital purposes, and such instruments have consistently been treated as debt for federal income tax purposes where the other traditional debt factors are satisfied. The issuance of subordinated bank capital notes is not a novel or aggressive structure; it is a standard component of the U.S. bank capital stack.
Second, the subordination of the Notes is limited in scope. The Notes do not rank at the bottom of BRB's capital structure. Rather, the Notes rank senior to all equity interests of BRB (including common and preferred stock) and any junior subordinated indebtedness. The Notes are subordinated only to senior indebtedness and deposits — a standard structural feature inherent in the design of Tier 2 regulatory capital instruments. This limited subordination is fundamentally different from the "deep subordination" characteristic of equity, in which the holder's claim is residual and subject to all other claims against the issuer.
Third, the subordination of the Notes is offset by the other overwhelmingly debt-like characteristics of the instrument: a fixed maturity date, an unconditional obligation to pay principal and interest, a commercially reasonable interest rate, the absence of conversion features or equity participation, and the arm's-length nature of the transaction.
It is also important to note that the intended Tier 2 capital treatment of the Notes under 12 C.F.R. Part 3 does not, in and of itself, convert the Notes into equity for tax purposes. Regulatory capital classification and tax classification are determined under separate legal frameworks with distinct purposes. The OCC classifies certain instruments as Tier 2 capital to ensure that banks have a sufficient buffer of loss-absorbing capacity, but this regulatory objective does not dictate the tax treatment of the instrument. The IRS and the courts have recognized that an instrument may simultaneously qualify as regulatory capital and as indebtedness for tax purposes.
Assessment: This factor is neutral to mildly unfavorable, but is outweighed by the aggregate of all other factors.
E. Debt-to-Equity Ratio
BRB's capitalization as of December 31, 2025 indicates that the bank is well-capitalized and does not present "thin capitalization" concerns. BRB's Tier 1 capital ratio of 11.8% and total risk-based capital ratio of 14.2% exceed the minimum thresholds for a "well-capitalized" institution under the prompt corrective action framework (6% and 10%, respectively, under 12 C.F.R. § 6.4). BRB's total consolidated assets are approximately $62.4 billion.
Prior to the issuance of the Notes, BRB's outstanding subordinated debt consists of $200,000,000 in 5.250% Subordinated Notes due 2027. Upon issuance of the Notes, BRB's total subordinated debt will increase to $550,000,000. This represents approximately 0.88% of BRB's total consolidated assets — a modest level by any measure.
The issuance of $350,000,000 in additional subordinated debt does not create a thin capitalization concern. BRB's equity capital (Tier 1 capital) substantially exceeds its subordinated debt, and the ratio of total debt (including deposits, which are the primary funding source for a commercial bank) to equity is consistent with the leverage profile of a well-capitalized banking institution. While the debt-to-equity ratio for a commercial bank is necessarily higher than for a non-financial corporation (because banks are, by nature, leveraged institutions), the relevant inquiry is whether the additional subordinated debt renders the issuer so thinly capitalized that repayment is doubtful — a concern that is not present here.
Assessment: This factor weighs in favor of debt characterization.
F. No Conversion Feature / No Equity Participation
The Notes are not convertible into equity of BRB, BRFG, or any other entity. The Indenture contains no provision, whether at the option of BRB, the holders, or otherwise, permitting the Notes to be exchanged for or converted into shares of common stock, preferred stock, or any other equity security. The holders of the Notes have no voting rights with respect to BRB or BRFG, no right to attend or participate in meetings of shareholders, and no equity participation rights of any kind.
Holders of the Notes do not share in BRB's profits beyond the stated interest. There are no contingent interest features tied to BRB's earnings, revenue, or any other performance metric. The economic return to holders is limited to the stated interest (fixed or floating, as applicable) and the return of principal at maturity or upon earlier redemption. This return profile is the hallmark of a creditor's investment, not an equity investor's.
The absence of a conversion feature is a significant indicator of debt character. Courts have recognized that convertibility into equity is one of the most important factors suggesting equity treatment, because a conversion feature gives the holder an opportunity to participate in the upside of the issuer's business — a characteristic of equity ownership. The Notes have no such feature.
Assessment: This factor weighs strongly in favor of debt characterization.
