-----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, IME83SCfm1F3xonYfKxvk40iTLd0zymMreLfia7g/iBAWUw8EfF6IBZR3yETNpts Jox5WJWm/rlQk5m3NyF0Nw== 0000930661-97-001044.txt : 19970428 0000930661-97-001044.hdr.sgml : 19970428 ACCESSION NUMBER: 0000930661-97-001044 CONFORMED SUBMISSION TYPE: S-2/A PUBLIC DOCUMENT COUNT: 8 FILED AS OF DATE: 19970425 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRST STATE BANCORPORATION CENTRAL INDEX KEY: 0000897861 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 850366665 STATE OF INCORPORATION: NM FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-2/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-24417 FILM NUMBER: 97586933 BUSINESS ADDRESS: STREET 1: 111 LOMAS AVE N W CITY: ALBUQUERQUE STATE: NM ZIP: 87102 BUSINESS PHONE: 5052417500 MAIL ADDRESS: STREET 1: PO BOX 3686 CITY: ALBUQUERQUE STATE: NM ZIP: 87190 S-2/A 1 AMENDMENT 1 TO FORM S-2 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 25, 1997 REGISTRATION NO. 333-24417 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------- AMENDMENT NO. 1 TO FORM S-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 --------------- FIRST STATE BANCORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) NEW MEXICO 85-0366665 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.) INCORPORATION OR ORGANIZATION) 111 LOMAS AVENUE NW ALBUQUERQUE, NEW MEXICO 87102 (505) 241-7500 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) MICHAEL R. STANFORD, PRESIDENT 111 LOMAS AVENUE NW ALBUQUERQUE, NEW MEXICO 87102 (505) 241-7500 (NAME, ADDRESS, AND TELEPHONE NUMBER INCLUDING AREA CODE, OF AGENT FOR SERVICE) WITH COPIES TO: JEFFREY W. HELLBERG, ESQ. WILLIAM S. RUBENSTEIN, ESQ. HINKLE, COX, EATON, COFFIELD SKADDEN, ARPS, SLATE, MEAGHER & HENSLEY, L.L.P. & FLOM LLP 1700 BANK ONE CENTER 919 THIRD AVENUE AMARILLO, TEXAS 79101 NEW YORK, NEW YORK 10022 (806) 372-5569 (212) 735-3000 APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this Registration Statement becomes effective. If any of the securities being registered on this Form are being offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [_] If the registrant elects to deliver its latest annual report to security holders, or a complete and legible facsimile thereof, pursuant to Item 11(a)(1) of this Form, check the following box. [_] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [_] --------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT FILES A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY DETERMINE. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A + +REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE + +SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY + +OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT + +BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR + +THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE + +SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE + +UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF + +ANY SUCH STATE. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ SUBJECT TO COMPLETION, DATED APRIL 25, 1997 PROSPECTUS $12,000,000 FIRST STATE BANCORPORATION % CONVERTIBLE SUBORDINATED DEBENTURES DUE 2017 The $ aggregate principal amount of % Convertible Subordinated Debentures due 2017 (the "Debentures") are convertible at any time before maturity, unless previously redeemed, into shares of common stock, no par value per share (the "Common Stock"), of First State Bancorporation (the "Company") at a conversion price of $ per share (equivalent to a conversion rate of shares per $1,000 principal amount of Debentures), subject to adjustment in certain events. On April 16, 1997, the last reported sale price of the Common Stock on The Nasdaq Stock Market's National Market (symbol: FSNM) was $14.75 per share. See "Market for Common Stock and Dividends."Before this offering, there has been no public market for the Debentures. The Company intends to file an application to list the Debentures for quotation on The Nasdaq SmallCap Market. Interest on the Debentures is payable semiannually in arrears on each and , commencing on , 1997. The Debentures are redeemable, in whole or in part, at any time and from time to time on or after , 2001, at the option of the Company at fixed redemption prices as set forth herein, together with accrued interest to the redemption date; provided that the Debentures may be redeemed at the option of the Company, in whole or in part, at any time before , 2001, without any premium if the closing sale price of the Common Stock for at least 30 consecutive trading days equals or exceeds 140% of the conversion price then in effect. The Debentures are not subject to any sinking fund. The Debentures will be unsecured general obligations of the Company subordinate in right of payment to all existing and future Senior Indebtedness (as defined herein) of the Company. See "Risk Factors--Subordination." The Company currently has no Senior Indebtedness. Payment of principal of the Debentures may be accelerated only in certain events involving the bankruptcy, insolvency or reorganization of the Company. There is no right of acceleration of payment of the Debentures in the case of a default in the performance of any covenant of the Company, including payment of principal or interest. See "Description of the Debentures--Events of Default and Default." The Debentures will be issued in the form of a global debenture or debentures (the "Global Debentures") registered in the name of the nominee of The Depository Trust Company ("DTC"), which will act as depositary. Beneficial interests in the Global Debenture will be shown on, and transfers thereof will be effected only through, records maintained by DTC and its direct and indirect participants. Except as described herein, Debentures in definitive form will not be issued. The Debentures will be issued in registered form in denominations of $1,000 and integral multiples thereof. See "Description of the Debentures--Book-Entry." ---------- SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS. ---------- THE SECURITIES OFFERED HEREBY ARE NOT SAVINGS OR DEPOSIT ACCOUNTS AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE BANK INSURANCE FUND OR ANY OTHER GOVERNMENTAL AGENCY. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
PRICE TO UNDERWRITING PROCEEDS TO PUBLIC(1) DISCOUNT(2) COMPANY(1)(3) - -------------------------------------------------------------------------------- Per Debenture............................. % % % - -------------------------------------------------------------------------------- Total(4).................................. $ $ $ - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
(1) Plus accrued interest, if any, from , 1997. (2) The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. See "Underwriting." (3) Before deducting expenses payable by the Company, estimated at $ . (4) The Company has granted the Underwriters a 30-day option to purchase up to $1,800,000 principal amount of additional Debentures, on the same terms and conditions as set forth above, solely to cover over-allotments, if any. If such option is exercised in full, the total Price to Public, Underwriting Discount and Proceeds to Company will be approximately $ , $ , and $ , respectively. See "Underwriting." ---------- The Debentures are offered by the Underwriters, subject to prior sale, when, as and if issued to and accepted by the Underwriters, subject to approval of certain legal matters by counsel for the Underwriters and certain other conditions. The Underwriters reserve the right to withdraw, cancel or modify such offer and to reject orders in whole or in part. It is expected that the Debentures will be ready for delivery in book-entry form only through the facilities of DTC in New York, New York, on or about , 1997 against payment therefor in immediately available funds. KEEFE, BRUYETTE & WOODS, INC. The date of this Prospectus is , 1997. [LOGO] BANKING LOCATIONS [PASTE UP CRC MAP @ 80%] CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE DEBENTURES OFFERED HEREBY AND THE COMMON STOCK. SUCH TRANSACTIONS MAY INCLUDE STABILIZING THE MARKET PRICE OF THE DEBENTURES OR THE COMMON STOCK OR BOTH, THE PURCHASE OF DEBENTURES TO COVER SYNDICATE SHORT POSITIONS AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS (AND SELLING GROUP MEMBERS) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON NASDAQ IN ACCORDANCE WITH RULE 103 OF REGULATION M. SEE "UNDERWRITING." 2 PROSPECTUS SUMMARY The following summary does not purport to be complete and is qualified in its entirety by reference to the more detailed information and financial statements and notes thereto appearing elsewhere, or incorporated by reference, in this Prospectus. Unless otherwise indicated, all share and per share information for periods prior to November 20, 1995, has been adjusted to give effect to a 5- for-4 split of the Common Stock effected on November 20, 1995. Unless otherwise indicated, all information in this Prospectus assumes that the Underwriters' over-allotment option is not exercised. THE COMPANY First State Bancorporation is a New Mexico-based bank holding company that provides commercial banking services primarily to small and medium-sized businesses through its subsidiary bank, First State Bank of Taos ("First State Bank" which, together with First State Bancorporation, is referred to herein as the "Company" unless the context indicates otherwise). The Company operates four offices in Taos County, five offices in Albuquerque, two offices in Santa Fe and one office each in Rio Rancho, Los Lunas, Bernalillo and Placitas, New Mexico. First State Bank, the largest bank in Taos County, has operated in the county since 1922. See "The Company--History." At December 31, 1996, the Company had total assets, total deposits and total stockholders' equity of $325.0 million, $277.4 million and $21.1 million, respectively. Management's strategy is to provide a business culture in which customers are provided individualized service. As part of its operating and growth strategies, the Company is seeking to (i) place greater emphasis on attracting core deposits from, and providing financial services to, small and medium-sized businesses; (ii) expand operations in Albuquerque, Santa Fe, and other strategic areas in New Mexico; (iii) maintain asset quality through strict adherence to credit administration standards; (iv) manage interest rate risk; (v) continue to improve internal operating systems and (vi) manage noninterest expenses. Management believes that the Company is qualified to pursue an aggressive growth strategy throughout New Mexico due to its responsive customer service, its streamlined management structure, the strong community involvement of the Company's management and employees and recent trends in the New Mexico banking environment. Changes in banking laws have allowed out-of-state bank holding companies to acquire New Mexico banking institutions. As a result, several competing banks have been acquired by larger out-of-state institutions. See "The Company--Growth Strategy." Management believes that, in certain cases, the acquiring institutions have shifted the focus of the acquired banks away from the small and medium-sized businesses that are at the core of the Company's marketing efforts. The Company is seeking to capitalize on this environment by expanding internally and through de novo branching opportunities and select acquisitions. Management believes that the changes in the competitive environment have created expansion opportunities for the Company. These opportunities are primarily centered in the Albuquerque, Santa Fe, Rio Rancho, and Los Lunas markets. The Company has added staff to service the additional volume of loans and deposits obtained as a result of expansion in these marketplaces. The level of any additional staffing and related expenses will depend on the magnitude of continued growth. In addition, the Company will consider potential acquisition opportunities that complement the Company's existing operations and provide economies of scale when combined with its existing locations. The Company is not in negotiations with respect to any potential acquisitions. See "The Company--Growth Strategy." The Company's executive offices are located at 111 Lomas, Albuquerque, New Mexico 87102, and its telephone number is (505) 241-7500. 3 THE OFFERING Securities Offered........ $ in principal amount of % Convertible Subor- dinated Debentures due , 2017. Interest Payment Dates.... and , commencing on , 1997. Convertibility............ Convertible into Common Stock at any time before maturity or redemption at $ per share, subject to adjustment in certain events. Mandatory Redemption...... None. Optional Redemption....... The Debentures are redeemable, in whole or in part, at any time and from time to time, on or after , 2001, at the option of the Company on not less than 30 days notice, at fixed redemption prices as set forth herein, together with accrued interest to the redemption date; provided that the Debentures may be redeemed at the option of the Company, in whole or in part, at any time before , 2001, without any premium if the closing sale price of the Common Stock for at least 30 consecu- tive trading days equals or exceeds 140% of the conversion price then in effect. See "Description of the Debentures." Subordination............. The payment of principal and premium, if any, and interest on the Debentures is subordinated to all existing and future Senior Indebtedness (as defined herein). The Company currently has no Senior In- debtedness. The Indenture (as defined herein) does not limit the incurrence of indebtedness, including Senior Indebtedness, by the Company. See "Descrip- tion of the Debentures--Subordination." Events of Default......... The Indenture defines an Event of Default with re- spect to the Debentures as being certain events in- volving the bankruptcy, insolvency or reorganiza- tion of the Company. The Indenture does not provide for any right of acceleration of the payment of principal or interest or in the performance of any covenant or agreement in the Debentures or in the Indenture. See "Description of the Debentures-- Events of Default and Defaults." Use of Proceeds........... A portion of the net proceeds will be contributed to the capital of First State Bank and the remain- ing net proceeds will be used for general corporate purposes. In addition, the Company may use a por- tion of such proceeds to pay any costs incurred in connection with the redemption of the Company's currently outstanding 7% Convertible Exchangeable Redeemable Subordinated Debentures Due 2003 (the "7% Debentures"). See "Use of Proceeds." Nasdaq SmallCap Market Symbol................... Common Stock.............. The Common Stock is quoted on The Nasdaq Stock Mar- ket's National Market under the symbol "FSNM." At March 31, 1997, 2,227,332 shares of Common Stock were outstanding. RISK FACTORS Before making an investment decision, prospective investors should consider all of the information in this Prospectus. In particular, prospective investors should evaluate the factors discussed under "Risk Factors." RECENT DEVELOPMENTS Net income for the three months ended March 31, 1997 was $710,000 or $0.28 per fully diluted share, compared to $505,000 or $0.22 per fully diluted share for the same period of 1996, an increase of 40.6% and 27.3% in net income and earnings per fully diluted share, respectively. Total assets were $351 million at March 31, 1997, an increase of 33.0% from $264 million at March 31, 1996. Loans and leases increased $60.7 million and total deposits increased $78.1 million over March 31, 1996 levels. Return on average assets and return on average equity for the first quarter of 1997 were 0.85% and 13.06%, respectively, compared to 0.78% and 11.56%, respectively, for the same period in 1996. See "Recent Developments." 4 SUMMARY CONSOLIDATED FINANCIAL DATA The following summary consolidated financial data of the Company is derived from the Selected Consolidated Financial Data appearing elsewhere in this Prospectus, and should be read in conjunction with the Consolidated Financial Statements of the Company and the Notes thereto and the information contained in "Management's Discussion and Analysis of Financial Condition and Results of Operations."
AS OF AND FOR THE YEARS ENDED DECEMBER 31, ------------------------------------------------ 1996 1995 1994 1993(1) 1992(1) -------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) INCOME STATEMENT DATA: Net interest income......... $ 16,064 $ 13,307 $ 10,957 $ 7,581 $ 6,401 Provision for loan and lease losses..................... 1,231 418 248 267 198 -------- -------- -------- -------- -------- Net interest income after provision for loan and lease losses.............. 14,833 12,889 10,709 7,314 6,203 Noninterest income.......... 2,934 1,683 1,705 1,204 1,347 Loss from credit card processing operations...... -- (1,208) (158) -- -- Noninterest expense......... 14,590 10,926 9,625 6,724 6,137 -------- -------- -------- -------- -------- Income before taxes........ 3,177 2,438 2,631 1,794 1,413 Income tax expense (benefit)................. 1,116 763 240 (17) 67 -------- -------- -------- -------- -------- Net income available to common stockholders........ $ 2,061 $ 1,675 $ 2,391 $ 1,811 $ 1,346 ======== ======== ======== ======== ======== PER SHARE DATA: Net income(2)............... $ 0.88 $ 0.77 $ 1.06 $ 1.21 $ 0.98 Book value.................. 9.69 8.88 8.04 6.97 5.83 Dividends paid.............. 0.200 0.154 0.064 -- 0.433 Average fully diluted common shares outstanding (in thousands)................. 2,136 2,052 2,019 1,442 1,363 AVERAGE BALANCE SHEET DATA: Total assets................ $285,628 $229,382 $186,886 $140,083 $126,150 Investment securities....... 35,611 34,250 32,211 21,642 25,959 Loans and leases............ 218,776 164,172 133,685 102,974 85,058 Deposits.................... 242,366 195,079 160,226 126,989 114,446 Stockholders' equity........ 18,313 16,817 14,723 9,031 7,396 PERFORMANCE RATIOS: Return on average assets.... 0.72% 0.73% 1.28% 1.29% 1.07% Return on average common equity..................... 11.25 9.96 16.24 20.05 18.20 Net interest margin......... 6.25 6.49 6.46 5.89 5.60 Efficiency ratio(3)......... 76.84 72.80 76.00 76.64 80.67 ASSET QUALITY RATIOS(4): Nonperforming assets to total loans, leases and other real estate owned.... 1.17% 1.60% 1.17% 1.99% 3.75% Net charge-offs to average loans and leases........... 0.26 0.02 0.17 0.25 0.27 Allowance for loan and lease losses to total loans...... 1.00 1.01 0.98 1.18 1.21 Allowance for loan and lease losses to nonperforming loans(5)................... 153.52 81.58 290.12 201.26 134.45 CAPITAL RATIOS(4): Leverage ratio.............. 6.17% 6.55% 7.06% 7.21% 5.18% Average stockholders' equity to average total assets.... 6.41 7.33 7.88 6.45 5.86 Tier 1 risk-based capital ratio...................... 7.40 7.80 9.04 9.83 7.36 Total risk-based capital ratio...................... 8.30 8.70 9.90 10.96 8.54
- -------- (1) Except for December 1993, does not reflect the operations of the Santa Fe Bank, which was acquired by the Company on December 1, 1993. This acquisition was accounted for as a purchase. (2) Net income per share is based upon the weighted average number of shares of Common Stock, Common Stock equivalents, Common Stock options, Common Stock warrants and 7% Debentures outstanding during the period. (3) Calculated by dividing total noninterest expense, excluding securities gains and losses, by net interest income plus noninterest income. (4) At period end, except net charge-offs to average loans and average stockholders' equity to average total assets. (5) Nonperforming loans consist of nonaccrual loans and loans contractually past due 90 days or more. 5 RISK FACTORS An investment in the Debentures offered hereby involves certain risks. In addition to the other information contained or incorporated by reference herein, the following factors should be considered carefully in evaluating the Company before purchasing the Debentures offered hereby. Information contained in this Prospectus contains "forward-looking statements" which can be identified by the use of forward-looking terminology such as "believes," "expects," "will," "should," "projected," "contemplates" or "anticipates" or the negative thereof or other variations thereon or comparable terminology. No assurance can be given that the matters covered by the forward-looking statements will be achieved. The following factors could cause actual experience to vary materially from the matters covered in such forward-looking statements. Other factors, such as the general state of the economy, could also cause actual experience to vary materially from the matters covered in such forward-looking statements. DEPENDENCE ON KEY PERSONNEL The Company is dependent on the continued services of Michael R. Stanford, President of the Company and First State Bank, H. Patrick Dee, Secretary and Treasurer of the Company and Executive Vice President and Chief Operating Officer of First State Bank, and other members of management who have relationships with customers of First State Bank. The loss of these officers could have an adverse affect on the Company's growth and profitability. Certain of these officers are participating in the Executive Income Protection Plan. See "Management--Executive Income Protection Plan." GROWTH STRATEGY AND POSSIBLE NEED FOR ADDITIONAL CAPITAL The Company intends to pursue an aggressive growth strategy. This strategy is focused primarily upon the ability of the Company to develop new account relationships, establish de novo branches, complete acquisitions and generate loans and deposits at acceptable risk levels and on acceptable terms. While the Company believes that its existing capital level and anticipated earnings will be sufficient to support the Company's operations and anticipated expansion within its existing markets during at least the next 12 months and to meet all regulatory requirements, other factors such as faster than anticipated growth, reduced earnings levels and changes in regulatory requirements may require the Company to seek additional capital. There can be no assurance that the Company will be successful in implementing, or will have the necessary regulatory capital to implement, its growth strategy or that it would be able to raise additional capital if necessary. See "Business--Growth Strategy," "--Competition" and "--Regulatory Oversight." SOURCES OF PAYMENTS TO HOLDERS OF DEBENTURES; ABILITY TO PAY DIVIDENDS; POSSIBLE ISSUANCE OF ADDITIONAL SECURITIES Although the Company holds all of the outstanding capital stock of First State Bank, the Company is a legal entity separate and distinct from First State Bank. Except with respect to any proceeds of this offering retained by the Company, the ability of the Company to pay the interest on and principal of the Debentures and to pay dividends on the Common Stock will depend primarily on the ability of First State Bank to pay dividends to the Company in amounts sufficient to service the Company's obligations, including its obligation to make any payments with respect to securities issued by the Company in the future which are pari passu or have a preference over the Debentures or the Common Stock, as applicable, with respect to the payment of principal, interest, or dividends. See "Regulation and Supervision." First State Bank's ability to pay dividends, make other capital distributions, or pay management fees to the Company is governed by federal and state law. Under regulations issued by the Board of Governors of the Federal Reserve System (the "FRB" or "Federal Reserve Board"), First State Bank is permitted to pay dividends during a calendar year of up to the lesser of (i) its undivided profits then on hand, less its losses and bad debts, or (ii) the total of the bank's net profits for that year combined with its retained net profits of the preceding two calendar years, less any required transfers to surplus or to a fund for the retirement of any preferred stock. (Undivided profits may include, if approved by First State Bank's Board of Directors and the 6 FRB, part or all of any capital surplus that exceeds capital surplus required by state law.) Any additional capital distributions would require prior regulatory approval. In addition, First State Bank is prohibited under federal law from paying any dividend that would cause it to become undercapitalized. As of December 31, 1996, First State Bank met the capital requirements of an adequately capitalized institution under applicable FRB regulations. Additionally, the FRB has the right to object to a distribution on safety and soundness grounds. There is no assurance that First State Bank will remain adequately capitalized or that it will be in a position to make capital distributions to the Company in an amount sufficient for the Company to service the Debentures, or to pay dividends on the Common Stock issuable upon conversion of the Debentures. See "Regulation and Supervision." It is the policy of the Federal Reserve Board that bank holding companies should pay cash dividends on common stock only out of income available over the past year and only if prospective earnings retention is consistent with the organization's expected future needs and financial condition. The policy provides that bank holding companies should not maintain a level of cash dividends that undermines the bank holding company's ability to serve as a source of strength to its banking subsidiaries. Principal sources of revenues for the Company are expected to be dividends received from First State Bank and earnings on the proceeds of this offering that are retained by the Company. In addition, the federal regulatory agencies are authorized to prohibit a banking institution or bank holding company from engaging in an unsafe or unsound banking practice. Depending upon the circumstances, the agencies could take the position that paying a dividend would constitute an unsafe or unsound banking practice. There is no restriction in the Indenture on the ability of the Company to issue securities which are pari passu or have a preference over the Debentures or the Common Stock, nor is there any restriction on the ability to issue additional capital stock or incur additional indebtedness. SUBORDINATION The payment of principal of, premium, if any, and interest on the Debentures will, to the extent set forth in the Indenture, be subordinated and subject in right of payment to the prior payment in full of all Senior Indebtedness. In certain events of insolvency, the payment of the principal of, premium if any, and interest on the Debentures will, to the extent set forth in the Indenture, also be effectively subordinated in right of payment to the prior payment in full of all Other Financial Obligations (as defined herein). See "Description of the Debentures--Subordination of Debentures." Only the capital stock of the Company is currently junior in right of payment to the Debentures. As of March 26, 1997, the Company had no Senior Indebtedness and had outstanding $3.4 million in principal amount of 7% Debentures. The Company has called for redemption the 7% Debentures effective April 30, 1997. The Indenture does not limit the incurrence of additional indebtedness by the Company, including Senior Indebtedness, or by First State Bank. The Debentures will be obligations of the Company only, are not obligations of or deposits in First State Bank, and are not insured by any government agency. Because the Company is a bank holding company, its rights and the rights of its creditors, including the holders of the Debentures, to participate in any distribution of the assets of First State Bank (either as a shareholder or as a creditor), upon a liquidation, reorganization, or insolvency of First State Bank (and the consequent right of the holders of the Debentures to participate in those assets) will be subject to the claims of the creditors of First State Bank (including depositors in First State Bank). If the Company is a creditor of First State Bank, the claims of the Company would be subject to any prior security interest in the assets of First State Bank and any indebtedness of First State Bank senior to that of the Company. LIMITED COVENANTS The covenants in the Indenture are limited and do not protect holders of Debentures in the event of a material adverse change in the Company's financial condition or results of operations. Additionally, as more fully described in "Description of the Debentures," payments of principal of the Debentures can be accelerated only 7 upon certain events of bankruptcy, insolvency, or reorganization of the Company. There is no right of acceleration of payment of the Debentures in the case of a default in the performance of any covenant of the Company, including payment of principal or interest. Neither the Debentures nor the Indenture contains any provisions which will restrict the Company from incurring, assuming or becoming liable with respect to any indebtedness or other obligations, whether secured or unsecured, including indebtedness which will rank senior to the Debentures. Neither the Debentures nor the Indenture contains any financial ratios or specified levels of liquidity to which the Company must adhere. In addition, neither the Debentures nor the Indenture contains any provision which requires the Company to repurchase, redeem or modify the terms of the Debentures upon a change in control or other events involving the Company which may adversely affect the creditworthiness of the Debentures. Therefore, neither the covenants nor the other provisions of the Indenture should be a significant factor in evaluating whether the Company will be able to comply or will comply with its obligations under the Debentures. See "Description of the Debentures." ABSENCE OF PUBLIC MARKET FOR DEBENTURES Before this offering, there has been no public market for the Debentures. Although the Company intends to apply to have the Debentures approved for quotation on The Nasdaq SmallCap Market, there is no assurance that the Debentures will be approved for quotation. Keefe, Bruyette & Woods, Inc. has advised the Company that it intends to make a market in the Debentures and the Common Stock but is not obligated to do so and may discontinue market making at any time without notice. No assurance can be given that an active trading market for the Debentures will develop, or, if any market develops, that it will be sustained. Accordingly, holders of Debentures may experience difficulty in reselling or may be unable to sell the Debentures. Additionally, since the prices of securities generally fluctuate, there can be no assurance that purchasers in this offering will be able to sell the Debentures at or above the purchase price. LIMITED TRADING MARKET FOR COMMON STOCK The Debentures are convertible at any time before maturity, unless previously redeemed, into shares of Common Stock of the Company. There is no assurance that an active trading market for the Common Stock will be developed or sustained or that a holder of Common Stock will have the ability to dispose of his shares in a liquid market. The Common Stock was first issued by the Company and commenced trading on The Nasdaq Stock Market's National Market on November 3, 1993. As of March 31, 1997, there were outstanding 2,227,332 shares of Common Stock. See "Market for Common Stock and Dividends." ANTI-TAKEOVER PROVISIONS The Company's Articles of Incorporation (the "Articles") contain certain provisions that could delay, discourage or prevent an attempted acquisition or change of control of the Company. These provisions include (i) a Board of Directors classified into three classes with the directors of each class having staggered, three-year terms, (ii) a requirement that the holders of at least two-thirds of the outstanding Common Stock approve the removal of a director without cause and (iii) a provision establishing certain advance notice procedures for nomination of candidates for election as directors and for stockholder proposals to be considered at meetings of stockholders. The Articles authorize the Board of Directors of the Company to issue shares of preferred stock without stockholder approval and upon such terms as the Board of Directors may determine. The issuance of Preferred Stock, while providing desirable flexibility in connection with possible acquisitions, financings and other corporate purposes, could also have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from acquiring, a controlling interest in the Company. The Company has a Shareholder Protection Rights Agreement (the "Rights Agreement") in effect to ensure that all stockholders receive fair and equal treatment in the event of any proposal to acquire control of the Company. Under the Rights Agreement, each stockholder holds one right for each share of Common Stock held of record. Upon the occurrence of certain triggering events set forth in the Rights Agreement, holders of the rights, other than the "acquiring person" or any affiliate or transferree of such acquiring person, may be entitled to purchase Common Stock or, in the event of a merger or other business combination in which the Common Stock interests of the Company's stockholders 8 are changed, stock of the "acquiring person," at half the market value of such stock. The Board of Directors may, at its option, exchange all of the rights (other than rights held by the "acquiring person") for Common Stock of the Company on a one-for-one basis. The Company will be entitled to redeem the rights for $0.01 per right until the tenth day following a public announcement of the acquisition of ten percent of the Common Stock. The rights expire on October 25, 2006, unless earlier redeemed or exchanged by the Company. See "Description of Capital Stock--Common Stock " and "--Certain Anti-Takeover Provisions." INDEMNIFICATION OF OFFICERS AND DIRECTORS The Company's Bylaws provide for the indemnification of its officers and directors and in certain circumstances, exculpate its officers and directors from liability for breaches of their fiduciary duties to the Company. See "Management--Indemnification." EXPOSURE TO LOCAL ECONOMIC CONDITIONS The Company's success is dependent to a significant extent upon general economic conditions in the Albuquerque metropolitan area and Santa Fe and Taos counties. The banking industry in First State Bank's trade area is affected by general economic conditions such as inflation, recession, unemployment and other factors beyond the Company's control. Economic recession over a prolonged period of time in the area could cause significant increases in nonperforming assets, thereby causing operating losses, impairing liquidity and eroding capital. There can be no assurance that future adverse changes in the national and/or local economies would not have a material adverse effect on the Company's financial condition, results of operations or cash flows. INTEREST RATE RISK The Company's earnings depend to a substantial extent on "rate differentials," i.e., the difference between the income the Company receives from loans, securities and other earning assets, and the interest it pays to obtain deposits and other liabilities. These rates are highly sensitive to many factors which are beyond the Company's control, including general economic conditions and the policies of various governmental and regulatory authorities. Increases in the discount rate by the FRB usually lead to rising interest rates, which affect the Company's interest income, interest expense and securities portfolio. From time to time, maturities of assets and liabilities are not balanced, and a rapid increase or decrease in interest rates could have an adverse effect on the net interest margin and results of operations of the Company. The nature, timing and effect of any future changes in federal monetary and fiscal policies on the Company and its results of operations are not predictable. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Asset/Liability Management." COMPETITION The banking business is highly competitive, and the profitability of the Company depends principally upon the Company's ability to compete in its trade areas. In addition to competing with other commercial and savings banks and savings and loan associations, the Company competes with credit unions, finance companies, mutual funds, insurance companies, brokerage and investment banking firms, asset-based non-bank lenders and governmental organizations that may offer subsidized financing at lower rates than those offered by the Company. Many of such competitors have significantly greater financial and other resources than the Company. Although the Company has been able to compete effectively in the past, no assurance can be given that the Company will continue to be able to compete effectively in the future. Various legislative acts in recent years have led to increased competition among financial institutions. There can be no assurance that the United States Congress will not enact legislation that may further increase competitive pressures on the Company. Competition from both financial and non-financial institutions is expected to continue. REGULATORY OVERSIGHT Bank holding companies and banks operate in a highly regulated environment and are subject to extensive supervision and examination by federal and state regulatory agencies. The Company is subject to the Bank Holding Company Act of 1956, as amended (the "BHCA"), and to regulation and supervision by the FRB. The Bank, as a state member bank, is subject to regulation and supervision by the FRB and the New Mexico Financial 9 Institutions Division of the Regulation and Licensing Department and, as a result of the insurance of its deposits, the Federal Deposit Insurance Corporation (the "FDIC"). These regulations are intended primarily for the protection of depositors, rather than for the benefit of investors. The Company and First State Bank are subject to changes in federal and state law, as well as changes in regulation and governmental policies, income tax law and accounting principles. The effects of any potential changes cannot be predicted but could adversely affect the business and operations of the Company and First State Bank in the future. FRB policy requires a bank holding company such as the Company to serve as a source of financial strength to its banking subsidiaries and commit resources to their support. The FRB has required bank holding companies to contribute cash to their troubled bank subsidiaries based upon this "source of strength" doctrine, which could have the effect of decreasing funds available for the payment of principal and interest on the Debentures or for distributions to stockholders. In addition, a bank holding company in certain circumstances could be required to guarantee the capital plan of an undercapitalized banking subsidiary. See "Regulation and Supervision." REGULATION OF CONTROL Individuals or entities, alone or acting in concert with others, who acquire 10% or more of any class of voting securities of the Company may be presumed to have acquired "control" of the Company under the Change in Bank Control Act, which requires the prior approval of the FRB for any such acquisition. Persons other than individuals, alone or acting in concert, seeking to acquire 25% or more (5% or more in the case of an acquiror that is a bank holding company) of any class of voting securities of, or otherwise seeking to control, the Company are also required to seek the prior approval of the FRB under the BHCA. For purposes of these approval requirements, the FRB, in general, considers securities convertible into voting securities to be voting securities. THE COMPANY The Company is a New Mexico-based bank holding company that provides commercial banking services primarily to small and medium-sized businesses through its subsidiary bank First State Bank. The Company operates four offices in Taos County, five offices in Albuquerque, two offices in Santa Fe and one office each in Rio Rancho, Los Lunas, Bernalillo and Placitas, New Mexico. In addition, the Company has received approval to open a new branch in the Moriarty market, with the opening tentatively scheduled for the third quarter of 1997. First State Bank, the largest bank in Taos County, has operated in the county since 1922. The Company acquired three Albuquerque branches in 1991 by merging the business operations of First State Bank with an affiliated bank. The Company entered the Santa Fe market with the acquisition of a controlling interest in First State Bank of Santa Fe (the "Santa Fe Bank") on December 1, 1993. The Santa Fe Bank was merged into First State Bank on June 5, 1994. See "--History." At December 31, 1996, the Company had total assets, total deposits and total stockholders' equity of $325.0 million, $277.4 million and $21.1 million, respectively. Management's strategy is to provide a business culture in which customers are provided individualized service. As part of its operating and growth strategies, the Company is seeking to (i) place greater emphasis on attracting core deposits from, and providing financial services to, small and medium- sized businesses; (ii) expand operations in Albuquerque, Santa Fe and other strategic areas in New Mexico; (iii) maintain asset quality through strict adherence to credit administration standards; (iv) manage interest rate risk; (v) continue to improve internal operating systems and (vi) manage noninterest expenses. Management believes that the Company is qualified to pursue an aggressive growth strategy throughout New Mexico due to its responsive customer service, its streamlined management structure, the strong community involvement of the Company's management and employees and recent trends in the New Mexico banking environment. Changes in banking laws have allowed out-of-state bank holding companies to acquire New Mexico banking institutions. As a result, several competing banks have been acquired by larger out-of-state institutions. See "--Growth Strategy." Management believes that, in certain cases, the acquiring institutions have shifted the focus of the acquired banks away from the small and medium-sized businesses that are at the core of the Company's marketing efforts. The Company is seeking to capitalize on this environment by expanding internally and through de novo branching opportunities and select acquisitions. 10 Management believes that the changes in the competitive environment have created expansion opportunities for the Company. These opportunities are primarily centered in the Albuquerque, Santa Fe, Rio Rancho and Los Lunas markets. The Company has added staff to service the additional volume of loans and deposits obtained as a result of expansion in these marketplaces. The level of any additional staffing and related expenses will depend on the magnitude of continued growth. In addition, the Company will consider potential acquisition opportunities that complement the Company's existing operations and provide economies of scale when combined with its existing locations. The Company is not in negotiations with respect to any potential acquisitions. See "--Growth Strategy." At December 31, 1996, First State Bank was "adequately capitalized" under regulatory capital guidelines. The Company's executive offices are located at 111 Lomas, Albuquerque, New Mexico 87102, and its telephone number is (505) 241-7500. HISTORY In 1988, Livingston & Co. Southwest L.P. ("Livingston & Co.") formed the Company and an affiliated company, New Mexico Bank Corporation, to acquire banking institutions in New Mexico. In December 1988, the Company acquired First State Bank and New Mexico Bank Corporation acquired National Bank of Albuquerque ("NBA"). After a change in New Mexico banking laws in 1991, the Company and New Mexico Bank Corporation merged and NBA was merged into First State Bank. At the time of its acquisition, First State Bank had high levels of problem assets relative to total assets and an unacceptable record of loan charge- offs. To address these problems, Michael R. Stanford, who had been appointed President of First State Bank in April 1988 and is President of the Company, and his management team, focused on (i) strengthening underwriting standards and increasing senior management involvement in loan approvals and (ii) pursuing an aggressive policy of foreclosing upon nonperforming loans and selling the underlying collateral. In addition, the Company sought to manage noninterest expense by implementing expense and overhead reductions, including eliminating two unprofitable branch offices and one redundant branch and reducing staffing levels in the remaining three branches. On December 1, 1993, the Company acquired 94.5% of the outstanding shares of common stock (the "Santa Fe Stock") of the Santa Fe Bank (the "Santa Fe Bank Transaction"). The selling shareholders of the Santa Fe Bank (the "Selling Santa Fe Shareholders") included individuals who were (and continue to be) members of the Company's senior management team, as well as individuals who subsequently became members of the Board of Directors of the Company (collectively, the "Affiliated Sellers"). The Affiliated Sellers owned, in the aggregate, approximately 70% of the outstanding shares of Santa Fe Stock. The Company issued 236,925 shares of the Company's Common Stock to the Selling Santa Fe Shareholders in the Santa Fe Bank Transaction. Based on the closing sale price of the Company's Common Stock on December 1, 1993 of $8.40 per share, the total market value of the consideration received by the Selling Santa Fe Shareholders in the Santa Fe Bank Transaction equaled approximately $2.0 million, which represented 150% of the book value of the Santa Fe Bank at June 30, 1993. The Selling Santa Fe Shareholders acquired their ownership interest in the Santa Fe Bank in March 1993 (the "March Transaction") for an aggregate amount of $1.3 million from another bank holding company which had acquired such stock through foreclosure of a bank stock loan. The terms of such acquisition were favorable to the Selling Santa Fe Shareholders in part because the prior owner had held the shares of Santa Fe Stock in excess of the permitted holding period and was under pressure from its regulators to divest such holdings. The Selling Santa Fe Shareholders entered into an agreement to sell the shares of Santa Fe Stock to the Company on July 30, 1993. In addition to recognizing an aggregate gain of approximately $700,000 from the Santa Fe Bank Transaction, the Selling Santa Fe Shareholders received dividends in respect of the Santa Fe Stock of approximately $84,000 on June 30, 1993, and $215,000 on September 30, 1993. The consideration to be paid by the Company in the Santa Fe Bank Transaction was negotiated between representatives of the Selling Santa Fe 11 Shareholders (primarily Mr. Stanford, President and Chief Executive Officer of the Company, and Mr. H. Patrick Dee, Executive Vice President of the Company) and the Company. Because the Selling Santa Fe Shareholders included members of the Company's management, the transaction cannot be said to have been negotiated at arms length. The Company believes that the purchase price for the Santa Fe Bank was appropriate based on its review of comparable transactions, the Santa Fe Bank's earnings performance, asset quality and growth potential in the Santa Fe market, as well as the potential for operating efficiencies presented by combining the banks. The Company had been interested in acquiring the Santa Fe Bank prior to the March Transaction. However, the Company was precluded from purchasing the Santa Fe Bank at the time because the Federal Reserve Board had indicated that it would prohibit Livingston & Co., as well as any affiliate of Livingston & Co. (including the Company), from acquiring any additional financial institutions. In connection with the Company's initial public offering of Common Stock in November 1993, Livingston & Co.'s ownership interest in the Company was redeemed, thus allowing the Company to purchase the Santa Fe Bank. Since its initial public offering in 1993, the Company has made significant investments in expansion and technology. Since 1993, First State Bank has opened seven new branches which have contributed $80,364,000 in deposits. In addition, management estimates that these new branches have generated approximately $64,000,000 in loans. In 1996, First State Bank opened a de novo leasing department. Management believes that the leasing department will provide portfolio diversification as well as an additional vehicle for investing deposits resulting from branch expansions. The leasing department had funded leases of approximately $20,676,000 as of December 31, 1996. During 1996, First State Bank completed a conversion of its banking application software. Management believes that the new software will enhance the Bank's ability to service customers while realizing operational efficiencies. First State Bank also implemented a telephone banking system which is allowing it to handle growth without a proportionate increase in staff. In 1996, a deposit imaging system was implemented. This system has improved operational efficiencies and reduced certain direct costs. OPERATING STRATEGY The Company's operating strategies include: . Providing responsive, personal customer service . Attracting new account relationships . Emphasizing community involvement . Developing new business opportunities . Increasing efficiency . Optimizing asset/liability management Customer Service. The Company's objective is to increase market share in both lending volume and deposits by providing responsive customer service that is tailored to its customers' needs. By maximizing personal contact with customers, maintaining low employee turnover and endeavoring to understand the needs and preferences of its customers, the Company is working to maintain and further enhance its reputation of providing excellent customer service, allowing it to achieve its growth and earnings goals. The Company has developed a streamlined management structure that allows it to make credit and other banking decisions rapidly. Management believes that this structure, when compared to other competing institutions, enables the Company to provide a higher degree of service and increased flexibility to creditworthy customers. New Account Relationships. The Company's strategy is to increase its emphasis on relationship banking with small and medium-sized businesses and individual customers across all product lines. The Company 12 believes that the acquisition of many of the Company's local competitors by out-of-state banking companies has reduced the service level offered to customers of those banks and has created an opportunity for the Company to expand its customer base. The Company intends to capitalize on this opportunity by targeting its marketing efforts to those businesses and individuals who prefer the personalized customer service emphasized by the Company. Community Involvement. First State Bank management and other employees participate actively in a wide variety of civic and community activities and organizations, including local chambers of commerce, a board of education, United Way, and Habitat for Humanity. First State Bank also sponsors a number of community-oriented events each year. The Company believes that these activities assist First State Bank through increased visibility and through development and maintenance of customer relationships. New Business Opportunities. The Company has and will continue to consider a variety of new banking opportunities, whether through the opening of de novo branches, acquisition of an existing commercial bank or bank holding company, or other opportunities permissible under state and federal banking regulations. Expansion efforts will be focused in areas or markets that are complementary to the First State Bank's existing customer base and areas of operation. See "--Growth Strategy." Increasing Efficiency. Management believes that investments in technology and facilities made since 1993 will allow the Company to grow revenues significantly faster than expenses over the next three years. These investments should allow the Company to expand its asset base without a commensurate increase in noninterest expense. Asset/Liability Management. The Company's asset/liability management policy is designed to provide stable net interest income growth by protecting its earnings from undue interest rate risk. The Company maintains a strategy of keeping the rate adjustment period on the majority of both assets and liabilities to an earnings neutral position, with a substantial amount of these assets and liabilities adjustable in 90 days or less. See "Management's Discussion and Analysis of Financial Condition and Results of Operations-- Asset/Liability Management." GROWTH STRATEGY The Company expects to pursue an aggressive growth strategy through a combination of internal growth, de novo branching and select acquisitions. Several banks that compete with the Company have been acquired by larger out- of-state financial institutions since 1993. Management believes that these changes in the competitive environment have caused the acquired banks to significantly alter their operating procedures and their approach to customer service affording the Company an opportunity to gain profitable new account relationships and to expand existing relationships. In addition, management believes that there may be attractive opportunities to open new branches and acquire branches of existing or merged institutions in New Mexico. Management considers a variety of criteria when evaluating potential branch expansion, including (i) the short and long-term growth prospects for the location, (ii) the management and other resources required to integrate the operations, if such integration is desirable, (iii) the degree to which the branch would enhance the geographic diversification of the Company, (iv) the degree to which the branch would enhance the Company's presence in an existing market and (v) the costs of operating the branch. First State Bank has obtained approval to open one new branch in the Moriarty market, with the opening tentatively scheduled for the third quarter of 1997. An additional future branch site has been acquired in Santa Fe, and the Company is also evaluating other potential locations for new branches, one each in Albuquerque and Belen. The Company's goal over the next five years is to create a broad-based, well-capitalized, customer-focused New Mexico financial institution with assets of $600 to $700 million. Management believes that a financial institution of this size is large enough to meet the needs of most customers, yet small enough to deliver personal, high-quality service. To accommodate the Company's anticipated growth, management intends to further 13 develop the existing middle management of the Company and further develop its MIS and other appropriate internal management systems. There can be no assurance, however, that the Company will achieve its growth objectives. MARKET AREAS AND BANKING OFFICES Markets. First State Bank serves three distinct market areas within New Mexico: Taos County; Albuquerque, Rio Rancho and Los Lunas; and Santa Fe. Taos County is a popular year-round recreation and tourist area. Ski and golf resorts in the area attract visitors from throughout the southwestern and western United States. Taos also has an active art community catering to the tourist trade. The Albuquerque, Rio Rancho and Los Lunas area comprises the largest metropolitan area in New Mexico and is the financial center of the state. It has a diverse economy centered around federal and state government, military, service and technology industries. Military facilities include Kirtland Air Force Base and Sandia National Laboratories. A number of companies, including Intel, Lockheed Martin, Taco Bell, Intuit, Sumitomo and General Mills, have initiated or expanded operations in the area in the past several years. Santa Fe is the state capital of New Mexico. Its principal industries are government and tourism. Like Taos, Santa Fe is widely known for its southwestern art galleries and amenities, including the Santa Fe Opera. Santa Fe is one of the largest art markets in the United States, attracting visitors from all parts of the United States and many foreign countries. First State Bank. The following table sets forth certain information concerning the banking offices of First State Bank as of December 31, 1996:
TOTAL NUMBER OF TOTAL LOANS AND LOCATION FACILITIES DEPOSITS LEASES -------- ---------- -------- --------- (DOLLARS IN THOUSANDS) First State Bank: Taos County..................................... 4 $ 75,471 $ 47,512 Santa Fe........................................ 2 48,490 35,804 Albuquerque..................................... 5 112,951 124,471 Los Lunas....................................... 1 15,767 23,235 Rio Rancho...................................... 3 25,854 19,904 --- -------- -------- Total......................................... 15 $278,533 $250,926 === ======== ========
First State Bank offers a full range of financial services to commercial and individual customers, including checking accounts, short and medium-term loans, revolving credit facilities, inventory and accounts receivable financing, equipment financing, residential and small commercial construction lending, commercial leases, various savings programs, installment and personal loans, safe deposit services, credit cards and brokerage services. The Taos County locations provide conventional commercial and SBA loans to established commercial businesses and businesses that support the tourism and ski industries. The Taos branches also provide a broad range of consumer banking services, including a full complement of deposit and residential construction and other loan services. The Albuquerque, Rio Rancho and Los Lunas locations primarily serve established commercial businesses and individuals who may require a full range of banking services. In addition to an emphasis on conventional commercial and SBA lending, these locations are active in residential construction lending in the metropolitan Albuquerque area. The Santa Fe locations primarily serve a diverse group of small to medium- sized business and individual customers, including commercial businesses that support the tourism industry. 14 First State Bank is the largest bank in Taos County with 39.4% of the total deposits as of June 30, 1996, the latest date as of which information is available. Management believes that the Company's growth in this market will be through general economic growth and not as a result of increased market share. In Albuquerque and Santa Fe, First State Bank had approximately 2.7% and 4.0%, respectively, of the total deposits as of June 30, 1996. Management believes that the Albuquerque, Los Lunas and Rio Rancho market, and the Santa Fe market offer the greatest growth opportunity for the Company. The Albuquerque market offers the Company a variety of expansion opportunities including a number of potential sites for new branch locations. As the Company pursues its growth objectives of providing high-quality personal banking services, future branch expansion will be a high priority. See "--Growth Strategy." COMPETITION First State Bank competes for loans, leases and deposits with other commercial banks, savings banks, savings and loan associations, credit unions, finance companies, mutual funds, insurance companies, brokerage and investment banking firms, asset-based non-bank lenders, governmental organizations and other institutions with respect to the scope and type of services offered, interest rates paid on deposits and pricing of loans, among other things. Many of these competitors have significantly greater financial and other resources than the Company. First State Bank also faces significant competition for investors' funds from sellers of short-term money market securities and other corporate and government securities. First State Bank competes for loans and leases principally through the range and quality of its services, interest rates and loan fees. First State Bank believes its personal service philosophy enables it to compete favorably with other financial institutions in its focus market of small and medium-sized businesses. First State Bank actively solicits deposit-related clients and competes for deposits by offering customers personal attention and professional service. FACILITIES With the exception of its Southside facility in Taos, the Journal Center facility in Albuquerque and the Bernalillo facility, which are owned by First State Bank, the Company leases its banking facilities in Albuquerque, Taos, Santa Fe, Rio Rancho and Los Lunas. The following table shows the size and age of each of the banking facilities owned or leased by the Company:
APPROXIMATE SQUARE FOOTAGE BUILDING AREA APPROXIMATE LAND APPROXIMATE SQUARE NOW UTILIZED FOR BANKING AREA FOOTAGE BUILDING AREA SERVICES YEAR CONSTRUCTED OR (SQ. FT.) (SQ. FT.) (SQ. FT.) LAST RENOVATED: ---------------- --------------------- ------------------------ ------------------- Taos Main.................. 19,800 8,940 8,940 Renovated 6-93 North................. 45,215 2,239 2,239 Renovated 9-95 Questa................ 17,947 1,050 1,050 Renovated 8-93 South................. 36,590 5,550 5,550 Renovated 9-92 Albuquerque Lomas................. 9,119 9,199 9,199 Renovated 3-95 Carlisle.............. 16,256 1,880 1,880 Constructed 9-95 Montgomery............ 14,514 3,742 3,742 Renovated 7-91 Sycamore.............. 45,834 5,164 4,164 Constructed 9-94 Journal Center........ 88,427 13,200 13,200 Constructed 9-95 Santa Fe San Mateo............. 62,334 6,955 6,955 Renovated 11-95 Downtown.............. 5,100 2,116 2,116 Constructed 12-95 Rio Rancho Rio Rancho............ 50,214 5,500 4,000 Constructed 3-95 Placitas.............. 807 807 807 Constructed 9-94 Bernalillo............ 43,539 4,610 4,610 Constructed 8-96 Los Lunas............... 57,243 4,327 4,327 Constructed 8-95
15 EMPLOYEES As of December 31, 1996, the Company had 183 full-time equivalent employees. The Company places a high priority on staff development, training and selective hiring. New hires are selected on the basis of both technical skills and customer service capabilities. Staff development involves intensive training in marketing, customer service and regulatory compliance. None of the Company's employees is covered by a collective bargaining agreement, and management believes that its relationship with its employees is good. RECENT DEVELOPMENTS OVERVIEW Net income for the three months ended March 31, 1997 was $710,000 or $0.28 per fully diluted share, compared to $505,000 or $0.22 per fully diluted share for the same period of 1996, an increase of 40.6% and 27.3% in net income and earnings per fully diluted share, respectively. The growth in net income was primarily due to a $60.7 million increase in the loan and lease portfolio and a $15.9 million increase in the investment portfolio.
THREE MONTHS ENDED MARCH 31 ------------------------ 1997 1996 ----------- ----------- (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Income Statement Data: Net income available to common stockholders............................... $ 710 $ 505 Net income per share(1)..................... 0.28 0.22 Fully diluted average shares outstanding.... 2,676,993 2,623,574 Balance Sheet Data(2): Total assets................................ $ 350,741 $ 264,369 Loans and leases, net....................... 259,490 199,535 Total deposits ............................. 307,046 228,897 Total stockholders' equity.................. 21,928 17,796 Book value per share........................ 9.82 8.98 Performance Ratios Return on average assets.................... 0.85% 0.78% Return on average common equity............. 13.06 11.56 Asset Quality Ratios(2): Nonperforming assets to total assets(3) .... 0.94% 1.16% Allowance for loan and lease losses to total loans...................................... 1.04 1.00
- -------- (1) Net income per share is based upon the weighted average number of shares of Common Stock, Common Stock equivalents, Common Stock options, Common Stock warrants and 7% Debentures outstanding during the period. (2) At period end. (3) Nonperforming assets consist of accruing loans 90 days past due, non- accrual loans, restructured loans and other real estate owned. 16 USE OF PROCEEDS The net proceeds to be received by the Company from the sale of the Debentures offered hereby are estimated to be approximately $12,000,000 after deduction of the underwriting discount and estimated expenses. Initially, the Company intends to contribute to the capital of First State Bank such portion of the net proceeds of this offering as is required for First State Bank to constitute a "well capitalized" institution. See "Regulation and Supervision." First State Bank will use such funds for general corporate purposes, including working capital, and for financing possible future acquisitions. Any net proceeds retained by the Company will be used for general corporate purposes and may be used to pay any costs incurred in connection with the redemption of the 7% Debentures. In addition, from time to time the Company may contribute additional amounts to the capital of First State Bank if necessary for First State Bank to maintain "well capitalized" status under applicable regulatory capital guidelines. Approximately $3.4 million principal amount of the 7% Debentures was outstanding on March 31, 1997. Pending utilization as described above, the Company intends to invest the proceeds from this offering in short-term income producing obligations, including U.S. Treasury securities, federal agency securities, money market accounts and certificates of deposit. MARKET FOR COMMON STOCK AND DIVIDENDS PRICE RANGE OF COMMON STOCK The Company's Common Stock is traded on The Nasdaq Stock Market's National Market under the symbol "FSNM." The following table sets forth, for the periods indicated, the high and low bid prices on The Nasdaq Stock Market's National Market as reported by Nasdaq, and the dividends paid per share for the periods indicated. The Company's Common Stock commenced trading on November 3, 1993. The quotations in the over-the-counter market reflect inter- dealer prices, without retail markup, markdown or commissions and may not necessarily represent actual transactions.
DIVIDENDS HIGH LOW PAID ------ ------ --------- 1995 First Quarter.................................... $11.20 $ 9.00 $0.032 Second Quarter................................... 11.20 11.20 0.032 Third Quarter.................................... 11.60 11.00 0.032 Fourth Quarter................................... 12.60 11.25 0.050 1996 First Quarter.................................... $12.00 $11.00 $0.050 Second Quarter................................... 12.50 10.88 0.050 Third Quarter.................................... 13.25 12.25 0.050 Fourth Quarter................................... 14.75 13.25 0.050 1997 First Quarter.................................... $15.63 $14.50 $0.050 Second Quarter (through April 14, 1997).......... 15.00 13.63 --
The last reported sale price of the Company's Common Stock on April 16, 1997, was $14.75 per share. As of March 31, 1997, there were approximately 83 holders of record of Common Stock. The Company estimates that, as of March 31, 1997, there were approximately 1,500 beneficial holders of Common Stock. DIVIDEND POLICY The declaration and payment of cash dividends are determined by the Board of Directors in light of the earnings, capital requirements and financial condition of the Company, and other relevant factors. The ability of the Company to pay cash dividends depends on the amount of cash dividends paid to it by First State Bank and the capital position of the Company. Capital distributions, including dividends, by First State Bank are subject to federal and state regulatory restrictions tied to its earnings and capital. See "Regulation and Supervision" and Note 10 of Notes to Consolidated Financial Statements of the Company. 17 CAPITALIZATION The following table sets forth the consolidated capitalization of the Company at December 31, 1996, and as adjusted to reflect (i) the sale of the Debentures and (ii) the conversion of the outstanding 7% Debentures into shares of Common Stock. The information below should be read in conjunction with the detailed information and financial statements and notes thereto appearing elsewhere, or incorporated by reference, in this Prospectus.
DECEMBER 31, 1996 ------------------------- ACTUAL AS ADJUSTED ----------- ------------- (DOLLARS IN THOUSANDS) Long-term debt: 7% Subordinated Convertible Debentures due 2003.... $ 3,788 $ 0 Long-term advance from FHLB........................ 218 218 % Subordinated Convertible Debentures due 2017.... 0 12,000 ----------- ----------- Total long-term debt............................. $ 4,006 $ 12,218 =========== =========== Stockholders' equity: Preferred Stock, no par value, 1,000,000 shares authorized, none issued or outstanding............ -- -- Common Stock, no par value, 4,000,000 shares authorized, 2,172,357 shares issued and outstanding(1)(2)................................. $ 11,907 $ 15,576 Retained earnings.................................. 9,098 9,098 Net unrealized appreciation on investment securities available for sale--net of deferred income taxes...................................... 46 46 ----------- ----------- Total stockholders' equity....................... $ 21,051 $ 24,720 =========== ===========
- -------- (1) Does not include 248,863 shares of Common Stock issuable upon exercise of stock options outstanding at December 31, 1996, of which 192,363 were exercisable as of December 31, 1996. (2) Adjustment reflects the issuance of Common Stock in respect of the conversion of the 7% Debentures, less unamortized offering costs incurred in connection with the issuance of the 7% Debentures. The Company called the 7% Debentures for redemption effective April 30, 1997. Although the Company expects substantially all of the 7% Debentures to be converted into Common Stock, there can be no assurance that any of the 7% Debentures will be converted. If none of the outstanding 7% Debentures is converted, Common Stock would be $11,907, retained earnings would be $8,979 and total stockholders' equity would be $20,932. 18 SELECTED CONSOLIDATED FINANCIAL DATA The following summary consolidated financial data of the Company is derived from and is qualified in its entirety by reference to the Consolidated Financial Statements of the Company, and the notes thereto, appearing elsewhere, or incorporated by reference, in this Prospectus, and should be read in conjunction with such financial statements (and notes thereto) and the information contained in "Management's Discussion and Analysis of Financial Condition and Results of Operations." See "Index to Consolidated Financial Statements." No tax equivalent adjustments were made and all average balances are daily average balances.
AS OF AND FOR THE YEARS ENDED DECEMBER 31, -------------------------------------------------------- 1996 1995 1994 1993(1) 1992(1) ---------- ---------- ---------- --------- --------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) INCOME STATEMENT DATA: Interest income......... $ 25,681 $ 20,692 $ 15,623 $ 10,922 $ 10,397 Interest expense........ 9,617 7,385 4,666 3,341 3,996 ---------- ---------- ---------- --------- --------- Net interest income..... 16,064 13,307 10,957 7,581 6,401 Provision for loan and lease losses........... 1,231 418 248 267 198 ---------- ---------- ---------- --------- --------- Net interest income after provision for loan and lease losses.. 14,833 12,889 10,709 7,314 6,203 Net gain (loss) on sale of securities.......... 10 (19) (3) 12 140 Other noninterest income................. 2,924 1,702 1,708 1,192 1,207 Loss from credit card processing operation... -- (1,208) (158) -- -- Noninterest expense..... 14,590 10,926 9,615 6,723 6,137 ---------- ---------- ---------- --------- --------- Income before income taxes and minority interest............... 3,177 2,438 2,641 1,795 1,413 Income tax expense (benefit).............. 1,116 763 240 (17) 67 ---------- ---------- ---------- --------- --------- Income before minority interest............... 2,061 1,675 2,401 1,812 1,346 Minority interest....... -- -- (10) (1) 0 ---------- ---------- ---------- --------- --------- Net income.............. $ 2,061 $ 1,675 $ 2,391 $ 1,811 $ 1,346 ========== ========== ========== ========= ========= PER SHARE DATA: Net income(2) .......... $ 0.88 $ 0.77 $ 1.06 $ 1.21 $ 0.98 Book value ............. 9.69 8.88 8.04 6.97 5.83 Tangible book value .... 9.26 8.27 7.50 6.27 5.08 Dividends paid.......... 0.200 0.154 0.064 -- 0.433 Average fully diluted common shares outstanding............ 2,666,353 2,607,438 2,566,940 1,537,573 1,363,463 ========== ========== ========== ========= ========= AVERAGE BALANCE SHEET DATA: Total assets............ $ 285,628 $ 229,382 $ 186,886 $ 140,083 $ 126,150 Loans and leases ....... 218,776 164,172 133,685 102,974 85,058 Investment securities... 35,611 34,250 32,211 21,642 25,959 Federal funds sold...... 2,770 6,717 3,842 3,954 2,939 Deposits................ 242,366 195,079 160,226 126,989 114,446 Stockholders' equity.... 18,313 16,817 14,723 9,031 7,396 PERFORMANCE RATIOS: Return on average assets................. 0.72% 0.73% 1.28% 1.29% 1.07% Return on average common equity................. 11.25 9.96 16.24 20.05 18.20 Net interest margin..... 6.25 6.49 6.46 5.89 5.60 Efficiency ratio(3)..... 76.84 72.80 76.00 76.64 80.67 Earnings to fixed charges(4): Including interest on deposits.............. 1.33x 1.49x 1.60x 1.54x 1.35x Excluding interest on deposits.............. 3.56 4.76 5.34 11.20 8.44 ASSET QUALITY RATIOS(5): Nonperforming assets to total loans, leases and other real estate owned.................. 1.17% 1.60% 1.17% 1.99% 3.75% Net charge-offs to average loans and leases................. 0.26 0.02 0.17 0.25 0.27 Allowance for loan and lease losses to total loans ................. 1.00 1.01 0.98 1.18 1.21 Allowance for loan and lease losses to nonperforming loans(6)............... 153.52 81.58 290.12 201.26 166.15 CAPITAL RATIOS(5): Leverage ratio.......... 6.17% 6.55% 7.06% 7.21% 5.18% Average stockholders' equity to average total assets................. 6.41 7.33 7.88 6.45 5.86 Tier 1 risk-based capital ratio.......... 7.40 7.80 9.04 9.83 7.36 Total risk-based capital ratio.................. 8.30 8.70 9.90 10.96 8.54
- -------- (1) Except for December 1993, does not reflect the operations of the Santa Fe Bank, which was acquired by the Company on December 1, 1993. This acquisition was accounted for as a purchase. (2) Net income per share is based upon the weighted average number of shares of Common Stock, Common Stock equivalents, Common Stock options, Common Stock warrants and 7% Debentures outstanding during the period. (3) Calculated by dividing total noninterest expense, excluding securities gains and losses, by net interest income plus noninterest income. (4) For purposes of computing the ratio of earnings to fixed charges, earnings represent income before income taxes and minority interest plus fixed charges, and fixed charges represent interest expense. (5) At period end, except net charge-offs to average loans and average stockholders' equity to average total assets. (6) Nonperforming loans consist of nonaccrual loans and loans contractually past due 90 days or more. 19 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 GENERAL The Company's net income increased in 1996 from 1995 primarily due to increased net interest income which was the result of an increase in average loans of approximately $54.6 million. The increase in net interest income was partially offset by an increase in the provision for loan losses of $813,000, operating costs related to branch expansion, addition of a commercial leasing division and expansion of the credit card merchant program. NET INTEREST INCOME The primary component of earnings for financial institutions is net interest income. Net interest income is the difference between interest income, principally from loan, lease and investment securities portfolios, and interest expense, principally on customer deposits and borrowings. Changes in net interest income result from changes in volume, spread and margin. Volume refers to the average dollar level of interest-earning assets and interest- bearing liabilities. Spread refers to the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities. Margin refers to net interest income divided by average interest- earning assets and is influenced by the level and relative mix of interest- earning assets and interest-bearing liabilities. During the years ended December 31, 1996, 1995 and 1994, the Company's average interest-earning assets were $257.2 million, $205.1 million and $169.7 million, respectively. For the same periods, the Company's net interest margins were 6.25%, 6.49% and 6.46%. The following tables set forth, for the periods indicated, information with regard to average balances of assets and liabilities, as well as the total dollar amounts of interest income from interest-earning assets and interest expense from interest-bearing liabilities, resultant yields or costs, net interest income, net interest spread, net interest margin and the ratio of average interest-earning assets to average interest-bearing liabilities for the Company. No tax equivalent adjustments were made and all average balances are daily average balances. Nonaccruing loans have been included in the table as loans carrying a zero yield. 20
YEARS ENDED DECEMBER 31, -------------------------------------------------------------------------------------- 1996 1995 1994 ---------------------------- ---------------------------- ---------------------------- INTEREST AVERAGE INTEREST AVERAGE INTEREST AVERAGE AVERAGE INCOME OR YIELD OR AVERAGE INCOME OR YIELD OR AVERAGE INCOME OR YIELD OR BALANCE EXPENSE COST BALANCE EXPENSE COST BALANCE EXPENSE COST -------- --------- -------- -------- --------- -------- -------- --------- -------- (DOLLARS IN THOUSANDS) ASSETS Loans and leases: Commercial............. $ 31,164 $ 3,152 10.11% $ 18,503 $ 1,885 10.19% $ 28,405 $ 2,566 9.03% Real estate--mortgage.. 130,347 13,500 10.36 99,566 10,552 10.60 56,622 5,261 9.29 Real estate-- construction.......... 36,320 4,533 12.48 37,235 4,918 13.21 36,635 4,786 13.06 Consumer............... 12,017 1,413 11.76 8,535 907 10.63 11,774 1,074 9.12 Leases................. 8,607 725 8.42 -- -- -- -- -- -- Other.................. 321 -- -- 333 -- -- 249 -- -- -------- ------- ------ -------- ------- ------ -------- ------- ------ Total loans and leases................ 218,776 23,323 10.66 164,172 18,262 11.12 133,685 13,687 10.24% Allowance for loan and lease losses........... (2,181) (1,636) (1,628) Securities: U.S. government........ 30,656 1,916 6.25 30,925 1,850 5.98 30,240 1,659 5.49 State and political subdivisions: Nontaxable............. 3,607 198 5.49 2,293 136 5.93 1,182 79 6.68 Taxable................ 35 3 8.57 145 13 8.97 115 12 10.43 Other.................. 1,313 96 7.31 887 45 5.07 674 34 5.04 -------- ------- ------ -------- ------- ------ -------- ------- ------ Total securities...... 35,611 2,213 6.21 34,250 2,044 5.97 32,211 1,784 5.54 Federal funds sold...... 2,770 145 5.23 6,717 387 5.76 3,842 153 3.98% -------- ------- ------ -------- ------- ------ -------- ------- ------ Total interest-earning assets............... 257,157 25,681 9.99% 205,139 20,693 10.09% 169,736 15,624 9.20% ======= ======= ======= Noninterest-earning assets: Cash and due from banks................. 13,158 12,004 9,349 Other.................. 17,494 13,875 9,427 -------- -------- -------- Total noninterest- earning assets........ 30,652 25,879 18,776 -------- -------- -------- Total assets.......... $285,628 $229,382 $186,886 ======== ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Deposits: Interest-bearing demand accounts.............. $ 46,737 $ 1,097 2.35% $ 45,752 $ 1,224 2.68% $ 40,291 $ 942 2.34% Certificates of deposit............... 102,078 5,777 5.66 72,681 4,015 5.52 52,797 2,156 4.08 Money market savings accounts.............. 31,210 1,023 3.28 23,375 758 3.24 21,502 582 2.71 Regular savings accounts.............. 16,174 478 2.96 14,544 418 2.87 13,367 341 2.55 -------- ------- ------ -------- ------- ------ -------- ------- ------ Total interest-bearing deposits.............. 196,199 8,375 4.27 156,352 6,415 4.10 127,957 4,021 3.14 Short-term borrowings... 17,006 855 5.03 9,804 536 5.47 4,549 199 4.37 Note payable............ 226 19 8.41 240 18 7.5 -- -- -- Convertible subordinated debt................... 5,500 362 6.58 5,750 405 7.04 5,750 408 7.10 Capital leases.......... 60 5 8.33 100 12 12.00 233 38 16.31 -------- ------- ------ -------- ------- ------ -------- ------- ------ Total interest-bearing liabilities........... 218,991 9,616 4.39% 172,246 7,386 4.29% 138,489 4,666 3.37% Noninterest-bearing demand accounts........ 46,167 38,727 32,309 Other noninterest- bearing liabilities.... 2,157 1,592 1,365 -------- -------- -------- Total liabilities...... 267,315 212,565 172,163 Stockholders' equity.... 18,313 16,817 14,723 -------- -------- -------- Total liabilities and stockholders' equity... $285,628 $229,382 $186,886 ======== ------- ======== ------- ======== ------- Net interest income..... $16,065 $13,307 $10,958 ======= ======= ======= Net interest spread .... 5.60% 5.80% 5.83% Net interest margin .... 6.25 6.49 6.46 Ratio of average interest-earning assets to average interest- bearing liabilities.... 117.43 119.10 122.56
Loan fees of $1.9 million, $1.7 million and $1.9 million, are included in interest income for the years ended December 31, 1996, 1995 and 1994, respectively. 21 The following table illustrates the changes in the Company's net interest income due to changes in volume and changes in interest rate. Changes attributable to the combined effect of volume and interest rates have been included in the changes due to rate.
