-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TlwZ2zpwZhVWn2IQxBZTSsz44WdzZx30XU2qPUVqKpvukXfUIOtTmgekExcNFHlt r7FWD393ZdeKFgM0sYDEAg== 0001085204-07-000027.txt : 20070328 0001085204-07-000027.hdr.sgml : 20070328 20070328120448 ACCESSION NUMBER: 0001085204-07-000027 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 15 CONFORMED PERIOD OF REPORT: 20061231 FILED AS OF DATE: 20070328 DATE AS OF CHANGE: 20070328 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRST BANKS, INC CENTRAL INDEX KEY: 0000710507 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 431175538 STATE OF INCORPORATION: MO FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-31610 FILM NUMBER: 07723260 BUSINESS ADDRESS: STREET 1: 135 N MERAMEC CITY: ST LOUIS STATE: MO ZIP: 63105 BUSINESS PHONE: 3148544600 MAIL ADDRESS: STREET 1: 135 N MERAMEC CITY: ST LOUIS STATE: MO ZIP: 63105 FORMER COMPANY: FORMER CONFORMED NAME: FIRST BANKS INC DATE OF NAME CHANGE: 19940805 10-K 1 fbi10k2006.txt FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2006 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______ to ________ Commission File Number - 0-20632 FIRST BANKS, INC. (Exact name of registrant as specified in its charter) MISSOURI 43-1175538 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 135 North Meramec, Clayton, Missouri 63105 (Address of principal executive offices) (Zip code) (314) 854-4600 (Registrant's telephone number, including area code) ------------------------------------------- Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered ------------------- ------------------- 8.15% Cumulative Trust Preferred Securities (issued by First Preferred Capital Trust IV and New York Stock Exchange guaranteed by First Banks, Inc.) Securities registered pursuant to Section 12(g) of the Act: None (Title of class) Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. [ ] Yes [X] No Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. [X] Yes [ ] No Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer [ ] Accelerated filer [ ] Non- accelerated filer [X] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). [ ] Yes [X] No None of the voting stock of the Company is held by non-affiliates. All of the voting stock of the Company is owned by various trusts, which were established by and for the benefit of Mr. James F. Dierberg, the Company's Chairman of the Board of Directors, and members of his immediate family. At March 28, 2007, there were 23,661 shares of the registrant's common stock outstanding.
FIRST BANKS, INC. 2006 ANNUAL REPORT ON FORM 10-K TABLE OF CONTENTS Page ---- Part I Item 1. Business............................................................................... 1 Item 1A. Risk Factors........................................................................... 14 Item 1B. Unresolved Staff Comments.............................................................. 16 Item 2. Properties............................................................................. 16 Item 3. Legal Proceedings...................................................................... 16 Item 4. Submission of Matters to a Vote of Security Holders.................................... 16 Part II Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.......................................... 16 Item 6. Selected Financial Data................................................................ 17 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.............................................................. 18 Item 7A. Quantitative and Qualitative Disclosures About Market Risk............................. 51 Item 8. Financial Statements and Supplementary Data............................................ 52 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........................................................... 52 Item 9A. Controls and Procedures................................................................ 52 Item 9B. Other Information...................................................................... 52 Part III Item 10. Directors, Executive Officers and Corporate Governance................................. 52 Item 11. Executive Compensation................................................................. 56 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.................................................... 60 Item 13. Certain Relationships and Related Transactions, and Director Independence.............. 61 Item 14. Principal Accounting Fees and Services................................................. 62 Part IV Item 15. Exhibits, Financial Statement Schedules................................................ 62 Signatures ....................................................................................... 109
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS This Annual Report on Form 10-K contains certain forward-looking statements with respect to our financial condition, results of operations and business. Generally, forward-looking statements may be identified through the use of words such as: "believe," "expect," "anticipate," "intend," "plan," "estimate," or words of similar meaning or future or conditional terms such as: "will," "would," "should," "could," "may," "likely," "probably," or "possibly." Examples of forward-looking statements include, but are not limited to, estimates or projections with respect to our future financial condition, and expected or anticipated revenues with respect to our results of operations and our business. These forward-looking statements are subject to certain risks and uncertainties, not all of which can be predicted or anticipated. Factors that may cause our actual results to differ materially from those contemplated by the forward-looking statements herein include market conditions as well as conditions affecting the banking industry generally and factors having a specific impact on us, including but not limited to: fluctuations in interest rates and in the economy, including the threat of future terrorist activities, existing and potential wars and/or military actions related thereto, and domestic responses to terrorism or threats of terrorism; the impact of laws and regulations applicable to us and changes therein; the impact of accounting pronouncements applicable to us and changes therein; competitive conditions in the markets in which we conduct our operations, including competition from banking and non-banking companies with substantially greater resources than us, some of which may offer and develop products and services not offered by us; our ability to control the composition of our loan portfolio without adversely affecting interest income; the credit risk associated with consumers who may not repay loans; the geographic dispersion of our offices; the impact our hedging activities may have on our operating results; the highly regulated environment in which we operate; and our ability to respond to changes in technology. With regard to our efforts to grow through acquisitions, factors that could affect the accuracy or completeness of forward-looking statements contained herein include: our ability to consummate pending acquisitions; the competition of larger acquirers with greater resources; fluctuations in the prices at which acquisition targets may be available for sale; the impact of making acquisitions without using our common stock; and possible asset quality issues, unknown liabilities or integration issues with the businesses that we have acquired. Refer to further discussion under "Business --Item 1A Risk Factors" for factors that may impact these forward-looking statements. We do not have a duty to and will not update these forward-looking statements. Readers of this Annual Report on Form 10-K should therefore consider these risks and uncertainties in evaluating forward-looking statements and should not place undue reliance on these statements. PART I Item 1. Business General. We are a registered bank holding company incorporated in Missouri in 1978 and headquartered in St. Louis, Missouri. We operate through our wholly owned subsidiary bank holding company, The San Francisco Company, or SFC, and SFC's wholly owned subsidiary bank, First Bank, both headquartered in St. Louis, Missouri. First Bank operates through its subsidiaries, as listed below, and its branch banking offices. First Bank's subsidiaries are wholly owned, except for SBLS LLC, which was 51.0% owned by First Bank and 49.0% owned by First Capital America, Inc. as of December 31, 2006. >> First Bank Business Capital, Inc.; >> Missouri Valley Partners, Inc., or MVP; >> Adrian N. Baker & Company, or Adrian Baker; >> Universal Premium Acceptance Corporation and its wholly owned subsidiary, UPAC of California, Inc., or collectively, UPAC; and >> Small Business Loan Source LLC, or SBLS LLC. First Bank currently operates 195 branch offices in California, Illinois, Missouri and Texas, with 217 automated teller machines, or ATMs, across the four states. Over the last ten years, our organization has grown significantly, primarily as a result of our acquisition strategy, as well as through internal growth. At December 31, 2006, we had assets of $10.16 billion, loans, net of unearned discount, of $7.67 billion, deposits of $8.44 billion and stockholders' equity of $800.4 million. Through First Bank, we offer a broad range of financial services, including commercial and personal deposit products, commercial and consumer lending, and many other financial products and services. Commercial and personal deposit products include demand, savings, money market and time deposit accounts. In addition, we market combined basic services for various customer groups, including packaged accounts for more affluent customers, and sweep accounts, lock-box deposits and cash management products for commercial customers. Commercial lending includes commercial, financial and agricultural loans, real estate construction and development loans, commercial real estate loans, small business lending, asset-based loans, trade financing and insurance premium financing. Consumer lending includes residential real estate, home equity and installment lending. Other financial services include mortgage banking, debit cards, brokerage services, employee benefit and commercial and personal insurance services, internet banking, remote deposit, ATMs, telephone banking, safe deposit boxes, and trust, private banking and institutional money management services. The revenues generated by First Bank and its subsidiaries consist primarily of interest income, generated from our loan and investment security portfolios, service charges and fees generated from our deposit products and services, and fees generated by our mortgage banking, insurance services, and trust, private banking and institutional money management services businesses. Our extensive line of products and services are offered to customers primarily within our geographic areas, which include eastern Missouri, Illinois, including the Chicago metropolitan area, southern and northern California, and Houston and Dallas, Texas. Certain loan products, including small business loans and insurance premium financing loans, are available nationwide through our subsidiaries, SBLS LLC and UPAC. Primary responsibility for managing our banking units rests with the officers and directors of each unit, but we centralize many of our overall corporate policies, procedures and administrative functions and provide centralized operational support functions for our subsidiaries. This practice allows us to achieve various operating efficiencies while allowing our banking units to focus on customer service. Various trusts, established by and administered by and for the benefit of Mr. James F. Dierberg, our Chairman of the Board, and members of his immediate family, own all of our voting stock. Mr. Dierberg and his family, therefore, control our management and policies. We have formed numerous affiliated Delaware or Connecticut business or statutory trusts. These trusts operate as financing entities and were created for the sole purpose of issuing trust preferred securities, and the sole assets of the trusts are our subordinated debentures. In conjunction with the formation of our financing entities and their issuance of the trust preferred securities, we issued subordinated debentures to each of our financing entities in amounts equivalent to the respective trust preferred securities plus the amount of the common securities of the individual trusts, as outlined in the following table and more fully described in Note 12 to our Consolidated Financial Statements. We pay interest on our subordinated debentures to our respective financing entities. In turn, our financing entities pay distributions to the holders of the trust preferred securities. The interest payable on our subordinated debentures is included in interest expense in our consolidated statements of income. The trust preferred securities issued by First Preferred Capital Trust IV are publicly held and traded on the New York Stock Exchange, or NYSE. The remaining trust preferred securities were issued in private placements. The trust preferred securities have no voting rights except in certain limited circumstances. A summary of the outstanding trust preferred securities issued by our affiliated statutory and business trusts, and our related subordinated debentures issued to our respective trusts in conjunction with the trust preferred securities offerings, is as follows:
Date of Interest Preferred Subordinated Name of Trust Trust Formation Type of Offering Rate Securities Debentures ------------- --------------- ---------------- ---- ---------- ---------- First Bank Capital Trust April 2002 Private Placement Variable $25,000,000 $25,774,000 First Preferred Capital Trust IV January 2003 Publicly Underwritten 8.15% 46,000,000 47,422,700 First Bank Statutory Trust March 2003 Private Placement 8.10% 25,000,000 25,774,000 First Bank Statutory Trust II September 2004 Private Placement Variable 20,000,000 20,619,000 First Bank Statutory Trust III November 2004 Private Placement Variable 40,000,000 41,238,000 First Bank Statutory Trust IV February 2006 Private Placement Variable 40,000,000 41,238,000 First Bank Statutory Trust V April 2006 Private Placement Variable 20,000,000 20,619,000 First Bank Statutory Trust VI June 2006 Private Placement Variable 25,000,000 25,774,000 First Bank Statutory Trust VII December 2006 Private Placement Variable 50,000,000 51,547,000 First Bank Statutory Trust VIII February 2007 Private Placement Variable 25,000,000 25,774,000
Recent Developments. At the regular meeting of the First Banks, Inc., or First Banks, Board of Directors held on January 26, 2007, Mr. Allen H. Blake announced his retirement and resigned his positions as Director, President and Chief Executive Officer of First Banks, effective March 31, 2007. Upon acceptance of Mr. Blake's resignation, the Board of Directors elected Mr. Terrance M. McCarthy as President and Chief Executive Officer of First Banks, effective April 1, 2007. Strategy. In the development of our banking franchise, we have focused on building and reorganizing our infrastructure as necessary to accomplish our objectives for organic growth, and to supplement this growth with de novo and acquisition strategies to further expand our banking franchise. Our organization is structured to leverage a strong sales force in each of our major market areas in an effort to continue to provide quality financial products and the highest level of customer service to our expanding customer base. Within the individual markets, the sales organization is supported by a regional structure to position it to serve the market opportunities within each area in the four states in which we operate. We are committed to serving the small business and mid-sized commercial segments along with the retail consumer market. We have devoted significant resources to improving our infrastructure dedicated to rapid approval, underwriting and documentation of consumer loans, strengthening our small business services area, increasing our commercial business development staff, reorganizing our marketing and product management areas, improving the quality and depth of our regional commercial and consumer management groups, and increasing resources for financial service product line and delivery systems, branch development and training, and administrative and operational support. In the past three years, we have added three business lines, including an insurance premium financing company, an insurance brokerage agency and a small business lending group, providing our customers with new and expanded products and services to complement our existing line of financial services. In line with our small business lending strategy, we segmented the loan origination and servicing functions and added new business development officers throughout our markets. With the significant expansion of our Chicago banking franchise in the past three years, we have created a complete regional structure in the Chicago area as well as three additional commercial banking groups to enable our credit administration, commercial real estate and commercial and industrial banking groups, branch administration, credit review, and human resources and training functions to better serve our customers and employees. We continue to focus on modifying and effectively repositioning our internal and external resources to better serve the markets in which we operate. Although these efforts have led to certain increased capital expenditures and noninterest expenses, we expect they will lead to additional internal growth, more efficient operations and improved profitability over the long term, in accordance with our long-term corporate vision. In the development of our banking franchise, we acquire other entities providing financial services as one means of achieving our growth objectives and to augment internal growth. Acquisitions may serve to enhance our presence in a given market, to expand the extent of our market area, to enable us to enter new or noncontiguous markets or to enable us to expand the array of financial services that we provide. Due to the nature of our ownership, we have elected to engage only in those acquisitions that can be accomplished for cash, rather than by issuing securities, which given the characteristics of the acquisition arena may, at times, place us at a competitive disadvantage relative to other acquirers offering stock transactions. This results from the market attractiveness of other financial institutions' stock and the advantages of tax-free exchanges to the selling shareholders. Our acquisition activities are generally somewhat sporadic because we may consummate multiple transactions in a particular period, followed by a substantially less active acquisition period. Furthermore, the intangible assets recorded in conjunction with these acquisitions create an immediate reduction in our regulatory capital, providing further financial disincentives to paying large premiums in cash acquisitions. Recognizing these facts, we generally follow certain patterns in our acquisitions. First, we generally acquire several smaller institutions, sometimes over an extended period of time, rather than a single larger one. We attribute this approach to the constraints imposed by the amount of funds required for a larger transaction, as well as the opportunity to minimize the aggregate premium required through smaller individual transactions. We may, however, periodically acquire larger institutions that provide us with the opportunity to rapidly expand our market presence in a highly desired market area. Secondly, in some acquisitions, we may acquire institutions having significant asset-quality, ownership, regulatory or other problems. We seek to address the risks of these issues by adjusting the acquisition pricing, accompanied by appropriate remedial attention after consummation of the transaction. In these institutions, these issues may diminish their attractiveness to other potential acquirers, and therefore may reduce the amount of acquisition premium required. Finally, we may pursue our acquisition strategy in other geographic areas, or pursue internal growth more aggressively because cash transactions may not be economically viable in extremely competitive acquisition markets. Our acquisitions have allowed us to significantly expand our presence throughout our geographic markets, improve operational efficiencies, convey a more consistent image and quality of service and more cohesively market and deliver our products and services. Following our acquisitions, various undertakings are necessary to effectively integrate the acquired entities into our business systems and culture. While the specific activities required are dependent upon the individual circumstances surrounding each acquisition, the majority of our efforts have been concentrated in various areas including, but not limited to: (a) improving asset quality; (b) reducing unnecessary, duplicative and/or excessive expenses including personnel, information technology and certain other operational and administrative expenses; (c) maintaining, repairing and, in some cases, refurbishing bank premises necessitated by the deferral of such projects by some of the acquired entities; (d) renegotiating long-term leases that provide space in excess of that necessary for banking activities and/or at rates in excess of current market rates, or subleasing excess space to third parties; (e) relocating branch offices that are not adequate, conducive or convenient for banking operations; and (f) managing actual or potential litigation that existed with respect to acquired entities to minimize the overall costs of negotiation, settlement or litigation. The post-acquisition process also includes the combining of separate and distinct entities together to form a cohesive organization with common objectives and focus. We have invested and continue to invest significant resources to reorganize staff, recruit and train personnel where needed, and establish the direction and focus necessary for the combined entity to take advantage of the opportunities available to it. This investment generally contributes to increases in noninterest expense, and results in the creation of new banking units within the newly integrated combined entity, which convey a more consistent image and quality of service. The new banking units provide a broad array of banking products to their customers and generally compete effectively in their marketplaces, even in the presence of other financial institutions with much greater resources. While some of these modifications do not contribute to reductions of noninterest expense, they contribute to the commercial and retail business development efforts of the combined entity, and ultimately to their prospects for improving future profitability. Our business strategy also encompasses the opening of de novo branch offices as another means of achieving our growth objectives, particularly when our acquisition prospects are somewhat limited, primarily due to the market environment requiring significantly higher premiums in order to transact financial institution acquisitions. Our de novo branch strategy also provides similar opportunities to our acquisition strategy by allowing us to enhance our presence in our existing markets and enter new markets. Additionally, we generally have more flexibility in selecting the most opportunistic sites for our de novo branches, constructing the branch offices in accordance with our standard business model and marketing and promoting our customized products and services under our long-established trade name. We have plans underway to open several de novo branch offices over the next few years. We expect to further concentrate our efforts on this portion of our business strategy while continuing to identify viable acquisition candidates at reasonable acquisition premiums that are commensurate with our established acquisition strategy. Acquisitions. In the continuing development of our banking franchise, we emphasize acquiring other financial institutions and financial services companies as one means of achieving our growth objectives. After we consummate an acquisition, we expect to enhance the franchise of the acquired entity by supplementing the marketing and business development efforts to broaden the customer bases, strengthening particular segments of the business or filling voids in the overall market coverage. During the three years ended December 31, 2006, we completed ten bank acquisitions, four branch office purchases, the acquisition of an insurance premium financing company and an insurance brokerage agency, and purchased substantially all of the assets and assumed certain liabilities of a company that originates, sells and services SBA loans to small business concerns. As demonstrated in the following table, our acquisitions during the past three years have significantly increased our banking franchise presence in the dynamic market areas of metropolitan Chicago, Dallas and Houston, and further augmented our existing markets in southern California and the Midwest. We funded these acquisitions from available cash reserves, borrowings under our secured credit facility and proceeds from the issuance of subordinated debentures. These transactions, which are further described in Note 2 to our Consolidated Financial Statements, are summarized as follows:
Loans, Net Net of Goodwill Banking Entity / Total Unearned Investment Purchase and Other Locations Closing Date Assets Discount Securities Deposits Price Intangibles Acquired ------------ ------ -------- ---------- -------- ----- ----------- -------- (dollars expressed in thousands) 2006 - ---- MidAmerica National Bank Peoria and Bloomington, Illinois Branch Offices (1) November 10, 2006 $ 158,300 154,100 -- 48,200 -- 2,400 1 First Bank of Beverly Hills Beverly Hills, California Branch Office (2) November 3, 2006 157,500 -- -- 156,100 -- 8,700 1 TeamCo, Inc. Oak Lawn, Illinois August 31, 2006 67,900 43,100 16,100 60,100 13,900 9,600 2 San Diego Community Bank Chula Vista, California August 15, 2006 91,700 78,600 2,800 76,100 25,500 11,800 3 Universal Premium Acceptance Corporation Lenexa, Kansas May 31, 2006 152,800 149,200 -- -- 52,700 (3) 44,700 -- First Independent National Bank Plano, Texas May 1, 2006 68,200 59,600 800 55,500 19,200 11,800 3 Pittsfield Community Bancorp, Inc. Pittsfield, Illinois (4) April 28, 2006 17,600 11,100 3,300 12,300 5,100 1,300 -- Adrian N. Baker & Company Clayton, Missouri March 31, 2006 3,000 -- -- -- 7,400 8,000 -- Dallas National Bank Richardson, Texas Branch Office (5) January 20, 2006 1,100 100 -- 1,100 -- -- 1 First National Bank of Sachse Sachse, Texas January 3, 2006 76,200 49,300 14,300 66,200 20,800 12,400 1 --------- -------- -------- ---------- -------- -------- -- $ 794,300 545,100 37,300 475,600 144,600 110,700 12 ========= ======== ======== ========== ======== ======== == 2005 - ---- Northway State Bank Grayslake, Illinois October 31, 2005 $ 50,400 41,800 -- 45,200 10,300 5,400 1 International Bank of California Los Angeles, California September 30, 2005 151,600 113,500 14,700 132,100 33,700 15,800 5 Bank and Trust Company Roodhouse, Illinois Branch Office (6) September 23, 2005 5,000 -- -- 5,100 -- 100 -- FBA Bancorp, Inc. Chicago, Illinois April 29, 2005 73,300 54,300 5,400 55,700 10,500 4,500 3 --------- -------- -------- ---------- -------- -------- -- $ 280,300 209,600 20,100 238,100 54,500 25,800 9 ========= ======== ======== ========== ======== ======== ==
Loans, Net Net of Goodwill Banking Entity / Total Unearned Investment Purchase and Other Locations Closing Date Assets Discount Securities Deposits Price Intangibles Acquired ------------ ------ -------- ---------- -------- ----- ----------- -------- (dollars expressed in thousands) 2004 - ---- Hillside Investors, Ltd. Hillside, Illinois November 30, 2004 $1,196,700 683,300 393,200 1,102,000 67,400 10,600 16 Small Business Loan Source, Inc. (7) Houston, Texas August 31, 2004 47,100 24,000 -- -- 45,600 5,900 -- Continental Mortgage Corporation - Delaware Aurora, Illinois July 30, 2004 140,700 73,600 44,800 104,600 4,200 (8) 2,100 2 ---------- -------- -------- ---------- -------- -------- -- $1,384,500 780,900 438,000 1,206,600 117,200 18,600 18 ========== ======== ======== ========== ======== ======== == - --------------------------- (1) The Peoria and Bloomington, Illinois branch offices of MidAmerica National Bank, or MidAmerica, were acquired by First Bank through a purchase of certain assets and assumption of certain liabilities of the branch offices. Total assets consisted primarily of loans and fixed assets. Concurrent with this transaction, First Bank closed and merged one of the former MidAmerica banking offices into an existing First Bank banking office located in Peoria, Illinois, and, in addition, First Bank closed and merged one of its existing banking offices into one of the former MidAmerica banking offices located in Peoria, Illinois. (2) The Beverly Hills, California branch office of First Bank of Beverly Hills was acquired by First Bank through a purchase of certain assets and assumption of certain liabilities of the branch office. Total assets consisted primarily of cash received upon assumption of the deposit liabilities and certain assets. (3) In conjunction with the acquisition of UPAC, First Bank repaid in full the outstanding senior and subordinated notes of UPAC, including accumulated accrued and unpaid interest, totaling $125.9 million. (4) Community Bank operated two banking offices, one in Pittsfield, Illinois and one in Mount Sterling, Illinois. On June 16, 2006, First Bank sold the Mount Sterling, Illinois banking office to Beardstown Savings, s.b. At the time of the sale, the Mount Sterling banking office had assets of $2.7 million, loans, net of unearned discount, of $2.4 million, and deposits of $3.7 million. First Bank consolidated its existing banking office in Pittsfield with and into the acquired Pittsfield banking office. (5) The Richardson, Texas branch office of Dallas National Bank was acquired by First Bank through a purchase of certain assets and assumption of certain liabilities of the branch office. Total assets consisted primarily of cash received upon assumption of the deposit liabilities and certain assets. (6) The Roodhouse, Illinois branch of Bank and Trust Company was acquired by First Bank through a purchase of certain assets and assumption of certain liabilities of the branch office. Total assets consisted primarily of cash received upon assumption of the deposit liabilities. (7) SBLS LLC, a Nevada-based limited liability company and subsidiary of First Bank, purchased substantially all of the assets and assumed certain liabilities of Small Business Loan Source, Inc., or SBLS. In conjunction with this transaction, on August 30, 2004, First Bank granted to First Capital America, Inc., or FCA, a corporation owned by our Chairman and members of his immediate family, an option to purchase Membership Interests of SBLS LLC. FCA exercised this option on June 30, 2005 and paid First Bank $7.4 million in cash. As a result of this transaction, SBLS LLC became 51.0% owned by First Bank and 49.0% owned by FCA. (8) In conjunction with the acquisition of Continental Mortgage Corporation - Delaware, or CMC, First Banks redeemed in full all of the outstanding subordinated promissory notes of CMC, including accumulated accrued and unpaid interest, totaling $4.5 million in aggregate.
Despite the significant expenses we incurred in the amalgamation of the acquired entities into our corporate culture and systems, and in the expansion of our organizational capabilities, the earnings of the acquired entities and the increased net interest income resulting from the transition in the composition of our loan and deposit portfolios have contributed to improving net income. For the years ended December 31, 2006, 2005 and 2004, net income was $111.7 million, $96.9 million and $82.9 million, respectively. Additional information pertaining to our business and results of operations is included in the information set forth in pages 18 through 51 of Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," and in pages 101 through 102 of "Note 20 to our Consolidated Financial Statements," and is incorporated herein by reference. Although we may encounter certain short-term adverse effects on our operating results associated with acquisitions, we believe the long-term benefits of our acquisition program will exceed the short-term issues encountered with certain acquisitions. Accordingly, in addition to concentrating on internal growth through continued efforts to further develop our corporate infrastructure and product and service offerings, we expect to continue to identify and pursue opportunities for further growth through acquisitions and expansionary de novo branch activities. Pending Acquisitions. On November 7, 2006, we entered into an Agreement and Plan of Reorganization providing for the acquisition of Royal Oaks Bancshares, Inc. and its wholly owned banking subsidiary, Royal Oaks Bank, ssb (collectively, Royal Oaks). Royal Oaks was headquartered in Houston, Texas and operated five banking offices in the Houston area and was in the process of opening an additional de novo branch banking office, which is now scheduled to open in the second quarter of 2007. As further described in Note 25 to our Consolidated Financial Statements, we completed our acquisition of Royal Oaks on February 28, 2007. De Novo Branch Offices. During the three years ended December 31, 2006, we opened the following five de novo branch offices: Branch Office Location Date Opened ---------------------- ----------- Farmington, Missouri January 18, 2005 San Diego, California August 16, 2004 McKinney, Texas July 19, 2004 Wildwood, Missouri February 20, 2004 Houston, Texas February 9, 2004 Acquisition and Integration Costs. Certain costs associated with our acquisitions are accrued as of the respective consummation dates, including costs that we incur related to salary continuation agreements, or other similar agreements, of executive management and certain other employees of the acquired entities that were in place prior to the acquisition dates, and costs relating to adjustments to the staffing levels of the acquired entities or to the anticipated termination of information technology or item processing contracts of the acquired entities prior to their stated contractual expiration dates. A summary of the cumulative acquisition and integration costs attributable to our acquisitions, which were accrued as of the consummation dates of the respective acquisition, are summarized in Note 2 to our Consolidated Financial Statements. These acquisition and integration costs are reflected in accrued and other liabilities in our consolidated balance sheets. As the obligation to make payments under these agreements is accrued at the consummation date, such payments do not have any impact on our consolidated statements of income. We also incur integration costs associated with our acquisitions that are expensed in our consolidated statements of income that relate principally to additional costs incurred in conjunction with the information technology conversions of the respective entities, as further discussed under "Management's Discussion and Analysis of Financial Condition and Results of Operations --Comparison of Results of Operations for 2006 and 2005, and --Comparison of Results of Operations for 2005 and 2004." Lending Activities. As further discussed under "Management's Discussion and Analysis of Financial Condition and Results of Operations --Loans and Allowance for Loan Losses," our business development efforts are primarily focused on the origination of the following general loan types: commercial, financial and agricultural loans; real estate construction and land development loans; commercial real estate mortgage loans; and to a lesser extent, residential real estate mortgage loans. Our lending strategy emphasizes quality, growth and diversification. Throughout our organization, we employ a common credit underwriting policy. In addition to underwriting based on estimates and projection of financial strength, collateral values and future cash flows, most loans to borrowing entities other than individuals require the guarantee of the parent company or entity sponsor, or in the case of smaller entities, the personal guarantees of the principals. Our enhanced business development resources continue to assist in the realignment of certain acquired loan portfolios, which were skewed toward loan types that reflected the abilities and experiences of the management members of the acquired entities. In order to achieve a more diversified portfolio, to address asset-quality issues in the portfolios and to achieve a higher interest yield on our loan portfolio, we reduced a substantial portion of the loans that were acquired in certain acquisitions through payments, refinancing with other financial institutions, charge-offs and, in certain instances, sales of loans. As the acquired loan portfolios decrease, we attempt to replenish them with higher yielding loans that are internally generated by our business development function. With our acquisitions, we have expanded our business development function into the newly acquired market areas. We also continued to grow through internal growth. Consequently, in spite of relatively large reductions in certain acquired portfolios, our aggregate loan portfolio, net of unearned discount, increased 41.7% from $5.41 billion at December 31, 2001, to $7.67 billion at December 31, 2006. In addition to restructuring our loan portfolio, we also have experienced a change in the composition of our deposit base, through deposit development programs and the mix of deposits acquired through our recent acquisitions. A majority of our deposit development programs are directed toward increased transaction accounts, such as demand and savings accounts. However, we have recently experienced increased time deposits, coupled with higher deposit rates paid on certain products, resulting from the highly competitive rate market. We have also expanded our development of multiple account relationships with individual customers by broadening our relationship with existing customers and the products provided to our customers. This growth is accomplished by cross-selling various products and services, packaging account types and offering incentives to deposit customers on other deposit or non-deposit services. The expansion of our small business market lending provides additional opportunities to cross sell other financial services such as investment, trust, insurance and traditional personal banking services to small business owners. In addition, commercial borrowers are encouraged to maintain their operating deposit accounts with us. Our time deposits have increased to $3.83 billion at December 31, 2006, representing 45.3% of total deposits, as compared to $3.15 billion, or 41.8% of total deposits, at December 31, 2005. Our demand and savings accounts have increased to $4.62 billion at December 31, 2006, representing 54.7% of total deposits, as compared to $4.39 billion, or 58.2% of total deposits, at December 31, 2005, reflecting our continued focus on transactional accounts and full service deposit relationships with our customers. Commercial, Financial and Agricultural. Our commercial, financial and agricultural loan portfolio, including lease financing, was $1.93 billion, or 25.2% of total loans, at December 31, 2006, compared to $1.62 billion, or 23.1% of total loans, at December 31, 2005. The primary component of commercial, financial and agricultural loans is commercial loans, which are made based on the borrowers' general credit strength and ability to generate cash flows for repayment from income sources. Most of these loans are made on a secured basis, generally involving the use of company equipment, inventory and/or accounts receivable, and, from time to time, real estate, as collateral. Regardless of collateral, substantial emphasis is placed on the borrowers' ability to generate cash flow sufficient to operate the business and provide coverage of debt servicing requirements. Commercial loans are frequently renewable annually, although some terms may be as long as five years. These loans typically require the borrower to maintain certain operating covenants appropriate for the specific business, such as profitability, debt service coverage and current asset and leverage ratios, which are generally reported and monitored on a quarterly basis and subject to more detailed annual reviews. Commercial loans are made to customers primarily located in First Bank's geographic trade areas of California, Illinois, Missouri and Texas who are engaged in manufacturing, retailing, wholesaling and service businesses. This portfolio is not concentrated in large specific industry segments that are characterized by sufficient homogeneity that would result in significant concentrations of credit exposure. Rather, it is a highly diversified portfolio that encompasses many industry segments. Within both our real estate and commercial lending portfolios, we strive for the highest degree of diversity that is practicable. We also emphasize the development of other service relationships, particularly deposit accounts, with our commercial borrowers. Real Estate Construction and Development. Our real estate construction and land development loan portfolio was $1.83 billion, or 23.9% of total loans, at December 31, 2006, compared to $1.56 billion, or 22.3% of total loans, at December 31, 2005. Real estate construction and land development loans include commitments for construction of both residential and commercial properties. Commercial real estate projects often require commitments for permanent financing from other lenders upon completion of the project and, more typically, may include a short-term amortizing component of the financing from the bank. Commitments for construction of multi-tenant commercial and retail projects generally require lease commitments from a substantial primary tenant or tenants prior to commencement of construction. We typically engage in multi-phase, multi-tenant projects, as opposed to large vertical projects, that allow us to complete the projects in phases and limit the number of tenant building starts based upon successful lease and/or sale of the tenant units. We finance some projects for borrowers whose home office is located within our trade area but the particular project may be outside our normal trade area. Although we generally do not engage in developing commercial and residential construction lending business outside of our trade area, certain loans acquired in recent acquisitions have been related to projects outside our trade area. Residential real estate construction and development loans are made based on the cost of land acquisition and development, as well as the construction of the residential units. Although we finance the cost of display units and units held for sale, a substantial portion of the loans for individual residential units have purchase commitments prior to funding. Residential condominium projects are funded as the building construction progresses, but funding of unit finishing is generally based on firm sales contracts. Commercial Real Estate. Our commercial real estate loan portfolio was $2.20 billion, or 28.7% of total loans, at December 31, 2006, compared to $2.11 billion, or 30.1% of total loans, at December 31, 2005. Commercial real estate loans include loans for which the intended source of repayment is rental and other income from the real estate. This includes commercial real estate developed for lease to third parties as well as the owner's occupancy. The underwriting of owner occupied commercial real estate loans generally follows the procedures for commercial lending described above, except that the collateral is real estate, and the loan term may be longer. The primary emphasis in underwriting loans for which the source of repayment is the performance of the collateral is the projected cash flow from the real estate and its adequacy to cover the operating costs of the project and the debt service requirements. Secondary emphasis is placed on the appraised value of the real estate, with the requirement that the appraised liquidation value of the collateral must be adequate to repay the debt and related interest in the event the cash flow becomes insufficient to service the debt. Generally, underwriting terms require the loan principal not to exceed 80% of the appraised value of the collateral and the loan maturity not to exceed ten years. Commercial real estate loans are made for commercial office space, retail properties, hospitality, industrial and warehouse facilities and recreational properties. We rarely finance commercial real estate or rental properties that do not have lease commitments for a majority of the rentable space. Residential Real Estate Mortgage. Our residential real estate mortgage loan portfolio was $1.27 billion, or 16.6% of total loans, at December 31, 2006, compared to $1.21 billion, or 17.3% of total loans, at December 31, 2005. Residential real estate mortgage loans are primarily loans secured by single-family, owner-occupied properties. These loans include both adjustable rate and fixed rate mortgage loans. Although we typically originate residential real estate mortgage loans for sale in the secondary mortgage market in the form of a mortgage-backed security or to various private third-party investors, from time-to-time, we retain certain residential mortgage loans in our loan portfolio as directed by management's business strategies. These strategies are reflected in the expansion of our one-to-four family residential real estate mortgage loans, excluding loans held for sale, since 2004, with a home equity product line campaign in mid-2004 and our business strategy decision in mid-2003 to retain a portion of our new loan production in our real estate mortgage portfolio to provide more diversification within our loan portfolio and to compensate for continued weak loan demand in other sectors of our loan portfolio at that time. In addition, in the third quarter of 2005, we began retaining additional mortgage loan production in our residential real estate mortgage portfolio, including 15-year fixed rate, conforming conventional adjustable rate mortgages and other similar products, which contributed to an increase in this portion of our loan portfolio and represented a strategy we employed throughout the first and second quarters of 2006 prior to reverting to our longer-term business strategy of selling the majority of our mortgage loan production in the secondary mortgage market. Nonperforming Loans. Our nonperforming loans were $48.7 million, $97.2 million and $85.8 million at December 31, 2006, 2005 and 2004, respectively, representing 0.64%, 1.38% and 1.40%, respectively, of total loans, as further discussed under "Management's Discussion and Analysis of Financial Condition and Results of Operations --Loans and Allowance for Loan Losses." These levels of nonperforming loans, particularly in 2004 and 2005, are higher than our historical averages which we attribute to our acquisitions, growth within our loan portfolio and increased commercial lending activities. During 2004 and 2005, our commercial real estate portfolio experienced increasing amounts of nonperforming loans, largely attributable to the problem loans acquired with our acquisition of CIB Bank in November 2004, as further discussed below. During 2004, 2005 and 2006, we also experienced increasing amounts of nonperforming loans within our real estate construction and development loan portfolio, reflective of current market conditions surrounding land acquisition and development loans, including slowdowns in unit sales. Although the level of nonperforming loans associated with our acquisitions completed in 2006 and 2005 was not significant, the level of nonperforming loans associated with our acquisitions completed in 2004 was substantial. We had been experiencing higher levels of nonperforming loans during 2002 and 2003, primarily attributable to general economic conditions, additional problems identified in certain acquired loan portfolios and the continued deterioration of the portfolio of leases in our commercial leasing portfolio, particularly the segment related to the airline industry following the events of September 11, 2001. Throughout 2004, we had begun to exhibit a substantial improvement in the level of our nonperforming loans, primarily as a result of significant loan payoffs, the sale of a portion of our commercial leasing portfolio in mid-2004, the sale of certain acquired nonperforming loans, the strengthening of certain loans and our continued efforts to improve asset quality. However, we experienced a significant increase in the level of our nonperforming loans associated with our acquisition of CIB Bank in November 2004. As of the date of the acquisition, CIB Bank had $60.3 million of nonperforming loans, which represented approximately 8.8% of CIB Bank's total loan portfolio, largely attributable to a significant concentration in commercial real estate loans outstanding to a relatively small number of borrowers. When we analyzed the CIB Bank acquisition during our due diligence process prior to the acquisition, we determined the level of problem loans that we expected to acquire with this acquisition would, when combined with our existing portfolio of such loans, result in a level of problem loans that was unacceptable to management. Consequently, during the fourth quarter of 2004, we completed the sale of approximately $50.2 million of problem loans, including $19.1 million of nonperforming loans, which include loans on nonaccrual status and restructured loans. We had anticipated these problems in negotiating the acquisition price of CIB Bank. While CIB Bank had utilized a long-term workout strategy to address certain nonperforming assets, our strategy was to address problem assets in a more accelerated manner. Accordingly, we elected to hold for sale a portion of the problem assets acquired from CIB Bank. In December 2004, we transferred $18.3 million of CIB Bank's nonperforming loans to loans held for sale and recorded a corresponding charge of $5.4 million to our allowance for loan losses to reduce the loans held for sale to their estimated fair value, net of costs, that was expected to be realized at the time of the sale, resulting in $12.9 million of loans classified as held for sale at December 31, 2004, that were subsequently sold in early 2005, as further discussed below. Furthermore, we increased the allowance for loan losses by $15.7 million to reflect the additional reserves associated with the loans transferred to loans held for sale and the application of our loss factors to CIB Bank's loan portfolio risk ratings. This reflects our use of strategies for more rapid disposition and recovery of certain acquired classified and nonperforming assets. The level of nonperforming loans related to our CIB Bank acquisition declined to $50.5 million at December 31, 2004, representing 58.8% of our total nonperforming loans. As further described in Note 2 to our Consolidated Financial Statements, we completed the sale of the loans during the first and second quarters of 2005. As a result of loan payoffs prior to the sales and sales prices significantly in excess of the original third-party bid estimates for certain loans held for sale, we recorded a $10.0 million reduction in goodwill to adjust loans held for sale, net of the related tax effect. During 2005, we experienced continued improvement in our portfolio of nonperforming loans through the first nine months of the year, however, further deterioration of certain acquired loans in the fourth quarter of 2005 contributed to an increase in nonperforming loans for 2005 and the decision to sell certain loans and transfer them to our loans held for sale portfolio. This increase was primarily associated with the deterioration of a few large credit relationships during the fourth quarter of 2005, including two relationships totaling $31.5 million. As a result, on December 31, 2005, we recognized $7.6 million of loan charge-offs in conjunction with the transfer of approximately $59.7 million of nonperforming loans to our held for sale portfolio (of which $6.0 million in charge-offs and $56.1 million of loans transferred were associated with the CIB Bank acquired portfolio). These loans included the two large credit relationships that had deteriorated during the fourth quarter of 2005 and one credit relationship of $12.4 million that was included in nonperforming loans at December 31, 2004 with a value of $14.5 million, all of which were acquired in the purchase of CIB Bank. The $59.7 million represented the estimated fair value, net of costs, that was expected to be realized at the time of sale. The overall increase in nonperforming loans in 2005 was partially offset by significant improvement of 21.0% in the level of nonperforming loans during the first three quarters of 2005 resulting from the sale of certain acquired nonperforming loans, strengthening of certain loans, and loan payoffs and/or external refinancing of various credits. A portion of the loan payoffs and sales during the first quarter of 2005 pertaining to certain acquired nonperforming loans that were classified as loans held for sale as of December 31, 2004 contributed to a reallocation of the purchase price on our acquisition of CIB Bank, as previously discussed and further described in Note 2 to our Consolidated Financial Statements. The level of nonperforming loans related to our CIB Bank acquisition, which had declined to $32.8 million at the end of the third quarter of 2005 from sales of loans and additional loan payoffs, increased to $55.0 million, or 56.6% of nonperforming loans, at December 31, 2005 as a result of the further deterioration of the few credit relationships in the fourth quarter of 2005, as previously mentioned. Through loan payoffs, the sale of certain remaining nonperforming loans and continued aggressive collection efforts, we did not have any nonperforming loans associated with our acquisition of CIB Bank at December 31, 2006, as further discussed below. In January 2006, we received a payoff on one of the nonperforming loans in our held for sale portfolio, reducing the held for sale portfolio by $12.4 million and resulting in the recognition of a $5.0 million loan recovery. In addition, in March 2006, we completed the sale of a majority of the remaining nonaccrual loans in our held for sale portfolio, reducing the held for sale portfolio by $32.5 million, and in September 2006, we recorded a $1.1 million write-down on a remaining nonperforming loan in our held for sale portfolio and transferred the loan at its estimated fair value of $13.5 million back to our loan portfolio. We subsequently received a payoff on this nonperforming loan for the amount of the adjusted carrying value in December 2006. Furthermore, in the fourth quarter of 2006, we elected to sell certain nonperforming loans and recognized loan charge-offs of $2.3 million in conjunction with the transfer of $32.6 million of certain loans to our held for sale portfolio prior to their sale, including $14.8 million of nonperforming loans. We completed the sale of these loans held for sale in December 2006 and recognized a pre-tax gain of $3.7 million. These reductions in loans during 2006 were partially offset by deterioration within our one-to-four family residential loan portfolio primarily due to current market conditions, as well as several credit relationships, primarily within our residential development and construction portfolio in late 2006, that were placed on nonaccrual status during 2006. We believe the levels of our nonperforming assets, while largely attributable to our acquisitions and the overall risk in our loan portfolio, are also reflective of cyclical trends experienced within the banking industry as a result of economic conditions within our market areas. During 2006, we successfully reduced our nonperforming loans by $48.5 million, or 49.9%, and we will continue our efforts to further reduce the overall level of these assets through an ongoing process of problem loan work-outs, loan payoffs and external refinancings, and possibly additional sales of certain nonperforming loans. Loans past due 90 days or more and still accruing interest remained relatively flat, totaling $5.7 million at December 31, 2006, compared to $5.6 million at December 31, 2005, but showed significant improvement during 2005, decreasing $23.1 million from $28.7 million at December 31, 2004. Loan charge-offs, net of recoveries, decreased to $6.8 million for 2006, from $13.4 million for 2005, and $24.8 million for 2004, as further discussed under "Management's Discussion and Analysis of Financial Condition and Results of Operations --Loans and Allowance for Loan Losses." SBLS LLC's purchase of substantially all of the assets of SBLS in August 2004 resulted in an increase to nonperforming loans of $8.8 million, which represented approximately 36.7% of SBLS's loan portfolio at the time of acquisition. SBLS LLC held a significant concentration of assets associated with the shrimping vessel industry, reflected in both loans and other repossessed assets. The shrimping vessel industry concentration and its depressed status were reflected in our net asset purchase price. SBLS LLC's asset concentration associated with the distressed shrimping vessels industry further deteriorated in 2005 due to higher interest rates, increased fuel costs, and the physical damage to several of the vessels by Hurricane Katrina. As a result, the SBA agreed to repurchase SBLS LLC's entire shrimping vessels portfolio, and these loans were placed in liquidation status resulting in the recognition of substantial loan losses in 2005. Throughout 2006, the majority of these loans have been fully liquidated via completion of the sale of the underlying collateral and/or the collection of insurance proceeds associated with vessels that were deemed to be irreparable. SBLS LLC's nonperforming loans have declined substantially since the date of acquisition to $1.6 million at December 31, 2006, from $1.8 million and $6.2 million at December 31, 2005 and 2004, respectively. SBLS LLC's net loan charge-offs were $256,000 for 2006, compared to $3.8 million in 2005 and $690,000 in 2004. Market Areas. As of December 31, 2006, First Bank's 187 banking facilities were located in California, Illinois, Missouri and Texas. First Bank operates in the St. Louis metropolitan area, in eastern Missouri and throughout Illinois, including Chicago. First Bank also operates in southern California, including San Diego and the greater Los Angeles metropolitan area, including Ventura County, Riverside County and Orange County; in Santa Barbara County; in northern California, including the greater San Francisco, San Jose and Sacramento metropolitan areas; and in Texas in the Houston and Dallas metropolitan areas. Our larger networks of branch offices are located in high growth markets, specifically the Los Angeles, Chicago and St. Louis metropolitan areas. The following table lists the geographic market areas in which First Bank operates, total deposits, deposits as a percentage of total deposits and the number of locations as of December 31, 2006:
Total Deposits Number Deposits as a Percentage of Geographic Area (in millions) of Total Deposits Locations --------------- ------------- ----------------- --------- Southern California.................................................. $ 2,128.9 25.2% 40 Northern Illinois.................................................... 1,603.7 19.0 36 St. Louis, Missouri metropolitan area................................ 1,530.3 18.1 31 Northern California.................................................. 1,163.2 13.8 17 Central and southern Illinois........................................ 1,080.8 12.8 34 Texas................................................................ 514.1 6.1 15 Missouri (excluding the St. Louis metropolitan area)................. 422.1 5.0 14 --------- ----- --- Total deposits....................................................... $ 8,443.1 100.0% 187 ========= ===== ===
Competition and Branch Banking. The activities in which First Bank engages are highly competitive. Those activities and the geographic markets served primarily involve competition with other banks, some of which are affiliated with large regional or national holding companies, and other financial services companies. Financial institutions compete based upon interest rates offered on deposit accounts and other credit and service charges, the types of products and quality of services rendered, the convenience of branch facilities, interest rates charged on loans and, in the case of loans to large commercial borrowers, relative lending limits. Our principal competitors include other commercial banks, savings banks, savings and loan associations, mutual funds, finance companies, including insurance premium financing companies, trust companies, insurance brokerage companies, credit unions, mortgage companies, leasing companies, private issuers of debt obligations and suppliers of other investment alternatives, such as securities firms and financial holding companies. Many of our non-bank competitors are not subject to the same degree of regulation as that imposed on bank holding companies, federally insured banks and national or state chartered banks. As a result, such non-bank competitors have advantages over us in providing certain services. We also compete with major multi-bank holding companies, which are significantly larger than us and have greater access to capital and other resources. We believe we will also continue to face competition in the acquisition of independent banks, savings banks, branch offices and other financial companies. We often compete with larger financial institutions that have substantially greater resources available for making acquisitions. Subject to regulatory approval, commercial banks operating in California, Illinois, Missouri and Texas are permitted to establish branches throughout their respective states, thereby creating the potential for additional competition in our service areas. Supervision and Regulation General. Along with First Bank, we are extensively regulated by Federal and state laws and regulations which are designed to protect depositors of First Bank and the safety and soundness of the U.S. banking system, not our stockholders. To the extent this discussion refers to statutory or regulatory provisions, it is not intended to summarize all such provisions and is qualified in its entirety by reference to the relevant statutory and regulatory provisions. Changes in applicable laws, regulations or regulatory policies may have a material effect on our business and prospects. We are unable to predict the nature or extent of the effects on our business and earnings that new federal and state legislation or regulation may have. The enactment of the legislation described below has significantly affected the banking industry generally and is likely to have ongoing effects on First Bank and us in the future. As a registered bank holding company under the Bank Holding Company Act of 1956, as amended, we are subject to regulation and supervision of the Board of Governors of the Federal Reserve System, or Federal Reserve. We file annual reports with the Federal Reserve and provide to the Federal Reserve additional information as it may require. Since First Bank is an institution chartered by the State of Missouri and a member of the Federal Reserve, both the State of Missouri Division of Finance and the Federal Reserve supervise, regulate and examine First Bank. First Bank is also regulated by the Federal Deposit Insurance Corporation, or FDIC, which provides deposit insurance of up to $100,000 for each insured depositor. Bank Holding Company Regulation. The activities of bank holding companies are generally limited to the business of banking, managing or controlling banks, and other activities that the Federal Reserve has determined to be so closely related to banking or managing or controlling banks as to the proper incident thereto. In addition, under the Gramm-Leach-Bliley Act, or GLB Act, which was enacted in November 1999 and is further discussed below, a bank holding company, whose control depository institutions are "well-capitalized" and "well-managed" (as defined in Federal Banking Regulations), and which obtains "satisfactory" Community Reinvestment Act (discussed briefly below) ratings, may declare itself to be a "financial holding company" and engage in a broader range of activities. As of this date, we are not a "financial holding company." We are also subject to capital requirements applied on a consolidated basis, which are substantially similar to those required of First Bank (briefly summarized below). The Bank Holding Company Act also requires a bank holding company to obtain approval from the Federal Reserve before: >> acquiring, directly or indirectly, ownership or control of any voting shares of another bank or bank holding company if, after such acquisition, it would own or control more than 5% of such shares (unless it already owns or controls a majority of such shares); >> acquiring all or substantially all of the assets of another bank or bank holding company; or >> merging or consolidating with another bank holding company. The Federal Reserve will not approve any acquisition, merger or consolidation that would have a substantially anti-competitive result, unless the anti-competitive effects of the proposed transaction are clearly outweighed by a greater public interest in meeting the convenience and needs of the community to be served. The Federal Reserve also considers capital adequacy and other financial and managerial factors in reviewing acquisitions and mergers. Safety and Soundness and Similar Regulations. We are subject to various regulations and regulatory policies directed at the financial soundness of First Bank. These include, but are not limited to, the Federal Reserve's source of strength policy, which obligates a bank holding company such as us to provide financial and managerial strength to its subsidiary banks; restrictions on the nature and size of certain affiliate transactions between a bank holding company and its subsidiary depository institutions and restrictions on extensions of credit by its subsidiary banks to executive officers, directors, principal stockholders and the related interests of such persons. Regulatory Capital Standards. The federal bank regulatory agencies have adopted substantially similar risk-based and leverage capital guidelines for banking organizations. Risk-based capital ratios are determined by classifying assets and specified off-balance sheet obligations and financial instruments into weighted categories, with higher levels of capital being required for categories deemed to represent greater risk. Federal Reserve policy also provides that banking organizations generally, and particularly those that are experiencing internal growth or actively making acquisitions, are expected to maintain capital positions that are substantially above the minimum supervisory levels, without significant reliance on intangible assets. Under the risk-based capital standard, the minimum consolidated ratio of total capital to risk-adjusted assets required for bank holding companies is 8%. At least one-half of the total capital must be composed of common equity, retained earnings, qualifying noncumulative perpetual preferred stock, a limited amount of qualifying cumulative perpetual preferred stock and minority interests in the equity accounts of consolidated subsidiaries, less certain items such as goodwill and certain other intangible assets, which amount is referred to as "Tier I capital." The remainder may consist of qualifying hybrid capital instruments, perpetual debt, mandatory convertible debt securities, a limited amount of subordinated debt, preferred stock that does not qualify as Tier I capital and a limited amount of loan and lease loss reserves, which amount, together with Tier I capital, is referred to as "Total Risk-Based Capital." In addition to the risk-based standard, we are subject to minimum requirements with respect to the ratio of our Tier I capital to our average assets less goodwill and certain other intangible assets, or the Leverage Ratio. Applicable requirements provide for a minimum Leverage Ratio of 3% for bank holding companies that have the highest supervisory rating, while all other bank holding companies must maintain a minimum Leverage Ratio of at least 4% to 5%. The Office of the Comptroller of the Currency and the FDIC have established capital requirements for banks under their respective jurisdictions that are consistent with those imposed by the Federal Reserve on bank holding companies. Information regarding our capital levels and First Bank's capital levels under the federal capital requirements is contained in Note 21 to our Consolidated Financial Statements appearing elsewhere in this report. As further described in Note 21 to our Consolidated Financial Statements, on March 1, 2005, the Federal Reserve adopted a final rule, Risk-Based Capital Standards: Trust Preferred Securities and the Definition of Capital, which allows for the continued inclusion, on a limited basis, of trust preferred securities in Tier I capital. Under the final rule, trust preferred securities and other restricted core capital elements will be subject to stricter quantitative limits. The Federal Reserve's final rule limits restricted core capital elements to 25% of the sum of all core capital elements, including restricted core capital elements, net of goodwill less any associated deferred tax liability. Prompt Corrective Action. The FDIC Improvement Act requires the federal bank regulatory agencies to take prompt corrective action in respect to depository institutions that do not meet minimum capital requirements. A depository institution's status under the prompt corrective action provisions depends upon how its capital levels compare to various relevant capital measures and other factors as established by regulation. The federal regulatory agencies have adopted regulations establishing relevant capital measures and relevant capital levels. Under the regulations, a bank will be: >> "well capitalized" if it has a total risk-based capital ratio of 10% or greater, a Tier I capital ratio of 6% or greater and a Leverage Ratio of 5% or greater and is not subject to any order or written directive by any such regulatory authority to meet and maintain a specific capital level for any capital measure; >> "adequately capitalized" if it has a total risk-based capital ratio of 8% or greater, a Tier I capital ratio of 4% or greater and a Leverage Ratio of 4% or greater (3% in certain circumstances); >> "undercapitalized" if it has a total risk-based capital ratio of less than 8%, a Tier I capital ratio of less than 4% or a Leverage Ratio of less than 4% (3% in certain circumstances); >> "significantly undercapitalized" if it has a total risk-based capital ratio of less than 6%, a Tier I capital ratio of less than 3% or a Leverage Ratio of less than 3%; and >> "critically undercapitalized" if its tangible equity is equal to or less than 2% of its average quarterly tangible assets. Under certain circumstances, a depository institution's primary federal regulatory agency may use its authority to lower the institution's capital category. The banking agencies are permitted to establish individual minimum capital requirements exceeding the general requirements described above. Generally, failing to maintain the status of "well capitalized" or "adequately capitalized" subjects a bank to restrictions and limitations on its business that become progressively more severe as the capital levels decrease. A bank is prohibited from making any capital distribution (including payment of a dividend) or paying any management fee to its holding company if the bank would thereafter be "undercapitalized." Limitations exist for "undercapitalized" depository institutions regarding, among other things, asset growth, acquisitions, branching, new lines of business, acceptance of brokered deposits and borrowings from the Federal Reserve System. These institutions are also required to submit a capital restoration plan that includes a guarantee from the institution's holding company. "Significantly undercapitalized" depository institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become "adequately capitalized," requirements to reduce total assets and cessation of receipt of deposits from correspondent banks. The appointment of a receiver or conservator may be required for "critically undercapitalized" institutions. Dividends. Our primary source of funds in the future is the dividends, if any, paid by First Bank. The ability of First Bank to pay dividends is limited by federal laws, by regulations promulgated by the bank regulatory agencies and by principles of prudent bank management. Under the most restrictive of these requirements, the future payment of dividends from First Bank is limited to approximately $135.0 million at December 31, 2006, unless prior permission of the regulatory authorities is obtained. Customer Protection. First Bank is also subject to consumer laws and regulations intended to protect consumers in transactions with depository institutions, as well as other laws or regulations affecting customers of financial institutions generally. These laws and regulations mandate various disclosure requirements and substantively regulate the manner in which financial institutions must deal with their customers. First Bank must comply with numerous regulations in this regard and is subject to periodic examinations with respect to its compliance with the requirements. Community Reinvestment Act. The Community Reinvestment Act of 1977 requires that, in connection with examinations of financial institutions within their jurisdiction, the federal banking regulators evaluate the record of the financial institutions in meeting the credit needs of their local communities, including low and moderate income neighborhoods, consistent with the safe and sound operation of those financial institutions. These factors are also considered in evaluating mergers, acquisitions and other applications to expand. The Gramm-Leach-Bliley Act. The GLB Act, enacted in 1999, amended and repealed portions of the Glass-Steagall Act and other federal laws restricting the ability of bank holding companies, securities firms and insurance companies to affiliate with each other and to enter new lines of business. The GLB Act established a comprehensive framework to permit financial companies to expand their activities, including through such affiliations, and to modify the federal regulatory structure governing some financial services activities. This authority of financial firms to broaden the types of financial services offered to customers and to affiliates with other types of financial services companies may lead to further consolidation in the financial services industry. However, it may lead to additional competition in the markets in which we operate by allowing new entrants into various segments of those markets that are not the traditional competitors in those segments. Furthermore, the authority granted by the GLB Act may encourage the growth of larger competitors. The GLB Act also adopted consumer privacy safeguards requiring financial services providers to disclose their policies regarding the privacy of customer information to their customers and, subject to some exceptions, allowing customers to "opt out" of policies permitting such companies to disclose confidential financial information to non-affiliated third parties. The Sarbanes-Oxley Act. In July 2002, the Sarbanes-Oxley Act of 2002, or Sarbanes-Oxley, was enacted. Sarbanes-Oxley imposes a myriad of corporate governance and accounting measures designed to increase corporate responsibility, to provide for enhanced penalties for accounting and auditing improprieties at publicly traded companies, and to protect investors by improving the accuracy and reliability of disclosures under securities laws. All public companies that file periodic reports with the Securities and Exchange Commission, or SEC, are affected by Sarbanes-Oxley. Sarbanes-Oxley addresses, among other matters: (i) the creation of an independent accounting oversight board to oversee the audit of public companies and auditors who perform such audits; (ii) auditor independence provisions which restrict non-audit services that independent accountants may provide to their audit clients; (iii) additional corporate governance and responsibility measures which require the chief executive officer and chief financial officer to certify financial statements, to forfeit salary and bonuses in certain situations, and protect whistleblowers and informants; (iv) expansion of the audit committee's authority and responsibility by requiring that the audit committee have direct control of the outside auditor, be able to hire and fire the auditor, and approve all non-audit services; (v) requirements that audit committee members be independent; (vi) disclosure of a code of ethics; and (vii) enhanced penalties for fraud and other violations. The provisions of Sarbanes-Oxley also require that management assess the effectiveness of internal control over financial reporting and that the independent auditor issue a report on management's attestation on internal control over financial reporting. However, because we are a non-accelerated filer, this provision of Sarbanes-Oxley will not become effective for us until the fiscal year ended December 31, 2007. Sarbanes-Oxley has and is expected to continue to increase the administrative costs of doing business for public companies; however, we cannot predict the significance of such increase. The USA Patriot Act. The Patriot Act was enacted in October 2001 in response to the terrorist attacks in New York, Pennsylvania and Washington, D.C. that occurred on September 11, 2001. The Patriot Act is intended to strengthen the ability of U.S. law enforcement agencies and the intelligence communities to work cohesively to combat terrorism on a variety of fronts. The potential impact of the Patriot Act on financial institutions of all kinds is significant and wide ranging. The Patriot Act contains sweeping anti-money laundering and financial transparency laws and imposes various regulations, including standards for verifying client identification at account opening, and rules to promote cooperation among financial institutions, regulators and law enforcement entities in identifying parties that may be involved in terrorism or money laundering. The Patriot Act is expected to increase the administrative costs and burden of doing business for financial institutions; however, while we cannot predict the full impact of such an increase, we do not expect it to differ from that of other financial institutions. Reserve Requirements; Federal Reserve System and Federal Home Loan Bank System. The Federal Reserve requires all depository institutions to maintain reserves against their transaction accounts and non-personal time deposits. The balances maintained to meet the reserve requirements imposed by the Federal Reserve may be used to satisfy liquidity requirements. Institutions are authorized to borrow from the Federal Reserve Bank discount window, but Federal Reserve regulations require institutions to exhaust other reasonable alternative sources of funds, including advances from Federal Home Loan Banks, before borrowing from the Federal Reserve Bank. First Bank is a member of the Federal Reserve System and the Federal Home Loan Bank System. As a member, First Bank is required to hold investments in regional banks within those systems. First Bank was in compliance with these requirements at December 31, 2006, with investments of $10.3 million in stock of the Federal Home Loan Bank of Des Moines and $24.9 million in stock of the Federal Reserve Bank of St. Louis. First Bank also holds an investment of $784,000 in stock of the Federal Home Loan Bank of San Francisco and $54,000 in stock of the Federal Home Loan Bank of Dallas, as a nonmember, to collateralize certain Federal Home Loan Bank advances assumed in conjunction with certain acquisition transactions. Monetary Policy and Economic Control. The commercial banking business is affected by legislation, regulatory policies and general economic conditions as well as the monetary policies of the Federal Reserve. The instruments of monetary policy available to the Federal Reserve include the following: (i) changes in the discount rate on member bank borrowings and the targeted federal funds rate; (ii) the availability of credit at the discount window; (iii) open market operations; (iv) the imposition of changes in reserve requirements against deposits of domestic banks; (v) the imposition of changes in reserve requirements against deposits and assets of foreign branches; and (vi) the imposition of and changes in reserve requirements against certain borrowings by banks and their affiliates. These monetary policies are used in varying combinations to influence overall growth and distributions of bank loans, investments and deposits, and this use may affect interest rates charged on loans or paid on liabilities. The monetary policies of the Federal Reserve have had a significant effect on the operating results of commercial banks and are expected to do so in the future. Such policies are influenced by various factors, including inflation, unemployment, and short-term and long-term changes in the international trade balance and in the fiscal policies of the U.S. Government. We cannot predict the effect that changes in monetary policy or in the discount rate on member bank borrowings will have on our future business and earnings or those of First Bank. Employees As of March 28, 2007, we employed approximately 2,930 employees. None of the employees are subject to a collective bargaining agreement. We consider our relationships with our employees to be good. Item 1A. Risk Factors Readers of our Annual Report on Form 10-K should consider the risk factors described below in conjunction with the other information included in this Annual Report on Form 10-K, including Management's Discussion and Analysis of Financial Condition and Results of Operations, our Selected Financial Data, our Consolidated Financial Statements and the related notes thereto, and the financial and other data contained elsewhere in this report. See also "Special Note Regarding Forward-Looking Statements" appearing at the beginning of this report. We pursue acquisitions to supplement our internal growth. Acquisitions involve varying degrees of inherent risk that could affect our profitability. Acquisitions of other banks or businesses may expose us to asset quality problems, higher than anticipated expenses, operational problems or unknown or contingent liabilities of the entities we acquire. If the quantity of these problems exceeds our estimates, our earnings and financial condition may be adversely affected. Furthermore, acquisitions generally require integration of the acquired entity's systems and procedures with ours in order to make the transaction economically feasible. This integration process is complicated and time consuming and can also be disruptive to the customers of the acquired business. If the integration process is not conducted successfully and with minimal effect on the business and its customers, we may not realize the anticipated economic benefits of particular acquisitions within the expected time frame, and we may lose higher than expected numbers of customers or employees of the acquired business. Competition for acquisitions in the financial services industry and our status as a privately held company make our efforts to grow through acquisitions difficult. We face intense competition from other financial institutions in pursuing acquisitions, particularly related to price. Prices at which acquisitions can be made fluctuate with market conditions. We have experienced times during which acquisitions could not be made in specific markets at prices our management considered acceptable, and we expect that this situation will happen again. Because of our intention to remain a closely held company, we do not use our common stock to make acquisitions. Our use of cash as acquisition consideration can be a disadvantage in acquisitions relative to other prospective acquirers in those instances in which selling stockholders desire a tax-free exchange. Geographic distance between our operations increases operating costs and makes efforts to standardize operations more difficult. We operate banking offices in California, Illinois, Missouri and Texas. The noncontiguous nature of many of our geographic markets increases operating costs and makes it more difficult for us to standardize our business practices and procedures. As a result of our geographic dispersion, we face the following challenges, among others: (a) operation of information technology and item processing functions at remote locations including the transportation of documents and increased communications line charges from various service providers; (b) control of correspondent accounts, reserve balances and wire transfers in different time zones; (c) familiarizing personnel with our business environment, banking practices and customer requirements at geographically dispersed locations; (d) providing administrative support, including accounting, human resources, credit administration, loan servicing, internal audit and credit review at significant distances; and (e) establishing and monitoring compliance with our corporate policies and procedures in different areas. Our emphasis on commercial real estate lending and real estate construction and development lending has increased our credit risk. Our expanded level of commercial real estate and construction and development lending may carry with it greater credit risk than the credit risk associated with residential real estate lending. A substantial portion of our loans are secured by commercial real estate. Commercial real estate and real estate construction and development loans were $2.20 billion and $1.83 billion, respectively, at December 31, 2006, representing 29.6% and 24.6%, respectively, of our loan portfolio, excluding loans held for sale. As previously discussed under "Business --Lending Activities," during 2004 and 2005, we experienced increasing amounts of nonperforming loans within our commercial real estate portfolio, largely attributable to the problem loans acquired with our acquisition of CIB Bank in November 2004, and we have taken steps to significantly reduce the level of nonperforming loans during 2005 and 2006. During 2006, we experienced increasing amounts of nonperforming loans within our real estate construction and development loan portfolios, reflective of current market conditions surrounding land acquisition and development loans, including slowdowns in unit sales. Adverse developments affecting real estate in one or more of our markets could further increase the credit risk associated with our loan portfolio, as further discussed under "Business --Lending Activities" and "Management's Discussion and Analysis of Financial Condition and Results of Operations --Loans and Allowance for Loan Losses." The Department of the Treasury, Federal Reserve and FDIC collectively issued guidance entitled, "Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices," that focuses on financial institutions that have high and increasing concentrations of commercial real estate loans on their balance sheets that make them more vulnerable to cyclical commercial real estate markets, and is intended to reinforce the institution's risk management practices and appropriate capital levels associated with these concentrations. Decreases in interest rates could have a negative impact on our profitability. Our earnings are principally dependent on our ability to generate net interest income. Net interest income is affected by many factors that are partly or completely beyond our control, including competition, general economic conditions and the policies of regulatory authorities, including the monetary policies of the Federal Reserve. Under our current interest rate risk position, our net interest income could be negatively affected by a decline in interest rates, as further discussed under "Management's Discussion and Analysis of Financial Condition and Results of Operations --Interest Rate Risk Management." Our interest rate risk hedging activities may not effectively reduce volatility in earnings. To offset the risks associated with the effects of changes in market interest rates, we periodically enter into transactions designed to hedge our interest rate risk. The accounting for such hedging activities under U.S. generally accepted accounting principles requires our hedging instruments to be recorded at fair value. The effect of certain of our hedging strategies may result in volatility in our quarterly and annual earnings as interest rates change or as the volatility in the underlying derivatives markets increases or decreases. The volatility in earnings is primarily a result of marking to market certain of our hedging instruments and/or modifying our overall hedge position, as further discussed under "Management's Discussion and Analysis of Financial Condition and Results of Operations --Interest Rate Risk Management." The financial services business is highly competitive, and we face competitive disadvantages because of our size and the nature of banking regulation. We encounter strong direct competition for deposits, loans and other financial services in all of our market areas. Our larger competitors, which have significantly greater resources, may have advantages over us in providing certain services. Our principal competitors include other commercial banks, savings banks, savings and loan associations, mutual funds, finance companies, trust companies, insurance companies, leasing companies, credit unions, mortgage companies, private issuers of debt obligations and suppliers of other investment alternatives, such as securities firms and financial holding companies. Many of our non-bank competitors are not subject to the same degree of regulation as that imposed on bank holding companies, federally insured banks and national or state chartered banks. As a result, such non-bank competitors may have advantages over us in providing certain services. We may not be able to implement technological change as effectively as our competitors. The financial services industry has in the past and continues to undergo rapid technological change related to delivery and availability of products and services and operating efficiencies. In many instances technological improvements require significant capital expenditures, and many of our larger competitors have significantly greater resources to absorb such capital expenditures than we may have available. We operate in a highly regulated environment. Recently enacted, proposed and future legislation and regulations may increase our cost of doing business. We and our subsidiaries are subject to extensive federal and state legislation, regulation and supervision. Recently enacted, proposed and future legislation and regulations have had and are expected to continue to have a significant impact on the financial services industry. Some of the legislative and regulatory changes, including the Sarbanes-Oxley Act and the USA Patriot Act, have and are expected to continue to increase our costs of doing business, particularly personnel and technology expenses necessary to maintain compliance with the expanded regulatory requirements. Additionally, the legislative and regulatory changes could reduce our ability to compete in certain markets, as further discussed under "Business -- Supervision and Regulation." Item 1B. Unresolved Staff Comments We are not an accelerated filer or a large accelerated filer, as defined in Rule 12b-2 of the Securities Exchange Act of 1934, or the Exchange Act, nor are we a well-known seasoned issuer as defined in Rule 405 of the Securities Act. Consequently, Item 1B is not applicable to us. Item 2. Properties We own our office building, which houses our principal place of business, located at 135 North Meramec, Clayton, Missouri 63105. The property is in good condition and consists of approximately 60,353 square feet, of which approximately 1,791 square feet is currently leased to others. Of our other 186 offices and four operations and administrative facilities at December 31, 2006, 105 are located in buildings that we own and 85 are located in buildings that we lease. We consider the properties at which we do business to be in good condition generally and suitable for our business conducted at each location. To the extent our properties or those acquired in connection with our acquisition of other entities provide space in excess of that effectively utilized in the operations of First Bank, we seek to lease or sub-lease any excess space to third parties. Additional information regarding the premises and equipment utilized by First Bank appears in Note 7 to our Consolidated Financial Statements appearing elsewhere in this report. Item 3. Legal Proceedings In the ordinary course of business, we and our subsidiaries become involved in legal proceedings. Our management, in consultation with legal counsel, believes the ultimate resolution of existing proceedings will not have a material adverse effect on our business, financial condition or results of operations. Item 4. Submission of Matters to a Vote of Security Holders None. PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Market Information. There is no established public trading market for our common stock. Various trusts, which were established by and are administered by and for the benefit of Mr. James F. Dierberg, our Chairman of the Board, and members of his immediate family, own all of our voting stock. Dividends. In recent years, we have paid minimal dividends on our Class A Convertible Adjustable Rate Preferred Stock and our Class B Non-Convertible Adjustable Rate Preferred Stock, and have paid no dividends on our Common Stock. Our ability to pay dividends is limited by regulatory requirements and our credit agreement, and by the receipt of dividend payments from First Bank, which is also subject to regulatory requirements. The dividend limitations are further described in Note 11 and Note 22 to our Consolidated Financial Statements appearing elsewhere in this report. Item 6. Selected Financial Data The selected consolidated financial data set forth below are derived from our consolidated financial statements. This information is qualified by reference to our Consolidated Financial Statements appearing elsewhere in this report. This information should be read in conjunction with such Consolidated Financial Statements, the related notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations."
As of or For the Year Ended December 31, (1) ------------------------------------------------------------ 2006 2005 2004 2003 2002 ---- ---- ---- ---- ---- (dollars expressed in thousands, except share and per share data) Income Statement Data: Interest income................................... $ 646,304 493,940 394,782 391,153 425,721 Interest expense.................................. 261,862 168,259 94,767 104,026 157,551 ----------- --------- --------- --------- --------- Net interest income............................. 384,442 325,681 300,015 287,127 268,170 Provision for loan losses......................... 12,000 (4,000) 25,750 49,000 55,500 ----------- --------- --------- --------- --------- Net interest income after provision for loan losses................................... 372,442 329,681 274,265 238,127 212,670 Noninterest income................................ 112,943 96,085 87,199 87,519 67,649 Noninterest expense............................... 319,216 277,638 233,218 226,880 210,950 ----------- --------- --------- --------- --------- Income before provision for income taxes and minority interest in (loss) income of subsidiary.................................... 166,169 148,128 128,246 98,766 69,369 Provision for income taxes........................ 55,062 52,509 45,338 35,955 22,771 ----------- --------- --------- --------- --------- Income before minority interest in (loss) income of subsidiary.......................... 111,107 95,619 82,908 62,811 46,598 Minority interest in (loss) income of subsidiary.. (587) (1,287) -- -- 1,431 ----------- --------- --------- --------- --------- Net income...................................... $ 111,694 96,906 82,908 62,811 45,167 =========== ========= ========= ========= ========= Dividends: Preferred stock................................... $ 786 786 786 786 786 Common stock...................................... -- -- -- -- -- Ratio of total dividends declared to net income... 0.70% 0.81% 0.95% 1.25% 1.74% Per Share Data: Earnings per common share: Basic.......................................... $ 4,687.38 4,062.36 3,470.80 2,621.39 1,875.69 Diluted........................................ 4,630.72 4,007.46 3,421.58 2,588.31 1,853.64 Weighted average shares of common stock outstanding.................................... 23,661 23,661 23,661 23,661 23,661 Balance Sheet Data: Investment securities............................. $ 1,464,946 1,340,783 1,813,349 1,049,714 1,145,670 Loans, net of unearned discount................... 7,666,481 7,020,771 6,137,968 5,328,075 5,432,588 Total assets...................................... 10,158,714 9,170,333 8,732,841 7,106,940 7,351,177 Total deposits.................................... 8,443,086 7,541,831 7,151,970 5,961,615 6,172,820 Notes payable..................................... 65,000 100,000 15,000 17,000 7,000 Subordinated debentures........................... 297,966 215,461 273,300 209,320 278,389 Common stockholders' equity....................... 787,372 665,875 587,830 536,752 505,978 Total stockholders' equity........................ 800,435 678,938 600,893 549,815 519,041 Earnings Ratios: Return on average assets.......................... 1.16% 1.10% 1.10% 0.87% 0.64% Return on average stockholders' equity............ 15.26 15.11 14.44 11.68 9.44 Efficiency ratio (2).............................. 64.18 65.83 60.23 60.56 62.82 Net interest margin (3)........................... 4.36 4.01 4.36 4.45 4.23 Asset Quality Ratios: Allowance for loan losses to loans................ 1.90 1.93 2.46 2.19 1.83 Nonperforming loans to loans (4).................. 0.64 1.38 1.40 1.41 1.38 Allowance for loan losses to nonperforming loans (4)....................................... 299.05 139.23 175.65 154.52 132.29 Nonperforming assets to loans and other real estate (5)........................... 0.72 1.41 1.46 1.62 1.52 Net loan charge-offs to average loans............. 0.09 0.21 0.45 0.61 1.01 Capital Ratios: Average total stockholders' equity to average total assets............................ 7.61 7.28 7.61 7.48 6.78 Total risk-based capital ratio.................... 10.25 10.14 10.61 10.27 10.68 Leverage ratio.................................... 8.13 8.13 7.89 7.62 6.45 - --------------------------------- (1) The comparability of the selected data presented is affected by the acquisitions of 12 banks, an insurance brokerage agency, an insurance premium financing company, a loan origination business and seven branch offices during the five-year period ended December 31, 2006. The selected data includes the financial position and results of operations of each acquired entity only for the periods subsequent to its respective date of acquisition. (2) Efficiency ratio is the ratio of noninterest expense to the sum of net interest income and noninterest income. (3) Net interest rate margin is the ratio of net interest income (expressed on a tax-equivalent basis) to average interest-earning assets. (4) Nonperforming loans consist of nonaccrual loans and certain loans with restructured terms. (5) Nonperforming assets consist of nonperforming loans and other real estate.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The following presents management's discussion and analysis of our financial condition and results of operations as of the dates and for the periods indicated. This discussion should be read in conjunction with our "Selected Financial Data," our Consolidated Financial Statements and the related notes thereto, and the other financial data appearing elsewhere in this report. This discussion set forth in Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements with respect to our financial condition, results of operations and business. These forward-looking statements are subject to certain risks and uncertainties, not all of which can be predicted or anticipated. Various factors may cause our actual results to differ materially from those contemplated by the forward-looking statements herein. We do not have a duty to and will not update these forward-looking statements. Readers of our Annual Report on Form 10-K should therefore consider these risks and uncertainties in evaluating forward-looking statements and should not place undue reliance on forward-looking statements. See "Special Note Regarding Forward-Looking Statements" appearing at the beginning of this report and "Item 1A - Risk Factors," appearing elsewhere in this report. RESULTS OF OPERATIONS Overview Net income was $111.7 million, $96.9 million and $82.9 million for the years ended December 31, 2006, 2005 and 2004, respectively. Our return on average assets and our return on average stockholders' equity were 1.16% and 15.26%, respectively, for the year ended December 31, 2006, compared to 1.10% and 15.11%, respectively, for 2005, and 1.10% and 14.44%, respectively, for 2004. Our financial results for 2006 represented record earnings for us, both for the year and for the fourth quarter of 2006, and resulted in our achievement of surpassing the $100.0 million earnings milestone. Our record earnings in 2006 were driven by an 18.0% increase in net interest income and a 17.5% increase in noninterest income. Our average interest-earning assets increased 8.7% and, coupled with higher prevailing interest rates, contributed to a $58.8 million increase in net interest income and improvement in our net interest margin, which increased 35 basis points to 4.36% for 2006, from 4.01% for 2005. Noninterest income increased to $112.9 million in 2006, from $96.1 million in 2005. The increases in net interest income and noninterest income were partially offset by an increase in our provision for loan losses and higher levels of noninterest expense. Noninterest expense increased 15.0% to $319.2 million in 2006, from $277.6 million in 2005. The increased expenses are commensurate with significant expansion of our branch office network and employee base in several key markets resulting from our acquisitions of other financial institutions in 2005 and 2006, and the acquisition of an insurance premium financing company and an insurance brokerage agency in 2006. Our aggressive and diligent efforts to improve asset quality resulted in a 44.4% reduction in nonperforming assets during 2006. The increase in net income for 2005 was primarily attributable to a significant reduction in our provision for loan losses, as further discussed below, and increased net interest income resulting from net interest-earning assets provided by our acquisitions, higher yields earned on those assets and internal loan growth. However, our net interest income was adversely affected by a decline in earnings on interest rate swap agreements associated with our interest rate risk management program, primarily resulting from increasing prevailing interest rates and the maturity and termination of certain interest rate swap agreements, as further discussed under "--Interest Rate Risk Management." We recorded a provision for loan losses of $12.0 million for the year ended December 31, 2006, compared to a negative provision for loan losses of $4.0 million for the year ended December 31, 2005, and a provision for loan losses of $25.8 million for the year ended December 31, 2004. We attribute the increase in our provision for loan losses in 2006 primarily to loan portfolio growth, both external and organic, coupled with the deterioration of certain large credit relationships primarily associated with the real estate sector of our loan portfolio, including our one-to-four family residential loan portfolio. The decrease in our provision for loan losses in 2005 was commensurate with the decreasing credit risk that existed in our loan portfolio at that time. While we had recorded a negative provision for loan losses of $8.0 million for the first nine months of 2005, reflecting a 21.0% improvement in nonperforming loans during this period from the sale of certain acquired nonperforming loans, the strengthening of certain loans, loan payoffs and/or external refinancing of various credits, and a significant reduction in net loan charge-offs, the level of nonperforming loans increased during the fourth quarter of 2005 as a result of further deterioration of a small number of large credit relationships, which resulted in a fourth quarter provision for loan losses of $4.0 million. We continue to closely monitor the level of our nonperforming assets in accordance with our credit risk guidelines and focus on methods to improve our management of these assets based on changing economic conditions throughout our market areas. Financial Condition and Average Balances Our average total assets were $9.61 billion for the year ended December 31, 2006, compared to $8.81 billion and $7.54 billion for the years ended December 31, 2005 and 2004, respectively, reflecting increases of $797.7 million and $1.27 billion, respectively. Our total assets reached a record high of $10.16 billion at December 31, 2006, compared to $9.17 billion and $8.73 billion at December 31, 2005 and 2004, respectively, representing increases of $988.4 million and $437.5 million, respectively. We attribute the increase in our total assets in 2006 and 2005 to a combination of organic growth and growth through acquisitions in our target markets completed during the past three years, including our acquisition of CIB Bank in late 2004, which provided assets of $1.20 billion. Our acquisitions completed in 2004, 2005 and 2006 provided total assets at the time of the transactions of $1.38 billion, $280.3 million and $794.3 million, in aggregate, respectively, as well as the related intangible assets associated with these transactions. As previously mentioned, our acquisitions completed in 2006 included the acquisition of two financial service companies, an insurance premium financing company and an insurance brokerage company, thereby providing our business with new opportunities, and expanding the broad array of products and services available to our customers. Our interest-earning assets averaged $8.86 billion for the year ended December 31, 2006, compared to $8.15 billion and $6.91 billion for the years ended December 31, 2005 and 2004, respectively, while our interest-bearing liabilities averaged $7.50 billion for the year ended December 31, 2006, compared to $6.82 billion and $5.78 billion for the years ended December 31, 2005 and 2004, respectively. We used funds from the growth of average deposits of $809.9 million and maturities of investment securities to fund internal loan growth and to reinvest in higher-yielding investment securities in 2006. We issued additional subordinated debentures, as further described below, which we primarily used to fund our bank acquisitions in 2006 and to refinance existing, higher-cost subordinated debentures on their optional call date at the end of the year. Our average other borrowings declined $191.2 million as a result of a reduction of certain term repurchase agreements utilized in conjunction with our interest rate risk management program. The increase in our average assets for 2005 was primarily funded by an increase in average deposits of $1.04 billion; an increase in average other borrowings of $85.7 million, an increase in notes payable of $33.2 million; and an increase in average subordinated debentures of $38.8 million. Funds available from maturities and sales of investment securities during 2005 were primarily used to fund loan growth, and a portion of the remaining funds available from maturities of investment securities were reinvested in higher-yielding available-for-sale investment securities. Average loans, net of unearned discount, were $7.47 billion, $6.44 billion and $5.51 billion for the years ended December 31, 2006, 2005 and 2004, respectively. Our acquisitions completed during 2005 and 2006 provided total loans, net of unearned discount, of $209.6 million and $545.1 million, respectively. Internal loan growth of $584.2 million for 2006 reflects: a $234.1 million increase in our real estate construction and development portfolio; and a $289.8 million increase in our real estate mortgage portfolio resulting from management's business decision to retain certain residential mortgage loan production in our residential real estate mortgage portfolio during the first half of 2006, partially offset by the securitization of $138.9 million of certain residential mortgage loans in early 2006 which shifted these assets to available-for-sale investment securities; and the transfer of approximately $130.0 million of certain loans to our held for sale portfolio, which were subsequently sold in 2006 in conjunction with sales of existing loans originated and held for sale. Internal loan growth for 2006 also resulted from a $120.4 million increase in our loans held for sale portfolio, reflecting: (a) the timing of loan originations and subsequent sales of residential mortgage loans in the secondary mortgage market; partially offset by (b) the sale of certain nonperforming loans that were transferred to our held for sale portfolio on December 31, 2005, (c) the transfer and subsequent sale of certain performing and nonperforming loans in the fourth quarter of 2006; and (d) the payoff of two significant nonperforming loans, totaling $27.3 million in aggregate, that were included in our held for sale portfolio at December 31, 2005, as further discussed under "--Loans and Allowance for Loan Losses." Internal loan growth of $687.5 million for 2005 was primarily generated from a $286.8 million increase in our real estate mortgage portfolio resulting from management's business decision to retain additional mortgage loan product production in our residential real estate mortgage portfolio, and a home equity product line campaign that we held in mid-2004; a $241.9 million increase in our real estate construction and development portfolio; and a $194.8 million increase in our loans held for sale portfolio, including approximately $59.7 million of nonperforming loans that were transferred to the loans held for sale portfolio at December 31, 2005, as further discussed under "--Loans and Allowance for Loan Losses." This increase was partially offset by reductions in a portion of our nonperforming loan portfolio due to the sale of certain nonperforming loans in early 2005, loan payoffs and/or external refinancing of various credits. Investment securities averaged $1.27 billion, $1.64 billion and $1.28 billion for the years ended December 31, 2006, 2005 and 2004, respectively. Funds available from maturities of investment securities, deposit growth and excess short-term investments were utilized to fund internal loan growth during the majority of 2006, and the remaining funds were reinvested in higher-yielding investment securities. These securities purchases primarily occurred late in 2006 and resulted from funds available from deposit growth in excess of loan demand. The sale of available-for-sale investment securities associated with the termination of $200.0 million of term repurchase agreements in the first half of 2006 was partially offset by an increase in the securities portfolio due to the securitization of $138.9 million of certain of our residential mortgage loans held in our loan portfolio, an increase in our trading securities portfolio of $77.8 million, and the addition of $37.3 million of securities obtained with our bank acquisitions completed in 2006. We attribute the increase in 2005 primarily to our 2004 and 2005 acquisitions, which provided investment securities, in aggregate, of $438.0 million and $20.1 million, respectively. Funds available from maturities of investment securities, deposit growth and an increase in our other borrowings were used to fund loan growth and for the reinvestment in additional higher-yielding available-for-sale investment securities. Throughout 2005, short-tem investments were utilized to fund an anticipated level of attrition associated with our acquisitions, primarily time deposits acquired with CIB Bank. Average short-term investments declined $49.1 million to $70.3 million for the year ended December 31, 2005, from $119.4 million in 2004. Nonearning assets averaged $754.7 million, $662.4 million and $633.2 million for the years ended December 31, 2006, 2005 and 2004, respectively. The increases in 2006 and 2005 are largely attributable to our acquisitions completed in 2005 and 2006, which increased our capital expenditures, thus contributing to an overall increase in bank premises and equipment, partially offset by continued related depreciation and amortization, and an increase in intangible assets recognized in conjunction with the acquisitions. Aggregate intangible assets recorded in conjunction with our acquisitions completed in 2005 and 2006, including goodwill, core deposit intangibles associated with our bank and branch acquisitions, and the customer list intangibles associated with our purchases of Adrian Baker and UPAC, were $25.8 million and $110.7 million, respectively. Our derivative financial instruments averaged ($4.0) million, ($3.1) million and $25.9 million for the years ended December 31, 2006, 2005 and 2004, respectively. This reflects a decline in the fair value of certain derivative financial instruments and the maturity and/or termination of certain of our interest rate swap agreements during 2005 and 2006, as further discussed under "--Interest Rate Risk Management" and in Note 5 to our Consolidated Financial Statements. In addition, purchases of land, bank premises and equipment for future de novo branch offices further contributed to the overall increases in nonearning assets during these periods. We use deposits as our primary funding source and acquire them from a broad base of local markets, including both individual and corporate customers. Deposits averaged $8.01 billion, $7.20 billion and $6.17 billion for the years ended December 31, 2006, 2005 and 2004, respectively. Our year-end deposits were $8.44 billion, $7.54 billion and $7.15 billion at December 31, 2006, 2005 and 2004, respectively, reflecting increases of $901.3 million for 2006 and $389.9 million for 2005. The increases in 2006 and 2005 were primarily attributable to organic growth stemming from our deposit development programs throughout the periods, including enhanced product and service offerings coupled with marketing campaigns, in addition to our acquisitions of banks and/or branches in our target markets that were completed in 2005 and 2006, which provided aggregate deposits of $238.1 million and $475.6 million, respectively, at the time of their acquisition. The change in the composition of our deposit mix reflects continued efforts to expand our existing customer relationships by increasing the number and types of products provided, efforts to increase transactional accounts, such as savings and demand accounts through our deposit development campaigns, coupled with trends toward increased time deposits and higher deposit rates paid on certain products resulting from the highly competitive rate market environment. Average time deposits were $3.63 billion, $2.91 billion and $2.04 billion for the years ended December 31, 2006, 2005 and 2004, respectively. Average demand and savings deposits were $4.38 billion, $4.30 billion and $4.13 billion for the years ended December 31, 2006, 2005 and 2004, respectively. The overall growth in deposits was partially offset by an anticipated level of attrition associated with our recent acquisitions, particularly savings and time deposits acquired from CIB Bank, including brokered and internet deposits, and continued aggressive competition within our market areas. Other borrowings averaged $380.5 million, $571.7 million and $486.0 million for the years ended December 31, 2006, 2005 and 2004, respectively. The decrease in the average balances for 2006 reflects the termination of $150.0 million and $50.0 million of term repurchase agreements in the first and second quarters of 2006, respectively, partially offset by a $100.0 million term repurchase agreement entered into in the third quarter of 2006, as further described in Note 5 and Note 10 to our Consolidated Financial Statements. We also attribute the decrease to the prepayment of $35.3 million of Federal Home Loan Bank, or FHLB, advances that were assumed with certain bank acquisitions, and a decrease in daily repurchase agreements, principally in connection with the cash management activities of our commercial deposit customers. The increase in the average balances for 2005 reflects $250.0 million of term repurchase agreements that we entered into in conjunction with our interest rate risk management program during 2004, partially offset by the termination of $50.0 million of term repurchase agreements in the fourth quarter of 2005. The increase in average balances for 2005 also reflects an increase in daily repurchase agreements, as well as an increase in average FHLB advances, primarily associated with our bank acquisitions, to $44.2 million for 2005, compared to $21.0 million for 2004. Our notes payable averaged $88.8 million, $36.8 million and $3.7 million for the years ended December 31, 2006, 2005 and 2004, respectively. The increases in 2006 and 2005 were attributable to the addition of a term loan in conjunction with the restructuring of our overall financing arrangement in 2005. In conjunction with our Amended and Restated Secured Credit Agreement that we entered into in August 2005 to restructure our overall financing arrangement, we borrowed $80.0 million on the term loan in August 2005 and borrowed the remaining $20.0 million on the term loan in November 2005. The proceeds of the term loan were used to fund our acquisition of International Bank of California, or IBOC, and to partially fund the repayment of our 10.24% subordinated debentures issued to First Preferred Capital Trust II, or FPCT II, in September 2005, as further discussed below. As further described in Note 11 to our Consolidated Financial Statements, on August 10, 2006, we entered into an amendment to our Amended and Restated Secured Credit Agreement and reduced certain components of our financing arrangement, including the overall pricing structure. We subsequently repaid $35.0 million of the term loan during 2006, reducing the balance to $65.0 million at December 31, 2006, from $100.0 million at December 31, 2005. Furthermore, during 2005, we repaid in full the $15.0 million outstanding advance drawn under our revolving credit line in 2004 to partially fund our acquisition of CIB Bank. Subordinated debentures issued to our affiliated statutory and business trusts averaged $281.5 million, $259.2 million and $220.4 million for the years ended December 31, 2006, 2005 and 2004, respectively. During 2006, we issued a total of $139.2 million of variable rate subordinated debentures in private placements through four newly-formed statutory trusts: specifically, $41.2 million issued to First Bank Statutory Trust IV on March 1, 2006; $20.6 million issued to First Bank Statutory Trust V on April 28, 2006; $25.8 million issued to First Bank Statutory Trust VI on June 16, 2006; and $51.5 million issued to First Bank Statutory Trust VII on December 14, 2006. On December 31, 2006, we repaid in full $56.9 million of 9.0% fixed rate subordinated debentures, as further described in Note 12 to our Consolidated Financial Statements. The increase in 2005 reflects our issuance of $61.9 million of variable rate subordinated debentures late in 2004, specifically, $20.6 million issued to First Bank Statutory Trust II in September 2004 and $41.2 million issued to First Bank Statutory Trust III in November 2004, partially offset by the repayment in full of $59.3 million of 10.24% subordinated debentures on September 30, 2005 that were issued to FPCT II, as further described in Note 12 to our Consolidated Financial Statements. The repayment of these subordinated debentures was funded by the term loan. Stockholders' equity averaged $731.9 million, $641.5 million and $574.3 million for the years ended December 31, 2006, 2005 and 2004, respectively. The increase for 2006 reflects net income of $111.7 million, a $6.8 million increase in accumulated other comprehensive income, which was comprised of $4.9 million associated with the change in our unrealized gains and losses on available-for-sale investment securities and $1.9 million associated with the change in the fair value of our derivative financial instruments, partially offset by dividends paid on our Class A and Class B preferred stock. We primarily attribute the increase for 2005 to net income of $96.9 million, partially offset by dividends paid on our Class A and Class B preferred stock, and an $18.1 million decrease in accumulated other comprehensive income, which was comprised of $13.8 million associated with the change in our unrealized gains and losses on available-for-sale investment securities and $4.3 million associated with the change in the fair value of our derivative financial instruments. These decreases were reflective of changes in prevailing interest rates, a decline in the fair value of our derivative financial instruments, and the maturity of certain interest rate swap agreements designated as cash flow hedges during 2005, as further discussed under "--Interest Rate Risk Management" and in Note 5 to our Consolidated Financial Statements. The following table sets forth, on a tax-equivalent basis, certain information relating to our average balance sheets, and reflects the average yield earned on our interest-earning assets, the average cost of our interest-bearing liabilities and the resulting net interest income for the periods presented.
Years Ended December 31, ------------------------------------------------------------------------------------------ 2006 2005 2004 --------------------------- ------------------------------ --------------------------- Interest Interest Interest Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/ Balance Expense Rate Balance Expense Rate Balance Expense Rate ------- ------- ---- ------- ------- ---- ------- ------- ---- (dollars expressed in thousands) ASSETS ------ Interest-earning assets: Loans: (1)(2)(3) Taxable....................... $7,451,016 580,448 7.79% $6,422,341 423,361 6.59% $5,493,867 340,660 6.20% Tax-exempt (4)................ 21,073 1,623 7.70 14,629 1,129 7.72 15,187 1,260 8.30 Investment securities: Taxable....................... 1,220,785 57,017 4.67 1,599,161 65,895 4.12 1,245,226 50,170 4.03 Tax-exempt (4)................ 47,946 2,885 6.02 45,626 2,675 5.86 37,775 2,292 6.07 Short-term investments.......... 116,630 5,909 5.07 70,251 2,211 3.15 119,370 1,643 1.38 ---------- ------- ---------- ------- ---------- ------- Total interest-earning assets................... 8,857,450 647,882 7.31 8,152,008 495,271 6.08 6,911,425 396,025 5.73 ------- ------- ------- Nonearning assets................. 754,678 662,396 633,154 ---------- ---------- ---------- Total assets................ $9,612,128 $8,814,404 $7,544,579 ========== ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY -------------------- Interest-bearing liabilities: Interest-bearing deposits: Interest-bearing demand deposits.................... $ 962,956 8,147 0.85% $ 905,613 4,398 0.49% $ 856,765 3,472 0.41% Savings deposits.............. 2,152,419 53,297 2.48 2,135,156 29,592 1.39 2,175,425 20,128 0.93 Time deposits (3)............. 3,631,516 155,252 4.28 2,906,601 93,167 3.21 2,036,323 49,467 2.43 ---------- ------- ---------- ------- ---------- ------- Total interest-bearing deposits................. 6,746,891 216,696 3.21 5,947,370 127,157 2.14 5,068,513 73,067 1.44 Other borrowings................ 380,546 16,803 4.42 571,717 18,240 3.19 485,994 6,102 1.26 Notes payable (5)............... 88,843 5,530 6.22 36,849 2,305 6.26 3,657 506 13.84 Subordinated debentures (3)..... 281,500 22,833 8.11 259,214 20,557 7.93 220,428 15,092 6.85 ---------- ------- ---------- ------- ---------- ------- Total interest-bearing liabilities.............. 7,497,780 261,862 3.49 6,815,150 168,259 2.47 5,778,592 94,767 1.64 ------- ------- ------- Noninterest-bearing liabilities: Demand deposits................. 1,267,681 1,257,277 1,100,072 Other liabilities............... 114,735 100,462 91,660 ---------- ---------- ---------- Total liabilities........... 8,880,196 8,172,889 6,970,324 Stockholders' equity.............. 731,932 641,515 574,255 ---------- ---------- ---------- Total liabilities and stockholders' equity..... $9,612,128 $8,814,404 $7,544,579 ========== ========== ========== Net interest income............... 386,020 327,012 301,258 ======= ======= ======= Interest rate spread.............. 3.82 3.61 4.09 Net interest margin (6)........... 4.36% 4.01% 4.36% ==== ==== ==== - ------------------------ (1) For purposes of these computations, nonaccrual loans are included in the average loan amounts. (2) Interest income on loans includes loan fees. (3) Interest income and interest expense include the effects of interest rate swap agreements. (4) Information is presented on a tax-equivalent basis assuming a tax rate of 35%. The tax-equivalent adjustments were approximately $1.6 million, $1.3 million and $1.2 million for the years ended December 31, 2006, 2005 and 2004, respectively. (5) Interest expense on our notes payable includes commitment, arrangement and renewal fees. Exclusive of these fees, the interest rates paid were 6.11%, 4.93% and 2.87% for the years ended December 31, 2006, 2005 and 2004, respectively. (6) Net interest margin is the ratio of net interest income (expressed on a tax-equivalent basis) to average interest-earning assets.
The following table indicates, on a tax-equivalent basis, the changes in interest income and interest expense that are attributable to changes in average volume and changes in average rates, in comparison with the preceding year. The change in interest due to the combined rate/volume variance has been allocated to rate and volume changes in proportion to the dollar amounts of the change in each.
Increase (Decrease) Attributable to Change in: --------------------------------------------------------------------- December 31, 2006 Compared December 31, 2005 Compared to December 31, 2005 to December 31, 2004 -------------------------------- -------------------------------- Net Net Volume Rate Change Volume Rate Change ------ ---- ------ ------ ---- ------ (dollars expressed in thousands) Interest earned on: Loans: (1)(2)(3) Taxable............................. $ 73,513 83,574 157,087 60,269 22,432 82,701 Tax-exempt (4)...................... 497 (3) 494 (45) (86) (131) Investment securities: Taxable............................. (16,922) 8,044 (8,878) 14,579 1,146 15,725 Tax-exempt (4)...................... 137 73 210 464 (81) 383 Short-term investments................. 1,923 1,775 3,698 (888) 1,456 568 -------- ------- ------- ------- ------- ------- Total interest income........... 59,148 93,463 152,611 74,379 24,867 99,246 -------- ------- ------- ------- ------- ------- Interest paid on: Interest-bearing demand deposits....... 297 3,452 3,749 209 717 926 Savings deposits....................... 242 23,463 23,705 (381) 9,845 9,464 Time deposits (3)...................... 26,572 35,513 62,085 24,956 18,744 43,700 Other borrowings....................... (7,199) 5,762 (1,437) 1,253 10,885 12,138 Notes payable (5)...................... 3,240 (15) 3,225 2,219 (420) 1,799 Subordinated debentures (3)............ 1,801 475 2,276 2,882 2,583 5,465 -------- ------- ------- ------- ------- ------- Total interest expense.......... 24,953 68,650 93,603 31,138 42,354 73,492 -------- ------- ------- ------- ------- ------- Net interest income............. $ 34,195 24,813 59,008 43,241 (17,487) 25,754 ======== ======= ======= ======= ======= ======= - ------------------------------- (1) For purposes of these computations, nonaccrual loans are included in the average loan amounts. (2) Interest income on loans includes loan fees. (3) Interest income and interest expense include the effect of interest rate swap agreements. (4) Information is presented on a tax-equivalent basis assuming a tax rate of 35%. (5) Interest expense on our notes payable includes commitment, arrangement and renewal fees.
Net Interest Income The primary source of our income is net interest income. Net interest income (expressed on a tax-equivalent basis) increased to $386.0 million for the year ended December 31, 2006, from $327.0 million and $301.3 million for the years ended December 31, 2005 and 2004, respectively. Our net interest margin was 4.36% for the year ended December 31, 2006, compared to 4.01% and 4.36% for the years ended December 31, 2005 and 2004, respectively. Net interest income is the difference between the interest earned on our interest-earning assets, such as loans and investment securities, and the interest paid on our interest-bearing liabilities, such as deposits and borrowings. Net interest income is affected by the level and composition of assets, liabilities and stockholders' equity, as well as the general level of interest rates and changes in interest rates. Interest income on a tax-equivalent basis includes the additional amount of interest income that would have been earned if our investment in certain tax-exempt interest-earning assets had been made in assets subject to federal, state and local income taxes yielding the same after-tax income. Net interest margin is determined by dividing net interest income on a tax-equivalent basis by average interest-earning assets. The interest rate spread is the difference between the average equivalent yield earned on interest-earning assets and the average rate paid on interest-bearing liabilities. We attribute the increase in net interest income in 2006 to an 8.7% increase in our average interest-earning assets stemming from internal growth and growth through acquisitions of banks and other financial service companies, combined with higher yields on those assets commensurate with the prevailing interest rates in our markets. The increase in average interest-earning assets reflects increases in average loans and average short-term investments, and the transfer of funding from lower-yielding investment securities to higher-yielding loans. The increase in our interest income was partially offset by increased interest expense related to increasing deposit balances along with a continued redistribution of deposit balances toward higher-yielding products and higher interest rates paid on those deposits, as well as increased interest expense paid on the overall levels of our other borrowings and subordinated debentures. Our overall borrowing levels reflect the reduction in the use of higher cost funding sources, such as term repurchase agreements and FHLB advances. Our average notes payable increased $52.0 million as a result of the term loan advances we borrowed in August 2005 and November 2005. Our average subordinated debentures, which support acquisitions and are also utilized for other corporate purposes, increased $22.3 million as a result of our issuance of $139.2 million of variable rate subordinated debentures through four newly-formed statutory trusts, partially offset by the repayment of $56.9 million of 9.0% fixed rate subordinated debentures on December 31, 2006. In addition, our net interest income was adversely affected by a decline in earnings on our interest rate swap agreements that were entered into in conjunction with our interest rate risk management program, as further discussed below. We primarily credit the increase in net interest income in 2005 to interest-earning assets provided by our acquisitions completed in 2004 and 2005, internal loan growth coupled with higher interest rates on loans, higher-yielding investment securities and the repayment of our 10.24% subordinated debentures in September 2005. The overall increase in our net interest income was partially offset by: (a) increased interest expense associated with deposit growth, higher interest rates paid on deposits, and a redistribution of deposit balances toward higher-yielding products; (b) the mix of the CIB Bank deposit base acquired; (c) increased levels of other borrowings, including our term loan, coupled with increased interest rates on such borrowings; and (d) the issuance of $61.9 million of additional subordinated debentures in late 2004 through two newly formed statutory trusts; partially offset by our repayment of $59.3 million of 10.24% subordinated debentures in September 2005. These transactions, coupled with our use of derivative financial instruments, have allowed us to reduce our overall interest expense associated with our subordinated debentures as the additional subordinated debentures have been issued at significantly lower interest rates. Derivative financial instruments that were entered into in conjunction with our interest rate risk management program to mitigate the effects of decreasing interest rates reduced our net interest income by $5.0 million for the year ended December 31, 2006, whereas these derivative financial instruments contributed to increases in our net interest income of $2.2 million and $50.1 million, respectively, for the years ended December 31, 2005 and 2004. The decreased earnings on our interest rate swap agreements for 2006 and 2005 contributed to reductions in our net interest margin of approximately eight basis points and 59 basis points, respectively, and reflects higher interest rates and maturities of $750.0 million of interest rate swap agreements designated as cash flow hedges and $50.0 million of interest rate swap agreements designated as fair value hedges during 2004; the maturity of $200.0 million and $100.0 million of interest rate swap agreements designated as cash flow hedges in March 2005 and April 2006, respectively; and the termination of $150.0 million, $101.2 million and $25.0 million of interest rate swap agreements designated as fair value hedges in February 2005, May 2005 and February 2006, respectively. However, the earnings on our interest rate swap agreements significantly contributed to our ability to maintain our net interest margin in 2004. During the third quarter of 2006, we significantly expanded our utilization of derivative financial instruments, as further described in Note 5 to our Consolidated Financial Statements, to reduce our exposure to falling interest rates. The Company has implemented various methods to reduce the effect of decreasing interest rates on our net interest income, including the funding of investment security purchases through the issuance of term repurchase agreements. However, the reduction of our interest rate swap agreements has resulted in a substantial reduction of our net interest income and further compression of our net interest margin, which has been partially offset by the impact of the rising rate environment experienced in 2005 and 2006, as further discussed below. The yield on our loan portfolio was 7.79% for the year ended December 31, 2006, compared to 6.59% and 6.21% for 2005 and 2004, respectively. Average loans, net of unearned discount, were $7.47 billion for the year ended December 31, 2006, in comparison to $6.44 billion and $5.51 billion for the years ended December 31, 2005 and 2004, respectively. Increases in prevailing interest rates that began in mid-2004 and continued throughout 2005 and 2006 contributed to the increased yields on our loan portfolio during 2005 and 2006. During 2006, the Federal Reserve increased the targeted federal funds rate, resulting in four increases in the prime rate of interest from 7.25% at December 31, 2005 to 8.25% at December 31, 2006. During 2005, the Federal Reserve increased the targeted federal funds rate, resulting in eight increases in the prime rate of interest from 5.25% at December 31, 2004 to 7.25% at December 31, 2005. The prime rate of interest increased from 4.00% at January 1, 2004 to 5.25% at December 31, 2004. These interest rates are reflected not only in the rate of interest earned on loans that are indexed to the prime rate, but also in other assets and liabilities which either have variable or adjustable rates, or which have matured or repriced during these periods. Although the rising interest rate environment contributed to the increase in our loan yields during 2005 and 2006, total interest income on our loan portfolio was adversely impacted by decreased earnings on our interest rate swap agreements designated as cash flow hedges. These interest rate swap agreements reduced our interest income on loans by $4.2 million for the year ended December 31, 2006, in contrast to increasing our interest income on loans by $2.6 million and $38.3 million in 2005 and 2004, respectively. The yields on our loan portfolio were impacted by higher interest rates and the maturities and/or termination of interest rate swap agreements designated as cash flow hedges of $750.0 million in 2004, $200.0 million in 2005 and $100.0 million in 2006, which resulted in decreased earnings on our swap agreements, thereby contributing to a reduction in interest on our loan portfolio. Specifically, the impact of the swap agreements resulted in a compression of our net interest income of approximately $6.9 million for 2006 compared to 2005, and $35.7 million for 2005 compared to 2004, as further discussed under "--Interest Rate Risk Management." Interest income on our loan portfolio for 2006 includes a $2.0 million recovery of interest and fees from the payoff of a single nonaccrual loan, as further described under "--Loans and Allowance for Loan Losses." The lower yield on our loan portfolio during 2004 reflected increased competition, continued weak loan demand and generally lower prevailing interest rates during the period, despite the increases in the prime lending rate during the second half of 2004. For the years ended December 31, 2006, 2005 and 2004, the aggregate weighted average rate paid on our interest-bearing deposit portfolio was 3.21%, 2.14% and 1.44%, respectively. We attribute the increase in 2006 to the continued rising interest rate environment and a change in the mix of our average deposits which reflects a trend towards increased time deposits over transactional accounts, coupled with higher interest rates paid on deposits commensurate with the highly competitive rate market that continues to exert pressure on our net interest margin. We attribute the increase in 2005 to the rising interest rate environment and the mix of the CIB Bank deposit base acquired in November 2004, which included higher cost time deposits, including brokered and internet deposits. In addition, decreased earnings associated with certain of our interest rate swap agreements designated as fair value hedges, as well as the termination of $150.0 million notional amount of fair value hedges in February 2005, resulted in a decrease in our net interest income of approximately $8.5 million for 2005, compared to 2004, as further described in Note 5 to our Consolidated Financial Statements. While deposit growth continues to provide an adequate funding source for our loan portfolio, competitive pressures on deposits within our markets continue to impact our deposit pricing. The aggregate weighted average rate paid on our other borrowings was 4.42% for the year ended December 31, 2006, compared to 3.19% and 1.26% for the years ended December 31, 2005 and 2004, respectively, reflecting changes in the short-term interest rate environment that began in mid-2004. The increase in the aggregate weighted average rates paid on our other borrowings in 2006 and 2005 also reflects the termination of $200.0 million of term repurchase agreements in 2006, partially offset by a $100.0 million term repurchase agreement entered into during 2006, and the termination of a $50.0 million term repurchase agreement in November 2005, and the impact of the related spreads to the London Interbank Offering Rate, or LIBOR, as further described in Note 5 and Note 10 to our Consolidated Financial Statements. The aggregate weighted average rate on our notes payable was 6.22%, 6.26% and 13.84% for the years ended December 31, 2006, 2005 and 2004, respectively. The aggregate weighted average rates paid reflect changing market interest rates during these periods, and unused credit commitment and letter of credit facility fees on our secured credit agreement with a group of unaffiliated financial institutions, as well as other fees paid in conjunction with the annual renewal of this financing arrangement. The overall cost of this funding source during 2004 was significantly higher due to fees associated with the credit facility coupled with minimal borrowings under the revolving credit line during 2004. Exclusive of these fees, the aggregate weighted average rate paid on our notes payable was 6.11%, 4.93% and 2.87% for the years ended December 31, 2006, 2005 and 2004, respectively. Amounts outstanding under our term loan bear interest at a floating rate equal to LIBOR, plus a margin determined by the outstanding loan balances and our profitability for the preceding four calendar quarters. Amounts outstanding under our revolving line of credit bear interest at a floating rate equal to the lead bank's prime rate or, at our option, at LIBOR plus a margin determined by the outstanding loan balances and our profitability for the preceding four calendar quarters. Thus, our secured credit agreement represents a relatively high-cost funding source as increased advances have the effect of increasing the weighted average rate of our non-deposit liabilities. As further described in Note 11 to our Consolidated Financial Statements, we borrowed $80.0 million on our term loan in August 2005 and $20.0 million on our term loan in November 2005, and on August 10, 2006, we entered into an amendment to our Amended and Restated Secured Credit Agreement and reduced certain components of our financing arrangement, including the overall pricing structure. During 2006, we repaid $35.0 million of the term loan, reducing the balance to $65.0 million at December 31, 2006, from $100.0 million at December 31, 2005. Also, during 2005, we repaid the remaining outstanding balance of $15.0 million drawn under our revolving credit line that we had drawn in November 2004 to partially fund our acquisition of CIB Bank. The aggregate weighted average rate paid on our subordinated debentures was 8.11%, 7.93% and 6.85% for the years ended December 31, 2006, 2005 and 2004, respectively. The aggregate weighted average rates reflect the issuance of $139.2 million of variable rate subordinated debentures in private placements through four newly formed statutory trusts, partially offset by the repayment of $56.9 million of 9.0% fixed rate subordinated debentures on December 31, 2006, as well as the repayment of $59.3 million of 10.24% subordinated debentures in September 2005 and the issuance of $61.9 million of subordinated debentures in late 2004. The refinancing of the outstanding subordinated debentures that carried a higher fixed interest rate improved our net interest income and net interest margin. However, the earnings impact of our interest rate swap agreements had a declining impact on the reduction of interest expense associated with our subordinated debentures. These interest rate swap agreements, which reduced interest expense by $5.7 million and $2.0 million during 2004 and 2005, respectively, increased interest expense by $814,000 during 2006. These swap agreements, which were designated as fair value hedges, were terminated in May 2005 and February 2006, as further discussed under "--Interest Rate Risk Management" and in Note 5 to our Consolidated Financial Statements. Comparison of Results of Operations for 2006 and 2005 Net Income. Net income was $111.7 million for the year ended December 31, 2006, compared to $96.9 million for 2005. Our return on average assets and our return on average stockholders' equity were 1.16% and 15.26%, respectively, for the year ended December 31, 2006, compared to 1.10% and 15.11%, respectively, for 2005. Net income for 2006 reflects increased net interest income and noninterest income, partially offset by an increase in our provision for loan losses, higher levels of noninterest expense and an increase in our provision for income taxes. The increase in earnings in 2006 reflects our continuing efforts to strengthen earnings while focusing on reducing the overall level of our nonperforming assets. The increase in net interest income and net interest margin resulted from (a) an increase in average interest-earning assets stemming from internal loan growth and growth through acquisitions, and (b) higher yields earned on those assets as a result of an increased interest rate environment; partially offset by increased interest expense associated with an increasing deposit base coupled with higher interest rates paid on deposits and on our short-term and long-term borrowings, and the adverse impact of a decline in earnings on our interest rate swap agreements associated with our interest rate risk management program, as further discussed under "--Net Interest Income." The increase in net income in 2006 was partially offset by a significant increase in our provision for loan losses, which resulted from loan portfolio growth and the deterioration of certain credit relationships despite an overall improvement in our nonperforming loans throughout 2006, as further discussed under "--Provision for Loan Losses." The increase in our noninterest income in 2006 was attributable to increased gains on loans sold and held for sale associated with mortgage banking activities and the sale of certain loans, commission fee income associated with our insurance brokerage agency acquired in March 2006, increased service charges on deposit accounts and customer service fees related to higher deposit balances stemming from product development efforts and deposits associated with our 2005 and 2006 acquisitions, and gains on the sale of other assets, as further discussed under "--Noninterest Income." The overall increase in the level of noninterest expense for 2006 reflects increased salaries and employee benefits expense, occupancy expenses and amortization of intangible assets, commensurate with the significant expansion of our branch office network and employee base resulting from our acquisitions of an insurance premium financing company and an insurance brokerage agency in 2006, the addition of 20 branch offices associated with acquisitions in 2005 and 2006, and an increase in the full-time equivalent employee base during 2006, as further discussed under "--Noninterest Expense." Provision for Loan Losses. We recorded a provision for loan losses of $12.0 million for the year ended December 31, 2006. The provision recorded during 2006 was primarily driven by significant growth within our loan portfolio, coupled with deterioration within our one-to-four family residential portfolio in addition to the deterioration of certain other credits, including four large credit relationships within our residential development and construction portfolio during the later part of 2006 that were primarily driven by current market conditions, including slowdowns in unit sales, as further discussed under "Business -- Lending Activities" and "--Loans and Allowance for Loan Losses." We recorded a $4.0 million negative provision for loan losses for the year ended December 31, 2005 to reduce our allowance for loan losses to a level commensurate with the decreasing credit risk that existed in the loan portfolio at that time. Our nonperforming loans decreased $48.5 million, or 49.9%, to $48.7 million at December 31, 2006, from $97.2 million at December 31, 2005. The decrease in the overall level of nonperforming loans during 2006 reflects our efforts to improve asset quality through the sale of nonperforming loans and loan payoffs, as well as the strengthening of certain credit relationships, as further discussed under "--Loans and Allowance for Loan Losses." The overall decrease was partially offset by several significant credit relationships that were downgraded and placed on nonaccrual status during 2006, as previously mentioned. Our allowance for loan losses was $145.7 million at December 31, 2006, compared to $135.3 million at December 31, 2005, representing 1.90% and 1.93% of loans, net of unearned discount, respectively, and 299.05% and 139.23% of nonperforming loans, respectively. The allowance for loan losses at December 31, 2006 includes $5.2 million of balances acquired in conjunction with our 2006 acquisitions. Our net loan charge-offs declined to $6.8 million from $13.4 million for the years ended December 31, 2006 and 2005, respectively. Our net loan charge-offs for 2006 were 0.09% of average loans, representing a significant improvement over 0.21% in 2005. Loan charge-offs were $22.2 million for 2006, compared to $33.1 million in 2005, and loan recoveries were $15.4 million for 2006, compared to $19.8 million in 2005. Loan charge-offs for 2006 included approximately $3.3 million of loan charge-offs associated with two significant residential development project relationships that were placed on nonaccrual status during 2006, in addition to $2.3 million of charge-offs recorded in conjunction with the transfer of certain portfolio loans to our loans held for sale portfolio prior to their sale in December 2006. Loan recoveries for 2006 included $5.0 million recorded on the payoff of a single loan that was transferred to our held for sale portfolio on December 31, 2005. Under our loan policy, loans are placed on nonaccrual status once principal or interest payments become 90 days past due. However, individual loan officers may submit written requests for approval to continue the accrual of interest on loans that become 90 days past due. These requests must be submitted for approval consistent with the authority levels provided in our credit approval policies, and they are only granted if an expected near term future event, such as a pending renewal or expected payoff, exists at the time the loan becomes 90 days past due. If the expected near term future event does not occur as anticipated, the loan is then placed on nonaccrual status. Management considers the nonperforming assets trends in its overall assessment of the adequacy of the allowance for loan losses. Tables summarizing nonperforming assets, past due loans and charge-off and recovery experience are presented under "--Loans and Allowance for Loan Losses." Noninterest Income and Expense. The following table summarizes noninterest income and noninterest expense for the years ended December 31, 2006 and 2005:
December 31, Increase (Decrease) -------------------- ------------------- 2006 2005 Amount % ---- ---- ------ --- (dollars expressed in thousands) Noninterest income: Service charges on deposit accounts and customer service fees.... $ 43,310 39,776 3,534 8.88% Gain on loans sold and held for sale............................. 26,020 20,804 5,216 25.07 Net loss on investment securities................................ (1,813) (2,873) 1,060 36.90 Bank-owned life insurance investment income...................... 3,103 4,860 (1,757) (36.15) Investment management income..................................... 8,412 8,573 (161) (1.88) Insurance product income......................................... 4,848 -- 4,848 100.00 Other............................................................ 29,063 24,945 4,118 16.51 --------- ------- ------ Total noninterest income...................................... $ 112,943 96,085 16,858 17.54 ========= ======= ====== ====== Noninterest expense: Salaries and employee benefits................................... $ 166,864 139,764 27,100 19.39% Occupancy, net of rental income.................................. 26,953 22,081 4,872 22.06 Furniture and equipment.......................................... 16,960 16,015 945 5.90 Postage, printing and supplies................................... 6,721 5,743 978 17.03 Information technology fees...................................... 37,099 35,472 1,627 4.59 Legal, examination and professional fees......................... 8,783 9,319 (536) (5.75) Amortization of intangible assets................................ 8,195 4,850 3,345 68.97 Communications................................................... 2,425 2,012 413 20.53 Advertising and business development............................. 7,128 7,043 85 1.21 Charitable contributions......................................... 6,462 5,922 540 9.12 Other............................................................ 31,626 29,417 2,209 7.51 --------- ------- ------ Total noninterest expense..................................... $ 319,216 277,638 41,578 14.98 ========= ======= ====== ======
Noninterest Income. Noninterest income was $112.9 million for the year ended December 31, 2006, in comparison to $96.1 million for 2005. Noninterest income consists primarily of service charges on deposit accounts and customer service fees, mortgage-banking revenues, investment management income and other income. Service charges on deposit accounts and customer service fees increased to $43.3 million from $39.8 million for the years ended December 31, 2006 and 2005, respectively. The increase in service charges and customer service fees is primarily attributable to: (a) increased deposit account balances associated with internal growth and our acquisitions of banks completed in 2005 and 2006, as further discussed under "--Financial Condition and Average Balances" and in Note 2 to our Consolidated Financial Statements; (b) additional products and services available and utilized by our retail and commercial customer base; (c) increased fee income from customer service charges for non-sufficient funds and returned check fees coupled with enhanced control of fee waivers; and (d) pricing increases on certain service charges and customer service fees instituted to reflect current market conditions. The gain on loans sold and held for sale increased to $26.0 million from $20.8 million for the years ended December 31, 2006 and 2005, respectively. We primarily attribute the increase in 2006 to: (a) a $1.7 million gain, before applicable income taxes, recorded on the sale of certain nonperforming loans in March 2006 that were transferred to our loans held for sale portfolio on December 31, 2005; (b) the recognition of $1.2 million and $927,000 of income in March 2006 and April 2006, respectively, generated from the capitalization of mortgage servicing rights pertaining to the securitization and transfer to our investment portfolio of $77.1 million and $61.8 million, respectively, of residential mortgage loans held in our loan portfolio, as further described in Note 6 to our Consolidated Financial Statements; (c) net gains of $2.4 million recorded on the sale of $278.7 million of certain residential mortgage loans, as further discussed under "--Mortgage Banking Activities" and "--Loans and Allowance for Loan Losses;" and (d) a $3.7 million gain, before applicable income taxes, recorded on the sale, in December 2006, of 44 loans in our loans held for sale portfolio, of which 26 were nonperforming loans, as further discussed under "--Loans and Allowance for Loan Losses." The increase in our gain on loans sold and held for sale was partially offset by a $1.1 million write-down of the carrying value of a nonperforming loan that was transferred to our loans held for sale portfolio on December 31, 2005, and subsequently transferred back into our loan portfolio at fair value in September 2006, as further discussed under "--Loans and Allowance for Loan Losses." Noninterest income includes a net loss on investment securities of $1.8 million and $2.9 million for the years ended December 31, 2006 and 2005, respectively. The net loss for 2006 resulted primarily from sales of certain available-for-sale investment securities associated with the full termination of three $50.0 million term repurchase agreements and the partial termination of $50.0 million of a $150.0 million term repurchase agreement, as further described in Note 3, Note 5 and Note 10 to our Consolidated Financial Statements, partially offset by a gain of $389,000 on the redemption of common stock held as an available-for-sale investment security. The net loss for 2005 resulted from the sale of certain available-for-sale investment securities associated with the termination of a $50.0 million term repurchase agreement. Bank-owned life insurance investment income was $3.1 million for the year ended December 31, 2006, in comparison to $4.9 million in 2005. The decrease reflects a reduced return on the performance of the underlying investments surrounding the insurance contracts which is primarily attributable to the portfolio mix of investments and overall market conditions. Investment management income generated by MVP, our institutional money management subsidiary, was $8.4 million for the year ended December 31, 2006, in comparison to $8.6 million in 2005, reflecting decreased portfolio management fee income as a result of current market conditions. Insurance product income generated by Adrian Baker, our insurance brokerage agency acquired on March 31, 2006, as further described in Note 2 to our Consolidated Financial Statements, was $4.8 million for the year ended December 31, 2006. Other income was $29.1 million and $24.9 million for the years ended December 31, 2006 and 2005, respectively. We attribute the primary components of the increase in other income to: >> an increase of $3.1 million in gains on sales of other assets, including a $2.8 million gain recognized on the sale of an asset that was acquired as settlement in full of a loan charged-off in prior years and a gain of $885,000 recognized on the sale of assets that were acquired with our acquisition of CIB Bank; >> an increase of $1.7 million attributable to interest due on tax refunds associated with the filing of amended federal income tax returns for the years from 2000 through 2004; >> a release fee of $938,000 received on funds collected from a loan previously sold in March 2005, in which First Bank was entitled to 25% of any future fees collected on the loan under a defined release fee agreement that was entered into in conjunction with the loan sale; >> a net increase of $839,000 in loan servicing fees, which was primarily attributable to a decrease of $966,000 in impairment charges on SBA servicing rights and a decrease of $1.5 million in the amortization of servicing rights, as further described in Note 6 to our Consolidated Financial Statements; partially offset by a decrease of $1.6 million in fees from loans serviced for others; >> a decrease of $680,000 in net losses on our derivative instruments; >> an increase of $652,000 in gains on sales of other real estate. Gains on sales of other real estate were $2.0 million for the year ended December 31, 2006, and included a $1.5 million gain recognized on the sale of a parcel of other real estate in January 2006 acquired with our acquisition of CIB Bank. Gains on sales of other real estate for the year ended December 31, 2005 were $1.3 million; and >> income associated with continued growth and expansion of our banking franchise, including our de novo branch offices and our acquisitions completed during 2005 and 2006; partially offset by >> a decrease of $2.5 million in recoveries of certain loan principal balances that had been previously charged-off by the financial institutions prior to their acquisitions by First Banks. Noninterest Expense. Noninterest expense was $319.2 million for the year ended December 31, 2006, in comparison to $277.6 million for 2005. Our efficiency ratio was 64.18% for the year ended December 31, 2006, compared to 65.83% for 2005. The efficiency ratio is used by the financial services industry to measure an organization's operating efficiency. The efficiency ratio represents the ratio of noninterest expense to the sum of net interest income and noninterest income. The increase in noninterest expense was primarily attributable to our 2005 and 2006 acquisitions, including salaries and employee benefits expense, occupancy expense and information technology fees, as well as increases in amortization of intangible assets and other expense. We record the majority of integration costs attributable to our acquisitions as of the consummation date of our purchase business combinations. These costs include, but are not limited to, items such as: >> write-downs and impairment of assets of the acquired entities that will no longer be usable subsequent to the consummation date, primarily data processing equipment, incompatible hardware and software, bank signage, etc. These adjustments are generally recorded as of the consummation date as an allocation of the purchase price with the offsetting adjustment recorded as an increase to goodwill. For all periods presented, these adjustments are not material to our operations; >> costs associated with a planned exit of an activity of the acquired entity that is not associated with or is not expected to generate revenues after the consummation date, such as credit card lending. These costs are generally recorded as of the consummation date through the establishment of an accrued liability with the offsetting adjustment recorded as an increase to goodwill. These costs are infrequently encountered and, for all periods presented, are not material to our operations; >> planned involuntary employee termination benefits, as further discussed under "Business --Acquisitions - Acquisition and Integration Costs" and Note 2 to our Consolidated Financial Statements; and >> contractual obligations of the acquired entities that existed prior to the consummation date that either have no economic benefit to the combined entity or have a penalty that we will incur to cancel the contractual obligation. These contractual obligations generally relate to existing information technology and item processing contracts of the acquired entities that include penalties for early termination. The acquisition of specialized entities does not typically result in costs associated with integration of information technology systems as the existing systems remain in use. In conjunction with the merger and integration of our acquisitions, the acquired banks are converted to our existing information technology and item processing systems. Consequently, the costs associated with terminating the existing contracts of the acquired entities are generally recorded as of the consummation date through the establishment of an accrued liability with the offsetting adjustment recorded as an increase to goodwill as further discussed under "Business -- Acquisitions - Acquisition and Integration Costs" and Note 2 to our Consolidated Financial Statements. We make adjustments to the fair value of the acquired entities' assets and liabilities for these items as of the consummation date and include them in the allocation of the overall acquisition cost. We also incur costs associated with our acquisitions that are expensed in our consolidated statements of income. These costs relate specifically to additional costs incurred in conjunction with the information technology and item processing conversions of the acquired entities, as well as training of personnel on First Bank's systems, as further described and quantified below. Salaries and employee benefits increased by $27.1 million to $166.9 million for the year ended December 31, 2006, from $139.8 million in 2005. We attribute the overall increase to increased salaries and employee benefits expenses associated with an aggregate of 20 additional branches acquired in 2005 and 2006, one de novo branch opened in 2005, the acquisitions of UPAC and Adrian Baker, in addition to generally higher salary and employee benefit costs associated with employing and retaining qualified personnel, including the implementation of enhanced incentive compensation and employee benefit plans. Our total full-time equivalent employees increased to approximately 2,630 at December 31, 2006 from approximately 2,290 at December 31, 2005. Occupancy, net of rental income, and furniture and equipment expense was $43.9 million and $38.1 million for the years ended December 31, 2006 and 2005, respectively. The increase reflects higher levels of expense resulting from our de novo activities and acquisitions in 2005 and 2006, as discussed above, as well as increased technology equipment expenditures, continued expansion and renovation of certain corporate and branch offices, and increased depreciation expense associated with acquisitions and capital expenditures. Information technology and item processing fees were $37.1 million and $35.5 million for the years ended December 31, 2006 and 2005, respectively. As more fully described in Note 19 to our Consolidated Financial Statements, First Services, L.P., a limited partnership indirectly owned by our Chairman and members of his immediate family, provides information technology and various operational support services to our subsidiaries and us. Information technology fees also include fees paid to outside servicers associated with our mortgage lending and trust divisions, our small business lending and institutional money management subsidiaries, and UPAC and Adrian Baker. The increased level of information technology fees was primarily attributable to the additional branch offices provided by our acquisitions and de novo branch office openings; certain de-conversion costs from other providers associated with our acquisitions; growth and technological advancements consistent with our product and service offerings; and continued expansion and upgrades to technological equipment, networks and communication channels, including costs to maintain security and provide compliance with the Sarbanes-Oxley Act of 2002; partially offset by expense reductions resulting from information technology conversions of our acquisitions completed in 2005 and 2006, as well as the achievement of certain efficiencies associated with the implementation of various technology projects. Legal, examination and professional fees was $8.8 million and $9.3 million for the years ended December 31, 2006 and 2005, respectively. The continued expansion of overall corporate activities, the ongoing professional services utilized by certain of our acquired entities, and the levels of legal fees associated with certain litigation matters have all contributed to the overall expense levels in 2005 and 2006. Amortization of intangible assets was $8.2 million and $4.9 million for the years ended December 31, 2006 and 2005, respectively. The increase is attributable to core deposit intangibles associated with our acquisitions completed in 2005 and 2006, in addition to the customer list intangibles associated with our acquisitions of Adrian Baker and UPAC in March 2006 and May 2006, respectively, as further described in Note 2 and Note 8 to our Consolidated Financial Statements. Charitable contributions expense was $6.5 million and $5.9 million for the years ended December 31, 2006 and 2005, respectively. The increase is primarily attributable to an increase in charitable contributions made to the Dierberg Operating Foundation, Inc. and The Dierberg Foundation, charitable foundations established by our Chairman and members of his immediate family, as further described in Note 19 to our Consolidated Financial Statements. Other expense was $31.6 million and $29.4 million for the years ended December 31, 2006 and 2005, respectively. Other expense encompasses numerous general and administrative expenses including insurance, freight and courier services, correspondent bank charges, miscellaneous losses and recoveries, expenses on other real estate owned, memberships and subscriptions, transfer agent fees, sales taxes and travel, meals and entertainment. The increase in other expense was primarily attributable to: >> a $617,000 specific reserve established in March 2006 and an increase of $746,000 to the specific reserve in June 2006 for the estimated loss associated with a $3.1 million unfunded letter of credit acquired with our acquisition of CIB Bank; >> a $470,000 loss recognized on a liquidation sale of residential real estate and personal property of an SBA guaranteed loan; and >> expenses associated with continued growth and expansion of our banking franchise, including our de novo branch offices and our acquisitions completed during 2005 and 2006; partially offset by >> a decrease of $1.5 million of expenditures on other real estate. Expenses on other real estate were $520,000 for the year ended December 31, 2006. Expenses on other real estate were $2.0 million for the year ended December 31, 2005, and included expenditures of $1.1 million related to a parcel of other real estate acquired in conjunction with our CIB Bank acquisition. Provision for Income Taxes. The provision for income taxes was $55.1 million for the year ended December 31, 2006, representing an effective income tax rate of 33.1%, in comparison to $52.5 million, representing an effective income tax rate of 35.5%, for the year ended December 31, 2005. The increase in our provision for income taxes primarily reflects our increased earnings. In 2006, we reversed a $2.9 million federal tax reserve and a $1.9 million state tax reserve as they were no longer deemed necessary as a result of the resolution of a potential tax liability. In 2005, we reversed a $3.3 million state tax reserve as it was no longer deemed necessary as a result of the resolution of a potential tax liability. In addition, we recorded net tax benefits of $5.6 million and $2.1 million relating to the utilization of certain federal and state tax credits for the years ended December 31, 2006 and 2005, respectively. Excluding these transactions, our effective income tax rate was 38.5% and 38.4% for the years ended December 31, 2006 and 2005, respectively. Comparison of Results of Operations for 2005 and 2004 Net Income. Net income was $96.9 million for the year ended December 31, 2005, compared to $82.9 million for 2004. Our return on average assets and our return on average stockholders' equity were 1.10% and 15.11%, respectively, for the year ended December 31, 2005, compared to 1.10% and 14.44%, respectively, for 2004. Results for 2005 reflect increased net interest income and noninterest income, and a negative provision for loan losses, partially offset by increased noninterest expense and an increased provision for income taxes. The increase in 2005 reflects our continuing efforts to strengthen earnings and simultaneously improve asset quality. Net interest-earning assets provided by our 2004 and 2005 acquisitions, higher-yielding investment securities, and internal loan growth coupled with higher interest rates on loans contributed to increased interest income in 2005. However, net interest income was adversely affected by a decline in earnings on our interest rate swap agreements associated with our interest rate risk management program, primarily resulting from increasing prevailing interest rates and the maturity and termination of certain interest rate swap agreements; increased interest expense as a result of higher interest rates on deposits and a redistribution of deposit balances toward higher-yielding products in conjunction with the CIB Bank deposit base acquired in November 2004; increased levels of borrowings coupled with increased rates on such borrowings; and the issuance of additional subordinated debentures late in 2004 to partially fund our acquisition of CIB Bank, as further discussed under "--Net Interest Income." Despite the increasing interest rate environment, overall conditions within our markets and the impact of the decline in earnings on our interest rate swap agreements continue to exert pressure on our net interest income and our net interest margin. The increase in net income in 2005 also resulted from a significant reduction in our provision for loan losses as a result of overall improvement in our nonperforming loans during 2005, exclusive of a deterioration of certain credits in the fourth quarter of 2005 that we transferred to our loans held for sale portfolio, as further discussed under "--Provision for Loan Losses." We primarily attribute the increased noninterest income to additional noninterest income associated with our 2004 and 2005 acquisitions, increased gains on mortgage loans sold and held for sale, increased investment management fee income, and increased service charges on deposit accounts and customer service fees related to higher deposit balances; partially offset by net losses on sales of available-for-sale investment securities and the recognition of impairment on our SBA servicing assets, as further discussed under "--Noninterest Income." The overall increase in our operating expenses for 2005, as further discussed under "--Noninterest Expense," primarily reflects increased expense levels resulting from our 2004 and 2005 acquisitions and the addition of five de novo branch offices in 2004 and 2005, significant charitable contributions expense and increases in salaries and employee benefits expenses. Provision for Loan Losses. We recorded a $4.0 million negative provision for loan losses for the year ended December 31, 2005, in comparison to a provision for loan losses of $25.8 million for the year ended December 31, 2004. Our net loan charge-offs declined to $13.4 million from $24.8 million for the years ended December 31, 2005 and 2004, respectively. As further discussed under "--Lending Activities" and "--Loans and Allowance for Loan Losses," while we had recorded a negative provision for loan losses of $8.0 million for the first nine months of 2005, reflecting a 21.0% improvement in our nonperforming loans during this period as a result of the sale of certain acquired nonperforming loans, the strengthening of certain loans, loan payoffs and external refinancing of various credits, and a significant reduction in net loan charge-offs, the level of nonperforming loans increased during the fourth quarter of 2005 following further deterioration of a few large credit relationships, resulting in a fourth quarter provision for loan losses of $4.0 million. Our nonperforming loans, which had decreased to $67.8 million at September 30, 2005 from $85.8 million at December 31, 2004, increased $29.4 million during the fourth quarter of 2005, resulting in a balance of $97.2 million at December 31, 2005. The increase in nonperforming loans in the fourth quarter of 2005 is primarily attributable to further deterioration of a small number of credit relationships, including two large credit relationships associated with our CIB Bank purchase of $14.9 million and $16.6 million, or $31.5 million in aggregate. On December 31, 2005, we recognized $7.6 million of loan charge-offs to reduce the loans to their estimated fair value, net of costs, that is expected to be realized at the time of the sale, and transferred approximately $59.7 million of nonperforming loans to our held for sale portfolio, which included several of the relationships that deteriorated during the fourth quarter of 2005. Included in the loan charge-offs and loans transferred to our held for sale portfolio were $6.0 million of loan charge-offs and approximately $49.6 million of nonperforming loans that were associated with our CIB Bank purchase. In January 2006, we received a payoff of one of the nonperforming loans in our held for sale portfolio that had a carrying value of $12.4 million at December 31, 2005, and recorded a $5.0 million loan recovery. Furthermore, in March 2006, we completed the sale of a majority of the remaining nonaccrual loans in our held for sale portfolio that had a carrying value of approximately $32.5 million in aggregate, at December 31, 2005. Tables summarizing nonperforming assets, past due loans and charge-off and recovery experience are presented under "--Loans and Allowance for Loan Losses." Noninterest Income and Expense. The following table summarizes noninterest income and noninterest expense for the years ended December 31, 2005 and 2004:
December 31, Increase (Decrease) -------------------- ------------------- 2005 2004 Amount % ---- ---- ------ --- (dollars expressed in thousands) Noninterest income: Service charges on deposit accounts and customer service fees.... $ 39,776 38,230 1,546 4.04% Gain on loans sold and held for sale............................. 20,804 18,497 2,307 12.47 Net (loss) gain on investment securities......................... (2,873) 257 (3,130) (1,217.90) Bank-owned life insurance investment income...................... 4,860 5,201 (341) (6.56) Investment management income..................................... 8,573 6,870 1,703 24.79 Other............................................................ 24,945 18,144 6,801 37.48 --------- ------- ------ Total noninterest income...................................... $ 96,085 87,199 8,886 10.19 ========= ======= ====== ========= Noninterest expense: Salaries and employee benefits................................... $ 139,764 117,492 22,272 18.96% Occupancy, net of rental income.................................. 22,081 19,882 2,199 11.06 Furniture and equipment.......................................... 16,015 17,017 (1,002) (5.89) Postage, printing and supplies................................... 5,743 5,010 733 14.63 Information technology fees...................................... 35,472 32,019 3,453 10.78 Legal, examination and professional fees......................... 9,319 7,412 1,907 25.73 Amortization of intangible assets................................ 4,850 2,912 1,938 66.55 Communications................................................... 2,012 1,866 146 7.82 Advertising and business development............................. 7,043 5,493 1,550 28.22 Charitable contributions......................................... 5,922 577 5,345 926.34 Other............................................................ 29,417 23,538 5,879 24.98 --------- ------- ------ Total noninterest expense..................................... $ 277,638 233,218 44,420 19.05 ========= ======= ====== =========
Noninterest Income. Noninterest income was $96.1 million for the year ended December 31, 2005, in comparison to $87.2 million for 2004. Noninterest income consists primarily of service charges on deposit accounts and customer service fees, mortgage-banking revenues, investment management income and other income. Service charges on deposit accounts and customer service fees increased to $39.8 million from $38.2 million for the years ended December 31, 2005 and 2004, respectively. The increase in service charges and customer service fees is primarily attributable to: >> increased demand deposit account balances associated with internal growth and our acquisitions of Continental Community Bank and Trust Company, or CCB, and CIB Bank completed in 2004, and our acquisitions completed in 2005; >> additional products and services available and utilized by our retail and commercial customer base; >> increased fee income from customer service charges for non-sufficient funds and returned check fees coupled with enhanced control of fee waivers; >> higher earnings allowances on commercial deposit accounts; >> increased fee income associated with automated teller machine services and debit cards; and >> pricing increases on certain service charges and customer service fees instituted to reflect current market conditions. The gain on loans sold and held for sale increased to $20.8 million from $18.5 million for the years ended December 31, 2005 and 2004, respectively. The increase in 2005 is partially attributable to an increase of $2.0 million of gains on SBA loans sold by SBLS LLC. The increase is also attributable to an increase in gains on mortgage loans sold resulting from an increase in the volume of mortgage loan sales in the secondary market as a result of increased loan origination volumes. In general, new residential mortgage loan production of 15-year fixed rate, conforming conventional adjustable rate mortgages and other similar products is being retained in our portfolio, while other loans, primarily 20 and 30-year fixed rate loans, are typically being sold in the secondary loan markets. Noninterest income includes a net loss on investment securities of $2.9 million for the year ended December 31, 2005, in comparison to a net gain on investment securities of $257,000 in 2004. The net loss for 2005 resulted from the sale of certain available-for-sale investment securities associated with the termination of a $50.0 million term repurchase agreement in the fourth quarter of 2005. The net gain for 2004 resulted primarily from the sales of certain available-for-sale investment securities held by acquired institutions that did not meet our overall investment objectives. Bank-owned life insurance investment income was $4.9 million for the year ended December 31, 2005, in comparison to $5.2 million in 2004. The decrease in investment income reflects a reduced return on the performance of the underlying securities surrounding the insurance contracts which is primarily attributable to the portfolio mix of investments and overall market conditions. Investment management income generated by MVP was $8.6 million for the year ended December 31, 2005, in comparison to $6.9 million in 2004, reflecting increased portfolio management fee income attributable to new business development and overall growth in assets under management. Other income was $24.9 million and $18.1 million for the years ended December 31, 2005 and 2004, respectively. We attribute the primary components of the increase in other income to: >> an increase of $3.6 million attributable to recoveries of certain loan principal balances that had been charged-off by the various respective financial institutions prior to their acquisition by First Banks; >> an increase of $3.1 million attributable to the reversal of a specific reserve on a letter of credit assumed with the CIB Bank acquisition and collection of the related fees resulting from the cancellation of the letter of credit; >> a net decrease in losses on the valuation or sale of certain repossessed assets, primarily related to our commercial leasing portfolio. Net gains for 2005 were $696,000 and included $464,000 of gains on two sales of repossessed leasing equipment. Net losses for 2004 were $1.6 million and included a $750,000 write-down on repossessed aircraft leasing equipment and a $1.3 million write-down on repossessed equipment unrelated to the airline industry, partially offset by gains of $350,000 on the sale of other repossessed aircraft leasing equipment; >> an increase of $713,000 reflecting reductions of a contingent liability established in conjunction with the sale of a portion of our commercial leasing portfolio in June 2004. The reductions of the contingent liability in 2005 and 2004 of $1.1 million and $375,000, respectively, were the result of further reductions in related lease balances for the specific pools of leases sold; >> a recovery of agent loan collection expenses of $739,000 as permitted under a loan participation agreement prior to recovery of principal and interest, from funds collected from the liquidation of a portion of the collateral that secured the loan by the receiver; >> a $602,000 net increase in loan servicing fees. The net increase is primarily attributable to: increased fees from loans serviced for others, primarily attributable to a $2.3 million increase in SBLS LLC loan servicing fees, offset by an $887,000 increase in amortization of SBA servicing rights and the recognition of a $2.4 million impairment charge on our SBA servicing rights following substantial damage to several shrimping vessels within the servicing portfolio caused by the effects of Hurricane Katrina; a $199,000 decrease in mortgage loan servicing fees, including a lower level of interest shortfall on mortgage loans, offset by a $1.6 million decrease in amortization of mortgage servicing rights; and increased unused commitment fees of $281,000; >> an increase of $584,000 in fees from fiduciary activities; >> a $448,000 decrease in net losses on our derivative instruments; and >> our acquisitions completed in 2004 and 2005; partially offset by >> a decrease of $2.4 million in gains on sales of other real estate. Gains on sales of other real estate were $1.3 million for the year ended December 31, 2005, and included approximately $972,000 of gains recorded on the sale of six holdings of other real estate. Gains on sales of other real estate were $3.7 million for the year ended December 31, 2004, and included a $2.7 million gain recorded in the first quarter of 2004 on the sale of residential and recreational development property that was transferred to other real estate in January 2003 and approximately $390,000 of gains recorded on the sale of two additional holdings of other real estate; >> a decline of $1.2 million in rental income associated with reduced commercial leasing activities; >> a decrease of $1.0 million in gains on sales of branches, net of expenses. Gains, net of expenses, on the sale of two Midwest banking offices totaled $1.0 million and reflected a $390,000 gain, net of expenses, on the sale of one of our Missouri branch banking offices in February 2004, and a $630,000 gain, net of expenses, on the sale of one of our Illinois banking offices in April 2004. There were no sales of branch banking offices in 2005; and >> a net increase in losses, net of gains, on the disposition of certain assets, primarily attributable to a $459,000 net loss resulting from the demolition of a branch drive-thru facility and a $277,000 net loss resulting from the sale of a former CIB Bank branch facility during 2005. Noninterest Expense. Noninterest expense was $277.6 million for the year ended December 31, 2005, in comparison to $233.2 million for 2004. Our efficiency ratio was 65.83% for the year ended December 31, 2005, compared to 60.23% for 2004. The increases in noninterest expense and our efficiency ratio for 2005 were primarily attributable to increases in expenses resulting from our 2004 and 2005 acquisitions and the addition of five de novo branch offices in 2004 and 2005, and increases in salaries and employee benefits expense, information technology expense, charitable contributions expense, expenses on other real estate, and other expense. Salaries and employee benefits increased by $22.3 million to $139.8 million for the year ended December 31, 2005, from $117.5 million in 2004. We attribute the overall increase to increased salaries and employee benefits expenses associated with an aggregate of 27 additional branches acquired in 2004 and 2005 and five de novo branches opened in 2004 and 2005; and the addition of a regional structure in Chicago following our significant expansion in the Chicago market area, including credit administration, commercial real estate and commercial and industrial banking groups, branch administration, credit review and human resource and training functions. The increase is also attributable to generally higher salary and employee benefit costs associated with employing and retaining qualified personnel, including enhanced incentive compensation and employee benefits plans. Our number of employees on a full-time equivalent basis increased to approximately 2,290 at December 31, 2005, from approximately 2,170 at December 31, 2004. Occupancy, net of rental income, and furniture and equipment expense totaled $38.1 million and $36.9 million for the years ended December 31, 2005 and 2004, respectively. The increase is primarily attributable to higher levels of expense resulting from our acquisitions in 2004 and 2005, which added 27 branch offices, and the opening of five de novo branch offices in 2004 and 2005, as well as the formation of separate small business banking loan origination offices in most of our market areas. The increase is also attributable to increased technology equipment expenditures, continued expansion and renovation of certain corporate and branch offices, including additional production and administrative offices, and increased depreciation expense associated with acquisitions and capital expenditures. Information technology and item processing fees were $35.5 million and $32.0 million for the years ended December 31, 2005 and 2004, respectively. The increased level of fees is primarily attributable to the additional branch offices provided by our acquisitions and de novo branch office openings; certain de-conversion costs from other providers associated with our acquisitions, growth and technological advancements consistent with our product and service offerings; and continued expansion and upgrades to technological equipment, networks and communication channels; partially offset by expense reductions resulting from information technology conversions of our acquisitions completed in 2004, as well as the achievement of certain efficiencies associated with the implementation of various technology projects. Legal, examination and professional fees were $9.3 million and $7.4 million for the years ended December 31, 2005 and 2004, respectively. The continued expansion of overall corporate activities, the ongoing professional services utilized by certain of our acquired entities, and increased legal fees associated with commercial loan documentation, collection efforts and certain litigation costs primarily related to our various acquired entities have all contributed to the overall expense levels in 2004 and 2005. The increase in 2005 is also attributable to $471,000 of fees paid for accounting and other services, including operational and systems support, provided by the seller of CIB Bank pursuant to a service agreement to provide services from the November 2004 sale date through the system conversion date in February 2005. Amortization of intangible assets was $4.9 million and $2.9 million for the years ended December 31, 2005 and 2004, respectively. The increase is attributable to core deposit intangibles associated with our acquisitions completed in 2004 and 2005. Communications and advertising and business development expenses were $9.1 million and $7.4 million for the years ended December 31, 2005 and 2004, respectively. The expansion of our sales, marketing and product group in 2004 and broadened advertising campaigns have contributed to higher expenditures and are consistent with our continued focus on expanding our banking franchise and the products and services available to our customers. Our spring and fall advertising campaigns have contributed to the increase in 2005. We continue our efforts to manage these expenses through renegotiation of contracts, enhanced focus on advertising and promotional activities in markets that offer greater benefits, as well as ongoing cost containment efforts. Charitable contribution expense was $5.9 million and $577,000 for the years ended December 31, 2005 and 2004, respectively. The increase in 2005 was primarily attributable to charitable contributions of $2.5 million and $1.5 million, respectively, in December 2005 to The Dierberg Foundation and the Dierberg Operating Foundation, Inc. The increase is also attributable to a $1.5 million contribution in May 2005 to an urban revitalization development project located in the city of St. Louis. In exchange for this contribution, we received Missouri state tax credits that will be utilized to reduce certain state income taxes. Other expense was $29.4 million and $23.5 million for the years ended December 31, 2005 and 2004, respectively. Other expense encompasses numerous general and administrative expenses including insurance, freight and courier services, correspondent bank charges, miscellaneous losses and recoveries, expenses on other real estate owned, memberships and subscriptions, transfer agent fees, sales taxes and travel, meals and entertainment. The increase is primarily attributable to: >> an increase of $1.6 million of expenditures on other real estate. Expenditures on other real estate were $2.0 million for the year ended December 31, 2005, and included expenses of $1.1 million in preparation for the sale of a parcel of other real estate acquired with the acquisition of CIB Bank. Expenditures on other real estate were $364,000 for the year ended December 31, 2004; >> increased losses and adjustments to the carrying value of certain affordable housing credit partnership investments; and >> expenses associated with continued growth and expansion of our banking franchise, including our de novo branch offices and acquisitions completed during 2004 and 2005, particularly CIB Bank. Provision for Income Taxes. The provision for income taxes was $52.5 million for the year ended December 31, 2005, representing an effective income tax rate of 35.5%, in comparison to $45.3 million, representing an effective income tax rate of 35.4%, for the year ended December 31, 2004. The increase in our provision for income taxes primarily reflects our increased earnings. During 2005 and 2004, we reversed $3.3 million and $2.8 million of state tax reserves, respectively, that were no longer deemed necessary as a result of the resolution of a potential tax liability. Additionally, in 2005, we recorded a net tax benefit of $2.1 million relating to our utilization of certain federal and state tax credits. Excluding these transactions, our effective income tax rate was 38.4% and 37.5% for the years ended December 31, 2005 and 2004. Interest Rate Risk Management For financial institutions, the maintenance of a satisfactory level of net interest income is a primary factor in achieving acceptable income levels. However, the maturity and repricing characteristics of the institution's loan and investment portfolios may differ significantly from those within its deposit structure. The nature of the loan and deposit markets within which a financial institution operates and its objectives for business development within those markets at any point in time influence these characteristics. In addition, the ability of borrowers to repay loans and depositors to withdraw funds prior to stated maturity dates introduces divergent option characteristics that operate primarily as interest rates change. These factors cause various elements of the institution's balance sheet to react in different manners and at different times relative to changes in interest rates, potentially leading to increases or decreases in net interest income over time. Depending upon the direction and magnitude of interest rate movements and their effect on the specific components of the institution's balance sheet, the effects on net interest income can be substantial. Consequently, managing a financial institution requires establishing effective control over the exposure of the institution to changes in interest rates. We strive to manage our interest rate risk by: >> maintaining an Asset Liability Committee, or ALCO, responsible to our Board of Directors and Executive Management, to review the overall interest rate risk management activity and approve actions taken to reduce risk; >> employing a financial simulation model to determine our exposure to changes in interest rates; >> coordinating the lending, investing and deposit-generating functions to control the assumption of interest rate risk; and >> utilizing various financial instruments, including derivatives, to offset inherent interest rate risk should it become excessive. The objective of these procedures is to limit the adverse impact that changes in interest rates may have on our net interest income. The ALCO has overall responsibility for the effective management of interest rate risk and the approval of policy guidelines. The ALCO includes our President and Chief Executive Officer, Chief Operating Officer, Chief Financial Officer, Chief Investment Officer and the senior officers of finance and risk management, and certain other officers. The Asset Liability Management Group, which monitors interest rate risk, supports the ALCO, prepares analyses for review by the ALCO and implements actions that are either specifically directed by the ALCO or established by policy guidelines. In managing sensitivity, we strive to reduce the adverse impact on earnings by managing interest rate risk within internal policy constraints. Our policy is to manage exposure to potential risks associated with changing interest rates by maintaining a balance sheet posture in which annual net interest income is not significantly impacted by reasonably possible near-term changes in interest rates. To measure the effect of interest rate changes, we project our net income over a two-year horizon on a pro forma basis. The analysis assumes various scenarios for increases and decreases in interest rates including both instantaneous and gradual, and parallel and non-parallel shifts in the yield curve, in varying amounts. For purposes of arriving at reasonably possible near-term changes in interest rates, we include scenarios based on actual changes in interest rates, which have occurred over a two-year period, simulating both a declining and rising interest rate scenario. We are "asset-sensitive," indicating that our assets would generally reprice with changes in interest rates more rapidly than our liabilities, and our simulation model indicates a loss of projected net interest income should interest rates decline. While a decline in interest rates of less than 100 basis points has a relatively minimal impact on our net interest income, an instantaneous parallel decline in the interest yield curve of 100 basis points indicates a pre-tax projected loss of approximately 3.7% of net interest income, based on assets and liabilities at December 31, 2006. Although we do not anticipate that instantaneous shifts in the yield curve as projected in our simulation model are likely, these are indications of the effects that changes in interest rates would have over time. We also prepare and review a more traditional interest rate sensitivity position in conjunction with the results of our simulation model. The following table presents the projected maturities and periods to repricing of our rate sensitive assets and liabilities as of December 31, 2006, adjusted to account for anticipated prepayments:
Over Over Three Six Over Three through through One Over Months Six Twelve through Five or Less Months Months Five Years Years Total ------- ------ ------ ---------- ----- ----- (dollars expressed in thousands) Interest-earning assets: Loans (1).................................... $4,550,231 416,290 580,060 1,890,766 229,134 7,666,481 Investment securities........................ 350,854 167,462 161,407 557,480 227,743 1,464,946 Short-term investments....................... 153,583 -- -- -- -- 153,583 ---------- --------- --------- --------- --------- --------- Total interest-earning assets............ 5,054,668 583,752 741,467 2,448,246 456,877 9,285,010 Effect of interest rate swap agreements...... (600,000) -- 200,000 400,000 -- -- ---------- --------- --------- --------- --------- --------- Total interest-earning assets after the effect of interest rate swap agreements................... $4,454,668 583,752 941,467 2,848,246 456,877 9,285,010 ========== ========= ========= ========= ========= ========= Interest-bearing liabilities: Interest-bearing demand deposits............. $ 363,317 225,846 147,291 108,013 137,472 981,939 Money market deposits........................ 1,733,483 -- -- -- -- 1,733,483 Savings deposits............................. 105,246 86,673 74,291 105,245 247,637 619,092 Time deposits................................ 1,205,768 785,312 1,196,107 628,577 11,700 3,827,464 Other borrowings............................. 369,950 77 3,157 715 -- 373,899 Notes payable................................ 65,000 -- -- -- -- 65,000 Subordinated debentures...................... 201,035 25,736 -- -- 71,195 297,966 ---------- --------- --------- --------- --------- --------- Total interest-bearing liabilities....... $4,043,799 1,123,644 1,420,846 842,550 468,004 7,898,843 ========== ========= ========= ========= ========= ========= Interest-sensitivity gap: Periodic..................................... $ 410,869 (539,892) (479,379) 2,005,696 (11,127) 1,386,167 ========= Cumulative................................... 410,869 (129,023) (608,402) 1,397,294 1,386,167 ========== ========= ========= ========= ========= Ratio of interest-sensitive assets to interest-sensitive liabilities: Periodic................................. 1.10 0.52 0.66 3.38 0.98 1.18 ========= Cumulative............................... 1.10 0.98 0.91 1.19 1.18 ========== ========= ========= ========= ========= - ------------------------- (1) Loans are presented net of unearned discount.
