Document:

Form of senior debt security--medium-term note

 Exhibit 4.01 
 LEHMAN BROTHERS HOLDINGS INC. 
 Capped Bearish Return Enhanced Notes with Knock-Out Level Linked to the S&P 500® Index Due November 10, 2008 
  

			
	 Number R-1
	 	$4,565,000
	 ISIN US 52517P3D19P
	 	CUSIP 52517P3D1

 See Reverse for Certain Definitions 
 THIS SECURITY (THIS “SECURITY”) IS A GLOBAL SECURITY WITHIN THE MEANING OF THE INDENTURE HEREINAFTER REFERRED TO AND IS REGISTERED IN
THE NAME OF A DEPOSITORY OR A NOMINEE THEREOF. UNLESS AND UNTIL IT IS EXCHANGED IN WHOLE OR IN PART FOR SECURITIES IN CERTIFICATED FORM, THIS SECURITY MAY NOT BE TRANSFERRED EXCEPT AS A WHOLE BY THE DEPOSITORY TO A NOMINEE OF THE DEPOSITORY OR BY A
NOMINEE OF THE DEPOSITORY TO SUCH DEPOSITORY OR ANOTHER NOMINEE OF THE DEPOSITORY OR BY THE DEPOSITORY OR ANY SUCH NOMINEE TO A SUCCESSOR DEPOSITORY OR A NOMINEE OF SUCH SUCCESSOR DEPOSITORY. UNLESS THIS SECURITY IS PRESENTED BY AN AUTHORIZED
REPRESENTATIVE OF THE DEPOSITORY TO LEHMAN BROTHERS HOLDINGS INC. OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY SECURITY ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS REQUESTED BY AN
AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY (AND ANY PAYMENT IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY), 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. 
 LEHMAN BROTHERS
HOLDINGS INC., a corporation duly organized and existing under the laws of the State of Delaware (hereinafter called the “Company”), for value received, hereby promises to pay to CEDE & CO. or registered assigns, at the
office or agency of the Company in the Borough of Manhattan, The City of New York, on the Maturity Date, in such coin or currency of the United States of America at the time of payment shall be legal tender for the payment of public and private
debts, for each $1,000 principal amount of the Securities represented hereby, an amount equal to the Payment at Maturity. THE SECURITIES REPRESENTED HEREBY SHALL NOT BEAR ANY INTEREST. 
 Any amount payable on the Maturity Date hereon will be paid only upon presentation and surrender of this Security. 
 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. 
  

 “Standard & Poor’s” “S&P” “S&P 500”
“Standard & Poor’s 500” and “500” are trademarks of The McGraw-Hill Companies, Inc. and have been licensed for use by Lehman Brothers Inc. and sub-licensed for use by the Company. The Securities, linked to the
performance of the S&P 500® Index, are not sponsored, endorsed, sold or promoted by Standard & Poor’s and Standard & Poor’s makes no representation regarding
the advisability of investing in the Securities. This Security shall not be valid or become obligatory for any purpose until the certificate of authentication hereon shall have been signed by the Trustee under the Indenture referred to on the
reverse hereof. 
  

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 IN WITNESS WHEREOF, Lehman Brothers Holdings Inc. has caused this instrument to be signed by its
Chairman of the Board, its President, its Vice Chairman, its Chief Financial Officer, one of its Vice Presidents or its Treasurer, by manual or facsimile signature under its corporate seal, attested by its Secretary or one of its Assistant
Secretaries by manual or facsimile signature. 
  
  

							
	Dated: August 9, 2007	 	LEHMAN BROTHERS HOLDINGS INC.	 	
		 		 		 	
				
	[SEAL]	 	By:	 	  
	 	
		 		 	Vice President	 	
				
		 	Attest:	 	  
	 	
		 		 	Assistant Secretary	 	

  
 TRUSTEE’S CERTIFICATE OF
AUTHENTICATION 
 This is one of the Securities of the series designated therein referred to in the within-mentioned Indenture. 
  

			
	 CITIBANK, N.A.
 as
Trustee

		
	By:	 	  

		 	    Authorized Officer

  

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 Reverse of Security 
 This Security is one of a duly authorized series of Securities of the Company designated as Capped Bearish Return Enhanced Notes with Knock-Out Level Linked to the S&P 500® Index Due November 10, 2008 (herein called the “Securities”). The Company may, without the consent of the holders of the Securities, create and issue additional notes ranking equally with the
Securities and otherwise similar in all respects so that such further notes shall be consolidated and form a single series with the Securities; provided that no additional notes can be issued if an Event of Default has occurred with respect to the
Securities. This series of Securities is one of an indefinite number of series of debt securities of the Company, issued and to be issued under an indenture, dated as of September 1, 1987, as amended (herein called the
“Indenture”), duly executed and delivered by the Company and Citibank, N.A., 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 description of the rights, limitations of rights, obligations, duties and immunities thereunder of the Company, the Trustee and the Holders of the Securities. 
 The Payment at Maturity, at the request of the Trustee, shall be determined by the Calculation Agent pursuant to the Calculation Agency Agreement. The
Trustee shall fully rely on the determination by the Calculation Agent of the Payment at Maturity and shall have no duty to make any such determination. The Calculation Agent will provide written notice to the Trustee at its New York office, on
which notice the Trustee may conclusively rely, of the Payment at Maturity on or prior to 11:00 a.m. on the Business Day preceding the Maturity Date. 
 All calculations with respect to the Index Starting Level, the Index Ending Level, the Index Return or any Index Closing Level will be rounded to the nearest one hundred-thousandth, with five one-millionths rounded
upward (e.g., .876545 would be rounded to .87655); all dollar amounts related to determination of the payment per $1,000 principal amount Security on the Maturity Date, if any, will be rounded to the nearest ten-thousandth, with five one
hundred-thousandths rounded upward (e.g., .76545 would be rounded up to .7655); and all dollar amounts paid on the aggregate principal amount of Securities per Holder will be rounded to the nearest cent, with one-half cent rounded upward.