YEAR ENDED DECEMBER 31, --------------------------------------------- 1996 VS. 1995 1995 VS. 1994 INCREASE (DECREASE) INCREASE (DECREASE) DUE TO CHANGES IN DUE TO CHANGES IN --------------------- ---------------------- VOLUME RATE TOTAL VOLUME RATE TOTAL ------ ----- ------ ------ ------ ------ (DOLLARS IN THOUSANDS) INTEREST-EARNING ASSETS Loans and leases: Commercial.................... $1,290 $ (23) $1,267 $ (895) $ 214 $ (681) Real estate--mortgage......... 3,262 (314) 2,948 3,990 1,301 5,291 Real estate--construction..... (121) (264) (385) 78 54 132 Consumer...................... 370 136 506 (295) 128 (167) Leases........................ 725 -- 725 -- -- -- ------ ----- ------ ------ ------ ------ Total loans and leases...... 5,526 (465) 5,061 2,878 1,697 4,575 Securities: U.S. government............... (16) 82 66 38 153 191 States and political subdivi- sions: Nontaxable.................. 78 (16) 62 74 (17) 57 Taxable..................... (10) -- (10) 3 (2) 1 Other......................... 22 29 51 11 -- 11 ------ ----- ------ ------ ------ ------ Total securities............ 74 95 169 126 134 260 Federal funds sold............ (227) (15) (242) 114 120 234 ------ ----- ------ ------ ------ ------ Total interest-earning as- sets....................... 5,373 (385) 4,988 3,118 1,951 5,069 ------ ----- ------ ------ ------ ------ INTEREST-BEARING LIABILITIES Deposits: Interest-bearing demand ac- counts....................... 26 (153) (127) 128 153 281 Certificates of deposit....... 1,624 139 1,763 812 1,048 1,860 Money market savings ac- counts....................... 254 11 265 51 125 176 Regular savings accounts...... 47 13 60 30 47 77 ------ ----- ------ ------ ------ ------ Total interest-bearing de- posits..................... 1,951 10 1,961 1,021 1,373 2,394 Short-term borrowings........... 394 (75) 319 230 103 333 Note payable.................... (1) 2 1 18 -- 18 Convertible subordinated debt... (18) (25) (43) -- -- -- Capital leases.................. (5) (2) (7) (22) (4) (26) ------ ----- ------ ------ ------ ------ Total interest-bearing lia- bilities................... 2,321 (90) 2,231 1,247 1,472 2,719 ------ ----- ------ ------ ------ ------ Total increase (decrease) in net interest income........ $3,052 $(295) $2,757 $1,871 $ 479 $2,350 ====== ===== ====== ====== ====== ======
ASSET/LIABILITY MANAGEMENT The Company's results of operations depend substantially on its net interest income. Like most financial institutions, the Company's interest income and cost of funds are affected by general economic conditions and by competition in the marketplace. The purpose of asset/liability management is to provide stable net interest income growth by protecting the Company's earnings from undue interest rate risk. Exposure to interest rate risk arises from volatile interest rates and changes in the balance sheet mix. The Company maintains an asset/liability management policy that provides 22 guidelines for controlling exposure to interest rate risk. The Company's policy is to control the exposure of its earnings to changing interest rates by generally maintaining a position within a narrow range around an "earnings neutral position," which is defined as the mix of assets and liabilities that generate a net interest margin that is least affected by interest rate changes. Rising and falling interest rate environments can have various impacts on a bank's net interest income, depending on the short-term interest rate gap that the bank maintains, the relative changes in interest rates that occur when the bank's various assets and liabilities reprice, unscheduled repayments of loans, early withdrawals of deposits and other factors. As of December 31, 1996, the Company's cumulative interest rate gap for the period up to three months was a negative $16.8 million and for the period up to one year was a negative $24.0 million. Based solely on the Company's interest rate gap of twelve months or less, net income of the Company could be unfavorably impacted by an increase in interest rates or favorably impacted by a decrease in interest rates. The following table sets forth the estimated maturity or repricing, and the resulting interest rate gap, of the Company's interest-earning assets and interest-bearing liabilities at December 31, 1996. The amounts are based upon regulatory reporting formats and, therefore, may not be consistent with financial information appearing elsewhere in this report that has been prepared in accordance with generally accepted accounting principles. The amounts could be significantly affected by external factors such as changes in prepayment assumptions, early withdrawals of deposits and competition.
THREE LESS THAN MONTHS TO THREE LESS THAN ONE ONE TO FIVE OVER FIVE MONTHS YEAR YEARS YEARS TOTAL --------- ------------- ----------- --------- -------- (DOLLARS IN THOUSANDS) Interest-earning assets: Investment securi- ties................. $ 1,700 $ 500 $31,589 $ 6,807 $ 40,596 Loans and leases: Commercial.......... 21,833 6,902 7,801 42 36,578 Real estate......... 106,219 54,782 23,180 271 184,452 Consumer............ 3,323 3,490 6,425 -- 13,238 Leases.............. 669 2,104 13,885 -- 16,658 -------- -------- ------- ------- -------- Total interest- earning assets... 133,744 67,778 82,880 7,120 291,522 -------- -------- ------- ------- -------- Interest-bearing liabil- ities: Savings and NOW ac- counts............... 98,138 -- -- -- 98,138 Certificates of depos- its of $100,000 or more................. 11,654 34,431 5,611 -- 51,696 Other time accounts... 20,078 40,513 14,889 -- 75,480 Subordinated deben- tures................ -- -- -- 3,788 3,788 Other interest-bearing liabilities.......... 20,670 -- -- -- 20,670 -------- -------- ------- ------- -------- Total interest- bearing liabili- ties............. $150,540 $ 74,944 $20,500 $ 3,788 $249,772 -------- -------- ------- ------- -------- Interest rate gap....... (16,796) (7,166) 62,380 3,332 41,750 ======== ======== ======= ======= ======== Cumulative interest rate gap at December 31, 1996................... $(16,796) $(23,962) $38,418 $41,750 ======== ======== ======= ======= Cumulative gap ratio at December 31, 1996...... 0.89% 0.89% 1.16% 1.17% ======== ======== ======= =======
23 INVESTMENT PORTFOLIO The following table provides the carrying value of the Company's investment portfolio at each of the dates indicated. At December 31, 1996, 1995 and 1994, the market value of the Company's investment portfolio exceeded the carrying value by approximately $50,000, $174,000 and $285,000, respectively.
AS OF DECEMBER 31, ----------------------- 1996 1995 1994 ------- ------- ------- (DOLLARS IN THOUSANDS) U.S. Treasury securities............................ $ 9,789 $ 5,667 $ 9,348 U.S. government agency securities................... 25,994 28,118 19,973 Obligations of states and political subdivisions.... 3,271 4,004 1,889 Other securities.................................... 1,542 887 886 ------- ------- ------- Total investment securities....................... $40,596 $38,676 $32,096 ======= ======= =======
The table below provides the carrying values, maturities and weighted average yield of the investment portfolio of the Company as of December 31, 1996.
AVERAGE WEIGHTED CARRYING MATURITY AVERAGE VALUE (YEARS) YIELDS -------- -------- -------- (DOLLARS IN THOUSANDS) U.S. Treasury securities One year or less.............................. $ 700 0.59 5.85% After one through five years.................. 9,089 2.02 6.13 ------- ----- ---- Total U.S. Treasury securities.............. 9,789 1.91 6.11 U.S. government agency securities One year or less.............................. 1,500 0.17 5.28 After one through five years.................. 21,520 3.22 6.44 After five through ten years.................. 1,989 7.26 7.09 After ten years............................... 985 14.17 7.37 ------- ----- ---- Total U.S. government agency securities..... 25,994 3.77 6.46 Obligations of states and political subdivisions One year or less.............................. -- -- -- After one through five years.................. 981 3.63 5.12 After five through ten years.................. 1,100 7.60 5.83 After ten years............................... 1,190 15.87 5.24 ------- ----- ---- Total states and political subdivisions se- curities................................... 3,271 9.43 5.40 Other securities................................ 1,542 N/A 7.34 ------- ----- ---- Total investment securities................. $40,596 3.78 6.28% ======= ===== ====
LOAN AND LEASE PORTFOLIO The following table presents the amount of loans and leases of the Company, by category, at the dates indicated.
AS OF DECEMBER 31, ----------------------------------------------------------------------------------- 1996 1995 1994 1993 1992 ---------------- ---------------- ---------------- ---------------- --------------- AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT -------- ------- -------- ------- -------- ------- -------- ------- ------- ------- (DOLLARS IN THOUSANDS) Commercial.............. $ 36,578 14.6% $ 23,204 12.6% $ 21,711 14.5% $ 27,878 22.9% $18,213 19.7% Real estate--mortgage... 148,715 59.3 115,640 62.9 80,293 53.5 50,102 41.1 45,848 49.6 Real estate-- construction........... 35,737 14.2 34,924 19.0 39,372 26.3 29,833 24.5 14,454 15.6 Consumer and other...... 13,238 5.3 10,091 5.5 8,632 5.7 14,210 11.5 13,947 15.1 Leases.................. 16,658 6.6 -- -- -- -- -- -- -- -- -------- ---- -------- ---- -------- ---- -------- ---- ------- ---- Total loans and leases............... $250,926 100% $183,859 100% $150,008 100% $122,023 100% $92,462 100% ======== ==== ======== ==== ======== ==== ======== ==== ======= ====
24 The following table presents the aggregate maturities of loans and leases in each major category of the Company's loan and lease portfolio at December 31, 1996. Actual maturities may differ from the contractual maturities shown as a result of renewals and prepayments.
AS OF DECEMBER 31, ---------------------------------------- LESS THAN ONE TO FIVE OVER FIVE ONE YEAR YEARS YEARS TOTAL --------- ----------- --------- -------- (DOLLARS IN THOUSANDS) Fixed-rate loans and leases: Commercial.......................... $ 5,582 $ 7,223 $ 42 $ 12,847 Real estate......................... 4,491 13,466 271 18,228 Consumer............................ 4,418 4,959 -- 9,377 Leases.............................. 2,773 13,885 -- 16,658 -------- ------- ---- -------- Total fixed-rate loans and leases........................... 17,264 39,533 313 57,110 Variable-rate loans: Commercial.......................... 23,153 578 -- 23,731 Real estate......................... 156,510 9,714 -- 166,224 Consumer............................ 2,395 1,466 -- 3,861 -------- ------- ---- -------- Total variable-rate loans......... 182,058 11,758 -- 193,816 -------- ------- ---- -------- Total loans and leases............ $199,322 $51,291 $313 $250,926 ======== ======= ==== ========
NONPERFORMING ASSETS Nonperforming assets consist of loans and leases past due 90 days or more, nonaccrual loans and leases, restructured loans and leases and other real estate owned. The Company generally places a loan on nonaccrual status and ceases accruing interest when loan payment performance is deemed unsatisfactory. All loans past due 90 days, however, are placed on nonaccrual status, unless the loan is both well collateralized and in the process of collection. Cash payments received while a loan is classified as nonaccrual are recorded as a reduction of principal as long as doubt exists as to collection. The following table sets forth information with respect to these assets at the dates indicated.
AS OF DECEMBER 31, -------------------------------------- 1996 1995 1994 1993 1992 ------ ------ ------ ------ ------ (DOLLARS IN THOUSANDS) Loans and leases past due 90 days or more................................. $ 689 $ 289 $ 190 $ 64 $ 44 Nonaccrual loans and leases........... 946 1,808 64 -- 438 Restructured loans and leases......... -- 172 252 652 351 ------ ------ ------ ------ ------ Total nonperforming loans and leases............................. 1,635 2,269 506 716 833 Other real estate owned............... 1,362 678 1,271 1,746 2,733 ------ ------ ------ ------ ------ Total nonperforming assets.......... $2,997 $2,947 $1,777 $2,462 $3,566 ====== ====== ====== ====== ====== Allowance for loan and lease losses... $2,510 $1,851 $1,468 $1,441 $1,120 ====== ====== ====== ====== ====== Ratio of total nonperforming assets to total assets......................... 0.92% 1.16% 0.87% 1.42% 2.67% Ratio of total nonperforming loans and leases to total loans and leases..... 0.65 1.23 0.35 0.59 0.90 Ratio of allowance for loan and lease losses to total nonperforming loans and leases........................... 153.52 81.58 290.12 201.26 134.45
Management is not aware of any loans or leases in addition to those disclosed above which, based upon known information, cause management to have serious doubts as to the ability of such borrowers to comply with present loan repayment terms. 25 ANALYSIS OF THE ALLOWANCE FOR LOAN AND LEASE LOSSES The allowance for loan and lease losses represents management's recognition of the risks of extending credit and its evaluation of the quality of the loan and lease portfolios. The allowance is maintained at a level considered adequate to provide for anticipated loan and lease losses based on management's assessment of various factors affecting the loan and lease portfolios, including a review of problem loans and leases, business conditions and loss experience and an overall evaluation of the quality of the underlying collateral, holding and disposing costs and costs of capital. The allowance is increased by provisions charged to operations and reduced by loans and leases charged off, net of recoveries. The following table sets forth information regarding changes in the allowance for loan and lease losses of the Company for the periods indicated.
AS OF DECEMBER 31, --------------------------------------- 1996 1995 1994 1993 1992 ------ ------ ------ ------ ------- (DOLLARS IN THOUSANDS) Allowance for loan and lease losses, beginning of period................. $1,851 $1,468 $1,441 $1,120 $ 1,149 Charge incident to an acquisition.... -- -- -- 308 -- Charge-offs: Commercial and other............... 438 98 388 339 191 Real estate loans.................. 70 162 30 15 165 Consumer loans..................... 246 85 19 31 75 ------ ------ ------ ------ ------- Total charge-offs................ 754 345 437 385 431 ------ ------ ------ ------ ------- Recoveries: Commercial and other............... 13 197 135 73 144 Real estate loans.................. 40 85 43 22 17 Consumer loans..................... 129 28 38 34 43 ------ ------ ------ ------ ------- Total recoveries................. 182 310 216 129 204 ------ ------ ------ ------ ------- Net charge-offs...................... 572 35 221 254 227 Provision for loan and lease losses.. 1,231 418 248 267 198 ------ ------ ------ ------ ------- Allowance for loan and lease losses, end of period....................... $2,510 $1,851 $1,468 $1,441 $ 1,120 ====== ====== ====== ====== ======= As a percentage of average total loans and leases: Net charge-offs.................... 0.26% 0.02% 0.17% 0.25% 0.27 % Provision for loan and lease loss- es................................ 0.56 0.25 0.19 0.26 0.23 Allowance for loan and lease loss- es................................ 1.15 1.13 1.10 1.40 1.32 As a percentage of total loans and leases at year-end: Allowance for loan and lease loss- es................................ 1.00 1.01 0.98 1.18 1.21 As a multiple of net charge-offs: Allowance for loan and lease loss- es................................ 4.39 52.89 6.64 5.67 4.93 Income before income taxes and pro- vision for loan and lease losses.. 7.71 81.61 13.07 8.12 7.10
26 Specific reserves are provided for individual loans and leases where ultimate collection is considered questionable by management after reviewing the current status of loans and leases that are contractually past due and considering the net realizable value of the security and of the loan and lease guarantees, if applicable. The following table sets forth the allowance for loan and lease losses by category, based upon management's assessment of the risk associated with these categories, at the dates indicated and summarizes the percentage of gross loans and leases in each category as a percentage of total loans and leases.
AS OF DECEMBER 31, ------------------------------------------------------------------------------------------------------------- 1996 1995 1994 1993 1992 --------------------- --------------------- --------------------- --------------------- --------------------- (DOLLARS IN THOUSANDS) PERCENT OF PERCENT OF PERCENT OF PERCENT OF PERCENT OF LOANS AND LOANS AND LOANS AND LOANS AND LOANS AND LEASES TO LEASES TO LEASES TO LEASES TO LEASES TO AMOUNT OF TOTAL LOANS AMOUNT OF TOTAL LOANS AMOUNT OF TOTAL LOANS AMOUNT OF TOTAL LOANS AMOUNT OF TOTAL LOANS ALLOWANCE AND LEASES ALLOWANCE AND LEASES ALLOWANCE AND LEASES ALLOWANCE AND LEASES ALLOWANCE AND LEASES --------- ----------- --------- ----------- --------- ----------- --------- ----------- --------- ----------- Commercial and unallocated por- tion............ $ 600 14.57% $ 402 12.62% $1,027 14.48% $1,009 22.85% $ 784 28.53% Real estate...... 1,560 73.51 1,269 81.89 294 79.77 288 65.50 224 65.21 Leases........... 150 6.64 -- -- -- -- -- -- -- -- Consumer......... 200 5.28 180 5.49 147 5.75 144 11.65 112 6.26 ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- Total allowance for loan and lease losses.. $2,510 100% $1,851 100% $1,468 100% $1,441 100% $1,120 100% ====== === ====== === ====== === ====== === ====== ===
DEPOSITS The following table presents the average balances outstanding for each major category of the Company's deposits and weighted average interest rate paid for interest-bearing deposits for the periods indicated.
YEAR ENDED DECEMBER 31, -------------------------------------------------------------------- 1996 1995 1994 ---------------------- ---------------------- ---------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE -------- ------------- -------- ------------- -------- ------------- (DOLLARS IN THOUSANDS) Interest-bearing demand accounts............... $ 46,737 2.35% $ 45,752 2.68% $ 40,291 2.34% Certificates of depos- it..................... 102,078 5.66 72,681 5.52 52,797 4.08 Money market savings ac- counts................. 31,210 3.28 23,375 3.24 21,502 2.71 Regular savings ac- counts................. 16,174 2.96 14,544 2.87 13,367 2.55 Noninterest-bearing demand accounts........ 46,167 -- 38,727 -- 32,309 -- -------- ---- -------- ---- -------- ---- Total................. $242,366 4.27% $195,079 4.10% $160,266 3.14% ======== ==== ======== ==== ======== ====
The following table shows the amount and maturity of certificates of deposit that had balances of $100,000 or more and the percentage of the total for each maturity.
AS OF DECEMBER 31, ---------------------------------------------- 1996 1995 1994 -------------- -------------- -------------- (DOLLARS IN THOUSANDS) Three months or less........... $11,654 22.09% $ 8,153 28.37% $ 7,937 41.79% Three through twelve months.... 34,764 65.90 15,651 54.48 8,912 46.91 Over twelve months............. 6,333 12.01 4,929 17.15 2,147 11.30 ------- ------ ------- ------ ------- ------ Totals....................... $52,751 100.00% $28,733 100.00% $18,996 100.00% ======= ====== ======= ====== ======= ======
27 SECURITIES SOLD UNDER AGREEMENT TO REPURCHASE Securities sold under agreement to repurchase totaled $14.0 million, $9.0 million and $9.5 million at December 31, 1996, 1995 and 1994, respectively. The weighted average interest rate on securities sold under agreement to repurchase was 5.34%, 5.25% and 4.90% at December 31, 1996, 1995 and 1994, respectively. Securities sold under agreement to repurchase are summarized as follows:
YEARS ENDED DECEMBER 31, ----------------------------------- 1996 1995 1994 ----------- ---------- ---------- Balance.................................. $13,928,515 $8,913,474 $9,465,000 Weighted average interest rate........... 5.34% 5.25% 4.90% Maximum amount outstanding at any month end..................................... 13,928,516 9,622,511 9,465,000 Average balance outstanding during the period.................................. 11,843,000 8,375,000 3,395,000 Weighted average interest rate during the period.................................. 4.74% 5.20% 4.42%
RETURN ON EQUITY AND ASSETS The following table shows the return on average assets, return on average equity, dividend payout ratio and ratio of average equity to average assets, for the periods indicated.
FOR THE YEARS ENDED DECEMBER 31, ---------------------------------- 1996 1995 1994 ---------- ---------- ---------- Return on average assets............... 0.72% 0.73% 1.28% Return on average equity............... 11.25 9.96 16.24 Dividend payout ratio.................. 19.81 18.06 5.25 Average equity to average assets....... 6.41 7.33 7.88
RESULTS OF OPERATIONS--YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 Overview. The Company's net income increased to $2.1 million from $1.7 million in 1995 and decreased from $2.4 million in 1994. Net interest income increased to $16.1 million in 1996, compared to $13.3 million in 1995 and $11.0 million in 1994. This increase was offset by noninterest expenses that increased to $14.6 million in 1996, compared to $11.0 million in 1995 and $9.6 million in 1994. Income tax expense increased to $1.1 million in 1996 from $763,000 in 1995 and $240,000 in 1994. Income tax expense in 1994 was reduced by utilization of net operating loss carry-forwards. Interest Income. Interest income increased to $25.7 million in 1996, from $20.7 million in 1995 and $15.6 million in 1994. This increase was due to an increase in average interest-earning assets. Average interest-earning assets were $257.2 million in 1996, compared to $205.1 million in 1995 and $169.7 million in 1994. Average yield on interest-earning assets decreased to 9.99% from 10.09% in 1995 and increased from 9.20% in 1994. The increase in average interest-earning assets occurred primarily in loans and leases. The average balance in loans and leases increased to $218.8 million, from $164.2 million in 1995 and $133.7 million in 1994. The average yield on loans and leases decreased to 10.66% in 1996 from 11.12% in 1995 and increased from 10.24% in 1994. Interest Expense. Interest expense increased to $9.6 million in 1996, from $7.4 million in 1995 and $4.7 million in 1994. This increase was due to an increase in average interest-bearing liabilities and the average cost of interest-bearing liabilities. Average interest-bearing liabilities increased to $219.0 million in 1996 from $172.2 million in 1995 and $138.5 million in 1994. These increases were due primarily to increases in deposits and short- term borrowings. The average cost increased to 4.39% in 1996 from 4.29% in 1995 and 3.37% in 1994. The average balance in deposits increased to $196.2 million in 1996 from $156.4 million in 1995 and $128.0 million in 1994. The average cost of deposits increased to 4.27% in 1996 from 4.10% in 1995 and 3.14% in 1994. 28 Net Interest Income. Net interest income increased to $16.1 million in 1996, from $13.3 million in 1995 and $11.0 million in 1994. This increase was due to increases in average loans and leases. Net interest margin decreased to 6.25% in 1996 from 6.49% in 1995 and 6.46% in 1994, as a result of decreased average yields on loans and leases and increased cost of deposits. Provision for Loan and Lease Losses. The provision for loan and lease losses increased to $1.2 million in 1996 from $418,000 in 1995 and $248,000 in 1994. This increase was necessitated by the increase in loans and leases outstanding and increased charge-offs. Charge-offs net of recoveries of loans and leases were $572,000 in 1996, $35,000 in 1995 and $221,000 in 1994. Noninterest Income. Noninterest income was $2.9 million in 1996, compared to $1.7 million in 1995 and $1.7 million in 1994. The increase for 1996 from 1995 was due to rental income from operating leases and credit card merchant fees. Rental income from operating leases was $254,000 in 1996. The Company's commercial leasing division commenced operations during 1996. Credit card merchant income was $749,000 in 1996, $179,000 in 1995 and $84,000 in 1994. Noninterest Expense. Noninterest expense increased to $14.6 million in 1996 from $10.9 million in 1995 and $9.6 million in 1994. This increase was due largely to increases in salaries and employee benefits, occupancy, equipment and marketing expense as a result of the Company's branch expansions in 1996, 1995 and 1994, the addition of the commercial leasing division in 1996 and the expansion of the credit card merchant program. Salaries and employee benefits increased to $6.4 million in 1996 from $4.9 million in 1995 and $4.0 million in 1994. Occupancy expense increased to $1.9 million in 1996 from $1.4 million in 1995 and $1.2 million in 1994. Equipment expense increased to $1.3 million from $811,000 in 1995 and $565,000 in 1994. Marketing expense increased to $637,000 in 1996, compared to $569,000 in 1995 and $377,000 in 1994. Credit Card Processing Operation. As of December 31, 1995, the Company decided to abandon its 48% limited partnership interest in Credit Card Services, Ltd., effective April 1, 1996. The Company incurred losses from operations of $278,000 and $158,000 in 1995 and 1994, respectively. In addition, the Company incurred a loss of $930,000 in 1995 resulting from its abandonment of the limited partnership interest. Income Tax Expense. Income tax expense increased to $1.1 million in 1996, from $763,000 in 1995 and $240,000 in 1994. Income tax expense in 1994 was reduced by the utilization of net operating loss carry-forwards and reductions in the deferred tax asset valuation allowance. LIQUIDITY AND SOURCES OF FUNDS The Company's primary sources of funds are customer deposits and loan and lease repayments. These funds are used to make loans and leases, acquire investment securities and other assets and fund continuing operations. Scheduled loan and lease repayments are a relatively stable source of funds, while deposit inflows and unscheduled loan and lease prepayments, which are influenced by general interest rate levels, interest rates available on other investments, competition, economic conditions and other factors, are not a relatively stable source of funds. Deposits of the Company increased to $277.4 million at December 31, 1996, from $218.8 million at December 31, 1995. Growth in deposits has occurred primarily due to growth in the economy of the Company's trade area, market dislocations caused by the acquisition of local competitors and branch expansions. Net loans of the Company increased to $248.4 million at December 31, 1996, from $182.0 million as of December 31, 1995. Real estate-mortgage loans increased by $33.1 million during 1996. Commercial loans increased by $13.4 million, consumer loans increased by $3.1 million and commercial leases increased to $16.7 million as a result of the opening of the commercial leasing division in 1996. Management anticipates that the Company will continue to rely primarily on customer deposits and loan and lease repayments, as well as retained earnings, to provide liquidity and will use funds so provided primarily to make loans and leases and to purchase securities. The Company believes that its customer deposits provide a 29 strong source of liquidity because of the high percentage of core deposits, many of which are a part of long-standing banking relationships. Borrowings are used to compensate for reductions in other sources of funds. Borrowings may also be used on a longer-term basis to support expanded lending activities and to match the maturity or repricing intervals of assets. The sources of such borrowings are federal funds sold, securities sold under agreements to repurchase and borrowings from the Federal Home Loan Bank ("FHLB"). The Company's liquidity needs arise primarily from its need to service the 7% Debentures. The primary source of funds for the Company include interest on money market accounts maintained by the Company and payments in lieu of taxes from First State Bank. Management expects that in the future, a significant source of funds for the Company will consist of dividends from First State Bank. As of January 1, 1997, First State Bank had $3.5 million in retained earnings which were available for the payment of dividends to the Company, subject to regulatory capital requirements. CAPITAL RESOURCES The Company's total stockholders' equity increased to $21.1 million at December 31, 1996, from $17.4 million at December 31, 1995. Of the $3.6 million increase, $2.1 million was produced by earnings and $1.9 million was produced by the conversion of the 7% Debentures. This increase was offset by the change in unrealized investment security gains and by dividend payments of $408,000. Management currently intends to continue to retain a major portion of the Company's earnings to support anticipated growth. As of December 31, 1996, the Company and First State Bank met the fully phased-in regulatory capital requirements. IMPACT OF INFLATION The financial statements and related financial data and notes presented herein have been prepared in accordance with generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollars, without considering changes in the relative purchasing power of money over time due to inflation. Unlike most industrial companies, virtually all of the assets and liabilities of the Company are monetary in nature. As a result, interest rates have a more significant impact on the Company's performance than the effects of general price levels. REGULATION AND SUPERVISION The Company and First State Bank are extensively regulated under federal and New Mexico law. These laws and regulations are primarily intended to protect depositors and the deposit insurance funds of the FDIC, not security holders of the Company. The following information summarizes material statutory and regulatory provisions affecting the Company. The information is qualified in its entirety by reference to the particular statutory and regulatory provisions. Any change in applicable laws, regulations or regulatory policies may have a material effect on the business, operations and prospects of the Company and First State Bank. The Company is unable to predict the nature or the extent of the effects on its business and earnings that changes in fiscal or monetary policies, economic control or new federal or state legislation may have in the future. THE COMPANY General. The Company is a bank holding company registered under the BHCA, and is subject to supervision and regulation by the Federal Reserve Board. Federal laws subject bank holding companies to particular restrictions on the types of activities in which they may engage, and to a range of supervisory requirements, including regulatory enforcement actions for violations of laws and policies. Acquisitions and Permissible Activities. As a bank holding company, the Company is required to obtain the prior approval of the FRB before acquiring direct or indirect ownership or control of more than 5% of the 30 voting shares of a bank or bank holding company. The FRB will not approve any acquisition, merger or consolidation that would have a substantial anticompetitive result, unless the anticompetitive effects of the proposed transaction are outweighed by a greater public interest in meeting the needs and convenience of the public. The FRB also considers managerial, capital and other financial factors in acting on acquisition or merger applications. A bank holding company may not engage in, or acquire direct or indirect control of more than 5% of the voting shares of any company engaged in a nonbanking activity, unless such activity has been determined by the FRB to be closely related to banking or managing banks. The FRB has identified by regulation various nonbanking activities in which a bank holding company may engage with notice to, or prior approval by, the FRB. Regulatory Restrictions on Dividends. It is the policy of the Federal Reserve Board that bank holding companies should pay cash dividends on common stock only out of income available over the past year and only if prospective earnings retention is consistent with the organization's expected future needs and financial condition. The policy provides that bank holding companies should not maintain a level of cash dividends that undermines the bank holding company's ability to serve as a source of strength to its banking subsidiaries. In the future, dividends from First State Bank are expected to be a significant source of funds for the Company. In addition, the federal regulatory agencies are authorized to prohibit a banking institution or bank holding company from engaging in an unsafe or unsound banking practice. Depending upon the circumstances, the agencies could take the position that paying a dividend would constitute an unsafe or unsound banking practice. Holding Company Obligations and Status. Under Federal Reserve Board policy, a bank holding company is expected to act as a source of financial strength to each of its banking subsidiaries and commit resources to their support. Such support may be required at times when, absent this Federal Reserve Board policy, a holding company may not be inclined to provide it. As discussed below under "Prompt Corrective Action," a bank holding company in certain circumstances could be required to guarantee the capital plan of an undercapitalized banking subsidiary. In the event of a bank holding company's bankruptcy under Chapter 11 of the U.S. Bankruptcy Code, the trustee will be deemed to have assumed and is required to cure immediately any deficit under any commitment by the debtor holding company to any of the federal banking agencies to maintain the capital of an insured depository institution, and any claim for breach of such obligation will generally have priority over most other unsecured claims. Because the Company is a legal entity separate and distinct from its subsidiaries, its right to participate in the distribution of assets of any subsidiary upon the subsidiary's liquidation or reorganization will be subject to the prior claims of the subsidiary's creditors. In the event of a liquidation or other resolution of the First State Bank, the claims of depositors and other general or subordinated creditors of the First State Bank are entitled to a priority of payment over the claims of holders of any obligation of the institution to its stockholders, including any depository institution holding company (such as the Company) or any stockholder or creditor thereof. Capital Adequacy. The FRB monitors the capital adequacy of bank holding companies and has adopted risk-based capital adequacy guidelines to evaluate bank holding companies on a consolidated basis. The guidelines require a ratio of "Tier 1" or core capital (generally, common stockholders' equity, perpetual preferred stock and minority interests in consolidated subsidiaries, less goodwill, other disallowed intangibles and disallowed deferred tax assets, among other items) to total risk-weighted assets of at least 4% and a ratio of total capital to risk-weighted assets of at least 8%. At December 31, 1996, the Company's ratio of total capital to risk-weighted assets was 8.30% and its risk-based Tier 1 capital ratio was 7.40%. The FRB also uses a leverage ratio to evaluate the capital adequacy of bank holding companies. The leverage ratio applicable to the Company requires a ratio of Tier 1 capital to adjusted total assets of not less than 31 3%, although most organizations are expected to maintain leverage ratios that are 100 to 200 basis points above this minimum ratio. The Company's leverage ratio at December 31, 1996, was 6.17%. The following table sets forth the capital ratios for the Company as of December 31, 1996 and the minimum capital ratios required:
ACTUAL MINIMUM RATIO REQUIRED ------ -------- Tier 1 capital to total assets........................... 6.1% 3.0% Tier 1 capital to risk-weighted assets................... 7.4 4.0 Total capital to risk-weighted assets.................... 8.3 8.0
The Company expects that a portion of the net proceeds of this offering will qualify as "Tier 2" capital under the Federal Reserve Board's risk-based capital adequacy guidelines. Tier 2 capital is generally defined to include allowance for loan and lease losses, perpetual preferred stock (to the extent not included in Tier 1 capital), certain hybrid capital instruments, perpetual debt, mandatory convertible debt securities, term subordinated debt and intermediate-term preferred stock. Total capital is the sum of Tier 1 capital and Tier 2 capital. The federal banking agencies' risk-based and leverage ratios are minimum supervisory ratios generally applicable to banking organizations that meet certain specified criteria, assuming that they have the highest regulatory rating. Banking organizations not meeting these criteria are expected to operate with capital positions well above the minimum ratios. The federal bank regulatory agencies may set capital requirements for a particular banking organization that are higher than the minimum ratios when circumstances warrant. Federal Reserve Board guidelines also provide that banking organizations experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels, without significant reliance on intangible assets. In addition, the regulations of the Federal Reserve Board provide that concentration of credit risk and certain risks arising from nontraditional activities, as well as an institution's ability to manage these risks, are important factors to be taken into account by regulatory agencies in assessing an organization's overall capital adequacy. The Federal Reserve Board and the other federal banking agencies recently adopted amendments to their risk-based capital regulations to provide for the consideration of interest rate risk in the agencies' determination of a banking institution's capital adequacy. The amendments require such institutions to effectively measure and monitor their interest rate risk and to maintain capital adequate for that risk. As discussed below under "Enforcement Powers of the Federal and State Banking Agencies," failure to meet the minimum regulatory capital requirements could subject a banking organization to a variety of enforcement remedies available to federal regulatory authorities, including, in the most severe cases, the termination of deposit insurance by the FDIC and the placement of the institution into conservatorship or receivership. FIRST STATE BANK Overview. First State Bank is a state bank chartered under the laws of New Mexico, subject to comprehensive regulation and periodic examination by the New Mexico Financial Institutions Division of the Regulation and Licensing Department (the "Division") and the deposits are insured by the FDIC. First State Bank is also a member of the Federal Reserve System and is subject to comprehensive regulation by the FRB and periodic examination by the Federal Reserve Bank of Kansas City. The affairs of state-chartered banks in New Mexico are regulated under the New Mexico Banking Act (the "Banking Act") by the Division. The Director of the Division and his staff exercise various supervisory powers provided in the Banking Act and conduct examinations of state banks. 32 Restrictions on Dividends. First State Bank is limited under federal and state law in the amount of dividends it may declare. Under regulations issued by the Federal Reserve Board, First State Bank is permitted to pay dividends during a calendar year of up to the lesser of (i) its undivided profits then on hand, less its losses and bad debts, or (ii) the total of the bank's net profits for that year combined with its retained net profits of the preceding two calendar years, less any required transfers to surplus or to a fund for the retirement of any preferred stock. (Undivided profits may include, if approved by First State Bank's Board of Directors and the FRB, part or all of any capital surplus that exceeds capital surplus required by state law.) Any additional capital distributions would require prior regulatory approval. In addition, the FRB and FDIC are authorized to prohibit First State Bank from engaging in any unsafe and unsound practice in conducting business, and under some circumstances payment of a dividend could be deemed an unsafe and unsound practice. In addition, under federal law, a bank cannot pay a dividend that will cause such bank to be "undercapitalized." Under state law, First State Bank may pay dividends out of undivided profits, maintained in accordance with state law, provided that any reserve against deposits required by state law will not be impaired by the payment of such dividends. The Division also has the authority to prohibit unsafe and unsound practices. The payment of dividends by First State Bank may also be affected by other factors, such as the need to maintain adequate capital or to meet loan demands. At December 31, 1996, First State Bank could have paid total dividends to the Company of approximately $3,500,000 without prior regulatory approval. Restrictions on Transactions with Affiliates. First State Bank is subject to Sections 23A and 23B of the Federal Reserve Act, which govern certain transactions, such as loans, extensions of credit, investments and purchases of assets between member banks and their affiliates, including their parent holding companies. These restrictions limit the transfer of funds to the Company, as defined in the statute, in the form of loans, extensions of credit, investments or purchases of assets, and they require that First State Bank's transactions with the Company be on terms no less favorable than comparable transactions between First State Bank and unrelated third parties. Transfers by First State Bank to the Company are limited in amount to 10% of First State Bank's capital and surplus, and transfers to all affiliates are limited in the aggregate to 20% of First State Bank's capital and surplus. Furthermore, such loans and extensions of credit are also subject to various collateral requirements. Cross-Guarantee. Under the Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA"), a depository institution insured by the FDIC can be held liable for any loss incurred by, or reasonably expected to be incurred by, the FDIC in connection with (i) the default of a commonly controlled FDIC-insured depository institution or (ii) any assistance provided by the FDIC to a commonly controlled FDIC-insured institution in danger of default. "Default" is defined generally as the appointment of a conservator or receiver and "in danger of default" is defined generally as the existence of certain conditions indicating that a "default" is likely to occur in the absence of regulatory assistance. This provision would become applicable to the Company and First State Bank in the event that the Company acquired an additional depository institution subsidiary. Capital Adequacy Standards. Regulations of the Federal Reserve Board establish minimum requirements for the capital adequacy of depository institutions that are substantially similar to the ratios described above for the Company. The following table sets forth the capital ratios for First State Bank as of December 31, 1996, and the capital ratios required to be considered "adequately capitalized" and "well capitalized":
ACTUAL TO BE CONSIDERED TO BE CONSIDERED RATIO "ADEQUATELY CAPITALIZED" "WELL CAPITALIZED" ------ ------------------------ ------------------ Tier 1 capital to total assets................. 6.9% 4.0% 5.0% Tier 1 capital to risk- weighted assets........ 8.4 4.0 6.0 Total capital to risk- weighted assets........ 9.3 8.0 10.0
Prompt Corrective Action. Under the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), the federal banking agencies must take prompt supervisory and regulatory actions against 33 undercapitalized depository institutions. Depository institutions are assigned one of five capital categories: "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized," and "critically undercapitalized," and are subjected to differential regulation corresponding to the capital category within which the institutions fall. An institution is critically undercapitalized if it has a tangible equity to total assets ratio that is equal to or less than 2%. An institution is well capitalized if it has a total risk-based capital ratio of 10% or greater, a Tier 1 risk-based capital ratio of 6% or greater, and a leverage ratio of 5% or greater, and the institution is not subject to an order, written agreement, capital directive or prompt corrective action directive to meet and maintain a specific capital level for any capital measure. Under the regulations, First State Bank currently is adequately capitalized. Corrective Measures for Capital Deficiencies. FDICIA requires the federal banking regulators to take "prompt corrective action" with respect to capital- deficient institutions. FDICIA contains broad restrictions on certain activities of undercapitalized institutions, including asset growth, acquisitions, branch establishment and expansion into new lines of business. With certain exceptions, an insured depository institution is prohibited from making capital distributions, including dividends, and is prohibited from paying management fees to control persons if the institution would be undercapitalized after any such distribution or payment. Depending on the level of an institution's capital, the agency's corrective powers also include, among other things: prohibiting the payment of principal and interest on subordinated debt and prohibiting the holding company from making distributions without prior regulatory approval. Under certain circumstances, a well capitalized, adequately capitalized or undercapitalized institution may be treated as if the institution were in the next lower capital category. Adequately capitalized institutions cannot accept, renew or roll over brokered deposits except with a waiver from the FDIC, and are subject to restrictions on the interest rates that can be paid on such deposits. Undercapitalized institutions may not accept, renew or roll over brokered deposits. A banking institution that is undercapitalized is required to submit a capital restoration plan, and such a plan will not be accepted unless, among other things, the banking institution's holding company guarantees the plan up to a certain specified amount. Any such guarantee from a depository institution's holding company is entitled to a priority of payment in bankruptcy. The Company's maximum liability under any such guarantee would be the lesser of 5% of the undercapitalized bank's total assets at the time it became undercapitalized or the amount necessary to bring the bank into compliance with the capital plan. As an institution's capital decreases, the powers of the federal regulators become greater. A significantly undercapitalized institution is subject to mandated capital-raising activities, restrictions on interest rates paid and transactions with affiliates, removal of management and other restrictions. The regulators have very limited discretion in dealing with a critically undercapitalized institution and are required to appoint a receiver or conservator if the capital deficiency is not corrected promptly. Examinations and Safety and Soundness. The FRB periodically examines and evaluates state-chartered member banks, such as First State Bank. Based upon such an evaluation, the FRB may revalue the assets of an insured institution and require that it establish specific reserves to compensate for the difference between the value determined by the regulator and the book value of such assets. The cost of conducting the examinations is assessed to the bank. The Division also conducts examinations of New Mexico state banks. The Division may accept the results of a federal examination in lieu of conducting independent examination. The federal regulators have adopted regulations and examination procedures promoting the safety and soundness of individual institutions by specifically addressing, among other things: (i) internal controls, information systems and internal audit systems; (ii) loan documentation; (iii) credit underwriting; (iv) interest rate exposure; (v) asset growth; (vi) ratio of classified assets to capital; (vii) minimum earnings and (viii) compensation and benefits standards for management officials. 34 The federal regulators have adopted uniform standards for evaluations of loans secured by real estate or made to finance improvements to real estate. First State Bank is required to establish and maintain written internal real estate lending policies consistent with safe and sound banking practices and appropriate to the size of the institution and the nature and scope of its operations. Deposit Insurance Premiums. The deposits of First State Bank are insured by the FDIC through the Bank Insurance Fund (the "BIF") to the extent provided by law. Under the FDIC's risk-based insurance system, BIF-insured institutions are currently assessed premiums of between zero and twenty seven cents per $100 of eligible deposits, depending upon the institution's capital position and other supervisory factors. Congress recently enacted legislation that, among other things, provides for assessments against BIF-insured institutions that will be used to pay certain Financing Corporation ("FICO") obligations. In addition to any BIF insurance assessments, BIF-insured banks are expected to make payments for the FICO obligations equal to an estimated $0.0129 per $100 of eligible deposits each year during 1997 through 1999 and an estimated $0.024 per $100 of eligible deposits thereafter. Brokered Deposit Restrictions. The FDIC has issued rules which prohibit undercapitalized institutions from soliciting or accepting brokered deposits. Adequately capitalized institutions may not solicit, accept or renew such deposits, unless a waiver is obtained from the FDIC. Community Reinvestment Act. The federal Community Reinvestment Act of 1977 ("CRA") has become increasingly important to financial institutions. Among other things, the CRA allows regulators to withhold approval of an acquisition or the establishment of a branch unless the applicant has performed satisfactorily under the CRA. Satisfactory performance means adequately meeting the credit needs of the communities the applicant serves, including low and moderate income areas. The applicable federal regulators now regularly conduct CRA examinations to assess the performance of financial institutions. First State Bank has received "satisfactory" ratings in its most recent CRA examination. Branching Acquisitions. Under New Mexico law, banks are permitted to conduct business through branches, after application to and approval of the Director of the Division, and after the Director makes certain findings regarding the financial history and condition of the bank, as well as the appropriateness of the branch in the community to be served. In addition the acquisition of New Mexico banks and bank holding companies by out-of-state banks, holding companies and other financial institutions is permitted under the New Mexico Interstate Bank Acquisition Act, under the conditions and upon receipt of the approvals set forth in the Act. Changing Regulatory Structure. The laws and regulations affecting banks and bank holding companies are continually being reviewed and revised. The rules and the regulatory agencies in this area have changed significantly over recent years and there is reason to expect that similar changes will continue in the future. It is difficult to predict the outcome of these changes. Enforcement Powers of the Federal and State Banking Agencies. The Federal Reserve Board and the other federal banking agencies have broad enforcement powers, including the power to terminate deposit insurance, impose substantial fines and other civil and criminal penalties and appoint a conservator or receiver. Failure to comply with applicable laws, regulations and supervisory agreements could subject the Company or its banking subsidiaries, as well as officers, directors and other institution-affiliated parties of these organizations, to administrative sanctions and potentially substantial civil money penalties. In addition to the grounds discussed under "Prompt Corrective Action," the appropriate federal banking agency may appoint the FDIC as conservator or receiver for a banking institution (or the FDIC may appoint itself, under certain circumstances) if any one or more of a number of circumstances exist, including, without limitation, the fact that the banking institution is under capitalized and has no reasonable prospect of becoming adequately capitalized; fails to become adequately capitalized when required to do so; fails to submit a timely and acceptable capital restoration plan; or materially fails to implement an accepted capital restoration plan. In addition, the Division possesses 35 certain enumerated enforcement powers to address violations of the New Mexico Banking Act by state-chartered banks and to preserve safety and soundness, including, in the most severe cases, the authority to take possession of a state bank. EFFECT ON ECONOMIC ENVIRONMENT The policies of regulatory authorities, including the monetary policy of the FRB, have a significant effect on the operating results of bank holding companies and their subsidiaries. Among the means available to the FRB to affect the money supply are open market operations in U.S. Government securities, changes in the discount rate on member bank borrowings and changes in reserve requirements against member bank deposits. These means are used in varying combinations to influence overall growth and distribution of bank loans, investments and deposits, and their use may affect interest rates charged on loans or paid for deposits. FRB monetary policies have materially affected the operating results of commercial banks in the past and are expected to continue to do so in the future. The nature of future monetary policies and the effect of such policies on the business and earnings of the Company cannot be predicted. 36 MANAGEMENT The table below states the names and ages of the directors and executive officers of the Company as well as the positions and offices they hold. A summary of the background and experience of each is given after the table. The Company's Board of Directors consists of nine directors divided into three classes of three directors each. The directors are elected by the stockholders of the Company for staggered three-year terms and hold office until their successors are elected and qualified. One class of directors is elected each year.
NAME AGE POSITION ---- --- -------- Michael R. Stanford(1).......... 44 President, Chief Executive Officer, and Director H. Patrick Dee.................. 42 Executive Vice President, Chief Operating Officer, Secretary/Treasurer and Director Brian C. Reinhardt.............. 38 Senior Vice President and Chief Financial Officer Eloy A. Jeantete(1)............. 69 Chairman of the Board and Director Leonard J. DeLayo, Jr.(3)....... 48 Director Bradford M. Johnson(1)(2)....... 46 Director Sherman McCorkle(1)(2).......... 53 Director Douglas M. Smith, M.D.(1)(2).... 63 Director Herman N. Wisenteiner(1)(3)..... 66 Director Manuel Lujan, Jr................ 68 Director
- -------- (1) Member of Executive Committee (2) Member of Audit Committee (3) Member of Compensation Committee Each officer of the Company serves at the discretion of the Board of Directors. There are no family relationships among any of the directors, officers or key employees of the Company. The current authorized number of directors of the Company is ten. Michael R. Stanford, a Director of the Company since its organization in 1988, is President and Chief Executive Officer of the Company and First State Bank. Mr. Stanford's entire career has been in the banking industry. Prior to joining First State Bank in 1987, Mr. Stanford spent five years with New Mexico Banquest Corporation as Senior Vice President in charge of loan administration. Mr. Stanford is a past director of the New Mexico Bankers Association. In addition, Mr. Stanford is involved in a variety of civic organizations. H. Patrick Dee has been a Director of the Company since 1991 and presently serves as Executive Vice President, Chief Operating Officer and Secretary/Treasurer of the Company, and Executive Vice President and Chief Operating Officer of First State Bank, a position he has held since December 1991. Prior to joining the Company, Mr. Dee spent four years with New Mexico Banquest Corporation and, after its acquisition by Livingston & Co. Southwest L.P. in 1988, with NBA. In 1989, Mr. Dee became Senior Vice President and Chief Financial Officer of Livingston & Co. Southwest, L.P. Mr. Dee is a certified public accountant. Brian C. Reinhardt, a Senior Vice President and Chief Financial Officer of the Company since 1995, joined First State Bank in September 1994. Prior to joining First State Bank, Mr. Reinhardt was a Senior Manager with KPMG Peat Marwick LLP. Mr. Reinhardt joined KPMG Peat Marwick LLP in 1984. Eloy A. Jeantete, a Director of the Company since August 1993 and Chairman of the Board since January 1994, joined the Bank 48 years ago as a bookkeeper and has spent his entire working career with the Bank, rising to his present position of Chairman of the Board of the Company. As a lifetime resident of Taos, Mr. Jeantete has accumulated a long list of civic achievements and community involvement, culminating with his election in 1990 as Mayor of Taos, a position he held until March 1994. Leonard J. DeLayo, Jr., a Director of the Company since November 1993, served as a director of First State Bank from 1988 to January 1992. Mr. DeLayo has been engaged in a general corporate and commercial law 37 practice in New Mexico since 1974 and is the President and sole shareholder of Leonard J. DeLayo, Jr., P.C., which currently provides legal services to the Company and the Bank as outside counsel. Mr. DeLayo is a member of the Albuquerque Board of Education. Bradford M. Johnson, a Director of the Company since November 1993, is President of Heron Hill Corporation, a private company engaged in investments and financial consulting. From 1991 to November 1993, Mr. Johnson was a partner and Director of Research of Sterne, Agee & Leach, Inc., an investment banking firm in Atlanta, Georgia. Mr. Johnson studied at the University de Paris-Sorbonne from 1987 to 1991. Mr. Johnson is a director of Community Bank Capital Corporation, a privately owned thrift holding company in Atlanta, Georgia. Sherman McCorkle, a Director of the Company since November 1993, is the President of Technology Ventures Corporation, a wholly owned subsidiary of Lockheed Martin, and has over 15 years of banking experience. Mr. McCorkle served as President and Chief Executive Officer of Sunwest Credit Services Corporation from December 1988 to April 1992. Prior to that time, Mr. McCorkle held a variety of positions with Sunwest Credit Services Corporation's parent, Sunwest Bank of Albuquerque, N.A. Mr. McCorkle was a past Chairman of the Greater Albuquerque Chamber of Commerce, a Board member of United Way, and a member of the American Bankers Association. Douglas M. Smith, M.D., a Director of the Company since November 1993, is a Board Certified radiologist and the owner/general partner of The Historic Taos Inn. Dr. Smith is the co-founder and former President of Palm Beach Imaging, Inc., West Palm Beach, Florida, and a former member of the Board of Directors of the PIE Medical Insurance Co., a physician-owned medical malpractice insurance company headquartered in Cleveland, Ohio. Herman N. Wisenteiner, a Director of the Company since November 1993, is President and Chief Executive Officer of Horn Distributing Company, a real estate holding company which he founded in 1971 in Santa Fe, New Mexico. In addition to his many civic activities in northern New Mexico, from 1984 to 1993 Mr. Wisenteiner was also Chairman and Chief Executive Officer of CLX Exploration Inc., a publicly traded oil and natural gas exploration and production company headquartered in Denver, Colorado, and served as a Director of First Interstate Bank, Santa Fe, from 1980 to 1993. Manuel Lujan, Jr., a Director of the Company since June 1995, is a self- employed consultant on federal legislative matters. Mr. Lujan is also a self- employed real estate agent and an insurance agent for the Manuel Lujan Insurance Agency. Mr. Lujan served as Secretary of the Interior during the Bush administration until January 1993. Prior to serving as Secretary of the Interior, Mr. Lujan was a member of the United States House of Representatives representing New Mexico. Committees. The Board of Directors has an Executive Committee, an Audit Committee and a Compensation Committee. All of the members of the Audit Committee and Compensation Committee are outside directors. 38 EXECUTIVE COMPENSATION. The following tables set forth the compensation paid by the Company to the two executive officers of the Company and one officer of First State Bank who received in excess of $100,000 in cash compensation.
LONG-TERM ANNUAL COMPENSATION COMPENSATION NAME AND --------------------------------- STOCK OPTIONS RINCIPAL POSITIONP YEAR SALARY ($) BONUS ($) OTHER ($)(1) GRANTED (#) - ------------------ ---- ---------- --------- ------------ ------------- Michael R. Stanford....... 1996 $183,333 $24,000 $41,621 0 President and Chief 1995 $175,000 $45,000 $42,636 0 Executive Officer 1994 $166,250 $37,500 $44,483 0 H. Patrick Dee............ 1996 $130,000 $16,000 $42,836 0 Secretary and 1995 $116,250 $30,000 $39,369 0 Treasurer 1994 $ 92,083 $22,500 $36,580 0 W. Gary Millhollon(2)..... 1996 $ 86,575 $20,830 $ 6,000 0 Senior Vice President First State Bank
- -------- (1) Represents insurance premiums paid by the Company on behalf of Messrs. Stanford and Dee in the amount of $35,000 and $30,000, respectively, per year, amounts contributed by the Company to Messrs. Stanford and Dee's Section 401(k) plan, and auto allowance and dues. (2) Mr. Millhollon was hired by First State Bank effective December 1995. AGGREGATE OPTION EXERCISES IN FISCAL YEAR AND FISCAL YEAR-END OPTIONS VALUE
NUMBER OF VALUE OF UNEXERCISED IN-THE-MONEY OPTIONS AT OPTIONS AT SHARES 12/31/96 (#) 12/31/96 ($)(1) ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/ NAME EXERCISE (#) REALIZED ($) UNEXERCISABLE UNEXERCISABLE ---- ------------ ------------ ------------- --------------- Michael R. Stanford..... 19,600 $124,754 100,113(2)(3) $830,629 12,000 $ 82,500 H. Patrick Dee.......... -- -- 35,000 $231,000 8,750 $ 57,750
- -------- (1) The closing price of the Company's Common Stock on December 31, 1996, was $15.00 per share. (2) On January 30, 1997, Mr. Stanford exercised options to acquire 21,500 shares of Common Stock at an exercise price of $5.01 per share. (3) Includes the option to purchase 28,613 shares of Common Stock described under "--Stock Option Agreement" below. EXECUTIVE INSURANCE First State Bank has key-person insurance policies on each of Messrs. Stanford and Dee. Under these policies, First State Bank is named as beneficiary of $810,000 of term life insurance on Mr. Stanford and $533,000 of term life insurance on Mr. Dee. In addition, First State Bank also pays the premiums on $690,000 of additional whole life insurance for Mr. Stanford and $667,000 for Mr. Dee under which each is able to name the beneficiary. Under the provisions of the term life policies the amount of term insurance under each policy is gradually decreased over 10 years. However, First State Bank's premium payments are kept level during the entire ten-year period with the excess premiums from the term life policies being applied to the whole life policies. As a result of the increasing portion of the premiums which are allocated to the whole life policies, at the end of the ten-year period the whole life policies are fully paid. Upon termination of employment, the whole life policies would be transferable to Messrs. Stanford or Dee, as the case may be, who could elect to continue making the premium payment if such termination occurred before the tenth year of the policy. The annual premium which will be paid for the whole life policies will constitute compensation to such individuals. 39 STOCK OPTION AGREEMENT Under the terms of a stock option agreement, Mr. Stanford can exercise an option to purchase 28,613 shares of Common Stock at a price of $5.01 per share. As originally granted, the option allowed Mr. Stanford to purchase up to 10 percent of the common stock of New Mexico Bank Corporation ("NMBC"), the parent holding company of NBA, at the book value of the NMBC common stock as of November 19, 1990. In December 1991, the option was converted to an option to purchase the Company's Common Stock when NMBC was merged into the Company. The option may be exercised at any time by Mr. Stanford and will expire on October 12, 2003. EXECUTIVE INCOME PROTECTION PLAN The Company has an Executive Income Protection Plan (the "Plan") with the following participants: Patrick G. Cahalan, Robert L. Chavez, H. Patrick Dee, Brian C. Reinhardt and Michael R. Stanford, which provides for benefits upon a Control Change (as defined in the Plan). Following a Control Change, the Plan provides for a three-year employment term and specifies the employee's position, salary, bonus, and benefits payable during that period. If the employee (i) resigns; (ii) is discharged for any reason other than cause, death or disability; or (iii) experiences a Reduction in Position (as defined in the Plan) within a three-year period beginning on the date of the Control Change, then the employee shall have income protection benefits consisting of (a) a compensation benefit, payable in a single sum, equal to three times his Compensation (as defined in the Plan) in the case of Messrs. Dee and Stanford and two times his Compensation in the case of Messrs. Cahalan, Chavez, and Reinhardt; (b) the same level of fringe benefits as existed on the date of the Control Change for a period ending three years after the Control Change including, without limitation, any plan or arrangement to receive and exercise stock options and/or stock appreciation rights, restricted stock or grants thereof in which the employee is participating on the date of the Control Change (or plans or arrangements providing him with substantially similar benefits); (c) an amount equal to the employee's non-vested accrued benefit in the Company's retirement plans, determined as of the last valuation date under such plans, if the employee is not fully vested under the terms of such plans; (d) up to a maximum of 30% of his Compensation for out-placement services for the employee; and (e) a lump-sum payment at the same time as the compensation payment described in (a) above, if the Company has purchased a split-dollar life insurance policy on the life of an employee. "Control Change" is defined in the Plan as (i) a sale or sales (including an exchange) of shares of the Company, other than pursuant to a public offering, at one or more times by the Company, a stockholder or stockholders of the Company, or any combination of the foregoing, which in the aggregate results in the beneficial ownership of more than 50% of the combined voting power of the Company's outstanding securities after the sale or sales by one or more stockholders who were not stockholders of the Company on April 19, 1996 (the effective date of the Plan), and who are not controlled after the sale or sales, directly or indirectly, by one or more of the stockholders of the Company on April 19, 1996; (ii) a sale or sales by the Company of all or substantially all of its assets to one or more persons or entities who were not stockholders of the Company on April 19, 1996, and who are not controlled after the sale or sales, directly or indirectly, by one or more of such stockholders; (iii) a merger or other combination in which the Company is either the surviving or disappearing corporation, which results in the beneficial ownership of more than 50% of the combined voting power of the outstanding securities of the surviving corporation by one or more persons or entities which were not stockholders of the Company on April 19, 1996, and which are not controlled after such merger or other combination, directly or indirectly, by one or more of such stockholders; (iv) the approval by the stockholders of the Company of any plan or proposal to liquidate or dissolve the Company; or (v) during any period of two consecutive years, individuals who at the beginning of the period constitute the entire Board of Directors of the Company cease for any reason to constitute a majority thereof, unless the election or the nomination for election by the Company's stockholders of each new director was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of the period. "Compensation" means the sum of (i) the employee's average taxable compensation from the Company; (ii) the employee's average elective salary reduction contributions to plans under Internal Revenue Code (the 40 "Code") Sections 401(k) and/or 125; and (iii) the product of the average percentage of covered payroll contributed by the Company to the Company's 401(k) profit sharing plan multiplied by the sum of (i) and (ii), in each case for the five calendar years preceding the Control Change. "Reduction in Position" shall occur if an employee (i) is removed as an officer or director; (ii) experiences a significant decrease in managerial or supervisory authority; (iii) experiences a reduction in salary or bonus; (iv) is required by the Company to relocate to an office more than 50 miles from his location before the Control Change; (v) is reduced in the rate of his awards under any stock option plan in effect before the Control Change; or (vi) experiences a material adverse change in his terms and conditions of employment. The Plan provides that the employees will be entitled to a gross-up payment if it is determined that any payment would be subject to the excise tax imposed by Section 4999 of the Code. The Plan also provides for the Company to pay the employee's legal fees incurred in any contest relating to the Plan and certain other indemnification to the extent permitted under applicable New Mexico or federal law and under the Company's Bylaws and the Articles. As of the date of this Prospectus, the aggregate cost to the Company (including the cost of early vesting under employee plans) under the Plan would not exceed $2.4 million in the event of a Control Change. COMPENSATION OF DIRECTORS Each director who is not an employee of the Company (the "Outside Directors") is paid an annual fee of $3,000 and a per-meeting fee of $500 and will be reimbursed for expenses incurred in attending meetings of the Board of Directors and the committee meetings of the Board of Directors. SECTION 401(K) PLAN In 1991, the Company adopted a tax-qualified profit sharing 401(k) plan (the "Saving Plan") covering all employees who have attained 18 years of age and have completed three months of service with the Company. Each participant in the Saving Plan may reduce his or her salary by as much as the lesser of 20% of his or her compensation or, in 1996, $9,500. The dollar limit is adjusted each year for inflation. The Company is required to make matching contributions of up to 50% of the first 6% of a participant's deferred compensation up to a maximum of 3%. The Company may, but is not required to, contribute additional amounts to the Saving Plan. Any such additional amounts are allocated to the accounts of participants who were active participants on the last day of the plan year or who retired or died or were disabled during the plan year. The allocation is in proportion to the eligible participants' compensation. During 1996, 1995 and 1994, First State Bank made contributions to the Saving Plan of $106,000, $70,000 and $53,000, respectively. All contributions by a participant are 100% vested and nonforfeitable at all times. The Company's contributions become 100% vested after three years of service with the Company. A participant may direct the investment of his or her account pursuant to the investment options offered by the trustee of the Saving Plan. Distribution of a participant's account under the Saving Plan normally occurs upon the participant's retirement or the participant's termination of employment with the Company. INCENTIVE PLANS The Company has adopted a Stock Option Plan (the "Stock Option Plan"). Under the Stock Option Plan, the Company has reserved an aggregate of 225,000 shares of Common Stock for issuance pursuant to the exercise of options. Options may be granted to key employees of the Company, including directors who are also employees of the Company, and to certain outside consultants. As of February 28, 1997, options to purchase 199,753 shares of Common Stock were outstanding under the Stock Option Plan. The Stock Option Plan is administered by a committee which is composed of disinterested members of the Board of Directors (the "Committee"). Subject to the terms of the Stock Option Plan, the Committee determines 41 the persons to whom awards are granted, the type of awards granted, the number of shares granted, the vesting schedule, the type of consideration to be paid to the Company upon exercise of options and the term of each option (not to exceed ten years). Under the Stock Option Plan, the Company may grant both incentive stock options ("incentive stock options") intended to qualify under Section 422 of the Code, and options which are not qualified as incentive stock options ("nonqualified stock options"). Incentive stock options must be granted at an exercise price equal to or greater than the fair market value of the Common Stock on the date of grant. The exercise price of nonqualified stock options granted under the Stock Option Plan will be determined by the Committee on the date of grant. The exercise price of incentive stock options granted to holders of more than 10% of the Common Stock must be at least 110% of the fair market value of the Common Stock on the date of grant, and the term of these options may not exceed five years. The Stock Option Plan provides that the total number of shares covered by the Stock Option Plan, the number of shares covered by each option and the exercise price per share may be proportionately adjusted by the Board of Directors or the Committee in the event of a stock split, reverse stock split, stock dividend or similar capital adjustment effected without receipt of consideration by the Company. Upon a change in control of the Company, stock options outstanding under the Stock Option Plan immediately become fully vested and exercisable. Also, in the event of a merger or consolidation in which the Company is not the surviving corporation, the sale of all or substantially all of the Company's assets, certain reorganizations or the liquidation of the Company, each option granted under the Stock Option Plan may, at the election of the holder, become immediately exercisable. INDEMNIFICATION The Company's Bylaws provide that the Company will indemnify all directors, officers and employees of the Company to the fullest extent now permitted by the New Mexico Business Corporation Act (the "NMBCA"). Under these provisions any director, officer or employee who is made a party to any suit or proceeding will be indemnified if (i) such person acted in good faith and in a manner he reasonably believed to be in the best interests of the Company, (ii) with respect to any criminal proceeding, had no reasonable cause to believe his conduct was unlawful and (iii) in all other cases, that his conduct was at least not opposed to the best interests of the Company. The NMBCA further provides that such indemnification is not exclusive of any other rights to which such individuals may be entitled under the Articles of Incorporation, the Bylaws, an agreement, a resolution of stockholders or directors or otherwise that are not inconsistent with the NMBCA. Pursuant to the Bylaws and the NMBCA, the Company cannot indemnify a director in connection with a proceeding by or in the right of the Company in which the director was adjudged liable to the Company, or in connection with any other proceeding charging improper personal benefit to the director, whether or not involving action in his official capacity, in which he is adjudged liable on the basis that personal benefit was improperly received by him. In addition, the Company's Articles provide that to the fullest extent now or hereafter permitted by New Mexico law, the Company's directors will not be liable to the Company or its stockholders for monetary damages for breach of their fiduciary duties as directors unless any such director has breached or failed to perform the duties of the director's office in compliance with Subsection 43-11-35(B) of the NMBCA (duty of care) and the breach or failure to perform constitutes negligence, willful misconduct or recklessness in the case of a director who has either an ownership interest in the Company or receives compensation of more than $2,000 from the Company in any calendar year, or willful misconduct or recklessness in the case of a director who does not have an ownership interest in the Company and does not receive compensation of more than $2,000 in any calendar year. Each director will continue to be subject to liability for breach of the director's duty of loyalty to the Company and its stockholders, for acts or omissions not undertaken in good faith or involving intentional misconduct or knowing violations of law, for liability arising under Section 53-11-46 of the NMBCA (relating to the unlawful payment of distributions, and purchase or redemption of the Company's stock) or for any transaction from which the director derived an improper personal benefit. This provision also does not affect a 42 director's responsibilities under any other laws, such as federal securities laws or state or federal environmental laws. There is no pending litigation or proceeding involving a director, officer, employee or other agent of the Company as to which indemnification is being sought. The Company is not aware of any other threatened litigation that may result in claims for indemnification by any director, officer, employee or other agent. The Company maintains directors and officers liability insurance. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information regarding beneficial ownership of the Company's Common Stock as of March 31, 1997, by (i) each stockholder known by the Company to be the beneficial owner of more than 5% of the outstanding Common Stock, (ii) each director of the Company, and (iii) all directors and executive officers as a group. Unless otherwise indicated, based on information furnished by such owners, the Company believes that the stockholders listed below have sole investment and voting power with respect to their shares. Unless otherwise indicated, the address of such person is the Company's address, 111 Lomas Avenue N.W., Albuquerque, New Mexico 87102.