G. Identity of Holders — Arm's-Length Transaction
The Notes are being sold to unrelated third-party QIBs in a Rule 144A offering. The purchasers of the Notes have no equity interest in BRB or BRFG and are not acquiring the Notes in proportion to any existing equity holdings. The Notes are being acquired by institutional investors — including insurance companies, pension funds, mutual funds, and other professional investment managers — in arm's-length transactions at a market-determined price.
BRFG, the sole shareholder of BRB, is not acquiring any of the Notes. No officer, director, or affiliate of BRB or BRFG is acquiring any of the Notes. The initial purchasers — Wainwright Zanthor & Co., LLC, Redstone Capital Markets LLC, and Kensington Hale Securities Inc. — are independent, unaffiliated broker-dealers that have no equity interest in BRB or BRFG.
The arm's-length nature of the transaction is one of the most significant factors in the debt-equity analysis. When a purported debt instrument is held by the issuer's shareholders in proportion to their equity interests, there is a strong inference that the instrument represents an additional equity investment rather than a bona fide loan. Conversely, when the instrument is held by unrelated third parties who have negotiated at arm's length, the inference is that the instrument represents a genuine creditor-debtor relationship. The Notes fall squarely in the latter category.
This factor also eliminates any concern under the Section 385 related-party debt regulations (Treasury Regulation § 1.385-3), which by their terms apply only to debt instruments between members of the same expanded group.
Assessment: This factor weighs strongly in favor of debt characterization.
H. Payments Not Contingent on Earnings
As discussed in Section IV.C above, interest on the Notes is an unconditional obligation of BRB, payable on fixed dates regardless of BRB's profitability, cash flow, or financial condition. The Indenture does not contain any provision permitting BRB to defer, reduce, or eliminate interest payments based on earnings or at the discretion of BRB's board of directors. This stands in stark contrast to preferred stock dividends, which are typically payable only when, as, and if declared by the board of directors, and to certain hybrid instruments (such as trust preferred securities or contingent convertible bonds) on which interest may be deferred at the issuer's option.
Failure to pay interest on the Notes when due constitutes an Event of Default under Section 6.01 of the Indenture, entitling the trustee or holders of at least 25% in aggregate principal amount of the outstanding Notes to declare the principal of and accrued interest on the Notes immediately due and payable. The availability of this acceleration remedy further confirms the creditor nature of the holders' claims: equity investors have no comparable remedy for the non-payment of dividends.
Assessment: This factor weighs strongly in favor of debt characterization.
I. BRB's Ability to Obtain Credit
BRB is a top-25 U.S. commercial bank by total assets with investment-grade credit ratings (BBB from Meridian; Baa2 from Archer). BRB has demonstrated sustained access to the debt capital markets, as evidenced by its prior issuance of the 5.250% Subordinated Notes due 2027, as well as its regular issuance of senior unsecured notes, brokered certificates of deposit, and other funding instruments.
In addition to its capital markets access, BRB maintains significant borrowing capacity from the Federal Home Loan Bank ("FHLB") system, the Federal Reserve discount window, and interbank lending markets. As of December 31, 2025, BRB had approximately $8.2 billion in available but undrawn FHLB borrowing capacity and maintained a portfolio of investment securities eligible for pledging at the Federal Reserve discount window. BRB's ability to obtain credit from multiple sources on commercially reasonable terms is consistent with its status as a well-capitalized banking institution and further supports the characterization of the Notes as debt.
When an issuer is unable to obtain credit from unrelated lenders and instead turns to its shareholders for funding, this may suggest that the "loan" from shareholders is in substance an equity contribution. That concern is entirely absent here: BRB is borrowing from the very type of sophisticated institutional lenders that regularly extend credit to investment-grade borrowers, at market-determined terms.
Assessment: This factor weighs in favor of debt characterization.
J. Use of Proceeds
BRB intends to use the net proceeds from the offering for general corporate purposes, including the support and expansion of its digital banking platform (BRB Digital) and the potential future redemption of the existing 5.250% Subordinated Notes due 2027. These are ordinary course uses of funds that are consistent with the use of borrowed proceeds. The proceeds are not being used to fund the initial capitalization of BRB or to acquire the stock or assets of another corporation in a leveraged transaction.
When proceeds of a purported debt instrument are used to provide the initial capital for a new enterprise, or to fund speculative ventures with a high risk of loss, the use of proceeds may suggest that the instrument is more properly characterized as equity — a risk investment in the enterprise — rather than debt. The opposite is true here: BRB is a well-established, profitable banking institution that is borrowing to support its ongoing operations and to refinance existing indebtedness, which are quintessential debt-financed activities.