Management made certain assumptions in preparing the foregoing table. These assumptions included: >> loans will repay at projected repayment rates; >> mortgage-backed securities, included in investment securities, will repay at projected repayment rates; >> interest-bearing demand accounts and savings deposits will behave in a projected manner with regard to their interest rate sensitivity; and >> fixed maturity deposits will not be withdrawn prior to maturity. A significant variance in actual results from one or more of these assumptions could materially affect the results reflected in the foregoing table. Our overall asset-sensitive position at December 31, 2006 remained relatively consistent at $1.39 billion, or 13.65% of our total assets, in comparison to our overall asset-sensitive position of $1.34 billion, or 14.60% of our total assets, at December 31, 2005. However, we were in a liability-sensitive position on a cumulative basis through the twelve-month time horizon of $608.4 million, or 5.99% of our total assets, at December 31, 2006, whereas we were in an asset-sensitive position on a cumulative basis through the twelve-month time horizon of $117.1 million, or 1.28% of our total assets, at December 31, 2005. We primarily attribute the liability-sensitive position on a cumulative basis through the twelve-month time horizon in 2006 to an increase in money market deposits and an increase in the repricing of time deposits within the twelve-month time horizon as a result of the current interest rate environment and economic conditions. The interest-sensitivity position is one of several measurements of the impact of interest rate changes on net interest income. Its usefulness in assessing the effect of potential changes in net interest income varies with the constant change in the composition of our assets and liabilities and changes in interest rates. For this reason, we place greater emphasis on our simulation model for monitoring our interest rate risk exposure. As previously discussed, we utilize derivative financial instruments to assist in our management of interest rate sensitivity by modifying the repricing, maturity and option characteristics of certain assets and liabilities. The derivative financial instruments we held as of December 31, 2006 and 2005 are summarized as follows:
December 31, ---------------------------------------------------- 2006 2005 ------------------------ ------------------------- Notional Credit Notional Credit Amount Exposure Amount Exposure ------ -------- ------ -------- (dollars expressed in thousands) Cash flow hedges............................ $600,000 4,369 300,000 114 Fair value hedges........................... -- -- 25,000 748 Interest rate floor agreements.............. 300,000 376 100,000 70 Interest rate cap agreements................ 400,000 139 -- -- Interest rate lock commitments.............. 5,900 -- 5,900 -- Forward commitments to sell mortgage-backed securities................ 54,000 -- 47,000 -- ======== ====== ======== =====
The notional amounts of our derivative financial instruments do not represent amounts exchanged by the parties and, therefore, are not a measure of our credit exposure through our use of these instruments. The credit exposure represents the loss we would incur in the event the counterparties failed completely to perform according to the terms of the derivative financial instruments and the collateral held to support the credit exposure was of no value. For the year ended December 31, 2006, we realized net interest expense of $5.0 million on our derivative financial instruments, whereas for the years ended December 31, 2005 and 2004, we realized net interest income of $2.2 million and $50.1 million, respectively, on our derivative financial instruments. The decreased earnings for 2006 and 2005 are primarily attributable to increases in prevailing interest rates, the maturity of $200.0 million and $100.0 million notional amount of interest rate swap agreements designated as cash flow hedges in March 2005 and April 2006, respectively, and the termination of $150.0 million, $101.2 million and $25.0 million notional amount of interest rate swap agreements designated as fair value hedges in February 2005, May 2005 and February 2006, respectively. Although we have implemented other methods to mitigate the reduction in net interest income associated with our derivatives, the maturity and termination of the swap agreements has resulted in a compression of our net interest margin of approximately eight basis points for the year ended December 31, 2006, in comparison to 2005. In addition, the increasing interest rate environment has mitigated a portion of the effect of the reduced earnings on our derivative financial instruments. During the third quarter of 2006, we significantly expanded our utilization of derivative financial instruments, as further described in Note 5 to our Consolidated Financial Statements, in an effort to reduce the adverse impact that falling interest rates could have on our net interest income. We recorded net losses on derivative instruments, which are included in noninterest income in our consolidated statements of income, of $390,000, $1.1 million and $1.5 million for the years ended December 31, 2006, 2005 and 2004, respectively. The net losses recorded in 2006 reflect changes in the value of our interest rate floor agreements entered into in September 2005 and 2006, and changes in the value of our interest rate cap agreements entered into in September 2006. The net losses recorded in 2005 reflect changes in the value of our fair value hedges and the underlying hedged liabilities, and changes in the value of our interest rate floor agreement entered into in September 2005. Information regarding our derivative financial instruments outlined in the table above is further discussed in Note 5 to our Consolidated Financial Statements appearing elsewhere in this report. Mortgage Banking Activities Our mortgage banking activities consist of the origination, purchase and servicing of residential mortgage loans. The purchase of loans to be held for sale is primarily limited to loans that we acquire in conjunction with our acquisition of other financial institutions. Generally, we sell our production of residential mortgage loans in the secondary loan markets. However, in mid-2003, as a result of continued weak loan demand in other sectors of our loan portfolio, we made a business strategy decision to retain a portion of new residential mortgage loan production in our real estate mortgage portfolio, generally represented by production originated in our St. Louis production offices with the exception of 20 and 30-year fixed rate loans which are typically sold in the secondary loan markets. Furthermore, in the third quarter of 2005, we revised our strategy and began retaining additional mortgage loan production in our residential real estate mortgage portfolio, including 15-year fixed rate, conforming conventional adjustable rate mortgages and other similar products, and continued this strategy through the first six months of 2006, as further discussed in "--Loans and Allowance for Loan Losses." Servicing rights may either be retained or released with respect to conventional, FHA and VA conforming fixed-rate and conventional adjustable rate residential mortgage loans. For the three years ended December 31, 2006, 2005 and 2004, we originated residential mortgage loans held for sale and held for portfolio totaling $1.28 billion, $1.60 billion and $1.14 billion, respectively, and sold residential mortgage loans totaling $1.11 billion, $1.14 billion and $1.03 billion, respectively. The origination and purchase of residential mortgage loans and the related sale of the loans provides us with additional sources of income including the gain or loss realized upon sale, the interest income earned while the loan is held awaiting sale and the ongoing loan servicing fees from the loans sold with servicing rights retained. Mortgage loans serviced for investors aggregated $1.04 billion, $1.01 billion and $1.06 billion at December 31, 2006, 2005 and 2004, respectively. The gain on mortgage loans originated for resale, including loans sold and held for sale, was $18.6 million, $18.1 million and $17.8 million for the years ended December 31, 2006, 2005 and 2004, respectively. We determine these gains, net of losses, on a lower of cost or market basis. These gains are realized at the time of sale. The cost basis reflects both the adjustments of the carrying values of loans held for sale to the lower of cost, adjusted to include the cost of hedging the loans held for sale, or current market values, as well as the adjustments for any gains or losses on loan commitments for which the interest rate has been established, net of anticipated underwriting "fallout," adjusted for the cost of hedging these loan commitments. Fallout represents loans not funded due to issues discovered during the underwriting process or withdrawal of the loan request by the customer. The increase in gains in 2006 is primarily attributable to the recognition of $2.1 million of servicing income generated from the capitalization of mortgage servicing rights pertaining to the securitization and transfer to our investment portfolio of $138.9 million of residential mortgage loans held in our loan portfolio, as further described in Note 6 to our Consolidated Financial Statements; and net gains of $386,000, $1.1 million and $909,000 recorded on the sale of $100.0 million, $101.6 million and $77.1 million of certain residential mortgage loans in August 2006, October 2006 and December 2006, respectively, of which $127.8 million represented loans held in our portfolio and $150.9 million represented loans held for sale; partially offset by management's decision to retain additional loan volume in our residential real estate mortgage portfolio during the first six months of 2006, as discussed above. The increase for 2005 is primarily attributable to the continued growth of our mortgage banking activities and the relatively high volume of loans originated and sold commensurate with the prevailing interest rate environment, partially offset by management's decision to retain additional loan volume in our residential real estate mortgage portfolio, as discussed above. Interest income on loans held for sale was $18.2 million for the year ended December 31, 2006, in comparison to $11.7 million and $8.8 million for the years ended December 31, 2005 and 2004, respectively. The amount of interest income realized on loans held for sale is a function of the average balance of loans held for sale, the period for which the loans are held and the prevailing interest rates when the loans are made. The average balance of loans held for sale was $247.0 million, $184.1 million and $133.3 million for the years ended December 31, 2006, 2005 and 2004, respectively. On an annualized basis, our yield on the portfolio of loans held for sale was 7.39%, 6.36% and 6.61% for the years ended December 31, 2006, 2005 and 2004, respectively. This compares with our cost of funds, as a percentage of average interest-bearing liabilities, of 3.49%, 2.47% and 1.64% for the years ended December 31, 2006, 2005 and 2004, respectively. We report mortgage loan servicing fees in other noninterest income in our consolidated statements of income, net of amortization of mortgage servicing rights, interest shortfall and mortgage-backed security guarantee fee expense. Interest shortfall equals the difference between the interest collected from a loan-servicing customer upon prepayment of the loan and a full month's interest that is required to be remitted to the security owner. Our net mortgage loan servicing fees contributed to an overall reduction in our other noninterest income of $1.4 million, $1.2 million and $2.6 million for the years ended December 31, 2006, 2005 and 2004, respectively, which included the amortization of mortgage servicing rights of $4.1 million, $5.0 million and $6.5 million for the years ended December 31, 2006, 2005 and 2004, respectively. We attribute the slight decrease in net loan servicing fees in 2006 to a reduction in fees associated with the retention of a portion of loan production in our residential mortgage loan portfolio, as previously discussed, partially offset by reduced amortization of mortgage servicing rights. We attribute the increase in net loan servicing fees in 2005 to reduced amortization of mortgage servicing rights, partially offset by a reduction in fees associated with a lower volume of loans serviced for others and the retention of a portion of loan production in our residential mortgage loan portfolio. Our interest rate risk management policy provides certain hedging parameters to reduce the interest rate risk exposure arising from changes in loan prices from the time of commitment until the sale of the security or loan. To reduce this exposure, we use forward commitments to sell fixed-rate mortgage-backed securities at a specified date in the future. At December 31, 2006, 2005 and 2004, we had $56.0 million, $47.7 million and $35.3 million, respectively, of loans held for sale and related commitments, net of committed loan sales and estimated underwriting fallout, of which $54.0 million, $47.0 million and $34.0 million, respectively, were hedged through the use of such forward commitments. Investment Securities We classify the securities within our investment portfolio as trading, available for sale or held to maturity. Our investment security portfolio consists primarily of securities designated as available for sale. During the fourth quarter of 2005, we began to engage in the trading of investment securities. The investment security portfolio was $1.46 billion at December 31, 2006, compared to $1.34 billion and $1.81 billion at December 31, 2005 and 2004, respectively. We attribute the increase in the investment securities portfolio in 2006 to: an increase in the available-for-sale securities portfolio due to the securitization of $138.9 million of certain of our residential mortgage loans held in our loan portfolio; an increase in our trading securities portfolio of $77.8 million; reinvestment of funds available from maturities in higher-yielding securities; and an increase of $37.3 million relating to securities acquired through our acquisitions completed in 2006; partially offset by the sale of the underlying available-for-sale investment securities associated with the termination of $200.0 million of term repurchase agreements, as further described in Note 3, Note 5 and Note 10 to our Consolidated Financial Statements. Funds available from maturities of investment securities during 2005 were primarily used to fund loan growth, resulting in the decrease in our investment securities portfolio in 2005. A portion of the remaining funds available from maturities of investment securities were reinvested in higher-yielding available-for-sale investment securities. The decrease also reflects the sale of the underlying available-for-sale investment securities associated with the termination of a $50.0 million term repurchase agreement. Loans and Allowance for Loan Losses Interest earned on our loan portfolio represents the principal source of income for First Bank. Interest and fees on loans were 90.0%, 85.9% and 86.5% of total interest income for the years ended December 31, 2006, 2005 and 2004, respectively. We recognize interest and fees on loans as income using the interest method of accounting. Loan origination fees are deferred and accreted to interest income over the estimated life of the loans using the interest method of accounting. The accrual of interest on loans is discontinued when it appears that interest or principal may not be paid in a timely manner in the normal course of business. We generally record payments received on nonaccrual and impaired loans as principal reductions, and defer the recognition of interest income on loans until all principal has been repaid or an improvement in the condition of the loan has occurred that would warrant the resumption of interest accruals. Loans, net of unearned discount, represented 75.5% of our assets as of December 31, 2006, compared to 76.6% of our assets at December 31, 2005. Loans, net of unearned discount, increased $645.7 million to $7.67 billion at December 31, 2006 from $7.02 billion at December 31, 2005. The overall increase in loans, net of unearned discount, in 2006 is primarily attributable to internal loan growth of $584.2 million and our acquisitions completed in 2006, which provided loans, net of unearned discount, of $545.1 million, in aggregate. This increase was partially offset by the securitization of certain residential mortgage loans that we transferred to our investment portfolio, and the sale and/or payoff of certain nonperforming loans, as further discussed below. Loans, net of unearned discount, increased $882.8 million to $7.02 billion at December 31, 2005 from $6.14 billion at December 31, 2004. Our acquisitions completed in 2005 provided loans, net of unearned discount, of $209.6 million, in aggregate. Exclusive of these acquisitions, our loans, net of unearned discount, increased $687.5 million in 2005, as a result of internal loan growth. In addition, we reduced our loans and leases by $14.3 million in the first and second quarters of 2005 from the sale of certain nonperforming loans, resulting from management's business decision in late 2004 to reduce the level of our nonperforming assets through the sale of certain nonperforming loans. We attribute the net increase in our loan portfolio in 2006 primarily to: >> an increase of $315.1 million in our commercial, financial and agricultural portfolio, primarily attributable to an increase of $214.9 million associated with our acquisitions completed during 2006, including $149.2 million of loans provided by our acquisition of UPAC in May 2006, in addition to continued internal loan production growth within this portfolio; >> an increase of $268.2 million in our real estate construction and development portfolio resulting from internal growth due to new loan originations and seasonal fluctuations on existing and available credit lines, as well as a $34.2 million increase associated with our acquisitions completed in 2006; and >> an increase of $145.4 million in our real estate mortgage portfolio resulting from: (a) internal loan growth of $289.8 million, largely attributable to the retention of certain mortgage loan production in our residential real estate mortgage portfolio during the first six months of 2006 following management's business strategy decision in the third quarter of 2005 to retain certain additional mortgage loan product production in our residential real estate mortgage portfolio; (b) our acquisitions completed during 2006, which provided real estate mortgage loans of $293.0 million; partially offset by (c) the securitization of $77.1 million and $61.8 million of certain residential mortgage loans in March 2006 and April 2006, respectively, which resulted in a change in our asset structure from residential mortgage loans to available-for-sale investment securities; and (d) the sale of approximately $127.8 million of residential mortgage loans in the third and fourth quarters of 2006; partially offset by >> a decrease of $98.8 million in loans held for sale resulting from (a) the timing of loan originations and subsequent sales in the secondary mortgage market; (b) the payoff and/or sale of approximately $44.9 million of certain acquired loans that we transferred to our held for sale portfolio on December 31, 2005; and (c) the transfer of a $13.5 million nonperforming loan from our loans held for sale portfolio to our commercial real estate loan portfolio after recording a $1.1 million write-down of the credit to its estimated fair value at the time of transfer. We subsequently received a payoff on this credit for the amount of its revised carrying value in December 2006. In our evaluation of acquisitions, it is anticipated that as we apply our standards for credit structuring, underwriting, documentation and approval, a portion of the existing borrowers will elect to refinance their loans with another financial institution, because of one or more of the following factors: (a) there may be an aggressive effort by other financial institutions to attract them; (b) they do not accept the changes involved, or (c) they are unable to meet our credit requirements. In addition, another portion of the portfolio may either enter our remedial collection process to reduce undue credit exposure or improve problem loans, or may be charged-off. The amount of this attrition will vary substantially among acquisitions depending on the strength and discipline within the credit function of the acquired institution; the magnitude of problems contained in the acquired portfolio; the aggressiveness of competing institutions to attract business; and the significance of the acquired institution to the overall banking market. Typically, in acquisitions of institutions that have strong credit cultures prior to their acquisitions and operate in moderately large markets, there is relatively little attrition that occurs after the acquisition. However, in those acquisitions in which the credit discipline has been weak, and particularly those in small metropolitan or rural areas, we can experience substantially greater attrition. Generally, this process occurs within approximately six to 12 months after completion of the acquisition. During the five years ended December 31, 2006, loans, net of unearned discount, increased from $5.41 billion at December 31, 2001 to $7.67 billion at December 31, 2006, an increase of $2.26 billion, or 41.7%. Throughout this period, we have achieved significant growth through implementation of our acquisition strategy and we have also enhanced our capabilities for achieving and managing internal growth. A key element of this process has been the expansion of our corporate business development staff, which is responsible for the internal development and management of both loan and deposit relationships with commercial customers. While this process was occurring, in an attempt to achieve more diversification, a higher level of interest yield and a reduction in interest rate risk within our loan portfolio, we also focused on repositioning our portfolio. As the corporate business development effort continued to originate a substantial volume of new loans, nearly all of our conforming residential mortgage loan production was historically sold in the secondary mortgage market until management's decision in 2003 to retain a portion of the new loan production in our real estate mortgage portfolio to offset continued weak loan demand in other sectors of our loan portfolio and management's decision in the third quarter of 2005 to retain additional mortgage loan product production in our residential real estate mortgage portfolio, including 15-year fixed rate, conforming conventional adjustable rate mortgages and other similar products. Furthermore, our lease financing portfolio, which now represents an insignificant portion of our loan portfolio, was reduced as a result of (a) the discontinuation of our New Mexico based leasing operation in 2002, the transfer of all responsibilities for the existing portfolio to a new leasing staff in St. Louis, Missouri, a change in our overall business strategy resulting in reduced commercial leasing activities and repayment of leases by borrowers, and (b) the sale of a significant portion of our remaining commercial leasing portfolio, which reduced the portfolio by approximately $33.1 million to $9.6 million at June 30, 2004. We have also reduced our consumer lending by discontinuing the origination of indirect auto loans and selling our student loan and credit card loan portfolios. This allowed us to fund part of the growth in corporate lending through reductions in indirect automobile and other consumer-related loans. As previously mentioned, our acquisitions have contributed to an increase in the portfolios of new loans during the five years ended December 31, 2006. In certain cases, these acquired portfolios contained significant loan problems, which we had anticipated and attempted to consider in our acquisition pricing. As we resolved the asset quality issues, the portfolios of the acquired entities tended to decline due to the elimination of problem loans and because many of the resources that would otherwise be directed toward generating new loans were concentrated on improving or eliminating existing problem relationships. We continued to experience this trend, most significantly as a result of our acquisition of CIB Bank in November 2004, although we have been successful in satisfactorily addressing the problem credits acquired with that acquisition, as further discussed below. The following table summarizes the components of changes in our loan portfolio, net of unearned discount, for the five years ended December 31, 2006:
Increase (Decrease) For the Year Ended December 31, ------------------------------------------------------------ 2006 2005 2004 2003 2002 ---- ---- ---- ---- ---- (dollars expressed in thousands) Internal loan volume increase (decrease): Commercial lending.............................. $ 160,642 204,494 91,760 (22,211) (119,295) Residential real estate lending (1)............. 410,181 481,642 32,348 (103,573) 36,074 Consumer lending, net of unearned discount...... 13,412 1,383 (11,900) (22,429) (44,060) Loans and leases sold................................ (344,687) (14,337) (83,216) -- -- Loans provided by acquisitions....................... 545,106 209,621 780,901 43,700 151,000 Securitization of loans.............................. (138,944) -- -- -- -- ---------- ------- ------- -------- -------- Total increase (decrease)....................... $ 645,710 882,803 809,893 (104,513) 23,719 ========== ======= ======= ======== ======== - -------------------------------- (1) Includes loans held for sale.
We seek to maintain a lending strategy that emphasizes quality, growth and diversification. Throughout our organization, we employ a common credit underwriting policy. Our commercial lenders focus principally on small to middle-market companies. Consumer lenders focus principally on residential loans, including home equity loans and other consumer financing opportunities arising out of our branch banking network. Commercial, financial and agricultural loans include loans that are made primarily based on the borrowers' general credit strength and ability to generate cash flows for repayment from income sources even though such loans may also be secured by real estate or other assets. Real estate construction and development loans, primarily relating to residential properties and commercial properties, represent financing secured by real estate under construction. Real estate mortgage loans consist primarily of loans secured by single-family, owner-occupied properties and various types of commercial properties on which the income from the property is the intended source of repayment. Consumer and installment loans are loans to individuals and consist of a mix of secured and unsecured loans, including preferred credit and loans secured by automobiles. Loans held for sale are primarily fixed and adjustable rate residential mortgage loans pending sale in the secondary mortgage market in the form of a mortgage-backed security, or to various private third-party investors. The following table summarizes the composition of our loan portfolio by major category and the percent of each category to the total portfolio as of the dates presented:
December 31, -------------------------------------------------------------------------------------------------- 2006 2005 2004 2003 2002 ------------------ ------------------ ------------------ ----------------- ------------------ Amount % Amount % Amount % Amount % Amount % ------ - ------ - ------ - ------ - ------ - (dollars expressed in thousands) Commercial, financial and agricultural.......... $1,934,908 26.0% $1,616,841 24.1% $1,569,321 26.1% $1,407,626 27.1% $1,443,016 28.4% Real estate construction and development........... 1,832,504 24.6 1,564,255 23.3 1,318,413 22.0 1,063,889 20.5 989,650 19.5 Real estate mortgage: One-to-four-family residential loans....... 1,270,158 17.0 1,214,121 18.1 870,889 14.5 811,650 15.7 694,604 13.7 Multi-family residential loans................... 141,341 1.9 143,663 2.2 102,447 1.7 108,163 2.1 112,517 2.2 Commercial real estate loans................... 2,203,649 29.6 2,112,004 31.5 2,088,245 34.8 1,662,451 32.1 1,637,001 32.2 Lease financing............... 4 -- 2,981 -- 5,911 0.1 67,282 1.3 126,738 2.5 Consumer and installment, net of unearned discount.................. 67,590 0.9 51,772 0.8 49,677 0.8 61,268 1.2 79,097 1.5 ---------- ----- ---------- ----- ---------- ----- ---------- ----- --------- ----- Total loans, excluding loans held for sale...... 7,450,154 100.0% 6,705,637 100.0% 6,004,903 100.0% 5,182,329 100.0% 5,082,623 100.0% ===== ===== ===== ===== ===== Loans held for sale........... 216,327 315,134 133,065 145,746 349,965 ---------- ---------- ---------- ---------- ---------- Total loans........... $7,666,481 $7,020,771 $6,137,968 $5,328,075 $5,432,588 ========== ========== ========== ========== ==========
Loans at December 31, 2006 mature as follows: Over One Year Through Five Years Over Five Years --------------------- ------------------- One Year Fixed Floating Fixed Floating or Less Rate Rate Rate Rate Total ------- ---- ---- ---- ---- ----- (dollars expressed in thousands) Commercial, financial and agricultural.................... $1,208,583 63,055 133,517 243,697 286,056 1,934,908 Real estate construction and development... .............. 1,098,508 114,593 555,247 33,526 30,630 1,832,504 Real estate mortgage: One-to-four family residential loans.................. 91,421 163,450 48,235 162,845 804,207 1,270,158 Multi-family residential loans........................ 9,964 60,688 41,148 18,332 11,209 141,341 Commercial real estate loans.......................... 409,604 800,092 301,190 362,776 329,987 2,203,649 Lease financing........................................... -- 4 -- -- -- 4 Consumer and installment, net of unearned discount........ 22,567 38,278 2,628 2,126 1,991 67,590 Loans held for sale....................................... 216,327 -- -- -- -- 216,327 ---------- --------- --------- -------- --------- --------- Total loans......................................... $3,056,974 1,240,160 1,081,965 823,302 1,464,080 7,666,481 ========== ========= ========= ======== ========= =========
Nonperforming assets include nonaccrual loans, restructured loans and other real estate. The following table presents the categories of nonperforming assets and certain ratios as of the dates presented:
December 31, --------------------------------------------------------------- 2006 2005 2004 2003 2002 ---- ---- ---- ---- ---- (dollars expressed in thousands) Commercial, financial and agricultural: Nonaccrual..................................... $ 9,879 4,937 10,147 26,876 15,787 Restructured terms............................. -- -- 4 -- -- Real estate construction and development: Nonaccrual..................................... 13,344 11,137 13,435 6,402 23,378 Real estate mortgage: One-to-four family residential loans: Nonaccrual................................... 18,885 9,576 9,881 21,611 14,833 Restructured terms........................... 9 10 11 13 15 Multi-family residential loans: Nonaccrual................................... 272 740 434 804 772 Commercial real estate loans: Nonaccrual................................... 6,260 70,625 50,671 13,994 8,890 Restructured terms........................... -- -- -- -- 1,907 Lease financing: Nonaccrual .................................... -- 11 907 5,328 8,723 Consumer and installment: Nonaccrual .................................... 81 160 310 336 860 ---------- --------- --------- --------- --------- Total nonperforming loans............... 48,730 97,196 85,800 75,364 75,165 Other real estate................................. 6,433 2,025 4,030 11,130 7,609 ---------- --------- --------- --------- --------- Total nonperforming assets.............. $ 55,163 99,221 89,830 86,494 82,774 ========== ========= ========= ========= ========= Loans, net of unearned discount................... $7,666,481 7,020,771 6,137,968 5,328,075 5,432,588 ========== ========= ========= ========= ========= Loans past due 90 days or more and still accruing.............................. $ 5,653 5,576 28,689 2,776 4,635 ========== ========= ========= ========= ========= Ratio of: Allowance for loan losses to loans............. 1.90% 1.93% 2.46% 2.19% 1.83% Nonperforming loans to loans................... 0.64 1.38 1.40 1.41 1.38 Allowance for loan losses to nonperforming loans.......................... 299.05 139.23 175.65 154.52 132.29 Nonperforming assets to loans and other real estate............................ 0.72 1.41 1.46 1.62 1.52 ========== ========= ========= ========= =========
Nonperforming loans, consisting of loans on nonaccrual status and certain restructured loans, were $48.7 million at December 31, 2006, in comparison to $97.2 million and $85.8 million at December 31, 2005 and 2004, respectively. Other real estate owned was $6.4 million, $2.0 million and $4.0 million at December 31, 2006, 2005 and 2004, respectively. Our nonperforming assets, consisting of nonperforming loans and other real estate owned, were $55.2 million, $99.2 million and $89.8 million at December 31, 2006, 2005 and 2004, respectively. A significant portion of our nonperforming loans in 2004 and 2005 included loans associated with our acquisition of CIB Bank in November 2004, which totaled $55.0 million, or 56.6% of our nonperforming loans, at December 31, 2005, and $50.5 million, or 58.8% of our nonperforming loans, at December 31, 2004. At December 31, 2006, we did not have any nonperforming loans associated with our CIB Bank acquisition. The decrease in nonperforming loans primarily resulted from our plans to reduce nonperforming assets through the sale of certain nonperforming loans, loan payoffs and/or external refinancing of certain credit relationships. We attribute the 44.4% net decrease in our nonperforming assets during the year ended December 31, 2006 to the following: >> the payoff of two significant nonperforming loans totaling $27.3 million, in aggregate; >> following the transfer of 11 nonperforming loans totaling approximately $59.7 million to our held for sale portfolio on December 31, 2005, as further discussed below, in January 2006, we received a payoff on one of the loans held for sale that had a carrying value of $12.4 million at December 31, 2005. In conjunction with this payoff, we recognized a loan recovery of $5.0 million and interest and late fees of $2.0 million on the payoff of the loan. In March 2006, we completed the sale of the majority of the remaining loans held for sale that had a carrying value of approximately $32.5 million, in aggregate, at December 31, 2005, and recorded a pre-tax gain of approximately $1.7 million on the sale of these loans. Additionally, in September 2006, we recorded a $1.1 million write-down on the single remaining nonperforming loan held for sale and transferred the loan at its estimated fair value of $13.5 million back into our loan portfolio. We subsequently received a payoff on this nonperforming loan in December 2006 in the amount of the loan's adjusted carrying value; >> in December 2006, we completed the sale of $32.6 million of loans, which included approximately $14.8 million of acquired nonperforming loans, and recorded a pre-tax gain of approximately $3.7 million on the sale of these loans. In addition, we recognized loan charge-offs of $2.3 million in conjunction with the transfer of these commercial loans to our loans held for sale portfolio prior to their sale; and >> overall improvement in the level of nonperforming assets resulting from our continued focus on improving asset quality through an ongoing process of problem loan work-outs, exclusive of the deterioration of certain credit relationships discussed below; the sale of certain acquired nonperforming loans; the strengthening of certain loans; and loan payoffs and/or external refinancing of various credits, as further discussed below. The overall reduction in our nonperforming assets was partially offset by deterioration within our one-to-four family residential loan portfolio as a result of current market conditions, and the deterioration of several credit relationships, primarily within our residential development and construction portfolio, during the later part of 2006 that were driven by current market conditions, including slowdowns in unit sales. As further discussed under "Business --Lending Activities," the increase in nonperforming loans in 2005 was primarily attributable to the deterioration of a few large credit relationships in our Midwest region during the fourth quarter of 2005, partially offset by significant improvement in the overall level of our nonperforming loans during the first nine months of 2005. The increase in nonperforming loans in the fourth quarter of 2005 was primarily attributable to further deterioration of a small number of credit relationships in our Midwest region, including two large relationships of $14.9 million and $16.6 million, or $31.5 million in aggregate, that were acquired in the purchase of CIB Bank. On December 31, 2005, we recognized $7.6 million of loan charge-offs to reduce the loans to their estimated fair value, net of costs, that was expected to be realized at the time of the sale, and transferred approximately $59.7 million of nonperforming loans to our held for sale portfolio, which included several of the relationships that deteriorated during the fourth quarter of 2005 and one credit relationship of $12.4 million, which was included in nonperforming loans at December 31, 2004 with a value of $14.5 million. Included in these loan charge-offs and loans transferred to our held for sale portfolio were $6.0 million of loan charge-offs and approximately $49.6 million of nonperforming loans that were associated with our CIB Bank purchase. As previously discussed, during 2006, we sold the majority of these loans held in our loans held for sale portfolio, received payoffs on certain credits, and transferred one loan back into our loan portfolio and subsequently received payment in full of the remaining balance. The improvement of our nonperforming loans during the first nine months of 2005 primarily resulted from: our continued emphasis on improving asset quality; the sale of approximately $14.3 million of certain acquired nonperforming loans; strengthening of certain loans; and loan payoffs and/or external refinancing of various credits, including $97.3 million of loan payoffs on 14 credit relationships during the first and second quarters of 2005. A portion of the loan payoffs and sales during the first quarter of 2005 pertaining to certain acquired nonperforming loans that were classified as loans held for sale as of December 31, 2004 contributed to a reallocation of the purchase price on our acquisition of CIB Bank, as further described in Note 2 to our Consolidated Financial Statements. We also recorded a $1.6 million write-down on an acquired parcel of other real estate owned to its estimated fair value based upon additional data received. This write-down was recorded as an acquisition-related adjustment in the first quarter of 2005 and is further discussed in Note 2 to our Consolidated Financial Statements. In addition, our nonperforming assets associated with our acquisition of SBLS in August 2004 decreased by $4.0 million during 2005, primarily resulting from $3.8 million of loan charge-offs, which reduced SBLS LLC's nonperforming assets to $2.3 million at December 31, 2005. SBLS LLC previously had a significant concentration of assets associated with the shrimping vessels industry, which were reflected in both nonperforming loans and other repossessed assets. The SBA agreed to repurchase SBLS LLC's entire shrimping vessels portfolio, and these loans were placed in liquidation status in 2005. Throughout 2006, the majority of these loans have been fully liquidated via completion of the sale of the underlying collateral and/or the collection of insurance proceeds associated with vessels that were heavily damaged by Hurricane Katrina and deemed to be irreparable. The increase in nonperforming loans in 2004 was primarily associated with our 2004 acquisitions, partially offset by substantial improvement in our existing portfolio of nonperforming assets as a result of significant loan payoffs, the liquidation of foreclosed property, the sale of certain nonperforming loans and the sale of a portion of our commercial leasing portfolio. The increase in nonperforming loans in 2003 and 2002 was primarily attributable to the current economic conditions that existed during those periods, additional problems identified in two acquired loan portfolios and continuing deterioration in our commercial leasing portfolio, particularly the segment of the portfolio related to the airline industry. Loans past due 90 days or more and still accruing interest were $5.7 million and $5.6 million at December 31, 2006 and 2005, respectively, reflecting a decrease of approximately $23.1 million from $28.7 million at December 31, 2004. The overall levels of such delinquencies at December 31, 2006 and 2005 are primarily reflective of the continued growth in our loan portfolio. The substantial increase in 2004 resulted from our acquisitions of CIB Bank and CCB, which comprised $27.2 million of our loans past due 90 days or more and still accruing interest at December 31, 2004. A significant portion of these loans were past due as to contractual maturity and pending renewal at December 31, 2004; however, the majority of the loan payments were current and in accordance with the contractual terms of the underlying credit agreements. Our allowance for loan losses as a percentage of loans, net of unearned discount, was 1.90%, 1.93% and 2.46% at December 31, 2006, 2005 and 2004, respectively. Our allowance for loan losses as a percentage of nonperforming loans increased to 299.05% at December 31, 2006, from 139.23% and 175.65% at December 31, 2005 and 2004, respectively, and primarily resulted from the reduction in nonperforming loans in 2006. Our allowance for loan losses was $145.7 million at December 31, 2006, compared to $135.3 million and $150.7 million at December 31, 2005 and 2004, respectively. As further described in the table below and under "--Business - Lending Activities," the allowance for loan losses also reflects an increase of $5.2 million and $2.0 million in 2006 and 2005, respectively, and an increase of $33.8 million in 2004, of balances acquired in conjunction with our acquisitions, including a $15.7 million increase to reflect the application of our loss factors to CIB Bank's loan portfolio risk ratings, reflecting our strategies for more rapid resolution of certain acquired classified and nonperforming assets. This adjustment was partially offset by our reclassification, at the time of acquisition, of CIB Bank's specific reserves of $21.7 million as a reduction of the basis of the individual loan relationships (which had no impact on our net loan balances), and the transfer of $18.3 million of nonperforming loans to loans held for sale, resulting in a corresponding charge of $5.4 million to the allowance for loan losses to reduce the loans held for sale to their estimated fair value, net of broker costs, that was expected to be realized at the time of sale. Loan charge-offs decreased to $22.2 million for the year ended December 31, 2006, compared to $33.1 million and $50.6 million for the comparable periods in 2005 and 2004, respectively. Loan recoveries were $15.4 million for the year ended December 31, 2006, compared to $19.8 million and $25.9 million for the comparable periods in 2005 and 2004, respectively. Loan charge-offs, net of recoveries, decreased to $6.8 million for the year ended December 31, 2006, compared to $13.4 million and $24.8 million for the comparable periods in 2005 and 2004, respectively. Net loan charge-offs for 2006 include $2.3 million of loans charged-off in conjunction with the transfer of certain commercial loans to the loans held for sale portfolio prior to their sale in the fourth quarter of 2006, and a $5.0 recovery recorded in the first quarter of 2006 on the payoff of a single nonperforming loan. Net loan charge-offs for 2005 included $7.6 million of charge-offs associated with the $59.7 million of loans transferred to our held for sale portfolio at December 31, 2005, as previously discussed. We continue to closely monitor our loan portfolio and address the ongoing challenges posed by the economic environment, including reduced loan demand and highly competitive markets within certain sectors of our loan portfolio. We consider this in our overall assessment of the adequacy of the allowance for loan losses. The level of nonperforming assets from our 2004 acquisitions significantly contributed to increased levels of problem loans and past due loans, and we anticipated the level of nonperforming and delinquent loans would continue during 2005 and, to a lesser degree, during 2006 as we worked to resolve the underlying issues associated with the nonperforming assets of the acquired portfolios, including our efforts to actively market and sell a significant portion of the nonperforming loans, as discussed above. In addition, although we have experienced improvement in our nonperforming asset levels in 2006, we continue our efforts to reduce the overall level of these assets in accordance with our credit risk guidelines. As of December 31, 2006, 2005, 2004, 2003 and 2002, $67.1 million, $124.3 million, $161.8 million, $109.4 million and $98.2 million, respectively, of loans not included in the table above were identified by management as having potential credit problems, or problem loans. The decline in the level of problem loans during 2005 and 2006 primarily reflects improvement in the management of these loans and success in resolving certain of the problem loans associated with our 2004 and 2005 acquisitions. The significant increase in the level of problem loans for the year ended December 31, 2004 was primarily attributable to our acquisition of CIB Bank, in addition to internal portfolio growth and economic conditions within certain sectors of the markets in which we operate. The significant level of problem loans for the year ended December 31, 2003 was primarily due to continuing deterioration of our commercial leasing portfolio, internal and external portfolio growth, the gradual slow down and uncertainties that occurred in the economy in the markets in which we operate, as well as residual problem loans stemming from one of our 2001 acquisitions. Certain acquired loan portfolios exhibited varying degrees of distress prior to their acquisition. While these problems had been identified and considered in our acquisition pricing, the acquisitions led to an increase in nonperforming assets and problem loans. Management continues its efforts to reduce nonperforming and problem loans and re-define overall strategy and business plans with respect to our loan portfolio as deemed necessary. Our credit management policies and procedures focus on identifying, measuring and controlling credit exposure. These procedures employ a lender-initiated system of rating credits, which is ratified in the loan approval process and subsequently tested in internal credit reviews, external audits and regulatory bank examinations. The system requires the rating of all loans at the time they are originated or acquired, except for homogeneous categories of loans, such as residential real estate mortgage loans and consumer loans. These homogeneous loans are assigned an initial rating based on our experience with each type of loan. We adjust the ratings of the homogeneous loans based on payment experience subsequent to their origination. We include adversely rated credits, including loans requiring close monitoring that would not normally be considered classified credits by regulators, on our monthly loan watch list. Loans may be added to our watch list for reasons that are temporary and correctable, such as the absence of current financial statements of the borrower or a deficiency in loan documentation. Other loans are added to our watch list whenever any adverse circumstance is detected which might affect the borrower's ability to comply with the contractual terms of the loan. The delinquency of a scheduled loan payment, deterioration in the borrower's financial condition identified in a review of periodic financial statements, a decrease in the value of the collateral securing the loan, or a change in the economic environment within which the borrower operates could initiate the addition of a loan to our watch list. Loans on our watch list require periodic detailed loan status reports prepared by the responsible officer which are discussed in formal meetings with credit review and credit administration staff members. Upgrades and downgrades of loan risk ratings may be initiated by the responsible loan officer. However, upgrades of risk ratings associated with significant credit relationships and/or problem credit relationships may only be made with the concurrence of appropriate regional or senior regional credit officers. Each month, the credit administration department provides management with detailed lists of loans on the watch list and summaries of the entire loan portfolio by risk rating. These are coupled with analyses of changes in the risk profile of the portfolio, changes in past-due and nonperforming loans and changes in watch list and classified loans over time. In this manner, we continually monitor the overall increases or decreases in the level of risk in our loan portfolio. Factors are applied to the loan portfolio for each category of loan risk to determine acceptable levels of allowance for loan losses. In addition, a quarterly evaluation of each lending unit is performed based on certain factors, such as lending personnel experience, recent credit reviews, loan concentrations and other factors. Based on this evaluation, changes to the allowance for loan losses may be required due to the perceived risk of particular portfolios. The calculated allowance required for the portfolio is then compared to the actual allowance balance to determine the adjustments necessary to maintain the allowance at an appropriate level. In addition, management exercises a certain degree of judgment in its analysis of the overall adequacy of the allowance for losses. In its analysis, management considers the changes in the portfolio, including growth, composition, the ratio of net loans to total assets, and the economic conditions of the regions in which we operate. Based on this quantitative and qualitative analysis, adjustments are made to the allowance for loan losses. Such adjustments are reflected in our consolidated statements of income. The allocation of the allowance for loan losses by loan category is a result of the application of our risk rating system augmented by qualitative analysis. The same procedures we employ to determine the overall risk in our loan portfolio and our requirements for the allowance for loan losses determine the distribution of the allowance by loan category. Consequently, the distribution of the allowance will change from period to period due to (a) changes in the aggregate loan balances by loan category; (b) changes in the identified risk in each loan in the portfolio over time, excluding those homogeneous categories of loans such as consumer and installment loans and residential real estate mortgage loans for which risk ratings are changed based on payment performance; and (c) changes in loan concentrations by borrower. Since the methods of calculating the allowance requirements have not significantly changed over time, the reallocations among different categories of loans that appear between periods are the result of changes in the balances of the individual loans that comprise the aggregate portfolio due to the factors listed above. However, the perception of risk with respect to particular loans within the portfolio will change over time as a result of the characteristics and performance of those loans, as well as the overall economic trends and market trends, including our actual and expected trends in nonperforming loans. Consequently, while there are no specific allocations of the allowance resulting from economic or market conditions or actual or expected trends in nonperforming loans, these factors are considered in the initial assignment of risk ratings to loans and in subsequent changes to those risk ratings. The following table is a summary of our loan loss experience for the five years ended December 31, 2006:
As of or For the Years Ended December 31, ------------------------------------------------------------- 2006 2005 2004 2003 2002 ---- ---- ---- ---- ---- (dollars expressed in thousands) Allowance for loan losses, beginning of year......... $ 135,330 150,707 116,451 99,439 97,164 Acquired allowances for loan losses.................. 5,208 1,989 33,752 757 1,366 Other adjustments (1)................................ -- -- (479) -- -- ---------- --------- --------- --------- --------- 140,538 152,696 149,724 100,196 98,530 ---------- --------- --------- --------- --------- Loans charged-off: Commercial, financial and agricultural........... (6,905) (10,500) (26,550) (23,476) (45,697) Real estate construction and development......... (6,202) (7,838) (3,481) (5,825) (7,778) Real estate mortgage: One-to-four family residential loans.......... (3,779) (3,399) (4,891) (4,167) (2,697) Multi-family residential loans................ (241) -- (139) (87) (109) Commercial real estate loans.................. (3,635) (9,699) (9,995) (1,708) (2,747) Lease financing.................................. (607) (491) (4,536) (19,160) (8,426) Consumer and installment......................... (834) (1,196) (1,051) (1,350) (3,070) ---------- --------- --------- --------- --------- Total...................................... (22,203) (33,123) (50,643) (55,773) (70,524) ---------- --------- --------- --------- --------- Recoveries of loans previously charged-off: Commercial, financial and agricultural........... 5,237 10,802 14,983 10,147 8,331 Real estate construction and development......... 1,661 1,963 748 1,659 631 Real estate mortgage: One-to-four family residential loans.......... 1,066 1,953 1,597 781 628 Multi-family residential loans................ -- -- 27 99 792 Commercial real estate loans.................. 6,048 2,901 2,659 4,174 3,491 Lease financing.................................. 731 1,501 4,878 4,805 494 Consumer and installment......................... 651 637 984 1,363 1,566 ---------- --------- --------- --------- --------- Total...................................... 15,394 19,757 25,876 23,028 15,933 ---------- --------- --------- --------- --------- Net loans charged-off...................... (6,809) (13,366) (24,767) (32,745) (54,591) ---------- --------- --------- --------- --------- Provision for loan losses............................ 12,000 (4,000) 25,750 49,000 55,500 ---------- --------- --------- --------- --------- Allowance for loan losses, end of year............... $ 145,729 135,330 150,707 116,451 99,439 ========== ========= ========= ========= ========= Loans outstanding, net of unearned discount: Average.......................................... $7,472,089 6,436,970 5,509,054 5,385,363 5,424,508 End of year...................................... 7,666,481 7,020,771 6,137,968 5,328,075 5,432,588 End of year, excluding loans held for sale....... 7,450,154 6,705,637 6,004,903 5,182,329 5,082,623 ========== ========= ========= ========= ========= Ratio of allowance for loan losses to loans outstanding: Average.......................................... 1.95% 2.10% 2.74% 2.16% 1.83% End of year...................................... 1.90 1.93 2.46 2.19 1.83 End of year, excluding loans held for sale....... 1.96 2.02 2.51 2.25 1.96 Ratio of net charge-offs to average loans outstanding.................................. 0.09 0.21 0.45 0.61 1.01 Ratio of current year recoveries to preceding year's charge-offs....................... 46.48 39.01 46.40 32.65 50.66 ========== ========= ========= ========= ========= - --------------- (1) In December 2003, we established a $1.0 million specific reserve for estimated losses on a $5.3 million letter of credit that was recorded in accrued and other liabilities in our consolidated balance sheets. In January 2004, the letter of credit was fully funded as a loan and the related $1.0 million specific reserve was reclassified from accrued and other liabilities to the allowance for loan losses. In June 2004, we reclassified $1.5 million from the allowance for loan losses to accrued and other liabilities to establish a specific reserve associated with our commercial leasing portfolio sale and related recourse obligations for certain leases sold.
The following table is a summary of the allocation of the allowance for loan losses for the five years ended December 31, 2006: 2006 2005 2004 2003 2002 ---------------- ----------------- ---------------- ----------------- ---------------- Percent Percent Percent Percent Percent of of of of of Category Category Category Category Category of of of of of Loans Loans Loans Loans Loans to to to to to Total Total Total Total Total Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- (dollars expressed in thousands) Commercial, financial and agricultural................ $ 47,973 25.24% $ 39,245 23.03% $ 46,195 25.57% $ 37,142 26.42% $34,915 26.56% Real estate construction and development................. 40,410 23.90 32,638 22.28 38,525 21.48 26,782 19.97 22,667 18.22 Real estate mortgage: One-to-four family residential loans........... 13,308 16.57 10,526 17.29 8,466 14.19 9,684 15.23 7,913 12.79 Multi-family residential loans....................... 95 1.84 67 2.05 20 1.67 186 2.03 32 2.07 Commercial real estate loans.. 41,833 28.75 51,199 30.08 55,922 34.01 36,632 31.20 28,477 30.13 Lease financing................... 87 -- 315 0.04 628 0.10 4,830 1.26 3,649 2.33 Consumer and installment.......... 1,035 0.88 757 0.74 617 0.81 668 1.15 703 1.46 Loans held for sale............... 988 2.82 583 4.49 334 2.17 527 2.74 1,083 6.44 -------- ------ -------- ------ -------- ------ -------- ------ ------- ------ Total....................... $145,729 100.00% $135,330 100.00% $150,707 100.00% $116,451 100.00% $99,439 100.00% ======== ====== ======== ====== ======== ====== ======== ====== ======= ======
Deposits Deposits are the primary source of funds for First Bank. Our deposits consist principally of core deposits from our local market areas, including individual and corporate customers. The following table sets forth the distribution of our average deposit accounts for the years indicated and the weighted average interest rates on each category of deposits:
Year Ended December 31, ---------------------------------------------------------------------------------------- 2006 2005 2004 -------------------------- ----------------------------- ----------------------------- Percent Percent Percent of of of Amount Deposits Rate Amount Deposits Rate Amount Deposits Rate ------ -------- ---- ------ -------- ---- ------ -------- ---- (dollars expressed in thousands) Noninterest-bearing demand deposits.................... $1,267,681 15.82% --% $1,257,277 17.45% --% $1,100,072 17.83% --% Interest-bearing demand deposits.................... 962,956 12.01 0.85 905,613 12.57 0.49 856,765 13.89 0.41 Savings deposits.............. 2,152,419 26.86 2.48 2,135,156 29.64 1.39 2,175,425 35.27 0.93 Time deposits................. 3,631,516 45.31 4.28 2,906,601 40.34 3.21 2,036,323 33.01 2.43 ---------- ------ ==== ---------- ------ ==== ---------- ------ ==== Total average deposits.... $8,014,572 100.00% $7,204,647 100.00% $6,168,585 100.00% ========== ====== ========== ====== ========== ======
Capital and Dividends Historically, we have accumulated capital to support our acquisitions by retaining most of our earnings. We pay relatively small dividends on our Class A convertible, adjustable rate preferred stock and our Class B adjustable rate preferred stock, totaling $786,000 for the years ended December 31, 2006, 2005 and 2004. Management believes as of December 31, 2006 and 2005, First Bank and we were "well capitalized," as defined in regulations adopted pursuant to the FDIC Improvement Act of 1991. First Bank's and our actual and required capital ratios are further described in Note 21 to our Consolidated Financial Statements. As of December 31, 2006, we had nine affiliated Delaware or Connecticut statutory and business trusts that were created for the sole purpose of issuing trust preferred securities. As further described in Note 12 to our Consolidated Financial Statements, the sole assets of the statutory and business trusts are our subordinated debentures. A summary of the outstanding trust preferred securities issued by our affiliated statutory and business trusts, and our related subordinated debentures issued to the respective trusts in conjunction with the trust preferred securities offerings as of December 31, 2006, is as follows:
Date of Trust Interest Preferred Subordinated Name of Trust Formation Type of Offering Rate Securities Debentures ------------- --------- ---------------- ---- ---------- ---------- First Bank Capital Trust April 2002 Private Placement Variable $25,000,000 $25,774,000 First Preferred Capital Trust IV January 2003 Publicly Underwritten 8.15% 46,000,000 47,422,700 First Bank Statutory Trust March 2003 Private Placement 8.10% 25,000,000 25,774,000 First Bank Statutory Trust II September 2004 Private Placement Variable 20,000,000 20,619,000 First Bank Statutory Trust III November 2004 Private Placement Variable 40,000,000 41,238,000 First Bank Statutory Trust IV February 2006 Private Placement Variable 40,000,000 41,238,000 First Bank Statutory Trust V April 2006 Private Placement Variable 20,000,000 20,619,000 First Bank Statutory Trust VI June 2006 Private Placement Variable 25,000,000 25,774,000 First Bank Statutory Trust VII December 2006 Private Placement Variable 50,000,000 51,547,000
For regulatory reporting purposes, the trust preferred securities are eligible for inclusion, subject to certain limitations, in our Tier 1 capital. Because of these limitations, as of December 31, 2006, $19.8 million of the trust preferred securities was not eligible for inclusion in our Tier 1 capital; however, this amount was eligible for inclusion in our total risk-based capital. In addition, as further described in Note 25 to our Consolidated Financial Statements, in February 2007, we issued $25.8 million of subordinated debentures to First Bank Statutory Trust VIII, a newly-formed Delaware statutory trust. Liquidity Our liquidity is the ability to maintain a cash flow that is adequate to fund operations, service debt obligations and meet obligations and other commitments on a timely basis. We receive funds for liquidity from customer deposits, loan payments, maturities of loans and investments, sales of investments and earnings. In addition, we may avail ourselves of other sources of funds by issuing certificates of deposit in denominations of $100,000 or more, borrowing federal funds, selling securities under agreements to repurchase and utilizing borrowings from the FHLB and other borrowings, including our term loan and our revolving credit line. The aggregate funds acquired from these sources were $1.86 billion and $1.72 billion at December 31, 2006 and 2005, respectively. The following table presents the maturity structure of these other sources of funds, which consists of certificates of deposit of $100,000 or more and other borrowings, including our notes payable, at December 31, 2006:
Certificates of Deposit Other of $100,000 or More Borrowings Total ------------------- ---------- ----- (dollars expressed in thousands) Three months or less.................................... $ 506,143 174,874 681,017 Over three months through six months.................... 323,862 5,000 328,862 Over six months through twelve months................... 410,917 13,000 423,917 Over twelve months...................................... 178,657 246,025 424,682 ---------- --------- --------- Total............................................... $1,419,579 438,899 1,858,478 ========== ========= =========
In addition to these sources of funds, First Bank has established a borrowing relationship with the Federal Reserve Bank of St. Louis. This borrowing relationship, which is secured by commercial loans, provides an additional liquidity facility that may be utilized for contingency purposes. At December 31, 2006 and 2005, First Bank's borrowing capacity under the agreement was approximately $639.1 million and $743.6 million, respectively. In addition, First Bank's borrowing capacity through its relationship with the FHLB was approximately $666.0 million and $679.3 million at December 31, 2006 and 2005, respectively. We had FHLB advances outstanding of $4.0 million and $39.3 million at December 31, 2006 and 2005, respectively, all of which represent advances assumed in conjunction with various acquisitions. On March 17, 2006 and May 10, 2006, we prepaid $20.5 million and $14.8 million of FHLB advances, respectively, that were assumed in conjunction with previous acquisitions, as further described in Note 10 to our Consolidated Financial Statements. In addition to our owned banking facilities, we have entered into long-term leasing arrangements to support our ongoing activities. The required payments under such commitments and other obligations at December 31, 2006 were as follows:
Less Than 1-3 3-5 Over 1 Year Years Years 5 Years Total ------ ----- ----- ------- ----- (dollars expressed in thousands) Operating leases....................... $ 14,175 25,728 16,106 36,984 92,993 Certificates of deposit (1)............ 3,185,226 513,793 116,744 11,701 3,827,464 Other borrowings....................... 172,874 201,025 -- -- 373,899 Notes payable.......................... 30,000 35,000 -- -- 65,000 Subordinated debentures................ -- -- -- 297,966 297,966 Other contractual obligations (2)...... 57,861 135 8 15 58,019 ---------- -------- -------- -------- --------- Total.............................. $3,460,136 775,681 132,858 346,666 4,715,341 ========== ======== ======== ======== ========= ---------------------------- (1) Amounts exclude the related interest expense accrued on these obligations as of December 31, 2006. (2) Amounts include the obligation related to our repayment in full of the $56.9 million of subordinated debentures issued to First Preferred Capital Trust III, which is included in accrued and other liabilities in our consolidated balance sheets, as further described in Note 12 to our Consolidated Financial Statements. Amounts exclude the related interest expense accrued on this obligation as of December 31, 2006.
Management believes the available liquidity and operating results of First Bank will be sufficient to provide funds for growth and to permit the distribution of dividends to us sufficient to meet our operating and debt service requirements, both on a short-term and long-term basis, and to pay the interest on the subordinated debentures that we issued to our affiliated statutory and business financing trusts. Critical Accounting Policies Our financial condition and results of operations presented in our Consolidated Financial Statements, accompanying notes to our Consolidated Financial Statements, selected consolidated and other financial data appearing elsewhere in this report, and management's discussion and analysis of financial condition and results of operations are, to a large degree, dependent upon our accounting policies. The selection and application of our accounting policies involve judgments, estimates and uncertainties that are susceptible to change. We have identified the following accounting policies that we believe are the most critical to the understanding of our financial condition and results of operations. These critical accounting policies require management's most difficult, subjective and complex judgments about matters that are inherently uncertain. In the event that different assumptions or conditions were to prevail, and depending upon the severity of such changes, the possibility of a materially different financial condition and/or results of operations could be a reasonable likelihood. The impact and any associated risks related to our critical accounting policies on our business operations is discussed throughout "--Management's Discussion and Analysis of Financial Condition and Results of Operations," where such policies affect our reported and expected financial results. A detailed discussion on the application of these and other accounting policies is summarized in Note 1 to our Consolidated Financial Statements appearing elsewhere in this report. Loans and Allowance for Loan Losses. We maintain an allowance for loan losses at a level we consider adequate to provide for probable losses in our loan portfolio. The determination of our allowance for loan losses requires management to make significant judgments and estimates based upon a periodic analysis of our loans held for portfolio and held for sale considering, among other factors, current economic conditions, loan portfolio composition, past loan loss experience, independent appraisals, the fair value of underlying loan collateral, our customers' ability to repay their loans and selected key financial ratios. If actual events prove the estimates and assumptions we used in determining our allowance for loan losses were incorrect, we may need to make additional provisions for loan losses. For further discussion, refer to "--Loans and Allowance for Loan Losses" and Note 4 to our Consolidated Financial Statements appearing elsewhere in this report. Derivative Financial Instruments. We utilize derivative financial instruments to assist in our management of interest rate sensitivity by modifying the repricing, maturity and option characteristics of certain assets and liabilities. The judgments and assumptions that are most critical to the application of this critical accounting policy are those affecting the estimation of fair value and hedge effectiveness. Fair value is based on quoted market prices where available. If quoted market prices are unavailable, fair value is based on quoted market prices of comparable derivative instruments. Factors that affect hedge effectiveness include the initial selection of the derivative that will be used as a hedge and how well changes in its cash flow or fair value have correlated and are expected to correlate with changes in the cash flow or fair value of the underlying hedged asset or liability. Past correlation is easy to demonstrate, but expected correlation depends upon projections and trends that may not always hold true within acceptable limits. Changes in assumptions and conditions could result in greater than expected inefficiencies that, if large enough, could reduce or eliminate the economic benefits anticipated when the hedges were established and/or invalidate continuation of hedge accounting. Greater inefficiency and/or discontinuation of hedge accounting are likely to result in increased volatility in our reported earnings. For cash flow hedges, this would result as more or all of the change in the fair value of the affected derivative being reported in noninterest income. For fair value hedges, there may be some impact on our reported earnings as the change in the fair value of the affected derivative may not be offset by changes in the fair value of the underlying hedged asset or liability. For further discussion, refer to "--Effects of New Accounting Standards," "--Interest Rate Risk Management" and Note 5 to our Consolidated Financial Statements appearing elsewhere in this report. Deferred Tax Assets. We recognize deferred tax assets for the estimated future tax effects of temporary differences, net operating loss carryforwards and tax credits. We recognize deferred tax assets subject to management's judgment based upon available evidence that realization is more likely than not. Our deferred tax assets are reduced, if necessary, by a deferred tax asset valuation allowance. In the event that we determine we would not be able to realize all or part of our deferred tax assets in the future, we would need to adjust the recorded value of our deferred tax assets, which would result in a direct charge to our provision for income taxes in the period in which such determination is made. For further discussion, refer to "--Comparison of Results of Operations for 2006 and 2005 - Provision for Income Taxes," "--Comparison of Results of Operations for 2005 and 2004 - Provision for Income Taxes," and Note 13 to our Consolidated Financial Statements appearing elsewhere in this report. Business Combinations. We emphasize acquiring other financial institutions as one means of achieving our growth objectives. The determination of the fair value of the assets and liabilities acquired in these transactions, as well as the returns on investment that may be achieved, requires management to make significant judgments and estimates based upon detailed analyses of the existing and future economic value of such assets and liabilities and/or the related income streams, including the resulting intangible assets. If actual events prove the estimates and assumptions we used in determining the fair values of the acquired assets and liabilities or the projected income streams were incorrect, we may need to make additional adjustments to the recorded values of such assets and liabilities, which could result in increased volatility in our reported earnings. In addition, we may need to make additional adjustments to the recorded value of our intangible assets, which may impact our reported earnings and directly impacts our regulatory capital levels. For further discussion, refer to "--Acquisitions" and Note 2, Note 8 and Note 21 to our Consolidated Financial Statements appearing elsewhere in this report. Effects of New Accounting Standards In November 2005, the Financial Accounting Standards Board, or FASB, issued FASB Staff Position, or FSP, FAS 115-1 and FAS 124-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments. The FSP addresses determining when an investment is considered impaired and whether that impairment is other than temporary, and measuring an impairment loss. The FSP also addresses the accounting after an entity recognizes an other-than-temporary impairment, and requires certain disclosures about unrealized losses that the entity did not recognize as other-than-temporary impairment. The FSP was effective for reporting periods beginning after December 15, 2005. On January 1, 2006, we implemented the requirements of FSP FAS 115-1 and FAS 124-1, which did not have a material effect on our financial condition or results of operations. In May 2005, the FASB issued SFAS No. 154 -- Accounting Changes and Error Corrections. SFAS No. 154, a replacement of Accounting Principles Bulletin Opinion No. 20 -- Accounting Changes and SFAS No. 3 -- Reporting Accounting Changes in Interim Financial Statements, requires retrospective application for voluntary changes in accounting principles unless it is impracticable to do so. SFAS No. 154 was effective for accounting changes and corrections of errors in fiscal years beginning after December 15, 2005. Early application was permitted for accounting changes and corrections of errors during fiscal years beginning after June 1, 2005. On January 1, 2006, we implemented the requirements of SFAS No. 154, which did not have a material effect on our financial condition or results of operations. In February 2006, the FASB issued SFAS No. 155 -- Accounting For Certain Hybrid Financial Instruments, an amendment of SFAS No. 133 -- Accounting For Derivative Instruments and Hedging Activities and SFAS No. 140. SFAS No. 155 allows entities to remeasure at fair value a hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation from the host instrument, if the holder irrevocably elects to account for the whole instrument on a fair value basis. Subsequent changes in the fair value of the instrument would be recognized in earnings. In January 2007, the FASB posted to its website revisions to certain SFAS No. 133 implementation issues that were affected by the issuance of SFAS No. 155 and SFAS No. 156 (discussed below). These revisions provide a narrow scope exception for securitized interests in prepayable financial assets that only contain an embedded derivative that results from the embedded call options in the underlying prepayable financial assets if certain criteria are met. SFAS No. 155 is effective for financial instruments acquired, issued, or subject to a remeasurement event occurring after the beginning of the first fiscal year that begins after September 15, 2006. Early adoption is permitted as of the beginning of the fiscal year unless the entity has already issued interim financial statements during that fiscal year. We are currently evaluating the requirements of SFAS No. 155 to determine its impact on our financial condition and results of operations. In March 2006, the FASB issued SFAS No. 156 - Accounting for Servicing of Financial Assets. SFAS No. 156, an amendment of FASB SFAS No. 140 - Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, addresses the recognition and measurement of separately recognized servicing assets and liabilities and allows mark-to-market accounting for servicing rights resulting in reporting that is similar to fair value hedge accounting, but without the effort and system costs needed to identify effective hedging instruments and document hedging relationships. SFAS No. 156 is effective for fiscal years beginning after September 15, 2006. Early adoption is permitted as of the beginning of an entity's fiscal year unless the entity has already issued interim financial statements during that fiscal year. We implemented SFAS No. 156 on January 1, 2007, which did not have a material impact on our financial condition or results of operations. In June 2006, the FASB issued FASB Interpretation No. 48 -- Accounting for Uncertainty in Income Taxes, an Interpretation of SFAS No. 109 -- Accounting for Income Taxes. FASB Interpretation No. 48 clarifies the accounting for uncertainty in income taxes in financial statements and prescribes a recognition threshold and measurement attribute for financial statement recognition and measurement of a tax position taken or expected to be taken. The FASB Interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The FASB Interpretation is effective for fiscal years beginning after December 15, 2006. We implemented FASB Interpretation No. 48 on January 1, 2007, which did not have a material impact on our financial condition, results of operations, or our beginning retained earnings. In September 2006, the SEC issued SEC Staff Accounting Bulletin, or SAB, No. 108 - - Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements. SAB No. 108 addresses the methods in which uncorrected errors in previous years should be considered when quantifying errors in current-year financial statements, and requires an entity to consider the effect of all carry over and reversing effects of prior-year misstatements when quantifying errors in current-year financial statements. The SAB does not change the SEC staff's previous guidance on evaluating the materiality of errors in financial statements. SAB No. 108 allows an entity to record the effects of adopting the guidance as a cumulative-effect adjustment to retained earnings. This adjustment must be reported as of the beginning of the first fiscal year ending after November 15, 2006. In December 2006, we implemented the requirements of SAB No. 108, which had no impact on our financial condition or results of operations. In September 2006, the FASB issued SFAS No. 157 - Fair Value Measurements. SFAS No. 157 defines fair value, establishes a framework for measuring fair value in U.S. generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS No. 157 applies under other accounting pronouncements that require or permit fair value measurements, and does not require any new fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Early adoption is permitted as of the beginning of an entity's fiscal year unless the entity has already issued interim financial statements during that fiscal year. We are currently evaluating the requirements of SFAS No. 157 to determine its impact on our financial condition and results of operations. In February 2007, the FASB issued SFAS No. 159 - The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of SFAS No. 115. SFAS No. 159 provides entities with an option to report selected financial assets and liabilities at fair value in an effort to reduce both complexity in accounting for financial instruments and the volatility in earnings caused by measuring related assets and liabilities differently. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. Retrospective application is not allowed. Early adoption is permitted as of the beginning of an entity's fiscal year that begins on or before November 15, 2007, provided the entity also elects to adopt all of the provisions of SFAS No. 157 at the early adoption date. We are currently evaluating the requirements of SFAS No. 159 to determine their impact on our financial condition and results of operations. Item 7A. Quantitative and Qualitative Disclosures about Market Risk The quantitative and qualitative disclosures about market risk are included under "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations - Interest Rate Risk Management" appearing on pages 35 through 37 of this report. Effects of Inflation Inflation affects financial institutions less than other types of companies. Financial institutions make relatively few significant asset acquisitions that are directly affected by changing prices. Instead, the assets and liabilities are primarily monetary in nature. Consequently, interest rates are more significant to the performance of financial institutions than the effect of general inflation levels. While a relationship exists between the inflation rate and interest rates, we believe this is generally manageable through our asset-liability management program. Item 8. Financial Statements and Supplementary Data The financial statements and supplementary data appear on pages 63 through 106 of this report. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. Item 9A. Controls and Procedures Our Chief Executive Officer and our Chief Financial Officer have evaluated the effectiveness of our "disclosure controls and procedures" (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), as of the end of the period covered by this report. Based on such evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that, as of the end of such period, the Company's disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act. There have not been any changes in the Company's internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fourth quarter of 2006 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. Item 9B. Other Information None. PART III Item 10. Directors, Executive Officers and Corporate Governance Board of Directors and Committees of the Board Our Board of Directors consists of seven members. The Board determined that Messrs. Gundaker, Steward and Yaeger are independent. Each of our directors identified in the following table was elected or appointed to serve a one-year term and until his successor has been duly qualified for office.
Director Principal Occupation(s) During Last Five Years Name Age Since and Directorships of Public Companies ---- --- ----- ------------------------------------- James F. Dierberg (1) 69 1979 Chairman of the Board of Directors of First Banks, Inc. since 1988; Chief Executive Officer of First Banks, Inc. from 1988 to April 2003; President of First Banks, Inc. from 1979 to 1992 and from 1994 to October 1999; Chairman of the Board of Directors, President and Chief Executive Officer of First Banks America, Inc.from 1994 until its merger with First Banks, Inc. in December 2002. Allen H. Blake (2) 64 1988 President of First Banks, Inc. since October 1999; Chief Executive Officer of First Banks, Inc. since April 2003; Chief Financial Officer of First Banks, Inc. from 1984 to September 1999 and from May 2001 to August 31, 2005; Chief Operating Officer of First Banks, Inc. from 1998 to July 2002; Director of First Banks, Inc. since 1988; Director, Executive Vice President, Chief Operating Officer and Secretary of First Banks America, Inc. from 1998 until its merger with First Banks, Inc. in December 2002; Chief Financial Officer of First Banks America, Inc. from 1994 to September 1999 and from May 2001 until December 2002. Terrance M. McCarthy (2) 52 2003 Senior Executive Vice President and Chief Operating Officer of First Banks, Inc. since August 2002; Director of First Banks, Inc. since April 2003; Director of First Banks America, Inc. from July 2001 until its merger with First Banks, Inc. in December 2002; Executive Vice President of First Banks America, Inc. from 1999 to December 2002; Chairman of the Board of Directors of First Bank since January 2003; President and Chief Executive Officer of First Bank since August 2002; Chairman of the Board of Directors, President and Chief Executive Officer of First Bank and Trust from April 2000 until its merger with and into First Bank in March 2003. Steven F. Schepman (1) 34 2004 Director of First Banks, Inc. since July 2004; Senior Vice President and Chief Financial Officer of First Banks, Inc. since August 31, 2005; Director of First Bank from April 2001 to October 2004; Senior Vice President - Private Banking, Wealth Management and Trust Services of First Bank from November 2000 to August 31, 2005; From May 1999 to November 2000, Mr. Schepman was employed in various other senior management capacities with First Banks, Inc. Gordon A. Gundaker (3) 73 2001 President and Chief Executive Officer of Coldwell Banker Gundaker, a full-service real estate brokerage company, in St. Louis, Missouri. David L. Steward (3) 55 2000 Chairman of the Board of Directors of World Wide Technology Holding Co., Inc., an electronic procurement and logistics company in the information technology industry, in St. Louis, Missouri; Director of Centene Corporation, Civic Progress of St. Louis, the St. Louis Regional Commerce and Growth Association, the Regional Business Council, Webster University, Barnes Jewish Hospital, the United Way of Greater St. Louis and Greater St. Louis Area Council - Boy Scouts of America. Douglas H. Yaeger (3)(4) 58 2000 Chairman of the Board of Directors, President and Chief Executive Officer of The Laclede Group, Inc., an exempt public utility holding company in St. Louis, Missouri since 2001; Chairman of the Board of Directors, President and Chief Executive Officer of Laclede Gas Company since 1999; President of Laclede Gas Company since 1997; Director and Chief Operating Officer of Laclede Gas Company from 1997 to 1999; Executive Vice President - Operations and Marketing of Laclede Gas Company from 1995 to 1997; Director and past Chairman of the Board of Directors of the St. Louis Regional Commerce and Growth Association; Director and past Chairman of Southern Gas Association; Director of American Gas Association; Director and incoming Chairman of the Missouri Energy Development Association; Commissioner of the St. Louis Science Center; Director of Barnes-Jewish Hospital, Greater St. Louis Area Council - Boy Scouts of America, The Municipal Theatre Association of St. Louis, the United Way of Greater St. Louis and Webster University; President of Civic Progress. - -------------------------------------- (1) Mr. Steven F. Schepman is the son-in-law of Mr. James F. Dierberg. (2) At the regular meeting of the First Banks, Inc. Board of Directors held on January 26, 2007, Mr. Allen H. Blake announced his retirement and resigned his positions as a Director, President and Chief Executive Officer of First Banks, effective March 31, 2007. Upon acceptance of Mr. Blake's resignation, the Board of Directors elected Mr. Terrance M. McCarthy as President and Chief Executive Officer of First Banks, effective April 1, 2007. (3) Member of the Audit Committee. (4) Mr. Douglas H. Yaeger serves as Chairman of the Audit Committee and the audit committee financial expert.
Committees and Meetings of the Board of Directors Three members of our Board of Directors currently serve on the Audit Committee, all of whom the Board of Directors determined to be independent; there are no other committees of the Board of Directors. The Audit Committee assists the Board of Directors in fulfilling the Board's oversight responsibilities with respect to the quality and integrity of the consolidated financial statements, financial reporting process and systems of internal controls. The Audit Committee also assists the Board of Directors in monitoring the independence and performance of the independent auditors, the internal audit department and the operation of ethics programs. The Audit Committee operates under a written charter adopted by the Board of Directors. The members of the Audit Committee as of March 28, 2007 were Mr. Gordon A. Gundaker, Mr. David L. Steward and Mr. Douglas H. Yaeger, who serves as the Chairman of the Audit Committee and the audit committee financial expert. Audit Committee Report The Audit Committee is responsible for oversight of our financial reporting process on behalf of the Board of Directors. Management has primary responsibility for our financial statements and financial reporting, including internal controls, subject to the oversight of the Audit Committee and the Board of Directors. In fulfilling its responsibilities, the Audit Committee reviewed the audited consolidated financial statements with management and discussed the acceptability of the accounting principles used, the reasonableness of significant judgments made and the clarity of the disclosures. The Audit Committee reviewed with the Independent Registered Public Accounting Firm, who is responsible for planning and carrying out a proper audit and expressing an opinion on the conformity of our audited consolidated financial statements with U.S. generally accepted accounting principles, their judgments as to the acceptability of the accounting principles we use, and such other matters as are required to be discussed with the Audit Committee by Statement on Auditing Standards No. 61, Communications with Audit Committees, as amended. In addition, the Audit Committee discussed with the Independent Registered Public Accounting Firm its independence from management and the Company, including the matters required by Standard No. 1 of the Independence Standards Board, and the Audit Committee considered the compatibility of non-audit services provided by the Independent Registered Public Accounting Firm with the firm's independence. KPMG LLP has provided the Audit Committee with the written disclosures and letter required by Standard No. 1 of the Independence Standards Board. The Audit Committee discussed with our Internal Audit Department and Independent Registered Public Accounting Firm the overall scope and plans for their respective audits. The Audit Committee met with the Internal Audit Department and Independent Registered Public Accounting Firm with and without management present to discuss the results of their examinations, their evaluations of our internal controls and the overall quality of our financial reporting. In reliance on the reviews and discussions referred to above, the Audit Committee recommended to the Board of Directors that the audited consolidated financial statements be included in the Annual Report on Form 10-K as of and for the year ended December 31, 2006 for filing with the SEC. Audit Committee --------------- Douglas H. Yaeger, Chairman of the Audit Committee Gordon A. Gundaker David L. Steward Code of Ethics for Principal Executive Officer and Financial Professionals The Board of Directors has approved a Code of Ethics for Principal Executive Officer and Financial Professionals that covers the Principal Executive Officer, the Chief Financial Officer, the Chief Operating Officer, the Chief Credit Officer, the Chief Investment Officer, the Senior Vice President and Controller, the Senior Vice President - Director of Taxes, the Senior Vice President - Director of Management Accounting, and all professionals serving in a Corporate Finance, Accounting, Treasury, Tax or Investor Relations role. These individuals are also subject to the policies and procedures adopted by First Banks that govern the conduct of all of its employees. The Code of Ethics for Principal Executive Officer and Financial Professionals is included as an exhibit to this Annual Report on Form 10-K. Code of Conduct for Employees, Officers and Directors The Board of Directors has approved a Code of Conduct applicable to all employees, officers and directors of First Banks that addresses conflicts of interest, honesty and fair dealing, accounting and auditing matters, political activities and application and enforcement of the Code of Conduct. The Code of Conduct is available on First Banks' website, www.firstbanks.com, under "About us." ------------------ Executive Officers Our executive officers, each of whom was elected to the office(s) indicated by the Board of Directors, as of March 28, 2007, were as follows:
Current First Banks Principal Occupation(s) Name Age Office(s) Held During Last Five Years ---- --- -------------- ---------------------- James F. Dierberg 69 Chairman of the Board of Directors. See "Item 10 - Directors, Executive Officers and Corporate Governance - Board of Directors." Allen H. Blake 64 President, Chief Executive Officer See "Item 10 - Directors, Executive and Director. Officers and Corporate Governance - Board of Directors." Terrance M. McCarthy 52 Senior Executive Vice President, See "Item 10 - Directors, Executive Chief Operating Officer and Officers and Corporate Governance - Director; Chairman of the Board of Board of Directors." Directors, President and Chief Executive Officer of First Bank. Steven F. Schepman 34 Senior Vice President, Chief See "Item 10 - Directors, Executive Financial Officer and Director. Officers and Corporate Governance - Board of Directors." Russell L. Goldammer 50 Executive Vice President and Chief Executive Vice President and Chief Information Officer. Information Officer since November 2004; Chief Information Officer of Outsourcing Solutions, Inc., St. Louis, Missouri, from April 2001 to October 2004; Senior Vice President of U.S. Bank in Milwaukee, Wisconsin, from October 1999 to April 2001. Daniel W. Jasper 61 Executive Vice President and Chief Executive Vice President and Chief Credit Officer; Director and Credit Officer of First Banks, Inc. Executive Vice President of First since October 2003; Senior Vice Bank. President and Acting Chief Credit Officer of First Banks, Inc. from May 2003 to October 2003; Senior Vice President - Credit Administration of First Banks, Inc. from 1995 to May 2003. F. Christopher McLaughlin 53 Executive Vice President and Executive Vice President and Director of Director of Sales, Marketing and Sales, Marketing and of Products First Products; Director of First Bank. Banks, Inc. since September 2003; Director of First Bank since Otober 2004; Executive Vice President-Personal Banking Division, HSBC Bank USA in Buffalo, New York from 1998 to June 2002; Independent Consultant from July 2002 to August 2003. Mary P. Sherrill 52 Executive Vice President and Executive Vice President and Director Director of Operations; Director of of Operations of First Banks, Inc. First Bank. since April 2003; Director of First Bank since April 2003; Director, Vice Chairman and Chief of Bank Operations Southwest Bank in St. Louis, Missouri from April 1999 to March 2003.
Item 11. Executive Compensation Compensation Discussion and Analysis. As outlined in the stock ownership table included in "Item 12 - Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters," all of our voting stock is owned by various trusts, established by and administered by and for the benefit of Mr. James F. Dierberg, our Chairman of the Board, and members of his immediate family. Therefore, we do not use equity awards in our compensation program. The objective of our executive compensation policies and practices is to attract and retain talented key executives that will contribute to the achievement of strategic goals and the growth and success of the Company in order to enhance the long-term value of our Company. Compensation is based upon the achievement of corporate goals and objectives, as established by key corporate executives and reported to the Board of Directors. Rewards for performance are designed to motivate the continued strong performance of key executives on a long-term basis. Our executive compensation programs are designed to reward the achievement of financial results in accordance with our corporate goals and objectives. The elements of our executive compensation programs include base salary, annual bonus compensation and the ability to participate in a nonqualified deferred compensation plan. Our executive compensation programs are cash-based and do not include any other forms of non-cash compensation. We do not provide the named executive officers with employment contracts or severance agreements, and consequently, we are under no obligation to make additional payments to any of the named executive officers in the event of severance, change in control, retirement or resignation. The individual components of compensation to executive officers are periodically evaluated using various factors, as further discussed below. Salary. Base salaries of executive officers are dependent upon the evaluation of certain factors and are based, in part, on non-quantifiable considerations, at the discretion of the Chairman and/or certain executive officers. The level of base salaries of executive officers is designed to reward the officer's performance based upon an evaluation of the following factors: (i) the performance of the Company and the achievement of corporate goals and objectives, considering general business and industry conditions, among other factors, and the contributions of specific executives towards the overall performance; (ii) each executive officer's areas of responsibility and the Company's performance in those areas; and (iii) the level of compensation paid to comparable executives by other financial institutions of comparable size in the market areas in which we operate to ensure we maintain a competitive compensation package. Our corporate goals and objectives provide particular measurements to which the Board of Directors and executive management assign significance, such as net income, organic and external growth in target market areas, expense control, net interest margin, credit quality, and regulatory examination results. These factors are taken into consideration by the Chairman of the Board, who evaluates the appropriate base salary and related annual salary increases of the President and Chief Executive Officer, and by the Chairman of the Board and certain senior executive officers, who evaluate the appropriate base salary and related annual salary increases of executive officers and other employees. Base salaries of executive officers are reviewed on an ongoing basis and are generally adjusted on an annual basis, and may be further adjusted periodically as a result of significant changes in responsibility, employment market conditions, and other factors. Bonus. We offer our key executive officers additional compensation through an Executive Incentive Compensation Plan, or the Plan. The objectives of the Plan are to promote superior short-term and long-term financial performance of the Company through its key executives; to reward those key executive officers who deliver solid results with market-competitive incentives; and to attract, motivate and retain skilled and experienced individuals who can increase the size and profitability of the Company. Our Chairman of the Board has full discretion to determine on an annual basis those executives who are eligible to participate in the Plan. Each of the named executive officers is a participant in the Plan, along with certain other executive officers, with the exception of Mr. Schepman, son-in-law to Mr. James F. Dierberg, as lineal descendants of Mr. Dierberg and their spouses are not eligible to participate in Plan. Mr. Schepman received a discretionary bonus in 2006. The bonus award amounts under the Plan are determined by a mathematical formula that is based primarily on our weighted average return on equity multiplied by a weighting component and the named executive officer's annual salary. Payments under the Plan are made annually based upon the results of the above-referenced formulas, unless determined otherwise by the Board of Directors for the Chief Executive Officer or by the Chief Executive Officer for the other participants. In considering any adjustment to payments to other executive officers, the Chief Executive Officer will evaluate each executive officer's contribution to improving our return on equity during the plan year. Deferred Compensation. We offer a deferred compensation plan to the executive officers and other key employees to promote retention by providing a long-term savings opportunity on a tax-effective basis. The Board of Directors and President and Chief Executive Officer periodically review the various components of our executive compensation programs. The salaries paid, annual bonuses awarded and deferred compensation balances for the named executives in 2006 are further described in the "Summary Compensation Table" and "Nonqualified Deferred Compensation Table" below. Executive Compensation. The following table sets forth certain information regarding compensation earned by the named executive officers for the year ended December 31, 2006:
SUMMARY COMPENSATION TABLE -------------------------- All Other Name and Principal Position(s) Salary (1) Bonus (1) Compensation (2) Total (1) - ------------------------------ ------ ----- ------------ ----- James F. Dierberg $ 610,000 -- 8,800 618,800 Chairman of the Board of Directors Allen H. Blake 470,000 413,800 8,800 892,600 President and Chief Executive Officer Steven F. Schepman 175,400 20,000 8,300 203,700 Senior Vice President and Chief Financial Officer Terrance M. McCarthy 409,000 345,000 8,800 762,800 Senior Executive Vice President and Chief Operating Officer Daniel W. Jasper 245,600 215,000 8,800 469,400 Executive Vice President and Chief Credit Officer - -------------------------- (1) Salary and bonus reported for Messrs. Allen H. Blake, Steven F. Schepman, Terrance M. McCarthy and Daniel W. Jasper include payments deferred in our NQDC Plan, as further described below, of $300,900, $5,000, $213,400 and $67,600, respectively, or an aggregate of $586,900. Salary reported for Mr. Dierberg did not include any payments deferred in our NQDC Plan. Earnings by the named executives on their NQDC Plan balances did not include any above-market or preferential earnings. (2) All other compensation reported reflects matching contributions to our 401(k) Plan.
Nonqualified Deferred Compensation. Officers that meet certain position and base salary criteria and non-employee directors are eligible to participate in our Nonqualified Deferred Compensation Plan, or NQDC Plan. Participants are allowed to defer, on an annual basis, up to 25% of their salary and up to 100% of their bonus payments, and hypothetically invest in various investment options available in the NQDC Plan that are selected by the participant and may be changed by the participant at any time. These investment options mirror the investment options that we offer through our 401(k) plan and include various investment funds such as equity funds, international stock funds, capital appreciation funds, money market funds, bond funds, mid-cap value funds and growth funds. The NQDC Plan allows for us to credit the deferred compensation accounts of any participant with discretionary contributions, however, we have not made any such discretionary contributions under the NQDC Plan since its inception. Any such contributions, if made, would vest over a five-year period. Earnings or losses on participant account balances resulting from the participant's investment choices are credited or charged to the participant accounts on a monthly basis. We recognized these earnings or losses in our consolidated statements of income on a monthly basis. In the event of retirement, payment of the vested portion of the participant's deferred compensation account balance is either made through a single lump sum payment or annual payments over five or ten years, subject to the election by the participant. Payment of the vested portion of the participant's deferred compensation account balance is made through a single lump sum payment in the event the participant terminates his or her employment for reasons other than retirement. We did not make any withdrawals or distributions to the named executive officers or the non-employee directors from our NQDC Plan for the year ended December 31, 2006. The following table sets forth certain information regarding nonqualified deferred compensation earned by the named executive officers for the year ended December 31, 2006:
NONQUALIFIED DEFERRED COMPENSATION TABLE ---------------------------------------- Executive Aggregate Aggregate Contributions in Earnings in Balance at Name and Principal Position(s) Last Fiscal Year (1) Last Fiscal Year December 31, 2006 - ------------------------------ ---------------- ---------------- ----------------- James F. Dierberg $ -- 22,200 392,800 (2) Chairman of the Board of Directors Allen H. Blake (3) 300,900 65,700 1,111,100 (4) President and Chief Executive Officer Steven F. Schepman 5,000 200 5,200 Senior Vice President and Chief Financial Officer Terrance M. McCarthy 213,400 52,700 502,300 (5) Senior Executive Vice President and Chief Operating Officer Daniel W. Jasper 67,600 18,600 187,200 (6) Executive Vice President and Chief Credit Officer - ---------------------------- (1) All executive contributions represent the deferral of base salary and/or bonus payments reflected in the "Summary Compensation Table." We did not make any discretionary contributions under the NQDC Plan as of and for the year ended December 31, 2006. (2) Of this amount, $305,500 represents deferrals of cash consideration from prior years that were reflected in the "Summary Compensation Table" in our Annual Report on Form 10-K for the relevant years. The remaining balance represents the cumulative earnings on the original deferred amounts and the participant's 2006 activity. (3) Following his retirement, which will be effective on March 31, 2007, Mr. Allen H. Blake will receive his NQDC Plan participant account balance, which is fully vested, in annual distributions over a period of ten years. (4) Of this amount, $605,800 represents deferrals of cash consideration from prior years that were reflected in the "Summary Compensation Table" in our Annual Report on Form 10-K for the relevant years. The remaining balance represents the cumulative earnings on the original deferred amounts and the participant's 2006 activity. (5) Of this amount, $189,900 represents deferrals of cash consideration from prior years that were reflected in the "Summary Compensation Table" in our Annual Report on Form 10-K for the relevant years. The remaining balance represents the cumulative earnings on the original deferred amounts and the participant's 2006 activity. (6) Of this amount, $92,500 represents deferrals of cash consideration from prior years that were reflected in the "Summary Compensation Table" in our Annual Report on Form 10-K for the relevant years. The remaining balance represents the cumulative earnings on the original deferred amounts and the participant's 2006 activity.
Potential Payments Upon Termination. Upon termination of employment, the executive officers will receive payments of their vested portion of the executive's deferred compensation account balance under our NQDC Plan as described above. Compensation of Directors. The following table sets forth compensation earned by the named non-employee directors for the year ended December 31, 2006: DIRECTOR COMPENSATION TABLE --------------------------- Fees Earned or Paid Name in Cash Total - ---- ------- ----- Gordon A. Gundaker $ 29,000 29,000 David L. Steward (1) 29,000 29,000 Hal J. Upbin (2) 8,000 8,000 Douglas H. Yaeger (1)(3) 33,000 33,000 - ----------------------------- (1) Fees paid for Messrs. David L. Steward and Douglas H. Yaeger include payments deferred in our NQDC Plan of $29,000 and $33,000, respectively, or an aggregate of $62,000. Earnings by the directors on their NQDC Plan balances did not include any above-market or preferential earnings. (2) Mr. Hal J. Upbin resigned his positions as a Director and as an independent member of the Audit Committee at the regular meeting of the First Banks Board of Directors held on January 27, 2006. (3) Mr. Douglas H. Yaeger serves as Chairman of the Audit Committee and the audit committee financial expert. Our executive officers that are also directors do not receive remuneration other than salaries and bonuses for serving on our Board of Directors. Only those directors who are neither our employees nor employees of any of our subsidiaries receive cash remuneration for their services as directors. Such non-employee directors, as shown in the table above, received a fee of $3,000 for each Board meeting attended and $1,000 for each Audit Committee meeting attended in 2006. Messr. Douglas H. Yaeger also received a fee of $4,000 per calendar quarter for his service as Chairman of the Audit Committee, and Messrs. Gordon A. Gundaker, David L. Steward and Hal J. Upbin also received a fee of $3,000 per calendar quarter for their service as members of the Audit Committee. Our non-employee directors are also eligible to participate in our NQDC Plan. Our directors do not receive any retainers or other compensation, and there are no arrangements for amounts to be paid to directors upon resignation or any other termination of such director or a change in control of the Company. The Audit Committee is currently the only committee of our Board of Directors. Compensation Committee Interlocks and Insider Participation. We do not have a compensation committee, therefore, our Board of Directors performs the functions of such a committee. Messrs. Dierberg, Blake, McCarthy and Schepman serve or have served as executive officers and/or members of our Board of Directors. Except for the foregoing, none of our executive officers served during 2006 as a member of our compensation committee, or any other committee performing similar functions, or as a director of another entity, any of whose executive officers or directors served on our Board of Directors. See further information regarding transactions with related parties in Note 19 to our Consolidated Financial Statements appearing on pages 100 through 101 of this report. Compensation Committee Report. Our Board of Directors, which performs the functions of our compensation committee, has reviewed the Compensation Discussion and Analysis and discussed such with management. Based on such review and discussions, the Board of Directors recommended the Compensation Discussion and Analysis be included in the Company's Annual Report on Form 10-K as of and for the year ended December 31, 2006. Board of Directors ------------------ James F. Dierberg, Chairman of the Board of Directors Allen H. Blake Gordon A. Gundaker Terrance M. McCarthy Steven F. Schepman David L. Steward Douglas H. Yaeger Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The following table sets forth, as of March 28, 2007, certain information with respect to the beneficial ownership of all classes of our voting capital stock by each person known to us to be the beneficial owner of more than five percent of the outstanding shares of the respective classes of our stock:
Percent of Number of Total Title of Class Shares Percent Voting and Name of Owner Owned of Class Power ----------------- ----- -------- ----- Common Stock ($250.00 par value) - -------------------------------- James F. Dierberg II Family Trust (1)........................ 7,714.677 (2) 32.605% * Ellen C. Dierberg Family Trust (1)........................... 7,714.676 (2) 32.605 * Michael J. Dierberg Family Trust (1)......................... 4,255.319 (2) 17.985 * Michael J. Dierberg Irrevocable Trust (1).................... 3,459.358 (2) 14.621 * First Trust (Mary W. Dierberg and First Bank, Trustees) (1).. 516.830 (3) 2.184 * Class A Convertible Adjustable Rate Preferred Stock - --------------------------------------------------- ($20.00 par value) - ------------------ James F. Dierberg, Trustee of the James F. Dierberg Living Trust (1)......................................... 641,082 (4)(5) 100% 77.7% Class B Non-Convertible Adjustable Rate Preferred Stock - ------------------------------------------------------- ($1.50 par value) - ----------------- James F. Dierberg, Trustee of the James F. Dierberg Living Trust (1)......................................... 160,505 (5) 100% 19.4% All executive officers and directors other than Mr. James F. Dierberg and members of his immediate family.......................... 0 0% 0.0% - -------------------- * Represents less than 1.0%. (1) Each of the above-named trustees and beneficial owners are United States citizens, and the business address for each such individual is 135 North Meramec, Clayton, Missouri 63105. Mr. James F. Dierberg, our Chairman of the Board, and Mrs. Mary W. Dierberg, are husband and wife, and Messrs. James F. Dierberg II and Michael J. Dierberg and Mrs. Ellen D. Schepman, formerly Ms. Ellen C. Dierberg, are their adult children. (2) Due to the relationship between Mr. James F. Dierberg, his wife and their children, Mr. Dierberg is deemed to share voting and investment power over these shares. (3) Due to the relationship between Mr. James F. Dierberg, his wife and First Bank, Mr. Dierberg is deemed to share voting and investment power over these shares. (4) Convertible into common stock, based on the appraised value of the common stock at the date of conversion. Assuming an appraised value of the common stock equal to the book value, the number of shares of common stock into which the Class A Preferred Stock is convertible at December 31, 2006 is 385, which shares are not included in the above table. (5) Sole voting and investment power.
Item 13. Certain Relationships and Related Transactions, and Director Independence Review and Approval of Related Person Transactions. We review all relationships and transactions in which we and our directors and executive officers and their immediate family members and entities in which such persons have a significant interest are participants to determine whether such persons have a direct or indirect material interest. Our management collects information from the executive officers and the directors regarding the related person transactions and determines whether we or a related person has a direct or indirect material interest in the transaction. If we determine that a transaction is directly or indirectly material to us or a related person, then the transaction is disclosed in accordance with applicable requirements. In addition, the Audit Committee of our Board of Directors reviews and approves or ratifies any related person transaction that is required to be so disclosed. In the event that a member of the Audit Committee is a related person to such a transaction, such member may not participate in the discussion or vote regarding approval or ratification of the transaction. Related Person Transactions. Outside of normal customer relationships, no directors, executive officers or shareholders holding over 5% of our voting securities, and no corporations or firms with which such persons or entities are associated, currently maintain or have maintained since the beginning of the last full fiscal year, any significant business or personal relationship with our subsidiaries or us, other than that which arises by virtue of such position or ownership interest in our subsidiaries or us, except as set forth in "Item 11 - - Executive Compensation - Compensation of Directors," or as described in the following paragraphs. First Bank has had in the past, and may have in the future, loan transactions and related banking services in the ordinary course of business with our directors and/or their affiliates. These loan transactions have been made on the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unaffiliated persons and did not involve more than the normal risk of collectibility or present other unfavorable features. First Bank does not extend credit to our officers or to officers of First Bank, except extensions of credit secured by mortgages on personal residences, loans to purchase automobiles and personal credit card accounts. Certain of our shareholders, directors and officers and their respective affiliates have deposit accounts and related banking services with First Bank. It is First Bank's policy not to permit any of its officers or directors or their affiliates to overdraw their respective deposit accounts. Deposit account overdraft protection may be approved for persons or entities under a plan whereby a credit limit has been established in accordance with First Bank's standard credit criteria. Transactions with related parties, including transactions with affiliated persons and entities, are described in Note 19 to our Consolidated Financial Statements on pages 100 through 101 of this report. Director Independence. Our Board of Directors has determined that Messrs. Gordon A. Gundaker, David L. Steward and Douglas H. Yaeger have no material relationship with us and each is independent. Our Audit Committee of the Board of Directors is composed only of independent directors. In order to be considered independent, our Board of Directors must determine that a director does not have any direct or indirect material relationship with us as provided under the rules of the New York Stock Exchange, or NYSE. In making such a determination, the Board of Directors considers all relationships between us, or any of our subsidiaries, and the director, or any of his immediate family members, or any entity with which the director or any of his immediate family members is affiliated by reason of being a partner, officer or significant shareholder thereof. In assessing the independence of our directors, the Board of Directors considered all relationships between us and our directors based primarily upon responses of the directors to questions posed through a directors' and officers' questionnaire. The Board of Directors considered each of the related person transaction discussed above in making its independence determination. First Banks has only preferred securities listed on the NYSE and, pursuant to the General Application section of NYSE Rule 303A, is not subject to NYSE Rule 303A.01 requiring a majority of independent directors. Messrs. Dierberg, Blake, McCarthy and Schepman are not independent because they are each current or former executive officers of the company. Item 14. Principal Accounting Fees and Services Fees of Independent Registered Public Accounting Firm During 2006 and 2005, KPMG LLP served as our Independent Registered Public Accounting Firm and provided services to our affiliates and us. The following table sets forth fees for professional audit services rendered by KPMG LLP for the audit of our consolidated financial statements and other audit services in 2006 and 2005:
2006 2005 ---- ---- Audit fees, excluding audit related fees (1)......................... $ 601,500 820,500 Audit related fees................................................... -- -- Tax fees (2)......................................................... 82,637 111,676 All other fees....................................................... -- -- --------- -------- Total......................................................... $ 684,137 932,176 ========= ======== ------------------------ (1) For 2006 and 2005, audit fees include the audits of the consolidated financial statements of First Banks and SBLS LLC, as well as services provided for reporting requirements under FDICIA and mortgage banking activities, which are included in the audit fees of First Banks, as these services are closely related to the audit of First Banks' consolidated financial statements. Audit fees also include other accounting and reporting consultations. Audit fees for 2005 also include audits of the consolidated financial statements of Hillside and subsidiaries. (2) For 2006, tax services include tax compliance and general tax planning and advice. For 2005, tax services include preparation of amended income tax returns, tax compliance and general tax planning and advice.
Policy Regarding the Approval of Independent Auditor Provision of Audit and Non-Audit Services Consistent with the Securities and Exchange Commission requirements regarding auditor independence, the Audit Committee recognizes the importance of maintaining the independence, in fact and appearance, of our independent auditors. As such, the Audit Committee has adopted a policy for pre-approval of all audit and permissible non-audit services provided by our independent auditors. Under the policy, the Audit Committee, or its designated member, must pre-approve services prior to commencement of the specified service. The requests for pre-approval are submitted to the Audit Committee or its designated member by the Director of Audit with a statement as to whether in his/her view the request is consistent with the Securities and Exchange Commission's rules on auditor independence. The Audit Committee reviews the pre-approval requests and the fees paid for such services at their regularly scheduled quarterly meetings or at special meetings. PART IV Item 15. Exhibits, Financial Statement Schedules (a) 1. Financial Statements and Supplementary Data - The financial statements and supplementary data filed as part of this Report are included in Item 8. 2. Financial Statement Schedules - These schedules are omitted for the reason they are not required or are not applicable. 3. Exhibits - The exhibits are listed in the index of exhibits required by Item 601 of Regulation S-K at Item (b) below and are incorporated herein by reference. (b) The index of required exhibits is included beginning on page 110 of this Report. (c) Not Applicable. FIRST BANKS, INC. REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM - -------------------------------------------------------------------------------- The Board of Directors and Stockholders First Banks, Inc.: We have audited the accompanying consolidated balance sheets of First Banks, Inc. and subsidiaries (the Company) as of December 31, 2006 and 2005, and the related consolidated statements of income, changes in stockholders' equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2006. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of First Banks, Inc. and subsidiaries as of December 31, 2006 and 2005, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2006, in conformity with U.S. generally accepted accounting principles. /s/ KPMG LLP ------------ St. Louis, Missouri March 28, 2007
FIRST BANKS, INC. CONSOLIDATED BALANCE SHEETS - ------------------------------------------------------------------------------------------------------------------ (dollars expressed in thousands, except share and per share data) December 31, ---------------------------- 2006 2005 ---- ---- ASSETS ------ Cash and cash equivalents: Cash and due from banks........................................................ $ 215,974 212,667 Short-term investments......................................................... 153,583 73,985 ----------- --------- Total cash and cash equivalents........................................... 369,557 286,652 ----------- --------- Investment securities: Trading........................................................................ 81,168 3,389 Available for sale............................................................. 1,359,729 1,311,289 Held to maturity (fair value of $23,971 and $25,791, respectively)............. 24,049 26,105 ----------- --------- Total investment securities............................................... 1,464,946 1,340,783 ----------- --------- Loans: Commercial, financial and agricultural......................................... 1,934,912 1,619,822 Real estate construction and development....................................... 1,832,504 1,564,255 Real estate mortgage........................................................... 3,615,148 3,469,788 Consumer and installment....................................................... 83,008 64,724 Loans held for sale............................................................ 216,327 315,134 ----------- --------- Total loans............................................................... 7,681,899 7,033,723 Unearned discount.............................................................. (15,418) (12,952) Allowance for loan losses...................................................... (145,729) (135,330) ----------- --------- Net loans................................................................. 7,520,752 6,885,441 ----------- --------- Bank premises and equipment, net.................................................... 178,417 144,941 Goodwill and other intangible assets................................................ 295,382 191,901 Bank-owned life insurance........................................................... 113,778 111,442 Deferred income taxes............................................................... 100,175 128,938 Other assets........................................................................ 115,707 80,235 ----------- --------- Total assets.............................................................. $10,158,714 9,170,333 =========== ========= LIABILITIES ----------- Deposits: Noninterest-bearing demand..................................................... $ 1,281,108 1,299,350 Interest-bearing demand........................................................ 981,939 981,837 Savings........................................................................ 2,352,575 2,106,470 Time deposits of $100 or more.................................................. 1,419,579 1,076,908 Other time deposits............................................................ 2,407,885 2,077,266 ----------- --------- Total deposits............................................................ 8,443,086 7,541,831 Other borrowings.................................................................... 373,899 539,174 Notes payable....................................................................... 65,000 100,000 Subordinated debentures............................................................. 297,966 215,461 Deferred income taxes............................................................... 42,826 27,104 Accrued expenses and other liabilities.............................................. 130,033 61,762 Minority interest in subsidiary..................................................... 5,469 6,063 ----------- --------- Total liabilities......................................................... 9,358,279 8,491,395 ----------- --------- STOCKHOLDERS' EQUITY -------------------- Preferred stock: $1.00 par value, 5,000,000 shares authorized, no shares issued and outstanding.............................................................. -- -- Class A convertible, adjustable rate, $20.00 par value, 750,000 shares authorized, 641,082 shares issued and outstanding..................... 12,822 12,822 Class B adjustable rate, $1.50 par value, 200,000 shares authorized, 160,505 shares issued and outstanding........................................ 241 241 Common stock, $250.00 par value, 25,000 shares authorized, 23,661 shares issued and outstanding........................................... 5,915 5,915 Additional paid-in capital.......................................................... 9,685 5,910 Retained earnings................................................................... 784,864 673,956 Accumulated other comprehensive loss................................................ (13,092) (19,906) ----------- --------- Total stockholders' equity................................................ 800,435 678,938 ----------- --------- Total liabilities and stockholders' equity................................ $10,158,714 9,170,333 =========== ========= The accompanying notes are an integral part of the consolidated financial statements.
FIRST BANKS, INC. CONSOLIDATED STATEMENTS OF INCOME - ------------------------------------------------------------------------------------------------------------------ (dollars expressed in thousands, except share and per share data) Years Ended December 31, ---------------------------------- 2006 2005 2004 ---- ---- ---- Interest income: Interest and fees on loans............................................... $ 581,503 424,095 341,479 Investment securities: Taxable................................................................ 57,017 65,895 50,170 Nontaxable............................................................. 1,875 1,739 1,490 Short-term investments................................................... 5,909 2,211 1,643 --------- -------- -------- Total interest income................................................ 646,304 493,940 394,782 --------- -------- -------- Interest expense: Deposits: Interest-bearing demand................................................ 8,147 4,398 3,472 Savings................................................................ 53,297 29,592 20,128 Time deposits of $100 or more.......................................... 59,114 28,010 13,762 Other time deposits.................................................... 96,138 65,157 35,705 Other borrowings......................................................... 16,803 18,240 6,102 Notes payable............................................................ 5,530 2,305 506 Subordinated debentures.................................................. 22,833 20,557 15,092 --------- -------- -------- Total interest expense............................................... 261,862 168,259 94,767 --------- -------- -------- Net interest income.................................................. 384,442 325,681 300,015 Provision for loan losses................................................... 12,000 (4,000) 25,750 --------- -------- -------- Net interest income after provision for loan losses.................. 372,442 329,681 274,265 --------- -------- -------- Noninterest income: Service charges on deposit accounts and customer service fees............ 43,310 39,776 38,230 Gain on loans sold and held for sale..................................... 26,020 20,804 18,497 Net (loss) gain on investment securities................................. (1,813) (2,873) 257 Bank-owned life insurance investment income.............................. 3,103 4,860 5,201 Investment management income............................................. 8,412 8,573 6,870 Insurance product income................................................. 4,848 -- -- Other.................................................................... 29,063 24,945 18,144 --------- -------- -------- Total noninterest income............................................. 112,943 96,085 87,199 --------- -------- -------- Noninterest expense: Salaries and employee benefits........................................... 166,864 139,764 117,492 Occupancy, net of rental income.......................................... 26,953 22,081 19,882 Furniture and equipment.................................................. 16,960 16,015 17,017 Postage, printing and supplies........................................... 6,721 5,743 5,010 Information technology fees.............................................. 37,099 35,472 32,019 Legal, examination and professional fees................................. 8,783 9,319 7,412 Amortization of intangible assets........................................ 8,195 4,850 2,912 Communications........................................................... 2,425 2,012 1,866 Advertising and business development..................................... 7,128 7,043 5,493 Charitable contributions................................................. 6,462 5,922 577 Other.................................................................... 31,626 29,417 23,538 --------- -------- -------- Total noninterest expense............................................ 319,216 277,638 233,218 --------- -------- -------- Income before provision for income taxes and minority interest in loss of subsidiary................................................ 166,169 148,128 128,246 Provision for income taxes.................................................. 55,062 52,509 45,338 --------- -------- -------- Income before minority interest in loss of subsidiary................ 111,107 95,619 82,908 Minority interest in loss of subsidiary..................................... (587) (1,287) -- --------- -------- -------- Net income........................................................... 111,694 96,906 82,908 Preferred stock dividends................................................... 786 786 786 --------- -------- -------- Net income available to common stockholders.......................... $ 110,908 96,120 82,122 ========= ======== ========
Basic earnings per common share............................................. $4,687.38 4,062.36 3,470.80 ========= ======== ======== Diluted earnings per common share........................................... $4,630.72 4,007.46 3,421.58 ========= ======== ======== Weighted average shares of common stock outstanding......................... 23,661 23,661 23,661 ========= ======== ======== The accompanying notes are an integral part of the consolidated financial statements.
FIRST BANKS, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME Three Years Ended December 31, 2006 - ------------------------------------------------------------------------------------------------------------------------------------ (dollars expressed in thousands, except per share data) Accu- Adjustable Rate mulated Preferred Stock Other ------------------- Compre- Total Class A Additional hensive Stock- Conver- Common Paid-in Retained Income holders' tible Class B Stock Capital Earnings (Loss) Equity ----- ------- ----- ------- -------- ------ ------ Consolidated balances, January 1, 2004............... $12,822 241 5,915 5,910 495,714 29,213 549,815 ------- Year ended December 31, 2004: Comprehensive income: Net income..................................... -- -- -- -- 82,908 -- 82,908 Other comprehensive loss, net of tax: Unrealized losses on investment securities... -- -- -- -- -- (5,711) (5,711) Reclassification adjustment for investment securities gains included in net income.... -- -- -- -- -- (167) (167) Derivative instruments: Current period transactions................ -- -- -- -- -- (25,166) (25,166) ------- Total comprehensive income....................... 51,864 Class A preferred stock dividends, $1.20 per share................................ -- -- -- -- (769) -- (769) Class B preferred stock dividends, $0.11 per share................................ -- -- -- -- (17) -- (17) ------- --- ----- ----- ------- ------- ------- Consolidated balances, December 31, 2004............. 12,822 241 5,915 5,910 577,836 (1,831) 600,893 ------- Year ended December 31, 2005: Comprehensive income: Net income..................................... -- -- -- -- 96,906 -- 96,906 Other comprehensive loss, net of tax: Unrealized losses on investment securities... -- -- -- -- -- (15,659) (15,659) Reclassification adjustment for investment securities losses included in net income... -- -- -- -- -- 1,867 1,867 Derivative instruments: Current period transactions................ -- -- -- -- -- (4,283) (4,283) ------- Total comprehensive income....................... 78,831 Class A preferred stock dividends, $1.20 per share................................ -- -- -- -- (769) -- (769) Class B preferred stock dividends, $0.11 per share................................ -- -- -- -- (17) -- (17) ------- --- ----- ----- ------- ------- ------- Consolidated balances, December 31, 2005............. 12,822 241 5,915 5,910 673,956 (19,906) 678,938 ------- Year ended December 31, 2006: Comprehensive income: Net income..................................... -- -- -- -- 111,694 -- 111,694 Other comprehensive income, net of tax: Unrealized gains on investment securities.... -- -- -- -- -- 3,666 3,666 Reclassification adjustment for investment securities losses included in net income... -- -- -- -- -- 1,242 1,242 Derivative instruments Current period transactions................ -- -- -- -- -- 1,906 1,906 ------- Total comprehensive income....................... 118,508 Adjustment for the utilization of net operating losses associated with prior acquisitions................................. -- -- -- 3,775 -- -- 3,775 Class A preferred stock dividends, $1.20 per share................................ -- -- -- -- (769) -- (769) Class B preferred stock dividends, $0.11 per share................................ -- -- -- -- (17) -- (17) ------- --- ----- ----- ------- ------- ------- Consolidated balances, December 31, 2006............. $12,822 241 5,915 9,685 784,864 (13,092) 800,435 ======= === ===== ===== ======= ======= ======= The accompanying notes are an integral part of the consolidated financial statements.
FIRST BANKS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS - ------------------------------------------------------------------------------------------------------------------- (dollars expressed in thousands) Years ended December 31, ------------------------------------ 2006 2005 2004 ---- ---- ---- Cash flows from operating activities: Net income.............................................................. $ 111,694 96,906 82,908 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization of bank premises and equipment....... 18,912 17,381 18,579 Amortization, net of accretion..................................... 13,863 16,111 17,102 Originations and purchases of loans held for sale.................. (1,000,765) (1,327,890) (1,036,548) Proceeds from sales of loans held for sale......................... 1,229,574 1,201,695 1,104,254 Provision for loan losses.......................................... 12,000 (4,000) 25,750 Provision for deferred income taxes................................ 10,208 (1,216) (747) Increase in accrued interest receivable............................ (9,781) (2,280) (696) Increase in accrued interest payable............................... 6,230 6,115 1,361 Proceeds from sales of trading securities.......................... 9,947 -- -- Purchases of trading securities.................................... (88,494) (3,389) -- Gain on loans sold and held for sale............................... (26,020) (20,804) (18,497) Net loss (gain) on sales of investment securities.................. 1,813 2,873 (257) Gain on sales of branches, net of expenses......................... -- -- (1,000) Other operating activities, net.................................... 42,973 20,323 13,513 Minority interest in loss of subsidiary............................ (587) (1,287) -- ---------- ---------- ---------- Net cash provided by operating activities..................... 331,567 538 205,722 ---------- ---------- ---------- Cash flows from investing activities: Cash (paid) received for acquired entities, net of cash and cash equivalents received (paid)...................................... (204,690) (11,579) 21,098 Proceeds from sales of investment securities available for sale......... 198,061 147,120 26,340 Maturities of investment securities available for sale.................. 1,003,970 658,803 680,631 Maturities of investment securities held to maturity.................... 2,887 5,635 4,632 Purchases of investment securities available for sale................... (1,065,738) (325,642) (1,029,993) Purchases of investment securities held to maturity..................... (865) (6,509) (19,031) Proceeds from sale of leases............................................ -- -- 35,544 Net increase in loans................................................... (510,054) (569,255) (211,104) Recoveries of loans previously charged-off.............................. 15,394 19,757 25,876 Purchases of bank premises and equipment................................ (37,904) (17,128) (10,960) Sale of minority interest in subsidiary................................. -- 7,350 -- Other investing activities, net......................................... 12 1,834 15,358 ---------- ---------- ---------- Net cash used in investing activities......................... (598,927) (89,614) (461,609) ---------- ---------- ---------- Cash flows from financing activities: Increase (decrease) in demand and savings deposits...................... 10,185 (50,119) 23,355 Increase (decrease) in time deposits.................................... 415,562 199,255 (11,521) Decrease in Federal Home Loan Bank advances............................. (43,410) (6,144) (29,020) Decrease in federal funds purchased..................................... -- (78) -- (Decrease) increase in securities sold under agreements to repurchase... (135,464) (59,232) 286,928 Advances drawn on notes payable......................................... -- 100,000 15,000 Repayments of notes payable............................................. (35,000) (15,000) (17,000) Proceeds from issuance of subordinated debentures....................... 139,178 -- 61,857 Repayments of subordinated debentures................................... -- (59,278) -- Cash paid for sales of branches, net of cash and cash equivalents sold.. -- -- (19,353) Payment of preferred stock dividends.................................... (786) (786) (786) ---------- ---------- ---------- Net cash provided by financing activities..................... 350,265 108,618 309,460 ---------- ---------- ---------- Net increase in cash and cash equivalents..................... 82,905 19,542 53,573 Cash and cash equivalents, beginning of year................................. 286,652 267,110 213,537 ---------- ---------- ---------- Cash and cash equivalents, end of year....................................... $ 369,557 286,652 267,110 ========== ========== ========== Supplemental disclosures of cash flow information: Cash paid during the period for: Interest on liabilities............................................... $ 255,632 162,144 93,406 Income taxes.......................................................... 45,497 56,591 42,701 ========== ========== ========== Noncash investing and financing activities: Securitization and transfer of loans to investment securities......... $ 138,944 -- -- Loans transferred to other real estate................................ 7,542 3,737 5,142 ========== ========== ========== The accompanying notes are an integral part of the consolidated financial statements.