 This Security is not subject to any sinking fund. 
 If an Event of Default with respect to the Securities shall occur and be continuing, the amounts payable on all of the Securities may be declared due and payable in the manner and with the effect provided in the
Indenture. The amount payable to the Holder hereof upon any acceleration permitted under the Indenture will be equal to the Payment at Maturity calculated as though the date of acceleration were the Maturity Date and the third Business Day
immediately preceding the date of acceleration were the Valuation Date. If the maturity of the Securities is accelerated because of an Event of Default, the Company shall, or shall cause the Calculation Agent to, provide written notice to the
Trustee at its New York office, on which notice the Trustee may conclusively rely, and to The Depository Trust Company of the cash amount due with respect to the Securities as promptly as possible and in no event later than two Business Days after
the date of acceleration. 
  

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 The Indenture contains provisions permitting the Company and the Trustee, with the consent of the
holders of not less than 66 2/3% in aggregate principal amount of each series of Securities at the time
Outstanding to be affected (each series voting as a class), evidenced as in the Indenture provided, to execute supplemental indentures adding any provisions to, or changing in any manner or eliminating any of the provisions of the Indenture or of
any supplemental indenture or modifying in any manner the rights of the holders of the Securities of all such series; provided, however, that no such supplemental indenture shall, among other things, (i) change the fixed maturity
of any Security, or reduce the principal amount thereof, or reduce the rate or extend the time of payment of interest thereon, if any, or reduce any premium payable on redemption, or make the principal thereof, or premium, if any, or interest
thereon, if any, payable in any coin or currency other than that hereinabove provided, without the consent of the holder of each Security so affected, or (ii) change the place of payment on any Security, or impair the right to institute suit
for payment on any Security, or reduce the aforesaid percentage of Securities, the holders of which are required to consent to any such supplemental indenture, without the consent of the holders of each Security so affected. It is also provided in
the Indenture that, prior to any declaration accelerating the maturity of any series of Securities, the holders of a majority in aggregate principal amount of the Securities of such series Outstanding may on behalf of the holders of all the
Securities of such series waive any past default or Event of Default under the Indenture with respect to such series and its consequences, except a default in the payment of interest, if any, or the principal of, or premium, if any, on any of the
Securities of such series, or in the payment of any sinking fund installment or analogous obligation with respect to Securities of such series. Any such consent or waiver by the Holder of this Security shall be conclusive and binding upon such
Holder and upon all future holders and owners of this Security and any Securities which may be issued in exchange or substitution hereof, irrespective of whether or not any notation thereof is made upon this Security or such other Securities.

 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 Payment at Maturity with respect to this Security. 
 The Securities are
issuable in denominations of $1,000 and any whole multiples of $1,000. 
 The Company, the Trustee, and any agent of the Company or of the
Trustee may deem and treat the registered holder (the “Holder”) hereof as the absolute owner of this Security (whether or not this Security shall be overdue and notwithstanding any notation of ownership or other writing hereon), for
the purpose of receiving payment hereof, or on account hereof, and for all other purposes and neither the Company nor the Trustee nor any agent of the Company or of the Trustee shall be affected by any notice to the contrary. All such payments made
to or upon the order of such registered holder shall, to the extent of the sum or sums paid, effectually satisfy and discharge liability for moneys payable on this Security. 
 No recourse for the payment of the principal of, premium, if any, or interest on this Security, or for any claim based hereon or otherwise in respect
hereof, and no recourse under or upon any obligation, covenant or agreement of the Company in the Indenture or any indenture supplemental thereto or in any Security, or because of the creation of any indebtedness represented thereby, shall be had
against any incorporator, stockholder, officer or director, as 

  

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such, past, present or future, of the Company or of any successor corporation, either directly or through the Company or any successor corporation, whether
by virtue of any constitution, statute or rule of law or by the enforcement of any assessment or penalty or otherwise, all such liability being, by the acceptance hereof and as part of the consideration for the issue hereof, expressly waived and
released. 
 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 Corporate Trust Office or agency in a Place of Payment for this Security, duly endorsed by, or accompanied by a written instrument of transfer in form
satisfactory to the Company and the Security Registrar duly executed by, the Holder hereof or such Holder’s attorney duly authorized in writing, and thereupon one or more new Securities of this series or of like tenor and of authorized
denominations and for the same aggregate principal amount, will be issued to the designated transferee or transferees. 
 The Company
intends to treat, and by purchasing this Security, the Holder agrees to treat, for all tax purposes, this Security as a cash-settled financial contract, rather than as a debt instrument. 
 THE INDENTURE AND THIS SECURITY SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. 
 Definitions 
 Set forth below are definitions of the
terms used in this Security. 
 “Business Day”, notwithstanding any provision in the Indenture, shall mean any day that is
not a Saturday or Sunday and that is not a day on which banking institutions in the City of New York are authorized or obligated by law to close. 
 “Calculation Agency Agreement” shall mean the Calculation Agency Agreement, dated as of December 21, 2006 between the Company and the Calculation Agent, as amended from time to time, or any successor calculation agency
agreement. 
 “Calculation Agent” shall mean the person that has entered into an agreement with the Company providing for,
among other things, the determination of the Payment at Maturity, which term shall, unless the context otherwise requires, include its successors and assigns. The initial Calculation Agent shall be Lehman Brothers Inc. 
 “Closing Price” of a security, on any particular day, means the last reported sales price for that security on the Relevant Exchange at
the scheduled weekday closing time of the regular trading session of the Relevant Exchange. If, however, the security is not listed or traded on a bulletin board, then the Closing Price of the security will be determined using the average execution
price per share that an affiliate of the Company pays or receives upon the purchase or sale of the security used to hedge the Company’s obligations under the Securities. 
 “Company” shall have the meaning set forth on the face of this Security. 
  