Assessment: This factor weighs in favor of debt characterization.
K. Intent of the Parties
BRB has structured and documented the Notes as debt instruments in every respect. The Notes are denominated as "Notes" and are evidenced by a formal Indenture between BRB and a trustee (Brindoval Trust Company, N.A.), which is the standard documentation format for debt securities. The Offering Memorandum, the Purchase Agreement, and the Indenture all refer to the Notes as "debt" and treat the interest payments as interest on indebtedness. BRB's financial statements and regulatory filings will report the Notes as subordinated debt, and BRB intends to deduct the interest payments on the Notes for federal income tax purposes.
The holders of the Notes, for their part, will treat the Notes as debt instruments and will include the interest in income as ordinary interest income. The initial purchasers, as underwriters, are distributing the Notes through a process that is standard for debt securities offerings, including the use of an offering memorandum formatted as a fixed-income offering circular.
There is no indication — in the transactional documents, in the negotiations between the parties, or in any other communication — that any party views the Notes as anything other than indebtedness. The objective manifestation of the parties' intent, as reflected in the documentation and the economic terms of the transaction, uniformly supports debt characterization.
Assessment: This factor weighs strongly in favor of debt characterization.
L. Overall Assessment of Multi-Factor Test
The following table summarizes the application of the traditional debt-equity factors to the Notes:
The overwhelming majority of the traditional debt-equity factors weigh in favor of characterizing the Notes as indebtedness for U.S. federal income tax purposes. The sole factor that could arguably weigh against debt — subordination — is a standard feature of bank capital instruments that has been repeatedly found insufficient by the courts to overcome the weight of the other factors favoring debt treatment. We are aware of no judicial decision or IRS ruling in which a subordinated bank debt instrument with the characteristics of the Notes (fixed maturity, unconditional obligation to pay, commercially reasonable interest, arm's-length sale to unrelated institutional investors, no conversion or equity participation features) has been recharacterized as equity.
Accordingly, based on the totality of the relevant factors, we conclude that the Notes should be treated as indebtedness for U.S. federal income tax purposes.
V. AHYDO ANALYSIS — SECTION 163(i) AND SECTION 163(e)(5)
A. Overview of AHYDO Rules
Under Section 163(e)(5) of the Code, an issuer's deduction for original issue discount on an "applicable high yield discount obligation" (an "AHYDO") is restricted. Specifically, Section 163(e)(5)(A) provides that no deduction is allowed for the "disqualified portion" of the OID on an AHYDO (the "disqualified portion" being the lesser of the amount of the OID or the portion of the total return on the instrument that exceeds the relevant benchmark rate), and Section 163(e)(5)(B) provides that the remaining portion of the OID (to the extent not disqualified) is deductible only when paid, rather than when accrued. These restrictions were enacted to prevent issuers from claiming current deductions for deferred interest on high-yield discount instruments that, in substance, more closely resemble equity.
Section 163(i)(1) of the Code defines an AHYDO as any debt instrument that satisfies all three of the following conditions:
(1) Maturity exceeding five years. The instrument has a maturity date more than five years from the date of issue.
(2) Yield exceeding AFR + 5 percentage points. The instrument's yield to maturity equals or exceeds the sum of the applicable federal rate ("AFR") in effect under Section 1274(d) for the calendar month in which the instrument is issued, plus five percentage points.
(3) Significant OID. The instrument has "significant original issue discount." Under Section 163(i)(2), an instrument has significant OID if, at the end of any accrual period ending after the date five years after the date of issue, the aggregate amount of OID that would be includible in gross income with respect to such instrument (if it were held by an original holder) exceeds the sum of the aggregate amount of interest to be paid under the instrument on or before the close of any accrual period ending on or after the date five years after the date of issue plus the product of the issue price of the instrument and its yield to maturity.
All three conditions must be satisfied for an instrument to be classified as an AHYDO. If any one of the three conditions is not met, the AHYDO limitations do not apply.
B. Application to the Notes
We analyze each of the three AHYDO conditions in turn:
Condition 1 — Maturity exceeding five years. The Notes mature on March 1, 2036, which is approximately ten years from the expected issue date of February 24, 2026. The maturity date of the Notes is clearly more than five years from the date of issue. Accordingly, the first condition of Section 163(i)(1) is satisfied.