FIRST BANKS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The following is a summary of the significant accounting policies followed by First Banks, Inc. and subsidiaries (First Banks or the Company): Basis of Presentation. The accompanying consolidated financial statements of First Banks have been prepared in accordance with U.S. generally accepted accounting principles and conform to predominant practices within the banking industry. Management of First Banks has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare the consolidated financial statements in conformity with U.S. generally accepted accounting principles. Actual results could differ from those estimates. Principles of Consolidation. The consolidated financial statements include the accounts of the parent company and its subsidiaries, giving effect to the minority interest in one subsidiary, as more fully described below, and in Note 2 and Note 19 to the Consolidated Financial Statements. All significant intercompany accounts and transactions have been eliminated. Certain reclassifications of 2005 and 2004 amounts have been made to conform to the 2006 presentation. First Banks operates through its wholly owned subsidiary bank holding company, The San Francisco Company (SFC), and SFC's wholly owned subsidiary bank, First Bank, both headquartered in St. Louis, Missouri. First Bank operates through its branch banking offices and subsidiaries: First Bank Business Capital, Inc.; Missouri Valley Partners, Inc. (MVP); Adrian N. Baker & Company (Adrian Baker); Universal Premium Acceptance Corporation (UPAC) and its wholly owned subsidiary, UPAC of California, Inc.; and Small Business Loan Source LLC (SBLS LLC). All of the subsidiaries are wholly owned, except for SBLS LLC, which is 51.0% owned by First Bank and 49.0% owned by First Capital America, Inc. (FCA) as of December 31, 2006. Cash and Cash Equivalents. Cash, due from banks and short-term investments, which include federal funds sold and interest-bearing deposits, are considered to be cash and cash equivalents for purposes of the consolidated statements of cash flows. Federal funds sold were $152.2 million and $65.0 million at December 31, 2006 and 2005, respectively, and interest-bearing deposits were $1.4 million and $9.0 million at December 31, 2006 and 2005, respectively. First Bank is required to maintain certain daily reserve balances on hand in accordance with regulatory requirements. These reserve balances maintained in accordance with such requirements were $24.7 million and $24.3 million at December 31, 2006 and 2005, respectively. Investment Securities. The classification of investment securities as trading, available for sale or held to maturity is determined at the date of purchase. Investment securities designated as trading, which represent any security held for near term sale, are stated at fair value. Realized and unrealized gains and losses are included in noninterest income. Investment securities designated as available for sale, which represent any security that First Banks has no immediate plan to sell but which may be sold in the future under different circumstances, are stated at fair value. Realized gains and losses are included in noninterest income, based on the amortized cost of the individual security sold. Unrealized gains and losses, net of related income tax effects, are recorded in accumulated other comprehensive income. All previous fair value adjustments included in the separate component of accumulated other comprehensive income (loss) are reversed upon sale. Premiums and discounts incurred relative to the par value of securities purchased are amortized or accreted, respectively, on the level-yield method taking into consideration the level of current and anticipated prepayments. Investment securities designated as held to maturity, which represent any security that First Banks has the positive intent and ability to hold to maturity, are stated at cost, net of amortization of premiums and accretion of discounts computed on the level-yield method taking into consideration the level of current and anticipated prepayments. A decline in the market value of any available-for-sale or held-to-maturity investment security below its carrying value that is deemed to be other than temporary results in a reduction in the cost basis of the carrying value to fair value. The other-than-temporary impairment is charged to noninterest income and a new cost basis is established. When determining other-than-temporary impairment, consideration is given as to whether First Banks has the ability and intent to hold the investment security until a market price recovery and whether evidence indicating the carrying value of the investment security is recoverable outweighs evidence to the contrary. Loans Held for Portfolio. Loans held for portfolio are carried at cost, adjusted for amortization of premiums and accretion of discounts using the interest method. Interest and fees on loans are recognized as income using the interest method. Loan origination fees are deferred and accreted to interest income over the estimated life of the loans using the interest method. Loans held for portfolio are stated at cost as First Banks has the ability and it is management's intention to hold them to maturity. The accrual of interest on loans is discontinued when it appears that interest or principal may not be paid in a timely manner in the normal course of business or once principal or interest payments become 90 days past due under the contractual terms of the loan agreement. Generally, payments received on nonaccrual and impaired loans are recorded as principal reductions. Interest income is recognized after all delinquent principal has been repaid or an improvement in the condition of the loan has occurred that warrants resumption of interest accruals. A loan is considered impaired when it is probable that First Banks will be unable to collect all amounts due, both principal and interest, according to the contractual terms of the loan agreement. Loans on nonaccrual status are considered to be impaired loans. When measuring impairment, the expected future cash flows of an impaired loan are discounted at the loan's effective interest rate. Alternatively, impairment is measured by reference to an observable market price, if one exists, or the fair value of the collateral for a collateral-dependent loan. Regardless of the historical measurement method used, First Banks measures impairment based on the fair value of the collateral when foreclosure is probable. Additionally, impairment of a restructured loan is measured by discounting the total expected future cash flows at the loan's effective rate of interest as stated in the original loan agreement. Loans Held for Sale. Loans held for sale are comprised of residential mortgage loans held for sale in the secondary mortgage market, frequently in the form of a mortgage-backed security, U.S. Small Business Administration (SBA) loans awaiting sale of the guaranteed portion to the SBA, and commercial real estate loans which may be identified for sale to specific buyers to achieve credit or loan concentration objectives. Loans held for sale are carried at the lower of cost or market value, which is determined on an individual loan basis. Additionally, the carrying value of the residential mortgage loans held for sale also includes the cost of hedging the loans held for sale. The amount by which cost exceeds market value is recorded in a valuation allowance as a reduction of loans held for sale. Changes in the valuation allowance are reflected as part of the gain on loans sold and held for sale in the consolidated statements of income in the periods in which the changes occur. Gains or losses on the sale of loans held for sale are determined on a specific identification basis and reflect the difference between the value received upon sale and the carrying value of the loans held for sale, including the cost of hedging the residential mortgage loans held for sale. Loans held for sale transferred to loans held for portfolio or available-for-sale investment securities are transferred at fair value. Loan Servicing Income. Loan servicing income is included in noninterest income and represents fees earned for servicing real estate mortgage loans owned by investors and originated by First Bank's mortgage banking operation, as well as SBA loans to small business concerns that are originated by SBLS LLC, First Bank's majority-owned subsidiary that originates, sells and services SBA loans. These fees are net of federal agency guarantee fees, interest shortfall, amortization of loan servicing rights and impairment valuation allowances. Such fees are generally calculated on the outstanding principal balance of the loans serviced and are recorded as income when earned. Allowance for Loan Losses. The allowance for loan losses is maintained at a level considered adequate to provide for probable losses. The provision for loan losses is based on a monthly analysis of the loans held for portfolio, considering, among other factors, current economic conditions, loan portfolio composition, past loan loss experience, independent appraisals, loan collateral, payment experience and selected key financial ratios. Adjustments are reflected in the consolidated statements of income in the periods in which they become known. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the allowance for loan losses. Such agencies may require First Banks to modify its allowance for loan losses based on their judgment about information available to them at the time of their examination. Derivative Instruments and Hedging Activities. First Banks utilizes derivative instruments and hedging strategies to assist in the management of interest rate sensitivity and to modify the repricing, maturity and option characteristics of certain assets and liabilities. First Banks uses such derivative instruments solely to reduce its interest rate risk exposure. Derivative instruments are recorded in the consolidated balance sheets and measured at fair value. At inception of a derivative transaction, First Banks designates the derivative instrument as either a hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment (fair value hedges) or a hedge of a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability (cash flow hedges). For all hedging relationships, First Banks documents the hedging relationship and its risk-management objectives and strategy for entering into the hedging relationship including the hedging instrument, the hedged item(s), the nature of the risk being hedged, how the hedging instrument's effectiveness in offsetting the hedged risk will be assessed and a description of the method the Company will utilize to measure hedge ineffectiveness. This process also includes linking all derivative instruments that are designated as fair value hedges or cash flow hedges to the underlying assets and liabilities or to specific firm commitments or forecasted transactions. First Banks also assesses, both at the hedge's inception and on an ongoing basis, whether the derivative instruments that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of the hedged item(s). First Banks discontinues hedge accounting prospectively when it is determined that the derivative instrument is no longer effective in offsetting changes in the fair value or cash flows of the hedged item(s), the derivative instrument expires or is sold, terminated, or exercised, the derivative instrument is de-designated as a hedging instrument because it is unlikely that a forecasted transaction will occur, a hedged firm commitment no longer meets the definition of a firm commitment, or management determines that designation of the derivative instrument as a hedging transaction is no longer appropriate. A summary of First Banks' accounting policies for its derivative instruments and hedging activities is as follows: >> Interest Rate Swap Agreements - Cash Flow Hedges. Interest rate swap agreements designated as cash flow hedges are accounted for at fair value. The effective portion of the change in the cash flow hedge's gain or loss is initially reported as a component of other comprehensive income and subsequently reclassified into noninterest income when the underlying transaction affects earnings. The ineffective portion of the change in the cash flow hedge's gain or loss is recorded in noninterest income on each monthly measurement date. The net interest differential is recognized as an adjustment to interest income or interest expense of the related asset or liability being hedged. In the event of early termination, the net proceeds received or paid on the interest rate swap agreements are recognized immediately in noninterest income. >> Interest Rate Swap Agreements - Fair Value Hedges. Interest rate swap agreements designated as fair value hedges are accounted for at fair value. Changes in the fair value of the swap agreements are recognized currently in noninterest income. The change in the fair value of the underlying hedged item is recognized as an adjustment to the carrying amount of the underlying hedged item and is also reflected currently in noninterest income. All changes in fair value are measured on a monthly basis. The net interest differential is recognized as an adjustment to interest income or interest expense of the related asset or liability being hedged. In the event of early termination or ineffectiveness, the net proceeds received or paid on the interest rate swap agreements are recognized immediately in noninterest income and the future net interest differential, if any, is recognized prospectively in noninterest income. The cumulative change in the fair value of the underlying hedged item is deferred and amortized or accreted to interest income or interest expense over the weighted average life of the related asset or liability. If, however, the underlying hedged item is repaid, the cumulative change in the fair value of the underlying hedged item is recognized immediately in noninterest income. >> Interest Rate Cap and Floor Agreements. Interest rate cap and floor agreements are accounted for at fair value. Changes in the fair value of interest rate cap and floor agreements are recognized in noninterest income on each monthly measurement date. >> Interest Rate Lock Commitments. Commitments to originate loans for subsequent sale in the secondary market (interest rate lock commitments), which primarily consist of commitments to originate fixed rate residential mortgage loans, are recorded at fair value. Changes in the fair value are recognized in noninterest income on a monthly basis. >> Forward Commitments to Sell Mortgage-Backed Securities. Forward commitments to sell mortgage-backed securities are recorded at fair value. Changes in the fair value of forward commitments to sell mortgage-backed securities are recognized in noninterest income on a monthly basis. Bank Premises and Equipment, Net. Bank premises and equipment are carried at cost less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets. Amortization of leasehold improvements is calculated using the straight-line method over the shorter of the useful life of the related asset or the term of the lease. Bank premises and improvements are depreciated over five to 40 years and equipment is depreciated over three to seven years. Goodwill and Other Intangible Assets. Goodwill and other intangible assets consist of goodwill, core deposit intangibles and customer list intangibles. Goodwill and intangible assets with indefinite useful lives are not amortized, but instead tested for impairment at least annually. Intangible assets with definite useful lives are amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 144. First Banks amortizes, on a straight-line basis, its core deposit intangibles, customer list intangibles and goodwill associated with transactions structured as purchases of certain assets and assumption of selected liabilities (P&A Transactions). Core deposit intangibles are amortized over the estimated periods to be benefited, which has been estimated at five to seven years, and customer list intangibles are amortized over the estimated periods to be benefited, which has been estimated at seven to 16 years. Goodwill associated with P&A Transactions is amortized over the estimated periods to be benefited, which has been estimated to be 15 years. Goodwill associated with stock purchases is not amortized, but instead, is tested annually for impairment in accordance with First Banks' existing methods of measuring and recording impairment losses, as described below. First Banks reviews intangible assets for impairment whenever events or changes in circumstances indicate the carrying value of an underlying asset may not be recoverable. First Banks measures recoverability based upon the future cash flows expected to result from the use of the underlying asset and its eventual disposition. If the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying value of the underlying asset, First Banks recognizes an impairment loss. The impairment loss recognized represents the amount by which the carrying value of the underlying asset exceeds the fair value of the underlying asset. If an asset being tested for recoverability was acquired in a business combination accounted for using the purchase method, goodwill that arose in the transaction is included as part of the asset grouping in determining recoverability. If some but not all of the assets acquired in that transaction are being tested, goodwill is allocated to the assets being tested for recoverability on a pro rata basis using the relative fair values of the long-lived assets and identifiable intangibles acquired at the acquisition dates. In instances where goodwill is identified with assets that are subject to an impairment loss, the carrying amount of the identified goodwill is eliminated before reducing the carrying amounts of impaired long-lived assets and identifiable intangibles. As such adjustments become necessary, they are reflected in the consolidated statements of income in the periods in which they become known. Mortgage Servicing Rights. Mortgage servicing rights are capitalized by allocating the total cost of the mortgage loans to mortgage servicing rights and the loans (without mortgage servicing rights) based on the relative fair values of the two components. Upon capitalizing the mortgage servicing rights, they are amortized, in proportion to the related estimated net servicing income on a basis that approximates the disaggregated, discounted basis, over the expected lives of the related loans, which is approximately five to seven years. The weighted average amortization period of mortgage servicing rights is approximately five years. The value of mortgage servicing rights is adversely affected when mortgage interest rates decline which normally causes mortgage loan prepayments to increase. When loans are prepaid or refinanced, the related unamortized balance of the mortgage servicing rights is charged to amortization expense. The determination of the fair value of the mortgage servicing rights is performed quarterly based upon an independent third party valuation. Based on these analyses, a comparison of the fair value of the mortgage servicing rights with the carrying value of the mortgage servicing rights is made, with impairment, if any, recognized at that time. The impairment analyses are prepared using stratifications of the mortgage servicing rights based on the predominant risk characteristics of the underlying mortgage loans, including size, interest rate, weighted average original term, weighted average remaining term and estimated prepayment speeds. As part of these analyses, the fair value of the mortgage servicing rights for each stratum is compared to the carrying value of the mortgage servicing rights for each stratum. To the extent the carrying value of the mortgage servicing rights exceeds the fair value of the mortgage servicing rights for a stratum, First Banks recognizes impairment equal to the amount by which the carrying value of the mortgage servicing rights for a stratum exceeds the fair value. Impairment is recognized through a valuation allowance that is recorded as a reduction of mortgage servicing rights. The valuation allowance may be reversed based upon subsequent improvement in the fair value of a stratum; however, First Banks does not recognize fair value of the mortgage servicing rights in excess of the carrying value of mortgage servicing rights for any stratum. Changes in the valuation allowance are reflected in the consolidated statements of income in the periods in which the change occurs. SBA Servicing Rights. SBA servicing rights are capitalized by allocating the total cost of the SBA loans to servicing rights and the loans (without servicing rights) based on the relative fair values of the two components. The fair value of servicing rights is computed using the present value of the estimated future servicing income in excess of such income estimated at a normal servicing fee rate. The servicing rights, net of the valuation allowance, are amortized in proportion to, and over the period of, the estimated net servicing revenue of the underlying SBA loans, which range from seven to 25 years. The weighted average amortization period of the SBA servicing rights is approximately 18 years. The determination of the fair value of the SBA servicing rights is performed monthly based upon quarterly independent third party valuation analyses. Based on these analyses, a comparison of the fair value of the SBA servicing rights with the carrying value of the SBA servicing rights is made, with impairment, if any, recognized at that time. The predominant risk characteristics of the underlying SBA loans used to stratify SBA servicing rights for purposes of measuring impairment include size, interest rate, weighted average original term, weighted average remaining term and estimated prepayment speeds. To the extent the carrying value of the SBA servicing rights exceeds the fair value of the SBA servicing rights, First Banks recognizes impairment equal to the amount by which the carrying value of the SBA servicing rights exceeds the fair value. Impairment is recognized through a valuation allowance that is recorded as a reduction of SBA servicing rights. Changes in the valuation allowance are reflected in the consolidated statements of income in the periods in which the change occurs. First Banks does not recognize fair value of the SBA servicing rights in excess of the carrying value of SBA servicing rights for any stratum. Other Real Estate. Other real estate, consisting of real estate acquired through foreclosure or deed in lieu of foreclosure, is stated at the lower of cost or fair value less applicable selling costs. The excess of cost over fair value of the property at the date of acquisition is charged to the allowance for loan losses. Subsequent reductions in carrying value, to reflect current fair value or costs incurred in maintaining the properties, are charged to expense as incurred. Other real estate was $6.4 million and $2.0 million at December 31, 2006 and 2005, respectively. Income Taxes. Deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in the tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. First Banks, Inc. and its eligible subsidiaries file a consolidated federal income tax return and unitary or consolidated state income tax returns in all applicable states. Financial Instruments With Off-Balance Sheet Risk. A financial instrument is defined as cash, evidence of an ownership interest in an entity, or a contract that conveys or imposes on an entity the contractual right or obligation to either receive or deliver cash or another financial instrument. First Banks utilizes financial instruments to reduce the interest rate risk arising from its financial assets and liabilities. These instruments involve, in varying degrees, elements of interest rate risk and credit risk in excess of the amount recognized in the consolidated balance sheets. "Interest rate risk" is defined as the possibility that interest rates may move unfavorably from the perspective of First Banks due to maturity and/or interest rate adjustment timing differences between interest-earning assets and interest-bearing liabilities. The risk that a counterparty to an agreement entered into by First Banks may default is defined as "credit risk." First Banks is a party to commitments to extend credit and commercial and standby letters of credit in the normal course of business to meet the financing needs of its customers. These commitments involve, in varying degrees, elements of interest rate risk and credit risk in excess of the amount reflected in the consolidated balance sheets. Earnings Per Common Share. Basic earnings per common share (EPS) are computed by dividing the income available to common stockholders (the numerator) by the weighted average number of shares of common stock outstanding (the denominator) during the year. The computation of dilutive EPS is similar except the denominator is increased to include the number of additional shares of common stock that would have been outstanding if the dilutive potential shares had been issued. In addition, in computing the dilutive effect of convertible securities, the numerator is adjusted to add back any convertible preferred dividends. (2) ACQUISITIONS AND INTEGRATION COSTS Completed Acquisitions. During the three years ended December 31, 2006, First Banks completed the following acquisitions:
Goodwill Total Purchase and Other Entity Date Assets Price Intangibles ------ ---- ------ ----- ----------- (dollars expressed in thousands) 2006 ---- MidAmerica National Bank Peoria and Bloomington, Illinois Branch Offices (1) November 10, 2006 $ 158,300 -- 2,400 First Bank of Beverly Hills Beverly Hills, California Branch Office (1) November 3, 2006 157,500 -- 8,700 TeamCo, Inc. Oak Lawn, Illinois August 31, 2006 67,900 13,900 9,600 San Diego Community Bank Chula Vista, California August 15, 2006 91,700 25,500 11,800 Universal Premium Acceptance Corporation (2) Lenexa, Kansas May 31, 2006 152,800 52,700 44,700 First Independent National Bank Plano, Texas May 1, 2006 68,200 19,200 11,800 Pittsfield Community Bancorp, Inc. Pittsfield, Illinois April 28, 2006 17,600 5,100 1,300 Adrian N. Baker & Company Clayton, Missouri March 31, 2006 3,000 7,400 8,000 Dallas National Bank Richardson, Texas Branch Office (1) January 20, 2006 1,100 -- -- First National Bank of Sachse Sachse, Texas January 3, 2006 76,200 20,800 12,400 ---------- -------- -------- $ 794,300 144,600 110,700 ========== ======== ======== 2005 ---- Northway State Bank Grayslake, Illinois October 31, 2005 $ 50,400 10,300 5,400 International Bank of California Los Angeles, California September 30, 2005 151,600 33,700 15,800 Bank and Trust Company Roodhouse, Illinois Branch Office (1) September 23, 2005 5,000 -- 100 FBA Bancorp, Inc. Chicago, Illinois April 29, 2005 73,300 10,500 4,500 ---------- -------- -------- $ 280,300 54,500 25,800 ========== ======== ======== 2004 ---- Hillside Investors, Ltd. Hillside, Illinois November 30, 2004 $1,196,700 67,400 10,600 Small Business Loan Source, Inc. Houston, Texas August 31, 2004 47,100 45,600 5,900 Continental Mortgage Corporation - Delaware (3) Aurora, Illinois July 30, 2004 140,700 4,200 2,100 ---------- -------- -------- $1,384,500 117,200 18,600 ========== ======== ======== --------------- (1) First Bank acquired the branch offices through a purchase of certain assets and assumption of certain liabilities of the branch offices. Total assets consisted of cash received upon assumption of the deposit liabilities and loans. (2) In conjunction with the acquisition of UPAC, First Bank repaid in full the outstanding senior and subordinated notes of UPAC, including accumulated accrued and unpaid interest, totaling $125.9 million. (3) In conjunction with the acquisition of Continental Mortgage Corporation- Delaware (CMC), First Banks redeemed in full all of the outstanding subordinated promissory notes of CMC, including accumulated accrued and unpaid interest, totaling $4.5 million in aggregate.
Goodwill and other intangible assets associated with the acquisitions included in the table above are not deductible for tax purposes, with the exception of P&A Transactions and the goodwill associated with the purchase of assets and assumption of liabilities of Small Business Loan Source, Inc. (SBLS). For 2006, 2005 and 2004 acquisitions, goodwill and other intangible assets in the amounts of $110.7 million, $25.8 million and $18.6 million, respectively, were assigned to First Bank. The consolidated financial statements include the financial position and results of operations of the aforementioned transactions for the periods subsequent to the respective acquisition dates, and the assets acquired and liabilities assumed were recorded at their estimated fair value on the acquisition dates. These fair value adjustments for the acquisitions completed in 2006 represent current estimates and are subject to further adjustments as the valuation data is finalized. The aforementioned acquisitions were funded from available cash reserves, borrowings under First Banks' term loan and revolving credit agreements, and/or proceeds from the issuance of subordinated debentures. On July 30, 2004, First Banks completed its acquisition of CMC and its wholly owned banking subsidiary, Continental Community Bank and Trust Company (CCB) for $4.2 million in cash, and redeemed in full all of the outstanding subordinated promissory notes of CMC, including accumulated accrued and unpaid interest, totaling $4.5 million in aggregate. The acquisition served to expand First Banks' banking franchise in Chicago, Illinois. The transaction was funded through internally generated funds. CMC, through CCB, operated two banking offices in the Chicago suburban communities of Aurora and Villa Park. At the time of the transaction, CMC had assets of $140.7 million, loans, net of unearned discount, of $73.6 million and deposits of $104.6 million. Preliminary goodwill of $1.5 million was subsequently adjusted to $100,000 during the third quarter of 2005, and the core deposit intangibles, which are being amortized over seven years utilizing the straight-line method, were $2.0 million. CMC was merged with and into SFC and CCB was merged with and into First Bank at the time of the acquisition. On August 31, 2004, SBLS LLC, a Nevada-based limited liability company and subsidiary of First Bank, purchased substantially all of the assets and assumed certain liabilities of SBLS, headquartered in Houston, Texas, in exchange for cash and certain payments contingent on future valuations of specifically identified assets, including servicing assets and retained interests in securitizations, as further described in Note 24 to the Consolidated Financial Statements. The transaction was funded through internally generated funds. At the time of the transaction, SBLS LLC purchased from SBLS assets of $47.1 million, including $24.0 million of SBA loans, net of unearned discount, and $15.1 million of SBA servicing rights, and assumed $1.5 million of liabilities, resulting in a net cash payment of $45.6 million. Goodwill was $5.9 million. In conjunction with this transaction, on August 30, 2004, First Bank granted to FCA, a corporation owned by First Banks' Chairman and members of his immediate family, an option to purchase Membership Interests of SBLS LLC. FCA exercised this option on June 30, 2005 and paid First Bank $7.4 million in cash. As a result of this transaction, SBLS LLC became 51.0% owned by First Bank and 49.0% owned by FCA, and accordingly, effective June 30, 2005, FCA's ownership interest is recognized as minority interest in subsidiary in the consolidated balance sheets and, beginning July 1, 2005, the related minority interest in income or loss of subsidiary is recognized in the consolidated statements of income. On November 30, 2004, First Banks completed its acquisition of Hillside Investors, Ltd. (Hillside) and its wholly owned banking subsidiary, CIB Bank (collectively, CIB Bank), headquartered in Hillside, Illinois, for approximately $67.4 million in cash. The acquisition served to significantly expand First Banks' banking franchise in Chicago, Illinois. The transaction was funded through the issuance of subordinated debentures associated with two private placements of $60.0 million in aggregate of trust preferred securities through newly formed affiliated statutory trusts, as further described in Note 12 to the Consolidated Financial Statements. The acquisition was also funded through borrowings under the Company's revolving line of credit with a group of unaffiliated financial institutions. CIB Bank operated 16 banking offices in the Chicago, Illinois metropolitan area, including ten offices in Cook County, three offices in Lake County, two offices in Will County and one office in DuPage County. At the time of the transaction, CIB Bank had assets of $1.20 billion, loans, net of unearned discount, of $683.3 million, investment securities of $393.2 million and deposits of $1.10 billion. Preliminary goodwill was $4.3 million and the core deposit intangibles, which are being amortized over seven years utilizing the straight-line method, were $13.4 million. As further described below, goodwill and core deposit intangibles were subsequently adjusted during the first quarter of 2005. Hillside was merged with and into SFC and CIB Bank was merged with and into First Bank on December 1, 2004. During the first quarter of 2005, First Banks recorded certain acquisition-related adjustments pertaining to its acquisition of CIB Bank. Acquisition-related adjustments included additional purchase accounting adjustments necessary to appropriately adjust the preliminary goodwill of $4.3 million recorded at the time of the acquisition, which was based upon current estimates available at that time, to reflect the receipt of additional valuation data. The aggregate adjustments resulted in a purchase price reallocation among goodwill, core deposit intangibles and bank premises and equipment. The purchase price reallocation resulted in the reallocation of $3.1 million of negative goodwill to core deposit intangibles and bank premises and equipment, thereby reducing such assets by $2.8 million and $2.4 million, net of the related tax effect of $1.1 million and $941,000, respectively. Following the recognition of the acquisition-related adjustments, goodwill recorded was reduced from $4.3 million to zero and the core deposit intangibles, which are being amortized over seven years utilizing the straight-line method, were reduced from $13.4 million to $10.6 million, net of the related tax effect. The individual components of the $4.3 million acquisition-related adjustments to goodwill and the $3.1 million purchase price reallocation recorded in the first quarter of 2005 are summarized as follows: >> a $1.6 million increase in goodwill to adjust time deposits, net of the related tax effect, to their estimated fair value; >> a $967,000 increase in goodwill to adjust other real estate owned, net of the related tax effect, to its estimated fair value; >> a $10.0 million reduction in goodwill to adjust loans held for sale, net of the related tax effect, to their estimated fair value. These adjustments were based upon the receipt of loan payoffs and significantly higher sales prices received over the original third-party bid estimates, for certain loans held for sale. All of the acquired nonperforming loans that had been held for sale as of December 31, 2004 had either been sold or repaid as of March 31, 2005, with the exception of one credit relationship, which was subsequently sold in April 2005; >> a $1.7 million increase in goodwill, net of the related tax effect, and a related decrease in core deposit intangibles of $2.8 million, resulting from the purchase price reallocation; and >> a $1.4 million increase in goodwill, net of the related tax effect, and a related decrease in bank premises and equipment of $2.4 million, resulting from the purchase price reallocation. On April 29, 2005, First Banks completed its acquisition of FBA Bancorp, Inc. (FBA) and its wholly owned subsidiary, First Bank of the Americas, S.S.B. (FBOTA), for $10.5 million in cash. The acquisition served to expand First Banks' banking franchise in Chicago, Illinois. The transaction was funded through internally generated funds. FBA was headquartered in Chicago, Illinois, and through FBOTA, operated three banking offices in the southwestern Chicago metropolitan communities of Back of the Yards, Little Village and Cicero. At the time of the acquisition, FBA had assets of $73.3 million, loans, net of unearned discount, of $54.3 million and deposits of $55.7 million. Goodwill was $2.8 million, and the core deposit intangibles, which are being amortized over seven years utilizing the straight-line method, were $1.7 million. FBA was merged with and into SFC, and FBOTA was merged with and into First Bank at the time of the acquisition. On September 23, 2005, First Bank completed its acquisition of certain assets and assumption of the deposit liabilities of the Roodhouse, Illinois branch office of Bank and Trust Company, an Illinois commercial bank (Roodhouse Branch). At the time of the transaction, the Roodhouse Branch had deposit liabilities of $5.1 million. Total assets consisted primarily of cash received upon assumption of the deposit liabilities. The core deposit intangibles, which are being amortized over seven years utilizing the straight-line method, were $100,000. On September 30, 2005, First Banks completed its acquisition of International Bank of California (IBOC) for $33.7 million in cash. The acquisition served to further expand First Banks' banking franchise in Southern California, providing five additional banking offices in Los Angeles, California, including one branch in downtown Los Angeles and four branches in eastern Los Angeles County, in Alhambra, Arcadia, Artesia and Rowland Heights. The transaction was funded with a portion of the proceeds of First Banks' $100.0 million term loan, as further described in Note 11 to the Consolidated Financial Statements. At the time of the acquisition, IBOC had assets of $151.6 million, loans, net of unearned discount, of $113.5 million and deposits of $132.1 million. Goodwill was $12.0 million, and the core deposit intangibles, which are being amortized over seven years utilizing the straight-line method, were $3.8 million. IBOC was merged with and into First Bank at the time of the acquisition. On October 31, 2005, First Banks completed its acquisition of Northway State Bank (NSB) for $10.3 million in cash. The acquisition served to expand First Banks' banking franchise in Chicago, Illinois. The transaction was funded through internally generated funds. NSB was headquartered in Grayslake, Illinois, and operated one banking office in Lake County in the northern Chicago metropolitan area. At the time of the acquisition, NSB had assets of $50.4 million, loans, net of unearned discount, of $41.8 million and deposits of $45.2 million. Preliminary goodwill of $3.8 million was subsequently adjusted to $4.5 million during the third quarter of 2006, and the core deposit intangibles, which are being amortized over seven years utilizing the straight-line method, were $909,000. NSB was merged with and into First Bank at the time of the acquisition. On January 3, 2006, First Banks acquired the majority of the outstanding common stock of First National Bank of Sachse (FNBS), and subsequently acquired the remaining outstanding common stock of FNBS in January 2006, for $20.8 million in cash, in aggregate. FNBS was headquartered and operated one banking office in Sachse, Texas, located in the northeast Dallas metropolitan area. The acquisition served to expand First Banks' banking franchise in Texas. The transaction was funded through internally generated funds. At the time of the acquisition, FNBS had assets of $76.2 million, loans, net of unearned discount, of $49.3 million, deposits of $66.2 million and stockholders' equity of $9.9 million. Goodwill was $8.8 million, and the core deposit intangibles, which are being amortized over five years utilizing the straight-line method, were $3.6 million. FNBS was merged with and into First Bank on January 24, 2006. On January 20, 2006, First Bank completed its acquisition of the branch office of Dallas National Bank in Richardson, Texas (Richardson Branch). At the time of the acquisition, the Richardson Branch had assets of $1.1 million, including loans, net of unearned discount, of $144,000, and deposits of $1.1 million. Total assets consisted primarily of loans, fixed assets and cash received upon assumption of deposit liabilities and certain assets. On March 31, 2006, First Bank completed its acquisition of Adrian Baker for $7.4 million in cash and certain payments contingent on the future earnings of Adrian Baker for each of the years in the three-year period following the closing date of the transaction. Adrian Baker is an insurance brokerage agency based in Clayton, Missouri that provides a comprehensive range of employee benefit and commercial and personal insurance services on a nationwide basis. The acquisition served to diversify First Banks' products and services in this specialized industry. The transaction was funded through internally generated funds. At the time of the acquisition, Adrian Baker had assets of $3.0 million and stockholders' equity of $810,000. Goodwill was $4.3 million, and the customer list intangibles, which are being amortized over 15 years utilizing the straight-line method, were $3.7 million. Adrian Baker operates as a wholly owned subsidiary of First Bank. On April 28, 2006, First Banks completed its acquisition of Pittsfield Community Bancorp, Inc. and its wholly owned banking subsidiary, Community Bank of Pittsfield (collectively, Community Bank) for $5.1 million in cash. Community Bank was headquartered in Pittsfield, Illinois and operated two banking offices, one in Pittsfield, Illinois, and one in Mount Sterling, Illinois. On June 16, 2006, First Bank completed its sale of the Mount Sterling office to Beardstown Savings, s.b. The acquisition served to expand First Banks' banking franchise in Pittsfield, Illinois. The transaction was funded through internally generated funds. At the time of the acquisition, after giving effect to the sale of the Mount Sterling office, Community Bank had assets of $17.6 million, loans, net of unearned discount, of $11.1 million, deposits of $12.3 million and stockholder's equity of $3.9 million. Goodwill was $807,000, and the core deposit intangibles, which are being amortized over five years utilizing the straight-line method, were $517,000. Community Bank was merged with and into First Bank at the time of the acquisition. On May 1, 2006, First Banks acquired the majority of the outstanding common stock of First Independent National Bank (FINB), and subsequently acquired the remaining outstanding common stock in May 2006, for $19.2 million in cash, in aggregate. FINB was headquartered in Plano, Texas and operated two banking offices in Plano, Texas, located in Collin County. In addition, at the time of the acquisition, FINB was in the process of opening a de novo branch banking office located in the Preston Forest Shopping Center in Dallas County, which subsequently opened on June 26, 2006. The acquisition served to expand First Banks' banking franchise in Texas. The transaction was funded through internally generated funds and the issuance of subordinated debentures associated with a private placement of $40.0 million of trust preferred securities through a newly formed affiliated statutory trust, as further described in Note 12 to the Consolidated Financial Statements. At the time of the acquisition, FINB had assets of $68.2 million, loans, net of unearned discount, of $59.6 million, deposits of $55.5 million and stockholders' equity of $7.3 million. Goodwill was $9.3 million, and the core deposit intangibles, which are being amortized over five years utilizing the straight-line method, were $2.5 million. FINB was merged with and into First Bank on May 16, 2006. On May 31, 2006, First Bank completed its acquisition of KIF, Inc., an Iowa corporation, and its wholly owned subsidiaries, UPAC, a Missouri corporation, and UPAC of California, Inc., a California corporation (collectively, UPAC), for $52.7 million in cash. In conjunction with the acquisition of UPAC, First Banks repaid in full the outstanding senior and subordinated notes of UPAC, which totaled $125.9 million at the time of the acquisition. UPAC is an insurance premium financing company headquartered in the Kansas City suburb of Lenexa, Kansas and operates in 49 states. The acquisition served to diversify First Banks' products and services in this highly-specialized industry. The transaction was funded through internally generated funds and a $52.0 million short-term Federal Home Loan Bank (FHLB) advance. At the time of the acquisition, UPAC had assets of $152.8 million, loans, net of unearned discount, of $149.2 million and stockholders' equity of $18.3 million. Goodwill was $25.4 million, and the customer list intangibles, which are being amortized over 16 years utilizing the straight-line method, were $19.3 million. KIF, Inc. was merged with and into UPAC on June 30, 2006. UPAC of California, Inc. operates as a wholly owned subsidiary of UPAC, which operates as a wholly owned subsidiary of First Bank. On August 15, 2006, First Banks completed its acquisition of San Diego Community Bank (SDCB) for $25.5 million in cash. SDCB was headquartered in Chula Vista, California, which is located approximately ten miles south of downtown San Diego, and operated two other banking offices in Kearney Mesa and Otay Mesa. The acquisition served to expand First Banks' banking franchise in southern California. The transaction was funded through internally generated funds and the issuance of subordinated debentures associated with the private placement of $20.0 million of trust preferred securities through a newly formed affiliated statutory trust, as further described in Note 12 to the Consolidated Financial Statements. At the time of the acquisition, SDCB had assets of $91.7 million, loans, net of unearned discount, of $78.6 million, deposits of $76.1 million and stockholders' equity of $12.3 million. Goodwill was $7.5 million, and the core deposit intangibles, which are being amortized over five years utilizing the straight-line method, were $4.3 million. SDCB was merged with and into First Bank at the time of the acquisition. On August 31, 2006, First Banks completed its acquisition of TeamCo, Inc. and its wholly owned banking subsidiary, Oak Lawn Bank (collectively, Oak Lawn) for $13.9 million in cash. Oak Lawn was headquartered in Oak Lawn, Illinois, which is located approximately 15 miles southwest of the Chicago Loop in Chicago Southland, and operated a second banking office in Orland Park, Illinois, which is located approximately 39 miles southwest of downtown Chicago. The acquisition served to expand First Banks' banking franchise in Chicago, Illinois. The transaction was funded through internally generated funds and the issuance of subordinated debentures associated with the private placement of $25.0 million of trust preferred securities through a newly formed affiliated statutory trust, as further described in Note 12 to the Consolidated Financial Statements. At the time of the acquisition, Oak Lawn had assets of $67.9 million, loans, net of unearned discount, of $43.1 million, deposits of $60.1 million and stockholders' equity of $5.5 million. Goodwill was $7.3 million, and the core deposit intangibles, which are being amortized over five years utilizing the straight-line method, were $2.3 million. Oak Lawn was merged with and into First Bank at the time of the acquisition. On November 3, 2006, First Bank completed its acquisition of the First Bank of Beverly Hills' banking office located in Beverly Hills, California (Beverly Drive Office). At the time of the acquisition, the Beverly Drive Office had assets of $157.5 million and deposits of $156.1 million. Total assets consisted primarily of cash received upon assumption of deposit liabilities and certain assets. The core deposit intangibles, which are being amortized over five years utilizing the straight-line method, were $8.7 million. On November 10, 2006, First Bank completed its acquisition of MidAmerica National Bank's three banking offices located in Peoria and Bloomington, Illinois (collectively, MidAmerica Offices). At the time of the acquisition, the MidAmerica Offices had, on a combined basis, assets of $158.3 million including loans, net of unearned discount, of $154.1 million, and deposits of $48.2 million. The core deposit intangibles, which are being amortized over five years utilizing the straight-line method, were $2.4 million. Pending Acquisitions. On November 7, 2006, First Banks entered into an Agreement and Plan of Reorganization providing for the acquisition of Royal Oaks Bancshares, Inc. and its wholly owned banking subsidiary, Royal Oaks Bank, ssb (collectively, Royal Oaks). Royal Oaks was headquartered in Houston, Texas and operated five banking offices in the Houston area. In addition, at the time of the acquisition, Royal Oaks was in the process of opening a de novo branch banking office located in the Heights, near downtown Houston, which is expected to be completed in the second quarter of 2007. As further described in Note 25 to the Consolidated Financial Statements, First Banks completed its acquisition of Royal Oaks on February 28, 2007. Acquisition and Integration Costs. First Banks accrues certain costs associated with its acquisitions as of the respective consummation dates. The accrued costs relate to adjustments to the staffing levels of the acquired entities or to the anticipated termination of information technology or item processing contracts of the acquired entities prior to their stated contractual expiration dates. The most significant costs that First Banks incurs relate to salary continuation agreements, or other similar agreements, of executive management and certain other employees of the acquired entities that were in place prior to the acquisition dates. These agreements provide for payments over periods generally ranging from two to 15 years and are triggered as a result of the change in control of the acquired entity. Other severance benefits for employees that are terminated in conjunction with the integration of the acquired entities into First Banks' existing operations are normally paid to the recipients within 90 days of the respective consummation date and are expensed in the consolidated statements of income as incurred. The accrued severance balance of $386,000 as of December 31, 2006, as summarized in the following table, is comprised of contractual obligations under salary continuation agreements to seven individuals with remaining terms ranging from approximately two months to nine years. As the obligation to make payments under these agreements is accrued at the consummation date, such payments do not have any impact on the consolidated statements of income. First Banks also incurs integration costs associated with acquisitions that are expensed in the consolidated statements of income. These costs relate principally to additional costs incurred in conjunction with the information technology conversions of the respective entities. The following table summarizes the cumulative acquisition and integration costs attributable to the Company's acquisitions, which were accrued as of the consummation dates of the respective acquisition and are reflected in accrued and other liabilities in the consolidated balance sheets:
Information Severance Technology Fees Total --------- --------------- ----- (dollars expressed in thousands) Balance at December 31, 2003......................... $ 1,412 -- 1,412 Year Ended December 31, 2004: Amounts accrued at acquisition date................ 180 496 676 Payments........................................... (831) (496) (1,327) ------- ------- ------- Balance at December 31, 2004......................... 761 -- 761 ------- ------- ------- Year Ended December 31, 2005: Amounts accrued at acquisition date................ 785 1,265 2,050 Payments........................................... (1,004) (1,131) (2,135) ------- ------- ------- Balance at December 31, 2005......................... 542 134 676 ------- ------- ------- Year Ended December 31, 2006: Amounts accrued at acquisition date................ 1,702 1,949 3,651 Payments........................................... (1,858) (2,083) (3,941) ------- ------- ------- Balance at December 31, 2006......................... $ 386 -- 386 ======= ======= =======
(3) INVESTMENTS IN DEBT AND EQUITY SECURITIES Securities Available for Sale. The amortized cost, contractual maturity, gross unrealized gains and losses and fair value of investment securities available for sale at December 31, 2006 and 2005 were as follows:
Maturity ---------------------------------- Total Gross After Amor- Unrealized Weighted 1 Year 1-5 5-10 10 tized ------------------ Fair Average or Less Years Years Years Cost Gains Losses Value Yield ------- ----- ----- ----- ---- ----- ------ ----- ----- (dollars expressed in thousands) December 31, 2006: Carrying value: U.S. Government sponsored agencies..................... $344,636 29,737 4,032 966 379,371 81 (742) 378,710 4.99% Mortgage-backed securities..... 438 11,477 50,670 839,172 901,757 610 (19,514) 882,853 4.76 State and political subdivisions................. 4,102 16,294 11,493 2,122 34,011 260 (56) 34,215 3.90 Equity investments ............ -- -- -- 26,608 26,608 1,527 (234) 27,901 4.06 Federal Home Loan Bank and Federal Reserve Bank stock (no stated maturity)......... 36,050 -- -- -- 36,050 -- -- 36,050 5.49 -------- ------- ------ ------- --------- ------ ------- --------- Total..................... $385,226 57,508 66,195 868,868 1,377,797 2,478 (20,546) 1,359,729 4.81 ======== ======= ====== ======= ========= ====== ======= ========= ==== Fair value: Debt securities................ $348,448 57,480 65,580 824,270 Equity securities.............. 36,050 -- -- 27,901 -------- ------- ------ ------- Total..................... $384,498 57,480 65,580 852,171 ======== ======= ====== ======= Weighted average yield........... 5.01% 4.69% 4.57% 4.75% ======== ======= ====== ======= December 31, 2005: Carrying value: U.S. Government sponsored agencies..................... $212,869 181,800 4,400 -- 399,069 -- (4,725) 394,344 3.32% Mortgage-backed securities..... 281 9,899 52,121 783,831 846,132 149 (22,156) 824,125 4.60 State and political subdivisions................. 5,574 17,242 8,864 710 32,390 293 (109) 32,574 3.79 Corporate debt securities...... 7,721 -- -- -- 7,721 -- (15) 7,706 4.58 Equity investments............. 156 -- -- 16,995 17,151 961 -- 18,112 4.64 Federal Home Loan Bank and Federal Reserve Bank stock (no stated maturity)......... 34,428 -- -- -- 34,428 -- -- 34,428 4.87 -------- ------- ------ ------- --------- ------ ------- --------- Total..................... $261,029 208,941 65,385 801,536 1,336,891 1,403 (27,005) 1,311,289 4.21 ======== ======= ====== ======= ========= ====== ======= ========= ==== Fair value: Debt securities................ $224,429 206,076 64,207 764,037 Equity securities.............. 34,584 -- -- 17,956 -------- ------- ------ ------- Total........................ $259,013 206,076 64,207 781,993 ======== ======= ====== ======= Weighted average yield........... 3.27% 3.72% 4.33% 4.62% ======== ======= ====== =======
Securities Held to Maturity. The amortized cost, contractual maturity, gross unrealized gains and losses and fair value of investment securities held to maturity at December 31, 2006 and 2005 were as follows: Maturity ------------------------------------ Total Gross After Amor- Unrealized Weighted 1 Year 1-5 5-10 10 tized -------------------- Fair Average or Less Years Years Years Cost Gains Losses Value Yield ------- ----- ----- ----- ---- ----- ------ ----- ----- (dollars expressed in thousands) December 31, 2006: Carrying value: Mortgage-backed securities..... $ -- -- 6,875 7,213 14,088 7 (132) 13,963 5.13% State and political subdivisions................. 1,482 6,861 1,355 263 9,961 97 (50) 10,008 4.18 -------- ------ ------ ------ ------ ---- ---- ------ Total..................... $ 1,482 6,861 8,230 7,476 24,049 104 (182) 23,971 4.74 ======== ====== ====== ====== ====== ==== ==== ====== ==== Fair value: Debt securities................ $ 1,479 6,848 8,278 7,366 ======== ====== ====== ====== Weighted average yield........... 3.84% 4.21% 5.02% 5.07% ======== ====== ====== ====== December 31, 2005: Carrying value: Mortgage-backed securities..... $ -- -- 6,970 8,495 15,465 9 (321) 15,153 5.09% State and political subdivisions................. 1,350 8,331 695 264 10,640 67 (69) 10,638 4.20 -------- ------ ------ ------ ------ ---- ---- ------ Total..................... $ 1,350 8,331 7,665 8,759 26,105 76 (390) 25,791 4.73 ======== ====== ====== ====== ====== ==== ==== ====== ==== Fair value: Debt securities................ $ 1,355 8,328 7,509 8,599 ======== ====== ====== ====== Weighted average yield........... 4.40% 4.20% 5.03% 5.02% ======== ====== ====== ======
Proceeds from sales of available-for-sale investment securities were $198.0 million, $147.1 million and $26.3 million for the years ended December 31, 2006, 2005 and 2004, respectively. Gross gains of $389,300 and $257,100 were realized on sales of available-for-sale investment securities for the years ended December 31, 2006 and 2004, respectively. There were no gross gains on the sale of these securities during the year ended December 31, 2005. Gross losses of $2.7 million and $2.9 million were realized on sales of available-for-sale investment securities during the years ended December 31, 2006 and 2005, respectively. The gross losses for the year ended December 31, 2006 include a loss of $2.7 million that resulted from the sale of $197.0 million of available-for-sale investment securities for liquidity purposes, including the related termination of $200.0 million in aggregate of term repurchase agreements, as further described in Note 5 and Note 10 to the Consolidated Financial Statements. The gross loss of $2.9 million for the year ended December 31, 2005 resulted from the sale of $150.0 million of available-for-sale investment securities for liquidity purposes, including the related termination of a $50.0 million term repurchase agreement, as further described in Note 5 to the Consolidated Financial Statements. There were no gross losses realized on sales of available-for-sale investment securities in 2004. Proceeds from calls of investment securities were $27.5 million, $16.6 million and $63.1 million for the years ended December 31, 2006, 2005 and 2004, respectively. There were no gross gains realized on called securities in 2006, 2005 and 2004. Gross losses of $2,100 and $3,800 were realized on these called securities during the years ended December 31, 2006 and 2005, respectively. There were no gross losses realized on called securities in 2004. Net gains on trading securities for the year ended December 31, 2006 were $97,000. First Bank is a member of the Federal Home Loan Bank (FHLB) system and the Federal Reserve Bank (FRB) system and maintains investments in FHLB and FRB stock. These investments are recorded at cost, which represents redemption value. The investment in FRB stock is maintained at a minimum of 6% of First Bank's capital stock and capital surplus. The investment in FHLB of Des Moines stock is maintained at an amount equal to 0.12% of First Bank's total assets as of December 31, 2004, up to a maximum of $10.0 million, plus 4.45% of advances and 0.15% of outstanding standby letters of credit. First Bank also holds an investment in stock of the FHLB of Dallas and the FHLB of San Francisco, as a nonmember, to collateralize certain FHLB advances assumed in conjunction with certain acquisition transactions. The investment in FHLB of Dallas stock is maintained at a minimum of 4.10% of advances. The investment in FHLB of San Francisco stock is maintained at a minimum of 4.70% of advances. Investment securities with a carrying value of approximately $586.4 million and $619.4 million at December 31, 2006 and 2005, respectively, were pledged in connection with deposits of public and trust funds, securities sold under agreements to repurchase and for other purposes as required by law. Gross unrealized losses on investment securities and the fair value of the related securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at December 31, 2006 and 2005, were as follows:
December 31, 2006 --------------------------------------------------------------------------- Less than 12 months 12 months or more Total ----------------------- ----------------------- ----------------------- Fair Unrealized Fair Unrealized Fair Unrealized Value Losses Value Losses Value Losses --------- ---------- --------- ---------- --------- ---------- (dollars expressed in thousands) Available for sale: U.S. Government sponsored agencies....................... $ 202,459 (304) 64,799 (438) 267,258 (742) Mortgage-backed securities....... 197,214 (3,912) 597,394 (15,602) 794,608 (19,514) State and political subdivisions. 3,088 (7) 5,656 (49) 8,744 (56) Equity investments............... 5,602 (234) -- -- 5,602 (234) --------- ------- -------- -------- --------- -------- Total....................... $ 408,363 (4,457) 667,849 (16,089) 1,076,212 (20,546) ========= ======= ======== ======== ========= ======== Held to maturity: Mortgage-backed securities....... $ -- -- 13,682 (132) 13,682 (132) State and political subdivisions. 199 (1) 4,630 (49) 4,829 (50) --------- ------- -------- -------- --------- -------- Total....................... $ 199 (1) 18,312 (181) 18,511 (182) ========= ======= ======== ======== ========= ======== December 31, 2005 --------------------------------------------------------------------------- Less than 12 months 12 months or more Total ----------------------- ----------------------- ----------------------- Fair Unrealized Fair Unrealized Fair Unrealized Value Losses Value Losses Value Losses --------- ---------- --------- ---------- --------- ---------- (dollars expressed in thousands) Available for sale: U.S. Government sponsored agencies....................... $ 206,641 (2,374) 187,702 (2,351) 394,343 (4,725) Mortgage-backed securities....... 375,462 (8,368) 411,640 (13,788) 787,102 (22,156) State and political subdivisions. 11,653 (97) 833 (12) 12,486 (109) Corporate debt securities........ 7,706 (15) -- -- 7,706 (15) --------- ------- -------- -------- --------- -------- Total....................... $ 601,462 (10,854) 600,175 (16,151) 1,201,637 (27,005) ========= ======= ======== ======== ========= ======== Held to maturity: Mortgage-backed securities....... $ 14,828 (321) -- -- 14,828 (321) State and political subdivisions. 4,462 (58) 365 (11) 4,827 (69) --------- ------- -------- -------- --------- -------- Total....................... $ 19,290 (379) 365 (11) 19,655 (390) ========= ======= ======== ======== ========= ========
U.S. Government sponsored agencies and mortgage-backed securities - The unrealized losses on investments in mortgage-backed securities and other agency securities were caused by fluctuations in interest rates. The contractual terms of these securities are guaranteed by government-sponsored enterprises. It is expected that the securities would not be settled at a price less than the amortized cost. Because First Banks has the ability and intent to hold these investments until a market price recovery or maturity, these investments are not considered other-than-temporarily impaired. At December 31, 2006, the unrealized losses for U.S. government sponsored agencies for 12 months or more included 19 securities, and the unrealized losses for mortgage-backed securities for 12 months or more included 138 securities. At December 31, 2005, the unrealized losses for U.S. government sponsored agencies for 12 months or more included 14 securities, and the unrealized losses for mortgage-backed securities for 12 months or more included 62 securities. State and political subdivisions and corporate debt securities - The unrealized losses on investments in state and political subdivisions and corporate debt securities were caused by fluctuations in interest rates. It is expected that the securities would not be settled at a price less than the amortized cost. Because the decline in fair value is attributable to changes in interest rates and not credit quality, and because First Banks has the ability and intent to hold these investments until a market price recovery or maturity, these investments are not considered other-than-temporarily impaired. At December 31, 2006, the unrealized losses for state and political subdivisions for 12 months or more included 53 securities. At December 31, 2005, the unrealized losses for state and political subdivisions for 12 months or more included seven securities. (4) LOANS AND ALLOWANCE FOR LOAN LOSSES Changes in the allowance for loan losses for the years ended December 31, 2006, 2005 and 2004 were as follows:
2006 2005 2004 ---- ---- ---- (dollars expressed in thousands) Balance, beginning of year...................................... $ 135,330 150,707 116,451 Acquired allowances for loan losses............................. 5,208 1,989 33,752 Other adjustments (1)........................................... -- -- (479) --------- -------- -------- 140,538 152,696 149,724 --------- -------- -------- Loans charged-off............................................... (22,203) (33,123) (50,643) Recoveries of loans previously charged-off...................... 15,394 19,757 25,876 --------- -------- -------- Net loans charged-off...................................... (6,809) (13,366) (24,767) --------- -------- -------- Provision for loan losses....................................... 12,000 (4,000) 25,750 --------- -------- -------- Balance, end of year............................................ $ 145,729 135,330 150,707 ========= ======== ======== --------------- (1) In December 2003, First Bank established a $1.0 million specific reserve for estimated losses on a $5.3 million letter of credit that was recorded in accrued and other liabilities in the consolidated balance sheets. In January 2004, the letter of credit was fully funded as a loan and the related $1.0 million specific reserve was reclassified from accrued and other liabilities to the allowance for loan losses. Additionally, in June 2004, First Bank reclassified $1.5 million from the allowance for loan losses to accrued and other liabilities to establish a specific reserve associated with the commercial leasing portfolio sale and related recourse obligations for certain leases sold. This liability has been reduced to $410,000 at December 31, 2006.
At December 31, 2006 and 2005, First Banks had $48.7 million and $97.2 million of impaired loans, consisting of loans on nonaccrual status. Interest on nonaccrual loans that would have been recorded under the original terms of the loans was $3.7 million, $9.9 million and $4.4 million for the years ended December 31, 2006, 2005 and 2004, respectively. Of these amounts, $1.3 million, $3.4 million and $716,000 was recorded as interest income on such loans in 2006, 2005 and 2004, respectively. The allowance for loan losses includes an allocation for each impaired loan. The aggregate allocation of the allowance for loan losses related to impaired loans was approximately $9.7 million and $20.1 million at December 31, 2006 and 2005, respectively. The average recorded investment in impaired loans was $73.6 million, $79.9 million and $77.3 million for the years ended December 31, 2006, 2005 and 2004, respectively. The amount of interest income recognized using a cash basis method of accounting during the time these loans were impaired was $3.7 million, $3.6 million and $717,000 in 2006, 2005 and 2004, respectively. At December 31, 2006 and 2005, First Banks had $5.7 million and $5.6 million, respectively, of loans past due 90 days or more and still accruing interest. First Banks' primary market areas are the states of Missouri, Illinois, Texas and California. At December 31, 2006 and 2005, approximately 90% and 91% of the total loan portfolio, respectively, and 77% and 83% of the commercial, financial and agricultural loan portfolio, respectively, were made to borrowers within these states. Real estate lending constituted the only significant concentration of credit risk. Real estate loans comprised approximately 74% and 76% of the loan portfolio at December 31, 2006 and 2005, respectively, of which 26% and 27%, respectively, were made to consumers in the form of residential real estate mortgages and home equity lines of credit. First Bank also offers residential real estate mortgage loans with terms that require interest only payments. At December 31, 2006, the balance of such loans was $332.6 million, of which $276.5 million were held for portfolio and $56.1 million were held for sale. At December 31, 2005, the balance of such loans was $332.3 million, of which $194.6 million were held for portfolio and $137.7 million were held for sale. In general, First Banks is a secured lender. At December 31, 2006 and 2005, 99% of the loan portfolio was collateralized. Collateral is required in accordance with the normal credit evaluation process based upon the creditworthiness of the customer and the credit risk associated with the particular transaction. Loans to directors, their affiliates and executive officers of First Banks, Inc. were approximately $55.9 million and $37.9 million at December 31, 2006 and 2005, respectively, as further described in Note 19 to the Consolidated Financial Statements. (5) DERIVATIVE INSTRUMENTS First Banks utilizes derivative financial instruments to assist in the management of interest rate sensitivity by modifying the repricing, maturity and option characteristics of certain assets and liabilities. Derivative financial instruments held by First Banks at December 31, 2006 and 2005 are summarized as follows:
December 31, -------------------------------------------------- 2006 2005 ------------------------ ---------------------- Notional Credit Notional Credit Amount Exposure Amount Exposure ------ -------- ------ -------- (dollars expressed in thousands) Cash flow hedges............................. $600,000 4,369 300,000 114 Fair value hedges............................ -- -- 25,000 748 Interest rate floor agreements............... 300,000 376 100,000 70 Interest rate cap agreements................. 400,000 139 -- -- Interest rate lock commitments............... 5,900 -- 5,900 -- Forward commitments to sell mortgage-backed securities............... 54,000 -- 47,000 -- ======== ===== ======== ====
The notional amounts of derivative financial instruments do not represent amounts exchanged by the parties and, therefore, are not a measure of First Banks' credit exposure through its use of these instruments. The credit exposure represents the loss First Banks would incur in the event the counterparties failed completely to perform according to the terms of the derivative financial instruments and the collateral held to support the credit exposure was of no value. For the year ended December 31, 2006, First Banks realized net interest expense of $5.0 million on its derivative financial instruments, whereas for the years ended December 31, 2005 and 2004, First Banks realized net interest income of $2.2 million and $50.1 million, respectively, on its derivative financial instruments. First Banks recorded net losses on derivative instruments, which are included in noninterest income in the consolidated statements of income, of $390,000, $1.1 million and $1.5 million for the years ended December 31, 2006, 2005 and 2004, respectively. Cash Flow Hedges. First Banks entered into the following interest rate swap agreements, which have been designated as cash flow hedges, to effectively lengthen the repricing characteristics of certain interest-earning assets to correspond more closely with their funding source with the objective of stabilizing cash flow, and accordingly, net interest income over time: >> During September 2000, March 2001, April 2001, March 2002 and July 2003, First Banks entered into interest rate swap agreements of $600.0 million, $200.0 million, $175.0 million, $150.0 million and $200.0 million notional amount, respectively. The underlying hedged assets are certain loans within First Banks' commercial loan portfolio. The swap agreements provide for First Banks to receive a fixed rate of interest and pay an adjustable rate of interest equivalent to the weighted average prime lending rate minus 2.70%, 2.82%, 2.82%, 2.80% and 2.85%, respectively. The terms of the swap agreements provide for First Banks to pay and receive interest on a quarterly basis. In November 2001, First Banks terminated $75.0 million notional amount of the swap agreements originally entered into in April 2001 in order to appropriately modify its overall hedge position in accordance with its interest rate risk management program, and on April 2, 2006, the remaining $100.0 million notional amount of these swap agreements matured. In addition, the $150.0 million notional swap agreement that was entered into in March 2002 matured in March 2004, the $600.0 million notional swap agreements that were entered into in September 2000 matured in September 2004, and the $200.0 million notional swap agreement that was entered into in March 2001 matured in March 2005. >> On September 14, 2006, First Banks entered into a $200.0 million notional amount three-year interest rate swap agreement and a $200.0 million notional amount four-year interest rate swap agreement. The underlying hedged assets are certain loans within First Banks' commercial loan portfolio. The swap agreements provide for First Banks to receive a fixed rate of interest and pay an adjustable rate of interest equivalent to the weighted average prime lending rate minus 2.86%. The terms of the swap agreements provide for First Banks to pay and receive interest on a quarterly basis. The amount receivable by First Banks under the swap agreements was $7.0 million and $2.4 million at December 31, 2006 and 2005, respectively, and the amount payable by First Banks under the swap agreements was $2.7 million and $2.5 million at December 31, 2006 and 2005, respectively. The maturity dates, notional amounts, interest rates paid and received and fair value of First Banks' interest rate swap agreements designated as cash flow hedges as of December 31, 2006 and 2005 were as follows:
Notional Interest Rate Interest Rate Fair Maturity Date Amount Paid Received Value ------------- ------ ---- -------- ----- (dollars expressed in thousands) December 31, 2006: July 31, 2007........................... $ 200,000 5.40% 3.08% $ (2,705) September 18, 2009...................... 200,000 5.39 5.20 98 September 20, 2010...................... 200,000 5.39 5.20 449 --------- -------- $ 600,000 5.39 4.49 $ (2,158) ========= ===== ===== ======== December 31, 2005: April 2, 2006........................... $ 100,000 4.43% 5.45% $ 205 July 31, 2007........................... 200,000 4.40 3.08 (5,296) --------- -------- $ 300,000 4.41 3.87 $ (5,091) ========= ===== ===== ========
Fair Value Hedges. First Banks entered into the following interest rate swap agreements, which have been designated as fair value hedges, to effectively shorten the repricing characteristics of certain interest-bearing liabilities to correspond more closely with their funding source with the objective of stabilizing net interest income over time: >> During January 2001, First Banks entered into $150.0 million notional amount of five-year interest rate swap agreements that provided for First Banks to receive a fixed rate of interest and pay an adjustable rate of interest equivalent to the three-month London Interbank Offering Rate (LIBOR). The underlying hedged liabilities were a portion of First Banks' other time deposits. The terms of the swap agreements provided for First Banks to pay interest on a quarterly basis and receive interest on a semiannual basis. In February 2005, First Banks terminated the swap agreements. The termination of the swap agreements resulted from an increasing level of ineffectiveness associated with the correlation of the hedge positions between the swap agreements and the underlying hedged liabilities that had been anticipated as the swap agreements neared their originally scheduled maturity dates in January 2006. The resulting $3.1 million basis adjustment of the underlying hedged liabilities was recorded as interest expense over the remaining weighted average maturity of the underlying hedged liabilities of approximately ten months. At December 31, 2005, the basis adjustments associated with these swap agreements were fully amortized. >> During May 2002, March 2003 and April 2003, First Banks entered into $55.2 million, $25.0 million and $46.0 million notional amount, respectively, of interest rate swap agreements that provided for First Banks to receive a fixed rate of interest and pay an adjustable rate of interest equivalent to the three-month LIBOR plus 2.30%, 2.55% and 2.58%, respectively. The underlying hedged liabilities were a portion of First Banks' subordinated debentures. The terms of the swap agreements provided for First Banks to pay and receive interest on a quarterly basis. The amounts receivable and payable by First Banks under the swap agreements at December 31, 2005 were $506,000 and $420,000, respectively. In May 2005, First Banks terminated the $55.2 million and $46.0 million notional swap agreements in order to appropriately modify future hedge positions in accordance with First Banks' interest rate risk management program. The resulting $854,000 basis adjustment of the underlying hedged liabilities, in aggregate, was being recorded as a reduction of interest expense over the remaining maturities of the underlying hedged liabilities, which ranged from 26 to 28 years at the time of the termination. Effective February 16, 2006, First Banks terminated the remaining $25.0 million notional swap agreement. In conjunction with this transaction, First Banks recorded the resulting $1.7 million basis adjustment of the underlying hedged liabilities and the remaining balance of the basis adjustments associated with the swap agreements that were terminated in May 2005, totaling $834,000, in the consolidated statements of income. The recognition of the net basis adjustments on all of the terminated fair value interest rate swap agreements resulted in a pre-tax loss of $849,000 that was recorded in February 2006. The maturity date, notional amount, interest rate paid and received and fair value of First Banks' interest rate swap agreement designated as a fair value hedge as of December 31, 2005 was as follows:
Notional Interest Rate Interest Rate Fair Maturity Date Amount Paid Received Value ------------- ------ ---- -------- ----- (dollars expressed in thousands) December 31, 2005: March 20, 2033......................... $ 25,000 6.57% 8.10% $ (1,460) ======== ===== ===== ========
Interest Rate Floor Agreements. In September 2005, First Bank entered into a $100.0 million notional amount three-year interest rate floor agreement in conjunction with its interest rate risk management program. The interest rate floor agreement provides for First Bank to receive a quarterly fixed rate of interest of 5.00% should the three-month LIBOR equal or fall below the strike price of 2.00%. On August 24, 2006, First Bank entered into a $200.0 million notional amount three-year interest rate floor agreement in conjunction with the restructuring of a term repurchase agreement, as further described in Note 10 to the Consolidated Financial Statements, to further stabilize net interest income in the event of a declining rate scenario. The interest rate floor agreement provides for First Bank to receive a quarterly adjustable rate of interest equivalent to the differential between the strike price of 4.00% and the three-month LIBOR should the three-month LIBOR equal or fall below the strike price. The carrying value of the interest rate floor agreements, which is included in other assets in the consolidated balance sheets, was $376,000 and $70,000 at December 31, 2006 and 2005, respectively. Interest Rate Floor Agreements Embedded in Term Repurchase Agreements. First Bank has term repurchase agreements under master repurchase agreements with unaffiliated third parties, as further described in Note 10 to the Consolidated Financial Statements. The underlying securities associated with the term repurchase agreements are mortgage-backed securities and callable U.S. Government agency securities and are held by other financial institutions under safekeeping agreements. The term repurchase agreements were entered into with the objective of stabilizing net interest income over time, further protecting net interest margin against changes in interest rates and providing funding for security purchases. The interest rate floor agreements included within the term repurchase agreements (and the interest rate cap agreements previously included within the term repurchase agreements) represent embedded derivative instruments which, in accordance with existing accounting literature governing derivative instruments, are not required to be separated from the term repurchase agreements and accounted for separately as a derivative financial instrument. As such, the term repurchase agreements are reflected in other borrowings in the consolidated balance sheets and the related interest expense is reflected as interest expense on other borrowings in the consolidated statements of income. As further described in Note 10 to the Consolidated Financial Statements, in March 2005, in accordance with the Company's interest rate risk management program, First Bank modified its term repurchase agreements under master repurchase agreements with unaffiliated third parties to terminate the interest rate cap agreements previously embedded within the agreements and simultaneously enter into interest rate floor agreements, also embedded within the agreements. These modifications resulted in adjustments to the existing interest rate spread to LIBOR for the underlying agreements. The modified terms of the term repurchase agreements became effective during the second quarter of 2005. First Bank did not incur any costs associated with the modifications of the agreements nor did the modifications result in a change to the accounting treatment of the embedded derivative instruments. As further described in Note 3 and Note 10 to the Consolidated Financial Statements, in November 2005, First Bank terminated its $50.0 million term repurchase agreement with a maturity date of August 15, 2006, and simultaneously recognized a loss of $2.9 million on the sale of available-for-sale investment securities associated with the termination of the term repurchase agreement. In addition, on February 14, 2006, First Bank terminated its two $50.0 million term repurchase agreements with maturity dates of June 14, 2007, and recognized a $1.6 million loss on the sale of $100.0 million of available-for-sale investment securities associated with the termination of the term repurchase agreements; on March 28, 2006, First Bank terminated the $50.0 million term repurchase agreement with a maturity date of August 1, 2007, and recognized a $746,000 loss on the sale of $50.0 million of available-for-sale investment securities associated with the termination of the term repurchase agreement; and on April 28, 2006, First Bank terminated $50.0 million of the $150.0 million term repurchase agreement with a maturity date of January 12, 2007, and recognized a $310,000 loss on the sale of $50.0 million of available-for-sale investment securities associated with the termination of the term repurchase agreement. The Company's termination transactions entered into in 2006 resulted in a reduction of $200.0 million of its term repurchase agreements, the recognition of a $2.7 million loss on the sale of $200.0 million of investment securities held in its available-for-sale investment portfolio, and prepayment penalties of $306,000 incurred in conjunction with the early termination of the term repurchase agreements. Additionally, on August 24, 2006, First Bank restructured the remaining $100.0 million term repurchase agreement to extend the maturity date to October 12, 2010 and to modify the pricing structure, including the interest rate floor strike price, as further described in Note 10 to the Consolidated Financial Statements. First Bank did not incur any costs associated with the restructuring of the agreement. On July 14, 2006, First Bank entered into a $100.0 million four-year term repurchase agreement under a master repurchase agreement with an unaffiliated third party, as further described in Note 10 to the Consolidated Financial Statements. The underlying securities associated with the term repurchase agreement are U.S. Government agency collateralized mortgage obligation securities and are held by other financial institutions under a safekeeping agreement. Interest Rate Cap Agreements. On September 14, 2006, First Bank entered into a $200.0 million notional amount three-year interest rate cap agreement and a $200.0 million notional amount four-year interest rate cap agreement in conjunction with the interest rate swap agreements designated as cash flow hedges that First Banks entered into on September 14, 2006, as previously described, to limit the net interest expense associated with First Banks' interest rate swap agreements in the event of a rising rate scenario. The $200.0 million notional amount three-year interest rate cap agreement provides for First Bank to receive a quarterly adjustable rate of interest equivalent to the differential between the three-month LIBOR and the strike price of 7.00% should the three-month LIBOR exceed the strike price. The $200.0 million notional amount four-year interest rate cap agreement provides for First Bank to receive a quarterly adjustable rate of interest equivalent to the differential between the three-month LIBOR and the strike price of 7.50% should the three-month LIBOR exceed the strike price. The carrying value of the interest rate cap agreements, which is included in other assets in the consolidated balance sheets, was $139,000 at December 31, 2006. Pledged Collateral. At December 31, 2006, First Banks had accepted cash of $4.2 million as collateral in connection with its interest rate swap agreements. At December 31, 2005, First Banks had a $2.0 million letter of credit issued on its behalf to the counterparty and had pledged investment securities available for sale with a fair value of $5.1 million and cash of $1.8 million as collateral in connection with its interest rate swap agreements. Interest Rate Lock Commitments / Forward Commitments to Sell Mortgage-Backed Securities. Derivative financial instruments issued by First Banks consist of interest rate lock commitments to originate fixed-rate loans to be sold. Commitments to originate fixed-rate loans consist primarily of residential real estate loans. These net loan commitments and loans held for sale are hedged with forward contracts to sell mortgage-backed securities. The carrying value of these interest rate lock commitments included in other assets in the consolidated balance sheets was ($17,000) and ($49,000) at December 31, 2006 and 2005, respectively. (6) SERVICING RIGHTS Mortgage Banking Activities. At December 31, 2006 and 2005, First Banks serviced mortgage loans for others totaling $1.04 billion and $1.01 billion, respectively. Borrowers' escrow balances held by First Banks on such loans were $5.7 million and $5.0 million at December 31, 2006 and 2005, respectively. Changes in mortgage servicing rights, net of amortization, for the years ended December 31, 2006 and 2005 were as follows:
2006 2005 ---- ---- (dollars expressed in thousands) Balance, beginning of year............................................. $ 6,623 10,242 Mortgage servicing rights acquired..................................... -- 435 Originated mortgage servicing rights (1)............................... 3,298 904 Amortization........................................................... (4,054) (4,958) -------- ------- Balance, end of year................................................... $ 5,867 6,623 ======== ======= ------------------------ (1) In March 2006, First Banks capitalized mortgage servicing rights of $1.2 million associated with the securitization of $77.1 million of certain residential mortgage loans held in the Company's loan portfolio, resulting in the recognition of $1.2 million in loan servicing income related to the future servicing of the underlying loans. Additionally, in April 2006, First Banks capitalized mortgage servicing rights of $927,000 associated with the securitization of $61.8 million of certain residential mortgage loans held in the Company's loan portfolio, resulting in the recognition of $927,000 in loan servicing income related to the future servicing of the underlying loans.
First Banks did not incur any impairment of mortgage servicing rights during the years ended December 31, 2006, 2005 and 2004. Amortization of mortgage servicing rights at December 31, 2006 has been estimated in the following table:
(dollars expressed in thousands) Year ending December 31: 2007.................................................................... $ 2,250 2008.................................................................... 1,226 2009.................................................................... 761 2010.................................................................... 567 2011.................................................................... 446 Thereafter.............................................................. 617 ------- Total............................................................... $ 5,867 =======
Other Servicing Activities. At December 31, 2006 and 2005, First Banks serviced SBA loans for others totaling $143.4 million and $163.4 million, respectively. Changes in SBA servicing rights, net of amortization and impairment, for the years ended December 31, 2006 and 2005 were as follows:
2006 2005 ---- ---- (dollars expressed in thousands) Balance, beginning of year............................................. $ 9,489 13,013 Originated SBA servicing rights........................................ 1,630 1,065 Amortization........................................................... (1,662) (2,230) Impairment............................................................. (1,393) (2,359) -------- ------- Balance, end of year................................................... $ 8,064 9,489 ======== =======
First Banks recognized impairment of $1.4 million, $2.4 million and $459,000 for the years ended December 31, 2006, 2005 and 2004, respectively. The impairment of $1.4 million recorded for the year ended December 31, 2006 primarily resulted from a decline in the fair value of the SBA servicing assets below the carrying value attributable to the placement of certain loans on nonaccrual status and payoffs received on certain existing loans. The impairment of $2.4 million recorded for the year ended December 31, 2005 resulted from a decline in the fair value of the SBA servicing assets below the carrying value following substantial damage to several shrimping vessels within the servicing portfolio caused by the effects of Hurricane Katrina, as well as continued distress affecting the U.S. shrimping industry and the ability of these borrowers to repay their loans. Amortization of SBA servicing rights at December 31, 2006 has been estimated in the following table:
(dollars expressed in thousands) Year ending December 31: 2007.................................................................... $ 1,498 2008.................................................................... 1,243 2009.................................................................... 1,030 2010.................................................................... 850 2011.................................................................... 701 Thereafter.............................................................. 2,742 ------- Total............................................................... $ 8,064 =======
(7) BANK PREMISES AND EQUIPMENT, NET Bank premises and equipment, net of accumulated depreciation and amortization, were comprised of the following at December 31, 2006 and 2005:
2006 2005 ---- ---- (dollars expressed in thousands) Land................................................................. $ 42,386 33,191 Buildings and improvements........................................... 126,903 118,426 Furniture, fixtures and equipment.................................... 124,980 111,238 Leasehold improvements............................................... 25,250 25,494 Construction in progress............................................. 18,066 2,269 --------- -------- Total........................................................... 337,585 290,618 Less accumulated depreciation and amortization....................... 159,168 145,677 --------- -------- Bank premises and equipment, net................................ $ 178,417 144,941 ========= ========
Depreciation and amortization expense for the years ended December 31, 2006, 2005 and 2004 was $18.9 million, $17.4 million and $18.6 million, respectively. First Banks leases land, office properties and equipment under operating leases. Certain of the leases contain renewal options and escalation clauses. Total rent expense was $18.0 million, $15.5 million and $13.2 million for the years ended December 31, 2006, 2005 and 2004, respectively. Future minimum lease payments under noncancellable operating leases extend through 2084 as follows:
(dollars expressed in thousands) Year ending December 31: 2007................................................................... $ 14,175 2008................................................................... 13,716 2009................................................................... 12,012 2010................................................................... 9,914 2011................................................................... 6,192 Thereafter............................................................. 36,984 -------- Total future minimum lease payments................................ $ 92,993 ========
First Banks also leases to unrelated parties a portion of its banking facilities. Rental income associated with these leases was $5.9 million, $6.4 million and $5.8 million for the years ended December 31, 2006, 2005 and 2004, respectively. (8) GOODWILL AND OTHER INTANGIBLE ASSETS Goodwill and other intangible assets, net of amortization, were comprised of the following at December 31, 2006 and 2005:
2006 2005 ------------------------- -------------------------- Gross Gross Carrying Accumulated Carrying Accumulated Amount Amortization Amount Amortization ------ ------------ ------ ------------ (dollars expressed in thousands) Amortized intangible assets: Core deposit intangibles............ $ 60,867 (18,850) 36,555 (11,710) Customer list intangibles........... 23,320 (913) -- -- Goodwill associated with P&A Transactions.................. 2,210 (1,288) 2,210 (1,146) --------- -------- -------- -------- Total........................... $ 86,397 (21,051) 38,765 (12,856) ========= ======== ======== ======== Unamortized intangible assets: Goodwill associated with stock purchases................... $ 230,036 165,992 ========= ========
Amortization of intangible assets was $8.2 million, $4.9 million and $2.9 million for the years ended December 31, 2006, 2005 and 2004, respectively. As of December 31, 2006, the remaining estimated life of the amortization period for core deposit intangibles, customer list intangibles and goodwill associated with P&A Transactions was six years, 16 years and eight years, respectively. Amortization of intangible assets, including amortization of core deposit intangibles, customer list intangibles and goodwill associated with P&A Transactions, has been estimated in the following table, and does not take into consideration any potential future acquisitions or branch office purchases.
(dollars expressed in thousands) Year ending December 31: 2007..................................................................... $11,706 2008..................................................................... 11,706 2009..................................................................... 9,803 2010..................................................................... 9,342 2011..................................................................... 7,041 Thereafter............................................................... 15,748 ------- Total................................................................ $65,346 =======
Changes in the carrying amount of goodwill for the years ended December 31, 2006 and 2005 were as follows:
2006 2005 ---- ---- (dollars expressed in thousands) Balance, beginning of year............................................. $ 167,056 156,849 Goodwill acquired during the year...................................... 63,378 18,579 Acquisition-related adjustments (1).................................... 666 (8,229) Amortization - P&A Transactions........................................ (142) (143) --------- -------- Balance, end of year................................................... $ 230,958 167,056 ========= ======== -------------------- (1) Acquisition-related adjustments recorded in 2006, as further described in Note 2 to the Consolidated Financial Statements, included $646,000 recorded in the third quarter of 2006 pertaining to the acquisition of Northway State Bank in October 2005. Acquisition-related adjustments recorded in 2005 included $4.3 million recorded in the first quarter of 2005 pertaining to the acquisition of CIB Bank in November 2004, $1.4 million recorded in the third quarter of 2005 pertaining to the acquisition of CMC in July 2004, and $2.5 million recorded in the fourth quarter of 2005 pertaining to the acquisition of Bank of Ste. Genevieve in March 2003. Acquisition-related adjustments included additional purchase accounting adjustments necessary to appropriately adjust preliminary goodwill recorded at the time of the acquisition, which was based upon current estimates available at that time, to reflect the receipt of additional valuation data.
(9) MATURITIES OF TIME DEPOSITS A summary of maturities of time deposits of $100,000 or more and other time deposits as of December 31, 2006 is as follows:
Time deposits of Other time $100,000 or more deposits Total ---------------- -------- ----- (dollars expressed in thousands) Year ending December 31: 2007............................................ $ 1,240,922 1,944,304 3,185,226 2008............................................ 112,728 322,275 435,003 2009............................................ 18,611 60,179 78,790 2010............................................ 19,299 56,515 75,814 2011............................................ 17,734 23,196 40,930 Thereafter...................................... 10,285 1,416 11,701 ----------- ---------- ---------- Total....................................... $ 1,419,579 2,407,885 3,827,464 =========== ========== ==========
(10) OTHER BORROWINGS Other borrowings were comprised of the following at December 31, 2006 and 2005:
2006 2005 ---- ---- (dollars expressed in thousands) Securities sold under agreements to repurchase: Daily............................................................... $ 169,874 199,874 Term................................................................ 200,000 300,000 FHLB advances (1)........................................................ 4,025 39,300 --------- -------- Total........................................................... $ 373,899 539,174 ========= ======== ---------------------- (1) On March 17, 2006 and May 10, 2006, First Bank prepaid $20.5 million and $14.8 million, respectively, of FHLB advances that were assumed in conjunction with previous acquisitions. First Bank did not incur any losses associated with the prepayment of the FHLB advances.
The average balance of other borrowings was $380.5 million and $571.7 million, respectively, and the maximum month-end balance of other borrowings was $535.7 million and $604.3 million, respectively, for the years ended December 31, 2006 and 2005. The average rates paid on other borrowings during the years ended December 31, 2006, 2005 and 2004 were 4.42%, 3.19% and 1.26%, respectively. Interest expense on securities sold under agreements to repurchase was $16.1 million, $16.5 million and $5.4 million for the years ended December 31, 2006, 2005 and 2004, respectively. Interest expense on FHLB advances was $689,000, $1.6 million and $716,000 for the years ended December 31, 2006, 2005 and 2004, respectively. The assets underlying the daily securities sold under agreements to repurchase and the FHLB advances are held by First Banks. The underlying securities associated with the term repurchase agreements are mortgage-backed securities and callable U.S. Government agency securities and are held by other financial institutions under safekeeping agreements. As further described in Note 5 to the Consolidated Financial Statements, the interest rate floor agreements included within the term repurchase agreements (and the interest rate cap agreements previously included within the term repurchase agreements) represent embedded derivative instruments. In accordance with the Company's interest rate risk management program, First Bank modified its term repurchase agreements under master repurchase agreements with unaffiliated third parties in March 2005 to terminate the interest rate cap agreements previously embedded within the agreements and simultaneously enter into interest rate floor agreements, also embedded within the agreements. These modifications resulted in adjustments to the existing interest rate spread to LIBOR for the underlying agreements, as set forth in the following table. The modified terms of the agreements became effective during the second quarter of 2005. First Bank did not incur any costs associated with the modifications of the agreements nor did the modifications result in a change to the accounting treatment of the embedded derivative instruments. The maturity dates, par amounts, interest rate spreads and interest rate floor strike prices on First Bank's term repurchase agreements as of December 31, 2006 and 2005 were as follows:
Par Interest Rate Interest Rate Floor Maturity Date Amount Spread Strike Price ------------- ------ ------ ------------ (dollars expressed in thousands) December 31, 2006: July 19, 2010 (1)................. $ 100,000 LIBOR + 0.5475% (3) 5.00% (3) October 12, 2010 (2).............. 100,000 LIBOR + 0.5100% (3) 4.50% (3) --------- $ 200,000 ========= December 31, 2005: January 12, 2007 (2).............. $ 150,000 LIBOR + 0.0050% (4) 3.00% (4) June 14, 2007 (5)................. 50,000 LIBOR - 0.3300% (4) 3.00% (4) June 14, 2007 (5)................. 50,000 LIBOR - 0.3400% (4) 3.00% (4) August 1, 2007 (6)................ 50,000 LIBOR + 0.0800% (4) 3.00% (4) --------- $ 300,000 ========= ----------------------- (1) First Bank entered into this $100.0 million four-year term repurchase agreement under a master repurchase agreement on July 14, 2006. Interest is paid quarterly, beginning on October 18, 2006. (2) First Bank terminated $50.0 million of this term repurchase agreement on April 28, 2006, resulting in an $83,000 prepayment penalty and the recognition of a $310,000 loss on the sale of $50.0 million of available-for-sale investment securities associated with the termination of the term repurchase agreement, as further described in Note 3 and Note 5 to the Consolidated Financial Statements. On August 24, 2006, First Bank restructured the remaining $100.0 million term repurchase agreement to extend the maturity date to October 12, 2010 and to modify the pricing structure, including the interest rate floor strike price, which was effective immediately following the next quarterly scheduled interest payment date of October 12, 2006. First Bank did not incur any costs in conjunction with the restructure of this term repurchase agreement. (3) The interest rate paid on these term repurchase agreements is based on the three-month LIBOR plus the spread amount shown minus a floating rate, subject to a 0% floor, equal to two times the differential between the three-month LIBOR and the strike price shown, if the three-month LIBOR falls below the strike price associated with the interest rate floor agreements. (4) The interest rate paid on these term repurchase agreements is based on the LIBOR reset in arrears plus or minus the spread amount shown minus a floating amount equal to the differential between the three-month LIBOR reset in arrears and the strike price shown, if the three-month LIBOR reset in arrears falls below the strike price associated with the interest rate floor agreements. (5) First Bank terminated these term repurchase agreements on February 14, 2006, and recognized a $1.6 million loss on the sale of $100.0 million of available-for-sale investment securities associated with the termination of the term repurchase agreements, as further described in Note 3 and Note 5 to the Consolidated Financial Statements. (6) First Bank terminated this term repurchase agreement on March 28, 2006, resulting in a prepayment penalty of $223,000, and the recognition of a $746,000 loss on the sale of $50.0 million of available-for-sale investment securities associated with the termination of the term repurchase agreement, as further described in Note 3 and Note 5 to the Consolidated Financial Statements.
(11) NOTES PAYABLE On August 10, 2006, First Banks entered into a First Amendment to its Amended and Restated Secured Credit Agreement with a group of unaffiliated financial institutions (Amended Credit Agreement). The Amended Credit Agreement, in the amount of $96.0 million, amended the previous Amended and Restated Secured Credit Agreement dated August 11, 2005 in the amount of $122.5 million that provided a $15.0 million senior secured revolving credit facility, a $7.5 million senior secured standby letter of credit facility and a $100.0 million senior secured term loan facility (Term Loan) (collectively, the Credit Agreements). The primary changes to the structure of the financing arrangement relate to a reduction of certain components of the secured credit facilities, a reduction in the overall pricing structure of the secured credit facilities, and the renewal of the revolving credit and letter of credit facilities. The Amended Credit Agreement provides a $10.0 million senior secured revolving credit facility (Revolving Credit) that matures on August 9, 2007 and a $1.0 million senior secured standby letter of credit facility (LC Facility) that matures on August 9, 2007, in addition to the existing Term Loan that matures on August 10, 2008 and had a balance of $85.0 million at the time of the amendment. The Amended Credit Agreement also provides First Banks an option to increase the Revolving Credit, which is limited to two increase requests from August 10, 2006 until its maturity date, by an amount of up to $40.0 million provided such increase will not cause the Revolving Credit to exceed $50.0 million. Interest is payable on the outstanding principal loan balances under the Revolving Credit at a floating rate equal to either the lender's prime rate or, at First Banks' option, LIBOR plus a margin determined by the outstanding loan balances and First Banks' net income for the preceding four calendar quarters. If the loan balances outstanding under the Revolving Credit are accruing at the prime rate, interest is payable quarterly in arrears. If the loan balances outstanding under the Revolving Credit are accruing at LIBOR, interest is payable based on the one, two, three or six-month LIBOR, as selected by First Banks. First Banks is also subject to a quarterly commitment fee on the unused portion of the Revolving Credit. First Banks had not drawn any advances on the Revolving Credit as of December 31, 2006. First Banks borrowed $80.0 million on the Term Loan in August 2005 and borrowed the remaining $20.0 million in November 2005. Interest is payable on the outstanding principal loan balance of the Term Loan at a floating rate equal to LIBOR plus a margin determined by the outstanding loan balance and First Banks' net income for the preceding four calendar quarters. The outstanding principal balance of the Term Loan is payable in quarterly installments of $5.0 million, at a minimum, with the remainder of the Term Loan balance to be repaid in full, including any unpaid interest, upon its maturity date. As of December 31, 2006, First Banks had made payments of $35.0 million on the outstanding principal balance of the Term Loan, reducing the balance from $100.0 million at December 31, 2005 to $65.0 million at December 31, 2006. The interest rate for outstanding borrowings under the Credit Agreements at December 31, 2006 and 2005 was 6.25% and 5.38%, respectively. Letters of credit issued to unaffiliated third parties on behalf of First Banks under the Credit Agreements were $450,000 and $2.9 million at December 31, 2006 and 2005, respectively, and had not been drawn on by the counterparties. The Amended Credit Agreement requires maintenance of certain minimum capital ratios for First Banks and First Bank, certain maximum nonperforming assets ratios for First Bank and a minimum return on assets ratio for First Banks. In addition, it contains additional covenants, including a limitation on the amount of dividends on First Banks' common stock that may be paid to stockholders. The Amended Credit Agreement is secured by First Banks' ownership interest in the capital stock of SFC and First Bank. First Banks and First Bank were in compliance with all restrictions and requirements of the Credit Agreements at December 31, 2006 and 2005. The average balance and maximum month-end balance of borrowings outstanding under the Credit Agreements during the years ended December 31, 2006 and 2005 were as follows:
2006 2005 ---- ---- (dollars expressed in thousands) Average balance.......................................................... $ 88,843 36,849 Maximum month-end balance................................................ 100,000 100,000 ======== ========
The average rates paid on the outstanding borrowings during the years ended December 31, 2006, 2005 and 2004 were 6.22%, 6.26% and 13.84%, respectively. Interest expense recognized on borrowings under the Amended Credit Agreement includes commitment, arrangement and renewal fees. During 2004, the average rate paid on the outstanding borrowings reflects a marginal increased level of commitment, arrangement and renewal fees on a much smaller base of borrowings outstanding during the year, thereby causing the average rate paid to be significantly higher than in 2006 and 2005. (12) SUBORDINATED DEBENTURES First Banks has formed various affiliated Delaware or Connecticut statutory and business trusts (collectively, the Trusts) that were created for the sole purpose of issuing trust preferred securities. The trust preferred securities were issued in private placements, with the exception of First Preferred Capital Trust II, First Preferred Capital Trust III and First Preferred Capital Trust IV, which were issued in underwritten public offerings. First Banks owns all of the common securities of the Trusts. The gross proceeds of the offerings were used by the Trusts to purchase fixed rate or variable rate subordinated debentures from First Banks. The subordinated debentures are the sole asset of the Trusts. A summary of the subordinated debentures issued to the Trusts in conjunction with the trust preferred securities offerings at December 31, 2006 and 2005 were as follows:
Subordinated Trust Debentures Maturity Call Interest Preferred --------------- Name of Trust Issuance Date Date Date Rate (1) Securities 2006 2005 ------------- ------------- ---- ---- ---- ---------- ---- ---- Variable Rate - ------------- First Bank Capital Trust April 2002 April 22, 2032 April 22, 2007 + 387.5 bp $25,000 25,774 25,774 First Bank Statutory Trust II September 2004 September 20, 2034 September 20, 2009 + 205.0 bp 20,000 20,619 20,619 First Bank Statutory Trust III November 2004 December 15, 2034 December 15, 2009 + 218.0 bp 40,000 41,238 41,238 First Bank Statutory Trust IV March 2006 March 15, 2036 March 15, 2011 + 142.0 bp 40,000 41,238 -- First Bank Statutory Trust V April 2006 June 15, 2036 June 15, 2011 + 145.0 bp 20,000 20,619 -- First Bank Statutory Trust VI June 2006 July 7, 2036 July 7, 2011 + 165.0 bp 25,000 25,774 -- First Bank Statutory Trust VII December 2006 December 15, 2036 December 15, 2011 + 185.0 bp 50,000 51,547 -- Fixed Rate - ---------- First Preferred Capital Trust II (2) October 2000 September 30, 2030 September 30, 2005 10.24% 57,500 -- -- First Preferred Capital Trust III (3) November 2001 December 31, 2031 December 31, 2006 9.00% 55,200 -- 56,907 First Bank Statutory Trust March 2003 March 20, 2033 March 20, 2008 8.10% 25,000 25,774 25,774 First Preferred Capital Trust IV April 2003 June 30, 2033 June 30, 2008 8.15% 46,000 47,423 47,423 - ---------------------------- (1) The interest rates paid on the trust preferred securities were based on either a fixed rate or a variable rate. The variable rate was based on the three-month LIBOR plus the basis point spread as shown above, with the exception of First Bank Capital Trust, which was based on the six-month LIBOR plus the basis point spread shown above. (2) On September 30, 2005, First Banks redeemed the cumulative fixed rate trust preferred securities at the liquidation value of $25 per preferred security, together with distributions accumulated and unpaid to the redemption date. In conjunction with this transaction, First Banks paid in full its outstanding $59.3 million of subordinated debentures that were issued by First Banks to First Preferred Capital Trust II. The funds necessary for the redemption of the subordinated debentures were provided from a portion of the proceeds of First Banks' Term Loan. (3) On December 31, 2006, First Banks redeemed the cumulative fixed rate trust preferred securities at the liquidation value of $25 per preferred security, together with distributions accumulated and unpaid to the redemption date. In conjunction with this transaction, First Banks paid in full its outstanding $56.9 million of subordinated debentures that were issued by First Banks to First Preferred Capital Trust III. The net proceeds associated with these transactions were paid on January 2, 2007. The funds necessary for the redemption of the subordinated debentures were provided by internally generated funds and the net proceeds from the issuance of additional subordinated debentures to First Bank Statutory VII on December 14, 2006.
In connection with the issuance of the trust preferred securities, First Banks made certain guarantees and commitments that, in the aggregate, constitute a full and unconditional guarantee by First Banks of the obligations of the Trusts under the trust preferred securities. First Banks' distributions accrued on the subordinated debentures were $22.4 million, $20.9 million and $19.0 million for the years ended December 31, 2006, 2005 and 2004, respectively. The distributions payable on all of First Banks' subordinated debentures are included in interest expense in the consolidated statements of income. Deferred issuance costs associated with First Banks' subordinated debentures are included as a reduction of subordinated debentures in the consolidated balance sheets and are amortized on a straight-line basis. Subsequent to December 31, 2006, First Banks, through a newly formed statutory trust affiliate, issued $25.8 million of subordinated debentures, as more fully described in Note 25 to the Consolidated Financial Statements. The structure of the trust preferred securities currently satisfies the regulatory requirements for inclusion, subject to certain limitations, in First Banks' capital base. (13) INCOME TAXES Provision for income taxes attributable to income from continuing operations for the years ended December 31, 2006, 2005 and 2004 consists of:
2006 2005 2004 ---- ---- ---- (dollars expressed in thousands) Current provision for taxes: Federal........................................................ $41,582 48,306 36,578 State.......................................................... 3,272 5,419 9,507 ------- ------- ------- 44,854 53,725 46,085 ------- ------- ------- Deferred provision for taxes: Federal........................................................ 10,062 116 236 State.......................................................... 146 (1,332) (983) ------- ------- ------- 10,208 (1,216) (747) ------- ------- ------- Total...................................................... $55,062 52,509 45,338 ======= ======= =======
The effective rates of federal income taxes for the years ended December 31, 2006, 2005 and 2004 differ from the federal statutory rates of taxation as follows:
Years Ended December 31, ----------------------------------------------------------- 2006 2005 2004 ------------------- ------------------ ------------------- Amount Percent Amount Percent Amount Percent ------ ------- ------ ------- ------ ------- (dollars expressed in thousands) Income before provision for income taxes and minority interest in loss of subsidiary................................ $ 166,169 $148,128 $ 128,246 ========= ======== ========= Provision for income taxes calculated at federal statutory income tax rates..... $ 58,159 35.0% $ 51,845 35.0% $ 44,886 35.0% Effects of differences in tax reporting: Tax-exempt interest income, net of tax preference adjustment............. (908) (0.5) (814) (0.5) (791) (0.6) State income taxes........................ 3,487 2.0 4,773 3.2 5,541 4.3 Reduction in prior year contingency reserve............................... (4,154) (2.5) (2,116) (1.4) (2,825) (2.2) Bank owned life insurance, net of premium............................... (1,039) (0.6) (1,602) (1.1) (1,670) (1.3) Other, net................................ (483) (0.3) 423 0.3 197 0.2 --------- ---- -------- ---- --------- ---- Provision for income taxes.......... $ 55,062 33.1% $ 52,509 35.5% $ 45,338 35.4% ========= ==== ======== ==== ========= ====
The $4.2 million, $2.1 million and $2.8 million reductions in the prior year contingency reserve, reflected in 2006, 2005 and 2004, respectively, resulted from reversals of federal and state tax reserves no longer deemed necessary. The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2006 and 2005 were as follows:
December 31, ------------ 2006 2005 ---- ---- (dollars expressed in thousands) Deferred tax assets: Net operating loss carryforwards................................ $ 26,267 35,513 Deferred built-in loss carryforward............................. 3,345 3,824 Allowance for loan losses....................................... 60,052 57,137 Loans held for sale............................................. 572 5,562 Alternative minimum and general business tax credits............ 3,510 2,770 Interest on nonaccrual loans.................................... 2,286 3,582 Servicing rights................................................ -- 10,081 Deferred compensation........................................... 7,732 6,462 Net fair value adjustment for available-for-sale investment securities........................................ 6,312 8,954 Net fair value adjustment for derivative instruments............ 755 1,782 Partnership investments......................................... 7,079 4,161 State taxes..................................................... -- 515 Other........................................................... 3,666 6,349 --------- -------- Gross deferred tax assets................................... 121,576 146,692 --------- -------- Valuation allowance............................................. (21,401) (17,754) --------- -------- Deferred tax assets, net of valuation allowance............. 100,175 128,938 --------- -------- Deferred tax liabilities: Depreciation on bank premises and equipment..................... 8,445 8,407 Servicing rights................................................ 919 -- Unrealized gains on investment securities....................... -- 144 Core deposit intangibles........................................ 8,887 6,491 Customer list intangibles....................................... 9,307 -- Discount on loans............................................... 5,446 4,878 Equity investments.............................................. 6,103 6,331 State taxes..................................................... 2,594 -- Other........................................................... 1,125 853 --------- -------- Deferred tax liabilities.................................... 42,826 27,104 --------- -------- Net deferred tax assets..................................... $ 57,349 101,834 ========= ========
The realization of First Banks' net deferred tax assets is based on the availability of carrybacks to prior taxable periods, the expectation of future taxable income and the utilization of tax planning strategies. Based on these factors, management believes it is more likely than not that First Banks will realize the recognized net deferred tax assets of $57.5 million at December 31, 2006. Changes in the deferred tax asset valuation allowance for the years ended December 31, 2006, 2005 and 2004 were as follows:
2006 2005 2004 ---- ---- ---- (dollars expressed in thousands) Balance, beginning of year........................................... $17,754 17,767 -- Purchase acquisitions................................................ -- -- 17,767 Adjustment to purchase acquisitions completed in prior periods....... 3,647 (13) -- ------- ------- ------- Balance, end of year................................................. $21,401 17,754 17,767 ======= ======= =======
Upon completion of the acquisition of CIB Bank, the net deferred tax assets associated with the acquisition were evaluated to determine whether it is more likely than not that the net deferred tax assets will be recognized in the future. The ability to utilize the net deferred tax assets recorded in connection with the acquisition is subject to a number of limitations. Among these limitations is the restriction that any built-in loss (the fair value was less than the tax basis) that existed at the date of acquisition, if realized within the first five years subsequent to the date of acquisition, will be deferred and must be carried forward and subjected to rules similar to the rules for carrying forward net operating losses. Based upon these factors, management determined that a valuation allowance should be established for CIB Bank in the amount of $21.4 million. Subsequent reductions in the valuation allowance will be credited to goodwill. At December 31, 2006 and 2005, the accumulation of prior years' earnings representing tax bad debt deductions was approximately $29.8 million. If these tax bad debt reserves were charged for losses other than bad debt losses, First Banks would be required to recognize taxable income in the amount of the charge. It is not contemplated that such tax-restricted retained earnings will be used in a manner that would create federal income tax liabilities. At December 31, 2006 and 2005, for federal income taxes purposes, First Banks had net operating loss carryforwards relating to pre-acquisition tax losses of acquired entities of approximately $75.0 million and $101.5 million, respectively. At December 31, 2006, the net operating loss carryforwards for First Banks expire as follows:
(dollars expressed in thousands) Year ending December 31: 2007.................................................................. $ 1,718 2008.................................................................. 11,924 2009.................................................................. 6,114 2010.................................................................. 7 2011 - 2025........................................................... 55,287 --------- Total............................................................. $ 75,050 =========
During 2004, First Banks recognized built-in losses associated with the acquisition of CIB Bank. A portion of the realized built-in losses was deferred for 2004 and is required to be carried forward subject to rules similar to the rules for carrying forward net operating losses. Utilization of the realized built-in losses is allowed subsequent to the utilization of any net operating loss carryforwards associated with the acquisition of CIB Bank. Consequently, at December 31, 2006, First Banks had deferred built-in loss carryforwards of approximately $8.0 million. Utilization of the deferred built-in loss carryforwards is allowed beginning in the year 2020, and such losses will expire in the year 2024. (14) EARNINGS PER COMMON SHARE The following is a reconciliation of basic and diluted EPS for the years ended December 31, 2006, 2005 and 2004:
Per Share Income Shares Amount ------ ------ ------ (dollars in thousands, except share and per share data) Year ended December 31, 2006: Basic EPS - income available to common stockholders......... $ 110,908 23,661 $4,687.38 Effect of dilutive securities: Class A convertible preferred stock...................... 769 456 (56.66) --------- -------- --------- Diluted EPS - income available to common stockholders....... $ 111,677 24,117 $4,630.72 ========= ======== ========= Year ended December 31, 2005: Basic EPS - income available to common stockholders......... $ 96,120 23,661 $4,062.36 Effect of dilutive securities: Class A convertible preferred stock...................... 769 516 (54.90) --------- -------- --------- Diluted EPS - income available to common stockholders....... $ 96,889 24,177 $4,007.46 ========= ======== ========= Year ended December 31, 2004: Basic EPS - income available to common stockholders......... $ 82,123 23,661 $3,470.80 Effect of dilutive securities: Class A convertible preferred stock...................... 769 565 (49.22) --------- -------- --------- Diluted EPS - income available to common stockholders....... $ 82,892 24,226 $3,421.58 ========= ======== =========
(15) CREDIT COMMITMENTS First Banks is a party to commitments to extend credit and commercial and standby letters of credit in the normal course of business to meet the financing needs of its customers. These instruments involve, in varying degrees, elements of credit risk and interest rate risk in excess of the amount recognized in the consolidated balance sheets. The interest rate risk associated with these credit commitments relates primarily to the commitments to originate fixed-rate loans. As more fully described in Note 5 to the Consolidated Financial Statements, the interest rate risk of the commitments to originate fixed-rate loans has been hedged with forward commitments to sell mortgage-backed securities. The credit risk amounts are equal to the contractual amounts, assuming the amounts are fully advanced and the collateral or other security is of no value. First Banks uses the same credit policies in granting commitments and conditional obligations as it does for on-balance sheet items. Commitments to extend fixed and variable rate credit, and commercial and standby letters of credit at December 31, 2006 and 2005 were as follows:
December 31, -------------------------------- 2006 2005 ---- ---- (dollars expressed in thousands) Commitments to extend credit............................................. $ 3,092,804 2,785,028 Commercial and standby letters of credit................................. 171,097 191,634 ----------- ---------- $ 3,263,901 2,976,662 =========== ==========
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Each customer's creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained, if deemed necessary upon extension of credit, is based on management's credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property, plant, equipment, income-producing commercial properties or single family residential properties. In the event of nonperformance, First Banks may obtain and liquidate the collateral to recover amounts paid under its guarantees on these financial instruments. Commercial and standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. The letters of credit are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing and similar transactions. Most letters of credit extend for less than one year. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Upon issuance of the commitments, First Banks typically holds marketable securities, certificates of deposit, inventory, real property or other assets as collateral supporting those commitments for which collateral is deemed necessary. The standby letters of credit at December 31, 2006 expire, at various dates, within 10 years. (16) FAIR VALUE OF FINANCIAL INSTRUMENTS The fair value of financial instruments is management's estimate of the values at which the instruments could be exchanged in a transaction between willing parties. These estimates are subjective and may vary significantly from amounts that would be realized in actual transactions. In addition, other significant assets are not considered financial assets including servicing assets, deferred income tax assets, bank premises and equipment and goodwill and other intangible assets. Furthermore, the income taxes that would be incurred if First Banks were to realize any of the unrealized gains or unrealized losses indicated between the estimated fair values and corresponding carrying values could have a significant effect on the fair value estimates and have not been considered in any of the estimates. The estimated fair value of First Banks' financial instruments at December 31, 2006 and 2005 were as follows:
2006 2005 -------------------------- -------------------------- Carrying Estimated Carrying Estimated Value Fair Value Value Fair Value ----- ---------- ----- ---------- (dollars expressed in thousands) Financial Assets: Cash and cash equivalents................... $ 369,557 369,557 286,652 286,652 Investment securities: Trading................................. 81,168 81,168 3,389 3,389 Available for sale...................... 1,359,729 1,359,729 1,311,289 1,311,289 Held to maturity........................ 24,049 23,971 26,105 25,791 Net loans................................... 7,520,752 7,471,250 6,885,441 6,847,421 Derivative instruments...................... (1,659) (1,659) (6,530) (6,530) Bank-owned life insurance................... 113,778 113,778 111,442 111,442 Accrued interest receivable................. 55,464 55,464 43,280 43,280 Interest rate lock commitments.............. (17) (17) (49) (49) Forward commitments to sell mortgage-backed securities.............. 86 86 (538) (538) ========== ========== ========== ========== Financial Liabilities: Deposits: Noninterest-bearing demand.............. $1,281,108 1,281,108 1,299,350 1,299,350 Interest-bearing demand................. 981,939 981,939 981,837 981,837 Savings................................. 2,352,575 2,352,575 2,106,470 2,106,470 Time deposits........................... 3,827,464 3,827,464 3,154,174 3,154,174 Other borrowings............................ 373,899 373,899 539,174 539,174 Notes payable............................... 65,000 65,000 100,000 100,000 Accrued interest payable.................... 28,176 28,176 21,023 21,023 Subordinated debentures..................... 297,966 303,302 215,461 219,675 ========== ========== ========== ========== Off-Balance Sheet Financial Instruments....... $ -- -- -- -- ========== ========== ========== ==========
The following methods and assumptions were used in estimating the fair value of financial instruments: Cash and cash equivalents and accrued interest receivable: The carrying values reported in the consolidated balance sheets approximate fair value. Investment securities: The fair value of trading and available-for-sale investment securities is the amount reported in the consolidated balance sheets. The fair value of held-to-maturity investment securities is based on quoted market prices where available. If quoted market prices were not available, the fair value was based on quoted market prices of comparable instruments. Net loans: The fair value of most loans held for portfolio was estimated utilizing discounted cash flow calculations that applied interest rates currently being offered for similar loans to borrowers with similar risk profiles. The fair value of loans held for sale, which is the amount reported in the consolidated balance sheets, is based on quoted market prices where available. If quoted market prices were not available, the fair value was based on quoted market prices of comparable instruments. The carrying value of loans is net of the allowance for loan losses and unearned discount. Derivative instruments and bank-owned life insurance: The fair value of derivative instruments, including cash flow hedges, fair value hedges, interest rate floor and cap agreements, and interest rate lock commitments, and bank-owned life insurance is based on quoted market prices where available. If quoted market prices were not available, the fair value was based on quoted market prices of comparable instruments. Forward commitments to sell mortgage-backed securities: The fair value of forward commitments to sell mortgage-backed securities is based on quoted market prices. The fair value of these commitments has been reflected in the consolidated balance sheets in the carrying value of the loans held for sale portfolio. Deposits: The fair value of deposits generally payable on demand (i.e., noninterest-bearing and interest-bearing demand and savings accounts) is considered equal to their respective carrying amounts as reported in the consolidated balance sheets. The fair value of demand deposits does not include the benefit that results from the low-cost funding provided by deposit liabilities compared to the cost of borrowing funds in the market. The fair value disclosed for time deposits was estimated utilizing a discounted cash flow calculation that applied interest rates currently being offered on similar deposits to a schedule of aggregated monthly maturities of time deposits. If the estimated fair value is lower than the carrying value, the carrying value is reported as the fair value of time deposits. Other borrowings, notes payable and accrued interest payable: The carrying values reported in the consolidated balance sheets approximate fair value. Subordinated debentures: The fair value is based on quoted market prices. Off-Balance Sheet Financial Instruments: The fair value of commitments to extend credit, standby letters of credit and financial guarantees is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements, the likelihood of the counterparties drawing on such financial instruments and the credit worthiness of the counterparties. These fees in aggregate are not considered material, and as such, were not assigned a value for purposes of this disclosure. (17) EMPLOYEE BENEFITS First Banks' 401(k) plan is a self-administered savings and incentive plan covering substantially all employees. Employer match contributions are determined annually under the plan by First Banks' Board of Directors. Employee contributions were limited to $15,000 of gross compensation for 2006. Total employer contributions under the plan were $3.9 million, $2.4 million and $2.1 million for the years ended December 31, 2006, 2005 and 2004, respectively. The plan assets are held and managed under a trust agreement with First Bank's trust department. First Banks' nonqualified deferred compensation plan, which covers a select group of employees, is administered by an independent third party. The plan is exempt from the participation, vesting, funding and fiduciary requirements of the Employee Retirement Income Security Act of 1974. Participants may contribute from 1% to 25% of their salary and up to 100% of their bonuses on a pre-tax basis. Balances outstanding under the plan, which are reflected in accrued and other liabilities in the consolidated balance sheets, were $8.1 million and $6.2 million at December 31, 2006 and 2005, respectively. Plan expense recorded under the plan, which is reflected in salaries and employee benefits expense in the consolidated statements of income, was $845,000, $592,000 and $450,000 for the years ended December 31, 2006, 2005 and 2004, respectively. (18) STOCKHOLDERS' EQUITY First Banks has two classes of preferred stock outstanding. The Class A preferred stock is convertible into shares of common stock at a rate based on the ratio of the par value of the preferred stock to the current market value of the common stock at the date of conversion, to be determined by independent appraisal at the time of conversion. Shares of Class A preferred stock may be redeemed by First Banks at any time at 105.0% of par value. The Class B preferred stock may not be redeemed or converted. The redemption of any issue of preferred stock requires the prior approval of the Board of Governors of the Federal Reserve System (Federal Reserve). The holders of the Class A and Class B preferred stock have full voting rights. Dividends on the Class A and Class B preferred stock are adjustable quarterly based on the highest of the Treasury Bill Rate or the Ten Year Constant Maturity Rate for the two-week period immediately preceding the beginning of the quarter. This rate shall not be less than 6.0% nor more than 12.0% on the Class A preferred stock, or less than 7.0% nor more than 15.0% on the Class B preferred stock. The annual dividend rates for the Class A and Class B preferred stock were 6.0% and 7.0%, respectively, for the years ended December 31, 2006, 2005 and 2004. Other comprehensive income (loss) of $6.8 million, ($18.1) million and ($31.0) million, as presented in the accompanying Consolidated Statements of Changes in Stockholders' Equity and Comprehensive Income, is reflected net of income tax expense (benefit) of $3.7 million, ($9.7) million and ($16.7) million at December 31, 2006, 2005 and 2004, respectively. In December 2006, First Banks recorded an increase in additional paid-in capital of $3.8 million which related to the utilization of net operating losses that were acquired with the acquisition of First Banks America, Inc. (FBA) and its wholly-owned subsidiary BankTEXAS N.A., in 1994. Effective December 1994, the FBA Board of Directors approved the implementation of a quasi-reorganization. In accordance with the provisions of SFAS No. 109 and under the requirements for completing the quasi-reorganization, tax benefits for deductible temporary differences and net operating loss carryforwards that existed at the date of the quasi-reorganization and are subsequently recognized are generally reported as a direct addition to contributed capital. (19) TRANSACTIONS WITH RELATED PARTIES Outside of normal customer relationships, no directors or officers of First Banks, no shareholders holding over 5% of First Banks' voting securities and no corporations or firms with which such persons or entities are associated currently maintain or have maintained, since the beginning of the last full fiscal year, any significant business or personal relationships with First Banks or its subsidiaries, other than that which arises by virtue of such position or ownership interest in First Banks or its subsidiaries, except as described in the following paragraphs. First Services, L.P., a limited partnership indirectly owned by First Banks' Chairman and members of his immediate family, provides information technology, item processing and various related services to First Banks, Inc. and its subsidiaries. Fees paid under agreements with First Services, L.P. were $30.6 million, $29.6 million and $26.6 million for the years ended December 31, 2006, 2005 and 2004, respectively. First Services, L.P. leases information technology and other equipment from First Bank. During 2006, 2005 and 2004, First Services, L.P. paid First Bank $4.2 million, $4.3 million and $4.3 million, respectively, in rental fees for the use of that equipment. First Brokerage America, L.L.C., a limited liability company indirectly owned by First Banks' Chairman and members of his immediate family, received approximately $3.0 million, $2.6 million and $3.3 million for the years ended December 31, 2006, 2005 and 2004, respectively, in gross commissions paid by unaffiliated third-party companies. The commissions received were primarily in connection with the sales of annuities, securities and other insurance products to customers of First Bank. First Title Guaranty LLC D/B/A First Banc Insurors (First Title), a limited liability company owned by First Banks' Chairman and members of his immediate family, received approximately $221,000, $379,000 and $514,000 for the years ended December 31, 2006, 2005 and 2004, respectively, in commissions for insurance policies purchased by First Banks or customers of First Bank from unaffiliated third-party insurers. The insurance premiums on which these commissions were earned were competitively bid, and First Banks deems the commissions First Title earned from unaffiliated third-party companies to be comparable to those that would have been earned by an unaffiliated third-party agent. On May 31, 2006, Adrian Baker, a newly acquired subsidiary of First Bank, purchased the personal and commercial insurance book of business from First Title. First Bank engaged an independent third party to perform a business valuation of the personal and commercial insurance book of business of First Title, which was determined to be approximately $270,000 and is being amortized over seven years utilizing the straight-line method. During 2006, First Bank contributed $5.0 million in cash to the Dierberg Operating Foundation, Inc., a charitable foundation established by First Banks' Chairman and members of his immediate family. In addition, on November 15, 2006, First Banks contributed 26,962 shares of common stock held in its available-for-sale investment securities portfolio with a fair value of $1.0 million to the Dierberg Operating Foundation, Inc. In conjunction with this transaction, First Banks recorded charitable contribution expense of $1.0 million, which was partially offset by a gain on the contribution of these available-for-sale investment securities of $121,000, representing the difference between the cost basis and the fair value of the common stock on the date of the contribution. In addition, First Banks recognized a tax benefit of $522,000 associated with this transaction. During 2005, First Bank contributed $2.5 million in cash to The Dierberg Foundation, a charitable foundation established by First Banks' Chairman and members of his immediate family, and $1.5 million in cash to the Dierberg Operating Foundation, Inc. First Banks did not make any charitable contributions to these organizations during 2004. First Banks periodically purchases various products from Hermannhof, Inc. and Dierberg Star Lane Vineyards, entities that are controlled by First Banks' Chairman and members of his immediate family. First Banks utilizes these products primarily for customer and employee events and promotions, and business development functions. During the years ended December 31, 2006, 2005 and 2004, First Banks purchased products aggregating approximately $376,000, $320,000 and $189,000, respectively, from these entities. First Bank leases certain of its in-store branch offices and ATM sites from Dierbergs Markets, Inc., a grocery store chain headquartered in St. Louis, Missouri that is owned and operated by the brother of First Banks' Chairman and members of his immediate family. Total rent expense incurred by First Bank under the lease obligation contracts was $385,000, $335,000 and $297,000 for the years ended December 31, 2006, 2005 and 2004, respectively. In August 2004, First Bank granted to FCA, a corporation owned by First Banks' Chairman and members of his immediate family, a written option to purchase 735 Membership Interests of SBLS LLC, a wholly owned limited liability company of First Bank, at a price of $10,000 per Membership Interest, or $7.4 million in aggregate. The option could have been exercised by FCA at any time prior to its expiration, which was extended to June 30, 2005. On June 30, 2005, FCA exercised this option and paid $7.4 million in cash. Consequently, SBLS LLC became 51.0% owned by First Bank and 49.0% owned by FCA as of June 30, 2005. In June 2005, SBLS LLC executed a Multi-Party Agreement by and among SBLS LLC, First Bank, Colson Services Corp., fiscal transfer agent for the SBA, and the SBA, in addition to a Loan and Security Agreement by and among First Bank and the SBA (collectively, the Agreement) that provides a $50.0 million warehouse line of credit for loan funding purposes. The Agreement provided for an initial maturity date of June 30, 2008, which was extended on June 15, 2006 by First Bank to June 30, 2009. Interest is payable monthly, in arrears, on the outstanding loan balances at a rate equal to First Bank's prime lending rate minus 50 basis points. Advances under the Agreement are secured by the assignment of the majority of the assets of SBLS LLC. The balance of advances outstanding under this line of credit was $47.5 million and $31.4 million at December 31, 2006 and 2005, respectively. Interest expense recorded under the Agreement by SBLS LLC was $3.0 million and $1.9 million for the years ended December 31, 2006 and 2005, respectively. The balance of the advances under the Agreement and the related interest expense recognized by SBLS LLC are fully eliminated for purposes of the Consolidated Financial Statements. First Bank has had in the past, and may have in the future, loan transactions in the ordinary course of business with its directors and/or their affiliates. These loan transactions have been made on the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unaffiliated persons and did not involve more than the normal risk of collectibility or present other unfavorable features. Loans to directors, their affiliates and executive officers of First Banks, Inc. were approximately $55.9 million and $37.9 million at December 31, 2006 and 2005, respectively. First Bank does not extend credit to its officers or to officers of First Banks, Inc., except extensions of credit secured by mortgages on personal residences, loans to purchase automobiles, personal credit card accounts and deposit account overdraft protection under a plan whereby a credit limit has been established in accordance with First Bank's standard credit criteria. In August 2005, First Bank entered into a contract with World Wide Technology, Inc. (WWT), a wholly owned subsidiary of World Wide Technology Holding Co., Inc. (WWTHC). WWTHC is an electronic procurement and logistics company in the information technology industry headquartered in St. Louis, Missouri. The contract provided for WWT to provide information technology services associated with the initial phase of the upgrade of personal computers to First Bank employees in an ongoing effort to further standardize the technological infrastructure throughout the First Bank branch banking network. Mr. David L. Steward, a director of First Banks and a member of the Audit Committee of First Banks, serves as the Chairman of the Board of Directors of WWTHC. Prior to entering into this contract, the Audit Committee of First Banks reviewed and approved the utilization of WWT for information technology services for this phase of the project with fees not to exceed $500,000. First Bank made payments of $7,000 and $471,000 under the contract for the first phase of the project for the years ended December 31, 2006 and 2005, respectively. During 2006, First Bank evaluated the second phase of its corporate-wide personal computer upgrade project and entered into a contract with WWT on August 21, 2006 for additional information technology services. Prior to entering into this contract, the Audit Committee of First Banks reviewed and approved the utilization of WWT for this phase of the project with fees not to exceed $500,000. First Bank made payments of $367,000 under the contract for the second phase of the project for the year ended December 31, 2006. (20) BUSINESS SEGMENT RESULTS First Banks' business segment is First Bank. The reportable business segment is consistent with the management structure of First Banks, First Bank and the internal reporting system that monitors performance. First Bank provides similar products and services in its defined geographic areas through its branch network. The products and services offered include a broad range of commercial and personal deposit products, including demand, savings, money market and time deposit accounts. In addition, First Bank markets combined basic services for various customer groups, including packaged accounts for more affluent customers, and sweep accounts, lock-box deposits and cash management products for commercial customers. First Bank also offers both consumer and commercial loans. Consumer lending includes residential real estate, home equity and installment lending. Commercial lending includes commercial, financial and agricultural loans, real estate construction and development loans, commercial real estate loans, asset-based loans, trade financing and insurance premium financing. Other financial services include mortgage banking, debit cards, brokerage services, employee benefit and commercial and personal insurance services, internet banking, automated teller machines, telephone banking, safe deposit boxes and trust, private banking and institutional money management services. The revenues generated by First Bank and its subsidiaries consist primarily of interest income, generated from the loan and investment security portfolios, service charges and fees generated from the deposit products and services, and fees generated by our mortgage banking, insurance services, and trust, private banking and institutional money management services businesses. The geographic areas include eastern Missouri, Illinois, including Chicago, southern and northern California, and Houston and Dallas, Texas. The products and services are offered to customers primarily within First Banks' respective geographic areas. The business segment results are consistent with First Banks' internal reporting system and, in all material respects, with U.S. generally accepted accounting principles and practices predominant in the banking industry. Such principles and practices are summarized in Note 1 to the Consolidated Financial Statements. The business segment results are summarized as follows:
Corporate, Other and Intercompany First Bank Reclassifications (1) Consolidated Totals --------------------------------- ----------------------------- ---------------------------------- 2006 2005 2004 2006 2005 2004 2006 2005 2004 ---- ---- ---- ---- ---- ---- ---- ---- ---- (dollars expressed in thousands) Balance sheet information: Investment securities......... $ 1,439,118 1,324,219 1,803,454 25,828 16,564 9,895 1,464,946 1,340,783 1,813,349 Loans, net of unearned discount................... 7,666,481 7,020,771 6,137,968 -- -- -- 7,666,481 7,020,771 6,137,968 Goodwill and other intangible assets.......... 295,382 191,901 182,669 -- -- -- 295,382 191,901 182,669 Total assets.................. 10,116,246 9,148,931 8,720,331 42,468 21,402 12,510 10,158,714 9,170,333 8,732,841 Deposits...................... 8,550,062 7,601,162 7,161,636 (106,976) (59,331) (9,666) 8,443,086 7,541,831 7,151,970 Notes payable................. -- -- -- 65,000 100,000 15,000 65,000 100,000 15,000 Subordinated debentures....... -- -- -- 297,966 215,461 273,300 297,966 215,461 273,300 Stockholders' equity.......... 1,086,876 931,192 877,473 (286,441) (252,254) (276,580) 800,435 678,938 600,893 =========== ========= ========= ======== ======== ======== ========== ========= ========= Income statement information: Interest income............... $ 645,100 493,182 394,196 1,204 758 586 646,304 493,940 394,782 Interest expense.............. 233,982 145,608 79,260 27,880 22,651 15,507 261,862 168,259 94,767 ----------- --------- --------- -------- -------- -------- ---------- --------- --------- Net interest income..... 411,118 347,574 314,936 (26,676) (21,893) (14,921) 384,442 325,681 300,015 Provision for loan losses..... 12,000 (4,000) 25,750 -- -- -- 12,000 (4,000) 25,750 ----------- --------- --------- -------- -------- -------- ---------- --------- --------- Net interest income after provision for loan losses.... 399,118 351,574 289,186 (26,676) (21,893) (14,921) 372,442 329,681 274,265 Noninterest income............ 112,549 96,871 87,790 394 (786) (591) 112,943 96,085 87,199 Noninterest expense........... 315,663 274,484 229,896 3,553 3,154 3,322 319,216 277,638 233,218 ----------- --------- --------- -------- -------- -------- ---------- --------- --------- Income before provision for income taxes and minority interest in loss of subsidiary.... 196,004 173,961 147,080 (29,835) (25,833) (18,834) 166,169 148,128 128,246 Provision for income taxes.... 65,752 61,517 54,682 (10,690) (9,008) (9,344) 55,062 52,509 45,338 ----------- --------- --------- -------- -------- -------- ---------- --------- --------- Income before minority interest in loss of subsidiary........ 130,252 112,444 92,398 (19,145) (16,825) (9,490) 111,107 95,619 82,908 Minority interest in loss of subsidiary.............. (587) (1,287) -- -- -- -- (587) (1,287) -- ----------- --------- --------- -------- -------- -------- ---------- --------- --------- Net income.............. $ 130,839 113,731 92,398 (19,145) (16,825) (9,490) 111,694 96,906 82,908 =========== ========= ========= ======== ======== ======== ========== ========= ========= - ------------------------ (1) Corporate and other includes $14.8 million, $13.4 million and $9.8 million of interest expense on subordinated debentures, after applicable income tax benefit of $8.0 million, $7.2 million and $5.3 million for the years ended December 31, 2006, 2005 and 2004, respectively.
(21) REGULATORY CAPITAL First Banks and First Bank are subject to various regulatory capital requirements administered by the federal and state banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on First Banks' financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, First Banks and First Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require First Banks and First Bank to maintain minimum amounts and ratios of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets, and of Tier 1 capital to average assets. Management believes, as of December 31, 2006 and 2005, First Banks and First Bank were each well capitalized. As of December 31, 2006, the most recent notification from First Banks' primary regulator categorized First Banks and First Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, First Banks and First Bank must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the following table. At December 31, 2006 and 2005, First Banks' and First Bank's required and actual capital ratios were as follows:
Actual ------------------------------------------ For To be Well 2006 2005 Capital Capitalized Under -------------------- -------------------- Adequacy Prompt Corrective Amount Ratio Amount Ratio Purposes Action Provisions ------ ----- ------ ----- -------- ----------------- (dollars expressed in thousands) Total capital (to risk-weighted assets): First Banks......................... $ 929,688 10.25% $ 826,893 10.14% 8.0% 10.0% First Bank.......................... 925,013 10.23 868,393 10.66 8.0 10.0 Tier 1 capital (to risk-weighted assets): First Banks......................... 789,967 8.71 724,501 8.88 4.0 6.0 First Bank.......................... 811,530 8.97 766,148 9.41 4.0 6.0 Tier 1 capital (to average assets): First Banks......................... 789,967 8.13 724,501 8.13 3.0 5.0 First Bank.......................... 811,530 8.38 766,148 8.61 3.0 5.0
In March 2005, the Federal Reserve adopted a final rule, Risk-Based Capital Standards: Trust Preferred Securities and the Definition of Capital, which allows for the continued limited inclusion of trust preferred securities in Tier 1 capital. The Federal Reserve's final rule limits restricted core capital elements to 25% of the sum of all core capital elements, including restricted core capital elements, net of goodwill less any associated deferred tax liability. Amounts of restricted core capital elements in excess of these limits may generally be included in Tier 2 capital. Specifically, amounts of qualifying trust preferred securities and cumulative perpetual preferred stock in excess of the 25% limit may be included in Tier 2 capital, but will be limited, together with subordinated debt and limited-life preferred stock, to 50% of Tier 1 capital. In addition, the final rule provides that in the last five years before the maturity of the underlying subordinated note, the outstanding amount of the associated trust preferred securities is to be excluded from Tier 1 capital and included in Tier 2 capital, subject to one-fifth amortization per year. The final rule provides for a five-year transition period, ending March 31, 2009, for the application of the quantitative limits. Until March 31, 2009, the aggregate amount of qualifying cumulative perpetual preferred stock and qualifying trust preferred securities that may be included in Tier 1 capital is limited to 25% of the sum of the following core capital elements: qualifying common stockholders' equity, qualifying noncumulative and cumulative perpetual preferred stock, qualifying minority interest in the equity accounts of consolidated subsidiaries and qualifying trust preferred securities. First Banks has evaluated the impact of the final rule on the Company's financial condition and results of operations, and determined the implementation of the Federal Reserve's final rules that will be effective in March 2009 would reduce First Banks' Tier 1 capital (to risk-weighted assets) and Tier 1 capital (to average assets) to 7.86% and 7.34%, respectively, and would not have an impact on total capital (to risk-weighted assets), as of December 31, 2006. (22) DISTRIBUTION OF EARNINGS OF FIRST BANK First Bank is restricted by various state and federal regulations as to the amount of dividends that are available for payment to First Banks, Inc. Under the most restrictive of these requirements, the future payment of dividends from First Bank is limited to approximately $135.0 million at December 31, 2006, unless prior permission of the regulatory authorities is obtained. (23) PARENT COMPANY ONLY FINANCIAL INFORMATION Following are condensed balance sheets of First Banks, Inc. as of December 31, 2006 and 2005, and condensed statements of income and cash flows for the years ended December 31, 2006, 2005 and 2004:
CONDENSED BALANCE SHEETS December 31, ---------------------- 2006 2005 ---- ---- (dollars expressed in thousands) Assets ------ Cash deposited in First Bank............................................ $ 16,688 59,036 Cash deposited in unaffiliated financial institutions................... 26 1,789 ---------- --------- Total cash......................................................... 16,714 60,825 Investment securities................................................... 25,828 16,564 Investment in subsidiaries.............................................. 1,087,356 931,690 Advances due from subsidiary bank holding company....................... 90,000 -- Other assets............................................................ 17,014 3,425 ---------- --------- Total assets....................................................... $1,236,912 1,012,504 ========== ========= Liabilities and Stockholders' Equity Notes payable........................................................... $ 65,000 100,000 Subordinated debentures................................................. 297,966 215,461 Accrued expenses and other liabilities.................................. 73,511 18,105 ---------- --------- Total liabilities.................................................. 436,477 333,566 Stockholders' equity.................................................... 800,435 678,938 ---------- --------- Total liabilities and stockholders' equity......................... $1,236,912 1,012,504 ========== ========= CONDENSED STATEMENTS OF INCOME Years Ended December 31, ---------------------------------- 2006 2005 2004 ---- ---- ---- (dollars expressed in thousands) Income: Dividends from subsidiaries................................... $ 70,000 94,050 40,000 Management fees from subsidiaries............................. 35,525 31,975 27,853 Gain on sale of available-for-sale investment securities...... 767 -- -- Other......................................................... 2,284 1,049 710 --------- -------- -------- Total income............................................... 108,576 127,074 68,563 --------- -------- -------- Expense: Interest...................................................... 28,356 22,860 15,597 Salaries and employee benefits................................ 25,530 23,238 20,699 Legal, examination and professional fees...................... 3,796 3,959 2,943 Charitable contributions...................................... 1,068 100 43 Other......................................................... 9,660 8,687 8,114 --------- -------- -------- Total expense.............................................. 68,410 58,844 47,396 --------- -------- -------- Income before benefit for income taxes and equity in undistributed earnings of subsidiaries................ 40,166 68,230 21,167 Benefit for income taxes........................................ (10,690) (9,004) (9,344) --------- -------- -------- Income before equity in undistributed earnings of subsidiaries.......................................... 50,856 77,234 30,511 Equity in undistributed earnings of subsidiaries................ 60,838 19,672 52,397 --------- -------- -------- Net income................................................. $ 111,694 96,906 82,908 ========= ======== ========
CONDENSED STATEMENTS OF CASH FLOWS Years Ended December 31, ---------------------------------- 2006 2005 2004 ---- ---- ---- (dollars expressed in thousands) Cash flows from operating activities: Net income.................................................... $ 111,694 96,906 82,908 Adjustments to reconcile net income to net cash provided by operating activities: Net income of subsidiaries............................... (130,838) (113,722) (92,397) Dividends from subsidiaries.............................. 70,000 94,050 40,000 Other, net............................................... (100,610) 4,882 (3,262) --------- -------- -------- Net cash (used in) provided by operating activities.... (49,754) 82,116 27,249 --------- -------- -------- Cash flows from investing activities: Increase in investment securities............................. (6,375) (5,304) (915) Investment in common securities of affiliated business and statutory trusts....................................... (4,178) -- (1,857) Payments from redemption of investment in common securities of affiliated business and statutory trusts................ -- 1,778 -- Acquisitions of subsidiaries.................................. (85,514) (52,400) (76,067) Capital contributions to subsidiaries......................... -- -- (15,000) Other, net.................................................... (1,682) 1,340 (39) --------- -------- -------- Net cash used in investing activities.................. (97,749) (54,586) (93,878) --------- -------- -------- Cash flows from financing activities: Advances drawn on notes payable............................... -- 100,000 15,000 Repayments of notes payable................................... (35,000) (15,000) (17,000) Proceeds from issuance of subordinated debentures............. 139,178 -- 61,857 Repayments of subordinated debentures......................... -- (59,278) -- Payment of preferred stock dividends.......................... (786) (786) (786) --------- -------- -------- Net cash provided by financing activities.............. 103,392 24,936 59,071 --------- -------- -------- Net (decrease) increase in cash........................ (44,111) 52,466 (7,558) Cash, beginning of year......................................... 60,825 8,359 15,917 --------- -------- -------- Cash, end of year............................................... $ 16,714 60,825 8,359 ========= ======== ======== Noncash investing activities: Cash paid for interest........................................ $ 28,843 18,690 13,527 ========= ======== ========
(24) CONTINGENT LIABILITIES In October 2000, First Banks entered into two continuing guaranty contracts. For value received, and for the purpose of inducing a pension fund and its trustees and a welfare fund and its trustees (the Funds) to conduct business with MVP, First Bank's institutional investment management subsidiary, First Banks irrevocably and unconditionally guaranteed payment of and promised to pay to each of the Funds any amounts up to the sum of $5.0 million to the extent MVP is liable to the Funds for a breach of the Investment Management Agreements (including the Investment Policy Statement and Investment Guidelines), by and between MVP and the Funds and/or any violation of the Employee Retirement Income Security Act by MVP resulting in liability to the Funds. The guaranties are continuing guaranties of all obligations that may arise for transactions occurring prior to termination of the Investment Management Agreements and are coexistent with the term of the Investment Management Agreements. The Investment Management Agreements have no specified term but may be terminated at any time upon written notice by the Trustees or, at First Banks' option, upon thirty days written notice to the Trustees. In the event of termination of the Investment Management Agreements, such termination shall have no effect on the liability of First Banks with respect to obligations incurred before such termination. The obligations of First Banks are joint and several with those of MVP. First Banks does not have any recourse provisions that would enable it to recover from third parties any amounts paid under the contracts nor does First Banks hold any assets as collateral that, upon occurrence of a required payment under the contract, could be liquidated to recover all or a portion of the amount(s) paid. At December 31, 2006, First Banks had not recorded a liability for the obligations associated with these guaranty contracts as the likelihood that First Banks will be required to make payments under the contracts is remote. In August 2004, SBLS LLC acquired substantially all of the assets and assumed certain liabilities of SBLS, as further described in Note 2 to the Consolidated Financial Statements. The Amended and Restated Asset Purchase Agreement (Asset Purchase Agreement) governing this transaction provided for certain payments to the seller contingent on future valuations of specifically identified assets, including servicing assets and retained interests in securitizations. SBLS LLC was not required to make any payments to the seller as of September 30, 2006 and September 30, 2005, the first and second measurement dates under the terms of the Asset Purchase Agreement. However, in October 2006, SBLS LLC made a payment of $375,000, as settlement in full of all obligations associated with these contingent payments pursuant to a mutual agreement amongst the parties. As of December 31, 2005, SBLS LLC had not recorded a liability for the obligations associated with these contingent payments, as the likelihood that SBLS LLC would be required to make payments under the Asset Purchase Agreement was not ascertainable at that time. In the ordinary course of business, First Banks and its subsidiaries become involved in legal proceedings. Management, in consultation with legal counsel, believes the ultimate resolution of these proceedings will not have a material adverse effect on the financial condition or results of operations of First Banks and/or its subsidiaries. (25) SUBSEQUENT EVENTS (UNAUDITED) On February 23, 2007, First Bank Statutory Trust VIII (FBST VIII), a newly formed Delaware statutory trust, issued 25,000 variable rate trust preferred securities at $1,000 per security in a private placement, and issued 774 common securities to First Banks at $1,000 per security. First Banks owns all of the common securities of FBST VIII. The gross proceeds of the offering were used by FBST VIII to purchase $25.8 million of variable rate subordinated debentures from First Banks, maturing on March 30, 2037. The maturity date of the subordinated debentures may be shortened, at the option of First Banks, to a date not earlier than March 30, 2012, if certain conditions are met. The subordinated debentures are the sole asset of FBST VIII. In connection with the issuance of the FBST VIII preferred securities, First Banks made certain guarantees and commitments that, in the aggregate, constitute a full and unconditional guarantee by First Banks of the obligations of FBST VIII under the FBST VIII preferred securities. Proceeds from the issuance of the subordinated debentures to FBST VIII, net of offering expenses, were $25.8 million. The distribution rate on the FBST VIII preferred securities is equivalent to the three-month LIBOR plus 161.0 basis points, and is payable quarterly in arrears beginning March 30, 2007. On February 28, 2007, First Banks completed its acquisition of Royal Oaks, located in Houston, Texas, for $38.6 million in cash. The acquisition served to expand First Banks' banking franchise in Houston, Texas. The transaction was funded through internally generated funds and the issuance of the FBST VIII trust preferred securities. At the time of the acquisition, Royal Oaks had assets of $206.9 million, loans, net of unearned discount, of $175.5 million, deposits of $159.1 million and stockholders' equity of $9.6 million. The assets acquired and liabilities assumed were recorded at their estimated fair value on the acquisition date. The fair value adjustments represent current estimates and are subject to further adjustment as the valuation data is finalized. Preliminary goodwill, which is not deductible for tax purposes, was approximately $29.0 million. Royal Oaks was merged with and into First Bank at the time of the acquisition.