NUMBER OF PERCENTAGE OF NAME SHARES OWNED (1) SHARES OWNED - ---- ---------------- ------------- Richard L. Duchossois........................ 112,500 5.12% 845 Larch Avenue Elmhurst, IL 60126 John Hancock Advisors, Inc................... 170,125 7.74% 101 Humington Avenue Boston, MA 02199 Michael R. Stanford.......................... 112,772(2)(3) 4.95% H. Patrick Dee............................... 42,855(2)(4) 1.92% Eloy A. Jeantete............................. 1,000 0.05% Leonard J. DeLayo, Jr........................ 98,089(2)(5) 4.41% Bradford M. Johnson.......................... 164,009(2) 7.43% Sherman McCorkle............................. 1,051 0.05% Douglas M. Smith, M.D........................ 23,750 1.08% Herman N. Wisenteiner........................ 9,454(2) 0.43% Manuel Lujan, Jr............................. 10,625 0.48% All executive officers and directors as a group (13 persons).......................... 503,018 21.16%
- -------- (1) Includes shares of Common Stock issuable on conversion of 7% Debentures. (2) Includes shares of Common Stock that were acquired as a result of the individuals' sale of shares of the Santa Fe Bank to the Company. (3) Includes 28,613 shares which may be acquired within 60 days pursuant to outstanding stock options at an exercise price of $5.01 per share and 50,000 shares which may be acquired within 60 days pursuant to outstanding stock options at an exercise price of $8.40 per share. (4) Includes 35,000 shares which may be acquired within 60 days pursuant to outstanding stock options at an exercise price of $8.40 per share. (5) Includes 10,000 shares which may be acquired within 60 days pursuant to outstanding stock options at an exercise price of $8.40 per share. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Credit Transactions. The executive officers, directors and principal stockholders of the Company and First State Bank, and members of their immediate families and businesses in which these individuals hold controlling interests, are customers of First State Bank and it is anticipated that such parties will continue to be customers of 43 First State Bank in the future. Credit transactions with these parties are subject to review by First State Bank's Board of Directors. All outstanding loans and extensions of credit by First State Bank to these parties were made in the ordinary course of business on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons, and in the opinion of management did not involve more than the normal risk of collectability or present other unfavorable features. At December 31, 1996, the aggregate balance of First State Bank's loans and advances under existing lines of credit to these parties was approximately $1.9 million, or 0.78% of First State Bank's total loans. All payments of principal and interest on these loans are current. These loans represented 9.24% of the Company's equity as of December 31, 1996. Legal Services. Mr. DeLayo was a director of First State Bank from 1988 through January 1992, was a director of the Santa Fe Bank from March 1993 to June 1994 and was appointed as a director of the Company in November 1993. Mr. DeLayo acts as general counsel to the Company and First State Bank. Mr. DeLayo and his firm, Leonard J. DeLayo, P.C., are involved in representing the Company in numerous collection matters. The Company paid Mr. DeLayo's firm approximately $146,000, $187,000 and $161,000 for its services in 1996, 1995 and 1994. Santa Fe Branch Location. The Downtown Santa Fe location was constructed on land owned by Herman Wisenteiner, a Director of the Company. The Company is leasing the site from Mr. Wisenteiner for an initial term of 15 years (beginning December 1995) at an initial rate of $60,000 per year. In the opinion of management, the lease is on terms similar to other third-party commercial transactions in the ordinary course of business. DESCRIPTION OF THE DEBENTURES The Debentures are to be issued under an Indenture, dated as of , 1997 (the "Indenture"), between the Company and First Trust National Association, as Trustee (the "Trustee"), a copy of which is filed as an exhibit to the Registration Statement. The following summaries of certain provisions of the Indenture do not purport to be complete and are subject to, and are qualified in their entirety by reference to, all the provisions of the Indenture, including the definitions therein of certain terms. Wherever particular sections or defined terms of the Indenture are referred to, such sections or defined terms are incorporated herein by reference. GENERAL The Debentures will be unsecured subordinated obligations of the Company, will be limited to an aggregate principal amount of $13,800,000 (including $1,800,000 subject to the Underwriters' over-allotment option) and will mature on . The Debentures will bear interest at the rate per annum shown on the front cover of this Prospectus from , 1997 or from the most recent Interest Payment Date on which interest has been paid or provided for, payable semi-annually on and of each year, commencing , 1997, to the Person in whose name such Debenture (or any predecessor Debenture) is registered at the close of business on the Regular Record Date for such interest payment, which shall be the or (whether or not a Business Day), as the case may be, next preceding such Interest Payment Date. (Sections 301 and 307) Principal of and premium, if any, and interest on the Debentures will be payable, and the transfer of Debentures will be registrable, and the Debentures may be presented for exchange or conversion at the offices of the Trustee in the City of , or at such other office designated by the Company. (Sections 301, 305 and 1002) The Debentures will be issued only in fully registered form, without coupons, in denominations of $1,000 and integral multiples thereof. (Section 302) No service charge will be made for any registration of transfer or exchange of Debentures, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith. (Section 305) Because the Company is a holding company, its rights and the rights of its creditors, including the Holders of the Debentures, to participate in the assets of any Subsidiary upon the latter's liquidation or recapitalization 44 will be subject to the prior claims of the Subsidiary's creditors (including, in the case of the Bank, its depositors), except to the extent that the Company may itself be a creditor with recognized claims against the Subsidiary. See also "The Company" and "Regulation and Supervision." The Indenture does not contain any provisions that would provide protection to Holders of the Debentures against a sudden and dramatic decline in credit quality of the Company resulting from any takeover, recapitalization or similar restructuring. A holder of 25% or more of the outstanding Common Stock (5% or more if such holder otherwise exercises a "controlling influence" over the Company) may be subject to regulation as a "bank holding company" in accordance with the BHCA. In addition, (i) any bank holding company or foreign bank with a U.S. presence may be required to obtain the approval of the FRB under the BHCA to acquire or retain 5% or more of the outstanding Common Stock and (ii) any person other than a bank holding company may be required to obtain the approval of the FRB under the Change in Bank Control Act to acquire or retain 10% or more of the outstanding Common Stock. For purposes of the BHCA, Holders of the Debentures may be deemed to be holders of the underlying shares of Common Stock. SUBORDINATION OF DEBENTURES The payment of the principal of and premium, if any, and interest on the Debentures will, to the extent set forth in the Indenture, be subordinated in right of payment to the prior payment in full of all Senior Indebtedness (as defined in the Indenture). In certain events of insolvency, the payment of the principal of and premium and interest on the Debentures will, to the extent set forth in the Indenture, also be effectively subordinated in right of payment to the prior payment in full of all Other Financial Obligations. Upon any payment or distribution of assets to creditors upon any liquidation, dissolution, winding up, reorganization, assignment for the benefit of creditors, marshalling of assets or any bankruptcy, insolvency or similar proceedings of the Company, the holders of all Senior Indebtedness will first be entitled to receive payment in full of all amounts due or to become due thereon before the Holders of the Debentures will be entitled to receive any payment in respect of the principal of or premium or interest on the Debentures. If upon any such payment or distribution of assets to creditors, there remain, after giving effect to such subordination provisions in favor of the holders of Senior Indebtedness, any amounts of cash, property or securities available for payment or distribution in respect of the Debentures (as defined in the Indenture, "Excess Proceeds") and if, at such time, any Entitled Persons in respect of Other Financial Obligations have not received payment in full in respect of all amounts due or to become due on or in respect of such Other Financial Obligations, then such Excess Proceeds first shall be applied to pay or provide for the payment in full of such Other Financial Obligations before any payment or distribution may be made in respect of the Debentures. In the event of the acceleration of the maturity of the Debentures, the holders of all Senior Indebtedness first will be entitled to receive payment in full of all amounts due thereon before the Holders of the Debentures will be entitled to receive any payment upon the principal of or premium or interest on the Debentures. No payments on account of principal of or interest on the Debentures or on account of the purchase or acquisition of the Debentures may be made if there shall have occurred and be continuing a default in any payment with respect to Senior Indebtedness or if any judicial proceeding shall be pending with respect to any such default. (Article Twelve) By reason of such subordination in favor of the holders of Senior Indebtedness, in the event of insolvency, creditors of the Company who are not holders of Senior Indebtedness or of the Debentures may recover less, ratably, than holders of Senior Indebtedness and may recover more, ratably, than the Holders of the Debentures. The Company's obligations under the Debentures shall rank pari passu in right of payment with each other. The Indenture does not limit or prohibit the incurrence of additional Senior Indebtedness, which may include indebtedness that is senior to the Debentures, but subordinate to other obligations of the Company, including obligations of the Company in respect of Other Financial Obligations. 45 CONVERSION RIGHTS The Debentures will be convertible, at the option of the Holder, into Common Stock of the Company at any time prior to the maturity date (subject to prior redemption by the Company on not less than 30 days' notice and not more than 60 days' notice), initially at the conversion price stated on the cover page hereof. The right to convert Debentures called for redemption will terminate at the close of business on the Redemption Date and will be lost if not exercised prior to that time. (Section 1301) For information as to notices of redemption, see "Optional Redemption" below. The conversion price will be subject to adjustment in certain events, including (i) dividends (and other distributions) payable in Common Stock on any class of capital stock of the Company, (ii) the issuance to all holders of Common Stock of rights or warrants entitling them to subscribe for or purchase Common Stock at less than the current market price (as defined), (iii) subdivisions, combinations and reclassifications of Common Stock, (iv) distributions to all holders of Common Stock of evidences of indebtedness of the Company or assets (including securities, but excluding those dividends, rights, warrants and distributions referred to above and any dividend or distribution paid exclusively in cash), (v) distributions consisting exclusively of cash (excluding any cash distributions referred to in (iv) above) to all holders of Common Stock in aggregate amount that, together with (A) other all-cash distributions made within the preceding 12 months and (B) any cash and the fair market value of other consideration payable in respect of any tender offer by the Company or a Subsidiary for the Company's Common Stock concluded within the preceding 12 months, exceeds 12.5% of the Company's market capitalization (being the product of the current market price (as defined) of the Common Stock times the number of shares of Common Stock then outstanding) on the date fixed for determination of stockholders entitled to receive such distribution and (vi) the successful completion of a tender offer made by the Company or any Subsidiary for the Company's Common Stock which involves an aggregate consideration that, together with (A) any cash and other consideration payable in respect of any tender offer by the Company or a Subsidiary for the Company's Common Stock expiring within the 12 months preceding the expiration of such tender offer and (B) the aggregate amount of any all-cash distributions to all holders of the Company's Common Stock within the 12 months preceding the expiration of such tender offer, exceeds 12.5% of the Company's market capitalization on the expiration of such tender offer. Generally no adjustments to the conversion price will be required to be made until cumulative adjustments amount to 1% or more of the conversion price as last adjusted. (Section 1304) In the event that the Company shall distribute rights or warrants (other than those referred to in (ii) in the preceding paragraph) pro rata to holders of Common Stock, the Holder of any Debenture surrendered for conversion will be entitled to receive upon such conversion in addition to the shares of Common Stock issuable upon such conversion (the "Conversion Shares"), a number of rights or warrants to be determined as follows: (i) if such conversion occurs on or prior to the date for the distribution to the holders of rights or warrants of separate certificates evidencing such rights or warrants (the "Distribution Date"), the same number of rights or warrants to which a holder of a number of shares of Common Stock equal to the number of Conversion Shares is entitled at the time of such conversion in accordance with the terms and provisions of and applicable to the rights or warrants, and (ii) if such conversion occurs after such Distribution Date, the same number of rights or warrants to which a holder of the number of shares of Common Stock into which such Debenture was convertible immediately prior to such Distribution Date would have been entitled on such Distribution Date in accordance with the terms and provisions of and applicable to the rights or warrants. (Section 1304) In addition to the foregoing adjustments, the Company will be permitted to make such reductions in the conversion price as it considers to be advisable in order that any event treated for Federal income tax purposes as a dividend of stock or stock rights will not be taxable to the holders of the Common Stock. (Section 1304) In case of certain consolidations or mergers to which the Company is a party or the transfer of substantially all of the assets of the Company, each Debenture then outstanding would, without the consent of any Holders of Debentures, become convertible only into the kind and amount of securities, cash and other property receivable upon the consolidation, merger or transfer by a holder of the number of shares of Common Stock into which such Debenture might have been converted immediately prior to such consolidation, merger or transfer (assuming 46 such holder of Common Stock failed to exercise any rights of election and received per share the kind and amount received per share by a plurality of non-electing shares). (Section 1311) Fractional shares of Common Stock are not to be issued upon conversion, but, in lieu thereof, the Company will pay a cash adjustment based upon the market price of the Common Stock. (Section 1303) Debentures surrendered for conversion during the period from the close of business on any Regular Record Date next preceding any Interest Payment Date to the opening of business on such Interest Payment Date (except Debentures called for redemption on a Redemption Date within such period) must be accompanied by payment of an amount equal to the interest thereon which the registered Holder is to receive. In the case of any Debenture which has been converted after any Regular Record Date but on or before the next Interest Payment Date (except Debentures called for redemption on a Redemption Date within such period), interest whose Stated Maturity is on such Interest Payment Date shall be payable on such Interest Payment Date notwithstanding such conversion, and such interest shall be paid to the Holder of such Debenture on such Regular Record Date. Except as described above, no interest on converted Debentures will be payable by the Company on any Interest Payment Date subsequent to the date of conversion. No other payment or adjustment for interest or dividends is to be made upon conversion. (Sections 307 and 1302) If at any time the Company makes a distribution of property to its stockholders which would be taxable to such stockholders as a dividend for Federal income tax purposes (e.g., distributions of evidences of indebtedness or assets of the Company, but generally not stock dividends or rights to subscribe for Common Stock) and, pursuant to the antidilution provisions of the Indenture, the conversion price of the Debentures is reduced, such reduction may be deemed to be the payment of a taxable dividend to Holders of Debentures. Holders of Debentures could, therefore, have taxable income as a result of an event pursuant to which they received no cash or property that could be used to pay the related income tax. OPTIONAL REDEMPTION The Debentures are to be redeemable at the election of the Company, in whole or in part, from time to time, upon not less than 30 nor more than 60 days' notice mailed to each Holder of Debentures to be redeemed at his address appearing in the Security Register, on any date on or after , 2001, and prior to maturity at the following Redemption Prices (expressed as percentages of principal amount) plus accrued interest to the Redemption Date (subject to the right of Holders of record on the relevant Regular Record Date to receive interest due on an Interest Payment Date that is on or prior to the Redemption Date): If redeemed during the 12-month period beginning ,
REDEMPTION REDEMPTION --------------------------- ------------------------------------------------- YEAR PRICE YEAR PRICE ----- ------ ---- -----
and thereafter at 100% of principal amount. (Sections 203, 1101, 1105, and 1107) Notwithstanding the foregoing, the Debentures may be redeemed at the option of the Company, in whole or in part, at any time before , 2001, without any premium if the closing sale price of the Common Stock for at least 30 consecutive trading days equals or exceeds 140% of the conversion price then in effect. No sinking fund is provided for the Debentures. EVENTS OF DEFAULT AND DEFAULTS The Indenture defines an Event of Default with respect to the Debentures as being certain events involving the bankruptcy, insolvency or reorganization of the Company. (Section 501) If any Event of Default with respect to the Debentures at the time Outstanding occurs and is continuing, either the Trustee or the Holders of not less than 25% in principal amount of the Outstanding Debentures may declare the principal amount of the Debentures to be due and payable immediately (provided that no such declaration is required upon certain events of 47 bankruptcy), but upon certain conditions such declaration may be annulled and past defaults (except, unless theretofore cured, a default in payment of principal of (or premium, if any), or interest on the Debentures and certain other specified defaults) may be waived by the Holders of a majority in principal amount of the Outstanding Debentures on behalf of the Holders of all Debentures. (Sections 502 and 513) The Indenture does not provide for any right of acceleration of the payment of principal of the Debentures upon a default in the payment of principal or interest or in the performance of any covenant or agreement in the Debentures or in the Indenture. The Indenture defines a Default with respect to the Debentures as any one of the following events: (A) an Event of Default; (B) default for 30 days in payment of interest on any Debenture; (C) default in payment of principal of (or premium, if any), on any Debenture at Maturity; (D) failure by the Company for 60 days after due notice in performance or the breach of any covenant or warranty in the Indenture or any Debenture; and (E) (i) failure by the Company or the Bank to pay indebtedness for money borrowed (including the Debentures) in an aggregate principal amount exceeding $500,000 at the later of final maturity or upon the expiration of any applicable period of grace with respect to such principal amount; (ii) acceleration of the maturity of any indebtedness of the Company or the Bank for borrowed money in excess of $500,000, if such failure to pay or acceleration results from a default under the instrument giving rise to, or securing, such indebtedness and is not annulled within 30 days after due notice, unless such default is contested in good faith by appropriate proceedings. In case a Default shall occur and be continuing, the Trustee may in its discretion proceed to protect and enforce its rights and the rights of the Holders by appropriate judicial proceeding as the Trustee deems most effectual. (Section 503) The Indenture provides that the Trustee will, within 90 days after the occurrence of a default with respect to the Debentures at the time Outstanding, give to the Holders of the Outstanding Debentures notice of such default known to it if uncured or not waived, provided that, except in the case of default in the payment of principal of (or premium, if any), or interest on any Debenture, the Trustee will be protected in withholding such notice if the Trustee in good faith determines that the withholding of such notice is in the interest of the Holders of the Outstanding Debentures; and, provided further, that such notice shall not be given until 60 days after the occurrence of a default with respect to the Debentures in the performance or breach of a covenant in the Indenture other than for the payment of the principal of (or premium, if any), or interest on any Debentures of such series. The term "default" with respect to the Debentures for the purpose only of the provision described in this paragraph means the happening of any of the Events of Default or Defaults. (Section 602) The Indenture provides that, subject to the duty of the Trustee during default to act with the required standard of care, the Trustee will not be under an obligation to exercise any of its rights or powers under the Indenture at the request or direction of any of the Holders, unless such Holders shall have offered to the Trustee reasonable security or indemnity. (Sections 601 and 603) The Indenture provides that the Holders of a majority in principal amount of Outstanding Debentures may direct the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or other power conferred on the Trustee, provided that the Trustee may decline to act if such direction is contrary to law or the Indenture and may take any other action deemed proper which is not inconsistent with such directions. (Section 512) The Indenture includes a covenant that the Company will file annually with the Trustee a certificate of no default, or specifying any default that exists. (Section 1004) MODIFICATION OF THE INDENTURE Modifications to and amendments of the Indenture may be made by the Company and the Trustee, only with the consent of the Holders of 66 2/3% in aggregate principal amount of the Outstanding Debentures, by executing supplemental indentures adding any provisions to or changing or eliminating any of the provisions of the Indenture or modifying the rights of the Holders of Debentures, except that no such supplemental indenture may, (a) change the Stated Maturity of the principal of, or any installment of interest on, any Debenture; (b) reduce the principal amount of, or any premium or the rate of interest on, any Debenture; (c) change the place or currency of payment of principal of (or premium, if any) or interest on, any Debenture; (d) impair the 48 right to institute suit for the enforcement of any payment on or with respect to any Debenture; (e) reduce the percentage in principal amount of Debentures, the consent of the Holders of which is required for modification or amendment of the Indenture, for waiver of compliance with certain provisions of the Indenture or for waiver of certain covenant defaults; (f) modify the provisions of the Indenture relating to modification and amendment of the Indenture; (g) adversely affect the right to convert Debentures or (h) modify the subordination provisions in a manner adverse to the Holders of Debentures. The Indenture provides, however, that each of the amendments and modifications listed in clauses (a) through (h) above may be made with the consent of the Holder of each Outstanding Debenture affected thereby. (Sections 901, 902 and 907) The Holders of 66 2/3% in aggregate principal amount of the Outstanding Debentures may waive compliance by the Company with certain restrictive provisions of the Indenture. (Section 1007) The Holders of a majority in aggregate principal amount of the Outstanding Debentures may waive any past default under the Indenture, except a default in the payment of principal, premium or interest. (Section 513) CONSOLIDATION, MERGER AND SALE OF ASSETS The Company, without the consent of the Holders of any of the Debentures, may consolidate with or merge into any other Person or convey, transfer or lease its assets substantially as an entirety to any Person, or permit any Person to consolidate with or merge into the Company or convey, transfer or lease the properties substantially as an entirety to the Company, provided that, (i) if applicable, the successor is a Person, organized under the laws of any domestic jurisdiction; (ii) the successor Person, if other than the Company, assumes the Company's obligations on the Debentures and under the Indenture; (iii) after giving effect to the transaction no Event of Default or Default, and no event which, after notice or lapse of time, would become an Event of Default or Default shall have occurred and be continuing; and (iv) certain other conditions are met. (Section 801) Upon any consolidation or merger into any other Person or any conveyance, transfer or lease of the Company's assets substantially as an entirety to any Person, the successor Person shall succeed to, and be substituted for, the Company under the Indenture, and the Company, except in the case of a lease, shall be relieved of all obligations and covenants under the Indenture and the Debentures to the extent it was the predecessor Person. OUTSTANDING DEBENTURES The Indenture provides that, in determining whether the Holders of the requisite principal amount of Outstanding Debentures have given any request, demand, authorization, direction, notice, consent or waiver under the Indenture. Debentures owned by the Company or any of its Affiliates shall not be deemed to be Outstanding. (Section 101) CONCERNING THE TRUSTEE In the ordinary course of business, the Company may maintain deposits with, and from time to time may borrow from, the Trustee. REPORTS TO HOLDERS The Company intends to furnish to Holders of Debentures all quarterly and annual reports which it sends to holders of its Common Stock. BOOK-ENTRY The Debentures will be issued in the form of the Global Debenture deposited with, or on behalf of, DTC and registered in the name of Cede & Co. as DTC's partnership nominee. Owners of beneficial interests in the Debentures represented by the Global Debenture will hold such interests pursuant to the procedures and practices of DTC and must exercise any rights in respect of their interests (including any right to convert) in accordance with those procedures and practices. Such beneficial owners will not be Holders, and will not be entitled to any 49 rights under the Global Debenture or the Indenture, with respect to the Global Debenture, and the Company and the Trustee, and any of their respective agents, may treat DTC as the sole Holder and owner of the Global Debenture. The laws of some jurisdictions require that certain purchasers of securities take physical delivery of securities in definitive form. Such laws may impair the ability to transfer beneficial interests in the Debentures represented by a Global Debenture. DTC is a limited-purpose trust company organized under the New York Banking Law, a "banking organization" within the meaning of the New York Banking Law, a member of the Federal Reserve System, a "clearing corporation" within the meaning of the New York Uniform Commercial Code and a "clearing agency" registered pursuant to the provisions of Section 17A of the Exchange Act. DTC holds securities that its participants ("Participants") deposit with DTC. DTC also facilitates the settlement among Participants of securities transactions, such as transfers and pledges, in deposited securities through electronic computerized book-entry changes in Participants' accounts, thereby eliminating the need for physical movement of securities certificates. Direct Participants include securities brokers and dealers, banks, trust companies, clearing corporations and certain other organizations ("Direct Participants"). DTC is owned by a number of its Direct Participants and by the New York Stock Exchange, the American Stock Exchange and the National Association of Securities Dealers, Inc. Access to the DTC system is also available to others such as securities brokers and dealers, banks and trust companies that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly ("Indirect Participants"). The rules applicable to DTC and its participants are on file with the Commission. Purchases of Debentures under the DTC system must be made by or through Direct Participants, which will receive a credit for the Debentures on DTC's records. The ownership interest of each actual purchaser of Debentures ("Beneficial Owner") is in turn to be recorded on the Direct or Indirect Participant's records. Beneficial Owners will not receive written confirmation from DTC of their purchases, but Beneficial Owners are expected to receive written confirmations providing details of the transactions, as well as periodic statements of their holdings, from the Direct or Indirect Participants through which the Beneficial Owners entered into the transaction. Transfers of ownership interests in the Debentures are to be accomplished by entries made on the books of Participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive certificates representing their ownership interests in the Debentures, except in the event that the use of the book-entry system for the Debentures is discontinued. To facilitate subsequent transfers, all Debentures deposited by Participants with DTC are registered in the name of DTC's partnership nominee, Cede & Co. The deposit of Debentures with DTC and their registration in the name of Cede & Co. effect no change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the Debentures; DTC's records reflect only the identity of the Direct Participants to whose accounts such Debentures are credited, which may or may not be the Beneficial Owners. The Participants will remain responsible for keeping account of their holdings on behalf of their customers. Conveyance of notices and other communications by DTC to Direct Participants, by Direct Participants to Indirect Participants and by Direct Participants and Indirect Participants to Beneficial Owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time. Redemption notices with respect to the Debentures shall be sent to Cede & Co. If less than all of the Debentures are being redeemed, DTC's practice is to determine by lot the amount of the interest of each Direct Participant in such securities to be redeemed. Neither DTC nor Cede & Co. will consent or vote with respect to the Debentures. Under its usual procedures, DTC mails an "Omnibus Proxy" to the Company as soon as possible after the record date. The Omnibus Proxy assigns Cede & Co.'s consenting or voting rights to those Direct Participants to whose accounts the Debentures are credited on the record date (identified in a listing attached to the Omnibus Proxy). 50 Principal, premium, if any, and interest payments on the Debentures will be made to DTC. DTC's practice is to credit Direct Participants' accounts on the relevant payment date in accordance with their respective holdings shown on DTC's records unless DTC has reason to believe that it will not receive payments on such payable date. Payments by Participants to Beneficial Owners will be governed by standing instructions and customary practices, as is the case with securities held for the account of customers in bearer form or registered in "street name," and will be the responsibility of such Participant and not of DTC or the Company, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of principal, premium, if any, and interest to DTC is the responsibility of the Company, disbursement of such payments to Direct Participants is the responsibility of DTC and disbursement of such payments to the Beneficial Owners is the responsibility of Direct and Indirect Participants. A Beneficial Owner shall give notice to elect to have its Debentures purchased or tendered, through its Participant, to the Trustee, and shall effect delivery of such Debentures by causing the Direct Participant to transfer the Participant's interest in the Global Debenture representing such Debentures, on DTC's records, to the Trustee. The requirement for physical delivery of tender or a mandatory purchase will be deemed satisfied when the Debentures in connection with a demand for repayment, an optional ownership rights in the Global Debenture representing such Debentures are transferred by Direct Participants on DTC's records and followed by a book-entry credit of tendered Debentures to the Trustee's account. Except as provided herein, a Beneficial Owner in a Global Debenture will not be entitled to receive physical delivery of Debentures. Accordingly, each Beneficial Owner must rely on the procedures of DTC to exercise any rights under the Debentures. DTC may discontinue providing its services as securities depositary with respect to the Debentures at any time by giving reasonable notice to the Company. Under such circumstances, in the event that a successor securities depositary is not obtained, certificates representing the Debentures will be printed and delivered. If the Company decides to discontinue use of the system of book-entry transfers through DTC (or a successor depositary), certificates representing the Debentures will be printed and delivered. The information in this section concerning DTC and DTC's book-entry system has been obtained from sources that the Company believes to be reliable, but the Company takes no responsibility for the accuracy thereof. CERTAIN DEFINITIONS Set forth below is a summary of certain of the defined terms used in the Indenture. Reference is made to the Indenture for the full definition of all such terms, as well as any other terms used herein for which no definition is provided. "Affiliate" means, with respect to any specified Person, any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. The term "control" when used with respect to any specified Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "Business Day" means each Monday, Tuesday, Wednesday, Thursday and Friday which is not a day on which (i) national banking associations in the State of Minnesota or (ii) banking institutions in Albuquerque, New Mexico are authorized or obligated by law or executive order to close. "Holder" means a Person in whose name a Debenture is registered in the Security Register. "Interest Payment Date" means the Stated Maturity of an instalment of interest on the Debentures. 51 "Maturity," when used with respect to any Debenture, means the date on which the principal of such Debenture becomes due and payable as provided in such Debenture or in the Indenture, whether at the Stated Maturity or by declaration of acceleration, call for redemption or otherwise. "Other Financial Obligations" means all obligations of the Company to make payments pursuant to the terms of financial instruments, such as (i) securities contracts and foreign currency exchange contracts, (ii) derivative instruments, such as swap agreements (including interest rate and foreign exchange rate swap agreements), cap agreements, floor agreements, collar agreements, interest rate agreements, foreign exchange rate agreements, options, commodity futures contracts, commodity options contracts and (iii) in the case of both (i) and (ii) above, similar financial instruments, other than (A) obligations on account of Senior Indebtedness and (B) obligations on account of indebtedness for money borrowed ranking pari passu with or subordinate to the Debentures. "Entitled Persons" means any person who is entitled to payment pursuant to the terms of Other Financial Obligations. "Outstanding," when used with respect to Debentures, means, as of the date of determination, all Debentures theretofore authenticated and delivered under the Indenture, except: (i) Debentures theretofore cancelled by the Trustee or delivered to the Trustee for cancellation; (ii) Debentures for whose payment or redemption money in the necessary amount has been theretofore deposited with the Trustee or any Paying Agent (other than the Company) in trust or set aside and segregated in trust by the Company (if the Company shall act as its own Paying Agent) for the Holders of such Debentures; provided that, if such Debentures are to be redeemed, notice of such redemption has been duly given pursuant to the Indenture or provision therefor satisfactory to the Trustee has been made; and (iii) Debentures which have been paid pursuant to Section 306 of the Indenture or in exchange for or in lieu of which other Debentures have been authenticated and delivered pursuant to the Indenture, other than any such Debentures in respect of which there shall have been presented to the Trustee proof satisfactory to it that such Debentures are held by a bona fide purchaser in whose hands such Debentures are valid obligations of the Company; provided, however, that in determining whether the Holders of the requisite principal amount of the Outstanding Debentures have given any request, demand, authorization, direction, notice, consent or waiver under the Indenture, Debentures owned by the Company or any other obligor upon the Debentures or any Affiliate of the Company or of such other obligor shall be disregarded and deemed not to be Outstanding, except that, in determining whether the Trustee shall be protected in relying upon any such request, demand, authorization, direction, notice, consent or waiver, only Debentures which the Trustee knows to be so owned shall be so disregarded. Debentures so owned which have been pledged in good faith may be regarded as Outstanding if the pledgee establishes to the satisfaction of the Trustee the pledgee's right so to act with respect to such Debentures and that the pledgee is not the Company or any other obligor upon the Debentures or any Affiliate of the Company or of such other obligor. "Paying Agent" means any Person authorized by the Company to pay the principal of (and premium, if any) or interest on any Debentures on behalf of the Company. "Person" means any individual, corporation, partnership, joint venture, trust, unincorporated organization or government or any agency or political subdivision thereof. "Redemption Date," when used with respect to any Debenture to be redeemed, means the date fixed for such redemption by or pursuant to the Indenture. "Regular Record Date" for the interest payable on any Interest Payment Date means the or (whether or not a Business Day), as the case may be, next preceding such Interest Payment Date. "Security Register" means the register provided by the Company pursuant to Section 305 of the Indenture for the registration of Debentures and of transfers of Debentures. 52 "Senior Indebtedness" is defined in the Indenture as (a) the principal of (and premium, if any), and interest on all indebtedness of the Company for money borrowed, whether outstanding on the date of execution of the Indenture or thereafter created, assumed or incurred, except (i) such indebtedness as is by its terms expressly stated to be junior in right of payment to the Debentures and (ii) such indebtedness as is by its terms expressly stated to rank pari passu with the Debentures and (b) any deferrals, renewals or extensions of any such Senior Indebtedness. (Section 101) The term "indebtedness for money borrowed" when used with respect to the Company is defined to mean any obligation of, or any obligation guaranteed by, the Company for the repayment of borrowed money, whether or not evidenced by bonds, debentures, notes or other written instruments, and any deferred obligation of, or any such obligation guaranteed by, the Company for the payment of the purchase price of property or assets. (Section 101) "Stated Maturity," when used with respect to any Debenture or any instalment of interest thereon, means the date specified in such Debenture as the fixed date on which the principal of such Debenture or such instalment of interest is due and payable. "Subsidiary" means a corporation more than 50% of the outstanding voting stock of which is owned, directly or indirectly, by the Company or by one or more other Subsidiaries, or by the Company and one or more other Subsidiaries. The term "voting stock" means stock which ordinarily has voting power for the election of directors, whether at all times or only so long as no senior class of stock has such voting power by reason of any contingency. DESCRIPTION OF CAPITAL STOCK The following summary description of the Company's capital stock does not purport to be complete and is subject to the more detailed provisions of the Company's Articles and Bylaws and is qualified in its entirety by reference thereto. The authorized capital stock of the Company consists of 4,000,000 shares of Common Stock, no par value, and 1,000,000 shares of preferred stock (the "Preferred Stock"). As of March 31, 1997, the Company had 2,227,332 shares of Common Stock issued and outstanding, and no shares of Preferred Stock were outstanding. At the Company's 1997 Annual Meeting of Shareholders the stockholders will be presented with a proposal to increase the number of authorized shares of Common Stock to 20,000,000. COMMON STOCK Voting. The holders of Common Stock currently possess exclusive voting rights in the Company. Shares of Preferred Stock issued in the future may be granted voting rights at the discretion of the Board of Directors. On matters submitted to the stockholders of the Company, the holders of the Common Stock will be entitled to one vote for each share held. No shares have cumulative voting rights. Dividends. Holders of shares of Common Stock are entitled to receive any dividends declared by the Board of Directors out of funds legally available therefor. The ability of the Company to pay cash dividends is subject to the ability of First State Bank to pay dividends or make other distributions to the Company, which in turn is subject to limitations imposed by law and regulation. See "Regulation and Supervision." Liquidation Rights. In the event of any liquidation or dissolution of the Company, all assets of the Company legally available for distribution after payment or provision for payment of (i) all debts and liabilities of the Company, (ii) any accrued dividend claims and (iii) liquidation preferences of any outstanding Preferred Stock, and will be distributed ratably, in cash or in kind, among the holders of Common Stock. Common Stock Purchase Rights. On October 25, 1996, the Board of Directors declared a dividend paid on December 18, 1996, of one right (a "Right") for each outstanding share of Common Stock of the Company held of record at the close of business on November 20, 1996 (the "Record Date"), or issued thereafter and 53 before the Separation Time (as hereinafter defined) and thereafter pursuant to options and convertible securities outstanding at the Separation Time. The Rights were issued pursuant to a Shareholder Protection Rights Agreement, dated as of October 25, 1996 (the "Rights Agreement"), between the Company and American Securities Transfer & Trust, Inc., as Rights Agent. Each Right entitles its registered holder to purchase from the Company, after the Separation Time, one share of Common Stock for $45 (the "Exercise Price"), subject to adjustment. The Rights will be evidenced by the Common Stock certificates until the close of business on the earlier of either (the "Separation Time"): (1) the tenth business day after any Person (as defined in the Rights Agreement) commences a tender or an exchange offer which, if consummated, would result in such Person's becoming an Acquiring Person, as defined below (or a later date as the Board of Directors of the Company may fix by resolution adopted before the Separation Time that would otherwise have occurred); or (2) the tenth business day after the first date (the "Flip-in Date") of a public announcement by the Company or any Person that such Person has become an Acquiring Person, other than as a result of a Flip-over Transaction or Event, as defined below (or such earlier or later date, not beyond the thirtieth day after such acquisition, as the Board of Directors of the Company may fix by resolution adopted before the Flip-in Date that would otherwise have occurred); provided, that if a tender or an exchange offer referred to in clause (1) is canceled, terminated or otherwise withdrawn before the Separation Time without the purchase of any shares of Common Stock pursuant thereto, such offer shall be deemed never to have been made. For purposes of the Rights Agreement, an Acquiring Person is any Person having Beneficial Ownership (as defined in the Rights Agreement) of 10% or more of the outstanding shares of Common Stock, other than: (1) the Company, any wholly owned subsidiary of the Company or any employee stock ownership or other employee benefit plan of the Company; (2) any Person who becomes the Beneficial Owner of 10% or more of the outstanding Common Stock solely through the Company's acquisition of Common Stock, until the Person becomes the Beneficial Owner (other than through a dividend or stock split) of any additional shares of Common Stock; (3) any Person who becomes the Beneficial Owner of 10% or more of the outstanding Common Stock without any plan or intent to seek or affect control of the Company if the Person promptly enters into an irrevocable commitment promptly to divest, and thereafter promptly divests, sufficient securities so that such 10% or greater of Beneficial Ownership ceases; or (4) any Person who Beneficially owns shares of Common Stock consisting solely of (A) shares acquired pursuant to the grant or exercise of an option granted by the Company in connection with an agreement to merge with, or acquire, the Company entered into before a Flip-in Date; (B) shares owned by the Person and its affiliates and associates at the time of such grant; (C) shares, amounting to less than 1% of the outstanding Common Stock, acquired by affiliates and associates of the Person after such grant; and (D) shares held by the Person in trust accounts, managed accounts and the like or otherwise held in a fiduciary capacity, that are beneficially owned by third persons who are not affiliates or associates of the Person or acting together with the Person to hold such shares, or which are held by the Person in respect of a debt previously contracted. The Rights Agreement provides that, until the Separation Time, the Rights will be transferred only with the Common Stock. Common Stock certificates issued after the Record Date but before the Separation Time shall evidence one Right for each share of Common Stock represented thereby and shall contain a legend incorporating by reference the terms of the Rights Agreement (as amended from time to time). Notwithstanding the absence of the legend, certificates evidencing shares of Common Stock outstanding at the Record Date shall also evidence one Right for each share of Common Stock evidenced thereby. Promptly following the Separation Time, separate 54 certificates evidencing the Rights ("Rights Certificates") will be mailed to holders of record of Common Stock at the Separation Time. The Rights will be exercisable on the first Business Day (as defined in the Rights Agreement) following the Separation Time. The Rights will expire on the earliest of (1) the Exchange Time (as defined below); (2) the close of business on October 25, 2006; (3) the date on which the Rights are redeemed as described below; or (4) upon the merger of the Company into another corporation pursuant to an agreement entered into before the Flip-in Date (in any such case, the "Expiration Time"). The Exercise Price and the number of Rights outstanding, or in certain circumstances the securities purchasable upon exercise of the Rights, are subject to adjustment from time to time to prevent dilution in the event of a Common Stock dividend on, or a division or a combination into a smaller number of shares of, Common Stock, or the issuance or distribution of any securities or assets in respect of, in lieu of, or in exchange for Common Stock. If before the Expiration Time a Flip-in Date occurs, the Company shall take any necessary action to ensure and provide that each Right (other than Rights beneficially owned by the Acquiring Person or any affiliate or associate thereof or any transferee of any of the foregoing, which Rights shall become void) shall constitute the right to purchase from the Company, upon the exercise thereof in accordance with the Rights Agreement, that number of shares of Common Stock having an aggregate Market Price (as defined in the Rights Agreement), on the date of the public announcement of an Acquiring Person's becoming such (the "Stock Acquisition Date") that gave rise to the Flip-in Date, equal to twice the Exercise Price for an amount in cash equal to the then-current Exercise Price. In addition, the Board of Directors of the Company may, at its option, at any time on and after a Flip-in Date and before an Acquiring Person becomes the Beneficial Owner of more than 50% of the outstanding shares of Common Stock, elect to exchange all (but not less than all) of the then-outstanding Rights (other than Rights beneficially owned by the Acquiring Person or any affiliate or associate thereof, which Rights become void) for shares of Common Stock at an exchange ratio of one share of Common Stock per Right, appropriately adjusted to reflect any stock split, stock dividend or similar transaction occurring after the Separation Time (the "Exchange Ratio"). Immediately upon such action by the Board of Directors (the "Exchange Time"), the right to exercise the Rights will terminate, and each Right will thereafter represent only the right to receive a number of shares of Common Stock equal to the Exchange Ratio. Before the Expiration Time, the Company may not enter into, consummate or permit to occur a transaction or series of transactions after a Flip-in Date (each, a "Flip-over Transaction or Event") in which, directly or indirectly: (1) the Company consolidates or merges or participates in a binding share exchange with any other Person if, at the time of the consolidation, merger or share exchange or when the Company enters into an agreement with respect to such consolidation, merger or share exchange, the Acquiring Person controls the Board of Directors of the Company and either (a) any term of or arrangement concerning the treatment of shares of capital stock in such merger, consolidation or share exchange relating to the Acquiring Person is not identical to the terms and arrangements relating to other holders of Common Stock or (b) the person with whom the transaction or series of transactions occurs is the Acquiring Person or an affiliate or associate of the Acquiring Person, or (2) the Company sells or otherwise transfers (or one or more of its subsidiaries sells or otherwise transfers) assets (a) aggregating more than 50% of the assets (measured by either book value or fair market value) or (b) generating more than 50% of the operating income or cash flow of the Company and its subsidiaries (taken as a whole) to any other Person (other than the Company or one or more of its wholly owned subsidiaries) or to two or more such Persons which are affiliated or otherwise acting in concert, if, at the time of the sale or transfer of assets or when the Company (or any subsidiary) enters into an agreement with respect to the sale or transfer, the Acquiring Person controls the Board of Directors of the Company; 55 in each case until it has entered into a supplemental agreement with the Person engaging in the Flip-over Transaction or Event or the parent corporation thereof (the "Flip-over Entity"), for the benefit of the holders of the Rights, providing that upon consummation or occurrence of the Flip-over Transaction or Event (i) each Right shall thereafter constitute the right to purchase from the Flip-over Entity, upon exercise thereof in accordance with the Rights Agreement, that number of shares of common stock of the Flip-over Entity having an aggregate Market Price on the date of consummation or occurrence of such Flip-over Transaction or Event equal to twice the Exercise Price for an amount in cash equal to the then-current Exercise Price and (ii) the Flip-over Entity shall thereafter be liable for, and shall assume, by virtue of the Flip-over Transaction or Event and the supplemental agreement, all obligations and duties of the Company pursuant to the Rights Agreement. An Acquiring Person shall be deemed to control the Company's Board of Directors when, following a Flip-in Date, the persons who were directors of the Company before the Flip-in Date cease to constitute a majority of the Company's Board of Directors. For purposes of the foregoing description, the term "Acquiring Person" shall include any Acquiring Person and its affiliates and associates counted together as a single Person. The Board of Directors of the Company may, at its option, at any time before the close of business on the Flip-in Date, redeem all (but not less than all) of the then-outstanding Rights at $0.01 per Right (the "Redemption Price"), as provided in the Rights Agreement. Immediately upon the action of the Board of Directors of the Company electing to redeem the Rights, without any further action and without any notice, the right to exercise the Rights will terminate, and each Right will thereafter represent only the right to receive the Redemption Price in cash or securities, as determined by the Board of Directors of the Company. The holders of Rights will, solely by reason of their ownership of Rights, have no rights as stockholders of the Company, including, without limitation, the right to vote or to receive dividends. The Rights Agreement is designed to protect stockholders in the event of an unsolicited attempt to acquire the Company for an inadequate price and to protect against abusive practices that do not treat all stockholders equally, such as, among others, partial and two-tier tender offers, coercive offers and creeping stock accumulation programs. These practices can pressure stockholders into tendering their Common Stock before realizing the full value or total potential of the investments. The Rights Agreement is intended to make the cost of abusive practices prohibitive and create an incentive for a potential acquirer to negotiate in good faith with the Company's Board of Directors. The Rights Agreement is not intended to, and will not, prevent all unsolicited offers to acquire the Company. If an unsolicited offer is made, and the Board of Directors determines that it is fair and in the best interest of the Company and its stockholders, then, pursuant to the Rights Agreement, the Board of Directors has the authority to redeem the Rights and permit the offer to proceed. Essentially, the Rights Agreement will allow the Board of Directors to evaluate the fairness of any unsolicited offer and the credibility of the bidder, and will therefore enable the Board of Directors to represent the interests of all stockholders more effectively. Of course, in deciding whether to redeem the Rights in connection with any unsolicited offer, the Board of Directors will be bound by its fiduciary obligations to act in the best interests of the Company and its stockholders. Other Characteristics. The Common Stock is not entitled to any preemptive right to subscribe for or receive any shares of any class of stock of the Company (or any securities convertible into shares of stock of the Company) issued in the future. PREFERRED STOCK In supplementary sections to the Articles, the Company may provide for one or more classes of Preferred Stock, which must be separately identified. The shares of any such class may be divided into and issued in series, with each series separately designated to distinguish the shares thereof from the shares of all other series and classes. The terms of each series shall be stated in a supplementary section to the Company's Articles and may provide for, among other things, board representation, voting rights and dividend and liquidation preferences. All shares of the same class must be identical except as to certain relative rights and preferences specified in the Articles, as to which there may be variations between different series. The Preferred Stock could be deemed to 56 have an antitakeover effect in that, if a hostile takeover situation should arise, shares of Preferred Stock could be issued to purchasers sympathetic with the Company's management or others in such a way as to render more difficult or to discourage a merger, tender offer, proxy contest, the assumption of control by a holder of a large block of the Company's securities or the removal of incumbent management. The effects of the issuance of the Preferred Stock on the holders of Common Stock could include, among other things, (i) reduction of the amount otherwise available for payments of dividends on Common Stock if dividends are payable on the series of Preferred Stock; (ii) restrictions on dividends on Common Stock if dividends on the series of Preferred Stock are in arrears; (iii) dilution of the voting power of Common Stock if the series of Preferred Stock has voting rights, including a possible "veto" power if the series of Preferred Stock has class voting rights; (iv) dilution of the equity interest of holders of Common Stock if the series of Preferred Stock is convertible, and is converted, into Common Stock and (v) restrictions on the rights of holders of Common Stock to share in the Company's assets upon liquidation until satisfaction of any liquidation preference granted to the holders of the series of Preferred Stock. CERTAIN ANTI-TAKEOVER PROVISIONS The Company's Rights Agreement and certain provisions of the Company's Articles could make more difficult the acquisition of the Company by means of a tender offer, a proxy contest or otherwise and the removal of incumbent officers and directors. These are intended to discourage certain types of coercive takeover practices and inadequate takeover bids and to encourage persons seeking to acquire control of the Company to negotiate first with the Company. The following discussion is a summary of certain material provisions of the Company's Articles, a copy of which is filed as an exhibit to the Registration Statement of which this Prospectus is a part, which could have anti-takeover effects. Classified Board of Directors. Under the Articles, the Board of Directors is classified into three classes, with the directors being elected for staggered, three-year terms. The classification of the Company's Board of Directors will have the effect of making it more difficult to change the composition of the Board of Directors, because at least two annual meetings of the stockholders would be required to change the control of the Board of Directors rather than one. In addition, the Articles provide for the affirmative vote of two-thirds of the outstanding Common Stock to remove directors without cause. The NMBCA currently provides for a simple majority vote to remove directors, with or without cause. This helps achieve the benefits of the classification since stockholders holding a simple majority of Common Stock could not remove without cause the two classes of directors not standing for election in a particular year. Advance Notice of Stockholder Proposals and Nominations. The Company's Articles establish an advance notice procedure for stockholders to make nominations of candidates for election as directors or bring other business before a meeting of stockholders of the Company (the "Stockholder Notice Procedure"). The Shareholder Notice Procedure provides that only persons who are nominated by, or at the direction of, the Board, or by a stockholder who has given timely written notice to the Secretary of the Company prior to the meeting at which directors are to be elected, will be eligible for election as directors of the Company and that, at an annual meeting, only such business may be conducted as has been brought before the meeting by, or at the direction of, the Board of Directors or by a stockholder who has given timely written notice to the secretary of the Company of such stockholder's intention to bring such business before such meeting. Notice will be timely if the Secretary of the Company receives it not less than 35 nor more than 50 days before the meeting, unless the Company has given less than 45 days prior notice or public disclosure of the meeting, in which case the stockholder will have until the 10th day after the Company gave notice or made public disclosure of the meeting to give notice. In the case of nominations for directors, the Articles further require that the stockholder's notice set forth certain information concerning the stockholder and the nominee. In the case of proposed business, the stockholder's notice shall briefly describe the business and the reasons for considering it, 57 state the stockholder's name and address, represent that the stockholder is entitled to vote at the meeting and intends to appear in person or by proxy at the meeting, and state any material interest of the stockholder in the proposed business. The chairman of the meeting will have the power to receive a notice relating to a stockholder nomination or a proposal for business and will not accept nominations and proposals not made in accordance with these procedures. This provision requires notices in addition to those currently required by law to permit stockholders to make proposals at any meetings of stockholders. The advance notice requirements allow the Board of Directors to consider the qualifications of the proposed nominees for the reasons for the proposed business and, to the extent deemed necessary or desirable by the Board of Directors, to inform stockholders about those qualifications or reasons. Although these provisions do not give the Board of Directors any power to approve or disapprove stockholder nominations for election of directors or proposals for other business, they may have the effect of precluding a contest for the election of directors or proposals for other business if the procedures set forth in the Articles are not followed and may discourage or deter a third party from conducting a solicitation of proxies to elect its own slate of directors or to propose other business, without regard to whether this might be harmful or beneficial to the Company and its stockholders. Super-Majority Vote. The Articles require the affirmative vote of 66.6% of the outstanding shares of the Company entitled to vote on the merger, consolidation, sale, lease or exchange of all or substantially all of the assets of the Company if the offeror or any affiliate of the offeror owns of record, or owns beneficially, directly or indirectly, more than 10% of any class of equity security of the Company. UNDERWRITING Subject to the terms and conditions set forth in a purchase agreement (the "Purchase Agreement"), the Company has agreed to sell to each of the Underwriters named below, for whom Keefe, Bruyette & Woods, Inc. is acting as representative (the "Representative"), and each Underwriter has severally agreed to purchase from the Company, the principal amount of Debentures set forth opposite its name below.