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 “Holder” shall have the meaning set forth on the reverse of this Security. 

“Indenture” shall have the meaning set forth on the reverse of this Security. 
 “Index” shall mean the S&P 500® Index, as calculated, published and
disseminated by S&P. 
 “Index Closing Level”, as determined by the Calculation Agent, shall mean, with respect to any
Trading Day, the closing level of the Index or the Successor Index, as the case may be, at the regular official weekday close of the principal trading session of the Relevant Exchange or market for the Index or the Successor Index, as the case may
be, on such day, or as determined by the Calculation Agent pursuant to the Calculation Agency Agreement as described below under “Discontinuation of the Index; Alteration of Method of Calculation.” 
 “Index Ending Level” shall equal the Index Closing Level on the Valuation Date. 
 “Index Return”, as calculated by the Calculation Agent, is calculated as follows: 
 Index Ending Level – Index Starting Level 
 Index Starting Level 
 “Index Starting Level” shall equal 1,467.67, the Index Closing Level on August 6,
2007. 
 A “Knock-Out Event” shall occur if at any time during the Monitoring Period the Index Closing Level is equal to or
greater than the Knock-Out Level. 
 “Knock-Out Level” shall equal 1,614.44, the product of the Index Starting Level and
the Knock-Out Rate. 
 “Knock-Out Rate” shall equal 110%. 
 “Market Disruption Event”, with respect to the Index or any Successor Index shall mean any of the following events has occurred on any
day as determined by the Calculation Agent: 
 (1)    a suspension, absence or material limitation of trading of stocks
then constituting 20% or more of the level of the Index (or the relevant Successor Index) on the Relevant Exchanges for such securities at any time during the one hour period preceding the close of the principal trading session on such Relevant
Exchange; 
 (2)    a breakdown or failure in the price and trade reporting systems of any Relevant Exchange as a result
of which the reported trading prices for stocks then constituting 20% or more of the level of the Index (or the relevant Successor Index) at any time during the one hour period preceding the close of the principal trading session on such Relevant
Exchange are materially inaccurate; 
  

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 (3)    a suspension, absence or material limitation of trading on any major
securities exchange for trading in futures or options contracts or exchange traded funds related to the Index (or the relevant Successor Index) at any time during the one hour period preceding the close of the principal trading session on such
exchange; or 
 (4)    a decision to permanently discontinue trading in the relevant futures or options contracts or
exchange traded funds. 
 For the purpose of determining whether a Market Disruption Event exists at any time, if trading in a security
included in the Index is materially suspended or materially limited at that time, then the relevant percentage contribution of that security to the level of the Index shall be based on a comparison of: 
 (1)    the portion of the level of the Index attributable to that security relative to 
 (2)    the overall level of the Index, 
 in each case immediately before that suspension or limitation. 
 For purposes of determining whether a Market Disruption Event has
occurred: 
 (1)    a limitation on the hours or number of days of trading will not constitute a Market Disruption Event
if it results from an announced change in the regular business hours of the Relevant Exchange or market; 
 (2)    limitations pursuant to the rules of any Relevant Exchange similar to NYSE Rule 80B (or any applicable rule or regulation enacted or promulgated by any other self-regulatory organization or any government agency
of scope similar to NYSE Rule 80B as determined by the Calculation Agent in its sole discretion) on trading during significant market fluctuations will constitute a suspension, absence or material limitation of trading; 
 (3)    a suspension of trading in futures or options contracts on the Index by the primary securities market trading in such
contracts by reason of (i) a price change exceeding limits set by such exchange or market, (ii) an imbalance of orders relating to such contracts, or (iii) a disparity in bid and ask quotes relating to such contracts, will, in each
such case, constitute a suspension, absence or material limitation of trading in futures or options contracts related to the Index; and 
 (4)    a suspension, absence or material limitation of trading on any Relevant Exchange or on the primary market on which futures or options contracts related to the Index are traded will not include any time when such
market is itself closed for trading under ordinary circumstances. 
 “Maturity Date” shall mean November 10, 2008,
unless that day is not a Business Day, in which case the amount equal to the Payment at Maturity will be made on the next succeeding Business Day following November 10, 2008; provided, that if due to a non-Trading Day or a Market
Disruption Event, the Valuation Date is postponed so that it falls less than three 

  

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Business Days prior to the scheduled Maturity Date, the Maturity Date will be the third Business Day following the Valuation Date, as postponed. 