Condition 2 — Yield to maturity exceeding AFR + 5 percentage points. The applicable federal rate for this purpose is determined under Section 1274(d) of the Code for the calendar month in which the Notes are issued. Because the Notes have a maturity of approximately ten years, the long-term AFR (applicable to instruments with terms exceeding nine years) is the relevant rate. Based on published AFR data, the long-term AFR for February 2026 is expected to be in the range of approximately 4.00% to 5.00% (the exact rate will be confirmed upon publication by the IRS of the applicable revenue ruling for February 2026, which is typically published in the preceding month). Even taking the high end of this range, the AFR + 5 percentage points threshold would be approximately 9.00% to 10.00%.
The yield to maturity of the Notes is determined taking into account the 6.750% coupon rate and the 99.750% issue price. The discount from par results in a yield to maturity that is slightly higher than the coupon rate. Specifically, the yield to maturity of the Notes, computed on a semi-annual bond equivalent basis, is approximately 6.78%. This is well below the AFR + 5 percentage points threshold of approximately 9.00% to 10.00%.
We note that the floating rate period (Compounded SOFR + 275 basis points, commencing March 1, 2031) introduces a variable element into the yield computation. For purposes of the AHYDO yield test, Treasury Regulation § 1.1275-4 and related provisions provide guidance on the treatment of variable rate instruments. Under the VRDI rules of Treasury Regulation § 1.1275-5, the yield of a variable rate debt instrument is generally computed by treating all stated interest at the qualified floating rate as if it were fixed at the rate in effect on the issue date (or, for a fixed-to-floating rate instrument, using the equivalent fixed rate methodology). Even under the most conservative assumptions regarding the level of Compounded SOFR as of the issue date, the yield to maturity of the Notes would need to exceed the AFR + 5 percentage points threshold by a substantial margin — approximately 225 to 325 basis points above the current yield — in order for the second AHYDO condition to be satisfied. There is no reasonable basis for anticipating that the yield to maturity of the Notes, computed under any applicable methodology, would approach the threshold.
Accordingly, the second condition of Section 163(i)(1) is not satisfied.
Condition 3 — Significant OID. Even if the yield test were met (which it is not), the Notes have only de minimis OID, as discussed in detail in Section VI below. The total OID on the Notes is $875,000 (the difference between the $350,000,000 stated redemption price at maturity and the $349,125,000 issue price), which is well below the statutory de minimis threshold. While the repayment of the full $350,000,000 par amount at maturity occurs after the five-year mark referenced in Section 163(i)(2), the amount of OID is de minimis and would not give rise to "significant OID" within the meaning of the statute. Because the OID is treated as zero under the de minimis rule of Section 1273(a)(3), there is no accrual of OID that could be compared to interest payments for purposes of the "significant OID" computation.
Conclusion. The Notes are not AHYDOs because the yield to maturity of the Notes does not equal or exceed the AFR plus five percentage points. Since the second condition of Section 163(i)(1) is not satisfied, the AHYDO classification fails, and the limitations under Section 163(e)(5) do not apply. BRB may deduct the interest on the Notes on an accrual basis as it accrues, subject to any other applicable limitations (such as Section 163(j), discussed in Section VII.C below).
VI. ORIGINAL ISSUE DISCOUNT ANALYSIS
A. Calculation of OID
Under Section 1273(a)(1) of the Code, the OID on a debt instrument is equal to the excess of the instrument's "stated redemption price at maturity" (the "SRPM") over its "issue price."
Issue Price. Under Treasury Regulation § 1.1273-2, the issue price of a debt instrument depends on whether the instrument is "publicly offered." A debt instrument is considered publicly offered if it is part of an issue of which a substantial amount is traded on an established securities market within the meaning of Treasury Regulation § 1.1273-2(f) or is sold for money to persons other than bond houses, brokers, or similar persons acting in the capacity of underwriters, placement agents, or wholesalers. The Notes are being sold in a Rule 144A private placement to QIBs through initial purchasers acting in their capacity as underwriters. While the determination of whether a Rule 144A offering produces a "publicly offered" debt instrument involves a factual analysis, the issue price of the Notes should, in either case, be the price at which a substantial amount of the Notes is sold to the first buyers who are not acting as underwriters, placement agents, or wholesalers. Based on the terms of the offering, the issue price of the Notes is 99.750% of par, or $349,125,000 (representing $99.750 per $100 of principal amount, multiplied by the $350,000,000 aggregate principal amount).