UNDERWRITER OF DEBENTURES PRINCIPAL AMOUNT ------------- ---------------- Keefe, Bruyette & Woods, Inc.................................. $ ----- Total..................................................... $ =====
The Purchase Agreement provides that the obligations of the Underwriters are subject to certain conditions precedent. The Underwriters are obligated to take and pay for all of the Debentures offered hereby (other than those covered by the over-allotment option described below) if any are taken. The Company has been advised by the Representative that the Underwriters propose to offer the Debentures to the public at the public offering price set forth on the cover page of this Prospectus and to certain dealers at such price less a concession not in excess of % of the principal amount of the Debentures. The Underwriters may allow and dealers may re-allow a concession not excess of % of the principal amount of the Debentures to certain other dealers. After the initial public offering, the offering price and other selling terms may be changed by the Underwriters. Pursuant to the Purchase Agreement, the Company has granted to the Underwriters an option, exercisable for 30 days after the date of this Prospectus, to purchase up to an additional $1,800,000 in aggregate principal amount of Debentures at the public offering price, less the underwriting discount set forth on the cover page of this Prospectus, solely to cover over- allotments, if any. The Company and each of its directors and executive officers have agreed not to sell, offer to sell, grant an option for the sale of, or otherwise dispose of, (i) any debt securities similar to the Debentures or (ii) any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock, for a 58 period of 180 days after the date of this Prospectus without the prior written consent of the Representative, subject to certain limited exceptions set forth in the Purchase Agreement. The Company has agreed to indemnify the several Underwriters against certain liabilities, including liabilities under the Securities Act or to contribute to payments the Underwriters may be required to make in respect thereof. The Company has agreed to reimburse the Representative for certain expenses and legal fees related to the sale of the Debentures. Until the distribution of the Debentures is completed, rules of the Commission may limit the ability of the Underwriters and certain selling group members to bid for and purchase the Debentures and the Common Stock. As an exception to these rules, the Representative is permitted to engage in certain transactions that stabilize the price of the Debentures and the Common Stock. Such transactions consist of bids or purchases for the purpose of pegging, fixing or maintaining the price of the Debentures and the Common Stock. If the Underwriters create a short position in the Debentures in connection with the offering, i.e., if they sell a greater aggregate principal amount of Debentures than is set forth on the cover page of this Prospectus, the Representative may reduce that short position by purchasing Debentures in the open market. The Representative may also elect to reduce any short position by exercising all or part of the over-allotment option described above. The Representative may also impose a penalty bid on certain Underwriters and selling group members. This means that if the Representative purchases Debentures in the open market to reduce the Underwriters' short position or to stabilize the price of the Debentures, it may reclaim the amount of the selling concession from the Underwriters and selling group members who sold those Debentures as part of the offering. In general, purchases of a security for the purpose of stabilization or to reduce a short position could cause the price of the security to be higher than it might be in the absence of such purchases. The imposition of a penalty bid might also have an effect on the price of a security to the extent that it were to discourage resales of the security. Neither the Company nor any of the Underwriters makes any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of the Debentures or the Common Stock. In addition, neither the Company nor any of the Underwriters makes any representation that the Representative will engage in such transactions or that such transactions, once commenced, will not be discontinued without notice. The underwriters and dealers may engage in passive market making transactions in the Common Stock in accordance with Rule 103 of Regulation M promulgated by the Commission. In general, a passive market maker may not bid for, or purchase, the Common Stock at a price that exceeds the highest independent bid. In addition, the net daily purchases made by any passive market maker generally may not exceed 30% of its average daily trading volume in the Common Stock during a specified two month prior period, or 200 shares, whichever is greater. A passive market maker must identify passive market making bids as such on the Nasdaq electronic inter-dealer reporting system. Passive market making may stabilize or maintain the market price of the Common Stock and, consequently, the Debentures, above independent market levels. Underwriters and dealers are not required to engage in passive market making and may end passive market making activities at any time. The Debentures are a new issue of securities with no established trading market. No assurance can be given as to the liquidity of the trading market for the Debentures. The Company intends to file an application for the approval of the Debentures for quotation on The Nasdaq SmallCap Market. 59 LEGAL MATTERS The validity of the Debentures and Common Stock offered hereby will be passed upon by Hinkle, Cox, Eaton, Coffield & Hensley, L.L.P., 1700 Bank One Center, Amarillo, Texas 79101, counsel to the Company. Certain legal matters with respect to the Debentures have been passed upon for the Underwriters by Skadden, Arps, Slate, Meagher & Flom LLP, counsel to the Underwriters. EXPERTS The consolidated financial statements of First State Bancorporation as of December 31, 1996, and 1995, and for each of the years in the three year period ended December 31, 1996 have been included herein and in the registration statement in reliance upon the report of KPMG Peat Marwick LLP, independent certified public accountants, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing. The report of KPMG Peat Marwick LLP covering the December 31, 1996 financial statements refers to a change in the method of accounting for investment securities. AVAILABLE INFORMATION The Company is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith, files reports, proxy statements, and other information with the Securities and Exchange Commission (the "Commission"). Such reports, proxy statements, and other information can be inspected and copied at the public reference facilities of the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's regional offices at Suite 1400, 500 West Madison Street, Chicago, Illinois 60661, and 7 World Trade Center, Suite 1300, New York, New York 10048. Copies of such material can be obtained from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C 20549, at prescribed rates. The Company's Common Stock is traded on The Nasdaq Stock Market's National Market. Reports and other information concerning the Company may be inspected at the National Association of Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C. 20006. The Commission maintains a Web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission. The address of the site is http://www.sec.gov. The Company has filed with the Commission a Registration Statement on Form S-2 (herein, together with all amendments and exhibits, referred to as the "Registration Statement"), of which this Prospectus is a part, under the Securities Act of 1933, as amended (the "Securities Act"), with respect to the securities covered by this Prospectus. This Prospectus does not contain all the information set forth in the Registration Statement, certain portions of which have been omitted as permitted by the rules and regulations of the Commission. In addition, certain documents filed by the Company with the Commission have been incorporated in this Prospectus by reference. See "Incorporation of Certain Documents by Reference." For further information with respect to the Company and the Debentures, reference is made to the Registration Statement, including the exhibits thereto and the documents incorporated herein by reference. The Registration Statement may be inspected without charge at the principal office of the Commission in Washington, D.C., and copies of all or part of it may be obtained from the Commission upon payment of the prescribed fees. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The Company's Annual Report on Form 10-KSB for the year ended December 31, 1996, previously filed with the Commission (File No. 22-25144), is hereby incorporated in this Prospectus by reference and made a part hereof. Financial and other information included in the reports incorporated by reference herein does not reflect stock splits or dividends declared after the respective dates of the reports, except as indicated in such reports. 60 Any statement contained in a document all or a portion of which is incorporated or deemed to be incorporated by reference herein shall be deemed to be modified or superseded for purposes of this Prospectus to the extent that a statement contained herein or in any other subsequently filed document which also is or is deemed to be incorporated by reference herein modifies or supersedes such statement. Any statement so modified shall not be deemed to constitute a part of this Prospectus except as so modified, and any statement so superseded shall not be deemed to constitute part of this Prospectus. The Company will provide without charge to any person to whom this Prospectus is delivered, on his or her written or oral request, a copy of any or all of the documents incorporated or deemed to be incorporated herein by reference, other than certain exhibits to such documents. Written requests should be directed to First State Bancorporation, 111 Lomas Avenue, N.W., Albuquerque, New Mexico 87102, Attention: Secretary; telephone (505) 241-7500. 61 FIRST STATE BANCORPORATION AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- Independent Auditors' Report............................................. F-2 Consolidated Balance Sheets as of December 31, 1996, and 1995............ F-3 Consolidated Statements of Operations for the Years Ended December 31, 1996, 1995, and 1994.................................................... F-4 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1996, 1995, and 1994....................................... F-5 Consolidated Statements of Cash Flows for the Years Ended December 31, 1996, 1995, and 1994.................................................... F-6 Notes to Consolidated Financial Statements............................... F-7
F-1 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders First State Bancorporation: We have audited the accompanying consolidated balance sheets of First State Bancorporation and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the years in the three year period ended December 31, 1996. 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 generally accepted auditing standards. 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 presentations. 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 State Bancorporation and subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three year period ended December 31, 1996 in conformity with generally accepted accounting principles. As discussed in Note 1(b) to the consolidated financial statements, the Company changed its method of accounting for investment securities in 1994. KPMG PEAT MARWICK LLP Albuquerque, New Mexico February 7, 1997 F-2 FIRST STATE BANCORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, ------------------------- 1996 1995 ------------ ------------ ASSETS Cash and due from banks (note 2)..................... $ 15,711,932 $ 14,787,266 Federal funds sold................................... -- -- ------------ ------------ Total cash and cash equivalents................ 15,711,932 14,787,266 Investment securities (note 3): Available for sale (at market, amortized cost of $20,979,000 and $17,329,000 at December 31, 1996 and 1995)......................................... 21,048,140 17,504,265 Held to maturity (at amortized cost, market of $19,597,000 and $21,345,000 at December 31, 1996 and 1995)......................................... 19,547,433 21,171,746 ------------ ------------ Total Investment Securities.................... 40,595,573 38,676,011 Loans and leases net of unearned interest (note 4)... 250,926,023 183,859,770 Less allowance for loan and lease losses............. 2,510,155 1,850,605 ------------ ------------ Net loans and leases........................... 248,415,868 182,009,165 Premises and equipment, net (note 5)................. 13,558,835 11,652,018 Accrued interest receivable.......................... 2,001,678 1,959,569 Other real estate owned.............................. 1,362,494 678,373 Goodwill, less accumulated amortization of $713,926 and $609,719 at December 31, 1996 and 1995.......... 881,881 986,088 Other assets......................................... 2,440,184 2,232,070 ------------ ------------ Total assets................................... $324,968,445 $252,980,560 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Deposits (note 6): Noninterest-bearing.............................. $ 52,038,847 $ 42,026,645 Interest-bearing................................. 225,314,476 176,820,223 ------------ ------------ Total deposits................................. 277,353,323 218,846,868 Securities sold under repurchase agreements (note 7)................................................ 13,928,515 8,913,474 Federal Home Loan Bank advances (note 7)........... 4,970,000 -- Federal funds purchased............................ 1,500,000 -- Other liabilities.................................. 2,159,976 1,808,207 Long-term debt (note 7)............................ 4,006,119 5,986,103 ------------ ------------ Total liabilities.............................. 303,917,933 235,554,652 Stockholders' equity (note 10): Preferred stock, no par value, 1,000,000 shares authorized, none issued or outstanding............ -- -- Common stock, no par value, 4,000,000 shares authorized, 2,172,357 and 1,962,067 issued and outstanding at December 31, 1996 and 1995......... 11,906,581 9,864,598 Retained earnings.................................. 9,097,986 7,445,338 Unrealized gains on investment securities available for sale, net of deferred income taxes (notes 1, 3 and 9)............................................ 45,945 115,972 ------------ ------------ Total stockholders' equity..................... 21,050,512 17,425,908 Commitments and contingencies (note 12).............. -- -- ------------ ------------ Total liabilities and stockholders' equity..... $324,968,445 $252,980,560 ============ ============
See accompanying notes to consolidated financial statements. F-3 FIRST STATE BANCORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, ------------------------------------ 1996 1995 1994 ----------- ----------- ----------- Interest income: Interest and fees on loans and leases.. $23,322,817 $18,261,973 $13,686,844 Interest on marketable securities: Taxable.............................. 2,015,497 1,908,463 1,704,436 Nontaxable........................... 197,736 135,693 79,172 Federal funds sold..................... 145,246 386,619 153,087 ----------- ----------- ----------- Total interest income................ 25,681,296 20,692,748 15,623,539 Interest expense: Deposits............................... 8,375,055 6,415,153 4,021,900 Short-term borrowings.................. 855,443 533,903 155,018 Long-term debt and capital leases...... 386,120 436,395 489,562 ----------- ----------- ----------- Total interest expense............... 9,616,618 7,385,451 4,666,480 ----------- ----------- ----------- Net interest income.................. 16,064,678 13,307,297 10,957,059 Provision for loan and lease losses (note 4)...................................... 1,231,403 418,000 247,680 ----------- ----------- ----------- Net interest income after provision for loan and lease losses........... 14,833,275 12,889,297 10,709,379 ----------- ----------- ----------- Other income (loss): Service charges on deposit accounts.... 1,138,239 961,287 951,928 Other banking service fees............. 926,864 319,968 200,085 Loss from credit card processing operation (note 15)................... -- (1,208,000) (158,000) Gain (loss) on call or sale of investment securities, net............ 10,156 (19,454) (3,753) Other.................................. 859,258 421,336 556,369 ----------- ----------- ----------- Total other income................... 2,934,517 475,137 1,546,629 ----------- ----------- ----------- Other expenses: Salaries and employee benefits......... 6,388,350 4,898,453 4,001,356 Occupancy.............................. 1,854,447 1,352,888 1,186,773 Data Processing........................ 698,228 202,965 199,338 Credit Card Interchange................ 504,179 -- -- Equipment.............................. 1,261,835 811,482 564,642 Legal, accounting and consulting....... 454,090 403,634 434,308 Marketing.............................. 636,704 568,964 377,247 Other real estate owned expenses....... 65,496 97,689 337,208 FDIC insurance premiums................ 2,000 199,169 359,220 Amortization of intangibles............ 185,286 182,836 222,942 Other.................................. 2,540,148 2,207,923 1,931,435 ----------- ----------- ----------- Total other expenses................. 14,590,763 10,926,003 9,614,469 ----------- ----------- ----------- Income before income taxes and minority interest................................ 3,177,029 2,438,431 2,641,539 Income tax expense (note 9).............. 1,115,892 763,230 240,000 ----------- ----------- ----------- Income before minority interest.......... 2,061,137 1,675,201 2,401,539 Minority interest in earnings of consoli- dated subsidiaries...................... -- -- (10,478) ----------- ----------- ----------- Net income......................... $ 2,061,137 $ 1,675,201 $ 2,391,061 =========== =========== =========== Earnings per share (note 1): Earnings per common and common equivalent share...................... $ 0.96 $ 0.82 $ 1.18 =========== =========== =========== Earnings per common share--assuming full dilution......................... $ 0.88 $ 0.77 $ 1.06 =========== =========== ===========
See accompanying notes to consolidated financial statements. F-4 FIRST STATE BANCORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994 -------------------------------------------------------------- UNREALIZED GAINS (LOSSES) COMMON COMMON ON SECURITIES TOTAL STOCK STOCK RETAINED AVAILABLE FOR STOCKHOLDERS' SHARES AMOUNT EARNINGS SALE, NET EQUITY --------- ----------- ---------- -------------- ------------- Balance at December 31, 1993................... 1,962,067 $ 9,864,598 $3,807,193 -- $13,671,791 Net income............ -- -- 2,391,061 -- 2,391,061 Dividends ($.064 per share)............... -- -- (125,572) -- (125,572) Net unrealized losses............... -- -- -- (163,544) (163,544) --------- ----------- ---------- -------- ----------- Balance at December 31, 1994................... 1,962,067 9,864,598 6,072,682 (163,544) 15,773,736 Net income............ -- -- 1,675,201 -- 1,675,201 Dividends ($0.154 per share)............... -- -- (302,545) -- (302,545) Net change in market value................ -- -- -- 279,516 279,516 --------- ----------- ---------- -------- ----------- Balance at December 31, 1995................... 1,962,067 9,864,598 7,445,338 115,972 17,425,908 Net Income............ -- -- 2,061,137 -- 2,061,137 Dividends ($0.20) per share................ -- -- (408,489) -- (408,489) Common shares issued from exercise of options (note 10).... 19,600 98,196 -- -- 98,196 Common shares issued pursuant to conversion of subordinated debentures (note 7).. 186,838 1,888,224 -- -- 1,888,224 Common shares issued in employee benefit plan................. 3,852 55,563 -- -- 55,563 Net change in market value................ -- -- -- (70,027) (70,027) --------- ----------- ---------- -------- ----------- Balance at December 31, 1996................... 2,172,357 $11,906,581 $9,097,986 $ 45,945 $21,050,512 ========= =========== ========== ======== ===========
See accompanying notes to consolidated financial statements. F-5 FIRST STATE BANCORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, ---------------------------------------- 1996 1995 1994 ------------ ------------ ------------ Operating activities: Net income......................... $ 2,061,137 $ 1,675,201 $ 2,391,061 ------------ ------------ ------------ Adjustments to reconcile net income to cash provided by operating activities: Provision for loan and lease losses............................ 1,231,403 418,000 247,680 Provision for decline in value of other real estate owned........... 12,500 30,000 137,753 Depreciation and amortization...... 1,595,687 1,063,791 775,103 Net (gain) loss on call or sale of investment securities............. (10,156) 19,454 3,753 Gain on sale of loans.............. -- -- (69,498) Net loss on sale of premises and equipment......................... -- -- 15,619 Loss from credit card processing operation......................... -- 1,208,000 158,000 Net (gain) loss on sales of other real estate owned................. 20,294 (45,403) 7,143 Minority interest in net income.... -- -- (80,531) Increase in accrued interest receivable........................ (557,115) (515,006) (370,641) (Increase) decrease in other assets, net....................... 62,334 (1,723,658) (491,767) Increase in other liabilities, net............................... 366,191 534,637 49,279 ------------ ------------ ------------ Total adjustments................. 2,721,138 989,815 381,893 ------------ ------------ ------------ Net cash provided by operating activities....................... 4,782,275 2,665,016 2,772,954 ------------ ------------ ------------ Cash flows from investing activities: Net increase in loans.............. (68,626,889) (33,537,346) (31,242,718) Sales of loans..................... -- -- 3,102,622 Purchases of investment securities carried at amortized cost......... (14,877,176) (20,049,734) (6,949,100) Maturities of investment securities carried at amortized cost......... 10,750,000 16,252,962 6,705,000 Purchases of investment securities carried at market................. (6,243,339) (9,461,536) (3,461,561) Maturities of investment securities carried at market................. 7,890,000 3,026,790 638,166 Sales of investment securities available for sale................ 500,156 4,095,844 1,278,145 Purchases of premises and equipment......................... (5,803,732) (7,324,833) (3,660,522) Sales of premises and equipment.... 2,537,649 -- -- Additions to other real estate owned............................. (245,312) (244,770) (592,303) Payments received on loans classified as other real estate owned............................. 1,518 265,082 333,663 Proceeds from sale of other real estate owned...................... 555,156 237,556 592,540 ------------ ------------ ------------ Net cash used in investing activities....................... (73,561,969) (46,739,985) (33,256,068) ------------ ------------ ------------ Cash flows from financing activities: Net increase in interest-bearing deposits.......................... 48,494,253 40,561,347 6,315,984 Net increase in noninterest-bearing deposits.......................... 10,012,202 4,837,675 17,121,157 Net increase (decrease) in securities sold under repurchase agreements........................ 5,015,042 (551,583) 7,577,321 Common stock issued................ 153,759 -- -- Proceeds from Federal Home Loan Bank borrowings................... 8,970,000 5,000,000 -- Payments on Federal Home Loan Bank borrowings........................ (4,000,000) (5,000,000) -- Dividends paid..................... (408,489) (302,545) (125,572) Proceeds from long-term debt....... -- 250,000 -- Payments on long-term debt......... (32,407) (126,896) (109,837) Federal funds purchased, net....... 1,500,000 -- -- ------------ ------------ ------------ Net cash provided by financing activities....................... 69,704,360 44,667,998 30,779,053 ------------ ------------ ------------ Increase in cash and cash equivalents....................... 924,666 593,029 295,939 Cash and cash equivalents at beginning of year.................. 14,787,266 14,194,237 13,898,298 ------------ ------------ ------------ Cash and cash equivalents at end of year............................... $ 15,711,932 $ 14,787,266 $ 14,194,237 ============ ============ ============ Supplemental disclosure of additional noncash investing and financing activities: Additions to other real estate owned in settlement of loans...... $ 988,783 $ 203,420 $ 251,238 Additions to loans in settlement of other real estate owned........... -- $ 425,219 $ 247,500 Issuance of common stock pursuant to conversion of subordinated debentures, net (note 7).......... $ 1,888,224 -- -- ============ ============ ============ Supplemental disclosure of cash flow information: Cash paid for interest............. $ 9,426,618 $ 6,928,861 $ 4,524,416 ============ ============ ============ Cash paid for income taxes......... $ 1,010,000 $ 925,000 $ 660,000 ============ ============ ============
See accompanying notes to consolidated financial statements. F-6 FIRST STATE BANCORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Organization, Basis of Presentation and Principles of Consolidation First State Bancorporation ("FSBC") is a New Mexico-based holding company that is focused on New Mexico markets. In 1988, FSBC acquired First State Bank of Taos ("FSBT"), a state chartered bank with locations in Taos, Albuquerque, Santa Fe, Rio Rancho, Los Lunas, Bernalillo, Placitas, and Questa, New Mexico. In December 1993, FSBC acquired First State Bank of Santa Fe ("the Santa Fe Bank"), a state chartered bank located in Santa Fe, New Mexico. On June 5, 1994, the Santa Fe Bank was merged into FSBT. As a result of the merger, FSBC purchased the interest of the minority stockholders of the Santa Fe Bank. First State Bancorporation and its wholly owned subsidiary FSBT are collectively referred to as the Company. In November 1993, the Company completed a common stock and convertible debenture offering. The proceeds received by the Company from the sale of the common stock and the convertible debentures were principally used to purchase the shares of the principal shareholders, Livingston & Company Southwest, L.P. All significant intercompany accounts and transactions have been eliminated in the consolidated financial statements. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan and lease losses and the valuation of real estate acquired in satisfaction of loans. In connection with the determination of the allowances for loan and lease losses and real estate owned, management obtains independent appraisals for significant properties. Management believes that the estimates and assumptions it uses to prepare the financial statements, particularly as they relate to the allowances for losses on loans and leases and real estate owned, are adequate. However, future additions to these allowances may be necessary based on changes in economic conditions. Further, regulatory agencies, as an integral part of their examination process, periodically review the allowances for losses on loans and leases and real estate owned and may require the Company to recognize additions to these allowances based on their judgments about information available to them at the time of their examinations. The Company's results of operations depend on its net interest income. The components of net interest income, interest income and interest expense, are affected by general economic conditions and by competition in the marketplace. Interest rate risk arises from volatile interest rates and changes in the balance sheet mix. The Company maintains an asset/liability management policy that provides guidelines for controlling exposure to interest rate risk. The Company's policy is to control the exposure of its earnings to changing interest rates by generally maintaining a position within a narrow range around an "earnings neutral position," which is defined as the mix of assets and liabilities that generate a net interest margin that is least affected by interest rate changes. (b) Investment Securities Effective January 1, 1994, the Company adopted Statement of Financial Accounting Standards No. 115 "Accounting for Certain Investments in Debt and Equity Securities" (FAS 115). FAS 115 requires that investment securities be classified in one of three categories and accounted for as follows: (i) debt securities that the Company has the positive intent and ability to hold to maturity are classified as held to maturity and carried F-7 FIRST STATE BANCORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) at amortized cost; (ii) debt and equity securities that are bought and held primarily for the purpose of selling them in the near term are classified as trading securities and carried at fair value, with unrealized gains and losses included in earnings; and (iii) debt and equity securities not classified as either held to maturity securities or trading securities are classified as available for sale securities. These are securities which the Company will hold for an indefinite period of time and may be used as a part of the Company's asset/liability management strategy and may be sold in response to changes in interest rates, prepayments, or similar factors. Available for sale securities are carried at estimated market value, with unrealized gains and losses excluded from earnings and reported as a separate component of stockholders' equity, net of related deferred income taxes. Upon purchase of investment securities, management designates securities as either held to maturity or available for sale. The Company does not maintain a trading portfolio. On November 15, 1995, the Financial Accounting Standards Board issued "A Guide to Implementation of Statement 115 on Accounting for Certain Investments in Debt and Equity Securities ("the Guide"). The Guide allowed the Company to perform a one-time reassessment to determine the appropriateness of the categories in which securities were designated. On December 31, 1995, pursuant to the Guide, the Company reclassified securities with an amortized cost of approximately $3,483,000, and an approximate market value of $3,594,000 from held to maturity to available for sale. In accordance with FAS 115, the unrealized appreciation, net of deferred income taxes, was recorded as unrealized gains on investment securities as a separate component of stockholders' equity. Sales of available for sale securities are recognized using the specific identification method. (c) Loans, Leases and Allowance for Loan and Lease Losses Interest on loans is recognized as income based upon the daily principal amount outstanding. Interest on nonaccrual loans is recognized as income when payments are received. When a loan is placed on nonaccrual, any uncollected interest accrued in the current year is charged against income, with prior years' accruals charged to the allowance for loan and lease losses. Interest accrued on loans is, in most instances, discontinued when a loan becomes 90 days past due and/or management believes the borrower's financial condition is such that collection of future principal and interest payments is doubtful. Loans are removed from nonaccrual status when they become current as to both principal and interest and concern no longer exists as to the collectibility of principal or interest. Leases which meet the criteria to be classified as direct financing leases are carried at the gross investment in the lease less unearned income. Unearned income is recognized in a manner to produce a constant periodic rate of return. The gross investment in the lease includes the minimum lease payment due under the term of the lease, plus initial direct costs and the estimated residual value of the collateral underlying the lease. Initial direct costs are amortized using the level yield method. The value of unguaranteed residuals are reviewed periodically and any necessary adjustments are charged against operations. For leases which meet the operating lease criteria, income is recognized as rental payments are earned. The equipment leased under operating leases is carried as property and equipment at cost less accumulated depreciation. Depreciation expense is calculated using the straight-line method over the estimated useful life of the equipment, generally five years. The allowance for loan and lease losses is that amount which, in management's judgment, is considered adequate to provide for potential losses in the loan and lease portfolios. Management's determination of the allowance for loan and lease losses is made with consideration of such factors as delinquencies, changing collateral values, previous charge-off experience, local and national economic conditions and other factors which, in management's opinion, deserve current recognition in the allowance. F-8 FIRST STATE BANCORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) First State Bank's loan portfolio is concentrated in Albuquerque, Santa Fe, Los Lunas, Rio Rancho and Taos, New Mexico. A significant portion of the loan portfolio is secured by real estate in those communities. Accordingly, the ultimate collectibility of First State Bank's loan portfolio is dependent upon real estate values in those markets. Loan origination fees and certain direct loan origination costs are deferred and amortized to income over the contractual life of the loan using a method that approximates the interest method. Any unamortized balance of the deferred fees is recognized as income if the loans are sold, participated or repaid prior to maturity. The Company adopted Statement of Financial Accounting Standards No. 114 and 118, "Accounting by Creditors for Impairment of a Loan" (FAS 114 and 118) as of January 1, 1995. The adoption of the standards did not have a significant impact on the Company. (d) Premises and Equipment Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are computed by the straight-line method over the estimated useful lives of the related assets. (e) Intangible Assets The excess of cost over the fair value of the net assets of acquired banks is recorded as goodwill, which is amortized on a straight-line basis over a period of 15 years. Core deposit intangibles are amortized over a 10-year period using the straight-line method. At December 31, 1996 and 1995, unamortized core deposit intangibles included in other assets in the accompanying financial statements totaled $60,461 and $92,007, respectively. The Company assesses the recoverability of goodwill and core-deposit intangibles by determining whether the amortization of the intangibles over their remaining lives can be recovered through projected undiscounted future results of operations. (f) Other Real Estate Owned Other real estate owned consists of loan-related properties acquired through foreclosure and by deed-in-lieu of foreclosure. Other real estate owned is carried at the lower of the investment in the related loan or fair value of the assets received. Fair value of such assets is determined based on independent appraisals minus estimated costs of disposition. Declines in value subsequent to acquisition are accounted for within the allowance for other real estate owned. Provisions for losses subsequent to acquisition, operating expenses and gain or losses from sales of other real estate owned are charged or credited to other operating costs. (g) Income Taxes The Company files a consolidated tax return with its wholly owned subsidiary. The Company uses the asset and liability method prescribed in the Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (FAS 109). Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. F-9 FIRST STATE BANCORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (h) Statement of Cash Flows For the purpose of reporting cash flows, cash and cash equivalents include cash and due from banks and federal funds sold. (i) Earnings per Common Share Earnings per common and common equivalent share are computed by dividing net income applicable to common stock by this total of the weighted average number of common shares and the additional dilutive effect of stock options and warrants outstanding during the period. The dilutive effect of outstanding stock options and warrants is computed using the greater of the closing price or the average market price of the Company's common stock for the period. Earnings per common share, assuming full dilution, also include the dilution which would result if the convertible debentures outstanding during the period had been converted at the date of issuance in November 1993. On November 20, 1995, the Company effected a 5-for-4 split of its common stock. All references to number of shares and per-share computations in the consolidated financial statements and notes have been retroactively restated to reflect the common stock split. The number of shares used in the earnings per-share computation are as follows:
YEARS ENDED DECEMBER 31, ----------------------------- 1996 1995 1994 --------- --------- --------- Primary Average common shares outstanding............... 2,026,428 1,962,067 1,962,067 Average common share equivalents................ 109,498 89,438 57,254 --------- --------- --------- 2,135,926 2,051,505 2,019,321 ========= ========= ========= Fully diluted Average common shares outstanding............... 2,026,428 1,962,067 1,962,067 Average common share equivalents: Common stock options and warrants............. 136,351 97,752 57,254 Convertible debentures........................ 503,574 547,619 547,619 --------- --------- --------- 2,666,353 2,607,438 2,566,940 ========= ========= =========
(j) Stock Options Prior to January 1, 1996, the Company accounted for its stock option plan in accordance with the provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees, and related interpretations." As such, compensation expense would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. On January 1, 1996, the Company adopted Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (FAS 123), which permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. Alternatively, FAS 123 also allows entities to continue to apply the provisions of APB Opinion No. 25 and provide pro forma net income and pro forma earnings per share disclosures for employee stock option grants made in 1995 and future years as if the fair-value-based method defined in FAS 123 had been applied. The Company has elected to continue to apply the provisions of APB Opinion No. 25. Had compensation cost for the Company's stock-based compensation plans been determined consistent with FAS 123, the Company's net income and net income per share for the year ended December 31, 1996, would have been substantially the same as reported. (k) Reclassifications Certain 1995 balances have been reclassified to conform to the 1996 presentation. F-10 FIRST STATE BANCORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (l) Accounting Standards Issued but not yet Adopted In June 1996, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No.125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" (FAS 125). FAS 125 is effective for transfers and servicing of financial assets and extinguishments of liabilities after December 31, 1996, and is to be applied prospectively. This statement provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities based on consistent application of a financial-components approach that focuses on control. It distinguishes transfers of financial assets that are sales from transfers that are secured borrowings. Management does not expect that adoption of FAS 125 will have a material impact on the company's financial position, results of operations, or liquidity. 2. CASH AND DUE FROM BANKS First State Bank is required to maintain certain daily reserve balances on hand in accordance with Federal Reserve Board requirements. The consolidated reserve balances maintained in accordance with these requirements were approximately $5,357,000 and $4,649,000 at December 31, 1996 and 1995, respectively. 3. INVESTMENT SECURITIES Following is a summary of amortized costs and approximate market values of investment securities:
GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED MARKET COST GAINS LOSSES VALUE ----------- ---------- ---------- ----------- As of December 31, 1996 Obligations of the U.S. Treasury: Available for sale........... $ 6,972,191 $ 39,662 $ 3,093 $ 7,008,760 Held to maturity............. 2,780,724 21,876 -- 2,802,600 Obligations of U.S. government agencies: Available for sale........... 12,463,885 60,400 27,355 12,496,930 Held to maturity............. 13,497,297 36,000 47,625 13,485,672 Obligations of states and political subdivisions-- Held to maturity............. 3,269,412 39,810 547 3,308,675 Federal Home Loan Bank stock... 1,231,500 -- -- 1,231,500 Federal Reserve Bank stock..... 310,950 -- -- 310,950 ----------- -------- ------- ----------- $40,525,959 $197,748 $78,620 $40,645,087 =========== ======== ======= =========== As of December 31, 1995 Obligations of the U.S. Treasury: Available for sale........... $ 1,980,023 $ 16,910 $ 2,868 $ 1,994,065 Held to maturity............. 3,673,297 34,676 -- 3,707,973 Obligations of U.S. government agencies: Available for sale........... 14,461,975 168,375 6,700 14,623,650 Held to maturity............. 13,494,429 101,107 28,976 13,566,560 Obligations of states and political subdivisions-- Held to maturity............. 4,004,020 68,871 2,429 4,070,462 Federal Home Loan Bank stock... 613,100 -- -- 613,100 Federal Reserve Bank stock..... 273,450 -- -- 273,450 ----------- -------- ------- ----------- $38,500,294 $389,939 $40,973 $38,849,260 =========== ======== ======= ===========
F-11 FIRST STATE BANCORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The amortized cost and estimated market value of investment securities at December 31, 1996, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations.
ESTIMATED AMORTIZED MARKET COST VALUE ----------- ----------- Within one year: Available for sale................................... -- -- Held to maturity..................................... $ 2,199,647 $ 2,200,596 One through five years: Available for sale................................... 16,444,672 16,531,625 Held to maturity..................................... 15,058,414 15,079,550 Five through ten years: Available for sale................................... 1,994,254 1,989,065 Held to maturity..................................... 1,099,372 1,121,782 After ten years: Available for sale................................... 997,150 985,000 Held to maturity..................................... 1,190,000 1,195,019 Federal Reserve stock.................................. 310,950 310,950 Federal Home Loan Bank stock........................... 1,231,500 1,231,500 ----------- ----------- Total.............................................. $40,525,959 $40,645,087 =========== ===========
Marketable securities with an amortized cost of approximately $34,685,000 and $24,390,000 were pledged to collateralize deposits as required by law and for other purposes at December 31, 1996 and 1995, respectively. Proceeds from sales of investments in debt securities for the years ended December 31, were $500,156 in 1996, $4,095,844 in 1995 and $1,278,146 in 1994. Gross losses realized were zero in 1996, $26,997 in 1995 and $3,753 in 1994. Gross gains realized were $156 in 1996, $7,543 in 1995 and zero in 1994. 4. LOANS AND LEASES Following is a summary of loans and leases by major categories:
AS OF DECEMBER 31, ------------------------- 1996 1995 ------------ ------------ Commercial........................................... $ 36,578,045 $ 23,204,781 Consumer and other................................... 13,238,944 10,091,600 Lease financing...................................... 16,658,963 -- Real estate--mortgage................................ 148,712,636 115,640,653 Real estate--construction............................ 35,737,435 34,922,736 ------------ ------------ $250,926,023 $183,859,770 ============ ============
F-12 FIRST STATE BANCORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Future minimum lease receivable under noncancellable leasing arrangements as of December 31, 1996 are as follows:
DIRECT FINANCING OPERATING LEASES LEASES ----------- ---------- Years ending December 31: 1997................................................. $ 4,706,704 $ 911,387 1998................................................. 4,601,372 861,244 1999................................................. 3,883,109 790,927 2000................................................. 3,096,316 730,475 2001................................................. 1,640,355 584,894 Thereafter........................................... 704,408 -- ----------- ---------- Net minimum future lease receipts...................... $18,632,264 $3,878,927 ========== Less unearned income................................... (3,595,644) Unamortized initial indirect costs..................... 184,395 Estimated residual value............................... 1,437,948 ----------- Net investment in direct financing leases.............. $16,658,963 ===========
Following is a summary of changes to the allowance for loan and lease losses:
YEARS ENDED DECEMBER 31, ---------------------------------- 1996 1995 1994 ---------- ---------- ---------- Balance at beginning of year................ $1,850,605 $1,467,954 $1,441,437 Provision charged to operations............. 1,231,403 418,000 247,680 Loans charged off........................... (753,512) (345,459) (437,378) Recoveries.................................. 181,659 310,110 216,215 ---------- ---------- ---------- Balance at end of year...................... $2,510,155 $1,850,605 $1,467,954 ========== ========== ==========
The Company adopted the provisions of Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan," as amended by SFAS No. 118, "Accounting by Creditors for Impairment of a Loan- Income Recognition and Disclosures," effective January 1, 1995. Prior periods have not been restated. All loans have been evaluated for collectibility under the provisions of these statements. The recorded investment in loans for which an impairment has been recognized were $1,057,802 at December 31, 1996, and $1,730,483 at December 31, 1995. The average investment in loans for which impairment has been recognized was $1,294,000 in 1996. The allowance for loan losses related to these loans were zero at December 31, 1996 and $135,583 at December 31, 1995. The allowance for impaired loans is included in the allowance for loan and lease losses. Interest income of $18,293 was recognized on impaired loans during 1996. No interest income was recognized on impaired loans during 1995. Loans on which the accrual of interest has been discontinued amounted to $946,408, $1,807,601 and $64,828 at December 31, 1996, 1995 and 1994, respectively. If interest on such loans had been accrued, such income would have been approximately $12,000 in 1996, $98,000 in 1995 and $800 in 1994. Actual interest income on those loans, which is recorded only when received, amounted to zero in 1996, 1995 and 1994. F-13 FIRST STATE BANCORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Activity during 1996 and 1995 regarding outstanding loans to certain related-party loan customers of the subsidiary bank's (executive officers, directors and principal shareholders of First State Bank including their families and companies in which they are principal owners) was as follows:
1996 1995 ---------- ----------- Balance at beginning of year........................... $1,495,355 $ 2,779,317 Advances............................................... 858,845 3,133,028 Loans to parties no longer related..................... -- (1,833,955) Repayments............................................. (408,081) (2,583,035) ---------- ----------- Balance at December 31................................. $1,946,119 $ 1,495,355 ========== ===========
5. PREMISES AND EQUIPMENT Following is a summary of premises and equipment, at cost:
ESTIMATED AS OF DECEMBER 31, USEFUL ------------------------ LIFE (YEARS) 1996 1995 ------------ ----------- ----------- Land................................... -- $ 1,389,490 $ 2,432,185 Building and leasehold improvements.... 15-30 7,267,468 8,706,747 Equipment.............................. 5 5,060,522 3,474,327 Equipment subject to operating lease financing............................. 3-5 4,017,468 -- Assets under capital leases............ 5 78,781 78,781 ----------- ----------- 17,813,729 14,692,040 Less accumulated depreciation and amortization.......................... (4,254,894) (3,040,022) ----------- ----------- $13,558,835 11,652,018 =========== ===========
Depreciation and amortization expense on premises and equipment in 1996, 1995 and 1994 was $1,331,147, $822,344 and $670,897, respectively. During 1996, the Company entered into two agreements for the sale and lease back of two bank branch facilities totaling $2,563,500. The leases are classified as operating leases in accordance with Statement of Financial Accounting Standards No. 13 as amended. The net book value of the premises was removed from the consolidated balance sheet and a gain of approximately $13,000 was deferred and is being recognized as an adjustment to rent expense over the term of the lease. The two leases have a lease term of fifteen years. The minimum lease payments total $255,000 in 1997, $255,000 in 1998, $255,000 in 1999, $255,000 in 2000, $255,000 in 2001 and $2,420,000 thereafter. Rent expense under these leases was $130,400 in 1996. 6. DEPOSITS Following is a summary of interest-bearing deposits:
AS OF DECEMBER 31, ------------------------- 1996 1995 ------------ ------------ Interest-bearing checking accounts................... $ 49,245,938 $ 49,289,474 Money market savings................................. 32,811,455 24,257,612 Regular savings...................................... 16,081,190 15,352,403 Time: Denominations $100,000 and over.................... 52,751,491 28,732,839 Denominations under $100,000....................... 74,424,402 59,187,895 ------------ ------------ $225,314,476 $176,820,223 ============ ============
F-14 FIRST STATE BANCORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 7. BORROWINGS Securities sold under agreement to repurchase Securities sold under agreements to repurchase are comprised of customer deposit agreements with overnight maturities. The obligations are not federally insured but are collateralized by a security interest in U.S. Treasury or U.S. government agency securities. These securities are segregated and safekept by third-party banks. These securities had a market value of $15,916,000 and $10,731,000, at December 31, 1996 and 1995, respectively. Securities sold under agreement to repurchase are summarized as follows:
YEARS ENDED DECEMBER 31, -------------------------- 1996 1995 ------------ ------------ Balance............................................. $ 13,928,515 $ 8,913,474 Weighted average interest rate...................... 5.34% 5.25% Maximum amount outstanding at any month end......... 13,928,516 9,622,511 Average balance outstanding during the period....... 11,843,000 8,375,000 Weighted average interest rate during the period.... 4.74% 5.20%
Subordinated Debentures The convertible debentures issued November 10, 1993, had an outstanding balance of $3,788,000 and $5,750,000 at December 31, 1996 and 1995, respectively. Interest on the convertible debentures accrues from the date of issuance and is payable semiannually on May 1 and November 1 of each year at a rate of 7.00 percent per annum. The convertible debentures mature on November 10, 2003, subject to prior redemption or exchange. The convertible debentures are subordinated to all present and future senior indebtedness. Only capital stock of the Company (common or preferred) is junior to the convertible debentures. The convertible debentures may be redeemed at the option of the Company, in whole or in part, at a redemption value of 101 percent of the outstanding principal amount plus accrued interest. The redemption value decreases one percent each succeeding November 1 until reaching 100 percent in 1997. If necessary to meet regulatory capital requirements, the Company may require the holders of the convertible debentures to exchange all of the convertible debentures for convertible preferred stock at a rate of one share of convertible preferred stock for each $25 in principal amount of convertible debentures. The holders of the convertible debentures are entitled at any time up to and including November 1, 2003, subject to prior redemption or exchange, to convert the principal amount into shares of common stock at a conversion price of $10.50 per share subject to adjustment in certain events, including (i) the issuance of capital stock of the Company as a dividend or distribution on the common stock; (ii) subdivisions, combinations or reclassifications of the common stock; (iii) the issuance to all holders of common stock of certain rights or warrants entitling them to subscribe for common stock at a price per share less than the then current market price; or (iv) the distribution to all holders of common stock of assets or debt securities of the Company or rights or warrants to purchase securities of the Company. In 1996, debentures totaling $1,962,000 were converted into 186,838 shares of common stock. Federal Home Loan Bank advances First State Bank has a note payable to the Federal Home Loan Bank of Dallas included in long-term debt, dated January 30, 1995, with an outstanding balance of $218,119 and $236,103 at December 31, 1996, and 1995, respectively. The note is payable in monthly installments of principal and interest at 8.26% through February 1, 2005. F-15 FIRST STATE BANCORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) First State Bank has a Federal Home Loan Bank advance with a balance of $4,000,000 at December 31, 1996. The advance has a final maturity of April 23, 2003, but is prepayable, in whole or in part monthly. The advance bears interest based on the one month LIBOR index plus 0.21%, 5.86% at December 31, 1996. First State Bank has a Federal Home Loan Bank advance with a balance of $970,000 at December 31,1996, secured by a U.S. Treasury security with an estimated market value of $977,000. The advance has an eight-day term maturing January 7, 1997, and bears interest at 5.61%. The maximum amount of Federal Home Loan Bank advances outstanding during 1996 was $8,000,000, and the weighted average interest rate paid for these advances was 5.74%, with an average outstanding balance of $4,283,000. 8. LEASES First State Bank leases certain of its premises and equipment under noncancellable operating leases from unrelated parties. Rent expense for the years ended December 31, 1996, 1995, and 1994, totaled approximately $829,000, $529,000 and $417,000, respectively. Minimum future payments under these leases at December 31, 1996, are as follows:
YEARS ENDING DECEMBER 31, ------------ 1997......................................................... $1,026,609 1998......................................................... 1,021,932 1999......................................................... 715,226 2000......................................................... 676,750 2001......................................................... 638,049 2002 and beyond.............................................. 5,797,999 ---------- $9,876,565 ==========
9. INCOME TAXES Federal income tax expense (benefit) consisted of the following:
YEARS ENDED DECEMBER 31, --------------------------------- 1996 1995 1994 ---------- ---------- --------- Current................................... $1,124,780 $1,013,725 $ 508,100 Deferred.................................. (8,888) (250,495) (268,100) ---------- ---------- --------- Total expense........................... $1,115,892 $ 763,230 $ 240,000 ========== ========== =========
F-16 FIRST STATE BANCORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Actual income tax expense from continuing operations differs from the "expected" tax expense for 1996, 1995 and 1994 (computed by applying the U.S. federal corporate tax rate of 34 percent to income from continuing operations before income taxes) as follows:
YEARS ENDING DECEMBER 31, -------------------------------- 1996 1995 1994 ---------- --------- --------- Computed "expected" tax expense.............. $1,080,000 $ 829,000 $ 898,000 Increase (reduction) in income taxes resulting from: Tax-exempt interest........................ (76,000) (62,000) (57,000) Amortization of intangibles................ 92,000 96,000 75,800 Utilization of operating loss carryforwards and credits............................... -- -- (377,000) Change in valuation allowance for deferred tax assets................................ (120,000) (132,466) (341,534) Other...................................... 139,582 32,696 41,734 ---------- --------- --------- Total income tax expense................. $1,115,892 $ 763,230 $ 240,000 ========== ========= =========
Elements of deferred income tax assets and liabilities are as follows:
AS OF DECEMBER 31, ------------------ 1996 1995 -------- --------- Deferred tax assets: Allowance for loan losses................................. $592,424 $ 368,230 Write-down of other real estate owned..................... 37,267 32,167 Depreciation.............................................. 92,323 79,523 Accrued expenses.......................................... 17,000 17,000 Deferred compensation expense............................. 31,618 20,244 Alternative minimum tax credit carryforwards.............. -- 61,747 Loss from abandonment of credit card operation............ -- 316,200 Other..................................................... 14,838 23,000 -------- --------- Total gross deferred tax assets......................... 785,470 918,111 Less valuation allowance................................ -- (120,000) -------- --------- 785,470 798,111 Deferred tax liabilities: Deferred gains on sale of other real estate owned......... 17,987 39,516 Tax effect of unrealized gains on investment securities... 23,669 59,743 -------- --------- Total gross deferred tax liabilities.................... 41,656 99,259 -------- --------- Net deferred tax asset.................................. $743,814 $ 698,852 ======== =========
In order to fully realize the deferred tax asset on the Company's balance sheet at December 31, 1996, of $785,470, the Company will need to generate future taxable income of approximately $2,310,000. Based on the Company's historical and current pre-tax income, management believes it is more likely than not that the Company will realize the benefit of the temporary differences prior to the expiration of the carry-forward period and further believes that the existing net deductible temporary differences will reverse during periods in which the Company generates net taxable income. There can be no assurance, however, that the Company will generate taxable income or any specific level of continuing taxable income. F-17 FIRST STATE BANCORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 10. STOCKHOLDERS' EQUITY At December 31, 1996, under terms of a stock option agreement, an officer of First State Bank has an outstanding option to purchase 50,113 common shares of the Company at a price of $5.01 per share. The options may be exercised at any time and expire on October 12, 2003. During 1996, the officer exercised 19,600 options for a total of $98,196. Effective October 5, 1993, the Company adopted the First State Bancorporation 1993 Stock Option Plan, which provides for the granting of options to purchase up to 225,000 shares of the Company common stock. Exercise dates and prices for the options are set by a committee of the Board of Directors. The plan also provides that options other than those qualifying as incentive stock options may be granted. On November 2, 1993, three officers and one consultant, who is also a director of the Company, were granted 150,000 options at a price of $8.40 per share. On December 12, 1994, eleven officers were granted 13,750 options at a price of $8.40 per share. On December 29, 1995, twenty officers were granted 35,000 options at a price of $8.40 per share. Compensation expense of $33,453 and $59,542 was recognized pursuant to the grant of options in 1996 and 1995, respectively. Vesting of these options is 20 percent at the date of grant and 20 percent per year thereafter until fully vested. At December 31, 1996, the vested portion of these options totaled 142,250 shares. On October 25, 1996, the Board of Directors approved a shareholder protection rights agreement to protect the shareholders of the Company from abusive or unfair take-over practices. The terms of the agreement provide one right for each share of common stock held. The rights become exercisable only if a person or a group accumulates ten percent or more of the Company's common shares. The Company would be entitled to redeem the rights for $0.01 per right until the tenth day following a public announcement of an acquisition of 10% of its common shares. The rights expire on October 25, 2006. On October 25, 1996, the Board of Directors approved a dividend reinvestment plan. The plan allows any shareholder of record of 300 shares of common stock to reinvest dividends on those shares in common shares issued by the Company pursuant to the plan. Holders of 300 or more shares may also acquire shares from the Company through the plan in an amount not to exceed $30,000 quarterly. In connection with the common stock and convertible debenture offering, the Company sold to the underwriter for $100 a five-year warrant to purchase 48,125 shares of common stock. The warrant is exercisable at $10.50 per share of common stock of the Company. The warrants expire November 1, 1998. Bank regulations specify the level of dividends that can be paid by First State Bank. As of January 1, 1997, First State Bank had approximately $3,500,000 in retained earnings which was available for the payment of dividends to the Company subject to regulatory capital requirements. Future dividend payments will be dependent upon the level of earnings generated by First State Bank and/or regulatory restrictions, if any. Payment of dividends subsequent to January 1, 1993 to the Company's stockholders is limited by the convertible debenture indenture to amounts not to exceed the sum of: (a) 75 percent of the Company's net income, plus (b) 75 percent of the net proceeds received by the Company from equity securities issued, excluding the November 1993 offering. The Bank is subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory--and possibly discretionary--actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that involve quantitative measures of the Company's assets, liabilities, and certain off balance sheet items as calculated under regulatory accounting practices. The F-18 FIRST STATE BANCORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Company's capital amounts and classification 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 the Company to maintain minimum amounts and ratios of total and Tier I capital (as defined in regulations) to risk-weighted assets, and of Tier I capital, and of Tier I capital to total assets. Management believes, as of December 31, 1996, that the Company meets all capital adequacy requirements to which it is subject. As of December 31, 1996, the most recent notification from the Federal Reserve Bank of Kansas City categorized the Bank as adequately capitalized under the regulatory framework for prompt corrective action. To be categorized as adequately capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the institution's category.
AS OF DECEMBER 31, 1996 ---------------------------------------------------- FOR CAPITAL TO BE CONSIDERED ACTUAL ADEQUACY PURPOSES WELL CAPITALIZED ------------- ------------------- ----------------- AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO ------- ----- ---------- -------- --------- ------- (DOLLARS IN THOUSANDS) Total capital to risk weighted assets: Consolidated........... $22,418 8.3% $ 21,530 8.0% $ 26,912 10.0% Bank subsidiary........ 24,975 9.3% 21,483 8.0% 26,841 10.0% Tier I capital to risk weighted assets: Consolidated........... 19,941 7.4% 10,764 4.0% 16,146 6.0% Bank subsidiary........ 22,498 8.4% 10,739 4.0% 16,108 6.0% Tier I capital to total assets: Consolidated........... 19,941 6.1% 12,990 4.0% 16,238 5.0% Bank subsidiary........ 22,498 6.9% 12,911 4.0% 16,139 5.0% AS OF DECEMBER 31, 1995 ---------------------------------------------------- FOR CAPITAL TO BE CONSIDERED ACTUAL ADEQUACY PURPOSES WELL CAPITALIZED ------------- ------------------- ----------------- AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO ------- ----- ---------- -------- --------- ------- (DOLLARS IN THOUSANDS) Total capital to risk weighted assets: Consolidated........... $17,871 8.7% $ 16,433 8.0% $ 20,541 10.0% Bank subsidiary........ 20,502 10.0% 16,401 8.0% 20,502 10.0% Tier I capital to risk weighted assets: Consolidated........... 16,020 7.8% 8,215 4.0% 12,323 6.0% Bank subsidiary........ 18,651 9.0% 8,198 4.0% 12,297 6.0% Tier I capital to total assets: Consolidated........... 16,020 6.8% 9,423 4.0% 11,779 5.0% Bank subsidiary........ 18,651 7.4% 10,081 4.0% 12,602 5.0%
11. EMPLOYEE BENEFIT PLANS Effective January 1, 1991, First State Bank adopted an employee tax- sheltered savings plan for substantially all full-time employees which provides a mandatory 50% matching by First State Bank of employee contributions up to a maximum of 6% of gross annual wages. Full vesting occurs after three years. Contributions to the plan totaled $105,788 in 1996, $70,391 in 1995 and $53,178 in 1994. F-19 FIRST STATE BANCORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 12. COMMITMENTS AND CONTINGENCIES In the normal course of business, various commitments and contingent liabilities are outstanding, such as standby letters of credit and commitments to extend credit. These financial instruments with off balance sheet risk are not reflected in the financial statements. Financial instruments with off balance sheet risk involve elements of credit risk, interest rate risk, liquidity risk and market risk. Management does not anticipate any significant losses as a result of these transactions. The following table summarizes these financial instruments:
AS OF DECEMBER 31, ----------------------- 1996 1995 ----------- ----------- Commitments to extend credit..................... $46,883,000 $41,570,000 Standby letters of credit........................ 1,417,000 1,405,000
The Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual notional amount of those instruments. The Bank controls the credit risk of these transactions through credit approvals, limits, and monitoring procedures. 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. Standby letters of credit are written conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Bank evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management's credit evaluation of the customer. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, and income-producing commercial properties. In the normal course of business, the Company is involved in various legal matters. After consultation with legal counsel, management does not believe the outcome of these legal matters will have an adverse impact on the Company's financial position. 13. CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY The assets of the Company, as parent company, consist primarily of the investment in its subsidiary bank and the parent company's marketable securities portfolio. The primary sources of the parent company's cash revenues are dividends from its subsidiary bank along with interest received from the marketable securities portfolio. This cash revenue is the source of funds for payment of interest on the convertible debentures issued by the parent company. Following are condensed financial statements of the parent company for December 31: F-20 FIRST STATE BANCORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) CONDENSED STATEMENTS OF CONDITION
AS OF DECEMBER 31, ----------------------- 1996 1995 ----------- ----------- (DOLLARS IN THOUSANDS) ASSETS: Cash and due from banks.............................. $ 1,180 $ 1,078 Securities available for sale........................ -- 2,000 Investment in subsidiary............................. 23,104 19,263 Goodwill............................................. 384 416 Deferred tax asset................................... 32 343 Other assets......................................... 279 398 ----------- ----------- Total assets....................................... $ 24,979 $ 23,498 =========== =========== LIABILITIES AND EQUITY CAPITAL: Liabilities--accounts payable and accrued expenses... $ 141 $ 124 Estimated liabilities for credit card processing operation........................................... -- 198 Convertible debentures............................... 3,788 5,750 Equity capital....................................... 21,050 17,426 ----------- ----------- Total liabilities and equity capital............... $ 24,979 $ 23,498 =========== ===========
CONDENSED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, --------------------------- 1996 1995 1994 -------- -------- -------- (DOLLARS IN THOUSANDS) Income: Cash dividends from subsidiaries................ $ -- $ -- $ -- Loss from credit card processing operation...... -- (1,208) (158) Other income.................................... 67 176 203 ------- -------- ------- Total income (loss)........................... 67 (1,032) 45 ------- -------- ------- Expenses: Interest expense................................ 362 405 408 Amortization.................................... 158 176 176 Legal........................................... 57 56 78 Consulting...................................... 65 62 54 Other........................................... 173 255 28 ------- -------- ------- Total expense................................. 815 954 744 ------- -------- ------- Loss before income taxes and undistributed income of bank subsidiary............................... (748) (1,986) (699) Income tax benefit................................ 148 596 228 Undistributed income of bank subsidiary........... 2,661 3,065 2,862 ------- -------- ------- Net Income........................................ $ 2,061 $ 1,675 $ 2,391 ======= ======== =======
F-21 FIRST STATE BANCORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) CONDENSED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, ---------------------------- 1996 1995 1994 -------- -------- -------- (DOLLARS IN THOUSANDS) Cash flows from operating activities: Net income..................................... $ 2,061 $ 1,675 $ 2,391 -------- -------- -------- Adjustments to reconcile net income to cash used by operations: Amortization of goodwill..................... 32 32 33 Undistributed income of bank subsidiaries.... (2,661) (3,064) (3,020) Loss from investment in credit card operation................................... -- 1,208 158 (Increase) decrease in other assets.......... 356 (255) 186 Increase (decrease) in other liabilities, net......................................... (181) 121 35 -------- -------- -------- Total adjustments.......................... (2,454) (1,958) (2,608) -------- -------- -------- Net cash used by operating activities...... (393) (283) (217) Cash flows from investing activities: Sale of investment securities.................. -- 3,998 496 Maturity of investment securities.............. 2,000 1,000 500 Purchase of investment securities.............. -- (2,494) (483) -------- -------- -------- Net cash provided by investing activities.. 2,000 2,504 513 -------- -------- -------- Cash flows from financing activities: Common stock issued............................ 154 -- -- Capital contributions to subsidiary bank....... (1,250) (500) (500) Contributions and loans to credit card processing operation.......................... -- (523) (650) Dividends paid................................. (409) (303) (126) -------- -------- -------- Net cash used by financing activities...... (1,505) (1,326) (1,276) -------- -------- -------- Increase in cash and due from banks.............. 102 895 (980) Cash and due from banks at beginning of year..... 1,078 183 1,163 -------- -------- -------- Cash and due from banks at end of year........... $ 1,180 $ 1,078 $ 183 ======== ======== ========
14. FAIR VALUE OF FINANCIAL INSTRUMENTS Statement of Financial Accounting Standards No. 107, "Disclosures About Fair Value of Financial Instruments" (FAS 107), requires disclosure of current fair value of all financial instruments, both assets and liabilities recognized and not recognized in the balance sheet, for which it is practicable to estimate fair value. FAS 107 defines fair value as the amount at which a financial instrument could be exchanged in a current transaction between willing parties other than in a forced or liquidation sale. Financial instruments are defined as cash, evidence of ownership in an entity, or a contract that both imposes on one entity a contractual obligation: (1) to deliver cash or another financial instrument to a second entity, or (2) to exchange other financial instruments on potentially unfavorable terms with a second entity and conveys to the second entity a contractual right: (a) to receive cash or another financial instrument from the first entity, or (b) to exchange other financial instruments on potentially favorable terms with the first entity. Fair value estimates are made at a specific point in time based on available relevant market information about the financial instrument. However, a significant portion of the Company's financial instruments, such as F-22 FIRST STATE BANCORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) commercial real estate loans, do not currently have an active marketplace in which they can be readily sold or purchased to determine fair value. Consequently, fair value estimates for those financial instruments are based on assumptions made by management regarding the financial instrument's credit risk characteristics, prevailing interest rates, future estimated cash flows, expected loss experience, current and future economic conditions and other factors which affect fair value. As a result, these fair value estimates are subjective in nature and involve uncertainties and matters of significant judgment, and therefore, cannot be determined with precision. Accordingly, changes in management's assumptions could cause the fair value estimates to deviate substantially. Further, these estimates do not reflect any additional premium or discount that could result from offering for sale, at one time, the Company's entire holdings of a particular financial instrument or any estimated transaction costs. Lastly, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on the fair value estimates and have not been considered in the estimates. The carrying values and estimated fair values of the Company's financial instruments at December 31 are as follows:
1996 1995 ----------------- ----------------- CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE -------- -------- -------- -------- (DOLLARS IN THOUSANDS) Financial assets: Cash and due from banks.................. $ 15,712 $ 15,712 $ 14,787 $ 14,787 Marketable securities available for sale.................................... 21,048 21,048 17,504 17,504 Marketable securities held to maturity... 19,547 19,597 21,172 21,345 Loans, net............................... 250,926 250,503 182,009 182,898 Accrued interest receivable.............. 2,002 2,002 1,960 1,960 Financial liabilities: Deposits................................. 277,353 278,000 218,846 219,705 Securities sold under repurchase agreements.............................. 13,929 13,929 8,913 8,913 Long-term debt........................... 4,006 4,043 5,985 6,101 Federal Home Loan Bank advances.......... 4,970 4,970 -- -
The following methods and assumptions were used to estimate the fair value of each class of financial instruments: Cash and due from banks. Carrying value approximates fair value since these instruments are payable on demand and do not present credit concerns. Federal funds sold and interest-bearing deposits with banks. Carrying value approximates fair value since these instruments have short-term maturities and do not present credit concerns. Marketable securities available for sale and held to maturity. The estimated fair value of securities available for sale and held to maturity is based on independent dealer quotations or published market price bid quotes. Loans, net. The estimated fair value of the loan portfolio is calculated by discounting scheduled cash flows over the estimated maturity of loans using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities or repricing terms. Credit risk is accounted for through a reduction of contractual cash flows by loss estimates of classified loans and as a component of the discount rate. F-23 FIRST STATE BANCORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Accrued interest receivable. Carrying value of interest receivable approximates fair value, since these instruments have short-term maturities. Deposits. The estimated fair value of deposits with no stated maturity, such as demand deposits, savings accounts and money market deposits, approximates the amounts payable on demand at December 31, 1996 and 1995. The fair value of fixed maturity certificates of deposit is estimated by discounting the future contractual cash flows using the rates currently offered for deposits of similar remaining maturities. Securities sold under repurchase agreements. The estimated fair value of securities sold under repurchase agreements, which reset frequently to market interest rates, approximate fair value. Long-term debt. Long-term debt consists primarily of subordinated debentures which are callable at the Company's option; their fair value is therefore considered to be their call price. Federal Home Loan Bank Advances. Federal Home Loan Bank advances reprice at least monthly; accordingly their carrying value is considered to approximate their fair value. Off Balance Sheet Items. The estimated fair values of the Company's off balance sheet items are not material to the fair value of financial instruments included in the statement of financial condition. Rates currently available to the Company and subsidiary for debt with similar terms and remaining maturities are used to estimate fair value of existing debt. 15. CREDIT CARD PROCESSING OPERATION As of December 31, 1995, the Company decided to abandon its 48% limited partnership investment in Credit Card Services, Ltd. (CCS), effective April 1, 1996. CCS is a credit card processing operation located in Henderson, Nevada. The Company's initial investment in CCS was made in June 1994. The loss from abandonment includes the Company's limited partnership investment, loans to the partnership and commitments for advances to the partnership. The following is a summary of the loss from CCS:
YEARS ENDED DECEMBER 31, -------------------------- 1995 1994 ------------- ------------ Equity in losses from operations.............. $ 278,000 $ 158,000 Loss from abandonment of limited partnership interest..................................... $ 930,000 -- ------------- ----------- $ 1,208,000 $ 158,000 ============= ===========
F-24 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRE- SENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE IN THIS PROSPEC- TUS, AND, IF GIVEN OR MADE, THE INFORMATION AND REPRESENTATIONS MUST BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITER. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE HEREUNDER SHALL, UNDER ANY CIRCUM- STANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME AFTER THE DATE HEREOF. THIS PROSPECTUS DOES NOT CON- STITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY SECURI- TIES IN ANY CIRCUMSTANCES IN WHICH THE OFFER OR SOLICITATION IS UNLAWFUL. --------------- TABLE OF CONTENTS
PAGE ---- Prospectus Summary......................................................... 3 Summary Consolidated Financial Data........................................ 5 Risk Factors............................................................... 6 The Company................................................................ 10 Recent Developments........................................................ 16 Use of Proceeds............................................................ 17 Market for Common Stock and Dividends...................................... 17 Capitalization............................................................. 18 Selected Consolidated Financial Data....................................... 19 Management's Discussion and Analysis of Financial Condition and Results of Operations For the Years Ended December 31, 1996, 1995 and 1994.......................................... 20 Regulation and Supervision................................................. 30 Management................................................................. 37 Description of the Debentures.............................................. 44 Description of Capital Stock............................................... 53 Underwriting............................................................... 58 Legal Matters.............................................................. 60 Experts.................................................................... 60 Available Information...................................................... 60 Incorporation of Certain Documents by Reference............................ 60 Index to Consolidated Financial Statements................................. F-1
- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- $ FIRST STATE BANCORPORATION % SUBORDINATED DEBENTURES DUE 2017 --------------- PROSPECTUS --------------- KEEFE, BRUYETTE & WOODS, INC. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following statement states the estimated amounts of expenses (other than underwriting discounts and commissions) to be borne by the Registrant in connection with the Offering: SEC Registration Fee............................................... $ 4,182 NASD Filing Fee.................................................... 1,880 NASDAQ Listing Fee................................................. 10,000 Legal Fees and Expenses............................................ 55,000 Trustee and Transfer Agent Fees and Expenses....................... 4,250 Accounting Fees and Expenses....................................... 49,500 Printing, Mailing, and Publication Expenses........................ 19,500 Blue Sky Fees and Expenses......................................... 2,500 Miscellaneous Expenses............................................. 5,000 -------- TOTAL FEES AND EXPENSES.......................................... $151,812 ========
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS. The Company's Bylaws provide that the Company will indemnify all directors, officers and employees of the Company to the fullest extent now permitted by the New Mexico Business Corporation Act (the "NMBCA"). Under these provisions any director, officer or employee who is made a party to any suit or proceeding will be indemnified if (i) such person acted in good faith and in a manner he reasonably believed to be in the best interests of the Company, (ii) with respect to any criminal proceeding, had no reasonable cause to believe his conduct was unlawful and (iii) in all other cases, that his conduct was at least not opposed to the best interests of the Company. The NMBCA further provides that such indemnification is not exclusive of any other rights to which such individuals may be entitled under the Articles of Incorporation, the Bylaws, an agreement, a resolution of shareholders or directors or otherwise that are not inconsistent with the NMBCA. Pursuant to the Bylaws and the NMBCA, the Company cannot indemnify a director in connection with a proceeding by or in the right of the Company in which the director was adjudged liable to the Company, or in connection with any other proceeding charging improper personal benefit to the director, whether or not involving action in his official capacity, in which he is adjudged liable on the basis that personal benefit was improperly received by him. In addition, the Company's Articles of Incorporation provide that to the fullest extent now or hereafter permitted by New Mexico law, the Company's directors will not be liable to the Company or its stockholders for monetary damages for breach of their fiduciary duties as directors unless any such director has breached or failed to perform the duties of the director's office in compliance with Subsection 43-11-35(B) of the NMBCA (duty of care) and the breach or failure to perform constitutes negligence, willful misconduct or recklessness in the case of a director who has either an ownership interest in the Company or receives compensation of more than $2,000 from the Company in any calendar year, or willful misconduct or recklessness in the case of a director who does not have an ownership interest in the Company and does not receive compensation of more than $2,000 in any calendar year. Each director will continue to be subject to liability for breach of the director's duty of loyalty to the Company and its stockholders, for acts or omissions not undertaken in good faith or involving intentional misconduct or knowing violations of law, for liability arising under Section 53-11-46 of the NMBCA (relating to the unlawful payment of distributions, and purchase or redemption of the Company's stock), or for any transaction from which the director derived an improper personal benefit. This provision also does not affect a director's responsibilities under any other laws, such as federal securities laws or state or federal environmental laws. II-1 ITEM 16. EXHIBITS. The following exhibits are either filed herewith or incorporated by reference to documents previously filed as indicated below:
EXHIBITS DESCRIPTION -------- ----------- 1 Form of Purchase Agreement 3.1 Restated Articles of Incorporation of the Company 3.2 Bylaws of the Company(1) 4.1 Form of Indenture between the Company and First Trust National Association, as Trustee, with respect to the Debentures 4.2 Specimen Convertible Subordinated Debenture (found at Article II of the Form of Indenture filed as Exhibit 4.1) 4.3 Shareholder Protection Rights Agreement, dated as of October 25, 1996, between the Company and American Securities Transfer & Trust, Incorporated, as Rights Agent(3) 5 Form of Opinion of Hinkle, Cox, Eaton, Coffield & Hensley, L.L.P., regarding binding obligation of the Convertible Subordinated Debentures being offered 10.1 Stock Option Plan of the Company(1) 10.2 Stock Option Agreement with Michael R. Stanford(1) 10.3 Lease agreement between the Company and Horn Distributing, Herman N. Wisenteiner, President(2) 10.4 Executive Income Protection Plan(2) 12.1 Statement re Computation of Ratio of Earnings to Fixed Charges 23.1 Consent of Hinkle, Cox, Eaton, Coffield & Hensley, L.L.P. (included in Exhibit 5) 23.2 Consent of KPMG Peat Marwick LLP 24 Power of Attorney* 25 Form T-1: Statement of Eligibility of Trustee
- -------- * Previously filed. (1) Incorporated by reference from the Company's Registration Statement on Form SB-2, Commission File No. 33-68166, declared effective November 3, 1993. (2) Incorporated by reference from the Company's Form 10-QSB for the quarter ended June 30, 1996. (3) Incorporated by reference from the Company's Form 10-QSB for the quarter ended September 30, 1996. II-2 ITEM 17. UNDERTAKINGS. The undersigned Registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this Registration Statement: (i) To include any prospectus required by section 10(a)(3) of the Securities Act; (ii) To reflect in the prospectus any facts or events arising after the effective date of the Registration Statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information stated in the Registration Statement; (iii) To include any material information with respect to the plan of distribution not previously disclosed in the Registration Statement or any material change to the information in the Registration Statement; (2) That, to determine any liability under the Act, each post-effective amendment shall be deemed a new registration statement relating to the securities offered therein, and the offering of those securities at that time shall be deemed the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. The undersigned Registrant hereby undertakes that, to determine any liability under the Securities Act, each filing of the Registrant's annual report pursuant to Section 13(a) or Section 15 (d) of the Exchange Act that is incorporated by reference in the Registration Statement shall be deemed a new registration statement relating to the securities offered therein, and the offering of the securities at that time shall be deemed the initial bona fide offering thereof. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers, and controlling persons of the Registrant pursuant to the foregoing provisions or otherwise, the Registrant has been advised that in the opinion of the Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. If a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer, or controlling person of the Registrant in the successful defense of any action, suit, or proceeding) is asserted by director, officer, or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether its indemnification is against public policy as expressed in the Securities Act and will be governed by the final adjudication of the issue. The undersigned Registrant hereby undertakes that: (a) To determine any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed part of this registration statement as of the time it was declared effective. (b) To determine any liability under the Securities Act, each post- effective amendment that contains a form of prospectus shall be deemed a new registration statement relating to the securities offered therein, and the offering of such securities at the time shall be deemed the initial bona fide offering thereof. II-3 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL REQUIREMENTS FOR FILING ON FORM S-2 AND HAS DULY CAUSED THIS AMENDMENT TO THE REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN ALBUQUERQUE, NEW MEXICO, ON APRIL 23, 1997. First State Bancorporation * By: _________________________________ CHIEF EXECUTIVE OFFICER,PRESIDENT AND DIRECTOR POWER OF ATTORNEY PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES INDICATED ON APRIL 23, 1997.