FIRST BANKS, INC. QUARTERLY CONDENSED FINANCIAL DATA -- UNAUDITED - --------------------------------------------------------------------------------------------------------------------- 2006 Quarter Ended ------------------------------------------------------ March 31 June 30 September 30 December 31 -------- ------- ------------ ----------- (dollars expressed in thousands, except per share data) Interest income............................................ $ 147,234 157,731 168,293 173,046 Interest expense........................................... 56,368 62,051 69,109 74,334 --------- -------- -------- -------- Net interest income..................................... 90,866 95,680 99,184 98,712 Provision for loan losses.................................. 1,000 5,000 2,000 4,000 --------- -------- -------- -------- Net interest income after provision for loan losses..... 89,866 90,680 97,184 94,712 Noninterest income......................................... 25,497 25,879 29,994 31,573 Noninterest expense........................................ 74,815 81,051 80,473 82,877 --------- -------- -------- -------- Income before provision for income taxes and minority interest in loss of subsidiary........................ 40,548 35,508 46,705 43,408 Provision for income taxes................................. 11,703 13,500 17,249 12,610 --------- -------- -------- -------- Income before minority interest in loss of subsidiary... 28,845 22,008 29,456 30,798 Minority interest in loss of subsidiary.................... (158) (78) (204) (147) --------- -------- -------- -------- Net income.............................................. $ 29,003 22,086 29,660 30,945 ========= ======== ======== ======== Earnings per common share: Basic................................................... $1,217.49 927.86 1,245.28 1,296.75 ========= ======== ======== ======== Diluted................................................. $1,202.46 916.31 1,231.06 1,285.63 ========= ======== ======== ======== 2005 Quarter Ended ------------------------------------------------------ March 31 June 30 September 30 December 31 -------- ------- ------------ ----------- (dollars expressed in thousands, except per share data) Interest income............................................ $ 112,228 117,188 127,801 136,723 Interest expense........................................... 34,149 39,367 45,155 49,588 --------- -------- -------- -------- Net interest income..................................... 78,079 77,821 82,646 87,135 Provision for loan losses.................................. -- (8,000) -- 4,000 --------- -------- -------- -------- Net interest income after provision for loan losses..... 78,079 85,821 82,646 83,135 Noninterest income......................................... 21,215 26,191 24,948 23,731 Noninterest expense........................................ 63,869 70,161 67,852 75,756 --------- -------- -------- -------- Income before provision for income taxes and minority interest in loss of subsidiary........................ 35,425 41,851 39,742 31,110 Provision for income taxes................................. 13,298 15,005 13,265 10,941 --------- -------- -------- -------- Income before minority interest in loss of subsidiary... 22,127 26,846 26,477 20,169 Minority interest in loss of subsidiary.................... -- -- (1,036) (251) --------- -------- -------- -------- Net income.............................................. $ 22,127 26,846 27,513 20,420 ========= ======== ======== ======== Earnings per common share: Basic................................................... $ 926.87 1,129.05 1,154.52 851.91 ========= ======== ======== ======== Diluted................................................. $ 915.04 1,110.42 1,139.46 846.12 ========= ======== ======== ========
FIRST BANKS, INC. INVESTOR INFORMATION - -------------------------------------------------------------------------------- FIRST BANKS, INC. PREFERRED SECURITIES - -------------------------------------- The preferred securities of First Preferred Capital Trust IV are traded on the New York Stock Exchange with the ticker symbol "FBSPrA." The preferred securities of First Preferred Capital Trust IV are represented by a global security that has been deposited with and registered in the name of The Depository Trust Company, New York, New York (DTC). The beneficial ownership interests of these preferred securities are recorded through the DTC book-entry system. The high and low preferred securities prices and the dividends declared for 2006 and 2005 are summarized as follows:
FIRST PREFERRED CAPITAL TRUST IV (ISSUE DATE - APRIL 2003) - FBSPrA 2006 2005 ------------------ ------------------- Dividend High Low High Low Declared ---- --- ---- --- -------- First quarter...................................... $28.00 25.76 27.80 26.00 $ 0.509375 Second quarter..................................... 27.65 26.38 27.55 25.75 0.509375 Third quarter...................................... 28.05 26.70 27.40 26.28 0.509375 Fourth quarter..................................... 29.20 26.75 27.61 25.97 0.509375 ---------- $ 2.037500 ==========
FOR INFORMATION CONCERNING FIRST BANKS, PLEASE CONTACT: - ------------------------------------------------------- Allen H. Blake Terrance M. McCarthy Steven F. Schepman President and Senior Executive Vice President Senior Vice President Chief Executive Officer and Chief Operating Officer and Chief Financial Officer 600 James S. McDonnell Blvd. 600 James S. McDonnell Blvd. 600 James S. McDonnell Blvd. Mail Code - M1-199-014 Mail Code - M1-199-071 Mail Code - M1-199-014 Hazelwood, Missouri 63042 Hazelwood, Missouri 63042 Hazelwood, Missouri 63042 Telephone - (314) 592-5000 Telephone - (314) 592-5000 Telephone - (314) 592-5000 www.firstbanks.com www.firstbanks.com www.firstbanks.com - ------------------ ------------------ ------------------ TRANSFER AGENT: - -------------- Computershare Investor Services, LLC 2 North LaSalle Street Chicago, Illinois 60602 Telephone - (312) 588-4990 www.computershare.com - ---------------------
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. FIRST BANKS, INC. By: /s/ Allen H. Blake ----------------------------------------- Allen H. Blake President and Chief Executive Officer (Principal Executive Officer) By: /s/ Steven F. Schepman ---------------------------------------- Steven F. Schepman Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)
Date: March 28, 2007 Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed by the following persons on behalf of the Registrant and in the capacities and on the date indicated. Signatures Title Date - ------------------------------------------------------------------------------------------------------------------- /s/ James F. Dierberg Director March 28, 2007 ----------------------------------------- James F. Dierberg /s/ Allen H. Blake Director March 28, 2007 ----------------------------------------- Allen H. Blake /s/ Terrance M. McCarthy Director March 28, 2007 ----------------------------------------- Terrance M. McCarthy /s/ Steven F. Schepman Director March 28, 2007 ----------------------------------------- Steven F. Schepman /s/ Gordon A. Gundaker Director March 28, 2007 ----------------------------------------- Gordon A. Gundaker /s/ David L. Steward Director March 28, 2007 ----------------------------------------- David L. Steward /s/ Douglas H. Yaeger Director March 28, 2007 ----------------------------------------- Douglas H. Yaeger
INDEX TO EXHIBITS Exhibit Number Description ------ ----------- 2.1 Stock Purchase Agreement by and among First Banks, Inc., The San Francisco Company, CIB Marine Bancshares, Inc., Hillside Investors, Ltd., and CIB Bank, dated August 12, 2004 (incorporated herein by reference to Exhibit 10.6 to the Company's Current Report on Form 8-K dated August 12, 2004). 3.1 Restated Articles of Incorporation of the Company, as amended (incorporated herein by reference to Exhibit 3(i) to the Company's Annual Report on Form 10-K for the year ended December 31, 1993). 3.2 By-Laws of the Company (incorporated herein by reference to Exhibit 3.2 to Amendment No. 2 to the Company's Registration Statement on Form S-1, File No. 33-50576, dated September 15, 1992). 4.1 Agreement as to Expenses and Liabilities between First Banks, Inc. and First Preferred Capital Trust IV, dated April 1, 2003 (relating to First Preferred Capital Trust IV ("First Preferred IV")) (incorporated herein by reference to Exhibit 10.20 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2003). 4.2 Preferred Securities Guarantee Agreement by and between First Banks, Inc. and Fifth Third Bank, dated April 1, 2003 (relating to First Preferred IV) (incorporated herein by reference to Exhibit 10.21 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2003). 4.3 Indenture between First Banks, Inc. and Fifth Third Bank, as Trustee, dated April 1, 2003 (relating to First Preferred IV) (incorporated herein by reference to Exhibit 10.22 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2003). 4.4 Amended and Restated Trust Agreement among First Banks, Inc., as Depositor, Fifth Third Bank, as Property Trustee, Wilmington Trust Company, as Delaware Trustee, and the Administrative Trustees, dated April 1, 2003 (relating to First Preferred IV) (incorporated herein by reference to Exhibit 10.23 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2003). 4.5 Indenture between First Banks, Inc., as Issuer, and Wilmington Trust Company, as Trustee, dated as of April 10, 2002 (incorporated herein by reference to Exhibit 4.15 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2002). 4.6 Guarantee Agreement for First Bank Capital Trust, dated as of April 10, 2002 (incorporated herein by reference to Exhibit 4.16 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2002). 4.7 Amended and Restated Declaration of Trust of First Bank Capital Trust, dated as of April 10, 2002 (incorporated herein by reference to Exhibit 4.17 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2002). 4.8 Floating Rate Junior Subordinated Debt Security Certificate of First Banks, Inc., dated April 10, 2002 (incorporated herein by reference to Exhibit 4.18 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2002). 4.9 Capital Security Certificate of First Bank Capital Trust, dated as of April 10, 2002 (incorporated herein by reference to Exhibit 4.19 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2002). 4.10 Indenture between First Banks, Inc., as Issuer, and U.S. Bank National Association, as Trustee, dated as of March 20, 2003 (incorporated herein by reference to Exhibit 10.6 to Amendment No. 4 to the Company's Registration Statement on Form S-2, File No. 333-102549, dated March 24, 2003). 4.11 Amended and Restated Declaration of Trust by and among U.S. Bank National Association, as Institutional Trustee, First Banks, Inc., as Sponsor, and Allen H. Blake, Terrance M. McCarthy and Lisa K. Vansickle, as Administrators, dated as of March 20, 2003 (incorporated herein by reference to Exhibit 10.7 to Amendment No. 4 to the Company's Registration Statement on Form S-2, File No. 333-102549, dated March 24, 2003). 4.12 Guarantee Agreement by and between First Banks, Inc. and U.S. Bank National Association, dated as of March 20, 2003 (incorporated herein by reference to Exhibit 10.8 to Amendment No. 4 to the Company's Registration Statement on Form S-2, File No. 333-102549, dated March 24, 2003). 4.13 Placement Agreement by and among First Banks, Inc., First Bank Statutory Trust and SunTrust Capital Markets, Inc., dated as of March 20, 2003 (incorporated herein by reference to Exhibit 10.9 to Amendment No. 4 to the Company's Registration Statement on Form S-2, File No. 333-102549, dated March 24, 2003). 4.14 Junior Subordinated Debenture of First Banks, Inc., dated as of March 20, 2003 (incorporated herein by reference to Exhibit 10.10 to Amendment No. 4 to the Company's Registration Statement on Form S-2, File No. 333-102549, dated March 24, 2003). 4.15 Capital Securities Subscription Agreement by and among First Bank Statutory Trust, First Banks, Inc. and STI Investment Management, Inc., dated as of March 20, 2003 (incorporated herein by reference to Exhibit 10.11 to Amendment No. 4 to the Company's Registration Statement on Form S-2, File No. 333-102549, dated March 24, 2003). 4.16 Common Securities Subscription Agreement by and between First Bank Statutory Trust and First Banks, Inc., dated as of March 20, 2003 (incorporated herein by reference to Exhibit 10.12 to Amendment No. 4 to the Company's Registration Statement on Form S-2, File No. 333-102549, dated March 24, 2003). 4.17 Debenture Subscription Agreement by and between First Banks, Inc. and First Bank Statutory Trust, dated as of March 20, 2003 (incorporated herein by reference to Exhibit 10.13 to Amendment No. 4 to the Company's Registration Statement on Form S-2, File No. 333-102549, dated March 24, 2003). 4.18 Indenture between First Banks, Inc., as Issuer, and Wilmington Trust Company, as Trustee, dated as of September 20, 2004 (incorporated herein by reference to Exhibit 4.26 to the Company's Annual Report on Form 10-K for the year ended December 31, 2004). 4.19 Amended and Restated Declaration of Trust by and among Wilmington Trust Company, as Delaware Trustee and the Institutional Trustee, First Banks, Inc., as Sponsor, and Allen H. Blake, Terrance M. McCarthy and Lisa K. Vansickle, as Administrators, dated as of September 20, 2004 (incorporated herein by reference to Exhibit 4.27 to the Company's Annual Report on Form 10-K for the year ended December 31, 2004). 4.20 Guarantee Agreement by and between First Banks, Inc. and Wilmington Trust Company, dated as of September 20, 2004 (incorporated herein by reference to Exhibit 4.28 to the Company's Annual Report on Form 10-K for the year ended December 31, 2004). 4.21 Placement Agreement by and among First Banks, Inc., First Bank Statutory Trust II and FTN Financial Capital Markets and Keefe, Bruyette & Woods, as Placement Agents, dated as of September 10, 2004 (incorporated herein by reference to Exhibit 4.29 to the Company's Annual Report on Form 10-K for the year ended December 31, 2004). 4.22 Floating Rate Junior Subordinated Deferrable Interest Debenture of First Banks, Inc., dated as of September 20, 2004 (incorporated herein by reference to Exhibit 4.30 to the Company's Annual Report on Form 10-K for the year ended December 31, 2004). 4.23 Capital Securities Subscription Agreement by and among First Bank Statutory Trust II, First Banks, Inc. and First Tennessee Bank National Association, dated as of September 20, 2004 (incorporated herein by reference to Exhibit 4.31 to the Company's Annual Report on Form 10-K for the year ended December 31, 2004). 4.24 Capital Securities Subscription Agreement by and between First Bank Statutory Trust II, First Banks, Inc. and Preferred Term Securities XV, Ltd., dated as of September 20, 2004 (incorporated herein by reference to Exhibit 4.32 to the Company's Annual Report on Form 10-K for the year ended December 31, 2004). 4.25 Capital Securities Certificate P-1 of First Bank Statutory Trust II, dated September 20, 2004 (incorporated herein by reference to Exhibit 4.33 to the Company's Annual Report on Form 10-K for the year ended December 31, 2004). 4.26 Capital Securities Certificate P-2 of First Bank Statutory Trust II, dated September 20, 2004 (incorporated herein by reference to Exhibit 4.34 to the Company's Annual Report on Form 10-K for the year ended December 31, 2004). 4.27 Indenture between First Banks, Inc., as Issuer, and Wilmington Trust Company, as Trustee, dated as of November 23, 2004 (incorporated herein by reference to Exhibit 4.35 to the Company's Annual Report on Form 10-K for the year ended December 31, 2004). 4.28 Amended and Restated Declaration of Trust by and among Wilmington Trust Company, as Delaware Trustee and the Institutional Trustee, First Banks, Inc., as Sponsor, and Terrance M. McCarthy, Peter D. Wimmer and Lisa K. Vansickle, as Administrators, dated as of November 23, 2004 (incorporated herein by reference to Exhibit 4.36 to the Company's Annual Report on Form 10-K for the year ended December 31, 2004). 4.29 Guarantee Agreement by and between First Banks, Inc. and Wilmington Trust Company, dated as of November 23, 2004 (incorporated herein by reference to Exhibit 4.37 to the Company's Annual Report on Form 10-K for the year ended December 31, 2004). 4.30 Placement Agreement by and among First Banks, Inc., First Bank Statutory Trust III and FTN Financial Capital Markets and Keefe, Bruyette & Woods, as Placement Agents, dated as of November 22, 2004 (incorporated herein by reference to Exhibit 4.38 to the Company's Annual Report on Form 10-K for the year ended December 31, 2004). 4.31 Floating Rate Junior Subordinated Deferrable Interest Debenture of First Banks, Inc., dated as of November 23, 2004 (incorporated herein by reference to Exhibit 4.39 to the Company's Annual Report on Form 10-K for the year ended December 31, 2004). 4.32 Capital Securities Subscription Agreement by and among First Bank Statutory Trust III, First Banks, Inc. and First Tennessee Bank National Association, dated as of November 23, 2004 (incorporated herein by reference to Exhibit 4.40 to the Company's Annual Report on Form 10-K for the year ended December 31, 2004). 4.33 Capital Securities Certificate P-1 of First Bank Statutory Trust III, dated November 23, 2004 (incorporated herein by reference to Exhibit 4.41 to the Company's Annual Report on Form 10-K for the year ended December 31, 2004). 4.34 Indenture between First Banks, Inc., as Issuer, and Wilmington Trust Company, as Trustee, dated as of March 1, 2006 (incorporated herein by reference to Exhibit 4.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2006). 4.35 Amended and Restated Declaration of Trust by and among Wilmington Trust Company, as Delaware Trustee and the Institutional Trustee, First Banks, Inc., as Sponsor, and Allen H. Blake, Peter D. Wimmer and Lisa K. Vansickle, as Administrators, dated as of March 1, 2006 (incorporated herein by reference to Exhibit 4.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2006). 4.36 Guarantee Agreement by and between First Banks, Inc. and Wilmington Trust Company, dated as of March 1, 2006 (incorporated herein by reference to Exhibit 4.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2006). 4.37 Placement Agreement by and among First Banks, Inc., First Bank Statutory Trust IV and FTN Financial Capital Markets and Keefe, Bruyette & Woods, as Placement Agents, dated as of February 16, 2006 (incorporated herein by reference to Exhibit 4.4 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2006). 4.38 Floating Rate Junior Subordinated Deferrable Interest Debenture of First Banks, Inc., dated as of March 1, 2006 (incorporated herein by reference to Exhibit 4.5 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2006). 4.39 Capital Securities Subscription Agreement by and among First Bank Statutory Trust IV, First Banks, Inc. and First Tennessee Bank National Association, dated as of March 1, 2006 (incorporated herein by reference to Exhibit 4.6 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2006). 4.40 Capital Securities Subscription Agreement by and among First Bank Statutory Trust IV, First Banks, Inc. and Preferred Term Securities XXI, Ltd., dated as of March 1, 2006 (incorporated herein by reference to Exhibit 4.7 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2006). 4.41 Capital Securities Certificate P-1 of First Bank Statutory Trust IV, dated March 1, 2006 (incorporated herein by reference to Exhibit 4.8 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2006). 4.42 Capital Securities Certificate P-2 of First Bank Statutory Trust IV, dated March 1, 2006 (incorporated herein by reference to Exhibit 4.9 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2006). 4.43 Indenture between First Banks, Inc., as Issuer, and Wilmington Trust Company, as Trustee, dated as of April 28, 2006 (incorporated herein by reference to Exhibit 4.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2006). 4.44 Amended and Restated Declaration of Trust of First Bank Statutory Trust V by and among Wilmington Trust Company, as Delaware Trustee and the Institutional Trustee, First Banks, Inc., as Sponsor, and Allen H. Blake, Peter D. Wimmer and Lisa K. Vansickle, as Administrators, dated as of April 28, 2006 (incorporated herein by reference to Exhibit 4.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2006). 4.45 Guarantee Agreement by and between First Banks, Inc. and Wilmington Trust Company, dated as of April 28, 2006 (incorporated herein by reference to Exhibit 4.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2006). 4.46 Placement Agreement by and among First Banks, Inc., First Bank Statutory Trust V and FTN Financial Capital Markets and Keefe, Bruyette & Woods, as Placement Agents, dated as of April 27, 2006 (incorporated herein by reference to Exhibit 4.4 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2006). 4.47 Floating Rate Junior Subordinated Deferrable Interest Debenture of First Banks, Inc., dated as of April 28, 2006 (incorporated herein by reference to Exhibit 4.5 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2006). 4.48 Capital Securities Subscription Agreement by and among First Bank Statutory Trust V, First Banks, Inc. and First Tennessee Bank National Association, dated as of April 28, 2006 (incorporated herein by reference to Exhibit 4.6 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2006). 4.49 Capital Securities Certificate P-1 of First Bank Statutory Trust V, dated as of April 28, 2006 (incorporated herein by reference to Exhibit 4.7 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2006). 4.50 Indenture between First Banks, Inc., as Issuer, and Wells Fargo Bank, National Association, as Trustee, dated as of June 16, 2006 (incorporated herein by reference to Exhibit 4.8 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2006). 4.51 Amended and Restated Declaration of Trust of First Bank Statutory Trust VI by and among Wells Fargo Delaware Trust Company, as Delaware Trustee, Wells Fargo Bank, National Association, as Institutional Trustee, First Banks, Inc., as Sponsor, and Allen H. Blake and Lisa K. Vansickle, as Administrators, dated as of June 16, 2006 (incorporated herein by reference to Exhibit 4.9 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2006). 4.52 Guarantee Agreement by and between First Banks, Inc. and Wells Fargo Bank, National Association, dated as of June 16, 2006 (incorporated herein by reference to Exhibit 4.10 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2006). 4.53 Purchase Agreement among First Bank Statutory Trust VI, Issuer, First Banks, Inc., Sponsor, and Bear, Stearns & Co. Inc., Initial Purchaser, dated as of June 14, 2006 (incorporated herein by reference to Exhibit 4.11 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2006). 4.54 Junior Subordinated Debt Security due 2036 of First Banks, Inc., dated as of June 16, 2006 (incorporated herein by reference to Exhibit 4.12 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2006). 4.55 Debenture Subscription Agreement by and between First Banks, Inc. and First Bank Statutory Trust VI, dated as of June 16, 2006 (incorporated herein by reference to Exhibit 4.13 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2006). 4.56 Capital Securities Certificate P-001 of First Bank Statutory Trust VI, dated as of June 16, 2006 (incorporated herein by reference to Exhibit 4.14 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2006). 4.57 Indenture between First Banks, Inc., as Issuer, and Wilmington Trust Company, as Trustee, dated as of December 14, 2006 - filed herewith. 4.58 Amended and Restated Declaration of Trust of First Bank Statutory Trust VII by and among Wilmington Trust Company, as Delaware Trustee and the Institutional Trustee, First Banks, Inc., as Sponsor, and Terrance M. McCarthy, Peter D. Wimmer and Lisa K. Vansickle, as Administrators, dated as of December 14, 2006 - filed herewith. 4.59 Guarantee Agreement by and between First Banks, Inc. and Wilmington Trust Company, dated as of December 14, 2006 - filed herewith. 4.60 Placement Agreement by and among First Banks, Inc., First Bank Statutory Trust VII and FTN Financial Capital Markets and Keefe, Bruyette & Woods, as Placement Agents, dated as of December 6, 2006 - filed herewith. 4.61 Floating Rate Junior Subordinated Deferrable Interest Debenture of First Banks, Inc., dated as of December 14, 2006 - filed herewith. 4.62 Capital Securities Subscription Agreement by and among First Bank Statutory Trust VII, First Banks, Inc. and First Tennessee Bank National Association, dated as of December 14, 2006 - filed herewith. 4.63 Capital Securities Subscription Agreement by and among First Bank Statutory Trust VII, First Banks, Inc. and Preferred Term Securities XXIV, Ltd., dated as of December 14, 2006 - filed herewith. 4.64 Capital Securities Certificate P-1 of First Bank Statutory Trust VII, dated as of December 14, 2006 - filed herewith. 4.65 Capital Securities Certificate P-2 of First Bank Statutory Trust VII, dated as of December 14, 2006 - filed herewith. 10.1 Shareholders' Agreement by and among James F. Dierberg II and Mary W. Dierberg, Trustees under the Living Trust of James F. Dierberg II, dated July 24, 1989, Michael James Dierberg and Mary W. Dierberg, Trustees under the Living Trust of Michael James Dierberg, dated July 24, 1989; Ellen C. Dierberg and Mary W. Dierberg, Trustees under the Living Trust of Ellen C. Dierberg dated July 17, 1992, and First Banks, Inc. (incorporated herein by reference to Exhibit 10.3 to the Company's Registration Statement on Form S-1, File No 33-50576, dated August 6, 1992). 10.2 Comprehensive Banking System License and Service Agreement dated as of July 24, 1991, by and between the Company and FiServ CIR, Inc. (incorporated herein by reference to Exhibit 10.4 to the Company's Registration Statement on Form S-1, File No. 33-50576, dated August 6, 1992). 10.3 AFS Customer Agreement by and between First Banks, Inc. and Advanced Financial Solutions, Inc., dated January 29, 2004 (incorporated herein by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2004). 10.4 Management Services Agreement by and between First Banks, Inc. and First Bank, dated February 28, 2004 (incorporated herein by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2004). 10.5 Service Agreement by and between First Services, L.P. and First Banks, Inc., dated May 1, 2004 (incorporated herein by reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2004). 10.6 Service Agreement by and between First Services, L.P. and First Bank, dated May 1, 2004 (incorporated herein by reference to Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2004). 10.7 Service Agreement by and between First Banks, Inc. and First Services, L.P., dated May 1, 2004 (incorporated herein by reference to Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2004). 10.8* First Banks, Inc. Executive Incentive Compensation Plan (incorporated herein by reference to Exhibit 10.10 to the Company's Annual Report on Form 10-K for the year ended December 31, 2004). 10.9* First Banks, Inc. Nonqualified Deferred Compensation Plan (incorporated herein by reference to Exhibit 10.11 to the Company's Annual Report on Form 10-K for the year ended December 31, 2004). 10.10* First Amendment to First Banks, Inc. Nonqualified Deferred Compensation Plan (incorporated herein by reference to Exhibit 10.12 to the Company's Annual Report on Form 10-K for the year ended December 31, 2004). 10.11 Amended and Restated Secured Credit Agreement ($100.0 million Term Loan Facility, $15.0 million Revolving Credit Facility and $7.5 million Letter of Credit Facility), dated as of August 11, 2005, by and among First Banks, Inc. and Wells Fargo Bank, National Association, as Agent, JP Morgan Chase Bank, N.A., LaSalle Bank National Association, The Northern Trust Company, Union Bank of California, N.A., Fifth Third Bank (Chicago) and U.S. Bank National Association (incorporated herein by reference to Exhibit 10 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2005). 10.12 First Amendment to the Amended and Restated Secured Credit Agreement ($85.0 million Term Loan Facility, $10.0 million Revolving Credit Facility and $1.0 million Letter of Credit Facility), dated as of August 10, 2006, by and among First Banks, Inc. and Wells Fargo Bank, National Association, as Agent, JP Morgan Chase Bank, N.A., LaSalle Bank National Association, The Northern Trust Company, Union Bank of California, N.A., Fifth Third Bank (Chicago) and U.S. Bank National Association (incorporated herein by reference to Exhibit 10 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2006). 14.1 Code of Ethics for Principal Executive Officer and Financial Professionals (incorporated herein by reference to Exhibit 14 to the Company's Annual Report on Form 10-K for the year ended December 31, 2003). 21.1 Subsidiaries of the Company - filed herewith. 31.1 Rule 13a-14(a) / 15d-14(a) Certifications of Chief Executive Officer - filed herewith. 31.2 Rule 13a-14(a) / 15d-14(a) Certifications of Chief Financial Officer - filed herewith. 32.1 Section 1350 Certifications of Chief Executive Officer - filed herewith. 32.2 Section 1350 Certifications of Chief Financial Officer - filed herewith. * Exhibits designated by an asterisk in the Index to Exhibits relate to management contracts and/or compensatory plans or arrangements. EX-4 2 v11indenture.txt 4.57 Exhibit 4.57 =============================================== FIRST BANKS, INC., as Issuer INDENTURE Dated as of December 14, 2006 WILMINGTON TRUST COMPANY, as Trustee FLOATING RATE JUNIOR SUBORDINATED DEFERRABLE INTEREST DEBENTURES DUE 2036 ===============================================
TABLE OF CONTENTS ----------------- Page ---- ARTICLE I. DEFINITIONS............................................................................................1 Section 1.1. Definitions................................................................................1 ARTICLE II. DEBENTURES............................................................................................8 Section 2.1. Authentication and Dating..................................................................8 Section 2.2. Form of Trustee's Certificate of Authentication............................................9 Section 2.3. Form and Denomination of Debentures........................................................9 Section 2.4. Execution of Debentures....................................................................9 Section 2.5. Exchange and Registration of Transfer of Debentures.......................................10 Section 2.6. Mutilated, Destroyed, Lost or Stolen Debentures...........................................12 Section 2.7. Temporary Debentures......................................................................12 Section 2.8. Payment of Interest and Additional Interest...............................................13 Section 2.9. Cancellation of Debentures Paid, etc......................................................14 Section 2.10. Computation of Interest...................................................................14 Section 2.11. Extension of Interest Payment Period......................................................15 Section 2.12. CUSIP Numbers.............................................................................16 Section 2.13. Global Debentures.........................................................................17 ARTICLE III. PARTICULAR COVENANTS OF THE COMPANY.................................................................18 Section 3.1. Payment of Principal, Premium and Interest; Agreed Treatment of the Debentures............18 Section 3.2. Offices for Notices and Payments, etc.....................................................19 Section 3.3. Appointments to Fill Vacancies in Trustee's Office........................................19 Section 3.4. Provision as to Paying Agent..............................................................20 Section 3.5. Certificate to Trustee....................................................................20 Section 3.6. Additional Sums...........................................................................21 Section 3.7. Compliance with Consolidation Provisions..................................................21 Section 3.8. Limitation on Dividends...................................................................21 Section 3.9. Covenants as to the Trust.................................................................22 Section 3.10. Additional Junior Indebtedness............................................................22 ARTICLE IV. SECURITYHOLDERS' LISTS AND REPORTS BY THE COMPANY AND THE TRUSTEE....................................22 Section 4.1. Securityholders' Lists....................................................................22 Section 4.2. Preservation and Disclosure of Lists......................................................22 ARTICLE V. REMEDIES OF THE TRUSTEE AND SECURITYHOLDERS UPON AN EVENT OF DEFAULT..................................23 Section 5.1. Events of Default.........................................................................23 Section 5.2. Payment of Debentures on Default; Suit Therefor...........................................25 Section 5.3. Application of Moneys Collected by Trustee................................................26 Section 5.4. Proceedings by Securityholders............................................................27 Section 5.5. Proceedings by Trustee....................................................................27 Section 5.6. Remedies Cumulative and Continuing; Delay or Omission Not a Waiver........................27 Section 5.7. Direction of Proceedings and Waiver of Defaults by Majority of Securityholders............28 Section 5.8. Notice of Defaults........................................................................28 Section 5.9. Undertaking to Pay Costs..................................................................28 ARTICLE VI. CONCERNING THE TRUSTEE...............................................................................29 Section 6.1. Duties and Responsibilities of Trustee....................................................29 Section 6.2. Reliance on Documents, Opinions, etc......................................................30 Section 6.3. No Responsibility for Recitals, etc.......................................................30 Section 6.4. Trustee, Authenticating Agent, Paying Agents, Transfer Agents or Registrar May Own Debentures..............................................................31 Section 6.5. Moneys to be Held in Trust................................................................31 Section 6.6. Compensation and Expenses of Trustee......................................................31 Section 6.7. Officers' Certificate as Evidence.........................................................32 Section 6.8. Eligibility of Trustee....................................................................32 Section 6.9. Resignation or Removal of Trustee.........................................................32 Section 6.10. Acceptance by Successor Trustee...........................................................33 Section 6.11. Succession by Merger, etc.................................................................34 Section 6.12. Authenticating Agents.....................................................................34 ARTICLE VII. CONCERNING THE SECURITYHOLDERS......................................................................35 Section 7.1. Action by Securityholders.................................................................35 Section 7.2. Proof of Execution by Securityholders.....................................................36 Section 7.3. Who Are Deemed Absolute Owners............................................................36 Section 7.4. Debentures Owned by Company Deemed Not Outstanding........................................36 Section 7.5. Revocation of Consents; Future Holders Bound..............................................36 ARTICLE VIII. SECURITYHOLDERS' MEETINGS..........................................................................37 Section 8.1. Purposes of Meetings......................................................................37 Section 8.2. Call of Meetings by Trustee...............................................................37 Section 8.3. Call of Meetings by Company or Securityholders............................................37 Section 8.4. Qualifications for Voting.................................................................37 Section 8.5. Regulations...............................................................................38 Section 8.6. Voting....................................................................................38 Section 8.7. Quorum; Actions...........................................................................38 ARTICLE IX. SUPPLEMENTAL INDENTURES..............................................................................39 Section 9.1. Supplemental Indentures without Consent of Securityholders................................39 Section 9.2. Supplemental Indentures with Consent of Securityholders...................................40 Section 9.3. Effect of Supplemental Indentures.........................................................41 Section 9.4. Notation on Debentures....................................................................41 Section 9.5. Evidence of Compliance of Supplemental Indenture to be Furnished to Trustee...............41 ARTICLE X. REDEMPTION OF SECURITIES..............................................................................41 Section 10.1. Optional Redemption.......................................................................41 Section 10.2. Special Event Redemption..................................................................42 Section 10.3. Notice of Redemption; Selection of Debentures.............................................42 Section 10.4. Payment of Debentures Called for Redemption...............................................42 ARTICLE XI. CONSOLIDATION, MERGER, SALE, CONVEYANCE AND LEASE....................................................43 Section 11.1. Company May Consolidate, etc., on Certain Terms...........................................43 Section 11.2. Successor Entity to be Substituted........................................................43 Section 11.3. Opinion of Counsel to be Given to Trustee.................................................44 ARTICLE XII. SATISFACTION AND DISCHARGE OF INDENTURE.............................................................44 Section 12.1. Discharge of Indenture....................................................................44 Section 12.2. Deposited Moneys to be Held in Trust by Trustee...........................................44 Section 12.3. Paying Agent to Repay Moneys Held.........................................................44 Section 12.4. Return of Unclaimed Moneys................................................................45 ARTICLE XIII. IMMUNITY OF INCORPORATORS, STOCKHOLDERS, OFFICERS AND DIRECTORS....................................45 Section 13.1. Indenture and Debentures Solely Corporate Obligations.....................................45 ARTICLE XIV. MISCELLANEOUS PROVISIONS............................................................................45 Section 14.1. Successors................................................................................45 Section 14.2. Official Acts by Successor Entity.........................................................45 Section 14.3. Surrender of Company Powers...............................................................45 Section 14.4. Addresses for Notices, etc................................................................45 Section 14.5. Governing Law.............................................................................46 Section 14.6. Evidence of Compliance with Conditions Precedent..........................................46 Section 14.7. Table of Contents, Headings, etc..........................................................46 Section 14.8. Execution in Counterparts.................................................................46 Section 14.9. Separability..............................................................................46 Section 14.10. Assignment................................................................................46 Section 14.11. Acknowledgment of Rights..................................................................47 ARTICLE XV. SUBORDINATION OF DEBENTURES..........................................................................47 Section 15.1. Agreement to Subordinate..................................................................47 Section 15.2. Default on Senior Indebtedness............................................................47 Section 15.3. Liquidation, Dissolution, Bankruptcy......................................................48 Section 15.4. Subrogation...............................................................................49 Section 15.5. Trustee to Effectuate Subordination.......................................................49 Section 15.6. Notice by the Company.....................................................................49 Section 15.7. Rights of the Trustee; Holders of Senior Indebtedness.....................................50 Section 15.8. Subordination May Not Be Impaired.........................................................50 Exhibit A Form of Floating Rate Junior Subordinated Deferrable Interest Debenture Exhibit B Form of Certificate to Trustee
THIS INDENTURE, dated as of December 14, 2006, between First Banks, Inc., a Missouri corporation (the "Company"), and Wilmington Trust Company, a ------- Delaware banking corporation, as debenture trustee (the "Trustee"). ------- WITNESSETH: WHEREAS, for its lawful corporate purposes, the Company has duly authorized the issuance of its Floating Rate Junior Subordinated Deferrable Interest Debentures due 2036 (the "Debentures") under this Indenture to provide, among other things, for the execution and authentication, delivery and administration thereof, and the Company has duly authorized the execution of this Indenture; and WHEREAS, all acts and things necessary to make this Indenture a valid agreement according to its terms, have been done and performed; NOW, THEREFORE, This Indenture Witnesseth: In consideration of the premises, and the purchase of the Debentures by the holders thereof, the Company covenants and agrees with the Trustee for the equal and proportionate benefit of the respective holders from time to time of the Debentures as follows: ARTICLE I. DEFINITIONS ----------- Section 1.1. Definitions. The terms defined in this Section 1.1 ----------- (except as herein otherwise expressly provided or unless the context otherwise requires) for all purposes of this Indenture and of any indenture supplemental hereto shall have the respective meanings specified in this Section 1.1. All accounting terms used herein and not expressly defined shall have the meanings assigned to such terms in accordance with generally accepted accounting principles and the term "generally accepted accounting principles" means such accounting principles as are generally accepted in the United States at the time of any computation. The words "herein," "hereof" and "hereunder" and other words of similar import refer to this Indenture as a whole and not to any particular Article, Section or other subdivision. "Acceleration Event of Default" means an Event of Default under Section ----------------------------- 5.1(a), (d), (e) or (f), whatever the reason for such Acceleration Event of Default and whether it shall be voluntary or involuntary or be effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body. "Additional Interest" has the meaning set forth in Section 2.11. ------------------- "Additional Junior Indebtedness" means, without duplication and other ------------------------------- than the Debentures, any indebtedness, liabilities or obligations of the Company, or any Subsidiary of the Company, under debt securities (or guarantees in respect of debt securities) initially issued after the date of this Indenture to any trust, or a trustee of a trust, partnership or other entity affiliated with the Company that is, directly or indirectly, a finance subsidiary (as such term is defined in Rule 3a-5 under the Investment Company Act of 1940) or other financing vehicle of the Company or any Subsidiary of the Company in connection with the issuance by that entity of preferred securities or other securities that are eligible to qualify for Tier 1 capital treatment (or its then equivalent) for purposes of the capital adequacy guidelines of the Federal Reserve, as then in effect and applicable to the Company (or, if the Company is not a bank holding company, such guidelines applied to the Company as if the Company were subject to such guidelines); provided, however, that the inability -------- ------- of the Company to treat all or any portion of the Additional Junior Indebtedness as Tier 1 capital shall not disqualify it as Additional Junior Indebtedness if such inability results from the Company having cumulative preferred stock, minority interests in consolidated subsidiaries, or any other class of security or interest which the Federal Reserve now or may hereafter accord Tier 1 capital treatment (including the Debentures) in excess of the amount which may qualify for treatment as Tier 1 capital under applicable capital adequacy guidelines. "Additional Sums" has the meaning set forth in Section 3.6. --------------- "Affiliate" has the same meaning as given to that term in Rule 405 of --------- the Securities Act or any successor rule thereunder. "Applicable Depositary Procedures" means, with respect to any transfer --------------------------------- or transaction involving a Global Debenture or beneficial interest therein, the rules and procedures of the Depositary for such Debenture, in each case to the extent applicable to such transaction and as in effect from time to time. "Authenticating Agent" means any agent or agents of the Trustee which --------------------- at the time shall be appointed and acting pursuant to Section 6.12. "Bankruptcy Law" means Title 11, U.S. Code, or any similar federal or -------------- state law for the relief of debtors. "Board of Directors" means the board of directors or the executive ------------------- committee or any other duly authorized designated officers of the Company. "Board Resolution" means a copy of a resolution certified by the ----------------- Secretary or an Assistant Secretary of the Company to have been duly adopted by the Board of Directors and to be in full force and effect on the date of such certification and delivered to the Trustee. "Business Day" means any day other than a Saturday, Sunday or any other ------------ day on which banking institutions in New York City or Wilmington, Delaware are permitted or required by any applicable law or executive order to close. "Capital Securities" means undivided beneficial interests in the assets ------------------ of the Trust which rank pari passu with Common Securities issued by the Trust; provided, however, that upon the occurrence and continuance of an Event of - -------- ------- Default (as defined in the Declaration), the rights of holders of such Common Securities to payment in respect of distributions and payments upon liquidation, redemption and otherwise are subordinated to the rights of holders of such Capital Securities. "Capital Securities Guarantee" means the guarantee agreement that the ------------------------------ Company enters into with Wilmington Trust Company, as guarantee trustee, or other Persons that operates directly or indirectly for the benefit of holders of Capital Securities of the Trust. "Capital Treatment Event" means the receipt by the Company and the ------------------------- Trust of an opinion of counsel experienced in such matters to the effect that, as a result of the occurrence of any amendment to, or change (including any announced prospective change) in, the laws, rules or regulations of the United States or any political subdivision thereof or therein, or as the result of any official or administrative pronouncement or action or decision interpreting or applying such laws, rules or regulations, which amendment or change is effective or which pronouncement, action or decision is announced on or after the date of original issuance of the Debentures, there is more than an insubstantial risk that the Company will not, within 90 days of the date of such opinion, be entitled to treat an amount equal to the aggregate liquidation amount of the Capital Securities as "Tier 1 Capital" (or its then equivalent) for purposes of the capital adequacy guidelines of the Federal Reserve, as then in effect and applicable to the Company (or if the Company is not a bank holding company or otherwise is not subject to the Federal Reserve's risk-based capital adequacy guidelines, such guidelines applied to the Company as if the Company were subject to such guidelines); provided, however, that the inability of the -------- ------- Company to treat all or any portion of the liquidation amount of the Capital Securities as Tier l Capital shall not constitute the basis for a Capital Treatment Event, if such inability results from the Company having cumulative preferred stock, minority interests in consolidated subsidiaries, or any other class of security or interest which the Federal Reserve or OTS, as applicable, may now or hereafter accord Tier 1 Capital treatment in excess of the amount which may now or hereafter qualify for treatment as Tier 1 Capital under applicable capital adequacy guidelines; provided further, however, that the -------- ------- ------- distribution of Debentures in connection with the liquidation of the Trust shall not in and of itself constitute a Capital Treatment Event unless such liquidation shall have occurred in connection with a Tax Event or an Investment Company Event. "Certificate" means a certificate signed by any one of the principal ----------- executive officer, the principal financial officer or the principal accounting officer of the Company. "Common Securities" means undivided beneficial interests in the assets ----------------- of the Trust which rank pari passu with Capital Securities issued by the Trust; provided, however, that upon the occurrence and continuance of an Event of - -------- ------- Default (as defined in the Declaration), the rights of holders of such Common Securities to payment in respect of distributions and payments upon liquidation, redemption and otherwise are subordinated to the rights of holders of such Capital Securities. "Company" means First Banks, Inc., a Missouri corporation, and, subject ------- to the provisions of Article XI, shall include its successors and assigns. "Coupon Rate" has the meaning set forth in Section 2.8. ----------- "Debenture" or "Debentures" has the meaning stated in the first recital --------- ---------- of this Indenture. "Debenture Register" has the meaning specified in Section 2.5. ------------------ "Declaration" means the Amended and Restated Declaration of Trust of ----------- the Trust, as amended or supplemented from time to time. "Default" means any event, act or condition that with notice or lapse ------- of time, or both, would constitute an Event of Default. "Defaulted Interest" has the meaning set forth in Section 2.8. ------------------ "Depositary" means an organization registered as a clearing agency ---------- under the Exchange Act that is designated as Depositary by the Company or any successor thereto. The initial Depositary will be DTC. "Depositary Participant" means a broker, dealer, bank, other financial ----------------------- institution or other Person for whom from time to time a Depositary effects book-entry transfers and pledges of securities deposited with the Depositary. "Distribution Period" means (i) with respect to interest paid on the -------------------- first Interest Payment Date, the period beginning on (and including) the date of original issuance and ending on (but excluding) the Interest Payment Date in March 2007 and (ii) thereafter, with respect to interest paid on each successive Interest Payment Date, the period beginning on (and including) the preceding Interest Payment Date and ending on (but excluding) such current Interest Payment Date. "Determination Date" has the meaning set forth in Section 2.10. ------------------ "DTC" means the Depository Trust Company, a New York corporation. --- "Event of Default" means any event specified in Section 5.1, continued ---------------- for the period of time, if any, and after the giving of the notice, if any, therein designated. "Exchange Act" means the Securities Exchange Act of 1934, as amended ------------- from time to time, or any successor legislation. "Extension Period" has the meaning set forth in Section 2.11. ---------------- "Federal Reserve" means the Board of Governors of the Federal Reserve ---------------- System, or its designated district bank, as applicable, and any successor federal agency that is primarily responsible for regulating the activities of bank holding companies. "Global Debenture" means a security that evidences all or part of the ----------------- Debentures, the ownership and transfers of which shall be made through book entries by a Depositary. "Indenture" means this instrument as originally executed or, if amended --------- or supplemented as herein provided, as so amended or supplemented, or both. "Institutional Trustee" has the meaning set forth in the Declaration. --------------------- "Interest Payment Date" means March 15, June 15, September 15 and ----------------------- December 15 of each year during the term of this Indenture, or if such day is not a Business Day, then the next succeeding Business Day (it being understood that interest accrues for any such non-Business Day), commencing in March 2007. "Interest Rate" means for the Distribution Period beginning on (and -------------- including) the date of original issuance and ending on (but excluding) the Interest Payment Date in March 2007 the rate per annum of 7.20%, and for each Distribution Period beginning on or after the Interest Payment Date in March 2007, the Coupon Rate for such Distribution Period. "Investment Company Event" means the receipt by the Company and the -------------------------- Trust of an opinion of counsel experienced in such matters to the effect that, as a result of the occurrence of a change in law or regulation or written change (including any announced prospective change) in interpretation or application of law or regulation by any legislative body, court, governmental agency or regulatory authority, there is more than an insubstantial risk that the Trust is or, within 90 days of the date of such opinion will be considered an "investment company" that is required to be registered under the Investment Company Act of 1940, as amended which change or prospective change becomes effective or would become effective, as the case may be, on or after the date of the issuance of the Debentures. "Liquidation Amount" means the stated amount of $1,000.00 per Trust ------------------- Security. "Maturity Date" means December 15, 2036. ------------- "Officers' Certificate" means a certificate signed by the Chairman of ----------------------- the Board, the Chief Executive Officer, the Vice Chairman, the President, any Managing Director or any Vice President, and by the Treasurer, an Assistant Treasurer, the Comptroller, an Assistant Comptroller, the Secretary or an Assistant Secretary of the Company, and delivered to the Trustee. Each such certificate shall include the statements provided for in Section 14.6 if and to the extent required by the provisions of such Section. "Opinion of Counsel" means an opinion in writing signed by legal -------------------- counsel, who may be an employee of or counsel to the Company, or may be other counsel reasonably satisfactory to the Trustee. Each such opinion shall include the statements provided for in Section 14.6 if and to the extent required by the provisions of such Section. "OTS" means the Office of Thrift Supervision and any successor federal --- agency that is primarily responsible for regulating the activities of savings and loan holding companies. The term "outstanding," when used with reference to Debentures, means, ----------- subject to the provisions of Section 7.4, as of any particular time, all Debentures authenticated and delivered by the Trustee or the Authenticating Agent under this Indenture, except: (a) Debentures theretofore canceled by the Trustee or the Authenticating Agent or delivered to the Trustee for cancellation; (b) Debentures, or portions thereof, for the payment or redemption of which moneys in the necessary amount shall have been deposited in trust with the Trustee or with any paying agent (other than the Company) or shall have been set aside and segregated in trust by the Company (if the Company shall act as its own paying agent); provided, however, that, if such Debentures, or portions -------- ------- thereof, are to be redeemed prior to maturity thereof, notice of such redemption shall have been given as provided in Section 10.3 or provision satisfactory to the Trustee shall have been made for giving such notice; and (c) Debentures paid pursuant to Section 2.6 or in lieu of or in substitution for which other Debentures shall have been authenticated and delivered pursuant to the terms of Section 2.6 unless proof satisfactory to the Company and the Trustee is presented that any such Debentures are held by bona fide holders in due course. "Person" means any individual, corporation, limited liability company, ------ partnership, joint venture, association, joint-stock company, trust, unincorporated organization or government or any agency or political subdivision thereof. "Predecessor Security" of any particular Debenture means every previous -------------------- Debenture evidencing all or a portion of the same debt as that evidenced by such particular Debenture; and, for purposes of this definition, any Debenture authenticated and delivered under Section 2.6 in lieu of a lost, destroyed or stolen Debenture shall be deemed to evidence the same debt as the lost, destroyed or stolen Debenture. "Principal Office of the Trustee," or other similar term, means the -------------------------------- office of the Trustee, at which at any particular time its corporate trust business shall be principally administered, which at the time of the execution of this Indenture shall be Rodney Square North, 1100 North Market Street, Wilmington, Delaware 19890-1600, Attention: Corporate Trust Administration. "Redemption Date" has the meaning set forth in Section 10.1. --------------- "Redemption Price" means 100% of the principal amount of the Debentures ---------------- being redeemed, plus accrued and unpaid interest (including any Additional Interest) on such Debentures to the Redemption Date. "Responsible Officer" means, with respect to the Trustee, any officer -------------------- within the Principal Office of the Trustee, including any vice-president, any assistant vice-president, any secretary, any assistant secretary, the treasurer, any assistant treasurer, any trust officer or other officer of the Principal Trust Office of the Trustee customarily performing functions similar to those performed by any of the above designated officers and also means, with respect to a particular corporate trust matter, any other officer to whom such matter is referred because of that officer's knowledge of and familiarity with the particular subject. "Securities Act" means the Securities Act of 1933, as amended from time -------------- to time or any successor legislation. "Securityholder," "holder of Debentures," or other similar terms, means -------------- any Person in whose name at the time a particular Debenture is registered on the register kept by the Company or the Trustee for that purpose in accordance with the terms hereof. "Senior Indebtedness" means, with respect to the Company, (i) the -------------------- principal, premium, if any, and interest in respect of (A) indebtedness of the Company for all borrowed and purchased money and (B) indebtedness evidenced by securities, debentures, notes, bonds or other similar instruments issued by the Company; (ii) all capital lease obligations of the Company; (iii) all obligations of the Company issued or assumed as the deferred purchase price of property, all conditional sale obligations of the Company and all obligations of the Company under any title retention agreement; (iv) all obligations of the Company for the reimbursement of any letter of credit, any banker's acceptance, any security purchase facility, any repurchase agreement or similar arrangement, any interest rate swap, any other hedging arrangement, any obligation under options or any similar credit or other transaction; (v) all obligations of the Company associated with derivative products such as interest and foreign exchange rate contracts, commodity contracts, and similar arrangements; (vi) all obligations of the type referred to in clauses (i) through (v) above of other Persons for the payment of which the Company is responsible or liable as obligor, guarantor or otherwise including, without limitation, similar obligations arising from off-balance sheet guarantees and direct credit substitutes; and (vii) all obligations of the type referred to in clauses (i) through (vi) above of other Persons secured by any lien on any property or asset of the Company (whether or not such obligation is assumed by the Company), whether incurred on or prior to the date of this Indenture or thereafter incurred. Notwithstanding the foregoing, "Senior Indebtedness" shall not include (1) any Additional Junior Indebtedness, (2) Debentures issued pursuant to this Indenture and guarantees in respect of such Debentures, (3) trade accounts payable of the Company arising in the ordinary course of business (such trade accounts payable being pari passu in right of payment to the Debentures), or (4) obligations with respect to which (a) in the instrument creating or evidencing the same or pursuant to which the same is outstanding, it is provided that such obligations are pari passu, junior or otherwise not superior in right of payment to the Debentures and (b) the Company, prior to the issuance thereof, has notified (and, if then required under the applicable guidelines of the regulating entity, has received approval from) the Federal Reserve (if the Company is a bank holding company) or the OTS (if the Company is a savings and loan holding company). Senior Indebtedness shall continue to be Senior Indebtedness and be entitled to the subordination provisions irrespective of any amendment, modification or waiver of any term of such Senior Indebtedness. "Special Event" means any of a Capital Treatment Event, an Investment ------------- Company Event or a Tax Event. "Special Redemption Date" has the meaning set forth in Section 10.2. ----------------------- "Special Redemption Price" means the price set forth in the following -------------------------- table for any Special Redemption Date that occurs on the date indicated below (or if such day is not a Business Day, then the next succeeding Business Day), expressed as the percentage of the principal amount of the Debentures being redeemed: ---------------------------------- ---------------------------- Month in which Special Special Redemption Price ---------------------- ------------------------ Redemption Date Occurs ---------------------- ---------------------------------- ---------------------------- March 2007 104.625% ---------------------------------- ---------------------------- June 2007 104.300% ---------------------------------- ---------------------------- September 2007 104.000% ---------------------------------- ---------------------------- December 2007 103.650% ---------------------------------- ---------------------------- March 2008 103.350% ---------------------------------- ---------------------------- June 2008 103.000% ---------------------------------- ---------------------------- September 2008 102.700% ---------------------------------- ---------------------------- December 2008 102.350% ---------------------------------- ---------------------------- March 2009 102.050% ---------------------------------- ---------------------------- June 2009 101.700% ---------------------------------- ---------------------------- September 2009 101.400% ---------------------------------- ---------------------------- December 2009 101.050% ---------------------------------- ---------------------------- March 2010 100.750% ---------------------------------- ---------------------------- June 2010 100.450% ---------------------------------- ---------------------------- September 2010 100.200% ---------------------------------- ---------------------------- December 2010 and thereafter 100.000% ---------------------------------- ---------------------------- plus, in each case, accrued and unpaid interest (including any Additional Interest) on such Debentures to the Special Redemption Date. "Subsidiary" means with respect to any Person, (i) any corporation at ---------- least a majority of the outstanding voting stock of which is owned, directly or indirectly, by such Person or by one or more of its Subsidiaries, or by such Person and one or more of its Subsidiaries, (ii) any general partnership, joint venture or similar entity, at least a majority of the outstanding partnership or similar interests of which shall at the time be owned by such Person, or by one or more of its Subsidiaries, or by such Person and one or more of its Subsidiaries and (iii) any limited partnership of which such Person or any of its Subsidiaries is a general partner. For the purposes of this definition, "voting stock" means shares, interests, participations or other equivalents in the equity interest (however designated) in such Person having ordinary voting power for the election of a majority of the directors (or the equivalent) of such Person, other than shares, interests, participations or other equivalents having such power only by reason of the occurrence of a contingency. "Tax Event" means the receipt by the Company and the Trust of an ---------- opinion of counsel experienced in such matters to the effect that, as a result of any amendment to or change (including any announced prospective change) in the laws or any regulations thereunder of the United States or any political subdivision or taxing authority thereof or therein, or as a result of any official administrative pronouncement (including any private letter ruling, technical advice memorandum, field service advice, regulatory procedure, notice or announcement, including any notice or announcement of intent to adopt such procedures or regulations) (an "Administrative Action") or judicial decision ---------------------- interpreting or applying such laws or regulations, regardless of whether such Administrative Action or judicial decision is issued to or in connection with a proceeding involving the Company or the Trust and whether or not subject to review or appeal, which amendment, clarification, change, Administrative Action or decision is enacted, promulgated or announced, in each case on or after the date of original issuance of the Debentures, there is more than an insubstantial risk that: (i) the Trust is, or will be within 90 days of the date of such opinion, subject to United States federal income tax with respect to income received or accrued on the Debentures; (ii) interest payable by the Company on the Debentures is not, or within 90 days of the date of such opinion, will not be, deductible by the Company, in whole or in part, for United States federal income tax purposes; or (iii) the Trust is, or will be within 90 days of the date of such opinion, subject to more than a de minimis amount of other taxes, duties or other governmental charges. "3-Month LIBOR" has the meaning set forth in Section 2.10. ------------- "Telerate Page 3750" has the meaning set forth in Section 2.10. ------------------ "Trust" shall mean First Bank Statutory Trust VII, a Delaware statutory ----- trust, or any other similar trust created for the purpose of issuing Capital Securities in connection with the issuance of Debentures under this Indenture, of which the Company is the sponsor. "Trust Securities" means Common Securities and Capital Securities of ----------------- the Trust. "Trustee" means Wilmington Trust Company, and, subject to the ------- provisions of Article VI hereof, shall also include its successors and assigns as Trustee hereunder. ARTICLE II. DEBENTURES ---------- Section 2.1. Authentication and Dating. Upon the execution and --------------------------- delivery of this Indenture, or from time to time thereafter, Debentures in an aggregate principal amount not in excess of $51,547,000.00 may be executed and delivered by the Company to the Trustee for authentication, and the Trustee, upon receipt of a written authentication order from the Company, shall thereupon authenticate and make available for delivery said Debentures to or upon the written order of the Company, signed by its Chairman of the Board of Directors, Chief Executive Officer, Vice Chairman, the President, one of its Managing Directors or one of its Vice Presidents without any further action by the Company hereunder. Notwithstanding anything to the contrary contained herein, the Trustee shall be fully protected in relying upon the aforementioned authentication order and written order in authenticating and delivering said Debentures. In authenticating such Debentures, and accepting the additional responsibilities under this Indenture in relation to such Debentures, the Trustee shall be entitled to receive, and (subject to Section 6.1) shall be fully protected in relying upon: (a) a copy of any Board Resolution or Board Resolutions relating thereto and, if applicable, an appropriate record of any action taken pursuant to such resolution, in each case certified by the Secretary or an Assistant Secretary of the Company, as the case may be; and (b) an Opinion of Counsel prepared in accordance with Section 14.6 which shall also state: (1) that such Debentures, when authenticated and delivered by the Trustee and issued by the Company in each case in the manner and subject to any conditions specified in such Opinion of Counsel, will constitute valid and legally binding obligations of the Company, subject to or limited by applicable bankruptcy, insolvency, reorganization, conservatorship, receivership, moratorium and other statutory or decisional laws relating to or affecting creditors' rights or the reorganization of financial institutions (including, without limitation, preference and fraudulent conveyance or transfer laws), heretofore or hereafter enacted or in effect, affecting the rights of creditors generally; and (2) that all laws and requirements in respect of the execution and delivery by the Company of the Debentures have been complied with and that authentication and delivery of the Debentures by the Trustee will not violate the terms of this Indenture. The Trustee shall have the right to decline to authenticate and deliver any Debentures under this Section if the Trustee, being advised in writing by counsel, determines that such action may not lawfully be taken or if a Responsible Officer of the Trustee in good faith shall determine that such action would expose the Trustee to personal liability to existing holders. The definitive Debentures shall be typed, printed, lithographed or engraved on steel engraved borders or may be produced in any other manner, all as determined by the officers executing such Debentures, as evidenced by their execution of such Debentures. Section 2.2. Form of Trustee's Certificate of Authentication. The -------------------------------------------------- Trustee's certificate of authentication on all Debentures shall be in substantially the following form: This is one of the Debentures referred to in the within-mentioned Indenture. WILMINGTON TRUST COMPANY, as Trustee By ---------------------------------- Authorized Signer Section 2.3. Form and Denomination of Debentures. The Debentures --------------------------------------- shall be substantially in the form of Exhibit A attached hereto. The Debentures shall be in registered, certificated form without coupons and in minimum denominations of $100,000.00 and any multiple of $1,000.00 in excess thereof. Any attempted transfer of the Debentures in a block having an aggregate principal amount of less than $100,000.00 shall be deemed to be void and of no legal effect whatsoever. Any such purported transferee shall be deemed not to be a holder of such Debentures for any purpose, including, but not limited to the receipt of payments on such Debentures, and such purported transferee shall be deemed to have no interest whatsoever in such Debentures. The Debentures shall be numbered, lettered, or otherwise distinguished in such manner or in accordance with such plans as the officers executing the same may determine with the approval of the Trustee as evidenced by the execution and authentication thereof. Section 2.4. Execution of Debentures. The Debentures shall be signed ----------------------- in the name and on behalf of the Company by the manual or facsimile signature of its Chairman of the Board of Directors, Chief Executive Officer, Vice Chairman, President, one of its Managing Directors or one of its Executive Vice Presidents, Senior Vice Presidents or Vice Presidents. Only such Debentures as shall bear thereon a certificate of authentication substantially in the form herein before recited, executed by the Trustee or the Authenticating Agent by the manual signature of an authorized signer, shall be entitled to the benefits of this Indenture or be valid or obligatory for any purpose. Such certificate by the Trustee or the Authenticating Agent upon any Debenture executed by the Company shall be conclusive evidence that the Debenture so authenticated has been duly authenticated and delivered hereunder and that the holder is entitled to the benefits of this Indenture. In case any officer of the Company who shall have signed any of the Debentures shall cease to be such officer before the Debentures so signed shall have been authenticated and delivered by the Trustee or the Authenticating Agent, or disposed of by the Company, such Debentures nevertheless may be authenticated and delivered or disposed of as though the Person who signed such Debentures had not ceased to be such officer of the Company; and any Debenture may be signed on behalf of the Company by such Persons as, at the actual date of the execution of such Debenture, shall be the proper officers of the Company, although at the date of the execution of this Indenture any such person was not such an officer. Every Debenture shall be dated the date of its authentication. Section 2.5. Exchange and Registration of Transfer of Debentures. The --------------------------------------------------- Company shall cause to be kept, at the office or agency maintained for the purpose of registration of transfer and for exchange as provided in Section 3.2, a register (the "Debenture Register") for the Debentures issued hereunder in ------------------- which, subject to such reasonable regulations as it may prescribe, the Company shall provide for the registration and transfer of all Debentures as in this Article II provided. The Debenture Register shall be in written form or in any other form capable of being converted into written form within a reasonable time. Debentures to be exchanged may be surrendered at the Principal Office of the Trustee or at any office or agency to be maintained by the Company for such purpose as provided in Section 3.2, and the Company shall execute, the Company or the Trustee shall register and the Trustee or the Authenticating Agent shall authenticate and make available for delivery in exchange therefor the Debenture or Debentures which the Securityholder making the exchange shall be entitled to receive. Upon due presentment for registration of transfer of any Debenture at the Principal Office of the Trustee or at any office or agency of the Company maintained for such purpose as provided in Section 3.2, the Company shall execute, the Company or the Trustee shall register and the Trustee or the Authenticating Agent shall authenticate and make available for delivery in the name of the transferee or transferees a new Debenture for a like aggregate principal amount. Registration or registration of transfer of any Debenture by the Trustee or by any agent of the Company appointed pursuant to Section 3.2, and delivery of such Debenture, shall be deemed to complete the registration or registration of transfer of such Debenture. All Debentures presented for registration of transfer or for exchange or payment shall (if so required by the Company or the Trustee or the Authenticating Agent) be duly endorsed by, or be accompanied by a written instrument or instruments of transfer in form satisfactory to the Company and the Trustee or the Authenticating Agent duly executed by the holder or his attorney duly authorized in writing. No service charge shall be made for any exchange or registration of transfer of Debentures, but the Company or the Trustee may require payment of a sum sufficient to cover any tax, fee or other governmental charge that may be imposed in connection therewith. The Company or the Trustee shall not be required to exchange or register a transfer of any Debenture for a period of 15 days next preceding the date of selection of Debentures for redemption. Notwithstanding anything herein to the contrary, Debentures may not be transferred except in compliance with the restricted securities legend set forth below, unless otherwise determined by the Company, upon the advice of counsel expert in securities law, in accordance with applicable law: THIS SECURITY IS NOT A SAVINGS ACCOUNT OR DEPOSIT AND IT IS NOT INSURED BY THE UNITED STATES OR ANY AGENCY OR FUND OF THE UNITED STATES, INCLUDING THE FEDERAL DEPOSIT INSURANCE CORPORATION. THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), ANY STATE SECURITIES LAWS OR ANY OTHER APPLICABLE SECURITIES LAW. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND ANY APPLICABLE STATE SECURITIES LAWS. THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF AGREES TO OFFER, SELL OR OTHERWISE TRANSFER THIS SECURITY ONLY (A) TO THE COMPANY, (B) PURSUANT TO A REGISTRATION STATEMENT THAT HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C) TO A PERSON WHOM THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A SO LONG AS THIS SECURITY IS ELIGIBLE FOR RESALE PURSUANT TO RULE 144A IN ACCORDANCE WITH RULE 144A, (D) TO A NON-U.S. PERSON IN AN OFFSHORE TRANSACTION IN ACCORDANCE WITH RULE 903 OR RULE 904 (AS APPLICABLE) OF REGULATION S UNDER THE SECURITIES ACT, (E) TO AN INSTITUTIONAL "ACCREDITED INVESTOR" WITHIN THE MEANING OF SUBPARAGRAPH (A) OF RULE 501 UNDER THE SECURITIES ACT THAT IS ACQUIRING THIS SECURITY FOR ITS OWN ACCOUNT, OR FOR THE ACCOUNT OF SUCH AN INSTITUTIONAL ACCREDITED INVESTOR, FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO, OR FOR OFFER OR SALE IN CONNECTION WITH, ANY DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT, OR (F) PURSUANT TO ANY OTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, SUBJECT TO THE COMPANY'S RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATION AND/OR OTHER INFORMATION SATISFACTORY TO IT IN ACCORDANCE WITH THE INDENTURE, A COPY OF WHICH MAY BE OBTAINED FROM THE COMPANY. THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF ALSO AGREES, REPRESENTS AND WARRANTS THAT IT IS NOT AN EMPLOYEE BENEFIT, INDIVIDUAL RETIREMENT ACCOUNT OR OTHER PLAN OR ARRANGEMENT SUBJECT TO TITLE I OF THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974, AS AMENDED ("ERISA"), OR SECTION 4975 OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED (THE "CODE") (EACH A "PLAN"), OR AN ENTITY WHOSE UNDERLYING ASSETS INCLUDE "PLAN ASSETS" BY REASON OF ANY PLAN'S INVESTMENT IN THE ENTITY, AND NO PERSON INVESTING "PLAN ASSETS" OF ANY PLAN MAY ACQUIRE OR HOLD THE SECURITIES OR ANY INTEREST THEREIN, UNLESS SUCH PURCHASER OR HOLDER IS ELIGIBLE FOR EXEMPTIVE RELIEF AVAILABLE UNDER U.S. DEPARTMENT OF LABOR PROHIBITED TRANSACTION CLASS EXEMPTION 96-23, 95-60, 91-38, 90-1 OR 84-14 OR ANOTHER APPLICABLE EXEMPTION OR ITS PURCHASE AND HOLDING OF THIS SECURITY IS NOT PROHIBITED BY SECTION 406 OF ERISA OR SECTION 4975 OF THE CODE WITH RESPECT TO SUCH PURCHASE OR HOLDING. ANY PURCHASER OR HOLDER OF THE SECURITIES OR ANY INTEREST THEREIN WILL BE DEEMED TO HAVE REPRESENTED BY ITS PURCHASE AND HOLDING THEREOF THAT EITHER (i) IT IS NOT AN EMPLOYEE BENEFIT PLAN WITHIN THE MEANING OF SECTION 3(3) OF ERISA, OR A PLAN TO WHICH SECTION 4975 OF THE CODE IS APPLICABLE, A TRUSTEE OR OTHER PERSON ACTING ON BEHALF OF AN EMPLOYEE BENEFIT PLAN OR PLAN, OR ANY OTHER PERSON OR ENTITY USING THE ASSETS OF ANY EMPLOYEE BENEFIT PLAN OR PLAN TO FINANCE SUCH PURCHASE, OR (ii) SUCH PURCHASE WILL NOT RESULT IN A PROHIBITED TRANSACTION UNDER SECTION 406 OF ERISA OR SECTION 4975 OF THE CODE FOR WHICH THERE IS NO APPLICABLE STATUTORY OR ADMINISTRATIVE EXEMPTION. THIS SECURITY WILL BE ISSUED AND MAY BE TRANSFERRED ONLY IN BLOCKS HAVING AN AGGREGATE PRINCIPAL AMOUNT OF NOT LESS THAN $100,000.00 AND MULTIPLES OF $1,000.00 IN EXCESS THEREOF. ANY ATTEMPTED TRANSFER OF THIS SECURITY IN A BLOCK HAVING AN AGGREGATE PRINCIPAL AMOUNT OF LESS THAN $100,000.00 SHALL BE DEEMED TO BE VOID AND OF NO LEGAL EFFECT WHATSOEVER. THE HOLDER OF THIS SECURITY AGREES THAT IT WILL COMPLY WITH THE FOREGOING RESTRICTIONS. Section 2.6. Mutilated, Destroyed, Lost or Stolen Debentures. In case ----------------------------------------------- any Debenture shall become mutilated or be destroyed, lost or stolen, the Company shall execute, and upon its written request the Trustee shall authenticate and deliver, a new Debenture bearing a number not contemporaneously outstanding, in exchange and substitution for the mutilated Debenture, or in lieu of and in substitution for the Debenture so destroyed, lost or stolen. In every case the applicant for a substituted Debenture shall furnish to the Company and the Trustee such security or indemnity as may be required by them to save each of them harmless, and, in every case of destruction, loss or theft, the applicant shall also furnish to the Company and the Trustee evidence to their satisfaction of the destruction, loss or theft of such Debenture and of the ownership thereof. The Trustee may authenticate any such substituted Debenture and deliver the same upon the written request or authorization of any officer of the Company. Upon the issuance of any substituted Debenture, the Company may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other expenses connected therewith. In case any Debenture which has matured or is about to mature or has been called for redemption in full shall become mutilated or be destroyed, lost or stolen, the Company may, instead of issuing a substitute Debenture, pay or authorize the payment of the same (without surrender thereof except in the case of a mutilated Debenture) if the applicant for such payment shall furnish to the Company and the Trustee such security or indemnity as may be required by them to save each of them harmless and, in case of destruction, loss or theft, evidence satisfactory to the Company and to the Trustee of the destruction, loss or theft of such Debenture and of the ownership thereof. Every substituted Debenture issued pursuant to the provisions of this Section 2.6 by virtue of the fact that any such Debenture is destroyed, lost or stolen shall constitute an additional contractual obligation of the Company, whether or not the destroyed, lost or stolen Debenture shall be found at any time, and shall be entitled to all the benefits of this Indenture equally and proportionately with any and all other Debentures duly issued hereunder. All Debentures shall be held and owned upon the express condition that, to the extent permitted by applicable law, the foregoing provisions are exclusive with respect to the replacement or payment of mutilated, destroyed, lost or stolen Debentures and shall preclude any and all other rights or remedies notwithstanding any law or statute existing or hereafter enacted to the contrary with respect to the replacement or payment of negotiable instruments or other securities without their surrender. Section 2.7. Temporary Debentures. Pending the preparation of ---------------------- definitive Debentures, the Company may execute and the Trustee shall authenticate and make available for delivery temporary Debentures that are typed, printed or lithographed. Temporary Debentures shall be issuable in any authorized denomination, and substantially in the form of the definitive Debentures in lieu of which they are issued but with such omissions, insertions and variations as may be appropriate for temporary Debentures, all as may be determined by the Company. Every such temporary Debenture shall be executed by the Company and be authenticated by the Trustee upon the same conditions and in substantially the same manner, and with the same effect, as the definitive Debentures. Without unreasonable delay the Company will execute and deliver to the Trustee or the Authenticating Agent definitive Debentures and thereupon any or all temporary Debentures may be surrendered in exchange therefor, at the principal corporate trust office of the Trustee or at any office or agency maintained by the Company for such purpose as provided in Section 3.2, and the Trustee or the Authenticating Agent shall authenticate and make available for delivery in exchange for such temporary Debentures a like aggregate principal amount of such definitive Debentures. Such exchange shall be made by the Company at its own expense and without any charge therefor except that in case of any such exchange involving a registration of transfer the Company may require payment of a sum sufficient to cover any tax, fee or other governmental charge that may be imposed in relation thereto. Until so exchanged, the temporary Debentures shall in all respects be entitled to the same benefits under this Indenture as definitive Debentures authenticated and delivered hereunder. Section 2.8. Payment of Interest and Additional Interest. Interest at ------------------------------------------- the Interest Rate and any Additional Interest on any Debenture that is payable, and is punctually paid or duly provided for, on any Interest Payment Date for Debentures shall be paid to the Person in whose name said Debenture (or one or more Predecessor Securities) is registered at the close of business on the regular record date for such interest installment except that interest and any Additional Interest payable on the Maturity Date shall be paid to the Person to whom principal is paid. Each Debenture shall bear interest for the period beginning on (and including) the date of original issuance and ending on (but excluding) the Interest Payment Date in March 2007 at a rate per annum of 7.20%, and shall bear interest for each successive Distribution Period beginning on or after the Interest Payment Date in March 2007 at a rate per annum equal to the 3-Month LIBOR, determined as described in Section 2.10, plus 1.85% (the "Coupon Rate"), ----------- applied to the principal amount thereof, until the principal thereof becomes due and payable, and on any overdue principal and to the extent that payment of such interest is enforceable under applicable law (without duplication) on any overdue installment of interest (including Additional Interest) at the Interest Rate in effect for each applicable period compounded quarterly. Interest shall be payable (subject to any relevant Extension Period) quarterly in arrears on each Interest Payment Date with the first installment of interest to be paid on the Interest Payment Date in March 2007. Any interest on any Debenture, including Additional Interest, that is payable, but is not punctually paid or duly provided for, on any Interest Payment Date (herein called "Defaulted Interest") shall forthwith cease to be ------------------- payable to the registered holder on the relevant regular record date by virtue of having been such holder; and such Defaulted Interest shall be paid by the Company to the Persons in whose names such Debentures (or their respective Predecessor Securities) are registered at the close of business on a special record date for the payment of such Defaulted Interest, which shall be fixed in the following manner: the Company shall notify the Trustee in writing at least 25 days prior to the date of the proposed payment of the amount of Defaulted Interest proposed to be paid on each such Debenture and the date of the proposed payment, and at the same time the Company shall deposit with the Trustee an amount of money equal to the aggregate amount proposed to be paid in respect of such Defaulted Interest or shall make arrangements satisfactory to the Trustee for such deposit prior to the date of the proposed payment, such money when deposited to be held in trust for the benefit of the Persons entitled to such Defaulted Interest as in this clause provided. Thereupon the Trustee shall fix a special record date for the payment of such Defaulted Interest which shall not be more than 15 nor less than 10 days prior to the date of the proposed payment and not less than 10 days after the receipt by the Trustee of the notice of the proposed payment. The Trustee shall promptly notify the Company of such special record date and, in the name and at the expense of the Company, shall cause notice of the proposed payment of such Defaulted Interest and the special record date therefor to be mailed, first class postage prepaid, to each Securityholder at its address as it appears in the Debenture Register, not less than 10 days prior to such special record date. Notice of the proposed payment of such Defaulted Interest and the special record date therefor having been mailed as aforesaid, such Defaulted Interest shall be paid to the Persons in whose names such Debentures (or their respective Predecessor Securities) are registered on such special record date and shall be no longer payable. The Company may make payment of any Defaulted Interest on any Debentures in any other lawful manner after notice given by the Company to the Trustee of the proposed payment method; provided, however, the Trustee in its -------- ------- sole discretion deems such payment method to be practical. Any interest (including Additional Interest) scheduled to become payable on an Interest Payment Date occurring during an Extension Period shall not be Defaulted Interest and shall be payable on such other date as may be specified in the terms of such Debentures. The term "regular record date" as used in this Section shall mean the close of business on the 15th Business Day preceding the applicable Interest Payment Date. Subject to the foregoing provisions of this Section, each Debenture delivered under this Indenture upon registration of transfer of or in exchange for or in lieu of any other Debenture shall carry the rights to interest accrued and unpaid, and to accrue, that were carried by such other Debenture. Section 2.9. Cancellation of Debentures Paid, etc. All Debentures --------------------------------------- surrendered for the purpose of payment, redemption, exchange or registration of transfer, shall, if surrendered to the Company or any paying agent, be surrendered to the Trustee and promptly canceled by it, or, if surrendered to the Trustee or any Authenticating Agent, shall be promptly canceled by it, and no Debentures shall be issued in lieu thereof except as expressly permitted by any of the provisions of this Indenture. All Debentures canceled by any Authenticating Agent shall be delivered to the Trustee. The Trustee shall destroy all canceled Debentures unless the Company otherwise directs the Trustee in writing. If the Company shall acquire any of the Debentures, however, such acquisition shall not operate as a redemption or satisfaction of the indebtedness represented by such Debentures unless and until the same are surrendered to the Trustee for cancellation. Section 2.10. Computation of Interest. The amount of interest payable ----------------------- for each Distribution Period will be calculated by applying the Interest Rate to the principal amount outstanding at the commencement of the Distribution Period on the basis of the actual number of days in the Distribution Period concerned divided by 360. All percentages resulting from any calculations on the Debentures will be rounded, if necessary, to the nearest one hundred-thousandth of a percentage point, with five one-millionths of a percentage point rounded upward (e.g., 9.876545% (or .09876545) being rounded to 9.87655% (or .0987655), and all dollar amounts used in or resulting from such calculation will be rounded to the nearest cent (with one-half cent being rounded upward)). (a) "3-Month LIBOR" means the London interbank offered interest rate ------------- for three-month, U.S. dollar deposits determined by the Trustee in the following order of priority: (1) the rate (expressed as a percentage per annum) for U.S. dollar deposits having a three-month maturity that appears on Telerate Page 3750 as of 11:00 a.m. (London time) on the related Determination Date (as defined below). "Telerate Page 3750" means the display designated as "Page 3750" on the Moneyline Telerate Service or such other page as may replace Page 3750 on that service or such other service or services as may be nominated by the British Bankers' Association as the information vendor for the purpose of displaying London interbank offered rates for U.S. dollar deposits; (2) if such rate cannot be identified on the related Determination Date, the Trustee will request the principal London offices of four leading banks in the London interbank market to provide such banks' offered quotations (expressed as percentages per annum) to prime banks in the London interbank market for U.S. dollar deposits having a three-month maturity as of 11:00 a.m. (London time) on such Determination Date. If at least two quotations are provided, 3-Month LIBOR will be the arithmetic mean of such quotations; (3) if fewer than two such quotations are provided as requested in clause (2) above, the Trustee will request four major New York City banks to provide such banks' offered quotations (expressed as percentages per annum) to leading European banks for loans in U.S. dollars as of 11:00 a.m. (London time) on such Determination Date. If at least two such quotations are provided, 3-Month LIBOR will be the arithmetic mean of such quotations; and (4) if fewer than two such quotations are provided as requested in clause (3) above, 3-Month LIBOR will be a 3-Month LIBOR determined with respect to the Distribution Period immediately preceding such current Distribution Period. If the rate for U.S. dollar deposits having a three-month maturity that initially appears on Telerate Page 3750 as of 11:00 a.m. (London time) on the related Determination Date is superseded on the Telerate Page 3750 by a corrected rate by 12:00 noon (London time) on such Determination Date, then the corrected rate as so substituted on the applicable page will be the applicable 3-Month LIBOR for such Determination Date. (b) The Interest Rate for any Distribution Period will at no time be higher than the maximum rate then permitted by New York law as the same may be modified by United States law. (c) "Determination Date" means the date that is two London Banking ------------------- Days (i.e., a business day in which dealings in deposits in U.S. dollars are transacted in the London interbank market) preceding the particular Distribution Period for which a Coupon Rate is being determined. (d) The Trustee shall notify the Company, the Institutional Trustee and any securities exchange or interdealer quotation system on which the Capital Securities are listed, of the Coupon Rate and the Determination Date for each Distribution Period, in each case as soon as practicable after the determination thereof but in no event later than the thirtieth (30th) day of the relevant Distribution Period. Failure to notify the Company, the Institutional Trustee or any securities exchange or interdealer quotation system, or any defect in said notice, shall not affect the obligation of the Company to make payment on the Debentures at the applicable Coupon Rate. Any error in the calculation of the Coupon Rate by the Trustee may be corrected at any time by notice delivered as above provided. Upon the request of a holder of a Debenture, the Trustee shall provide the Coupon Rate then in effect and, if determined, the Coupon Rate for the next Distribution Period. (e) Subject to the corrective rights set forth above, all certificates, communications, opinions, determinations, calculations, quotations and decisions given, expressed, made or obtained for the purposes of the provisions relating to the payment and calculation of interest on the Debentures and distributions on the Capital Securities by the Trustee or the Institutional Trustee will (in the absence of willful default, bad faith and manifest error) be final, conclusive and binding on the Trust, the Company and all of the holders of the Debentures and the Capital Securities, and no liability shall (in the absence of willful default, bad faith or manifest error) attach to the Trustee or the Institutional Trustee in connection with the exercise or non- exercise by either of them or their respective powers, duties and discretion. Section 2.11. Extension of Interest Payment Period. So long as no ---------------------------------------- Acceleration Event of Default has occurred and is continuing, the Company shall have the right, from time to time, and without causing an Event of Default, to defer payments of interest on the Debentures by extending the interest payment period on the Debentures at any time and from time to time during the term of the Debentures, for up to 20 consecutive quarterly periods (each such extended interest payment period, an "Extension Period"), during which Extension Period ----------------- no interest (including Additional Interest) shall be due and payable (except any Additional Sums that may be due and payable). No Extension Period may end on a date other than an Interest Payment Date. During an Extension Period, interest will continue to accrue on the Debentures, and interest on such accrued interest will accrue at an annual rate equal to the Interest Rate in effect for such Extension Period, compounded quarterly from the date such interest would have been payable were it not for the Extension Period, to the extent permitted by law (such interest referred to herein as "Additional Interest"). At the end of -------------------- any such Extension Period the Company shall pay all interest then accrued and unpaid on the Debentures (together with Additional Interest thereon); provided, -------- however, that no Extension Period may extend beyond the Maturity Date; provided - ------- -------- further, however, that during any such Extension Period, the Company shall not - ------- ------- and shall not permit any Affiliate to (i) declare or pay any dividends or distributions on, or redeem, purchase, acquire, or make a liquidation payment with respect to, any of the Company's or such Affiliate's capital stock (other than payments of dividends or distributions to the Company) or make any guarantee payments with respect to the foregoing or (ii) make any payment of principal of or interest or premium, if any, on or repay, repurchase or redeem any debt securities of the Company or any Affiliate that rank pari passu in all respects with or junior in interest to the Debentures (other than, with respect to clauses (i) or (ii) above, (a) repurchases, redemptions or other acquisitions of shares of capital stock of the Company in connection with any employment contract, benefit plan or other similar arrangement with or for the benefit of one or more employees, officers, directors or consultants, in connection with a dividend reinvestment or stockholder stock purchase plan or in connection with the issuance of capital stock of the Company (or securities convertible into or exercisable for such capital stock) as consideration in an acquisition transaction entered into prior to the applicable Extension Period, (b) as a result of any exchange or conversion of any class or series of the Company's capital stock (or any capital stock of a subsidiary of the Company) for any class or series of the Company's capital stock or of any class or series of the Company's indebtedness for any class or series of the Company's capital stock, (c) the purchase of fractional interests in shares of the Company's capital stock pursuant to the conversion or exchange provisions of such capital stock or the security being converted or exchanged, (d) any declaration of a dividend in connection with any stockholders' rights plan, or the issuance of rights, stock or other property under any stockholders' rights plan, or the redemption or repurchase of rights pursuant thereto, (e) any dividend in the form of stock, warrants, options or other rights where the dividend stock or the stock issuable upon exercise of such warrants, options or other rights is the same stock as that on which the dividend is being paid or ranks pari passu with or junior to such stock and any cash payments in lieu of fractional shares issued in connection therewith, or (f) payments under the Capital Securities Guarantee). Prior to the termination of any Extension Period, the Company may further extend such period, provided that such period together with all such previous and further consecutive extensions thereof shall not exceed 20 consecutive quarterly periods, or extend beyond the Maturity Date. Upon the termination of any Extension Period and upon the payment of all accrued and unpaid interest and Additional Interest, the Company may commence a new Extension Period, subject to the foregoing requirements. No interest or Additional Interest shall be due and payable during an Extension Period, except at the end thereof, but each installment of interest that would otherwise have been due and payable during such Extension Period shall bear Additional Interest to the extent permitted by applicable law. The Company must give the Trustee notice of its election to begin or extend an Extension Period by the close of business at least 15 Business Days prior to the Interest Payment Date with respect to which interest on the Debentures would have been payable except for the election to begin or extend such Extension Period. The Trustee shall give notice of the Company's election to begin a new Extension Period to the Securityholders. Section 2.12. CUSIP Numbers. The Company in issuing the Debentures may ------------- use "CUSIP" numbers (if then generally in use), and, if so, the Trustee shall use CUSIP numbers in notices of redemption as a convenience to Securityholders; provided, however, that any such notice may state that no representation is made - -------- ------- as to the correctness of such numbers either as printed on the Debentures or as contained in any notice of a redemption and that reliance may be placed only on the other identification numbers printed on the Debentures, and any such redemption shall not be affected by any defect in or omission of such numbers. The Company will promptly notify the Trustee in writing of any change in the CUSIP numbers. Section 2.13. Global Debentures. ----------------- (a) Upon the election of the holder of outstanding Debentures, which election need not be in writing, the Debentures owned by such holder shall be issued in the form of one or more Global Debentures registered in the name of the Depositary or its nominee. Each Global Debenture issued under this Indenture shall be registered in the name of the Depositary designated by the Company for such Global Debenture or a nominee thereof, delivered to such Depositary or a nominee thereof or custodian therefor and shall contain such legends as may be required by the Depositary and each such Global Debenture shall constitute a single Debenture for all purposes of this Indenture. (b) Notwithstanding any other provision in this Indenture, no Global Debenture may be exchanged in whole or in part for Debentures registered, and no transfer of a Global Debenture in whole or in part may be registered, in the name of any Person other than the Depositary for such Global Debenture or a nominee thereof unless (i) such Depositary advises the Trustee and the Company in writing that such Depositary is no longer willing or able to properly discharge its responsibilities as Depositary with respect to such Global Debenture, and no qualified successor is appointed by the Company within ninety (90) days of receipt by the Company of such notice, (ii) such Depositary ceases to be a clearing agency registered under the Exchange Act and no successor is appointed by the Company within ninety (90) days after obtaining knowledge of such event, (iii) the Company executes and delivers to the Trustee a Company order stating that the Company elects to terminate the book-entry system through the Depositary or (iv) an Event of Default shall have occurred and be continuing. Upon the occurrence of any event specified in clause (i), (ii), (iii) or (iv) above, the Trustee shall notify the Depositary and instruct the Depositary to notify all owners of beneficial interests in such Global Debenture of the occurrence of such event and of the availability of Debentures to such owners of beneficial interests requesting the same. Upon the issuance of such Debentures and the registration in the Debenture Register of such Debentures in the names of the holders of the beneficial interests therein, the Trustee shall recognize such holders of beneficial interests as holders. (c) If any Global Debenture is to be exchanged for other Debentures or canceled in part, or if another Debenture is to be exchanged in whole or in part for a beneficial interest in any Global Debenture, then either (i) such Global Debenture shall be so surrendered for exchange or cancellation as provided in this Article II or (ii) the principal amount thereof shall be reduced or increased by an amount equal to the portion thereof to be so exchanged or canceled, or equal to the principal amount of such other Debentures to be so exchanged for a beneficial interest therein, as the case may be, by means of an appropriate adjustment made on the records of the Debenture registrar, whereupon the Trustee, in accordance with the Applicable Depositary Procedures, shall instruct the Depositary or its authorized representative to make a corresponding adjustment to its records. Upon any such surrender or adjustment of a Global Debenture by the Depositary, accompanied by registration instructions, the Company shall execute and the Trustee shall authenticate and deliver any Debentures issuable in exchange for such Global Debenture (or any portion thereof) in accordance with the instructions of the Depositary. The Trustee shall not be liable for any delay in delivery of such instructions and may conclusively rely on, and shall be fully protected in relying on, such instructions. (d) Every Debenture authenticated and delivered upon registration of transfer of, or in exchange for or in lieu of, a Global Debenture or any portion thereof shall be authenticated and delivered in the form of, and shall be, a Global Debenture, unless such Debenture is registered in the name of a Person other than the Depositary for such Global Debenture or a nominee thereof. (e) Debentures distributed to holders of Book-Entry Capital Securities (as defined in the Declaration) upon the dissolution of the Trust shall be distributed in the form of one or more Global Debentures registered in the name of a Depositary or its nominee, and deposited with the Debentures registrar, as custodian for such Depositary, or with such Depositary, for credit by the Depositary to the respective accounts of the beneficial owners of the Debentures represented thereby (or such other accounts as they may direct). Debentures distributed to holders of Capital Securities other than Book-Entry Capital Securities upon the dissolution of the Trust shall not be issued in the form of a Global Debenture or any other form intended to facilitate book-entry trading in beneficial interests in such Debentures. (f) The Depositary or its nominee, as the registered owner of a Global Debenture, shall be the holder of such Global Debenture for all purposes under this Indenture and the Debentures, and owners of beneficial interests in a Global Debenture shall hold such interests pursuant to the Applicable Depositary Procedures. Accordingly, any such owner's beneficial interest in a Global Debenture shall be shown only on, and the transfer of such interest shall be effected only through, records maintained by the Depositary or its nominee or its Depositary Participants. The Debentures registrar and the Trustee shall be entitled to deal with the Depositary for all purposes under this Indenture relating to a Global Debenture (including the payment of principal and interest thereon and the giving of instructions or directions by owners of beneficial interests therein and the giving of notices) as the sole holder of the Debenture and shall have no obligations to the owners of beneficial interests therein. Neither the Trustee nor the Debentures registrar shall have any liability in respect of any transfers effected by the Depositary. (g) The rights of owners of beneficial interests in a Global Debenture shall be exercised only through the Depositary and shall be limited to those established by law and agreements between such owners and the Depositary and/or its Depositary Participants. (h) No holder of any beneficial interest in any Global Debenture held on its behalf by a Depositary shall have any rights under this Indenture with respect to such Global Debenture, and such Depositary may be treated by the Company, the Trustee and any agent of the Company or the Trustee as the owner of such Global Debenture for all purposes whatsoever. None of the Company, the Trustee nor any agent of the Company or the Trustee will have any responsibility or liability for any aspect of the records relating to or payments made on account of beneficial ownership interests of a Global Debenture or maintaining, supervising or reviewing any records relating to such beneficial ownership interests. Notwithstanding the foregoing, nothing herein shall prevent the Company, the Trustee or any agent of the Company or the Trustee from giving effect to any written certification, proxy or other authorization furnished by a Depositary or impair, as between a Depositary and such holders of beneficial interests, the operation of customary practices governing the exercise of the rights of the Depositary (or its nominee) as holder of any Debenture. ARTICLE III. PARTICULAR COVENANTS OF THE COMPANY ----------------------------------- Section 3.1. Payment of Principal, Premium and Interest; Agreed -------------------------------------------------------- Treatment of the Debentures. - --------------------------- (a) The Company covenants and agrees that it will duly and punctually pay or cause to be paid the principal of and premium, if any, and interest and any Additional Interest and other payments on the Debentures at the place, at the respective times and in the manner provided in this Indenture and the Debentures. Each installment of interest on the Debentures may be paid (i) by mailing checks for such interest payable to the order of the holders of Debentures entitled thereto as they appear on the registry books of the Company if a request for a wire transfer has not been received by the Company or (ii) by wire transfer to any account with a banking institution located in the United States designated in writing by such Person to the paying agent no later than the related record date. Notwithstanding the foregoing, so long as the holder of this Debenture is the Institutional Trustee, the payment of the principal of and interest on this Debenture will be made in immediately available funds at such place and to such account as may be designated by the Institutional Trustee. (b) The Company will treat the Debentures as indebtedness, and the amounts payable in respect of the principal amount of such Debentures as interest, for all United States federal income tax purposes. All payments in respect of such Debentures will be made free and clear of United States withholding tax to any beneficial owner thereof that has provided an Internal Revenue Service Form W8 BEN (or any substitute or successor form) establishing its non-United States status for United States federal income tax purposes. (c) As of the date of this Indenture, the Company has no present intention to exercise its right under Section 2.11 to defer payments of interest on the Debentures by commencing an Extension Period. (d) As of the date of this Indenture, the Company believes that the likelihood that it would exercise its right under Section 2.11 to defer payments of interest on the Debentures by commencing an Extension Period at any time during which the Debentures are outstanding is remote because of the restrictions that would be imposed on the Company's ability to declare or pay dividends or distributions on, or to redeem, purchase or make a liquidation payment with respect to, any of its outstanding equity and on the Company's ability to make any payments of principal of or interest on, or repurchase or redeem, any of its debt securities that rank pari passu in all respects with (or junior in interest to) the Debentures. Section 3.2. Offices for Notices and Payments, etc. So long as any of ------------------------------------- the Debentures remain outstanding, the Company will maintain in Wilmington, Delaware, an office or agency where the Debentures may be presented for payment, an office or agency where the Debentures may be presented for registration of transfer and for exchange as in this Indenture provided and an office or agency where notices and demands to or upon the Company in respect of the Debentures or of this Indenture may be served. The Company will give to the Trustee written notice of the location of any such office or agency and of any change of location thereof. Until otherwise designated from time to time by the Company in a notice to the Trustee, or specified as contemplated by Section 2.5, such office or agency for all of the above purposes shall be the office or agency of the Trustee. In case the Company shall fail to maintain any such office or agency in Wilmington, Delaware, or shall fail to give such notice of the location or of any change in the location thereof, presentations and demands may be made and notices may be served at the Principal Office of the Trustee. In addition to any such office or agency, the Company may from time to time designate one or more offices or agencies outside Wilmington, Delaware, where the Debentures may be presented for registration of transfer and for exchange in the manner provided in this Indenture, and the Company may from time to time rescind such designation, as the Company may deem desirable or expedient; provided, however, that no such designation or rescission shall in -------- ------- any manner relieve the Company of its obligation to maintain any such office or agency in Wilmington, Delaware, for the purposes above mentioned. The Company will give to the Trustee prompt written notice of any such designation or rescission thereof. Section 3.3. Appointments to Fill Vacancies in Trustee's Office. The -------------------------------------------------- Company, whenever necessary to avoid or fill a vacancy in the office of Trustee, will appoint, in the manner provided in Section 6.9, a Trustee, so that there shall at all times be a Trustee hereunder. Section 3.4. Provision as to Paying Agent. ---------------------------- (a) If the Company shall appoint a paying agent other than the Trustee, it will cause such paying agent to execute and deliver to the Trustee an instrument in which such agent shall agree with the Trustee, subject to the provision of this Section 3.4, (1) that it will hold all sums held by it as such agent for the payment of the principal of and premium, if any, or interest, if any, on the Debentures (whether such sums have been paid to it by the Company or by any other obligor on the Debentures) in trust for the benefit of the holders of the Debentures; (2) that it will give the Trustee prompt written notice of any failure by the Company (or by any other obligor on the Debentures) to make any payment of the principal of and premium, if any, or interest, if any, on the Debentures when the same shall be due and payable; and (3) that it will, at any time during the continuance of any Event of Default, upon the written request of the Trustee, forthwith pay to the Trustee all sums so held in trust by such paying agent. (b) If the Company shall act as its own paying agent, it will, on or before each due date of the principal of and premium, if any, or interest or other payments, if any, on the Debentures, set aside, segregate and hold in trust for the benefit of the holders of the Debentures a sum sufficient to pay such principal, premium, interest or other payments so becoming due and will notify the Trustee in writing of any failure to take such action and of any failure by the Company (or by any other obligor under the Debentures) to make any payment of the principal of and premium, if any, or interest or other payments, if any, on the Debentures when the same shall become due and payable. Whenever the Company shall have one or more paying agents for the Debentures, it will, on or prior to each due date of the principal of and premium, if any, or interest, if any, on the Debentures, deposit with a paying agent a sum sufficient to pay the principal, premium, interest or other payments so becoming due, such sum to be held in trust for the benefit of the Persons entitled thereto and (unless such paying agent is the Trustee) the Company shall promptly notify the Trustee in writing of its action or failure to act. (c) Anything in this Section 3.4 to the contrary notwithstanding, the Company may, at any time, for the purpose of obtaining a satisfaction and discharge with respect to the Debentures, or for any other reason, pay, or direct any paying agent to pay to the Trustee all sums held in trust by the Company or any such paying agent, such sums to be held by the Trustee upon the trusts herein contained. (d) Anything in this Section 3.4 to the contrary notwithstanding, the agreement to hold sums in trust as provided in this Section 3.4 is subject to Sections 12.3 and 12.4. Section 3.5. Certificate to Trustee. The Company will deliver to the ---------------------- Trustee on or before 120 days after the end of each fiscal year, so long as Debentures are outstanding hereunder, a Certificate stating that in the course of the performance by the signers of their duties as officers of the Company they would normally have knowledge of any default during such fiscal year by the Company in the performance of any covenants contained herein, stating whether or not they have knowledge of any such default and, if so, specifying each such default of which the signers have knowledge and the nature and status thereof. A form of this Certificate is attached hereto as Exhibit B. --------- Section 3.6. Additional Sums. If and for so long as the Trust is the --------------- holder of all Debentures and the Trust is required to pay any additional taxes (including withholding taxes), duties, assessments or other governmental charges as a result of a Tax Event, the Company will pay such additional amounts ("Additional Sums") on the Debentures as shall be required so that the net ---------------- amounts received and retained by the Trust after paying taxes (including withholding taxes), duties, assessments or other governmental charges will be equal to the amounts the Trust would have received if no such taxes, duties, assessments or other governmental charges had been imposed. Whenever in this Indenture or the Debentures there is a reference in any context to the payment of principal of or interest on the Debentures, such mention shall be deemed to include mention of payments of the Additional Sums provided for in this paragraph to the extent that, in such context, Additional Sums are, were or would be payable in respect thereof pursuant to the provisions of this paragraph and express mention of the payment of Additional Sums (if applicable) in any provisions hereof shall not be construed as excluding Additional Sums in those provisions hereof where such express mention is not made; provided, however, -------- ------- that the deferral of the payment of interest during an Extension Period pursuant to Section 2.11 shall not defer the payment of any Additional Sums that may be due and payable. Section 3.7. Compliance with Consolidation Provisions. The Company ------------------------------------------- will not, while any of the Debentures remain outstanding, consolidate with, or merge into, or merge into itself, or sell or convey all or substantially all of its property to any other Person unless the provisions of Article XI hereof are complied with. Section 3.8. Limitation on Dividends. If Debentures are initially ------------------------ issued to the Trust or a trustee of such Trust in connection with the issuance of Trust Securities by the Trust (regardless of whether Debentures continue to be held by such Trust) and (i) there shall have occurred and be continuing an Event of Default, (ii) the Company shall be in default with respect to its payment of any obligations under the Capital Securities Guarantee, or (iii) the Company shall have given notice of its election to defer payments of interest on the Debentures by extending the interest payment period as provided herein and such period, or any extension thereof, shall be continuing, then the Company shall not, and shall not allow any Affiliate of the Company to, (x) declare or pay any dividends or distributions on, or redeem, purchase, acquire, or make a liquidation payment with respect to, any of the Company's capital stock or its Affiliates' capital stock (other than payments of dividends or distributions to the Company) or make any guarantee payments with respect to the foregoing or (y) make any payment of principal of or interest or premium, if any, on or repay, repurchase or redeem any debt securities of the Company or any Affiliate that rank pari passu in all respects with or junior in interest to the Debentures (other than, with respect to clauses (x) and (y) above, (1) repurchases, redemptions or other acquisitions of shares of capital stock of the Company in connection with any employment contract, benefit plan or other similar arrangement with or for the benefit of one or more employees, officers, directors or consultants, in connection with a dividend reinvestment or stockholder stock purchase plan or in connection with the issuance of capital stock of the Company (or securities convertible into or exercisable for such capital stock) as consideration in an acquisition transaction entered into prior to the applicable Extension Period, if any, (2) as a result of any exchange or conversion of any class or series of the Company's capital stock (or any capital stock of a subsidiary of the Company) for any class or series of the Company's capital stock or of any class or series of the Company's indebtedness for any class or series of the Company's capital stock, (3) the purchase of fractional interests in shares of the Company's capital stock pursuant to the conversion or exchange provisions of such capital stock or the security being converted or exchanged, (4) any declaration of a dividend in connection with any stockholders' rights plan, or the issuance of rights, stock or other property under any stockholders' rights plan, or the redemption or repurchase of rights pursuant thereto, (5) any dividend in the form of stock, warrants, options or other rights where the dividend stock or the stock issuable upon exercise of such warrants, options or other rights is the same stock as that on which the dividend is being paid or ranks pari passu with or junior to such stock and any cash payments in lieu of fractional shares issued in connection therewith, or (6) payments under the Capital Securities Guarantee). Section 3.9. Covenants as to the Trust. For so long as the Trust --------------------------- Securities remain outstanding, the Company shall maintain 100% ownership of the Common Securities; provided, however, that any permitted successor of the -------- ------- Company under this Indenture may succeed to the Company's ownership of such Common Securities. The Company, as owner of the Common Securities, shall, except in connection with a distribution of Debentures to the holders of Trust Securities in liquidation of the Trust, the redemption of all of the Trust Securities or certain mergers, consolidations or amalgamations, each as permitted by the Declaration, cause the Trust (a) to remain a statutory trust, (b) to otherwise continue to be classified as a grantor trust for United States federal income tax purposes, and (c) to cause each holder of Trust Securities to be treated as owning an undivided beneficial interest in the Debentures. Section 3.10. Additional Junior Indebtedness. The Company shall not, ------------------------------- and it shall not cause or permit any Subsidiary of the Company to, incur, issue or be obligated on any Additional Junior Indebtedness, either directly or indirectly, by way of guarantee, suretyship or otherwise, other than Additional Junior Indebtedness (i) that, by its terms, is expressly stated to be either junior and subordinate or pari passu in all respects to the Debentures, and (ii) of which the Company has notified (and, if then required under the applicable guidelines of the regulating entity, has received approval from) the Federal Reserve, if the Company is a bank holding company, or the OTS, if the Company is a savings and loan holding company. ARTICLE IV. SECURITYHOLDERS' LISTS AND REPORTS ---------------------------------- BY THE COMPANY AND THE TRUSTEE ------------------------------ Section 4.1. Securityholders' Lists. The Company covenants and agrees ---------------------- that it will furnish or cause to be furnished to the Trustee: (a) on each regular record date for the Debentures, a list, in such form as the Trustee may reasonably require, of the names and addresses of the Securityholders of the Debentures as of such record date; and (b) at such other times as the Trustee may request in writing, within 30 days after the receipt by the Company of any such request, a list of similar form and content as of a date not more than 15 days prior to the time such list is furnished; except that no such lists need be furnished under this Section 4.1 so long as the Trustee is in possession thereof by reason of its acting as Debenture registrar. Section 4.2. Preservation and Disclosure of Lists. ------------------------------------ (a) The Trustee shall preserve, in as current a form as is reasonably practicable, all information as to the names and addresses of the holders of Debentures (1) contained in the most recent list furnished to it as provided in Section 4.1 or (2) received by it in the capacity of Debentures registrar (if so acting) hereunder. The Trustee may destroy any list furnished to it as provided in Section 4.1 upon receipt of a new list so furnished. (b) In case three or more holders of Debentures (hereinafter referred to as "applicants") apply in writing to the Trustee and furnish to the Trustee reasonable proof that each such applicant has owned a Debenture for a period of at least 6 months preceding the date of such application, and such application states that the applicants desire to communicate with other holders of Debentures with respect to their rights under this Indenture or under such Debentures and is accompanied by a copy of the form of proxy or other communication which such applicants propose to transmit, then the Trustee shall within 5 Business Days after the receipt of such application, at its election, either: (1) afford such applicants access to the information preserved at the time by the Trustee in accordance with the provisions of subsection (a) of this Section 4.2, or (2) inform such applicants as to the approximate number of holders of Debentures whose names and addresses appear in the information preserved at the time by the Trustee in accordance with the provisions of subsection (a) of this Section 4.2, and as to the approximate cost of mailing to such Securityholders the form of proxy or other communication, if any, specified in such application. If the Trustee shall elect not to afford such applicants access to such information, the Trustee shall, upon the written request of such applicants, mail to each Securityholder whose name and address appear in the information preserved at the time by the Trustee in accordance with the provisions of subsection (a) of this Section 4.2 a copy of the form of proxy or other communication which is specified in such request with reasonable promptness after a tender to the Trustee of the material to be mailed and of payment, or provision for the payment, of the reasonable expenses of mailing, unless within five days after such tender, the Trustee shall mail to such applicants and file with the Securities and Exchange Commission, if permitted or required by applicable law, together with a copy of the material to be mailed, a written statement to the effect that, in the opinion of the Trustee, such mailing would be contrary to the best interests of the holders of all Debentures, as the case may be, or would be in violation of applicable law. Such written statement shall specify the basis of such opinion. If said Commission, as permitted or required by applicable law, after opportunity for a hearing upon the objections specified in the written statement so filed, shall enter an order refusing to sustain any of such objections or if, after the entry of an order sustaining one or more of such objections, said Commission shall find, after notice and opportunity for hearing, that all the objections so sustained have been met and shall enter an order so declaring, the Trustee shall mail copies of such material to all such Securityholders with reasonable promptness after the entry of such order and the renewal of such tender; otherwise the Trustee shall be relieved of any obligation or duty to such applicants respecting their application. (c) Each and every holder of Debentures, by receiving and holding the same, agrees with the Company and the Trustee that neither the Company nor the Trustee nor any paying agent shall be held accountable by reason of the disclosure of any such information as to the names and addresses of the holders of Debentures in accordance with the provisions of subsection (b) of this Section 4.2, regardless of the source from which such information was derived, and that the Trustee shall not be held accountable by reason of mailing any material pursuant to a request made under said subsection (b). ARTICLE V. REMEDIES OF THE TRUSTEE AND SECURITYHOLDERS ------------------------------------------- UPON AN EVENT OF DEFAULT ------------------------ Section 5.1. Events of Default. "Event of Default," wherever used ----------------- herein, means any one of the following events (whatever the reason for such Event of Default and whether it shall be voluntary or involuntary or be effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body): (a) the Company defaults in the payment of any interest upon any Debenture, including any Additional Interest in respect thereof, following the nonpayment of any such interest for twenty or more consecutive Distribution Periods; or (b) the Company defaults in the payment of all or any part of the principal of (or premium, if any, on) any Debentures as and when the same shall become due and payable either at maturity, upon redemption, by declaration of acceleration or otherwise; or (c) the Company defaults in the performance of, or breaches, any of its covenants or agreements in this Indenture or in the terms of the Debentures established as contemplated in this Indenture (other than a covenant or agreement a default in whose performance or whose breach is elsewhere in this Section specifically dealt with), and continuance of such default or breach for a period of 60 days after there has been given, by registered or certified mail, to the Company by the Trustee or to the Company and the Trustee by the holders of at least 25% in aggregate principal amount of the outstanding Debentures, a written notice specifying such default or breach and requiring it to be remedied and stating that such notice is a "Notice of Default" hereunder; or (d) a court of competent jurisdiction shall enter a decree or order for relief in respect of the Company in an involuntary case under any applicable bankruptcy, insolvency, reorganization or other similar law now or hereafter in effect, or appointing a receiver, liquidator, assignee, custodian, trustee, sequestrator (or similar official) of the Company or for any substantial part of its property, or ordering the winding-up or liquidation of its affairs and such decree or order shall remain unstayed and in effect for a period of 90 consecutive days; or (e) the Company shall commence a voluntary case under any applicable bankruptcy, insolvency, reorganization or other similar law now or hereafter in effect, shall consent to the entry of an order for relief in an involuntary case under any such law, or shall consent to the appointment of or taking possession by a receiver, liquidator, assignee, trustee, custodian, sequestrator (or other similar official) of the Company or of any substantial part of its property, or shall make any general assignment for the benefit of creditors, or shall fail generally to pay its debts as they become due; or (f) the Trust shall have voluntarily or involuntarily liquidated, dissolved, wound-up its business or otherwise terminated its existence except in connection with (i) the distribution of the Debentures to holders of such Trust Securities in liquidation of their interests in the Trust, (ii) the redemption of all of the outstanding Trust Securities or (iii) certain mergers, consolidations or amalgamations, each as permitted by the Declaration. If an Acceleration Event of Default occurs and is continuing with respect to the Debentures, then, and in each and every such case, unless the principal of the Debentures shall have already become due and payable, either the Trustee or the holders of not less than 25% in aggregate principal amount of the Debentures then outstanding hereunder, by notice in writing to the Company (and to the Trustee if given by Securityholders), may declare the entire principal of the Debentures and the interest accrued thereon, if any, to be due and payable immediately, and upon any such declaration the same shall become immediately due and payable. If an Event of Default under Section 5.1(b) or (c) occurs and is continuing with respect to the Debentures, then, and in each and every such case, unless the principal of the Debentures shall have already become due and payable, either the Trustee or the holders of not less than 25% in aggregate principal amount of the Debentures then outstanding hereunder, by notice in writing to the Company (and to the Trustee if given by Securityholders), may proceed to remedy the default or breach thereunder by such appropriate judicial proceedings as the Trustee or such holders shall deem most effectual to remedy the defaulted covenant or enforce the provisions of this Indenture so breached, either by suit in equity or by action at law, for damages or otherwise. The foregoing provisions, however, are subject to the condition that if, at any time after the principal of the Debentures shall have been so declared due and payable, and before any judgment or decree for the payment of the moneys due shall have been obtained or entered as hereinafter provided, (i) the Company shall pay or shall deposit with the Trustee a sum sufficient to pay all matured installments of interest upon all the Debentures and the principal of and premium, if any, on the Debentures which shall have become due otherwise than by acceleration (with interest upon such principal and premium, if any, and Additional Interest) and such amount as shall be sufficient to cover reasonable compensation to the Trustee and each predecessor Trustee, their respective agents, attorneys and counsel, and all other amounts due to the Trustee pursuant to Section 6.6, if any, and (ii) all Events of Default under this Indenture, other than the non-payment of the principal of or premium, if any, on Debentures which shall have become due by acceleration, shall have been cured, waived or otherwise remedied as provided herein -- then and in every such case the holders of a majority in aggregate principal amount of the Debentures then outstanding, by written notice to the Company and to the Trustee, may waive all defaults and rescind and annul such declaration and its consequences, but no such waiver or rescission and annulment shall extend to or shall affect any subsequent default or shall impair any right consequent thereon. In case the Trustee shall have proceeded to enforce any right under this Indenture and such proceedings shall have been discontinued or abandoned because of such rescission or annulment or for any other reason or shall have been determined adversely to the Trustee, then and in every such case the Company, the Trustee and the holders of the Debentures shall be restored respectively to their several positions and rights hereunder, and all rights, remedies and powers of the Company, the Trustee and the holders of the Debentures shall continue as though no such proceeding had been taken. Section 5.2. Payment of Debentures on Default; Suit Therefor. The -------------------------------------------------- Company covenants that upon the occurrence of an Event of Default pursuant to Section 5.1(a) or (b) then, upon demand of the Trustee, the Company will pay to the Trustee, for the benefit of the holders of the Debentures the whole amount that then shall have become due and payable on all Debentures for principal and premium, if any, or interest, or both, as the case may be, with Additional Interest accrued on the Debentures (to the extent that payment of such interest is enforceable under applicable law and, if the Debentures are held by the Trust or a trustee of such Trust, without duplication of any other amounts paid by the Trust or a trustee in respect thereof); and, in addition thereto, such further amount as shall be sufficient to cover the costs and expenses of collection, including a reasonable compensation to the Trustee, its agents, attorneys and counsel, and any other amounts due to the Trustee under Section 6.6. In case the Company shall fail forthwith to pay such amounts upon such demand, the Trustee, in its own name and as trustee of an express trust, shall be entitled and empowered to institute any actions or proceedings at law or in equity for the collection of the sums so due and unpaid, and may prosecute any such action or proceeding to judgment or final decree, and may enforce any such judgment or final decree against the Company or any other obligor on such Debentures and collect in the manner provided by law out of the property of the Company or any other obligor on such Debentures wherever situated the moneys adjudged or decreed to be payable. In case there shall be pending proceedings for the bankruptcy or for the reorganization of the Company or any other obligor on the Debentures under Bankruptcy Law, or in case a receiver or trustee shall have been appointed for the property of the Company or such other obligor, or in the case of any other similar judicial proceedings relative to the Company or other obligor upon the Debentures, or to the creditors or property of the Company or such other obligor, the Trustee, irrespective of whether the principal of the Debentures shall then be due and payable as therein expressed or by declaration of acceleration or otherwise and irrespective of whether the Trustee shall have made any demand pursuant to the provisions of this Section 5.2, shall be entitled and empowered, by intervention in such proceedings or otherwise, (i) to file and prove a claim or claims for the whole amount of principal and interest owing and unpaid in respect of the Debentures, (ii) in case of any judicial proceedings, to file such proofs of claim and other papers or documents as may be necessary or advisable in order to have the claims of the Trustee (including any claim for reasonable compensation to the Trustee and each predecessor Trustee, and their respective agents, attorneys and counsel, and for reimbursement of all other amounts due to the Trustee under Section 6.6), and of the Securityholders allowed in such judicial proceedings relative to the Company or any other obligor on the Debentures, or to the creditors or property of the Company or such other obligor, unless prohibited by applicable law and regulations, to vote on behalf of the holders of the Debentures in any election of a trustee or a standby trustee in arrangement, reorganization, liquidation or other bankruptcy or insolvency proceedings or Person performing similar functions in comparable proceedings, (iii) to collect and receive any moneys or other property payable or deliverable on any such claims, and (iv) to distribute the same after the deduction of its charges and expenses. Any receiver, assignee or trustee in bankruptcy or reorganization is hereby authorized by each of the Securityholders to make such payments to the Trustee, and, in the event that the Trustee shall consent to the making of such payments directly to the Securityholders, to pay to the Trustee such amounts as shall be sufficient to cover reasonable compensation to the Trustee, each predecessor Trustee and their respective agents, attorneys and counsel, and all other amounts due to the Trustee under Section 6.6. Nothing herein contained shall be construed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Securityholder any plan of reorganization, arrangement, adjustment or composition affecting the Debentures or the rights of any holder thereof or to authorize the Trustee to vote in respect of the claim of any Securityholder in any such proceeding. All rights of action and of asserting claims under this Indenture, or under any of the Debentures, may be enforced by the Trustee without the possession of any of the Debentures, or the production thereof at any trial or other proceeding relative thereto, and any such suit or proceeding instituted by the Trustee shall be brought in its own name as trustee of an express trust, and any recovery of judgment shall be for the ratable benefit of the holders of the Debentures. In any proceedings brought by the Trustee (and also any proceedings involving the interpretation of any provision of this Indenture to which the Trustee shall be a party), the Trustee shall be held to represent all the holders of the Debentures, and it shall not be necessary to make any holders of the Debentures parties to any such proceedings. Section 5.3. Application of Moneys Collected by Trustee. Any moneys ------------------------------------------- collected by the Trustee pursuant to this Article V shall be applied in the following order, at the date or dates fixed by the Trustee for the distribution of such moneys, upon presentation of the several Debentures in respect of which moneys have been collected, and stamping thereon the payment, if only partially paid, and upon surrender thereof if fully paid: First: To the payment of costs and expenses incurred by, and reasonable fees of, the Trustee, its agents, attorneys and counsel, and of all other amounts due to the Trustee under Section 6.6; Second: To the payment of all Senior Indebtedness of the Company if and to the extent required by Article XV; Third: To the payment of the amounts then due and unpaid upon Debentures for principal (and premium, if any), and interest on the Debentures, in respect of which or for the benefit of which money has been collected, ratably, without preference or priority of any kind, according to the amounts due on such Debentures (including Additional Interest); and Fourth: The balance, if any, to the Company. Section 5.4. Proceedings by Securityholders. No holder of any ---------------------------------- Debenture shall have any right to institute any suit, action or proceeding for any remedy hereunder, unless such holder previously shall have given to the Trustee written notice of an Event of Default with respect to the Debentures and unless the holders of not less than 25% in aggregate principal amount of the Debentures then outstanding shall have given the Trustee a written request to institute such action, suit or proceeding and shall have offered to the Trustee such reasonable indemnity as it may require against the costs, expenses and liabilities to be incurred thereby, and the Trustee for 60 days after its receipt of such notice, request and offer of indemnity shall have failed to institute any such action, suit or proceeding. Notwithstanding any other provisions in this Indenture, however, the right of any holder of any Debenture to receive payment of the principal of, premium, if any, and interest, on such Debenture when due, or to institute suit for the enforcement of any such payment, shall not be impaired or affected without the consent of such holder and by accepting a Debenture hereunder it is expressly understood, intended and covenanted by the taker and holder of every Debenture with every other such taker and holder and the Trustee, that no one or more holders of Debentures shall have any right in any manner whatsoever by virtue or by availing itself of any provision of this Indenture to affect, disturb or prejudice the rights of the holders of any other Debentures, or to obtain or seek to obtain priority over or preference to any other such holder, or to enforce any right under this Indenture, except in the manner herein provided and for the equal, ratable and common benefit of all holders of Debentures. For the protection and enforcement of the provisions of this Section, each and every Securityholder and the Trustee shall be entitled to such relief as can be given either at law or in equity. Section 5.5. Proceedings by Trustee. In case of an Event of Default ----------------------- hereunder the Trustee may in its discretion proceed to protect and enforce the rights vested in it by this Indenture by such appropriate judicial proceedings as the Trustee shall deem most effectual to protect and enforce any of such rights, either by suit in equity or by action at law or by proceeding in bankruptcy or otherwise, whether for the specific enforcement of any covenant or agreement contained in this Indenture or in aid of the exercise of any power granted in this Indenture, or to enforce any other legal or equitable right vested in the Trustee by this Indenture or by law. Section 5.6. Remedies Cumulative and Continuing; Delay or Omission -------------------------------------------------------- Not a Waiver. Except as otherwise provided in Section 2.6, all powers and - ------------ remedies given by this Article V to the Trustee or to the Securityholders shall, to the extent permitted by law, be deemed cumulative and not exclusive of any other powers and remedies available to the Trustee or the holders of the Debentures, by judicial proceedings or otherwise, to enforce the performance or observance of the covenants and agreements contained in this Indenture or otherwise established with respect to the Debentures, and no delay or omission of the Trustee or of any holder of any of the Debentures to exercise any right, remedy or power accruing upon any Event of Default occurring and continuing as aforesaid shall impair any such right, remedy or power, or shall be construed to be a waiver of any such default or an acquiescence therein; and, subject to the provisions of Section 5.4, every power and remedy given by this Article V or by law to the Trustee or to the Securityholders may be exercised from time to time, and as often as shall be deemed expedient, by the Trustee (in accordance with its duties under Section 6.1) or by the Securityholders. Section 5.7. Direction of Proceedings and Waiver of Defaults by -------------------------------------------------------- Majority of Securityholders. The holders of a majority in aggregate principal - ---------------------------- amount of the Debentures affected (voting as one class) at the time outstanding shall have the right to direct the time, method, and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred on the Trustee with respect to such Debentures; provided, -------- however, that (subject to the provisions of Section 6.1) the Trustee shall have - ------- the right to decline to follow any such direction if the Trustee shall determine that the action so directed would be unjustly prejudicial to the holders not taking part in such direction or if the Trustee being advised by counsel determines that the action or proceeding so directed may not lawfully be taken or if a Responsible Officer of the Trustee shall determine that the action or proceedings so directed would involve the Trustee in personal liability. The holders of a majority in aggregate principal amount of the Debentures at the time outstanding may on behalf of the holders of all of the Debentures waive (or modify any previously granted waiver of) any past default or Event of Default, and its consequences, except a default (a) in the payment of principal of, premium, if any, or interest on any of the Debentures, (b) in respect of covenants or provisions hereof which cannot be modified or amended without the consent of the holder of each Debenture affected, or (c) in respect of the covenants contained in Section 3.9; provided, however, that if the -------- ------- Debentures are held by the Trust or a trustee of such trust, such waiver or modification to such waiver shall not be effective until the holders of a majority in Liquidation Amount of Trust Securities of the Trust shall have consented to such waiver or modification to such waiver, provided, further, that -------- ------- if the consent of the holder of each outstanding Debenture is required, such waiver shall not be effective until each holder of the Trust Securities of the Trust shall have consented to such waiver. Upon any such waiver, the default covered thereby shall be deemed to be cured for all purposes of this Indenture and the Company, the Trustee and the holders of the Debentures shall be restored to their former positions and rights hereunder, respectively; but no such waiver shall extend to any subsequent or other default or Event of Default or impair any right consequent thereon. Whenever any default or Event of Default hereunder shall have been waived as permitted by this Section, said default or Event of Default shall for all purposes of the Debentures and this Indenture be deemed to have been cured and to be not continuing. Section 5.8. Notice of Defaults. The Trustee shall, within 90 days ------------------ after the actual knowledge by a Responsible Officer of the Trustee of the occurrence of a default with respect to the Debentures, mail to all Securityholders, as the names and addresses of such holders appear upon the Debenture Register, notice of all defaults with respect to the Debentures known to the Trustee, unless such defaults shall have been cured before the giving of such notice (the term "defaults" for the purpose of this Section 5.8 being hereby defined to be the events specified in clauses (a), (b), (c), (d), (e) and (f) of Section 5.1, not including periods of grace, if any, provided for therein); provided, however, that, except in the case of default in the payment -------- ------- of the principal of, premium, if any, or interest on any of the Debentures, the Trustee shall be protected in withholding such notice if and so long as a Responsible Officer of the Trustee in good faith determines that the withholding of such notice is in the interests of the Securityholders. Section 5.9. Undertaking to Pay Costs. All parties to this Indenture ------------------------ agree, and each holder of any Debenture by his acceptance thereof shall be deemed to have agreed, that any court may in its discretion require, in any suit for the enforcement of any right or remedy under this Indenture, or in any suit against the Trustee for any action taken or omitted by it as Trustee, the filing by any party litigant in such suit of an undertaking to pay the costs of such suit, and that such court may in its discretion assess reasonable costs, including reasonable attorneys' fees and expenses, against any party litigant in such suit, having due regard to the merits and good faith of the claims or defenses made by such party litigant; provided, however, that the provisions of -------- ------- this Section 5.9 shall not apply to any suit instituted by the Trustee, to any suit instituted by any Securityholder, or group of Securityholders, holding in the aggregate more than 10% in principal amount of the Debentures outstanding, or to any suit instituted by any Securityholder for the enforcement of the payment of the principal of (or premium, if any) or interest on any Debenture against the Company on or after the same shall have become due and payable. ARTICLE VI. CONCERNING THE TRUSTEE ---------------------- Section 6.1. Duties and Responsibilities of Trustee. With respect to -------------------------------------- the holders of Debentures issued hereunder, the Trustee, prior to the occurrence of an Event of Default with respect to the Debentures and after the curing or waiving of all Events of Default which may have occurred, with respect to the Debentures, undertakes to perform such duties and only such duties as are specifically set forth in this Indenture, and no implied covenants shall be read into this Indenture against the Trustee. In case an Event of Default with respect to the Debentures has occurred (which has not been cured or waived), the Trustee shall exercise such of the rights and powers vested in it by this Indenture, and use the same degree of care and skill in their exercise, as a prudent man would exercise or use under the circumstances in the conduct of his own affairs. No provision of this Indenture shall be construed to relieve the Trustee from liability for its own negligent action, its own negligent failure to act or its own willful misconduct, except that: (a) prior to the occurrence of an Event of Default with respect to Debentures and after the curing or waiving of all Events of Default which may have occurred (1) the duties and obligations of the Trustee with respect to Debentures shall be determined solely by the express provisions of this Indenture, and the Trustee shall not be liable except for the performance of such duties and obligations with respect to the Debentures as are specifically set forth in this Indenture, and no implied covenants or obligations shall be read into this Indenture against the Trustee, and (2) in the absence of bad faith on the part of the Trustee, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon any certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture; but, in the case of any such certificates or opinions which by any provision hereof are specifically required to be furnished to the Trustee, the Trustee shall be under a duty to examine the same to determine whether or not they conform to the requirements of this Indenture; (b) the Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer or Officers of the Trustee, unless it shall be proved that the Trustee was negligent in ascertaining the pertinent facts; and (c) the Trustee shall not be liable with respect to any action taken or omitted to be taken by it in good faith, in accordance with the direction of the Securityholders pursuant to Section 5.7, relating to the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred upon the Trustee, under this Indenture. None of the provisions contained in this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur personal financial liability in the performance of any of its duties or in the exercise of any of its rights or powers, if there is ground for believing that the repayment of such funds or liability is not assured to it under the terms of this Indenture or indemnity satisfactory to the Trustee against such risk is not reasonably assured to it. Section 6.2. Reliance on Documents, Opinions, etc. Except as ------------------------------------------ otherwise provided in Section 6.1: (a) the Trustee may conclusively rely and shall be fully protected in acting or refraining from acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, consent, order, bond, note, debenture or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties; (b) any request, direction, order or demand of the Company mentioned herein shall be sufficiently evidenced by an Officers' Certificate (unless other evidence in respect thereof be herein specifically prescribed); and any Board Resolution may be evidenced to the Trustee by a copy thereof certified by the Secretary or an Assistant Secretary of the Company; (c) the Trustee may consult with counsel of its selection and any advice or Opinion of Counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in accordance with such advice or Opinion of Counsel; (d) the Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request, order or direction of any of the Securityholders, pursuant to the provisions of this Indenture, unless such Securityholders shall have offered to the Trustee reasonable security or indemnity against the costs, expenses and liabilities which may be incurred therein or thereby; (e) the Trustee shall not be liable for any action taken or omitted by it in good faith and believed by it to be authorized or within the discretion or rights or powers conferred upon it by this Indenture; nothing contained herein shall, however, relieve the Trustee of the obligation, upon the occurrence of an Event of Default with respect to the Debentures (that has not been cured or waived) to exercise with respect to Debentures such of the rights and powers vested in it by this Indenture, and to use the same degree of care and skill in their exercise, as a prudent man would exercise or use under the circumstances in the conduct of his own affairs; (f) the Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, consent, order, approval, bond, debenture, coupon or other paper or document, unless requested in writing to do so by the holders of not less than a majority in aggregate principal amount of the outstanding Debentures affected thereby; provided, however, that if the payment -------- ------- within a reasonable time to the Trustee of the costs, expenses or liabilities likely to be incurred by it in the making of such investigation is, in the opinion of the Trustee, not reasonably assured to the Trustee by the security afforded to it by the terms of this Indenture, the Trustee may require reasonable indemnity against such expense or liability as a condition to so proceeding; (g) the Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents (including any Authenticating Agent) or attorneys, and the Trustee shall not be responsible for any misconduct or negligence on the part of any such agent or attorney appointed by it with due care; and (h) with the exceptions of defaults under Sections 5.1(a) or (b), the Trustee shall not be charged with knowledge of any Default or Event of Default with respect to the Debentures unless a written notice of such Default or Event of Default shall have been given to the Trustee by the Company or any other obligor on the Debentures or by any holder of the Debentures. Section 6.3. No Responsibility for Recitals, etc. The recitals ---------------------------------------- contained herein and in the Debentures (except in the certificate of authentication of the Trustee or the Authenticating Agent) shall be taken as the statements of the Company, and the Trustee and the Authenticating Agent assume no responsibility for the correctness of the same. The Trustee and the Authenticating Agent make no representations as to the validity or sufficiency of this Indenture or of the Debentures. The Trustee and the Authenticating Agent shall not be accountable for the use or application by the Company of any Debentures or the proceeds of any Debentures authenticated and delivered by the Trustee or the Authenticating Agent in conformity with the provisions of this Indenture. Section 6.4. Trustee, Authenticating Agent, Paying Agents, Transfer -------------------------------------------------------- Agents or Registrar May Own Debentures. The Trustee or any Authenticating Agent - -------------------------------------- or any paying agent or any transfer agent or any Debenture registrar, in its individual or any other capacity, may become the owner or pledgee of Debentures with the same rights it would have if it were not Trustee, Authenticating Agent, paying agent, transfer agent or Debenture registrar. Section 6.5. Moneys to be Held in Trust. Subject to the provisions of -------------------------- Section 12.4, all moneys received by the Trustee or any paying agent shall, until used or applied as herein provided, be held in trust for the purpose for which they were received, but need not be segregated from other funds except to the extent required by law. The Trustee and any paying agent shall be under no liability for interest on any money received by it hereunder except as otherwise agreed in writing with the Company. So long as no Event of Default shall have occurred and be continuing, all interest allowed on any such moneys shall be paid from time to time upon the written order of the Company, signed by the Chairman of the Board of Directors, the Chief Executive Officer, the President, a Managing Director, a Vice President, the Treasurer or an Assistant Treasurer of the Company. Section 6.6. Compensation and Expenses of Trustee. The Company ---------------------------------------- covenants and agrees to pay or reimburse the Trustee upon its request for all reasonable expenses, disbursements and advances incurred or made by the Trustee in accordance with any of the provisions of this Indenture (including the reasonable compensation and the expenses and disbursements of its counsel and of all Persons not regularly in its employ) except any such expense, disbursement or advance as may arise from its negligence or willful misconduct. For purposes of clarification, this Section 6.6 does not contemplate the payment by the Company of acceptance or annual administration fees owing to the Trustee pursuant to the services to be provided by the Trustee under this Indenture or the fees and expenses of the Trustee's counsel in connection with the closing of the transactions contemplated by this Indenture. The Company also covenants to indemnify each of the Trustee or any predecessor Trustee (and its officers, agents, directors and employees) for, and to hold it harmless against, any and all loss, damage, claim, liability or expense including taxes (other than taxes based on the income of the Trustee) incurred without negligence or willful misconduct on the part of the Trustee and arising out of or in connection with the acceptance or administration of this trust, including the costs and expenses of defending itself against any claim of liability. The obligations of the Company under this Section 6.6 to compensate and indemnify the Trustee and to pay or reimburse the Trustee for expenses, disbursements and advances shall constitute additional indebtedness hereunder. Such additional indebtedness shall be secured by a lien prior to that of the Debentures upon all property and funds held or collected by the Trustee as such, except funds held in trust for the benefit of the holders of particular Debentures. Without prejudice to any other rights available to the Trustee under applicable law, when the Trustee incurs expenses or renders services in connection with an Event of Default specified in Section 5.1(d), (e) or (f), the expenses (including the reasonable charges and expenses of its counsel) and the compensation for the services are intended to constitute expenses of administration under any applicable federal or state bankruptcy, insolvency or other similar law. The provisions of this Section shall survive the resignation or removal of the Trustee and the defeasance or other termination of this Indenture. Notwithstanding anything in this Indenture or any Debenture to the contrary, the