“Maximum Return” shall equal 52.80%. 
 “Monitoring Period” shall mean the period from, and including, the Pricing Date to, and including, the Valuation Date. 
 “NYSE” shall mean The New York Stock Exchange, Inc. 
 “Participation
Rate” shall equal 400%. 
 “Payment at Maturity”, as calculated by the Calculation Agent, for each $1,000
principal amount Security shall equal: 
 (1) If the Index Ending Level is less than or equal to the Index Starting Level, $1,000 + [$1,000
× Participation Rate × Index Return × (-1)]; or 
 (2) If the Index Ending Level is greater than the Index Starting Level,
and 
 (i) A Knock-Out Event has not occurred, $1,000 
 (ii) A Knock-Out Event has occurred, $1,000 × (1 – Index Return); 
 provided, however, that in no event
shall the Payment at Maturity be less than zero or greater than $1,528.00. 
 “Place of Payment” shall mean the place or
places where the Payment at Maturity on the Securities is payable. 
 “Pricing Date” shall mean August 6, 2007.

 “Relevant Exchange” shall mean, for any security (or any combination thereof) then included in the Index or any
Successor Index, the primary exchange, quotation system (which includes bulletin board services) or other market of trading for such security. 
 “S&P” shall mean Standard & Poor’s, a division of The McGraw-Hill Companies, Inc. 
 “Securities” shall have the meaning set forth on the reverse of this Security. 
 “Security”
shall have the meaning set forth on the face of this Security. 
 “Successor Index” shall have the meaning specified under
“Discontinuation of the Index; Alteration of Method of Calculation.” 
 “Trading Day” means a day, as determined
by the Calculation Agent, on which trading is generally conducted on (i) the Relevant Exchanges for securities underlying the Index and (ii) the exchanges on which futures or options contracts related to the Index are traded, other than a
day on which trading on such Relevant Exchange or exchange on which such securities, 

  

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futures or options contracts are traded is scheduled to close prior to its scheduled weekday closing time. 
 “Trustee” shall have the meaning set forth on the reverse of this Security. 
 “Valuation Date” shall mean November 5, 2008. 
 All terms used but not defined in this Security are used herein as defined in the Calculation Agency Agreement or the Indenture. 
 Calculation Agent 
 The Calculation Agent will determine, among other things, the Index Starting Level, the Index Closing
Level on each Trading Day, the Index Ending Level, the Index Return and the Payment at Maturity, if any. In addition, the Calculation Agent will determine whether there has been a Market Disruption Event or a discontinuation of the Index, and
whether there has been a material change in the method of calculation of the Index. All calculations, determinations or adjustments made by the Calculation Agent will be at the sole discretion of the Calculation Agent and will, in the absence of
manifest error, be conclusive for all purposes and binding on Holders and on the Company. The Company may appoint a different Calculation Agent from time to time after the date of the original issue of the Securities without the Holders’
consent and without notifying Holders. 
 Discontinuation of the Index; Alteration of Method of Calculation 
 If S&P discontinues publication of the Index and S&P or another entity publishes a successor or substitute index that the Calculation Agent
determines, in its sole discretion, to be comparable to the discontinued Index (a “S&P 500® Successor Index”), then any Index Closing Level will be determined by reference to
the level of such S&P 500® Successor Index at the close of trading on the Relevant Exchange or market for the Successor Index on any Trading Day. Upon any selection by the Calculation
Agent of a S&P 500® Successor Index, the Calculation Agent will cause written notice thereof to be promptly furnished to the Trustee, to the Company and to the Holders. 
 If S&P discontinues publication of the Index prior to, and such discontinuation is continuing on, any Trading Day, and the Calculation Agent
determines, in its sole discretion, that no S&P 500® Successor Index is available at such time, or the Calculation Agent has
previously selected a S&P 500® Successor Index and publication of such Successor Index is discontinued prior to, and such
discontinuation is continuing on, such Trading Day, or if S&P (or the publisher of any S&P 500® Successor Index) fails to
calculate and publish an Index Closing Level for the Index (or any S&P 500® Successor Index) on any date when it would
ordinarily do so in accordance with its customary practice, then the Calculation Agent will determine the Index Closing Level for such date. The Index Closing Level will be computed by the Calculation Agent in accordance with the formula for and
method of calculating the Index or S&P 500® Successor Index, as applicable, last in effect prior to such discontinuation or
failure to calculate or publish an Index Closing Level for the Index or S&P 500® Successor Index, as applicable, using the
Closing Price (or, if trading in the relevant securities has been materially suspended or materially limited, its good faith estimate of the Closing Price that would have 

  

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prevailed but for such suspension or limitation) at the close of the principal trading session on such date of each security most recently composing the
Index or S&P 500® Successor Index, as applicable. 
 If at any time the method of calculating the Index or a S&P 500®
Successor Index, or the level thereof, is changed in a material respect, or if the Index or an S&P 500® Successor Index is in any other way modified so that the Index or such S&P 500® Successor
Index does not, in the opinion of the Calculation Agent, fairly represent the level of the Index or such S&P 500® Successor
Index had such changes or modifications not been made, then the Calculation Agent will, at the close of business in New York City on each date on which the Index Closing Level is to be determined, make such calculations and adjustments as, in the
good faith judgment of the Calculation Agent, may be necessary in order to arrive at a level of a stock index comparable to the Index or such S&P 500® Successor Index, as the case may be, as if such changes or modifications had not been made, and the Calculation Agent will calculate the Index Closing Level with reference to the Index or such S&P 500® Successor Index, as adjusted. Accordingly, if the method of calculating the Index or an S&P 500® Successor Index is modified so that the level of the Index or such S&P 500® 
Successor Index is a fraction of what it would have been if there had been no such modification (e.g., due to a split in the Index), then the Calculation Agent will adjust its calculation of the
Index or such S&P 500® Successor Index in order to arrive at a level of the Index or such S&P 500® Successor Index as if there had been no such modification (e.g., as if such split had not occurred). 