SIGNATURE TITLE --------- ----- * Chief Executive Officer, - --------------------------------- President, and Director MICHAEL R. STANFORD * Executive Vice President, - --------------------------------- Chief Operating Officer H. PATRICK DEE and Director * Senior Vice President and - --------------------------------- Chief Financial Officer BRIAN C. REINHARDT (Principal Financial and Accounting Officer) * Chairman of the - --------------------------------- Board and Director ELOY A. JEANTETE * Director - --------------------------------- LEONARD J. DELAYO, JR. * Director - --------------------------------- BRADFORD M. JOHNSON * Director - --------------------------------- SHERMAN MCCORKLE * Director - --------------------------------- DOUGLAS M. SMITH, M.D. * Director - --------------------------------- HERMAN N. WISENTEINER * Director - --------------------------------- MANUEL LUJAN, JR. *By: /s/ Brian C. Reinhardt ----------------------------- BRIAN C. REINHARDT ATTORNEY-IN FACT
II-4 INDEX TO EXHIBITS
SEQUENTIALLY EXHIBITS DESCRIPTION NUMBERED PAGE -------- ----------- ------------- 1 Form of Purchase Agreement 3.1 Restated Articles of Incorporation of the Company 3.2 Bylaws of the Company(1) 4.1 Form of Indenture between the Company and First Trust National Association, as Trustee, with respect to the Debentures 4.2 Specimen Convertible Subordinated Debenture (found at Article II of the Form of Indenture filed as Exhibit 4.1) 4.3 Shareholder Protection Rights Agreement, dated as of October 25, 1996, between the Company and American Securities Transfer & Trust, Incorporated, as Rights Agent(3) 5 Form of Opinion of Hinkle, Cox, Eaton, Coffield & Hensley, L.L.P., regarding binding obligation of the Convertible Subordinated Debentures being offered 10.1 Stock Option Plan of the Company(1) 10.2 Stock Option Agreement with Michael R. Stanford(1) 10.3 Lease agreement between the Company and Horn Distributing, Herman N. Wisenteiner, President(2) 10.4 Executive Income Protection Plan(2) 12.1 Statement re Computation of Ratio of Earnings to Fixed Charges 23.1 Consent of Hinkle, Cox, Eaton, Coffield & Hensley, L.L.P. (included in Exhibit 5) 23.2 Consent of KPMG Peat Marwick LLP 24 Power of Attorney* 25 Form T-1: Statement of Eligibility of Trustee
- -------- * Previously filed. (1) Incorporated by reference from the Company's Registration Statement on Form SB-2, Commission File No. 33-68166, declared effective November 3, 1993. (2) Incorporated by reference from the Company's Form 10-QSB for the quarter ended June 30, 1996. (3) Incorporated by reference from the Company's Form 10-QSB for the quarter ended September 30, 1996. II-5 EX-1 2 FORM OF PURCHASE AGREEMENT FIRST STATE BANCORPORATION (a New Mexico corporation) Convertible Subordinated Debentures due 2017 PURCHASE AGREEMENT Dated: ., 1997 Table of Contents
PURCHASE AGREEMENT........................................................ 1 SECTION 1. Representations and Warranties.................... 3 ------------------------------ (a) Representations and Warranties by the Company.............. 3 (i) Compliance with Registration Requirement.......... 3 --------------------------------------- (ii) Incorporated Documents............................ 4 ---------------------- (iii) Independent Accountants........................... 4 ----------------------- (iv) Financial Statements.............................. 4 -------------------- (v) No Material Adverse Change in Business............ 4 -------------------------------------- (vi) Good Standing of the Company...................... 5 ---------------------------- (vii) Good Standing of Subsidiaries..................... 5 ----------------------------- (viii) Capitalization.................................... 5 -------------- (ix) Authorization of Agreement........................ 6 -------------------------- (x) Authorization of the Indenture.................... 6 ------------------------------ (xi) Authorization of the Securities................... 6 ------------------------------- (xii) Description of the Securities and the Indenture... 6 ----------------------------------------------- (xiii) Authorization and Description of Common Stock..... 6 --------------------------------------------- (xiv) Absence of Defaults and Conflicts................. 7 --------------------------------- (xv) Absence of Labor Dispute.......................... 7 ------------------------ (xvi) Absence of Proceedings............................ 7 ---------------------- (xvii) Accuracy of Exhibits.............................. 8 ------------------------ (xviii) Possession of Intellectual Property............... 8 ----------------------------------- (xix) Absence of Further Requirements................... 8 ------------------------------- (xx) Possession of Licenses and Permits................ 8 ---------------------------------- (xxi) Title to Property................................. 9 ----------------- (xxii) Compliance with Cuba Act.......................... 9 ------------------------ (xxiii) Investment Company Act............................ 9 ---------------------- (xxiv) Environmental Laws................................ 9 ------------------ (xxv) Taxes............................................. 10 ----- (xxvi) Accounting Controls............................... 10 ------------------- (xxvii) Insurance......................................... 10 --------- (xxviii) Registration Rights............................... 11 ------------------- (xxix) Stabilization..................................... 11 ------------- (xxx) Certain Relationships............................. 11 ------------------------ (xxxi) Certain Actions................................... 11 ------------------------ (b) Officer's Certificates..................................... 11 SECTION 2. Sale and Delivery to Underwriters; Closing................. 11 ------------------------------------------ (a) Initial Securities......................................... 11 (b) Option Securities.......................................... 11 (c) Payment.................................................... 12 (d) Denominations; Registration................................ 12 SECTION 3. Covenants of the Company................................... 13 ------------------------
i (a) Compliance with Securities Regulations and Commission Requests.................................... 13 (b) Filing of Amendments....................................... 13 (c) Delivery of Registration Statements........................ 13 (d) Delivery of Prospectuses................................... 14 (e) Continued Compliance with Securities Laws.................. 14 (f) Blue Sky Qualifications.................................... 14 (g) Rule 158................................................... 15 (h) Use of Proceeds............................................ 15 (i) Listing.................................................... 15 (j) Restriction on Sale of Securities ......................... 15 (k) Restriction on Sale of Common Stock........................ 15 (l) Reporting Requirements..................................... 16 (m) Compliance with Cuba Act................................... 16 SECTION 4. Payment of Expenses........................................ 16 ------------------- (a) Expenses................................................... 16 (b) Termination of Agreement................................... 17 SECTION 5. Conditions of Underwriters' Obligations.................... 17 --------------------------------------- (a) Effectiveness of Registration Statement.................... 17 (b) Opinion of Counsel for Company............................. 17 (c) Opinion of Counsel for Underwriters........................ 17 (d) Officers' Certificate...................................... 18 (e) Accountant's Comfort Letter................................ 18 (f) Bring-down Comfort Letter.................................. 18 (g) Approval of Listing........................................ 19 (h) No Objection............................................... 19 (i) Lock-up Agreements......................................... 19 (j) Conditions to Purchase of Option Securities................ 19 (k) Additional Documents....................................... 20 (l) Termination of Agreement................................... 20 SECTION 6. Indemnification............................................ 20 --------------- (a) Indemnification of Underwriters............................ 20 (b) Indemnification of Company, Directors and Officers......... 21 (c) Actions against Parties; Notification...................... 22 (d) Settlement without Consent if Failure to Reimburse......... 22 SECTION 7. Contribution............................................... 22 ------------ SECTION 8. Representations, Warranties and Agreements to Survive ----------------------------------------------------- Delivery................................................... 24 -------- SECTION 9. Termination of Agreement................................... 24 ------------------------ (a) Termination; General....................................... 24 (b) Liabilities................................................ 24 SECTION 10. Default by One or More of the Underwriters................ 25 ------------------------------------------ SECTION 11. Notices................................................... 25 ------- SECTION 12. Parties................................................... 25 -------
ii SECTION 13. GOVERNING LAW AND TIME.................................... 25 ---------------------- SECTION 14. Effect of Headings........................................ 26 ------------------ SCHEDULES Schedule A - List of Underwriters................................... Sch A-1 Schedule B - Pricing Information.................................... Sch B-1 Schedule C - List of Subsidiaries................................... Sch C-1 Schedule D - List of persons and entities subject to lock-up........ Sch D-1 EXHIBITS Exhibit A - Form of Opinion of Company's Counsel........................ A-1 Exhibit B - Form of Lock-up Letter...................................... B-1
iii Draft of April 17, 1997 FIRST STATE BANCORPORATION (a New Mexico corporation) $__________ __% Convertible Subordinated Debentures due 2017 PURCHASE AGREEMENT ------------------ ., 1997 KEEFE, BRUYETTE & WOODS, INC. as Representative of the several Underwriters Two World Trade Center New York, New York 10048 Ladies and Gentlemen: First State Bancorporation, a New Mexico corporation (the "Company"), confirms its agreement with Keefe, Bruyette & Woods, Inc. ("KBW") and each of the other Underwriters named in Schedule A hereto (collectively, the "Underwriters", which term shall also include any underwriter substituted as hereinafter provided in Section 10 hereof), for whom KBW is acting as representative (in such capacity, the "Representative"), with respect to the issue and sale by the Company and the purchase by the Underwriters, acting severally and not jointly, of the respective principal amounts set forth in said Schedule A of $__________ aggregate principal amount of the Company's __% Convertible Subordinated Debentures due 2017 (the "Debentures"), and with respect to the grant by the Company to the Underwriters, acting severally and not jointly, of the option described in Section 2(b) hereof to purchase all or any part of an additional $_________ principal amount of Debentures to cover over-allotments, if any. The aforesaid $__________ principal amount of Debentures (the "Initial Securities") to be purchased by the Underwriters and all or any part of the $_________ principal amount of Debentures subject to the option described in Section 2(b) hereof (the "Option Securities") are hereinafter called, collectively, the "Securities". The Securities are to be issued pursuant to an indenture dated as of . (the "Indenture") between the Company and ., as trustee (the "Trustee"). The Securities are convertible into shares of common stock, no par value per share, of the Company (the "Common Stock"), in accordance with the terms of the Securities and the Indenture, at the initial conversion price specified in Schedule B hereto. Each such share of Common Stock will be issued with the rights (the "Rights") attached thereto issued pursuant to 1 the Shareholder Protection Rights Agreement, dated as of October 25, 1996, between the Company and American Securities Transfer & Trust, Incorporated, as Rights Agent. The Company understands that the Underwriters propose to make a public offering of the Securities as soon as the Representative deems advisable after this Agreement has been executed and delivered and the Indenture has been qualified under the Trust Indenture Act of 1939, as amended (the "1939 Act"). The Company has filed with the Securities and Exchange Commission (the "Commission") a registration statement on Form S-2 (No. 333-24417) covering the registration of the Securities under the Securities Act of 1933, as amended (the "1933 Act"), including the related preliminary prospectus or prospectuses. Promptly after execution and delivery of this Agreement, the Company will either (i) prepare and file a prospectus in accordance with the provisions of Rule 430A ("Rule 430A") of the rules and regulations of the Commission under the 1933 Act (the "1933 Act Regulations") and paragraph (b) of Rule 424 ("Rule 424(b)") of the 1933 Act Regulations or (ii) if the Company has elected to rely upon Rule 434 ("Rule 434") of the 1933 Act Regulations, prepare and file a term sheet (a "Term Sheet") in accordance with the provisions of Rule 434 and Rule 424(b). The information included in such prospectus or in such Term Sheet, as the case may be, that was omitted from such registration statement at the time it became effective but that is deemed to be part of such registration statement at the time it became effective (a) pursuant to paragraph (b) of Rule 430A is referred to as "Rule 430A Information" or (b) pursuant to paragraph (d) of Rule 434 is referred to as "Rule 434 Information." Each prospectus used before such registration statement became effective, and any prospectus that omitted, as applicable, the Rule 430A Information or the Rule 434 Information, that was used after such effectiveness and prior to the execution and delivery of this Agreement, is herein called a "preliminary prospectus." Such registration statement, including the exhibits thereto, schedules thereto, if any, and the documents incorporated by reference therein pursuant to Item 12 of Form S-2 under the 1933 Act, at the time it became effective and including the Rule 430A Information and the Rule 434 Information, as applicable, is herein called the "Registration Statement." Any registration statement filed pursuant to Rule 462(b) of the 1933 Act Regulations is herein referred to as the "Rule 462(b) Registration Statement," and after such filing the term "Registration Statement" shall include the Rule 462(b) Registration Statement. The final prospectus, including the documents incorporated by reference therein pursuant to Item 12 of Form S-2 under the 1933 Act, in the form first furnished to the Underwriters for use in connection with the offering of the Securities is herein called the "Prospectus." If Rule 434 is relied on, the term "Prospectus" shall refer to the preliminary prospectus dated April 17, 1997, together with the Term Sheet, and all references in this Agreement to the date of the Prospectus shall mean the date of the Term Sheet. For purposes of this Agreement, all references to the Registration Statement, any preliminary prospectus, the Prospectus or any Term Sheet or any amendment or supplement to any of the foregoing shall be deemed to include the copy filed with the Commission pursuant to its Electronic Data Gathering, Analysis and Retrieval system ("EDGAR"). 2 All references in this Agreement to financial statements and schedules and other information which is "contained," "included" or "stated" in the Registration Statement, any preliminary prospectus or the Prospectus (or other references of like import) shall be deemed to mean and include all such financial statements and schedules and other information which is incorporated by reference in the Registration Statement, any preliminary prospectus or the Prospectus, as the case may be; and all references in this Agreement to amendments or supplements to the Registration Statement, any preliminary prospectus or the Prospectus shall be deemed to mean and include the filing of any document under the Securities Exchange Act of 1934 (the "1934 Act") which is incorporated by reference in the Registration Statement, such preliminary prospectus or the Prospectus, as the case may be. SECTION 1. Representations and Warranties. ------------------------------ (a) Representations and Warranties by the Company. The Company represents and warrants to each Underwriter as of the date hereof, as of the Closing Time referred to in Section 2(c) hereof, and as of each Date of Delivery (if any) referred to in Section 2(b) hereof, and agrees with each Underwriter, as follows: (i) Compliance with Registration Requirements. The Company meets ----------------------------------------- the requirements for use of Form S-2 under the 1933 Act. Each of the Registration Statement and any Rule 462(b) Registration Statement has become effective under the 1933 Act and no stop order suspending the effectiveness of the Registration Statement or any Rule 462(b) Registration Statement has been issued under the 1933 Act and no proceedings for that purpose have been instituted or are pending or, to the knowledge of the Company, are contemplated by the Commission, and any request on the part of the Commission for additional information has been complied with. At the respective times the Registration Statement, any Rule 462(b) Registration Statement and any post-effective amendments thereto became effective and at the Closing Time (and, if any Option Securities are purchased, at the Date of Delivery), the Registration Statement, the Rule 462(b) Registration Statement and any amendments and supplements thereto complied and will comply in all material respects with the requirements of the 1933 Act and the 1933 Act Regulations and the 1939 Act and the rules and regulations of the Commission under the 1939 Act (the "1939 Act Regulations"), and did not and will 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 not misleading. Neither the Prospectus nor any amendments or supplements thereto, at the time the Prospectus or any such amendment or supplement was issued and at the Closing Time (and, if any Option Securities are purchased, at the Date of Delivery), included or will include an untrue statement of a material fact or omitted or will omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. If Rule 434 is used, the Company will comply with the requirements of Rule 434 and the Prospectus shall not be "materially different", as such term is used in Rule 434, from the prospectus included in the Registration Statement at the time it became effective. The representations and warranties in this subsection 3 shall not apply to statements in or omissions from the Registration Statement or Prospectus made in reliance upon and in conformity with information furnished to the Company in writing by any Underwriter through KBW expressly for use in the Registration Statement or Prospectus. Each preliminary prospectus and the prospectus filed as part of the Registration Statement as originally filed or as part of any amendment thereto, or filed pursuant to Rule 424 under the 1933 Act, complied when so filed in all material respects with the 1933 Act Regulations and each preliminary prospectus and the Prospectus delivered to the Underwriters for use in connection with this offering was identical to the electronically transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T. (ii) Incorporated Documents. The documents incorporated or deemed ---------------------- to be incorporated by reference in the Registration Statement and the Prospectus, at the time they were or hereafter are filed with the Commission, complied and will comply in all material respects with the requirements of the 1934 Act and the rules and regulations of the Commission thereunder (the "1934 Act Regulations"), and, when read together with the other information in the Prospectus, at the time the Registration Statement became effective, at the time the Prospectus was issued and at the Closing Time (and if any Option Securities are purchased, at the Date of Delivery), did not and will 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 not misleading. (iii) Independent Accountants. The accountants who certified the ----------------------- financial statements and supporting schedules included in the Registration Statement are independent public accountants as required by the 1933 Act and the 1933 Act Regulations. (iv) Financial Statements. The financial statements included in -------------------- the Registration Statement and the Prospectus, together with the related schedules and notes, present fairly the financial position of the Company and its consolidated subsidiaries at the dates indicated and the statement of operations, stockholders' equity and cash flows of the Company and its consolidated subsidiaries for the periods specified; said financial statements have been prepared in conformity with generally accepted accounting principles ("GAAP") applied on a consistent basis throughout the periods involved. The supporting schedules, if any, included in the Registration Statement present fairly in accordance with GAAP the information required to be stated therein. The selected financial data and the summary financial information included in the Prospectus present fairly the information shown therein and have been compiled on a basis consistent with that of the audited financial statements included in the Registration Statement. (v) No Material Adverse Change in Business. Since the -------------------------------------- respective dates as of which information is given in the Registration Statement and the Prospectus, except as otherwise stated therein, (A) there has been no material adverse change in the condition, financial or otherwise, or in the earnings, business affairs or business prospects of the Company and its subsidiaries considered as one enterprise, whether or not arising in the ordinary course 4 of business (a "Material Adverse Effect"), (B) there have been no transactions entered into by the Company or any of its subsidiaries, other than those in the ordinary course of business, which are material with respect to the Company and its subsidiaries considered as one enterprise, and (C) except for regular quarterly dividends on the Common Stock in amounts per share that are consistent with past practice, there has been no dividend or distribution of any kind declared, paid or made by the Company on any class of its capital stock. (vi) Good Standing of the Company. The Company has been duly ---------------------------- organized and is validly existing as a corporation in good standing under the laws of the State of New Mexico and has corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Prospectus and to enter into and perform its obligations under this Agreement; and the Company is duly qualified as a foreign corporation to transact business and is in good standing in each other jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except where the failure or failures so to qualify or to be in good standing would not, individually or in the aggregate, result in a Material Adverse Effect; and the Company is duly registered as a bank holding company under the Bank Holding Company Act of 1956, as amended. (vii) Good Standing of Subsidiaries. First State Bank of Taos (the ----------------------------- "Bank") has been duly organized and is validly existing as a state bank in good standing under the laws of the State of New Mexico and has corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Prospectus. Each other subsidiary of the Company (each of the Bank and each such other subsidiary is referred to herein as a "Subsidiary" and, collectively, as the "Subsidiaries") has been duly organized and is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation, and has corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Prospectus. Each Subsidiary is duly qualified as a foreign corporation to transact business and is in good standing in each jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except where the failure or failures so to qualify or to be in good standing would not, individually or in the aggregate, result in a Material Adverse Effect; except as otherwise disclosed in the Registration Statement, all of the issued and outstanding capital stock of each such Subsidiary has been duly authorized and validly issued, is fully paid and non-assessable and is owned by the Company, directly or through subsidiaries, free and clear of any security interest, mortgage, pledge, lien, encumbrance, claim or equity; none of the outstanding shares of capital stock of any Subsidiary was issued in violation of the preemptive or similar rights of any securityholder of such Subsidiary. The only Subsidiaries of the Company are the Subsidiaries listed on Schedule C hereto. Except for the shares of capital stock of the Subsidiaries owned by the Company and such Subsidiaries, neither the Company nor the Subsidiaries owns any shares of stock or any other equity securities of any corporation or has any equity interest in any firm, partnership, association or other entity, except as described in the Prospectus and except for those interests which are not required to be described in the Registration Statement. 5 (viii) Capitalization. The authorized, issued and outstanding capital -------------- stock of the Company is as set forth in the Prospectus in the column entitled "Actual" under the caption "Capitalization" (except for subsequent issuances, if any, pursuant to this Agreement, pursuant to reservations, agreements or employee benefit plans referred to in the Prospectus or pursuant to the exercise of convertible securities or options referred to in the Prospectus). The shares of issued and outstanding capital stock of the Company have been duly authorized and validly issued and are fully paid and non-assessable; none of the outstanding shares of capital stock of the Company was issued in violation of the preemptive or other similar rights of any securityholder of the Company. (ix) Authorization of Agreement. This Agreement has been duly -------------------------- authorized, executed and delivered by the Company. (x) Authorization of the Indenture. The Indenture has been duly ------------------------------ authorized by the Company and duly qualified under the 1939 Act and, when duly executed and delivered by the Company and the Trustee, will constitute a valid and binding agreement of the Company, enforceable against the Company in accordance with its terms, except as the enforcement thereof may be limited by bankruptcy, insolvency (including, without limitation, all laws relating to fraudulent transfers), reorganization, moratorium or similar laws affecting enforcement of creditors' rights generally and except as enforcement thereof is subject to general principles of equity (regardless of whether enforcement is considered in a proceeding in equity or at law). (xi) Authorization of the Securities. The Securities have been duly ------------------------------- authorized and, at the Closing Time, will have been duly executed by the Company and, when authenticated, issued and delivered in the manner provided for in the Indenture and delivered against payment of the purchase price therefor as provided in this Agreement, will constitute valid and binding obligations of the Company, enforceable against the Company in accordance with their terms, except as the enforcement thereof may be limited by bankruptcy, insolvency (including, without limitation, all laws relating to fraudulent transfers), reorganization, moratorium or similar laws affecting enforcement of creditors' rights generally and except as enforcement thereof is subject to general principles of equity (regardless of whether enforcement is considered in a proceeding in equity or at law), and will be in the form contemplated by, and entitled to the benefits of, the Indenture. (xii) Description of the Securities and the Indenture. The Securities ----------------------------------------------- and the Indenture will conform in all material respects to the respective statements relating thereto contained in the Prospectus and will be in substantially the respective forms filed or incorporated by reference, as the case may be, as exhibits to the Registration Statement. (xiii) Authorization and Description of Common Stock. Each of the --------------------------------------------- Common Stock and the Rights conforms to all statements relating thereto contained or incorporated by reference in the Prospectus and each such description conforms to the rights set forth in the respective instruments defining the same. Upon issuance and delivery of the Securities in accordance with this Agreement and the Indenture, the Securities will be convertible at the 6 option of the holder thereof for shares of Common Stock and associated Rights, if any, in accordance with the terms of the Securities and the Indenture; the shares of Common Stock and the associated Rights, if any, issuable upon conversion of the Securities have been duly authorized and reserved for issuance upon such conversion by all necessary corporate action and such shares of Common Stock, when issued upon such conversion, will be validly issued and will be fully paid and non-assessable; no holder of such shares of Common Stock will be subject to personal liability by reason of being such a holder; and the issuance of such shares of Common Stock upon such conversion will not be subject to the preemptive or other similar rights of any securityholder of the Company. (xiv) Absence of Defaults and Conflicts. Neither the Company nor any of --------------------------------- the Subsidiaries is in violation of its charter or by-laws or in default in the performance or observance of any obligation, agreement, covenant or condition contained in any contract, indenture, mortgage, deed of trust, loan or credit agreement, note, lease or other agreement or instrument to which the Company or any of the 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 Subsidiary is subject (collectively, "Agreements and Instruments") except for such defaults that would not, individually or in the aggregate, result in a Material Adverse Effect; and the execution, delivery and performance of this Agreement, the Indenture and the Securities and the consummation of the transactions contemplated herein and in the Registration Statement (including (a) the issuance and sale of the Securities and the use of the proceeds from the sale of the Securities as described in the Prospectus under the caption "Use of Proceeds", (b) the issuance of the shares of Common Stock issuable upon conversion of the Securities and (c) the consummation of the Company's redemption (the "Redemption") of its outstanding 7% Subordinated Convertible Debentures due 2003 (the "7% Debentures")) and compliance by the Company with its obligations hereunder and under the Indenture and the Securities have been duly authorized by all necessary corporate action and do not and will not, whether with or without the giving of notice or passage of time or both, conflict with or constitute a breach of, or default or Repayment Event (as defined below) under, give rise to any right of termination under, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or any Subsidiary pursuant to, the Agreements and Instruments (except for such conflicts, breaches or defaults or liens, charges or encumbrances that would not, individually or in the aggregate, result in a Material Adverse Effect), nor will such action result in any violation of the provisions of the charter or by-laws of the Company or any Subsidiary or any applicable law, statute, rule, regulation, judgment, order, writ or decree of any government, government instrumentality or court, domestic or foreign, having jurisdiction over the Company or any Subsidiary or any of their assets, properties or operations. As used herein, a "Repayment Event" means any event or condition which gives the holder of any note, debenture or other evidence of indebtedness (or any person acting on such holder's behalf) the right to require the repurchase, redemption or repayment of all or a portion of such indebtedness by the Company or any Subsidiary. (xv) Absence of Labor Dispute. No labor dispute with the employees of ------------------------ the Company or any Subsidiary exists or, to the knowledge of the Company, is imminent, and the 7 Company is not aware of any existing or imminent labor disturbance by the employees of any of its or any Subsidiary's principal suppliers, customers or contractors, which, in either case, may reasonably be expected to result in a Material Adverse Effect. (xvi) Absence of Proceedings. There is no action, suit, proceeding, ---------------------- inquiry or investigation before or brought by any court or governmental agency or body, domestic or foreign, now pending, or, to the knowledge of the Company, threatened, against or affecting the Company or any Subsidiary, which is required to be disclosed in the Registration Statement (other than as disclosed therein), or which might reasonably be expected to result in a Material Adverse Effect, or which might reasonably be expected to materially and adversely affect the properties or assets thereof or the consummation of the transactions contemplated in this Agreement or the consummation of the Redemption or the performance by the Company of its obligations hereunder; the aggregate of all pending legal or governmental proceedings to which the Company or any Subsidiary is a party or of which any of their respective property or assets is the subject which are not described in the Registration Statement, including ordinary routine litigation incidental to the business, could not reasonably be expected to result in a Material Adverse Effect. (xvii) Accuracy of Exhibits. There are no contracts or documents which -------------------- are required to be described in the Registration Statement, the Prospectus or the documents incorporated by reference therein or to be filed as exhibits thereto which have not been so described and filed as required. (xviii) Possession of Intellectual Property. The Company and the ----------------------------------- Subsidiaries own or possess, or can acquire on reasonable terms, adequate patents, patent rights, licenses, inventions, copyrights, know-how (including trade secrets and other unpatented and/or unpatentable proprietary or confidential information, systems or procedures), trademarks, service marks, trade names or other intellectual property (collectively, "Intellectual Property") necessary to carry on the business now operated by them, and neither the Company nor any of the Subsidiaries has received any notice or is otherwise aware of any infringement of or conflict with asserted rights of others with respect to any Intellectual Property or of any facts or circumstances which would render any Intellectual Property invalid or inadequate to protect the interest of the Company or any of the Subsidiaries therein, and which infringement or conflict (if the subject of any unfavorable decision, ruling or finding) or invalidity or inadequacy, individually or in the aggregate, would result in a Material Adverse Effect. (xix) Absence of Further Requirements. No filing with, or ------------------------------- authorization, approval, consent, license, order, registration, qualification or decree of, any court or governmental authority or agency is necessary or required for the performance by the Company of its obligations hereunder, in connection with the offering, issuance or sale of the Securities hereunder, the issuance of shares of Common Stock upon conversion of Securities or the consummation of the transactions contemplated by this Agreement or for the due execution, delivery or performance of the Indenture by the Company or for the consummation of the Redemption, except such as have been already obtained or as may be required under the 1933 8 Act or the 1933 Act Regulations or state securities laws and except for the qualification of the Indenture under the 1939 Act. (xx) Possession of Licenses and Permits. The Company and its ---------------------------------- Subsidiaries possess such certificates, authorities, permits, licenses, approvals, consents and other authorizations (collectively, "Governmental Licenses") issued by the appropriate federal, state, local or foreign regulatory agencies or bodies necessary to conduct the business now operated by them; the Company and its Subsidiaries are in compliance with the terms and conditions of all such Governmental Licenses, except where the failure so to comply would not, individually or in the aggregate, have a Material Adverse Effect; all of the Governmental Licenses are valid and in full force and effect, except when the invalidity of such Governmental Licenses or the failure of such Governmental Licenses to be in full force and effect would not 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 Governmental Licenses which, individually or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would result in a Material Adverse Effect. (xxi) Title to Property. The Company and the Subsidiaries have good ----------------- and marketable title to all real property owned by the Company and the Subsidiaries and good title to all other properties owned by them, in each case, free and clear of all mortgages, pledges, liens, security interests, claims, restrictions or encumbrances of any kind except such as (a) are described in the Prospectus or (b) do not, individually or in the aggregate, materially affect the value of such property and do not interfere with the use made and proposed to be made of such property by the Company or any of the Subsidiaries; and all of the leases and subleases material to the business of the Company and the Subsidiaries, considered as one enterprise, and under which the Company or any of the Subsidiaries holds properties described in the Prospectus, are in full force and effect, and neither the Company nor any Subsidiary has any notice of any material claim of any sort that has been asserted by anyone adverse to the rights of the Company or any Subsidiary under any of the leases or subleases mentioned above, or affecting or questioning the rights of the Company or such Subsidiary to the continued possession of the leased or subleased premises under any such lease or sublease. (xxii) Compliance with Cuba Act. The Company has complied with, and is ------------------------ and will be in compliance with, the provisions of that certain Florida act relating to disclosure of doing business with Cuba, codified as Section 517.075 of the Florida statutes, and the rules and regulations thereunder (collectively, the "Cuba Act") or is exempt therefrom. (xxiii) Investment Company Act. The Company is not, and upon the ---------------------- issuance and sale of the Securities as herein contemplated and the application of the net proceeds therefrom as described in the Prospectus will not be, an "investment company" or an entity "controlled" by an "investment company" as such terms are defined in the Investment Company Act of 1940, as amended (the "1940 Act"). 9 (xxiv) Environmental Laws. Except as described in the Registration ------------------ Statement and except as would not, individually or in the aggregate, result in a Material Adverse Effect, (A) neither the Company nor any of the Subsidiaries is in violation of any federal, state, local or foreign statute, law, rule, regulation, ordinance, code, policy or rule of common law or any judicial or administrative interpretation thereof, including any judicial or administrative order, consent, decree or judgment, relating to pollution or protection of human health, the environment (including, without limitation, ambient air, surface water, groundwater, land surface or subsurface strata) or wildlife, including, without limitation, laws and regulations relating to the release or threatened release of chemicals, pollutants, contaminants, wastes, toxic substances, hazardous substances, petroleum or petroleum products (collectively, "Hazardous Materials") or to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Hazardous Materials (collectively, "Environmental Laws"), (B) the Company and the Subsidiaries have all permits, authorizations and approvals required under any applicable Environmental Laws and are each in compliance with their requirements, (C) there are no pending or threatened administrative, regulatory or judicial actions, suits, demands, demand letters, claims, liens, notices of noncompliance or violation, investigation or proceedings relating to any Environmental Law against the Company or any of the Subsidiaries and (D) there are no events or circumstances that might reasonably be expected to form the basis of an order for clean-up or remediation, or an action, suit or proceeding by any private party or governmental body or agency, against or affecting the Company or any of the Subsidiaries relating to Hazardous Materials or any Environmental Laws. (xxv) Taxes. All United States federal income tax returns of the ----- Company and the Subsidiaries required by law to be filed have been filed and all taxes shown by such returns or otherwise assessed, which are due and payable, have been paid, except assessments against which appeals have been or will be promptly taken and as to which adequate reserves have been provided. The United States federal income tax returns of the Company through the fiscal year ended December 31, 1995 have been settled and no assessment in connection therewith has been made against the Company. Each of the Company and the Subsidiaries has filed all other tax returns that are required to have been filed by it pursuant to applicable foreign, state, local or other law except insofar as the failure to file such returns would not result in a Material Adverse Effect, and has paid all taxes due pursuant to such returns or pursuant to any assessment received by the Company or any Subsidiary, except for such taxes, if any, as are being contested in good faith and as to which adequate reserves have been provided. The charges, accruals and reserves on the books of the Company in respect of any income and corporation tax liability for any years not finally determined are adequate to meet any assessments or re-assessments for additional income tax for any years not finally determined, except to the extent of any inadequacy that would not result in a Material Adverse Effect. (xxvi) Accounting Controls. The Company and the Subsidiaries maintain a ------------------- system of internal accounting controls sufficient to provide reasonable assurances that (A) transactions are executed in accordance with management's general or specific authorization, (B) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain accountability for assets, (C) 10 access to assets is permitted only in accordance with management's general or specific authorization and (D) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (xxvii) Insurance. The Company and the Subsidiaries carry or are --------- entitled to the benefits of insurance, with financially sound and reputable insurers, in such amounts and covering such risks as is generally maintained by companies of established repute engaged in the same or similar business, and all such insurance is in full force and effect. (xxviii) Registration Rights. There are no persons with registration ------------------- rights or other similar rights to have any securities registered pursuant to the Registration Statement or otherwise registered by the Company under the 1933 Act. (xxix) Stabilization. Neither Company nor any of its officers, ------------- directors or controlling persons has taken, directly or indirectly, any action designed to cause or to result in, or that has constituted or which might reasonably be expected to constitute, the stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Securities. (xxx) Certain Relationships. No relationship, direct or indirect, --------------------- exists between or among any of the Company or any affiliate of the Company, on the one hand, and any director, officer, stockholder, customer or supplier of any of them, on the other hand, which is required by the 1933 Act or by the 1933 Act Regulations to be described in the Registration Statement or the Prospectus which is not so described or is not described as required. (xxxi) Certain Actions. The Company has not distributed and, prior to --------------- the later to occur of (i) the Closing Time and (ii) completion of the distribution of the Securities, will not distribute any offering material in connection with the offering and sale of the Securities other than the Registration Statement, any preliminary prospectus, the Prospectus or other materials, if any, permitted by the 1933 Act and approved by the Representative(s). (b) Officer's Certificates. Any certificate signed by any officer of the Company or any of its subsidiaries delivered to the Representative or to counsel for the Underwriters shall be deemed a representation and warranty by the Company to each Underwriter as to the matters covered thereby. SECTION 2. Sale and Delivery to Underwriters; Closing. ------------------------------------------ (a) Initial Securities. On the basis of the representations and warranties herein contained and subject to the terms and conditions herein set forth, the Company agrees to sell to each Underwriter, severally and not jointly, and each Underwriter, severally and not jointly, agrees to purchase from the Company, at the price set forth in Schedule B, the aggregate principal amount of Initial Securities set forth in Schedule A opposite the name of such 11 Underwriter, plus any additional principal amount of Initial Securities which such Underwriter may become obligated to purchase pursuant to the provisions of Section 10 hereof. (b) Option Securities. In addition, on the basis of the representations and warranties herein contained and subject to the terms and conditions herein set forth, the Company hereby grants an option to the Underwriters, severally and not jointly, to purchase up to an additional $_________ principal amount of Securities at the same price set forth in Schedule B for the Initial Securities, plus accrued interest, if any, from the Closing Date to the date of Delivery (as defined below). The option hereby granted will expire 30 days after the date hereof and may be exercised in whole or in part from time to time only for the purpose of covering over-allotments which may be made in connection with the offering and distribution of the Initial Securities upon notice by the Representative to the Company setting forth the number of Option Securities as to which the several Underwriters are then exercising the option and the time and date of payment and delivery for such Option Securities. Any such time and date of delivery (a "Date of Delivery") shall be determined by the Representative, but shall not be later than seven full business days after the exercise of said option, nor in any event prior to the Closing Time, as hereinafter defined. If the option is exercised as to all or any portion of the Option Securities, each of the Underwriters, acting severally and not jointly, will purchase that proportion of the total number of Option Securities then being purchased which the number of Initial Securities set forth in Schedule A opposite the name of such Underwriter bears to the total number of Initial Securities. (c) Payment. Payment of the purchase price for, and delivery of certificates for, the Initial Securities shall be made at the offices of [Skadden, Arps, Slate, Meagher & Flom LLP, 919 Third Avenue, New York, New York 10022], or at such other place as shall be agreed upon by the Representative and the Company, at 9:00 A.M. (Eastern time) on the third (fourth, if the pricing occurs after 4:30 P.M. (Eastern time) on any given day) business day after the date hereof (unless postponed in accordance with the provisions of Section 10), or such other time not later than ten business days after such date as shall be agreed upon by the Representative and the Company (such time and date of payment and delivery being herein called "Closing Time"). In addition, in the event that any or all of the Option Securities are purchased by the Underwriters, payment of the purchase price for, and delivery of certificates for, such Option Securities shall be made at the above-mentioned offices, or at such other place as shall be agreed upon by the Representative and the Company, on each Date of Delivery as specified in the notice from the Representative to the Company. Payment shall be made to the Company by wire transfer of immediately available funds to a bank account designated by the Company, against delivery to the Representative for the respective accounts of the Underwriters of certificates for the Securities to be purchased by them. It is understood that each Underwriter has authorized the Representative, for its account, to accept delivery of, receipt for, and make payment of the purchase price for, the Initial Securities and the Option Securities, if any, which it has agreed to purchase. KBW, individually and not as representative of the Underwriters, may (but shall not be obligated to) make payment 12 of the purchase price for the Initial Securities or the Option Securities, if any, to be purchased by any Underwriter whose funds have not been received by the Closing Time or the relevant Date of Delivery, as the case may be, but such payment shall not relieve such Underwriter from its obligations hereunder. (d) Denominations; Registration. Certificates for the Initial Securities and the Option Securities, if any, shall be in such denominations ($1,000 or integral multiples thereof) and registered in such names as the Representative may request in writing at least one full business day before the Closing Time or the relevant Date of Delivery, as the case may be. The certificates [,which may be in temporary form,] for the Initial Securities and the Option Securities, if any, will be made available for examination and packaging by the Representative in The City of New York not later than 10:00 A.M. (Eastern time) on the business day prior to the Closing Time or the relevant Date of Delivery, as the case may be. SECTION 3. Covenants of the Company. The Company covenants with each ------------------------ Underwriter as follows: (a) Compliance with Securities Regulations and Commission Requests. The Company, subject to Section 3(b), will comply with the requirements of Rule 430A or Rule 434, as applicable, and will notify the Representative immediately, and confirm the notice in writing, (i) when any post-effective amendment to the Registration Statement shall become effective, or any supplement to the Prospectus or any amended Prospectus shall have been filed, (ii) of the receipt of any comments from the Commission, (iii) of any request by the Commission for any amendment to the Registration Statement or any amendment or supplement to the Prospectus or for additional information, and (iv) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or of any order preventing or suspending the use of any preliminary prospectus, or of the suspension of the qualification of the Securities for offering or sale in any jurisdiction, or of the initiation or threatening of any proceedings for any of such purposes. The Company will promptly effect the filings necessary pursuant to Rule 424(b) and will take such steps as it deems necessary to ascertain promptly whether the form of prospectus transmitted for filing under Rule 424(b) was received for filing by the Commission and, in the event that it was not, it will promptly file such prospectus. The Company will make every reasonable effort to prevent the issuance of any stop order and, if any stop order is issued, to obtain the lifting thereof at the earliest possible moment. (b) Filing of Amendments. The Company will give the Representative notice of its intention to file or prepare any amendment to the Registration Statement (including any filing under Rule 462(b)), any Term Sheet or any amendment, supplement or revision to either the prospectus included in the Registration Statement at the time it became effective or to the Prospectus, whether pursuant to the 1933 Act, the 1934 Act or otherwise, will furnish the Representative with copies of any such documents a reasonable amount of time prior to such proposed filing or use, as the case may be, and 13 will not file or use any such document to which the Representative or counsel for the Underwriters shall object. (c) Delivery of Registration Statements. The Company has furnished or will deliver to the Representative and counsel for the Underwriters, without charge, signed copies of the Registration Statement as originally filed and of each amendment thereto (including exhibits filed therewith or incorporated by reference therein and documents incorporated or deemed to be incorporated by reference therein) and signed copies of all consents and certificates of experts, and will also deliver to the Representative, without charge, a conformed copy of the Registration Statement as originally filed and of each amendment thereto (without exhibits) for each of the Underwriters. The copies of the Registration Statement and each amendment thereto furnished to the Underwriters will be identical to the electronically transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T. (d) Delivery of Prospectuses. The Company has delivered to each Underwriter, without charge, as many copies of each preliminary prospectus as such Underwriter reasonably requested, and the Company hereby consents to the use of such copies for purposes permitted by the 1933 Act. The Company will furnish to each Underwriter, without charge, during the period when the Prospectus is required to be delivered under the 1933 Act or the 1934 Act, such number of copies of the Prospectus (as amended or supplemented) as such Underwriter may reasonably request. The Prospectus and any amendments or supplements thereto furnished to the Underwriters will be identical to the electronically transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T. (e) Continued Compliance with Securities Laws. The Company will comply with the 1933 Act and the 1933 Act Regulations, the 1934 Act and the 1934 Act Regulations and the 1939 Act and the 1939 Act Regulations so as to permit the completion of the distribution of the Securities as contemplated in this Agreement and in the Prospectus. If at any time when a prospectus is required by the 1933 Act to be delivered in connection with sales of the Securities, any event shall occur or condition shall exist as a result of which it is necessary, in the opinion of counsel for the Underwriters or for the Company, to amend the Registration Statement or amend or supplement the Prospectus in order that the Prospectus will not include any untrue statements of a material fact or omit to state a material fact necessary in order to make the statements therein not misleading in the light of the circumstances existing at the time it is delivered to a purchaser, or if it shall be necessary, in the opinion of such counsel, at any such time to amend the Registration Statement or amend or supplement the Prospectus in order to comply with the requirements of the 1933 Act or the 1933 Act Regulations, the Company will promptly prepare and file with the Commission, subject to Section 3(b), such amendment or supplement as may be necessary to correct such statement or omission or to make the Registration Statement or the Prospectus comply 14 with such requirements, and the Company will furnish to the Underwriters such number of copies of such amendment or supplement as the Underwriters may reasonably request. (f) Blue Sky Qualifications. The Company will use its best efforts, in cooperation with the Underwriters, to qualify the Securities and the shares of Common Stock issuable upon conversion of Securities for offering and sale under the applicable securities laws of such states and other jurisdictions (domestic or foreign) as the Representative may designate and to maintain such qualifications in effect for a period of not less than one year from the later of the effective date of the Registration Statement and any Rule 462(b) Registration Statement; provided, however, that the Company shall not be obligated to file any general consent to service of process or to qualify as a foreign corporation or as a dealer in securities in any jurisdiction in which it is not so qualified or to subject itself to taxation in respect of doing business in any jurisdiction in which it is not otherwise so subject. In each jurisdiction in which the Securities have been so qualified, the Company will file such statements and reports as may be required by the laws of such jurisdiction to continue such qualification in effect for a period of not less than one year from the effective date of the Registration Statement and any Rule 462(b) Registration Statement. The Company will also supply the Underwriters with such information as is necessary for the determination of the legality of the Securities for investment under the laws of such jurisdictions as the Underwriters may request. (g) Rule 158. The Company will timely file such reports pursuant to the 1934 Act as are necessary in order to make generally available to its securityholders as soon as practicable an earnings statement for the purposes of, and to provide the benefits contemplated by, the last paragraph of Section 11(a) of the 1933 Act. (h) Use of Proceeds. The Company will use the net proceeds received by it from the sale of the Securities in the manner specified in the Prospectus under "Use of Proceeds". (i) Listing. The Company will use its best efforts to (a) effect and maintain the quotation of the Common Stock issuable upon conversion of the Securities on the Nasdaq National Market and will file with the Nasdaq National Market all documents and notices required by the Nasdaq National Market of companies that have securities that are traded in the over-the- counter market and quotations for which are reported by the Nasdaq National Market and (b) effect and maintain the quotation of the Securities on the Nasdaq SmallCap Market and will file with the Nasdaq SmallCap Market all documents and notices required by the Nasdaq SmallCap Market of companies that have securities that are traded in the over-the-counter market and quotations for which are reported by the Nasdaq SmallCap Market. (j) Restriction on Sale of Securities. During a period of 180 days from the date of the Prospectus, the Company will not, without the prior written consent of KBW, 15 directly or indirectly, issue, sell, offer or contract to sell, grant any option for the sale of, or otherwise transfer or dispose of, any debt securities of the Company. (k) Restriction on Sale of Common Stock. During a period of 180 days from the date of the Prospectus, the Company will not, without the prior written consent of KBW, (i) directly or indirectly, offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase or otherwise transfer or dispose of any share of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock or file or cause to be filed any registration statement under the 1933 Act with respect to any of the foregoing or (ii) enter into any swap or any other agreement or any transaction that transfers, in whole or in part, directly or indirectly, the economic consequence of ownership of the Common Stock, whether any such swap or transaction described in clause (i) or (ii) above is to be settled by delivery of Common Stock or such other securities, in cash or otherwise. The foregoing sentence shall not apply to (A) the Securities to be sold hereunder, (B) any shares of Common Stock issued by the Company upon the exercise of an option or warrant or the conversion of a security outstanding on the date hereof and referred to in the Prospectus, (C) any shares of Common Stock issued or options to purchase Common Stock granted pursuant to existing employee benefit plans of the Company referred to in the Prospectus or (D) any shares of Common Stock issued pursuant to any non-employee director stock plan or dividend reinvestment plan. (l) Reporting Requirements. The Company, during the period when the Prospectus is required to be delivered under the 1933 Act or the 1934 Act, will file all documents required to be filed with the Commission pursuant to the 1934 Act within the time periods required by the 1934 Act and the 1934 Act Regulations. (m) Compliance with Cuba Act. In accordance with the Cuba Act and without limitation to the provisions of Sections 6 and 7 hereof, the Company agrees to indemnify and hold harmless each Underwriter from and against any and all loss, liability, claim, damage and expense whatsoever (including fees and disbursements of counsel), as incurred, arising out of any violation by the Company of the Cuba Act. SECTION 4. Payment of Expenses. (a) Expenses. The Company will pay all ------------------- expenses incident to the performance of its obligations under this Agreement, including (i) the preparation, printing and filing of the Registration Statement (including financial statements and exhibits) as originally filed and of each amendment thereto, (ii) the preparation, printing and delivery to the Underwriters of this Agreement, any Agreement among Underwriters, the Indenture and such other documents as may be required in connection with the offering, purchase, sale, issuance or delivery of the Securities or the issuance or delivery of the Common Stock issuable upon conversion thereof, (iii) the preparation, issuance and delivery of the certificates for the Securities to the Underwriters and the certificates for the Common Stock issuable upon conversion thereof, (iv) the fees and disbursements of the Company's counsel, accountants and 16 other advisors, (v) the qualification of the Securities and the Common Stock under securities laws in accordance with the provisions of Section 3(f) hereof, including filing fees and the reasonable fees and disbursements of counsel for the Underwriters in connection therewith and in connection with the preparation of the Blue Sky Survey and any supplement thereto, (vi) the printing and delivery to the Underwriters of copies of each preliminary prospectus, any Term Sheets and of the Prospectus and any amendments or supplements thereto, (vii) the preparation, printing and delivery to the Underwriters of copies of the Blue Sky Survey and any supplement thereto, (viii) the fees and expenses of the Trustee, including the fees and disbursements of counsel for the Trustee in connection with the Indenture and the Securities, (ix) the fees and expenses of any transfer agent or registrar for the Common Stock, (x) any fees payable in connection with the rating of the Securities, (xi) the filing fees incident to, and the reasonable fees and disbursements of counsel to the Underwriters in connection with, the review by the National Association of Securities Dealers, Inc. (the "NASD") of the terms of the sale of the Securities and (xii) the fees and expenses incurred in connection with the inclusion of the Securities in the Nasdaq SmallCap Market and the Common Stock issuable upon conversion thereof in the Nasdaq National Market. (b) Termination of Agreement. If this Agreement is terminated by the Representative in accordance with the provisions of Section 5 or Section 9(a)(i) hereof, the Company shall reimburse the Underwriters for all of their out-of- pocket expenses, including the reasonable fees and disbursements of counsel for the Underwriters. SECTION 5. Conditions of Underwriters' Obligations. The obligations of --------------------------------------- the several Underwriters hereunder are subject to the accuracy of the representations and warranties of the Company contained in Section 1 hereof or in certificates of any officer of the Company or any Subsidiary of the Company delivered pursuant to the provisions hereof, to the performance by the Company of its covenants and other obligations hereunder, and to the following further conditions: (a) Effectiveness of Registration Statement. The Registration Statement, including any Rule 462(b) Registration Statement, has become effective and at Closing Time no stop order suspending the effectiveness of the Registration Statement shall have been issued under the 1933 Act or proceedings therefor initiated or threatened by the Commission, and any request on the part of the Commission for additional information shall have been complied with to the reasonable satisfaction of counsel to the Underwriters. A prospectus containing the Rule 430A Information shall have been filed with the Commission in accordance with Rule 424(b) (or a post- effective amendment providing such information shall have been filed and declared effective in accordance with the requirements of Rule 430A) or, if the Company has elected to rely upon Rule 434, a Term Sheet shall have been filed with the Commission in accordance with Rule 424(b). (b) Opinion of Counsel for Company. At Closing Time, the Representative shall have received the favorable opinion, dated as of Closing Time, of Hinkle, Cox, 17 Eaton, Coffield & Hensley, L.L.P., counsel for the Company, in form and substance satisfactory to counsel for the Underwriters, together with signed or reproduced copies of such letter for each of the other Underwriters to the effect set forth in Exhibit A hereto and to such further effect as counsel to the Underwriters may reasonably request. (c) Opinion of Counsel for Underwriters. At Closing Time, the Representative shall have received the favorable opinion, dated as of Closing Time, of Skadden, Arps, Slate, Meagher & Flom LLP, counsel for the Underwriters, in form and substance satisfactory to the Underwriters, together with signed or reproduced copies of such letter for each of the other Underwriters. In giving such opinion such counsel may rely, as to all matters governed by the laws of jurisdictions other than the law of the State of New York and the federal law of the United States, upon the opinions of counsel satisfactory to the Representative. Such counsel may also state that, insofar as such opinion involves factual matters, they have relied, to the extent they deem proper, upon certificates of officers of the Company and its subsidiaries and certificates of public officials. (d) Officers' Certificate. At Closing Time, there shall not have been, since the date hereof or since the respective dates as of which information is given in the Prospectus, any material adverse change in the condition, financial or otherwise, or in the earnings, business affairs or business prospects of the Company and its subsidiaries considered as one enterprise, whether or not arising in the ordinary course of business, and the Representative shall have received a certificate of the President or a Vice President of the Company and of the chief financial or chief accounting officer of the Company, dated as of Closing Time, to the effect that (i) there has been no such material adverse change, (ii) the representations and warranties in Section 1(a) hereof are true and correct with the same force and effect as though expressly made at and as of Closing Time, (iii) the Company has complied with all agreements and satisfied all conditions on its part to be performed or satisfied at or prior to Closing Time, and (iv) no stop order suspending the effectiveness of the Registration Statement has been issued and no proceedings for that purpose have been instituted or are pending or are contemplated by the Commission. (e) Accountant's Comfort Letter. At the time of the execution of this Agreement, the Representative shall have received from KPMG Peat Marwick LLP a letter dated such date, in form and substance satisfactory to the Representative, together with signed or reproduced copies of such letter for each of the other Underwriters containing statements and information of the type ordinarily included in accountants' "comfort letters" to underwriters with respect to the financial statements and certain financial information contained in the Registration Statement and the Prospectus. (f) Bring-down Comfort Letter. At Closing Time, the Representative shall have received from KPMG Peat Marwick LLP a letter, dated as of Closing Time, to the effect that they reaffirm the statements made in the letter furnished pursuant to 18 subsection (e) of this Section, except that the specified date referred to shall be a date not more than three business days prior to Closing Time. (g) Approval of Listing. At Closing Time, (i) the Securities shall have been approved for inclusion in the Nasdaq SmallCap Market, subject only to official notice of issuance and (i) the Common Stock issuable on conversion of the Securities shall have been approved for inclusion in the Nasdaq National Market, subject only to official notice of issuance. (h) No Objection. The NASD has confirmed that it has not raised any objection with respect to the fairness and reasonableness of the underwriting terms and arrangements. (i) Lock-up Agreements. At the date of this Agreement, the Representative shall have received an agreement substantially in the form of Exhibit B hereto signed by the persons listed on Schedule D hereto. (j) Conditions to Purchase of Option Securities. In the event that the Underwriters exercise their option provided in Section 2(b) hereof to purchase all or any portion of the Option Securities, the representations and warranties of the Company contained herein and the statements in any certificates furnished by the Company or any Subsidiary of the Company hereunder shall be true and correct as of each Date of Delivery and, at the relevant Date of Delivery, the Representative shall have received: (i) Officers' Certificate. A certificate, dated such Date of --------------------- Delivery, of the President or a Vice President of the Company and of the chief financial or chief accounting officer of the Company confirming that the certificate delivered at the Closing Time pursuant to Section 5(d) hereof remains true and correct as of such Date of Delivery. (ii) Opinion of Counsel for Company. The favorable opinion of ------------------------------ Hinkle, Cox, Eaton, Coffield & Hensley, L.L.P., counsel for the Company, in form and substance satisfactory to counsel for the Underwriters, dated such Date of Delivery, relating to the Option Securities to be purchased on such Date of Delivery and otherwise to the same effect as the opinion required by Section 5(b) hereof. (iii) Opinion of Counsel for Underwriters. The favorable ----------------------------------- opinion of Skadden, Arps, Slate, Meagher & Flom LLP, counsel for the Underwriters, dated such Date of Delivery, relating to the Option Securities to be purchased on such Date of Delivery and otherwise to the same effect as the opinion required by Section 5(c) hereof. 19 (iv) Bring-down Comfort Letter. A letter from KPMG Peat Marwick ------------------------- LLP, in form and substance satisfactory to the Representative and dated such Date of Delivery, substantially in the same form and substance as the letter furnished to the Representative pursuant to Section 5(f) hereof, except that the "specified date" in the letter furnished pursuant to this paragraph shall be a date not more than five days prior to such Date of Delivery. (k) Additional Documents. At Closing Time and at each Date of Delivery, counsel for the Underwriters shall have been furnished with such documents and opinions as they may require for the purpose of enabling them to pass upon the issuance and sale of the Securities as herein contemplated, or in order to evidence the accuracy of any of the representations or warranties, or the fulfillment of any of the conditions, herein contained; and all proceedings taken by the Company in connection with the issuance and sale of the Securities as herein contemplated shall be satisfactory in form and substance to the Representative and counsel for the Underwriters. (l) Termination of Agreement. If any condition specified in this Section shall not have been fulfilled when and as required to be fulfilled, this Agreement, or, in the case of any condition to the purchase of Option Securities, on a Date of Delivery which is after the Closing Time, the obligations of the several Underwriters to purchase the relevant Option Securities, may be terminated by the Representative by notice to the Company at any time at or prior to Closing Time or such Date of Delivery, as the case may be, and such termination shall be without liability of any party to any other party except as provided in Section 4 and except that Sections 1, 3(m), 6, 7 and 8 shall survive any such termination and remain in full force and effect. SECTION 6. Indemnification. --------------- (a) Indemnification of Underwriters. The Company agrees to indemnify and hold harmless each Underwriter and each person, if any, who controls any Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act as follows: (i) against any and all loss, liability, claim, damage and expense whatsoever, as incurred, arising out of any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement (or any amendment thereto), including the Rule 430A Information and the Rule 434 Information, if applicable, or the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statements therein not misleading or arising out of any untrue statement or alleged untrue statement of a material fact included in any preliminary prospectus or the Prospectus (or any amendment or supplement thereto), or the omission or alleged omission therefrom of a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; 20 (ii) against any and all loss, liability, claim, damage and expense whatsoever, as incurred, to the extent of the aggregate amount paid in settlement of any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or of any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission; provided that (subject to Section 6(d) below) any such settlement is effected with the written consent of the Company; and (iii) against any and all expense whatsoever, as incurred (including the fees and disbursements of counsel chosen by KBW), reasonably incurred in investigating, preparing or defending against any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission, to the extent that any such expense is not paid under (i) or (ii) above; provided, however, that this indemnity agreement shall not apply to any loss, - -------- ------- liability, claim, damage or expense to the extent arising out of any untrue statement or omission or alleged untrue statement or omission made in reliance upon and in conformity with written information furnished to the Company by any Underwriter through KBW expressly for use in the Registration Statement (or any amendment thereto), including the Rule 430A Information and the Rule 434 Information, if applicable, or any preliminary prospectus or the Prospectus (or any amendment or supplement thereto). (b) Indemnification of Company, Directors and Officers. Each Underwriter severally agrees to indemnify and hold harmless the Company, its directors, each of its officers who signed the Registration Statement, and each person, if any, who controls the Company within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act against any and all loss, liability, claim, damage and expense described in the indemnity contained in subsection (a) of this Section, as incurred, but only with respect to untrue statements or omissions, or alleged untrue statements or omissions, made in the Registration Statement (or any amendment thereto), including the Rule 430A Information and the Rule 434 Information, if applicable, or any preliminary prospectus or the Prospectus (or any amendment or supplement thereto) in reliance upon and in conformity with written information furnished to the Company by such Underwriter through KBW expressly for use in the Registration Statement (or any amendment thereto) or such preliminary prospectus or the Prospectus (or any amendment or supplement thereto). (c) Actions against Parties; Notification. Each indemnified party shall give notice as promptly as reasonably practicable to each indemnifying party of any action commenced against it in respect of which indemnity may be sought hereunder, but failure to so notify an indemnifying party shall not relieve such indemnifying party from any liability hereunder to the extent it is not materially prejudiced as a result thereof and in any event shall not relieve it from any liability which it may have otherwise than on account of this indemnity agreement. In the case of parties indemnified pursuant to Section 6(a) above, counsel to the indemnified parties shall be selected by KBW, and, in the case of parties indemnified pursuant to Section 6(b) 21 above, counsel to the indemnified parties shall be selected by the Company. An indemnifying party may participate at its own expense in the defense of any such action; provided, however, that counsel to the indemnifying party shall not (except with the consent of the indemnified party) also be counsel to the indemnified party. In no event shall the indemnifying parties be liable for fees and expenses of more than one counsel (in addition to any local counsel) separate from their own counsel for all indemnified parties in connection with any one action or separate but similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances. No indemnifying party shall, without the prior written consent of the indemnified parties, settle or compromise or consent to the entry of any judgment with respect to any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever in respect of which indemnification or contribution could be sought under this Section 6 or Section 7 hereof (whether or not the indemnified parties are actual or potential parties thereto), unless such settlement, compromise or consent (i) includes an unconditional release of each indemnified party from all liability arising out of such litigation, investigation, proceeding or claim and (ii) does not include a statement as to or an admission of fault, culpability or a failure to act by or on behalf of any indemnified party. (d) Settlement without Consent if Failure to Reimburse. If at any time an indemnified party shall have requested an indemnifying party to reimburse the indemnified party for fees and expenses of counsel, such indemnifying party agrees that it shall be liable for any settlement of the nature contemplated by Section 6(a)(ii) effected without its written consent if (i) such settlement is entered into more than 45 days after receipt by such indemnifying party of the aforesaid request, (ii) such indemnifying party shall have received notice of the terms of such settlement at least 30 days prior to such settlement being entered into and (iii) such indemnifying party shall not have reimbursed such indemnified party in accordance with such request prior to the date of such settlement. SECTION 7. Contribution. If the indemnification provided for in Section 6 ------------ hereof is for any reason unavailable to or insufficient to hold harmless an indemnified party in respect of any losses, liabilities, claims, damages or expenses referred to therein, then each indemnifying party shall contribute to the aggregate amount of such losses, liabilities, claims, damages and expenses incurred by such indemnified party, as incurred, (i) in such proportion as is appropriate to reflect the relative benefits received by the Company on the one hand and the Underwriters on the other hand from the offering of the Securities pursuant to this Agreement or (ii) if the allocation provided by clause (i) 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 Company on the one hand and of the Underwriters on the other hand in connection with the statements or omissions which resulted in such losses, liabilities, claims, damages or expenses, as well as any other relevant equitable considerations. The relative benefits received by the Company on the one hand and the Underwriters on the other hand in connection with the offering of the Securities pursuant to this Agreement shall be deemed to be in the same respective proportions as the total net proceeds from the offering 22 of the Securities pursuant to this Agreement (before deducting expenses) received by the Company and the total underwriting discount received by the Underwriters, in each case as set forth on the cover of the Prospectus, or, if Rule 434 is used, the corresponding location on the Term Sheet, bear to the aggregate initial public offering price of the Securities as set forth on such cover. The relative fault of the Company on the one hand and the Underwriters on the other hand shall be determined by reference to, among other things, whether any such untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact relates to information supplied by the Company or by the Underwriters and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Underwriters agree that it would not be just and equitable if contribution pursuant to this Section 7 were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to above in this Section 7. The aggregate amount of losses, liabilities, claims, damages and expenses incurred by an indemnified party and referred to above in this Section 7 shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in investigating, preparing or defending against any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever based upon any such untrue or alleged untrue statement or omission or alleged omission. Notwithstanding the provisions of this Section 7, no Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the Securities underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages which such Underwriter has otherwise been required to pay by reason of any such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. For purposes of this Section 7, each person, if any, who controls an Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act shall have the same rights to contribution as such Underwriter, and each director of the Company, each officer of the Company who signed the Registration Statement, and each person, if any, who controls the Company within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act shall have the same rights to contribution as the Company. The Underwriters' respective obligations to contribute pursuant to this Section 7 are several in proportion to the principal amount of Initial Securities set forth opposite their respective names in Schedule A hereto and not joint. 23 SECTION 8. Representations, Warranties and Agreements to Survive Delivery. -------------------------------------------------------------- All representations, warranties and agreements contained in this Agreement or in certificates of officers of the Company or any of its subsidiaries submitted pursuant hereto, shall remain operative and in full force and effect, regardless of any investigation made by or on behalf of any Underwriter or controlling person, or by or on behalf of the Company, and shall survive delivery of the Securities to the Underwriters. SECTION 9. Termination of Agreement. ------------------------ (a) Termination; General. The Representative may terminate this Agreement, by notice to the Company, at any time at or prior to Closing Time (i) if there has been, since the time of execution of this Agreement or since the respective dates as of which information is given in the Prospectus, any material adverse change in the condition, financial or otherwise, or in the earnings, business affairs or business prospects of the Company and its subsidiaries considered as one enterprise, whether or not arising in the ordinary course of business, or (ii) if there has occurred any material adverse change in the financial markets in the United States or the international financial markets, any outbreak of hostilities or escalation thereof or other calamity or crisis or any change or development involving a prospective change in national or international political, financial or economic conditions, in each case the effect of which is such as to make it, in the judgment of the Representative, impracticable to market the Securities or to enforce contracts for the sale of the Securities, or (iii) if trading in any securities of the Company has been suspended or materially limited by the Commission or the Nasdaq National Market or the Nasdaq SmallCap Market, or if trading generally on the American Stock Exchange or the New York Stock Exchange or in the Nasdaq National Market or in the Nasdaq SmallCap Market has been suspended or materially limited, or minimum or maximum prices for trading have been fixed, or maximum ranges for prices have been required, by any of said exchanges or by such system or by order of the Commission, the National Association of Securities Dealers, Inc. or any other governmental authority, or (iv) if a banking moratorium has been declared by Federal, New York or New Mexico authorities. (b) Liabilities. If this Agreement is terminated pursuant to this Section, such termination shall be without liability of any party to any other party except as provided in Section 4 hereof, and provided further that Sections 1, 3(m), 6, 7 and 8 shall survive such termination and remain in full force and effect. SECTION 10. Default by One or More of the Underwriters. If one or more of ------------------------------------------ the Underwriters shall fail at Closing Time to purchase the Securities which it or they are obligated to purchase under this Agreement (the "Defaulted Securities"), the Representative shall have the right, but not the obligation, within 24 hours thereafter, to make arrangements for one or more of the non- defaulting Underwriters, or any other underwriters, to purchase all, but not less than all, of the Defaulted Securities in such amounts as may be agreed upon and upon the terms herein set forth; if, however, the Representative shall not have completed such arrangements within such 24-hour period, then this Agreement shall terminate without liability on the part of any non-defaulting Underwriter. 24 No action pursuant to this Section shall relieve any defaulting Underwriter from liability in respect of its default. In the event of any such default which does not result in a termination of this Agreement, either the Representative or the Company shall have the right to postpone the Closing Time for a period not exceeding seven days in order to effect any required changes in the Registration Statement or Prospectus or in any other documents or arrangement. SECTION 11. Notices. All notices and other communications hereunder shall ------- be in writing and shall be deemed to have been duly given if mailed or transmitted by any standard form of telecommunication. Notices to the Underwriters shall be directed to the Representative at Two World Trade Center, New York, New York 10048, attention of Albert A. De Almeida, Jr., Senior Vice President; and notices to the Company shall be directed to it at 111 Lomas Avenue NW, Albuquerque, New Mexico 87102, attention of Michael R. Sanford, President. SECTION 12. Parties. This Agreement shall each inure to the benefit of ------- and be binding upon the Underwriters and the Company and their respective successors. Nothing expressed or mentioned in this Agreement is intended or shall be construed to give any person, firm or corporation, other than the Underwriters and the Company and their respective successors and the controlling persons and officers and directors referred to in Sections 6 and 7 and their heirs and legal representatives, any legal or equitable right, remedy or claim under or in respect of this Agreement or any provision herein contained. This Agreement and all conditions and provisions hereof are intended to be for the sole and exclusive benefit of the Underwriters and the Company and their respective successors, and said controlling persons and officers and directors and their heirs and legal representatives, and for the benefit of no other person, firm or corporation. No purchaser of Securities from any Underwriter shall be deemed to be a successor by reason merely of such purchase. SECTION 13. GOVERNING LAW AND TIME. THIS AGREEMENT SHALL BE GOVERNED BY ---------------------- AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. EXCEPT AS OTHERWISE SET FORTH HEREIN, SPECIFIED TIMES OF DAY REFER TO NEW YORK CITY TIME. SECTION 14. Effect of Headings. The Article and Section headings herein ------------------ and the Table of Contents are for convenience only and shall not affect the construction hereof. 25 If the foregoing is in accordance with your understanding of our agreement, please sign and return to the Company a counterpart hereof, whereupon this instrument, along with all counterparts, will become a binding agreement between the Underwriters and the Company in accordance with its terms. Very truly yours, FIRST STATE BANCORPORATION By ____________________________________ Title: CONFIRMED AND ACCEPTED, as of the date first above written: KEEFE, BRUYETTE & WOODS, INC. By ______________________________________ Authorized Signatory For itself and as Representative of the other Underwriters named in Schedule A hereto. 26 SCHEDULE A