Trustee shall have no obligation whatsoever to advance funds to pay any principal of or interest on or other amounts with respect to the Debentures or otherwise advance funds to or on behalf of the Company. Section 6.7. Officers' Certificate as Evidence. Except as otherwise ---------------------------------- provided in Sections 6.1 and 6.2, whenever in the administration of the provisions of this Indenture the Trustee shall deem it necessary or desirable that a matter be proved or established prior to taking or omitting any action hereunder, such matter (unless other evidence in respect thereof be herein specifically prescribed) may, in the absence of negligence or willful misconduct on the part of the Trustee, be deemed to be conclusively proved and established by an Officers' Certificate delivered to the Trustee, and such certificate, in the absence of negligence or willful misconduct on the part of the Trustee, shall be full warrant to the Trustee for any action taken or omitted by it under the provisions of this Indenture upon the faith thereof. Section 6.8. Eligibility of Trustee. The Trustee hereunder shall at ---------------------- all times be a corporation organized and doing business under the laws of the United States of America or any state or territory thereof or of the District of Columbia or a corporation or other Person authorized under such laws to exercise corporate trust powers, having (or whose obligations under this Indenture are guaranteed by an affiliate having) a combined capital and surplus of at least 50 million U.S. dollars ($50,000,000.00) and subject to supervision or examination by federal, state, territorial, or District of Columbia authority. If such corporation publishes reports of condition at least annually, pursuant to law or to the requirements of the aforesaid supervising or examining authority, then for the purposes of this Section 6.8 the combined capital and surplus of such corporation shall be deemed to be its combined capital and surplus as set forth in its most recent records of condition so published. The Company may not, nor may any Person directly or indirectly controlling, controlled by, or under common control with the Company, serve as Trustee. In case at any time the Trustee shall cease to be eligible in accordance with the provisions of this Section 6.8, the Trustee shall resign immediately in the manner and with the effect specified in Section 6.9. If the Trustee has or shall acquire any "conflicting interest" within the meaning of ss. 310(b) of the Trust Indenture Act of 1939, the Trustee shall either eliminate such interest or resign, to the extent and in the manner described by this Indenture. Section 6.9. Resignation or Removal of Trustee --------------------------------- (a) The Trustee, or any trustee or trustees hereafter appointed, may at any time resign by giving written notice of such resignation to the Company and by mailing notice thereof, at the Company's expense, to the holders of the Debentures at their addresses as they shall appear on the Debenture Register. Upon receiving such notice of resignation, the Company shall promptly appoint a successor trustee or trustees by written instrument, in duplicate, executed by order of its Board of Directors, one copy of which instrument shall be delivered to the resigning Trustee and one copy to the successor Trustee. If no successor Trustee shall have been so appointed and have accepted appointment within 30 days after the mailing of such notice of resignation to the affected Securityholders, the resigning Trustee may petition any court of competent jurisdiction for the appointment of a successor Trustee, or any Securityholder who has been a bona fide holder of a Debenture or Debentures for at least six months may, subject to the provisions of Section 5.9, on behalf of himself and all others similarly situated, petition any such court for the appointment of a successor Trustee. Such court may thereupon, after such notice, if any, as it may deem proper and prescribe, appoint a successor Trustee. (b) In case at any time any of the following shall occur -- (1) the Trustee shall fail to comply with the provisions of Section 6.8 after written request therefor by the Company or by any Securityholder who has been a bona fide holder of a Debenture or Debentures for at least 6 months, or (2) the Trustee shall cease to be eligible in accordance with the provisions of Section 6.8 and shall fail to resign after written request therefor by the Company or by any such Securityholder, or (3) the Trustee shall become incapable of acting, or shall be adjudged as bankrupt or insolvent, or a receiver of the Trustee or of its property shall be appointed, or any public officer shall take charge or control of the Trustee or of its property or affairs for the purpose of rehabilitation, conservation or liquidation, then, in any such case, the Company may remove the Trustee and appoint a successor Trustee by written instrument, in duplicate, executed by order of the Board of Directors, one copy of which instrument shall be delivered to the Trustee so removed and one copy to the successor Trustee, or, subject to the provisions of Section 5.9, any Securityholder who has been a bona fide holder of a Debenture or Debentures for at least 6 months may, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee. Such court may thereupon, after such notice, if any, as it may deem proper and prescribe, remove the Trustee and appoint successor Trustee. (c) Upon prior written notice to the Company and the Trustee, the holders of a majority in aggregate principal amount of the Debentures at the time outstanding may at any time remove the Trustee and nominate a successor Trustee, which shall be deemed appointed as successor Trustee unless within 10 Business Days after such nomination the Company objects thereto, in which case, or in the case of a failure by such holders to nominate a successor Trustee, the Trustee so removed or any Securityholder, upon the terms and conditions and otherwise as in subsection (a) of this Section 6.9 provided, may petition any court of competent jurisdiction for an appointment of a successor. (d) Any resignation or removal of the Trustee and appointment of a successor Trustee pursuant to any of the provisions of this Section shall become effective upon acceptance of appointment by the successor Trustee as provided in Section 6.10. Section 6.10. Acceptance by Successor Trustee. Any successor Trustee -------------------------------- appointed as provided in Section 6.9 shall execute, acknowledge and deliver to the Company and to its predecessor Trustee an instrument accepting such appointment hereunder, and thereupon the resignation or removal of the retiring Trustee shall become effective and such successor Trustee, without any further act, deed or conveyance, shall become vested with all the rights, powers, duties and obligations with respect to the Debentures of its predecessor hereunder, with like effect as if originally named as Trustee herein; but, nevertheless, on the written request of the Company or of the successor Trustee, the Trustee ceasing to act shall, upon payment of any amounts then due it pursuant to the provisions of Section 6.6, execute and deliver an instrument transferring to such successor Trustee all the rights and powers of the Trustee so ceasing to act and shall duly assign, transfer and deliver to such successor Trustee all property and money held by such retiring Trustee thereunder. Upon request of any such successor Trustee, the Company shall execute any and all instruments in writing for more fully and certainly vesting in and confirming to such successor Trustee all such rights and powers. Any Trustee ceasing to act shall, nevertheless, retain a lien upon all property or funds held or collected by such Trustee to secure any amounts then due it pursuant to the provisions of Section 6.6. If a successor Trustee is appointed, the Company, the retiring Trustee and the successor Trustee shall execute and deliver an indenture supplemental hereto which shall contain such provisions as shall be deemed necessary or desirable to confirm that all the rights, powers, trusts and duties of the retiring Trustee with respect to the Debentures as to which the predecessor Trustee is not retiring shall continue to be vested in the predecessor Trustee, and shall add to or change any of the provisions of this Indenture as shall be necessary to provide for or facilitate the administration of the Trust hereunder by more than one Trustee, it being understood that nothing herein or in such supplemental indenture shall constitute such Trustees co-trustees of the same trust and that each such Trustee shall be Trustee of a trust or trusts hereunder separate and apart from any trust or trusts hereunder administered by any other such Trustee. No successor Trustee shall accept appointment as provided in this Section unless at the time of such acceptance such successor Trustee shall be eligible under the provisions of Section 6.8. In no event shall a retiring Trustee be liable for the acts or omissions of any successor Trustee hereunder. Upon acceptance of appointment by a successor Trustee as provided in this Section 6.10, the Company shall mail notice of the succession of such Trustee hereunder to the holders of Debentures at their addresses as they shall appear on the Debenture Register. If the Company fails to mail such notice within 10 Business Days after the acceptance of appointment by the successor Trustee, the successor Trustee shall cause such notice to be mailed at the expense of the Company. Section 6.11. Succession by Merger, etc. Any corporation into which ------------------------- the Trustee may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which the Trustee shall be a party, or any corporation succeeding to all or substantially all of the corporate trust business of the Trustee, shall be the successor of the Trustee hereunder without the execution or filing of any paper or any further act on the part of any of the parties hereto; provided such -------- corporation shall be otherwise eligible and qualified under this Article. In case at the time such successor to the Trustee shall succeed to the trusts created by this Indenture any of the Debentures shall have been authenticated but not delivered, any such successor to the Trustee may adopt the certificate of authentication of any predecessor Trustee, and deliver such Debentures so authenticated; and in case at that time any of the Debentures shall not have been authenticated, any successor to the Trustee may authenticate such Debentures either in the name of any predecessor hereunder or in the name of the successor Trustee; and in all such cases such certificates shall have the full force which it is anywhere in the Debentures or in this Indenture provided that the certificate of the Trustee shall have; provided, however, that the -------- ------- right to adopt the certificate of authentication of any predecessor Trustee or authenticate Debentures in the name of any predecessor Trustee shall apply only to its successor or successors by merger, conversion or consolidation. Section 6.12. Authenticating Agents. There may be one or more ---------------------- Authenticating Agents appointed by the Trustee upon the request of the Company with power to act on its behalf and subject to its direction in the authentication and delivery of Debentures issued upon exchange or registration of transfer thereof as fully to all intents and purposes as though any such Authenticating Agent had been expressly authorized to authenticate and deliver Debentures; provided, however, that the Trustee shall have no liability to the -------- ------- Company for any acts or omissions of the Authenticating Agent with respect to the authentication and delivery of Debentures. Any such Authenticating Agent shall at all times be a corporation organized and doing business under the laws of the United States or of any state or territory thereof or of the District of Columbia authorized under such laws to act as Authenticating Agent, having a combined capital and surplus of at least $50,000,000.00 and being subject to supervision or examination by federal, state, territorial or District of Columbia authority. If such corporation publishes reports of condition at least annually pursuant to law or the requirements of such authority, then for the purposes of this Section 6.12 the combined capital and surplus of such corporation shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. If at any time an Authenticating Agent shall cease to be eligible in accordance with the provisions of this Section, it shall resign immediately in the manner and with the effect herein specified in this Section. Any corporation into which any Authenticating Agent may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, consolidation or conversion to which any Authenticating Agent shall be a party, or any corporation succeeding to all or substantially all of the corporate trust business of any Authenticating Agent, shall be the successor of such Authenticating Agent hereunder, if such successor corporation is otherwise eligible under this Section 6.12 without the execution or filing of any paper or any further act on the part of the parties hereto or such Authenticating Agent. Any Authenticating Agent may at any time resign by giving written notice of resignation to the Trustee and to the Company. The Trustee may at any time terminate the agency of any Authenticating Agent with respect to the Debentures by giving written notice of termination to such Authenticating Agent and to the Company. Upon receiving such a notice of resignation or upon such a termination, or in case at any time any Authenticating Agent shall cease to be eligible under this Section 6.12, the Trustee may, and upon the request of the Company shall, promptly appoint a successor Authenticating Agent eligible under this Section 6.12, shall give written notice of such appointment to the Company and shall mail notice of such appointment to all holders of Debentures as the names and addresses of such holders appear on the Debenture Register. Any successor Authenticating Agent upon acceptance of its appointment hereunder shall become vested with all rights, powers, duties and responsibilities with respect to the Debentures of its predecessor hereunder, with like effect as if originally named as Authenticating Agent herein. The Company agrees to pay to any Authenticating Agent from time to time reasonable compensation for its services. Any Authenticating Agent shall have no responsibility or liability for any action taken by it as such in accordance with the directions of the Trustee. ARTICLE VII. CONCERNING THE SECURITYHOLDERS ------------------------------ Section 7.1. Action by Securityholders. Whenever in this Indenture it ------------------------- is provided that the holders of a specified percentage in aggregate principal amount of the Debentures may take any action (including the making of any demand or request, the giving of any notice, consent or waiver or the taking of any other action) the fact that at the time of taking any such action the holders of such specified percentage have joined therein may be evidenced (a) by any instrument or any number of instruments of similar tenor executed by such Securityholders in person or by agent or proxy appointed in writing, or (b) by the record of such holders of Debentures voting in favor thereof at any meeting of such Securityholders duly called and held in accordance with the provisions of Article VIII, or (c) by a combination of such instrument or instruments and any such record of such a meeting of such Securityholders or (d) by any other method the Trustee deems satisfactory. If the Company shall solicit from the Securityholders any request, demand, authorization, direction, notice, consent, waiver or other action or revocation of the same, the Company may, at its option, as evidenced by an Officers' Certificate, fix in advance a record date for such Debentures for the determination of Securityholders entitled to give such request, demand, authorization, direction, notice, consent, waiver or other action or revocation of the same, but the Company shall have no obligation to do so. If such a record date is fixed, such request, demand, authorization, direction, notice, consent, waiver or other action or revocation of the same may be given before or after the record date, but only the Securityholders of record at the close of business on the record date shall be deemed to be Securityholders for the purposes of determining whether Securityholders of the requisite proportion of outstanding Debentures have authorized or agreed or consented to such request, demand, authorization, direction, notice, consent, waiver or other action or revocation of the same, and for that purpose the outstanding Debentures shall be computed as of the record date; provided, however, that no such authorization, agreement -------- ------- or consent by such Securityholders on the record date shall be deemed effective unless it shall become effective pursuant to the provisions of this Indenture not later than 6 months after the record date. Section 7.2. Proof of Execution by Securityholders. Subject to the --------------------------------------- provisions of Section 6.1, 6.2 and 8.5, proof of the execution of any instrument by a Securityholder or his agent or proxy shall be sufficient if made in accordance with such reasonable rules and regulations as may be prescribed by the Trustee or in such manner as shall be satisfactory to the Trustee. The ownership of Debentures shall be proved by the Debenture Register or by a certificate of the Debenture registrar. The Trustee may require such additional proof of any matter referred to in this Section as it shall deem necessary. The record of any Securityholders' meeting shall be proved in the manner provided in Section 8.6. Section 7.3. Who Are Deemed Absolute Owners. Prior to due presentment ------------------------------ for registration of transfer of any Debenture, the Company, the Trustee, any Authenticating Agent, any paying agent, any transfer agent and any Debenture registrar may deem the Person in whose name such Debenture shall be registered upon the Debenture Register to be, and may treat him as, the absolute owner of such Debenture (whether or not such Debenture shall be overdue) for the purpose of receiving payment of or on account of the principal of, premium, if any, and interest on such Debenture and for all other purposes; and neither the Company nor the Trustee nor any Authenticating Agent nor any paying agent nor any transfer agent nor any Debenture registrar shall be affected by any notice to the contrary. All such payments so made to any holder for the time being or upon his order shall be valid, and, to the extent of the sum or sums so paid, effectual to satisfy and discharge the liability for moneys payable upon any such Debenture. Section 7.4. Debentures Owned by Company Deemed Not Outstanding. In --------------------------------------------------- determining whether the holders of the requisite aggregate principal amount of Debentures have concurred in any direction, consent or waiver under this Indenture, Debentures which are owned by the Company or any other obligor on the Debentures or by any Person directly or indirectly controlling or controlled by or under direct or indirect common control with the Company or any other obligor on the Debentures shall be disregarded and deemed not to be outstanding for the purpose of any such determination; provided, however, that for the purposes of -------- ------- determining whether the Trustee shall be protected in relying on any such direction, consent or waiver, only Debentures which a Responsible Officer of the Trustee actually knows are so owned shall be so disregarded. Debentures so owned which have been pledged in good faith may be regarded as outstanding for the purposes of this Section 7.4 if the pledgee shall establish to the satisfaction of the Trustee the pledgee's right to vote such Debentures and that the pledgee is not the Company or any such other obligor or Person directly or indirectly controlling or controlled by or under direct or indirect common control with the Company or any such other obligor. In the case of a dispute as to such right, any decision by the Trustee taken upon the advice of counsel shall be full protection to the Trustee. Section 7.5. Revocation of Consents; Future Holders Bound. At any ----------------------------------------------- time prior to (but not after) the evidencing to the Trustee, as provided in Section 7.1, of the taking of any action by the holders of the percentage in aggregate principal amount of the Debentures specified in this Indenture in connection with such action, any holder (in cases where no record date has been set pursuant to Section 7.1) or any holder as of an applicable record date (in cases where a record date has been set pursuant to Section 7.1) of a Debenture (or any Debenture issued in whole or in part in exchange or substitution therefor) the serial number of which is shown by the evidence to be included in the Debentures the holders of which have consented to such action may, by filing written notice with the Trustee at the Principal Office of the Trustee and upon proof of holding as provided in Section 7.2, revoke such action so far as concerns such Debenture (or so far as concerns the principal amount represented by any exchanged or substituted Debenture). Except as aforesaid any such action taken by the holder of any Debenture shall be conclusive and binding upon such holder and upon all future holders and owners of such Debenture, and of any Debenture issued in exchange or substitution therefor or on registration of transfer thereof, irrespective of whether or not any notation in regard thereto is made upon such Debenture or any Debenture issued in exchange or substitution therefor. ARTICLE VIII. SECURITYHOLDERS' MEETINGS ------------------------- Section 8.1. Purposes of Meetings. A meeting of Securityholders may -------------------- be called at any time and from time to time pursuant to the provisions of this Article VIII for any of the following purposes: (a) to give any notice to the Company or to the Trustee, or to give any directions to the Trustee, or to consent to the waiving of any default hereunder and its consequences, or to take any other action authorized to be taken by Securityholders pursuant to any of the provisions of Article V; (b) to remove the Trustee and nominate a successor trustee pursuant to the provisions of Article VI; (c) to consent to the execution of an indenture or indentures supplemental hereto pursuant to the provisions of Section 9.2; or (d) to take any other action authorized to be taken by or on behalf of the holders of any specified aggregate principal amount of such Debentures under any other provision of this Indenture or under applicable law. Section 8.2. Call of Meetings by Trustee. The Trustee may at any time --------------------------- call a meeting of Securityholders to take any action specified in Section 8.1, to be held at such time and at such place as the Trustee shall determine. Notice of every meeting of the Securityholders, setting forth the time and the place of such meeting and in general terms the action proposed to be taken at such meeting, shall be mailed to holders of Debentures affected at their addresses as they shall appear on the Debentures Register and, if the Company is not a holder of Debentures, to the Company. Such notice shall be mailed not less than 20 nor more than 180 days prior to the date fixed for the meeting. Section 8.3. Call of Meetings by Company or Securityholders. In case ---------------------------------------------- at any time the Company pursuant to a Board Resolution, or the holders of at least 10% in aggregate principal amount of the Debentures, as the case may be, then outstanding, shall have requested the Trustee to call a meeting of Securityholders, by written request setting forth in reasonable detail the action proposed to be taken at the meeting, and the Trustee shall not have mailed the notice of such meeting within 20 days after receipt of such request, then the Company or such Securityholders may determine the time and the place for such meeting and may call such meeting to take any action authorized in Section 8.1, by mailing notice thereof as provided in Section 8.2. Section 8.4. Qualifications for Voting. To be entitled to vote at any ------------------------- meeting of Securityholders a Person shall (a) be a holder of one or more Debentures with respect to which the meeting is being held or (b) a Person appointed by an instrument in writing as proxy by a holder of one or more such Debentures. The only Persons who shall be entitled to be present or to speak at any meeting of Securityholders shall be the Persons entitled to vote at such meeting and their counsel and any representatives of the Trustee and its counsel and any representatives of the Company and its counsel. Section 8.5. Regulations. Notwithstanding any other provisions of ----------- this Indenture, the Trustee may make such reasonable regulations as it may deem advisable for any meeting of Securityholders, in regard to proof of the holding of Debentures and of the appointment of proxies, and in regard to the appointment and duties of inspectors of votes, the submission and examination of proxies, certificates and other evidence of the right to vote, and such other matters concerning the conduct of the meeting as it shall think fit. The Trustee shall, by an instrument in writing, appoint a temporary chairman of the meeting, unless the meeting shall have been called by the Company or by Securityholders as provided in Section 8.3, in which case the Company or the Securityholders calling the meeting, as the case may be, shall in like manner appoint a temporary chairman. A permanent chairman and a permanent secretary of the meeting shall be elected by majority vote of the meeting. Subject to the provisions of Section 7.4, at any meeting each holder of Debentures with respect to which such meeting is being held or proxy therefor shall be entitled to one vote for each $1,000.00 principal amount of Debentures held or represented by him; provided, however, that no vote shall be cast or -------- ------- counted at any meeting in respect of any Debenture challenged as not outstanding and ruled by the chairman of the meeting to be not outstanding. The chairman of the meeting shall have no right to vote other than by virtue of Debentures held by him or instruments in writing as aforesaid duly designating him as the Person to vote on behalf of other Securityholders. Any meeting of Securityholders duly called pursuant to the provisions of Section 8.2 or 8.3 may be adjourned from time to time by a majority of those present, whether or not constituting a quorum, and the meeting may be held as so adjourned without further notice. Section 8.6. Voting. The vote upon any resolution submitted to any ------ meeting of holders of Debentures with respect to which such meeting is being held shall be by written ballots on which shall be subscribed the signatures of such holders or of their representatives by proxy and the serial number or numbers of the Debentures held or represented by them. The permanent chairman of the meeting shall appoint two inspectors of votes who shall count all votes cast at the meeting for or against any resolution and who shall make and file with the secretary of the meeting their verified written reports in triplicate of all votes cast at the meeting. A record in duplicate of the proceedings of each meeting of Securityholders shall be prepared by the secretary of the meeting and there shall be attached to said record the original reports of the inspectors of votes on any vote by ballot taken thereat and affidavits by one or more Persons having knowledge of the facts setting forth a copy of the notice of the meeting and showing that said notice was mailed as provided in Section 8.2. The record shall show the serial numbers of the Debentures voting in favor of or against any resolution. The record shall be signed and verified by the affidavits of the permanent chairman and secretary of the meeting and one of the duplicates shall be delivered to the Company and the other to the Trustee to be preserved by the Trustee, the latter to have attached thereto the ballots voted at the meeting. Any record so signed and verified shall be conclusive evidence of the matters therein stated. Section 8.7. Quorum; Actions. The Persons entitled to vote a majority --------------- in principal amount of the Debentures then outstanding shall constitute a quorum for a meeting of Securityholders; provided, however, that if any action is to be -------- ------- taken at such meeting with respect to a consent, waiver, request, demand, notice, authorization, direction or other action which may be given by the holders of not less than a specified percentage in principal amount of the Debentures then outstanding, the Persons holding or representing such specified percentage in principal amount of the Debentures then outstanding will constitute a quorum. In the absence of a quorum within 30 minutes of the time appointed for any such meeting, the meeting shall, if convened at the request of Securityholders, be dissolved. In any other case the meeting may be adjourned for a period of not less than 10 days as determined by the permanent chairman of the meeting prior to the adjournment of such meeting. In the absence of a quorum at any such adjourned meeting, such adjourned meeting may be further adjourned for a period of not less than 10 days as determined by the permanent chairman of the meeting prior to the adjournment of such adjourned meeting. Notice of the reconvening of any adjourned meeting shall be given as provided in Section 8.2, except that such notice need be given only once not less than 5 days prior to the date on which the meeting is scheduled to be reconvened. Notice of the reconvening of an adjourned meeting shall state expressly the percentage, as provided above, of the principal amount of the Debentures then outstanding which shall constitute a quorum. Except as limited by the provisos in the first paragraph of Section 9.2, any resolution presented to a meeting or adjourned meeting duly reconvened at which a quorum is present as aforesaid may be adopted by the affirmative vote of the holders of a majority in principal amount of the Debentures then outstanding; provided, however, that, except as limited by the provisos in the -------- ------- first paragraph of Section 9.2, any resolution with respect to any consent, waiver, request, demand, notice, authorization, direction or other action which this Indenture expressly provides may be given by the holders of not less than a specified percentage in principal amount of the Debentures then outstanding may be adopted at a meeting or an adjourned meeting duly reconvened and at which a quorum is present as aforesaid only by the affirmative vote of the holders of a not less than such specified percentage in principal amount of the Debentures then outstanding. Any resolution passed or decision taken at any meeting of holders of Debentures duly held in accordance with this Section shall be binding on all the Securityholders, whether or not present or represented at the meeting. ARTICLE IX. SUPPLEMENTAL INDENTURES ----------------------- Section 9.1. Supplemental Indentures without Consent of -------------------------------------------------------- Securityholders. The Company, when authorized by a Board Resolution, and the - --------------- Trustee may from time to time and at any time enter into an indenture or indentures supplemental hereto, without the consent of the Securityholders, for one or more of the following purposes: (a) to evidence the succession of another Person to the Company, or successive successions, and the assumption by the successor Person of the covenants, agreements and obligations of the Company, pursuant to Article XI hereof; (b) to add to the covenants of the Company such further covenants, restrictions or conditions for the protection of the holders of Debentures as the Board of Directors shall consider to be for the protection of the holders of such Debentures, and to make the occurrence, or the occurrence and continuance, of a default in any of such additional covenants, restrictions or conditions a default or an Event of Default permitting the enforcement of all or any of the several remedies provided in this Indenture as herein set forth; provided, -------- however, that in respect of any such additional covenant restriction or - ------- condition such supplemental indenture may provide for a particular period of grace after default (which period may be shorter or longer than that allowed in the case of other defaults) or may provide for an immediate enforcement upon such default or may limit the remedies available to the Trustee upon such default; (c) to cure any ambiguity or to correct or supplement any provision contained herein or in any supplemental indenture which may be defective or inconsistent with any other provision contained herein or in any supplemental indenture, or to make such other provisions in regard to matters or questions arising under this Indenture; provided that any such action shall not materially -------- adversely affect the interests of the holders of the Debentures; (d) to add to, delete from, or revise the terms of Debentures, including, without limitation, any terms relating to the issuance, exchange, registration or transfer of Debentures, including to provide for transfer procedures and restrictions substantially similar to those applicable to the Capital Securities as required by Section 2.5 (for purposes of assuring that no registration of Debentures is required under the Securities Act); provided, -------- however, that any such action shall not adversely affect the interests of the - ------- holders of the Debentures then outstanding (it being understood, for purposes of this proviso, that transfer restrictions on Debentures substantially similar to those that were applicable to Capital Securities shall not be deemed to materially adversely affect the holders of the Debentures); (e) to evidence and provide for the acceptance of appointment hereunder by a successor Trustee with respect to the Debentures and to add to or change any of the provisions of this Indenture as shall be necessary to provide for or facilitate the administration of the trusts hereunder by more than one Trustee; (f) to make any change (other than as elsewhere provided in this paragraph) that does not adversely affect the rights of any Securityholder in any material respect; or (g) to provide for the issuance of and establish the form and terms and conditions of the Debentures, to establish the form of any certifications required to be furnished pursuant to the terms of this Indenture or the Debentures, or to add to the rights of the holders of Debentures. The Trustee is hereby authorized to join with the Company in the execution of any such supplemental indenture, to make any further appropriate agreements and stipulations which may be therein contained and to accept the conveyance, transfer and assignment of any property thereunder, but the Trustee shall not be obligated to, but may in its discretion, enter into any such supplemental indenture which affects the Trustee's own rights, duties or immunities under this Indenture or otherwise. Any supplemental indenture authorized by the provisions of this Section 9.1 may be executed by the Company and the Trustee without the consent of the holders of any of the Debentures at the time outstanding, notwithstanding any of the provisions of Section 9.2. Section 9.2. Supplemental Indentures with Consent of Securityholders. ------------------------------------------------------- With the consent (evidenced as provided in Section 7.1) of the holders of not less than a majority in aggregate principal amount of the Debentures at the time outstanding affected by such supplemental indenture (voting as a class), the Company, when authorized by a Board Resolution, and the Trustee may from time to time and at any time enter into an indenture or indentures supplemental hereto for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Indenture or of any supplemental indenture or of modifying in any manner the rights of the holders of the Debentures; provided, however, that no such supplemental indenture shall without -------- ------- the consent of the holders of each Debenture then outstanding and affected thereby (i) change the fixed maturity of any Debenture, or reduce the principal amount thereof or any premium thereon, or reduce the rate or extend the time of payment of interest thereon, or reduce any amount payable on redemption thereof or make the principal thereof or any interest or premium thereon payable in any coin or currency other than that provided in the Debentures, or impair or affect the right of any Securityholder to institute suit for payment thereof or impair the right of repayment, if any, at the option of the holder, or (ii) reduce the aforesaid percentage of Debentures the holders of which are required to consent to any such supplemental indenture; provided further, however, that if the -------- ------- ------- Debentures are held by a trust or a trustee of such trust, such supplemental indenture shall not be effective until the holders of a majority in Liquidation Amount of Trust Securities shall have consented to such supplemental indenture; provided further, however, that if the consent of the Securityholder of each - -------- ------- ------- outstanding Debenture is required, such supplemental indenture shall not be effective until each holder of the Trust Securities shall have consented to such supplemental indenture. Upon the request of the Company accompanied by a Board Resolution authorizing the execution of any such supplemental indenture, and upon the filing with the Trustee of evidence of the consent of Securityholders as aforesaid, the Trustee shall join with the Company in the execution of such supplemental indenture unless such supplemental indenture affects the Trustee's own rights, duties or immunities under this Indenture or otherwise, in which case the Trustee may in its discretion, but shall not be obligated to, enter into such supplemental indenture. Promptly after the execution by the Company and the Trustee of any supplemental indenture pursuant to the provisions of this Section, the Trustee shall transmit by mail, first class postage prepaid, a notice, prepared by the Company, setting forth in general terms the substance of such supplemental indenture, to the Securityholders as their names and addresses appear upon the Debenture Register. Any failure of the Trustee to mail such notice, or any defect therein, shall not, however, in any way impair or affect the validity of any such supplemental indenture. It shall not be necessary for the consent of the Securityholders under this Section 9.2 to approve the particular form of any proposed supplemental indenture, but it shall be sufficient if such consent shall approve the substance thereof. Section 9.3. Effect of Supplemental Indentures. Upon the execution of --------------------------------- any supplemental indenture pursuant to the provisions of this Article IX, this Indenture shall be and be deemed to be modified and amended in accordance therewith and the respective rights, limitations of rights, obligations, duties and immunities under this Indenture of the Trustee, the Company and the holders of Debentures shall thereafter be determined, exercised and enforced hereunder subject in all respects to such modifications and amendments and all the terms and conditions of any such supplemental indenture shall be and be deemed to be part of the terms and conditions of this Indenture for any and all purposes. Section 9.4. Notation on Debentures. Debentures authenticated and ----------------------- delivered after the execution of any supplemental indenture pursuant to the provisions of this Article IX may bear a notation as to any matter provided for in such supplemental indenture. If the Company or the Trustee shall so determine, new Debentures so modified as to conform, in the opinion of the Board of Directors of the Company, to any modification of this Indenture contained in any such supplemental indenture may be prepared and executed by the Company, authenticated by the Trustee or the Authenticating Agent and delivered in exchange for the Debentures then outstanding. Section 9.5. Evidence of Compliance of Supplemental Indenture to be -------------------------------------------------------- Furnished to Trustee. The Trustee, subject to the provisions of Sections 6.1 and - -------------------- 6.2, shall, in addition to the documents required by Section 14.6, receive an Officers' Certificate and an Opinion of Counsel as conclusive evidence that any supplemental indenture executed pursuant hereto complies with the requirements of this Article IX. The Trustee shall receive an Opinion of Counsel as conclusive evidence that any supplemental indenture executed pursuant to this Article IX is authorized or permitted by, and conforms to, the terms of this Article IX and that it is proper for the Trustee under the provisions of this Article IX to join in the execution thereof. ARTICLE X. REDEMPTION OF SECURITIES ------------------------ Section 10.1. Optional Redemption. The Company shall have the right -------------------- (subject to the receipt by the Company of prior approval (i) if the Company is a bank holding company, from the Federal Reserve, if then required under applicable capital guidelines or policies of the Federal Reserve or (ii) if the Company is a savings and loan holding company, from the OTS, if then required under applicable capital guidelines or policies of the OTS) to redeem the Debentures, in whole or in part, but in all cases in a principal amount with integral multiples of $1,000.00, on any Interest Payment Date on or after the Interest Payment Date in December 2011 (the "Redemption Date"), at the ---------------- Redemption Price. Section 10.2. Special Event Redemption. If a Special Event shall occur ------------------------ and be continuing, the Company shall have the right (subject to the receipt by the Company of prior approval (i) if the Company is a bank holding company, from the Federal Reserve, if then required under applicable capital guidelines or policies of the Federal Reserve or (ii) if the Company is a savings and loan holding company, from the OTS, if then required under applicable capital guidelines or policies of the OTS) to redeem the Debentures in whole, but not in part, at any Interest Payment Date, within 120 days following the occurrence of such Special Event (the "Special Redemption Date") at the Special Redemption ------------------------- Price. Section 10.3. Notice of Redemption; Selection of Debentures. In case ---------------------------------------------- the Company shall desire to exercise the right to redeem all, or, as the case may be, any part of the Debentures, it shall cause to be mailed a notice of such redemption at least 30 and not more than 60 days prior to the Redemption Date or the Special Redemption Date to the holders of Debentures so to be redeemed as a whole or in part at their last addresses as the same appear on the Debenture Register. Such mailing shall be by first class mail. The notice if mailed in the manner herein provided shall be conclusively presumed to have been duly given, whether or not the holder receives such notice. In any case, failure to give such notice by mail or any defect in the notice to the holder of any Debenture designated for redemption as a whole or in part shall not affect the validity of the proceedings for the redemption of any other Debenture. Each such notice of redemption shall specify the CUSIP number, if any, of the Debentures to be redeemed, the Redemption Date or the Special Redemption Date, as applicable, the Redemption Price or the Special Redemption Price, as applicable, at which Debentures are to be redeemed, the place or places of payment, that payment will be made upon presentation and surrender of such Debentures, that interest accrued to the date fixed for redemption will be paid as specified in said notice, and that on and after said date interest thereon or on the portions thereof to be redeemed will cease to accrue. If less than all the Debentures are to be redeemed the notice of redemption shall specify the numbers of the Debentures to be redeemed. In case the Debentures are to be redeemed in part only, the notice of redemption shall state the portion of the principal amount thereof to be redeemed and shall state that on and after the date fixed for redemption, upon surrender of such Debenture, a new Debenture or Debentures in principal amount equal to the unredeemed portion thereof will be issued. Prior to 10:00 a.m. New York City time on the Redemption Date or Special Redemption Date, as applicable, the Company will deposit with the Trustee or with one or more paying agents an amount of money sufficient to redeem on the Redemption Date or the Special Redemption Date, as applicable, all the Debentures so called for redemption at the appropriate Redemption Price or Special Redemption Price. If all, or less than all, the Debentures are to be redeemed, the Company will give the Trustee notice not less than 45 nor more than 60 days, respectively, prior to the Redemption Date or Special Redemption Date, as applicable, as to the aggregate principal amount of Debentures to be redeemed and the Trustee shall select, in such manner as in its sole discretion it shall deem appropriate and fair, the Debentures or portions thereof (in integral multiples of $1,000.00) to be redeemed. Section 10.4. Payment of Debentures Called for Redemption. If notice ------------------------------------------- of redemption has been given as provided in Section 10.3, the Debentures or portions of Debentures with respect to which such notice has been given shall become due and payable on the Redemption Date or Special Redemption Date, as applicable, and at the place or places stated in such notice at the applicable Redemption Price or Special Redemption Price and on and after said date (unless the Company shall default in the payment of such Debentures at the Redemption Price or Special Redemption Price, as applicable) interest on the Debentures or portions of Debentures so called for redemption shall cease to accrue. On presentation and surrender of such Debentures at a place of payment specified in said notice, such Debentures or the specified portions thereof shall be paid and redeemed by the Company at the applicable Redemption Price or Special Redemption Price. Upon presentation of any Debenture redeemed in part only, the Company shall execute and the Trustee shall authenticate and make available for delivery to the holder thereof, at the expense of the Company, a new Debenture or Debentures of authorized denominations, in principal amount equal to the unredeemed portion of the Debenture so presented. ARTICLE XI. CONSOLIDATION, MERGER, SALE, CONVEYANCE AND LEASE ------------------------------------------------- Section 11.1. Company May Consolidate, etc., on Certain Terms. Nothing ----------------------------------------------- contained in this Indenture or in the Debentures shall prevent any consolidation or merger of the Company with or into any other Person (whether or not affiliated with the Company) or successive consolidations or mergers in which the Company or its successor or successors shall be a party or parties, or shall prevent any sale, conveyance, transfer or other disposition of the property of the Company or its successor or successors as an entirety, or substantially as an entirety, to any other Person (whether or not affiliated with the Company, or its successor or successors) authorized to acquire and operate the same; provided, however, that the Company hereby covenants and agrees that, upon any - -------- ------- such consolidation, merger (where the Company is not the surviving corporation), sale, conveyance, transfer or other disposition, the due and punctual payment of the principal of (and premium, if any) and interest on all of the Debentures in accordance with their terms, according to their tenor, and the due and punctual performance and observance of all the covenants and conditions of this Indenture to be kept or performed by the Company, shall be expressly assumed by supplemental indenture satisfactory in form to the Trustee executed and delivered to the Trustee by the entity formed by such consolidation, or into which the Company shall have been merged, or by the entity which shall have acquired such property. Section 11.2. Successor Entity to be Substituted. In case of any such ---------------------------------- consolidation, merger, sale, conveyance, transfer or other disposition and upon the assumption by the successor entity, by supplemental indenture, executed and delivered to the Trustee and satisfactory in form to the Trustee, of the due and punctual payment of the principal of and premium, if any, and interest on all of the Debentures and the due and punctual performance and observance of all of the covenants and conditions of this Indenture to be performed or observed by the Company, such successor entity shall succeed to and be substituted for the Company, with the same effect as if it had been named herein as the Company, and thereupon the predecessor entity shall be relieved of any further liability or obligation hereunder or upon the Debentures. Such successor entity thereupon may cause to be signed, and may issue in its own name, any or all of the Debentures issuable hereunder which theretofore shall not have been signed by the Company and delivered to the Trustee or the Authenticating Agent; and, upon the order of such successor entity instead of the Company and subject to all the terms, conditions and limitations in this Indenture prescribed, the Trustee or the Authenticating Agent shall authenticate and deliver any Debentures which previously shall have been signed and delivered by the officers of the Company, to the Trustee or the Authenticating Agent for authentication, and any Debentures which such successor entity thereafter shall cause to be signed and delivered to the Trustee or the Authenticating Agent for that purpose. All the Debentures so issued shall in all respects have the same legal rank and benefit under this Indenture as the Debentures theretofore or thereafter issued in accordance with the terms of this Indenture as though all of such Debentures had been issued at the date of the execution hereof. Section 11.3. Opinion of Counsel to be Given to Trustee. The Trustee, ----------------------------------------- subject to the provisions of Sections 6.1 and 6.2, shall receive, in addition to the Opinion of Counsel required by Section 9.5, an Opinion of Counsel as conclusive evidence that any consolidation, merger, sale, conveyance, transfer or other disposition, and any assumption, permitted or required by the terms of this Article XI complies with the provisions of this Article XI. ARTICLE XII. SATISFACTION AND DISCHARGE OF INDENTURE --------------------------------------- Section 12.1. Discharge of Indenture. When ---------------------- (a) the Company shall deliver to the Trustee for cancellation all Debentures theretofore authenticated (other than any Debentures which shall have been destroyed, lost or stolen and which shall have been replaced or paid as provided in Section 2.6) and not theretofore canceled, or (b) all the Debentures not theretofore canceled or delivered to the Trustee for cancellation shall have become due and payable, or are by their terms to become due and payable within 1 year or are to be called for redemption within 1 year under arrangements satisfactory to the Trustee for the giving of notice of redemption, and the Company shall deposit with the Trustee, in trust, funds, which shall be immediately due and payable, sufficient to pay at maturity or upon redemption all of the Debentures (other than any Debentures which shall have been destroyed, lost or stolen and which shall have been replaced or paid as provided in Section 2.6) not theretofore canceled or delivered to the Trustee for cancellation, including principal and premium, if any, and interest due or to become due to such date of maturity or redemption date, as the case may be, but excluding, however, the amount of any moneys for the payment of principal of, and premium, if any, or interest on the Debentures (1) theretofore repaid to the Company in accordance with the provisions of Section 12.4, or (2) paid to any state or to the District of Columbia pursuant to its unclaimed property or similar laws, and if in the case of either clause (a) or clause (b) the Company shall also pay or cause to be paid all other sums payable hereunder by the Company, then this Indenture shall cease to be of further effect except for the provisions of Sections 2.5, 2.6, 2.8, 3.1, 3.2, 3.4, 6.6, 6.8, 6.9 and 12.4 hereof shall survive until such Debentures shall mature and be paid. Thereafter, Sections 6.6 and 12.4 shall survive, and the Trustee, on demand of the Company accompanied by an Officers' Certificate and an Opinion of Counsel, each stating that all conditions precedent herein provided for relating to the satisfaction and discharge of this Indenture have been complied with, and at the cost and expense of the Company, shall execute proper instruments acknowledging satisfaction of and discharging this Indenture. The Company agrees to reimburse the Trustee for any costs or expenses thereafter reasonably and properly incurred by the Trustee in connection with this Indenture or the Debentures. Section 12.2. Deposited Moneys to be Held in Trust by Trustee. Subject ----------------------------------------------- to the provisions of Section 12.4, all moneys deposited with the Trustee pursuant to Section 12.1 shall be held in trust in a non-interest bearing account and applied by it to the payment, either directly or through any paying agent (including the Company if acting as its own paying agent), to the holders of the particular Debentures for the payment of which such moneys have been deposited with the Trustee, of all sums due and to become due thereon for principal, and premium, if any, and interest. Section 12.3. Paying Agent to Repay Moneys Held. Upon the satisfaction --------------------------------- and discharge of this Indenture all moneys then held by any paying agent of the Debentures (other than the Trustee) shall, upon demand of the Company, be repaid to it or paid to the Trustee, and thereupon such paying agent shall be released from all further liability with respect to such moneys. Section 12.4. Return of Unclaimed Moneys. Any moneys deposited with or -------------------------- paid to the Trustee or any paying agent for payment of the principal of, and premium, if any, or interest on Debentures and not applied but remaining unclaimed by the holders of Debentures for 2 years after the date upon which the principal of, and premium, if any, or interest on such Debentures, as the case may be, shall have become due and payable, shall, subject to applicable escheatment laws, be repaid to the Company by the Trustee or such paying agent on written demand; and the holder of any of the Debentures shall thereafter look only to the Company for any payment which such holder may be entitled to collect, and all liability of the Trustee or such paying agent with respect to such moneys shall thereupon cease. ARTICLE XIII. IMMUNITY OF INCORPORATORS, STOCKHOLDERS, ---------------------------------------- OFFICERS AND DIRECTORS ---------------------- Section 13.1. Indenture and Debentures Solely Corporate Obligations. ------------------------------------------------------- No recourse for the payment of the principal of or premium, if any, or interest on any Debenture, or for any claim based thereon or otherwise in respect thereof, and no recourse under or upon any obligation, covenant or agreement of the Company in this Indenture or in any supplemental indenture, or in any such Debenture, or because of the creation of any indebtedness represented thereby, shall be had against any incorporator, stockholder, employee, officer or director, as such, past, present or future, of the Company or of any successor Person of the Company, either directly or through the Company or any successor Person of the Company, whether by virtue of any constitution, statute or rule of law, or by the enforcement of any assessment or penalty or otherwise, it being expressly understood that all such liability is hereby expressly waived and released as a condition of, and as a consideration for, the execution of this Indenture and the issue of the Debentures. ARTICLE XIV. MISCELLANEOUS PROVISIONS ------------------------ Section 14.1. Successors. All the covenants, stipulations, promises ---------- and agreements of the Company in this Indenture shall bind its successors and assigns whether so expressed or not. Section 14.2. Official Acts by Successor Entity. Any act or proceeding --------------------------------- by any provision of this Indenture authorized or required to be done or performed by any board, committee or officer of the Company shall and may be done and performed with like force and effect by the like board, committee, officer or other authorized Person of any entity that shall at the time be the lawful successor of the Company. Section 14.3. Surrender of Company Powers. The Company by instrument --------------------------- in writing executed by authority of at least 2/3 (two-thirds) of its Board of Directors and delivered to the Trustee may surrender any of the powers reserved to the Company and thereupon such power so surrendered shall terminate both as to the Company, and as to any permitted successor. Section 14.4. Addresses for Notices, etc. Any notice, consent, ------------------------------ direction, request, authorization, waiver or demand which by any provision of this Indenture is required or permitted to be given, made, furnished or served by the Trustee or by the Securityholders on or to the Company may be given or served in writing by being deposited postage prepaid by registered or certified mail in a post office letter box addressed (until another address is filed by the Company, with the Trustee for the purpose) to the Company, 600 James S. McDonnell Boulevard, Mail Stop M1 199 014, Hazelwood, Missouri 63042, Attention: Lisa K. Vansickle. Any notice, consent, direction, request, authorization, waiver or demand by any Securityholder or the Company to or upon the Trustee shall be deemed to have been sufficiently given or made, for all purposes, if given or made in writing at the office of the Trustee, addressed to the Trustee, Rodney Square North, 1100 North Market Street, Wilmington, Delaware 19890-1600, Attention: Corporate Trust Administration. Any notice, consent, direction, request, authorization, waiver or demand on or to any Securityholder shall be deemed to have been sufficiently given or made, for all purposes, if given or made in writing at the address set forth in the Debenture Register. Section 14.5. Governing Law. This Indenture and each Debenture shall ------------- be deemed to be a contract made under the law of the State of New York, and for all purposes shall be governed by and construed in accordance with the law of said State, without regard to conflict of laws principles thereof. Section 14.6. Evidence of Compliance with Conditions Precedent. Upon ------------------------------------------------- any application or demand by the Company to the Trustee to take any action under any of the provisions of this Indenture, the Company shall furnish to the Trustee an Officers' Certificate stating that in the opinion of the signers all conditions precedent, if any, provided for in this Indenture relating to the proposed action have been complied with and an Opinion of Counsel stating that, in the opinion of such counsel, all such conditions precedent have been complied with. Each certificate or opinion provided for in this Indenture and delivered to the Trustee with respect to compliance with a condition or covenant provided for in this Indenture shall include (1) a statement that the person making such certificate or opinion has read such covenant or condition; (2) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (3) a statement that, in the opinion of such person, he has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been complied with; and (4) a statement as to whether or not in the opinion of such person, such condition or covenant has been complied with. Section 14.7. Table of Contents, Headings, etc. The table of contents --------------------------------- and the titles and headings of the articles and sections of this Indenture have been inserted for convenience of reference only, are not to be considered a part hereof, and shall in no way modify or restrict any of the terms or provisions hereof. Section 14.8. Execution in Counterparts. This Indenture may be ----------------------------- executed in any number of counterparts, each of which shall be an original, but such counterparts shall together constitute but one and the same instrument. Section 14.9. Separability. In case any one or more of the provisions ------------ contained in this Indenture or in the Debentures shall for any reason be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provisions of this Indenture or of such Debentures, but this Indenture and such Debentures shall be construed as if such invalid or illegal or unenforceable provision had never been contained herein or therein. Section 14.10. Assignment. The Company will have the right at all times ---------- to assign any of its rights or obligations under this Indenture to a direct or indirect wholly owned Subsidiary of the Company, provided that, in the event of any such assignment, the Company will remain liable for all such obligations. Subject to the foregoing, this Indenture is binding upon and inures to the benefit of the parties hereto and their respective successors and assigns. This Indenture may not otherwise be assigned by the parties hereto. Section 14.11. Acknowledgment of Rights. The Company agrees that, with ------------------------ respect to any Debentures held by the Trust or the Institutional Trustee of the Trust, if the Institutional Trustee of the Trust fails to enforce its rights under this Indenture as the holder of Debentures held as the assets of such Trust after the holders of a majority in Liquidation Amount of the Capital Securities of such Trust have so directed such Institutional Trustee, a holder of record of such Capital Securities may, to the fullest extent permitted by law, institute legal proceedings directly against the Company to enforce such Institutional Trustee's rights under this Indenture without first instituting any legal proceedings against such trustee or any other Person. Notwithstanding the foregoing, if an Event of Default has occurred and is continuing and such event is attributable to the failure of the Company to pay interest (or premium, if any) or principal on the Debentures on the date such interest (or premium, if any) or principal is otherwise payable (or in the case of redemption, on the redemption date), the Company agrees that a holder of record of Capital Securities of the Trust may directly institute a proceeding against the Company for enforcement of payment to such holder directly of the principal of (or premium, if any) or interest on the Debentures having an aggregate principal amount equal to the aggregate Liquidation Amount of the Capital Securities of such holder on or after the respective due date specified in the Debentures. ARTICLE XV. SUBORDINATION OF DEBENTURES --------------------------- Section 15.1. Agreement to Subordinate. The Company covenants and ------------------------- agrees, and each holder of Debentures by such Securityholder's acceptance thereof likewise covenants and agrees, that all Debentures shall be issued subject to the provisions of this Article XV; and each holder of a Debenture, whether upon original issue or upon transfer or assignment thereof, accepts and agrees to be bound by such provisions. The payment by the Company of the principal of, and premium, if any, and interest on all Debentures shall, to the extent and in the manner hereinafter set forth, be subordinated and junior in right of payment to the prior payment in full of all Senior Indebtedness of the Company, whether outstanding at the date of this Indenture or thereafter incurred; provided, -------- however, that the Debentures shall rank pari passu in all material respects with - ------- any current indebtedness, liabilities or obligations of the Company, or any Subsidiary of the Company, under debt securities (or guarantees in respect of debt securities) issued to any trust, or a trustee of a trust, partnership or other entity affiliated with the Company that is, directly or indirectly, a finance subsidiary (as such term is defined in Rule 3a-5 under the Investment Company Act of 1940) or other financing vehicle of the Company or any Subsidiary of the Company in connection with the issuance by that entity of preferred securities or other securities that are eligible to qualify for Tier 1 capital treatment (or its then equivalent) for purposes of the capital adequacy guidelines of the Federal Reserve, as then in effect and applicable to the Company. No provision of this Article XV shall prevent the occurrence of any default or Event of Default hereunder. Section 15.2. Default on Senior Indebtedness. In the event and during ------------------------------ the continuation of any default by the Company in the payment of principal, premium, interest or any other payment due on any Senior Indebtedness of the Company following any grace period, or in the event that the maturity of any Senior Indebtedness of the Company has been accelerated because of a default and such acceleration has not been rescinded or canceled and such Senior Indebtedness has not been paid in full, then, in either case, no payment shall be made by the Company with respect to the principal (including redemption) of, or premium, if any, or interest on the Debentures. In the event that, notwithstanding the foregoing, any payment shall be received by the Trustee when such payment is prohibited by the preceding paragraph of this Section 15.2, such payment shall, subject to Section 15.7, be held in trust for the benefit of, and shall be paid over or delivered to, the holders of Senior Indebtedness or their respective representatives, or to the trustee or trustees under any indenture pursuant to which any of such Senior Indebtedness may have been issued, as their respective interests may appear, but only to the extent that the holders of the Senior Indebtedness (or their representative or representatives or a trustee) notify the Trustee in writing within 90 days of such payment of the amounts then due and owing on the Senior Indebtedness and only the amounts specified in such notice to the Trustee shall be paid to the holders of Senior Indebtedness. Section 15.3. Liquidation, Dissolution, Bankruptcy. Upon any payment -------------------------------------- by the Company or distribution of assets of the Company of any kind or character, whether in cash, property or securities, to creditors upon any dissolution or winding-up or liquidation or reorganization of the Company, whether voluntary or involuntary or in bankruptcy, insolvency, receivership or other proceedings, all amounts due upon all Senior Indebtedness of the Company shall first be paid in full, or payment thereof provided for in money in accordance with its terms, before any payment is made by the Company, on account of the principal (and premium, if any) or interest on the Debentures. Upon any such dissolution or winding-up or liquidation or reorganization, any payment by the Company, or distribution of assets of the Company of any kind or character, whether in cash, property or securities, to which the Securityholders or the Trustee would be entitled to receive from the Company, except for the provisions of this Article XV, shall be paid by the Company, or by any receiver, trustee in bankruptcy, liquidating trustee, agent or other Person making such payment or distribution, or by the Securityholders or by the Trustee under this Indenture if received by them or it, directly to the holders of Senior Indebtedness (pro rata to such holders on the basis of the respective amounts of Senior Indebtedness held by such holders, as calculated by the Company) or their representative or representatives, or to the trustee or trustees under any indenture pursuant to which any instruments evidencing such Senior Indebtedness may have been issued, as their respective interests may appear, to the extent necessary to pay such Senior Indebtedness in full, in money or money's worth, after giving effect to any concurrent payment or distribution to or for the holders of such Senior Indebtedness, before any payment or distribution is made to the Securityholders or to the Trustee. In the event that, notwithstanding the foregoing, any payment or distribution of assets of the Company of any kind or character, whether in cash, property or securities, prohibited by the foregoing, shall be received by the Trustee before all Senior Indebtedness is paid in full, or provision is made for such payment in money in accordance with its terms, such payment or distribution shall be held in trust for the benefit of and shall be paid over or delivered to the holders of such Senior Indebtedness or their representative or representatives, or to the trustee or trustees under any indenture pursuant to which any instruments evidencing such Senior Indebtedness may have been issued, as their respective interests may appear, as calculated by the Company, for application to the payment of all Senior Indebtedness, remaining unpaid to the extent necessary to pay such Senior Indebtedness in full in money in accordance with its terms, after giving effect to any concurrent payment or distribution to or for the benefit of the holders of such Senior Indebtedness. For purposes of this Article XV, the words "cash, property or securities" shall not be deemed to include shares of stock of the Company as reorganized or readjusted, or securities of the Company or any other corporation provided for by a plan of reorganization or readjustment, the payment of which is subordinated at least to the extent provided in this Article XV with respect to the Debentures to the payment of all Senior Indebtedness, that may at the time be outstanding, provided that (i) such Senior Indebtedness is assumed by the new corporation, if any, resulting from any such reorganization or readjustment, and (ii) the rights of the holders of such Senior Indebtedness are not, without the consent of such holders, altered by such reorganization or readjustment. The consolidation of the Company with, or the merger of the Company into, another corporation or the liquidation or dissolution of the Company following the conveyance or transfer of its property as an entirety, or substantially as an entirety, to another corporation upon the terms and conditions provided for in Article XI of this Indenture shall not be deemed a dissolution, winding-up, liquidation or reorganization for the purposes of this Section if such other corporation shall, as a part of such consolidation, merger, conveyance or transfer, comply with the conditions stated in Article XI of this Indenture. Nothing in Section 15.2 or in this Section shall apply to claims of, or payments to, the Trustee under or pursuant to Section 6.6 of this Indenture. Section 15.4. Subrogation. Subject to the payment in full of all ----------- Senior Indebtedness, the Securityholders shall be subrogated to the rights of the holders of such Senior Indebtedness to receive payments or distributions of cash, property or securities of the Company, applicable to such Senior Indebtedness until the principal of (and premium, if any) and interest on the Debentures shall be paid in full. For the purposes of such subrogation, no payments or distributions to the holders of such Senior Indebtedness of any cash, property or securities to which the Securityholders or the Trustee would be entitled except for the provisions of this Article XV, and no payment over pursuant to the provisions of this Article XV to or for the benefit of the holders of such Senior Indebtedness by Securityholders or the Trustee, shall, as between the Company, its creditors other than holders of Senior Indebtedness of the Company, and the holders of the Debentures be deemed to be a payment or distribution by the Company to or on account of such Senior Indebtedness. It is understood that the provisions of this Article XV are and are intended solely for the purposes of defining the relative rights of the holders of the Securities, on the one hand, and the holders of such Senior Indebtedness, on the other hand. Nothing contained in this Article XV or elsewhere in this Indenture or in the Debentures is intended to or shall impair, as between the Company, its creditors other than the holders of Senior Indebtedness, and the holders of the Debentures, the obligation of the Company, which is absolute and unconditional, to pay to the holders of the Debentures the principal of (and premium, if any) and interest on the Debentures as and when the same shall become due and payable in accordance with their terms, or is intended to or shall affect the relative rights of the holders of the Debentures and creditors of the Company, other than the holders of Senior Indebtedness, nor shall anything herein or therein prevent the Trustee or the holder of any Debenture from exercising all remedies otherwise permitted by applicable law upon default under this Indenture, subject to the rights, if any, under this Article XV of the holders of such Senior Indebtedness in respect of cash, property or securities of the Company, received upon the exercise of any such remedy. Upon any payment or distribution of assets of the Company referred to in this Article XV, the Trustee, subject to the provisions of Article VI of this Indenture, and the Securityholders shall be entitled to conclusively rely upon any order or decree made by any court of competent jurisdiction in which such dissolution, winding-up, liquidation or reorganization proceedings are pending, or a certificate of the receiver, trustee in bankruptcy, liquidation trustee, agent or other Person making such payment or distribution, delivered to the Trustee or to the Securityholders, for the purposes of ascertaining the Persons entitled to participate in such distribution, the holders of Senior Indebtedness and other indebtedness of the Company, the amount thereof or payable thereon, the amount or amounts paid or distributed thereon and all other facts pertinent thereto or to this Article XV. Section 15.5. Trustee to Effectuate Subordination. Each Securityholder ----------------------------------- by such Securityholder's acceptance thereof authorizes and directs the Trustee on such Securityholder's behalf to take such action as may be necessary or appropriate to effectuate the subordination provided in this Article XV and appoints the Trustee such Securityholder's attorney-in-fact for any and all such purposes. Section 15.6. Notice by the Company. The Company shall give prompt ---------------------- written notice to a Responsible Officer of the Trustee at the Principal Office of the Trustee of any fact known to the Company that would prohibit the making of any payment of monies to or by the Trustee in respect of the Debentures pursuant to the provisions of this Article XV. Notwithstanding the provisions of this Article XV or any other provision of this Indenture, the Trustee shall not be charged with knowledge of the existence of any facts that would prohibit the making of any payment of monies to or by the Trustee in respect of the Debentures pursuant to the provisions of this Article XV, unless and until a Responsible Officer of the Trustee at the Principal Office of the Trustee shall have received written notice thereof from the Company or a holder or holders of Senior Indebtedness or from any trustee therefor; and before the receipt of any such written notice, the Trustee, subject to the provisions of Article VI of this Indenture, shall be entitled in all respects to assume that no such facts exist; provided, however, that if the Trustee shall not have received the notice -------- ------- provided for in this Section at least 2 Business Days prior to the date upon which by the terms hereof any money may become payable for any purpose (including, without limitation, the payment of the principal of (or premium, if any) or interest on any Debenture), then, anything herein contained to the contrary notwithstanding, the Trustee shall have full power and authority to receive such money and to apply the same to the purposes for which they were received, and shall not be affected by any notice to the contrary that may be received by it within 2 Business Days prior to such date. The Trustee, subject to the provisions of Article VI of this Indenture, shall be entitled to conclusively rely on the delivery to it of a written notice by a Person representing himself to be a holder of Senior Indebtedness (or a trustee or representative on behalf of such holder), to establish that such notice has been given by a holder of such Senior Indebtedness or a trustee or representative on behalf of any such holder or holders. In the event that the Trustee determines in good faith that further evidence is required with respect to the right of any Person as a holder of such Senior Indebtedness to participate in any payment or distribution pursuant to this Article XV, the Trustee may request such Person to furnish evidence to the reasonable satisfaction of the Trustee as to the amount of such Senior Indebtedness held by such Person, the extent to which such Person is entitled to participate in such payment or distribution and any other facts pertinent to the rights of such Person under this Article XV, and, if such evidence is not furnished, the Trustee may defer any payment to such Person pending judicial determination as to the right of such Person to receive such payment. Section 15.7. Rights of the Trustee; Holders of Senior Indebtedness. ------------------------------------------------------- The Trustee in its individual capacity shall be entitled to all the rights set forth in this Article XV in respect of any Senior Indebtedness at any time held by it, to the same extent as any other holder of Senior Indebtedness, and nothing in this Indenture shall deprive the Trustee of any of its rights as such holder. With respect to the holders of Senior Indebtedness, the Trustee undertakes to perform or to observe only such of its covenants and obligations as are specifically set forth in this Article XV, and no implied covenants or obligations with respect to the holders of such Senior Indebtedness shall be read into this Indenture against the Trustee. The Trustee shall not be deemed to owe any fiduciary duty to the holders of such Senior Indebtedness and, subject to the provisions of Article VI of this Indenture, the Trustee shall not be liable to any holder of such Senior Indebtedness if it shall pay over or deliver to Securityholders, the Company or any other Person money or assets to which any holder of such Senior Indebtedness shall be entitled by virtue of this Article XV or otherwise. Nothing in this Article XV shall apply to claims of, or payments to, the Trustee under or pursuant to Section 6.6. Section 15.8. Subordination May Not Be Impaired. No right of any ------------------------------------ present or future holder of any Senior Indebtedness to enforce subordination as herein provided shall at any time in any way be prejudiced or impaired by any act or failure to act on the part of the Company, or by any act or failure to act, in good faith, by any such holder, or by any noncompliance by the Company, with the terms, provisions and covenants of this Indenture, regardless of any knowledge thereof that any such holder may have or otherwise be charged with. Without in any way limiting the generality of the foregoing paragraph, the holders of Senior Indebtedness may, at any time and from time to time, without the consent of or notice to the Trustee or the Securityholders, without incurring responsibility to the Securityholders and without impairing or releasing the subordination provided in this Article XV or the obligations hereunder of the holders of the Debentures to the holders of such Senior Indebtedness, do any one or more of the following: (i) change the manner, place or terms of payment or extend the time of payment of, or renew or alter, such Senior Indebtedness, or otherwise amend or supplement in any manner such Senior Indebtedness or any instrument evidencing the same or any agreement under which such Senior Indebtedness is outstanding; (ii) sell, exchange, release or otherwise deal with any property pledged, mortgaged or otherwise securing such Senior Indebtedness; (iii) release any Person liable in any manner for the collection of such Senior Indebtedness; and (iv) exercise or refrain from exercising any rights against the Company, and any other Person. Signatures appear on the following page IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed by their respective officers thereunto duly authorized, as of the day and year first above written. FIRST BANKS, INC. By /s/ Lisa K. Vansickle --------------------------------------- Name: Lisa K. Vansickle Title: Senior Vice President WILMINGTON TRUST COMPANY, as Trustee By /s/ Christopher J. Monigle --------------------------------------- Name: Christopher J. Monigle Title: Vice President EXHIBIT A FORM OF FLOATING RATE JUNIOR SUBORDINATED DEFERRABLE INTEREST DEBENTURE [FORM OF FACE OF SECURITY] THIS SECURITY IS NOT A SAVINGS ACCOUNT OR DEPOSIT AND IT IS NOT INSURED BY THE UNITED STATES OR ANY AGENCY OR FUND OF THE UNITED STATES, INCLUDING THE FEDERAL DEPOSIT INSURANCE CORPORATION. THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), ANY STATE SECURITIES LAWS OR ANY OTHER APPLICABLE SECURITIES LAW. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND ANY APPLICABLE STATE SECURITIES LAWS. THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF AGREES TO OFFER, SELL OR OTHERWISE TRANSFER THIS SECURITY ONLY (A) TO THE COMPANY, (B) PURSUANT TO A REGISTRATION STATEMENT THAT HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C) TO A PERSON WHOM THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A SO LONG AS THIS SECURITY IS ELIGIBLE FOR RESALE PURSUANT TO RULE 144A IN ACCORDANCE WITH RULE 144A, (D) TO A NON-U.S. PERSON IN AN OFFSHORE TRANSACTION IN ACCORDANCE WITH RULE 903 OR RULE 904 (AS APPLICABLE) OF REGULATION S UNDER THE SECURITIES ACT, (E) TO AN INSTITUTIONAL "ACCREDITED INVESTOR" WITHIN THE MEANING OF SUBPARAGRAPH (A) OF RULE 501 UNDER THE SECURITIES ACT THAT IS ACQUIRING THIS SECURITY FOR ITS OWN ACCOUNT, OR FOR THE ACCOUNT OF SUCH AN INSTITUTIONAL ACCREDITED INVESTOR, FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO, OR FOR OFFER OR SALE IN CONNECTION WITH, ANY DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT, OR (F) PURSUANT TO ANY OTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, SUBJECT TO THE COMPANY'S RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATION AND/OR OTHER INFORMATION SATISFACTORY TO IT IN ACCORDANCE WITH THE INDENTURE, A COPY OF WHICH MAY BE OBTAINED FROM THE COMPANY. THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF ALSO AGREES, REPRESENTS AND WARRANTS THAT IT IS NOT AN EMPLOYEE BENEFIT, INDIVIDUAL RETIREMENT ACCOUNT OR OTHER PLAN OR ARRANGEMENT SUBJECT TO TITLE I OF THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974, AS AMENDED ("ERISA"), OR SECTION 4975 OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED (THE "CODE") (EACH A "PLAN"), OR AN ENTITY WHOSE UNDERLYING ASSETS INCLUDE "PLAN ASSETS" BY REASON OF ANY PLAN'S INVESTMENT IN THE ENTITY, AND NO PERSON INVESTING "PLAN ASSETS" OF ANY PLAN MAY ACQUIRE OR HOLD THE SECURITIES OR ANY INTEREST THEREIN, UNLESS SUCH PURCHASER OR HOLDER IS ELIGIBLE FOR EXEMPTIVE RELIEF AVAILABLE UNDER U.S. DEPARTMENT OF LABOR PROHIBITED TRANSACTION CLASS EXEMPTION 96-23, 95-60, 91-38, 90-1 OR 84-14 OR ANOTHER APPLICABLE EXEMPTION OR ITS PURCHASE AND HOLDING OF THIS SECURITY IS NOT PROHIBITED BY SECTION 406 OF ERISA OR SECTION 4975 OF THE CODE WITH RESPECT TO SUCH PURCHASE OR HOLDING. ANY PURCHASER OR HOLDER OF THE SECURITIES OR ANY INTEREST THEREIN WILL BE DEEMED TO HAVE REPRESENTED BY ITS PURCHASE AND HOLDING THEREOF THAT EITHER (i) IT IS NOT AN EMPLOYEE BENEFIT PLAN WITHIN THE MEANING OF SECTION 3(3) OF ERISA, OR A PLAN TO WHICH SECTION 4975 OF THE CODE IS APPLICABLE, A TRUSTEE OR OTHER PERSON ACTING ON BEHALF OF AN EMPLOYEE BENEFIT PLAN OR PLAN, OR ANY OTHER PERSON OR ENTITY USING THE ASSETS OF ANY EMPLOYEE BENEFIT PLAN OR PLAN TO FINANCE SUCH PURCHASE, OR (ii) SUCH PURCHASE WILL NOT RESULT IN A PROHIBITED TRANSACTION UNDER SECTION 406 OF ERISA OR SECTION 4975 OF THE CODE FOR WHICH THERE IS NO APPLICABLE STATUTORY OR ADMINISTRATIVE EXEMPTION. THIS SECURITY WILL BE ISSUED AND MAY BE TRANSFERRED ONLY IN BLOCKS HAVING AN AGGREGATE PRINCIPAL AMOUNT OF NOT LESS THAN $100,000.00 AND MULTIPLES OF $1,000.00 IN EXCESS THEREOF. ANY ATTEMPTED TRANSFER OF THIS SECURITY IN A BLOCK HAVING AN AGGREGATE PRINCIPAL AMOUNT OF LESS THAN $100,000.00 SHALL BE DEEMED TO BE VOID AND OF NO LEGAL EFFECT WHATSOEVER. THE HOLDER OF THIS SECURITY AGREES THAT IT WILL COMPLY WITH THE FOREGOING RESTRICTIONS. IN CONNECTION WITH ANY TRANSFER, THE HOLDER WILL DELIVER TO THE REGISTRAR AND TRANSFER AGENT SUCH CERTIFICATES AND OTHER INFORMATION AS MAY BE REQUIRED BY THE INDENTURE TO CONFIRM THAT THE TRANSFER COMPLIES WITH THE FOREGOING RESTRICTIONS. Floating Rate Junior Subordinated Deferrable Interest Debenture of First Banks, Inc. December 14, 2006 First Banks, Inc., a Missouri corporation (the "Company" which term includes any successor Person under the Indenture hereinafter referred to), for value received promises to pay to Wilmington Trust Company, not in its individual capacity but solely as Institutional Trustee for First Bank Statutory Trust VII (the "Holder") or registered assigns, the principal sum of fifty-one million five hundred forty-seven thousand dollars ($51,547,000.00) on December 15, 2036, and to pay interest on said principal sum from December 14, 2006, or from the most recent Interest Payment Date (as defined below) to which interest has been paid or duly provided for, quarterly (subject to deferral as set forth herein) in arrears on March 15, June 15, September 15 and December 15 of each year or if such day is not a Business Day, then the next succeeding Business Day (each such date, an "Interest Payment Date") (it being understood that interest accrues for any such non-Business Day), commencing on the Interest Payment Date in March 2007, at an annual rate equal to 7.20% beginning on (and including) the date of original issuance and ending on (but excluding) the Interest Payment Date in March 2007 and at an annual rate for each successive period beginning on (and including) the Interest Payment Date in March 2007, and each succeeding Interest Payment Date, and ending on (but excluding) the next succeeding Interest Payment Date (each a "Distribution Period"), equal to 3-Month LIBOR, determined as described below, plus 1.85% (the "Coupon Rate"), applied to the principal amount hereof, until the principal hereof is paid or duly provided for or made available for payment, and on any overdue principal and (without duplication and to the extent that payment of such interest is enforceable under applicable law) on any overdue installment of interest (including Additional Interest) at the Interest Rate in effect for each applicable period, compounded quarterly, from the dates such amounts are due until they are paid or made available for payment. The amount of interest payable for any period will be computed on the basis of the actual number of days in the Distribution Period concerned divided by 360. The interest installment so payable, and punctually paid or duly provided for, on any Interest Payment Date will, as provided in the Indenture, be paid to the Person in whose name this Debenture (or one or more Predecessor Securities) is registered at the close of business on the regular record date for such interest installment, which shall be fifteen Business Days prior to the day on which the relevant Interest Payment Date occurs. Any such interest installment not so punctually paid or duly provided for shall forthwith cease to be payable to the Holder on such regular record date and may be paid to the Person in whose name this Debenture (or one or more Predecessor Securities) is registered at the close of business on a special record date. "3-Month LIBOR" as used herein, means the London interbank offered interest rate for three-month U.S. dollar deposits determined by the Trustee in the following order of priority: (i) the rate (expressed as a percentage per annum) for U.S. dollar deposits having a three-month maturity that appears on Telerate Page 3750 as of 11:00 a.m. (London time) on the related Determination Date ("Telerate Page 3750" means the display designated as "Page 3750" on the Moneyline Telerate Service or such other page as may replace Page 3750 on that service or such other service or services as may be nominated by the British Bankers' Association as the information vendor for the purpose of displaying London interbank offered rates for U.S. dollar deposits); (ii) if such rate cannot be identified on the related Determination Date, the Trustee will request the principal London offices of four leading banks in the London interbank market to provide such banks' offered quotations (expressed as percentages per annum) to prime banks in the London interbank market for U.S. dollar deposits having a three-month maturity as of 11:00 a.m. (London time) on such Determination Date. If at least two quotations are provided, 3-Month LIBOR will be the arithmetic mean of such quotations; (iii) if fewer than two such quotations are provided as requested in clause (ii) above, the Trustee will request four major New York City banks to provide such banks' offered quotations (expressed as percentages per annum) to leading European banks for loans in U.S. dollars as of 11:00 a.m. (London time) on such Determination Date. If at least two such quotations are provided, 3-Month LIBOR will be the arithmetic mean of such quotations; and (iv) if fewer than two such quotations are provided as requested in clause (iii) above, 3-Month LIBOR will be a 3-Month LIBOR determined with respect to the Distribution Period immediately preceding such current Distribution Period. If the rate for U.S. dollar deposits having a three-month maturity that initially appears on Telerate Page 3750 as of 11:00 a.m. (London time) on the related Determination Date is superseded on the Telerate Page 3750 by a corrected rate by 12:00 noon (London time) on such Determination Date, then the corrected rate as so substituted on the applicable page will be the applicable 3-Month LIBOR for such Determination Date. As used herein, "Determination Date" means the date that is two London Banking Days (i.e., a business day in which dealings in deposits in U.S. dollars are transacted in the London interbank market) preceding the commencement of the relevant Distribution Period. The Interest Rate for any Distribution Period will at no time be higher than the maximum rate then permitted by New York law as the same may be modified by United States law. All percentages resulting from any calculations on the Debentures will be rounded, if necessary, to the nearest one hundred-thousandth of a percentage point, with five one-millionths of a percentage point rounded upward (e.g., 9.876545% (or .09876545) being rounded to 9.87655% (or .0987655), and all dollar amounts used in or resulting from such calculation will be rounded to the nearest cent (with one-half cent being rounded upward)). The principal of and interest on this Debenture shall be payable at the office or agency of the Trustee (or other paying agent appointed by the Company) maintained for that purpose in any coin or currency of the United States of America that at the time of payment is legal tender for payment of public and private debts; provided, however, that payment of interest may be made by check -------- ------- mailed to the registered holder at such address as shall appear in the Debenture Register if a request for a wire transfer by such holder has not been received by the Company or by wire transfer to an account appropriately designated by the holder hereof. Notwithstanding the foregoing, so long as the holder of this Debenture is the Institutional Trustee, the payment of the principal of and interest on this Debenture will be made in immediately available funds at such place and to such account as may be designated by the Trustee. So long as no Acceleration Event of Default has occurred and is continuing, the Company shall have the right, from time to time, and without causing an Event of Default, to defer payments of interest on the Debentures by extending the interest payment period on the Debentures at any time and from time to time during the term of the Debentures, for up to 20 consecutive quarterly periods (each such extended interest payment period, an "Extension Period"), during which Extension Period no interest (including Additional Interest) shall be due and payable (except any Additional Sums that may be due and payable). No Extension Period may end on a date other than an Interest Payment Date. During an Extension Period, interest will continue to accrue on the Debentures, and interest on such accrued interest will accrue at an annual rate equal to the Interest Rate in effect for such Extension Period, compounded quarterly from the date such interest would have been payable were it not for the Extension Period, to the extent permitted by law (such interest referred to herein as "Additional Interest"). At the end of any such Extension Period the Company shall pay all interest then accrued and unpaid on the Debentures (together with Additional Interest thereon); provided, however, that no -------- ------- Extension Period may extend beyond the Maturity Date; provided further, however, -------- ------- ------- that during any such Extension Period, the Company shall not and shall not permit any Affiliate to engage in any of the activities or transactions described on the reverse side hereof and in the Indenture. Prior to the termination of any Extension Period, the Company may further extend such period, provided that such period together with all such previous and further consecutive extensions thereof shall not exceed 20 consecutive quarterly periods, or extend beyond the Maturity Date. Upon the termination of any Extension Period and upon the payment of all accrued and unpaid interest and Additional Interest, the Company may commence a new Extension Period, subject to the foregoing requirements. No interest or Additional Interest shall be due and payable during an Extension Period, except at the end thereof, but each installment of interest that would otherwise have been due and payable during such Extension Period shall bear Additional Interest. The Company must give the Trustee notice of its election to begin or extend an Extension Period by the close of business at least 15 Business Days prior to the Interest Payment Date with respect to which interest on the Debentures would have been payable except for the election to begin or extend such Extension Period. The indebtedness evidenced by this Debenture is, to the extent provided in the Indenture, subordinate and junior in right of payment to the prior payment in full of all Senior Indebtedness, and this Debenture is issued subject to the provisions of the Indenture with respect thereto. Each holder of this Debenture, by accepting the same, (a) agrees to and shall be bound by such provisions, (b) authorizes and directs the Trustee on his or her behalf to take such action as may be necessary or appropriate to acknowledge or effectuate the subordination so provided and (c) appoints the Trustee his or her attorney-in-fact for any and all such purposes. Each holder hereof, by his or her acceptance hereof, hereby waives all notice of the acceptance of the subordination provisions contained herein and in the Indenture by each holder of Senior Indebtedness, whether now outstanding or hereafter incurred, and waives reliance by each such holder upon said provisions. This Debenture shall not be entitled to any benefit under the Indenture hereinafter referred to, be valid or become obligatory for any purpose until the certificate of authentication hereon shall have been signed by or on behalf of the Trustee. The provisions of this Debenture are continued on the reverse side hereof and such provisions shall for all purposes have the same effect as though fully set forth at this place. IN WITNESS WHEREOF, the Company has duly executed this certificate. FIRST BANKS, INC. By --------------------------------------- Name: Title: CERTIFICATE OF AUTHENTICATION ----------------------------- This is one of the Debentures referred to in the within-mentioned Indenture. WILMINGTON TRUST COMPANY, as Trustee By: --------------------------------------- Authorized Officer [FORM OF REVERSE OF DEBENTURE] This Debenture is one of the floating rate junior subordinated deferrable interest debentures of the Company, all issued or to be issued under and pursuant to the Indenture dated as of December 14, 2006 (the "Indenture"), duly executed and delivered between the Company and the Trustee, to which Indenture reference is hereby made for a description of the rights, limitations of rights, obligations, duties and immunities thereunder of the Trustee, the Company and the holders of the Debentures. The Debentures are limited in aggregate principal amount as specified in the Indenture. Upon the occurrence and continuation of a Special Event prior to the Interest Payment Date in December 2011, the Company shall have the right to redeem the Debentures in whole, but not in part, at any Interest Payment Date, within 120 days following the occurrence of such Special Event, at the Special Redemption Price. In addition, the Company shall have the right to redeem the Debentures, in whole or in part, but in all cases in a principal amount with integral multiples of $1,000.00, on any Interest Payment Date on or after the Interest Payment Date in December 2011, at the Redemption Price. Prior to 10:00 a.m. New York City time on the Redemption Date or Special Redemption Date, as applicable, the Company will deposit with the Trustee or with one or more paying agents an amount of money sufficient to redeem on the Redemption Date or the Special Redemption Date, as applicable, all the Debentures so called for redemption at the appropriate Redemption Price or Special Redemption Price. If all, or less than all, the Debentures are to be redeemed, the Company will give the Trustee notice not less than 45 nor more than 60 days, respectively, prior to the Redemption Date or Special Redemption Date, as applicable, as to the aggregate principal amount of Debentures to be redeemed and the Trustee shall select, in such manner as in its sole discretion it shall deem appropriate and fair, the Debentures or portions thereof (in integral multiples of $1,000.00) to be redeemed. Notwithstanding the foregoing, any redemption of Debentures by the Company shall be subject to the receipt of any and all required regulatory approvals. In case an Acceleration Event of Default shall have occurred and be continuing, upon demand of the Trustee, the principal of all of the Debentures shall become due and payable in the manner, with the effect and subject to the conditions provided in the Indenture. The Indenture contains provisions permitting the Company and the Trustee, with the consent of the holders of not less than a majority in aggregate principal amount of the Debentures at the time outstanding, to execute supplemental indentures for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Indenture or of any supplemental indenture or of modifying in any manner the rights of the holders of the Debentures; provided, however, that no such supplemental indenture shall -------- ------- without the consent of the holders of each Debenture then outstanding and affected thereby (i) change the fixed maturity of any Debenture, or reduce the principal amount thereof or any premium thereon, or reduce the rate or extend the time of payment of interest thereon, or reduce any amount payable on redemption thereof or make the principal thereof or any interest or premium thereon payable in any coin or currency other than that provided in the Debentures, or impair or affect the right of any Securityholder to institute suit for payment thereof or impair the right of repayment, if any, at the option of the holder, or (ii) reduce the aforesaid percentage of Debentures the holders of which are required to consent to any such supplemental indenture. The Indenture also contains provisions permitting the holders of a majority in aggregate principal amount of the Debentures at the time outstanding on behalf of the holders of all of the Debentures to waive (or modify any previously granted waiver of) any past default or Event of Default, and its consequences, except a default (a) in the payment of principal of, premium, if any, or interest on any of the Debentures, (b) in respect of covenants or provisions hereof or of the Indenture which cannot be modified or amended without the consent of the holder of each Debenture affected, or (c) in respect of the covenants contained in Section 3.9 of the Indenture; provided, however, -------- ------- that if the Debentures are held by the Trust or a trustee of such trust, such waiver or modification to such waiver shall not be effective until the holders of a majority in Liquidation Amount of Trust Securities of the Trust shall have consented to such waiver or modification to such waiver, provided, further, that -------- ------- if the consent of the holder of each outstanding Debenture is required, such waiver shall not be effective until each holder of the Trust Securities of the Trust shall have consented to such waiver. Upon any such waiver, the default covered thereby shall be deemed to be cured for all purposes of the Indenture and the Company, the Trustee and the holders of the Debentures shall be restored to their former positions and rights hereunder, respectively; but no such waiver shall extend to any subsequent or other default or Event of Default or impair any right consequent thereon. Whenever any default or Event of Default hereunder shall have been waived as permitted by the Indenture, said default or Event of Default shall for all purposes of the Debentures and the Indenture be deemed to have been cured and to be not continuing. No reference herein to the Indenture and no provision of this Debenture or of the Indenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of and premium, if any, and interest, including Additional Interest, on this Debenture at the time and place and at the rate and in the money herein prescribed. The Company has agreed that if Debentures are initially issued to the Trust or a trustee of such Trust in connection with the issuance of Trust Securities by the Trust (regardless of whether Debentures continue to be held by such Trust) and (i) there shall have occurred and be continuing an Event of Default, (ii) the Company shall be in default with respect to its payment of any obligations under the Capital Securities Guarantee, or (iii) the Company shall have given notice of its election to defer payments of interest on the Debentures by extending the interest payment period as provided herein and such Extension Period, or any extension thereof, shall be continuing, then the Company shall not, and shall not allow any Affiliate of the Company to, (x) declare or pay any dividends or distributions on, or redeem, purchase, acquire, or make a liquidation payment with respect to, any of the Company's capital stock or its Affiliates' capital stock (other than payments of dividends or distributions to the Company) or make any guarantee payments with respect to the foregoing or (y) make any payment of principal of or interest or premium, if any, on or repay, repurchase or redeem any debt securities of the Company or any Affiliate that rank pari passu in all respects with or junior in interest to the Debentures (other than, with respect to clauses (x) and (y) above, (1) repurchases, redemptions or other acquisitions of shares of capital stock of the Company in connection with any employment contract, benefit plan or other similar arrangement with or for the benefit of one or more employees, officers, directors or consultants, in connection with a dividend reinvestment or stockholder stock purchase plan or in connection with the issuance of capital stock of the Company (or securities convertible into or exercisable for such capital stock) as consideration in an acquisition transaction entered into prior to the applicable Extension Period, if any, (2) as a result of any exchange or conversion of any class or series of the Company's capital stock (or any capital stock of a subsidiary of the Company) for any class or series of the Company's capital stock or of any class or series of the Company's indebtedness for any class or series of the Company's capital stock, (3) the purchase of fractional interests in shares of the Company's capital stock pursuant to the conversion or exchange provisions of such capital stock or the security being converted or exchanged, (4) any declaration of a dividend in connection with any stockholders' rights plan, or the issuance of rights, stock or other property under any stockholders' rights plan, or the redemption or repurchase of rights pursuant thereto, (5) any dividend in the form of stock, warrants, options or other rights where the dividend stock or the stock issuable upon exercise of such warrants, options or other rights is the same stock as that on which the dividend is being paid or ranks pari passu with or junior to such stock and any cash payments in lieu of fractional shares issued in connection therewith, or (6) payments under the Capital Securities Guarantee). The Debentures are issuable only in registered, certificated form without coupons and in minimum denominations of $100,000.00 and any multiple of $1,000.00 in excess thereof. As provided in the Indenture and subject to the transfer restrictions and limitations as may be contained herein and therein from time to time, this Debenture is transferable by the holder hereof on the Debenture Register of the Company. Upon due presentment for registration of transfer of any Debenture at the Principal Office of the Trustee or at any office or agency of the Company maintained for such purpose as provided in Section 3.2 of the Indenture, the Company shall execute, the Company or the Trustee shall register and the Trustee or the Authenticating Agent shall authenticate and make available for delivery in the name of the transferee or transferees a new Debenture for a like aggregate principal amount. All Debentures presented for registration of transfer or for exchange or payment shall (if so required by the Company or the Trustee or the Authenticating Agent) be duly endorsed by, or be accompanied by a written instrument or instruments of transfer in form satisfactory to, the Company and the Trustee or the Authenticating Agent duly executed by the holder or his attorney duly authorized in writing. No service charge shall be made for any exchange or registration of transfer of Debentures, but the Company or the Trustee may require payment of a sum sufficient to cover any tax, fee or other governmental charge that may be imposed in connection therewith. Prior to due presentment for registration of transfer of any Debenture, the Company, the Trustee, any Authenticating Agent, any paying agent, any transfer agent and any Debenture registrar may deem the Person in whose name such Debenture shall be registered upon the Debenture Register to be, and may treat him as, the absolute owner of such Debenture (whether or not such Debenture shall be overdue) for the purpose of receiving payment of or on account of the principal of, premium, if any, and interest on such Debenture and for all other purposes; and neither the Company nor the Trustee nor any Authenticating Agent nor any paying agent nor any transfer agent nor any Debenture registrar shall be affected by any notice to the contrary. All such payments so made to any holder for the time being or upon his order shall be valid, and, to the extent of the sum or sums so paid, effectual to satisfy and discharge the liability for moneys payable upon any such Debenture. No recourse for the payment of the principal of or premium, if any, or interest on any Debenture, or for any claim based thereon or otherwise in respect thereof, and no recourse under or upon any obligation, covenant or agreement of the Company in the Indenture or in any supplemental indenture, or in any such Debenture, or because of the creation of any indebtedness represented thereby, shall be had against any incorporator, stockholder, employee, officer or director, as such, past, present or future, of the Company or of any successor Person of the Company, either directly or through the Company or any successor Person of the Company, whether by virtue of any constitution, statute or rule of law, or by the enforcement of any assessment or penalty or otherwise, it being expressly understood that all such liability is hereby expressly waived and released as a condition of, and as a consideration for, the execution of the Indenture and the issue of the Debentures. Capitalized terms used and not defined in this Debenture shall have the meanings assigned in the Indenture dated as of the date of original issuance of this Debenture between the Trustee and the Company. THE INDENTURE AND THE DEBENTURES SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO CONFLICT OF LAW PRINCIPLES THEREOF. EXHIBIT B FORM OF CERTIFICATE TO TRUSTEE Pursuant to Section 3.5 of the Indenture between First Banks, Inc., as the Company (the "Company"), and Wilmington Trust Company, as Trustee, dated as of December 14, 2006 (the "Indenture"), the undersigned hereby certifies as follows: 1. In my capacity as an officer of the Company, I would normally have knowledge of any default by the Company during the last fiscal year in the performance of any covenants of the Company contained in the Indenture. 2. [To my knowledge, the Company is not in default in the performance of any covenants contained in the Indenture. or, alternatively: I am aware of the default(s) in the performance of covenants in the Indentures, as specified below.] Capitalized terms used herein, and not otherwise defined herein, have the respective meanings ascribed thereto in the Indenture. IN WITNESS WHEREOF, the undersigned has executed this Certificate. Date: ------------------------------ Name: Title: EX-4 3 v11amendtrst.txt 4.58 Exhiit 4.58 ======================================= AMENDED AND RESTATED DECLARATION OF TRUST by and among WILMINGTON TRUST COMPANY, as Delaware Trustee, WILMINGTON TRUST COMPANY, as Institutional Trustee, FIRST BANKS, INC., as Sponsor, and TERRANCE M. MCCARTHY, PETER D. WIMMER and LISA K. VANSICKLE, as Administrators, Dated as of December 14, 2006 =======================================
TABLE OF CONTENTS ----------------- Page ---- ARTICLE I INTERPRETATION AND DEFINITIONS..........................................................................1 Section 1.1. Definitions............................................................................1 ----------- ARTICLE II ORGANIZATION...........................................................................................8 Section 2.1. Name...................................................................................8 ---- Section 2.2. Office.................................................................................8 ------ Section 2.3. Purpose................................................................................8 ------- Section 2.4. Authority..............................................................................8 --------- Section 2.5. Title to Property of the Trust.........................................................8 ------------------------------ Section 2.6. Powers and Duties of the Trustees and the Administrators...............................9 -------------------------------------------------------- Section 2.7. Prohibition of Actions by the Trust and the Institutional Trustee.....................12 ----------------------------------------------------------------- Section 2.8. Powers and Duties of the Institutional Trustee........................................13 ---------------------------------------------- Section 2.9. Certain Duties and Responsibilities of the Trustees and Administrators................14 ---------------------------------------------------------------------- Section 2.10. Certain Rights of Institutional Trustee...............................................15 --------------------------------------- Section 2.11. Delaware Trustee......................................................................17 ---------------- Section 2.12. Execution of Documents................................................................17 ---------------------- Section 2.13. Not Responsible for Recitals or Issuance of Securities................................17 ------------------------------------------------------ Section 2.14. Duration of Trust.....................................................................17 ----------------- Section 2.15. Mergers...............................................................................18 ------- ARTICLE III SPONSOR..............................................................................................19 Section 3.1. Sponsor's Purchase of Common Securities...............................................19 --------------------------------------- Section 3.2. Responsibilities of the Sponsor.......................................................19 ------------------------------- Section 3.3. Expenses..............................................................................19 -------- Section 3.4. Right to Proceed......................................................................20 ---------------- ARTICLE IV INSTITUTIONAL TRUSTEE AND ADMINISTRATORS..............................................................20 Section 4.1. Number of Trustees....................................................................20 ------------------ Section 4.2. Delaware Trustee; Eligibility.........................................................20 ----------------------------- Section 4.3. Institutional Trustee; Eligibility....................................................21 ---------------------------------- Section 4.4. Administrators........................................................................21 -------------- Section 4.5. Appointment, Removal and Resignation of Trustees and Administrators...................21 ------------------------------------------------------------------- Section 4.6. Vacancies Among Trustees..............................................................23 ------------------------ Section 4.7. Effect of Vacancies...................................................................23 ------------------- Section 4.8. Meetings of the Trustees and the Administrators.......................................23 ----------------------------------------------- Section 4.9. Delegation of Power...................................................................24 ------------------- Section 4.10. Conversion, Consolidation or Succession to Business...................................24 --------------------------------------------------- ARTICLE V DISTRIBUTIONS..........................................................................................24 Section 5.1. Distributions.........................................................................24 ------------- ARTICLE VI ISSUANCE OF SECURITIES................................................................................24 Section 6.1. General Provisions Regarding Securities...............................................24 --------------------------------------- Section 6.2. Paying Agent, Transfer Agent and Registrar............................................25 ------------------------------------------ Section 6.3. Form and Dating.......................................................................25 --------------- Section 6.4. Book-Entry Capital Securities.........................................................26 ----------------------------- Section 6.5. Mutilated, Destroyed, Lost or Stolen Certificates.....................................27 ------------------------------------------------- Section 6.6. Temporary Securities..................................................................28 -------------------- Section 6.7. Cancellation..........................................................................28 ------------ Section 6.8. CUSIP Numbers.........................................................................28 ------------- Section 6.9. Rights of Holders; Waivers of Past Defaults...........................................28 ------------------------------------------- ARTICLE VII DISSOLUTION AND TERMINATION OF TRUST.................................................................30 Section 7.1. Dissolution and Termination of Trust..................................................30 ------------------------------------ ARTICLE VIII TRANSFER OF INTERESTS...............................................................................31 Section 8.1. General...............................................................................31 ------- Section 8.2. Transfer Procedures and Restrictions..................................................32 ------------------------------------ Section 8.3. Deemed Security Holders...............................................................34 ----------------------- ARTICLE IX LIMITATION OF LIABILITY OF HOLDERS OF SECURITIES, INSTITUTIONAL TRUSTEE OR OTHERS.....................34 Section 9.1. Liability.............................................................................34 --------- Section 9.2. Exculpation...........................................................................35 ----------- Section 9.3. Fiduciary Duty........................................................................35 -------------- Section 9.4. Indemnification.......................................................................35 --------------- Section 9.5. Outside Businesses....................................................................37 ------------------ Section 9.6. Compensation; Fee.....................................................................38 ----------------- ARTICLE X ACCOUNTING.............................................................................................38 Section 10.1. Fiscal Year...........................................................................38 ----------- Section 10.2. Certain Accounting Matters............................................................38 -------------------------- Section 10.3. Banking...............................................................................39 ------- Section 10.4. Withholding...........................................................................39 ----------- ARTICLE XI AMENDMENTS AND MEETINGS...............................................................................39 Section 11.1. Amendments............................................................................39 ---------- Section 11.2. Meetings of the Holders of Securities; Action by Written Consent......................41 ---------------------------------------------------------------- ARTICLE XII REPRESENTATIONS OF INSTITUTIONAL TRUSTEE AND THE DELAWARE TRUSTEE....................................42 Section 12.1. Representations and Warranties of Institutional Trustee...............................42 ------------------------------------------------------- Section 12.2. Representations of the Delaware Trustee...............................................42 --------------------------------------- ARTICLE XIII MISCELLANEOUS.......................................................................................43 Section 13.1. Notices...............................................................................43 ------- Section 13.2. Governing Law.........................................................................44 ------------- Section 13.3. Intention of the Parties..............................................................44 ------------------------ Section 13.4. Headings..............................................................................44 -------- Section 13.5. Successors and Assigns................................................................45 ---------------------- Section 13.6. Partial Enforceability................................................................45 ---------------------- Section 13.7. Counterparts..........................................................................45 ------------ Annex I....................Terms of Securities Exhibit A-1................Form of Capital Security Certificate Exhibit A-2................Form of Capital Security Certificate Exhibit A-3................Form of Common Security Certificate Exhibit B..................Specimen of Initial Debenture Exhibit C..................Placement Agreement
AMENDED AND RESTATED DECLARATION OF TRUST OF FIRST BANK STATUTORY TRUST VII December 14, 2006 AMENDED AND RESTATED DECLARATION OF TRUST ("Declaration") dated and ----------- effective as of December 14, 2006, by the Trustees (as defined herein), the Administrators (as defined herein), the Sponsor (as defined herein) and by the holders, from time to time, of undivided beneficial interests in the Trust (as defined herein) to be issued pursuant to this Declaration; WHEREAS, the Trustees, the Administrators and the Sponsor established First Bank Statutory Trust VII (the "Trust"), a statutory trust under the ----- Statutory Trust Act (as defined herein) pursuant to a Declaration of Trust dated as of November 16, 2006 (the "Original Declaration"), and a Certificate of Trust -------------------- filed with the Secretary of State of the State of Delaware on November 16, 2006, for the sole purpose of issuing and selling certain securities representing undivided beneficial interests in the assets of the Trust and investing the proceeds thereof in certain debentures of the Debenture Issuer (as defined herein); WHEREAS, as of the date hereof, no interests in the Trust have been issued; and WHEREAS, the Trustees, the Administrators and the Sponsor, by this Declaration, amend and restate each and every term and provision of the Original Declaration; NOW, THEREFORE, it being the intention of the parties hereto to continue the Trust as a statutory trust under the Statutory Trust Act and that this Declaration constitutes the governing instrument of such statutory trust, the Trustees declare that all assets contributed to the Trust will be held in trust for the benefit of the holders, from time to time, of the securities representing undivided beneficial interests in the assets of the Trust issued hereunder, subject to the provisions of this Declaration. The parties hereto hereby agree as follows: ARTICLE I INTERPRETATION AND DEFINITIONS Section 1.1. Definitions. Unless the context otherwise requires: ----------- (a) Capitalized terms used in this Declaration but not defined in the preamble above have the respective meanings assigned to them in this Section 1.1; (b) a term defined anywhere in this Declaration has the same meaning throughout; (c) all references to "the Declaration" or "this Declaration" are to this Declaration as modified, supplemented or amended from time to time; (d) all references in this Declaration to Articles and Sections and Annexes and Exhibits are to Articles and Sections of and Annexes and Exhibits to this Declaration unless otherwise specified; and (e) a reference to the singular includes the plural and vice versa. "Acceleration Event of Default" has the meaning set forth in the -------------------------------- Indenture. "Additional Interest" has the meaning set forth in the Indenture. ------------------- "Administrative Action" has the meaning set forth in paragraph 4(a) of ---------------------- Annex I. "Administrators" means each of Terrance M. McCarthy, Peter D. Wimmer -------------- and Lisa K. Vansickle, solely in such Person's capacity as Administrator of the Trust created and continued hereunder and not in such Person's individual capacity, or such Administrator's successor in interest in such capacity, or any successor appointed as herein provided. "Affiliate" has the same meaning as given to that term in Rule 405 of --------- the Securities Act or any successor rule thereunder. "Applicable Depositary Procedures" means, with respect to any transfer --------------------------------- or transaction involving a Book-Entry Capital Security, the rules and procedures of the Depositary for such Book-Entry Capital Security, in each case to the extent applicable to such transaction and as in effect from time to time. "Authorized Officer" of a Person means any Person that is authorized to ------------------ bind such Person. "Bankruptcy Event" means, with respect to any Person: ---------------- (a) a court having jurisdiction in the premises shall enter a decree or order for relief in respect of such Person in an involuntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or appointing a receiver, liquidator, assignee, custodian, trustee, sequestrator (or similar official) of such Person or for any substantial part of its property, or ordering the winding-up or liquidation of its affairs and such decree or order shall remain unstayed and in effect for a period of 90 consecutive days; or (b) such Person shall commence a voluntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, shall consent to the entry of an order for relief in an involuntary case under any such law, or shall consent to the appointment of or taking possession by a receiver, liquidator, assignee, trustee, custodian, sequestrator (or other similar official) of such Person of any substantial part of its property, or shall make any general assignment for the benefit of creditors, or shall fail generally to pay its debts as they become due. "Book-Entry Capital Securities" means a Capital Security, the ownership ----------------------------- and transfer of which shall be made through book entries by a Depositary. "Business Day" means any day other than Saturday, Sunday or any other ------------ day on which banking institutions in New York City or Wilmington, Delaware are permitted or required by any applicable law or executive order to close. "Capital Securities" has the meaning set forth in paragraph 1(a) of ------------------- Annex I. "Capital Security Certificate" means a definitive Certificate in fully ---------------------------- registered form representing a Capital Security substantially in the form of Exhibits A-1 and A-2. "Capital Treatment Event" has the meaning set forth in paragraph 4(a) ------------------------- of Annex I. "Certificate" means any certificate evidencing Securities. ----------- "Closing Date" has the meaning set forth in the Placement Agreement. ------------ "Code" means the Internal Revenue Code of 1986, as amended from time to ---- time, or any successor legislation. "Common Securities" has the meaning set forth in paragraph 1(b) of ------------------ Annex I. "Common Security Certificate" means a definitive Certificate in fully ---------------------------- registered form representing a Common Security substantially in the form of Exhibit A-3. "Company Indemnified Person" means (a) any Administrator; (b) any ---------------------------- Affiliate of any Administrator; (c) any officers, directors, shareholders, members, partners, employees, representatives or agents of any Administrator; or (d) any officer, employee or agent of the Trust or its Affiliates. "Corporate Trust Office" means the office of the Institutional Trustee ---------------------- at which the corporate trust business of the Institutional Trustee shall, at any particular time, be principally administered, which office at the date of execution of this Declaration is located at Rodney Square North, 1100 North Market Street, Wilmington, Delaware 19890-1600, Attn: Corporate Trust Administration. "Coupon Rate" has the meaning set forth in paragraph 2(a) of Annex I. ----------- "Covered Person" means: (a) any Administrator, officer, director, --------------- shareholder, partner, member, representative, employee or agent of (i) the Trust or (ii) any of the Trust's Affiliates; and (b) any Holder of Securities. "Creditor" has the meaning set forth in Section 3.3. -------- "Debenture Issuer" means First Banks, Inc., a Missouri corporation, in ---------------- its capacity as issuer of the Debentures under the Indenture. "Debenture Trustee" means Wilmington Trust Company, as trustee under ------------------ the Indenture until a successor is appointed thereunder, and thereafter means such successor trustee. "Debentures" means the Floating Rate Junior Subordinated Deferrable ---------- Interest Debentures due 2036 to be issued by the Debenture Issuer under the Indenture. "Defaulted Interest" has the meaning set forth in the Indenture. ------------------ "Definitive Capital Securities Certificates" means Capital Securities -------------------------------------------- issued in certificated, fully registered form that are not Global Capital Securities. "Delaware Trustee" has the meaning set forth in Section 4.2. ---------------- "Depositary" means an organization registered as a clearing agency ---------- under the Exchange Act that is designated as Depositary by the Administrators or any successor thereto. DTC will be the initial Depositary. "Depositary Participant" means a broker, dealer, bank, other financial ----------------------- institution or other Person for whom from time to time the Depositary effects book-entry transfers and pledges of securities deposited with the Depositary. "Determination Date" has the meaning set forth in paragraph 4(a) of ------------------- Annex I. "Direct Action" has the meaning set forth in Section 2.8(d). ------------- "Distribution" means a distribution payable to Holders of Securities in ------------ accordance with Section 5.1. "Distribution Payment Date" has the meaning set forth in paragraph 2(b) ------------------------- of Annex I. "Distribution Period" means (i) with respect to the Distribution paid -------------------- on the first Distribution Payment Date, the period beginning on (and including) the date of original issuance and ending on (but excluding) the Distribution Payment Date in March 2007 and (ii) thereafter, with respect to a Distribution paid on each successive Distribution Payment Date, the period beginning on (and including) the preceding Distribution Payment Date and ending on (but excluding) such current Distribution Payment Date. "Distribution Rate" means, for the Distribution Period beginning on ------------------ (and including) the date of original issuance and ending on (but excluding) the Distribution Payment Date in March 2007, the rate per annum of 7.20%, and for each Distribution Period beginning on or after the Distribution Payment Date in March 2007, the Coupon Rate for such Distribution Period. "DTC" means The Depository Trust Company or any successor thereto. --- "Event of Default" means any one of the following events (whatever the ---------------- reason for such event and whether it shall be voluntary or involuntary or be effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body): (a) the occurrence of an Indenture Event of Default; or (b) default by the Trust in the payment of any Redemption price or Special Redemption Price of any Security when it becomes due and payable; or (c) default in the performance, or breach, in any material respect, of any covenant or warranty of the Institutional Trustee in this Declaration (other than those specified in clause (a) or (b) above) and continuation of such default or breach for a period of 60 days after there has been given, by registered or certified mail to the Institutional Trustee and to the Sponsor by the Holders of at least 25% in aggregate liquidation amount of the outstanding Capital Securities, a written notice specifying such default or breach and requiring it to be remedied and stating that such notice is a "Notice of Default" hereunder; or (d) the occurrence of a Bankruptcy Event with respect to the Institutional Trustee if a successor Institutional Trustee has not been appointed within 90 days thereof. "Exchange Act" means the Securities Exchange Act of 1934, as amended ------------- from time to time, or any successor legislation. "Extension Period" has the meaning set forth in paragraph 2(b) of Annex ---------------- I. "Federal Reserve" has the meaning set forth in paragraph 3 of Annex I. --------------- "Fiduciary Indemnified Person" shall mean each of the Institutional ------------------------------ Trustee (including in its individual capacity), the Delaware Trustee (including in its individual capacity), any Affiliate of the Institutional Trustee or Delaware Trustee and any officers, directors, shareholders, members, partners, employees, representatives, custodians, nominees or agents of the Institutional Trustee or Delaware Trustee. "Fiscal Year" has the meaning set forth in Section 10.1. ----------- "Global Capital Security" means a Capital Securities Certificate ------------------------- evidencing ownership of Book-Entry Capital Securities. "Guarantee" means the guarantee agreement to be dated as of the Closing --------- Date, of the Sponsor in respect of the Capital Securities. "Holder" means a Person in whose name a Certificate representing a ------ Security is registered, such Person being a beneficial owner within the meaning of the Statutory Trust Act. "Indemnified Person" means a Company Indemnified Person or a Fiduciary ------------------- Indemnified Person. "Indenture" means the Indenture dated as of the Closing Date, between --------- the Debenture Issuer and the Debenture Trustee, and any indenture supplemental thereto pursuant to which the Debentures are to be issued, as such Indenture and any supplemental indenture may be amended, supplemented or otherwise modified from time to time. "Indenture Event of Default" means an "Event of Default" as defined in --------------------------- the Indenture. "Institutional Trustee" means the Trustee meeting the eligibility ---------------------- requirements set forth in Section 4.3. "Interest" means any interest due on the Debentures including any -------- Additional Interest and Defaulted Interest. "Investment Company" means an investment company as defined in the ------------------- Investment Company Act. "Investment Company Act" means the Investment Company Act of 1940, as ----------------------- amended from time to time, or any successor legislation. "Investment Company Event" has the meaning set forth in paragraph 4(a) ------------------------- of Annex I. "Liquidation" has the meaning set forth in paragraph 3 of Annex I. ----------- "Liquidation Distribution" has the meaning set forth in paragraph 3 of ------------------------- Annex I. "Majority in liquidation amount of the Securities" means Holder(s) of ------------------------------------------------- outstanding Securities voting together as a single class or, as the context may require, Holders of outstanding Capital Securities or Holders of outstanding Common Securities voting separately as a class, who are the record owners of more than 50% of the aggregate liquidation amount (including the stated amount that would be paid on redemption, liquidation or otherwise, plus accrued and unpaid Distributions to the date upon which the voting percentages are determined) of all outstanding Securities of the relevant class. "Maturity Date" has the meaning set forth in paragraph 4(a) of Annex I. ------------- "Officers' Certificates" means, with respect to any Person, a ------------------------ certificate signed by two Authorized Officers of such Person. Any Officers' Certificate delivered with respect to compliance with a condition or covenant providing for it in this Declaration shall include: (a) a statement that each officer signing the Certificate has read the covenant or condition and the definitions relating thereto; (b) a brief statement of the nature and scope of the examination or investigation undertaken by each officer in rendering the Certificate; (c) a statement that each such officer has made such examination or investigation as, in such officer's opinion, is necessary to enable such officer to express an informed opinion as to whether or not such covenant or condition has been complied with; and (d) a statement as to whether, in the opinion of each such officer, such condition or covenant has been complied with. "OTS" has the meaning set forth in paragraph 3 of Annex I. --- "Owner" means each Person who is the beneficial owner of Book-Entry ----- Capital Securities as reflected in the records of the Depositary or, if a Depositary Participant is not the beneficial owner, then the beneficial owner as reflected in the records of the Depositary Participant. "Paying Agent" has the meaning specified in Section 6.2. ------------ "Person" means a legal person, including any individual, corporation, ------ estate, partnership, joint venture, association, joint stock company, limited liability company, trust, unincorporated association, or government or any agency or political subdivision thereof, or any other entity of whatever nature. "Placement Agreement" means the Placement Agreement relating to the -------------------- offering and sale of Capital Securities in the form of Exhibit C. "Property Account" has the meaning set forth in Section 2.8(c). ---------------- "Pro Rata" has the meaning set forth in paragraph 8 of Annex I. -------- "QIB" means a "qualified institutional buyer" as defined in Rule 144A --- under the Securities Act. "Quorum" means a majority of the Administrators or, if there are only ------ two Administrators, both of them. "Redemption Date" has the meaning set forth in paragraph 4(a) of Annex ---------------- I. "Redemption/Distribution Notice" has the meaning set forth in paragraph ------------------------------ 4(e) of Annex I. "Redemption Price" has the meaning set forth in paragraph 4(a) of Annex ---------------- I. "Registrar" has the meaning set forth in Section 6.2. --------- "Relevant Trustee" has the meaning set forth in Section 4.5(a). ---------------- "Responsible Officer" means, with respect to the Institutional Trustee, ------------------- any officer within the Corporate Trust Office of the Institutional Trustee, including any vice-president, any assistant vice-president, any assistant secretary, the treasurer, any assistant treasurer, any trust officer or other officer of the Corporate Trust Office of the Institutional Trustee customarily performing functions similar to those performed by any of the above designated officers and also means, with respect to a particular corporate trust matter, any other officer to whom such matter is referred because of that officer's knowledge of and familiarity with the particular subject. "Restricted Securities Legend" has the meaning set forth in Section ------------------------------ 8.2(b). "Rule 3a-5" means Rule 3a-5 under the Investment Company Act. --------- "Rule 3a-7" means Rule 3a-7 under the Investment Company Act. --------- "Securities" means the Common Securities and the Capital Securities. ---------- "Securities Act" means the Securities Act of 1933, as amended from time -------------- to time, or any successor legislation. "Special Event" has the meaning set forth in paragraph 4(a) of Annex I. ------------- "Special Redemption Date" has the meaning set forth in paragraph 4(a) ------------------------- of Annex I. "Special Redemption Price" has the meaning set forth in paragraph 4(a) ------------------------- of Annex I. "Sponsor" means First Banks, Inc., a Missouri corporation, or any ------- successor entity in a merger, consolidation or amalgamation, in its capacity as sponsor of the Trust. "Statutory Trust Act" means Chapter 38 of Title 12 of the Delaware --------------------- Code, 12 Del. C. ss.ss. 3801, et seq. as may be amended from time to time. "Successor Entity" has the meaning set forth in Section 2.15(b). ---------------- "Successor Delaware Trustee" has the meaning set forth in Section ---------------------------- 4.5(e). "Successor Institutional Trustee" has the meaning set forth in Section -------------------------------- 4.5(b). "Successor Securities" has the meaning set forth in Section 2.15(b). -------------------- "Super Majority" has the meaning set forth in paragraph 5(b) of Annex --------------- I. "Tax Event" has the meaning set forth in paragraph 4(a) of Annex I. --------- "10% in liquidation amount of the Securities" means Holder(s) of ----------------------------------------------- outstanding Securities voting together as a single class or, as the context may require, Holders of outstanding Capital Securities or Holders of outstanding Common Securities voting separately as a class, who are the record owners of 10% or more of the aggregate liquidation amount (including the stated amount that would be paid on redemption, liquidation or otherwise, plus accrued and unpaid Distributions to the date upon which the voting percentages are determined) of all outstanding Securities of the relevant class. "3-Month LIBOR" has the meaning set forth in paragraph 4(a) of Annex I. ------------- "Transfer Agent" has the meaning set forth in Section 6.2. -------------- "Treasury Regulations" means the income tax regulations, including --------------------- temporary and proposed regulations, promulgated under the Code by the United States Treasury, as such regulations may be amended from time to time (including corresponding provisions of succeeding regulations). "Trust Property" means (a) the Debentures, (b) any cash on deposit in, -------------- or owing to, the Property Account and (c) all proceeds and rights in respect of the foregoing and any other property and assets for the time being held or deemed to be held by the Institutional Trustee pursuant to the trusts of this Declaration. "Trustee" or "Trustees" means each Person who has signed this ------- -------- Declaration as a trustee, so long as such Person shall continue in office in accordance with the terms hereof, and all other Persons who may from time to time be duly appointed, qualified and serving as Trustees in accordance with the provisions hereof, and references herein to a Trustee or the Trustees shall refer to such Person or Persons solely in their capacity as trustees hereunder. "U.S. Person" means a United States Person as defined in Section ------------ 7701(a)(30) of the Code. ARTICLE II ORGANIZATION Section 2.1. Name. The Trust is named "First Bank Statutory Trust ---- VII," as such name may be modified from time to time by the Administrators following written notice to the Holders of the Securities. The Trust's activities may be conducted under the name of the Trust or any other name deemed advisable by the Administrators. Section 2.2. Office. The address of the principal office of the ------ Trust is c/o Wilmington Trust Company, Rodney Square North, 1100 North Market Street, Wilmington, Delaware 19890-1600. On at least 10 Business Days written notice to the Holders of the Securities, the Administrators may designate another principal office, which shall be in a state of the United States or in the District of Columbia. Section 2.3. Purpose. The exclusive purposes and functions of the ------- Trust are (a) to issue and sell the Securities representing undivided beneficial interests in the assets of the Trust, (b) to invest the gross proceeds from such sale to acquire the Debentures, (c) to facilitate direct investment in the assets of the Trust through issuance of the Common Securities and the Capital Securities and (d) except as otherwise limited herein, to engage in only those other activities necessary or incidental thereto. The Trust shall not borrow money, issue debt or reinvest proceeds derived from investments, pledge any of its assets, or otherwise undertake (or permit to be undertaken) any activity that would cause the Trust not to be classified for United States federal income tax purposes as a grantor trust. Section 2.4. Authority. Except as specifically provided in this --------- Declaration, the Institutional Trustee shall have exclusive and complete authority to carry out the purposes of the Trust. An action taken by a Trustee in accordance with its powers shall constitute the act of and serve to bind the Trust. In dealing with the Trustees acting on behalf of the Trust, no Person shall be required to inquire into the authority of the Trustees to bind the Trust. Persons dealing with the Trust are entitled to rely conclusively on the power and authority of the Trustees as set forth in this Declaration. The Administrators shall have only those ministerial duties set forth herein with respect to accomplishing the purposes of the Trust and are not intended to be trustees or fiduciaries with respect to the Trust or the Holders. The Institutional Trustee shall have the right, but shall not be obligated except as provided in Section 2.6, to perform those duties assigned to the Administrators. Section 2.5. Title to Property of the Trust. Except as provided in ------------------------------- Section 2.8 with respect to the Debentures and the Property Account or as otherwise provided in this Declaration, legal title to all assets of the Trust shall be vested in the Trust. The Holders shall not have legal title to any part of the assets of the Trust, but shall have an undivided beneficial interest in the assets of the Trust. Section 2.6. Powers and Duties of the Trustees and the Administrators. ------------------------------------------------------- - --------------- (a) The Trustees and the Administrators shall conduct the affairs of the Trust in accordance with the terms of this Declaration. Subject to the limitations set forth in paragraph (b) of this Section, and in accordance with the following provisions (i) and (ii), the Trustees and the Administrators shall have the authority to enter into all transactions and agreements determined by the Institutional Trustee to be appropriate in exercising the authority, express or implied, otherwise granted to the Trustees or the Administrators, as the case may be, under this Declaration, and to perform all acts in furtherance thereof, including without limitation, the following: (i) Each Administrator shall have the power and authority to act on behalf of the Trust with respect to the following matters: (A) the issuance and sale of the Securities; (B) to cause the Trust to enter into, and to execute and deliver on behalf of the Trust, such agreements as may be necessary or desirable in connection with the purposes and function of the Trust, including agreements with the Paying Agent; (C) ensuring compliance with the Securities Act, applicable state securities or blue sky laws; (D) the sending of notices (other than notices of default), and other information regarding the Securities and the Debentures to the Holders in accordance with this Declaration; (E) the consent to the appointment of a Paying Agent, Transfer Agent and Registrar in accordance with this Declaration, which consent shall not be unreasonably withheld or delayed; (F) execution and delivery of the Securities in accordance with this Declaration; (G) execution and delivery of closing certificates pursuant to the Placement Agreement and the application for a taxpayer identification number; (H) unless otherwise determined by the Holders of a Majority in liquidation amount of the Securities or as otherwise required by the Statutory Trust Act, to execute on behalf of the Trust (either acting alone or together with any or all of the Administrators) any documents that the Administrators have the power to execute pursuant to this Declaration; (I) the taking of any action incidental to the foregoing as the Institutional Trustee may from time to time determine is necessary or advisable to give effect to the terms of this Declaration for the benefit of the Holders (without consideration of the effect of any such action on any particular Holder); (J) to establish a record date with respect to all actions to be taken hereunder that require a record date be established, including Distributions, voting rights, redemptions and exchanges, and to issue relevant notices to the Holders of Capital Securities and Holders of Common Securities as to such actions and applicable record dates; and (K) to duly prepare and file all applicable tax returns and tax information reports that are required to be filed with respect to the Trust on behalf of the Trust. (ii) As among the Trustees and the Administrators, the Institutional Trustee shall have the power, duty and authority to act on behalf of the Trust with respect to the following matters: (A) the establishment of the Property Account; (B) the receipt of the Debentures; (C) the collection of interest, principal and any other payments made in respect of the Debentures in the Property Account; (D) the distribution through the Paying Agent of amounts owed to the Holders in respect of the Securities; (E) the exercise of all of the rights, powers and privileges of a holder of the Debentures; (F) he sending of notices of default and other information regarding the Securities and the Debentures to the Holders in accordance with this Declaration; (G) the distribution of the Trust Property in accordance with the terms of this Declaration; (H) to the extent provided in this Declaration, the winding up of the affairs of and liquidation of the Trust and the preparation, execution and filing of the certificate of cancellation with the Secretary of State of the State of Delaware; (I) after any Event of Default (provided that such -------- Event of Default is not by or with respect to the Institutional Trustee) the taking of any action incidental to the foregoing as the Institutional Trustee may from time to time determine is necessary or advisable to give effect to the terms of this Declaration and protect and conserve the Trust Property for the benefit of the Holders (without consideration of the effect of any such action on any particular Holder); and (J) to take all action that may be necessary for the preservation and the continuation of the Trust's valid existence, rights, franchises and privileges as a statutory trust under the laws of the State of Delaware. (iii) The Institutional Trustee shall have the power and authority to act on behalf of the Trust with respect to any of the duties, liabilities, powers or the authority of the Administrators set forth in Section 2.6(a)(i)(D), (E) and (F) herein but shall not have a duty to do any such act unless specifically requested to do so in writing by the Sponsor, and shall then be fully protected in acting pursuant to such written request; and in the event of a conflict between the action of the Administrators and the action of the Institutional Trustee, the action of the Institutional Trustee shall prevail. (b) So long as this Declaration remains in effect, the Trust (or the Trustees or Administrators acting on behalf of the Trust) shall not undertake any business, activities or transaction except as expressly provided herein or contemplated hereby. In particular, neither the Trustees nor the Administrators may cause the Trust to (i) acquire any investments or engage in any activities not authorized by this Declaration, (ii) sell, assign, transfer, exchange, mortgage, pledge, set-off or otherwise dispose of any of the Trust Property or interests therein, including to Holders, except as expressly provided herein, (iii) take any action that would reasonably be expected (x) to cause the Trust to fail or cease to qualify as a "grantor trust" for United States federal income tax purposes or (y) to require the trust to register as an Investment Company under the Investment Company Act, (iv) incur any indebtedness for borrowed money or issue any other debt or (v) take or consent to any action that would result in the placement of a lien on any of the Trust Property. The Institutional Trustee shall, at the sole cost and expense of the Trust, defend all claims and demands of all Persons at any time claiming any lien on any of the Trust Property adverse to the interest of the Trust or the Holders in their capacity as Holders. (c) In connection with the issuance and sale of the Capital Securities, the Sponsor shall have the right and responsibility to assist the Trust with respect to, or effect on behalf of the Trust, the following (and any actions taken by the Sponsor in furtherance of the following prior to the date of this Declaration are hereby ratified and confirmed in all respects): (i) the taking of any action necessary to obtain an exemption from the Securities Act; (ii) the determination of the States in which to take appropriate action to qualify or register for sale all or part of the Capital Securities and the determination of any and all such acts, other than actions which must be taken by or on behalf of the Trust, and the advice to the Administrators of actions they must take on behalf of the Trust, and the preparation for execution and filing of any documents to be executed and filed by the Trust or on behalf of the Trust, as the Sponsor deems necessary or advisable in order to comply with the applicable laws of any such States in connection with the sale of the Capital Securities; (iii) the negotiation of the terms of, and the execution and delivery of, the Placement Agreement providing for the sale of the Capital Securities; and (iv) the taking of any other actions necessary or desirable to carry out any of the foregoing activities. (d) Notwithstanding anything herein to the contrary, the Administrators and the Holders of a Majority in liquidation amount of the Common Securities are authorized and directed to conduct the affairs of the Trust and to operate the Trust so that the Trust will not (i) be deemed to be an Investment Company required to be registered under the Investment Company Act, and (ii) fail to be classified as a "grantor trust" for United States federal income tax purposes. The Administrators and the Holders of a Majority in liquidation amount of the Common Securities shall not take any action inconsistent with the treatment of the Debentures as indebtedness of the Debenture Issuer for United States federal income tax purposes. In this connection, the Administrators and the Holders of a Majority in liquidation amount of the Common Securities are authorized to take any action, not inconsistent with applicable laws, the Certificate of Trust or this Declaration, as amended from time to time, that each of the Administrators and the Holders of a Majority in liquidation amount of the Common Securities determines in their discretion to be necessary or desirable for such purposes. (e) All expenses incurred by the Administrators or the Trustees pursuant to this Section 2.6 shall be reimbursed by the Sponsor, and the Trustees and the Administrators shall have no obligations with respect to such expenses (for purposes of clarification, this Section 2.6(e) does not contemplate the payment by the Sponsor of acceptance or annual administration fees owing to the Trustees under this Declaration or the fees and expenses of the Trustees' counsel in connection with the closing of the transactions contemplated by this Declaration). (f) The assets of the Trust shall consist of the Trust Property. (g) Legal title to all Trust Property shall be vested at all times in the Institutional Trustee (in its capacity as such) and shall be held and administered by the Institutional Trustee and the Administrators for the benefit of the Trust in accordance with this Declaration. (h) If the Institutional Trustee or any Holder has instituted any proceeding to enforce any right or remedy under this Declaration and such proceeding has been discontinued or abandoned for any reason, or has been determined adversely to the Institutional Trustee or to such Holder, then and in every such case the Sponsor, the Institutional Trustee and the Holders shall, subject to any determination in such proceeding, be restored severally and respectively to their former positions hereunder, and thereafter all rights and remedies of the Institutional Trustee and the Holders shall continue as though no such proceeding had been instituted. Section 2.7. Prohibition of Actions by the Trust and the ------------------------------------------------------- Institutional Trustee. - --------------------- (a) The Trust shall not, and the Institutional Trustee shall cause the Trust not to, engage in any activity other than as required or authorized by this Declaration. In particular, the Trust shall not and the Institutional Trustee shall cause the Trust not to: (i) invest any proceeds received by the Trust from holding the Debentures, but shall distribute all such proceeds to Holders of the Securities pursuant to the terms of this Declaration and of the Securities; (ii) acquire any assets other than as expressly provided herein; (iii) possess Trust Property for other than a Trust purpose; (iv) make any loans or incur any indebtedness other than loans represented by the Debentures; (v) possess any power or otherwise act in such a way as to vary the Trust assets or the terms of the Securities in any way whatsoever other than as expressly provided herein; (vi) issue any securities or other evidences of beneficial ownership of, or beneficial interest in, the Trust other than the Securities; (vii) carry on any "trade or business" as that phrase is used in the Code; or (viii) other than as provided in this Declaration (including Annex I), (A) direct the time, method and place of exercising any trust or power conferred upon the Debenture Trustee with respect to the Debentures, (B) waive any past default that is waivable under the Indenture, (C) exercise any right to rescind or annul any declaration that the principal of all the Debentures shall be due and payable, or (D) consent to any amendment, modification or termination of the Indenture or the Debentures where such consent shall be required unless the Trust shall have received a written opinion of counsel to the effect that such modification will not cause the Trust to cease to be classified as a "grantor trust" for United States federal income tax purposes. Section 2.8. Powers and Duties of the Institutional Trustee. ------------------------------------------------------ (a) The legal title to the Debenture shall be owned by and held of record in the name of the Institutional Trustee in trust for the benefit of the Trust and the Holders of the Securities. The right, title and interest of the Institutional Trustee to the Debentures shall vest automatically in each Person who may hereafter be appointed as Institutional Trustee in accordance with Section 4.5. Such vesting and cessation of title shall be effective whether or not conveyancing documents with regard to the Debentures have been executed and delivered. (b) The Institutional Trustee shall not transfer its right, title and interest in the Debentures to the Administrators or to the Delaware Trustee. (c) The Institutional Trustee shall: (i) establish and maintain a segregated non-interest bearing trust account (the "Property Account") in the name of and ----------------- under the exclusive control of the Institutional Trustee, and maintained in the Institutional Trustee's trust department, on behalf of the Holders of the Securities and, upon the receipt of payments of funds made in respect of the Debentures held by the Institutional Trustee, deposit such funds into the Property Account and make payments, or cause the Paying Agent to make payments, to the Holders of the Capital Securities and Holders of the Common Securities from the Property Account in accordance with Section 5.1. Funds in the Property Account shall be held uninvested until disbursed in accordance with this Declaration; (ii) engage in such ministerial activities as shall be necessary or appropriate to effect the redemption of the Capital Securities and the Common Securities to the extent the Debentures are redeemed or mature; and (iii) upon written notice of distribution issued by the Administrators in accordance with the terms of the Securities, engage in such ministerial activities as shall be necessary or appropriate to effect the distribution of the Debentures to Holders of Securities upon the occurrence of certain circumstances pursuant to the terms of the Securities. (d) The Institutional Trustee may bring or defend, pay, collect, compromise, arbitrate, resort to legal action with respect to, or otherwise adjust claims or demands of or against, the Trust which arises out of or in connection with an Event of Default of which a Responsible Officer of the Institutional Trustee has actual knowledge or arises out of the Institutional Trustee's duties and obligations under this Declaration; provided, however, that -------- ------- if an Event of Default has occurred and is continuing and such event is attributable to the failure of the Debenture Issuer to pay interest or principal on the Debentures on the date such interest or principal is otherwise payable (or in the case of redemption, on the redemption date), then a Holder of the Capital Securities may directly institute a proceeding for enforcement of payment to such Holder of the principal of or interest on the Debentures having a principal amount equal to the aggregate liquidation amount of the Capital Securities of such Holder (a "Direct Action") on or after the respective due ------ ------ date specified in the Debentures. In connection with such Direct Action, the rights of the Holders of the Common Securities will be subrogated to the rights of such Holder of the Capital Securities to the extent of any payment made by the Debenture Issuer to such Holder of the Capital Securities in such Direct Action; provided, however, that no Holder of the Common Securities may exercise -------- ------- such right of subrogation so long as an Event of Default with respect to the Capital Securities has occurred and is continuing. (e) The Institutional Trustee shall continue to serve as a Trustee until either: (i) the Trust has been completely liquidated and the proceeds of the liquidation distributed to the Holders of the Securities pursuant to the terms of the Securities and this Declaration; or (ii) a Successor Institutional Trustee has been appointed and has accepted that appointment in accordance with Section 4.5. (f) The Institutional Trustee shall have the legal power to exercise all of the rights, powers and privileges of a Holder of the Debentures under the Indenture and, if an Event of Default occurs and is continuing, the Institutional Trustee may, for the benefit of Holders of the Securities, enforce its rights as holder of the Debentures subject to the rights of the Holders pursuant to this Declaration (including Annex I) and the terms of the Securities. The Institutional Trustee must exercise the powers set forth in this Section 2.8 in a manner that is consistent with the purposes and functions of the Trust set out in Section 2.3, and the Institutional Trustee shall not take any action that is inconsistent with the purposes and functions of the Trust set out in Section 2.3. Section 2.9. Certain Duties and Responsibilities of the Trustees and ------------------------------------------------------- Administrators. - -------------- (a) The Institutional Trustee, before the occurrence of any Event of Default and after the curing or waiving of all such Events of Default that may have occurred, shall undertake to perform only such duties as are specifically set forth in this Declaration and no implied covenants shall be read into this Declaration against the Institutional Trustee. In case an Event of Default has occurred (that has not been cured or waived pursuant to Section 6.9), the Institutional Trustee shall exercise such of the rights and powers vested in it by this Declaration, and use the same degree of care and skill in their exercise, as a prudent person would exercise or use under the circumstances in the conduct of his or her own affairs. (b) The duties and responsibilities of the Trustees and the Administrators shall be as provided by this