  

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 The following abbreviations, when used in the inscription on the face of the within Security, shall be
construed as though they were written out in full according to applicable laws or regulations: 
  

							
	TEN COM -	    	as tenants in common	    	UNIF GIFT MIN ACT - _________ Custodian  _________
		    		    	                          (Cust)             
     (Minor)

	TEN ENT -	    	as tenants by the entireties	    	under Uniform Gifts to Minors
	JT TEN -	    	as joint tenants with right of	    	Act	  	  

		    	Survivorship and not as tenants in common	    		  	(State)

 Additional abbreviations may also be used though not in the above list. 
                                       
                   
 FOR VALUE RECEIVED, the
undersigned hereby sells, assigns and transfers unto 
 PLEASE INSERT SOCIAL SECURITY OR OTHER 
 IDENTIFYING NUMBER OF ASSIGNEE 
  

			
	 	 	
	 	 	
	 	 	

  
  
  

	
	 

 (Name and Address of Assignee, including zip code, must be printed or typewritten.) 
  
  

	
	 

 the within Security, and all rights thereunder, hereby irrevocably constituting and appointing 
  
  

	
	 

 to transfer the said Security on the books of the Company, with full power of substitution in the premises.

 Dated: 
 __________________________________________ 
 NOTICE: The signature to this assignment must correspond with the name as it appears
upon the face of the within Security in every particular, without alteration or enlargement or any change whatever. 
 Signature(s) Guaranteed: 

__________________________ 
 THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN
ELIGIBLE GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED MEDALLION SIGNATURE GUARANTEE PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15. 
  

 9Key Executives Incentive Plan

 Exhibit 10.1 
 FIRST STATE BANCORPORATION 

 Key Executives Incentive Plan 
 Effective as of January 1, 2007 

 FIRST STATE BANCORPORATION 

 Key Executives Incentive Plan 
 TABLE OF CONTENTS

  

							
	 	 	 	  	 	  	Page
		 	 1.0
	  	Plan Objectives	  	1
		 	 2.0
	  	Definitions	  	1
		 	 3.0
	  	Eligibility	  	4
		 	 4.0
	  	Base Award Opportunity and Performance Option Opportunity	  	4
		 	 5.0
	  	Achievement Levels	  	5
		 	 6.0
	  	Final Award Determination	  	6
		 	 7.0
	  	Administration	  	6
		 	 8.0
	  	Payment of Benefit	  	7
		 	 9.0
	  	Miscellaneous Conditions	  	8

 FIRST STATE BANCORPORATION 

 Key Executives Incentive Plan 
 PLAN DOCUMENT 

  

	1.0	Plan Objectives 

  

	 	1.1	The purpose of the First State Bancorporation Key Executives Incentive Plan (the “Plan”) is to achieve five objectives: 

  

	 	1.1.1	Promote the achievement of the Company’s short-term profitability and business goals; 

  

	 	1.1.2	Link executive compensation to specific short-term performance measures; 

  

	 	1.1.3	Provide a competitive reward structure for certain designated senior officers and other key employees; 

  

	 	1.1.4	Provide a vehicle for closer Board involvement and communication with management regarding the Company’s short- and long-term strategic plans; and 

  

	 	1.1.5	Promote loyalty and dedication to the Company and its objectives. 

  

	 	1.2	The Plan is a cash- and option-based, short-term incentive program that establishes individual Target Awards related to achievement of Company performance over certain three-year
Performance Periods. 

  

	2.0	Definitions 

  

	 	2.1	When used in this Plan, the words and phrases below shall have the following meanings: 

  

	 	2.1.1	Administrator means the Compensation Committee of the Board, or such other committee or person designated by the Board to administer the Plan, in accordance with
Section 7.1. 

  

	 	2.1.2	Bank or Subsidiary means First Community Bank, the Company’s wholly owned subsidiary. 

  

	 	2.1.3	Base Award Opportunity means the cash award that may be earned during a Performance Period for achieving target Return on Equity during the Performance Period. The Base Award
Opportunity is equal to a percentage of each Participant’s annual base salary at the beginning of the Performance Period as described in Section 4.0. 

  

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	 	2.1.4	Beneficiary means (a) the person or persons, natural or otherwise, so designated in writing by the Participant in a form provided for this purpose and filed with the
Administrator (and, in the event that more than one person is so designated, benefits shall be allocated equally among such persons unless another allocation method acceptable to the Administrator is specified in such designation) or (b) the
Participant’s estate in the event no such designation is made or no person so designated survives the Participant. 

  

	 	2.1.5	Board means the Company’s Board of Directors. 

  

	 	2.1.6	Code means the Internal Revenue Code of 1986, as amended at the particular time applicable. 

  

	 	2.1.7	Committee means the Compensation Committee of the Board. 

  

	 	2.1.8	Company means First State Bancorporation, a New Mexico corporation. 

  

	 	2.1.9	Continuous Service means that the Participant’s service with the Company or a Subsidiary is not interrupted or terminated. The Participant’s Continuous Service
shall not be deemed to have been interrupted or terminated merely because of a change in the capacity in which the Participant renders service to the Company or a Subsidiary; or a change in the entity for which the Participant renders such service.
The Administrator, in its sole discretion, may determine whether Continuous Service shall be considered interrupted in any circumstance, including (but not limited to) in the case of any leave of absence, including sick leave, military leave or any
other personal leave. 