Principal Amount of Name of Underwriter Securities - ------------------- ---------- Keefe, Bruyette & Woods, Inc. ........................... ------------ Total.................................................... $ ============
Sch A - 1 SCHEDULE B FIRST STATE BANCORPORATION $__________ Convertible Subordinated Debentures due 2017 1. The initial public offering price of the Securities shall be __% of the principal amount thereof, plus accrued interest, if any, from the date of issuance. 2. The purchase price to be paid by the Underwriters for the Initial Securities shall be __% of the principal amount thereof. 3. The interest rate on the Securities shall be __% per annum. 4. The Securities shall be convertible into shares of common stock, no par value per share, of the Company at an initial conversion price of $____ per share (equivalent to a conversion rate of ____ shares per $1,000 principal amount of Securities). 5. [Include the terms of any optional or mandatory redemption and other price-related terms.] Sch B - 1 SCHEDULE C First State Bank of Taos Sch C - 1 SCHEDULE D Michael R. Stanford H. Patrick Dee Brian C. Reinhardt Eloy A. Jeantete Leonard J. DeLayo, Jr. Bradford M. Johnson Sherman McCorkle Douglase M. Smith, M.D. Herman N. Wisenteiner Manuel Lujan, Jr. Sch D - 1 Exhibit A FORM OF OPINION OF COMPANY'S COUNSEL TO BE DELIVERED PURSUANT TO SECTION 5(b) (i) The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State of New Mexico. (ii) The Company has corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Prospectus and to enter into and perform its obligations under each of the Purchase Agreement and the Indenture. (iii) The Company is duly registered as a bank holding company under the Bank Holding Company Act of 1956, as amended. The activities of each of the Subsidiaries are permitted to subsidiaries of a bank holding company. (iv) The Company is duly qualified as a foreign corporation to transact business and is in good standing in each jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except where the failure or failures so to qualify or to be in good standing would not, individually or in the aggregate, result in a Material Adverse Effect. (v) The authorized, issued and outstanding capital stock of the Company is as set forth in the Prospectus in the column entitled "Actual" under the caption "Capitalization" (except for subsequent issuances, if any, pursuant to the Purchase Agreement or pursuant to reservations, agreements or employee benefit plans referred to in the Prospectus or pursuant to the exercise of convertible securities or options referred to in the Prospectus); the shares of issued and outstanding capital stock of the Company have been duly authorized and validly issued and are fully paid and non-assessable; and none of the outstanding shares of capital stock of the Company was issued in violation of the preemptive or other similar rights of any securityholder of the Company. (vi) Each Subsidiary has been duly incorporated and is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation, has corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Prospectus and is duly qualified as a foreign corporation to transact business and is in good standing in each jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except where the failure or failures so to qualify or to be in good standing would not, individually or in the aggregate, result in a Material Adverse Effect; except as otherwise disclosed in the Registration A-1 Statement, all of the issued and outstanding capital stock of each Subsidiary has been duly authorized and validly issued, is fully paid and non-assessable and, to the best of our knowledge, is owned by the Company, directly or through subsidiaries, free and clear of any security interest, mortgage, pledge, lien, encumbrance, claim or equity; none of the outstanding shares of capital stock of any Subsidiary was issued in violation of the preemptive or similar rights of any securityholder of such Subsidiary. (vii) The Purchase Agreement has been duly authorized, executed and delivered by the Company. (viii) The Indenture has been duly authorized, executed and delivered by the Company and (assuming the due authorization, execution and delivery thereof by the Trustee) constitutes a valid and binding agreement of the Company, enforceable against the Company in accordance with its terms, except as the enforcement thereof may be limited by bankruptcy, insolvency (including, without limitation, all laws relating to fraudulent transfers), reorganization, moratorium or similar laws affecting enforcement of creditors' rights generally and except as enforcement thereof is subject to general principles of equity (regardless of whether enforcement is considered in a proceeding in equity or at law). (ix) The Securities are in the form contemplated by the Indenture, have been duly authorized by the Company and, assuming that the Securities have been duly authenticated by the Trustee in the manner described in its certificate delivered to you today (which fact such counsel need not determine by an inspection of the Securities), the Securities have been duly executed, issued and delivered by the Company and constitute valid and binding obligations of the Company, enforceable against the Company in accordance with their terms, except as the enforcement thereof may be limited by bankruptcy, insolvency (including, without limitation, all laws relating to fraudulent transfers), reorganization, moratorium or similar laws affecting enforcement of creditors' rights generally and except as enforcement thereof is subject to general principles of equity (regardless of whether enforcement is considered in a proceeding in equity or at law), and will be entitled to the benefits of the Indenture. (x) Upon issuance and delivery of the Securities in accordance with the Purchase Agreement and the Indenture, the Securities shall be convertible at the option of the holder thereof for shares of Common Stock in accordance with the terms of the Securities and the Indenture; the shares of Common Stock and the Rights issuable upon conversion of the Securities have been duly authorized and reserved for issuance upon such conversion by all necessary corporate action; such shares of Common Stock, when issued upon such conversion, will be validly issued and will be fully paid and non-assessable and no holder of such Common Stock is or will be subject to personal liability by reason of being such a holder. (xi) The issuance of the shares of Common Stock upon conversion of the Securities is not subject to the preemptive or other similar rights of any securityholder of the Company. (xii) The Indenture has been duly qualified under the 1939 Act. A-2 (xiii) The Securities and the Indenture conform as to legal matters in all material respects to the descriptions thereof contained in the Prospectus. (xiv) The Registration Statement, including any Rule 462(b) Registration Statement, has been declared effective under the 1933 Act; any required filing of the Prospectus pursuant to Rule 424(b) has been made in the manner and within the time period required by Rule 424(b); and, to the best of our knowledge, no stop order suspending the effectiveness of the Registration Statement or any Rule 462(b) Registration Statement has been issued under the 1933 Act and no proceedings for that purpose have been instituted or are pending or threatened by the Commission. (xv) The Registration Statement, including any Rule 462(b) Registration Statement, the Rule 430A Information and the Rule 434 Information, as applicable, the Prospectus, excluding the documents incorporated by reference therein, and each amendment or supplement to the Registration Statement and Prospectus, excluding the documents incorporated by reference therein, as of their respective effective or issue dates (other than the financial statements and supporting schedules included therein or omitted therefrom, and the Trustee's Statement of Eligibility on Form T-1 (the "Form T-1"), as to which we need express no opinion) complied as to form in all material respects with the requirements of the 1933 Act and the 1933 Act Regulations. (xvi) The documents incorporated by reference in the Prospectus (other than the financial statements and supporting schedules included therein or omitted therefrom, as to which we need express no opinion), when they were filed with the Commission complied as to form in all material respects with the requirements of the 1934 Act and the rules and regulations of the Commission thereunder. (xvii) If Rule 434 has been relied upon, the Prospectus was not "materially different," as such term is used in Rule 434, from the prospectus included in the Registration Statement at the time it became effective. (xviii) The form of certificate used to evidence the Common Stock complies in all material respects with all applicable statutory requirements, with any applicable requirements of the charter and by-laws of the Company and the requirements of the Nasdaq National Market. (xix) To the best of our knowledge, there is not pending or threatened any action, suit, proceeding, inquiry or investigation, to which the Company or any subsidiary is a party, or to which the property or assets of the Company or any subsidiary is subject, before or brought by any court or governmental agency or body, domestic or foreign, which might reasonably be expected to result in a Material Adverse Effect, or which might reasonably be expected to materially and adversely affect the properties or assets thereof or the consummation of the transactions contemplated in the Purchase Agreement or the performance by the Company of its obligations thereunder or the consummation of the Redemption or that is required to be described in the Prospectus that is not described as required; and to the best of our knowledge, all pending A-3 legal or governmental proceedings to which the Company or any of its subsidiaries is a party or that affect any of their respective properties or assets that are not described in the Prospectus, including ordinary routine litigation incidental to the business, would not reasonably be expected to result in a Material Adverse Effect. (xx) The information in the Prospectus under "Summary", "Risk Factors - Sources of Payments to Holders of Debentures; Ability to Pay Dividends; Possible Issuance of Additional Securities", "Risk Factors - Subordination", "Risk Factors - Limited Covenants", "Risk Factors -Anti-takeover Provisions", "Risk Factors - Regulatory Oversight", "Risk Factors - Regulation of Control", "Regulation and Supervision", "Management - Executive Insurance", "Management - Stock Option Agreement", "Management - Executive Income Protection Plan", "Management - Compensation of Directors", "Management - Section 401(k) Plan", "Management - Incentive Plans", "Management - Indemnification", "Description of the Debentures" and "Description of Capital Stock" and in the Registration Statement under Item 15, to the extent that it constitutes matters of law, summaries of legal matters, the Company's charter and bylaws, documents or legal proceedings, or legal conclusions, has been reviewed by us and is correct in all material respects. (xxi) To the best of our knowledge, there are no statutes or regulations that are required to be described in the Prospectus that are not described as required. (xxii) All descriptions in the Registration Statement of contracts and other documents to which the Company or its subsidiaries are a party are accurate in all material respects; to the best of our knowledge, there are no franchises, contracts, indentures, mortgages, loan agreements, notes, leases or other instruments required to be described or referred to in the Registration Statement or to be filed as exhibits thereto other than those described or referred to therein or filed or incorporated by reference as exhibits thereto, and the descriptions thereof or references thereto are correct in all material respects. (xxiii) To the best of our knowledge, neither the Company nor any subsidiary is in violation of its charter or by-laws and no default by the Company or any subsidiary exists in the due performance or observance of any material obligation, agreement, covenant or condition contained in any contract, indenture, mortgage, loan agreement, note, lease or other agreement or instrument that is described or referred to in the Registration Statement or the Prospectus or filed or incorporated by reference as an exhibit to the Registration Statement. (xxiv) No filing with, or authorization, approval, consent, license, order, registration, qualification or decree of, any court or governmental authority or agency, domestic or foreign (other than under the 1933 Act and the 1933 Act Regulations, which have been obtained, or as may be required under the securities or blue sky laws of the various states and except for the qualification of the Indenture under the 1939 Act, as to which we need express no opinion) is necessary or required in connection with the due authorization, execution and delivery of the Purchase Agreement or the due execution, delivery or performance of the Indenture by the A-4 Company or for the offering, issuance, sale or delivery of the Securities and the issuance of shares of Common Stock upon conversion of Securities or the consummation of the Redemption. (xxv) The execution, delivery and performance of the Purchase Agreement, the Indenture and the Securities and the consummation of the transactions contemplated in the Purchase Agreement and in the Registration Statement (including (a) the issuance and sale of the Securities and the use of the proceeds from the sale of the Securities as described in the Prospectus under the caption "Use Of Proceeds", (b) the issuance of the shares of Common Stock issuable upon conversion of the Securities and (c) the consummation of the Redemption) and compliance by the Company with its obligations under the Purchase Agreement, the Indenture and the Securities do not and will not, whether with or without the giving of notice or lapse of time or both, conflict with or constitute a breach of, or default or Repayment Event (as defined in Section 1(a)(xiv) of the Purchase Agreement) under, give rise to any right of termination under, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or any subsidiary pursuant to any contract, indenture, mortgage, deed of trust, loan or credit agreement, note, lease or any other agreement or instrument, known to us, to which the Company or any subsidiary 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 subsidiary is subject (except for such conflicts, breaches or defaults or liens, charges or encumbrances that would not, individually or in the aggregate, have a Material Adverse Effect), nor will such action result in any violation of the provisions of the charter or by-laws of the Company or any subsidiary, or any applicable law, statute, rule, regulation, judgment, order, writ or decree, known to us, of any government, government instrumentality or court, domestic or foreign, having jurisdiction over the Company or any subsidiary or any of their respective properties, assets or operations. (xxvi) The Company is not, and upon the issuance and sale of the Securities as contemplated in the Purchase Agreement and the application of the net proceeds therefrom as described in the Prospectus will not be, an "investment company" or an entity "controlled" by an "investment company," as such terms are defined in the 1940 Act. Nothing has come to our attention that would lead us to believe that the Registration Statement or any amendment thereto, including the Rule 430A Information and Rule 434 Information (if applicable), (except for financial statements and schedules and other financial data included or incorporated by reference therein or omitted therefrom and the Form T-1, as to which we need make no statement), at the time such Registration Statement or any such amendment became effective, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading or that the Prospectus or any amendment or supplement thereto (except for financial statements and schedules and other financial data included or incorporated by reference therein or omitted therefrom and the Form T-1, as to which we need make no statement), at the time the Prospectus was issued, at the time any such amended or supplemented prospectus was issued or at the Closing Time, included or includes an untrue statement of a material fact or omitted or omits to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. A-5 In rendering such opinion, such counsel may rely, as to matters of fact (but not as to legal conclusions), to the extent they deem proper, on certificates of responsible officers of the Company and public officials. Such opinion shall not state that it is to be governed or qualified by, or that it is 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). A-6 [Form of lock-up pursuant to Section 5(j)] Exhibit B ., 1997 KEEFE, BRUYETTE & WOODS, INC. as Representative of the several Underwriters to be named in the within-mentioned Purchase Agreement Two World Trade Center New York, New York 10048 Re: Proposed Public Offering by First State Bancorporation ------------------------------------------------------ Dear Sirs: The undersigned, a stockholder [and an officer and/or director]/1/ of First State Bancorporation, a New Mexico corporation (the "Company"), understands that Keefe, Bruyette & Woods, Inc. ("KBW") proposes to enter into a Purchase Agreement (the "Purchase Agreement") with the Company providing for the public offering of $__________ aggregate principal amount of the Company's Convertible Subordinated Debentures due 2017 (the "Securities"). In recognition of the benefit that such an offering will confer upon the undersigned as a stockholder [and an officer and/or director]/2/ of the Company, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the undersigned agrees with each underwriter to be named in the Purchase Agreement that, during a period of 180 days from the date of the Purchase Agreement, the undersigned will not, without the prior written consent of KBW, directly or indirectly, (i) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant for the sale of, or otherwise dispose of or transfer any shares of the Company's Common Stock, no par value per share (the "Common Stock"), or any securities convertible into or exchangeable or exercisable for Common Stock, whether now owned or hereafter acquired by the undersigned or with respect to which the undersigned has or hereafter acquires the power of disposition, or file or caused to be filed any registration statement under the Securities Act of 1933, as amended, with respect to any of the foregoing or (ii) enter into any swap or any other agreement or any transaction that transfers, in whole or in part, directly or indirectly, the economic consequence of ownership of Common Stock or any securities convertible into or exchangeable for Common Stock, whether any such swap or transaction is to be settled by delivery of Common Stock or other securities, in cash or otherwise. Very truly yours, Signature: ----------------------- Print Name: ---------------- - ---------------------------- /1/ Delete or revise bracketed language as appropriate. B-1 EX-3.1 3 RESTATED ARTICLES OF INCORPORATION RESTATED ARTICLES OF INCORPORATION OF FIRST STATE BANCORPORATION a New Mexico corporation In accordance with Section 53-13-7 of the New Mexico Business Corporation Act and pursuant to a resolution duly adopted by its board of directors, First State Bancorporation hereby restates its articles of incorporation. These restated articles of incorporation correctly set forth without change the corresponding provisions of the articles of incorporation as theretofore amended and they supersede the original articles of incorporation and all amendments thereto: ARTICLE I The name of the corporation is First State Bancorporation. ARTICLE 2 The address of the corporation's registered office in the State of New Mexico is 111 Lomas Avenue, NW, Albuquerque, New Mexico, 87102. ARTICLE 3 The purpose of the corporation shall be primarily to purchase, own and hold the stock of other corporations, and do every act and thing covered generally by the denomination "holding corporation," and especially to direct the operations of the other corporations through the ownership of stock therein; to purchase, subscribe for, acquire, own, hold, sell, exchange, assign, transfer, create security interests in, pledge or otherwise dispose of shares, voting trust certificates for shares of capital stock or any bonds, notes, securities or evidence of indebtedness created by any other corporation or corporations organized under the laws of this state or any other state or district or country, nation or government, and also bonds and evidences of indebtedness of the United States or of any state, district, territory, dependency or country or subdivision or municipality thereof; to issue and exchange therefor shares of the capital stock, bonds, notes or other obligations of the corporation and while the owner thereof to exercise all the rights, powers and privileges of ownership including the right to vote on any shares of stock or voting trust certificates so owned; to promote, lend money to and guarantee the dividends, stocks, bonds, notes, evidences of indebtedness, contracts or other obligations owed, and otherwise aid in any manner, which shall be lawful, any corporation or association of which any bonds, stocks, voting trust certificates or other securities or evidences of indebtedness shall be held by or for this corporation, or in which, or in the welfare of which, this corporation shall have any interest and to do any acts and things permitted by law and designed to protect, preserve, improve or enhance the value of any such bonds, stocks or other securities or evidences or indebtedness or the property of this corporation. Further, to engage in the conduct of financial management and activities related thereto; to transact any lawful business for which corporations may be incorporated under the Business Corporation Act of New Mexico, to have and to exercise such additional powers, privileges and franchise as law may allow, even though not specifically provided herein. ARTICLE 4 Section 4.1 Authorized Shares. The total number of shares that the ----------------- corporation shall have authority to issue is five million (5,000,000) shares, of which four million (4,000,000) shares shall be common stock, no par value and one million (1,000,000) shares shall be preferred shares as determined pursuant to Section 4.3 hereof. Section 4.2 Common Stock. Each holder of common stock shall be entitled to ------------ one vote for each share of common stock held on all matters as to which holders of common stock shall be entitled to vote. Except for and subject to those preferences, rights, and privileges expressly granted to the holders of preferred stock, and except as may be provided by the laws of the State of New Mexico, the holders of common stock shall have exclusively all other rights of stockholders of the corporation, including, but not by any way of limitation, (i) the right to receive dividends, when and as declared by the board of directors out of assets lawfully available therefor, and (ii) in the event of any distribution of assets upon the dissolution and liquidation of the corporation, the right to receive ratably and equally all of the assets of the corporation remaining after the payment to the holders of preferred stock of the specific amounts, if any, which they are entitled to receive as may be provided herein or pursuant hereto. Section 4.3 Preferred Stock. The board of directors of the corporation is --------------- authorized, subject to limitations prescribed by law, to provide by resolution or resolutions for the issuance of the shares of preferred stock as a class or in one or more series, and, by filing a certificate of designations pursuant to the Business Corporation Act of New Mexico setting forth a copy of such resolution or resolutions to establish from time to time the number of shares to be included in each such series, and to fix the designation, powers, preferences, and rights of the shares of the class or of each such series and the qualifications, limitations, and restrictions thereof. The authority of the board of directors with respect to the class or each series shall include, but not be limited to, determination of the following: (i) The number of shares constituting any series and the distinctive designation of that series; (ii) The dividend rate on the shares of the class or of any series, whether dividends shall be cumulative, and if so, from which date or dates, and the relative rights of priority, if any, of payment of dividends (iii) Whether the class or any series shall have voting rights, in addition to the voting rights provided by law, and, if so, the terms of such voting rights; (iv) Whether the class or any series shall have conversion privileges, and, if so, the terms and conditions of such conversion, including provision for adjustment of the conversion rate in such events as the board of directors shall determine; (v) Whether or not the shares of the class or of any series shall be redeemable, and, if so, the terms and conditions of such redemption, including the date or date upon or after which they shall be redeemable and the amount per share payable in case of redemption, which amount may vary under different conditions and at different redemption dates; - 2 - (vi) Whether the class or any series shall have a sinking fund for the redemption or purchase of shares of the class or of that series, and, if so, the terms and amount of such sinking fund; (vii) The rights of the shares of the class or of any series in the event of voluntary or involuntary dissolution or winding up of the corporation, and the relative rights of priority, if any, of payment of shares of the class or of that series; (viii) Any other powers, preferences, rights, qualifications, limitations, and restrictions of the class or of any series. Section 4.4 Cumulative Voting. Cumulative voting shall not be permissible ----------------- in the election of directors or for any other purpose. Section 4.5 Pre-emptive Rights. No shareholder shall be entitled to ------------------ pre-emptive rights. ARTICLE 5 The name and mailing address of the incorporator are: Leonard J. Delayo, Jr., P.C. Post Office Box 1590 Albuquerque, New Mexico 87103 ARTICLE 6 Section 6.1. Number and Election of Directors. The number of directors -------------------------------- shall be fixed as provided in the Bylaws of the Corporation (the "Bylaws"), but in no case shall the number of directors elected by the holders of the Common Stock be less than nine, or greater than fifteen. The Board of Directors shall be divided into three classes, designated "Class I," "Class II," and "Class III." The number of directors in each class elected by the holders of the Common Stock, shall be as nearly equal as possible. The term of directors in Class I shall be initially one year and thereafter three years. The term of directors in Class II shall be initially two years and thereafter three years. The term of directors in Class III shall be three years. The initial term for each of the foregoing classes shall commence on the election of directors at the annual meeting of shareholders in 1996. At each annual meeting of shareholders commencing with the annual meeting in 1997, a number of directors equal to the number of the class whose term expires at the meeting shall be elected (unless the number of directors in such class has been increased or decreased, in which case the larger or smaller number shall be elected) by the affirmative vote of the holders of the majority of the shares represented at the meeting either in person or by proxy and entitled to vote on the election of directors. Notwithstanding the foregoing, each director shall hold office until his or her successor is chosen and qualified in his or her stead. Newly created directorships resulting from any increase in the number of directors or any vacancies in the Board of Directors resulting from death, resignation, retirement, disqualification, removal from office, or other cause may be filled by a majority vote of the -3- directors then in office (even though the number of directors then in office may constitute less than a quorum). A director elected to fill a vacancy shall be elected for the unexpired term of his or her predecessor in office. A director elected to fill an increase in the number of directors may be elected by the Board of Directors for a term of office continuing only until the next election of directors by the shareholders. Any repeal or modification of this Section 6.1 by the shareholders of the corporation shall not adversely affect any right or protection of a director of the Corporation in respect of any act or omission before the repeal or modification. Section 6.2 Bylaw Amendments. The board of directors of the corporation is ---------------- expressly authorized to make, alter, or repeal the bylaws of the corporation, but such authorization shall not divest the stockholders of the power, nor limit their power, to adopt, amend, or repeal bylaws. ARTICLE 7 No director of the corporation shall be personally liable to the corporation or its shareholders for monetary damages for breach of fiduciary duty as a director unless: I. the director has breached or failed to perform the duties of the directors office in compliance with Subsection B of Section 53-11-35 NMSA 1978; and II. the breach or failure to perform constitutes: A. negligence, willful misconduct or recklessness in the case of a director who has either an ownership interest in the corporation or receives in his capacity as a director, or as an employee of the corporation, compensation of more than two thousand dollars ($2,000) from the corporation in any calendar year; or B. willful misconduct or recklessness in the case of a director, who does not have an ownership interest in the corporation and does not receive in his capacity as director, or as an employee of the corporation compensation of more than two thousand dollars ($2,000) from the corporation in any calendar year. No amendment to or repeal of these provisions shall apply to or have any effect on the liability or alleged liability of any director of the corporation for or with respect to any acts or omissions of such director occurring prior to such amendment. Notwithstanding anything contained herein to the contrary, director liability shall be eliminated to the greatest extent possible as is now or in the future allowed by the laws of New Mexico. ARTICLE 8 The corporation shall have authority, to the fullest extent now or hereafter permitted by the Business Corporation Act of New Mexico, or by any other applicable law, to enter into any -4- contract of transaction with one or more of its directors or officers, or with any corporation, partnership, joint venture, trust, association, or other entity in which one or more of its directors or officers are directors or officers, or have a financial interest, notwithstanding such relationships and notwithstanding the fact that the director or officer is present at or participates in the meeting of the board of directors or committee thereof which authorizes the contract or transaction. ARTICLE 9 If any person, firm, or corporation, hereinafter referred to as the Tender Offeror, or any person, firm, or corporation controlling the Tender Offeror, controlled by the Tender Offeror, or under common control with the Tender Offeror, or any group of which the Tender Offeror or any of the foregoing persons, firms, or corporations are members, or any other group controlling the Tender Offeror, controlled by the Tender Offeror, or under common control with the Tender Offeror owns of record, or owns beneficially, directly or indirectly, more than 10 percent of any class of equity security of this Company, then any merger or consolidation of the Company with the Tender Offeror, or any sale, lease, or exchange of substantially all of the assets of this Company or the Tender Offeror to the other may not be effected unless a meeting of shareholders of this Company is held to act thereon and the votes of the holders of voting securities of this company representing not less than 66.6 percent of the votes entitled to vote thereon voted in favor thereof. As used herein, the term group includes persons, firms, and corporations acting in concert, whether or not as a formal group, and the term equity security means any share or similar security; or any security convertible, with or without consideration, into such a security, or carrying any warrant to subscribe to or purchase such a security; or any such warrant or right. The foregoing provision is in addition to the requirements of the New Mexico Business Corporation Act and may not be amended or repeated without an affirmative vote of at least 66.6 percent of the shares entitled to vote thereon. ARTICLE 10 The corporation reserves the right to amend, alter, change or repeal any provision contained in this certificate of incorporation, in the manner now or hereafter prescribed by statute and this certificate of incorporation, and all rights conferred upon officers, directors and stockholders herein are granted subject to this reservation. ARTICLE 11 Subject to the rights of holders of any class or series of shares ranking prior to the Common Stock in respect of dividends or assets, only persons who are nominated in accordance with the procedures in this Article shall be eligible to be nominated as directors at any meeting of the shareholders of the Corporation. At any meeting of the shareholders of the Corporation, nominations of persons for election to the Board of Directors may be made (1) by or at the direction of the Board of Directors or (2) by any shareholder of the Corporation who is a shareholder of record at the time of giving the notice provided for in this Article, who shall be entitled to vote at the meeting, and who complies with the notice procedures set forth in this Article. For a nomination to be properly brought before a shareholders' meeting by a shareholder, timely written notice shall be made to the Secretary of the Corporation. The -5- shareholder's notice shall be delivered to, or mailed and received at, the principal office of the Corporation not less than 35 days nor more than 50 days before the meeting; provided, however, if less than 45 days notice or prior public disclosure of the date of the meeting is given or made to shareholders, notice by the shareholders to be timely must be received not later than the close of business on the tenth day following the day on which the notice of the meeting was mailed or the public disclosure was made. The shareholder's notice shall set forth (1) as to each person whom the shareholder proposed to nominate for election or reelection as a director, all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise required by applicable law (including the person's written consent to being named as a nominee and to serving as a director if elected); and (2)(a) the name and address, as they appear on the Corporation's books, of the shareholder, (b) a description of all arrangements or understandings between the shareholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the shareholder. The shareholder shall also comply with all applicable requirements of the Securities Exchange Act of 1934, as amended (the "1934 Act"), and the rules and regulations thereunder with respect to the matters in this paragraph. If the chairman of the meeting determines and declares at the meeting that a nomination was not made in accordance with the procedures prescribed by this Article, the nomination shall not be accepted. At any meeting of the shareholders of the Corporation, only such business shall be conducted as has been brought before the meeting (1) by or at the direction of the Board of Directors or (2) by any shareholder of the Corporation who is a shareholder of record at the time of giving the notice provided for in this Article, who shall be entitled to vote at the meeting, and who complies with the notice procedures set forth in this Article. For business to be properly brought before a shareholder's meeting by a shareholder, timely written notice shall be made to the Secretary of the Corporation. The shareholder's notice shall be delivered to, or mailed and received at, the principal office of the Corporation not less than 35 days or more than 50 days before the meeting; provided, however, if less than 45 day notice or prior public disclosure of the date of the meeting is given or made to shareholders, notice by the shareholder to be timely must be received not later than the close of business on the tenth day following the day on which the notice of the meeting was mailed or the public disclosure was made. The shareholder's notice shall set forth (1) a brief description of the business desired to be brought before the meeting and the reasons for considering the business, and (2)(a) the name and address, as they appear on the Corporation's books, or the shareholder, (b) a representation that the shareholder is a holder of record of the Common Stock entitled to vote at the meeting on the date of the notice and intends to appear in person or by proxy at the meeting to present the business specified in the notice, and (c) any material interest of the shareholder in the proposed business. The shareholder shall also comply with all applicable requirements of the 1934 Act and the rules and regulations thereunder with respect to the matters set forth in this paragraph. If the chairman of the meeting determines and declares at the meeting that the proposed business was not brought before the meeting in accordance with the procedures prescribed by this paragraph, the business shall not be considered. The notice procedures set forth in this Article 11 do not change or limit any procedures the Corporation may require in accordance with applicable law with respect to the inclusion of matters in the Corporation's proxy statement. -6- ARTICLE 12 These Articles of Incorporation may be amended by the affirmative vote of the holders of a majority of the shares of the Common Stock. Notwithstanding the foregoing or any other provision of these Articles of Incorporation or the Bylaws (and notwithstanding that a lesser percentage may be specified by law), to amend, alter, change, or repeal, or to adopt any provisions inconsistent with, Section 6.1, Article 11 or this paragraph of Article 12, or to remove any director of the Corporation without cause, the affirmative vote of the holders of at least two-thirds of the Common Stock shall be required. Executed on October 25, 1996. ---------- /s/ Michael R. Stanford ------------------------------ Michael R. Stanford, President /s/ H. Patrick Dee ------------------------------ H. Patrick Dee, Secretary Under penalties of perjury, I declare and affirm that I am one of the above corporate officers who signed the foregoing document executed by the corporation, and that the statements contained therein are true and correct to the best of my knowledge, information and belief. /s/ H. Patrick Dee ------------------------------ -7- EX-4.1 4 INDENTURE ================================================================================ FIRST STATE BANCORPORATION, Issuer ------ TO FIRST TRUST NATIONAL ASSOCIATION Trustee ------- _______________ Indenture Dated as of , 1997 ---------------------------- _______________ $__________ __% Convertible Subordinated Debentures Due 2017 ================================================================================ FIRST STATE BANCORPORATION Certain Sections of this Indenture relating to Sections 310 through 318 of the Trust Indenture Act of 1939:
Trust Indenture Indenture Act Section Section - --------------------------- ---------- (S) 310(a)(1) .................................... 609 (a)(2) .................................... 609 (a)(3) .................................... Not Applicable (a)(4) .................................... Not Applicable (b) .................................... 608 610 (S) 311(a) .................................... 613 (b) .................................... 613 (S) 312(a) .................................... 701 702(a) (b) .................................... 702(b) (c) .................................... 702(c) (S) 313(a) .................................... 703(a) (b) .................................... 703(a) (c) .................................... 703(a) (d) .................................... 703(b) (S) 314(a) .................................... 704 (b) .................................... Not Applicable (c)(1) .................................... 102 (c)(2) .................................... 102 (c)(3) .................................... Not Applicable (d) .................................... Not Applicable (e) .................................... 102 (S) 315(a) .................................... 601 (b) .................................... 602 (c) .................................... 601 (d) .................................... 601 (e) .................................... 514
-i-
Trust Indenture Indenture Act Section Section - --------------------------- ---------- (S) 316(a) .................................... 101 (a)(1)(A) .................................... 502 512 (a)(1)(B) .................................... 513 (a)(2) .................................... Not Applicable (b) .................................... 508 (c) .................................... 104(c) (S) 317(a)(1) .................................... 503 (a)(2) .................................... 504 (b) .................................... 1003 (S) 318(a) .................................... 107
Note: This table of contents shall not, for any purpose, be deemed to be a part of the Indenture. -ii- TABLE OF CONTENTS
Page ---- RECITALS OF THE COMPANY ................................................... 1
ARTICLE ONE Definitions and Other Provisions of General Application
SECTION 101. Definitions ................................................ 1 ----------- "Act" ...................................................... 2 "Affiliate" ................................................ 2 "Agent Member" ............................................. 2 "Applicable Procedures" .................................... 2 "Authenticating Agent" ..................................... 2 "Bank" ..................................................... 2 "Board of Directors" ....................................... 3 "Board Resolution" ......................................... 3 "Business Day" ............................................. 3 "Closing Price" ............................................ 3 "Commission" ............................................... 3 "Common Stock" ............................................. 3 "Company" .................................................. 4 "Company Request" or "Company Order" ....................... 4 "Corporate Trust Office" ................................... 4 "corporation" .............................................. 4 "Custodian" ................................................ 4 "Defaulted Interest" ....................................... 4 "Depositary" ............................................... 4 "DTC" ...................................................... 4 "Entitled Persons" ......................................... 5 "Event of Default" ......................................... 5 "Excess Proceeds" .......................................... 5 "Global Security" .......................................... 5 "Holder" ................................................... 5 "indebtedness for money borrowed" .......................... 5 "Indenture" ................................................ 5 "Interest Payment Date" .................................... 5 "Major Depository Institution Subsidiary"................................................. 5 "Maturity" ................................................. 6 "Officers' Certificate" .................................... 6 "Opinion of Counsel" ....................................... 6
- ------------ Note: This table of contents shall not, for any purpose, be deemed to be a part of the Indenture. -i-
Page ---- "Other Financial Obligations" .............................. 6 "Outstanding" .............................................. 6 "Paying Agent" ............................................. 7 "Person" ................................................... 7 "Predecessor Security" ..................................... 7 "Redemption Date" .......................................... 8 "Redemption Price" ......................................... 8 "Regular Record Date" ...................................... 8 "Responsible Officer" ...................................... 8 "Security Register" and "Security Registrar" ................................................. 8 "Senior Indebtedness" ...................................... 8 "Special Record Date" ...................................... 8 "Stated Maturity" .......................................... 8 "Subsidiary" ............................................... 9 "Trading Date" ............................................. 9 "Trustee" .................................................. 9 "Trust Indenture Act" ...................................... 9 "Vice President" ........................................... 9 SECTION 102. Compliance Certificates and Opinions ....................... 9 ------------------------------------ SECTION 103. Form of Documents Delivered to Trustee ..................... 10 -------------------------------------- SECTION 104. Acts of Holders; Record Dates .............................. 11 ----------------------------- SECTION 105. Notices, Etc., to Trustee and Company ...................... 12 ------------------------------------- SECTION 106. Notice to Holders; Waiver .................................. 12 ------------------------- SECTION 107. Conflict with Trust Indenture Act .......................... 13 --------------------------------- SECTION 108. Effect of Headings and Table of Contents ................... 13 ---------------------------------------- SECTION 109. Successors and Assigns ..................................... 13 ---------------------- SECTION 110. Separability Clause ........................................ 13 ------------------- SECTION 111. Benefits of Indenture ...................................... 14 --------------------- SECTION 112. GOVERNING LAW .............................................. 14 ------------- SECTION 113. Legal Holidays ............................................. 14 --------------
Note: This table of contents shall not, for any purpose, be deemed to be a part of the Indenture. -ii- Page ---- ARTICLE TWO Security Forms SECTION 201. Forms Generally ............................................ 14 --------------- SECTION 202. Form of Face of Security ................................... 15 ------------------------ SECTION 203. Form of Reverse of Security ................................ 18 --------------------------- SECTION 204. Form of Trustee's Certificate of Authentication ............ 24 -----------------------------------------------
ARTICLE THREE The Securities SECTION 301. Title and Terms ............................................ 25 --------------- SECTION 302. Denominations .............................................. 26 ------------- SECTION 303. Execution, Authentication, Delivery and Dating ............. 26 ---------------------------------------------- SECTION 304. Temporary Securities ....................................... 27 -------------------- SECTION 305. Registration, Registration of Transfer and Exchange ........ 27 --------------------------------------------------- SECTION 306. Mutilated, Destroyed, Lost and Stolen Securities ........... 30 ------------------------------------------------ SECTION 307. Payment of Interest; Interest Rights Preserved ............. 31 ---------------------------------------------- SECTION 308. Persons Deemed Owners ...................................... 33 -------------------- SECTION 309. Cancellation ............................................... 33 ------------ SECTION 310. Computation of Interest .................................... 33 -----------------------
- ------------- Note: This table of contents shall not, for any purpose, be deemed to be a part of the Indenture. -iii-
Page ---- ARTICLE FOUR Satisfaction and Discharge SECTION 401. Satisfaction and Discharge of Indenture.... 33 --------------------------------------- SECTION 402. Application of Trust Money................. 35 -------------------------- ARTICLE FIVE Remedies SECTION 501. Events of Default........................... 35 ----------------- SECTION 502. Acceleration of Maturity; Rescission and ---------------------------------------- Annulment................................... 37 --------- SECTION 503. Collection of Indebtedness and Suits for ---------------------------------------- Enforcement by Trustee...................... 38 ---------------------- SECTION 504. Trustee May File Proofs of Claim............ 41 -------------------------------- SECTION 505. Trustee May Enforce Claims Without Possession --------------------------------------------- of Securities............................... 42 ------------- SECTION 506. Application of Money Collected.............. 42 ------------------------------ SECTION 507. Limitation on Suits......................... 43 ------------------- SECTION 508. Unconditional Right of Holders to Receive ----------------------------------------- Principal, Premium and Interest and to -------------------------------------- Convert..................................... 44 ------- SECTION 509. Restoration of Rights and Remedies.......... 44 ---------------------------------- SECTION 510. Rights and Remedies Cumulative.............. 44 ------------------------------ SECTION 511. Delay or Omission Not Waiver................ 44 ---------------------------- SECTION 512. Control by Holders.......................... 45 ------------------
- -------------------- Note: This table of contents shall not, for any purpose, be deemed to be a part of the Indenture. -iv-
Page ---- SECTION 513. Waiver of Past Defaults.................... 45 ----------------------- SECTION 514. Undertaking for Costs...................... 45 --------------------- SECTION 515. Waiver of Stay or Extension Laws........... 46 -------------------------------- ARTICLE SIX The Trustee SECTION 601. Certain Duties and Responsibilities........ 46 ------------------------------------------- SECTION 602. Notice of Defaults......................... 47 ------------------------------------------- SECTION 603. Certain Rights of Trustee.................. 47 ------------------------------------------- SECTION 604. Not Responsible for Recitals or Issuance of ------------------------------------------- Securities................................. 48 ---------- SECTION 605. May Hold Securities........................ 49 ------------------- SECTION 606. Money Held in Trust........................ 49 ------------------- SECTION 607. Compensation and Reimbursement............. 49 ------------------------------ SECTION 608. Disqualification; Conflicting Interests.... 50 --------------------------------------- SECTION 609. Corporate Trustee Required; Eligibility.... 50 --------------------------------------- SECTION 610. Resignation and Removal; Appointment of --------------------------------------- Successor.................................. 50 --------- SECTION 611. Acceptance of Appointment by Successor..... 52 -------------------------------------- SECTION 612. Merger, Conversion, Consolidation or Suc- ----------------------------------------- cession to Business........................ 52 ------------------- SECTION 613. Preferential Collection of Claims Against ----------------------------------------- Company.................................... 53 ------- SECTION 614. Appointment of Authenticating Agent........ 53 -----------------------------------
- -------------- Note: This table of contents shall not, for any purpose, be deemed to be a part of the Indenture. -v- ARTICLE SEVEN Holders' Lists and Reports by Trustee and Company
Page ---- SECTION 701. Company to Furnish Trustee Names and Ad- ---------------------------------------- dresses of Holders......................... 55 ------------------ SECTION 702. Preservation of Information; Communications ------------------------------------------- to Holders................................. 55 ---------- SECTION 703. Reports by Trustee......................... 56 ------------------ SECTION 704. Reports by Company......................... 56 ------------------ ARTICLE EIGHT Consolidation, Merger, Conveyance, Transfer or Lease SECTION 801. Company May Consolidate, Etc., Only on -------------------------------------- Certain Terms.............................. 57 ------------- SECTION 802. Successor Substituted...................... 58 --------------------- ARTICLE NINE Supplemental Indentures SECTION 901. Supplemental Indentures Without Consent of ------------------------------------------ Holders................................... 58 ------- SECTION 902. Supplemental Indentures with Consent of --------------------------------------- Holders................................... 59 ------- SECTION 903. Execution of Supplemental Indentures...... 60 ------------------------------------------ SECTION 904. Effect of Supplemental Indentures......... 61 --------------------------------- SECTION 905. Conformity with Trust Indenture Act....... 61 -----------------------------------
- --------------------- Note: This table of contents shall not, for any purpose, be deemed to be a part of the Indenture. -vi- Page ---- SECTION 906. Reference in Securities to Supplemental --------------------------------------- Indentures ................................ 61 ---------- SECTION 907. Subordination Unimpaired .................. 61 ------------------------ ARTICLE TEN Covenants SECTION 1001. Payment of Principal, Premium and Interest 61 ------------------------------------------ SECTION 1002. Maintenance of Office or Agency ........... 62 ------------------------------- SECTION 1003. Money for Security Payments to Be Held in ----------------------------------------- Trust ..................................... 62 ----- SECTION 1004. Statement by Officers as to Default ....... 64 ----------------------------------- SECTION 1005. Existence ................................. 64 --------- SECTION 1006. Payment of Taxes and Other Claims ......... 64 --------------------------------- SECTION 1007. Waiver of Certain Covenants ............... 65 --------------------------- SECTION 1008. Book-Entry System ......................... 65 ----------------- ARTICLE ELEVEN Redemption of Securities SECTION 1101. Right of Redemption ....................... 65 ------------------- SECTION 1102. Applicability of Article .................. 66 ------------------------ SECTION 1103. Election to Redeem; Notice to Trustee ..... 66 ------------------------------------- SECTION 1104. Selection by Trustee of Securities to Be ---------------------------------------- Redeemed .................................. 66 --------
- ----------------------------- Note: This table of contents shall not, for any purpose, be deemed to be a part of the Indenture. -vii- Page ---- SECTION 1105. Notice of Redemption ...................... 67 -------------------- SECTION 1106. Deposit of Redemption Price ............... 67 --------------------------- SECTION 1107. Securities Payable on Redemption Date ..... 68 ------------------------------------- SECTION 1108. Securities Redeemed in Part ................ 68 --------------------------- ARTICLE TWELVE Subordination of Securities SECTION 1201. Securities Subordinate to Senior Indebted- ----------------------------------------- ness ...................................... 69 ---- SECTION 1202. Payment Over of Proceeds Upon Dissolution, ----------------------------------------- Etc. ...................................... 69 --- SECTION 1203. Prior Payment to Senior Indebtedness Upon ----------------------------------------- Acceleration of Securities ................ 70 -------------------------- SECTION 1204. No Payment When Senior Indebtedness in -------------------------------------- Default ................................... 71 ------- SECTION 1205. Payment Permitted If No Default ........... 71 ------------------------------- SECTION 1206. Subrogation to Rights of Holders of Senior ------------------------------------------ Indebtedness .............................. 72 ------------ SECTION 1207. Provisions Solely to Define Relative Rights 72 ------------------------------------------- SECTION 1208. Trustee to Effectuate Subordination ....... 73 ----------------------------------- SECTION 1209. No Waiver of Subordination Provisions ..... 73 ------------------------------------- SECTION 1210. Notice to Trustee ......................... 74 ----------------- SECTION 1211. Reliance on Judicial Order or Certificate of -------------------------------------------- Liquidating Agent ........................ 75 ------------------ SECTION 1212. Trustee Not Fiduciary for Holders of Senior ------------------------------------------- Indebtedness .............................. 75 ------------
- ----------------------------- Note: This table of contents shall not, for any purpose, be deemed to be a part of the Indenture. -viii- Page ---- SECTION 1213. Rights of Trustee as Holder of Senior ------------------------------------- Indebtedness; Preservation of Trustee's --------------------------------------- Rights .................................... 75 ------ SECTION 1214. Article Applicable to Paying Agents ....... 76 ----------------------------------- SECTION 1215. Payment of Proceeds in Certain Cases ...... 76 ------------------------------------ SECTION 1216. Certain Conversions Deemed Payment ........ 78 ---------------------------------- ARTICLE THIRTEEN Conversion of Securities SECTION 1301. Conversion Privilege and Conversion Price.. 78 ----------------------------------------- SECTION 1302. Exercise of Conversion Privilege .......... 79 -------------------------------- SECTION 1303. Fractions of Shares ....................... 80 ------------------- SECTION 1304. Adjustment of Conversion Price ............ 80 ------------------------------ SECTION 1305. Notice of Adjustments of Conversion Price.. 87 ----------------------------------------- SECTION 1306. Notice of Certain Corporate Actions ....... 88 ----------------------------------- SECTION 1307. Company to Reserve Common Stock ........... 89 ------------------------------- SECTION 1308. Taxes on Conversions ...................... 89 -------------------- SECTION 1309. Covenant as to Common Stock ............... 89 --------------------------- SECTION 1310. Cancellation of Converted Securities ...... 89 ------------------------------------ SECTION 1311. Provisions in Case of Consolidation, Merger ------------------------------------------- or Sale of Assets ......................... 89 -----------------
- ----------------------------- Note: This table of contents shall not, for any purpose, be deemed to be a part of the Indenture. -ix- INDENTURE, dated as of __________ __, 1997 between FIRST STATE BANCORPORATION, a corporation duly organized and existing under the laws of the State of New Mexico (herein called the "Company"), having its principal office at 111 Lomas Avenue N.W., Albuquerque, New Mexico 87102, and FIRST TRUST NATIONAL ASSOCIATION, a national banking association duly organized and existing under the laws of The United States of America, as Trustee (herein called the "Trustee"). RECITALS OF THE COMPANY The Company has duly authorized the creation of an issue of its ____% Convertible Subordinated Debentures Due 2017 (herein called the "Securities") of substantially the tenor and amount hereinafter set forth, and to provide therefor the Company has duly authorized the execution and delivery of this Indenture. All things necessary to make the Securities, when executed by the Company and authenticated and delivered hereunder and duly issued by the Company, the valid obligations of the Company, and to make this Indenture a valid agreement of the Company, in accordance with their and its terms, have been done. NOW, THEREFORE, THIS INDENTURE WITNESSETH: For and in consideration of the premises and the purchase of the Securities by the Holders thereof, it is mutually agreed, for the equal and proportionate benefit of all Holders of the Securities, as follows: ARTICLE ONE Definitions and Other Provisions of General Application SECTION 101. Definitions. ----------- For all purposes of this Indenture, except as otherwise expressly provided or unless the context otherwise requires: (1) the terms defined in this Article have the meanings assigned to them in this Article and include the plural as well as the singular; (2) all other terms used herein which are defined in the Trust Indenture Act, either directly or by reference therein, have the meanings assigned to them therein; (3) all accounting terms not otherwise defined herein have the meanings assigned to them in accordance with generally accepted accounting principles, and, except as otherwise herein expressly provided, the term "generally accepted accounting principles" with respect to any computation required or permitted hereunder shall mean such accounting principles as are generally accepted at the date of such computation; and (4) 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. "Act", when used with respect to any Holder, has the meaning specified in Section 104. "Affiliate" of any specified Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For the purposes of this definition, "control" when used with respect to any specified Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "Agent Member" means any member of, or participant in, the Depositary. "Applicable Procedures" means, with respect to any transfer or transaction involving a Global Security or beneficial interest therein, the rules and procedures of the Depositary for such Global Security to the extent applicable to such transaction and as in effect from time to time. "Authenticating Agent" means any Person authorized by the Trustee pursuant to Section 614 to act on behalf of the Trustee to authenticate Securities. "Bank" means FIRST STATE BANK OF TAOS, a state bank chartered under the laws of the State of New Mexico, and its successors (whether by consolidation, merger, conversion, transfer of substantially all of their assets 2 and business or otherwise) so long as FIRST STATE BANK OF TAOS or any successor is a Subsidiary. "Board of Directors" means either the board of directors of the Company or any duly authorized committee of that board. "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 each Monday, Tuesday, Wednesday, Thursday and Friday which is not a day on which (i) national banking associations in the State of Minnesota or (ii) banking institutions in Albuquerque, State of New Mexico, are authorized or obligated by law or executive order to close. "Closing Price" means, with respect to the Common Stock of the Company, for any day, the reported last sales price or, in case no such reported sale takes place on such day, the average of the reported closing bid and asked prices, in either case (i) on the Nasdaq National Market or, if the Common Stock is not quoted on the Nasdaq National Market, on the principal national securities exchange on which the Common Stock is listed or admitted to trading, or (ii) if not quoted on the Nasdaq National Market or listed or admitted to trading on any national securities exchange, the average of the closing bid and asked prices in the over-the-counter market as furnished by any New York Stock Exchange member firm selected from time to time by the Trustee for that purpose. "Commission" means the Securities and Exchange Commission, as from time to time constituted, created under the Securities Exchange Act of 1934, or, if at any time after the execution of this instrument such Commission is not existing and performing the duties now assigned to it under the Trust Indenture Act, then the body performing such duties at such time. "Common Stock" includes any stock of any class of the Company which has no preference in respect of dividends or of amounts payable in the event of any voluntary or involuntary liquidation, dissolution or winding-up of the Company and which is not subject to redemption by the Company. However, subject to the provisions of Section 1311, shares issuable on conversion of Securities shall include only shares of the class designated as Common Stock of the Company at the date of this instrument or shares of any class or classes resulting from any 3 reclassification or reclassifications thereof and which have no preference in respect of dividends or of amounts payable in the event of any voluntary or involuntary liquidation, dissolution or winding-up of the Company and which are not subject to redemption by the Company; provided that if at any time there -------- shall be more than one such resulting class, the shares of each such class then so issuable shall be substantially in the proportion which the total number of shares of such class resulting from all such reclassifications bears to the total number of shares of all such classes resulting from all such reclassifications. "Company" means the Person named as the "Company" in the first paragraph of this instrument until a successor Person shall have become such pursuant to the applicable provisions of this Indenture, and thereafter "Company" shall mean such successor Person. "Company Request" or "Company Order" means a written request or order signed in the name of the Company by its Chairman of the Board, its Vice Chairman of the Board, its President or a Vice President, and by its Treasurer, an Assistant Treasurer, its Secretary or an Assistant Secretary, and delivered to the Trustee. "Corporate Trust Office" means the principal office of the Trustee at which at any particular time its corporate trust business shall be administered, which office at the date of the execution of this Indenture is located at 180 East 5th Street, St. Paul, Minnesota 55101. "corporation" means a corporation, association, company, joint-stock company or business trust. "Custodian" means First Trust National Association, as custodian with respect to any Global Security, or any successor entity thereto. "Defaulted Interest" has the meaning specified in Section 307. "Depositary" means, with respect to any Global Securities, a clearing agency that is registered as such under the Exchange Act and is designated by the Company to act as Depositary for such Global Securities (or any successor securities clearing agency so registered). "DTC" means The Depository Trust Company, a New York corporation. 4 "Entitled Persons" means any person entitled to payment pursuant to the terms of Other Financial Obligations. "Event of Default" has the meaning specified in Section 501. "Excess Proceeds" has the meaning specified in Section 1215(a). "Global Security" means a Security that is registered in the Security Register in the name of a Depositary or a nominee thereof. "Holder" means a Person in whose name a Security is registered in the Security Register. "indebtedness for money borrowed", when used with respect to the Company, means any obligation of, or any obligation guaranteed by, the Company for the repayment of borrowed money, whether or not evidenced by bonds, debentures, notes or other written instruments, and any deferred obligation of, or any such obligation guaranteed by, the Company for the payment of the purchase price of property or assets. "Indenture" means this instrument as originally executed or as it may from time to time be supplemented or amended by one or more indentures supplemental hereto entered into pursuant to the applicable provisions hereof, including, for all purposes of this instrument and any such supplemental indenture, the provisions of the Trust Indenture Act that are deemed to be a part of and govern this instrument and any such supplemental indenture, respectively. "Interest Payment Date" means the Stated Maturity of an instalment of interest on the Securities. "Major Depository Institution Subsidiary", means a Subsidiary that is an insured depository institution and that is or would be a direct or indirect major subsidiary (or other subsidiary deemed to be the equivalent of a major subsidiary) as such term is defined by the Board of Governors of the Federal Reserve System (or any successor thereof) from time to time; provided, however, that any Subsidiary that had consolidated quarterly average total assets that were less than 20% of the Company's consolidated quarterly average total assets for the most recently available quarter shall not be deemed to be a Major Depository Institution Subsidiary. 5 "Maturity", when used with respect to any Security, means the date on which the principal of such Security becomes due and payable as therein or herein provided, whether at the Stated Maturity or by declaration of acceleration, call for redemption or otherwise. "Officers' Certificate" means a certificate signed by the Chairman of the Board, a Vice Chairman of the Board, the President or a Vice President, and by the Treasurer, an Assistant Treasurer, the Secretary or an Assistant Secretary, of the Company, and delivered to the Trustee. One of the officers signing an Officers' Certificate given pursuant to Section 1004 shall be the principal executive, financial or accounting officer of the Company. "Opinion of Counsel" means a written opinion of counsel, who may be counsel for the Company, and who shall be acceptable to the Trustee. "Other Financial Obligations" means all obligations to make payment pursuant to the terms of financial instruments, such as (i) securities contracts and foreign currency exchange contracts, (ii) derivative instruments, such as swap agreements (including interest rate and foreign exchange rate swap agreements), cap agreements, floor agreements, collar agreements, interest rate agreements, foreign exchange rate agreements, options, commodity futures contracts and commodity options contracts and (iii) in the case of both (i) and (ii) above, similar financial instruments other than (A) obligations on account of Senior Indebtedness and (B) obligations on account of indebtedness for money borrowed ranking pari passu with or subordinate to the Securities. ---- ----- "Outstanding", when used with respect to Securities, means, as of the date of determination, all Securities theretofore authenticated and delivered under this Indenture, except: ------ (i) Securities theretofore cancelled by the Trustee or delivered to the Trustee for cancellation; (ii) Securities for whose payment or redemption money in the necessary amount has been theretofore deposited with the Trustee or any Paying Agent (other than the Company) in trust or set aside and segregated in trust by the Company (if the Company shall act as its own Paying Agent) for the Holders of such Securities; provided that, if such Securities are -------- to be redeemed, notice of such redemption has been duly given pursuant to 6 this Indenture or provision therefor satisfactory to the Trustee has been made; and (iii) Securities which have been paid pursuant to Section 306 or in exchange for or in lieu of which other Securities have been authenticated and delivered pursuant to this Indenture, other than any such Securities in respect of which there shall have been presented to the Trustee proof satisfactory to it that such Securities are held by a bona fide purchaser in whose hands such Securities are valid obligations of the Company; provided, however, that in determining whether the Holders of the requisite - -------- ------- principal amount of the Outstanding Securities have given any request, demand, authorization, direction, notice, consent or waiver hereunder, Securities owned by the Company or any other obligor upon the Securities or any Affiliate of the Company or of such other obligor shall be disregarded and deemed not to be Outstanding, except that, in determining whether the Trustee shall be protected in relying upon any such request, demand, authorization, direction, notice, consent or waiver, only Securities which the Trustee knows to be so owned shall be so disregarded. Securities so owned which have been pledged in good faith may be regarded as Outstanding if the pledgee establishes to the satisfaction of the Trustee the pledgee's right so to act with respect to such Securities and that the pledgee is not the Company or any other obligor upon the Securities or any Affiliate of the Company or of such other obligor. "Paying Agent" means any Person authorized by the Company to pay the principal of (and premium, if any) or interest on any Securities on behalf of the Company. "Person" means any individual, corporation, partnership, joint venture, trust, unincorporated organization or government or any agency or political subdivision thereof. "Predecessor Security" of any particular Security means every previous Security evidencing all or a portion of the same debt as that evidenced by such particular Security; and, for the purposes of this definition, any Security authenticated and delivered under Section 306 in exchange for or in lieu of a mutilated, destroyed, lost or stolen Security shall be deemed to evidence the same debt as the mutilated, destroyed, lost or stolen Security. 7 "Redemption Date", when used with respect to any Security to be redeemed, means the date fixed for such redemption by or pursuant to this Indenture. "Redemption Price", when used with respect to any Security to be redeemed, means the price at which it is to be redeemed pursuant to this Indenture. "Regular Record Date" for the interest payable on any Interest Payment Date means the __________ or _____________ (whether or not a Business Day), as the case may be, next preceding such Interest Payment Date. "Responsible Officer", when used with respect to the Trustee, means the chairman or any vice-chairman of the board of directors, the chairman or any vice-chairman of the executive committee of the board of directors, the chairman of the trust committee, the president, any vice president, the secretary, any assistant secretary, the treasurer, any assistant treasurer, the cashier, any assistant cashier, any trust officer or assistant trust officer, the controller or any assistant controller or any other officer 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 his knowledge of and familiarity with the particular subject. "Security Register" and "Security Registrar" have the respective meanings specified in Section 305. "Senior Indebtedness" means the principal of, and premium, if any, and interest on (a) all indebtedness of the Company for money borrowed, whether outstanding on the date of execution of this Indenture or thereafter created, assumed or incurred, except (i) such indebtedness as is by its terms expressly stated to be junior in right of payment to the Securities and (ii) such indebtedness as is by its terms expressly stated to rank pari passu in right of ---- ----- payment with the Securities, and (b) any deferrals, renewals or extensions of any such Senior Indebtedness. "Special Record Date" for the payment of any Defaulted Interest means a date fixed by the Trustee pursuant to Section 307. "Stated Maturity", when used with respect to any Security or any instalment of interest thereon, means the date specified in such Security as the fixed date on which the principal of such Security or such instalment of interest is due and payable. 8 "Subsidiary" means a corporation more than 50% of the outstanding voting stock of which is owned, directly or indirectly, by the Company or by one or more other Subsidiaries, or by the Company and one or more other Subsidiaries. For the purposes of this definition, "voting stock" means stock which ordinarily has voting power for the election of directors, whether at all times or only so long as no senior class of stock has such voting power by reason of any contingency. "Trading Date" means each Monday, Tuesday, Wednesday, Thursday and Friday, other than any day on which the Common Stock is not traded on the principal exchange or market on which the Common Stock is traded or quoted. "Trustee" means the Person named as the "Trustee" in the first paragraph of this instrument until a successor Trustee shall have become such pursuant to the applicable provisions of this Indenture, and thereafter "Trustee" shall mean such successor Trustee. "Trust Indenture Act" means the Trust Indenture Act of 1939 as in force at the date as of which this instrument was executed; provided, however, -------- ------- that in the event the Trust Indenture Act of 1939 is amended after such date, "Trust Indenture Act" means, to the extent required by any such amendment, the Trust Indenture Act of 1939 as so amended. "Vice President", when used with respect to the Company or the Trustee, means any vice president, whether or not designated by a number or a word or words added before or after the title "vice president". SECTION 102. Compliance Certificates and Opinions. ------------------------------------ Upon any application or request by the Company to the Trustee to take any action under any provision of this Indenture, the Company shall furnish to the Trustee such certificates and opinions as may be required under the Trust Indenture Act. Each such certificate or opinion shall be given in the form of an Officers' Certificate, if to be given by an officer of the Company, or an Opinion of Counsel, if to be given by counsel, and shall comply with the requirements of the Trust Indenture Act and any other requirement set forth in this Indenture. Every certificate or opinion with respect to compliance with a condition or covenant provided for in this Indenture shall include 9 (1) a statement that each individual signing such certificate or opinion has read such covenant or condition and the definitions herein relating thereto; (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 each such individual, 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, in the opinion of each such individual, such condition or covenant has been complied with. SECTION 103. Form of Documents Delivered to Trustee. -------------------------------------- In any case where several matters are required to be certified by, or covered by an opinion of, any specified Person, it is not necessary that all such matters be certified by, or covered by the opinion of, only one such Person, or that they be so certified or covered by only one document, but one such Person may certify or give an opinion with respect to some matters and one or more other such Persons as to other matters, and any such Person may certify or give an opinion as to such matters in one or several documents. Any certificate or opinion of an officer of the Company may be based, insofar as it relates to legal matters, upon a certificate or opinion of, or representations by, counsel, unless such officer knows, or in the exercise of reasonable care should know, that the certificate or opinion or representations with respect to the matters upon which his certificate or opinion is based are erroneous. Any such certificate or opinion of counsel may be based, insofar as it relates to factual matters, upon a certificate or opinion of, or representations by, an officer or officers of the Company stating that the information with respect to such factual matters is in the possession of the Company, unless such counsel knows, or in the exercise of reasonable care should know, that the certificate or opinion or representations with respect to such matters are erroneous. 10 Where any Person is required to make, give or execute two or more applications, requests, consents, certificates, statements, opinions or other instruments under this Indenture, they may, but need not, be consolidated and form one instrument. SECTION 104. Acts of Holders; Record Dates. ----------------------------- (a) Any request, demand, authorization, direction, notice, consent, waiver or other action provided by this Indenture to be given or taken by Holders may be embodied in and evidenced by one or more instruments of substantially similar tenor signed by such Holders in person or by agent duly appointed in writing; and, except as herein otherwise expressly provided, such action shall become effective when such instrument or instruments are delivered to the Trustee and, where it is hereby expressly required, to the Company. Such instrument or instruments (and the action embodied therein and evidenced thereby) are herein sometimes referred to as the "Act" of the Holders signing such instrument or instruments. Proof of execution of any such instrument or of a writing appointing any such agent shall be sufficient for any purpose of this Indenture and (subject to Section 601) conclusive in favor of the Trustee and the Company, if made in the manner provided in this Section. (b) The fact and date of the execution by any Person of any such instrument or writing may be proved by the affidavit of a witness of such execution or by a certificate of a notary public or other officer authorized by law to take acknowledgments of deeds, certifying that the individual signing such instrument or writing acknowledged to him the execution thereof. Where such execution is by a signer acting in a capacity other than his individual capacity, such certificate or affidavit shall also constitute sufficient proof of his authority. The fact and date of the execution of any such instrument or writing, or the authority of the Person executing the same, may also be proved in any other manner which the Trustee deems sufficient. (c) The Company may, in the circumstances permitted by the Trust Indenture Act, fix any day as the record date for the purpose of determining the Holders entitled to give or take any request, demand, authorization, direction, notice, consent, waiver or other action, or to vote on any action, authorized or permitted to be given or taken by Holders. If not set by the Company prior to the first solicitation of a Holder made by any Person in respect of any such action, or, in the case of any such vote, prior to such vote, the record date for any such action or vote 11 shall be the 30th day (or, if later, the date of the most recent list of Holders required to be provided pursuant to Section 701) prior to such first solicitation or vote, as the case may be. With regard to any record date, only the Holders on such date (or their duly designated proxies) shall be entitled to give or take, or vote on, the relevant action. (d) The ownership of Securities shall be proved by the Security Register. (e) Any request, demand, authorization, direction, notice, consent, waiver or other Act of the Holder of any Security shall bind every future Holder of the same Security and the Holder of every Security issued upon the registration of transfer thereof or in exchange therefor or in lieu thereof in respect of anything done, omitted or suffered to be done by the Trustee or the Company in reliance thereon, whether or not notation of such action is made upon such Security. SECTION 105. Notices, Etc., to Trustee and Company. ------------------------------------- Any request, demand, authorization, direction, notice, consent, waiver or Act of Holders or other document provided or permitted by this Indenture to be made upon, given or furnished to, or filed with, (1) the Trustee by any Holder or by the Company shall be sufficient for every purpose hereunder if made, given, furnished or filed in writing to or with the Trustee at its Corporate Trust Office, Attention: Corporate Trust Department, or (2) the Company by the Trustee or by any Holder shall be sufficient for every purpose hereunder (unless otherwise herein expressly provided) if in writing and mailed, first-class postage prepaid, to the Company addressed to it at the address of its principal office specified in the first paragraph of this instrument or at any other address previously furnished in writing to the Trustee by the Company. SECTION 106. Notice to Holders; Waiver. ------------------------- Where this Indenture provides for notice to Holders of any event, such notice shall be sufficiently given (unless otherwise herein expressly provided) if in writing and mailed, first-class postage prepaid, to each 12 Holder affected by such event, at his address as it appears in the Security Register, not later than the latest date (if any), and not earlier than the earliest date (if any), prescribed for the giving of such notice. In any case where notice to Holders is given by mail, neither the failure to mail such notice, nor any defect in any notice so mailed, to any particular Holder shall affect the sufficiency of such notice with respect to other Holders. Where this Indenture provides for notice in any manner, such notice may be waived in writing by the Person entitled to receive such notice, either before or after the event, and such waiver shall be the equivalent of such notice. Waivers of notice by Holders shall be filed with the Trustee, but such filing shall not be a condition precedent to the validity of any action taken in reliance upon such waiver. In case by reason of the suspension of regular mail service or by reason of any other cause it shall be impracticable to give such notice by mail, then such notification as shall be made with the approval of the Trustee shall constitute a sufficient notification for every purpose hereunder. SECTION 107. Conflict with Trust Indenture Act. --------------------------------- If any provision hereof limits, qualifies or conflicts with a provision of the Trust Indenture Act that is required under such Act to be a part of and govern this Indenture, the latter provision shall control. If any provision of this Indenture modifies or excludes any provision of the Trust Indenture Act that may be so modified or excluded, the latter provision shall be deemed to apply to this Indenture as so modified or to be excluded, as the case may be. SECTION 108. Effect of Headings and Table of Contents. ---------------------------------------- The Article and Section headings herein and the Table of Contents are for convenience only and shall not affect the construction hereof. SECTION 109. Successors and Assigns. ---------------------- All covenants and agreements in this Indenture by the Company shall bind its successors and assigns, whether so expressed or not. SECTION 110. Separability Clause. ------------------- In case any provision in this Indenture or in the Securities shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining 13 provisions shall not in any way be affected or impaired thereby. SECTION 111. Benefits of Indenture. --------------------- Nothing in this Indenture or in the Securities, express or implied, shall give to any Person, other than the parties hereto and their successors hereunder, the holders of Senior Indebtedness, the Holders of Securities, and subject to Section 907, Entitled Persons in respect of Other Financial Obligations, any benefit or any legal or equitable right, remedy or claim under this Indenture. SECTION 112. GOVERNING LAW. ------------- THIS INDENTURE AND THE SECURITIES SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. SECTION 113. Legal Holidays. -------------- In any case where any Interest Payment Date, Redemption Date or Stated Maturity of any Security or the last date on which a Holder has the right to convert his Securities shall not be a Business Day, then (notwithstanding any other provision of this Indenture or of the Securities) payment of interest or principal (and premium, if any) or conversion of the Securities need not be made on such date, but may be made on the next succeeding Business Day with the same force and effect as if made on the Interest Payment Date or Redemption Date, or at the Stated Maturity, or on such last day for conversion, provided that no -------- interest shall accrue for the period from and after such Interest Payment Date, Redemption Date or Stated Maturity, as the case may be. ARTICLE TWO Security Forms SECTION 201. Forms Generally. --------------- The Securities and the Trustee's certificates of authentication shall be in substantially the forms set forth in this Article, with such appropriate insertions, omissions, substitutions and other variations as are required or permitted by this Indenture, and may have such letters, numbers or other marks of identification and such legends or endorsements placed thereon as may be required to comply with the rules of any securities exchange or as may, 14 consistently herewith, be determined by the officers executing such Securities, as evidenced by their execution of the Securities. Any definitive Securities shall be typed, printed, lithographed or engraved or produced by any combination of these methods on steel engraved borders or may be produced in any other manner permitted by the rules of any automated quotation system or securities exchange on which the Securities may be quoted or listed, as the case may be, all as determined by the officers executing such Securities, as evidenced by their execution of such Securities. SECTION 202. Form of Face of Security. ------------------------ [The following legend shall appear on the face of each Global Security: THIS SECURITY IS A GLOBAL SECURITY WITHIN THE MEANING OF THE INDENTURE HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME OF THE DEPOSITARY OR A NOMINEE OF THE DEPOSITARY, WHICH MAY BE TREATED BY THE COMPANY, THE TRUSTEE AND ANY AGENT THEREOF AS OWNER AND HOLDER OF THIS SECURITY FOR ALL PURPOSES.] [The following legend shall appear on the face of each Global Security for which The Depository Trust Company is to be the Depositary: UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), TO THE COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT 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. UNLESS AND UNTIL IT IS EXCHANGED IN WHOLE OR IN PART FOR REGISTERED SECURITIES IN DEFINITIVE REGISTERED FORM IN THE LIMITED CIRCUMSTANCES REFERRED TO IN THE INDENTURE, THIS GLOBAL SECURITY MAY NOT BE TRANSFERRED EXCEPT AS A WHOLE BY THE DEPOSITARY TO A NOMINEE OF THE DEPOSITARY OR BY A NOMINEE OF THE DEPOSITARY TO THE DEPOSITARY OR ANOTHER NOMINEE OF THE DEPOSITARY OR BY THE DEPOSITARY OR ANY SUCH NOMINEE TO A SUCCESSOR DEPOSITARY OR A NOMINEE OF SUCH SUCCESSOR DEPOSITARY.] 