Declaration. Notwithstanding the foregoing, no provision of this Declaration shall require any Trustee or Administrator to expend or risk their own funds or otherwise incur any financial liability in the performance of any of their duties hereunder, or in the exercise of any of their rights or powers if it shall have reasonable grounds to believe that repayment of such funds or adequate protection against such risk of liability is not reasonably assured to it. Whether or not therein expressly so provided, every provision of this Declaration relating to the conduct or affecting the liability of or affording protection to the Trustees or Administrators shall be subject to the provisions of this Article. Nothing in this Declaration shall be construed to relieve an Administrator or a Trustee from liability for its own negligent act, its own negligent failure to act, or its own willful misconduct. To the extent that, at law or in equity, a Trustee or an Administrator has duties and liabilities relating to the Trust or to the Holders, such Trustee or such Administrator shall not be liable to the Trust or to any Holder for such Trustee's or such Administrator's good faith reliance on the provisions of this Declaration. The provisions of this Declaration, to the extent that they restrict the duties and liabilities of the Administrators or the Trustee otherwise existing at law or in equity, are agreed by the Sponsor and the Holders to replace such other duties and liabilities of the Administrators or the Trustees. (c) All payments made by the Institutional Trustee or a Paying Agent in respect of the Securities shall be made only from the revenue and proceeds from the Trust Property and only to the extent that there shall be sufficient revenue or proceeds from the Trust Property to enable the Institutional Trustee or a Paying Agent to make payments in accordance with the terms hereof. Each Holder, by its acceptance of a Security, agrees that it will look solely to the revenue and proceeds from the Trust Property to the extent legally available for distribution to it as herein provided and that the Trustees and the Administrators are not personally liable to it for any amount distributable in respect of any Security or for any other liability in respect of any Security. This Section 2.9(c) does not limit the liability of the Trustees expressly set forth elsewhere in this Declaration. (d) The Institutional Trustee shall not be liable for its own acts or omissions hereunder except as a result of its own negligent action, its own negligent failure to act, or its own willful misconduct, except that: (i) the Institutional Trustee shall not be liable for any error of judgment made in good faith by an Authorized Officer of the Institutional Trustee, unless it shall be proved that the Institutional Trustee was negligent in ascertaining the pertinent facts; (ii) the Institutional Trustee shall not be liable with respect to any action taken or omitted to be taken by it in good faith in accordance with the direction of the Holders of not less than a Majority in liquidation amount of the Capital Securities or the Common Securities, as applicable, relating to the time, method and place of conducting any proceeding for any remedy available to the Institutional Trustee, or exercising any trust or power conferred upon the Institutional Trustee under this Declaration; (iii) the Institutional Trustee's sole duty with respect to the custody, safekeeping and physical preservation of the Debentures and the Property Account shall be to deal with such property in a similar manner as the Institutional Trustee deals with similar property for its fiduciary accounts generally, subject to the protections and limitations on liability afforded to the Institutional Trustee under this Declaration; (iv) the Institutional Trustee shall not be liable for any interes t on any money received by it except as it may otherwise agree in writing with t he Sponsor; and money held by the Institutional Trustee need not be segregated from other funds held by it except in relation to the Property Account maintained by the Institutional Trustee pursuant to Section 2.8(c)(i) and except to the extent otherwise required by law; and (v) the Institutional Trustee shall not be responsible for monitoring the compliance by the Administrators or the Sponsor with their respective duties under this Declaration, nor shall the Institutional Trustee be liable for any default or misconduct of the Administrators or the Sponsor. Section 2.10. Certain Rights of Institutional Trustee. Subject to the --------------------------------------- provisions of Section 2.9: (a) the Institutional Trustee may conclusively rely and shall fully be protected in acting or refraining from acting in good faith upon any resolution, opinion of counsel, certificate, written representation of a Holder or transferee, certificate of auditors or any other certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, appraisal, bond, debenture, note, other evidence of indebtedness or other paper or document believed by it to be genuine and to have been signed, sent or presented by the proper party or parties; (b) if (i) in performing its duties under this Declaration, the Institutional Trustee is required to decide between alternative courses of action, (ii) in construing any of the provisions of this Declaration, the Institutional Trustee finds the same ambiguous or inconsistent with any other provisions contained herein, or (iii) the Institutional Trustee is unsure of the application of any provision of this Declaration, then, except as to any matter as to which the Holders of Capital Securities are entitled to vote under the terms of this Declaration, the Institutional Trustee may deliver a notice to the Sponsor requesting the Sponsor's written instructions as to the course of action to be taken and the Institutional Trustee shall take such action, or refrain from taking such action, as the Institutional Trustee shall be instructed in writing, in which event the Institutional Trustee shall have no liability except for its own negligence or willful misconduct; (c) any direction or act of the Sponsor or the Administrators contemplated by this Declaration shall be sufficiently evidenced by an Officers' Certificate; (d) whenever in the administration of this Declaration, the Institutional Trustee shall deem it desirable that a matter be proved or established before undertaking, suffering or omitting any action hereunder, the Institutional Trustee (unless other evidence is herein specifically prescribed) may request and conclusively rely upon an Officers' Certificate as to factual matters which, upon receipt of such request, shall be promptly delivered by the Sponsor or the Administrators; (e) the Institutional Trustee shall have no duty to see to any recording, filing or registration of any instrument (including any financing or continuation statement or any filing under tax or securities laws) or any rerecording, refiling or reregistration thereof; (f) the Institutional Trustee may consult with counsel of its selection (which counsel may be counsel to the Sponsor or any of its Affiliates) and the advice of such counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in reliance thereon and in accordance with such advice; the Institutional Trustee shall have the right at any time to seek instructions concerning the administration of this Declaration from any court of competent jurisdiction; (g) the Institutional Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Declaration at the request or direction of any of the Holders pursuant to this Declaration, unless such Holders shall have offered to the Institutional Trustee security or indemnity reasonably satisfactory to it against the costs, expenses and liabilities which might be incurred by it in compliance with such request or direction; provided, that nothing contained in this Section 2.10(g) shall be -------- taken to relieve the Institutional Trustee, subject to Section 2.9(b), upon the occurrence of an Event of Default (that has not been cured or waived pursuant to Section 6.9), to exercise such of the rights and powers vested in it by this Declaration, and use the same degree of care and skill in their exercise, as a prudent person would exercise or use under the circumstances in the conduct of his or her own affairs; (h) the Institutional Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, consent, order, approval, bond, debenture, note or other evidence of indebtedness or other paper or document, unless requested in writing to do so by one or more Holders, but the Institutional Trustee may make such further inquiry or investigation into such facts or matters as it may see fit; (i) the Institutional Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through its agents or attorneys and the Institutional Trustee shall not be responsible for any misconduct or negligence on the part of or for the supervision of, any such agent or attorney appointed with due care by it hereunder; (j) whenever in the administration of this Declaration the Institutional Trustee shall deem it desirable to receive instructions with respect to enforcing any remedy or right or taking any other action hereunder the Institutional Trustee (i) may request instructions from the Holders of the Capital Securities which instructions may only be given by the Holders of the same proportion in liquidation amount of the Capital Securities as would be entitled to direct the Institutional Trustee under the terms of the Capital Securities in respect of such remedy, right or action, (ii) may refrain from enforcing such remedy or right or taking such other action until such instructions are received, and (iii) shall be fully protected in acting in accordance with such instructions; (k) except as otherwise expressly provided in this Declaration, the Institutional Trustee shall not be under any obligation to take any action that is discretionary under the provisions of this Declaration; (l) when the Institutional Trustee incurs expenses or renders services in connection with a Bankruptcy Event, such expenses (including the fees and expenses of its counsel) and the compensation for such services are intended to constitute expenses of administration under any bankruptcy law or law relating to creditors rights generally; (m) the Institutional Trustee shall not be charged with knowledge of an Event of Default unless a Responsible Officer of the Institutional Trustee obtains actual knowledge of such event or the Institutional Trustee receives written notice of such event from any Holder, the Sponsor or the Debenture Trustee; (n) any action taken by the Institutional Trustee or its agents hereunder shall bind the Trust and the Holders of the Securities, and the signature of the Institutional Trustee or its agents alone shall be sufficient and effective to perform any such action and no third party shall be required to inquire as to the authority of the Institutional Trustee to so act or as to its compliance with any of the terms and provisions of this Declaration, both of which shall be conclusively evidenced by the Institutional Trustee's or its agent's taking such action; and (o) no provision of this Declaration shall be deemed to impose any duty or obligation on the Institutional Trustee to perform any act or acts or exercise any right, power, duty or obligation conferred or imposed on it, in any jurisdiction in which it shall be illegal, or in which the Institutional Trustee shall be unqualified or incompetent in accordance with applicable law, to perform any such act or acts, or to exercise any such right, power, duty or obligation. No permissive power or authority available to the Institutional Trustee shall be construed to be a duty. Section 2.11. Delaware Trustee. Notwithstanding any other provision ---------------- of this Declaration other than Section 4.1, the Delaware Trustee shall not be entitled to exercise any powers, nor shall the Delaware Trustee have any of the duties and responsibilities of any of the Trustees or the Administrators described in this Declaration (except as may be required under the Statutory Trust Act). Except as set forth in Section 4.1, the Delaware Trustee shall be a Trustee for the sole and limited purpose of fulfilling the requirements of ss. 3807 of the Statutory Trust Act. Section 2.12. Execution of Documents. Unless otherwise determined in ---------------------- writing by the Institutional Trustee, and except as otherwise required by the Statutory Trust Act, the Institutional Trustee, or any one or more of the Administrators, as the case may be, is authorized to execute on behalf of the Trust any documents that the Trustees or the Administrators, as the case may be, have the power and authority to execute pursuant to Section 2.6. Section 2.13. Not Responsible for Recitals or Issuance of Securities. ------------------------------------------------------ The recitals contained in this Declaration and the Securities shall be taken as the statements of the Sponsor, and the Trustees do not assume any responsibility for their correctness. The Trustees make no representations as to the value or condition of the property of the Trust or any part thereof. The Trustees make no representations as to the validity or sufficiency of this Declaration, the Debentures or the Securities. Section 2.14. Duration of Trust. The Trust, unless earlier dissolved ----------------- pursuant to the provisions of Article VII hereof, shall be in existence for 35 years from the Closing Date. Section 2.15. Mergers. ------- (a) The Trust may not consolidate, amalgamate, merge with or into, or be replaced by, or convey, transfer or lease its properties and assets substantially as an entirety to any corporation or other body, except as described in Section 2.15(b) and (c) and except in connection with the liquidation of the Trust and the distribution of the Debentures to Holders of Securities pursuant to Section 7.1(a)(iv) of the Declaration or Section 4 of Annex I. (b) The Trust may, with the consent of the Institutional Trustee and without the consent of the Holders of the Capital Securities, consolidate, amalgamate, merge with or into, or be replaced by a trust organized as such under the laws of any state; provided that: (i) if the Trust is not the surviving entity, such successor entity (the "Successor Entity") either: ---------------- (A) expressly assumes all of the obligations of the Trust under the Securities; or (B) substitutes for the Securities other securities having substantially the same terms as the Securities (the "Successor Securities") so that the Successor Securities rank -------------------- the same as the Securities rank with respect to Distributions and payments upon Liquidation, redemption and otherwise; (ii) the Sponsor expressly appoints a trustee of the Successor Entity that possesses substantially the same powers and duties as the Institutional Trustee as the Holder of the Debentures; (iii) such merger, consolidation, amalgamation or replacement does not adversely affect the rights, preferences and privileges of the Holders of the Securities (including any Successor Securities) in any material respect; (iv) the Institutional Trustee receives written confirmation from Moody' s Investor Services, Inc. and any other nationally recognized statistical rating organization that rates securities issued by the initial purchaser of the Capital Securities that it will not reduce or withdraw the rating of any such securities because of such merger, conversion, consolidation, amalgamation or replacement; (v) such Successor Entity has a purpose substantially identical to that of the Trust; (vi) prior to such merger, consolidation, amalgamation or replacement, the Trust has received an opinion of a nationally recognized independent counsel to the Trust experienced in such matters to the effect that: (A) such merger, consolidation, amalgamation or replacement does not adversely affect the rights, preferences and privileges of the Holders of the Securities (including any Successor Securities) in any material respect; (B) following such merger, consolidation, amalgamation or replacement, neither the Trust nor the Successor Entity will be required to register as an Investment Company; and (C) following such merger, consolidation, amalgamation or replacement, the Trust (or the Successor Entity) will continue to be classified as a "grantor trust" for United States federal income tax purposes; (vii) the Sponsor guarantees the obligations of such Successor Entity under the Successor Securities at least to the extent provided by the Guarantee; (viii) the Sponsor owns 100% of the common securities of any Successor Entity; and (ix) prior to such merger, consolidation, amalgamation or replacement, the Institutional Trustee shall have received an Officers' Certificate of the Administrators and an opinion of counsel, each to the effect that all conditions precedent under this Section 2.15(b) to such transaction have been satisfied. (c) Notwithstanding Section 2.15(b), the Trust shall not, except with the consent of Holders of 100% in aggregate liquidation amount of the Securities, consolidate, amalgamate, merge with or into, or be replaced by any other entity or permit any other entity to consolidate, amalgamate, merge with or into, or replace it if such consolidation, amalgamation, merger or replacement would cause the Trust or Successor Entity to be classified as other than a grantor trust for United States federal income tax purposes. ARTICLE III SPONSOR Section 3.1. Sponsor's Purchase of Common Securities. On the Closing --------------------------------------- Date, the Sponsor will purchase all of the Common Securities issued by the Trust in an amount at least equal to 3% of the capital of the Trust, at the same time as the Capital Securities are sold. Section 3.2. Responsibilities of the Sponsor. In connection with the ------------------------------- issue and sale of the Capital Securities, the Sponsor shall have the exclusive right and responsibility to engage in, or direct the Administrators to engage in, the following activities: (a) to determine the States in which to take appropriate action to qualify the Trust or to qualify or register for sale all or part of the Capital Securities and to do any and all such acts, other than actions which must be taken by the Trust, and advise the Trust of actions it must take, and prepare for execution and filing any documents to be executed and filed by the Trust, as the Sponsor deems necessary or advisable in order to comply with the applicable laws of any such States, to protect the limited liability of the Holders of the Capital Securities or to enable the Trust to effect the purposes for which it was created; and (b) to negotiate the terms of and/or execute on behalf of the Trust, the Placement Agreement and other related agreements providing for the sale of the Capital Securities. Section 3.3. Expenses. In connection with the offering, sale and -------- issuance of the Debentures to the Trust and in connection with the sale of the Securities by the Trust, the Sponsor, in its capacity as Debenture Issuer, shall: (a) pay all reasonable costs and expenses owing to the Debenture Trustee pursuant to Section 6.6 of the Indenture; (b) be responsible for and shall pay all debts and obligations (other than with respect to the Securities) and all costs and expenses of the Trust, the offering, sale and issuance of the Securities (including fees to the placement agents in connection therewith), the costs and expenses (including reasonable counsel fees and expenses) of the Institutional Trustee and the Administrators, the costs and expenses relating to the operation of the Trust, including, without limitation, costs and expenses of accountants, attorneys, statistical or bookkeeping services, expenses for printing and engraving and computing or accounting equipment, Paying Agents, Registrars, Transfer Agents, duplicating, travel and telephone and other telecommunications expenses and costs and expenses incurred in connection with the acquisition, financing, and disposition of Trust assets and the enforcement by the Institutional Trustee of the rights of the Holders (for purposes of clarification, this Section 3.3(b) does not contemplate the payment by the Sponsor of acceptance or annual administration fees owing to the Trustees pursuant to the services to be provided by the Trustees under this Declaration or the fees and expenses of the Trustees' counsel in connection with the closing of the transactions contemplated by this Declaration); and (c) pay any and all taxes (other than United States withholding taxes attributable to the Trust or its assets) and all liabilities, costs and expenses with respect to such taxes of the Trust. The Sponsor's obligations under this Section 3.3 shall be for the benefit of, and shall be enforceable by, any Person to whom such debts, obligations, costs, expenses and taxes are owed (a "Creditor") whether or not -------- such Creditor has received notice hereof. Any such Creditor may enforce the Sponsor's obligations under this Section 3.3 directly against the Sponsor and the Sponsor irrevocably waives any right or remedy to require that any such Creditor take any action against the Trust or any other Person before proceeding against the Sponsor. The Sponsor agrees to execute such additional agreements as may be necessary or desirable in order to give full effect to the provisions of this Section 3.3. Section 3.4. Right to Proceed. The Sponsor acknowledges the rights ---------------- of Holders to institute a Direct Action as set forth in Section 2.8(d) hereto. ARTICLE IV INSTITUTIONAL TRUSTEE AND ADMINISTRATORS Section 4.1. Number of Trustees. The number of Trustees shall -------------------- initially be two, and; (a) at any time before the issuance of any Securities, the Sponsor may, by written instrument, increase or decrease the number of Trustees; and (b) after the issuance of any Securities, the number of Trustees may be increased or decreased by vote of the Holder of a Majority in liquidation amount of the Common Securities voting as a class at a meeting of the Holder of the Common Securities; provided, however, that there shall be a Delaware Trustee -------- ------- if required by Section 4.2; and there shall always be one Trustee who shall be the Institutional Trustee, and such Trustee may also serve as Delaware Trustee if it meets the applicable requirements, in which case Section 2.11 shall have no application to such entity in its capacity as Institutional Trustee. Section 4.2. Delaware Trustee; Eligibility. ----------------------------- (a) If required by the Statutory Trust Act, one Trustee (the "Delaware Trustee") shall be: (i) a natural person at least 21 years of age who is a resident of the State of Delaware; or (ii) if not a natural person, an entity which is organized under the laws of the United States or any state thereof or the District of Columbia, has its principal place of business in the State of Delaware, and otherwise meets the requirements of applicable law, including ss. 3807 of the Statutory Trust Act. (b) The initial Delaware Trustee shall be Wilmington Trust Company. Section 4.3. Institutional Trustee; Eligibility. ---------------------------------- (a) There shall at all times be one Trustee which shall: (i) not be an Affiliate of the Sponsor; (ii) not offer or provide credit or credit enhancement to the Trust; and (iii) be a banking corporation or trust company organized and doing business under the laws of the United States of America or any state thereof or the District of Columbia, authorized under such laws to exercise corporate trust powers, having a combined capital and surplus of at least 50 million U.S. dollars ($50,000,000.00), and subject to supervision or examination by Federal, state, or District of Columbia authority. If such corporation publishes reports of condition at least annually, pursuant to law or to the requirements of the supervising or examining authority referred to above, then for the purposes of this Section 4.3(a)(iii), the combined capital and surplus of such corporation shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. (b) If at any time the Institutional Trustee shall cease to be eligible to so act under Section 4.3(a), the Institutional Trustee shall immediately resign in the manner and with the effect set forth in Section 4.5. (c) If the Institutional Trustee has or shall acquire any "conflicting interest" within the meaning of Section 310(b) of the Trust Indenture Act of 1939, as amended, the Institutional Trustee shall either eliminate such interest or resign, to the extent and in the manner provided by, and subject to this Declaration. (d) The initial Institutional Trustee shall be Wilmington Trust Company. Section 4.4. Administrators. Each Administrator shall be a U.S. -------------- Person, 21 years of age or older and authorized to bind the Sponsor. The initial Administrators shall be Terrance M. McCarthy, Peter D. Wimmer and Lisa K. Vansickle. There shall at all times be at least one Administrator. Except where a requirement for action by a specific number of Administrators is expressly set forth in this Declaration and except with respect to any action the taking of which is the subject of a meeting of the Administrators, any action required or permitted to be taken by the Administrators may be taken by, and any power of the Administrators may be exercised by, or with the consent of, any one such Administrator. Section 4.5. Appointment, Removal and Resignation of Trustees and ------------------------------------------------------- Administrators. - -------------- (a) No resignation or removal of any Trustee (the "Relevant -------- Trustee") and no appointment of a successor Trustee pursuant to this Article - ------- shall become effective until the acceptance of appointment by the successor Trustee in accordance with the applicable requirements of this Section 4.5. (b) Subject to Section 4.5(a), a Relevant Trustee may resign at any time by giving written notice thereof to the Holders of the Securities and by appointing a successor Relevant Trustee. Upon the resignation of the Institutional Trustee, the Institutional Trustee shall appoint a successor by requesting from at least three Persons meeting the eligibility requirements their expenses and charges to serve as the successor Institutional Trustee on a form provided by the Administrators, and selecting the Person who agrees to the lowest expense and charges (the "Successor Institutional Trustee"). If the --------------------------------- instrument of acceptance by the successor Relevant Trustee required by this Section 4.5 shall not have been delivered to the Relevant Trustee within 60 days after the giving of such notice of resignation or delivery of the instrument of removal, the Relevant Trustee may petition, at the expense of the Trust, any federal, state or District of Columbia court of competent jurisdiction for the appointment of a successor Relevant Trustee. Such court may thereupon, after prescribing such notice, if any, as it may deem proper, appoint a Relevant Trustee. The Institutional Trustee shall have no liability for the selection of such successor pursuant to this Section 4.5. (c) Unless an Event of Default shall have occurred and be continuing, any Trustee may be removed at any time by an act of the Holders of a Majority in liquidation amount of the Common Securities. If any Trustee shall be so removed, the Holders of the Common Securities, by act of the Holders of a Majority in liquidation amount of the Common Securities delivered to the Relevant Trustee, shall promptly appoint a successor Relevant Trustee, and such successor Trustee shall comply with the applicable requirements of this Section 4.5. If an Event of Default shall have occurred and be continuing, the Institutional Trustee or the Delaware Trustee, or both of them, may be removed by the act of the Holders of a Majority in liquidation amount of the Capital Securities, delivered to the Relevant Trustee (in its individual capacity and on behalf of the Trust). If any Trustee shall be so removed, the Holders of Capital Securities, by act of the Holders of a Majority in liquidation amount of the Capital Securities then outstanding delivered to the Relevant Trustee, shall promptly appoint a successor Relevant Trustee or Trustees, and such successor Trustee shall comply with the applicable requirements of this Section 4.5. If no successor Relevant Trustee shall have been so appointed by the Holders of a Majority in liquidation amount of the Capital Securities and accepted appointment in the manner required by this Section 4.5 within 30 days after delivery of an instrument of removal, the Relevant Trustee or any Holder who has been a Holder of the Securities for at least six months may, on behalf of himself and all others similarly situated, petition any federal, state or District of Columbia court of competent jurisdiction for the appointment of a successor Relevant Trustee. Such court may thereupon, after prescribing such notice, if any, as it may deem proper, appoint a successor Relevant Trustee or Trustees. (d) The Institutional Trustee shall give notice of each resignation and each removal of a Trustee and each appointment of a successor Trustee to all Holders and to the Sponsor. Each notice shall include the name of the successor Relevant Trustee and the address of its Corporate Trust Office if it is the Institutional Trustee. (e) Notwithstanding the foregoing or any other provision of this Declaration, in the event a Delaware Trustee who is a natural person dies or is adjudged by a court to have become incompetent or incapacitated, the vacancy created by such death, incompetence or incapacity may be filled by the Institutional Trustee following the procedures in this Section 4.5 (with the successor being a Person who satisfies the eligibility requirement for a Delaware Trustee set forth in this Declaration) (the "Successor Delaware ------------------- Trustee"). - ------- (f) In case of the appointment hereunder of a successor Relevant Trustee, the retiring Relevant Trustee and each successor Relevant Trustee with respect to the Securities shall execute and deliver an amendment hereto wherein each successor Relevant Trustee shall accept such appointment and which (a) shall contain such provisions as shall be necessary or desirable to transfer and confirm to, and to vest in, each successor Relevant Trustee all the rights, powers, trusts and duties of the retiring Relevant Trustee with respect to the Securities and the Trust and (b) shall add to or change any of the provisions of this Declaration as shall be necessary to provide for or facilitate the administration of the Trust by more than one Relevant Trustee, it being understood that nothing herein or in such amendment shall constitute such Relevant Trustees co-trustees and upon the execution and delivery of such amendment the resignation or removal of the retiring Relevant Trustee shall become effective to the extent provided therein and each such successor Relevant Trustee, without any further act, deed or conveyance, shall become vested with all the rights, powers, trusts and duties of the retiring Relevant Trustee; but, on request of the Trust or any successor Relevant Trustee, such retiring Relevant Trustee shall duly assign, transfer and deliver to such successor Relevant Trustee all Trust Property, all proceeds thereof and money held by such retiring Relevant Trustee hereunder with respect to the Securities and the Trust subject to the payment of all unpaid fees, expenses and indemnities of such retiring Relevant Trustee. (g) No Institutional Trustee or Delaware Trustee shall be liable for the acts or omissions to act of any Successor Institutional Trustee or Successor Delaware Trustee, as the case may be. (h) The Holders of the Capital Securities will have no right to vote to appoint, remove or replace the Administrators, which voting rights are vested exclusively in the Holders of the Common Securities. (i) Any successor Delaware Trustee shall file an amendment to the Certificate of Trust with the Secretary of State of the State of Delaware identifying the name and principal place of business of such Delaware Trustee in the State of Delaware. Section 4.6. Vacancies Among Trustees. If a Trustee ceases to -------------------------- hold office for any reason and the number of Trustees is not reduced pursuant to Section 4.1, a vacancy shall occur. A resolution certifying the existence of such vacancy by the Trustees or, if there are more than two, a majority of the Trustees, shall be conclusive evidence of the existence of such vacancy. The vacancy shall be filled with a Trustee appointed in accordance with Section 4.5. Section 4.7. Effect of Vacancies. The death, resignation, ----------------------- retirement, removal, bankruptcy, dissolution, liquidation, incompetence or incapacity to perform the duties of a Trustee shall not operate to dissolve, terminate or annul the Trust or terminate this Declaration. Whenever a vacancy in the number of Trustees shall occur, until such vacancy is filled by the appointment of a Trustee in accordance with Section 4.5, the Institutional Trustee shall have all the powers granted to the Trustees and shall discharge all the duties imposed upon the Trustees by this Declaration. Section 4.8. Meetings of the Trustees and the Administrators. ------------------------------------------------------ Meetings of the Administrators shall be held from time to time upon the call of an Administrator. Regular meetings of the Administrators may be held in person in the United States or by telephone, at a place (if applicable) and time fixed by resolution of the Administrators. Notice of any in-person meetings of the Trustees with the Administrators or meetings of the Administrators shall be hand delivered or otherwise delivered in writing (including by facsimile, with a hard copy by overnight courier) not less than 48 hours before such meeting. Notice of any telephonic meetings of the Trustees with the Administrators or meetings of the Administrators or any committee thereof shall be hand delivered or otherwise delivered in writing (including by facsimile, with a hard copy by overnight courier) not less than 24 hours before a meeting. Notices shall contain a brief statement of the time, place and anticipated purposes of the meeting. The presence (whether in person or by telephone) of a Trustee or an Administrator, as the case may be, at a meeting shall constitute a waiver of notice of such meeting except where the Trustee or an Administrator, as the case may be, attends a meeting for the express purpose of objecting to the transaction of any activity on the grounds that the meeting has not been lawfully called or convened. Unless provided otherwise in this Declaration, any action of the Trustees or the Administrators, as the case may be, may be taken at a meeting by vote of a majority of the Trustees or the Administrators present (whether in person or by telephone) and eligible to vote with respect to such matter, provided that a Quorum is present, or without a meeting by the unanimous written consent of the Trustees or the Administrators. Meetings of the Trustees and the Administrators together shall be held from time to time upon the call of any Trustee or an Administrator. Section 4.9. Delegation of Power. ------------------- (a) Any Administrator may, by power of attorney consistent with applicable law, delegate to any other natural person over the age of 21 that is a U.S. Person his or her power for the purpose of executing any documents contemplated in Section 2.6; and (b) the Administrators shall have power to delegate from time to time to such of their number the doing of such things and the execution of such instruments either in the name of the Trust or the names of the Administrators or otherwise as the Administrators may deem expedient, to the extent such delegation is not prohibited by applicable law or contrary to the provisions of the Trust, as set forth herein. Section 4.10. Conversion, Consolidation or Succession to Business. ------------------------------------------------------ Any Person into which the Institutional Trustee or the Delaware Trustee may be merged or converted or with which it may be consolidated, or any Person resulting from any merger, conversion or consolidation to which the Institutional Trustee or the Delaware Trustee shall be a party, or any Person succeeding to all or substantially all the corporate trust business of the Institutional Trustee or the Delaware Trustee shall be the successor of the Institutional Trustee or the Delaware Trustee hereunder, provided such Person shall be otherwise qualified and eligible under this Article and, provided, -------- further, that such Person shall file an amendment to the Certificate of Trust - ------- with the Secretary of State of the State of Delaware as contemplated in Section 4.5(i). ARTICLE V DISTRIBUTIONS Section 5.1. Distributions. Holders shall receive Distributions in ------------- accordance with the applicable terms of the relevant Holder's Securities. Distributions shall be made on the Capital Securities and the Common Securities in accordance with the preferences set forth in their respective terms. If and to the extent that the Debenture Issuer makes a payment of Interest or any principal on the Debentures held by the Institutional Trustee, the Institutional Trustee shall and is directed, to the extent funds are available for that purpose, to make a distribution (a "Distribution") of such amounts to Holders. ------------ ARTICLE VI ISSUANCE OF SECURITIES Section 6.1. General Provisions Regarding Securities. --------------------------------------- (a) The Administrators shall, on behalf of the Trust, issue one series of capital securities substantially in the form of Exhibits A-1 and A-2 representing undivided beneficial interests in the assets of the Trust having such terms as are set forth in Annex I and one series of common securities representing undivided beneficial interests in the assets of the Trust having such terms as are set forth in Annex I. The Trust shall issue no securities or other interests in the assets of the Trust other than the Capital Securities and the Common Securities. The Capital Securities rank pari passu to, and payment thereon shall be made Pro Rata with, the Common Securities except that, where an Event of Default has occurred and is continuing, the rights of Holders of the Common Securities to payment in respect of Distributions and payments upon liquidation, redemption and otherwise are subordinated to the rights to payment of the Holders of the Capital Securities as set forth in Annex I. (b) The Certificates shall be signed on behalf of the Trust by one or more Administrators. Such signature shall be the facsimile or manual signature of any Administrator. In case any Administrator of the Trust who shall have signed any of the Securities shall cease to be such Administrator before the Certificates so signed shall be delivered by the Trust, such Certificates nevertheless may be delivered as though the person who signed such Certificates had not ceased to be such Administrator, and any Certificate may be signed on behalf of the Trust by such persons who, at the actual date of execution of such Security, shall be an Administrator of the Trust, although at the date of the execution and delivery of the Declaration any such person was not such an Administrator. A Capital Security shall not be valid until authenticated by the facsimile or manual signature of an Authorized Officer of the Institutional Trustee. Such signature shall be conclusive evidence that the Capital Security has been authenticated under this Declaration. Upon written order of the Trust signed by one Administrator, the Institutional Trustee shall authenticate the Capital Securities for original issue. The Institutional Trustee may appoint an authenticating agent that is a U.S. Person acceptable to the Trust to authenticate the Capital Securities. A Common Security need not be so authenticated. (c) The Capital Securities issued to QIBs shall be, except as provided in Section 6.4, Book-Entry Capital Securities issued in the form of one or more Global Capital Securities registered in the name of the Depositary or its nominee and deposited with the Depositary or a custodian for the Depositary for credit by the Depositary to the respective accounts of the Depositary Participants thereof (or such other accounts as they may direct). The Capital Securities issued to a Person other than a QIB shall be issued in the form of a Definitive Capital Securities Certificate. (d) The consideration received by the Trust for the issuance of the Securities shall constitute a contribution to the capital of the Trust and shall not constitute a loan to the Trust. (e) Upon issuance of the Securities as provided in this Declaration, the Securities so issued shall be deemed to be validly issued, fully paid and, except as provided in Section 9.1(b) with respect to the Common Securities, non-assessable. (f) Every Person, by virtue of having become a Holder in accordance with the terms of this Declaration, shall be deemed to have expressly assented and agreed to the terms of, and shall be bound by, this Declaration and the Guarantee. Section 6.2. Paying Agent, Transfer Agent and Registrar. The Trust ------------------------------------------- shall maintain in Wilmington, Delaware, an office or agency where the Capital Securities may be presented for payment ("Paying Agent"), and an office or ------------- agency where Securities may be presented for registration of transfer or exchange (the "Transfer Agent"). The Trust shall keep or cause to be kept at --------------- such office or agency a register for the purpose of registering Securities, transfers and exchanges of Securities, such register to be held by a registrar (the "Registrar"). The Administrators may appoint the Paying Agent, the --------- Registrar and the Transfer Agent and may appoint one or more additional Paying Agents or one or more co-Registrars, or one or more co Transfer Agents in such other locations as it shall determine. The term "Paying Agent" includes any additional paying agent, the term "Registrar" includes any additional registrar or co Registrar and the term "Transfer Agent" includes any additional transfer agent. The Administrators may change any Paying Agent, Transfer Agent or Registrar at any time without prior notice to any Holder. The Administrators shall notify the Institutional Trustee of the name and address of any Paying Agent, Transfer Agent and Registrar not a party to this Declaration. The Administrators hereby initially appoint the Institutional Trustee to act as Paying Agent, Transfer Agent and Registrar for the Capital Securities and the Common Securities. The Institutional Trustee or any of its Affiliates in the United States may act as Paying Agent, Transfer Agent or Registrar. Section 6.3. Form and Dating. The Capital Securities and the ----------------- Institutional Trustee's certificate of authentication thereon shall be substantially in the form of Exhibits A-1 and A-2, and the Common Securities shall be substantially in the form of Exhibit A-3, each of which is hereby incorporated in and expressly made a part of this Declaration. Certificates may be typed, printed, lithographed or engraved or may be produced in any other manner as is reasonably acceptable to the Administrators, as conclusively evidenced by their execution thereof. The Securities may have letters, numbers, notations or other marks of identification or designation and such legends or endorsements required by law, stock exchange rule, agreements to which the Trust is subject if any, or usage (provided that any such notation, legend or endorsement is in a form acceptable to the Sponsor). The Trust at the direction of the Sponsor shall furnish any such legend not contained in Exhibits A-1 and A-2 to the Institutional Trustee in writing. Each Capital Security shall be dated on or before the date of its authentication. The terms and provisions of the Securities set forth in Annex I and the forms of Securities set forth in Exhibits A-1, A-2 and A-3 are part of the terms of this Declaration and to the extent applicable, the Institutional Trustee, the Delaware Trustee, the Administrators and the Sponsor, by their execution and delivery of this Declaration, expressly agree to such terms and provisions and to be bound thereby. Capital Securities will be issued only in blocks having a stated liquidation amount of not less than $100,000.00 and any multiple of $1,000.00 in excess thereof. The Capital Securities are being offered and sold by the Trust pursuant to the Placement Agreement in definitive, registered form without coupons and with the Restricted Securities Legend. Section 6.4. Book-Entry Capital Securities. ----------------------------- (a) A Global Capital Security may be exchanged, in whole or in part, for Definitive Capital Securities Certificates registered in the names of Owners only if such exchange complies with Article VIII and (i) the Depositary advises the Administrators and the Institutional Trustee in writing that the Depositary is no longer willing or able to properly discharge its responsibilities with respect to the Global Capital Security, and no qualified successor is appointed by the Administrators within ninety (90) days of receipt of such notice, (ii) the Depositary ceases to be a clearing agency registered under the Exchange Act and the Administrators fail to appoint a qualified successor within ninety (90) days of obtaining knowledge of such event, (iii) the Administrators at their option advise the Institutional Trustee in writing that the Trust elects to terminate the book-entry system through the Depositary, or (iv) an Indenture Event of Default has occurred and is continuing. Upon the occurrence of any event specified in clause (i), (ii), (iii) or (iv) above, the Administrators shall notify the Depositary and instruct the Depositary to notify all Owners of Book-Entry Capital Securities and the Institutional Trustee of the occurrence of such event and of the availability of Definitive Capital Securities Certificates to Owners of the Capital Securities requesting the same. Upon the issuance of Definitive Capital Securities Certificates, the Administrators and the Institutional Trustee shall recognize the Holders of the Definitive Capital Securities Certificates as Holders. Notwithstanding the foregoing, if an Owner of a beneficial interest in a Global Capital Security wishes at any time to transfer an interest in such Global Capital Security to a Person other than a QIB, such transfer shall be effected, subject to the Applicable Depositary Procedures, in accordance with the provisions of this Section 6.4 and Article VIII, and the transferee shall receive a Definitive Capital Securities Certificate in connection with such transfer. A holder of a Definitive Capital Securities Certificate that is a QIB may upon request, and in accordance with the provisions of this Section 6.4 and Article VIII, exchange such Definitive Capital Securities Certificate for a beneficial interest in a Global Capital Security. (b) If any Global Capital Security is to be exchanged for Definitive Capital Securities Certificates or canceled in part, or if any Definitive Capital Securities Certificate is to be exchanged in whole or in part for any Global Capital Security, then either (i) such Global Capital Security shall be so surrendered for exchange or cancellation as provided in this Section 6.4 and Article VIII or (ii) the aggregate liquidation amount represented by such Global Capital Security shall be reduced, subject to Section 6.3, or increased by an amount equal to the liquidation amount represented by that portion of the Global Capital Security to be so exchanged or canceled, or equal to the liquidation amount represented by such Definitive Capital Securities Certificates to be so exchanged for any Global Capital Security, as the case may be, by means of an appropriate adjustment made on the records of the Registrar, whereupon the Institutional Trustee, in accordance with the Applicable Depositary Procedures, shall instruct the Depositary or its authorized representative to make a corresponding adjustment to its records. Upon any such surrender to the Administrators or the Registrar of any Global Capital Security or Securities by the Depositary, accompanied by registration instructions, the Administrators, or any one of them, shall execute the Definitive Capital Securities Certificates in accordance with the instructions of the Depositary. None of the Registrar, Administrators, or the Institutional Trustee shall be liable for any delay in delivery of such instructions and may conclusively rely on, and shall be fully protected in relying on, such instructions. (c) Every Definitive Capital Securities Certificate executed and delivered upon registration or transfer of, or in exchange for or in lieu of, a Global Capital Security or any portion thereof shall be executed and delivered in the form of, and shall be, a Global Capital Security, unless such Definitive Capital Securities Certificate is registered in the name of a Person other than the Depositary for such Global Capital Security or a nominee thereof. (d) The Depositary or its nominee, as registered owner of a Global Capital Security, shall be the Holder of such Global Capital Security for all purposes under this Declaration and the Global Capital Security, and Owners with respect to a Global Capital Security shall hold such interests pursuant to the Applicable Depositary Procedures. The Registrar, the Administrators and the Institutional Trustee shall be entitled to deal with the Depositary for all purposes of this Declaration relating to the Global Capital Securities (including the payment of the liquidation amount of and Distributions on the Book-Entry Capital Securities represented thereby and the giving of instructions or directions by Owners of Book-Entry Capital Securities represented thereby and the giving of notices) as the sole Holder of the Book-Entry Capital Securities represented thereby and shall have no obligations to the Owners thereof. None of the Administrators, the Institutional Trustee nor the Registrar shall have any liability in respect of any transfers effected by the Depositary. (e) The rights of the Owners of the Book-Entry Capital Securities shall be exercised only through the Depositary and shall be limited to those established by law, the Applicable Depositary Procedures and agreements between such Owners and the Depositary and/or the Depositary Participants; provided, however, solely for the purpose of determining whether the Holders of the requisite amount of Capital Securities have voted on any matter provided for in this Declaration, to the extent that Capital Securities are represented by a Global Capital Security, the Administrators and the Institutional Trustee may conclusively rely on, and shall be fully protected in relying on, any written instrument (including a proxy) delivered to the Institutional Trustee by the Depositary setting forth the Owners' votes or assigning the right to vote on any matter to any other Persons either in whole or in part. To the extent that Capital Securities are represented by a Global Capital Security, the initial Depositary will make book-entry transfers among the Depositary Participants and receive and transmit payments on the Capital Securities that are represented by a Global Capital Security to such Depositary Participants, and none of the Sponsor, the Administrators or the Institutional Trustee shall have any responsibility or obligation with respect thereto. (f) To the extent that a notice or other communication to the Holders is required under this Declaration, for so long as Capital Securities are represented by a Global Capital Security, the Administrator and the Institutional Trustee shall give all such notices and communications to the Depositary, and shall have no obligations to the Owners. Section 6.5. Mutilated, Destroyed, Lost or Stolen Certificates. ------------------------------------------------- If: (a) any mutilated Certificates should be surrendered to the Registrar, or if the Registrar shall receive evidence to its satisfaction of the destruction, loss or theft of any Certificate; and (b) there shall be delivered to the Registrar, the Administrators and the Institutional Trustee such security or indemnity as may be required by them to keep each of them harmless; then, in the absence of notice that such Certificate shall have been acquired by a protected purchaser, an Administrator on behalf of the Trust shall execute (and in the case of a Capital Security Certificate, the Institutional Trustee shall authenticate) and deliver, in exchange for or in lieu of any such mutilated, destroyed, lost or stolen Certificate, a new Certificate of like denomination. In connection with the issuance of any new Certificate under this Section 6.5, the Registrar or the Administrators may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection therewith. Any duplicate Certificate issued pursuant to this Section shall constitute conclusive evidence of an ownership interest in the relevant Securities, as if originally issued, whether or not the lost, stolen or destroyed Certificate shall be found at any time. Section 6.6. Temporary Securities. Until definitive Securities are --------------------- ready for delivery, the Administrators may prepare and, in the case of the Capital Securities, the Institutional Trustee shall authenticate, temporary Securities. Temporary Securities shall be substantially in the form of definitive Securities but may have variations that the Administrators consider appropriate for temporary Securities. Without unreasonable delay, the Administrators shall prepare and, in the case of the Capital Securities, the Institutional Trustee shall authenticate, definitive Securities in exchange for temporary Securities. Section 6.7. Cancellation. The Administrators at any time may ------------ deliver Securities to the Institutional Trustee for cancellation. The Registrar shall forward to the Institutional Trustee any Securities surrendered to it for registration of transfer, redemption or payment. The Institutional Trustee shall promptly cancel all Securities surrendered for registration of transfer, payment, replacement or cancellation and shall dispose of such canceled Securities as the Administrators direct. The Administrators may not issue new Securities to replace Securities that have been paid or that have been delivered to the Institutional Trustee for cancellation. Section 6.8. CUSIP Numbers. The Trust in issuing the Securities may ------------- use "CUSIP" numbers (if then generally in use), and, if so, the Institutional Trustee shall use CUSIP numbers in notice of redemption as a convenience to Holders; provided, however, that any such notice may state that no -------- ------- representation is made as to the correctness of such numbers either as printed on the Securities or as contained in any notice of redemption and that identification numbers printed on the Securities and any such redemption shall not be affected by any defect in or omission of such numbers. The Trust shall promptly notify the Institutional Trustee in writing of any change in the CUSIP numbers. Section 6.9. Rights of Holders; Waivers of Past Defaults. ------------------------------------------- (a) The legal title to the Trust Property is vested exclusively in the Institutional Trustee (in its capacity as such) in accordance with Section 2.5, and the Holders shall not have any right or title therein other than the undivided beneficial interest in the assets of the Trust conferred by their Securities and they shall have no right to call for any partition or division of property, profits or rights of the Trust except as described below. The Securities shall be personal property giving only the rights specifically set forth therein and in this Declaration. The Securities shall have no preemptive or similar rights. (b) For so long as any Capital Securities remain outstanding, if upon an Acceleration Event of Default, the Debenture Trustee fails or the holders of not less than 25% in principal amount of the outstanding Debentures fail to declare the principal of all of the Debentures to be immediately due and payable, the Holders of a Majority in liquidation amount of the Capital Securities then outstanding shall have the right to make such declaration by a notice in writing to the Institutional Trustee, the Sponsor and the Debenture Trustee. At any time after a declaration of acceleration with respect to the Debentures has been made and before a judgment or decree for payment of the money due has been obtained by the Debenture Trustee as provided in the Indenture, if the Institutional Trustee, subject to the provisions hereof, fails to annul any such declaration and waive such default, the Holders of a Majority in liquidation amount of the Capital Securities, by written notice to the Institutional Trustee, the Sponsor and the Debenture Trustee, may rescind and annul such declaration and its consequences if: (i) the Debenture Issuer has paid or deposited with the Debenture Trustee a sum sufficient to pay (A) all overdue installments of interest on all of the Debentures, (B) any accrued Additional Interest on all of the Debentures, (C) the principal of (and premium, if any, on) any Debentures that have become due otherwise than by such declaration of acceleration and interest and Additional Interest thereon at the rate borne by the Debentures, and (D) all sums paid or advanced by the Debenture Trustee under the Indenture and the reasonable compensation, expenses, disbursements and advances of the Debenture Trustee and the Institutional Trustee, their agents and counsel; and (ii) all Events of Default with respect to the Debentures, other than the non-payment of the principal of the Debentures that has become due solely by such acceleration, have been cured or waived as provided in Section 5.7 of the Indenture. The Holders of at least a Majority in liquidation amount of the Capital Securities may, on behalf of the Holders of all the Capital Securities, waive any past default under the Indenture or any Indenture Event of Default, except a default or Indenture Event of Default in the payment of principal or interest on the Debentures (unless such default or Indenture Event of Default has been cured and a sum sufficient to pay all matured installments of interest and principal due otherwise than by acceleration has been deposited with the Debenture Trustee) or a default under the Indenture or an Indenture Event of Default in respect of a covenant or provision that under the Indenture cannot be modified or amended without the consent of the holder of each outstanding Debenture. No such rescission shall affect any subsequent default or impair any right consequent thereon. Upon receipt by the Institutional Trustee of written notice declaring such an acceleration, or rescission and annulment thereof, by Holders of any part of the Capital Securities, a record date shall be established for determining Holders of outstanding Capital Securities entitled to join in such notice, which record date shall be at the close of business on the day the Institutional Trustee receives such notice. The Holders on such record date, or their duly designated proxies, and only such Persons, shall be entitled to join in such notice, whether or not such Holders remain Holders after such record date; provided, that unless such declaration of acceleration, or rescission and -------- annulment, as the case may be, shall have become effective by virtue of the requisite percentage having joined in such notice prior to the day that is 90 days after such record date, such notice of declaration of acceleration, or rescission and annulment, as the case may be, shall automatically and without further action by any Holder be canceled and of no further effect. Nothing in this paragraph shall prevent a Holder, or a proxy of a Holder, from giving, after expiration of such 90-day period, a new written notice of declaration of acceleration, or rescission and annulment thereof, as the case may be, that is identical to a written notice that has been canceled pursuant to the proviso to the preceding sentence, in which event a new record date shall be established pursuant to the provisions of this Section 6.9. (c) Except as otherwise provided in paragraphs (a) and (b) of this Section 6.9, the Holders of at least a Majority in liquidation amount of the Capital Securities may, on behalf of the Holders of all the Capital Securities, waive any past default or Event of Default and its consequences. Upon such waiver, any such default or Event of Default shall cease to exist, and any default or Event of Default arising therefrom shall be deemed to have been cured, for every purpose of this Declaration, but no such waiver shall extend to any subsequent or other default or Event of Default or impair any right consequent thereon. ARTICLE VII DISSOLUTION AND TERMINATION OF TRUST Section 7.1. Dissolution and Termination of Trust. ------------------------------------ (a) The Trust shall dissolve on the first to occur of: (i) unless earlier dissolved, on December 15, 2041, the expiration of the term of the Trust; (ii) upon a Bankruptcy Event with respect to the Sponsor, the Trust or the Debenture Issuer; (iii) upon the filing of a certificate of dissolution or its equivalent with respect to the Sponsor (other than in connection with a merger, consolidation or similar transaction not prohibited by the Indenture, this Declaration or the Guarantee, as the case may be) or upon the revocation of the charter of the Sponsor and the expiration of 90 days after the date of revocation without a reinstatement thereof; (iv) upon the distribution of the Debentures to the Holders of the Securities, upon exercise of the right of the Holder of all of the outstanding Common Securities to dissolve the Trust as provided in Annex I hereto; (v) upon the entry of a decree of judicial dissolution of the Holder of the Common Securities, the Sponsor, the Trust or the Debenture Issuer; (vi) when all of the Securities shall have been called for redemption and the amounts necessary for redemption thereof shall have been paid to the Holders in accordance with the terms of the Securities; or (vii) before the issuance of any Securities, with the consent of all of the Trustees and the Sponsor. (b) As soon as is practicable after the occurrence of an event referred to in Section 7.1(a), and after satisfaction of liabilities to creditors of the Trust as required by applicable law, including of the Statutory Trust Act, and subject to the terms set forth in Annex I, the Institutional Trustee shall terminate the Trust by filing a certificate of cancellation with the Secretary of State of the State of Delaware. (c) The provisions of Section 2.9 and Article IX shall survive the termination of the Trust. ARTICLE VIII TRANSFER OF INTERESTS Section 8.1. General. ------- (a) Subject to Section 8.1(c), where Capital Securities are presented to the Registrar or a co-registrar with a request to register a transfer or to exchange them for an equal number of Capital Securities represented by different certificates, the Registrar shall register the transfer or make the exchange if its requirements for such transactions are met. To permit registrations of transfer and exchanges, the Trust shall issue and the Institutional Trustee shall authenticate Capital Securities at the Registrar's request. (b) Upon issuance of the Common Securities, the Sponsor shall acquire and retain beneficial and record ownership of the Common Securities and for so long as the Securities remain outstanding, and to the fullest extent permitted by applicable law, the Sponsor shall maintain 100% ownership of the Common Securities; provided, however, that any permitted successor of the -------- ------- Sponsor, in its capacity as Debenture Issuer, under the Indenture that is a U.S. Person may succeed to the Sponsor's ownership of the Common Securities. (c) Capital Securities may only be transferred, in whole or in part, in accordance with the terms and conditions set forth in this Declaration and in the terms of the Securities. To the fullest extent permitted by applicable law, any transfer or purported transfer of any Security not made in accordance with this Declaration shall be null and void and will be deemed to be of no legal effect whatsoever and any such transferee shall be deemed not to be the holder of such Capital Securities for any purpose, including but not limited to the receipt of Distributions on such Capital Securities, and such transferee shall be deemed to have no interest whatsoever in such Capital Securities. (d) The Registrar shall provide for the registration of Securities and of transfers of Securities, which will be effected without charge but only upon payment (with such indemnity as the Registrar may require) in respect of any tax or other governmental charges that may be imposed in relation to it. Upon surrender for registration of transfer of any Securities, the Registrar shall cause one or more new Securities of the same tenor to be issued in the name of the designated transferee or transferees. Every Security surrendered for registration of transfer shall be accompanied by a written instrument of transfer in form satisfactory to the Registrar duly executed by the Holder or such Holder's attorney duly authorized in writing. Each Security surrendered for registration of transfer shall be canceled by the Institutional Trustee pursuant to Section 6.7. A transferee of a Security shall be entitled to the rights and subject to the obligations of a Holder hereunder upon the receipt by such transferee of a Security. By acceptance of a Security, each transferee shall be deemed to have agreed to be bound by this Declaration. (e) The Trust shall not be required (i) to issue, register the transfer of, or exchange any Securities during a period beginning at the opening of business fifteen days before the day of any selection of Securities for redemption and ending at the close of business on the earliest date on which the relevant notice of redemption is deemed to have been given to all Holders of the Securities to be redeemed, or (ii) to register the transfer or exchange of any Security so selected for redemption in whole or in part, except the unredeemed portion of any Security being redeemed in part. Section 8.2. Transfer Procedures and Restrictions. ------------------------------------ (a) The Capital Securities shall bear the Restricted Securities Legend, which shall not be removed unless there is delivered to the Trust such satisfactory evidence, which may include an opinion of counsel satisfactory to the Institutional Trustee, as may be reasonably required by the Trust, that neither the legend nor the restrictions on transfer set forth therein are required to ensure that transfers thereof comply with the provisions of the Securities Act. Upon provision of such satisfactory evidence, the Institutional Trustee, at the written direction of the Trust, shall authenticate and deliver Capital Securities that do not bear the legend. (b) Except as permitted by Section 8.2(a), each Capital Security shall bear a legend (the "Restricted Securities Legend") in substantially the ------------------------------ following form and a Capital Security shall not be transferred except in compliance with such legend, unless otherwise determined by the Sponsor, upon the advice of counsel expert in securities law, in accordance with applicable law: [If the Capital Security is to be Global Capital Security- THIS CAPITAL SECURITY IS A GLOBAL SECURITY WITHIN THE MEANING OF THE DECLARATION HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME OF THE DEPOSITORY TRUST COMPANY ("DTC") OR A NOMINEE OF DTC. THIS CAPITAL SECURITY IS EXCHANGEABLE FOR CAPITAL SECURITIES REGISTERED IN THE NAME OF A PERSON OTHER THAN DTC OR ITS NOMINEE ONLY IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE DECLARATION, AND NO TRANSFER OF THIS CAPITAL SECURITY (OTHER THAN A TRANSFER OF THIS CAPITAL SECURITY AS A WHOLE BY DTC TO A NOMINEE OF DTC OR BY A NOMINEE OF DTC TO DTC OR ANOTHER NOMINEE OF DTC) MAY BE REGISTERED EXCEPT IN LIMITED CIRCUMSTANCES. UNLESS THIS CAPITAL SECURITY IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF DTC TO FIRST BANK STATUTORY TRUST VII OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CAPITAL SECURITY ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT HEREON IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.] THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), ANY STATE SECURITIES LAWS OR ANY OTHER APPLICABLE SECURITIES LAW. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND ANY APPLICABLE STATE SECURITIES LAWS. THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF AGREES TO OFFER, SELL OR OTHERWISE TRANSFER THIS SECURITY ONLY (A) TO THE SPONSOR OR THE TRUST, (B) PURSUANT TO A REGISTRATION STATEMENT THAT HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C) TO A PERSON WHOM THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A SO LONG AS THIS SECURITY IS ELIGIBLE FOR RESALE PURSUANT TO RULE 144A IN ACCORDANCE WITH RULE 144A, (D) TO A NON-U.S. PERSON IN AN OFFSHORE TRANSACTION IN ACCORDANCE WITH RULE 903 OR RULE 904 (AS APPLICABLE) OF REGULATION S UNDER THE SECURITIES ACT, (E) TO AN INSTITUTIONAL "ACCREDITED INVESTOR" WITHIN THE MEANING OF SUBPARAGRAPH (A) OF RULE 501 UNDER THE SECURITIES ACT THAT IS ACQUIRING THIS CAPITAL SECURITY FOR ITS OWN ACCOUNT, OR FOR THE ACCOUNT OF SUCH AN INSTITUTIONAL ACCREDITED INVESTOR, FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO, OR FOR OFFER OR SALE IN CONNECTION WITH, ANY DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT, OR (F) PURSUANT TO ANY OTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, SUBJECT TO THE SPONSOR'S AND THE TRUST'S RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATION AND/OR OTHER INFORMATION SATISFACTORY TO EACH OF THEM IN ACCORDANCE WITH THE DECLARATION OF TRUST, A COPY OF WHICH MAY BE OBTAINED FROM THE SPONSOR OR THE TRUST. HEDGING TRANSACTIONS INVOLVING THIS SECURITY MAY NOT BE CONDUCTED UNLESS IN COMPLIANCE WITH THE SECURITIES ACT. THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF ALSO AGREES, REPRESENTS AND WARRANTS THAT IT IS NOT AN EMPLOYEE BENEFIT, INDIVIDUAL RETIREMENT ACCOUNT OR OTHER PLAN OR ARRANGEMENT SUBJECT TO TITLE I OF THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974, AS AMENDED ("ERISA"), OR SECTION 4975 OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED (THE "CODE") (EACH A "PLAN"), OR AN ENTITY WHOSE UNDERLYING ASSETS INCLUDE "PLAN ASSETS" BY REASON OF ANY PLAN'S INVESTMENT IN THE ENTITY, AND NO PERSON INVESTING "PLAN ASSETS" OF ANY PLAN MAY ACQUIRE OR HOLD THE SECURITIES OR ANY INTEREST THEREIN, UNLESS SUCH PURCHASER OR HOLDER IS ELIGIBLE FOR EXEMPTIVE RELIEF AVAILABLE UNDER U.S. DEPARTMENT OF LABOR PROHIBITED TRANSACTION CLASS EXEMPTION 96-23, 95-60, 91-38, 90-1 OR 84-14 OR ANOTHER APPLICABLE EXEMPTION OR ITS PURCHASE AND HOLDING OF THIS SECURITY IS NOT PROHIBITED BY SECTION 406 OF ERISA OR SECTION 4975 OF THE CODE WITH RESPECT TO SUCH PURCHASE OR HOLDING. ANY PURCHASER OR HOLDER OF THE SECURITIES OR ANY INTEREST THEREIN WILL BE DEEMED TO HAVE REPRESENTED BY ITS PURCHASE AND HOLDING THEREOF THAT EITHER (i) IT IS NOT AN EMPLOYEE BENEFIT PLAN WITHIN THE MEANING OF SECTION 3(3) OF ERISA, OR A PLAN TO WHICH SECTION 4975 OF THE CODE IS APPLICABLE, A TRUSTEE OR OTHER PERSON ACTING ON BEHALF OF AN EMPLOYEE BENEFIT PLAN OR PLAN, OR ANY OTHER PERSON OR ENTITY USING THE ASSETS OF ANY EMPLOYEE BENEFIT PLAN OR PLAN TO FINANCE SUCH PURCHASE, OR (ii) SUCH PURCHASE WILL NOT RESULT IN A PROHIBITED TRANSACTION UNDER SECTION 406 OF ERISA OR SECTION 4975 OF THE CODE FOR WHICH THERE IS NO APPLICABLE STATUTORY OR ADMINISTRATIVE EXEMPTION. THIS SECURITY WILL BE ISSUED AND MAY BE TRANSFERRED ONLY IN BLOCKS HAVING A LIQUIDATION AMOUNT OF NOT LESS THAN $100,000.00 (100 SECURITIES) AND MULTIPLES OF $1,000.00 IN EXCESS THEREOF. ANY ATTEMPTED TRANSFER OF SECURITIES IN A BLOCK HAVING A LIQUIDATION AMOUNT OF LESS THAN $100,000.00 SHALL BE DEEMED TO BE VOID AND OF NO LEGAL EFFECT WHATSOEVER. THE HOLDER OF THIS SECURITY AGREES THAT IT WILL COMPLY WITH THE FOREGOING RESTRICTIONS. (c) To permit registrations of transfers and exchanges, the Trust shall execute and the Institutional Trustee shall authenticate Capital Securities at the Registrar's request. (d) Registrations of transfers or exchanges will be effected without charge, but only upon payment (with such indemnity as the Registrar or the Sponsor may require) in respect of any tax or other governmental charge that may be imposed in relation to it. (e) All Capital Securities issued upon any registration of transfer or exchange pursuant to the terms of this Declaration shall evidence the same security and shall be entitled to the same benefits under this Declaration as the Capital Securities surrendered upon such registration of transfer or exchange. Section 8.3. Deemed Security Holders. The Trust, the Administrators, ----------------------- the Trustees, the Paying Agent, the Transfer Agent or the Registrar may treat the Person in whose name any Certificate shall be registered on the books and records of the Trust as the sole holder of such Certificate and of the Securities represented by such Certificate for purposes of receiving Distributions and for all other purposes whatsoever and, accordingly, shall not be bound to recognize any equitable or other claim to or interest in such Certificate or in the Securities represented by such Certificate on the part of any Person, whether or not the Trust, the Administrators, the Trustees, the Paying Agent, the Transfer Agent or the Registrar shall have actual or other notice thereof. ARTICLE IX LIMITATION OF LIABILITY OF HOLDERS OF SECURITIES, INSTITUTIONAL TRUSTEE OR OTHERS Section 9.1. Liability. --------- (a) Except as expressly set forth in this Declaration, the Guarantee and the terms of the Securities, the Sponsor shall not be: (i) personally liable for the return of any portion of the capital contributions (or any return thereon) of the Holders of the Securities which shall be made solely from assets of the Trust; or (ii) required to pay to the Trust or to any Holder of the Securities any deficit upon dissolution of the Trust or otherwise. (b) The Holder of the Common Securities shall be liable for all of the debts and obligations of the Trust (other than with respect to the Securities) to the extent not satisfied out of the Trust's assets. (c) Pursuant to the Statutory Trust Act, the Holders of the Capital Securities shall be entitled to the same limitation of personal liability extended to stockholders of private corporations for profit organized under the General Corporation Law of the State of Delaware. Section 9.2. Exculpation. ----------- (a) No Indemnified Person shall be liable, responsible or accountable in damages or otherwise to the Trust or any Covered Person for any loss, damage or claim incurred by reason of any act or omission performed or omitted by such Indemnified Person in good faith on behalf of the Trust and in a manner such Indemnified Person reasonably believed to be within the scope of the authority conferred on such Indemnified Person by this Declaration or by law, except that an Indemnified Person shall be liable for any such loss, damage or claim incurred by reason of such Indemnified Person's negligence or willful misconduct with respect to such acts or omissions. (b) An Indemnified Person shall be fully protected in relying in good faith upon the records of the Trust and upon such information, opinions, reports or statements presented to the Trust by any Person as to matters the Indemnified Person reasonably believes are within such other Person's professional or expert competence and, if selected by such Indemnified Person, has been selected by such Indemnified Person with reasonable care by or on behalf of the Trust, including information, opinions, reports or statements as to the value and amount of the assets, liabilities, profits, losses, or any other facts pertinent to the existence and amount of assets from which Distributions to Holders of Securities might properly be paid. Section 9.3. Fiduciary Duty. -------------- (a) To the extent that, at law or in equity, an Indemnified Person has duties (including fiduciary duties) and liabilities relating thereto to the Trust or to any other Covered Person, an Indemnified Person acting under this Declaration shall not be liable to the Trust or to any other Covered Person for its good faith reliance on the provisions of this Declaration. The provisions of this Declaration, to the extent that they restrict the duties and liabilities of an Indemnified Person otherwise existing at law or in equity, are agreed by the parties hereto to replace such other duties and liabilities of the Indemnified Person. (b) Whenever in this Declaration an Indemnified Person is permitted or required to make a decision: (i) in its "discretion" or under a grant of similar authority, the Indemnified Person shall be entitled to consider such interests and factors as it desires, including its own interests, and shall have no duty or obligation to give any consideration to any interest of or factors affecting the Trust or any other Person; or (ii) in its "good faith" or under another express standard, the Indemnified Person shall act under such express standard and shall not be subject to any other or different standard imposed by this Declaration or by applicable law. Section 9.4. Indemnification. --------------- (a) The Sponsor shall indemnify, to the full extent permitted by law, any Indemnified Person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Trust) arising out of or in connection with the acceptance or administration of this Declaration by reason of the fact that he is or was an Indemnified Person against expenses (including reasonable attorneys' fees and expenses), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Trust, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the Indemnified Person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the Trust, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful. (b) The Sponsor shall indemnify, to the full extent permitted by law, any Indemnified Person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Trust to procure a judgment in its favor arising out of or in connection with the acceptance or administration of this Declaration by reason of the fact that he is or was an Indemnified Person against expenses (including reasonable attorneys' fees and expenses) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Trust; provided, however, that no such indemnification -------- ------- shall be made in respect of any claim, issue or matter as to which such Indemnified Person shall have been adjudged to be liable to the Trust unless and only to the extent that the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which such court shall deem proper. (c) To the extent that an Indemnified Person shall be successful on the merits or otherwise (including dismissal of an action without prejudice or the settlement of an action without admission of liability) in defense of any action, suit or proceeding referred to in paragraphs (a) and (b) of this Section 9.4, or in defense of any claim, issue or matter therein, he shall be indemnified, to the full extent permitted by law, against expenses (including attorneys' fees and expenses) actually and reasonably incurred by him in connection therewith. (d) Any indemnification of an Administrator under paragraphs (a) and (b) of this Section 9.4 (unless ordered by a court) shall be made by the Sponsor only as authorized in the specific case upon a determination that indemnification of the Indemnified Person is proper in the circumstances because he has met the applicable standard of conduct set forth in paragraphs (a) and (b). Such determination shall be made (i) by the Administrators by a majority vote of a Quorum consisting of such Administrators who were not parties to such action, suit or proceeding, (ii) if such a Quorum is not obtainable, or, even if obtainable, if a Quorum of disinterested Administrators so directs, by independent legal counsel in a written opinion, or (iii) by the Common Security Holder of the Trust. (e) To the fullest extent permitted by law, expenses (including reasonable attorneys' fees and expenses) incurred by an Indemnified Person in defending a civil, criminal, administrative or investigative action, suit or proceeding referred to in paragraphs (a) and (b) of this Section 9.4 shall be paid by the Sponsor in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such Indemnified Person to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the Sponsor as authorized in this Section 9.4. Notwithstanding the foregoing, no advance shall be made by the Sponsor if a determination is reasonably and promptly made (i) by the Administrators by a majority vote of a Quorum of disinterested Administrators, (ii) if such a Quorum is not obtainable, or, even if obtainable, if a quorum of disinterested Administrators so directs, by independent legal counsel in a written opinion or (iii) by the Common Security Holder of the Trust, that, based upon the facts known to the Administrators, counsel or the Common Security Holder at the time such determination is made, such Indemnified Person acted in bad faith or in a manner that such Indemnified Person did not believe to be in the best interests of the Trust, or, with respect to any criminal proceeding, that such Indemnified Person believed or had reasonable cause to believe his conduct was unlawful. In no event shall any advance be made in instances where the Administrators, independent legal counsel or the Common Security Holder reasonably determine that such Indemnified Person deliberately breached his duty to the Trust or its Common or Capital Security Holders. (f) The Trustees, at the sole cost and expense of the Sponsor, retain the right to representation by counsel of their own choosing in any action, suit or any other proceeding for which they are indemnified under paragraphs (a) and (b) of this Section 9.4, without affecting their right to indemnification hereunder or waiving any rights afforded to it under this Declaration or applicable law. (g) The indemnification and advancement of expenses provided by, or granted pursuant to, the other paragraphs of this Section 9.4 shall not be deemed exclusive of any other rights to which those seeking indemnification and advancement of expenses may be entitled under any agreement, vote of stockholders or disinterested directors of the Sponsor or Capital Security Holders of the Trust or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office. All rights to indemnification under this Section 9.4 shall be deemed to be provided by a contract between the Sponsor and each Indemnified Person who serves in such capacity at any time while this Section 9.4 is in effect. Any repeal or modification of this Section 9.4 shall not affect any rights or obligations then existing. (h) The Sponsor or the Trust may purchase and maintain insurance on behalf of any Person who is or was an Indemnified Person against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the Sponsor would have the power to indemnify him against such liability under the provisions of this Section 9.4. (i) For purposes of this Section 9.4, references to "the Trust" shall include, in addition to the resulting or surviving entity, any constituent entity (including any constituent of a constituent) absorbed in a consolidation or merger, so that any Person who is or was a director, trustee, officer or employee of such constituent entity, or is or was serving at the request of such constituent entity as a director, trustee, officer, employee or agent of another entity, shall stand in the same position under the provisions of this Section 9.4 with respect to the resulting or surviving entity as he would have with respect to such constituent entity if its separate existence had continued. (j) The indemnification and advancement of expenses provided by, or granted pursuant to, this Section 9.4 shall, unless otherwise provided when authorized or ratified, (i) continue as to a Person who has ceased to be an Indemnified Person and shall inure to the benefit of the heirs, executors and administrators of such a Person; and (ii) survive the termination or expiration of this Declaration or the earlier removal or resignation of an Indemnified Person. Section 9.5. Outside Businesses. Any Covered Person, the Sponsor, ------------------ the Delaware Trustee and the Institutional Trustee may engage in or possess an interest in other business ventures of any nature or description, independently or with others, similar or dissimilar to the business of the Trust, and the Trust and the Holders of Securities shall have no rights by virtue of this Declaration in and to such independent ventures or the income or profits derived therefrom, and the pursuit of any such venture, even if competitive with the business of the Trust, shall not be deemed wrongful or improper. None of any Covered Person, the Sponsor, the Delaware Trustee or the Institutional Trustee shall be obligated to present any particular investment or other opportunity to the Trust even if such opportunity is of a character that, if presented to the Trust, could be taken by the Trust, and any Covered Person, the Sponsor, the Delaware Trustee and the Institutional Trustee shall have the right to take for its own account (individually or as a partner or fiduciary) or to recommend to others any such particular investment or other opportunity. Any Covered Person, the Delaware Trustee and the Institutional Trustee may engage or be interested in any financial or other transaction with the Sponsor or any Affiliate of the Sponsor, or may act as depositary for, trustee or agent for, or act on any committee or body of holders of, securities or other obligations of the Sponsor or its Affiliates. Section 9.6. Compensation; Fee. The Sponsor agrees: ----------------- (a) to pay to the Trustees from time to time such compensation for all services rendered by them hereunder as the parties shall agree from time to time (which compensation shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust); and (b) except as otherwise expressly provided herein, to reimburse the Trustees upon request for all reasonable expenses, disbursements and advances incurred or made by the Trustees in accordance with any provision of this Declaration (including the reasonable compensation and the expenses and disbursements of their respective agents and counsel), except any such expense, disbursement or advance as may be attributable to its negligence, bad faith or willful misconduct. For purposes of clarification, this Section 9.6 does not contemplate the payment by the Sponsor of acceptance or annual administration fees owing to the Trustees under this Declaration or the fees and expenses of the Trustees' counsel in connection with the closing of the transactions contemplated by this Declaration. The provisions of this Section 9.6 shall survive the dissolution of the Trust and the termination of this Declaration and the removal or resignation of any Trustee. No Trustee may claim any lien or charge on any property of the Trust as a result of any amount due pursuant to this Section 9.6. ARTICLE X ACCOUNTING Section 10.1. Fiscal Year. The fiscal year ("Fiscal Year") of the ----------- ----------- Trust shall be the calendar year, or such other year as is required by the Code. Section 10.2. Certain Accounting Matters. -------------------------- (a) At all times during the existence of the Trust, the Administrators shall keep, or cause to be kept at the principal office of the Trust in the United States, as defined for purposes of Treasury Regulations section 301.7701-7, full books of account, records and supporting documents, which shall reflect in reasonable detail each transaction of the Trust. The books of account shall be maintained, at the Sponsor's expense, in accordance with generally accepted accounting principles, consistently applied. The books of account and the records of the Trust shall be examined by and reported upon (either separately or as part of the Sponsor's regularly prepared consolidated financial report) as of the end of each Fiscal Year of the Trust by a firm of independent certified public accountants selected by the Administrators. (b) The Administrators shall cause to be duly prepared and delivered to each of the Holders of Securities Form 1099 or such other annual United States federal income tax information statement required by the Code, containing such information with regard to the Securities held by each Holder as is required by the Code and the Treasury Regulations. Notwithstanding any right under the Code to deliver any such statement at a later date, the Administrators shall endeavor to deliver all such statements within 30 days after the end of each Fiscal Year of the Trust. (c) The Administrators, at the Sponsor's expense, shall cause to be duly prepared at the principal office of the Sponsor in the United States, as `United States' is defined in Section 7701(a)(9) of the Code (or at the principal office of the Trust if the Sponsor has no such principal office in the United States), and filed an annual United States federal income tax return on a Form 1041 or such other form required by United States federal income tax law, and any other annual income tax returns required to be filed by the Administrators on behalf of the Trust with any state or local taxing authority. Section 10.3. Banking. The Trust shall maintain in the United States, ------- as defined for purposes of Treasury Regulations section 301.7701-7, one or more bank accounts in the name and for the sole benefit of the Trust; provided, -------- however, that all payments of funds in respect of the Debentures held by the - ------- Institutional Trustee shall be made directly to the Property Account and no other funds of the Trust shall be deposited in the Property Account. The sole signatories for such accounts (including the Property Account) shall be designated by the Institutional Trustee. Section 10.4. Withholding. The Institutional Trustee or any Paying ----------- Agent and the Administrators shall comply with all withholding requirements under United States federal, state and local law. The Institutional Trustee or any Paying Agent shall request, and each Holder shall provide to the Institutional Trustee or any Paying Agent, such forms or certificates as are necessary to establish an exemption from withholding with respect to the Holder, and any representations and forms as shall reasonably be requested by the Institutional Trustee or any Paying Agent to assist it in determining the extent of, and in fulfilling, its withholding obligations. The Administrators shall file required forms with applicable jurisdictions and, unless an exemption from withholding is properly established by a Holder, shall remit amounts withheld with respect to the Holder to applicable jurisdictions. To the extent that the Institutional Trustee or any Paying Agent is required to withhold and pay over any amounts to any authority with respect to distributions or allocations to any Holder, the amount withheld shall be deemed to be a Distribution in the amount of the withholding to the Holder. In the event of any claimed overwithholding, Holders shall be limited to an action against the applicable jurisdiction. If the amount required to be withheld was not withheld from actual Distributions made, the Institutional Trustee or any Paying Agent may reduce subsequent Distributions by the amount of such withholding. ARTICLE XI AMENDMENTS AND MEETINGS Section 11.1. Amendments. ---------- (a) Except as otherwise provided in this Declaration or by any applicable terms of the Securities, this Declaration may only be amended by a written instrument approved and executed (i) by the Institutional Trustee, or (ii) if the amendment affects the rights, powers, duties, obligations or immunities of the Delaware Trustee, by the Delaware Trustee. (b) Notwithstanding any other provision of this Article XI, an amendment may be made, and any such purported amendment shall be valid and effective only if: (i) the Institutional Trustee shall have first received (A) an Officers' Certificate from each of the Trust and the Sponsor that such amendment is permitted by, and conforms to, the terms of this Declaration (including the terms of the Securities); and (B) an opinion of counsel (who may be counsel to the Sponsor or the Trust) that such amendment is permitted by, and conforms to, the terms of this Declaration (including the terms of the Securities); and (ii) the result of such amendment would not be to (A) cause the Trust to cease to be classified for purposes of United States federal income taxation as a grantor trust; or (B) cause the Trust to be deemed to be an Investment Company required to be registered under the Investment Company Act. (c) Except as provided in Section 11.1(d), (e) or (h), no amendment shall be made, and any such purported amendment shall be void and ineffective, unless the Holders of a Majority in liquidation amount of the Capital Securities shall have consented to such amendment. (d) In addition to and notwithstanding any other provision in this Declaration, without the consent of each affected Holder, this Declaration may not be amended to (i) change the amount or timing of any Distribution on the Securities or otherwise adversely affect the amount of any Distribution required to be made in respect of the Securities as of a specified date or change any conversion or exchange provisions or (ii) restrict the right of a Holder to institute suit for the enforcement of any such payment on or after such date. (e) Sections 9.1(b) and 9.1(c) and this Section 11.1 shall not be amended without the consent of all of the Holders of the Securities. (f) Article III shall not be amended without the consent of the Holders of a Majority in liquidation amount of the Common Securities. (g) The rights of the Holders of the Capital Securities under Article IV to appoint and remove Trustees shall not be amended without the consent of the Holders of a Majority in liquidation amount of the Capital Securities. (h) This Declaration may be amended by the Institutional Trustee and the Holders of a Majority in liquidation amount of the Common Securities without the consent of the Holders of the Capital Securities to: (i) cure any ambiguity; (ii) correct or supplement any provision in this Declaration that may be defective or inconsistent with any other provision of this Declaration; (iii) add to the covenants, restrictions or obligations of the Sponsor; or (iv) modify, eliminate or add to any provision of this Declaration to such extent as may be necessary to ensure that the Trust will be classified for United States federal income tax purposes at all times as a grantor trust and will not be required to register as an Investment Company (including without limitation to conform to any change in Rule 3a-5, Rule 3a-7 or any other applicable rule under the Investment Company Act or written change in interpretation or application thereof by any legislative body, court, government agency or regulatory authority) which amendment does not have a material adverse effect on the rights, preferences or privileges of the Holders of Securities; provided, however, that no such modification, elimination or addition -------- ------- referred to in clauses (i), (ii), (iii) or (iv) shall adversely affect in any material respect the powers, preferences or special rights of Holders of Capital Securities. Section 11.2. Meetings of the Holders of Securities; Action by ------------------------------------------------------- Written Consent. - --------------- (a) Meetings of the Holders of any class of Securities may be called at any time by the Administrators (or as provided in the terms of the Securities) to consider and act on any matter on which Holders of such class of Securities are entitled to act under the terms of this Declaration or the terms of the Securities. The Administrators shall call a meeting of the Holders of such class if directed to do so by the Holders of at least 10% in liquidation amount of such class of Securities. Such direction shall be given by delivering to the Administrators one or more calls in a writing stating that the signing Holders of the Securities wish to call a meeting and indicating the general or specific purpose for which the meeting is to be called. Any Holders of the Securities calling a meeting shall specify in writing the Certificates held by the Holders of the Securities exercising the right to call a meeting and only those Securities represented by such Certificates shall be counted for purposes of determining whether the required percentage set forth in the second sentence of this paragraph has been met. (b) Except to the extent otherwise provided in the terms of the Securities, the following provisions shall apply to meetings of Holders of the Securities: (i) notice of any such meeting shall be given to all the Holders of the Securities having a right to vote thereat at least 7 days and not more than 60 days before the date of such meeting. Whenever a vote, consent or approval of the Holders of the Securities is permitted or required under this Declaration, such vote, consent or approval may be given at a meeting of the Holders of the Securities. Any action that may be taken at a meeting of the Holders of the Securities may be taken without a meeting if a consent in writing setting forth the action so taken is signed by the Holders of the Securities owning not less than the minimum amount of Securities in liquidation amount that would be necessary to authorize or take such action at a meeting at which all Holders of the Securities having a right to vote thereon were present and voting. Prompt notice of the taking of action without a meeting shall be given to the Holders of the Securities entitled to vote who have not consented in writing. The Administrators may specify that any written ballot submitted to the Holders of the Securities for the purpose of taking any action without a meeting shall be returned to the Trust within the time specified by the Administrators; (ii) each Holder of a Security may authorize any Person to act for it by proxy on all matters in which a Holder of Securities is entitled to participate, including waiving notice of any meeting, or voting or participating at a meeting. No proxy shall be valid after the expiration of 11 months from the date thereof unless otherwise provided in the proxy. Every proxy shall be revocable at the pleasure of the Holder of the Securities executing it. Except as otherwise provided herein, all matters relating to the giving, voting or validity of proxies shall be governed by the General Corporation Law of the State of Delaware relating to proxies, and judicial interpretations thereunder, as if the Trust were a Delaware corporation and the Holders of the Securities were stockholders of a Delaware corporation; each meeting of the Holders of the Securities shall be conducted by the Administrators or by such other Person that the Administrators may designate; and (iii) unless the Statutory Trust Act, this Declaration, or the terms of the Securities otherwise provides, the Administrators, in their sole discretion, shall establish all other provisions relating to meetings of Holders of Securities, including notice of the time, place or purpose of any meeting at which any matter is to be voted on by any Holders of the Securities, waiver of any such notice, action by consent without a meeting, the establishment of a record date, quorum requirements, voting in person or by proxy or any other matter with respect to the exercise of any such right to vote; provided, however, -------- ------- that each meeting shall be conducted in the United States (as that term is defined in Treasury Regulations section 301.7701-7). ARTICLE XII REPRESENTATIONS OF INSTITUTIONAL TRUSTEE AND THE DELAWARE TRUSTEE Section 12.1. Representations and Warranties of Institutional ------------------------------------------------------- Trustee. The initial Institutional Trustee represents and warrants to the Trust - ------- and to the Sponsor at the date of this Declaration, and each Successor Institutional Trustee represents and warrants to the Trust and the Sponsor at the time of the Successor Institutional Trustee's acceptance of its appointment as Institutional Trustee, that: (a) the Institutional Trustee is a Delaware banking corporation with trust powers, duly organized and validly existing under the laws of the State of Delaware with trust power and authority to execute and deliver, and to carry out and perform its obligations under the terms of, this Declaration; (b) the execution, delivery and performance by the Institutional Trustee of this Declaration has been duly authorized by all necessary corporate action on the part of the Institutional Trustee. This Declaration has been duly executed and delivered by the Institutional Trustee, and it constitutes a legal, valid and binding obligation of the Institutional Trustee, enforceable against it in accordance with its terms, subject to applicable bankruptcy, reorganization, moratorium, insolvency, and other similar laws affecting creditors' rights generally and to general principles of equity (regardless of whether considered in a proceeding in equity or at law); (c) the execution, delivery and performance of this Declaration by the Institutional Trustee does not conflict with or constitute a breach of the charter or by-laws of the Institutional Trustee; and (d) no consent, approval or authorization of, or registration with or notice to, any state or federal banking authority is required for the execution, delivery or performance by the Institutional Trustee of this Declaration. Section 12.2. Representations of the Delaware Trustee. The Trustee --------------------------------------- that acts as initial Delaware Trustee represents and warrants to the Trust and to the Sponsor at the date of this Declaration, and each Successor Delaware Trustee represents and warrants to the Trust and the Sponsor at the time of the Successor Delaware Trustee's acceptance of its appointment as Delaware Trustee that: (a) if it is not a natural person, the Delaware Trustee is duly organized, validly existing and in good standing under the laws of the State of Delaware; (b) if it is not a natural person, the execution, delivery and performance by the Delaware Trustee of this Declaration has been duly authorized by all necessary corporate action on the part of the Delaware Trustee. This Declaration has been duly executed and delivered by the Delaware Trustee, and under Delaware law (excluding any securities laws) constitutes a legal, valid and binding obligation of the Delaware Trustee, enforceable against it in accordance with its terms, subject to applicable bankruptcy, reorganization, moratorium, insolvency and other similar laws affecting creditors' rights generally and to general principles of equity and the discretion of the court (regardless of whether considered in a proceeding in equity or at law); (c) if it is not a natural person, the execution, delivery and performance of this Declaration by the Delaware Trustee does not conflict with or constitute a breach of the charter or by-laws of the Delaware Trustee; (d) it has trust power and authority to execute and deliver, and to carry out and perform its obligations under the terms of, this Declaration; (e) no consent, approval or authorization of, or registration with or notice to, any state or federal banking authority governing the trust powers of the Delaware Trustee is required for the execution, delivery or performance by the Delaware Trustee of this Declaration; and (f) the Delaware Trustee is a natural person who is a resident of the State of Delaware or, if not a natural person, it is an entity which has its principal place of business in the State of Delaware and, in either case, a Person that satisfies for the Trust the requirements of Section 3807 of the Statutory Trust Act. ARTICLE XIII MISCELLANEOUS Section 13.1. Notices. All notices provided for in this Declaration ------- shall be in writing, duly signed by the party giving such notice, and shall be delivered, telecopied (which telecopy shall be followed by notice delivered or mailed by first class mail) or mailed by first class mail, as follows: (a) if given to the Trust, in care of the Administrators at the Trust's mailing address set forth below (or such other address as the Trust may give notice of to the Holders of the Securities): First Bank Statutory Trust VII c/o First Banks, Inc. 600 James S. McDonnell Boulevard Mail Stop M1 199 014 Hazelwood, Missouri 63042 Attention: Lisa K. Vansickle Telecopy: 314-592-6621 (b) if given to the Delaware Trustee, at the Delaware Trustee's mailing address set forth below (or such other address as the Delaware Trustee may give notice of to the Holders of the Securities): Wilmington Trust Company Rodney Square North 1100 North Market Street Wilmington, Delaware 19890-1600 Attention: Corporate Trust Administration Telecopy: 302-636-4140 (c) if given to the Institutional Trustee, at the Institutional Trustee's mailing address set forth below (or such other address as the Institutional Trustee may give notice of to the Holders of the Securities): Wilmington Trust Company Rodney Square North 1100 North Market Street Wilmington, Delaware 19890-1600 Attention: Corporate Trust Administration Telecopy: 302-636-4140 (d) if given to the Holder of the Common Securities, at the mailing address of the Sponsor set forth below (or such other address as the Holder of the Common Securities may give notice of to the Trust): First Banks, Inc. 600 James S. McDonnell Boulevard Mail Stop M1 199 014 Hazelwood, Missouri 63042 Attention: Lisa K. Vansickle Telecopy: 314-592-6621 (e) if given to any other Holder, at the address set forth on the books and records of the Trust. All such notices shall be deemed to have been given when received in person, telecopied with receipt confirmed, or mailed by first class mail, postage prepaid except that if a notice or other document is refused delivery or cannot be delivered because of a changed address of which no notice was given, such notice or other document shall be deemed to have been delivered on the date of such refusal or inability to deliver. Section 13.2. Governing Law. This Declaration and the rights of the ------------- parties hereunder shall be governed by and interpreted in accordance with the law of the State of Delaware and all rights and remedies shall be governed by such laws without regard to the principles of conflict of laws of the State of Delaware or any other jurisdiction that would call for the application of the law of any jurisdiction other than the State of Delaware; provided, however, -------- ------- that there shall not be applicable to the Trust, the Trustees or this Declaration any provision of the laws (statutory or common) of the State of Delaware pertaining to trusts that relate to or regulate, in a manner inconsistent with the terms hereof (a) the filing with any court or governmental body or agency of trustee accounts or schedules of trustee fees and charges, (b) affirmative requirements to post bonds for trustees, officers, agents or employees of a trust, (c) the necessity for obtaining court or other governmental approval concerning the acquisition, holding or disposition of real or personal property, (d) fees or other sums payable to trustees, officers, agents or employees of a trust, (e) the allocation of receipts and expenditures to income or principal, or (f) restrictions or limitations on the permissible nature, amount or concentration of trust investments or requirements relating to the titling, storage or other manner of holding or investing trust assets. Section 13.3. Intention of the Parties. It is the intention of the ------------------------- parties hereto that the Trust be classified for United States federal income tax purposes as a grantor trust. The provisions of this Declaration shall be interpreted to further this intention of the parties. Section 13.4. Headings. Headings contained in this Declaration are -------- inserted for convenience of reference only and do not affect the interpretation of this Declaration or any provision hereof. Section 13.5. Successors and Assigns. Whenever in this Declaration ---------------------- any of the parties hereto is named or referred to, the successors and assigns of such party shall be deemed to be included, and all covenants and agreements in this Declaration by the Sponsor and the Trustees shall bind and inure to the benefit of their respective successors and assigns, whether or not so expressed. Section 13.6. Partial Enforceability. If any provision of this ----------------------- Declaration, or the application of such provision to any Person or circumstance, shall be held invalid, the remainder of this Declaration, or the application of such provision to persons or circumstances other than those to which it is held invalid, shall not be affected thereby. Section 13.7. Counterparts. This Declaration may contain more than ------------ one counterpart of the signature page and this Declaration may be executed by the affixing of the signature of each of the Trustees and Administrators to any of such counterpart signature pages. All of such counterpart signature pages shall be read as though one, and they shall have the same force and effect as though all of the signers had signed a single signature page. Signatures appear on the following page IN WITNESS WHEREOF, the undersigned have caused these presents to be executed as of the day and year first above written. WILMINGTON TRUST COMPANY, as Delaware Trustee By: /s/ Christopher J. Monigle ------------------------------------------------ Name: Christopher J. Monigle Title: Vice President WILMINGTON TRUST COMPANY, as Institutional Trustee By: /s/ Christopher J. Monigle ------------------------------------------------ Name: Christopher J. Monigle Title: Vice President FIRST BANKS, INC., as Sponsor By: /s/ Lisa K. Vansickle ------------------------------------------------ Name: Lisa K. Vansickle Title: Senior Vice President ADMINISTRATORS OF FIRST BANK STATUTORY TRUST VII By: /s/ Lisa K. Vansickle ------------------------------------------------ Administrator By: /s/ Terrance M. McCarthy ------------------------------------------------ Administrator By: /s/ Peter D. Wimmer ------------------------------------------------ Administrator ANNEX I TERMS OF SECURITIES Pursuant to Section 6.1 of the Amended and Restated Declaration of Trust, dated as of December 14, 2006 (as amended from time to time, the "Declaration"), the designation, rights, privileges, restrictions, preferences and other terms and provisions of the Capital Securities and the Common Securities are set out below (each capitalized term used but not defined herein has the meaning set forth in the Declaration): 1. Designation and Number. ---------------------- (a) 50,000 Floating Rate Capital Securities of First Bank Statutory Trust VII (the "Trust"), with an aggregate stated liquidation amount with respect to the assets of the Trust of fifty million dollars ($50,000,000.00) and a stated liquidation amount with respect to the assets of the Trust of $1,000.00 per Capital Security, are hereby designated for the purposes of identification only as the "Capital Securities". The Capital ------------------- Security Certificates evidencing the Capital Securities shall be substantially in the form of Exhibits A-1 and A-2 to the Declaration, with such changes and additions thereto or deletions therefrom as may be required by ordinary usage, custom or practice. (b) 1,547 Floating Rate Common Securities of the Trust (the "Common Securities") will be evidenced by Common Security Certificates ------------------- substantially in the form of Exhibit A-3 to the Declaration, with such changes and additions thereto or deletions therefrom as may be required by ordinary usage, custom or practice. 2. Distributions. ------------- (a) Distributions will be payable on each Security for the Distribution Period beginning on (and including) the date of original issuance and ending on (but excluding) the Distribution Payment Date in March 2007 at a rate per annum of 7.20% and shall bear interest for each successive Distribution Period beginning on (and including) the Distribution Payment Date in March 2007, and each succeeding Distribution Payment Date, and ending on (but excluding) the next succeeding Distribution Payment Date at a rate per annum equal to the 3-Month LIBOR, determined as described below, plus 1.85% (the "Coupon Rate"), ----------- applied to the stated liquidation amount thereof, such rate being the rate of interest payable on the Debentures to be held by the Institutional Trustee. Distributions in arrears will bear interest thereon compounded quarterly at the applicable Distribution Rate (to the extent permitted by law). Distributions, as used herein, include cash distributions and any such compounded distributions unless otherwise noted. A Distribution is payable only to the extent that payments are made in respect of the Debentures held by the Institutional Trustee and to the extent the Institutional Trustee has funds available therefor. The amount of the Distribution payable for any Distribution Period will be calculated by applying the Distribution Rate to the stated liquidation amount outstanding at the commencement of the Distribution Period on the basis of the actual number of days in the Distribution Period concerned divided by 360. All percentages resulting from any calculations on the Capital Securities will be rounded, if necessary, to the nearest one hundred-thousandth of a percentage point, with five one-millionths of a percentage point rounded upward (e.g., 9.876545% (or .09876545) being rounded to 9.87655% (or .0987655), and all dollar amounts used in or resulting from such calculation will be rounded to the nearest cent (with one-half cent being rounded upward)). (b) Distributions on the Securities will be cumulative, will accrue from the date of original issuance, and will be payable, subject to extension of distribution payment periods as described herein, quarterly in arrears on March 15, June 15, September 15 and December 15 of each year, or if such day is not a Business Day, then the next succeeding Business Day (each a "Distribution Payment Date") (it being understood that interest accrues for any -------------------------- such non-Business Day), commencing on the Distribution Payment Date in March 2007 when, as and if available for payment. The Debenture Issuer has the right under the Indenture to defer payments of interest on the Debentures, so long as no Acceleration Event of Default has occurred and is continuing, by deferring the payment of interest on the Debentures for up to 20 consecutive quarterly periods (each an "Extension Period") at any time and from time to time, subject ----------------- to the conditions described below, during which Extension Period no interest shall be due and payable. During any Extension Period, interest will continue to accrue on the Debentures, and interest on such accrued interest will accrue at an annual rate equal to the Distribution Rate in effect for each such Extension Period, compounded quarterly from the date such interest would have been payable were it not for the Extension Period, to the extent permitted by law (such interest referred to herein as "Additional Interest"). No Extension Period may -------------------- end on a date other than a Distribution Payment Date. At the end of any such Extension Period, the Debenture Issuer shall pay all interest then accrued and unpaid on the Debentures (together with Additional Interest thereon); provided, -------- however, that no Extension Period may extend beyond the Maturity Date and - ------- provided further, however, that during any such Extension Period, the Debenture - -------- ------- ------- Issuer and its Affiliates shall not (i) declare or pay any dividends or distributions on, or redeem, purchase, acquire, or make a liquidation payment with respect to, any of the Debenture Issuer's or its Affiliates' capital stock (other than payments of dividends or distributions to the Debenture Issuer) or make any guarantee payments with respect to the foregoing, or (ii) make any payment of principal of or interest or premium, if any, on or repay, repurchase or redeem any debt securities of the Debenture Issuer or any Affiliate that rank pari passu in all respects with or junior in interest to the Debentures (other than, with respect to clauses (i) and (ii) above, (a) repurchases, redemptions or other acquisitions of shares of capital stock of the Debenture Issuer in connection with any employment contract, benefit plan or other similar arrangement with or for the benefit of one or more employees, officers, directors or consultants, in connection with a dividend reinvestment or stockholder stock purchase plan or in connection with the issuance of capital stock of the Debenture Issuer (or securities convertible into or exercisable for such capital stock) as consideration in an acquisition transaction entered into prior to the applicable Extension Period, (b) as a result of any exchange or conversion of any class or series of the Debenture Issuer's capital stock (or any capital stock of a subsidiary of the Debenture Issuer) for any class or series of the Debenture Issuer's capital stock or of any class or series of the Debenture Issuer's indebtedness for any class or series of the Debenture Issuer's capital stock, (c) the purchase of fractional interests in shares of the Debenture Issuer's capital stock pursuant to the conversion or exchange provisions of such capital stock or the security being converted or exchanged, (d) any declaration of a dividend in connection with any stockholders' rights plan, or the issuance of rights, stock or other property under any stockholders' rights plan, or the redemption or repurchase of rights pursuant thereto, (e) any dividend in the form of stock, warrants, options or other rights where the dividend stock or the stock issuable upon exercise of such warrants, options or other rights is the same stock as that on which the dividend is being paid or ranks pari passu with or junior to such stock and any cash payments in lieu of fractional shares issued in connection therewith, or (f) payments under the Capital Securities Guarantee). Prior to the termination of any Extension Period, the Debenture Issuer may further extend such period, provided that such period together with all such previous and further consecutive extensions thereof shall not exceed 20 consecutive quarterly periods, or extend beyond the Maturity Date. Upon the termination of any Extension Period and upon the payment of all accrued and unpaid interest and Additional Interest, the Debenture Issuer may commence a new Extension Period, subject to the foregoing requirements. No interest or Additional Interest shall be due and payable during an Extension Period, except at the end thereof, but each installment of interest that would otherwise have been due and payable during such Extension Period shall bear Additional Interest. During any Extension Period, Distributions on the Securities shall be deferred for a period equal to the Extension Period. If Distributions are deferred, the Distributions due shall be paid on the date that the related Extension Period terminates to Holders of the Securities as they appear on the books and records of the Trust on the record date immediately preceding such date. Distributions on the Securities must be paid on the dates payable (after giving effect to any Extension Period) to the extent that the Trust has funds available for the payment of such distributions in the Property Account of the Trust. The Trust's funds available for Distribution to the Holders of the Securities will be limited to payments received from the Debenture Issuer. The payment of Distributions out of moneys held by the Trust is guaranteed by the Guarantor pursuant to the Guarantee. (c) Distributions on the Securities will be payable to the Holders thereof as they appear on the books and records of the Trust on the relevant record dates. The relevant record dates shall be fifteen days before the relevant Distribution Payment Date. Distributions payable on any Securities that are not punctually paid on any Distribution Payment Date, as a result of the Debenture Issuer having failed to make a payment under the Debentures, as the case may be, when due (taking into account any Extension Period), will cease to be payable to the Person in whose name such Securities are registered on the relevant record date, and such defaulted Distribution will instead be payable to the Person in whose name such Securities are registered on the special record date or other specified date determined in accordance with the Indenture. (d) In the event that there is any money or other property held by or for the Trust that is not accounted for hereunder, such property shall be distributed Pro Rata (as defined herein) among the Holders of the Securities. 3. Liquidation Distribution Upon Dissolution. In the event of the ------------------------------------------ voluntary or involuntary liquidation, dissolution, winding-up or termination of the Trust (each a "Liquidation") other than in connection with a redemption of ----------- the Debentures, the Holders of the Securities will be entitled to receive out of the assets of the Trust available for distribution to Holders of the Securities, after satisfaction of liabilities to creditors of the Trust (to the extent not satisfied by the Debenture Issuer), distributions equal to the aggregate of the stated liquidation amount of $1,000.00 per Security plus accrued and unpaid Distributions thereon to the date of payment (such amount being the "Liquidation ----------- Distribution"), unless in connection with such Liquidation, the Debentures in an - ------------ aggregate stated principal amount equal to the aggregate stated liquidation amount of such Securities, with an interest rate equal to the Distribution Rate of, and bearing accrued and unpaid interest in an amount equal to the accrued and unpaid Distributions on, and having the same record date as, such Securities, after paying or making reasonable provision to pay all claims and obligations of the Trust in accordance with the Statutory Trust Act, shall be distributed on a Pro Rata basis to the Holders of the Securities in exchange for such Securities. The Sponsor, as the Holder of all of the Common Securities, has the right at any time to dissolve the Trust (including, without limitation, upon the occurrence of a Special Event), subject to the receipt by the Debenture Issuer of prior approval from the Board of Governors of the Federal Reserve System, or its designated district bank, as applicable, and any successor federal agency that is primarily responsible for regulating the activities of the Sponsor (the "Federal Reserve"), if the Sponsor is a bank holding company, or from the Office --------------- of Thrift Supervision and any successor federal agency that is primarily responsible for regulating the activities of Sponsor, (the "OTS") if the Sponsor --- is a savings and loan holding company, in either case if then required under applicable capital guidelines or policies of the Federal Reserve or OTS, as applicable, and, after satisfaction of liabilities to creditors of the Trust, cause the Debentures to be distributed to the Holders of the Securities on a Pro Rata basis in accordance with the aggregate stated liquidation amount thereof. If a Liquidation of the Trust occurs as described in clause (i), (ii), (iii) or (v) in Section 7.1(a) of the Declaration, the Trust shall be liquidated by the Institutional Trustee as expeditiously as it determines to be possible by distributing, after satisfaction of liabilities to creditors of the Trust, to the Holders of the Securities, the Debentures on a Pro Rata basis to the extent not satisfied by the Debenture Issuer, unless such distribution is determined by the Institutional Trustee not to be practical, in which event such Holders will be entitled to receive out of the assets of the Trust available for distribution to the Holders, after satisfaction of liabilities of creditors of the Trust to the extent not satisfied by the Debenture Issuer, an amount equal to the Liquidation Distribution. An early Liquidation of the Trust pursuant to clause (iv) of Section 7.1(a) of the Declaration shall occur if the Institutional Trustee determines that such Liquidation is possible by distributing, after satisfaction of liabilities to creditors of the Trust, to the Holders of the Securities on a Pro Rata basis, the Debentures, and such distribution occurs. If, upon any such Liquidation the Liquidation Distribution can be paid only in part because the Trust has insufficient assets available to pay in full the aggregate Liquidation Distribution, then the amounts payable directly by the Trust on such Capital Securities shall be paid to the Holders of the Trust Securities on a Pro Rata basis, except that if an Event of Default has occurred and is continuing, the Capital Securities shall have a preference over the Common Securities with regard to such distributions. After the date for any distribution of the Debentures upon dissolution of the Trust (i) the Securities of the Trust will be deemed to be no longer outstanding, (ii) upon surrender of a Holder's Securities certificate, such Holder of the Securities will receive a certificate representing the Debentures to be delivered upon such distribution, (iii) any certificates representing the Securities still outstanding will be deemed to represent undivided beneficial interests in such of the Debentures as have an aggregate principal amount equal to the aggregate stated liquidation amount with an interest rate identical to the Distribution Rate of, and bearing accrued and unpaid interest equal to accrued and unpaid distributions on, the Securities until such certificates are presented to the Debenture Issuer or its agent for transfer or reissuance (and until such certificates are so surrendered, no payments of interest or principal shall be made to Holders of Securities in respect of any payments due and payable under the Debentures; provided, however that such failure to pay shall -------- ------- not be deemed to be an Event of Default and shall not entitle the Holder to the benefits of the Guarantee), and (iv) all rights of Holders of Securities under the Declaration shall cease, except the right of such Holders to receive Debentures upon surrender of certificates representing such Securities. 4. Redemption and Distribution. --------------------------- (a) The Debentures will mature on December 15, 2036. The Debentures may be redeemed by the Debenture Issuer, in whole or in part, at any Distribution Payment Date on or after the Distribution Payment Date in December 2011, at the Redemption Price. In addition, the Debentures may be redeemed by the Debenture Issuer at the Special Redemption Price, in whole but not in part, at any Distribution Payment Date, upon the occurrence and continuation of a Special Event within 120 days following the occurrence of such Special Event at the Special Redemption Price, upon not less than 30 nor more than 60 days' notice to holders of such Debentures so long as such Special Event is continuing. In each case, the right of the Debenture Issuer to redeem the Debentures is subject to the Debenture Issuer having received prior approval from the Federal Reserve (if the Debenture Issuer is a bank holding company) or prior approval from the OTS (if the Debenture Issuer is a savings and loan holding company), in each case if then required under applicable capital guidelines or policies of the applicable federal agency. "3-Month LIBOR" means the London interbank offered interest rate for ------------- three-month, U.S. dollar deposits determined by the Debenture Trustee in the following order of priority: (1) the rate (expressed as a percentage per annum) for U.S. dollar deposits having a three-month maturity that appears on Telerate Page 3750 as of 11:00 a.m. (London time) on the related Determination Date (as defined below). "Telerate Page 3750" means the display designated as "Page 3750" on the Moneyline Telerate Service or such other page as may replace Page 3750 on that service or such other service or services as may be nominated by the British Bankers' Association as the information vendor for the purpose of displaying London interbank offered rates for U.S. dollar deposits; (2) if such rate cannot be identified on the related Determination Date, the Debenture Trustee will request the principal London offices of four leading banks in the London interbank market to provide such banks' offered quotations (expressed as percentages per annum) to prime banks in the London interbank market for U.S. dollar deposits having a three-month maturity as of 11:00 a.m. (London time) on such Determination Date. If at least two quotations are provided, 3-Month LIBOR will be the arithmetic mean of such quotations; (3) if fewer than two such quotations are provided as requested in clause (2) above, the Debenture Trustee will request four major New York City banks to provide such banks' offered quotations (expressed as percentages per annum) to leading European banks for loans in U.S. dollars as of 11:00 a.m. (London time) on such Determination Date. If at least two such quotations are provided, 3-Month LIBOR will be the arithmetic mean of such quotations; and (4) if fewer than two such quotations are provided as requested in clause (3) above, 3-Month LIBOR will be a 3-Month LIBOR determined with respect to the Distribution Period immediately preceding such current Distribution Period. If the rate for U.S. dollar deposits having a three-month maturity that initially appears on Telerate Page 3750 as of 11:00 a.m. (London time) on the related Determination Date is superseded on the Telerate Page 3750 by a corrected rate by 12:00 noon (London time) on such Determination Date, then the corrected rate as so substituted on the applicable page will be the applicable 3-Month LIBOR for such Determination Date. The Distribution Rate for any Distribution Period will at no time be higher than the maximum rate then permitted by New York law as the same may be modified by United States law. "Capital Treatment Event" means the receipt by the Debenture Issuer and ----------------------- the Trust of an opinion of counsel experienced in such matters to the effect that, as a result of the occurrence of any amendment to, or change (including any announced prospective change) in, the laws, rules or regulations of the United States or any political subdivision thereof or therein, or as the result of any official or administrative pronouncement or action or decision interpreting or applying such laws, rules or regulations, which amendment or change is effective or which pronouncement, action or decision is announced on or after the date of original issuance of the Debentures, there is more than an insubstantial risk that the Sponsor will not, within 90 days of the date of such opinion, be entitled to treat an amount equal to the aggregate liquidation amount of the Capital Securities as "Tier 1 Capital" (or its then equivalent) for purposes of the capital adequacy guidelines of the Federal Reserve, as then in effect and applicable to the Sponsor (or if the Sponsor is not a bank holding company or otherwise is not subject to the Federal Reserve's risk-based capital adequacy guidelines, such guidelines applied to the Sponsor as if the Sponsor were subject to such guidelines); provided, however, that the inability of the -------- ------- Sponsor to treat all or any portion of the liquidation amount of the Capital Securities as Tier l Capital shall not constitute the basis for a Capital Treatment Event, if such inability results from the Sponsor having cumulative preferred stock, minority interests in consolidated subsidiaries, or any other class of security or interest which the Federal Reserve or OTS, as applicable, may now or hereafter accord Tier 1 Capital treatment in excess of the amount which may now or hereafter qualify for treatment as Tier 1 Capital under applicable capital adequacy guidelines; provided further, however, that the -------- ------- ------- distribution of Debentures in connection with the Liquidation of the Trust shall not in and of itself constitute a Capital Treatment Event unless such Liquidation shall have occurred in connection with a Tax Event or an Investment Company Event. "Determination Date" means the date that is two London Banking Days ------------------- (i.e., a business day in which dealings in deposits in U.S. dollars are transacted in the London interbank market) preceding the particular Distribution Period for which a Coupon Rate is being determined. "Investment Company Event" means the receipt by the Debenture Issuer -------------------------- and the Trust of an opinion of counsel experienced in such matters to the effect that, as a result of the occurrence of a change in law or regulation or written change (including any announced prospective change) in interpretation or application of law or regulation by any legislative body, court, governmental agency or regulatory authority, there is more than an insubstantial risk that the Trust is or, within 90 days of the date of such opinion, will be considered an Investment Company that is required to be registered under the Investment Company Act which change or prospective change becomes effective or would become effective, as the case may be, on or after the date of the issuance of the Debentures. "Maturity Date" means December 15, 2036. ------------- "Redemption Date" shall mean the date fixed for the redemption of ---------------- Capital Securities, which shall be any Distribution Payment Date on or after the Distribution Payment Date in December 2011. "Redemption Price" means 100% of the principal amount of the Debentures ---------------- being redeemed, plus accrued and unpaid Interest on such Debentures to the Redemption Date. "Special Event" means a Tax Event, an Investment Company Event or a -------------- Capital Treatment Event. "Special Redemption Date" means a date on which a Special Event ------------------------- redemption occurs, which shall be a Distribution Payment Date. "Special Redemption Price" means the price set forth in the following -------------------------- table for any Special Redemption Date that occurs on the date indicated below (or if such day is not a Business Day, then the next succeeding Business Day), expressed as the percentage of the principal amount of the Debentures being redeemed: ---------------------------------- ---------------------------- Month in which Special Special Redemption Price ---------------------- ------------------------ Redemption Date Occurs ----------------------- ---------------------------------- ---------------------------- March 2007 104.625% ---------------------------------- ---------------------------- June 2007 104.300% ---------------------------------- ---------------------------- September 2007 104.000% ---------------------------------- ---------------------------- December 2007 103.650% ---------------------------------- ---------------------------- March 2008 103.350% ---------------------------------- ---------------------------- June 2008 103.000% ---------------------------------- ---------------------------- September 2008 102.700% ---------------------------------- ---------------------------- December 2008 102.350% ---------------------------------- ---------------------------- March 2009 102.050% ---------------------------------- ---------------------------- June 2009 101.700% ---------------------------------- ---------------------------- September 2009 101.400% ---------------------------------- ---------------------------- December 2009 101.050% ---------------------------------- ---------------------------- March 2010 100.750% ---------------------------------- ---------------------------- June 2010 100.450% ---------------------------------- ---------------------------- September 2010 100.200% ---------------------------------- ---------------------------- December 2010 and thereafter 100.000% ---------------------------------- ---------------------------- plus, in each case, accrued and unpaid Interest on such Debentures to the Special Redemption Date. "Tax Event" means the receipt by the Debenture Issuer and the Trust of --------- an opinion of counsel experienced in such matters to the effect that, as a result of any amendment to or change (including any announced prospective change) in the laws or any regulations thereunder of the United States or any political subdivision or taxing authority thereof or therein, or as a result of any official administrative pronouncement (including any private letter ruling, technical advice memorandum, field service advice, regulatory procedure, notice or announcement including any notice or announcement of intent to adopt such procedures or regulations) (an "Administrative Action") or judicial decision ---------------------- interpreting or applying such laws or regulations, regardless of whether such Administrative Action or judicial decision is issued to or in connection with a proceeding involving the Debenture Issuer or the Trust and whether or not subject to review or appeal, which amendment, clarification, change, Administrative Action or decision is enacted, promulgated or announced, in each case on or after the date of original issuance of the Debentures, there is more than an insubstantial risk that: (i) the Trust is, or will be within 90 days of the date of such opinion, subject to United States federal income tax with respect to income received or accrued on the Debentures; (ii) interest payable by the Debenture Issuer on the Debentures is not, or within 90 days of the date of such opinion, will not be, deductible by the Debenture Issuer, in whole or in part, for United States federal income tax purposes; or (iii) the Trust is, or will be within 90 days of the date of such opinion, subject to more than a de minimis amount of other taxes, duties or other governmental charges. (b) Upon the repayment in full at maturity or redemption in whole or in part of the Debentures (other than following the distribution of the Debentures to the Holders of the Securities), the proceeds from such repayment or payment shall concurrently be applied to redeem Pro Rata at the applicable Redemption Price or Special Redemption Price, as applicable, Securities having an aggregate liquidation amount equal to the aggregate principal amount of the Debentures so repaid or redeemed; provided, however, that holders of such -------- ------- Securities shall be given not less than 30 nor more than 60 days' notice of such redemption (other than at the scheduled maturity of the Debentures). (c) If fewer than all the outstanding Securities are to be so redeemed, the Common Securities and the Capital Securities will be redeemed Pro Rata and the Capital Securities to be redeemed will be redeemed Pro Rata from each Holder of Capital Securities. (d) The Trust may not redeem fewer than all the outstanding Capital Securities unless all accrued and unpaid Distributions have been paid on all Capital Securities for all quarterly Distribution periods terminating on or before the date of redemption. (e) Redemption or Distribution Procedures. ------------------------------------- (i) Notice of any redemption of, or notice of distribution of the Debentures in exchange for, the Securities (a "Redemption/Distribution Notice") will be given by the Trust by ------------------------------- mail to each Holder of Securities to be redeemed or exchanged not fewer than 30 nor more than 60 days before the date fixed for redemption or exchange thereof which, in the case of a redemption, will be the date fixed for redemption of the Debentures. For purposes of the calculation of the date of redemption or exchange and the dates on which notices are given pursuant to this paragraph 4(e)(i), a Redemption/Distribution Notice shall be deemed to be given on the day such notice is first mailed by first-class mail, postage prepaid, to Holders of such Securities. Each Redemption/Distribution Notice shall be addressed to the Holders of such Securities at the address of each such Holder appearing on the books and records of the Trust. No defect in the Redemption/Distribution Notice or in the mailing thereof with respect to any Holder shall affect the validity of the redemption or exchange proceedings with respect to any other Holder. (ii) If the Securities are to be redeemed and the Trust gives a Redemption/ Distribution Notice, which notice may only be issued if the Debentures are redeemed as set out in this paragraph 4 (which notice will be irrevocable), then, provided that the -------- Institutional Trustee has a sufficient amount of cash in connection with the related redemption or maturity of the Debentures, the Institutional Trustee will pay the relevant Redemption Price or Special Redemption Price, as applicable, to the Holders of such Securities by check mailed to the address of each such Holder appearing on the books and records of the Trust on the Redemption Date. If a Redemption/Distribution Notice shall have been given and funds deposited as required then immediately prior to the close of business on the date of such deposit Distributions will cease to accrue on the Securities so called for redemption and all rights of Holders of such Securities so called for redemption will cease, except the right of the Holders of such Securities to receive the applicable Redemption Price or Special Redemption Price specified in paragraph 4(a), but without interest on such Redemption Price or Special Redemption Price. If payment of the Redemption Price or Special Redemption Price in respect of any Securities is improperly withheld or refused and not paid either by the Trust or by the Debenture Issuer as guarantor pursuant to the Guarantee, Distributions on such Securities will continue to accrue at the Distribution Rate from the original Redemption Date to the actual date of payment, in which case the actual payment date will be considered the date fixed for redemption for purposes of calculating the Redemption Price or Special Redemption Price. In the event of any redemption of the Capital Securities issued by the Trust in part, the Trust shall not be required to (i) issue, register the transfer of or exchange any Security during a period beginning at the opening of business fifteen days before any selection for redemption of the Capital Securities and ending at the close of business on the earliest date on which the relevant notice of redemption is deemed to have been given to all Holders of the Capital Securities to be so redeemed or (ii) register the transfer of or exchange any Capital Securities so selected for redemption, in whole or in part, except for the unredeemed portion of any Capital Securities being redeemed in part. (iii) Redemption/Distribution Notices shall be sent by the Administrators on behalf of the Trust to (A) in respect of the Capital Securities, the Holders thereof and (B) in respect of the Common Securities, the Holder thereof. (iv) Subject to the foregoing and applicable law (including, without limitation, United States federal securities laws), and provided that the acquiror is not the Holder of the Common Securities or the obligor nder the Indenture, the Sponsor or any of its subsidiaries may at any time and from time to time purchase outstanding Capital Securities by tender, in the open market or by private agreement. 5. Voting Rights - Capital Securities. ---------------------------------- (a) Except as provided under paragraphs 5(b) and 7 and as otherwise required by law and the Declaration, the Holders of the Capital Securities will have no voting rights. The Administrators are required to call a meeting of the Holders of the Capital Securities if directed to do so by Holders of at least 10% in liquidation amount of the Capital Securities. (b) Subject to the requirements of obtaining a tax opinion by the Institutional Trustee in certain circumstances set forth in the last sentence of this paragraph, the Holders of a Majority in liquidation amount of the Capital Securities, voting separately as a class, have the right to direct the time, method, and place of conducting any proceeding for any remedy available to the Institutional Trustee, or exercising any trust or power conferred upon the Institutional Trustee under the Declaration, including the right to direct the Institutional Trustee, as holder of the Debentures, to (i) exercise the remedies available under the Indenture as the holder of the Debentures, (ii) waive any past default that is waivable under the Indenture, (iii) exercise any right to rescind or annul a declaration that the principal of all the Debentures shall be due and payable or (iv) consent on behalf of all the Holders of the Capital Securities to any amendment, modification or termination of the Indenture or the Debentures where such consent shall be required; provided, however, that, where a consent or action under the Indenture would - -------- ------- require the consent or act of the holders of greater than a simple majority in aggregate principal amount of Debentures (a "Super Majority") affected thereby, -------------- the Institutional Trustee may only give such consent or take such action at the written direction of the Holders of at least the proportion in liquidation amount of the Capital Securities outstanding which the relevant Super Majority represents of the aggregate principal amount of the Debentures outstanding. If the Institutional Trustee fails to enforce its rights under the Debentures after the Holders of a Majority in liquidation amount of such Capital Securities have so directed the Institutional Trustee, to the fullest extent permitted by law, a Holder of the Capital Securities may institute a legal proceeding directly against the Debenture Issuer to enforce the Institutional Trustee's rights under the Debentures without first instituting any legal proceeding against the Institutional Trustee or any other person or entity. Notwithstanding the foregoing, if an Event of Default has occurred and is continuing and such event is attributable to the failure of the Debenture Issuer to pay interest or principal on the Debentures on the date the interest or principal is payable (or in the case of redemption, the Redemption Date or the Special Redemption Date, as applicable), then a Holder of record of the Capital Securities may directly institute a proceeding for enforcement of payment, on or after the respective due dates specified in the Debentures, to such Holder directly of the principal of or interest on the Debentures having an aggregate principal amount equal to the aggregate liquidation amount of the Capital Securities of such Holder. The Institutional Trustee shall notify all Holders of the Capital Securities of any default actually known to the Institutional Trustee with respect to the Debentures unless (x) such default has been cured prior to the giving of such notice or (y) the Institutional Trustee determines in good faith that the withholding of such notice is in the interest of the Holders of such Capital Securities, except where the default relates to the payment of principal of or interest on any of the Debentures. Such notice shall state that such Indenture Event of Default also constitutes an Event of Default hereunder. Except with respect to directing the time, method and place of conducting a proceeding for a remedy, the Institutional Trustee shall not take any of the actions described in clauses (i), (ii) or (iii) above unless the Institutional Trustee has obtained an opinion of tax counsel to the effect that, as a result of such action, the Trust will not be classified as other than a grantor trust for United States federal income tax purposes. In the event the consent of the Institutional Trustee, as the holder of the Debentures, is required under the Indenture with respect to any amendment, modification or termination of the Indenture, the Institutional Trustee shall request the direction of the Holders of the Securities with respect to such amendment, modification or termination and shall vote with respect to such amendment, modification or termination as directed by a Majority in liquidation amount of the Securities voting together as a single class; provided, however, -------- ------- that where a consent under the Indenture would require the consent of a Super-Majority, the Institutional Trustee may only give such consent at the direction of the Holders of at least the proportion in liquidation amount of the Securities outstanding which the relevant Super-Majority represents of the aggregate principal amount of the Debentures outstanding. The Institutional Trustee shall not take any such action in accordance with the directions of the Holders of the Securities unless the Institutional Trustee has obtained an opinion of tax counsel to the effect that, as a result of such action, the Trust will not be classified as other than a grantor trust for United States federal income tax purposes. A waiver of an Indenture Event of Default will constitute a waiver of the corresponding Event of Default hereunder. Any required approval or direction of Holders of the Capital Securities may be given at a separate meeting of Holders of the Capital Securities convened for such purpose, at a meeting of all of the Holders of the Securities in the Trust or pursuant to written consent. The Institutional Trustee will cause a notice of any meeting at which Holders of the Capital Securities are entitled to vote, or of any matter upon which action by written consent of such Holders is to be taken, to be mailed to each Holder of record of the Capital Securities. Each such notice will include a statement setting forth the following information (i) the date of such meeting or the date by which such action is to be taken, (ii) a description of any resolution proposed for adoption at such meeting on which such Holders are entitled to vote or of such matter upon which written consent is sought and (iii) instructions for the delivery of proxies or consents. No vote or consent of the Holders of the Capital Securities will be required for the Trust to redeem and cancel Capital Securities or to distribute the Debentures in accordance with the Declaration and the terms of the Securities. Notwithstanding that Holders of the Capital Securities are entitled to vote or consent under any of the circumstances described above, any of the Capital Securities that are owned by the Sponsor or any Affiliate of the Sponsor shall not entitle the Holder thereof to vote or consent and shall, for purposes of such vote or consent, be treated as if such Capital Securities were not outstanding. In no event will Holders of the Capital Securities have the right to vote to appoint, remove or replace the Administrators, which voting rights are vested exclusively in the Sponsor as the Holder of all of the Common Securities of the Trust. Under certain circumstances as more fully described in the Declaration, Holders of Capital Securities have the right to vote to appoint, remove or replace the Institutional Trustee and the Delaware Trustee. 6. Voting Rights - Common Securities. --------------------------------- (a) Except as provided under paragraphs 6(b), 6(c) and 7 and as otherwise required by law and the Declaration, the Common Securities will have no voting rights. (b) The Holders of the Common Securities are entitled, in accordance with Article IV of the Declaration, to vote to appoint, remove or replace any Administrators. (c) Subject to Section 6.9 of the Declaration and only after each Event of Default (if any) with respect to the Capital Securities has been cured, waived, or otherwise eliminated and subject to the requirements of the second to last sentence of this paragraph, the Holders of a Majority in liquidation amount of the Common Securities, voting separately as a class, may direct the time, method, and place of conducting any proceeding for any remedy available to the Institutional Trustee, or exercising any trust or power conferred upon the Institutional Trustee under the Declaration, including (i) directing the time, method, place of conducting any proceeding for any remedy available to the Debenture Trustee, or exercising any trust or power conferred on the Debenture Trustee with respect to the Debentures, (ii) waiving any past default and its consequences that is waivable under the Indenture, or (iii) exercising any right to rescind or annul a declaration that the principal of all the Debentures shall be due and payable; provided, however, that, where a -------- ------- consent or action under the Indenture would require a Super Majority, the Institutional Trustee may only give such consent or take such action at the written direction of the Holders of at least the proportion in liquidation amount of the Common Securities which the relevant Super Majority represents of the aggregate principal amount of the Debentures outstanding. Notwithstanding this paragraph 6(c), the Institutional Trustee shall not revoke any action previously authorized or approved by a vote or consent of the Holders of the Capital Securities. Other than with respect to directing the time, method and place of conducting any proceeding for any remedy available to the Institutional Trustee or the Debenture Trustee as set forth above, the Institutional Trustee shall not take any action described in (i), (ii) or (iii) above, unless the Institutional Trustee has obtained an opinion of tax counsel to the effect that for the purposes of United States federal income tax the Trust will not be classified as other than a grantor trust on account of such action. If the Institutional Trustee fails to enforce its rights, to the fullest extent permitted by law, under the Declaration, any Holder of the Common Securities may institute a legal proceeding directly against any Person to enforce the Institutional Trustee's rights under the Declaration, without first instituting a legal proceeding against the Institutional Trustee or any other Person. Any approval or direction of Holders of the Common Securities may be given at a separate meeting of Holders of the Common Securities convened for such purpose, at a meeting of all of the Holders of the Securities in the Trust or pursuant to written consent. The Administrators will cause a notice of any meeting at which Holders of the Common Securities are entitled to vote, or of any matter upon which action by written consent of such Holders is to be taken, to be mailed to each Holder of the Common Securities. Each such notice will include a statement setting forth (i) the date of such meeting or the date by which such action is to be taken, (ii) a description of any resolution proposed for adoption at such meeting on which such Holders are entitled to vote or of such matter upon which written consent is sought and (iii) instructions for the delivery of proxies or consents. No vote or consent of the Holders of the Common Securities will be required for the Trust to redeem and cancel Common Securities or to distribute the Debentures in accordance with the Declaration and the terms of the Securities. 7. Amendments to Declaration and Indenture. --------------------------------------- (a) In addition to any requirements under Section 11.1 of the Declaration, if any proposed amendment to the Declaration provides for, or the Trustees, Sponsor or Administrators otherwise propose to effect, (i) any action that would adversely affect the powers, preferences or special rights of the Securities, whether by way of amendment to the Declaration or otherwise, or (ii) the Liquidation of the Trust, other than as described in Section 7.1 of the Declaration, then the Holders of outstanding Securities, voting together as a single class, will be entitled to vote on such amendment or proposal and such amendment or proposal shall not be effective except with the approval of the Holders of at least a Majority in liquidation amount of the Securities, affected thereby; provided, however, if any amendment or proposal referred to in clause -------- ------- (i) above would adversely affect only the Capital Securities or only the Common Securities, then only the affected class will be entitled to vote on such amendment or proposal and such amendment or proposal shall not be effective except with the approval of a Majority in liquidation amount of such class of Securities. (b) In the event the consent of the Institutional Trustee as the holder of the Debentures is required under the Indenture with respect to any amendment, modification or termination of the Indenture or the Debentures, the Institutional Trustee shall request the written direction of the Holders of the Securities with respect to such amendment, modification or termination and shall vote with respect to such amendment, modification, or termination as directed by a Majority in liquidation amount of the Securities voting together as a single class; provided, however, that where a consent under the Indenture would require -------- ------- a Super Majority, the Institutional Trustee may only give such consent at the direction of the Holders of at least the proportion in liquidation amount of the Securities which the relevant Super Majority represents of the aggregate principal amount of the Debentures outstanding. (c) Notwithstanding the foregoing, no amendment or modification may be made to the Declaration if such amendment or modification would (i) cause the Trust to be classified for purposes of United States federal income taxation as other than a grantor trust, (ii) reduce or otherwise adversely affect the powers of the Institutional Trustee or (iii) cause the Trust to be deemed an Investment Company which is required to be registered under the Investment Company Act. (d) Notwithstanding any provision of the Declaration, the right of any Holder of the Capital Securities to receive payment of distributions and other payments upon redemption or otherwise, on or after their respective due dates, or to institute a suit for the enforcement of any such payment on or after such respective dates, shall not be impaired or affected without the consent of such Holder. For the protection and enforcement of the foregoing provision, each and every Holder of the Capital Securities shall be entitled to such relief as can be given either at law or equity. 8. Pro Rata. A reference in these terms of the Securities to --------- any payment, distribution or treatment as being "Pro Rata" shall mean pro rata -------- to each Holder of the Securities according to the aggregate liquidation amount of the Securities held by the relevant Holder in relation to the aggregate liquidation amount of all Securities then outstanding unless, in relation to a payment, an Event of Default has occurred and is continuing, in which case any funds available to make such payment shall be paid first to each Holder of the Capital Securities Pro Rata according to the aggregate liquidation amount of the Capital Securities held by the relevant Holder relative to the aggregate liquidation amount of all Capital Securities outstanding, and only after satisfaction of all amounts owed to the Holders of the Capital Securities, to each Holder of the Common Securities Pro Rata according to the aggregate liquidation amount of the Common Securities held by the relevant Holder relative to the aggregate liquidation amount of all Common Securities outstanding. 9. Ranking. The Capital Securities rank pari passu with and ------- payment thereon shall be made Pro Rata with the Common Securities except that, where an Event of Default has occurred and is continuing, the rights of Holders of the Common Securities to receive payment of Distributions and payments upon liquidation, redemption and otherwise are subordinated to the rights of the Holders of the Capital Securities with the result that no payment of any Distribution on, or Redemption Price (or Special Redemption Price) of, any Common Security, and no other payment on account of redemption, liquidation or other acquisition of Common Securities, shall be made unless payment in full in cash of all accumulated and unpaid Distributions on all outstanding Capital Securities for all distribution periods terminating on or prior thereto, or in the case of payment of the Redemption Price (or Special Redemption Price) the full amount of such Redemption Price (or Special Redemption Price) on all outstanding Capital Securities then called for redemption, shall have been made or provided for, and all funds immediately available to the Institutional Trustee shall first be applied to the payment in full in cash of all Distributions on, or the Redemption Price (or Special Redemption Price) of, the Capital Securities then due and payable. 10. Acceptance of Guarantee and Indenture. Each Holder of the -------------------------------------- Capital Securities and the Common Securities, by the acceptance of such Securities, agrees to the provisions of the Guarantee, including the subordination provisions therein and to the provisions of the Indenture. 11. No Preemptive Rights. The Holders of the Securities shall have -------------------- no preemptive or similar rights to subscribe for any additional securities. 12. Miscellaneous. These terms constitute a part of the ------------- Declaration. The Sponsor will provide a copy of the Declaration, the Guarantee, and the Indenture to a Holder without charge on written request to the Sponsor at its principal place of business. EXHIBIT A-1 FORM OF CAPITAL SECURITY CERTIFICATE [FORM OF FACE OF SECURITY] THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), ANY STATE SECURITIES LAWS OR ANY OTHER APPLICABLE SECURITIES LAW. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND ANY APPLICABLE STATE SECURITIES LAWS. THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF AGREES TO OFFER, SELL OR OTHERWISE TRANSFER THIS SECURITY ONLY (A) TO THE SPONSOR OR THE TRUST, (B) PURSUANT TO A REGISTRATION STATEMENT THAT HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C) TO A PERSON WHOM THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A SO LONG AS THIS SECURITY IS ELIGIBLE FOR RESALE PURSUANT TO RULE 144A IN ACCORDANCE WITH RULE 144A, (D) TO A NON-U.S. PERSON IN AN OFFSHORE TRANSACTION IN ACCORDANCE WITH RULE 903 OR RULE 904 (AS APPLICABLE) OF REGULATION S UNDER THE SECURITIES ACT, (E) TO AN INSTITUTIONAL "ACCREDITED INVESTOR" WITHIN THE MEANING OF SUBPARAGRAPH (A) OF RULE 501 UNDER THE SECURITIES ACT THAT IS ACQUIRING THIS CAPITAL SECURITY FOR ITS OWN ACCOUNT, OR FOR THE ACCOUNT OF SUCH AN INSTITUTIONAL ACCREDITED INVESTOR, FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO, OR FOR OFFER OR SALE IN CONNECTION WITH, ANY DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT, OR (F) PURSUANT TO ANY OTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, SUBJECT TO THE SPONSOR'S AND THE TRUST'S RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATION AND/OR OTHER INFORMATION SATISFACTORY TO EACH OF THEM IN ACCORDANCE WITH THE DECLARATION OF TRUST, A COPY OF WHICH MAY BE OBTAINED FROM THE SPONSOR OR THE TRUST. HEDGING TRANSACTIONS INVOLVING THIS SECURITY MAY NOT BE CONDUCTED UNLESS IN COMPLIANCE WITH THE SECURITIES ACT. THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF ALSO AGREES, REPRESENTS AND WARRANTS THAT IT IS NOT AN EMPLOYEE BENEFIT, INDIVIDUAL RETIREMENT ACCOUNT OR OTHER PLAN OR ARRANGEMENT SUBJECT TO TITLE I OF THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974, AS AMENDED ("ERISA"), OR SECTION 4975 OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED (THE "CODE") (EACH A "PLAN"), OR AN ENTITY WHOSE UNDERLYING ASSETS INCLUDE "PLAN ASSETS" BY REASON OF ANY PLAN'S INVESTMENT IN THE ENTITY, AND NO PERSON INVESTING "PLAN ASSETS" OF ANY PLAN MAY ACQUIRE OR HOLD THE SECURITIES OR ANY INTEREST THEREIN, UNLESS SUCH PURCHASER OR HOLDER IS ELIGIBLE FOR EXEMPTIVE RELIEF AVAILABLE UNDER U.S. DEPARTMENT OF LABOR PROHIBITED TRANSACTION CLASS EXEMPTION 96-23, 95-60, 91-38, 90-1 OR 84-14 OR ANOTHER APPLICABLE EXEMPTION OR ITS PURCHASE AND HOLDING OF THIS SECURITY IS NOT PROHIBITED BY SECTION 406 OF ERISA OR SECTION 4975 OF THE CODE WITH RESPECT TO SUCH PURCHASE OR HOLDING. ANY PURCHASER OR HOLDER OF THE SECURITIES OR ANY INTEREST THEREIN WILL BE DEEMED TO HAVE REPRESENTED BY ITS PURCHASE AND HOLDING THEREOF THAT EITHER (i) IT IS NOT AN EMPLOYEE BENEFIT PLAN WITHIN THE MEANING OF SECTION 3(3) OF ERISA, OR A PLAN TO WHICH SECTION 4975 OF THE CODE IS APPLICABLE, A TRUSTEE OR OTHER PERSON ACTING ON BEHALF OF AN EMPLOYEE BENEFIT PLAN OR PLAN, OR ANY OTHER PERSON OR ENTITY USING THE ASSETS OF ANY EMPLOYEE BENEFIT PLAN OR PLAN TO FINANCE SUCH PURCHASE, OR (ii) SUCH PURCHASE WILL NOT RESULT IN A PROHIBITED TRANSACTION UNDER SECTION 406 OF ERISA OR SECTION 4975 OF THE CODE FOR WHICH THERE IS NO APPLICABLE STATUTORY OR ADMINISTRATIVE EXEMPTION. THIS SECURITY WILL BE ISSUED AND MAY BE TRANSFERRED ONLY IN BLOCKS HAVING A LIQUIDATION AMOUNT OF NOT LESS THAN $100,000.00 (100 SECURITIES) AND MULTIPLES OF $1,000.00 IN EXCESS THEREOF. ANY ATTEMPTED TRANSFER OF SECURITIES IN A BLOCK HAVING A LIQUIDATION AMOUNT OF LESS THAN $100,000.00 SHALL BE DEEMED TO BE VOID AND OF NO LEGAL EFFECT WHATSOEVER. THE HOLDER OF THIS SECURITY AGREES THAT IT WILL COMPLY WITH THE FOREGOING RESTRICTIONS. IN CONNECTION WITH ANY TRANSFER, THE HOLDER WILL DELIVER TO THE REGISTRAR AND TRANSFER AGENT SUCH CERTIFICATES AND OTHER INFORMATION AS MAY BE REQUIRED BY THE DECLARATION TO CONFIRM THAT THE TRANSFER COMPLIES WITH THE FOREGOING RESTRICTIONS. Certificate Number P-1 20,000 Capital Securities [CUSIP NO. [_______] **To be inserted at the request of the Holder] December 14, 2006 Certificate Evidencing Floating Rate Capital Securities of First Bank Statutory Trust VII (liquidation amount $1,000.00 per Capital Security) First Bank Statutory Trust VII, a statutory trust created under the laws of the State of Delaware (the "Trust"), hereby certifies that Hare & Co. (the "Holder"), as the nominee of The Bank of New York, indenture trustee under the Indenture dated as of December 14, 2006 among Preferred Term Securities XXIV, Ltd., Preferred Term Securities XXIV, Inc. and The Bank of New York, is the registered owner of capital securities of the Trust representing undivided beneficial interests in the assets of the Trust, (liquidation amount $1,000.00 per capital security) (the "Capital Securities"). Subject to the Declaration (as defined below), the Capital Securities are transferable on the books and records of the Trust in person or by a duly authorized attorney, upon surrender of this Certificate duly endorsed and in proper form for transfer. The Capital Securities represented hereby are issued pursuant to, and the designation, rights, privileges, restrictions, preferences and other terms and provisions of the Capital Securities shall in all respects be subject to, the provisions of the Amended and Restated Declaration of Trust of the Trust dated as of December 14, 2006, among Terrance M. McCarthy, Peter D. Wimmer and Lisa K. Vansickle, as Administrators, Wilmington Trust Company, as Delaware Trustee, Wilmington Trust Company, as Institutional Trustee, First Banks, Inc., as Sponsor, and the holders from time to time of undivided beneficial interests in the assets of the Trust, including the designation of the terms of the Capital Securities as set forth in Annex I to such amended and restated declaration as the same may be amended from time to time (the "Declaration"). Capitalized terms used herein but not defined shall have the meaning given them in the Declaration. The Holder is entitled to the benefits of the Guarantee to the extent provided therein. The Sponsor will provide a copy of the Declaration, the Guarantee, and the Indenture to the Holder without charge upon written request to the Sponsor at its principal place of business. Upon receipt of this Security, the Holder is bound by the Declaration and is entitled to the benefits thereunder. By acceptance of this Security, the Holder agrees to treat, for United States federal income tax purposes, the Debentures as indebtedness and the Capital Securities as evidence of beneficial ownership in the Debentures. This Capital Security is governed by, and construed in accordance with, the laws of the State of Delaware, without regard to principles of conflict of laws. Signatures appear on following page IN WITNESS WHEREOF, the Trust has duly executed this certificate. FIRST BANK STATUTORY TRUST VII By: --------------------------------------------- Name: Title: Administrator CERTIFICATE OF AUTHENTICATION ----------------------------- This is one of the Capital Securities referred to in the within-mentioned Declaration. WILMINGTON TRUST COMPANY, as the Institutional Trustee By: --------------------------------------------- Authorized Officer [FORM OF REVERSE OF CAPITAL SECURITY] Distributions payable on each Capital Security will be payable at an annual rate equal to 7.20% beginning on (and including) the date of original issuance and ending on (but excluding) the Distribution Payment Date in March 2007 and at an annual rate for each successive period beginning on (and including) the Distribution Payment Date in March 2007, and each succeeding Distribution Payment Date, and ending on (but excluding) the next succeeding Distribution Payment Date (each a "Distribution Period"), equal to 3-Month LIBOR, determined as described below, plus 1.85% (the "Coupon Rate"), applied to the stated liquidation amount of $1,000.00 per Capital Security, such rate being the rate of interest payable on the Debentures to be held by the Institutional Trustee. Distributions in arrears will bear interest thereon compounded quarterly at the Distribution Rate (to the extent permitted by applicable law). The term "Distributions" as used herein includes cash distributions and any such compounded distributions unless otherwise noted. A Distribution is payable only to the extent that payments are made in respect of the Debentures held by the Institutional Trustee and to the extent the Institutional Trustee has funds available therefor. As used herein, "Determination Date" means the date that is two London Banking Days (i.e., a business day in which dealings in deposits in U.S. dollars are transacted in the London interbank market) preceding the commencement of the relevant Distribution Period. The amount of the Distribution payable for any Distribution Period will be calculated by applying the Distribution Rate to the stated liquidation amount outstanding at the commencement of the Distribution Period on the basis of the actual number of days in the Distribution Period concerned divided by 360. "3-Month LIBOR" as used herein, means the London interbank offered interest rate for three-month U.S. dollar deposits determined by the Debenture Trustee in the following order of priority: (i) the rate (expressed as a percentage per annum) for U.S. dollar deposits having a three-month maturity that appears on Telerate Page 3750 as of 11:00 a.m. (London time) on the related Determination Date ("Telerate Page 3750" means the display designated as "Page 3750" on the Moneyline Telerate Service or such other page as may replace Page 3750 on that service or such other service or services as may be nominated by the British Bankers' Association as the information vendor for the purpose of displaying London interbank offered rates for U.S. dollar deposits); (ii) if such rate cannot be identified on the related Determination Date, the Debenture Trustee will request the principal London offices of four leading banks in the London interbank market to provide such banks' offered quotations (expressed as percentages per annum) to prime banks in the London interbank market for U.S. dollar deposits having a three-month maturity as of 11:00 a.m. (London time) on such Determination Date. If at least two quotations are provided, 3-Month LIBOR will be the arithmetic mean of such quotations; (iii) if fewer than two such quotations are provided as requested in clause (ii) above, the Debenture Trustee will request four major New York City banks to provide such banks' offered quotations (expressed as percentages per annum) to leading European banks for loans in U.S. dollars as of 11:00 a.m. (London time) on such Determination Date. If at least two such quotations are provided, 3-Month LIBOR will be the arithmetic mean of such quotations; and (iv) if fewer than two such quotations are provided as requested in clause (iii) above, 3-Month LIBOR will be a 3-Month LIBOR determined with respect to the Distribution Period immediately preceding such current Distribution Period. If the rate for U.S. dollar deposits having a three-month maturity that initially appears on Telerate Page 3750 as of 11:00 a.m. (London time) on the related Determination Date is superseded on the Telerate Page 3750 by a corrected rate by 12:00 noon (London time) on such Determination Date, then the corrected rate as so substituted on the applicable page will be the applicable 3-Month LIBOR for such Determination Date. The Distribution Rate for any Distribution Period will at no time be higher than the maximum rate then permitted by New York law as the same may be modified by United States law. All percentages resulting from any calculations on the Capital Securities will be rounded, if necessary, to the nearest one hundred-thousandth of a percentage point, with five one-millionths of a percentage point rounded upward (e.g., 9.876545% (or .09876545) being rounded to 9.87655% (or .0987655), and all dollar amounts used in or resulting from such calculation will be rounded to the nearest cent (with one-half cent being rounded upward)). Except as otherwise described below, Distributions on the Capital Securities will be cumulative, will accrue from the date of original issuance and will be payable quarterly in arrears on March 15, June 15, September 15 and December 15 of each year or if any such day is not a Business Day, then the next succeeding Business Day (each such day, a "Distribution Payment Date") (it being understood that interest accrues for any such non-Business Day), commencing on the Distribution Payment Date in March 2007. The Debenture Issuer has the right under the Indenture to defer payments of interest on the Debentures, so long as no Acceleration Event of Default has occurred and is continuing, by extending the interest payment period for up to 20 consecutive quarterly periods (each an "Extension Period") at any time and from time to time on the Debentures, subject to the conditions described below, during which Extension Period no interest shall be due and payable. During any Extension Period, interest will continue to accrue on the Debentures, and interest on such accrued interest will accrue at an annual rate equal to the Distribution Rate in effect for each such Extension Period, compounded quarterly from the date such interest would have been payable were it not for the Extension Period, to the extent permitted by law (such interest referred to herein as "Additional Interest"). No Extension Period may end on a date other than a Distribution Payment Date. At the end of any such Extension Period, the Debenture Issuer shall pay all interest then accrued and unpaid on the Debentures (together with Additional Interest thereon); provided, -------- however, that no Extension Period may extend beyond the Maturity Date. Prior to - ------- the termination of any Extension Period, the Debenture Issuer may further extend such period, provided that such period together with all such previous and further consecutive extensions thereof shall not exceed 20 consecutive quarterly periods, or extend beyond the Maturity Date. Upon the termination of any Extension Period and upon the payment of all accrued and unpaid interest and Additional Interest, the Debenture Issuer may commence a new Extension Period, subject to the foregoing requirements. No interest or Additional Interest shall be due and payable during an Extension Period, except at the end thereof, but each installment of interest that would otherwise have been due and payable during such Extension Period shall bear Additional Interest. During any Extension Period, Distributions on the Capital Securities shall be deferred for a period equal to the Extension Period. If Distributions are deferred, the Distributions due shall be paid on the date that the related Extension Period terminates, to Holders of the Securities as they appear on the books and records of the Trust on the record date immediately preceding such date. Distributions on the Securities must be paid on the dates payable (after giving effect to any Extension Period) to the extent that the Trust has funds available for the payment of such distributions in the Property Account of the Trust. The Trust's funds available for Distribution to the Holders of the Securities will be limited to payments received from the Debenture Issuer. The payment of Distributions out of moneys held by the Trust is guaranteed by the Guarantor pursuant to the Guarantee. The Capital Securities shall be redeemable as provided in the Declaration. ASSIGNMENT FOR VALUE RECEIVED, the undersigned assigns and transfers this Capital Security Certificate to: -------------------------------------------------------------------- (Insert assignee's social security or tax identification number) ---- -------------------------------------------------------------------- -------------------------------------------------------------------- (Insert address and zip code of assignee) and irrevocably appoints -------------------------------------------------------------------- agent to transfer this Capital Security Certificate on the books of the Trust. The agent may substitute another to act for him or her. Date: --------------------------------------- Signature: ---------------------------------- (Sign exactly as your name appears on the other side of this Capital Security Certificate) Signature Guarantee:1 - ---------------------------------- 1 Signature must be guaranteed by an "eligible guarantor institution" that is a bank, stockbroker, savings and loan association or credit union meeting the requirements of the Security registrar, which requirements include membership or participation in the Securities Transfer Agents Medallion Program ("STAMP") or such other "signature guarantee program" as may be determined by the Security registrar in addition to, or in substitution for, STAMP, all in accordance with the Securities Exchange Act of 1934, as amended. EXHIBIT A-2 FORM OF CAPITAL SECURITY CERTIFICATE [FORM OF FACE OF SECURITY] THIS CAPITAL SECURITY IS A GLOBAL SECURITY WITHIN THE MEANING OF THE DECLARATION HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME OF THE DEPOSITORY TRUST COMPANY ("DTC") OR A NOMINEE OF DTC. THIS CAPITAL SECURITY IS EXCHANGEABLE FOR CAPITAL SECURITIES REGISTERED IN THE NAME OF A PERSON OTHER THAN DTC OR ITS NOMINEE ONLY IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE DECLARATION, AND NO TRANSFER OF THIS CAPITAL SECURITY (OTHER THAN A TRANSFER OF THIS CAPITAL SECURITY AS A WHOLE BY DTC TO A NOMINEE OF DTC OR BY A NOMINEE OF DTC TO DTC OR ANOTHER NOMINEE OF DTC) MAY BE REGISTERED EXCEPT IN LIMITED CIRCUMSTANCES. UNLESS THIS CAPITAL SECURITY IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF DTC TO FIRST BANK STATUTORY TRUST VII OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CAPITAL SECURITY ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT HEREON IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN. THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), ANY STATE SECURITIES LAWS OR ANY OTHER APPLICABLE SECURITIES LAW. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND ANY APPLICABLE STATE SECURITIES LAWS. THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF AGREES TO OFFER, SELL OR OTHERWISE TRANSFER THIS SECURITY ONLY (A) TO THE SPONSOR OR THE TRUST, (B) PURSUANT TO A REGISTRATION STATEMENT THAT HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C) TO A PERSON WHOM THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A SO LONG AS THIS SECURITY IS ELIGIBLE FOR RESALE PURSUANT TO RULE 144A IN ACCORDANCE WITH RULE 144A, (D) TO A NON-U.S. PERSON IN AN OFFSHORE TRANSACTION IN ACCORDANCE WITH RULE 903 OR RULE 904 (AS APPLICABLE) OF REGULATION S UNDER THE SECURITIES ACT, (E) TO AN INSTITUTIONAL "ACCREDITED INVESTOR" WITHIN THE MEANING OF SUBPARAGRAPH (A) OF RULE 501 UNDER THE SECURITIES ACT THAT IS ACQUIRING THIS CAPITAL SECURITY FOR ITS OWN ACCOUNT, OR FOR THE ACCOUNT OF SUCH AN INSTITUTIONAL ACCREDITED INVESTOR, FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO, OR FOR OFFER OR SALE IN CONNECTION WITH, ANY DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT, OR (F) PURSUANT TO ANY OTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, SUBJECT TO THE SPONSOR'S AND THE TRUST'S RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATION AND/OR OTHER INFORMATION SATISFACTORY TO EACH OF THEM IN ACCORDANCE WITH THE DECLARATION OF TRUST, A COPY OF WHICH MAY BE OBTAINED FROM THE SPONSOR OR THE TRUST. HEDGING TRANSACTIONS INVOLVING THIS SECURITY MAY NOT BE CONDUCTED UNLESS IN COMPLIANCE WITH THE SECURITIES ACT. THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF ALSO AGREES, REPRESENTS AND WARRANTS THAT IT IS NOT AN EMPLOYEE BENEFIT, INDIVIDUAL RETIREMENT ACCOUNT OR OTHER PLAN OR ARRANGEMENT SUBJECT TO TITLE I OF THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974, AS AMENDED ("ERISA"), OR SECTION 4975 OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED (THE "CODE") (EACH A "PLAN"), OR AN ENTITY WHOSE UNDERLYING ASSETS INCLUDE "PLAN ASSETS" BY REASON OF ANY PLAN'S INVESTMENT IN THE ENTITY, AND NO PERSON INVESTING "PLAN ASSETS" OF ANY PLAN MAY ACQUIRE OR HOLD THE SECURITIES OR ANY INTEREST THEREIN, UNLESS SUCH PURCHASER OR HOLDER IS ELIGIBLE FOR EXEMPTIVE RELIEF AVAILABLE UNDER U.S. DEPARTMENT OF LABOR PROHIBITED TRANSACTION CLASS EXEMPTION 96-23, 95-60, 91-38, 90-1 OR 84-14 OR ANOTHER APPLICABLE EXEMPTION OR ITS PURCHASE AND HOLDING OF THIS SECURITY IS NOT PROHIBITED BY SECTION 406 OF ERISA OR SECTION 4975 OF THE CODE WITH RESPECT TO SUCH PURCHASE OR HOLDING. ANY PURCHASER OR HOLDER OF THE SECURITIES OR ANY INTEREST THEREIN WILL BE DEEMED TO HAVE REPRESENTED BY ITS PURCHASE AND HOLDING THEREOF THAT EITHER (i) IT IS NOT AN EMPLOYEE BENEFIT PLAN WITHIN THE MEANING OF SECTION 3(3) OF ERISA, OR A PLAN TO WHICH SECTION 4975 OF THE CODE IS APPLICABLE, A TRUSTEE OR OTHER PERSON ACTING ON BEHALF OF AN EMPLOYEE BENEFIT PLAN OR PLAN, OR ANY OTHER PERSON OR ENTITY USING THE ASSETS OF ANY EMPLOYEE BENEFIT PLAN OR PLAN TO FINANCE SUCH PURCHASE, OR (ii) SUCH PURCHASE WILL NOT RESULT IN A PROHIBITED TRANSACTION UNDER SECTION 406 OF ERISA OR SECTION 4975 OF THE CODE FOR WHICH THERE IS NO APPLICABLE STATUTORY OR ADMINISTRATIVE EXEMPTION. THIS SECURITY WILL BE ISSUED AND MAY BE TRANSFERRED ONLY IN BLOCKS HAVING A LIQUIDATION AMOUNT OF NOT LESS THAN $100,000.00 (100 SECURITIES) AND MULTIPLES OF $1,000.00 IN EXCESS THEREOF. ANY ATTEMPTED TRANSFER OF SECURITIES IN A BLOCK HAVING A LIQUIDATION AMOUNT OF LESS THAN $100,000.00 SHALL BE DEEMED TO BE VOID AND OF NO LEGAL EFFECT WHATSOEVER. THE HOLDER OF THIS SECURITY AGREES THAT IT WILL COMPLY WITH THE FOREGOING RESTRICTIONS. IN CONNECTION WITH ANY TRANSFER, THE HOLDER WILL DELIVER TO THE REGISTRAR AND TRANSFER AGENT SUCH CERTIFICATES AND OTHER INFORMATION AS MAY BE REQUIRED BY THE DECLARATION TO CONFIRM THAT THE TRANSFER COMPLIES WITH THE FOREGOING RESTRICTIONS. Certificate Number P-2 30,000 Capital Securities [CUSIP NO. [_______]] December 14, 2006 Certificate Evidencing Floating Rate Capital Securities of First Bank Statutory Trust VII (liquidation amount $1,000.00 per Capital Security) First Bank Statutory Trust VII, a statutory trust created under the laws of the State of Delaware (the "Trust"), hereby certifies that Cede & Co. (the "Holder") is the registered owner of capital securities of the Trust representing undivided beneficial interests in the assets of the Trust, (liquidation amount $1,000.00 per capital security) (the "Capital Securities"). Subject to the Declaration (as defined below), the Capital Securities are transferable on the books and records of the Trust in person or by a duly authorized attorney, upon surrender of this Certificate duly endorsed and in proper form for transfer. The Capital Securities represented hereby are issued pursuant to, and the designation, rights, privileges, restrictions, preferences and other terms and provisions of the Capital Securities shall in all respects be subject to, the provisions of the Amended and Restated Declaration of Trust of the Trust dated as of December 14, 2006, among Terrance M. McCarthy, Peter D. Wimmer and Lisa K. Vansickle, as Administrators, Wilmington Trust Company, as Delaware Trustee, Wilmington Trust Company, as Institutional Trustee, First Banks, Inc., as Sponsor, and the holders from time to time of undivided beneficial interests in the assets of the Trust, including the designation of the terms of the Capital Securities as set forth in Annex I to such amended and restated declaration as the same may be amended from time to time (the "Declaration"). Capitalized terms used herein but not defined shall have the meaning given them in the Declaration. The Holder is entitled to the benefits of the Guarantee to the extent provided therein. The Sponsor will provide a copy of the Declaration, the Guarantee, and the Indenture to the Holder without charge upon written request to the Sponsor at its principal place of business. Upon receipt of this Security, the Holder is bound by the Declaration and is entitled to the benefits thereunder. By acceptance of this Security, the Holder agrees to treat, for United States federal income tax purposes, the Debentures as indebtedness and the Capital Securities as evidence of beneficial ownership in the Debentures. This Capital Security is governed by, and construed in accordance with, the laws of the State of Delaware, without regard to principles of conflict of laws. Signatures appear on following page IN WITNESS WHEREOF, the Trust has duly executed this certificate. FIRST BANK STATUTORY TRUST VII By: ---------------------------------------------- Name: Title: Administrator CERTIFICATE OF AUTHENTICATION ----------------------------- This is one of the Capital Securities referred to in the within-mentioned Declaration. WILMINGTON TRUST COMPANY, as the Institutional Trustee By: ---------------------------------------------- Authorized Officer [FORM OF REVERSE OF CAPITAL SECURITY] Distributions payable on each Capital Security will be payable at an annual rate equal to 7.20% beginning on (and including) the date of original issuance and ending on (but excluding) the Distribution Payment Date in March 2007 and at an annual rate for each successive period beginning on (and including) the Distribution Payment Date in March 2007, and each succeeding Distribution Payment Date, and ending on (but excluding) the next succeeding Distribution Payment Date (each a "Distribution Period"), equal to 3-Month LIBOR, determined as described below, plus 1.85% (the "Coupon Rate"), applied to the stated liquidation amount of $1,000.00 per Capital Security, such rate being the rate of interest payable on the Debentures to be held by the Institutional Trustee. Distributions in arrears will bear interest thereon compounded quarterly at the Distribution Rate (to the extent permitted by applicable law). The term "Distributions" as used herein includes cash distributions and any such compounded distributions unless otherwise noted. A Distribution is payable only to the extent that payments are made in respect of the Debentures held by the Institutional Trustee and to the extent the Institutional Trustee has funds available therefor. As used herein, "Determination Date" means the date that is two London Banking Days (i.e., a business day in which dealings in deposits in U.S. dollars are transacted in the London interbank market) preceding the commencement of the relevant Distribution Period. The amount of the Distribution payable for any Distribution Period will be calculated by applying the Distribution Rate to the stated liquidation amount outstanding at the commencement of the Distribution Period on the basis of the actual number of days in the Distribution Period concerned divided by 360. "3-Month LIBOR" as used herein, means the London interbank offered interest rate for three-month U.S. dollar deposits determined by the Debenture Trustee in the following order of priority: (i) the rate (expressed as a percentage per annum) for U.S. dollar deposits having a three-month maturity that appears on Telerate Page 3750 as of 11:00 a.m. (London time) on the related Determination Date ("Telerate Page 3750" means the display designated as "Page 3750" on the Moneyline Telerate Service or such other page as may replace Page 3750 on that service or such other service or services as may be nominated by the British Bankers' Association as the information vendor for the purpose of displaying London interbank offered rates for U.S. dollar deposits); (ii) if such rate cannot be identified on the related Determination Date, the Debenture Trustee will request the principal London offices of four leading banks in the London interbank market to provide such banks' offered quotations (expressed as percentages per annum) to prime banks in the London interbank market for U.S. dollar deposits having a three-month maturity as of 11:00 a.m. (London time) on such Determination Date. If at least two quotations are provided, 3-Month LIBOR will be the arithmetic mean of such quotations; (iii) if fewer than two such quotations are provided as requested in clause (ii) above, the Debenture Trustee will request four major New York City banks to provide such banks' offered quotations (expressed as percentages per annum) to leading European banks for loans in U.S. dollars as of 11:00 a.m. (London time) on such Determination Date. If at least two such quotations are provided, 3-Month LIBOR will be the arithmetic mean of such quotations; and (iv) if fewer than two such quotations are provided as requested in clause (iii) above, 3-Month LIBOR will be a 3-Month LIBOR determined with respect to the Distribution Period immediately preceding such current Distribution Period. If the rate for U.S. dollar deposits having a three-month maturity that initially appears on Telerate Page 3750 as of 11:00 a.m. (London time) on the related Determination Date is superseded on the Telerate Page 3750 by a corrected rate by 12:00 noon (London time) on such Determination Date, then the corrected rate as so substituted on the applicable page will be the applicable 3-Month LIBOR for such Determination Date. The Distribution Rate for any Distribution Period will at no time be higher than the maximum rate then permitted by New York law as the same may be modified by United States law. All percentages resulting from any calculations on the Capital Securities will be rounded, if necessary, to the nearest one hundred-thousandth of a percentage point, with five one-millionths of a percentage point rounded upward (e.g., 9.876545% (or .09876545) being rounded to 9.87655% (or .0987655), and all dollar amounts used in or resulting from such calculation will be rounded to the nearest cent (with one-half cent being rounded upward)). Except as otherwise described below, Distributions on the Capital Securities will be cumulative, will accrue from the date of original issuance and will be payable quarterly in arrears on March 15, June 15, September 15 and December 15 of each year or if any such day is not a Business Day, then the next succeeding Business Day (each such day, a "Distribution Payment Date") (it being understood that interest accrues for any such non-Business Day), commencing on the Distribution Payment Date in March 2007. The Debenture Issuer has the right under the Indenture to defer payments of interest on the Debentures, so long as no Acceleration Event of Default has occurred and is continuing, by extending the interest payment period for up to 20 consecutive quarterly periods (each an "Extension Period") at any time and from time to time on the Debentures, subject to the conditions described below, during which Extension Period no interest shall be due and payable. During any Extension Period, interest will continue to accrue on the Debentures, and interest on such accrued interest will accrue at an annual rate equal to the Distribution Rate in effect for each such Extension Period, compounded quarterly from the date such interest would have been payable were it not for the Extension Period, to the extent permitted by law (such interest referred to herein as "Additional Interest"). No Extension Period may end on a date other than a Distribution Payment Date. At the end of any such Extension Period, the Debenture Issuer shall pay all interest then accrued and unpaid on the Debentures (together with Additional Interest thereon); provided, -------- however, that no Extension Period may extend beyond the Maturity Date. Prior to - ------- the termination of any Extension Period, the Debenture Issuer may further extend such period, provided that such period together with all such previous and further consecutive extensions thereof shall not exceed 20 consecutive quarterly periods, or extend beyond the Maturity Date. Upon the termination of any Extension Period and upon the payment of all accrued and unpaid interest and Additional Interest, the Debenture Issuer may commence a new Extension Period, subject to the foregoing requirements. No interest or Additional Interest shall be due and payable during an Extension Period, except at the end thereof, but each installment of interest that would otherwise have been due and payable during such Extension Period shall bear Additional Interest. During any Extension Period, Distributions on the Capital Securities shall be deferred for a period equal to the Extension Period. If Distributions are deferred, the Distributions due shall be paid on the date that the related Extension Period terminates, to Holders of the Securities as they appear on the books and records of the Trust on the record date immediately preceding such date. Distributions on the Securities must be paid on the dates payable (after giving effect to any Extension Period) to the extent that the Trust has funds available for the payment of such distributions in the Property Account of the Trust. The Trust's funds available for Distribution to the Holders of the Securities will be limited to payments received from the Debenture Issuer. The payment of Distributions out of moneys held by the Trust is guaranteed by the Guarantor pursuant to the Guarantee. The Capital Securities shall be redeemable as provided in the Declaration. ASSIGNMENT FOR VALUE RECEIVED, the undersigned assigns and transfers this Capital Security Certificate to: ------------------------------------------------------------------- (Insert assignee's social security or tax identification number) --- ------------------------------------------------------------------- ------------------------------------------------------------------- (Insert address and zip code of assignee) and irrevocably appoints ------------------------------------------------------------------- agent to transfer this Capital Security Certificate on the books of the Trust. The agent may substitute another to act for him or her. Date: --------------------------------------- Signature: ---------------------------------- (Sign exactly as your name appears on the other side of this Capital Security Certificate) Signature Guarantee:2 - --------------------------------- 2 Signature must be guaranteed by an "eligible guarantor institution" that is a bank, stockbroker, savings and loan association or credit union meeting the requirements of the Security registrar, which requirements include membership or participation in the Securities Transfer Agents Medallion Program ("STAMP") or such other "signature guarantee program" as may be determined by the Security registrar in addition to, or in substitution for, STAMP, all in accordance with the Securities Exchange Act of 1934, as amended. EXHIBIT A-3 FORM OF COMMON SECURITY CERTIFICATE THIS COMMON SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EXEMPTION FROM REGISTRATION. THIS CERTIFICATE IS NOT TRANSFERABLE EXCEPT IN COMPLIANCE WITH SECTION 8.1 OF THE DECLARATION. Certificate Number C-1 1,547 Common Securities December 14, 2006 Certificate Evidencing Floating Rate Common Securities of First Bank Statutory Trust VII First Bank Statutory Trust VII, a statutory trust created under the laws of the State of Delaware (the "Trust"), hereby certifies that First Banks, Inc. (the "Holder") is the registered owner of common securities of the Trust representing undivided beneficial interests in the assets of the Trust (the "Common Securities"). The Common Securities represented hereby are issued pursuant to, and the designation, rights, privileges, restrictions, preferences and other terms and provisions of the Common Securities shall in all respects be subject to, the provisions of the Amended and Restated Declaration of Trust of the Trust dated as of December 14, 2006, among Terrance M. McCarthy, Peter D. Wimmer and Lisa K. Vansickle, as Administrators, Wilmington Trust Company, as Delaware Trustee, Wilmington Trust Company, as Institutional Trustee, First Banks, Inc., as Sponsor, and the holders from time to time of undivided beneficial interest in the assets of the Trust including the designation of the terms of the Common Securities as set forth in Annex I to such amended and restated declaration, as the same may be amended from time to time (the "Declaration"). Capitalized terms used herein but not defined shall have the meaning given them in the Declaration. The Holder is entitled to the benefits of the Guarantee to the extent provided therein. The Sponsor will provide a copy of the Declaration, the Guarantee and the Indenture to the Holder without charge upon written request to the Sponsor at its principal place of business. As set forth in the Declaration, when an Event of Default has occurred and is continuing, the rights of Holders of Common Securities to payment in respect of Distributions and payments upon Liquidation, redemption or otherwise are subordinated to the rights of payment of Holders of the Capital Securities. Upon receipt of this Certificate, the Holder is bound by the Declaration and is entitled to the benefits thereunder. By acceptance of this Certificate, the Holder agrees to treat, for United States federal income tax purposes, the Debentures as indebtedness and the Common Securities as evidence of undivided beneficial ownership in the Debentures. This Common Security is governed by, and construed in accordance with, the laws of the State of Delaware, without regard to principles of conflict of laws. IN WITNESS WHEREOF, the Trust has duly executed this certificate. FIRST BANK STATUTORY TRUST VII By: ---------------------------------------- Name: Title: Administrator [FORM OF REVERSE OF COMMON SECURITY] Distributions payable on each Common Security will be payable at an annual rate equal to 7.20% beginning on (and including) the date of original issuance and ending on (but excluding) the Distribution Payment Date in March 2007 and at an annual rate for each successive period beginning on (and including) the Distribution Payment Date in March 2007, and each succeeding Distribution Payment Date, and ending on (but excluding) the next succeeding Distribution Payment Date (each a "Distribution Period"), equal to 3-Month LIBOR, determined as described below, plus 1.85% (the "Coupon Rate"), applied to the stated liquidation amount of $1,000.00 per Common Security, such rate being the rate of interest payable on the Debentures to be held by the Institutional Trustee. Distributions in arrears will bear interest thereon compounded quarterly at the Distribution Rate (to the extent permitted by applicable law). The term "Distributions" as used herein includes cash distributions and any such compounded distributions unless otherwise noted. A Distribution is payable only to the extent that payments are made in respect of the Debentures held by the Institutional Trustee and to the extent the Institutional Trustee has funds available therefor. As used herein, "Determination Date" means the date that is two London Banking Days (i.e., a business day in which dealings in deposits in U.S. dollars are transacted in the London interbank market) preceding the commencement of the relevant Distribution Period. The amount of the Distribution payable for any Distribution Period will be calculated by applying the Distribution Rate to the stated liquidation amount outstanding at the commencement of the Distribution Period on the basis of the actual number of days in the Distribution Period concerned divided by 360. "3-Month LIBOR" as used herein, means the London interbank offered interest rate for three-month U.S. dollar deposits determined by the Debenture Trustee in the following order of priority: (i) the rate (expressed as a percentage per annum) for U.S. dollar deposits having a three-month maturity that appears on Telerate Page 3750 as of 11:00 a.m. (London time) on the related Determination Date ("Telerate Page 3750" means the display designated as "Page 3750" on the Moneyline Telerate Service or such other page as may replace Page 3750 on that service or such other service or services as may be nominated by the British Bankers' Association as the information vendor for the purpose of displaying London interbank offered rates for U.S. dollar deposits); (ii) if such rate cannot be identified on the related Determination Date, the Debenture Trustee will request the principal London offices of four leading banks in the London interbank market to provide such banks' offered quotations (expressed as percentages per annum) to prime banks in the London interbank market for U.S. dollar deposits having a three-month maturity as of 11:00 a.m. (London time) on such Determination Date. If at least two quotations are provided, 3-Month LIBOR will be the arithmetic mean of such quotations; (iii) if fewer than two such quotations are provided as requested in clause (ii) above, the Debenture Trustee will request four major New York City banks to provide such banks' offered quotations (expressed as percentages per annum) to leading European banks for loans in U.S. dollars as of 11:00 a.m. (London time) on such Determination Date. If at least two such quotations are provided, 3-Month LIBOR will be the arithmetic mean of such quotations; and (iv) if fewer than two such quotations are provided as requested in clause (iii) above, 3-Month LIBOR will be a 3-Month LIBOR determined with respect to the Distribution Period immediately preceding such current Distribution Period. If the rate for U.S. dollar deposits having a three-month maturity that initially appears on Telerate Page 3750 as of 11:00 a.m. (London time) on the related Determination Date is superseded on the Telerate Page 3750 by a corrected rate by 12:00 noon (London time) on such Determination Date, then the corrected rate as so substituted on the applicable page will be the applicable 3-Month LIBOR for such Determination Date. The Distribution Rate for any Distribution Period will at no time be higher than the maximum rate then permitted by New York law as the same may be modified by United States law. All percentages resulting from any calculations on the Common Securities will be rounded, if necessary, to the nearest one hundred-thousandth of a percentage point, with five one-millionths of a percentage point rounded upward (e.g., 9.876545% (or .09876545) being rounded to 9.87655% (or .0987655), and all dollar amounts used in or resulting from such calculation will be rounded to the nearest cent (with one-half cent being rounded upward)). Except as otherwise described below, Distributions on the Common Securities will be cumulative, will accrue from the date of original issuance and will be payable quarterly in arrears on March 15, June 15, September 15 and December 15 of each year or if any such day is not a Business Day, then the next succeeding Business Day (each such day, a "Distribution Payment Date") (it being understood that interest accrues for any such non-Business Day), commencing on the Distribution Payment Date in March 2007. The Debenture Issuer has the right under the Indenture to defer payments of interest on the Debentures, so long as no Acceleration Event of Default has occurred and is continuing, by extending the interest payment period for up to 20 consecutive quarterly periods (each an "Extension Period") at any time and from time to time on the Debentures, subject to the conditions described below, during which Extension Period no interest shall be due and payable. During any Extension Period, interest will continue to accrue on the Debentures, and interest on such accrued interest will accrue at an annual rate equal to the Distribution Rate in effect for each such Extension Period, compounded quarterly from the date such interest would have been payable were it not for the Extension Period, to the extent permitted by law (such interest referred to herein as "Additional Interest"). No Extension Period may end on a date other than a Distribution Payment Date. At the end of any such Extension Period, the Debenture Issuer shall pay all interest then accrued and unpaid on the Debentures (together with Additional Interest thereon); provided, -------- however, that no Extension Period may extend beyond the Maturity Date. Prior to - ------- the termination of any Extension Period, the Debenture Issuer may further extend such period, provided that such period together with all such previous and further consecutive extensions thereof shall not exceed 20 consecutive quarterly periods, or extend beyond the Maturity Date. Upon the termination of any Extension Period and upon the payment of all accrued and unpaid interest and Additional Interest, the Debenture Issuer may commence a new Extension Period, subject to the foregoing requirements. No interest or Additional Interest shall be due and payable during an Extension Period, except at the end thereof, but each installment of interest that would otherwise have been due and payable during such Extension Period shall bear Additional Interest. During any Extension Period, Distributions on the Common Securities shall be deferred for a period equal to the Extension Period. If Distributions are deferred, the Distributions due shall be paid on the date that the related Extension Period terminates, to Holders of the Securities as they appear on the books and records of the Trust on the record date immediately preceding such date. Distributions on the Securities must be paid on the dates payable (after giving effect to any Extension Period) to the extent that the Trust has funds available for the payment of such distributions in the Property Account of the Trust. The Trust's funds available for Distribution to the Holders of the Securities will be limited to payments received from the Debenture Issuer. The Common Securities shall be redeemable as provided in the Declaration. ASSIGNMENT FOR VALUE RECEIVED, the undersigned assigns and transfers this Common Security Certificate to: ------------------------------------------------------------------- (Insert assignee's social security or tax identification number) --- ------------------------------------------------------------------- ------------------------------------------------------------------- (Insert address and zip code of assignee) and irrevocably appoints agent ----------------------------------------------- to transfer this Common Securit Certificate on the books of the Trust. The agent may substitute another to act for him or her. Date: ------------------------------------ Signature: ------------------------------- (Sign exactly as your name appears on the other side of this Common Security Certificate) Signature: ------------------------------- (Sign exactly as your name appears on the other side of this Common Security Certificate) Signature Guarantee3 - --------------------------------- 3 Signature must be guaranteed by an "eligible guarantor institution" that is a bank, stockbroker, savings and loan association or credit union, meeting the requirements of the Security registrar, which requirements include membership or participation in the Securities Transfer Agents Medallion Program ("STAMP") or such other "signature guarantee program" as may be determined by the Security registrar in addition to, or in substitution for, STAMP, all in accordance with the Securities Exchange Act of 1934, as amended. EXHIBIT B SPECIMEN OF INITIAL DEBENTURE (See Document No. 16) EXHIBIT C PLACEMENT AGREEMENT (See Document No. 1) EX-4 4 v11guaragree.txt 4.59 Exhibit 4.59 ------------------------------------------------- GUARANTEE AGREEMENT by and between FIRST BANKS, INC. and WILMINGTON TRUST COMPANY Dated as of December 14, 2006 -------------------------------------------------- GUARANTEE AGREEMENT ------------------- This GUARANTEE AGREEMENT (this "Guarantee"), dated as of December 14, 2006, is executed and delivered by First Banks, Inc., a Missouri corporation (the "Guarantor"), and Wilmington Trust Company, a Delaware banking corporation, as trustee (the "Guarantee Trustee"), for the benefit of the Holders (as defined herein) from time to time of the Capital Securities (as defined herein) of First Bank Statutory Trust VII, a Delaware statutory trust (the "Issuer"). WHEREAS, pursuant to an Amended and Restated Declaration of Trust (the "Declaration"), dated as of the date hereof among Wilmington Trust Company, not in its individual capacity but solely as institutional trustee, the administrators of the Issuer named therein, the Guarantor, as sponsor, and the holders from time to time of undivided beneficial interests in the assets of the Issuer, the Issuer is issuing on the date hereof those undivided beneficial interests, having an aggregate liquidation amount of $50,000,000.00 (the "Capital Securities"); and WHEREAS, as incentive for the Holders to purchase the Capital Securities, the Guarantor desires irrevocably and unconditionally to agree, to the extent set forth in this Guarantee, to pay to the Holders of Capital Securities the Guarantee Payments (as defined herein) and to make certain other payments on the terms and conditions set forth herein; NOW, THEREFORE, in consideration of the purchase by each Holder of the Capital Securities, which purchase the Guarantor hereby agrees shall benefit the Guarantor, the Guarantor executes and delivers this Guarantee for the benefit of the Holders. ARTICLE I DEFINITIONS AND INTERPRETATION Section 1.1. Definitions and Interpretation. In this Guarantee, ------------------------------ unless the context otherwise requires: (a) capitalized terms used in this Guarantee but not defined in the preamble above have the respective meanings assigned to them in this Section 1.1; (b) a term defined anywhere in this Guarantee has the same meaning throughout; (c) all references to "the Guarantee" or "this Guarantee" are to this Guarantee as modified, supplemented or amended from time to time; (d) all references in this Guarantee to "Articles" or "Sections" are to Articles or Sections of this Guarantee, unless otherwise specified; (e) terms defined in the Declaration as at the date of execution of this Guarantee have the same meanings when used in this Guarantee, unless otherwise defined in this Guarantee or unless the context otherwise requires; and (f) a reference to the singular includes the plural and vice versa. "Affiliate" has the same meaning as given to that term in Rule 405 of --------- the Securities Act of 1933, as amended, or any successor rule thereunder. "Beneficiaries" means any Person to whom the Issuer is or hereafter ------------- becomes indebted or liable. "Capital Securities" has the meaning set forth in the recitals to this ------------------- Guarantee. "Common Securities" means the common securities issued by the Issuer to ----------------- the Guarantor pursuant to the Declaration. "Corporate Trust Office" means the office of the Guarantee Trustee at ----------------------- which the corporate trust business of the Guarantee Trustee shall, at any particular time, be principally administered, which office at the date of execution of this Guarantee is located at Rodney Square North, 1100 North Market Street, Wilmington, Delaware 19890-1600, Attention: Corporate Trust Administration. "Covered Person" means any Holder of Capital Securities. -------------- "Debentures" means the debt securities of the Guarantor designated the ---------- Floating Rate Junior Subordinated Deferrable Interest Debentures due 2036 held by the Institutional Trustee (as defined in the Declaration) of the Issuer. "Declaration Event of Default" means an "Event of Default" as defined ----------------------------- in the Declaration. "Event of Default" has the meaning set forth in Section 2.4(a). ---------------- "Guarantee Payments" means the following payments or distributions, ------------------- without duplication, with respect to the Capital Securities, to the extent not paid or made by the Issuer: (i) any accrued and unpaid Distributions (as defined in the Declaration) which are required to be paid on such Capital Securities to the extent the Issuer shall have funds available therefor, (ii) the Redemption Price to the extent the Issuer has funds available therefor, with respect to any Capital Securities called for redemption by the Issuer, (iii) the Special Redemption Price to the extent the Issuer has funds available therefor, with respect to Capital Securities redeemed upon the occurrence of a Special Event, and (iv) upon a voluntary or involuntary liquidation, dissolution, winding-up or termination of the Issuer (other than in connection with the distribution of Debentures to the Holders of the Capital Securities in exchange therefor as provided in the Declaration), the lesser of (a) the aggregate of the liquidation amount and all accrued and unpaid Distributions on the Capital Securities to the date of payment, to the extent the Issuer shall have funds available therefor, and (b) the amount of assets of the Issuer remaining available for distribution to Holders in liquidation of the Issuer (in either case, the "Liquidation Distribution"). "Guarantee Trustee" means Wilmington Trust Company, until a Successor ------------------ Guarantee Trustee has been appointed and has accepted such appointment pursuant to the terms of this Guarantee and thereafter means each such Successor Guarantee Trustee. "Guarantor" means First Banks, Inc. and each of its successors and --------- assigns. "Holder" means any holder, as registered on the books and records of ------ the Issuer, of any Capital Securities; provided, however, that, in determining -------- ------- whether the Holders of the requisite percentage of Capital Securities have given any request, notice, consent or waiver hereunder, "Holder" shall not include the Guarantor or any Affiliate of the Guarantor. "Indemnified Person" means the Guarantee Trustee, any Affiliate of the ------------------- Guarantee Trustee, or any officers, directors, shareholders, members, partners, employees, representatives, nominees, custodians or agents of the Guarantee Trustee. "Indenture" means the Indenture dated as of the date hereof between the --------- Guarantor and Wilmington Trust Company, not in its individual capacity but solely as trustee, and any indenture supplemental thereto pursuant to which the Debentures are to be issued to the institutional trustee of the Issuer. "Issuer" has the meaning set forth in the opening paragraph to this ------ Guarantee. "Liquidation Distribution" has the meaning set forth in the definition ------------------------- of "Guarantee Payments" herein. "Majority in liquidation amount of the Capital Securities" means -------------------------------------------------------------- Holder(s) of outstanding Capital Securities, voting together as a class, but separately from the holders of Common Securities, of more than 50% of the aggregate liquidation amount (including the stated amount that would be paid on redemption, liquidation or otherwise, plus accrued and unpaid Distributions to the date upon which the voting percentages are determined) of all Capital Securities then outstanding. "Obligations" means any costs, expenses or liabilities (but not ----------- including liabilities related to taxes) of the Issuer other than obligations of the Issuer to pay to holders of any Trust Securities the amounts due such holders pursuant to the terms of the Trust Securities. "Officer's Certificate" means, with respect to any Person, a ----------------------- certificate signed by one Authorized Officer of such Person. Any Officer's Certificate delivered with respect to compliance with a condition or covenant provided for in this Guarantee shall include: (a) a statement that the officer signing the Officer's Certificate has read the covenant or condition and the definitions relating thereto; (b) a brief statement of the nature and scope of the examination or investigation undertaken by the officer in rendering the Officer's Certificate; (c) a statement that the officer has made such examination or investigation as, in such officer's opinion, is necessary to enable such officer to express an informed opinion as to whether or not such covenant or condition has been complied with; and (d) a statement as to whether, in the opinion of the officer, such condition or covenant has been complied with. "Person" means a legal person, including any individual, corporation, ------ estate, partnership, joint venture, association, joint stock company, limited liability company, trust, unincorporated association, or government or any agency or political subdivision thereof, or any other entity of whatever nature. "Redemption Price" has the meaning set forth in the Indenture. ---------------- "Responsible Officer" means, with respect to the Guarantee Trustee, any ------------------- officer within the Corporate Trust Office of the Guarantee Trustee including any Vice President, Assistant Vice President, Secretary, Assistant Secretary or any other officer of the Guarantee Trustee customarily performing functions similar to those performed by any of the above designated officers and also, with respect to a particular corporate trust matter, any other officer to whom such matter is referred because of that officer's knowledge of and familiarity with the particular subject. "Special Event" has the meaning set forth in the Indenture. ------------- "Special Redemption Price" has the meaning set forth in the Indenture. ------------------------ "Successor Guarantee Trustee" means a successor Guarantee Trustee ----------------------------- possessing the qualifications to act as Guarantee Trustee under Section 3.1. "Trust Securities" means the Common Securities and the Capital ------------------ Securities. ARTICLE II POWERS, DUTIES AND RIGHTS OF GUARANTEE TRUSTEE Section 2.1. Powers and Duties of the Guarantee Trustee. ------------------------------------------ (a) This Guarantee shall be held by the Guarantee Trustee for the benefit of the Holders of the Capital Securities, and the Guarantee Trustee shall not transfer this Guarantee to any Person except a Holder of Capital Securities exercising his or her rights pursuant to Section 4.4(b) or to a Successor Guarantee Trustee on acceptance by such Successor Guarantee Trustee of its appointment to act as Successor Guarantee Trustee. The right, title and interest of the Guarantee Trustee shall automatically vest in any Successor Guarantee Trustee, and such vesting and cessation of title shall be effective whether or not conveyancing documents have been executed and delivered pursuant to the appointment of such Successor Guarantee Trustee. (b) If an Event of Default actually known to a Responsible Officer of the Guarantee Trustee has occurred and is continuing, the Guarantee Trustee shall enforce this Guarantee for the benefit of the Holders of the Capital Securities. (c) The Guarantee Trustee, before the occurrence of any Event of Default and after curing all Events of Default that may have occurred, shall undertake to perform only such duties as are specifically set forth in this Guarantee, and no implied covenants shall be read into this Guarantee against the Guarantee Trustee. In case an Event of Default has occurred (that has not been waived pursuant to Section 2.4) and is actually known to a Responsible Officer of the Guarantee Trustee, the Guarantee Trustee shall exercise such of the rights and powers vested in it by this Guarantee, and use the same degree of care and skill in its exercise thereof, as a prudent person would exercise or use under the circumstances in the conduct of his or her own affairs. (d) No provision of this Guarantee shall be construed to relieve the Guarantee Trustee from liability for its own negligent action, its own negligent failure to act, or its own willful misconduct, except that: (i) prior to the occurrence of any Event of Default and after the curing or waiving of all such Events of Default that may have occurred: (A) the duties and obligations of the Guarantee Trustee shall be determined solely by the express provisions of this Guarantee, and the Guarantee Trustee shall not be liable except for the performance of such duties and obligations as are specifically set forth in this Guarantee, and no implied covenants or obligations shall be read into this Guarantee against the Guarantee Trustee; and (B) in the absence of bad faith on the part of the Guarantee Trustee, the Guarantee Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon any certificates or opinions furnished to the Guarantee Trustee and conforming to the requirements of this Guarantee; but in the case of any such certificates or opinions that by any provision hereof are specifically required to be furnished to the Guarantee Trustee, the Guarantee Trustee shall be under a duty to examine the same to determine whether or not they conform to the requirements of this Guarantee; (ii) the Guarantee Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer of the Guarantee Trustee, unless it shall be proved that such Responsible Officer of the Guarantee Trustee or the Guarantee Trustee was negligent in ascertaining the pertinent facts upon which such judgment was made; (iii) the Guarantee Trustee shall not be liable with respect to any action taken or omitted to be taken by it in good faith in accordance with the written direction of the Holders of not less than a Majority in liquidation amount of the Capital Securities relating to the time, method and place of conducting any proceeding for any remedy available to the Guarantee Trustee, or relating to the exercise of any trust or power conferred upon the Guarantee Trustee under this Guarantee; and (iv) no provision of this Guarantee shall require the Guarantee Trustee to expend or risk its own funds or otherwise incur personal financial liability in the performance of any of its duties or in the exercise of any of its rights or powers, if the Guarantee Trustee shall have reasonable grounds for believing that the repayment of such funds is not reasonably assured to it under the terms of this Guarantee or security and indemnity, reasonably satisfactory to the Guarantee Trustee, against such risk or liability is not reasonably assured to it. Section 2.2. Certain Rights of Guarantee Trustee. ----------------------------------- (a) Subject to the provisions of Section 2.1: (i) The Guarantee Trustee may conclusively rely, and shall be fully protected in acting or refraining from acting upon, any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document believed by it to be genuine and to have been signed, sent or presented by the proper party or parties. (ii) Any direction or act of the Guarantor contemplated by this Guarantee shall be sufficiently evidenced by an Officer's Certificate. (iii) Whenever, in the administration of this Guarantee, the Guarantee Trustee shall deem it desirable that a matter be proved or established before taking, suffering or omitting any action hereunder, the Guarantee Trustee (unless other evidence is herein specifically prescribed) may, in the absence of bad faith on its part, request and conclusively rely upon an Officer's Certificate of the Guarantor which, upon receipt of such request, shall be promptly delivered by the Guarantor. (iv) The Guarantee Trustee shall have no duty to see to any recording, filing or registration of any instrument (or any re-recording, refiling or re-registration thereof). (v) The Guarantee Trustee may consult with counsel of its selection, and the advice or opinion of such counsel with respect to legal matters shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in accordance with such advice or opinion. Such counsel may be counsel to the Guarantor or any of its Affiliates and may include any of its employees. The Guarantee Trustee shall have the right at any time to seek instructions concerning the administration of this Guarantee from any court of competent jurisdiction. (vi) The Guarantee Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Guarantee at the request or direction of any Holder, unless such Holder shall have provided to the Guarantee Trustee such security and indemnity, reasonably satisfactory to the Guarantee Trustee, against the costs, expenses (including attorneys' fees and expenses and the expenses of the Guarantee Trustee's agents, nominees or custodians) and liabilities that might be incurred by it in complying with such request or direction, including such reasonable advances as may be requested by the Guarantee Trustee; provided, however, that nothing -------- ------- contained in this Section 2.2(a)(vi) shall relieve the Guarantee Trustee, upon the occurrence of an Event of Default, of its obligation to exercise the rights and powers vested in it by this Guarantee. (vii) The Guarantee Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document, but the Guarantee Trustee, in its discretion, may make such further inquiry or investigation into such facts or matters as it may see fit. (viii) The Guarantee Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents, nominees, custodians or attorneys, and the Guarantee Trustee shall not be responsible for any misconduct or negligence on the part of any agent or attorney appointed with due care by it hereunder. (ix) Any action taken by the Guarantee Trustee or its agents hereunder shall bind the Holders of the Capital Securities, and the signature of the Guarantee Trustee or its agents alone shall be sufficient and effective to perform any such action. No third party shall be required to inquire as to the authority of the Guarantee Trustee to so act or as to its compliance with any of the terms and provisions of this Guarantee, both of which shall be conclusively evidenced by the Guarantee Trustee's or its agent's taking such action. (x) Whenever in the administration of this Guarantee the Guarantee Trustee shall deem it desirable to receive instructions with respect to enforcing any remedy or right or taking any other action hereunder, the Guarantee Trustee (i) may request instructions from the Holders of a Majority in liquidation amount of the Capital Securities, (ii) may refrain from enforcing such remedy or right or taking such other action until such instructions are received, and (iii) shall be protected in conclusively relying on or acting in accordance with such instructions. (xi) The Guarantee Trustee shall not be liable for any action taken, suffered, or omitted to be taken by it in good faith, without negligence, and reasonably believed by it to be authorized or within the discretion or rights or powers conferred upon it by this Guarantee. (b) No provision of this Guarantee shall be deemed to impose any duty or obligation on the Guarantee Trustee to perform any act or acts or exercise any right, power, duty or obligation conferred or imposed on it, in any jurisdiction in which it shall be illegal or in which the Guarantee Trustee shall be unqualified or incompetent in accordance with applicable law to perform any such act or acts or to exercise any such right, power, duty or obligation. No permissive power or authority available to the Guarantee Trustee shall be construed to be a duty. Section 2.3. Not Responsible for Recitals or Issuance of Guarantee. -------------------------------------------------------- The recitals contained in this Guarantee shall be taken as the statements of the Guarantor, and the Guarantee Trustee does not assume any responsibility for their correctness. The Guarantee Trustee makes no representation as to the validity or sufficiency of this Guarantee. Section 2.4. Events of Default; Waiver. ------------------------- (a) An Event of Default under this Guarantee will occur upon the failure of the Guarantor to perform any of its payment or other obligations hereunder. (b) The Holders of a Majority in liquidation amount of the Capital Securities may, voting or consenting as a class, on behalf of the Holders of all of the Capital Securities, waive any past Event of Default and its consequences. Upon such waiver, any such Event of Default shall cease to exist, and shall be deemed to have been cured, for every purpose of this Guarantee, but no such waiver shall extend to any subsequent or other default or Event of Default or impair any right consequent thereon. Section 2.5. Events of Default; Notice. ------------------------- (a) The Guarantee Trustee shall, within 90 days after the occurrence of an Event of Default, transmit by mail, first class postage prepaid, to the Holders of the Capital Securities and the Guarantor, notices of all Events of Default actually known to a Responsible Officer of the Guarantee Trustee, unless such defaults have been cured before the giving of such notice, provided, -------- however, that the Guarantee Trustee shall be protected in withholding such - ------- notice if and so long as a Responsible Officer of the Guarantee Trustee in good faith determines that the withholding of such notice is in the interests of the Holders of the Capital Securities. (b) The Guarantee Trustee shall not be deemed to have knowledge of any Event of Default unless the Guarantee Trustee shall have received written notice from the Guarantor or a Holder of the Capital Securities (except in the case of a payment default), or a Responsible Officer of the Guarantee Trustee charged with the administration of this Guarantee shall have obtained actual knowledge thereof. ARTICLE III GUARANTEE TRUSTEE Section 3.1. Guarantee Trustee; Eligibility. ------------------------------ (a) There shall at all times be a Guarantee Trustee which shall: (i) not be an Affiliate of the Guarantor, and (ii) be a corporation organized and doing business under the laws of the United States of America or any State or Territory thereof or of the District of Columbia, or Person authorized under such laws to exercise corporate trust powers, having a combined capital and surplus of at least 50 million U.S. dollars ($50,000,000), and subject to supervision or examination by Federal, State, Territorial or District of Columbia authority. If such corporation publishes reports of condition at least annually, pursuant to law or to the requirements of the supervising or examining authority referred to above, then, for the purposes of this Section 3.1(a)(ii), the combined capital and surplus of such corporation shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. (b) If at any time the Guarantee Trustee shall cease to be eligible to so act under Section 3.1(a), the Guarantee Trustee shall immediately resign in the manner and with the effect set out in Section 3.2(c). (c) If the Guarantee Trustee has or shall acquire any "conflicting interest" within the meaning of Section 310(b) of the Trust Indenture Act, the Guarantee Trustee shall either eliminate such interest or resign to the extent and in the manner provided by, and subject to this Guarantee. Section 3.2. Appointment, Removal and Resignation of Guarantee --------------------------------------------------------- Trustee. - ------- (a) Subject to Section 3.2(b), the Guarantee Trustee may be appointed or removed without cause at any time by the Guarantor except during an Event of Default. (b) The Guarantee Trustee shall not be removed in accordance with Section 3.2(a) until a Successor Guarantee Trustee has been appointed and has accepted such appointment by written instrument executed by such Successor Guarantee Trustee and delivered to the Guarantor. (c) The Guarantee Trustee appointed to office shall hold office until a Successor Guarantee Trustee shall have been appointed or until its removal or resignation. The Guarantee Trustee may resign from office (without need for prior or subsequent accounting) by an instrument in writing executed by the Guarantee Trustee and delivered to the Guarantor, which resignation shall not take effect until a Successor Guarantee Trustee has been appointed and has accepted such appointment by an instrument in writing executed by such Successor Guarantee Trustee and delivered to the Guarantor and the resigning Guarantee Trustee. (d) If no Successor Guarantee Trustee shall have been appointed and accepted appointment as provided in this Section 3.2 within 60 days after delivery of an instrument of removal or resignation, the Guarantee Trustee resigning or being removed may petition any court of competent jurisdiction for appointment of a Successor Guarantee Trustee. Such court may thereupon, after prescribing such notice, if any, as it may deem proper, appoint a Successor Guarantee Trustee. (e) No Guarantee Trustee shall be liable for the acts or omissions to act of any Successor Guarantee Trustee. (f) Upon termination of this Guarantee or removal or resignation of the Guarantee Trustee pursuant to this Section 3.2, the Guarantor shall pay to the Guarantee Trustee all amounts owing to the Guarantee Trustee under Sections 7.2 and 7.3 accrued to the date of such termination, removal or resignation. ARTICLE IV GUARANTEE Section 4.1 Guarantee. --------- (a) The Guarantor irrevocably and unconditionally agrees to pay in full to the Holders the Guarantee Payments (without duplication of amounts theretofore paid by the Issuer), as and when due, regardless of any defense (except the defense of payment by the Issuer), right of set-off or counterclaim that the Issuer may have or assert. The Guarantor's obligation to make a Guarantee Payment may be satisfied by direct payment of the required amounts by the Guarantor to the Holders or by causing the Issuer to pay such amounts to the Holders. (b) The Guarantor hereby also agrees to assume any and all Obligations of the Issuer and in the event any such Obligation is not so assumed, subject to the terms and conditions hereof, the Guarantor hereby irrevocably and unconditionally guarantees to each Beneficiary the full payment, when and as due, of any and all Obligations to such Beneficiaries. This Guarantee is intended to be for the benefit of, and to be enforceable by, all such Beneficiaries, whether or not such Beneficiaries have received notice hereof. Section 4.2. Waiver of Notice and Demand. The Guarantor hereby waives --------------------------- notice of acceptance of this Guarantee and of any liability to which it applies or may apply, presentment, demand for payment, any right to require a proceeding first against the Issuer or any other Person before proceeding against the Guarantor, protest, notice of nonpayment, notice of dishonor, notice of redemption and all other notices and demands. Section 4.3. Obligations Not Affected. The obligations, covenants, ------------------------- agreements and duties of the Guarantor under this Guarantee shall in no way be affected or impaired by reason of the happening from time to time of any of the following: (a) the release or waiver, by operation of law or otherwise, of the performance or observance by the Issuer of any express or implied agreement, covenant, term or condition relating to the Capital Securities to be performed or observed by the Issuer; (b) the extension of time for the payment by the Issuer of all or any portion of the Distributions, Redemption Price, Special Redemption Price, Liquidation Distribution or any other sums payable under the terms of the Capital Securities or the extension of time for the performance of any other obligation under, arising out of or in connection with, the Capital Securities (other than an extension of time for payment of Distributions, Redemption Price, Special Redemption Price, Liquidation Distribution or other sum payable that results from the extension of any interest payment period on the Debentures or any extension of the maturity date of the Debentures permitted by the Indenture); (c) any failure, omission, delay or lack of diligence on the part of the Holders to enforce, assert or exercise any right, privilege, power or remedy conferred on the Holders pursuant to the terms of the Capital Securities, or any action on the part of the Issuer granting indulgence or extension of any kind; (d) the voluntary or involuntary liquidation, dissolution, sale of any collateral, receivership, insolvency, bankruptcy, assignment for the benefit of creditors, reorganization, arrangement, composition or readjustment of debt of, or other similar proceedings affecting, the Issuer or any of the assets of the Issuer; (e) any invalidity of, or defect or deficiency in, the Capital Securities; (f) the settlement or compromise of any obligation guaranteed hereby or hereby incurred; or (g) any other circumstance whatsoever that might otherwise constitute a legal or equitable discharge or defense of a guarantor, it being the intent of this Section 4.3 that the obligations of the Guarantor hereunder shall be absolute and unconditional under any and all circumstances. There shall be no obligation of the Holders to give notice to, or obtain consent of, the Guarantor with respect to the happening of any of the foregoing. Section 4.4. Rights of Holders. ----------------- (a) The Holders of a Majority in liquidation amount of the Capital Securities have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Guarantee Trustee in respect of this Guarantee or to direct the exercise of any trust or power conferred upon the Guarantee Trustee under this Guarantee; provided, however, that (subject to -------- ------- Section 2.1) the Guarantee Trustee shall have the right to decline to follow any such direction if the Guarantee Trustee being advised by counsel determines that the action or proceeding so directed may not lawfully be taken or if the Guarantee Trustee in good faith by its board of directors or trustees, executive committees or a trust committee of directors or trustees and/or Responsible Officers shall determine that the action or proceedings so directed would involve the Guarantee Trustee in personal liability. (b) Any Holder of Capital Securities may institute a legal proceeding directly against the Guarantor to enforce the Guarantee Trustee's rights under this Guarantee, without first instituting a legal proceeding against the Issuer, the Guarantee Trustee or any other Person. The Guarantor waives any right or remedy to require that any such action be brought first against the Issuer, the Guarantee Trustee or any other Person before so proceeding directly against the Guarantor. Section 4.5. Guarantee of Payment. This Guarantee creates a guarantee -------------------- of payment and not of collection. Section 4.6. Subrogation. The Guarantor shall be subrogated to all (if ----------- any) rights of the Holders of Capital Securities against the Issuer in respect of any amounts paid to such Holders by the Guarantor under this Guarantee; provided, however, that the Guarantor shall not (except to the extent required - -------- ------- by mandatory provisions of law) be entitled to enforce or exercise any right that it may acquire by way of subrogation or any indemnity, reimbursement or other agreement, in all cases as a result of payment under this Guarantee, if, after giving effect to any such payment, any amounts are due and unpaid under this Guarantee. If any amount shall be paid to the Guarantor in violation of the preceding sentence, the Guarantor agrees to hold such amount in trust for the Holders and to pay over such amount to the Holders. Section 4.7. Independent Obligations. The Guarantor acknowledges that ----------------------- its obligations hereunder are independent of the obligations of the Issuer with respect to the Capital Securities and that the Guarantor shall be liable as principal and as debtor hereunder to make Guarantee Payments pursuant to the terms of this Guarantee notwithstanding the occurrence of any event referred to in subsections (a) through (g), inclusive, of Section 4.3 hereof. Section 4.8. Enforcement by a Beneficiary. A Beneficiary may enforce ---------------------------- the obligations of the Guarantor contained in Section 4.1(b) directly against the Guarantor and the Guarantor waives any right or remedy to require that any action be brought against the Issuer or any other person or entity before proceeding against the Guarantor. The Guarantor shall be subrogated to all rights (if any) of any Beneficiary against the Issuer in respect of any amounts paid to the Beneficiaries by the Guarantor under this Guarantee; provided, -------- however, that the Guarantor shall not (except to the extent required by - ------- mandatory provisions of law) be entitled to enforce or exercise any rights that it may acquire by way of subrogation or any indemnity, reimbursement or other agreement, in all cases as a result of payment under this Guarantee, if at the time of any such payment, and after giving effect to such payment, any amounts are due and unpaid under this Guarantee. ARTICLE V LIMITATION OF TRANSACTIONS; SUBORDINATION Section 5.1. Limitation of Transactions. So long as any Capital ---------------------------- Securities remain outstanding, if (a) there shall have occurred and be continuing an Event of Default or a Declaration Event of Default or (b) the Guarantor shall have selected an Extension Period as provided in the Declaration and such period, or any extension thereof, shall have commenced and be continuing, then the Guarantor shall not and shall not permit any Affiliate to (x) declare or pay any dividends or distributions on, or redeem, purchase, acquire, or make a liquidation payment with respect to, any of the Guarantor's or such Affiliate's capital stock (other than payments of dividends or distributions to the Guarantor) or make any guarantee payments with respect to the foregoing or (y) make any payment of principal of or interest or premium, if any, on or repay, repurchase or redeem any debt securities of the Guarantor or any Affiliate that rank pari passu in all respects with or junior in interest to the Debentures (other than, with respect to clauses (x) and (y) above, (i) repurchases, redemptions or other acquisitions of shares of capital stock of the Guarantor in connection with any employment contract, benefit plan or other similar arrangement with or for the benefit of one or more employees, officers, directors or consultants, in connection with a dividend reinvestment or stockholder stock purchase plan or in connection with the issuance of capital stock of the Guarantor (or securities convertible into or exercisable for such capital stock) as consideration in an acquisition transaction entered into prior to the occurrence of the Event of Default, Declaration Event of Default or Extension Period, as applicable, (ii) as a result of any exchange or conversion of any class or series of the Guarantor's capital stock (or any capital stock of a subsidiary of the Guarantor) for any class or series of the Guarantor's capital stock or of any class or series of the Guarantor's indebtedness for any class or series of the Guarantor's capital stock, (iii) the purchase of fractional interests in shares of the Guarantor's capital stock pursuant to the conversion or exchange provisions of such capital stock or the security being converted or exchanged, (iv) any declaration of a dividend in connection with any stockholders' rights plan, or the issuance of rights, stock or other property under any stockholders' rights plan, or the redemption or repurchase of rights pursuant thereto, (v) any dividend in the form of stock, warrants, options or other rights where the dividend stock or the stock issuable upon exercise of such warrants, options or other rights is the same stock as that on which the dividend is being paid or ranks pari passu with or junior to such stock and any cash payments in lieu of fractional shares issued in connection therewith, or (vi) payments under this Guarantee). Section 5.2. Ranking. This Guarantee will constitute an unsecured ------- obligation of the Guarantor and will rank subordinate and junior in right of payment to all present and future Senior Indebtedness (as defined in the Indenture) of the Guarantor. By their acceptance thereof, each Holder of Capital Securities agrees to the foregoing provisions of this Guarantee and the other terms set forth herein. The right of the Guarantor to participate in any distribution of assets of any of its subsidiaries upon any such subsidiary's liquidation or reorganization or otherwise is subject to the prior claims of creditors of that subsidiary, except to the extent the Guarantor may itself be recognized as a creditor of that subsidiary. Accordingly, the Guarantor's obligations under this Guarantee will be effectively subordinated to all existing and future liabilities of the Guarantor's subsidiaries, and claimants should look only to the assets of the Guarantor for payments hereunder. This Guarantee does not limit the incurrence or issuance of other secured or unsecured debt of the Guarantor, including Senior Indebtedness of the Guarantor, under any indenture that the Guarantor may enter into in the future or otherwise. ARTICLE VI TERMINATION Section 6.1. Termination. This Guarantee shall terminate as to the ----------- Capital Securities (i) upon full payment of the Redemption Price or Special Redemption Price of all Capital Securities then outstanding, (ii) upon the distribution of all of the Debentures to the Holders of all of the Capital Securities or (iii) upon full payment of the amounts payable in accordance with the Declaration upon dissolution of the Issuer. This Guarantee will continue to be effective or will be reinstated, as the case may be, if at any time any Holder of Capital Securities must restore payment of any sums paid under the Capital Securities or under this Guarantee. ARTICLE VII INDEMNIFICATION Section 7.1. Exculpation. ----------- (a) No Indemnified Person shall be liable, responsible or accountable in damages or otherwise to the Guarantor or any Covered Person for any loss, damage or claim incurred by reason of any act or omission performed or omitted by such Indemnified Person in good faith in accordance with this Guarantee and in a manner that such Indemnified Person reasonably believed to be within the scope of the authority conferred on such Indemnified Person by this Guarantee or by law, except that an Indemnified Person shall be liable for any such loss, damage or claim incurred by reason of such Indemnified Person's negligence or willful misconduct with respect to such acts or omissions. (b) An Indemnified Person shall be fully protected in relying in good faith upon the records of the Issuer or the Guarantor and upon such information, opinions, reports or statements presented to the Issuer or the Guarantor by any Person as to matters the Indemnified Person reasonably believes are within such other Person's professional or expert competence and who, if selected by such Indemnified Person, has been selected with reasonable care by such Indemnified Person, including information, opinions, reports or statements as to the value and amount of the assets, liabilities, profits, losses, or any other facts pertinent to the existence and amount of assets from which Distributions to Holders of Capital Securities might properly be paid. Section 7.2. Indemnification. --------------- (a) The Guarantor agrees to indemnify each Indemnified Person for, and to hold each Indemnified Person harmless against, any and all loss, liability, damage, claim or expense incurred without negligence or willful misconduct on the part of the Indemnified Person, arising out of or in connection with the acceptance or administration of the trust or trusts hereunder, including, but not limited to, the costs and expenses (including reasonable legal fees and expenses) of the Indemnified Person defending itself against, or investigating, any claim or liability in connection with the exercise or performance of any of the Indemnified Person's powers or duties hereunder. The obligation to indemnify as set forth in this Section 7.2 shall survive the resignation or removal of the Guarantee Trustee and the termination of this Guarantee. (b) Promptly after receipt by an Indemnified Person under this Section 7.2 of notice of the commencement of any action, such Indemnified Person will, if a claim in respect thereof is to be made against the Guarantor under this Section 7.2, notify the Guarantor in writing of the commencement thereof; but the failure so to notify the Guarantor (i) will not relieve the Guarantor from liability under paragraph (a) above unless and to the extent that the Guarantor did not otherwise learn of such action and such failure results in the forfeiture by the Guarantor of substantial rights and defenses and (ii) will not, in any event, relieve the Guarantor from any obligations to any Indemnified Person other than the indemnification obligation provided in paragraph (a) above. The Guarantor shall be entitled to appoint counsel of the Guarantor's choice at the Guarantor's expense to represent the Indemnified Person in any action for which indemnification is sought (in which case the Guarantor shall not thereafter be responsible for the fees and expenses of any separate counsel retained by the Indemnified Person or Persons except as set forth below); provided, however, that such counsel shall be reasonably satisfactory to the - -------- ------- Indemnified Person. Notwithstanding the Guarantor's election to appoint counsel to represent the Guarantor in an action, the Indemnified Person shall have the right to employ separate counsel (including local counsel), and the Guarantor shall bear the reasonable fees, costs and expenses of such separate counsel if (i) the use of counsel chosen by the Guarantor to represent the Indemnified Person would present such counsel with a conflict of interest, (ii) the actual or potential defendants in, or targets of, any such action include both the Indemnified Person and the Guarantor and the Indemnified Person shall have reasonably concluded that there may be legal defenses available to it and/or other Indemnified Person(s) which are different from or additional to those available to the Guarantor, (iii) the Guarantor shall not have employed counsel satisfactory to the Indemnified Person to represent the Indemnified Person within a reasonable time after notice of the institution of such action or (iv) the Guarantor shall authorize the Indemnified Person to employ separate counsel at the expense of the Guarantor. The Guarantor will not, without the prior written consent of the Indemnified Persons, settle or compromise or consent to the entry of any judgment with respect to any pending or threatened claim, action, suit or proceeding in respect of which indemnification or contribution may be sought hereunder (whether or not the Indemnified Persons are actual or potential parties to such claim or action) unless such settlement, compromise or consent includes an unconditional release of each Indemnified Person from all liability arising out of such claim, action, suit or proceeding. Section 7.3. Compensation; Reimbursement of Expenses. The Guarantor ----------------------------------------- agrees: (a) to pay to the Guarantee Trustee from time to time such compensation for all services rendered by it hereunder as the parties shall agree to from time to time (which compensation shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust); and (b) except as otherwise expressly provided herein, to reimburse the Guarantee Trustee upon request for all reasonable expenses, disbursements and advances incurred or made by it in accordance with any provision of this Guarantee (including the reasonable compensation and the expenses and disbursements of its agents and counsel), except any such expense, disbursement or advance as may be attributable to its negligence or willful misconduct. For purposes of clarification, this Section 7.3 does not contemplate the payment by the Guarantor of acceptance or annual administration fees owing to the Guarantee Trustee for services to be provided by the Guarantee Trustee under this Guarantee or the fees and expenses of the Guarantee Trustee's counsel in connection with the closing of the transactions contemplated by this Guarantee. The provisions of this Section 7.3 shall survive the resignation or removal of the Guarantee Trustee and the termination of this Guarantee. ARTICLE VIII MISCELLANEOUS Section 8.1. Successors and Assigns. All guarantees and agreements ----------------------- contained in this Guarantee shall bind the successors, assigns, receivers, trustees and representatives of the Guarantor and shall inure to the benefit of the Holders of the Capital Securities then outstanding. Except in connection with any merger or consolidation of the Guarantor with or into another entity or any sale, transfer or lease of the Guarantor's assets to another entity, in each case, to the extent permitted under the Indenture, the Guarantor may not assign its rights or delegate its obligations under this Guarantee without the prior approval of the Holders of at least a Majority in liquidation amount of the Capital Securities. Section 8.2. Amendments. Except with respect to any changes that do ---------- not adversely affect the rights of Holders of the Capital Securities in any material respect (in which case no consent of Holders will be required), this Guarantee may be amended only with the prior approval of the Holders of not less than a Majority in liquidation amount of the Capital Securities. The provisions of the Declaration with respect to amendments thereof apply to the giving of such approval. Section 8.3. Notices. All notices provided for in this Guarantee shall ------- be in writing, duly signed by the party giving such notice, and shall be delivered, telecopied or mailed by first class mail, as follows: (a) If given to the Guarantee Trustee, at the Guarantee Trustee's mailing address set forth below (or such other address as the Guarantee Trustee may give notice of to the Holders of the Capital Securities and the Guarantor): Wilmington Trust Company Rodney Square North 1100 North Market Street Wilmington, Delaware 19890-1600 Attention Corporate Trust Administration Telecopy: 302-636-4140 (b) If given to the Guarantor, at the Guarantor's mailing address set forth below (or such other address as the Guarantor may give notice of to the Holders of the Capital Securities and to the Guarantee Trustee): First Banks, Inc. 600 James S. McDonnell Boulevard Mail Stop M1 199 014 Hazelwood, Missouri 63042 Attention: Lisa K. Vansickle Telecopy: 314-592-6621 (c) If given to any Holder of the Capital Securities, at the address set forth on the books and records of the Issuer. All such notices shall be deemed to have been given when received in person, telecopied with receipt confirmed, or mailed by first class mail, postage prepaid, except that if a notice or other document is refused delivery or cannot be delivered because of a changed address of which no notice was given, such notice or other document shall be deemed to have been delivered on the date of such refusal or inability to deliver. Section 8.4. Benefit. This Guarantee is solely for the benefit of the ------- Beneficiaries and, subject to Section 2.1(a), is not separately transferable from the Capital Securities. Section 8.5. Governing Law. THIS GUARANTEE SHALL BE GOVERNED BY, AND ------------- CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK, WITHOUT REGARD TO CONFLICT OF LAWS PRINCIPLES THEREOF (OTHER THAN SECTION 5-1401 OF THE NEW YORK GENERAL OBLIGATIONS LAW). Section 8.6. Counterparts. This Guarantee may be executed in one or ------------ more counterparts, each of which shall be an original, but all of which taken together shall constitute one and the same instrument. Section 8.7 Separability. In case one or more of the provisions ------------ contained in this Guarantee shall for any reason be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provisions of this Guarantee, but this Guarantee shall be construed as if such invalid or illegal or unenforceable provision had never been contained herein. Signatures appear on the following page THIS GUARANTEE is executed as of the day and year first above written. FIRST BANKS, INC., as Guarantor By: /s/ Lisa K. Vansickle ----------------------------------- Name: Lisa K. Vansickle Title: Senior Vice President WILMINGTON TRUST COMPANY, as Guarantee Trustee By: /s/ Christopher J. Monigle ----------------------------------- Name: Christopher J. Monigle Title: Vice President EX-4 5 v11placement.txt 4.60 Exhibit 4.60 FIRST BANKS, INC. 50,000 Capital Securities Floating Rate Capital Securities (Liquidation Amount $1,000.00 per Capital Security) PLACEMENT AGREEMENT --------------- December 6, 2006 FTN Financial Capital Markets 845 Crossover Lane, Suite 150 Memphis, Tennessee 38117 Keefe, Bruyette & Woods, Inc. 787 7th Avenue 4th Floor New York, New York 10019 Ladies and Gentlemen: First Banks, Inc., a Missouri corporation (the "Company"), and its financing subsidiary, First Bank Statutory Trust VII, a Delaware statutory trust (the "Trust," and hereinafter together with the Company, the "Offerors"), hereby confirm their agreement (this "Agreement") with you as placement agents (the "Placement Agents"), as follows: Section 1. Issuance and Sale of Securities. ------------------------------- 1.1. Introduction. The Offerors propose to issue and sell at the ------------ Closing (as defined in Section 2.3.1 hereof) 50,000 of the Trust's Floating Rate Capital Securities, with a liquidation amount of $1,000.00 per capital security (the "Capital Securities"), to First Tennessee Bank National Association, a national banking association organized under the laws of the United States of America and Preferred Term Securities XXIV, Ltd., a company with limited liability established under the laws of the Cayman Islands (the "Purchasers") pursuant to the terms of Subscription Agreements entered into, or to be entered into on or prior to the Closing Date (as defined in Section 2.3.1 hereof), between the Offerors and the Purchasers (the "Subscription Agreements"), the forms of which are attached hereto as Exhibit A-1 and Exhibit A-2 and ------------ ------------ incorporated herein by this reference. 1.2. Operative Agreements. The Capital Securities shall be fully and -------------------- unconditionally guaranteed on a subordinated basis by the Company with respect to distributions and amounts payable upon liquidation, redemption or repayment (the "Guarantee") pursuant and subject to the Guarantee Agreement (the "Guarantee Agreement"), to be dated as of the Closing Date and executed and delivered by the Company and Wilmington Trust Company ("WTC"), as trustee (the "Guarantee Trustee"), for the benefit from time to time of the holders of the Capital Securities. The entire proceeds from the sale by the Trust to the holders of the Capital Securities shall be combined with the entire proceeds from the sale by the Trust to the Company of its common securities (the "Common Securities"), and shall be used by the Trust to purchase $51,547,000.00 in principal amount of the Floating Rate Junior Subordinated Deferrable Interest Debentures (the "Debentures") of the Company. The Capital Securities and the Common Securities for the Trust shall be issued pursuant to an Amended and Restated Declaration of Trust among WTC, as Delaware trustee (the "Delaware Trustee"), WTC, as institutional trustee (the "Institutional Trustee"), the Administrators named therein, and the Company, to be dated as of the Closing Date and in substantially the form heretofore delivered to the Placement Agents (the "Trust Agreement"). The Debentures shall be issued pursuant to an Indenture (the "Indenture"), to be dated as of the Closing Date, between the Company and WTC, as indenture trustee (the "Indenture Trustee"). The documents identified in this Section 1.2 and in Section 1.1 are referred to herein as the "Operative Documents." 1.3. Rights of Purchasers. The Capital Securities shall be offered -------------------- and sold by the Trust directly to the Purchasers without registration of any of the Capital Securities, the Debentures or the Guarantee under the Securities Act of 1933, as amended (the "Securities Act"), or any other applicable securities laws in reliance upon exemptions from the registration requirements of the Securities Act and other applicable securities laws. The Offerors agree that this Agreement shall be incorporated by reference into the Subscription Agreements and the Purchasers shall be entitled to each of the benefits of the Placement Agents and the Purchasers under this Agreement and shall be entitled to enforce obligations of the Offerors under this Agreement as fully as if the Purchasers were parties to this Agreement. The Offerors and the Placement Agents have entered into this Agreement to set forth their understanding as to their relationship and their respective rights, duties and obligations. 1.4. Legends. Upon original issuance thereof, and until such time as ------- the same is no longer required under the applicable requirements of the Securities Act, the Capital Securities and Debentures certificates shall each contain a legend as required pursuant to any of the Operative Documents. Section 2. Purchase of Capital Securities. ------------------------------ 2.1. Exclusive Rights; Purchase Price. From the date hereof until ---------------------------------- the Closing Date (which date may be extended by mutual agreement of the Offerors and the Placement Agents), the Offerors hereby grant to the Placement Agents the exclusive right to arrange for the sale of the Capital Securities to the Purchasers at a purchase price of $1,000.00 per Capital Security. 2.2. Subscription Agreements. The Offerors hereby agree to evidence ------------------------ their acceptance of the subscription by countersigning a copy of each of the Subscription Agreements and returning the same to the Placement Agents. 2.3. Closing and Delivery of Payment. ------------------------------- 2.3.1. Closing; Closing Date. The sale and purchase of the ----------------------- Capital Securities by the Offerors to the Purchasers shall take place at a closing (the "Closing") at the offices of Lewis, Rice & Fingersh, L.C., at 10:00 a.m. (St. Louis time) on December 14, 2006, or such other business day as may be agreed upon by the Offerors and the Placement Agents (the "Closing Date"); provided, however, that in no event shall the Closing Date occur later than - -------- ------- December 29, 2006 unless consented to by the Purchasers. Payment by the Purchasers shall be payable in the manner set forth in the Subscription Agreements and shall be made prior to or on the Closing Date. 2.3.2. Delivery. The certificates for the Capital Securities -------- shall be in definitive form, each registered in the name of the applicable Purchaser, or Purchaser designee, and in the aggregate amount of the Capital Securities purchased by the Purchaser. 2.3.3. Transfer Agent. Not less than two full business days -------------- prior to the Closing Date, a global Capital Securities certificate in definitive form shall be made available by or on behalf of the Offerors to the Placement Agents and the Institutional Trustee for inspection and delivery to the Depository Trust Company ("DTC") or its custodian. 2.4. Costs and Expenses. Whether or not this Agreement is terminated ------------------ or the sale of the Capital Securities is consummated, the Company hereby covenants and agrees that it shall pay or cause to be paid (directly or by reimbursement) all reasonable costs and expenses incident to the performance of the obligations of the Offerors under this Agreement, including all fees, expenses and disbursements of counsel and accountants for the Offerors; all reasonable expenses incurred by the Offerors incident to the preparation, execution and delivery of the Trust Agreement, the Indenture, and the Guarantee; and all other reasonable costs and expenses incident to the performance of the obligations of the Company hereunder and under the Trust Agreement. 2.5. Failure to Close. If any of the conditions to the Closing ---------------- specified in this Agreement shall not have been fulfilled to the satisfaction of the Placement Agents or if the Closing shall not have occurred on or before 10:00 a.m. (St. Louis time) on December 29, 2006, then each party hereto, notwithstanding anything to the contrary in this Agreement, shall be relieved of all further obligations under this Agreement without thereby waiving any rights it may have by reason of such nonfulfillment or failure; provided, however, that -------- ------- the obligations of the parties under Sections 2.4, 7.5 and 9 shall not be so relieved and shall continue in full force and effect. Section 3. Closing Conditions. The obligations of the Purchasers ------------------ and the Placement Agents on the Closing Date shall be subject to the accuracy, at and as of the Closing Date, of the representations and warranties of the Offerors contained in this Agreement, to the accuracy, at and as of the Closing Date, of the statements of the Offerors made in any certificates pursuant to this Agreement, to the performance by the Offerors of their respective obligations under this Agreement, to compliance, at and as of the Closing Date, by the Offerors with their respective agreements herein contained, and to the following further conditions: 3.1. Opinions of Counsel. On the Closing Date, the Placement Agents ------------------- shall have received the following favorable opinions, each dated as of the Closing Date: (a) from Stinson Morrison Hecker LLP, counsel for the Offerors and addressed to the Purchasers, the Placement Agents and WTC in substantially the form set forth on Exhibit B-1 attached hereto and incorporated herein by this ----------- reference, (b) from Richards, Layton & Finger, P.A., special Delaware counsel to the Offerors and addressed to the Purchasers, the Placement Agents and the Offerors, in substantially the form set forth on Exhibit B-2 attached hereto and ----------- incorporated herein by this reference and (c) from Lewis, Rice & Fingersh, L.C., special tax counsel to the Offerors, and addressed to the Placement Agents and the Offerors, addressing the items set forth on Exhibit B-3 attached hereto and ----------- incorporated herein by this reference, subject to the receipt by Lewis, Rice & Fingersh, L.C. of a representation letter from the Company in the form set forth in Exhibit B-3 completed in a manner reasonably satisfactory to Lewis, Rice & ----------- Fingersh, L.C. (collectively, the "Offerors' Counsel Opinions"). In rendering the Offerors' Counsel Opinions, counsel to the Offerors may rely as to factual matters upon certificates or other documents furnished by officers, directors and trustees of the Offerors (copies of which shall be delivered to the Placement Agents and the Purchasers) and by government officials, and upon such other documents as counsel to the Offerors may, in their reasonable opinion, deem appropriate as a basis for the Offerors' Counsel Opinions. Counsel to the Offerors may specify the jurisdictions in which they are admitted to practice and that they are not admitted to practice in any other jurisdiction and are not experts in the law of any other jurisdiction. If the Offerors' counsel is not admitted to practice in the State of New York, the opinion of Offerors' counsel may assume, for purposes of the opinion, that the laws of the State of New York are substantively identical, in all respects material to the opinion, to the internal laws of the state in which such counsel is admitted to practice. Such Offerors' Counsel Opinions shall not state that they are to be governed or qualified by, or that they are otherwise subject to, any treatise, written policy or other document relating to legal opinions, including, without limitation, the Legal Opinion Accord of the ABA Section of Business Law (1991). 3.2. Officer's Certificate. At the Closing Date, the Purchasers and --------------------- the Placement Agents shall have received certificates from an authorized officer of the Company, dated as of the Closing Date, stating that (i) the representations and warranties of the Offerors set forth in Section 5 hereof are true and correct as of the Closing Date and that the Offerors have complied with all agreements and satisfied all conditions on their part to be performed or satisfied at or prior to the Closing Date, (ii) since the date of this Agreement the Offerors have not incurred any liability or obligation, direct or contingent, or entered into any material transactions, other than in the ordinary course of business, which is material to the Offerors, and (iii) covering such other matters as the Placement Agents may reasonably request. 3.3. Administrator's Certificate. At the Closing Date, the Purchasers --------------------------- and the Placement Agents shall have received a certificate of one or more Administrators of the Trust, dated as of the Closing Date, stating that the representations and warranties of the Trust set forth in Section 5 are true and correct as of the Closing Date and that the Trust has complied with all agreements and satisfied all conditions on its part to be performed or satisfied at or prior to the Closing Date. 3.4. Purchase Permitted by Applicable Laws; Legal Investment. The ---------------------------------------------------------- purchase of and payment for the Capital Securities as described in this Agreement and pursuant to the Subscription Agreements shall (a) not be prohibited by any applicable law or governmental regulation, (b) not subject the Purchasers or the Placement Agents to any penalty or, in the reasonable judgment of the Purchasers and the Placement Agents, other onerous conditions under or pursuant to any applicable law or governmental regulation, and (c) be permitted by the laws and regulations of the jurisdictions to which the Purchasers and the Placement Agents are subject. 3.5. Consents and Permits. The Company and the Trust shall have --------------------- received all consents, permits and other authorizations, and made all such filings and declarations, as may be required from any person or entity pursuant to any law, statute, regulation or rule (federal, state, local and foreign), or pursuant to any agreement, order or decree to which the Company or the Trust is a party or to which either is subject, in connection with the transactions contemplated by this Agreement. 3.6. Sale of Purchaser Securities. Preferred Term Securities XXIV, ---------------------------- Ltd. shall have sold securities issued by it in an amount such that the net proceeds of such sale shall be (i) available on the Closing Date and (ii) in an amount sufficient to purchase that portion of the Capital Securities Preferred Term Securities XXIV, Ltd. agrees to purchase pursuant to the Subscription Agreement to be entered into by it and all other capital or similar securities contemplated to be purchased by Preferred Term Securities XXIV, Ltd. in agreements similar to this Agreement and the Subscription Agreement to be entered into by it. 3.7. Information. Prior to or on the Closing Date, the Offerors shall ----------- have furnished to the Placement Agents such further information, certificates, opinions and documents addressed to the Purchasers and the Placement Agents, which the Placement Agents may reasonably request, including, without limitation, a complete set of the Operative Documents or any other documents or certificates required by this Section 3; and all proceedings taken by the Offerors in connection with the issuance, offer and sale of the Capital Securities as herein contemplated shall be reasonably satisfactory in form and substance to the Placement Agents. If any condition specified in this Section 3 shall not have been fulfilled when and as required in this Agreement, or if any of the opinions or certificates mentioned above or elsewhere in this Agreement shall not be reasonably satisfactory in form and substance to the Placement Agents, this Agreement may be terminated by the Placement Agents by notice to the Offerors at any time at or prior to the Closing Date. Notice of such termination shall be given to the Offerors in writing or by telephone or facsimile confirmed in writing. Section 4. Conditions to the Offerors' Obligations. The obligations of the --------------------------------------- Offerors to sell the Capital Securities to the Purchasers and consummate the transactions contemplated by this Agreement shall be subject to the accuracy, at and as of the Closing Date, of the representations and warranties of the Placement Agents contained in this Agreement and to the following further conditions: 4.1. Executed Agreement. The Offerors shall have received from the ------------------ Placement Agents an executed copy of this Agreement. 4.2. Fulfillment of Other Obligations. The Placement Agents shall -------------------------------- have fulfilled all of their other obligations and duties required to be fulfilled under this Agreement prior to or at the Closing. Section 5. Representations and Warranties of the Offerors. Except as set ---------------------------------------------- forth on the Disclosure Schedule (as defined in Section 11.1) attached hereto, if any, the Offerors jointly and severally represent and warrant to the Placement Agents and the Purchasers as of the date hereof and as of the Closing Date as follows: 5.1. Securities Law Matters. ---------------------- (a) Neither the Company nor the Trust, nor any of their "Affiliates" (as defined in Rule 501(b) of Regulation D under the Securities Act ("Regulation D")), nor any person acting on any of their behalf has, directly or indirectly, made offers or sales of any security, or solicited offers to buy any security, under circumstances that would require the registration under the Securities Act of any of the Capital Securities, the Guarantee or the Debentures (collectively, the "Securities") or any other securities to be issued, or which may be issued, by Preferred Term Securities XXIV, Ltd. (b) Neither the Company nor the Trust, nor any of their Affiliates, nor any person acting on its or their behalf has (i) other than the Placement Agents, offered for sale or solicited offers to purchase the Securities, (ii) engaged in any form of offering, general solicitation or general advertising (within the meaning of Regulation D) in connection with any offer or sale of any of the Securities, or (iii) engaged or will engage in any "directed selling efforts" within the meaning of Regulation S of the Securities Act ("Regulation S") with respect to the Securities. (c) The Securities satisfy the eligibility requirements of Rule 144A(d)(3) under the Securities Act. (d) Neither the Company nor the Trust is or, after giving effect to the offering and sale of the Capital Securities and the consummation of the transactions described in this Agreement, will be an "investment company" or an entity "controlled" by an "investment company," in each case within the meaning of Section 3(a) of the Investment Company Act of 1940, as amended (the "Investment Company Act"), without regard to Section 3(c) of the Investment Company Act. (e) Neither the Company nor the Trust has paid or agreed to pay to any person or entity (other than the Placement Agents) any compensation for soliciting another to purchase any of the Securities. 5.2. Organization, Standing and Qualification of the Trust. The Trust ----------------------------------------------------- has been duly created and is validly existing in good standing as a statutory trust under the Delaware Statutory Trust Act (the "Statutory Trust Act") with the power and authority to own property and to conduct the business it transacts and proposes to transact and to enter into and perform its obligations under the Operative Documents. The Trust is duly qualified to transact business as a foreign entity and is in good standing in each jurisdiction in which such qualification is necessary, except where the failure to so qualify or be in good standing would not have a material adverse effect on the Trust. The Trust is not a party to or otherwise bound by any agreement other than the Operative Documents. The Trust is and will, under current law, be classified for federal income tax purposes as a grantor trust and not as an association taxable as a corporation. 5.3. Trust Agreement. The Trust Agreement has been duly authorized by --------------- the Company and, on the Closing Date, will have been duly executed and delivered by the Company and the Administrators of the Trust, and, assuming due authorization, execution and delivery by the Delaware Trustee and the Institutional Trustee, will be a valid and binding obligation of the Company and such Administrators, enforceable against them in accordance with its terms, subject to (a) applicable bankruptcy, insolvency, moratorium, receivership, reorganization, liquidation and other laws relating to or affecting creditors' rights generally, and (b) general principles of equity (regardless of whether considered and applied in a proceeding in equity or at law) ("Bankruptcy and Equity"). Each of the Administrators of the Trust is an employee or a director of the Company or of a financial institution subsidiary of the Company and has been duly authorized by the Company to execute and deliver the Trust Agreement. 5.4. Guarantee Agreement and the Indenture. Each of the Guarantee -------------------------------------- and the Indenture has been duly authorized by the Company and, on the Closing Date, will have been duly executed and delivered by the Company, and, assuming due authorization, execution and delivery by the Guarantee Trustee, in the case of the Guarantee, and by the Indenture Trustee, in the case of the Indenture, will be a valid and binding obligation of the Company enforceable against it in accordance with its terms, subject to Bankruptcy and Equity. 5.5. Capital Securities and Common Securities. The Capital Securities ---------------------------------------- and the Common Securities have been duly authorized by the Trust Agreement and, when issued and delivered against payment therefor on the Closing Date to the Purchasers, in the case of the Capital Securities, and to the Company, in the case of the Common Securities, will be validly issued and represent undivided beneficial interests in the assets of the Trust. None of the Capital Securities or the Common Securities is subject to preemptive or other similar rights. On the Closing Date, all of the issued and outstanding Common Securities will be directly owned by the Company free and clear of any pledge, security interest, claim, lien or other encumbrance. 5.6. Debentures. The Debentures have been duly authorized by the ---------- Company and, at the Closing Date, will have been duly executed and delivered to the Indenture Trustee for authentication in accordance with the Indenture, and, when authenticated in the manner provided for in the Indenture and delivered against payment therefor by the Trust, will constitute valid and binding obligations of the Company entitled to the benefits of the Indenture enforceable against the Company in accordance with their terms, subject to Bankruptcy and Equity. 5.7. Power and Authority. This Agreement has been duly authorized, ------------------- executed and delivered by the Company and the Trust and constitutes the valid and binding obligation of the Company and the Trust, enforceable against the Company and the Trust in accordance with its terms, subject to Bankruptcy and Equity. 5.8. No Defaults. The Trust is not in violation of the Trust ----------- Agreement or, to the knowledge of the Administrators, any provision of the Statutory Trust Act. The execution, delivery and performance by the Company or the Trust of this Agreement or the Operative Documents to which it is a party, and the consummation of the transactions contemplated herein or therein and the use of the proceeds therefrom, will not conflict with or constitute a breach of, or a default under, or result in the creation or imposition of any lien, charge or other encumbrance upon any property or assets of the Trust, the Company or any of the Company's Subsidiaries (as defined in Section 5.11 hereof) pursuant to any contract, indenture, mortgage, loan agreement, note, lease or other instrument to which the Trust, the Company or any of its Subsidiaries is a party or by which it or any of them may be bound, or to which any of the property or assets of any of them is subject, except for a conflict, breach, default, lien, charge or encumbrance which could not, singly or in the aggregate, reasonably be expected to have a Material Adverse Effect nor will such action result in any violation of the Trust Agreement or the Statutory Trust Act or require the consent, approval, authorization or order of any court or governmental agency or body. As used herein, the term "Material Adverse Effect" means any one or more effects that individually or in the aggregate are material and adverse to the Offerors' ability to consummate the transactions contemplated herein or in the Operative Documents or any one or more effects that individually or in the aggregate are material and adverse to the condition (financial or otherwise), earnings, affairs, business, prospects or results of operations of the Company and its Subsidiaries taken as whole, whether or not occurring in the ordinary course of business. 5.9. Organization, Standing and Qualification of the Company. The ---------------------------------------------------------- Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of Missouri, with all requisite corporate power and authority to own its properties and conduct the business it transacts and proposes to transact, and is duly qualified to transact business and is in good standing as a foreign corporation in each jurisdiction where the nature of its activities requires such qualification, except where the failure of the Company to be so qualified would not, singly or in the aggregate, have a Material Adverse Effect. 5.10. Subsidiaries of the Company. Each of the Company's significant --------------------------- subsidiaries (as defined in Section 1-02(w) of Regulation S-X to the Securities Act (the "Significant Subsidiaries")) is listed in Exhibit C attached hereto and --------- incorporated herein by this reference. Each Significant Subsidiary has been duly organized and is validly existing and in good standing under the laws of the jurisdiction in which it is chartered or organized, with all requisite power and authority to own its properties and conduct the business it transacts and proposes to transact, and is duly qualified to transact business and is in good standing as a foreign entity in each jurisdiction where the nature of its activities requires such qualification, except where the failure of any such Significant Subsidiary to be so qualified would not, singly or in the aggregate, have a Material Adverse Effect. All of the issued and outstanding shares of capital stock of the Significant Subsidiaries (a) have been duly authorized and are validly issued, (b) are fully paid and nonassessable, and (c) are wholly owned, directly or indirectly, by the Company free and clear of any security interest, mortgage, pledge, lien, encumbrance, restriction upon voting or transfer, preemptive rights, claim, equity or other defect. 5.11. Permits. The Company and each of its subsidiaries (as defined in ------- Section 1-02(x) of Regulation S-X to the Securities Act) (the "Subsidiaries") have all requisite power and authority, and all necessary authorizations, approvals, orders, licenses, certificates and permits of and from regulatory or governmental officials, bodies and tribunals, to own or lease their respective properties and to conduct their respective businesses as now being conducted, except such authorizations, approvals, orders, licenses, certificates and permits which, if not obtained and maintained, would not, singly or in the aggregate, have a Material Adverse Effect, and neither the Company nor any of its Subsidiaries has received any notice of proceedings relating to the revocation or modification of any such authorizations, approvals, orders, licenses, certificates or permits which, singly or in the aggregate, if the failure to be so licensed or approved is the subject of an unfavorable decision, ruling or finding, would, singly or in the aggregate, have a Material Adverse Effect; and the Company and its Subsidiaries are in compliance with all applicable laws, rules, regulations and orders and consents, the violation of which would, singly or in the aggregate, have a Material Adverse Effect. 5.12. Conflicts, Authorizations and Approvals. Neither the Company nor --------------------------------------- any of its Subsidiaries is in violation of its respective articles or certificate of incorporation, charter or by-laws or similar organizational documents or in default in the performance or observance of any obligation, agreement, covenant or condition contained in any contract, indenture, mortgage, loan agreement, note, lease or other agreement or instrument to which either the Company or any of its Subsidiaries is a party, or by which it or any of them may be bound or to which any of the property or assets of the Company or any of its Subsidiaries is subject, the effect of which violation or default in performance or observance would have, singly or in the aggregate, a Material Adverse Effect. 5.13. Holding Company Registration and Deposit Insurance. The Company -------------------------------------------------- is duly registered (i) as a bank holding company or financial holding company under the Bank Holding Company Act of 1956, as amended, and the regulations of the Board of Governors of the Federal Reserve System (the "Federal Reserve") or (ii) as a savings and loan holding company under the Home Owners' Loan Act of 1933, as amended, and the regulations of the Office of Thrift Supervision (the "OTS"), and the deposit accounts of the Company's Subsidiary depository institutions are insured by the Federal Deposit Insurance Corporation ("FDIC") to the fullest extent permitted by law and the rules and regulations of the FDIC, and no proceedings for the termination of such insurance are pending or threatened. 5.14. Financial Statements. -------------------- (a) The consolidated balance sheets of the Company and all of its Subsidiaries as of December 31, 2005 and December 31, 2004 and related consolidated income statements and statements of changes in shareholders' equity for the three years ended December 31, 2005 together with the notes thereto, copies of each of which have been provided to the Placement Agents (together, the "Financial Statements"), have been prepared in accordance with generally accepted accounting principles applied on a consistent basis (except as may be disclosed therein) and fairly present in all material respects the financial position and the results of operations and changes in shareholders' equity of the Company and all of its Subsidiaries as of the dates and for the periods indicated. The books and records of the Company and all of its Subsidiaries have been, and are being, maintained in all material respects in accordance with generally accepted accounting principles and any other applicable legal and accounting requirements and reflect only actual transactions. (b) The information in the Company's most recently filed (i) FR Y-9C filed with the Federal Reserve if the Company is a bank holding company, (ii) FR Y-9SP filed with the Federal Reserve if the Company is a small bank holding company or (iii) H-(b)11 filed with the OTS if the Company is a savings and loan holding company (the "Regulatory Report"), previously provided to the Placement Agents fairly presents in all material respects the financial position of the Company and, where applicable, all of its Subsidiaries as of the end of the period represented by such Regulatory Report. (c) Since the respective dates of the Financial Statements and the Regulatory Report, there has been no material adverse change or development with respect to the financial condition or earnings of the Company and all of its Subsidiaries, taken as a whole. (d) The accountants of the Company who certified the Financial Statements are independent public accountants of the Company and its Subsidiaries within the meaning of the Securities Act and the rules and regulations thereunder. 5.15. Exchange Act Reporting. The reports filed with the Securities ---------------------- and Exchange Commission (the "Commission") by the Company under the Securities Exchange Act of 1934, as amended (the "1934 Act") and the regulations thereunder at the time they were filed with the Commission complied as to form in all material respects with the requirements of the 1934 Act and such reports did not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading except to the extent superseded by a subsequent report filed by the Company with the Commission. 5.16. Regulatory Enforcement Matters. Neither the Company nor any of ------------------------------ its Subsidiaries is subject or is party to, or has received any notice or advice that any of them may become subject or party to, any investigation with respect to, any cease-and-desist order, agreement, consent agreement, memorandum of understanding or other regulatory enforcement action, proceeding or order with or by, or is a party to any commitment letter or similar undertaking to, or is subject to any directive by, or has been since January 1, 2003, a recipient of any supervisory letter from, or since January 1, 2003, has adopted any board resolutions at the request of, any Regulatory Agency (as defined below) that currently restricts in any material respect the conduct of their business or that in any material manner relates to their capital adequacy, their credit policies, their ability or authority to pay dividends or make distributions to their shareholders or make payments of principal or interest on their debt obligations, their management or their business (each, a "Regulatory Agreement"), nor has the Company or any of its Subsidiaries been advised since January 1, 2003, by any Regulatory Agency that it is considering issuing or requesting any such Regulatory Agreement. There is no material unresolved violation, criticism or exception by any Regulatory Agency with respect to any report or statement relating to any examinations of the Company or any of its Subsidiaries. As used herein, the term "Regulatory Agency" means any federal or state agency charged with the supervision or regulation of depository institutions, bank, financial or savings and loan holding companies, or engaged in the insurance of depository institution deposits, or any court, administrative agency or commission or other governmental agency, authority or instrumentality having supervisory or regulatory authority with respect to the Company or any of its Subsidiaries. Neither the Company nor any of the Subsidiaries is currently unable to pay dividends or make distributions to its shareholders with respect to any class of its equity securities, or prohibited from paying principal or interest on its debt obligations, due to a restriction or limitation, whether by statute, contract or otherwise, and, in the reasonable judgment of the Company's management, neither the Company nor any of the Subsidiaries will be unable in the foreseeable future to pay dividends or make distributions with respect to any class of equity securities, or be prohibited from paying principal or interest on its debt obligations, due to a restriction or limitation, whether by statute, contract or otherwise. 5.17. No Material Change. Since December 31, 2005, there has been no ------------------ material adverse change or development with respect to the condition (financial or otherwise), earnings, affairs, business, prospects or results of operations of the Company or its Subsidiaries on a consolidated basis, whether or not arising in the ordinary course of business. 5.18. No Undisclosed Liabilities. Neither the Company nor any of its --------------------------- Subsidiaries has any material liability, whether known or unknown, whether asserted or unasserted, whether absolute or contingent, whether accrued or unaccrued, whether liquidated or unliquidated, and whether due or to become due, including any liability for taxes (and there is no past or present fact, situation, circumstance, condition or other basis for any present or future action, suit, proceeding, hearing, charge, complaint, claim or demand against the Company or its Subsidiaries giving rise to any such liability), except (i) for liabilities set forth in the Financial Statements and (ii) normal fluctuation in the amount of the liabilities referred to in clause (i) above occurring in the ordinary course of business of the Company and all of its Subsidiaries since the date of the most recent balance sheet included in the Financial Statements. 5.19. Litigation. No charge, investigation, action, suit or proceeding ---------- is pending or, to the knowledge of the Offerors, threatened, against or affecting the Company or its Subsidiaries or any of their respective properties before or by any courts or any regulatory, administrative or governmental official, commission, board, agency or other authority or body, or any arbitrator, wherein an unfavorable decision, ruling or finding could have, singly or in the aggregate, a Material Adverse Effect. 5.20. Deferral of Interest Payments on Debentures. The Company has no ------------------------------------------- present intention to exercise its option to defer payments of interest on the Debentures as provided in the Indenture. The Company believes that the likelihood that it would exercise its right to defer payments of interest on the Debentures as provided in the Indenture at any time during which the Debentures are outstanding is remote because of the restrictions that would be imposed on the Company's ability to declare or pay dividends or distributions on, or to redeem, purchase, acquire or make a liquidation payment with respect to, any of the Company's capital stock and on the Company's ability to make any payments of principal, interest or premium on, or repay, repurchase or redeem, any of its debt securities that rank pari passu in all respects with, or junior in interest to, the Debentures. Section 6. Representations and Warranties of the Placement Agents. Each --------------------------------------------------------- Placement Agent represents and warrants to the Offerors as to itself (but not as to the other Placement Agent) as follows: 6.1. Organization, Standing and Qualification. ------------------------------------------- (a) FTN Financial Capital Markets is a division of First Tennessee Bank National Association, a national banking association duly organized, validly existing and in good standing under the laws of the United States, with full power and authority to own, lease and operate its properties and conduct its business as currently being conducted. FTN Financial Capital Markets is duly qualified to transact business as a foreign corporation and is in good standing in each other jurisdiction in which it owns or leases property or conducts its business so as to require such qualification and in which the failure to so qualify would, individually or in the aggregate, have a material adverse effect on the condition (financial or otherwise), earnings, business, prospects or results of operations of FTN Financial Capital Markets. (b) Keefe, Bruyette & Woods, Inc. is a corporation duly organized, validly existing and in good standing under the laws of the State of New York, with full power and authority to own, lease and operate its properties and conduct its business as currently being conducted. Keefe, Bruyette & Woods, Inc. is duly qualified to transact business as a foreign corporation and is in good standing in each other jurisdiction in which it owns or leases property or conducts its business so as to require such qualification and in which the failure to so qualify would, individually or in the aggregate, have a material adverse effect on the condition (financial or otherwise), earnings, business, prospects or results of operations of Keefe, Bruyette & Woods, Inc. 6.2. Power and Authority. The Placement Agent has all requisite power ------------------- and authority to enter into this Agreement, and this Agreement has been duly and validly authorized, executed and delivered by the Placement Agent and constitutes the legal, valid and binding agreement of the Placement Agent, enforceable against the Placement Agent in accordance with its terms, subject to Bankruptcy and Equity and except as any indemnification or contribution provisions thereof may be limited under applicable securities laws. 6.3. General Solicitation. In the case of the offer and sale of the -------------------- Capital Securities, no form of general solicitation or general advertising was used by the Placement Agent or its representatives including, but not limited to, advertisements, articles, notices or other communications published in any newspaper, magazine or similar medium or broadcast over television or radio or any seminar or meeting whose attendees have been invited by any general solicitation or general advertising. Neither the Placement Agent nor its representatives have engaged or will engage in any "directed selling efforts" within the meaning of Regulation S with respect to the Capital Securities. 6.4. Purchasers. The Placement Agent has made such reasonable inquiry ---------- as is necessary to determine that each Purchaser is acquiring the Capital Securities for its own account and that the Purchasers do not intend to distribute the Capital Securities in contravention of the Securities Act or any other applicable securities laws. 6.5. Qualified Purchasers. The Placement Agent has not offered or --------------------- sold and will not arrange for the offer or sale of the Capital Securities except (i) to those the Placement Agent reasonably believes are "accredited investors" (as defined in Rule 501 of Regulation D), (ii) in an offshore transaction complying with Rule 903 of Regulation S, or (iii) in any other manner that does not require registration of the Capital Securities under the Securities Act. In connection with each such sale, the Placement Agent has taken or will take reasonable steps to ensure that the purchasers is aware that (a) such sale is being made in reliance on an exemption under the Securities Act and (b) future transfers of the Capital Securities will not be made except in compliance with applicable securities laws. 6.6. Offering Circulars. Neither the Placement Agent nor its ------------------- representatives will include any non-public information about the Company, the Trust or any of their Affiliates in any registration statement, prospectus, offering circular or private placement memorandum used in connection with any purchase of Capital Securities without the prior written consent of the Trust and the Company. Section 7. Covenants of the Offerors. The Offerors covenant and agree with ------------------------- the Placement Agents and the Purchasers as follows: 7.1. Compliance with Representations and Warranties. During the -------------------------------------------------- period from the date of this Agreement to the Closing Date, the Offerors shall use their best efforts and take all action necessary or appropriate to cause their representations and warranties contained in Section 5 hereof to be true as of the Closing Date, after giving effect to the transactions contemplated by this Agreement, as if made on and as of the Closing Date. 7.2. Sale and Registration of Securities. The Offerors and their ------------------------------------ Affiliates shall not nor shall any of them permit any person acting on their behalf (other than the Placement Agents), to directly or indirectly (i) sell, offer for sale or solicit offers to buy or otherwise negotiate in respect of any security (as defined in the Securities Act) that would or could be integrated with the sale of the Capital Securities in a manner that would require the registration under the Securities Act of the Securities or (ii) make offers or sales of any such Security, or solicit offers to buy any such Security, under circumstances that would require the registration of any of such Securities under the Securities Act. 7.3. Use of Proceeds. The Trust shall use the proceeds from the sale --------------- of the Capital Securities and the Common Securities to purchase the Debentures from the Company. 7.4. Investment Company. The Offerors shall not engage, or permit ------------------- any Subsidiary to engage, in any activity which would cause it or any Subsidiary to be an "investment company" under the provisions of the Investment Company Act. 7.5. Reimbursement of Expenses. If the sale of the Capital --------------------------- Securities provided for herein is not consummated (i) because any condition set forth in Section 3 hereof is not satisfied, or (ii) because of any refusal, inability or failure on the part of the Company or the Trust to perform any agreement herein or comply with any provision hereof other than by reason of a breach by the Placement Agents, the Company shall reimburse the Placement Agents upon demand for all of their pro rata share of out-of-pocket expenses (including reasonable fees and disbursements of counsel) in an amount not to exceed $50,000.00 that shall have been incurred by them in connection with the proposed purchase and sale of the Capital Securities. Notwithstanding the foregoing, the Company shall have no obligation to reimburse the Placement Agents for their out-of-pocket expenses if the sale of the Capital Securities fails to occur because the Placement Agents fail to fulfill a condition set forth in Section 4 or either Purchaser fails to purchase the Capital Securities. 7.6. Directed Selling Efforts, Solicitation and Advertising. In ---------------------------------------------------------- connection with any offer or sale of any of the Securities, the Offerors shall not, nor shall either of them permit any of their Affiliates or any person acting on their behalf, other than the Placement Agents, to (i) engage in any "directed selling efforts" within the meaning of Regulation S, or (ii) engage in any form of general solicitation or general advertising (as defined in Regulation D). 7.7. Compliance with Rule 144A(d)(4) under the Securities Act. So ------------------------------------------------------------ long as any of the Securities are outstanding and are "restricted securities" within the meaning of Rule 144(a)(3) under the Securities Act, the Offerors will, during any period in which they are not subject to and in compliance with Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or the Offerors are not exempt from such reporting requirements pursuant to and in compliance with Rule 12g3-2(b) under the Exchange Act, provide to each holder of such restricted securities and to each prospective purchaser (as designated by such holder) of such restricted securities, upon the request of such holder or prospective purchaser in connection with any proposed transfer, any information required to be provided by Rule 144A(d)(4) under the Securities Act, if applicable. This covenant is intended to be for the benefit of the holders, and the prospective purchasers designated by such holders, from time to time of such restricted securities. The information provided by the Offerors pursuant to this Section 7.7 will not, at the date thereof, contain any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. 7.8. Quarterly Reports. Within 50 days of the end of each calendar ----------------- year quarter and within 100 days of the end of each calendar year during which the Debentures are issued and outstanding, the Offerors shall submit to The Bank of New York a completed quarterly report in the form attached hereto as Exhibit ------- D, with a copy provided to First Tennessee during the period when it holds any - - of the Capital Securities. 7.9. Book-Entry Registration. Each Offeror will cooperate with the ----------------------- Placement Agents and use all commercially reasonable efforts to make the Capital Securities, and in the event the Debentures are distributed to holders of the Capital Securities, to make the Debentures, eligible for clearance and settlement as book-entry securities through the facilities of DTC, and will execute, deliver and comply with all representations made to, and agreements with, DTC and Nasdaq's PORTAL system. Section 8. Covenants of the Placement Agents. The Placement Agents covenant --------------------------------- and agree with the Offerors that, during the period from the date of this Agreement to the Closing Date, the Placement Agents shall use their best efforts and take all action necessary or appropriate to cause their representations and warranties contained in Section 6 to be true as of Closing Date, after giving effect to the transactions contemplated by this Agreement, as if made on and as of the Closing Date. The Placement Agents further covenant and agree not to engage in hedging transactions with respect to the Capital Securities unless such transactions are conducted in compliance with the Securities Act. Section 9. Indemnification. --------------- 9.1. Indemnification Obligation. The Offerors shall jointly and -------------------------- severally indemnify and hold harmless the Placement Agents and the Purchasers and each of their respective agents, employees, officers and directors and each person that controls either of the Placement Agents or the Purchasers within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act, and agents, employees, officers and directors or any such controlling person of either of the Placement Agents or the Purchasers (each such person or entity, an "Indemnified Party") from and against any and all losses, claims, damages, judgments, liabilities or expenses, joint or several, to which such Indemnified Party may become subject under the Securities Act, the Exchange Act or other federal or state statutory law or regulation, or at common law or otherwise (including in settlement of any litigation, if such settlement is effected with the written consent of the Offerors), insofar as such losses, claims, damages, judgments, liabilities or expenses (or actions in respect thereof) arise out of, or are based upon, or relate to, in whole or in part, (a) any untrue statement or alleged untrue statement of a material fact contained in any information (whether written or oral) or documents executed in favor of, furnished or made available to the Placement Agents or the Purchasers by the Offerors, or (b) any omission or alleged omission to state in any information (whether written or oral) or documents executed in favor of, furnished or made available to the Placement Agents or the Purchasers by the Offerors a material fact required to be stated therein or necessary to make the statements therein not misleading, and shall reimburse each Indemnified Party for any legal and other expenses as such expenses are reasonably incurred by such Indemnified Party in connection with investigating, defending, settling, compromising or paying any such loss, claim, damage, judgments, liability, expense or action described in this Section 9.1. In addition to their other obligations under this Section 9, the Offerors hereby agree that, as an interim measure during the pendency of any claim, action, investigation, inquiry or other proceeding arising out of, or based upon, or related to the matters described above in this Section 9.1, they shall reimburse each Indemnified Party on a quarterly basis for all reasonable legal or other expenses incurred in connection with investigating or defending any such claim, action, investigation, inquiry or other proceeding, notwithstanding the absence of a judicial determination as to the propriety and enforceability of the possibility that such payments might later be held to have been improper by a court of competent jurisdiction. To the extent that any such interim reimbursement payment is so held to have been improper, each Indemnified Party shall promptly return such amounts to the Offerors together with interest, determined on the basis of the prime rate (or other commercial lending rate for borrowers of the highest credit standing) announced from time to time by First Tennessee Bank National Association (the "Prime Rate"). Any such interim reimbursement payments which are not made to an Indemnified Party within 30 days of a request for reimbursement shall bear interest at the Prime Rate from the date of such request. 9.2. Conduct of Indemnification Proceedings. Promptly after receipt --------------------------------------- by an Indemnified Party under this Section 9 of notice of the commencement of any action, such Indemnified Party shall, if a claim in respect thereof is to be made against the Offerors under this Section 9, notify the Offerors in writing of the commencement thereof; but, subject to Section 9.4, the omission to so notify the Offerors shall not relieve them from any liability pursuant to Section 9.1 which the Offerors may have to any Indemnified Party unless and to the extent that the Offerors did not otherwise learn of such action and such failure by the Indemnified Party results in the forfeiture by the Offerors of substantial rights and defenses. In case any such action is brought against any Indemnified Party and such Indemnified Party seeks or intends to seek indemnity from the Offerors, the Offerors shall be entitled to participate in, and, to the extent that they may wish, to assume the defense thereof with counsel reasonably satisfactory to such Indemnified Party; provided, however, if the defendants in -------- ------- any such action include both the Indemnified Party and the Offerors and the Indemnified Party shall have reasonably concluded that there may be a conflict between the positions of the Offerors and the Indemnified Party in conducting the defense of any such action or that there may be legal defenses available to it and/or other Indemnified Parties which are different from or additional to those available to the Offerors, the Indemnified Party shall have the right to select separate counsel to assume such legal defenses and to otherwise participate in the defense of such action on behalf of such Indemnified Party. Upon receipt of notice from the Offerors to such Indemnified Party of their election to so assume the defense of such action and approval by the Indemnified Party of counsel, the Offerors shall not be liable to such Indemnified Party under this Section 9 for any legal or other expenses subsequently incurred by such Indemnified Party in connection with the defense thereof unless (i) the Indemnified Party shall have employed such counsel in connection with the assumption of legal defenses in accordance with the proviso in the preceding sentence (it being understood, however, that the Offerors shall not be liable for the expenses of more than one separate counsel representing the Indemnified Parties who are parties to such action), or (ii) the Offerors shall not have employed counsel reasonably satisfactory to the Indemnified Party to represent the Indemnified Party within a reasonable time after notice of commencement of the action, in each of which cases the fees and expenses of counsel of such Indemnified Party shall be at the expense of the Offerors. 9.3. Contribution. If the indemnification provided for in this ------------ Section 9 is required by its terms, but is for any reason held to be unavailable to or otherwise insufficient to hold harmless an Indemnified Party under Section 9.1 in respect of any losses, claims, damages, liabilities or expenses referred to herein or therein, then the Offerors shall contribute to the amount paid or payable by such Indemnified Party as a result of any losses, claims, damages, judgments, liabilities or expenses referred to herein (i) in such proportion as is appropriate to reflect the relative benefits received by the Offerors, on the one hand, and the Indemnified Party, on the other hand, from the offering of such Capital Securities, or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Offerors, on the one hand, and the Placement Agents, on the other hand, in connection with the statements or omissions or inaccuracies in the representations and warranties herein or other breaches which resulted in such losses, claims, damages, judgments, liabilities or expenses, as well as any other relevant equitable considerations. The respective relative benefits received by the Offerors, on the one hand, and the Placement Agents, on the other hand, shall be deemed to be in the same proportion, in the case of the Offerors, as the total price paid to the Offerors for the Capital Securities sold by the Offerors to the Purchasers (net of the compensation paid to the Placement Agents hereunder, but before deducting expenses), and in the case of the Placement Agents, as the compensation received by them, bears to the total of such amounts paid to the Offerors and received by the Placement Agents as compensation. The relative fault of the Offerors and the Placement Agents shall be determined by reference to, among other things, whether the untrue statement or alleged untrue statement of a material fact or the omission or alleged omission of a material fact or the inaccurate or the alleged inaccurate representation and/or warranty relates to information supplied by the Offerors or the Placement Agents and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The provisions set forth in Section 9.2 with respect to notice of commencement of any action shall apply if a claim for contribution is made under this Section 9.3; provided, however, that no additional notice shall be required with respect -------- ------- to any action for which notice has been given under Section 9.2 for purposes of indemnification. The Offerors and the Placement Agents agree that it would not be just and equitable if contribution pursuant to this Section 9.3 were determined by pro rata allocation or by any other method of allocation that does not take account of the equitable considerations referred to in this Section 9.3. The amount paid or payable by an Indemnified Party as a result of the losses, claims, damages, judgments, liabilities or expenses referred to in this Section 9.3 shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by such Indemnified Party in connection with investigating or defending any such action or claim. In no event shall the liability of the Placement Agents hereunder be greater in amount than the dollar amount of the compensation (net of payment of all expenses) received by the Placement Agents upon the sale of the Capital Securities giving rise to such obligation. No person found guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not found guilty of such fraudulent misrepresentation. 9.4. Additional Remedies. The indemnity and contribution agreements ------------------- contained in this Section 9 are in addition to any liability that the Offerors may otherwise have to any Indemnified Party. 9.5. Additional Indemnification. The Company shall indemnify and -------------------------- hold harmless the Trust against all loss, liability, claim, damage and expense whatsoever, as due from the Trust under Sections 9.1 through 9.4 hereof. Section 10. Rights and Responsibilities of Placement Agents. ----------------------------------------------- 10.1. Reliance. In performing their duties under this Agreement, the -------- Placement Agents shall be entitled to rely upon any notice, signature or writing which they shall in good faith believe to be genuine and to be signed or presented by a proper party or parties. The Placement Agents may rely upon any opinions or certificates or other documents delivered by the Offerors or their counsel or designees to either the Placement Agents or the Purchasers. 10.2. Rights of Placement Agents. In connection with the performance -------------------------- of their duties under this Agreement, the Placement Agents shall not be liable for any error of judgment or any action taken or omitted to be taken unless the Placement Agents were grossly negligent or engaged in willful misconduct in connection with such performance or non-performance. No provision of this Agreement shall require the Placement Agents to expend or risk their own funds or otherwise incur any financial liability on behalf of the Purchasers in connection with the performance of any of their duties hereunder. The Placement Agents shall be under no obligation to exercise any of the rights or powers vested in them by this Agreement. Section 11. Miscellaneous. ------------- 11.1. Disclosure Schedule. The term "Disclosure Schedule," as used ------------------- herein, means the schedule, if any, attached to this Agreement that sets forth items the disclosure of which is necessary or appropriate as an exception to one or more representations or warranties contained in Section 5 hereof; provided, -------- that any item set forth in the Disclosure Schedule as an exception to a representation or warranty shall be deemed an admission by the Offerors that such item represents an exception, fact, event or circumstance that is reasonably likely to result in a Material Adverse Effect. The Disclosure Schedule shall be arranged in paragraphs corresponding to the section numbers contained in Section 5. Nothing in the Disclosure Schedule shall be deemed adequate to disclose an exception to a representation or warranty made herein unless the Disclosure Schedule identifies the exception with reasonable particularity and describes the relevant facts in reasonable detail. Without limiting the generality of the immediately preceding sentence, the mere listing (or inclusion of a copy) of a document or other item in the Disclosure Schedule shall not be deemed adequate to disclose an exception to a representation or warranty made herein unless the representation or warranty has to do with the existence of the document or other item itself. Information provided by the Company in response to any due diligence questionnaire shall not be deemed part of the Disclosure Schedule and shall not be deemed to be an exception to one or more representations or warranties contained in Section 5 hereof unless such information is specifically included on the Disclosure Schedule in accordance with the provisions of this Section 11.1. 11.2. Legal Expenses. At Closing, the Placement Agents shall provide -------------- a credit for the Offerors' transaction-related legal expenses in the amount of $10,000.00. 11.3. Non-Disclosure. Except as required by applicable law, including -------------- without limitation securities laws and regulations promulgated thereunder, (i) the Offerors shall not, and will cause their advisors and representatives not to, issue any press release or other public statement regarding the transactions contemplated by this Agreement or the Operative Documents prior to or on the Closing Date and (ii) following the Closing Date, the Offerors shall not include in any press release, other public statement or other communication regarding the transactions contemplated by this Agreement or the Operative Documents, any reference to the Placement Agents, WTC, the Purchasers, the term "PreTS" or any derivations thereof. Notwithstanding anything to the contrary, the Offerors may (1) consult any tax advisor regarding U.S. federal income tax treatment or tax structure of the transaction contemplated under this Agreement and the Operative Documents and (2) disclose to any and all persons, without limitation of any kind, the U.S. Federal income tax structure (in each case, within the meaning of Treasury Regulation ss. 1.6011-4) of the transaction contemplated under this Agreement and the Operative Documents and all materials of any kind (including opinions or other tax analyses) that are provided to you relating to such tax treatment and tax structure. For this purpose, "tax structure" is limited to any facts relevant to the U.S. federal income tax treatment of the transaction and does not include information relating to identity of the parties. 11.4. Notices. Prior to the Closing, and thereafter with respect to ------- matters pertaining to this Agreement only, all notices and other communications provided for or permitted hereunder shall be made in writing by hand-delivery, first-class mail, telex, telecopier or overnight air courier guaranteeing next day delivery: if to the Placement Agents, to: FTN Financial Capital Markets 845 Crossover Lane, Suite 150 Memphis, Tennessee 38117 Telecopier: 901-435-4706 Telephone: 800-456-5460 Attention: James D. Wingett and Keefe, Bruyette & Woods, Inc. 787 7th Avenue 4th Floor New York, New York 10019 Telecopier: 212-403-2000 Telephone: 212-403-1004 Attention: Mitchell Kleinman, General Counsel with a copy to: Lewis, Rice & Fingersh, L.C. 500 North Broadway, Suite 2000 St. Louis, Missouri 63102 Telecopier: 314-241-6056 Telephone: 314-444-7600 Attention: Thomas C. Erb, Esq. and Sidley Austin Brown & Wood LLP 787 7th Avenue New York, New York 10019 Telecopier: 212-839-5599 Telephone: 212-839-5300 Attention: Renwick Martin, Esq. if to the Offerors, to: First Banks, Inc. 600 James S. McDonnell Boulevard Mail Stop M1 199 014 Hazelwood, Missouri 63042 Telecopier: 314-592-6621 Telephone: 314-592-6603 Attention: Lisa K. Vansickle with a copy to: Stinson Morrison Hecker LLP 1201 Walnut Street Kansas City, Missouri 64106 Telecopier: 816-474-4208 Telephone: 816-691-3351 Attention: C. Robert Monroe, Esq. All such notices and communications shall be deemed to have been duly given (i) at the time delivered by hand, if personally delivered, (ii) five business days after being deposited in the mail, postage prepaid, if mailed, (iii) when answered back, if telexed, (iv) the next business day after being telecopied, or (v) the next business day after timely delivery to a courier, if sent by overnight air courier guaranteeing next day delivery. From and after the Closing, the foregoing notice provisions shall be superseded by any notice provisions of the Operative Documents under which notice is given. The Placement Agents, the Offerors, and their respective counsel, may change their respective notice addresses from time to time by written notice to all of the foregoing persons. 11.5. Parties in Interest, Successors and Assigns. Except as expressly ------------------------------------------- set forth herein, this Agreement is made solely for the benefit of the Placement Agents, the Purchasers and the Offerors and any person controlling the Placement Agents, the Purchasers or the Offerors and their respective successors and assigns; and no other person shall acquire or have any right under or by virtue of this Agreement. This Agreement shall inure to the benefit of and be binding upon the successors and assigns of each of the parties. 11.6. Counterparts. This Agreement may be executed by the parties ------------ hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. 11.7. Headings. The headings in this Agreement are for convenience of -------- reference only and shall not limit or otherwise affect the meaning hereof. 11.8. Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED ------------- IN ACCORDANCE WITH THE INTERNAL LAWS (AND NOT THE LAWS PERTAINING TO CONFLICTS OF LAWS) OF THE STATE OF NEW YORK. 11.9. Entire Agreement. This Agreement, together with the Operative ---------------- Documents and the other documents delivered in connection with the transactions contemplated by this Agreement, is intended by the parties as a final expression of their agreement and intended to be a complete and exclusive statement of the agreement and understanding of the parties hereto in respect of the subject matter contained herein and therein. There are no restrictions, promises, warranties or undertakings, other than those set forth or referred to herein and therein. This Agreement, together with the Operative Documents and the other documents delivered in connection with the transaction contemplated by this Agreement, supersedes all prior agreements and understandings between the parties with respect to such subject matter. 11.10. Severability. In the event that any one or more of the ------------ provisions contained herein, or the application thereof in any circumstances, is held invalid, illegal or unenforceable in any respect for any reason, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions hereof shall not be in any way impaired or affected, it being intended that all of the Placement Agents' and the Purchasers' rights and privileges shall be enforceable to the fullest extent permitted by law. 11.11. Survival. The Placement Agents and the Offerors, respectively, -------- agree that the representations, warranties and agreements made by each of them in this Agreement and in any certificate or other instrument delivered pursuant hereto shall remain in full force and effect and shall survive the delivery of, and payment for, the Capital Securities. Signatures appear on the following page If this Agreement is satisfactory to you, please so indicate by signing the acceptance of this Agreement and deliver such counterpart to the Offerors whereupon this Agreement will become binding between us in accordance with its terms. Very truly yours, FIRST BANKS, INC. By: /S/ Lisa K. Vansickle --------------------------------- Name: Lisa K. Vansickle ------------------------------- Title: Senior Vice President ------------------------------ FIRST BANK STATUTORY TRUST VII By: /s/ Lisa K. Vansickle --------------------------------- Name: Lisa K. Vansickle ------------------------------- Title: Administrator CONFIRMED AND ACCEPTED, as of the date first set forth above FTN FINANCIAL CAPITAL MARKETS, a division of First Tennessee Bank National Association, as a Placement Agent By: /s/ James D. Wingett ------------------------------------------------------- Name: James D. Wingett ----------------------------------------------------- Title: Senior Vice President ---------------------------------------------------- KEEFE, BRUYETTE & WOODS, INC., a New York corporation, as a Placement Agent By: /s/ Peter J. Wirth ------------------------------------------------------ Name: Peter J. Wirth ----------------------------------------------------- Title: Managing Director ---------------------------------------------------- EXHIBIT A-1 ----------- FORM OF SUBSCRIPTION AGREEMENT ------------------------------ FIRST BANK STATUTORY TRUST VII FIRST BANKS, INC. SUBSCRIPTION AGREEMENT December 14, 2006 THIS SUBSCRIPTION AGREEMENT (this "Agreement") made among First Bank Statutory Trust VII (the "Trust"), a statutory trust created under the Delaware Statutory Trust Act (Chapter 38 of Title 12 of the Delaware Code, 12 Del. C. ss.ss. 3801, et seq.), First Banks, Inc., a Missouri corporation, with its principal offices located at 600 James S. McDonnell Boulevard, Hazelwood, Missouri 63042 (the "Company" and, collectively with the Trust, the "Offerors"), and First Tennessee Bank National Association (the "Purchaser"). RECITALS: A. The Trust desires to issue 50,000 of its Floating Rate Capital Securities (the "Capital Securities"), liquidation amount $1,000.00 per Capital Security, representing an undivided beneficial interest in the assets of the Trust (the "Offering"), to be issued pursuant to an Amended and Restated Declaration of Trust (the "Declaration") by and among the Company, Wilmington Trust Company ("WTC"), the administrators named therein, and the holders (as defined therein), which Capital Securities are to be guaranteed by the Company with respect to distributions and payments upon liquidation, redemption and otherwise pursuant to the terms of a Guarantee Agreement between the Company and WTC, as trustee (the "Guarantee"); and B. The proceeds from the sale of the Capital Securities will be combined with the proceeds from the sale by the Trust to the Company of its common securities, and will be used by the Trust to purchase an equivalent amount of Floating Rate Junior Subordinated Deferrable Interest Debentures of the Company (the "Debentures") to be issued by the Company pursuant to an indenture to be executed by the Company and WTC, as trustee (the "Indenture"); and C. In consideration of the premises and the mutual representations and covenants hereinafter set forth, the parties hereto agree as follows: ARTICLE I PURCHASE AND SALE OF CAPITAL SECURITIES 1.1. Upon the execution of this Agreement, the Purchaser hereby agrees to purchase from the Trust 30,000 Capital Securities at a price equal to $1,000.00 per Capital Security (the "Purchase Price") and the Trust agrees to sell such Capital Securities to the Purchaser for said Purchase Price. The rights and preferences of the Capital Securities are set forth in the Declaration. The Purchase Price is payable in immediately available funds on December 14, 2006, or such other business day as may be designated by the Purchaser, but in no event later than December 29, 2006 (the "Closing Date"). The Offerors shall provide the Purchaser wire transfer instructions no later than 3 days prior to the Closing Date. 1.2. The Placement Agreement, dated December 6, 2006 (the "Placement Agreement"), among the Offerors and the placement agents identified therein (the "Placement Agents") includes certain representations and warranties, covenants and conditions to closing and certain other matters governing the Offering. The Placement Agreement is hereby incorporated by reference into this Agreement and the Purchaser shall be entitled to each of the benefits of the Placement Agents and the Purchaser under the Placement Agreement and shall be entitled to enforce the obligations of the Offerors under such Placement Agreement as fully as if the Purchaser were a party to such Placement Agreement. 