  

	 	2.1.10	Disabled or Disability means a Participant who (i) is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental
impairment which can be expected to result in death or can be expected to last for a continuous period of not less than twelve months, or (ii) is, by reason of any medically determinable physical or mental impairment which can be expected to
result in death or can be expected to last for a continuous period of not less than twelve months, receiving income replacement benefits for a period of not less than three months under an accident and health plan covering employees of the Company.

  

	 	2.1.11	Effective Date means January 1, 2007. 

  

	 	2.1.12	Final Award means the amount of the cash award as determined in accordance with Article 6 and ultimately paid in accordance with Article 8 to a Participant under
the Plan for a Performance Period. 

  

 2 

	 	2.1.13	Participant means an employee who participates in the Plan pursuant to Section 3.1. 

  

	 	2.1.14	Performance Level means the level of performance the Company must achieve during a Performance Period as articulated in Section 5.1 in order for the Participant to
receive a Target Award. 

  

	 	2.1.15	Performance Option means a nonqualified stock option granted under the Stock Option Plan that may vest during a Performance Period for achieving a Performance Level (as
described in Section 3.2) during the Performance Period. The number of Performance Options granted to a Participant at or near the beginning of the Performance Period shall be determined as described in Section 4.5.

  

	 	2.1.16	Performance Option Opportunity means the percentage of each Participant’s annual base salary at the beginning of the Performance Period used to determine the number of
Performance Options granted to the Participant, as described in Section 4.5. 

  

	 	2.1.17	Performance Period means a certain three-year period over which Company performance is measured. There will be three initial Performance Periods. The first Performance Period
shall be January 1, 2007 through December 31, 2009. The second Performance Period shall be January 1, 2008 through December 31, 2010. The third Performance Period shall be January 1, 2009 through December 31, 2011.
Additional performance periods can be added by the Board at any time without Plan amendment in the Board’s sole discretion. 

  

	 	2.1.18	Plan Award means an amount that is determined at the end of the Performance Period as provided in Section 6.0. 

  

	 	 2.1.19
	 Retirement means the first day of the month coinciding with or immediately following the Participant’s
60th birthday. 

  

	 	2.1.20	Return on Equity means the Company’s net income divided by average equity. 

  

	 	2.1.21	Stock Option Plan means the First State Bancorporation 2003 Equity Incentive Plan, as amended from time to time. 

  

	 	2.1.22	Target Award means the total award granted a Participant made up of two components: the Base Award Opportunity and the Performance Option Opportunity.

  

 3 

	3.0	Eligibility 

  

	 	3.1	Persons eligible to participate in this Plan include certain designated officers of the Company who have a title of Vice President and above, and who are key members of management
with significant decision-making capabilities and influence on Company operations. The initial eligible employees are identified in the attached Exhibit A. The Board, in its sole discretion, may name additional eligible employees to
participate in this Plan and may revise Exhibit A from time to time without Plan amendment. 

  

	 	3.2	Eligible employees will fall into one of two levels of participation: Level I participation and Level II participation (hereinafter referred to as “Participation Level”).
The Participant’s Participation Level will impact the Base Award Opportunity and Performance Option Opportunity as further described in Sections 4.2 and 4.3 below. 

  

	4.0	Base Award Opportunity and Performance Option Opportunity 

  

	 	4.1	As of the first day of a Performance Period, a Target Award shall be granted to each Participant based on his or her Participation Level. The Target Award shall be expressed as a
percentage of base salary as of the first day of the Performance Period. 

  

	 	4.2	The Target Award for Level I Participants shall be 90% of the Participant’s base salary. The Target Award shall be divided into two components: the Base Award Opportunity shall
be 33% of 90% of the Participant’s base salary and the Performance Option Opportunity shall be 67% of 90% of the Participant’s base salary. 

  

	 	4.3	The Target Award for Level II Participants shall be 50% of the Participant’s base salary. The Target Award shall be divided into two components: the Base Award Opportunity
shall be 33% of 50% of the Participant’s base salary and the Performance Option Opportunity shall be 67% of 50% of the Participant’s base salary. 

  

	 	4.4	Unless otherwise determined by the Board in its sole discretion and except as provided in Section 8.1, the Participant must remain in Continuous Service from the date the
Target Award is granted until the end of the Performance Period in order to receive a Plan Award. 

  

	 	4.5	Each Participant shall be granted Performance Options under the Stock Option Plan in accordance with the terms thereof and the following additional terms and conditions:

  

	 	4.5.1	The Performance Options shall be granted as soon as both administratively practicable and legally permissible at or after the beginning of each respective Performance Period.

  

 4 

	 	4.5.2	The Performance Options shall be 100% vested as of the last day of the Performance Period, provided that (1) the Participant has been in Continuous Service since the date the
Performance Options are granted (unless otherwise determined by the Board in its sole discretion and except as provided in Section 8.1); and (2) the Company’s Return on Equity during the Performance Period is no less than the
Threshold level described in Section 5.0. Otherwise, the options shall be forfeited as of the last day of the Performance Period (unless otherwise forfeited earlier in accordance with the terms of the Stock Option Plan).

  

	 	4.5.3	The exercise or strike price of the Performance Options shall equal the fair market value of a share of the Company’s stock as of the date of grant, determined in accordance
with the Stock Option Plan. 

  

	 	4.5.4	The number of Performance Options granted to a Participant shall be determined by multiplying the Participant’s Performance Option Opportunity by his or her base salary as of
the first day of the Performance Period and dividing the result by the Black Scholes value of an option as of the last business day before the date the options are granted or any other reasonable methodology the Company uses for accounting purposes.
An example of the Performance Option calculation is attached hereto in Exhibit B. 