15 FIRST STATE BANCORPORATION ___% Convertible Subordinated Debentures Due 2017 THIS DEBENTURE IS NOT A DEPOSIT AND IS NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY GOVERNMENT AGENCY No. __________ $________ FIRST STATE BANCORPORATION, a corporation duly organized and existing under the laws of the State of New Mexico (herein called the "Company", which term includes any successor Person under the Indenture hereinafter referred to), for value received, hereby promises to pay to _________________, or registered assigns, the principal sum of ________________ Dollars on ____________, and to pay interest thereon from _____________ or from the most recent Interest Payment Date to which interest has been paid or duly provided for, semi-annually on ____________ and ___________ in each year, commencing ___________, at the rate of ___% per annum, until the principal hereof is paid or made available for payment. The interest so payable, and punctually paid or duly provided for, on any Interest Payment Date will, as provided in such Indenture, be paid to the Person in whose name this Security (or one or more Predecessor Securities) is registered at the close of business on the Regular Record Date for such interest, which shall be the _________ or __________ (whether or not a Business Day), as the case may be, next preceding such Interest Payment Date. Any such interest not so punctually paid or duly provided for will forthwith cease to be payable to the Holder on such Regular Record Date and may either be paid to the Person in whose name this Security (or one or more Predecessor Securities) is registered at the close of business on a Special Record Date for the payment of such Defaulted Interest to be fixed by the Trustee, notice whereof shall be given to Holders of Securities not less than 10 days prior to such Special Record Date, or be paid at any time in any other lawful manner not inconsistent with the requirements of any automated quotation system or securities exchange on which the Securities may be quoted or listed, and upon such notice as may be required by such automated quotation system or exchange, all as more fully provided in said Indenture. Payment of the principal of (and premium, if any) and interest on this Security will be made at the office or agency of the Company maintained for that purpose, in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts; provided, however, that at the option of the Company ----------------- payment of interest may be made 16 by check mailed to the address of the Person entitled thereto as such address shall appear in the Security Register. Reference is hereby made to the further provisions of this Security set forth on the reverse hereof, which further provisions shall for all purposes have the same effect as if set forth at this place. Unless the certificate of authentication hereon has been executed by the Trustee referred to on the reverse hereof by manual signature, this Security shall not be entitled to any benefit under the Indenture or be valid or obligatory for any purpose. IN WITNESS WHEREOF, the Company has caused this instrument to be duly executed under its corporate seal. Dated: FIRST STATE BANCORPORATION [SEAL] By ---------------------------- Name: Title: Attest: - ------------------------------------ Name: Title: 17 SECTION 203. Form of Reverse of Security. --------------------------- This Security is one of a duly authorized issue of Securities of the Company designated as its __% Convertible Subordinated Debentures Due 2017 (herein called the "Securities"), limited in aggregate principal amount to $______, issued and to be issued under an Indenture, dated as of _______ __, 1997 (herein called the "Indenture"), between the Company and First Trust National Association, as Trustee (herein called the "Trustee", which term includes any successor trustee under the Indenture), to which Indenture and all indentures supplemental thereto reference is hereby made for a statement of the respective rights, limitations of rights, duties and immunities thereunder of the Company, the Trustee, the holders of Senior Indebtedness and the Holders of the Securities and of the terms upon which the Securities are, and are to be, authenticated and delivered. Subject to and upon compliance with the provisions of the Indenture, the Holder of this Security is entitled, at his option, at any time on or before the close of business on _________, or in case this Security or a portion hereof is called for redemption, then in respect of this Security or such portion hereof until and including, but (unless the Company defaults in making the payment due upon redemption) not after, the close of business on the Redemption Date, to convert this Security (or any portion of the principal amount hereof which is $1,000 or an integral multiple thereof), at the principal amount hereof, or of such portion, into fully paid and non-assessable shares (calculated as to each conversion to the nearest 1/100 of a share) of Common Stock of the Company at a conversion price equal to $___ aggregate principal amount of Securities for each share of Common Stock (or at the current adjusted conversion price if an adjustment has been made as provided in the Indenture) by surrender of this Security, duly endorsed or assigned to the Company or in blank, to the Company at its office or agency maintained for that purpose, accompanied by written notice to the Company that the Holder hereof elects to convert this Security, or if less than the entire principal amount hereof is to be converted, the portion hereof to be converted, and, in case such surrender shall be made during the period from the close of business on any Regular Record Date next preceding any Interest Payment Date to the opening of business on such Interest Payment Date (unless this Security or the portion thereof being converted has been called for redemption on a Redemption Date within such period), also accompanied by payment in New York Clearing House or other funds acceptable to the Company of an amount equal to the interest payable on such Interest Payment Date on the principal amount of this Security then being converted. 18 Subject to the aforesaid requirement for payment and, in the case of a conversion after the Regular Record Date next preceding any Interest Payment Date and on or before such Interest Payment Date, to the right of the Holder of this Security (or any Predecessor Security) of record at such Regular Record Date to receive an instalment of interest (with certain exceptions provided in the Indenture), no payment or adjustment is to be made on conversion for interest accrued hereon or for dividends on the Common Stock issued on conversion. No fractions of shares or scrip representing fractions of shares will be issued on conversion, but instead of any fractional interest the Company shall pay a cash adjustment as provided in the Indenture. The conversion price is subject to adjustment as provided in the Indenture. In addition, the Indenture provides that in case of certain consolidations or mergers to which the Company is a party or the transfer of substantially all of the assets of the Company, the Indenture shall be amended, without the consent of any Holders of Securities, so that this Security, if then outstanding, will be convertible thereafter, during the period this Security shall be convertible as specified above, only into the kind and amount of securities, cash and other property receivable upon the consolidation, merger or transfer by a holder of the number of shares of Common Stock into which this Security might have been converted immediately prior to such consolidation, merger or transfer (assuming such holder of Common Stock failed to exercise any rights of election and received per share the kind and amount received per share by a plurality of non-electing shares). The Securities are subject to redemption upon not less than 30 days' notice by mail, at any time, as a whole or in part, at the election of the Company, at the following Redemption Prices (expressed as percentages of the principal amount) if redeemed during the 12-month period beginning ________ of the years indicated: Redemption Redemption Year Price Year Price - ------ ---------- ---- ---------- and thereafter at a Redemption Price equal to 100% of the principal amount, together in the case of any such redemption with accrued interest to the Redemption Date; provided that interest installments whose Stated Maturity is -------- 19 on or prior to such Redemption Date will be payable to the Holders of such Securities, or one or more Predecessor Securities, of record at the close of business on the relevant Record Dates referred to on the face hereof, all as provided in the Indenture; and provided, further, that the Securities may not be -------- ------- redeemed prior to _____, 2001, unless the reported closing price of the Common Stock on The Nasdaq Stock Market's National Market (or as such price is otherwise determined in accordance with the Indenture) has been at least 140% of the then effective conversion price for each of 30 successive Business Days ending within five days of the date of notice of redemption. Any Securities called for redemption, unless surrendered for conversion on or before the close of business on the Redemption Date, are subject to purchase from the Holder of such Securities at the Redemption Price by one or more investment bankers or other purchasers who may agree with the Company to purchase such Securities and convert them into Common Stock of the Company. In the event of redemption or conversion of this Security in part only, a new Security or Securities for the unredeemed or unconverted portion hereof will be issued in the name of the Holder hereof upon the cancellation hereof. The indebtedness evidenced by this Security is, to the extent provided in the Indenture, subordinate and subject in right of payment to the prior payment in full of the principal of (and premium, if any) and interest on all Senior Indebtedness, as defined in the Indenture, and this Security is issued subject to the provisions of the Indenture with respect thereto. Each Holder of this Security, by accepting the same, agrees that each holder of Senior Indebtedness, whether created or acquired before or after the issuance of the Securities, shall be deemed conclusively to have relied on such provisions in acquiring and continuing to hold, or in continuing to hold, such Senior Indebtedness. The Indenture also provides that if, upon the occurrence of certain events of bankruptcy or insolvency relating to the Company, there remains, after giving effect to such subordination provisions, any amount of cash, property or securities available for payment or distribution in respect of Securities of this series (as defined in the Indenture, "Excess Proceeds"), and if, at such time, any Entitled Person (as defined in the Indenture) has not received payment in full of all amounts due or to become due on or in respect of Other Financial Obligations (as defined in the Indenture), then such Excess Proceeds shall first be applied to pay or provide for the payment in full of such Other Financial Obligations before any payment or distribution may be made in respect of Securities of this 20 series. This Security is also issued subject to the provisions of the Indenture regarding payments to Entitled Persons in respect of Other Financial Obligations. Each Holder of this Security, by accepting the same, agrees to be bound by the provisions of the Indenture described herein and authorizes and directs the Trustee to take such action on his behalf as may be necessary or appropriate to acknowledge or effectuate the subordination of this Security and payment of Excess Proceeds as provided in the Indenture and appoints the Trustee his attorney-in-fact for any and all such purposes. If an Event of Default shall occur and be continuing, the principal of all the Securities may be declared due and payable in the manner and with the effect provided in the Indenture. The Indenture permits, with certain exceptions as therein provided, the amendment thereof and the modification of the rights and obligations of the Company and the rights of the Holders of the Securities under the Indenture at any time by the Company and the Trustee with the consent of the Holders of 66- 2/3% in aggregate principal amount of the Securities at the time Outstanding. The Indenture also contains provisions permitting the Holders of specified percentages in aggregate principal amount of the Securities at the time Outstanding, on behalf of the Holders of all the Securities, to waive compliance by the Company with certain provisions of the Indenture and certain past defaults under the Indenture and their consequences. Any such consent or waiver by the Holder of this Security shall be conclusive and binding upon such Holder and upon all future Holders of this Security and of any Security issued upon the registration of transfer hereof or in exchange herefor or in lieu hereof, whether or not notation of such consent or waiver is made upon this Security. No reference herein to the Indenture and no provision of this Security 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 on this Security at the times, place and rate, and in the coin or currency, herein prescribed or to convert this Security as provided in the Indenture. As provided in the Indenture and subject to certain limitations therein set forth, the transfer of this Security is registrable in the Security Register, upon surrender of this Security for registration of transfer at the office or agency of the Company maintained for that purpose, duly endorsed by, or accompanied by a written instrument of transfer in form 21 satisfactory to the Company and the Security Registrar duly executed by, the Holder hereof or his attorney duly authorized in writing, and thereupon one or more new Securities, of authorized denominations and for the same aggregate principal amount, will be issued to the designated transferee or transferees. The Securities are issuable only in registered form without coupons in denominations of $1,000 and any integral multiple thereof. As provided in the Indenture and subject to certain limitations therein set forth, Securities are exchangeable for a like aggregate principal amount of Securities of a different authorized denomination, as requested by the Holder surrendering the same. No service charge shall be made for any such registration of transfer or exchange, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith. Prior to due presentment of this Security for registration of transfer, the Company, the Trustee and any agent of the Company or the Trustee may treat the Person in whose name this Security is registered as the owner hereof for all purposes, whether or not this Security be overdue, and neither the Company, the Trustee nor any such agent shall be affected by notice to the contrary. All terms used in this Security which are defined in the Indenture shall have the meanings assigned to them in the Indenture. 22 [FORM OF CONVERSION NOTICE] TO FIRST STATE BANCORPORATION The undersigned Holder of this Security hereby irrevocably exercises the option to convert this Security or portion hereof (which is $1,000 or an integral multiple thereof) below designated, into shares of Common Stock of First State Bancorporation in accordance with the terms of the Indenture referred to in this Security, and directs that the shares issuable and deliverable upon conversion, together with any check in payment for fractional shares and any Securities representing any unconverted principal amount hereof, be issued and delivered to the registered Holder hereof unless a different name has been indicated below. If shares of Common Stock or Securities are to be issued in the name of a Person other than the undersigned, the undersigned will pay all transfer taxes payable with respect thereto. Any amount required to be paid by the undersigned on account of interest accompanies this Security. Dated: --------------------- ----------------------------- Fill in for registration of shares of Common Stock and Securities if to be issued ----------------------------- otherwise than to the Signature(s) registered Holder. Signature(s) must be - --------------------------- guaranteed by an Eligible Name Guarantor Institution with membership in an approved - --------------------------- signature guarantee program Address pursuant to Rule 17Ad-15 under the Securities - --------------------------- Exchange Act of 1934. Please print name and address (including zip code) SOCIAL SECURITY OR TAXPAYER IDENTIFICATION NUMBER - --------------------------- Portion of Security to be Converted (in an integral multiple of $1,000, if less than all): ----------------------------- 23 [FORM OF ASSIGNMENT] For value received _______________________________ hereby sell(s), assign(s) and transfer(s) unto ______________________________ (please insert social security or other identifying number of assignee) the within Security and hereby irrevocably constitutes and appoints ______________________________ as attorney to transfer the said Security on the books of the Company, with full power of substitution in the premises. Dated: ------------------------------- -------------------------------- -------------------------------- Signature(s) Signature(s) must be guaranteed by an Eligible Guarantor Institution with membership in an approved signature guarantee program pursuant to Rule 17Ad-15 under the Securities Exchange Act of 1934. NOTICE: The signature on the conversion notice or the assignment must correspond with the name as written upon the face of the Security in every particular without alteration or enlargement or any change whatever. SECTION 204. Form of Trustee's Certificate of Authentication. ----------------------------------------------- This is one of the Securities referred to in the within-mentioned Indenture. FIRST TRUST NATIONAL ASSOCIATION, As Trustee By --------------------------- Authorized Signatory 24 ARTICLE THREE The Securities SECTION 301. Title and Terms. --------------- The aggregate principal amount of Securities which may be authenticated and delivered under this Indenture is limited to $___________, as such amount may be increased, but not by an amount in excess of $___________, solely as a result of the purchase of additional Securities (referred to in the Purchase Agreement as "Option Securities") pursuant to the exercise of the underwriter's over-allotment option granted by the Company under the Purchase Agreement, dated as of ____________, 1997 (the "Purchase Agreement"), between the Company and Keefe, Bruyette & Woods, Inc. (the "Underwriter"), except for Securities authenticated and delivered upon registration of transfer of, or in exchange for, or in lieu of, other Securities pursuant to Sections 304, 305, 306, 906, 1108 or 1302. The Securities shall be known and designated as the "__% Convertible Subordinated Debentures Due 2017" of the Company. Their Stated Maturity shall be ____________, and they shall bear interest at the rate of ____% per annum, from __________ or from the most recent Interest Payment Date to which interest has been paid or duly provided for, as the case may be, payable semi-annually on _____________ and ________, commencing ___________, until the principal thereof is paid or made available for payment. Upon receipt by the Trustee of an Officers' Certificate stating that the Underwriter has elected to purchase from the Company a specified aggregate principal amount of Option Securities, not to exceed a total of $___________ for all such elections in accordance with this paragraph, pursuant to the Purchase Agreement, the Trustee shall authenticate and make available for delivery such specified aggregate principal amount of such Option Securities to or upon a Company Request, and such specified aggregate principal amount of such Option Securities shall be considered part of the original aggregate principal amount of the Securities. The principal of (and premium, if any) and interest on the Securities shall be payable at the office or agency of the Company maintained for such purpose; provided, however, that at the option of the Company payment -------- ------- 25 of interest may be made by check mailed to the address of the Person entitled thereto as such address shall appear in the Security Register. The Securities shall be redeemable as provided in Article Eleven. The Securities shall be subordinated and subject in right of payment to the prior payment of Senior Indebtedness as provided in Article Twelve. The Securities shall be convertible as provided in Article Thirteen. SECTION 302. Denominations. ------------- The Securities shall be issuable only in registered form without coupons and only in denominations of $1,000 and any integral multiple thereof. SECTION 303. Execution, Authentication, Delivery and Dating. ---------------------------------------------- The Securities shall be executed on behalf of the Company by its Chairman of the Board, its Vice Chairman of the Board, its President or one of its Vice Presidents, under its corporate seal reproduced thereon attested by its Secretary or one of its Assistant Secretaries. The signature of any of these officers on the Securities may be manual or facsimile. Securities bearing the manual or facsimile signatures of individuals who were at any time the proper officers of the Company shall bind the Company, notwithstanding that such individuals or any of them have ceased to hold such offices prior to the authentication and delivery of such Securities or did not hold such offices at the date of such Securities. At any time and from time to time after the execution and delivery of this Indenture, the Company may deliver Securities executed by the Company to the Trustee for authentication, together with a Company Order for the authentication and delivery of such Securities; and the Trustee in accordance with such Company Order shall authenticate and deliver such Securities as in this Indenture provided and not otherwise. Each Security shall be dated the date of its authentication. 26 No Security shall be entitled to any benefit under this Indenture or be valid or obligatory for any purpose unless there appears on such Security a certificate of authentication substantially in the form provided for herein executed by the Trustee by manual signature, and such certificate upon any Security shall be conclusive evidence, and the only evidence, that such Security has been duly authenticated and delivered hereunder. SECTION 304. Temporary Securities. -------------------- Pending the preparation of definitive Securities, the Company may execute, and upon Company Order the Trustee shall authenticate and deliver, temporary Securities which are printed, lithographed, typewritten, mimeographed or otherwise produced, in any authorized denomination, substantially of the tenor of the definitive Securities in lieu of which they are issued and with such appropriate insertions, omissions, substitutions and other variations as the officers executing such Securities may determine, as evidenced by their execution of such Securities. If temporary Securities are issued, the Company will cause definitive Securities to be prepared without unreasonable delay. After the preparation of definitive Securities, the temporary Securities shall be exchangeable for definitive Securities upon surrender of the temporary Securities at any office or agency of the Company designated pursuant to Section 1002, without charge to the Holder. Upon surrender for cancellation of any one or more temporary Securities the Company shall execute and the Trustee shall authenticate and deliver in exchange therefor a like principal amount of definitive Securities of authorized denominations. Until so exchanged the temporary Securities shall in all respects be entitled to the same benefits under this Indenture as definitive Securities. For purposes of this Section 304, each Global Security shall be considered a definitive Security. SECTION 305. Registration, Registration of Transfer and Exchange. --------------------------------------------------- The Company shall cause to be kept at the Corporate Trust Office of the Trustee a register (the register maintained in such office and in any other office or agency designated pursuant to Section 1002 being herein sometimes collectively referred to as the "Security Register") in which, subject to such reasonable regulations as it may prescribe, the Company shall provide for the registration of Securities and of transfers of Securities. The Trustee is hereby appointed "Security Registrar" for the 27 purpose of registering Securities and transfers of Securities as herein provided. Upon surrender for registration of transfer of any Security at an office or agency of the Company designated pursuant to Section 1002 for such purpose, the Company shall execute, and the Trustee shall authenticate and deliver, in the name of the designated transferee or transferees, one or more new Securities of any authorized denominations and of a like aggregate principal amount. At the option of the Holder, Securities may be exchanged for other Securities of any authorized denominations and of a like aggregate principal amount, upon surrender of the Securities to be exchanged at such office or agency. Whenever any Securities are so surrendered for exchange, the Company shall execute, and the Trustee shall authenticate and deliver, the Securities which the Holder making the exchange is entitled to receive. All Securities issued upon any registration of transfer or exchange of Securities shall be the valid obligations of the Company, evidencing the same debt, and entitled to the same benefits under this Indenture, as the Securities surrendered upon such registration of transfer or exchange. Every Security presented or surrendered for registration of transfer or for exchange shall (if so required by the Company or the Trustee) be duly endorsed, or be accompanied by a written instrument of transfer in form satisfactory to the Company and the Security Registrar duly executed, by the Holder thereof or his attorney duly authorized in writing. No service charge shall be made for any registration of transfer or exchange of Securities, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection with any registration of transfer or exchange of Securities, other than exchanges pursuant to Section 304, 906, 1108 or 1302 not involving any transfer. The Company shall not be required (i) to issue, register the transfer of or exchange any Security during a period beginning at the opening of business 15 days before the day of the mailing of a notice of redemption of Securities selected for redemption under Section 1104 and ending at the close of business on the day of such mailing, or (ii) to register the transfer of or exchange any Security so selected for redemption in whole or in part, except the unredeemed portion of any Security being redeemed in part. 28 The provisions of Clauses (1), (2), (3), (4) and (5) below shall apply only to Global Securities: (1) Each Global Security authenticated under this Indenture shall be registered in the name of the Depositary designated for such Global Security or a nominee thereof and delivered to such Depositary or a nominee thereof or Custodian therefor, and each such Global Security shall constitute a single Security for all purposes of this Indenture. (2) Notwithstanding any other provision in this Indenture, no Global Security may be exchanged in whole or in part for Securities registered, and no transfer of a Global Security in whole or in part may be registered, in the name of any Person other than the Depositary for such Global Security or a nominee thereof unless (A) such Depositary (i) has notified the Company that it is unwilling or unable to continue as Depositary for such Global Security or (ii) has ceased to be a clearing agency registered under the Exchange Act, or (B) there shall have occurred and be continuing an Event of Default with respect to such Global Security. (3) Subject to Clause (2) above, any exchange of a Global Security for other Securities may be made in whole or in part, and all Securities issued in exchange for a Global Security or any portion thereof shall be registered in such names as the Depositary for such Global Security shall direct. (4) Every Security authenticated and delivered upon registration of transfer of, or in exchange for or in lieu of, a Global Security or any portion thereof, whether pursuant to this Article Three or otherwise, shall be authenticated and delivered in the form of, and shall be, a Global Security, unless such Security is registered in the name of a Person other than the Depositary for such Global Security or a nominee thereof. (5) The Depositary or its nominee, as registered owner of a Global Security, shall be the Holder of such Global Security for all purposes under the Indenture and the 29 Securities, and owners of beneficial interests in a Global Security shall hold such interests pursuant to the Applicable Procedures. Accordingly, any such owner's beneficial interest in a Global Security will 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 Agent Members and such owners of beneficial interests in a Global Security will not be considered the owners or holders thereof. SECTION 306. Mutilated, Destroyed, Lost and Stolen Securities. ------------------------------------------------ If any mutilated Security is surrendered to the Trustee, the Company shall execute and the Trustee shall authenticate and deliver in exchange therefor a new Security of like tenor and principal amount and bearing a number not contemporaneously outstanding. If there shall be delivered to the Company and the Trustee (i) evidence to their satisfaction of the destruction, loss or theft of any Security and (ii) such security or indemnity as may be required by them to save each of them and any agent of either of them harmless, then, in the absence of notice to the Company or the Trustee that such Security has been acquired by a bona fide purchaser, the Company shall execute and the Trustee shall authenticate and deliver, in lieu of any such destroyed, lost or stolen Security, a new Security of like tenor and principal amount and bearing a number not contemporaneously outstanding. In case any such mutilated, destroyed, lost or stolen Security has become or is about to become due and payable, the Company in its discretion may, instead of issuing a new Security, pay such Security. Upon the issuance of any new Security under this Section, 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 (including the fees and expenses of the Trustee) connected therewith. Every new Security issued pursuant to this Section in lieu of any destroyed, lost or stolen Security shall constitute an original additional contractual obligation of the Company, whether or not the destroyed, lost or stolen Security shall be at any time enforceable by anyone, and 30 shall be entitled to all the benefits of this Indenture equally and proportionately with any and all other Securities duly issued hereunder. The provisions of this Section are exclusive and shall preclude (to the extent lawful) all other rights and remedies with respect to the replacement or payment of mutilated, destroyed, lost or stolen Securities. SECTION 307. Payment of Interest; Interest Rights Preserved. ---------------------------------------------- Interest on any Security which is payable, and is punctually paid or duly provided for, on any Interest Payment Date shall be paid to the Person in whose name that Security (or one or more Predecessor Securities) is registered at the close of business on the Regular Record Date for such interest. Any interest on any Security which 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 Holder on the relevant Regular Record Date by virtue of having been such Holder, and such Defaulted Interest may be paid by the Company, at its election in each case, as provided in Clause (1) or (2) below: (1) The Company may elect to make payment of any Defaulted Interest to the Persons in whose names the Securities (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 of the amount of Defaulted Interest proposed to be paid on each Security 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 be not more 31 than 15 days and not 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 Holder at his address as it appears in the Security 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 so mailed, such Defaulted Interest shall be paid to the Persons in whose names the Securities (or their respective Predecessor Securities) are registered at the close of business on such Special Record Date and shall no longer be payable pursuant to the following Clause (2). (2) The Company may make payment of any Defaulted Interest in any other lawful manner not inconsistent with the requirements of any automated quotation system or securities exchange on which the Securities may be quoted or listed, and upon such notice as may be required by such automated quotation system or securities exchange, if, after notice given by the Company to the Trustee of the proposed payment pursuant to this Clause, such manner of payment shall be deemed practicable by the Trustee. Subject to the foregoing provisions of this Section, each Security delivered under this Indenture upon registration of transfer of or in exchange for or in lieu of any other Security shall carry the rights to interest accrued and unpaid, and to accrue, which were carried by such other Security. In the case of any Security which is converted after any Regular Record Date and on or prior to the next succeeding Interest Payment Date (other than any Security whose Maturity is prior to such Interest Payment Date), interest whose Stated Maturity is on such Interest Payment Date shall be payable on such Interest Payment Date notwithstanding such conversion, and such interest (whether or not punctually paid or duly provided for) shall be paid 32 to the Person in whose name that Security (or one or more Predecessor Securities) is registered at the close of business on such Regular Record Date. Except as otherwise expressly provided in the immediately preceding sentence, in the case of any Security which is converted, interest whose Stated Maturity is after the date of conversion of such Security shall not be payable. SECTION 308. Persons Deemed Owners. --------------------- Prior to due presentment of a Security for registration of transfer, the Company, the Trustee and any agent of the Company or the Trustee may treat the Person in whose name such Security is registered as the owner of such Security for the purpose of receiving payment of principal of (and premium, if any) and (subject to Section 307) interest on such Security and for all other purposes whatsoever, whether or not such Security be overdue, and neither the Company, the Trustee nor any agent of the Company or the Trustee shall be affected by notice to the contrary. SECTION 309. Cancellation. ------------ All Securities surrendered for payment, redemption, registration of transfer or exchange or conversion shall, if surrendered to any Person other than the Trustee, be delivered to the Trustee and shall be promptly cancelled by it. The Company may at any time deliver to the Trustee for cancellation any Securities previously authenticated and delivered hereunder which the Company may have acquired in any manner whatsoever, and all Securities so delivered shall be promptly cancelled by the Trustee. No Securities shall be authenticated in lieu of or in exchange for any Securities cancelled as provided in this Section, except as expressly permitted by this Indenture. All cancelled Securities held by the Trustee shall be disposed of as directed by a Company Order. SECTION 310. Computation of Interest. ----------------------- Interest on the Securities shall be computed on the basis of a 360-day year of twelve 30-day months. ARTICLE FOUR Satisfaction and Discharge SECTION 401. Satisfaction and Discharge of Indenture. --------------------------------------- 33 This Indenture shall cease to be of further effect (except as to any surviving rights of conversion, registration of transfer or exchange of Securities herein expressly provided for), and the Trustee, on demand of and at the expense of the Company, shall execute proper instruments acknowledging satisfaction and discharge of this Indenture, when (1) either (A) all Securities theretofore authenticated and delivered (other than (i) Securities which have been destroyed, lost or stolen and which have been replaced or paid as provided in Section 306 and (ii) Securities for whose payment money has theretofore been deposited in trust or segregated and held in trust by the Company and thereafter repaid to the Company or discharged from such trust, as provided in Section 1003) have been delivered to the Trustee for cancellation; or (B) all such Securities not theretofore delivered to the Trustee for cancellation (i) have become due and payable, or (ii) will become due and payable at their Stated Maturity within one year, or (iii) are to be called for redemption within one year under arrangements satisfactory to the Trustee for the giving of notice of redemption by the Trustee in the name, and at the expense, of the Company, and the Company, in the case of (i), (ii) or (iii) above, has deposited or caused to be deposited with the Trustee as trust funds in trust for the purpose an amount sufficient to pay and discharge the entire indebtedness on such Securities not theretofore delivered to the Trustee for cancellation, for principal (and 34 premium, if any) and interest to the date of such deposit (in the case of Securities which have become due and payable) or to the Stated Maturity or Redemption Date, as the case may be; (2) the Company has paid or caused to be paid all other sums payable hereunder by the Company; and (3) the Company has delivered to the Trustee 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. Notwithstanding the satisfaction and discharge of this Indenture, the obligations of the Company to the Trustee under Section 607, the obligations of the Trustee to any Authenticating Agent under Section 614 and, if money shall have been deposited with the Trustee pursuant to subclause (B) of Clause (1) of this Section, the obligations of the Trustee under Section 402 and the last paragraph of Section 1003 shall survive. SECTION 402. Application of Trust Money. -------------------------- Subject to the provisions of the last paragraph of Section 1003, all money deposited with the Trustee pursuant to Section 401 shall be held in trust and applied by it, in accordance with the provisions of the Securities and this Indenture, to the payment, either directly or through any Paying Agent (including the Company acting as its own Paying Agent) as the Trustee may determine, to the Persons entitled thereto, of the principal (and premium, if any) and interest for whose payment such money has been deposited with the Trustee. All moneys deposited with the Trustee pursuant to Section 401 (and held by it or any Paying Agent) for the payment of Securities subsequently converted shall be returned to the Company upon Company Request. ARTICLE FIVE Remedies SECTION 501. Events of Default. ----------------- "Event of Default", wherever used herein, means any one of the following events (whatever the reason for 35 such Event of Default and whether it shall be occasioned by the provisions of Article Twelve or 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): (1) the entry by a court having jurisdiction in the premises of (A) a decree or order for relief in respect of the Company in an involuntary case or proceeding under any applicable federal or state bankruptcy, insolvency, reorganization or other similar law or (B) a decree or order appointing a custodian, receiver, liquidator, assignee, trustee, sequestrator or other similar official of the Company or of substantially all of its assets (other than the appointment of a conservator with respect to the Bank or any other depository institution Subsidiary of the Company insured by the Federal Deposit Insurance Corporation or any successor agency), or ordering the winding up or liquidation of its affairs, and the continuance of any such decree or order for relief or any such other decree or order unstayed and in effect for a period of 60 consecutive days; or (2) the commencement by the Company of a voluntary case or proceeding under any applicable federal or state bankruptcy, insolvency, reorganization or other similar law, or the consent by it to the filing of a decree or order for relief in respect of the Company in an involuntary case or proceeding under any applicable federal or state bankruptcy, insolvency, reorganization or other similar law or to the commencement of any bankruptcy or insolvency case or proceeding against it, or the filing by it of a petition or answer or consent seeking reorganization or relief under any applicable federal or state law, or the consent by it to filing of such petition or to the appointment of or taking possession by a custodian, receiver, liquidator, assignee, trustee, sequestrator or other similar official of the Company or substantially all of its assets (other than the appointment of a conservator with respect to the Bank or any other depository institution Subsidiary of the 36 Company insured by the Federal Deposit Insurance Corporation or any successor agency), or the making by it of an assignment for the benefit of creditors. SECTION 502. Acceleration of Maturity; Rescission and Annulment. -------------------------------------------------- If an Event of Default occurs and is continuing, then in every such case the Trustee or the Holders of not less than 25% in principal amount of the Outstanding Securities may declare the principal amount of all the Securities to be due and payable immediately, by a notice in writing to the Company (and to the Trustee if given by Holders), and upon any such declaration such principal amount shall become immediately due and payable, except that no such declaration shall be required upon the occurrence of an Event of Default specified in Section 501(2). At any time after such a declaration of acceleration has been made and before a judgment or decree for payment of the money due has been obtained by the Trustee as hereinafter in this Article provided, the Holders of a majority in principal amount of the Outstanding Securities, by written notice to the Company and the Trustee, may rescind and annul such declaration and its consequences if (1) the Company has paid or deposited with the Trustee a sum sufficient to pay (A) all overdue interest on all Securities, (B) the principal of (and premium, if any, on) any Securities which have become due otherwise than by such declaration of acceleration and interest thereon at the rate borne by the Securities, (C) to the extent that payment of such interest is lawful, interest upon overdue interest at the rate borne by the Securities, and (D) all sums paid or advanced by the Trustee hereunder and the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel; 37 and (2) all Events of Default have been cured or waived as provided in Section 513. No such rescission shall affect any subsequent default or impair any right consequent thereon. SECTION 503. Collection of Indebtedness and Suits for Enforcement by Trustee. --------------------------------------------------------------- The Company covenants that if (1) default is made in the payment of any interest on any Security when such interest becomes due and payable and such default continues for a period of 30 days, or (2) default is made in the payment of the principal of (or premium, if any, on) any Security at the Maturity thereof, or (3) there shall occur the entry by a court having jurisdiction in the premises of (A) a decree or order for relief in respect of any Major Depository Institution Subsidiary in an involuntary case or proceeding under any applicable federal or state bankruptcy, insolvency, reorganization or other similar law or (B) a decree or order appointing a custodian, receiver, liquidator, assignee, trustee, sequestrator or other similar official of any Major Depository Institution Subsidiary or of any substantial part of its property, or ordering the winding up or liquidation of its affairs, and the continuance of any such decree or order for relief or any such other decree or order unstayed and in effect for a period of 60 consecutive days, or (4) there shall occur the commencement by any Major Depository Institution Subsidiary of a voluntary case or proceeding under any applicable federal or state bankruptcy, insolvency, reorganization or other similar law or the consent by it to the filing of such petition or to the appointment of or taking possession by a custodian, receiver, liquidator, assignee, trustee, sequestrator or similar official of the any Major Depository Institution Subsidiary or of 38 any substantial part of its property, or the making by it of an assignment for the benefit of creditors, or the admission by it in writing of its inability to pay its debts generally as they become due, or the taking of corporate action by the Company or any Major Depository Institution Subsidiary in furtherance of any such action; the Company will, upon demand of the Trustee, pay to it, for the benefit of the Holders of such Securities ((in the case of an event referred to in subsections 503(1) and 503(2) above) or of all the Securities (in the case of an event referred to in subsections 503(3) and 503(4) above)), the whole amount then due and payable on such Securities for principal (and premium, if any) and interest, interest on any overdue principal (and premium, if any) and on any overdue interest, at the rate borne by the Securities, and, in addition thereto, such further amount as shall be sufficient to cover the costs and expenses of collection, including the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel. If the Company fails to pay such amounts forthwith upon such demand, the Trustee, in its own name and as trustee of an express trust, may institute a judicial proceeding for the collection of the sums so due and unpaid, may prosecute such proceeding to judgment or final decree and may enforce the same against the Company or any other obligor upon such Security or Securities and collect the moneys adjudged or decreed to be payable in the manner provided by law out of the property of the Company or any other obligor upon such Security or Securities, wherever situated. "Default" means any one of the following events (whatever the reason for such Default and whether it shall be occasioned by the provisions of Article Twelve or 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 or any administrative or governmental body): (A) an Event of Default specified in Section 501; or (B) the events referred to in subsections 503(1) through (4) above; or (C) default in performance, or breach, of any covenant or warranty of the Company in 39 this Indenture or any Security (other than a covenant or warranty 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 principal amount of the Outstanding 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) a default under any bond, debenture, note or other evidence of indebtedness for money borrowed by the Company or under any mortgage, indenture or instrument under which there may be issued or by which there may be secured or evidenced any indebtedness for money borrowed by the Company (including this Indenture) or any Major Depository Institution Subsidiary, whether such indebtedness now exists or shall hereafter be created, which default shall have resulted (i) in a failure to pay an aggregate principal amount exceeding $500,000 of such debt at the later of final maturity or upon the expiration of any applicable period of grace with respect to such principal amount, or (ii) in such indebtedness in an aggregate principal amount exceeding $500,000 becoming or being declared due and payable prior to the date on which it would otherwise have become due and payable, without such indebtedness having been discharged, or such acceleration having been rescinded or annulled, within a period of 30 days after there shall have 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 principal amount of the Outstanding Securities a written notice specifying such default and requiring the Company to cause such indebtedness to be discharged or cause such acceleration to be rescinded or annulled and stating that such notice is a "Notice of Default" hereunder; provided, however, that, subject to the provisions of Sections 601 and 602, -------- ------- the Trustee shall not be deemed to have 40 knowledge of such default unless either (A) a Responsible Officer of the Trustee shall have actual knowledge of such default or (B) the Trustee shall have received written notice thereof from the Company, from any Holder, from the holder of any such indebtedness or from the trustee under any such mortgage, indenture or other instrument; and provided, further, -------- ------- that any such event of default shall not be deemed to have occurred if and so long as the Company shall contest the validity thereof in good faith by appropriate proceedings. If a Default occurs and is continuing, the Trustee may in its discretion proceed to protect and enforce its rights and the rights of the Holders by such appropriate judicial proceedings as the Trustee shall deem most effectual to protect and enforce any such rights, whether for the specific enforcement of any covenant or agreement in this Indenture or in aid of the exercise of any power granted herein, or to enforce any other proper remedy. SECTION 504. Trustee May File Proofs of Claim. -------------------------------- In case of the pendency of any receivership, insolvency, liquidation, bankruptcy, reorganization, arrangement, adjustment, composition or other judicial proceeding relative to the Company or any other obligor upon the Securities or the property of the Company or of such other obligor or their creditors, the Trustee (irrespective of whether the principal of the Securities shall then be due and payable as therein expressed or by declaration or otherwise and irrespective of whether the Trustee shall have made any demand on the Company for the payment of overdue principal or interest) shall be entitled and empowered, by intervention in such proceeding or otherwise, (i) to file and prove a claim for the whole amount of principal (and premium, if any) and interest, if any, owing and unpaid in respect of the Securities and to file such other papers or documents as may be necessary or advisable in order to have the claims of the Trustee (including any claim for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel) and of the Holders allowed in such judicial proceeding, and 41 (ii) to collect and receive moneys or other property payable or deliverable on any such claims and to distribute the same; and any custodian, receiver, assignee, trustee, liquidator, sequestrator or other similar official in any such judicial proceeding is hereby authorized by each Holder 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 Holders, to pay to the Trustee any amount due it for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amounts due the Trustee under Section 607. No provision of this Indenture shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Holder any plan of reorganization, arrangement, adjustment or composition affecting the Securities or the rights of any Holder thereof or to authorize the Trustee to vote in respect of the claim of any Holder in any such proceeding. SECTION 505. Trustee May Enforce Claims Without Possession of Securities. ----------------------------------------------------------- All rights of action and claims under this Indenture or the Securities may be prosecuted and enforced by the Trustee without the possession of any of the Securities or the production thereof in any proceeding relating thereto, and any such proceeding instituted by the Trustee shall be brought in its own name as trustee of an express trust, and any recovery of judgment shall, after provision for the payment of the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, be for the ratable benefit of the Holders of the Securities in respect of which such judgment has been recovered. SECTION 506. Application of Money Collected. ------------------------------ Subject to Article Twelve, any money collected by the Trustee pursuant to this Article shall be applied in the following order, at the date or dates fixed by the Trustee and, in case of the distribution of such money on account of principal (or premium, if any) or interest, upon presentation of the Securities and the notation thereon of the payment if only partially paid and upon surrender thereof if fully paid: FIRST: To the payment of all amounts due the Trustee under Section 607; and 42 SECOND: To the payment of the amounts then due and unpaid for principal of (and premium, if any) and interest on the Securities in respect of which or for the benefit of which such money has been collected, ratably, without preference or priority of any kind, according to the amounts due and payable on such Securities for principal (and premium, if any) and interest, respectively. SECTION 507. Limitation on Suits. ------------------- No Holder of any Security shall have any right to institute any proceeding, judicial or otherwise, with respect to this Indenture, or for the appointment of a receiver or trustee, or for any other remedy hereunder, unless (1) such Holder has previously given written notice to the Trustee of a continuing Default; (2) the Holders of not less than 25% in principal amount of the Outstanding Securities shall have made written request to the Trustee to institute proceedings in respect of such Event of Default in its own name as Trustee hereunder; (3) such Holder or Holders have offered to the Trustee reasonable indemnity against the costs, expenses and liabilities to be incurred in compliance with such request; (4) the Trustee for 60 days after its receipt of such notice, request and offer of indemnity has failed to institute any such proceeding; and (5) no direction inconsistent with such written request has been given to the Trustee during such 60-day period by the Holders of a majority in principal amount of the Outstanding Securities; it being understood and intended that no one or more Holders shall have any right in any manner whatever by virtue of, or by availing of, any provision of this Indenture to affect, disturb or prejudice the rights of any other Holders, or to obtain or to seek to obtain priority or preference over any other Holders or to enforce any right under this Indenture, 43 except in the manner herein provided and for the equal and ratable benefit of all the Holders. SECTION 508. Unconditional Right of Holders to Receive Principal, Premium and ---------------------------------------------------------------- Interest and to Convert. ----------------------- Notwithstanding any other provision in this Indenture, the Holder of any Security shall have the right, which is absolute and unconditional, to receive payment of the principal of (and premium, if any) and (subject to Section 307) interest on such Security on the respective Stated Maturities expressed in such Security (or, in the case of redemption, on the Redemption Date) and to convert such Security in accordance with Article Thirteen and to institute suit for the enforcement of any such payment and right to convert, and such rights shall not be impaired without the consent of such Holder. SECTION 509. Restoration of Rights and Remedies. ---------------------------------- If the Trustee or any Holder has instituted any proceeding to enforce any right or remedy under this Indenture and such proceeding has been discontinued or abandoned for any reason, or has been determined adversely to the Trustee or to such Holder, then and in every such case, subject to any determination in such proceeding, the Company, the Trustee and the Holders shall be restored severally and respectively to their former positions hereunder and thereafter all rights and remedies of the Trustee and the Holders shall continue as though no such proceeding had been instituted. SECTION 510. Rights and Remedies Cumulative. ------------------------------ Except as otherwise provided with respect to the replacement or payment of mutilated, destroyed, lost or stolen Securities in the last paragraph of Section 306, no right or remedy herein conferred upon or reserved to the Trustee or to the Holders is intended to be exclusive of any other right or remedy, and every right and remedy shall, to the extent permitted by law, be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other appropriate right or remedy. SECTION 511. Delay or Omission Not Waiver. ---------------------------- No delay or omission of the Trustee or of any Holder of any Security to exercise any right or remedy 44 accruing upon any Default shall impair any such right or remedy or constitute a waiver of any such Default or an acquiescence therein. Every right and remedy given by this Article or by law to the Trustee or to the Holders may be exercised from time to time, and as often as may be deemed expedient, by the Trustee or by the Holders, as the case may be. SECTION 512. Control by Holders. ------------------ The Holders of a majority in principal amount of the Outstanding Securities 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, provided that -------- (1) such direction shall not be in conflict with any rule of law or with this Indenture, and (2) the Trustee may take any other action deemed proper by the Trustee which is not inconsistent with such direction. SECTION 513. Waiver of Past Defaults. ----------------------- The Holders of not less than a majority in principal amount of the Outstanding Securities may on behalf of the Holders of all the Securities waive any past default hereunder and its consequences, except a default (1) in the payment of the principal of (or premium, if any) or interest on any Security, or (2) in respect of a covenant or provision hereof which under Article Nine cannot be modified or amended without the consent of the Holder of each Outstanding Security affected. Upon any such waiver, such default shall cease to exist, and any Default arising therefrom shall be deemed to have been cured, for every purpose of this Indenture; but no such waiver shall extend to any subsequent or other default or impair any right consequent thereon. SECTION 514. Undertaking for Costs. --------------------- 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, suffered or omitted by it as 45 Trustee, a court may require any party litigant in such suit to file an undertaking to pay the costs of such suit, and may assess costs against any such party litigant, in the manner and to the extent provided in the Trust Indenture Act; provided, that neither this Section nor the Trust Indenture Act shall be -------- deemed to authorize any court to require such an undertaking or to make such an assessment in any suit instituted by the Company or in any suit for the enforcement of the right to convert any Security in accordance with Article Thirteen. SECTION 515. Waiver of Stay or Extension Laws. -------------------------------- The Company covenants (to the extent that it may lawfully do so) that it will not at any time insist upon, or plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay or extension law wherever enacted, now or at any time hereafter in force, which may affect the covenants or the performance of this Indenture; and the Company (to the extent that it may lawfully do so) hereby expressly waives all benefit or advantage of any such law and covenants that it will not hinder, delay or impede the execution of any power herein granted to the Trustee, but will suffer and permit the execution of every such power as though no such law had been enacted. ARTICLE SIX The Trustee SECTION 601. Certain Duties and Responsibilities. ----------------------------------- The duties and responsibilities of the Trustee shall be as provided by the Trust Indenture Act. Notwithstanding the foregoing, no provision of this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder, or in the exercise of any of its rights or powers, if it shall have reasonable grounds for believing that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it. Whether or not therein expressly so provided, every provision of this Indenture relating to the conduct or affecting the liability of or affording protection to the Trustee shall be subject to the provisions of this Section. Subject to the foregoing, (i) the Trustee undertakes to perform such duties and only such duties as are specifically set forth in this Indenture, and (ii) no implied covenants or obligations shall be read into this Indenture against the Trustee. 46 SECTION 602. Notice of Defaults. ------------------ Within 90 days after the occurrence of any default hereunder known to the Trustee, the Trustee shall transmit by mail to all Holders of Securities, as their names and addresses appear in the Security Register, notice of such default hereunder known to the Trustee, unless such default shall have been cured or waived; provided, however, that, except in the case of a default in the -------- ------- payment of the principal of (or premium, if any) or interest on any Security, the Trustee shall be protected in withholding such notice if and so long as the board of directors, the executive committee or a trust committee of directors or Responsible Officers of the Trustee in good faith determine that the withholding of such notice is in the interest of the Holders of Securities; and provided, -------- further, that in the case of any default of the character specified in Section - ------- 503(C), no such notice to Holders shall be given until at least 30 days after the occurrence thereof. For the purpose of this Section, the term "default" means any event which is, or after notice or lapse of time or both would become, a Default. SECTION 603. Certain Rights of Trustee. ------------------------- Subject to the provisions of Section 601: (a) the Trustee may rely and shall be 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 or presented by the proper party or parties; (b) any request or direction of the Company mentioned herein shall be sufficiently evidenced by a Company Request or Company Order and any resolution of the Board of Directors may be sufficiently evidenced by a Board Resolution; (c) whenever in the administration of this Indenture the Trustee shall deem it desirable that a matter be proved or established prior to taking, suffering or omitting any action hereunder, the Trustee (unless other evidence be herein specifically prescribed) may, in the absence of bad faith 47 on its part, rely upon an Officers' Certificate; (d) the Trustee may consult with counsel and the written advice of such counsel or any 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 reliance thereon; (e) the Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request or direction of any of the Holders pursuant to this Indenture, unless such Holders shall have offered to the Trustee reasonable security or indemnity against the costs, expenses and liabilities which might be incurred by it in compliance with such request or direction; (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, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document, but the Trustee, in its discretion, may make such further inquiry or investigation into such facts or matters as it may see fit, and, if the Trustee shall determine to make such further inquiry or investigation, it shall be entitled to examine the books, records and premises of the Company, personally or by agent or attorney; and (g) the Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents or attorneys and the 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. SECTION 604. Not Responsible for Recitals or Issuance of Securities. ------------------------------------------------------ The recitals contained herein and in the Securities, except the Trustee's certificates of 48 authentication, shall be taken as the statements of the Company, and the Trustee assumes no responsibility for their correctness. The Trustee makes no representations as to the validity or sufficiency of this Indenture or of the Securities. The Trustee shall not be accountable for the use or application by the Company of Securities or the proceeds thereof. SECTION 605. May Hold Securities. ------------------- The Trustee, any Authenticating Agent, any Paying Agent, any Security Registrar or any other agent of the Company, in its individual or any other capacity, may become the owner or pledgee of Securities and, subject to Sections 608 and 613, may otherwise deal with the Company with the same rights it would have if it were not Trustee, Authenticating Agent, Paying Agent, Security Registrar or such other agent. SECTION 606. Money Held in Trust. ------------------- Money held by the Trustee in trust hereunder need not be segregated from other funds except to the extent required by law. The Trustee shall be under no liability for interest on any money received by it hereunder except as otherwise agreed with the Company. SECTION 607. Compensation and Reimbursement. ------------------------------ The Company agrees (1) to pay to the Trustee from time to time reasonable compensation for all services rendered by it hereunder, including reasonable default fees of the Trustee upon the occurrence of an Event or Default (which compensation shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust); (2) except as otherwise expressly provided herein, to reimburse the Trustee upon its request for all reasonable expenses, disbursements and advances incurred or made by the Trustee in accordance with any provision of this Indenture (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 bad faith; and (3) to indemnify the Trustee for, and to hold it harmless against, any loss, 49 liability or expense incurred without negligence or bad faith on its part, 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 or liability in connection with the exercise or performance of any of its powers or duties hereunder. As security for the performance of the obligations of the Company under this Section, the Trustee shall have a lien prior to the Securities upon all property and funds held or collected by the Trustee as such, except for funds held in trust for the benefit of the Holders of Securities. SECTION 608. Disqualification; Conflicting Interests. --------------------------------------- If the Trustee has or shall acquire a conflicting interest within the meaning of the Trust Indenture Act, the Trustee shall either eliminate such interest or resign, to the extent and in the manner provided by, and subject to the provisions of, the Trust Indenture Act and this Indenture. SECTION 609. Corporate Trustee Required; Eligibility. --------------------------------------- There shall at all times be a Trustee hereunder which shall be a Person that is eligible pursuant to the Trust Indenture Act to act as such and has a combined capital and surplus of at least $50,000,000 and is subject to supervision or examination by federal or state authority. If such Person publishes reports of condition at least annually, pursuant to law or to the requirements of said supervising or examining authority, then for the purposes of this Section, the combined capital and surplus of such Person 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 the Trustee shall cease to be eligible in accordance with the provisions of this Section, it shall resign immediately in the manner and with the effect hereinafter specified in this Article. SECTION 610. Resignation and Removal; Appointment of Successor. ------------------------------------------------- (a) No resignation or removal of the Trustee and no appointment of a successor Trustee pursuant to this Article shall become effective until the acceptance of appointment by the successor Trustee under Section 611. (b) The Trustee may resign at any time by giving written notice thereof to the Company. If an instrument of acceptance by a successor Trustee shall not have been delivered to the Trustee within 30 days after the giving of such notice of resignation, the resigning Trustee may petition any court of competent jurisdiction for the appointment of a successor Trustee. 50 (c) The Trustee may be removed at any time by Act of the Holders of a majority in principal amount of the Outstanding Securities, delivered to the Trustee and to the Company. (d) If at any time: (1) the Trustee shall fail to comply with Section 608 after written request therefor by the Company or by any Holder who has been a bona fide Holder of a Security for at least six months, or (2) the Trustee shall cease to be eligible under Section 609 and shall fail to resign after written request therefor by the Company or by any such Holder, or (3) the Trustee shall become incapable of acting or shall be adjudged a 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, (i) the Company by a Board Resolution may remove the Trustee, or (ii) subject to Section 514, any Holder who has been a bona fide Holder of a Security for at least six 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. (e) If the Trustee shall resign, be removed or become incapable of acting, or if a vacancy shall occur in the office of Trustee for any cause, the Company, by a Board Resolution, shall promptly appoint a successor Trustee. If, within one year after such resignation, removal or incapability, or the occurrence of such vacancy, a successor Trustee shall be appointed by Act of the Holders of a majority in principal amount of the Outstanding Securities delivered to the Company and the retiring Trustee, the successor Trustee so appointed shall, forthwith upon its acceptance of such appointment, become the successor Trustee and supersede the successor Trustee appointed by the Company. If no successor Trustee shall have been so appointed by the Company or the Holders and accepted appointment in the manner hereinafter provided, any Holder who has been a bona fide Holder of a Security for at least six months may, on behalf of himself and all others 51 similarly situated, petition any court of competent jurisdiction for the appointment of a successor Trustee. (f) The Company shall give notice of each resignation and each removal of the Trustee and each appointment of a successor Trustee to all Holders in the manner provided in Section 106. Each notice shall include the name of the successor Trustee and the address of its Corporate Trust Office. SECTION 611. Acceptance of Appointment by Successor. -------------------------------------- Every successor Trustee appointed hereunder shall execute, acknowledge and deliver to the Company and to the retiring Trustee an instrument accepting such appointment, 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, trusts and duties of the retiring Trustee; but, on request of the Company or the successor Trustee, such retiring Trustee shall, upon payment of its charges, execute and deliver an instrument transferring to such successor Trustee all the rights, powers and trusts of the retiring Trustee and shall duly assign, transfer and deliver to such successor Trustee all property and money held by such retiring Trustee hereunder. Upon request of any such successor Trustee, the Company shall execute any and all instruments for more fully and certainly vesting in and confirming to such successor Trustee all such rights, powers and trusts. No successor Trustee shall accept its appointment unless at the time of such acceptance such successor Trustee shall be qualified and eligible under this Article. SECTION 612. Merger, Conversion, Consolidation or Succession to Business. ----------------------------------------------------------- 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 the corporate trust business of the Trustee, shall be the successor of the Trustee hereunder, provided such corporation shall be otherwise qualified and eligible under this Article, without the execution or filing of any paper or any further act on the part of any of the parties hereto. In case any Securities shall have been authenticated, but not delivered, by the Trustee then in office, any successor by merger, conversion or consolidation to such authenticating Trustee may adopt such authentication and 52 deliver the Securities so authenticated with the same effect as if such successor Trustee had itself authenticated such Securities. SECTION 613. Preferential Collection of Claims Against Company. ------------------------------------------------- If and when the Trustee shall be or become a creditor of the Company (or any other obligor upon the Securities), the Trustee shall be subject to the provisions of the Trust Indenture Act regarding the collection of claims against the Company (or any such other obligor). SECTION 614. Appointment of Authenticating Agent. ----------------------------------- The Trustee may appoint an Authenticating Agent or Agents which shall be authorized to act on behalf of the Trustee to authenticate Securities issued upon original issue and upon exchange, registration of transfer, partial conversion or partial redemption or pursuant to Section 306, and Securities so authenticated shall be entitled to the benefits of this Indenture and shall be valid and obligatory for all purposes as if authenticated by the Trustee hereunder. Wherever reference is made in this Indenture to the authentication and delivery of Securities by the Trustee or the Trustee's certificate of authentication, such reference shall be deemed to include authentication and delivery on behalf of the Trustee by an Authenticating Agent and a certificate of authentication executed on behalf of the Trustee by an Authenticating Agent. Each Authenticating Agent shall be acceptable to the Company and shall at all times be a corporation organized and doing business under the laws of the United States of America, any state thereof or the District of Columbia, authorized under such laws to act as Authenticating Agent, having a combined capital and surplus of not less than $50,000,000 and subject to supervision or examination by federal or state authority. If such Authenticating Agent publishes reports of condition at least annually, pursuant to law or to the requirements of said supervising or examining authority, then for the purposes of this Section, the combined capital and surplus of such Authenticating Agent 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, such Authenticating Agent shall resign immediately in the manner and with the effect specified in this Section. Any corporation into which an Authenticating Agent may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, 53 conversion or consolidation to which such Authenticating Agent shall be a party, or any corporation succeeding to the corporate agency or corporate trust business of an Authenticating Agent, shall continue to be an Authenticating Agent, provided such corporation shall be otherwise eligible under this Section, without the execution or filing of any paper or any further act on the part of the Trustee or the Authenticating Agent. An Authenticating Agent may resign at any time by giving written notice thereof to the Trustee and to the Company. The Trustee may at any time terminate the agency of an Authenticating Agent by giving written notice thereof 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 such Authenticating Agent shall cease to be eligible in accordance with the provisions of this Section, the Trustee may appoint a successor Authenticating Agent which shall be acceptable to the Company and shall mail written notice of such appointment by first-class mail, postage prepaid, to all Holders as their names and addresses appear in the Security Register. Any successor Authenticating Agent upon acceptance of its appointment hereunder shall become vested with all the rights, powers and duties of its predecessor hereunder, with like effect as if originally named as an Authenticating Agent. No successor Authenticating Agent shall be appointed unless eligible under the provisions of this Section. The Trustee agrees to pay to each Authenticating Agent from time to time reasonable compensation for its services under this Section, and the Trustee shall be entitled to be reimbursed for such payments, subject to the provisions of Section 607. If an appointment is made pursuant to this Section, the Securities may have endorsed thereon, in addition to the Trustee's certificate of authentication, an alternative certificate of authentication in the following form: 54 This is one of the Securities described in the within-mentioned Indenture. FIRST TRUST NATIONAL ASSOCIATION, As Trustee By [AUTHENTICATING AGENT], As Authenticating Agent By --------------------------- Authorized Signatory ARTICLE SEVEN Holders' Lists and Reports by Trustee and Company SECTION 701. Company to Furnish Trustee Names and Addresses of Holders. --------------------------------------------------------- The Company will furnish or cause to be furnished to the Trustee (a) semi-annually, not more than 15 days after each Regular Record Date, a list, in such form as the Trustee may reasonably require, of the names and addresses of the Holders as of such Regular 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; excluding from any such list names and addresses received by the Trustee, if - --------- acting as and in its capacity as Security Registrar. SECTION 702. Preservation of Information; Communications to Holders. ------------------------------------------------------ (a) The Trustee shall preserve, in as current a form as is reasonably practicable, the names and addresses of Holders contained in the most recent list furnished to the Trustee as provided in Section 701 and the names and addresses of Holders received by the Trustee, if acting as 55 and in its capacity as Security Registrar. The Trustee may destroy any list furnished to it as provided in Section 701 upon receipt of a new list so furnished. (b) The rights of Holders to communicate with other Holders with respect to their rights under this Indenture or under the Securities, and the corresponding rights and duties of the Trustee, shall be as provided by the Trust Indenture Act. (c) Every Holder of Securities, by receiving and holding the same, agrees with the Company and the Trustee that neither the Company nor the Trustee nor any agent of either of them shall be held accountable by reason of any disclosure of information as to names and addresses of Holders made pursuant to the Trust Indenture Act. SECTION 703. Reports by Trustee. ------------------ (a) The Trustee shall transmit to Holders such reports concerning the Trustee and its actions under this Indenture as may be required pursuant to the Trust Indenture Act at the times and in the manner provided pursuant thereto. (b) A copy of each such report shall, at the time of such transmission to Holders, be filed by the Trustee with each stock exchange upon which the Securities are listed, with the Commission and with the Company. The Company will notify the Trustee when the Securities are listed on any stock exchange. SECTION 704. Reports by Company. ------------------ The Company shall file with the Trustee and the Commission, and transmit to Holders, such information, documents and other reports, and such summaries thereof, as may be required pursuant to the Trust Indenture Act at the times and in the manner provided pursuant to such Act; provided that any such -------- information, documents or reports required to be filed with the Commission pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 shall be filed with the Trustee within 15 days after the same is so required to be filed with the Commission. ARTICLE EIGHT Consolidation, Merger, Conveyance, Transfer or Lease 56 SECTION 801. Company May Consolidate, Etc., Only on Certain Terms. ---------------------------------------------------- The Company shall not consolidate with or merge into any other Person or convey, transfer or lease its properties and assets substantially as an entirety to any Person, and the Company shall not permit any Person to consolidate with or merge into the Company or convey, transfer or lease its properties and assets substantially as an entirety to the Company, unless: (1) in case the Company shall consolidate with or merge into another Person or convey, transfer or lease its properties and assets substantially as an entirety to any Person, the Person formed by such consolidation or into which the Company is merged or the Person which acquires by conveyance or transfer, or which leases, the properties and assets of the Company substantially as an entirety shall be a corporation, partnership or trust, shall be organized and validly existing under the laws of the United States of America, any state thereof or the District of Columbia and shall expressly assume, by an indenture supplemental hereto, executed and delivered to the Trustee, in form satisfactory to the Trustee, the due and punctual payment of the principal of (and premium, if any) and interest on all the Securities and the performance or observance of every covenant of this Indenture on the part of the Company to be performed or observed and shall have provided for conversion rights in accordance with Section 1311; (2) immediately after giving effect to such transaction, no Default, and no event which, after notice or lapse of time or both, would become a Default, shall have happened and be continuing; and (3) the Company has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that such consolidation, merger, conveyance, transfer or lease and, if a supplemental indenture is required in connection with such transaction, such supplemental indenture comply with this Article and that all conditions precedent 57 herein provided for relating to such transaction have been complied with. SECTION 802. Successor Substituted. --------------------- Upon any consolidation of the Company with, or merger of the Company into, any other Person or any conveyance, transfer or lease of the properties and assets of the Company substantially as an entirety in accordance with Section 801, the successor Person formed by such consolidation or into which the Company is merged or to which such conveyance, transfer or lease is made shall succeed to, and be substituted for, and may exercise every right and power of, the Company under this Indenture with the same effect as if such successor Person had been named as the Company herein, and thereafter, except in the case of a lease, the predecessor Person shall be relieved of all obligations and covenants under this Indenture and the Securities. ARTICLE NINE Supplemental Indentures SECTION 901. Supplemental Indentures Without Consent of Holders. -------------------------------------------------- Without the consent of any Holders, the Company, when authorized by a Board Resolution, and the Trustee, at any time and from time to time, may enter into one or more indentures supplemental hereto, in form satisfactory to the Trustee, for any of the following purposes: (1) to evidence the succession of another Person to the Company and the assumption by any such successor of the covenants of the Company herein and in the Securities; or (2) to add to the covenants of the Company for the benefit of the Holders, or to surrender any right or power herein conferred upon the Company; or (3) to secure the Securities; or (4) to make provision with respect to the conversion rights of Holders pursuant to the requirements of Section 1311; or 58 (5) to add any additional Events of Default or Defaults; or (6) to add to, change or eliminate any of the provisions of this Indenture, provided that any such addition, change or elimination shall not -------- modify the rights of the Holder of any Security with respect to such provision; or (7) subject to Section 907, to add to, change or eliminate any of the provisions of Article Twelve, provided that any such addition, change or elimination shall not adversely affect the interests of the Holders of Outstanding Securities in any material respect; or (8) to cure any ambiguity, to correct or supplement any provision herein which may be inconsistent with any other provision herein, or to make any other provisions with respect to matters or questions arising under this Indenture, provided that such action pursuant to this Clause (8) -------- shall not adversely affect the interests of the Holders in any material respect. SECTION 902. Supplemental Indentures with Consent of Holders. ----------------------------------------------- With the consent of the Holders of not less than 66-2/3% in principal amount of the Outstanding Securities, by Act of said Holders delivered to the Company and the Trustee, the Company, when authorized by a Board Resolution, and the Trustee may 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 modifying in any manner the rights of the Holders under this Indenture; provided, however, that no such -------- ------- supplemental indenture shall, without the consent of the Holder of each Outstanding Security affected thereby, (1) change the Stated Maturity of the principal of, or any instalment of interest on, any Security, or reduce the principal amount thereof or the rate of interest thereon or any premium payable upon the redemption thereof, or change the place of payment where, or the coin or currency in which, any Security or any premium or 59 interest thereon is payable, or impair the right to institute suit for the enforcement of any such payment on or after the Stated Maturity thereof (or, in the case of redemption, on or after the Redemption Date), or adversely affect the right to convert any Security as provided in Article Thirteen (except as permitted by Section 901(4)), or modify the provisions of this Indenture with respect to the subordination of the Securities in a manner adverse to the Holders, or (2) reduce the percentage in principal amount of the Outstanding Securities, the consent of whose Holders is required for any such supplemental indenture, or the consent of whose Holders is required for any waiver (of compliance with certain provisions of this Indenture or certain defaults hereunder and their consequences) provided for in this Indenture, or (3) modify any of the provisions of this Section, Section 513 or Section 1007, except to increase any such percentage or to provide that certain other provisions of this Indenture cannot be modified or waived without the consent of the Holder of each Outstanding Security affected thereby. It shall not be necessary for any Act of Holders under this Section to approve the particular form of any proposed supplemental indenture, but it shall be sufficient if such Act shall approve the substance thereof. SECTION 903. Execution of Supplemental Indentures. ------------------------------------ In executing, or accepting the additional trusts created by, any supplemental indenture permitted by this Article or the modifications thereby of the trusts created by this Indenture, the Trustee shall be entitled to receive, and (subject to Section 601) shall be fully protected in relying upon, an Opinion of Counsel stating that the execution of such supplemental indenture is authorized or permitted by this Indenture. The Trustee may, but shall not be obligated to, enter into any such supplemental indenture which affects the Trustee's own rights, duties or immunities under this Indenture or otherwise. 