1.3. Anything herein or in the Placement Agreement notwithstanding, the Offerors acknowledge and agree that, so long as Purchaser holds some or all of the Capital Securities, the Purchaser may in its discretion from time to time transfer or sell, or sell or grant participation interests in, some or all of such Capital Securities to one or more parties, provided that any such transaction complies, as applicable, with the registration requirements of the Securities Act of 1933, as amended (the "Securities Act") and any other applicable securities laws, is pursuant to an exemption therefrom, or is otherwise not subject thereto. ARTICLE II REPRESENTATIONS AND WARRANTIES OF PURCHASER 2.1. The Purchaser understands and acknowledges that none of the Capital Securities, the Debentures nor the Guarantee have been registered under the Securities Act or any other applicable securities law, are being offered for sale by the Trust in transactions not requiring registration under the Securities Act, and may not be offered, sold, pledged or otherwise transferred by the Purchaser except in compliance with the registration requirements of the Securities Act or any other applicable securities laws, pursuant to an exemption therefrom or in a transaction not subject thereto. 2.2. The Purchaser represents and warrants that, except as contemplated under Section 1.3 hereof, it is purchasing the Capital Securities for its own account, for investment, and not with a view to, or for offer or sale in connection with, any distribution thereof in violation of the Securities Act or other applicable securities laws, subject to any requirement of law that the disposition of its property be at all times within its control and subject to its ability to resell such Capital Securities pursuant to an effective registration statement under the Securities Act or under Rule 144A or any other exemption from registration available under the Securities Act or any other applicable securities law. 2.3. The Purchaser represents and warrants that neither the Offerors nor the Placement Agents are acting as a fiduciary or financial or investment adviser for the Purchaser. 2.4. The Purchaser represents and warrants that it is not relying (for purposes of making any investment decision or otherwise) upon any advice, counsel or representations (whether written or oral) of the Offerors or of the Placement Agents. 2.5. The Purchaser represents and warrants that (a) it has consulted with its own legal, regulatory, tax, business, investment, financial and accounting advisers in connection herewith to the extent it has deemed necessary, (b) it has had a reasonable opportunity to ask questions of and receive answers from officers and representatives of the Offerors concerning their respective financial condition and results of operations and the purchase of the Capital Securities, and any such questions have been answered to its satisfaction, (c) it has had the opportunity to review all publicly available records and filings concerning the Offerors and it has carefully reviewed such records and filings that it considers relevant to making an investment decision, and (d) it has made its own investment decisions based upon its own judgment, due diligence and advice from such advisers as it has deemed necessary and not upon any view expressed by the Offerors or the Placement Agents. 2.6. The Purchaser represents and warrants that it is a "qualified institutional buyer" as defined under Rule 144A under the Securities Act. If the Purchaser is a dealer of the type described in paragraph (a)(1)(ii) of Rule 144A under the Securities Act, it owns and invests on a discretionary basis not less than U.S. $25,000,000.00 in securities of issuers that are not affiliated with it. The Purchaser is not a participant-directed employee plan, such as a 401(k) plan, or any other type of plan referred to in paragraph (a)(1)(i)(D) or (a)(1)(i)(E) of Rule 144A, or a trust fund referred to in paragraph (a)(1)(i)(F) of Rule 144A that holds the assets of such a plan, unless investment decisions with respect to the plan are made solely by the fiduciary, trustee or sponsor of such plan. 2.7. The Purchaser represents and warrants that on each day from the date on which it acquires the Capital Securities through and including the date on which it disposes of its interests in the Capital Securities, either (i) it is not (a) an "employee benefit plan" (as defined in Section 3(3) of the United States Employee Retirement Income Security Act of 1974, as amended ("ERISA")) ----- which is subject to the provisions of Part 4 of Subtitle B of Title I of ERISA, or any entity whose underlying assets include the assets of any such plan (an "ERISA Plan"), (b) any other "plan" (as defined in Section 4975(e)(1) of the ----------- United States Internal Revenue Code of 1986, as amended (the "Code")) which is ---- subject to the provisions of Section 4975 of the Code or any entity whose underlying assets include the assets of any such plan (a "Plan"), (c) an entity ---- whose underlying assets include the assets of any such ERISA Plan or other Plan by reason of Department of Labor regulation section 2510.3-101 or otherwise, or (d) a governmental or church plan that is subject to any federal, state or local law which is substantially similar to the provisions of Section 406 of ERISA or Section 4975 of the Code (a "Similar Law"); or (ii) the purchase, holding and ------------ disposition of the Capital Securities by it will satisfy the requirements for exemptive relief under Prohibited Transaction Class Exemption ("PTCE") 84-14, ---- PTCE 90-1, PTCE 91-38, PTCE 95-60, PTCE 96-23 or a similar exemption, or, in the case of a plan subject to a Similar Law, will not result in a non-exempt violation of such Similar Law. 2.8. The Purchaser represents and warrants that it is acquiring the Capital Securities as principal for its own account for investment and, except as contemplated under Section 1.3 hereof, not for sale in connection with any distribution thereof. It was not formed solely for the purpose of investing in the Capital Securities, and additional capital or similar contributions were not specifically solicited from any person owning a beneficial interest in it for the purpose of enabling it to purchase any Capital Securities. The Purchaser is not a (i) partnership, (ii) common trust fund or (iii) special trust, pension, profit sharing or other retirement trust fund or plan in which the partners, beneficiaries or participants, as applicable, may designate the particular investments to be made or the allocation of any investment among such partners, beneficiaries or participants, and except as contemplated under Section 1.3 hereof, it agrees that it shall not hold the Capital Securities for the benefit of any other person and shall be the sole beneficial owner thereof for all purposes and that it shall not sell participation interests in the Capital Securities or enter into any other arrangement pursuant to which any other person shall be entitled to a beneficial interest in the distribution on the Capital Securities. The Capital Securities purchased directly or indirectly by the Purchaser constitute an investment of no more than 40% of its assets. The Purchaser understands and agrees that any purported transfer of the Capital Securities to a purchaser which would cause the representations and warranties of Section 2.6 and this Section 2.8 to be inaccurate shall be null and void ab initio and the Offerors retain the right to resell any Capital Securities sold to non-permitted transferees. 2.9. The Purchaser represents and warrants that it has full power and authority to execute and deliver this Agreement, to make the representations and warranties specified herein, and to consummate the transactions contemplated herein and it has full right and power to subscribe for Capital Securities and perform its obligations pursuant to this Agreement. 2.10. The Purchaser represents and warrants that no filing with, or authorization, approval, consent, license, order, registration, qualification or decree of, any governmental body, agency or court having jurisdiction over the Purchaser, other than those that have been made or obtained, is necessary or required for the performance by the Purchaser of its obligations under this Agreement or to consummate the transactions contemplated herein. 2.11. The Purchaser represents and warrants that this Agreement has been duly authorized, executed and delivered by the Purchaser. 2.12. The Purchaser understands and acknowledges that the Company will rely upon the truth and accuracy of the foregoing acknowledgments, representations, warranties and agreements and agrees that, if any of the acknowledgments, representations, warranties or agreements deemed to have been made by it by its purchase of the Capital Securities are no longer accurate, it shall promptly notify the Company. 2.13. The Purchaser understands that no public market exists for any of the Capital Securities, and that it is unlikely that a public market will ever exist for the Capital Securities. ARTICLE III MISCELLANEOUS 3.1. Any notice or other communication given hereunder shall be deemed sufficient if in writing and sent by registered or certified mail, return receipt requested, international courier or delivered by hand against written receipt therefor, or by facsimile transmission and confirmed by telephone, to the following addresses, or such other address as may be furnished to the other parties as herein provided: To the Offerors: First Banks, Inc. 600 James S. McDonnell Boulevard Mail Stop M1 199 014 Hazelwood, Missouri 63042 Attention: Lisa K. Vansickle Fax: 314-592-6621 To the Purchaser: First Tennessee Bank National Association 845 Crossover Lane, Suite 150 Memphis, Tennessee 38117 Attention: David Work Fax: 901-435-7983 Unless otherwise expressly provided herein, notices shall be deemed to have been given on the date of mailing, except notice of change of address, which shall be deemed to have been given when received. 3.2. This Agreement shall not be changed, modified or amended except by a writing signed by the parties to be charged, and this Agreement may not be discharged except by performance in accordance with its terms or by a writing signed by the party to be charged. 3.3. Upon the execution and delivery of this Agreement by the Purchaser, this Agreement shall become a binding obligation of the Purchaser with respect to the purchase of Capital Securities as herein provided. 3.4. NOTWITHSTANDING THE PLACE WHERE THIS AGREEMENT MAY BE EXECUTED BY ANY OF THE PARTIES HERETO, THE PARTIES EXPRESSLY AGREE THAT ALL THE TERMS AND PROVISIONS HEREOF SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW. 3.5. The parties agree to execute and deliver all such further documents, agreements and instruments and take such other and further action as may be necessary or appropriate to carry out the purposes and intent of this Agreement. 3.6. This Agreement may be executed in one or more counterparts each of which shall be deemed an original, but all of which shall together constitute one and the same instrument. 3.7. In the event that any one or more of the provisions contained herein, or the application thereof in any circumstances, is held invalid, illegal or unenforceable in any respect for any reason, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions hereof shall not be in any way impaired or affected, it being intended that all of the Offerors' and the Purchaser's rights and privileges shall be enforceable to the fullest extent permitted by law. Signatures appear on the following page IN WITNESS WHEREOF, this Agreement is agreed to and accepted as of the day and year first written above. FIRST TENNESSEE BANK NATIONAL ASSOCIATION By: ------------------------------------- Print Name: ----------------------------- Title: ---------------------------------- FIRST BANKS, INC. By: ------------------------------------- Name: ----------------------------------- Title: ---------------------------------- FIRST BANK STATUTORY TRUST VII By: ------------------------------------ Name: ---------------------------------- Title: Administrator EXHIBIT A-2 ----------- FORM OF SUBSCRIPTION AGREEMENT ------------------------------ FIRST BANK STATUTORY TRUST VII FIRST BANKS, INC. SUBSCRIPTION AGREEMENT December 14, 2006 THIS SUBSCRIPTION AGREEMENT (this "Agreement") made among First Bank Statutory Trust VII (the "Trust"), a statutory trust created under the Delaware Statutory Trust Act (Chapter 38 of Title 12 of the Delaware Code, 12 Del. C. ss.ss. 3801, et seq.), First Banks, Inc., a Missouri corporation, with its principal offices located at 600 James S. McDonnell Boulevard, Hazelwood, Missouri 63042 (the "Company" and, collectively with the Trust, the "Offerors"), and Preferred Term Securities XXIV, Ltd. (the "Purchaser"). RECITALS: A. The Trust desires to issue 50,000 of its Floating Rate Capital Securities (the "Capital Securities"), liquidation amount $1,000.00 per Capital Security, representing an undivided beneficial interest in the assets of the Trust (the "Offering"), to be issued pursuant to an Amended and Restated Declaration of Trust (the "Declaration") by and among the Company, Wilmington Trust Company ("WTC"), the administrators named therein, and the holders (as defined therein), which Capital Securities are to be guaranteed by the Company with respect to distributions and payments upon liquidation, redemption and otherwise pursuant to the terms of a Guarantee Agreement between the Company and WTC, as trustee (the "Guarantee"); and B. The proceeds from the sale of the Capital Securities will be combined with the proceeds from the sale by the Trust to the Company of its common securities, and will be used by the Trust to purchase an equivalent amount of Floating Rate Junior Subordinated Deferrable Interest Debentures of the Company (the "Debentures") to be issued by the Company pursuant to an indenture to be executed by the Company and WTC, as trustee (the "Indenture"); and C. In consideration of the premises and the mutual representations and covenants hereinafter set forth, the parties hereto agree as follows: ARTICLE I PURCHASE AND SALE OF CAPITAL SECURITIES 1.1. Upon the execution of this Agreement, the Purchaser hereby agrees to purchase from the Trust 20,000 Capital Securities at a price equal to $1,000.00 per Capital Security (the "Purchase Price") and the Trust agrees to sell such Capital Securities to the Purchaser for said Purchase Price. The rights and preferences of the Capital Securities are set forth in the Declaration. The Purchase Price is payable in immediately available funds on December 14, 2006, or such other business day as may be designated by the Purchaser, but in no event later than December 29, 2006 (the "Closing Date"). The Offerors shall provide the Purchaser wire transfer instructions no later than 3 days prior to the Closing Date. 1.2. The certificate for the Capital Securities shall be delivered by the Trust on the Closing Date to the Purchaser or its designee. 1.3. The Placement Agreement, dated December 6, 2006 (the "Placement Agreement"), among the Offerors and the Placement Agents identified therein includes certain representations and warranties, covenants and conditions to closing and certain other matters governing the Offering. The Placement Agreement is hereby incorporated by reference into this Agreement and the Purchaser shall be entitled to each of the benefits of the Placement Agents and the Purchaser under the Placement Agreement and shall be entitled to enforce the obligations of the Offerors under such Placement Agreement as fully as if the Purchaser were a party to such Placement Agreement. ARTICLE II REPRESENTATIONS AND WARRANTIES OF PURCHASER 2.1. The Purchaser understands and acknowledges that neither the Capital Securities, the Debentures nor the Guarantee have been registered under the Securities Act of 1933, as amended (the "Securities Act"), or any other applicable securities law, are being offered for sale by the Trust in transactions not requiring registration under the Securities Act, and may not be offered, sold, pledged or otherwise transferred by the Purchaser except in compliance with the registration requirements of the Securities Act or any other applicable securities laws, pursuant to an exemption therefrom or in a transaction not subject thereto. 2.2. The Purchaser represents, warrants and certifies that (i) it is not a "U.S. person" as such term is defined in Rule 902 under the Securities Act, (ii) it is not acquiring the Capital Securities for the account or benefit of any such U.S. person, (iii) the offer and sale of Capital Securities to the Purchaser constitutes an "offshore transaction" under Regulation S of the Securities Act, and (iv) it will not engage in hedging transactions with regard to the Capital Securities unless such transactions are conducted in compliance with the Securities Act and the Purchaser agrees to the legends and transfer restrictions set forth on the Capital Securities certificate. 2.3. The Purchaser represents and warrants that it is purchasing the Capital Securities for its own account, for investment, and not with a view to, or for offer or sale in connection with, any distribution thereof in violation of the Securities Act or other applicable securities laws, subject to any requirement of law that the disposition of its property be at all times within its control and subject to its ability to resell such Capital Securities pursuant to an effective registration statement under the Securities Act or under Rule 144A or any other exemption from registration available under the Securities Act or any other applicable Securities law. 2.4. The Purchaser represents and warrants that it has full power and authority to execute and deliver this Agreement, to make the representations and warranties specified herein, and to consummate the transactions contemplated herein and it has full right and power to subscribe for Capital Securities and perform its obligations pursuant to this Agreement. 2.5. The Purchaser, a Cayman Islands Company whose business includes issuance of certain notes and acquiring the Capital Securities and other similar securities, represents and warrants that it has such knowledge and experience in financial and business matters that it is capable of evaluating the merits and risks of purchasing the Capital Securities, has had the opportunity to ask questions of, and receive answers and request additional information from, the Offerors and is aware that it may be required to bear the economic risk of an investment in the Capital Securities. 2.6. The Purchaser represents and warrants that no filing with, or authorization, approval, consent, license, order, registration, qualification or decree of, any governmental body, agency or court having jurisdiction over the Purchaser, other than those that have been made or obtained, is necessary or required for the performance by the Purchaser of its obligations under this Agreement or to consummate the transactions contemplated herein. 2.7. The Purchaser represents and warrants that this Agreement has been duly authorized, executed and delivered by the Purchaser. 2.8. The Purchaser represents and warrants that (i) the Purchaser is not in violation or default of any term of its Memorandum of Association or Articles of Association, of any provision of any mortgage, indenture, contract, agreement, instrument or contract to which it is a party or by which it is bound or of any judgment, decree, order, writ or, to its knowledge, any statute, rule or regulation applicable to the Purchaser which would prevent the Purchaser from performing any material obligation set forth in this Agreement; and (ii) the execution, delivery and performance of and compliance with this Agreement, and the consummation of the transactions contemplated herein, will not, with or without the passage of time or giving of notice, result in any such material violation, or be in conflict with or constitute a default under any such term, or the suspension, revocation, impairment, forfeiture or non-renewal of any permit, license, authorization or approval applicable to the Purchaser, its business or operations or any of its assets or properties which would prevent the Purchaser from performing any material obligations set forth in this Agreement. 2.9. The Purchaser represents and warrants that the Purchaser is an exempted company with limited liability duly incorporated, validly existing and in good standing under the laws of the jurisdiction where it is organized, with full power and authority to perform its obligations under this Agreement. 2.10. The Purchaser understands and acknowledges that the Company will rely upon the truth and accuracy of the foregoing acknowledgments, representations, warranties and agreements and agrees that, if any of the acknowledgments, representations, warranties or agreements deemed to have been made by it by its purchase of the Capital Securities are no longer accurate, it shall promptly notify the Company. 2.11. The Purchaser understands that no public market exists for any of the Capital Securities, and that it is unlikely that a public market will ever exist for the Capital Securities. ARTICLE III MISCELLANEOUS 3.1. Any notice or other communication given hereunder shall be deemed sufficient if in writing and sent by registered or certified mail, return receipt requested, international courier or delivered by hand against written receipt therefor, or by facsimile transmission and confirmed by telephone, to the following addresses, or such other address as may be furnished to the other parties as herein provided: To the Offerors: First Banks, Inc. 600 James S. McDonnell Boulevard Mail Stop M1 199 014 Hazelwood, Missouri 63042 Attention: Lisa K. Vansickle Fax: 314-592-6621 To the Purchaser: Preferred Term Securities XXIV, Ltd. c/o Maples Finance Limited P.O. Box 1093 GT Queensgate House South Church Street George Town, Grand Cayman Cayman Islands Attention: The Directors Fax: 345-945-7100 Unless otherwise expressly provided herein, notices shall be deemed to have been given on the date of mailing, except notice of change of address, which shall be deemed to have been given when received. 3.2. This Agreement shall not be changed, modified or amended except by a writing signed by the parties to be charged, and this Agreement may not be discharged except by performance in accordance with its terms or by a writing signed by the party to be charged. 3.3. Upon the execution and delivery of this Agreement by the Purchaser, this Agreement shall become a binding obligation of the Purchaser with respect to the purchase of Capital Securities as herein provided. 3.4. NOTWITHSTANDING THE PLACE WHERE THIS AGREEMENT MAY BE EXECUTED BY ANY OF THE PARTIES HERETO, THE PARTIES EXPRESSLY AGREE THAT ALL THE TERMS AND PROVISIONS HEREOF SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW. 3.5. The parties agree to execute and deliver all such further documents, agreements and instruments and take such other and further action as may be necessary or appropriate to carry out the purposes and intent of this Agreement. 3.6. This Agreement may be executed in one or more counterparts each of which shall be deemed an original, but all of which shall together constitute one and the same instrument. 3.7. In the event that any one or more of the provisions contained herein, or the application thereof in any circumstances, is held invalid, illegal or unenforceable in any respect for any reason, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions hereof shall not be in any way impaired or affected, it being intended that all of the Offerors' and the Purchaser's rights and privileges shall be enforceable to the fullest extent permitted by law. Signatures appear on the following page IN WITNESS WHEREOF, I have set my hand the day and year first written above. PREFERRED TERM SECURITIES XXIV, LTD. By: -------------------------------------------- Print Name: ------------------------------------ Title: ----------------------------------------- IN WITNESS WHEREOF, this Subscription Agreement is agreed to and accepted as of the day and year first written above. FIRST BANKS, INC. By: --------------------------------------- Name: ------------------------------------- Title: ------------------------------------ FIRST BANK STATUTORY TRUST VII By: -------------------------------------- Name: ------------------------------------ Title: Administrator EXHIBIT B-1 ----------- FORM OF COMPANY COUNSEL OPINION ------------------------------- December 14, 2006 First Tennessee Bank National Association FTN Financial Capital Markets 845 Crossover Lane, Suite 150 845 Crossover Lane, Suite 150 Memphis, Tennessee 38117 Memphis, Tennessee 38117 Preferred Term Securities XXIV, Ltd. Keefe, Bruyette & Woods, Inc. c/o Maples Finance Limited 787 7th Avenue, 4th Floor P. O. Box 1093 GT New York, New York 10019 Queensgate House South Church Street Wilmington Trust Company George Town, Grand Cayman Rodney Square North Cayman Islands 1100 North Market Street Wilmington, Delaware 19890-1600 Ladies and Gentlemen: We have acted as counsel to First Banks, Inc. (the "Company"), a Missouri corporation in connection with a certain Placement Agreement, dated December 6, 2006, (the "Placement Agreement"), between the Company and First Bank Statutory Trust VII (the "Trust"), on one hand, and FTN Financial Capital Markets and Keefe, Bruyette & Woods, Inc. (the "Placement Agents"), on the other hand. Pursuant to the Placement Agreement, and subject to the terms and conditions stated therein, the Trust will issue and sell to First Tennessee Bank National Association and Preferred Term Securities XXIV, Ltd. (the "Purchasers"), $50,000,000.00 aggregate principal amount of Floating Rate Capital Securities (liquidation amount $1,000.00 per capital security) (the "Capital Securities"). Capitalized terms used herein and not otherwise defined shall have the same meanings ascribed to them in the Placement Agreement. The law covered by the opinions expressed herein is limited to the law of the United States of America and of the State of Missouri. We have made such investigations of law as, in our judgment, were necessary to render the following opinions. We have also reviewed (a) the Company's Articles of Incorporation, as amended, and its By-Laws, as amended; and (b) such corporate documents, records, information and certificates of the Company and the Subsidiaries, certificates of public officials or government authorities and other documents as we have deemed necessary or appropriate as a basis for the opinions hereinafter expressed. As to certain facts material to our opinions, we have relied, with your permission, upon statements, certificates or representations, including those delivered or made in connection with the above-referenced transaction, of officers and other representatives of the Company and the Subsidiaries and the Trust. As used herein, the phrases "to the best of our knowledge" or "known to us" or other similar phrases mean the actual knowledge of the attorneys who have had active involvement in the transactions described above or who have prepared or signed this opinion letter, or who otherwise have devoted substantial attention to legal matters for the Company. Based upon and subject to the foregoing and the further qualifications set forth below, we are of the opinion as of the date hereof that: 1. The Company is validly existing and in good standing under the laws of the State of Missouri and is duly registered as a bank holding company under the Bank Holding Company Act of 1956, as amended. Each of the Significant Subsidiaries is validly existing and in good standing under the laws of its jurisdiction of organization. Each of the Company and the Significant Subsidiaries has full corporate power and authority to own or lease its properties and to conduct its business as such business is currently conducted in all material respects. To the best of our knowledge, all outstanding shares of capital stock of the Significant Subsidiaries have been duly authorized and validly issued, and are fully paid and nonassessable except to the extent such shares may be deemed assessable under 12 U.S.C. Section 1831o or 12 U.S.C. Section 55, and are owned of record and beneficially, directly or indirectly, by the Company. 2. The issuance, sale and delivery of the Debentures in accordance with the terms and conditions of the Placement Agreement and the Operative Documents have been duly authorized by all necessary actions of the Company. The issuance, sale and delivery of the Debentures by the Company and the issuance, sale and delivery of the Capital Securities and the Common Securities by the Trust do not give rise to any preemptive or other rights to subscribe for or to purchase any shares of capital stock or equity securities of the Company or the Significant Subsidiaries pursuant to the corporate Articles of Incorporation or Charter, By-Laws or other governing documents of the Company or the Significant Subsidiaries, or, to the best of our knowledge, any agreement or other instrument to which either the Company or the Subsidiaries is a party or by which the Company or the Significant Subsidiaries may be bound. 3. The Company has all requisite corporate power to enter into and perform its obligations under the Placement Agreement and the Subscription Agreements, and the Placement Agreement and the Subscription Agreements have been duly and validly authorized, executed and delivered by the Company and constitute the legal, valid and binding obligations of the Company enforceable in accordance with their terms, except as the enforcement thereof may be limited by general principles of equity and by bankruptcy or other laws affecting creditors' rights generally, and except as the indemnification and contribution provisions thereof may be limited under applicable laws and certain remedies may not be available in the case of a non-material breach. 4. Each of the Indenture, the Trust Agreement and the Guarantee Agreement has been duly authorized, executed and delivered by the Company, and is a valid and legally binding obligation of the Company enforceable in accordance with its terms, subject to the effect of bankruptcy, insolvency, reorganization, receivership, moratorium and other laws affecting the rights and remedies of creditors generally and of general principles of equity. 5. The Debentures have been duly authorized, executed and delivered by the Company, are entitled to the benefits of the Indenture and are legal, valid and binding obligations of the Company enforceable against the Company in accordance with their terms, subject to the effect of bankruptcy, insolvency, reorganization, receivership, moratorium and other laws affecting the rights and remedies of creditors generally and of general principles of equity. 6. To the best of our knowledge, neither the Company, the Trust, nor any of the Subsidiaries is in breach or violation of, or default under, with or without notice or lapse of time or both, its Articles of Incorporation or Charter, By-Laws or other governing documents (including without limitation, the Trust Agreement). The execution, delivery and performance of the Placement Agreement and the Operative Documents and the consummation of the transactions contemplated by the Placement Agreement and the Operative Documents do not and will not (i) result in the creation or imposition of any material lien, claim, charge, encumbrance or restriction upon any property or assets of the Company or the Subsidiaries, or (ii) conflict with, constitute a material breach or violation of, or constitute a material default under, with or without notice or lapse of time or both, any of the terms, provisions or conditions of (A) the Articles of Incorporation or Charter, By-Laws or other governing documents of the Company or the Subsidiaries, or (B) to the best of our knowledge, any material contract, indenture, mortgage, deed of trust, loan or credit agreement, note, lease, franchise, license or any other agreement or instrument to which the Company or the Subsidiaries is a party or by which any of them or any of their respective properties may be bound or (C) any order, decree, judgment, franchise, license, permit, rule or regulation of any court, arbitrator, government, or governmental agency or instrumentality, domestic or foreign, known to us having jurisdiction over the Company or the Subsidiaries or any of their respective properties which, in the case of each of (i) or (ii) above, is material to the Company and the Subsidiaries on a consolidated basis. 7. Except for filings, registrations or qualifications that may be required by applicable securities laws, no authorization, approval, consent or order of, or filing, registration or qualification with, any person (including, without limitation, any court, governmental body or authority) is required under the laws of the State of Missouri in connection with the transactions contemplated by the Placement Agreement and the Operative Documents in connection with the offer and sale of the Capital Securities as contemplated by the Placement Agreement and the Operative Documents. 8. To the best of our knowledge (i) no action, suit or proceeding at law or in equity is pending or threatened to which the Company, the Trust or the Subsidiaries are or may be a party, and (ii) no action, suit or proceeding is pending or threatened against or affecting the Company, the Trust or the Subsidiaries or any of their properties, before or by any court or governmental official, commission, board or other administrative agency, authority or body, or any arbitrator, wherein an unfavorable decision, ruling or finding could reasonably be expected to have a material adverse effect on the consummation of the transactions contemplated by the Placement Agreement and the Operative Documents or the issuance and sale of the Capital Securities as contemplated therein or the condition (financial or otherwise), earnings, affairs, business, or results of operations of the Company, the Trust and the Subsidiaries on a consolidated basis. 9. Assuming the truth and accuracy of the representations and warranties of the Placement Agents in the Placement Agreement and the Purchasers in the Subscription Agreements, it is not necessary in connection with the offering, sale and delivery of the Capital Securities, the Debentures and the Guarantee Agreement (or the Guarantee) to register the same under the Securities Act of 1933, as amended, under the circumstances contemplated in the Placement Agreement and the Subscription Agreements. 10. Neither the Company nor the Trust is or after giving effect to the offering and sale of the Capital Securities and the consummation of the transactions described in the Placement Agreement will be, an "investment company" or an entity "controlled" by an "investment company," in each case within the meaning of the Investment Company Act of 1940, as amended, without regard to Section 3(c) of such Act. The opinion expressed in the first two sentences of numbered paragraph 1 of this opinion is based solely upon certain certificates and confirmations issued by the applicable governmental officer or authority with respect to each of the Company and the Significant Subsidiaries. With respect to the foregoing opinions, since no member of this firm is actively engaged in the practice of law in the States of Delaware or New York, we do not express any opinions as to the laws of such states and have (i) relied, with your approval, upon the opinion of Richards, Layton & Finger, P.A. with respect to matters of Delaware law and (ii) assumed, with your approval and without rendering any opinion to such effect, that the laws of the State of New York, in all respects material to this opinion, are substantively identical to the laws of the State of Missouri, without regard to conflict of law provisions. The opinions expressed herein are rendered to you solely pursuant to Section 3.1(a) of the Placement Agreement. As such, they may be relied upon by you only and may not be used or relied upon by any other person for any purpose whatsoever without our prior written consent. Very truly yours, EXHIBIT B-2 ----------- FORM OF DELAWARE COUNSEL OPINION -------------------------------- To Each of the Persons Listed on Schedule A Hereto Re: First Bank Statutory Trust VII ------------------------------ Ladies and Gentlemen: We have acted as special Delaware counsel for First Bank Statutory Trust VII, a Delaware statutory trust (the "Trust"), in connection with the matters set forth herein. At your request, this opinion is being furnished to you. For purposes of giving the opinions hereinafter set forth, our examination of documents has been limited to the examination of originals or copies of the following: (a) The Certificate of Trust of the Trust (the "Certificate of Trust"), as filed in the office of the Secretary of State of the State of Delaware (the "Secretary of State") on November 16, 2006; (b) The Declaration of Trust, dated as of November 16, 2006, among First Banks, Inc., a Missouri corporation (the "Company"), Wilmington Trust Company, a Delaware banking corporation ("WTC"), as trustee and the administrators named therein (the "Administrators"); (c) The Amended and Restated Declaration of Trust of the Trust, dated as of December 14, 2006 (including the form of Capital Securities Certificate attached thereto as Exhibits A-1 and A-2 and the terms of the Capital Securities attached as Annex I) (the "Declaration of Trust"), among the Company, as sponsor, WTC, as Delaware trustee (the "Delaware Trustee") and institutional trustee (the "Institutional Trustee"), the Administrators and the holders, from time to time, of undivided beneficial interests in the assets of the Trust; (d) The Placement Agreement, dated December 6, 2006 (the "Placement Agreement"), among the Company, the Trust, and FTN Financial Capital Markets and Keefe, Bruyette & Woods, Inc., as placement agents; (e) The Subscription Agreements, dated December 14, 2006 (the "Subscription Agreement"), among (i) the Trust, the Company and Preferred Term Securities XXIV, Ltd. and (ii) the Trust, the Company and First Tennessee Bank National Association (the documents identified in items (c) through (e) being collectively referred to as the "Operative Documents"); (f) The Capital Securities being issued on the date hereof (the "Capital Securities"); (g) The Common Securities being issued on the date hereof (the "Common Securities") (the documents identified in items (f) and (g) being collectively referred to as the "Trust Securities"); and (h) A Certificate of Good Standing for the Trust, dated December 13, 2006, obtained from the Secretary of State. Capitalized terms used herein and not otherwise defined are used as defined in the Declaration of Trust, except that reference herein to any document shall mean such document as in effect on the date hereof. This opinion is being delivered pursuant to Section 3.1 of the Placement Agreement. For purposes of this opinion, we have not reviewed any documents other than the documents listed in paragraphs (a) through (h) above. In particular, we have not reviewed any document (other than the documents listed in paragraphs (a) through (h) above) that is referred to in or incorporated by reference into the documents reviewed by us. We have assumed that there exists no provision in any document that we have not reviewed that is inconsistent with the opinions stated herein. We have conducted no independent factual investigation of our own but rather have relied solely upon the foregoing documents, the statements and information set forth therein and the additional matters recited or assumed herein, all of which we have assumed to be true, complete and accurate in all material respects. With respect to all documents examined by us, we have assumed (i) the authenticity of all documents submitted to us as authentic originals, (ii) the conformity with the originals of all documents submitted to us as copies or forms, and (iii) the genuineness of all signatures. For purposes of this opinion, we have assumed (i) that the Declaration of Trust constitutes the entire agreement among the parties thereto with respect to the subject matter thereof, including with respect to the creation, operation, and termination of the Trust, and that the Declaration of Trust and the Certificate of Trust are in full force and effect and have not been amended further, (ii) that there are no proceedings pending or contemplated, for the merger, consolidation, liquidation, dissolution or termination of the Trust, (iii) except to the extent provided in paragraph 1 below, the due creation, due formation or due organization, as the case may be, and valid existence in good standing of each party to the documents examined by us under the laws of the jurisdiction governing its creation, formation or organization, (iv) that each party to the documents examined by us is qualified to do business in each jurisdiction where such qualification is required generally or necessary in order for such party to enforce its rights under the documents examined by us, (v) the legal capacity of each natural person who is a party to the documents examined by us, (vi) except to the extent set forth in paragraph 2 below, that each of the parties to the documents examined by us has the power and authority to execute and deliver, and to perform its obligations under, such documents, (vii) except to the extent provided in paragraph 3 below, that each of the parties to the documents examined by us has duly authorized, executed and delivered such documents, (viii) the receipt by each Person to whom a Capital Security is to be issued by the Trust (the "Capital Security Holders") of a Capital Security Certificate for the Capital Security and the payment for the Capital Securities acquired by it, in accordance with the Declaration of Trust and the Subscription Agreement, (ix) that the Capital Securities are issued and sold to the Holders of the Capital Securities in accordance with the Declaration of Trust and the Subscription Agreement, (x) the receipt by the Person (the "Common Securityholder") to whom the common securities of the Trust representing common undivided beneficial interests in the assets of the Trust (the "Common Securities" and, together with the Capital Securities, the "Trust Securities") are to be issued by the Trust of a Common Security Certificate for the Common Securities and the payment for the Common Securities acquired by it, in accordance with the Declaration of Trust, (xi) that the Common Securities are issued and sold to the Common Securityholder in accordance with the Declaration of Trust, (xii) that each of the parties to the documents reviewed by us has agreed to and received the stated consideration for the incurrence of its obligations under such documents, (xiii) that each of the documents reviewed by us (other than the Declaration of Trust) is a legal, valid, binding and enforceable obligation of the parties thereto in accordance with the terms thereof and (xiv) that the Trust derives no income from or connected with sources within the State of Delaware and has no assets, activities (other than having a trustee and the filing of documents with the Secretary of State) or employees in the State of Delaware. We have not participated in the preparation of any offering materials with respect to the Trust Securities and assume no responsibility for its contents. This opinion is limited to the laws of the State of Delaware (excluding the securities laws of the State of Delaware), and we have not considered and express no opinion on the laws of any other jurisdiction, including federal laws and rules and regulations relating thereto. Our opinions are rendered only with respect to Delaware laws and rules, regulations and orders thereunder that are currently in effect. We express no opinion as to (i) the effect of suretyship defenses, or defenses in the nature thereof, with respect to the obligations of any applicable guarantor, joint obligor, surety, accommodation party, or other secondary obligor or any provisions of the Declaration of Trust with respect to indemnification or contribution and (ii) the accuracy or completeness of any exhibits or schedules to the Operative Documents. No opinion is given herein as to the choice of law or internal substantive rules of law that any court or other tribunal may apply to the transactions contemplated by the Operative Documents. We express no opinion as to the enforceability of any particular provision of the Declaration of Trust or the other Operative Documents relating to remedies after default. We express no opinion as to the enforceability of any particular provision of any of the Operative Documents relating to (i) waivers of rights to object to jurisdiction or venue, or consents to jurisdiction or venue, (ii) waivers of rights to (or methods of) service of process, or rights to trial by jury, or other rights or benefits bestowed by operation of law, (iii) waivers of any applicable defenses, setoffs, recoupments, or counterclaims, (iv) waivers or variations of provisions which are not capable of waiver or variation under the Uniform Commercial Code ("UCC") of the State, (v) the grant of powers of attorney to any person or entity, or (vi) exculpation or exoneration clauses, indemnity clauses, and clauses relating to releases or waivers of unmatured claims or rights. We have made no examination of, and no opinion is given herein as to the Trustee's or the Trust's title to or other ownership rights in, or the existence of any liens, charges or encumbrances on, or adverse claims against, any asset or property held by the Institutional Trustee or the Trust. We express no opinion as to the creation, validity, attachment, perfection or priority of any mortgage, security interest or lien in any asset or property held by the Institutional Trustee or the Trust. We express no opinion as to the effect of events occurring, circumstances arising, or changes of law becoming effective or occurring, after the date hereof on the matters addressed in this opinion letter, and we assume no responsibility to inform you of additional or changed facts, or changes in law, of which we may become aware. We express no opinion as to any requirement that any party to the Operative Documents (or any other persons or entities purportedly entitled to the benefits thereof) qualify or register to do business in any jurisdiction in order to be able to enforce its rights thereunder or obtain the benefits thereof. Based upon the foregoing, and upon our examination of such questions of law and statutes of the State of Delaware as we have considered necessary or appropriate, and subject to the assumptions, qualifications, limitations and exceptions set forth herein, we are of the opinion that: 1. The Trust has been duly created and is validly existing in good standing as a statutory trust under the Delaware Statutory Trust Act (12 Del. C. ss. 3801, et seq.) (the "Act"). All filings required under the laws of - ------- -- --- the State of Delaware with respect to the creation and valid existence of the Trust as a statutory trust have been made. 2. Under the Declaration of Trust and the Act, the Trust has the trust power and authority to (A) execute and deliver the Operative Documents, (B) perform its obligations under such Operative Documents and (C) issue the Trust Securities. 3. The execution and delivery by the Trust of the Operative Documents, and the performance by the Trust of its obligations thereunder, have been duly authorized by all necessary trust action on the part of the Trust. 4. The Declaration of Trust constitutes a legal, valid and binding obligation of the Company, the Trustees and the Administrators, and is enforceable against the Company, the Trustees and the Administrators, in accordance with its terms. 5. Each of the Operative Documents constitutes a legal, valid and binding obligation of the Trust, enforceable against the Trust, in accordance with its terms. 6. The Capital Securities have been duly authorized for issuance by the Declaration of Trust, and, when duly executed and delivered to and paid for by the purchasers thereof in accordance with the Declaration of Trust, the Subscription Agreement and the Placement Agreement, the Capital Securities will be validly issued, fully paid and, subject to the qualifications set forth in paragraph 8 below, nonassessable undivided beneficial interests in the assets of the Trust and will entitle the Capital Securities Holders to the benefits of the Declaration of Trust. The issuance of the Capital Securities is not subject to preemptive or other similar rights under the Act or the Declaration of Trust. 7. The Common Securities have been duly authorized fo issuance by the Declaration of Trust and, when duly executed and delivered to the Company as Common Security Holder in accordance with the Declaration of Trust, will be validly issued, fully paid and, subject to paragraph 8 below and Section 9.1(b) of the Declaration of Trust (which provides that the Holder of the Common Securities are liable for debts and obligations of Trust), nonassessable undivided beneficial interests in the assets of the Trust and will entitle the Common Security Holder to the benefits of the Declaration of Trust. The issuance of the Common Securities is not subject to preemptive or other similar rights under the Act or the Declaration of Trust. 8. Under the Declaration of Trust and the Act, the Holders of the Capital Securities, as beneficial owners of the Trust, will be entitled to the same limitation of personal liability extended to stockholders of private corporations for profit organized under the General Corporation Law of the State of Delaware. We note that the Holders of the Capital Securities and the Holder of the Common Securities may be obligated, pursuant to the Declaration of Trust, (A) to provide indemnity and/or security in connection with and pay taxes or governmental charges arising from transfers or exchanges of Capital Security Certificates and the issuance of replacement Capital Security Certificates, and (B) to provide security or indemnity in connection with requests of or directions to the Institutional Trustee to exercise its rights and powers under the Declaration of Trust. 9. Neither the execution, delivery and performance by the Trust of the Operative Documents, nor the consummation by the Trust of any of the transactions contemplated thereby, requires the consent or approval of, the authorization of, the withholding of objection on the part of, the giving of notice to, the filing, registration or qualification with, or the taking of any other action in respect of, any governmental authority or agency of the State of Delaware, other than the filing of the Certificate of Trust with the Secretary of State (which Certificate of Trust has been duly filed). 10. Neither the execution, delivery and performance by the Trust of the Trust Documents, nor the consummation by the Trust of the transactions contemplated thereby, (i) is in violation of the Declaration of Trust or of any law, rule or regulation of the State of Delaware applicable to the Trust or (ii) to the best of our knowledge, without independent investigation, violates, contravenes or constitutes a default under, or results in a breach of or in the creation of any lien (other than as permitted by the Operative Documents) upon any property of the Trust under any indenture, mortgage, chattel mortgage, deed of trust, conditional sales contract, bank loan or credit agreement, license or other agreement or instrument to which the Trust is a party or by which it is bound. 11. Assuming that the Trust will not be taxable as a corporation for federal income tax purposes, but rather will be classified for such purposes as a grantor trust under Subpart E, Part I of Subchapter J of the Internal Revenue Code of 1986, as amended, the Trust will not be subject to any tax, fee or governmental charge under the laws of the State of Delaware. The opinions expressed in paragraph 4, 5, 6, 7 and 8 above are subject, as to enforcement, to the effect upon the Declaration of Trust of (i) bankruptcy, insolvency, moratorium, receivership, reorganization, liquidation, fraudulent conveyance and transfer, and other similar laws relating to or affecting the rights and remedies of creditors generally, (ii) principles of equity, including applicable law relating to fiduciary duties (regardless of whether considered and applied in a proceeding in equity or at law), and (iii) the effect of applicable public policy on the enforceability of provisions relating to indemnification or contribution. Circular 230 Notice. Any advice contained in this communication with respect to any federal tax matter was not intended or written to be used, and it cannot be used by any taxpayer, for the purpose of avoiding penalties that the Internal Revenue Service may impose on the taxpayer. If any such advice is made to any person other than to our client for whom the advice was prepared, the advice expressed above is being delivered to support the promotion or marketing (by a person other than Richards, Layton & Finger) of the transaction or matter discussed or referenced, and such taxpayer should seek advice based on the taxpayer's particular circumstances from an independent tax advisor. In basing the opinions set forth herein on "our knowledge," the words "our knowledge" signify that no information has come to the attention of the attorneys in the firm who are directly involved in the representation of the Trust in this transaction that would give us actual knowledge that any such opinions are not accurate. Except as otherwise stated herein, we have undertaken no independent investigation or verification of such matters. We consent to your relying as to matters of Delaware law upon this opinion in connection with the Placement Agreement. We also consent to Lewis, Rice & Fingersh, L.C.'s and Stinson Morrison Hecker LLP's relying as to matters of Delaware law upon this opinion in connection with opinions to be rendered by them on the date hereof pursuant to the Placement Agreement. Except as stated above, without our prior written consent, this opinion may not be furnished or quoted to, or relied upon by, any other Person for any purpose. Very truly yours, SCHEDULE A ---------- Wilmington Trust Company FTN Financial Capital Markets Keefe, Bruyette & Woods, Inc. First Tennessee Bank National Association Preferred Term Securities XXIV, Ltd. Preferred Term Securities XXIV, Inc. First Banks, Inc. EXHIBIT B-3 ----------- TAX COUNSEL OPINION ITEMS ------------------------- 1. The Debentures will be classified as indebtedness of the Company for U.S. federal income tax purposes. 2. The Trust will be characterized as a grantor trust and not as an association taxable as a corporation for U.S. federal income tax purposes. Lewis, Rice & Fingersh, L.C. 500 N. Broadway, Suite 2000 St. Louis, Missouri 63102 Re: Representations Concerning the Issuance of Junior Subordinated Deferrable Interest Debentures (the "Debentures") to First Bank Statutory Trust VII (the "Trust") and Sale of Trust Securities (the "Trust Securities") of the Trust Ladies and Gentlemen: In accordance with your request, First Banks, Inc. (the "Company") hereby makes the following representations in connection with the preparation of your opinion letter as to the United States federal income tax consequences of the issuance by the Company of the Debentures to the Trust and the sale of the Trust Securities. Company hereby represents that: 1. The sole assets of the Trust will be the Debentures, any interest paid on the Debentures to the extent not distributed, proceeds of the Debentures, or any of the foregoing. 2. The Company intends to use the net proceeds from the sale of the Debentures for general corporate purposes. 3. The Trust was not formed to conduct any trade or business and is not authorized to conduct any trade or business. The Trust exists for the exclusive purposes of (i) issuing and selling the Trust Securities, (ii) using the proceeds from the sale of Trust Securities to acquire the Debentures, and (iii) engaging only in activities necessary or incidental thereto. 4. The Company has not entered into an agency agreement with the Trust or authorized the trustee to act as its agent in dealing with third parties. To the Company's knowledge, after due inquiry, the Trust has not acted as the agent of the Company or of anyone else in dealing with third parties. 5. The Trust was formed to facilitate direct investment in the assets of the Trust, and the existence of multiple classes of ownership is incidental to that purpose. There is no intent to provide holders of such interests in the Trust with diverse interests in the assets of the Trust. 6. The Company intends to create a debtor-creditor relationship between the Company, as debtor, and the Trust, as a creditor, upon the issuance and sale of the Debentures to the Trust by the Company. The Company will (i) record and at all times continue to reflect the Debentures as indebtedness on its separate books and records for financial accounting purposes, and (ii) treat the Debentures as indebtedness for all United States tax purposes. 7. During each year, the Trust's income will consist solely of payments made by the Company with respect to the Debentures. Such payments will not be derived from the active conduct of a financial business by the Trust. Both the Company's obligation to make such payments and the measurement of the amounts payable by the Company are defined by the terms of the Debentures. Neither the Company's obligation to make such payments nor the measurement of the amounts payable by the Company is dependent on income or profits of Company or any affiliate of the Company. 8. The Company expects that it will be able to make, and will make, timely payment of amounts identified by the Debentures as principal and interest in accordance with the terms of the Debentures with available capital or accumulated earnings. 9. The Company presently has no intention to defer interest payments on the Debentures, and it considers the likelihood of such a deferral to be remote because, if it were to exercise its right to defer payments of interest with respect to the Debentures, it would not be permitted to declare or pay any dividends or distributions on, or redeem, purchase, acquire, or make a liquidation payment with respect to, any capital stock of the Company or any affiliate of the Company (other than payments of dividends or distributions to the Company or payments of dividends from direct or indirect subsidiaries of the Company to their parent corporations, which also shall be direct or indirect subsidiaries of the Company) or make any payment of principal of or interest or premium, if any, on or repay, repurchase, or redeem any debt securities of the Company or any affiliate of the Company that rank pari passu in all respects with or junior in interest to the Debentures, in each case subject to limited exceptions stated in Section 2.11 of the Indenture to be entered into in connection with the issuance of the Debentures. 10. The Company has no present intention (a) to take the position that a deferral of interest payments on the Debentures is not a remote contingency, or (b) to make an explicit disclosure on the Company's tax return, under Reg. ss. 1.1275-2(h)(5) that its determination as holder with respect to remote contingency status is different from its determination as issuer. 11. Immediately after the issuance of the Debentures, the debt-to- equity ratio of the Company (as determined for financial accounting purposes, but excluding deposit liabilities from the Company's debt) will be within standard depository institution industry norms and, in any event, will be no higher than four to one (4 : 1). 12. To the best of our knowledge, the Company is currently in compliance with all federal, state, and local capital requirements, except to the extent that failure to comply with any such requirements would not have a material adverse effect on the Company and its affiliates. 13. The Company will not issue any class of common stock or preferred stock senior to the Debentures during their term. 14. The Internal Revenue Service has not challenged the interest deduction on any class of the Company's subordinated debt in the last ten (10) years on the basis that such debt constitutes equity for federal income tax purposes. The above representations are accurate as of the date below and will continue to be accurate through the issuance of the Trust Securities, unless you are otherwise notified by us in writing. The undersigned understands that you will rely on the foregoing in connection with rendering certain legal opinions, and possesses the authority to make the representations set forth in this letter on behalf of the Company. Very truly yours, FIRST BANKS, INC. Date: December 11, 2006 By: ______________________________ Title: _____________________________ EXHIBIT C --------- SIGNIFICANT SUBSIDIARIES ------------------------ First Bank The San Francisco Company EXHIBIT D --------- FORM OF QUARTERLY REPORT ------------------------ The Bank of New York Collateralized Debt Obligation Group 101 Barclay Street, 8E New York, New York 10286 Attention: Franco B. Talavera CDO Relationship Manager BANK HOLDING COMPANY As of [March 31, June 30, September 30 or December 31], 20__ Tier 1 to Risk Weighted Assets _________% Ratio of Double Leverage _________% Non-Performing Assets to Loans and OREO _________% Ratio of Reserves to Non-Performing Loans _________% Ratio of Net Charge-Offs to Loans _________% Return on Average Assets (annualized)** _________% Net Interest Margin (annualized)** _________% Efficiency Ratio _________% Ratio of Loans to Assets _________% Ratio of Loans to Deposits _________% Total Assets $__________ Year to Date Income $__________ - ------------------- *A table describing the quarterly report calculation procedures is provided on page D-2 ** To annualize Return on Average Assets and Net Interest Margin do the following: 1st Quarter-multiply income statement item by 4, then divide by balance sheet item(s) 2nd Quarter-multiply income statement item by 2,then divide by balance sheet item(s) 3rd Quarter-divide income statement item by 3, then multiply by 4, then divide by balance sheet item(s) 4th Quarter-should already be an annual number NO ADJUSTMENT SHOULD BE MADE TO BALANCE SHEET ITEMS
Financial Definitions - ----------------------- -------------------------------------------------- --------------------------------------------------- Report Item Corresponding FRY-9C or LP Line Items with Line Item corresponding Schedules Description of Calculation - ----------------------- -------------------------------------------------- --------------------------------------------------- "Tier 1 Capital" to BHCK7206 Tier 1 Risk Ratio: Core Capital (Tier 1)/ Risk Weighted Assets Schedule HC-R Risk-Adjusted Assets - ----------------------- -------------------------------------------------- --------------------------------------------------- Ratio of Double (BHCP0365)/(BHCP3210) Total equity investments in subsidiaries divided Leverage Schedule PC in the LP by the total equity capital. This field is calculated at the parent company level. "Subsidiaries" include bank, bank holding company, and nonbank subsidiaries. - ----------------------- -------------------------------------------------- --------------------------------------------------- Non-Performing Assets (BHCK5525-BHCK3506+BHCK5526- Total+Nonperforming Assets (NPLs+Foreclosed Real to Loans and OREO BHC3507+BHCK2744)(BHCK2122+BHCK2 Estate+Other Nonaccrual & Repossessed Assets)/ 744)Schedules HC-C, HC-M & HC-N Total Loans + Foreclosed Real Estate - ----------------------- -------------------------------------------------- --------------------------------------------------- Ratio of Reserves to (BHCK3123+BHCK3128)/(BHCK5525- Total Loan Loss and Allocated Transfer Risk Non-Performing Loans BHCK3506+BHCK5526-BHCK3507) Reserves/ Total Nonperforming Loans (Nonaccrual + Schedules HC & HC-N Restructured) - ----------------------- -------------------------------------------------- --------------------------------------------------- Ratio of Net (BHCK4635-BHCK4605)/(BHCK3516) Net charge offs for the period as a percentage of Charge-Offs to Loans Schedules HI-B & HC-K average loans. - ----------------------- -------------------------------------------------- --------------------------------------------------- Return on Assets (BHCK4340/BHCK3368) Net Income as a percentage of Assets. Schedules HI & HC-K - ----------------------- -------------------------------------------------- --------------------------------------------------- Net Interest Margin (BHCK4519)/(BHCK3515+BHCK3365+BHCK (NetInterest Income Fully Taxable Equivalent, if 3516+BHCK3401+BHCK985) available / Average Earning Assets) Schedules HI Memorandum and HC-K - ----------------------- -------------------------------------------------- --------------------------------------------------- Efficiency Ratio (BHCK4093)/(BHCK4519+BHCK4079) (Noninterest Expense)/ (Net Interest Income Schedule HI Fully Taxable Equivalent, if available, plus Noninterest Income) - ----------------------- -------------------------------------------------- --------------------------------------------------- Ratio of Loans to (BHCKB528+BHCK5369)/BHCK2170) Total Loans & Leases (Net of Unearned Income & Assets Schedule HC Gross of Reserve)/ Total Assets - ----------------------- -------------------------------------------------- --------------------------------------------------- Ratio of Loans to (BHCKB528+BHCK5369)/(BHDM6631+BHD Total Loans & Leases (Net of Unearned Income & Deposits M6636+BHFN6631+BHFN6636) Gross of Reserve)/ Total Deposits (Includes Schedule HC Domestic and Foreign Deposits) - ----------------------- -------------------------------------------------- --------------------------------------------------- Total Assets (BHCK2170) The sum of total assets. Includes cash and Schedule HC balances due from depository institutions; securities; federal funds sold and securities purchased under agreements to resell; loaans and lease financing receivables; trading assets; premises and fixed assets; other real estate owned; investments in unconsolidated subsidiaries and associated companies; customer's liability on acceptances outstanding; intangible assets; and other assets. - ----------------------- -------------------------------------------------- --------------------------------------------------- Net Income (BHCK4300) The sum of income (loss) before extraordinary Schedule HI items and other adjustments and extraordinary items; and other adjustments, net of income taxes. - ----------------------- -------------------------------------------------- ---------------------------------------------------
First Banks, Inc. Disclosure Schedule to the Placement Agreement Section 5.10 Subsidiaries of the Company - All issued and outstanding common --------------------------- stock of The San Francisco Company, a wholly owned subsidiary of the Company, and First Bank, a wholly owned subsidiary of The San Francisco Company, has been pledged to Wells Fargo Bank, National Association as the Agent for the ratable benefit of certain lenders pursuant to the terms of that certain Amended and Restated Secured Credit Agreement, dated as of August 11, 2005, as amended by First Amendment, dated August 10, 2006, by and among the Company, the Lenders signatory thereto and the Agent (the "Credit Agreement"). Section 5.16 Regulatory Enforcement Matters - Pursuant to the terms of the -------------------------------- Credit Agreement, the Company has agreed not to pay any cash dividends on its common or preferred stock in excess of 25% of the Company's consolidated net income for the immediately preceding fiscal year end. In addition, no cash dividends or distributions on trust preferred and common securities may be declared or paid if either a Default (as defined in the Credit Agreement) exists on the date of such declaration of payment or a Default will result from such payment. EX-4 6 viijrsubdeb.txt 4.61 Exhibit 4.61 FLOATING RATE JUNIOR SUBORDINATED DEFERRABLE INTEREST DEBENTURE THIS SECURITY IS NOT A SAVINGS ACCOUNT OR DEPOSIT AND IT IS NOT INSURED BY THE UNITED STATES OR ANY AGENCY OR FUND OF THE UNITED STATES, INCLUDING THE FEDERAL DEPOSIT INSURANCE CORPORATION. THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), ANY STATE SECURITIES LAWS OR ANY OTHER APPLICABLE SECURITIES LAW. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND ANY APPLICABLE STATE SECURITIES LAWS. THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF AGREES TO OFFER, SELL OR OTHERWISE TRANSFER THIS SECURITY ONLY (A) TO THE COMPANY, (B) PURSUANT TO A REGISTRATION STATEMENT THAT HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C) TO A PERSON WHOM THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A SO LONG AS THIS SECURITY IS ELIGIBLE FOR RESALE PURSUANT TO RULE 144A IN ACCORDANCE WITH RULE 144A, (D) TO A NON-U.S. PERSON IN AN OFFSHORE TRANSACTION IN ACCORDANCE WITH RULE 903 OR RULE 904 (AS APPLICABLE) OF REGULATION S UNDER THE SECURITIES ACT, (E) TO AN INSTITUTIONAL "ACCREDITED INVESTOR" WITHIN THE MEANING OF SUBPARAGRAPH (A) OF RULE 501 UNDER THE SECURITIES ACT THAT IS ACQUIRING THIS SECURITY FOR ITS OWN ACCOUNT, OR FOR THE ACCOUNT OF SUCH AN INSTITUTIONAL ACCREDITED INVESTOR, FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO, OR FOR OFFER OR SALE IN CONNECTION WITH, ANY DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT, OR (F) PURSUANT TO ANY OTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, SUBJECT TO THE COMPANY'S RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATION AND/OR OTHER INFORMATION SATISFACTORY TO IT IN ACCORDANCE WITH THE INDENTURE, A COPY OF WHICH MAY BE OBTAINED FROM THE COMPANY. THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF ALSO AGREES, REPRESENTS AND WARRANTS THAT IT IS NOT AN EMPLOYEE BENEFIT, INDIVIDUAL RETIREMENT ACCOUNT OR OTHER PLAN OR ARRANGEMENT SUBJECT TO TITLE I OF THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974, AS AMENDED ("ERISA"), OR SECTION 4975 OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED (THE "CODE") (EACH A "PLAN"), OR AN ENTITY WHOSE UNDERLYING ASSETS INCLUDE "PLAN ASSETS" BY REASON OF ANY PLAN'S INVESTMENT IN THE ENTITY, AND NO PERSON INVESTING "PLAN ASSETS" OF ANY PLAN MAY ACQUIRE OR HOLD THE SECURITIES OR ANY INTEREST THEREIN, UNLESS SUCH PURCHASER OR HOLDER IS ELIGIBLE FOR EXEMPTIVE RELIEF AVAILABLE UNDER U.S. DEPARTMENT OF LABOR PROHIBITED TRANSACTION CLASS EXEMPTION 96-23, 95-60, 91-38, 90-1 OR 84-14 OR ANOTHER APPLICABLE EXEMPTION OR ITS PURCHASE AND HOLDING OF THIS SECURITY IS NOT PROHIBITED BY SECTION 406 OF ERISA OR SECTION 4975 OF THE CODE WITH RESPECT TO SUCH PURCHASE OR HOLDING. ANY PURCHASER OR HOLDER OF THE SECURITIES OR ANY INTEREST THEREIN WILL BE DEEMED TO HAVE REPRESENTED BY ITS PURCHASE AND HOLDING THEREOF THAT EITHER (i) IT IS NOT AN EMPLOYEE BENEFIT PLAN WITHIN THE MEANING OF SECTION 3(3) OF ERISA, OR A PLAN TO WHICH SECTION 4975 OF THE CODE IS APPLICABLE, A TRUSTEE OR OTHER PERSON ACTING ON BEHALF OF AN EMPLOYEE BENEFIT PLAN OR PLAN, OR ANY OTHER PERSON OR ENTITY USING THE ASSETS OF ANY EMPLOYEE BENEFIT PLAN OR PLAN TO FINANCE SUCH PURCHASE, OR (ii) SUCH PURCHASE WILL NOT RESULT IN A PROHIBITED TRANSACTION UNDER SECTION 406 OF ERISA OR SECTION 4975 OF THE CODE FOR WHICH THERE IS NO APPLICABLE STATUTORY OR ADMINISTRATIVE EXEMPTION. THIS SECURITY WILL BE ISSUED AND MAY BE TRANSFERRED ONLY IN BLOCKS HAVING AN AGGREGATE PRINCIPAL AMOUNT OF NOT LESS THAN $100,000.00 AND MULTIPLES OF $1,000.00 IN EXCESS THEREOF. ANY ATTEMPTED TRANSFER OF THIS SECURITY IN A BLOCK HAVING AN AGGREGATE PRINCIPAL AMOUNT OF LESS THAN $100,000.00 SHALL BE DEEMED TO BE VOID AND OF NO LEGAL EFFECT WHATSOEVER. THE HOLDER OF THIS SECURITY AGREES THAT IT WILL COMPLY WITH THE FOREGOING RESTRICTIONS. IN CONNECTION WITH ANY TRANSFER, THE HOLDER WILL DELIVER TO THE REGISTRAR AND TRANSFER AGENT SUCH CERTIFICATES AND OTHER INFORMATION AS MAY BE REQUIRED BY THE INDENTURE TO CONFIRM THAT THE TRANSFER COMPLIES WITH THE FOREGOING RESTRICTIONS. Floating Rate Junior Subordinated Deferrable Interest Debenture of First Banks, Inc. December 14, 2006 First Banks, Inc., a Missouri corporation (the "Company" which term includes any successor Person under the Indenture hereinafter referred to), for value received promises to pay to Wilmington Trust Company, not in its individual capacity but solely as Institutional Trustee for First Bank Statutory Trust VII (the "Holder") or registered assigns, the principal sum of fifty-one million five hundred forty-seven thousand dollars ($51,547,000.00) on December 15, 2036, and to pay interest on said principal sum from December 14, 2006, or from the most recent Interest Payment Date (as defined below) to which interest has been paid or duly provided for, quarterly (subject to deferral as set forth herein) in arrears on March 15, June 15, September 15 and December 15 of each year or if such day is not a Business Day, then the next succeeding Business Day (each such date, an "Interest Payment Date") (it being understood that interest accrues for any such non-Business Day), commencing on the Interest Payment Date in March 2007, at an annual rate equal to 7.20% beginning on (and including) the date of original issuance and ending on (but excluding) the Interest Payment Date in March 2007 and at an annual rate for each successive period beginning on (and including) the Interest Payment Date in March 2007, and each succeeding Interest Payment Date, and ending on (but excluding) the next succeeding Interest Payment Date (each a "Distribution Period"), equal to 3-Month LIBOR, determined as described below, plus 1.85% (the "Coupon Rate"), applied to the principal amount hereof, until the principal hereof is paid or duly provided for or made available for payment, and on any overdue principal and (without duplication and to the extent that payment of such interest is enforceable under applicable law) on any overdue installment of interest (including Additional Interest) at the Interest Rate in effect for each applicable period, compounded quarterly, from the dates such amounts are due until they are paid or made available for payment. The amount of interest payable for any period will be computed on the basis of the actual number of days in the Distribution Period concerned divided by 360. The interest installment so payable, and punctually paid or duly provided for, on any Interest Payment Date will, as provided in the Indenture, be paid to the Person in whose name this Debenture (or one or more Predecessor Securities) is registered at the close of business on the regular record date for such interest installment, which shall be fifteen Business Days prior to the day on which the relevant Interest Payment Date occurs. Any such interest installment not so punctually paid or duly provided for shall forthwith cease to be payable to the Holder on such regular record date and may be paid to the Person in whose name this Debenture (or one or more Predecessor Securities) is registered at the close of business on a special record date. "3-Month LIBOR" as used herein, means the London interbank offered interest rate for three-month U.S. dollar deposits determined by the Trustee in the following order of priority: (i) the rate (expressed as a percentage per annum) for U.S. dollar deposits having a three-month maturity that appears on Telerate Page 3750 as of 11:00 a.m. (London time) on the related Determination Date ("Telerate Page 3750" means the display designated as "Page 3750" on the Moneyline Telerate Service or such other page as may replace Page 3750 on that service or such other service or services as may be nominated by the British Bankers' Association as the information vendor for the purpose of displaying London interbank offered rates for U.S. dollar deposits); (ii) if such rate cannot be identified on the related Determination Date, the Trustee will request the principal London offices of four leading banks in the London interbank market to provide such banks' offered quotations (expressed as percentages per annum) to prime banks in the London interbank market for U.S. dollar deposits having a three-month maturity as of 11:00 a.m. (London time) on such Determination Date. If at least two quotations are provided, 3-Month LIBOR will be the arithmetic mean of such quotations; (iii) if fewer than two such quotations are provided as requested in clause (ii) above, the Trustee will request four major New York City banks to provide such banks' offered quotations (expressed as percentages per annum) to leading European banks for loans in U.S. dollars as of 11:00 a.m. (London time) on such Determination Date. If at least two such quotations are provided, 3-Month LIBOR will be the arithmetic mean of such quotations; and (iv) if fewer than two such quotations are provided as requested in clause (iii) above, 3-Month LIBOR will be a 3-Month LIBOR determined with respect to the Distribution Period immediately preceding such current Distribution Period. If the rate for U.S. dollar deposits having a three-month maturity that initially appears on Telerate Page 3750 as of 11:00 a.m. (London time) on the related Determination Date is superseded on the Telerate Page 3750 by a corrected rate by 12:00 noon (London time) on such Determination Date, then the corrected rate as so substituted on the applicable page will be the applicable 3-Month LIBOR for such Determination Date. As used herein, "Determination Date" means the date that is two London Banking Days (i.e., a business day in which dealings in deposits in U.S. dollars are transacted in the London interbank market) preceding the commencement of the relevant Distribution Period. The Interest Rate for any Distribution Period will at no time be higher than the maximum rate then permitted by New York law as the same may be modified by United States law. All percentages resulting from any calculations on the Debentures will be rounded, if necessary, to the nearest one hundred-thousandth of a percentage point, with five one-millionths of a percentage point rounded upward (e.g., 9.876545% (or .09876545) being rounded to 9.87655% (or .0987655), and all dollar amounts used in or resulting from such calculation will be rounded to the nearest cent (with one-half cent being rounded upward)). The principal of and interest on this Debenture shall be payable at the office or agency of the Trustee (or other paying agent appointed by the Company) maintained for that purpose in any coin or currency of the United States of America that at the time of payment is legal tender for payment of public and private debts; provided, however, that payment of interest may be made by check -------- ------- mailed to the registered holder at such address as shall appear in the Debenture Register if a request for a wire transfer by such holder has not been received by the Company or by wire transfer to an account appropriately designated by the holder hereof. Notwithstanding the foregoing, so long as the holder of this Debenture is the Institutional Trustee, the payment of the principal of and interest on this Debenture will be made in immediately available funds at such place and to such account as may be designated by the Trustee. So long as no Acceleration Event of Default has occurred and is continuing, the Company shall have the right, from time to time, and without causing an Event of Default, to defer payments of interest on the Debentures by extending the interest payment period on the Debentures at any time and from time to time during the term of the Debentures, for up to 20 consecutive quarterly periods (each such extended interest payment period, an "Extension Period"), during which Extension Period no interest (including Additional Interest) shall be due and payable (except any Additional Sums that may be due and payable). No Extension Period may end on a date other than an Interest Payment Date. During an Extension Period, interest will continue to accrue on the Debentures, and interest on such accrued interest will accrue at an annual rate equal to the Interest Rate in effect for such Extension Period, compounded quarterly from the date such interest would have been payable were it not for the Extension Period, to the extent permitted by law (such interest referred to herein as "Additional Interest"). At the end of any such Extension Period the Company shall pay all interest then accrued and unpaid on the Debentures (together with Additional Interest thereon); provided, however, that no -------- ------- Extension Period may extend beyond the Maturity Date; provided further, however, -------- ------- ------- that during any such Extension Period, the Company shall not and shall not permit any Affiliate to engage in any of the activities or transactions described on the reverse side hereof and in the Indenture. Prior to the termination of any Extension Period, the Company may further extend such period, provided that such period together with all such previous and further consecutive extensions thereof shall not exceed 20 consecutive quarterly periods, or extend beyond the Maturity Date. Upon the termination of any Extension Period and upon the payment of all accrued and unpaid interest and Additional Interest, the Company may commence a new Extension Period, subject to the foregoing requirements. No interest or Additional Interest shall be due and payable during an Extension Period, except at the end thereof, but each installment of interest that would otherwise have been due and payable during such Extension Period shall bear Additional Interest. The Company must give the Trustee notice of its election to begin or extend an Extension Period by the close of business at least 15 Business Days prior to the Interest Payment Date with respect to which interest on the Debentures would have been payable except for the election to begin or extend such Extension Period. The indebtedness evidenced by this Debenture is, to the extent provided in the Indenture, subordinate and junior in right of payment to the prior payment in full of all Senior Indebtedness, and this Debenture is issued subject to the provisions of the Indenture with respect thereto. Each holder of this Debenture, by accepting the same, (a) agrees to and shall be bound by such provisions, (b) authorizes and directs the Trustee on his or her behalf to take such action as may be necessary or appropriate to acknowledge or effectuate the subordination so provided and (c) appoints the Trustee his or her attorney-in-fact for any and all such purposes. Each holder hereof, by his or her acceptance hereof, hereby waives all notice of the acceptance of the subordination provisions contained herein and in the Indenture by each holder of Senior Indebtedness, whether now outstanding or hereafter incurred, and waives reliance by each such holder upon said provisions. This Debenture shall not be entitled to any benefit under the Indenture hereinafter referred to, be valid or become obligatory for any purpose until the certificate of authentication hereon shall have been signed by or on behalf of the Trustee. The provisions of this Debenture are continued on the reverse side hereof and such provisions shall for all purposes have the same effect as though fully set forth at this place. Signatures appear on the following page IN WITNESS WHEREOF, the Company has duly executed this certificate. FIRST BANKS, INC. By /s/ Lisa K. Vansickle -------------------------------------- Name: Lisa K. Vansickle Title: Senior Vice President CERTIFICATE OF AUTHENTICATION ----------------------------- This is one of the Debentures referred to in the within-mentioned Indenture. WILMINGTON TRUST COMPANY, as Trustee By: /s/ Christopher J. Monigle ------------------------------------- Authorized Officer REVERSE OF DEBENTURE This Debenture is one of the floating rate junior subordinated deferrable interest debentures of the Company, all issued or to be issued under and pursuant to the Indenture dated as of December 14, 2006 (the "Indenture"), duly executed and delivered between the Company and the Trustee, to which Indenture reference is hereby made for a description of the rights, limitations of rights, obligations, duties and immunities thereunder of the Trustee, the Company and the holders of the Debentures. The Debentures are limited in aggregate principal amount as specified in the Indenture. Upon the occurrence and continuation of a Special Event prior to the Interest Payment Date in December 2011, the Company shall have the right to redeem the Debentures in whole, but not in part, at any Interest Payment Date, within 120 days following the occurrence of such Special Event, at the Special Redemption Price. In addition, the Company shall have the right to redeem the Debentures, in whole or in part, but in all cases in a principal amount with integral multiples of $1,000.00, on any Interest Payment Date on or after the Interest Payment Date in December 2011, at the Redemption Price. Prior to 10:00 a.m. New York City time on the Redemption Date or Special Redemption Date, as applicable, the Company will deposit with the Trustee or with one or more paying agents an amount of money sufficient to redeem on the Redemption Date or the Special Redemption Date, as applicable, all the Debentures so called for redemption at the appropriate Redemption Price or Special Redemption Price. If all, or less than all, the Debentures are to be redeemed, the Company will give the Trustee notice not less than 45 nor more than 60 days, respectively, prior to the Redemption Date or Special Redemption Date, as applicable, as to the aggregate principal amount of Debentures to be redeemed and the Trustee shall select, in such manner as in its sole discretion it shall deem appropriate and fair, the Debentures or portions thereof (in integral multiples of $1,000.00) to be redeemed. Notwithstanding the foregoing, any redemption of Debentures by the Company shall be subject to the receipt of any and all required regulatory approvals. In case an Acceleration Event of Default shall have occurred and be continuing, upon demand of the Trustee, the principal of all of the Debentures shall become due and payable in the manner, with the effect and subject to the conditions provided in the Indenture. The Indenture contains provisions permitting the Company and the Trustee, with the consent of the holders of not less than a majority in aggregate principal amount of the Debentures at the time outstanding, to execute supplemental indentures for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Indenture or of any supplemental indenture or of modifying in any manner the rights of the holders of the Debentures; provided, however, that no such supplemental indenture shall without the consent of the holders of each Debenture then outstanding and affected thereby (i) change the fixed maturity of any Debenture, or reduce the principal amount thereof or any premium thereon, or reduce the rate or extend the time of payment of interest thereon, or reduce any amount payable on redemption thereof or make the principal thereof or any interest or premium thereon payable in any coin or currency other than that provided in the Debentures, or impair or affect the right of any Securityholder to institute suit for payment thereof or impair the right of repayment, if any, at the option of the holder, or (ii) reduce the aforesaid percentage of Debentures the holders of which are required to consent to any such supplemental indenture. The Indenture also contains provisions permitting the holders of a majority in aggregate principal amount of the Debentures at the time outstanding on behalf of the holders of all of the Debentures to waive (or modify any previously granted waiver of) any past default or Event of Default, and its consequences, except a default (a) in the payment of principal of, premium, if any, or interest on any of the Debentures, (b) in respect of covenants or provisions hereof or of the Indenture which cannot be modified or amended without the consent of the holder of each Debenture affected, or (c) in respect of the covenants contained in Section 3.9 of the Indenture; provided, however, that if the Debentures are held by the Trust or a trustee of such trust, such waiver or modification to such waiver shall not be effective until the holders of a majority in Liquidation Amount of Trust Securities of the Trust shall have consented to such waiver or modification to such waiver, provided, further, that if the consent of the holder of each outstanding Debenture is required, such waiver shall not be effective until each holder of the Trust Securities of the Trust shall have consented to such waiver. Upon any such waiver, the default covered thereby shall be deemed to be cured for all purposes of the Indenture and the Company, the Trustee and the holders of the Debentures shall be restored to their former positions and rights hereunder, respectively; but no such waiver shall extend to any subsequent or other default or Event of Default or impair any right consequent thereon. Whenever any default or Event of Default hereunder shall have been waived as permitted by the Indenture, said default or Event of Default shall for all purposes of the Debentures and the Indenture be deemed to have been cured and to be not continuing. No reference herein to the Indenture and no provision of this Debenture or of the Indenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of and premium, if any, and interest, including Additional Interest, on this Debenture at the time and place and at the rate and in the money herein prescribed. The Company has agreed that if Debentures are initially issued to the Trust or a trustee of such Trust in connection with the issuance of Trust Securities by the Trust (regardless of whether Debentures continue to be held by such Trust) and (i) there shall have occurred and be continuing an Event of Default, (ii) the Company shall be in default with respect to its payment of any obligations under the Capital Securities Guarantee, or (iii) the Company shall have given notice of its election to defer payments of interest on the Debentures by extending the interest payment period as provided herein and such Extension Period, or any extension thereof, shall be continuing, then the Company shall not, and shall not allow any Affiliate of the Company to, (x) declare or pay any dividends or distributions on, or redeem, purchase, acquire, or make a liquidation payment with respect to, any of the Company's capital stock or its Affiliates' capital stock (other than payments of dividends or distributions to the Company) or make any guarantee payments with respect to the foregoing or (y) make any payment of principal of or interest or premium, if any, on or repay, repurchase or redeem any debt securities of the Company or any Affiliate that rank pari passu in all respects with or junior in interest to the Debentures (other than, with respect to clauses (x) and (y) above, (1) repurchases, redemptions or other acquisitions of shares of capital stock of the Company in connection with any employment contract, benefit plan or other similar arrangement with or for the benefit of one or more employees, officers, directors or consultants, in connection with a dividend reinvestment or stockholder stock purchase plan or in connection with the issuance of capital stock of the Company (or securities convertible into or exercisable for such capital stock) as consideration in an acquisition transaction entered into prior to the applicable Extension Period, if any, (2) as a result of any exchange or conversion of any class or series of the Company's capital stock (or any capital stock of a subsidiary of the Company) for any class or series of the Company's capital stock or of any class or series of the Company's indebtedness for any class or series of the Company's capital stock, (3) the purchase of fractional interests in shares of the Company's capital stock pursuant to the conversion or exchange provisions of such capital stock or the security being converted or exchanged, (4) any declaration of a dividend in connection with any stockholders' rights plan, or the issuance of rights, stock or other property under any stockholders' rights plan, or the redemption or repurchase of rights pursuant thereto, (5) any dividend in the form of stock, warrants, options or other rights where the dividend stock or the stock issuable upon exercise of such warrants, options or other rights is the same stock as that on which the dividend is being paid or ranks pari passu with or junior to such stock and any cash payments in lieu of fractional shares issued in connection therewith, or (6) payments under the Capital Securities Guarantee). The Debentures are issuable only in registered, certificated form without coupons and in minimum denominations of $100,000.00 and any multiple of $1,000.00 in excess thereof. As provided in the Indenture and subject to the transfer restrictions and limitations as may be contained herein and therein from time to time, this Debenture is transferable by the holder hereof on the Debenture Register of the Company. Upon due presentment for registration of transfer of any Debenture at the Principal Office of the Trustee or at any office or agency of the Company maintained for such purpose as provided in Section 3.2 of the Indenture, the Company shall execute, the Company or the Trustee shall register and the Trustee or the Authenticating Agent shall authenticate and make available for delivery in the name of the transferee or transferees a new Debenture for a like aggregate principal amount. All Debentures presented for registration of transfer or for exchange or payment shall (if so required by the Company or the Trustee or the Authenticating Agent) be duly endorsed by, or be accompanied by a written instrument or instruments of transfer in form satisfactory to, the Company and the Trustee or the Authenticating Agent duly executed by the holder or his attorney duly authorized in writing. No service charge shall be made for any exchange or registration of transfer of Debentures, but the Company or the Trustee may require payment of a sum sufficient to cover any tax, fee or other governmental charge that may be imposed in connection therewith. Prior to due presentment for registration of transfer of any Debenture, the Company, the Trustee, any Authenticating Agent, any paying agent, any transfer agent and any Debenture registrar may deem the Person in whose name such Debenture shall be registered upon the Debenture Register to be, and may treat him as, the absolute owner of such Debenture (whether or not such Debenture shall be overdue) for the purpose of receiving payment of or on account of the principal of, premium, if any, and interest on such Debenture and for all other purposes; and neither the Company nor the Trustee nor any Authenticating Agent nor any paying agent nor any transfer agent nor any Debenture registrar shall be affected by any notice to the contrary. All such payments so made to any holder for the time being or upon his order shall be valid, and, to the extent of the sum or sums so paid, effectual to satisfy and discharge the liability for moneys payable upon any such Debenture. No recourse for the payment of the principal of or premium, if any, or interest on any Debenture, or for any claim based thereon or otherwise in respect thereof, and no recourse under or upon any obligation, covenant or agreement of the Company in the Indenture or in any supplemental indenture, or in any such Debenture, or because of the creation of any indebtedness represented thereby, shall be had against any incorporator, stockholder, employee, officer or director, as such, past, present or future, of the Company or of any successor Person of the Company, either directly or through the Company or any successor Person of the Company, whether by virtue of any constitution, statute or rule of law, or by the enforcement of any assessment or penalty or otherwise, it being expressly understood that all such liability is hereby expressly waived and released as a condition of, and as a consideration for, the execution of the Indenture and the issue of the Debentures. Capitalized terms used and not defined in this Debenture shall have the meanings assigned in the Indenture dated as of the date of original issuance of this Debenture between the Trustee and the Company. THE INDENTURE AND THE DEBENTURES SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO CONFLICT OF LAW PRINCIPLES THEREOF. EX-4 7 viiftnsubagre.txt 4.62 Exhibit 4.62 FIRST BANK STATUTORY TRUST VII FIRST BANKS, INC. SUBSCRIPTION AGREEMENT December 14, 2006 THIS SUBSCRIPTION AGREEMENT (this "Agreement") made among First Bank Statutory Trust VII (the "Trust"), a statutory trust created under the Delaware Statutory Trust Act (Chapter 38 of Title 12 of the Delaware Code, 12 Del. C. ss.ss. 3801, et seq.), First Banks, Inc., a Missouri corporation, with its principal offices located at 600 James S. McDonnell Boulevard, Hazelwood, Missouri 63042 (the "Company" and, collectively with the Trust, the "Offerors"), and First Tennessee Bank National Association (the "Purchaser"). RECITALS: A. The Trust desires to issue 50,000 of its Floating Rate Capital Securities (the "Capital Securities"), liquidation amount $1,000.00 per Capital Security, representing an undivided beneficial interest in the assets of the Trust (the "Offering"), to be issued pursuant to an Amended and Restated Declaration of Trust (the "Declaration") by and among the Company, Wilmington Trust Company ("WTC"), the administrators named therein, and the holders (as defined therein), which Capital Securities are to be guaranteed by the Company with respect to distributions and payments upon liquidation, redemption and otherwise pursuant to the terms of a Guarantee Agreement between the Company and WTC, as trustee (the "Guarantee"); and B. The proceeds from the sale of the Capital Securities will be combined with the proceeds from the sale by the Trust to the Company of its common securities, and will be used by the Trust to purchase an equivalent amount of Floating Rate Junior Subordinated Deferrable Interest Debentures of the Company (the "Debentures") to be issued by the Company pursuant to an indenture to be executed by the Company and WTC, as trustee (the "Indenture"); and C. In consideration of the premises and the mutual representations and covenants hereinafter set forth, the parties hereto agree as follows: ARTICLE I PURCHASE AND SALE OF CAPITAL SECURITIES 1.1. Upon the execution of this Agreement, the Purchaser hereby agrees to purchase from the Trust 30,000 Capital Securities at a price equal to $1,000.00 per Capital Security (the "Purchase Price") and the Trust agrees to sell such Capital Securities to the Purchaser for said Purchase Price. The rights and preferences of the Capital Securities are set forth in the Declaration. The Purchase Price is payable in immediately available funds on December 14, 2006, or such other business day as may be designated by the Purchaser, but in no event later than December 29, 2006 (the "Closing Date"). The Offerors shall provide the Purchaser wire transfer instructions no later than 1 day following the date hereof. 1.2. The Placement Agreement, dated December 6, 2006 (the "Placement Agreement"), among the Offerors and the placement agents identified therein (the "Placement Agents") includes certain representations and warranties, covenants and conditions to closing and certain other matters governing the Offering. The Placement Agreement is hereby incorporated by reference into this Agreement and the Purchaser shall be entitled to each of the benefits of the Placement Agents and the Purchaser under the Placement Agreement and shall be entitled to enforce the obligations of the Offerors under such Placement Agreement as fully as if the Purchaser were a party to such Placement Agreement. 1.3. Anything herein or in the Placement Agreement notwithstanding, the Offerors acknowledge and agree that, so long as Purchaser holds some or all of the Capital Securities, the Purchaser may in its discretion from time to time transfer or sell, or sell or grant participation interests in, some or all of such Capital Securities to one or more parties, provided that any such transaction complies, as applicable, with the registration requirements of the Securities Act of 1933, as amended (the "Securities Act") and any other applicable securities laws, is pursuant to an exemption therefrom, or is otherwise not subject thereto. ARTICLE II REPRESENTATIONS AND WARRANTIES OF PURCHASER 2.1. The Purchaser understands and acknowledges that none of the Capital Securities, the Debentures or the Guarantee have been registered under the Securities Act or any other applicable securities law, are being offered for sale by the Trust in transactions not requiring registration under the Securities Act, and may not be offered, sold, pledged or otherwise transferred by the Purchaser except in compliance with the registration requirements of the Securities Act or any other applicable securities laws, pursuant to an exemption therefrom or in a transaction not subject thereto. 2.2. The Purchaser represents and warrants that, except as contemplated under Section 1.3 hereof, it is purchasing the Capital Securities for its own account, for investment, and not with a view to, or for offer or sale in connection with, any distribution thereof in violation of the Securities Act or other applicable securities laws, subject to any requirement of law that the disposition of its property be at all times within its control and subject to its ability to resell such Capital Securities pursuant to an effective registration statement under the Securities Act or under Rule 144A or any other exemption from registration available under the Securities Act or any other applicable securities law. 2.3. The Purchaser represents and warrants that neither the Offerors nor the Placement Agents are acting as a fiduciary or financial or investment adviser for the Purchaser. 2.4. The Purchaser represents and warrants that it is not relying (for purposes of making any investment decision or otherwise) upon any advice, counsel or representations (whether written or oral) of the Offerors or of the Placement Agents. 2.5. The Purchaser represents and warrants that (a) it has consulted with its own legal, regulatory, tax, business, investment, financial and accounting advisers in connection herewith to the extent it has deemed necessary, (b) it has had a reasonable opportunity to ask questions of and receive answers from officers and representatives of the Offerors concerning their respective financial condition and results of operations and the purchase of the Capital Securities, and any such questions have been answered to its satisfaction, (c) it has had the opportunity to review all publicly available records and filings concerning the Offerors and it has carefully reviewed such records and filings that it considers relevant to making an investment decision, and (d) it has made its own investment decisions based upon its own judgment, due diligence and advice from such advisers as it has deemed necessary and not upon any view expressed by the Offerors or the Placement Agents. 2.6. The Purchaser represents and warrants that it is a "qualified institutional buyer" as defined under Rule 144A under the Securities Act. If the Purchaser is a dealer of the type described in paragraph (a)(1)(ii) of Rule 144A under the Securities Act, it owns and invests on a discretionary basis not less than U.S. $25,000,000.00 in securities of issuers that are not affiliated with it. The Purchaser is not a participant-directed employee plan, such as a 401(k) plan, or any other type of plan referred to in paragraph (a)(1)(i)(D) or (a)(1)(i)(E) of Rule 144A, or a trust fund referred to in paragraph (a)(1)(i)(F) of Rule 144A that holds the assets of such a plan, unless investment decisions with respect to the plan are made solely by the fiduciary, trustee or sponsor of such plan. 2.7. The Purchaser represents and warrants that on each day from the date on which it acquires the Capital Securities through and including the date on which it disposes of its interests in the Capital Securities, either (i) it is not (a) an "employee benefit plan" (as defined in Section 3(3) of the United States Employee Retirement Income Security Act of 1974, as amended ("ERISA")) ----- which is subject to the provisions of Part 4 of Subtitle B of Title I of ERISA, or any entity whose underlying assets include the assets of any such plan (an "ERISA Plan"), (b) any other "plan" (as defined in Section 4975(e)(1) of the ----------- United States Internal Revenue Code of 1986, as amended (the "Code")) which is ---- subject to the provisions of Section 4975 of the Code or any entity whose underlying assets include the assets of any such plan (a "Plan"), (c) an entity ---- whose underlying assets include the assets of any such ERISA Plan or other Plan by reason of Department of Labor regulation section 2510.3-101 or otherwise, or (d) a governmental or church plan that is subject to any federal, state or local law which is substantially similar to the provisions of Section 406 of ERISA or Section 4975 of the Code (a "Similar Law"); or (ii) the purchase, holding and ------------ disposition of the Capital Securities by it will satisfy the requirements for exemptive relief under Prohibited Transaction Class Exemption ("PTCE") 84-14, ---- PTCE 90-1, PTCE 91-38, PTCE 95-60, PTCE 96-23 or a similar exemption, or, in the case of a plan subject to a Similar Law, will not result in a non-exempt violation of such Similar Law. 2.8. The Purchaser represents and warrants that it is acquiring the Capital Securities as principal for its own account for investment and, except as contemplated under Section 1.3 hereof, not for sale in connection with any distribution thereof. It was not formed solely for the purpose of investing in the Capital Securities, and additional capital or similar contributions were not specifically solicited from any person owning a beneficial interest in it for the purpose of enabling it to purchase any Capital Securities. The Purchaser is not a (i) partnership, (ii) common trust fund or (iii) special trust, pension, profit sharing or other retirement trust fund or plan in which the partners, beneficiaries or participants, as applicable, may designate the particular investments to be made or the allocation of any investment among such partners, beneficiaries or participants, and except as contemplated under Section 1.3 hereof, it agrees that it shall not hold the Capital Securities for the benefit of any other person and shall be the sole beneficial owner thereof for all purposes and that it shall not sell participation interests in the Capital Securities or enter into any other arrangement pursuant to which any other person shall be entitled to a beneficial interest in the distribution on the Capital Securities. The Capital Securities purchased directly or indirectly by the Purchaser constitute an investment of no more than 40% of its assets. The Purchaser understands and agrees that any purported transfer of the Capital Securities to a purchaser which would cause the representations and warranties of Section 2.6 and this Section 2.8 to be inaccurate shall be null and void ab initio and the Offerors retain the right to resell any Capital Securities sold to non-permitted transferees. 2.9. The Purchaser represents and warrants that it has full power and authority to execute and deliver this Agreement, to make the representations and warranties specified herein, and to consummate the transactions contemplated herein and it has full right and power to subscribe for Capital Securities and perform its obligations pursuant to this Agreement. 2.10. The Purchaser represents and warrants that no filing with, or authorization, approval, consent, license, order, registration, qualification or decree of, any governmental body, agency or court having jurisdiction over the Purchaser, other than those that have been made or obtained, is necessary or required for the performance by the Purchaser of its obligations under this Agreement or to consummate the transactions contemplated herein. 2.11. The Purchaser represents and warrants that this Agreement has been duly authorized, executed and delivered by the Purchaser. 2.12. The Purchaser understands and acknowledges that the Company will rely upon the truth and accuracy of the foregoing acknowledgments, representations, warranties and agreements and agrees that, if any of the acknowledgments, representations, warranties or agreements deemed to have been made by it by its purchase of the Capital Securities are no longer accurate, it shall promptly notify the Company. 2.13. The Purchaser understands that no public market exists for any of the Capital Securities, and that it is unlikely that a public market will ever exist for the Capital Securities. ARTICLE III MISCELLANEOUS 3.1. Any notice or other communication given hereunder shall be deemed sufficient if in writing and sent by registered or certified mail, return receipt requested, international courier or delivered by hand against written receipt therefor, or by facsimile transmission and confirmed by telephone, to the following addresses, or such other address as may be furnished to the other parties as herein provided: To the Offerors: First Banks, Inc. 600 James S. McDonnell Boulevard Mail Stop M1 199 014 Hazelwood, Missouri 63042 Attention: Lisa K. Vansickle Fax: 314-592-6621 To the Purchaser: First Tennessee Bank National Association 845 Crossover Lane, Suite 150 Memphis, Tennessee 38117 Attention: David Work Fax: 901-435-7983 Unless otherwise expressly provided herein, notices shall be deemed to have been given on the date of mailing, except notice of change of address, which shall be deemed to have been given when received. 3.2. This Agreement shall not be changed, modified or amended except by a writing signed by the parties to be charged, and this Agreement may not be discharged except by performance in accordance with its terms or by a writing signed by the party to be charged. 3.3. Upon the execution and delivery of this Agreement by the Purchaser, this Agreement shall become a binding obligation of the Purchaser with respect to the purchase of Capital Securities as herein provided. 3.4. NOTWITHSTANDING THE PLACE WHERE THIS AGREEMENT MAY BE EXECUTED BY ANY OF THE PARTIES HERETO, THE PARTIES EXPRESSLY AGREE THAT ALL THE TERMS AND PROVISIONS HEREOF SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW. 3.5. The parties agree to execute and deliver all such further documents, agreements and instruments and take such other and further action as may be necessary or appropriate to carry out the purposes and intent of this Agreement. 3.6. This Agreement may be executed in one or more counterparts each of which shall be deemed an original, but all of which shall together constitute one and the same instrument. 3.7. In the event that any one or more of the provisions contained herein, or the application thereof in any circumstances, is held invalid, illegal or unenforceable in any respect for any reason, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions hereof shall not be in any way impaired or affected, it being intended that all of the Offerors' and the Purchaser's rights and privileges shall be enforceable to the fullest extent permitted by law. Signatures appear on the following page IN WITNESS WHEREOF, this Agreement is agreed to and accepted as of the day and year first written above. FIRST TENNESSEE BANK NATIONAL ASSOCIATION By: /s/ David S. Work ------------------------------------ Print Name: David S. Work --------------------------- Title: Executive Vice President -------------------------------- FIRST BANKS, INC. By: /s/ Lisa K. Vansickle -------------------------------------- Name: Lisa K. Vansickle ------------------------------------ Title: Senior Vice President ----------------------------------- FIRST BANK STATUTORY TRUST VII By: /s/ Lisa K. Vansickle -------------------------------------- Name: Lisa K. Vansickle ------------------------------------ Title: Administrator EX-4 8 viisubagree.txt 4.63 Exhibit 4.63 FIRST BANK STATUTORY TRUST VII FIRST BANKS, INC. SUBSCRIPTION AGREEMENT December 14, 2006 THIS SUBSCRIPTION AGREEMENT (this "Agreement") made among First Bank Statutory Trust VII (the "Trust"), a statutory trust created under the Delaware Statutory Trust Act (Chapter 38 of Title 12 of the Delaware Code, 12 Del. C. ss.ss. 3801, et seq.), First Banks, Inc., a Missouri corporation, with its principal offices located at 600 James S. McDonnell Boulevard, Hazelwood, Missouri 63042 (the "Company" and, collectively with the Trust, the "Offerors"), and Preferred Term Securities XXIV, Ltd. (the "Purchaser"). RECITALS: A. The Trust desires to issue 50,000 of its Floating Rate Capital Securities (the "Capital Securities"), liquidation amount $1,000.00 per Capital Security, representing an undivided beneficial interest in the assets of the Trust (the "Offering"), to be issued pursuant to an Amended and Restated Declaration of Trust (the "Declaration") by and among the Company, Wilmington Trust Company ("WTC"), the administrators named therein, and the holders (as defined therein), which Capital Securities are to be guaranteed by the Company with respect to distributions and payments upon liquidation, redemption and otherwise pursuant to the terms of a Guarantee Agreement between the Company and WTC, as trustee (the "Guarantee"); and B. The proceeds from the sale of the Capital Securities will be combined with the proceeds from the sale by the Trust to the Company of its common securities, and will be used by the Trust to purchase an equivalent amount of Floating Rate Junior Subordinated Deferrable Interest Debentures of the Company (the "Debentures") to be issued by the Company pursuant to an indenture to be executed by the Company and WTC, as trustee (the "Indenture"); and C. In consideration of the premises and the mutual representations and covenants hereinafter set forth, the parties hereto agree as follows: ARTICLE I PURCHASE AND SALE OF CAPITAL SECURITIES 1.1. Upon the execution of this Agreement, the Purchaser hereby agrees to purchase from the Trust 20,000 Capital Securities at a price equal to $1,000.00 per Capital Security (the "Purchase Price") and the Trust agrees to sell such Capital Securities to the Purchaser for said Purchase Price. The rights and preferences of the Capital Securities are set forth in the Declaration. The Purchase Price is payable in immediately available funds on December 14, 2006, or such other business day as may be designated by the Purchaser, but in no event later than December 29, 2006 (the "Closing Date"). The Offerors shall provide the Purchaser wire transfer instructions no later than 1 day following the date hereof. 1.2. The certificate for the Capital Securities shall be delivered by the Trust on the Closing Date to the Purchaser or its designee. 1.3. The Placement Agreement, dated December 6, 2006 (the "Placement Agreement"), among the Offerors and the Placement Agents identified therein includes certain representations and warranties, covenants and conditions to closing and certain other matters governing the Offering. The Placement Agreement is hereby incorporated by reference into this Agreement and the Purchaser shall be entitled to each of the benefits of the Placement Agents and the Purchaser under the Placement Agreement and shall be entitled to enforce the obligations of the Offerors under such Placement Agreement as fully as if the Purchaser were a party to such Placement Agreement. ARTICLE II REPRESENTATIONS AND WARRANTIES OF PURCHASER 2.1. The Purchaser understands and acknowledges that neither the Capital Securities, the Debentures nor the Guarantee have been registered under the Securities Act of 1933, as amended (the "Securities Act"), or any other applicable securities law, are being offered for sale by the Trust in transactions not requiring registration under the Securities Act, and may not be offered, sold, pledged or otherwise transferred by the Purchaser except in compliance with the registration requirements of the Securities Act or any other applicable securities laws, pursuant to an exemption therefrom or in a transaction not subject thereto. 2.2. The Purchaser represents, warrants and certifies that (i) it is not a "U.S. person" as such term is defined in Rule 902 under the Securities Act, (ii) it is not acquiring the Capital Securities for the account or benefit of any such U.S. person, (iii) the offer and sale of Capital Securities to the Purchaser constitutes an "offshore transaction" under Regulation S of the Securities Act, and (iv) it will not engage in hedging transactions with regard to the Capital Securities unless such transactions are conducted in compliance with the Securities Act and the Purchaser agrees to the legends and transfer restrictions set forth on the Capital Securities certificate. 2.3. The Purchaser represents and warrants that it is purchasing the Capital Securities for its own account, for investment, and not with a view to, or for offer or sale in connection with, any distribution thereof in violation of the Securities Act or other applicable securities laws, subject to any requirement of law that the disposition of its property be at all times within its control and subject to its ability to resell such Capital Securities pursuant to an effective registration statement under the Securities Act or under Rule 144A or any other exemption from registration available under the Securities Act or any other applicable Securities law. 2.4. The Purchaser represents and warrants that it has full power and authority to execute and deliver this Agreement, to make the representations and warranties specified herein, and to consummate the transactions contemplated herein and it has full right and power to subscribe for Capital Securities and perform its obligations pursuant to this Agreement. 2.5. The Purchaser, a Cayman Islands Company whose business includes issuance of certain notes and acquiring the Capital Securities and other similar securities, represents and warrants that it has such knowledge and experience in financial and business matters that it is capable of evaluating the merits and risks of purchasing the Capital Securities, has had the opportunity to ask questions of, and receive answers and request additional information from, the Offerors and is aware that it may be required to bear the economic risk of an investment in the Capital Securities. 2.6. The Purchaser represents and warrants that no filing with, or authorization, approval, consent, license, order, registration, qualification or decree of, any governmental body, agency or court having jurisdiction over the Purchaser, other than those that have been made or obtained, is necessary or required for the performance by the Purchaser of its obligations under this Agreement or to consummate the transactions contemplated herein. 2.7. The Purchaser represents and warrants that this Agreement has been duly authorized, executed and delivered by the Purchaser. 2.8. The Purchaser represents and warrants that (i) the Purchaser is not in violation or default of any term of its Memorandum of Association or Articles of Association, of any provision of any mortgage, indenture, contract, agreement, instrument or contract to which it is a party or by which it is bound or of any judgment, decree, order, writ or, to its knowledge, any statute, rule or regulation applicable to the Purchaser which would prevent the Purchaser from performing any material obligation set forth in this Agreement; and (ii) the execution, delivery and performance of and compliance with this Agreement, and the consummation of the transactions contemplated herein, will not, with or without the passage of time or giving of notice, result in any such material violation, or be in conflict with or constitute a default under any such term, or the suspension, revocation, impairment, forfeiture or non-renewal of any permit, license, authorization or approval applicable to the Purchaser, its business or operations or any of its assets or properties which would prevent the Purchaser from performing any material obligations set forth in this Agreement. 2.9. The Purchaser represents and warrants that the Purchaser is an exempted company with limited liability duly incorporated, validly existing and in good standing under the laws of the jurisdiction where it is organized, with full power and authority to perform its obligations under this Agreement. 2.10. The Purchaser understands and acknowledges that the Company will rely upon the truth and accuracy of the foregoing acknowledgments, representations, warranties and agreements and agrees that, if any of the acknowledgments, representations, warranties or agreements deemed to have been made by it by its purchase of the Capital Securities are no longer accurate, it shall promptly notify the Company. 2.11. The Purchaser understands that no public market exists for any of the Capital Securities, and that it is unlikely that a public market will ever exist for the Capital Securities. ARTICLE III MISCELLANEOUS 3.1. Any notice or other communication given hereunder shall be deemed sufficient if in writing and sent by registered or certified mail, return receipt requested, international courier or delivered by hand against written receipt therefor, or by facsimile transmission and confirmed by telephone, to the following addresses, or such other address as may be furnished to the other parties as herein provided: To the Offerors: First Banks, Inc. 600 James S. McDonnell Boulevard Mail Stop M1 199 014 Hazelwood, Missouri 63042 Attention: Lisa K. Vansickle Fax: 314-592-6621 To the Purchaser: Preferred Term Securities XXIV, Ltd. c/o Maples Finance Limited P.O. Box 1093 GT Queensgate House South Church Street George Town, Grand Cayman Cayman Islands Attention: The Directors Fax: 345-945-7100 Unless otherwise expressly provided herein, notices shall be deemed to have been given on the date of mailing, except notice of change of address, which shall be deemed to have been given when received. 3.2. This Agreement shall not be changed, modified or amended except by a writing signed by the parties to be charged, and this Agreement may not be discharged except by performance in accordance with its terms or by a writing signed by the party to be charged. 3.3. Upon the execution and delivery of this Agreement by the Purchaser, this Agreement shall become a binding obligation of the Purchaser with respect to the purchase of Capital Securities as herein provided. 3.4. NOTWITHSTANDING THE PLACE WHERE THIS AGREEMENT MAY BE EXECUTED BY ANY OF THE PARTIES HERETO, THE PARTIES EXPRESSLY AGREE THAT ALL THE TERMS AND PROVISIONS HEREOF SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW. 3.5. The parties agree to execute and deliver all such further documents, agreements and instruments and take such other and further action as may be necessary or appropriate to carry out the purposes and intent of this Agreement. 3.6. This Agreement may be executed in one or more counterparts each of which shall be deemed an original, but all of which shall together constitute one and the same instrument. 3.7. In the event that any one or more of the provisions contained herein, or the application thereof in any circumstances, is held invalid, illegal or unenforceable in any respect for any reason, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions hereof shall not be in any way impaired or affected, it being intended that all of the Offerors' and the Purchaser's rights and privileges shall be enforceable to the fullest extent permitted by law. Signatures appear on the following page IN WITNESS WHEREOF, I have set my hand the day and year first written above. PREFERRED TERM SECURITIES XXIV, LTD. By: /s/ Carrie Bunton ----------------------------------------- Print Name: Carrie Bunton -------------------------------- Title: Director ------------------------------------- IN WITNESS WHEREOF, this Agreement is agreed to and accepted as of the day and year first written above. FIRST BANKS, INC. By: /s/ Lisa K. Vansickle -------------------------------------- Name: Lisa K. Vansickle ------------------------------------ Title: Senior Vice President ----------------------------------- FIRST BANK STATUTORY TRUST VII By: /s/ Lisa K. Vansickle -------------------------------------- Name: Lisa K. Vansickle ------------------------------------ Title: Administrator EX-4 9 viipoolcapsec.txt 4.64 Exhibit 4.64 Certificate Number P-1 20,000 Capital Securities CUSIP NO.32999AAA1 THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), ANY STATE SECURITIES LAWS OR ANY OTHER APPLICABLE SECURITIES LAW. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND ANY APPLICABLE STATE SECURITIES LAWS. THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF AGREES TO OFFER, SELL OR OTHERWISE TRANSFER THIS SECURITY ONLY (A) TO THE SPONSOR OR THE TRUST, (B) PURSUANT TO A REGISTRATION STATEMENT THAT HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C) TO A PERSON WHOM THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A SO LONG AS THIS SECURITY IS ELIGIBLE FOR RESALE PURSUANT TO RULE 144A IN ACCORDANCE WITH RULE 144A, (D) TO A NON-U.S. PERSON IN AN OFFSHORE TRANSACTION IN ACCORDANCE WITH RULE 903 OR RULE 904 (AS APPLICABLE) OF REGULATION S UNDER THE SECURITIES ACT, (E) TO AN INSTITUTIONAL "ACCREDITED INVESTOR" WITHIN THE MEANING OF SUBPARAGRAPH (A) OF RULE 501 UNDER THE SECURITIES ACT THAT IS ACQUIRING THIS CAPITAL SECURITY FOR ITS OWN ACCOUNT, OR FOR THE ACCOUNT OF SUCH AN INSTITUTIONAL ACCREDITED INVESTOR FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO, OR FOR OFFER OR SALE IN CONNECTION WITH, ANY DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT, OR (F) PURSUANT TO ANY OTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, SUBJECT TO THE SPONSOR'S AND THE TRUST'S RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATION AND/OR OTHER INFORMATION SATISFACTORY TO EACH OF THEM IN ACCORDANCE WITH THE DECLARATION OF TRUST, A COPY OF WHICH MAY BE OBTAINED FROM THE SPONSOR OR THE TRUST. HEDGING TRANSACTIONS INVOLVING THIS SECURITY MAY NOT BE CONDUCTED UNLESS IN COMPLIANCE WITH THE SECURITIES ACT. THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF ALSO AGREES, REPRESENTS AND WARRANTS THAT IT IS NOT AN EMPLOYEE BENEFIT, INDIVIDUAL RETIREMENT ACCOUNT OR OTHER PLAN OR ARRANGEMENT SUBJECT TO TITLE I OF THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974, AS AMENDED ("ERISA"), OR SECTION 4975 OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED (THE "CODE") (EACH A "PLAN"), OR AN ENTITY WHOSE UNDERLYING ASSETS INCLUDE "PLAN ASSETS" BY REASON OF ANY PLAN'S INVESTMENT IN THE ENTITY, AND NO PERSON INVESTING "PLAN ASSETS" OF ANY PLAN MAY ACQUIRE OR HOLD THE SECURITIES OR ANY INTEREST THEREIN, UNLESS SUCH PURCHASER OR HOLDER IS ELIGIBLE FOR EXEMPTIVE RELIEF AVAILABLE UNDER U.S. DEPARTMENT OF LABOR PROHIBITED TRANSACTION CLASS EXEMPTION 96-23, 95-60, 91-38, 90-1 OR 84-14 OR ANOTHER APPLICABLE EXEMPTION OR ITS PURCHASE AND HOLDING OF THIS SECURITY IS NOT PROHIBITED BY SECTION 406 OF ERISA OR SECTION 4975 OF THE CODE WITH RESPECT TO SUCH PURCHASE OR HOLDING. ANY PURCHASER OR HOLDER OF THE SECURITIES OR ANY INTEREST THEREIN WILL BE DEEMED TO HAVE REPRESENTED BY ITS PURCHASE AND HOLDING THEREOF THAT EITHER (I) IT IS NOT AN EMPLOYEE BENEFIT PLAN WITHIN THE MEANING OF SECTION 3(3) OF ERISA, OR A PLAN TO WHICH SECTION 4975 OF THE CODE IS APPLICABLE, A TRUSTEE OR OTHER PERSON ACTING ON BEHALF OF AN EMPLOYEE BENEFIT PLAN OR PLAN, OR ANY OTHER PERSON OR ENTITY USING THE ASSETS OF ANY EMPLOYEE BENEFIT PLAN OR PLAN TO FINANCE SUCH PURCHASE, OR (II) SUCH PURCHASE WILL NOT RESULT IN A PROHIBITED TRANSACTION UNDER SECTION 406 OF ERISA OR SECTION 4975 OF THE CODE FOR WHICH THERE IS NO APPLICABLE STATUTORY OR ADMINISTRATIVE EXEMPTION. THIS SECURITY WILL BE ISSUED AND MAY BE TRANSFERRED ONLY IN BLOCKS HAVING A LIQUIDATION AMOUNT OF NOT LESS THAN $100,000.00 (100 SECURITIES) AND MULTIPLES OF $1,000.00 IN EXCESS THEREOF. ANY ATTEMPTED TRANSFER OF SECURITIES IN A BLOCK HAVING A LIQUIDATION AMOUNT OF LESS THAN $100,000.00 SHALL BE DEEMED TO BE VOID AND OF NO LEGAL EFFECT WHATSOEVER. THE HOLDER OF THIS SECURITY AGREES THAT IT WILL COMPLY WITH THE FOREGOING RESTRICTIONS. IN CONNECTION WITH ANY TRANSFER, THE HOLDER WILL DELIVER TO THE REGISTRAR AND TRANSFER AGENT SUCH CERTIFICATES AND OTHER INFORMATION AS MAY BE REQUIRED BY THE DECLARATION TO CONFIRM THAT THE TRANSFER COMPLIES WITH THE FOREGOING RESTRICTIONS. December 14, 2006 Certificate Evidencing Floating Rate Capital Securities of First Bank Statutory Trust VII (liquidation amount $1,000 per Capital Security) First Bank Statutory Trust VII, a statutory trust created under the laws of the State of Delaware (the "Trust"), hereby certifies that Hare & Co. (the "Holder"), as the nominee of The Bank of New York, indenture trustee under the Indenture dated as of December 14, 2006 among Preferred Term Securities XXIV, Ltd., Preferred Term Securities XXIV, Inc. and The Bank of New York, is the registered owner of capital securities of the Trust representing undivided beneficial interests in the assets of the Trust, (liquidation amount $1,000 per capital security) (the "Capital Securities"). Subject to the Declaration (as defined below), the Capital Securities are transferable on the books and records of the Trust in person or by a duly authorized attorney, upon surrender of this Certificate duly endorsed and in proper form for transfer. The Capital Securities represented hereby are issued pursuant to, and the designation, rights, privileges, restrictions, preferences and other terms and provisions of the Capital Securities shall in all respects be subject to, the provisions of the Amended and Restated Declaration of Trust of the Trust dated as of December 14, 2006, among Terrance M. McCarthy, Peter D. Wimmer and Lisa K. Vansickle, as Administrators, Wilmington Trust Company, as Delaware Trustee, Wilmington Trust Company, as Institutional Trustee, First Banks, Inc., as Sponsor, and the holders from time to time of undivided beneficial interests in the assets of the Trust, including the designation of the terms of the Capital Securities as set forth in Annex I to such amended and restated declaration as the same may be amended from time to time (the "Declaration"). Capitalized terms used herein but not defined shall have the meaning given them in the Declaration. The Holder is entitled to the benefits of the Guarantee to the extent provided therein. The Sponsor will provide a copy of the Declaration, the Guarantee, and the Indenture to the Holder without charge upon written request to the Sponsor at its principal place of business. Upon receipt of this Security, the Holder is bound by the Declaration and is entitled to the benefits thereunder. By acceptance of this Security, the Holder agrees to treat, for United States federal income tax purposes, the Debentures as indebtedness and the Capital Securities as evidence of beneficial ownership in the Debentures. This Capital Security is governed by, and construed in accordance with, the laws of the State of Delaware, without regard to principles of conflict of laws. Signature appears on following page IN WITNESS WHEREOF, the Trust has duly executed this certificate. FIRST BANK STATUTORY TRUST VII By: /s/ Lisa K. Vansickle ------------------------------- Name: Lisa K. Vansickle Title: Administrator CERTIFICATE OF AUTHENTICATION ----------------------------- This is one of the Capital Securities referred to in the within-mentioned Declaration. WILMINGTON TRUST COMPANY, as the Institutional Trustee By: /s/ Christopher J. Monigle ------------------------------- Authorized Officer REVERSE OF CAPITAL SECURITY Distributions payable on each Capital Security will be payable at an annual rate equal to 7.20% beginning on (and including) the date of original issuance and ending on (but excluding) the Distribution Payment Date in March 2007 and at an annual rate for each successive period beginning on (and including) the Distribution Payment Date in March 2007, and each succeeding Distribution Payment Date, and ending on (but excluding) the next succeeding Distribution Payment Date (each a "Distribution Period"), equal to 3-Month LIBOR, determined as described below, plus 1.85% (the "Coupon Rate"), applied to the stated liquidation amount of $1,000.00 per Capital Security, such rate being the rate of interest payable on the Debentures to be held by the Institutional Trustee. Distributions in arrears will bear interest thereon compounded quarterly at the Distribution Rate (to the extent permitted by applicable law). The term "Distributions" as used herein includes cash distributions and any such compounded distributions unless otherwise noted. A Distribution is payable only to the extent that payments are made in respect of the Debentures held by the Institutional Trustee and to the extent the Institutional Trustee has funds available therefor. As used herein, "Determination Date" means the date that is two London Banking Days (i.e., a business day in which dealings in deposits in U.S. dollars are transacted in the London interbank market) preceding the commencement of the relevant Distribution Period. The amount of the Distribution payable for any Distribution Period will be calculated by applying the Distribution Rate to the stated liquidation amount outstanding at the commencement of the Distribution Period on the basis of the actual number of days in the Distribution Period concerned divided by 360. "3-Month LIBOR" as used herein, means the London interbank offered interest rate for three-month U.S. dollar deposits determined by the Debenture Trustee in the following order of priority: (i) the rate (expressed as a percentage per annum) for U.S. dollar deposits having a three-month maturity that appears on Telerate Page 3750 as of 11:00 a.m. (London time) on the related Determination Date ("Telerate Page 3750" means the display designated as "Page 3750" on the Moneyline Telerate Service or such other page as may replace Page 3750 on that service or such other service or services as may be nominated by the British Bankers' Association as the information vendor for the purpose of displaying London interbank offered rates for U.S. dollar deposits); (ii) if such rate cannot be identified on the related Determination Date, the Debenture Trustee will request the principal London offices of four leading banks in the London interbank market to provide such banks' offered quotations (expressed as percentages per annum) to prime banks in the London interbank market for U.S. dollar deposits having a three-month maturity as of 11:00 a.m. (London time) on such Determination Date. If at least two quotations are provided, 3-Month LIBOR will be the arithmetic mean of such quotations; (iii) if fewer than two such quotations are provided as requested in clause (ii) above, the Debenture Trustee will request four major New York City banks to provide such banks' offered quotations (expressed as percentages per annum) to leading European banks for loans in U.S. dollars as of 11:00 a.m. (London time) on such Determination Date. If at least two such quotations are provided, 3-Month LIBOR will be the arithmetic mean of such quotations; and (iv) if fewer than two such quotations are provided as requested in clause (iii) above, 3-Month LIBOR will be a 3-Month LIBOR determined with respect to the Distribution Period immediately preceding such current Distribution Period. If the rate for U.S. dollar deposits having a three-month maturity that initially appears on Telerate Page 3750 as of 11:00 a.m. (London time) on the related Determination Date is superseded on the Telerate Page 3750 by a corrected rate by 12:00 noon (London time) on such Determination Date, then the corrected rate as so substituted on the applicable page will be the applicable 3-Month LIBOR for such Determination Date. The Distribution Rate for any Distribution Period will at no time be higher than the maximum rate then permitted by New York law as the same may be modified by United States law. All percentages resulting from any calculations on the Capital Securities will be rounded, if necessary, to the nearest one hundred-thousandth of a percentage point, with five one-millionths of a percentage point rounded upward (e.g., 9.876545% (or .09876545) being rounded to 9.87655% (or .0987655), and all dollar amounts used in or resulting from such calculation will be rounded to the nearest cent (with one-half cent being rounded upward)). Except as otherwise described below, Distributions on the Capital Securities will be cumulative, will accrue from the date of original issuance and will be payable quarterly in arrears on March 15, June 15, September 15 and December 15 of each year or if any such day is not a Business Day, then the next succeeding Business Day (each such day, a "Distribution Payment Date") (it being understood that interest accrues for any such non-Business Day), commencing on the Distribution Payment Date in March 2007. The Debenture Issuer has the right under the Indenture to defer payments of interest on the Debentures, so long as no Acceleration Event of Default has occurred and is continuing, by extending the interest payment period for up to 20 consecutive quarterly periods (each an "Extension Period") at any time and from time to time on the Debentures, subject to the conditions described below, during which Extension Period no interest shall be due and payable. During any Extension Period, interest will continue to accrue on the Debentures, and interest on such accrued interest will accrue at an annual rate equal to the Distribution Rate in effect for each such Extension Period, compounded quarterly from the date such interest would have been payable were it not for the Extension Period, to the extent permitted by law (such interest referred to herein as "Additional Interest"). No Extension Period may end on a date other than a Distribution Payment Date. At the end of any such Extension Period, the Debenture Issuer shall pay all interest then accrued and unpaid on the Debentures (together with Additional Interest thereon); provided, however, that no Extension Period may extend beyond the Maturity Date. Prior to the termination of any Extension Period, the Debenture Issuer may further extend such period, provided that such period together with all such previous and further consecutive extensions thereof shall not exceed 20 consecutive quarterly periods, or extend beyond the Maturity Date. Upon the termination of any Extension Period and upon the payment of all accrued and unpaid interest and Additional Interest, the Debenture Issuer may commence a new Extension Period, subject to the foregoing requirements. No interest or Additional Interest shall be due and payable during an Extension Period, except at the end thereof, but each installment of interest that would otherwise have been due and payable during such Extension Period shall bear Additional Interest. During any Extension Period, Distributions on the Capital Securities shall be deferred for a period equal to the Extension Period. If Distributions are deferred, the Distributions due shall be paid on the date that the related Extension Period terminates, to Holders of the Securities as they appear on the books and records of the Trust on the record date immediately preceding such date. Distributions on the Securities must be paid on the dates payable (after giving effect to any Extension Period) to the extent that the Trust has funds available for the payment of such distributions in the Property Account of the Trust. The Trust's funds available for Distribution to the Holders of the Securities will be limited to payments received from the Debenture Issuer. The payment of Distributions out of moneys held by the Trust is guaranteed by the Guarantor pursuant to the Guarantee. The Capital Securities shall be redeemable as provided in the Declaration. ASSIGNMENT FOR VALUE RECEIVED, the undersigned assigns and transfers this Capital Security Certificate to: - -------------------------------------------------------------------------------- (Insert assignee's social security or tax identification number) ---------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (Insert address and zip code of assignee) and irrevocably appoints - -------------------------------------------------------------------------------- agent to transfer this Capital Security Certificate on the books of the Trust. The agent may substitute another to act for him or her. Date: --------------------------------------- Signature: ---------------------------------- (Sign exactly as your name appears on the other side of this Capital Security Certificate) Signature Guarantee:1 - --------------------------------- 1 Signature must be guaranteed by an "eligible guarantor institution" that is a bank, stockbroker, savings and loan association or credit union meeting the requirements of the Security registrar, which requirements include membership or participation in the Securities Transfer Agents Medallion Program ("STAMP") or such other "signature guarantee program" as may be determined by the Security registrar in addition to, or in substitution for, STAMP, all in accordance with the Securities Exchange Act of 1934, as amended. EX-4 10 viicapsecp2.txt 4.65 Exhibit 4.65 Certificate Number P-2 30,000 Capital Securities CUSIP NO.31927N AA 2 THIS CAPITAL SECURITY IS A GLOBAL SECURITY WITHIN THE MEANING OF THE DECLARATION HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME OF THE DEPOSITORY TRUST COMPANY ("DTC") OR A NOMINEE OF DTC. THIS CAPITAL SECURITY IS EXCHANGEABLE FOR CAPITAL SECURITIES REGISTERED IN THE NAME OF A PERSON OTHER THAN DTC OR ITS NOMINEE ONLY IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE DECLARATION, AND NO TRANSFER OF THIS CAPITAL SECURITY (OTHER THAN A TRANSFER OF THIS CAPITAL SECURITY AS A WHOLE BY DTC TO A NOMINEE OF DTC OR BY A NOMINEE OF DTC TO DTC OR ANOTHER NOMINEE OF DTC) MAY BE REGISTERED EXCEPT IN LIMITED CIRCUMSTANCES. UNLESS THIS CAPITAL SECURITY IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF DTC TO FIRST BANK STATUTORY TRUST VII OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CAPITAL SECURITY ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT HEREON IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN. THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), ANY STATE SECURITIES LAWS OR ANY OTHER APPLICABLE SECURITIES LAW. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND ANY APPLICABLE STATE SECURITIES LAWS. THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF AGREES TO OFFER, SELL OR OTHERWISE TRANSFER THIS SECURITY ONLY (A) TO THE SPONSOR OR THE TRUST, (B) PURSUANT TO A REGISTRATION STATEMENT THAT HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C) TO A PERSON WHOM THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A SO LONG AS THIS SECURITY IS ELIGIBLE FOR RESALE PURSUANT TO RULE 144A IN ACCORDANCE WITH RULE 144A, (D) TO A NON-U.S. PERSON IN AN OFFSHORE TRANSACTION IN ACCORDANCE WITH RULE 903 OR RULE 904 (AS APPLICABLE) OF REGULATION S UNDER THE SECURITIES ACT, (E) TO AN INSTITUTIONAL "ACCREDITED INVESTOR" WITHIN THE MEANING OF SUBPARAGRAPH (A) OF RULE 501 UNDER THE SECURITIES ACT THAT IS ACQUIRING THIS CAPITAL SECURITY FOR ITS OWN ACCOUNT, OR FOR THE ACCOUNT OF SUCH AN INSTITUTIONAL ACCREDITED INVESTOR FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO, OR FOR OFFER OR SALE IN CONNECTION WITH, ANY DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT, OR (F) PURSUANT TO ANY OTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, SUBJECT TO THE SPONSOR'S AND THE TRUST'S RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATION AND/OR OTHER INFORMATION SATISFACTORY TO EACH OF THEM IN ACCORDANCE WITH THE DECLARATION OF TRUST, A COPY OF WHICH MAY BE OBTAINED FROM THE SPONSOR OR THE TRUST. HEDGING TRANSACTIONS INVOLVING THIS SECURITY MAY NOT BE CONDUCTED UNLESS IN COMPLIANCE WITH THE SECURITIES ACT. THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF ALSO AGREES, REPRESENTS AND WARRANTS THAT IT IS NOT AN EMPLOYEE BENEFIT, INDIVIDUAL RETIREMENT ACCOUNT OR OTHER PLAN OR ARRANGEMENT SUBJECT TO TITLE I OF THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974, AS AMENDED ("ERISA"), OR SECTION 4975 OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED (THE "CODE") (EACH A "PLAN"), OR AN ENTITY WHOSE UNDERLYING ASSETS INCLUDE "PLAN ASSETS" BY REASON OF ANY PLAN'S INVESTMENT IN THE ENTITY, AND NO PERSON INVESTING "PLAN ASSETS" OF ANY PLAN MAY ACQUIRE OR HOLD THE SECURITIES OR ANY INTEREST THEREIN, UNLESS SUCH PURCHASER OR HOLDER IS ELIGIBLE FOR EXEMPTIVE RELIEF AVAILABLE UNDER U.S. DEPARTMENT OF LABOR PROHIBITED TRANSACTION CLASS EXEMPTION 96-23, 95-60, 91-38, 90-1 OR 84-14 OR ANOTHER APPLICABLE EXEMPTION OR ITS PURCHASE AND HOLDING OF THIS SECURITY IS NOT PROHIBITED BY SECTION 406 OF ERISA OR SECTION 4975 OF THE CODE WITH RESPECT TO SUCH PURCHASE OR HOLDING. ANY PURCHASER OR HOLDER OF THE SECURITIES OR ANY INTEREST THEREIN WILL BE DEEMED TO HAVE REPRESENTED BY ITS PURCHASE AND HOLDING THEREOF THAT EITHER (I) IT IS NOT AN EMPLOYEE BENEFIT PLAN WITHIN THE MEANING OF SECTION 3(3) OF ERISA, OR A PLAN TO WHICH SECTION 4975 OF THE CODE IS APPLICABLE, A TRUSTEE OR OTHER PERSON ACTING ON BEHALF OF AN EMPLOYEE BENEFIT PLAN OR PLAN, OR ANY OTHER PERSON OR ENTITY USING THE ASSETS OF ANY EMPLOYEE BENEFIT PLAN OR PLAN TO FINANCE SUCH PURCHASE, OR (II) SUCH PURCHASE WILL NOT RESULT IN A PROHIBITED TRANSACTION UNDER SECTION 406 OF ERISA OR SECTION 4975 OF THE CODE FOR WHICH THERE IS NO APPLICABLE STATUTORY OR ADMINISTRATIVE EXEMPTION. THIS SECURITY WILL BE ISSUED AND MAY BE TRANSFERRED ONLY IN BLOCKS HAVING A LIQUIDATION AMOUNT OF NOT LESS THAN $100,000.00 (100 SECURITIES) AND MULTIPLES OF $1,000.00 IN EXCESS THEREOF. ANY ATTEMPTED TRANSFER OF SECURITIES IN A BLOCK HAVING A LIQUIDATION AMOUNT OF LESS THAN $100,000.00 SHALL BE DEEMED TO BE VOID AND OF NO LEGAL EFFECT WHATSOEVER. THE HOLDER OF THIS SECURITY AGREES THAT IT WILL COMPLY WITH THE FOREGOING RESTRICTIONS. IN CONNECTION WITH ANY TRANSFER, THE HOLDER WILL DELIVER TO THE REGISTRAR AND TRANSFER AGENT SUCH CERTIFICATES AND OTHER INFORMATION AS MAY BE REQUIRED BY THE DECLARATION TO CONFIRM THAT THE TRANSFER COMPLIES WITH THE FOREGOING RESTRICTIONS. December 14, 2006 Certificate Evidencing Floating Rate Capital Securities of First Bank Statutory Trust VII (liquidation amount $1,000 per Capital Security) First Bank Statutory Trust VII, a statutory trust created under the laws of the State of Delaware (the "Trust"), hereby certifies that Cede & Co. (the "Holder") is the registered owner of capital securities of the Trust representing undivided beneficial interests in the assets of the Trust, (liquidation amount $1,000 per capital security) (the "Capital Securities"). Subject to the Declaration (as defined below), the Capital Securities are transferable on the books and records of the Trust in person or by a duly authorized attorney, upon surrender of this Certificate duly endorsed and in proper form for transfer. The Capital Securities represented hereby are issued pursuant to, and the designation, rights, privileges, restrictions, preferences and other terms and provisions of the Capital Securities shall in all respects be subject to, the provisions of the Amended and Restated Declaration of Trust of the Trust dated as of December 14, 2006, among Terrance M. McCarthy, Peter D. Wimmer and Lisa K. Vansickle, as Administrators, Wilmington Trust Company, as Delaware Trustee, Wilmington Trust Company, as Institutional Trustee, First Banks, Inc., as Sponsor, and the holders from time to time of undivided beneficial interests in the assets of the Trust, including the designation of the terms of the Capital Securities as set forth in Annex I to such amended and restated declaration as the same may be amended from time to time (the "Declaration"). Capitalized terms used herein but not defined shall have the meaning given them in the Declaration. The Holder is entitled to the benefits of the Guarantee to the extent provided therein. The Sponsor will provide a copy of the Declaration, the Guarantee, and the Indenture to the Holder without charge upon written request to the Sponsor at its principal place of business. Upon receipt of this Security, the Holder is bound by the Declaration and is entitled to the benefits thereunder. By acceptance of this Security, the Holder agrees to treat, for United States federal income tax purposes, the Debentures as indebtedness and the Capital Securities as evidence of beneficial ownership in the Debentures. This Capital Security is governed by, and construed in accordance with, the laws of the State of Delaware, without regard to principles of conflict of laws. Signature appears on following page IN WITNESS WHEREOF, the Trust has duly executed this certificate. FIRST BANK STATUTORY TRUST VII By: /s/ Lisa K. Vansickle ----------------------------------- Name: Lisa K. Vansickle Title: Administrator CERTIFICATE OF AUTHENTICATION ----------------------------- This is one of the Capital Securities referred to in the within-mentioned Declaration. WILMINGTON TRUST COMPANY, as the Institutional Trustee By: /s/ Christopher J. Monigle ----------------------------------- Authorized Officer REVERSE OF CAPITAL SECURITY Distributions payable on each Capital Security will be payable at an annual rate equal to 7.20% beginning on (and including) the date of original issuance and ending on (but excluding) the Distribution Payment Date in March 2007 and at an annual rate for each successive period beginning on (and including) the Distribution Payment Date in March 2007, and each succeeding Distribution Payment Date, and ending on (but excluding) the next succeeding Distribution Payment Date (each a "Distribution Period"), equal to 3-Month LIBOR, determined as described below, plus 1.85% (the "Coupon Rate"), applied to the stated liquidation amount of $1,000.00 per Capital Security, such rate being the rate of interest payable on the Debentures to be held by the Institutional Trustee. Distributions in arrears will bear interest thereon compounded quarterly at the Distribution Rate (to the extent permitted by applicable law). The term "Distributions" as used herein includes cash distributions and any such compounded distributions unless otherwise noted. A Distribution is payable only to the extent that payments are made in respect of the Debentures held by the Institutional Trustee and to the extent the Institutional Trustee has funds available therefor. As used herein, "Determination Date" means the date that is two London Banking Days (i.e., a business day in which dealings in deposits in U.S. dollars are transacted in the London interbank market) preceding the commencement of the relevant Distribution Period. The amount of the Distribution payable for any Distribution Period will be calculated by applying the Distribution Rate to the stated liquidation amount outstanding at the commencement of the Distribution Period on the basis of the actual number of days in the Distribution Period concerned divided by 360. "3-Month LIBOR" as used herein, means the London interbank offered interest rate for three-month U.S. dollar deposits determined by the Debenture Trustee in the following order of priority: (i) the rate (expressed as a percentage per annum) for U.S. dollar deposits having a three-month maturity that appears on Telerate Page 3750 as of 11:00 a.m. (London time) on the related Determination Date ("Telerate Page 3750" means the display designated as "Page 3750" on the Moneyline Telerate Service or such other page as may replace Page 3750 on that service or such other service or services as may be nominated by the British Bankers' Association as the information vendor for the purpose of displaying London interbank offered rates for U.S. dollar deposits); (ii) if such rate cannot be identified on the related Determination Date, the Debenture Trustee will request the principal London offices of four leading banks in the London interbank market to provide such banks' offered quotations (expressed as percentages per annum) to prime banks in the London interbank market for U.S. dollar deposits having a three-month maturity as of 11:00 a.m. (London time) on such Determination Date. If at least two quotations are provided, 3-Month LIBOR will be the arithmetic mean of such quotations; (iii) if fewer than two such quotations are provided as requested in clause (ii) above, the Debenture Trustee will request four major New York City banks to provide such banks' offered quotations (expressed as percentages per annum) to leading European banks for loans in U.S. dollars as of 11:00 a.m. (London time) on such Determination Date. If at least two such quotations are provided, 3-Month LIBOR will be the arithmetic mean of such quotations; and (iv) if fewer than two such quotations are provided as requested in clause (iii) above, 3-Month LIBOR will be a 3-Month LIBOR determined with respect to the Distribution Period immediately preceding such current Distribution Period. If the rate for U.S. dollar deposits having a three-month maturity that initially appears on Telerate Page 3750 as of 11:00 a.m. (London time) on the related Determination Date is superseded on the Telerate Page 3750 by a corrected rate by 12:00 noon (London time) on such Determination Date, then the corrected rate as so substituted on the applicable page will be the applicable 3-Month LIBOR for such Determination Date. The Distribution Rate for any Distribution Period will at no time be higher than the maximum rate then permitted by New York law as the same may be modified by United States law. All percentages resulting from any calculations on the Capital Securities will be rounded, if necessary, to the nearest one hundred-thousandth of a percentage point, with five one-millionths of a percentage point rounded upward (e.g., 9.876545% (or .09876545) being rounded to 9.87655% (or .0987655), and all dollar amounts used in or resulting from such calculation will be rounded to the nearest cent (with one-half cent being rounded upward)). Except as otherwise described below, Distributions on the Capital Securities will be cumulative, will accrue from the date of original issuance and will be payable quarterly in arrears on March 15, June 15, September 15 and December 15 of each year or if any such day is not a Business Day, then the next succeeding Business Day (each such day, a "Distribution Payment Date") (it being understood that interest accrues for any such non-Business Day), commencing on the Distribution Payment Date in March 2007. The Debenture Issuer has the right under the Indenture to defer payments of interest on the Debentures, so long as no Acceleration Event of Default has occurred and is continuing, by extending the interest payment period for up to 20 consecutive quarterly periods (each an "Extension Period") at any time and from time to time on the Debentures, subject to the conditions described below, during which Extension Period no interest shall be due and payable. During any Extension Period, interest will continue to accrue on the Debentures, and interest on such accrued interest will accrue at an annual rate equal to the Distribution Rate in effect for each such Extension Period, compounded quarterly from the date such interest would have been payable were it not for the Extension Period, to the extent permitted by law (such interest referred to herein as "Additional Interest"). No Extension Period may end on a date other than a Distribution Payment Date. At the end of any such Extension Period, the Debenture Issuer shall pay all interest then accrued and unpaid on the Debentures (together with Additional Interest thereon); provided, however, that no Extension Period may extend beyond the Maturity Date. Prior to the termination of any Extension Period, the Debenture Issuer may further extend such period, provided that such period together with all such previous and further consecutive extensions thereof shall not exceed 20 consecutive quarterly periods, or extend beyond the Maturity Date. Upon the termination of any Extension Period and upon the payment of all accrued and unpaid interest and Additional Interest, the Debenture Issuer may commence a new Extension Period, subject to the foregoing requirements. No interest or Additional Interest shall be due and payable during an Extension Period, except at the end thereof, but each installment of interest that would otherwise have been due and payable during such Extension Period shall bear Additional Interest. During any Extension Period, Distributions on the Capital Securities shall be deferred for a period equal to the Extension Period. If Distributions are deferred, the Distributions due shall be paid on the date that the related Extension Period terminates, to Holders of the Securities as they appear on the books and records of the Trust on the record date immediately preceding such date. Distributions on the Securities must be paid on the dates payable (after giving effect to any Extension Period) to the extent that the Trust has funds available for the payment of such distributions in the Property Account of the Trust. The Trust's funds available for Distribution to the Holders of the Securities will be limited to payments received from the Debenture Issuer. The payment of Distributions out of moneys held by the Trust is guaranteed by the Guarantor pursuant to the Guarantee. The Capital Securities shall be redeemable as provided in the Declaration. ASSIGNMENT FOR VALUE RECEIVED, the undersigned assigns and transfers this Capital Security Certificate to: - -------------------------------------------------------------------------------- (Insert assignee's social security or tax identification number) --------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (Insert address and zip code of assignee) and irrevocably appoints - -------------------------------------------------------------------------------- agent to transfer this Capital Security Certificate on the books of the Trust. The agent may substitute another to act for him or her. Date: --------------------------------------- Signature: ---------------------------------- (Sign exactly as your name appears on the other side of this Capital Security Certificate) Signature Guarantee:1 - ---------------------------------- 1 Signature must be guaranteed by an "eligible guarantor institution" that is a bank, stockbroker, savings and loan association or credit union meeting the requirements of the Security registrar, which requirements include membership or participation in the Securities Transfer Agents Medallion Program ("STAMP") or such other "signature guarantee program" as may be determined by the Security registrar in addition to, or in substitution for, STAMP, all in accordance with the Securities Exchange Act of 1934, as amended. EX-2 11 exhibit211.txt 21.1
EXHIBIT 21.1 FIRST BANKS, INC. SUBSIDIARIES The following is a list of our subsidiaries and the jurisdiction of incorporation or organization: Jurisdiction of Incorporation Name of Subsidiary or Organization ------------------ --------------- The San Francisco Company Delaware First Bank Missouri Adrian N. Baker & Company Missouri First Land Trustee Corp. Missouri First Bank Business Capital, Inc. Missouri Missouri Valley Partners, Inc. Missouri Universal Premium Acceptance Corporation Missouri UPAC of California, Inc. California Small Business Loan Source LLC (1) Nevada Small Business Loan Source Funding Corporation Delaware - -------------------- (1) First Bank owned 51% of Small Business Loan Source LLC at December 31, 2006.
EX-3 12 exhibit311.txt 31.1 EXHIBIT 31.1 CERTIFICATIONS REQUIRED BY RULE 13a-14(a) OR RULE 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934 I, Allen H. Blake, certify that: 1. I have reviewed this Annual Report on Form 10-K (the "Report") of First Banks, Inc. (the "Registrant"); 2. Based on my knowledge, this Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Report; 3. Based on my knowledge, the financial statements, and other financial information included in this Report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this Report; 4. The Registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Report is being prepared; b) Evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this Report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this Report based on such evaluation; and c) Disclosed in this Report any change in the Registrant's internal control over financial reporting that occurred during the Registrant's most recent fiscal quarter (the Registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant's internal control over financial reporting; and 5. The Registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant's auditors and the audit committee of the Registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal control over financial reporting. Date: March 28, 2007 FIRST BANKS, INC. By: /s/ Allen H. Blake ------------------------------------------ Allen H. Blake President and Chief Executive Officer (Principal Executive Officer) EX-3 13 exhibit312.txt 31.2 EXHIBIT 31.2 CERTIFICATIONS REQUIRED BY RULE 13a-14(a) OR RULE 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934 I, Steven F. Schepman, certify that: 1. I have reviewed this Annual Report on Form 10-K (the "Report") of First Banks, Inc. (the "Registrant"); 2. Based on my knowledge, this Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Report; 3. Based on my knowledge, the financial statements, and other financial information included in this Report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this Report; 4. The Registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Report is being prepared; b) Evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this Report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this Report based on such evaluation; and c) Disclosed in this Report any change in the Registrant's internal control over financial reporting that occurred during the Registrant's most recent fiscal quarter (the Registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant's internal control over financial reporting; and 5. The Registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant's auditors and the audit committee of the Registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal control over financial reporting. Date: March 28, 2007 FIRST BANKS, INC. By: /s/ Steven F. Schepman ------------------------------------------ Steven F. Schepman Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) EX-3 14 exhibit321.txt 32.1 EXHIBIT 32.1 CERTIFICATIONS PURSUANT TO 18 U.S.C. SECTION 1350 I, Allen H. Blake, President and Chief Executive Officer of First Banks, Inc. (the "Company"), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that: (1) The Annual Report on Form 10-K of the Company for the annual period ended December 31, 2006 (the "Report") fully complies with the requirements of Sections 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: March 28, 2007 By: /s/ Allen H. Blake ---------------------------------- President and Chief Executive Officer (Principal Executive Officer) EX-3 15 exhibit322.txt 32.2 EXHIBIT 32.2 CERTIFICATIONS PURSUANT TO 18 U.S.C. SECTION 1350 I, Steven F. Schepman, Senior Vice President and Chief Financial Officer of First Banks, Inc. (the "Company"), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that: (1) The Annual Report on Form 10-K of the Company for the annual period ended December 31, 2006 (the "Report") fully complies with the requirements of Sections 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: March 28, 2007 By: /s/ Steven F. Schepman ---------------------------------- Steven F. Schepman Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) -----END PRIVACY-ENHANCED MESSAGE-----