  

	5.0	Achievement Levels 

  

	 	5.1	Performance Levels for each Performance Period shall include the following five targets which shall be calculated as a simple average Return on Equity during the applicable
Performance Period. 

  

			
	Threshold	 	The minimum achievement level accepted. The Threshold achievement level will be attained if the Company’s Return on Equity during the Performance Period is at least
12%.
		
	Moderate	 	The achievement level that approaches the planned level of achievement. The Moderate achievement level will be attained if the Company’s Return on Equity during the Performance Period is at
least a 13%.
		
	Target	 	The planned achievement level. The Target achievement level will be attained if the Company’s Return on Equity during the Performance Period is at least a 14%.
		
	Good	 	The achievement level that exceeds the planned level of achievement. The Good achievement level will be attained if the Company’s Return on Equity during the Performance Period is at least
a 15%.

  

 5 

			
		
	Maximum	 	The achievement level that substantially exceeds the planned level of achievement. The Maximum achievement level will be attained if the Company’s Return on Equity during the Performance
Period is at least a 16%.

  

	6.0	Final Award Determination 

  

	 	6.1	A Participant’s Plan Award for a Performance Period equals his or her Base Award Opportunity for that Performance Period multiplied by the percentage in the following table,
based on the Threshold, Moderate, Target, Good, and Maximum Performance Levels: 

  

																			
	 Return on Equity
	  	Below
Threshold
<12%	 	 	Threshold
312%
<13%	 	 	Moderate
313%
<14%	 	 	Target
314%
<15%	 	 	Good
315%
<16%	 	 	Maximum
316%	 
	 Multiplier
	  	0	%	 	50	%	 	75	%	 	100	%	 	125	%	 	150	%

  

	 	6.2	As soon as is reasonably practicable following the relevant Performance Period, Final Awards for the Performance Period shall be determined by the Board in accordance with
Section 6.1 and payments to each participant shall be made in accordance with Article 8.0. 

  

	7.0	Administration 

  

	 	7.1	The Plan shall be administered by the Committee, unless and until such time as the Board delegates the administration of the Plan to a person or other committee. Any such person or
other committee shall be appointed by and shall serve at the pleasure of the Board. The Board may from time to time remove a person or committee from the position of Administrator, and fill any appointment thereto. 

  

	 	7.2	The Administrator shall hold meetings at such times and places as it may determine. A majority of the members of the Administrator shall constitute a quorum, and the acts of the
majority of the members present at a meeting or a consent in writing signed by all members of the Administrator shall be the acts of the Administrator and shall be final, binding and conclusive upon all persons, including the Company, its
stockholders, and all participants having any interest in Target Awards which may be or have been granted pursuant to the Plan. 

  

	 	7.3	The Administrator shall have the right to determine terms and conditions of the Target Awards granted under the Plan provided the terms and conditions do not conflict with the terms
herein. 

  

	 	7.4	 Each person who is or shall have been Administrator or a member of the Board shall be indemnified and held harmless by the Company against and from any loss, cost,
liability or expense that may be imposed upon or reasonably incurred in 

  

 6 

	 	 
connection with or resulting from any claim, action, suit or proceeding to which such person may be a party or in which such person may be involved by reason
of any action taken or failure to act under the Plan and against and from any and all amounts paid in settlement thereof, provided that the Company approved such settlement, or paid in satisfaction of a judgment in any such action, suit or
proceeding, provided such person shall give the Company an opportunity, at its own expense, to handle and defend the same before undertaking to handle and defend it on such person’s own behalf. The foregoing right of indemnification shall not
be exclusive of, and is in addition to, any other rights of indemnification to which any person may be entitled under the Company’s Articles of Incorporation or Bylaws, as a matter of law, or otherwise, or any power that the Company may have to
indemnify them or hold them harmless. 

  

	 	7.5	The Bank’s Human Resources Department will assist the Administrator, as requested, in the administration of the Plan; however, the Administrator will have the ultimate
authority to construe and interpret the Plan. 

  

	 	7.6	In addition to the authority expressly provided in the Plan, the Administrator shall have such authority in its sole discretion to control and manage the operation and
administration of the Plan and shall have all authority necessary to accomplish these purposes, including, but not limited to, the authority to interpret the terms of the Plan, and to decide questions regarding the Plan and the eligibility of any
person to participate in the Plan and to receive benefits under the Plan. The Administrator’s determinations and interpretations regarding the Plan shall be final, binding, and conclusive. 

  

	8.0	Payment of Benefit 

  

	 	 8.1
	 Provided the Participant has otherwise been in Continuous Service from the first day of a Performance Period (or the
first date he or she is eligible for Plan participation, whichever is applicable), a Participant who terminates service on account of his or her Retirement, death or Disability during the Performance Period shall receive a Plan Award. The Final
Award will be prorated for the period of Continuous Service and determined as of the date of the Participant’s termination. The Performance Level of achievement described in Section 5.0 shall be determined at that time and considered as if
it had been attained for the full Performance Period. The Final Award shall then be calculated and multiplied by the number of months the Participant remained in Continuous Service prior to his or her termination and then divided by 36. The Final
Award shall be paid to the Participant (or to the Participant’s Beneficiary in accordance with Section 8.6) no later than 2 1/2 months following the calendar year in which the Participant terminates on account of his or her Retirement, death or Disability. If a Participant terminates service with the Company for any reason other than his or her
Retirement, death, or Disability during the Performance Period, the Participant will not be eligible to receive a Plan Award. 