60 SECTION 904. Effect of Supplemental Indentures. --------------------------------- Upon the execution of any supplemental indenture under this Article, this Indenture shall be modified in accordance therewith, and such supplemental indenture shall form a part of this Indenture for all purposes; and every Holder of Securities theretofore or thereafter authenticated and delivered hereunder shall be bound thereby. SECTION 905. Conformity with Trust Indenture Act. ----------------------------------- Every supplemental indenture executed pursuant to this Article shall conform to the requirements of the Trust Indenture Act. SECTION 906. Reference in Securities to Supplemental Indentures. -------------------------------------------------- Securities authenticated and delivered after the execution of any supplemental indenture pursuant to this Article may, and shall if required by the Trustee, bear a notation in form approved by the Trustee as to any matter provided for in such supplemental indenture. If the Company shall so determine, new Securities so modified as to conform, in the opinion of the Trustee and the Company, to any such supplemental indenture may be prepared and executed by the Company and authenticated and delivered by the Trustee in exchange for Outstanding Securities. SECTION 907. Subordination Unimpaired. ------------------------ No provision in any supplemental indenture that affects the superior position of the holders of Senior Indebtedness shall be effective against any holder of Senior Indebtedness, unless such holder shall have consented thereto. Notwithstanding any provision in this Indenture or otherwise, the rights of Entitled Persons in respect of Other Financial Obligations under this Indenture and otherwise in respect of the Securities may, at any time and from time to time, be modified in any respect or eliminated without the consent of any Entitled Person in respect of Other Financial Obligations. ARTICLE TEN Covenants SECTION 1001. Payment of Principal, Premium and Interest. ------------------------------------------ 61 The Company will duly and punctually pay the principal of (and premium, if any) and interest on the Securities in accordance with the terms of the Securities and this Indenture. SECTION 1002. Maintenance of Office or Agency. ------------------------------- The Company will maintain an office or agency where Securities may be presented or surrendered for payment, where Securities may be surrendered for registration of transfer or exchange, where Securities may be surrendered for conversion and where notices and demands to or upon the Company in respect of the Securities and this Indenture may be served. The Company will give prompt written notice to the Trustee of the location, and any change in the location, of such office or agency. If at any time the Company shall fail to maintain any such required office or agency or shall fail to furnish the Trustee with the address thereof, such presentations, surrenders, notices and demands may be made or served at the Corporate Trust Office of the Trustee, and the Company hereby appoints the Trustee as its agent to receive all such presentations, surrenders, notices and demands. The Company may also from time to time designate one or more other offices or agencies (in or outside the Borough of Manhattan, The City of New York) where the Securities may be presented or surrendered for any or all such purposes and may from time to time rescind such designations; provided, however, -------- ------- that no such designation or rescission shall in any manner relieve the Company of its obligation to maintain an office or agency for such purposes. The Company will give prompt written notice to the Trustee of any such designation or rescission and of any change in the location of any such other office or agency. SECTION 1003. Money for Security Payments to Be Held in Trust. ----------------------------------------------- If the Company shall at any time act as its own Paying Agent, it will, on or before each due date of the principal of (and premium, if any) or interest on any of the Securities, segregate and hold in trust for the benefit of the Persons entitled thereto a sum sufficient to pay the principal (and premium, if any) or interest so becoming due until such sums shall be paid to such Persons or otherwise disposed of as herein provided and will promptly notify the Trustee of its action or failure so to act. 62 Whenever the Company shall have one or more Paying Agents, it will, prior to each due date of the principal of (and premium, if any) or interest on any Securities, deposit with a Paying Agent a sum sufficient to pay such amount, such sum to be held as provided by the Trust Indenture Act, and (unless such Paying Agent is the Trustee) the Company will promptly notify the Trustee of its action or failure so to act. The Company will cause each Paying Agent other than the Trustee to execute and deliver to the Trustee an instrument in which such Paying Agent shall agree with the Trustee, subject to the provisions of this Section, that such Paying Agent will (i) comply with the provisions of the Trust Indenture Act applicable to it as a Paying Agent and (ii) during the continuance of any default by the Company (or any other obligor upon the Securities) in the making of any payment in respect of the Securities, upon the written request of the Trustee, forthwith pay to the Trustee all sums held in trust by such Paying Agent as such. The Company may at any time, for the purpose of obtaining the satisfaction and discharge of this Indenture or for any other purpose, pay, or by Company Order direct any Paying Agent to pay, to the Trustee all sums held in trust by the Company or such Paying Agent, such sums to be held by the Trustee upon the same trusts as those upon which such sums were held by the Company or such Paying Agent; and, upon such payment by any Paying Agent to the Trustee, such Paying Agent shall be released from all further liability with respect to such money. Any money deposited with the Trustee or any Paying Agent, or then held by the Company, in trust for the payment of the principal of (and premium, if any) or interest on any Security and remaining unclaimed for two years after such principal (and premium, if any) or interest has become due and payable shall be paid to the Company on Company Request, or (if then held by the Company) shall be discharged from such trust; and the Holder of such Security shall thereafter, as an unsecured general creditor, look only to the Company for payment thereof, and all liability of the Trustee or such Paying Agent with respect to such trust money, and all liability of the Company as trustee thereof, shall thereupon cease; provided, however, that the Trustee or such -------- ------- Paying Agent, before being required to make any such repayment, may at the expense of the Company cause to be published once, in a newspaper published in the English language, customarily published on each Business Day and of general circulation in the Borough of Manhattan, the City of New York, and the City of Albuquerque, State of New Mexico, notice that such money remains unclaimed and that, after a 63 date specified therein, which shall not be less than 30 days from the date of such publication, any unclaimed balance of such money then remaining will be repaid to the Company. SECTION 1004. Statement by Officers as to Default. ----------------------------------- The Company will deliver to the Trustee, within 120 days after the end of each fiscal year of the Company ending after the date hereof, an Officers' Certificate, stating whether or not to the best knowledge of the signers thereof the Company is in default in the performance and observance of any of the terms, provisions and conditions of this Indenture (without regard to any period of grace or requirement of notice provided hereunder) and, if the Company shall be in default, specifying all such defaults and the nature and status thereof of which they may have knowledge. SECTION 1005. Existence. --------- Subject to Article Eight, the Company will do or cause to be done all things necessary to preserve and keep in full force and effect for it and the Bank their existence, rights (charter and statutory) and franchises; provided, -------- however, that the Company shall not be required to preserve any such right or - ------- franchise if the Board of Directors shall determine that the preservation thereof is no longer desirable in the conduct of the business of the Company and its Subsidiaries or the Bank and that the loss thereof is not disadvantageous in any material respect to the Holders. SECTION 1006. Payment of Taxes and Other Claims. --------------------------------- The Company will pay or discharge or cause to be paid or discharged, before the same shall become delinquent, (1) all taxes, assessments and governmental charges levied or imposed upon the Company or any Subsidiary or upon the income, profits or property of the Company or any Subsidiary, and (2) all lawful claims for labor, materials and supplies which, if unpaid, might by law become a lien upon the property of the Company or any Subsidiary; provided, -------- however, that the Company shall not be required to pay or discharge or cause to - ------- be paid or discharged any such tax, assessment, charge or claim whose amount, applicability or validity is being contested in good faith by appropriate proceedings. 64 SECTION 1007. Waiver of Certain Covenants. --------------------------- The Company may omit in any particular instance to comply with any covenant or condition set forth in Sections 1005 to 1006, inclusive, if before the time for such compliance the Holders of at least 66-2/3% in principal amount of the Outstanding Securities shall, by Act of such Holders, either waive such compliance in such instance or generally waive compliance with such covenant or condition, but no such waiver shall extend to or affect such covenant or condition except to the extent so expressly waived, and, until such waiver shall become effective, the obligations of the Company and the duties of the Trustee in respect of any such covenant or condition shall remain in full force and effect. SECTION 1008. Book-Entry System. ----------------- If the Securities cease to trade in DTC's book-entry settlement system, the Company covenants and agrees that it shall use reasonable efforts to make such other book-entry arrangements that it determines are reasonable for the Securities. ARTICLE ELEVEN Redemption of Securities SECTION 1101. Right of Redemption. ------------------- The Securities may be redeemed at the election of the Company, as a whole or from time to time in part, at any time, under the conditions and at the Redemption Prices specified in the form of Security hereinbefore set forth, together with accrued interest to the Redemption Date. In the case of any such redemption prior to ___, 2001, the Company shall, prior to giving notice of such redemption pursuant to Section 1105, furnish the Trustee with an Officers' Certificate stating that the Company is entitled to redeem the Securities pursuant to the provisions of the third paragraph in the reverse of the form of Security hereinbefore set forth. The Company will consult with the Board of Governors of the Federal Reserve System prior to electing to redeem for cash any of these Securities. 65 SECTION 1102. Applicability of Article. ------------------------ Redemption of Securities at the election of the Company, as permitted by any provision of this Indenture, shall be made in accordance with such provision and this Article. SECTION 1103. Election to Redeem; Notice to Trustee. ------------------------------------- The election of the Company to redeem any Securities pursuant to Section 1101 shall be evidenced by a Board Resolution. In case of any redemption at the election of the Company of less than all the Securities, the Company shall, at least 60 days prior to the Redemption Date fixed by the Company (unless a shorter notice shall be satisfactory to the Trustee), notify the Trustee of such Redemption Date and of the principal amount of Securities to be redeemed. SECTION 1104. Selection by Trustee of Securities to Be Redeemed. ------------------------------------------------- If less than all the Securities are to be redeemed, the particular Securities to be redeemed shall be selected not more than 60 days prior to the Redemption Date by the Trustee, from the Outstanding Securities not previously called for redemption, by such method as the Trustee shall deem fair and appropriate and which may provide for the selection for redemption of portions (equal to $1,000 or any integral multiple thereof) of the principal amount of Securities of a denomination larger than $1,000. If any Security selected for partial redemption is converted in part before termination of the conversion right with respect to the portion of the Security so selected, the converted portion of such Security shall be deemed (so far as may be) to be the portion selected for redemption. Securities which have been converted during a selection of Securities to be redeemed shall be treated by the Trustee as Outstanding for the purpose of such selection. The Trustee shall promptly notify the Company and each Security Registrar in writing of the Securities selected for redemption and, in the case of any Securities selected for partial redemption, the principal amount thereof to be redeemed. For all purposes of this Indenture, unless the context otherwise requires, all provisions relating to the redemption of Securities shall relate, in the case of any Securities redeemed or to be redeemed only in part, to the 66 portion of the principal amount of such Securities which has been or is to be redeemed. SECTION 1105. Notice of Redemption. -------------------- Notice of redemption shall be given by first-class mail, postage prepaid, mailed not less than 30 nor more than 60 days prior to the Redemption Date, to each Holder of Securities to be redeemed, at his address appearing in the Security Register. All notices of redemption shall state: (1) the Redemption Date, (2) the Redemption Price, (3) if less than all the Outstanding Securities are to be redeemed, the identification (and, in the case of partial redemption of any Securities, the principal amounts) of the particular Securities to be redeemed, (4) that on the Redemption Date the Redemption Price will become due and payable upon each such Security to be redeemed and that interest thereon will cease to accrue on and after said date, (5) the conversion price, the date on which the right to convert the Securities to be redeemed will terminate and the place or places where such Securities may be surrendered for conversion, and (6) the place or places where such Securities are to be surrendered for payment of the Redemption Price. Notice of redemption of Securities to be redeemed at the election of the Company shall be given by the Company or, at the Company's request, by the Trustee in the name and at the expense of the Company. SECTION 1106. Deposit of Redemption Price. --------------------------- Prior to any Redemption Date, the Company shall deposit with the Trustee or with a Paying Agent (or, if the Company is acting as its own Paying Agent, segregate and hold in trust as provided in Section 1003) an amount of money sufficient to pay the Redemption Price of, and (except 67 if the Redemption Date shall be an Interest Payment Date) accrued interest on, all the Securities which are to be redeemed on that date other than any Securities called for redemption on that date which have been converted prior to the date of such deposit. If any Security called for redemption is converted, any money deposited with the Trustee or with any Paying Agent or so segregated and held in trust for the redemption of such Security shall (subject to any right of the Holder of such Security or any Predecessor Security to receive interest as provided in the last paragraph of Section 307) be paid to the Company upon Company Request or, if then held by the Company, shall be discharged from such trust. SECTION 1107. Securities Payable on Redemption Date. ------------------------------------- Notice of redemption having been given as aforesaid, the Securities so to be redeemed shall, on the Redemption Date, become due and payable at the Redemption Price therein specified, and from and after such date (unless the Company shall default in the payment of the Redemption Price and accrued interest) such Securities shall cease to bear interest. Upon surrender of any such Security for redemption in accordance with said notice, such Security shall be paid by the Company at the Redemption Price, together with accrued interest to the Redemption Date; provided, however, that installments of interest whose -------- ------- Stated Maturity is on or prior to the Redemption Date shall be payable to the Holders of such Securities, or one or more Predecessor Securities, registered as such at the close of business on the relevant Record Dates according to their terms and the provisions of Section 307. If any Security called for redemption shall not be so paid upon surrender thereof for redemption, the principal (and premium, if any) shall, until paid, bear interest from the Redemption Date at the rate borne by the Security. SECTION 1108. Securities Redeemed in Part. --------------------------- Any Security which is to be redeemed only in part shall be surrendered at an office or agency of the Company designated for that purpose pursuant to Section 1002 (with, if the Company or the Trustee so requires, due endorsement by, or a written instrument of transfer in form satisfactory to the Company and the Trustee duly executed by, the Holder thereof or his attorney duly authorized in writing), and the Company shall execute, and the Trustee shall authenticate and deliver to the Holder of such Security without service charge, a new Security or Securities, of any authorized 68 denomination as requested by such Holder, in aggregate principal amount equal to and in exchange for the unredeemed portion of the principal of the Security so surrendered. ARTICLE TWELVE Subordination of Securities SECTION 1201. Securities Subordinate to Senior Indebtedness. --------------------------------------------- The Company covenants and agrees, and each Holder of a Security, by his acceptance thereof, likewise covenants and agrees, that, to the extent and in the manner hereinafter set forth in this Article, the indebtedness represented by the Securities and the payment of the principal of (and premium, if any) and interest on each and all of the Securities are hereby expressly made subordinate and subject in right of payment to the prior payment in full of all Senior Indebtedness. SECTION 1202. Payment Over of Proceeds Upon Dissolution, Etc. ----------------------------------------------- In the event of (a) any insolvency or bankruptcy case or proceeding, or any receivership, liquidation, reorganization or other similar case or proceeding in connection therewith, relative to the Company or to its creditors, as such, or to its assets, or (b) any liquidation, dissolution or other winding up of the Company, whether voluntary or involuntary and whether or not involving insolvency or bankruptcy, or (c) any assignment for the benefit of creditors or any other marshalling of assets and liabilities of the Company, then and in any such event the holders of Senior Indebtedness shall be entitled to receive payment in full of all amounts due or to become due on or in respect of all Senior Indebtedness, or provision shall be made for such payment in money or money's worth, before the Holders of the Securities are entitled to receive any payment on account of principal of (or premium, if any) or interest on the Securities, and to that end the holders of Senior Indebtedness shall be entitled to receive, for application to the payment thereof, any payment or distribution of any kind or character, whether in cash, property or securities, which may be payable or deliverable in respect of the Securities in any such case, proceeding, dissolution, liquidation or other winding up or event. In the event that, notwithstanding the foregoing provisions of this Section, the Trustee or the Holder of any 69 Security shall have received any payment or distribution of assets of the Company of any kind or character, whether in cash, property or securities, before all Senior Indebtedness is paid in full or payment thereof provided for, and if such fact shall, at or prior to the time of such payment or distribution, have been made known to the Trustee or, as the case may be, such Holder, then and in such event such payment or distribution shall be paid over or delivered forthwith to the trustee in bankruptcy, receiver, liquidating trustee, custodian, assignee, agent or other Person making payment or distribution of assets of the Company for application to the payment of all Senior Indebtedness remaining unpaid, to the extent necessary to pay all Senior Indebtedness in full, after giving effect to any concurrent payment or distribution to or for the holders of Senior Indebtedness. For purposes of this Article only, 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 which are subordinated in right of payment to all Senior Indebtedness which may at the time be outstanding to substantially the same extent as, or to a greater extent than, the Securities are so subordinated as provided in this Article. The consolidation of the Company with, or the merger of the Company into, another Person or the liquidation or dissolution of the Company following the conveyance or transfer of its properties and assets substantially as an entirety to another Person upon the terms and conditions set forth in Article Eight shall not be deemed a dissolution, winding up, liquidation, reorganization, assignment for the benefit of creditors or marshalling of assets and liabilities of the Company for the purposes of this Section if the Person formed by such consolidation or into which the Company is merged or which acquires by conveyance or transfer such properties and assets substantially as an entirety, as the case may be, shall, as a part of such consolidation, merger, conveyance or transfer, comply with the conditions set forth in Article Eight. SECTION 1203. Prior Payment to Senior Indebtedness Upon Acceleration of --------------------------------------------------------- Securities. ---------- In the event that any Securities are declared due and payable before their Stated Maturity, then and in such event the holders of the Senior Indebtedness shall be entitled to receive payment in full of all amounts due on or in respect of such Senior Indebtedness, or provision shall be made for such payment in money or money's worth, before 70 the Holders of the Securities are entitled to receive any payment of the principal of (or premium, if any) or interest on the Securities or on account of the purchase or other acquisition of Securities. In the event that, notwithstanding the foregoing, the Company shall make any payment to the Trustee or the Holder of any Security prohibited by the foregoing provisions of this Section, and if such fact shall, at or prior to the time of such payment, have been made known to the Trustee or, as the case may be, such Holder, then and in such event such payment shall be paid over and delivered forthwith to the Company. The provisions of this Section shall not apply to any payment with respect to which Section 1202 would be applicable. SECTION 1204. No Payment When Senior Indebtedness in Default. ---------------------------------------------- (a) In the event and during the continuation of any default in the payment of principal of (or premium, if any) or interest on any Senior Indebtedness beyond any applicable grace period with respect thereto, or (b) in the event any judicial proceeding shall be pending with respect to any such default, then no payment shall be made by the Company on account of principal of (or premium, if any) or interest on the Securities or on account of the purchase or other acquisition of Securities. In the event that, notwithstanding the foregoing, the Company shall make any payment to the Trustee or the Holder of any Security prohibited by the foregoing provisions of this Section, and if such fact shall, at or prior to the time of such payment, have been made known to the Trustee or, as the case may be, such Holder, then and in such event such payment shall be paid over and delivered forthwith to the Company. The provisions of this Section shall not apply to any payment with respect to which Section 1202 would be applicable. SECTION 1205. Payment Permitted If No Default. ------------------------------- Nothing contained in this Article or elsewhere in this Indenture or in any of the Securities shall prevent (a) the Company, at any time except during the pendency of any case, proceeding, dissolution, liquidation or other winding up, assignment for the benefit of creditors or other marshalling of assets and liabilities of the Company 71 referred to in Section 1202 or under the conditions described in Section 1203 or 1204, from making payments at any time of principal of (and premium, if any) or interest on the Securities, or (b) the application by the Trustee or any Paying Agent of any money deposited with it hereunder to the payment of or on account of the principal of (and premium, if any) or interest on the Securities or the retention of such payment by the Holder of any moneys so received, if, at the time of such application by the Trustee, it did not have knowledge that such payment would have been prohibited by the provisions of this Article. SECTION 1206. Subrogation to Rights of Holders of Senior Indebtedness. ------------------------------------------------------- Subject to the payment in full of all Senior Indebtedness, the Holders of the Securities shall be subrogated (equally and ratably with the holders of all indebtedness of the Company which by its express terms is subordinated to indebtedness of the Company to substantially the same extent as the Securities are subordinated and is entitled to like rights of subrogation) to the rights of the holders of such Senior Indebtedness to receive payments and distributions of cash, property and securities applicable to the Senior Indebtedness until the principal of (and premium, if any) and interest on the Securities shall be paid in full. For purposes of such subrogation, no payments or distributions to the holders of the Senior Indebtedness of any cash, property or securities to which the Holders of the Securities or the Trustee would be entitled except for the provisions of this Article, and no payments over pursuant to the provisions of this Article to the holders of Senior Indebtedness by Holders of the Securities or the Trustee, shall, as among the Company, its creditors other than holders of Senior Indebtedness and the Holders of the Securities, be deemed to be a payment or distribution by the Company to or on account of the Senior Indebtedness. SECTION 1207. Provisions Solely to Define Relative Rights. ------------------------------------------- The provisions of this Article are and are intended solely for the purpose of defining the relative rights of the Holders of the Securities on the one hand and the holders of Senior Indebtedness (and, in the case of Section 1215, Entitled Persons in respect of Other Financial Obligations) on the other hand. Nothing contained in this Article or elsewhere in this Indenture or in the Securities is intended to or shall (a) impair, as among the Company, its creditors other than holders of Senior Indebtedness and the Holders of the Securities, the obligation of the Company, which is absolute and unconditional (and which, subject to the rights under this Article of the holders of 72 Senior Indebtedness and the rights under Section 1215 of Entitled Persons in respect of Other Financial Obligations, is intended to rank equally with all other general obligations of the Company), to pay to the Holders of the Securities the principal of (and premium, if any) and interest on the Securities as and when the same shall become due and payable in accordance with their terms; or (b) affect the relative rights against the Company of the Holders of the Securities and creditors of the Company other than the holders of Senior Indebtedness; or (c) prevent the Trustee or the Holder of any Security from exercising all remedies otherwise permitted by applicable law upon default under this Indenture, subject to the rights, if any, under this Article of the holders of Senior Indebtedness, and under Section 1215 of Entitled Persons in respect of Other Financial Obligations, to receive cash, property and securities otherwise payable or deliverable to the Trustee or such Holder. SECTION 1208. Trustee to Effectuate Subordination. ----------------------------------- Each Holder of a Security by his acceptance thereof authorizes and directs the Trustee on his behalf to take such action as may be necessary or appropriate to effectuate the subordination provided in this Article and appoints the Trustee his attorney-in-fact for any and all such purposes. SECTION 1209. No Waiver of Subordination Provisions. ------------------------------------- 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 non-compliance by the Company with the terms, provisions and covenants of this Indenture, regardless of any knowledge thereof any such holder may have or be otherwise 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 Holders of the Securities, without incurring responsibility to the Holders of the Securities and without impairing or releasing the subordination provided in this Article or the obligations hereunder of the Holders of the Securities to the holders of 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, Senior Indebtedness, or otherwise amend or supplement in any manner 73 Senior Indebtedness or any instrument evidencing the same or any agreement under which Senior Indebtedness is outstanding; (ii) sell, exchange, release or otherwise deal with any property pledged, mortgaged or otherwise securing Senior Indebtedness; (iii) release any Person liable in any manner for the collection of Senior Indebtedness; and (iv) exercise or refrain from exercising any rights against the Company and any other Person. SECTION 1210. Notice to Trustee. ----------------- The Company shall give prompt written notice to the Trustee of any fact known to the Company which would prohibit the making of any payment or distribution to or by the Trustee in respect of the Securities. Notwithstanding the provisions of this Article or any other provision of this Indenture, the Trustee shall not be charged with knowledge of the existence of any facts which would prohibit the making of any payment or distribution to or by the Trustee in respect of the Securities, unless and until the Trustee shall have received written notice thereof from the Company or a holder of Senior Indebtedness or from any trustee therefor or from any Entitled Persons in respect of Other Financial Obligations, and, prior to the receipt of any such written notice, the Trustee shall be entitled in all respects to assume that no such facts exist. The Trustee shall be entitled to 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 therefor) or an Entitled Person in respect of Other Financial Obligations to establish that such notice has been given by a holder of Senior Indebtedness (or a trustee therefor) or an Entitled Person in respect of Other Financial Obligations. 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 Senior Indebtedness or an Entitled Person in respect of Other Financial Obligations to participate in any payment or distribution pursuant to this Article, the Trustee may request such Person to furnish evidence to the reasonable satisfaction of the Trustee as to the amount of Senior Indebtedness or Other Financial Obligations 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, and if such evidence is not furnished, the Trustee may defer any payment or distribution to such Person pending judicial determination as to the right of such Person to receive such payment. 74 SECTION 1211. Reliance on Judicial Order or Certificate of Liquidating Agent. -------------------------------------------------------------- Upon any payment or distribution of assets of the Company referred to in this Article, the Trustee and the Holders of the Securities shall be entitled to rely upon any order or decree entered by any court of competent jurisdiction in which such insolvency, bankruptcy, receivership, liquidation, reorganization, dissolution, winding up or similar case or proceeding is pending, or a certificate of the trustee in bankruptcy, receiver, liquidating trustee, custodian, assignee for the benefit of creditors, agent or other Person making such payment or distribution, delivered to the Trustee or to the Holders of Securities, for the purpose of ascertaining the Persons entitled to participate in such payment or distribution, the holders of the Senior Indebtedness and other indebtedness of the Company and the Entitled Persons in respect of Other Financial Obligations, the amount thereof or payable thereon, the amount or amounts paid or distributed thereon and all other facts pertinent thereto or to this Article. SECTION 1212. Trustee Not Fiduciary for Holders of Senior Indebtedness. -------------------------------------------------------- The Trustee shall not be deemed to owe any fiduciary duty to the holders of Senior Indebtedness or Entitled Persons in respect of Other Financial Obligations and shall not be liable to any such holders or creditors if it shall in good faith mistakenly pay over or distribute to Holders of Securities or to the Company or to any other Person cash, property or securities to which any holders of Senior Indebtedness or Entitled Persons in respect of Other Financial Obligations shall be entitled by virtue of this Article or otherwise. SECTION 1213. Rights of Trustee as Holder of Senior Indebtedness; Preservation ---------------------------------------------------------------- of Trustee's Rights. ------------------- The Trustee in its individual capacity shall be entitled to all the rights set forth in this Article with respect to any Senior Indebtedness which may at any time be held by it, and with respect to any Other Financial Obligations owed to the Trustee as an Entitled Person, to the same extent as any other holder of Senior Indebtedness or Entitled Persons in respect of Other Financial Obligations, as the case may be, and nothing in this Indenture shall deprive the Trustee of any of its rights as such holder or Entitled Person. 75 Nothing in this Article shall apply to claims of, or payments to, the Trustee under or pursuant to Section 607. SECTION 1214. Article Applicable to Paying Agents. ----------------------------------- In case at any time any Paying Agent other than the Trustee shall have been appointed by the Company and be then acting hereunder, the term "Trustee" as used in this Article shall in such case (unless the context otherwise requires) be construed as extending to and including such Paying Agent within its meaning as fully for all intents and purposes as if such Paying Agent were named in this Article in addition to or in place of the Trustee; provided, -------- however, that Section 1213 shall not apply to the Company or any Affiliate of - ------- the Company if it or such Affiliate acts as Paying Agent. SECTION 1215. Payment of Proceeds in Certain Cases. ------------------------------------ (a) If, after giving effect to the provisions of Section 1202 and Section 1206, any amount of cash, property or securities shall be available for payment or distribution in respect of the Securities ("Excess Proceeds"), and any Entitled Persons in respect of Other Financial Obligations shall not have received payment in full of all amounts due or to become due on or in respect of such Other Financial Obligations (and provision shall not have been made for such payment in money or money's worth), then such Excess Proceeds shall first be applied (ratably with any amount of cash, property or securities available for payment or distribution in respect of any other indebtedness of the Company that by its express terms provides for the payment over of amounts corresponding to Excess Proceeds to Entitled Persons in respect of Other Financial Obligations) to pay or provide for the payment of the Other Financial Obligations remaining unpaid, to the extent necessary to pay all Other Financial Obligations in full, after giving effect to any concurrent payment or distribution to or for Entitled Persons in respect of Other Financial Obligations. Any Excess Proceeds remaining after the payment (or provision for payment) in full of all Other Financial Obligations shall be available for payment or distribution in respect of the Securities. (b) In the event that, notwithstanding the foregoing provisions of subsection (a) of this Section, the Trustee or Holder of any Security shall have received any payment or distribution of assets of the Company of any kind or character, whether in cash, property or securities, before all Other Financial Obligations are paid in full or payment thereof duly provided for, and if such fact shall, 76 at or prior to the time of such payment or distribution have been made known to the Trustee or, as the case may be, such Holder, then and in such event, subject to any obligation that the Trustee or such Holder may have pursuant to Section 1202, such payment or distribution shall be paid over or delivered forthwith to the trustee in bankruptcy, receiver, liquidating trustee, custodian, assignee, agent or other Person making payment or distribution of assets of the Company for payment in accordance with subsection (a). (c) Subject to the payment in full of all Other Financial Obligations, the Holders of the Securities shall be subrogated (equally and ratably with the holders of all indebtedness of the Company that by its express terms provides for the payment over of amounts corresponding to Excess Proceeds to Entitled Persons in respect of Other Financial Obligations and is entitled to like rights of subrogation) to the rights of the Entitled Persons in respect of Other Financial Obligations to receive payments and distributions of cash, property and securities applicable to the Other Financial Obligations until the principal of and interest on the Securities shall be paid in full. For purposes of such subrogation, no payments or distributions to Entitled Persons in respect of Other Financial Obligations of any cash, property or securities to which Holders of the Securities or the Trustee would be entitled except for the provisions of this Section, and no payments over pursuant to the provisions of this Section to Entitled Persons in respect of Other Financial Obligations by Holders of Securities or the Trustee, shall, as among the Company, its creditors other than Entitled Persons in respect of Other Financial Obligations and the Holders of Securities be deemed to be a payment or distribution by the Company to or on account of the Other Financial Obligations. (d) The provisions of subsections (a), (b) and (c) of this Section are and are intended solely for the purpose of defining the relative rights of the Holders of the Securities, on the one hand, and the Entitled Persons in respect of Other Financial Obligations, on the other hand, after giving effect to the rights of the holders of Senior Indebtedness, as provided in this Article. Nothing contained in subsections (a), (b) and (c) of this Section is intended to or shall affect the relative rights against the Company of the Holders of the Securities and (1) the holders of Senior Indebtedness or (2) other creditors of the Company other than Entitled Persons in respect of Other Financial Obligations. 77 SECTION 1216. Certain Conversions Deemed Payment. ---------------------------------- For the purposes of this Article only, (1) the issuance and delivery of junior securities upon conversion of Securities in accordance with Article Thirteen shall not be deemed to constitute a payment or distribution on account of the principal of or premium or interest on Securities or on account of the purchase or other acquisition of Securities, and (2) the payment, issuance or delivery of cash, property or securities (other than junior securities) upon conversion of a Security shall be deemed to constitute payment on account of the principal of such Security. For the purposes of this Section, the term "junior securities" means (a) shares of any stock of any class of the Company and (b) securities of the Company which are subordinated in right of payment to all Senior Indebtedness which may be outstanding at the time of issuance or delivery of such securities to substantially the same extent as, or to a greater extent than, the Securities are so subordinated as provided in this Article. Nothing contained in this Article or elsewhere in this Indenture or in the Securities is intended to or shall impair, as among the Company, its creditors other than holders of Senior Indebtedness and the Holders of the Securities, the right, which is absolute and unconditional, of the Holder of any Security to convert such Security in accordance with Article Thirteen. ARTICLE THIRTEEN Conversion of Securities SECTION 1301. Conversion Privilege and Conversion Price. ----------------------------------------- Subject to and upon compliance with the provisions of this Article, at the option of the Holder thereof, the principal amount of any Security which is payable at Stated Maturity or any portion thereof which is $1,000 or an integral multiple of $1,000 may be converted into fully paid and non-assessable shares (calculated as to each conversion to the nearest 1/100 of a share) of Common Stock of the Company, at the conversion price, determined as hereinafter provided, in effect at the time of conversion. Such conversion right shall expire at the close of business on __________, subject, in the case of conversion of any Global Security, to any Applicable Procedures. In case a Security or portion thereof is called for redemption, such conversion right in respect of the Security or portion so called shall expire at the close of business on the Redemption Date unless the Company defaults in making the payment due upon 78 redemption, subject as aforesaid to any Applicable Procedures with respect to any Global Security. The price at which shares of Common Stock shall be delivered upon conversion (herein called the "conversion price") shall be initially $_____ per share of Common Stock. The conversion price shall be adjusted in certain instances as provided in this Article. SECTION 1302. Exercise of Conversion Privilege. -------------------------------- In order to exercise the conversion privilege, the Holder of any Security to be converted shall surrender such Security, duly endorsed or assigned to the Company or in blank, at any office or agency of the Company maintained for that purpose pursuant to Section 1002, accompanied by written notice to the Company substantially in the form set forth in the form of reverse of Security in Section 203 at such office or agency that the Holder elects to convert such Security or, if less than the entire principal amount thereof is to be converted, the portion thereof to be converted. Securities surrendered for conversion during the period from the close of business on any Regular Record Date next preceding any Interest Payment Date to the opening of business on such Interest Payment Date shall (except in the case of Securities or portions thereof which have been called for redemption on a Redemption Date within such period) be accompanied by payment in New York Clearing House funds, as the case may be, or other funds acceptable to the Company of an amount equal to the interest payable on such Interest Payment Date on the principal amount of Securities being surrendered for conversion. Subject to the provisions of Section 307 relating to the payment of Defaulted Interest by the Company, in the case of a Security which is converted after any Regular Record Date and on or prior to the next succeeding Interest Payment Date (other than any Securities or portions thereof which have been called for redemption on a Redemption Date within such period), the interest whose Stated Maturity is on such Interest Payment Date shall be payable on such Interest Payment Date to the Holder of such Security at the close of business on such Regular Record Date notwithstanding the conversion of such Security after such Regular Record Date and prior to such Interest Payment Date. Except as set forth above and subject to the final paragraph of Section 307, no payment or adjustment shall be made upon any conversion on account of any interest accrued on the Securities surrendered for conversion or on account of any dividends on the Common Stock issued upon conversion. Securities shall be deemed to have been converted immediately prior to the close of business on the day of surrender of such Securities for conversion in accordance 79 with the foregoing provisions, and at such time the rights of the Holders of such Securities as Holders shall cease, and the Person or Persons entitled to receive the Common Stock issuable upon conversion shall be treated for all purposes as the record holder or holders of such Common Stock at such time. As promptly as practicable on or after the conversion date, the Company shall issue and shall deliver at such office or agency a certificate or certificates for the number of full shares of Common Stock issuable upon conversion, together with payment in lieu of any fraction of a share, as provided in Section 1303. In the case of any Security which is converted in part only, upon such conversion the Company shall execute and the Trustee shall authenticate and deliver to the Holder thereof, at the expense of the Company, a new Security or Securities of authorized denominations in aggregate principal amount equal to the unconverted portion of the principal amount of such Security. SECTION 1303. Fractions of Shares. ------------------- No fractional shares of Common Stock shall be issued upon conversion of Securities. If more than one Security shall be surrendered for conversion at one time by the same Holder, the number of full shares which shall be issuable upon conversion thereof shall be computed on the basis of the aggregate principal amount of the Securities (or specified portions thereof) so surrendered. Instead of any fractional share of Common Stock which would otherwise be issuable upon conversion of any Security or Securities (or specified portions thereof), the Company shall pay a cash adjustment in respect of such fraction in an amount equal to the same fraction of the Closing Price at the close of business on the day of conversion (or, if such day is not a Trading Day, on the Trading Day immediately preceding such day). SECTION 1304. Adjustment of Conversion Price. ------------------------------ (a) In case the Company shall pay or make a dividend or other distribution on any class of capital stock of the Company in shares of Common Stock, the conversion price in effect at the opening of business on the day following the date fixed for the determination of shareholders entitled to receive such dividend or other distribution shall be reduced by multiplying such conversion price by a fraction of which the numerator shall be the number of shares of Common Stock outstanding at the close of business on the date fixed for such determination and the denominator shall be the sum of such number of shares and the total number of shares constituting such dividend or 80 other distribution, such reduction to become effective immediately after the opening of business on the day following the date fixed for such determination. For the purposes of this paragraph (a), the number of shares of Common Stock at any time outstanding shall not include shares held in the treasury of the Company or which shall have been otherwise acquired by the Company but shall include shares issuable in respect of scrip certificates issued in lieu of fractions of shares of Common Stock. The Company will not pay any dividend or make any distribution on shares of Common Stock held in the treasury of the Company. (b) Subject to the last sentence of paragraph (g) of this Section, in case the Company shall issue rights or warrants to all holders of its Common Stock entitling them to subscribe for or purchase shares of Common Stock at a price per share less than the current market price per share (determined as provided in paragraph (h) of this Section) of the Common Stock on the date fixed for the determination of the shareholders entitled to receive such rights or warrants, the conversion price in effect at the opening of business on the day following the date fixed for such determination shall be reduced by multiplying such conversion price by a fraction of which the numerator shall be the number of shares of Common Stock outstanding at the close of business on the date fixed for such determination plus the number of shares of Common Stock which the aggregate of the offering price of the total number of shares of Common Stock so offered for subscription or purchase would purchase at such current market price and the denominator shall be the number of shares of Common Stock outstanding at the close of business on the date fixed for such determination plus the number of shares of Common Stock so offered for subscription or purchase, such reduction to become effective immediately after the opening of business on the day following the date fixed for such determination. For the purposes of this paragraph (b), the number of shares of Common Stock at any time outstanding shall not include shares held in the treasury of the Company but shall include shares issuable in respect of scrip certificates issued in lieu of fractions of shares of Common Stock. The Company will not issue any rights or warrants in respect of shares of Common Stock held in the treasury of the Company. (c) In case outstanding shares of Common Stock shall be subdivided into a greater number of shares of Common Stock, the conversion price in effect at the opening of business on the day following the day upon which such subdivision becomes effective shall be proportionately reduced, and, conversely, in case outstanding shares of Common Stock shall each be combined into a smaller number of 81 shares of Common Stock, the conversion price in effect at the opening of business on the day following the day upon which such combination becomes effective shall be proportionately increased, such reduction or increase, as the case may be, to become effective immediately after the opening of business on the day following the day upon which such subdivision or combination becomes effective. (d) Subject to the last sentence of this paragraph (d) and the last sentence of paragraph (g) of this Section, in case the Company shall, by dividend or otherwise, distribute to all holders of its Common Stock evidences of its indebtedness, shares of any class of capital stock, cash or assets (including securities, but excluding those rights or warrants referred to in paragraph (b) of this Section, any dividend or distribution paid exclusively in cash and any dividend or distribution referred to in paragraph (a) of this Section), the conversion price shall be adjusted so that the same shall equal the price determined by multiplying the conversion price in effect immediately prior to the close of business on the date fixed for the determination of shareholders entitled to receive such distribution by a fraction of which the numerator shall be the current market price per share (determined as provided in paragraph (h) of this Section) of the Common Stock on the date fixed for such determination less the then fair market value (as determined by the Board of Directors, whose determination shall be conclusive and described in a Board Resolution filed with the Trustee) of the portion of the assets, securities or evidences of indebtedness so distributed applicable to one share of Common Stock and the denominator shall be such current market price per share of the Common Stock, such adjustment to become effective immediately prior to the opening of business on the day following the date fixed for the determination of shareholders entitled to receive such distribution. If the Board of Directors determines the fair market value of any distribution for purposes of this paragraph (d) by reference to the actual or when issued trading market for any securities comprising such distribution, it must in doing so consider the prices in such market over the same period used in computing the current market price per share pursuant to paragraph (h) of this Section. Notwithstanding the foregoing, in the event that the Company shall distribute rights or warrants (other than those referred to in paragraph (b) of this Section) ("Rights") pro rata to holders of Common Stock, the Company shall make proper provision so that each Holder of a Security who converts such Security (or any portion thereof) after the record date for such distribution and prior to the expiration or redemption of the Rights shall be entitled to receive upon such conversion, in addition to the shares of 82 Common Stock issuable upon such conversion (the "Conversion Shares"), a number of Rights to be determined as follows: (i) if such conversion occurs on or prior to the date for the distribution to the holders of Rights of separate certificates evidencing such Rights (the "Distribution Date"), the same number of Rights to which a holder of a number of shares of Common Stock equal to the number of Conversion Shares is entitled at the time of such conversion in accordance with the terms and provisions of and applicable to the Rights; and (ii) if such conversion occurs after the Distribution Date, the same number of Rights to which a holder of the number of shares of Common Stock into which the principal amount of the Security so converted was convertible immediately prior to the Distribution Date would have been entitled on the Distribution Date in accordance with the terms and provisions of and applicable to the Rights. (e) In case the Company shall, by dividend or otherwise, at any time distribute to all holders of its Common Stock cash (excluding any cash that is distributed as part of a distribution referred to in paragraph (d) of this Section) in an aggregate amount that, together with (i) the aggregate amount of any other distributions to all holders of its Common Stock made exclusively in cash with the 12 months preceding the date of payment of such distribution and in respect of which no conversion price adjustment pursuant to this paragraph (e) has been made and (ii) the aggregate of any cash plus the fair market value (as determined by the Board of Directors, whose determination shall be conclusive and described in a Board Resolution) of consideration payable in respect of any tender offer by the Company or a Subsidiary for all or any portion of the Company's Common Stock concluded within the 12 months preceding the date of payment of such distribution and in respect of which no conversion price adjustment pursuant to paragraph (f) of this Section has been made, exceeds 12.5% of the product of the current market price per share (determined as provided in paragraph (h) of this Section) of the Common Stock on the date fixed for the determination of shareholders entitled to receive such distribution times the number of shares of Common Stock outstanding on such date, the conversion price shall be reduced so that the same shall equal the price determined by multiplying the conversion price in effect immediately prior to the effectiveness of the conversion price reduction contemplated by this paragraph (e) by a fraction of which the numerator shall be the current market price per share (determined as provided in paragraph (h) of this Section) of the Common Stock on such date less the amount of cash so distributed applicable to one share of Common Stock and the denominator shall be such current market price per share of the Common Stock, 83 such reduction to become effective immediately prior to the opening of business on the later of (a) the date following the date fixed for the payment of such distribution and (b) the date 20 days after the notice relating to such distribution is given pursuant to Section 1306(a). (f) In case a tender offer made by the Company or any Subsidiary for all or any portion of the Company's Common Stock shall be consummated and such tender offer shall involve an aggregate consideration having a fair market value (as determined by the Board of Directors, whose determination shall be conclusive and described in a Board Resolution) on the last time (the "Expiration Time") tenders may be made pursuant to such tender offer (as it may be amended) that, together with (i) the aggregate of the cash plus the fair market value (as determined by the Board of Directors, whose determination shall be conclusive and described in a Board Resolution), as of the Expiration Time, of consideration payable in respect of any tender offer by the Company or a Subsidiary for all or any portion of the Company's Common Stock consummated within 12 months preceding the Expiration Time and in respect of which no conversion price adjustment pursuant to this paragraph (f) has been made and (ii) the aggregate amount of any distributions to all holders of the Company's Common Stock made exclusively in cash within the 12 months preceding the Expiration Time and in respect of which no conversion price adjustment pursuant to paragraph (e) of this Section has been made, exceeds 12.5% of the product of the current market price per share (determined as provided in paragraph (h) of this Section) of the Common Stock on the Expiration Time times the number of shares of Common Stock outstanding (including any tendered shares) on the Expiration Time, the conversion price shall be reduced so that the same shall equal the price determined by multiplying the conversion price in effect immediately prior to the Expiration Time by a fraction of which the numerator shall be (i) the product of the current market price per share (determined as provided in paragraph (h) of this Section) of the Common Stock on the Expiration Time times the number of shares of Common Stock outstanding (including any tendered shares) on the Expiration Time minus (ii) the fair market value (determined as aforesaid) of the aggregate consideration payable to stockholders based on the acceptance (up to any maximum specified in the terms of the tender offer) of all shares validly tendered and not withdrawn as of the Expiration Time (the shares deemed so accepted, up to any such maximum, being referred to as the "Purchased Shares") and the denominator shall be the product of (i) such current market price per share on the Expiration Time times (ii) such number of outstanding shares on the Expiration Time minus the number of Purchased Shares, such reduction to 84 become effective immediately prior to the opening of business on the day following the Expiration Time. (g) The reclassification of Common Stock into securities other than Common Stock (other than any reclassification upon a consolidation or merger to which Section 1311 applies) shall be deemed to involve (i) a distribution of such securities other than Common Stock to all holders of Common Stock (and the effective date of such reclassification shall be deemed to be "the date fixed for the determination of shareholders entitled to receive such distribution" within the meaning of paragraph (d) of this Section), and (ii) a subdivision or combination, as the case may be, of the number of shares of Common Stock outstanding immediately prior to such reclassification into the number of shares of Common Stock outstanding immediately thereafter (and the effective date of such reclassification shall be deemed to be "the day upon which such subdivision becomes effective" or "the day upon which such combination becomes effective", as the case may be, and "the day upon which such subdivision or combination becomes effective" within the meaning of paragraph (c) of this Section). Rights or warrants issued by the Company to all holders of its Common Stock entitling the holders thereof to subscribe for or purchase shares of Common Stock, which rights or warrants (i) are deemed to be transferred with such shares of Common Stock, (ii) are not exercisable and (iii) are also issued in respect of future issuances of Common Stock, in each case in clauses (i) through (iii) until the occurrence of a specified event or events ("Trigger Event"), shall for purposes of this Section 1304 not be deemed issued until the occurrence of the earliest Trigger Event. (h) For the purpose of any calculation under paragraphs (b), (d) and (e) of this Section, the current market price per share of Common Stock on any date shall be deemed to be the average of the Closing Prices for the 15 consecutive Trading Days selected by the Company commencing not more than 20 Trading Days before, and ending not later than the day in question, provided, however, that (i) if the "ex" date for any event (other than the issuance or distribution requiring such computation) that requires an adjustment to the conversion price pursuant to paragraph (a), (b), (c), (d), (e) or (f) above occurs on or after the 20th Trading Day prior to the day in question and prior to the "ex" date for the issuance or distribution requiring such computation, the Closing Price for each Trading Day prior to the "ex" date for such other event shall be adjusted by multiplying such Closing Price by the same fraction by which the conversion price is so required to be adjusted as a result of such other event, (ii) if the "ex" date for any event (other than the issuance or distribution 85 requiring such computation) that requires an adjustment to the conversion price pursuant to paragraph (a), (b), (c), (d), (e) or (f) above occurs on or after the "ex" date for the issuance or distribution requiring such computation and on or prior to the day in question, the Closing Price for each Trading Day on and after the "ex" date for such other event shall be adjusted by multiplying such Closing Price by the reciprocal of the fraction by which the conversion price is so required to be adjusted as a result of such other event, and (iii) if the "ex" date for the issuance or distribution requiring such computation is on or prior to the day in question, after taking into account any adjustment required pursuant to clause (ii) of this proviso, the Closing Price for each Trading Day on or after such "ex" date shall be adjusted by adding thereto the amount of any cash and the fair market value on the day in question (as determined by the Board Directors in a manner consistent with any determination of such value for purposes of paragraph (d) or (e) of this Section, whose determination shall be conclusive and described in a Board Resolution) of the evidences of indebtedness, shares of capital stock or assets being distributed applicable to one share of Common Stock as of the close of business on the day before such "ex" date. For the purpose of any computation under paragraph (f) of this Section, the current market price per share of Common Stock on any date shall be deemed to be the average of the daily Closing Prices for the 15 consecutive Trading Days selected by the Company commencing on or after the latest (the "Commencement Date") of (i) the date 20 Trading Days before the date in question, (ii) the date of commencement of the tender offer requiring such computation and (iii) the date of the last amendment, if any, of such tender offer involving a change in the maximum number of shares for which tenders are sought or a change in the consideration offered, and ending not later than the Expiration Time of such tender offer; provided, however, that if the "ex" date for any event (other than the tender offer requiring such computation) that requires an adjustment to the conversion price pursuant to paragraph (a), (b), (c), (d), (e) or (f) above occurs on or after the Commencement Date and prior to the Expiration Time for the tender offer requiring such computation, the Closing Price for each Trading Day prior to the "ex" date, for such other event shall be adjusted by multiplying such Closing Price by the same fraction by which the conversion price is so required to be adjusted as a result of such other event. For purposes of this paragraph, the term "ex" date, (i) when used with respect to any issuance or distribution, means the first date on which the Common Stock trades regular way on the relevant exchange or in the relevant market from which the Closing Price was obtained without the right to receive such issuance or distribution, (ii) when used with respect 86 to any subdivision or combination of shares of Common Stock, means the first date on which the Common Stock trades regular way on such exchange or in such market after the time at which such subdivision or combination becomes effective, and (iii) when used with respect to any tender offer means the first date on which the Common Stock trades regular way on such exchange or in such market after the Expiration Time of such tender offer. (i) No adjustment in the conversion price shall be required unless such adjustment would require an increase or decrease of at least 1% in such price; provided, however, that any adjustment which by reason of this paragraph -------- ------- (i) is not required to be made shall be carried forward and taken into account in any subsequent adjustment; and provided, further that all such adjustments -------- ------- shall be made no later than the third anniversary of the earliest date on which an adjustment would have been made but for this paragraph (i) and all calculations under this paragraph (i) shall be made to the nearest cent. (j) In addition to the adjustments in conversion price required by paragraphs (a), (b), (c), (d), (e) and (f), of this Section, the Company may from time to time in its discretion make such decreases in the conversion price as it considers to be advisable in order to avoid or diminish any federal income tax to any holders of shares of Common Stock resulting from any dividend or distribution of stock or issuance of rights or warrants to purchase or subscribe for stock or from any event treated as such for federal income tax purposes or for any other reasons. SECTION 1305. Notice of Adjustments of Conversion Price. ----------------------------------------- Whenever the conversion price is adjusted as herein provided: (a) the Company shall compute the adjusted conversion price in accordance with Section 1304 and shall prepare a certificate signed by the chief financial officer or the Treasurer of the Company setting forth the adjusted conversion price and showing in reasonable detail the facts upon which such adjustment is based, and such certificate shall forthwith be filed at each office or agency maintained for the purpose of conversion of Securities pursuant to Section 1002; and (b) a notice stating that the conversion price has been adjusted and setting forth the adjusted conversion price shall forthwith be required, and as soon as practicable after it is required, such notice 87 shall be mailed by the Company to all Holders at their last addresses as they shall appear in the Securities Register. SECTION 1306. Notice of Certain Corporate Actions. ----------------------------------- In case: (a) the Company shall declare a dividend (or any other distribution) on its Common Stock payable otherwise than in cash out of its retained earnings; or (b) the Company shall authorize the granting to the holders of its Common Stock of rights or warrants to subscribe for or purchase any shares of capital stock of any class or of any other rights; or (c) of any reclassification of the Common Stock of the Company (other than a subdivision or combination of its outstanding shares of Common Stock, or of any consolidation, merger or share exchange to which the Company is a party and for which approval of any shareholders of the Company is required), or of the sale or transfer of all or substantially all of the assets of the Company; or (d) of the voluntary or involuntary dissolution, liquidation or winding up of the Company; then the Company shall cause to be filed with the Trustee, and shall cause to be mailed to all Holders at their last addresses as they shall appear in the Securities Register, at least 20 days (or 10 days in any case specified in clause (a) or (b) above) prior to the applicable record date hereinafter specified, a notice stating (i) the date on which a record is to be taken for the purpose of such dividend, distribution, rights or warrants, or, if a record is not to be taken, the date as of which the holders of Common Stock of record to be entitled to such dividend, distribution, rights or warrants are to be determined, or (ii) the date on which such reclassification, consolidation, merger, share exchange, sale, transfer, dissolution, liquidation or winding up is expected to become effective, and the date as of which it is expected that holders of Common Stock of record shall be entitled to exchange their shares of Common Stock for securities, cash or other property deliverable upon such reclassification, consolidation, merger, share exchange, sale, transfer, dissolution, liquidation or winding up. If at any time the Trustee shall not be the conversion agent, a copy of such notice shall also forthwith be filed by the Company with the Trustee. 88 SECTION 1307. Company to Reserve Common Stock. ------------------------------- The Company shall at all times reserve and keep available, free from preemptive rights, out of its authorized but unissued Common Stock, for the purpose of effecting the conversion of Securities, the full number of shares of Common Stock then issuable upon the conversion of all outstanding Securities. SECTION 1308. Taxes on Conversions. -------------------- The Company will pay any and all taxes that may be payable in respect of the issue or delivery of shares of Common Stock on conversion of Securities pursuant hereto. The Company shall not, however, be required to pay any tax which may be payable in respect of any transfer involved in the issue and delivery of shares of Common Stock in a name other than that of the Holder of the Security or Securities to be converted, and no such issue or delivery shall be made unless and until the person requesting such issue has paid to the Company the amount of any such tax, or has established to the satisfaction of the Company that such tax has been paid. SECTION 1309. Covenant as to Common Stock. --------------------------- The Company covenants that all shares of Common Stock which may be issued upon conversion of Securities will upon issue be fully paid and non- assessable and, except as provided in Section 1308, the Company will pay all taxes, liens and charges with respect to the issue thereof. SECTION 1310. Cancellation of Converted Securities. ------------------------------------ All Securities delivered for conversion shall be delivered to the Trustee to be cancelled by or at the direction of the Trustee, which shall dispose of the same as provided in Section 309. SECTION 1311. Provisions in Case of Consolidation, Merger or Sale of Assets. ------------------------------------------------------------- In case of any consolidation of the Company with, or merger of the Company into, any other Person, any merger or consolidation of another Person into the Company (other than a merger which does not result in any reclassification, conversion, exchange or cancellation of outstanding shares of Common Stock of the Company), or any sale or transfer of all or substantially all of the assets of the Company, the Person formed by such consolidation or resulting from such merger or which acquires such assets or the Company, as the 89 case may be, shall execute and deliver to the Trustee a supplemental indenture providing that the Holder of each Security then outstanding shall have the right thereafter, during the period such Security shall be convertible as specified in Section 1301, to convert such Security only into the kind and amount of securities, cash and other property receivable upon such consolidation, merger, sale or transfer by a holder of the number of shares of Common Stock of the Company into which such Security might have been converted immediately prior to such consolidation, merger, sale or transfer, assuming such holder of Common Stock of the Company is not a Person with which the Company consolidated or into which the Company merged or which merged into the Company, or to which such sale or transfer was made, as the case may be (a "Constituent Person"), or an Affiliate of a Constituent Person, and failed to exercise his right of election, if any, as to the kind or amount of securities, cash or other property receivable upon such consolidation, merger, sale or transfer (provided that if the kind or amount of securities, cash and other property receivable upon such consolidation, merger, sale or transfer is not the same for each share of Common Stock of the Company in respect of which such rights of election shall not have been exercised ("non-electing share"), then for the purpose of this Section the kind and amount of securities, cash and other property receivable upon such consolidation, merger, sale or transfer by each non-electing share shall be deemed to be the kind and amount so receivable per share by a plurality of the non-electing shares). Such supplemental indenture shall provide for adjustments which, for events subsequent to the effective date of such supplemental indenture, shall be as nearly equivalent as may be practicable to the adjustments provided for in this Article. The above provisions of this Section shall similarly apply to successive consolidations, mergers, sales or transfers. -------------------- This instrument may be executed in any number of counterparts, each of which so executed shall be deemed to be an original, but all such counterparts shall together constitute but one and the same instrument. 90 IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed, and their respective corporate seals to be hereunto affixed and attested, all as of the day and year first above written. FIRST STATE BANCORPORATION [SEAL] By ____________________________ Name: Title: Attest: __________________________ Name: Title: FIRST TRUST NATIONAL ASSOCIATION [SEAL] By ___________________________ Name: Title: Attest: ___________________________ Name: Title: 91 STATE OF NEW YORK ) ss.: COUNTY OF NEW YORK ) On the _____ day of __________, 1997, before me personally came ___________________________, to me known, who, being by me duly sworn, did depose and say that he/she is ______________________________________________ of FIRST STATE BANCORPORATION, one of the corporations described in and which executed the foregoing instrument; that he/she knows the seal of said corporation; that the seal affixed to said instrument is such corporate seal; that it was so affixed by authority of the Board of Directors of said corporation, and that he/she signed his/her name thereto by like authority. ______________________________ Notary Public STATE OF NEW YORK ) ss.: COUNTY OF NEW YORK ) On the _____ day of __________, 1997, before me personally came ___________________________, to me known, who, being by me duly sworn, did depose and say that he/she is ____________________________________________ of FIRST TRUST NATIONAL ASSOCIATION, one of the corporations described in and which executed the foregoing instrument; that he/she knows the seal of said corporation; that the seal affixed to said instrument is such corporate seal; that it was so affixed by authority of the Board of Directors of said corporation, and that he/she signed his/her name thereto by like authority. ______________________________ Notary Public 92 EX-5 5 OPINION OF HINKLE, COX, EATON, COFFIELD & HENSLEY [LETTERHEAD OF HINKLE, COX, EATON, COFFIELD & HENSLEY, L.L.P. APPEARS HERE] April 21, 1997 First State Bancorporation 111 Lomas Avenue NW Albuquerque, New Mexico 87102 Ladies and Gentlemen: We have assisted in the preparation and filing with the Securities and Exchange Commission (the "Commission") of a Registration Statement on Form S-2 filed with the Commission on April 2, 1997 (the "Registration Statement"), relating to $13,800,000 principal amount of Convertible Subordinated Debentures due 2017 (the "Debentures") of First State Bancorporation, a New Mexico corporation (the "Company") and the shares of Common Stock, no par value per share, of the Company issuable upon conversion of the Debentures, including the corresponding rights under the Shareholder Protection Rights Agreement dated as of October 25, 1996, between the Company and American Securities Transfer, Incorporated, as Rights Agent (the "Conversion Shares"). We have examined the Restated Articles of Organization and the By-Laws of the Company and have examined and relied on the originals, or copies certified to our satisfaction of such records of meetings of the directors and shareholders of the Company, documents and other instruments as in our judgment are necessary or appropriate to enable us to render the opinions expressed below. We assume that appropriate action will be taken prior to the sale of the Debentures to register and qualify the Debentures and the Conversion Shares for sale under any applicable state "blue sky" or securities law. Based upon and subject to the foregoing, we are of the opinion that: 1. The Company is a duly organized and validly existing corporation under the laws of New Mexico with corporate powers adequate for the conduct of its business First State Bancorporation April 21, 1997 Page 2 as described in the Registration Statement and the Prospectus constituting a part thereof. 2. The execution and delivery of the Indenture between the Company and Colorado National Bank, as trustee (the "Indenture"), have been duly authorized by the Company and, when executed and delivered by the Company, the Indenture will constitute a valid and legally binding instrument of the Company, except as the enforceability thereof may be limited by bankruptcy, insolvency, reorganization, moratorium, notice, or other laws relating to or affecting creditors' rights generally. 3. The Debentures and the Conversion Shares have been duly authorized and when the Debentures have been duly executed, authenticated, issued, and delivered to and paid for by the Underwriters, (a) the Debentures will constitute valid and binding obligations of the Company and will be entitled to all the benefits of the Indenture, except as the enforceability of the Debentures may be limited by bankruptcy, insolvency, reorganization, moratorium, notice, or other laws relating to or affecting creditor's rights generally and (b) the Conversion Shares issuable upon conversion of the Debentures will be legally issued, fully paid, and non-assessable. We hereby consent to the use of our name in the Registration Statement and under the caption "Legal Matters" in the related Prospectus and to the filing of this opinion as an Exhibit to the Registration Statement. Very truly yours, /s/ Hinkle, Cox, Eaton, Coffield & Hensley EX-12.1 6 COMPUTATION OF RATIO OF EARNINGS Exhibit 12.1 ---- First State Bancorporation and Subsidiaries Computation of Earnings To Fixed Charges
1996 1995 1994 1993 1992 ------------------------------------------------------------------- Including interest on deposits: Earnings: Income before taxes and minority interest $3,177 $2,438 $2,641 $1,795 $1,413 Loss from credit card processing operation - 1,208 158 - - Interest expense 9,617 7,385 4,666 3,341 3,996 ------------------------------------------------------------------- 12,794 11,031 7,465 5,136 5,409 Fixed charges: Interest expense 9,617 7,385 4,666 3,341 3,996 ------------------------------------------------------------------- Earnings to fixed charges 1.33 1.49 1.60 1.54 1.35 =================================================================== Excluding interest on deposits: Earnings: Income before taxes and minority interest $3,177 $2,438 $2,641 $1,795 $1,413 Loss from credit card processing operation - 1,208 158 - - Interest expense 9,617 7,385 4,666 3,341 3,996 Interest on deposits (8,375) (6,415) (4,021) (3,165) (3,806) ------------------------------------------------------------------- 4,419 4,616 3,444 1,971 1,603 Fixed charges: Interest expense 9,617 7,385 4,666 3,341 3,996 Interest on deposits (8,375) (6,415) (4,021) (3,165) (3,806) ------------------------------------------------------------------- 1,242 970 645 176 190 ------------------------------------------------------------------- Earnings to fixed charges 3.56 4.76 5.34 11.20 8.44 ===================================================================
EX-23.2 7 CONSENT OF KPMG PEAT MARWICK LLP EXHIBIT 23.2 Independent Auditors' Consent ----------------------------- The Board of Directors First State Bancorporation: We consent to the use of our report included herein and to the reference to our firm under the heading "Experts" in the prospectus. KPMG Peat Marwick LLP Albuquerque, New Mexico April 24, 1997 EX-25 8 FORM T-1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON D.C. 20549 --------------------------------- FORM T-1 STATEMENT OF ELIGIBILITY UNDER THE TRUST INDENTURE ACT OF 1939 OF A CORPORATION DESIGNATED TO ACT AS TRUSTEE --------------------------------- FIRST TRUST NATIONAL ASSOCIATION (Exact name of trustee as specified in its charter) NOT APPLICABLE 41-0257700 (Jurisdiction of incorporation or (I.R.S. Employer organization if not a U.S. National Bank) Identification No.) First Trust Center 180 East Fifth Street 55101 St. Paul, Minnesota (Zip Code) (Address of principal executive offices) --------------------------------- FIRST STATE BANCORPORATION (Exact name of obligor as specified in its charter) NEW MEXICO 85-0366665 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 111 LOMAS AVENUE NW 87102 ALBUQUERQUE, NEW MEXICO (Zip Code) (Address of principal executive offices) --------------------------------- CONVERTIBLE SUBORDINATED DEBENTURES DUE 2017 (Title of the indenture securities) 1. GENERAL INFORMATION Furnish the following information as to the Trustee. -------------------- (a) Name and address of each examining or supervising authority to which it is subject. Comptroller of the Currency Washington, D.C. (b) Whether it is authorized to exercise corporate trust powers. Yes 2. AFFILIATIONS WITH THE OBLIGOR If the obligor is an affiliate of the ----------------------------- Trustee, describe each such affiliation. None Items 3-15 are not applicable because to the best of the Trustee's knowledge the obligor is not in default under any Indenture for which the Trustee acts as Trustee. 16. LIST OF EXHIBITS List below all exhibits filed as a part of this statement ---------------- of eligibility. Each of the exhibits listed below , other than Exhibit 6, is incorporated herein by reference from registration numbers referenced after each exhibit below. 1. Copy of Articles of Association. Registration #22-27000. 2. Copy of Certificate of Authority to Commence Business. Registration #22-27000. 3. Authorization of the Trustee to exercise corporate trust powers (included in Exhibits 1 and 2; no separate instrument). Registration #22-27000. 4. Copy of Existing By-Laws. Registration #22-27000. 5. Copy of each indenture referred to in Item 4. N/A. 6. The consents of the Trustee required by Section 321 (b) of the Act. 7. Copy of the latest report of condition of the Trustee published pursuant to law or the requirements of its supervising or examining authority. Registration #333-2090. NOTE The answers to this statement insofar as such answers relate to what persons have been underwriters for any securities of the obligor within three years prior to the date of filing this statement, or what persons are owners of 10% or more of the voting securities of the obligor, or affiliates, are based upon information furnished to the Trustee by the obligor. While the Trustee has no reason to doubt the accuracy of any such information, it cannot accept any responsibility therefor. SIGNATURE Pursuant to the requirements of the Trust Indenture Act of 1939, the Trustee, FIRST TRUST NATIONAL ASSOCIATION, an Association organized and existing under the laws of the United States, has duly caused this statement of eligibility to be signed on its behalf by the undersigned, thereunto duly authorized, and its seal to be hereunto affixed and attested on the 24th day of April, 1997. FIRST TRUST NATIONAL ASSOCIATION [SEAL] /s/ ADAM M. DALMY ----------------------- ADAM M. DALMY VICE PRESIDENT /s/ WILLIAM W.MACMILLAN - ----------------------- WILLIAM W. MACMILLAN ASSISTANT SECRETARY EXHIBIT 6 CONSENT In accordance with Section 321(b) of the Trust Indenture Act of 1939, the undersigned, FIRST TRUST NATIONAL ASSOCIATION hereby consents that reports of examination of the undersigned by Federal, State, Territorial or District authorities may be furnished by such authorities to the Securities and Exchange Commission upon its request therefor. Dated: April 24, 1997 FIRST TRUST NATIONAL ASSOCIATION /s/ ADAM M. DALMY ------------------------ ADAM M. DALMY VICE PRESIDENT -----END PRIVACY-ENHANCED MESSAGE-----