Stated Redemption Price at Maturity. Under Section 1273(a)(2) of the Code, the SRPM is the sum of all payments provided by the debt instrument other than "qualified stated interest" ("QSI"). Under Treasury Regulation § 1.1273-1(c), QSI is stated interest that is unconditionally payable in cash or in property (other than debt instruments of the issuer) at least annually at a single fixed rate or, in the case of a VRDI, at a qualified floating rate or certain permitted combinations thereof.
The interest payable on the Notes qualifies as QSI for the following reasons:
(i) During the Fixed Rate Period, interest is payable at a single fixed rate of 6.750% per annum, semi-annually (i.e., at intervals of less than one year), unconditionally and without regard to earnings. This is plainly QSI under Treasury Regulation § 1.1273-1(c)(1)(ii).
(ii) During the Floating Rate Period, interest is payable at a qualified floating rate (Compounded SOFR plus 275 basis points), quarterly (i.e., at intervals of less than one year), unconditionally and without regard to earnings. As discussed in Section VI.C below, Compounded SOFR is a qualified floating rate under Treasury Regulation § 1.1275-5(b)(1), and the Notes qualify as a VRDI. The floating rate interest therefore constitutes QSI under Treasury Regulation § 1.1273-1(c)(1)(iii).
Because all stated interest on the Notes constitutes QSI, the only payment included in the SRPM is the payment of the $350,000,000 aggregate principal amount at maturity. Therefore, the SRPM equals $350,000,000.
OID Computation. OID equals the SRPM ($350,000,000) minus the issue price ($349,125,000), which equals $875,000.
B. De Minimis OID Test
Under Section 1273(a)(3) of the Code and Treasury Regulation § 1.1273-1(d), if the total OID on a debt instrument is less than the "de minimis amount," the OID is treated as zero. The de minimis amount is defined as 0.25% (one-quarter of one percent, or 25 basis points) of the SRPM, multiplied by the number of complete years from the issue date to the maturity date.
For the Notes:
Issue date: February 24, 2026
Maturity date: March 1, 2036
Number of complete years to maturity: The period from February 24, 2026 to March 1, 2036 is approximately 10 years and 5 days. The number of "complete years" is determined by counting only whole years. Conservatively, using 9 complete years (from March 1, 2026 to March 1, 2035, because the issuance on February 24, 2026 does not complete a full year until February 24, 2027, which is before March 1, 2027), the calculation is as follows:
De minimis threshold (using 10 complete years): $350,000,000 × 0.0025 × 10 = $8,750,000
De minimis threshold (using 9 complete years): $350,000,000 × 0.0025 × 9 = $7,875,000
In either case, the actual OID of $875,000 is well below the de minimis threshold. Even using the more conservative figure of $7,875,000 (based on 9 complete years), the OID is only approximately 11.1% of the de minimis amount.
Conclusion. The OID on the Notes is de minimis and is treated as zero for purposes of the OID accrual rules under Sections 1272 and 1273 of the Code. Neither BRB (as issuer) nor the holders of the Notes are required to accrue OID over the term of the Notes. Instead, the de minimis OID will be included in the income of holders on a pro-rata basis as principal payments are received (i.e., at maturity or upon earlier redemption), treated as gain from the retirement of the debt instrument. For a holder that holds the Notes as a capital asset, such gain will generally be capital gain (and specifically, long-term capital gain if the Notes have been held for more than one year at the time of retirement). See Treasury Regulation § 1.1273-1(d)(2).
The de minimis nature of the OID has no effect on the debt-equity characterization of the Notes. The existence of OID, whether de minimis or otherwise, is a pricing feature that affects the timing and character of income inclusion but does not alter the fundamental characterization of the instrument as debt.
C. Treatment of the Fixed-to-Floating Rate Feature
The Notes bear interest at a fixed rate (6.750%) during the Fixed Rate Period (approximately the first five years) and at a floating rate (Compounded SOFR + 275 basis points) during the Floating Rate Period (approximately the last five years). This fixed-to-floating rate structure is a common feature of bank subordinated debt instruments designed to be callable on the reset date (here, March 1, 2031), and it raises the question of the appropriate treatment of the Notes under the