  

 7 

	 	8.2	If a Participant ceases employment after the Performance Period but before the Board approves the Final Award for that Performance Period, the Participant shall receive the Plan
Award as if he or she were still employed as of the date the Board approved the Final Award. 

  

	 	8.3	All Final Awards will be paid out in cash and will be subject to applicable federal and state withholding requirements. 

  

	 	 8.4
	 Final Awards will be paid as soon as practical following the end of the Performance Period, but no later than 2 1/2 months following the end of the Performance Period. 

  

	 	8.5	This Plan shall at all times be entirely unfunded and unsecured, and no provision shall at any time be made with respect to segregating assets of the Company for payment of any
award under this program. 

  

	 	8.6	If a Participant dies before receiving his or her Plan Award, any amounts determined to be paid under this Plan shall be paid to the Participant’s Beneficiary. The
Administrator’s determination as to the identity of the proper payee of any amount under this Plan shall be binding and conclusive and payment in accordance with such determination shall constitute a complete discharge of all obligations on
account of such amount. 

  

	9.0	Miscellaneous Conditions 

  

	 	9.1	Except as provided in Section 8.1, Participants must be employed by the Company on the last day of the Performance Period in order to become eligible to receive a Final Award.
If a Participant voluntarily or involuntarily terminates employment during the Performance Period for any other reason other than as articulated in Section 8.1, no Plan Award will be made to the Participant. 

  

	 	9.2	Employees of the Company who are hired, transferred, or promoted into an eligible position during a Performance Period may be selected for participation in the Plan in accordance
with Section 3.1, and receive a prorated Base Award Opportunity which shall be calculated as if the Participant had been in Continuous Service during the entire Performance Period, multiplied by the number of months the Participant participates
in the Plan during the Performance Period and then divided by 36. Such employees will not be eligible for a Performance Option Opportunity until the following Performance Period. 

  

 8 

	 	9.3	Notwithstanding any Plan provision to the contrary, mere participation in the Plan will not entitle a Participant to a Plan Award. 

  

	 	9.4	The designation of an employee as a Participant in the Plan does not guarantee employment. Nothing in this Plan shall be deemed (i) to give any employee or Participant any
legal or equitable rights against the Company, except as expressly provided herein or provided by law; or (ii) to create a contract of employment with any employee or Participant, to obligate the Company to continue the service of any employee
or Participant, or to affect or modify any employee’s or Participant’s term of employment in any way. 

  

	 	9.5	The right of the Company to discipline or discharge a Participant shall not be affected by reason of any provision of this Plan. 

  

	 	9.6	No Final Award received by a Participant shall be considered as compensation under any employee benefit plan of the Company, unless so provided by the applicable plan.

  

	 	9.7	The Administrator has the right to revise, modify, or terminate the Plan in whole or in part at any time or for any reason except that no such action shall diminish or impair the
rights under a Target Award previously granted unless agreed to in writing and signed by both the Company and the Participants. No amendment shall be made which reduces the price at which a Performance Option may be exercised under the Plan
following its grant. 

  

	 	9.8	Since no employee has a guaranteed right to any award under this Plan, any attempt by an employee to sell, transfer, assign, pledge, or otherwise encumber any anticipated award
shall be void, and the Company shall not be liable in any manner for or subject to the debts, contracts, liabilities, engagements or torts of any person who might anticipate an award under this program. 

  

	 	9.9	The Plan shall be construed, regulated and administered in accordance with the laws of the state of New Mexico, unless otherwise preempted by the laws of the United States. This
Plan is intended to comply with Code Section 409A and shall be interpreted to so comply. 

  

	 	9.10	If any provision of the Plan is held invalid or unenforceable, its invalidity or unenforceability shall not affect any other provision of the Plan, and the Plan shall be construed
and enforced as if such provision had not been included herein. 

  

	 	9.11	Any agreements or representations, oral or otherwise, express or implied, with respect to the subject matter of this Plan that are not contained herein will have no effect or
enforceability. 

  

 9 

 *        *        *

 [The following page is the execution page.] 
  

 10 

 Adopted as of the Effective Date. 
  

			
	 First State Bancorporation

		
	 By:
	 	 /s/ Leonard J. DeLayo, Jr.

	 Title:
	 	Chairman of the Board
	 Date:
	 	August 7, 2007

  

 11 

 EXHIBIT A 
 TO 
 FIRST STATE BANCORPORATION 
 KEY EXECUTIVES INCENTIVE PLAN 
  

							
	 Level
	 	 Name
	 	 Title

	 I
	 	Michael R. Stanford	 	President and Chief Executive Officer
			
	 II
	 	H. Patrick Dee	 	Executive Vice President and Chief Operating Officer
			
	 II
	 	Christopher C. Spencer	 	Senior Vice President & Chief Financial Officer

 Exhibit A 

 EXHIBIT B 
 TO 
 FIRST STATE BANCORPORATION 
 KEY EXECUTIVES INCENTIVE PLAN 
 Performance Option Calculation Example: Level One Participant 
  

					
	 Base Salary
	  	$	450,000	 
	 Percentage Applied
	  	 	90	%
	 Target Award
	  	$	405,000	 
		
	 Performance Option Opportunity Percentage
	  	 	67	%
	 Total Performance Option Opportunity
	  	$	271,350	 
		
	 Black Scholes Fair Value (per option)
	  	$	5.35	*
	 Number of Options to be Awarded
	  	 	50,720	 

	*	Estimate of Black Scholes fair value based on an $18.00 stock price 

 Exhibit B

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