<PAGE>
As filed with the Securities and Exchange Commission on June 30, 2000
Registration No. 333-_____
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM S-4
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
---------------------
ENB BANKSHARES, INC.
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
Texas 6712 75-2885916
------------------------------- ---------------------------- --------------------
(State or other jurisdiction of (Primary Standard Industrial I.R.S. Employer
incorporation or organization Classification Code Number) Identification No.)
</TABLE>
Harold Campbell
ENB Bankshares, Inc. ENB Bankshares, Inc.
5006 Verde Valley 5006 Verde Valley
Dallas, Texas 75240 Dallas, Texas 75240
(972) 980-4443 (972) 980-4443
--------------------------------------------- --------------------------------
(Address, including ZIP Code, and telephone Name, address, including ZIP
number, including area code, of registrant's Code and telephone number,
principal executive offices) including area code,
of agent for service)
With a Copy to:
Mark Haynie, Esquire
Haynie Rake & Repass, P.C.
14651 Dallas Parkway, Suite 136
Dallas, Texas 75240
(972) 716-1855
<PAGE>
Approximate date of commencement of the proposed sale of the securities to the
public: As soon as practicable after the effective date of the Registration
Statement.
If the securities being registered on this Form are being offered in connection
with the formation of a holding company and there is compliance with General
Instruction G, 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, 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(d) under
the Securities Act, check the following box and list of the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------------
Title of Each of Proposed Maximum Propose Maximum Amount of
Securities to be Amount to be Offering Price Per Aggregate Offering Registration
Registered Registered Share/Debenture(1) Price (1) Fee (2)
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, 505,750 shares $10.13 $5,123,247.50 $1,352.54
$5.00 par value
-------------------------------------------------------------------------------------------------------------------------------
9.5% Convertible $2,500,000 $1,000 $ 2,500,000 $ 660
Subordinated
Debentures (2)
-------------------------------------------------------------------------------------------------------------------------------
Total -- -- -- $2,012.54
=========
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee. In
accordance with Rule 457(f)(2), the offering price and registration fee
with respect to the common stock are computed on the book value of $10.13
per share of the shares of common stock of Eagle National Bank as of March
31, 2000, the latest practicable date prior to the date of filing this
Registration Statement, and estimated based upon the issuance of a maximum
of 505,750 shares of Registrant's common stock in the reorganization of
Eagle National Bank as a subsidiary of the Registrant. Registrant will
issue one share of its common stock in exchange for each share of bank
stock.
(2) Includes such indeterminate number of shares of the Registrant's common
stock as shall be issuable on conversion of the 9.5% Convertible
Subordinated Debentures being registered hereunder. No additional
consideration will be received for the common stock and therefore no
registration fee is required pursuant to Rule 457(i).
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file 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, as amended ("Securities Act"), or until the
Registration Statement shall become effective on such date as the Commission,
acting pursuant to such Section 8(a), may determine.
<PAGE>
EAGLE NATIONAL BANK
5006 Verde Valley
Dallas, Texas 75240
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
To be Held _____________, 2000
Eagle National Bank, Dallas, Texas (the "bank") will hold its annual
meeting of the shareholders at the offices of the bank, 5006 Verde Valley,
Dallas, Texas 75240, on ____________, 2000, at _____ p.m., local time.
We are holding this meeting:
. To consider and act upon a proposal to form a bank holding company to
own the bank. Specifically, you are being asked to approve and adopt
the Agreement and Plan of Reorganization, a copy of which is attached
to the proxy statement/prospectus as Annex A. This agreement provides
-------
for the consolidation of New Eagle Bank, Dallas, Texas, a proposed
Texas interim banking association (the "new bank"), with and into the
bank in a transaction having the effect of a merger. Upon consummation
of the reorganization, the bank will become a wholly owned subsidiary
of ENB Bankshares, Inc., a Texas corporation (the "holding company"),
and will continue its banking business at the same head office with
the same management serving the bank as immediately prior to the
reorganization. Pursuant to the reorganization, shareholders of the
bank will have the opportunity to elect to receive either shares of
voting common stock of the holding company, or $15.00 per share in
cash or a combination of the two choices for each share of bank stock.
The shareholders who receive stock of the holding company pursuant to
the reorganization will be the sole shareholders of the holding
company;
. To fix the number of Directors to be elected at eleven and to elect
eleven directors of the bank to hold office until the next annual
meeting of shareholders or until their respective successors are duly
elected and qualified; and
. To transact any other business that may properly come before the
annual meeting.
The Board of Directors of the bank has selected the close of business on
______________, 2000, as the record date (the "record date") for the
determination of shareholders entitled to receive notice of and to vote at the
annual meeting. Only shareholders of the bank of record at the close of
business on the record date are entitled to receive notice of and to vote at the
annual meeting.
You are cordially invited to attend the annual meeting. WHETHER OR NOT YOU
EXPECT TO ATTEND THE ANNUAL MEETING IN PERSON, HOWEVER, YOU ARE URGED TO MARK,
SIGN, DATE AND MAIL PROMPTLY THE ENCLOSED FORM OF PROXY SO THAT YOUR SHARES OF
BANK STOCK MAY BE REPRESENTED AND VOTED IN ACCORDANCE WITH YOUR WISHES AND IN
ORDER THAT THE PRESENCE OF A QUORUM MAY BE ASSURED AT THE ANNUAL MEETING. Your
Proxy will be returned to you if you should request return of it in the manner
provided in the attached proxy statement/prospectus.
BY ORDER OF THE BOARD OF DIRECTORS
_____________, 2000
Harold L. Campbell
Chairman of the Board
<PAGE>
SUBJECT TO COMPLETION, DATED ____________, 2000
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 ("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.
PROXY STATEMENT/PROSPECTUS
ENB BANKSHARES, INC.
Prospectus for up to 505,750 Shares of Common Stock
and $2,500,000 9.5% Convertible Subordinated Debentures
due beginning December 31, 2006
Issue Price: $1,000 per Debenture
EAGLE NATIONAL BANK
Proxy Statement
This document is a prospectus of ENB Bankshares, Inc. (the "holding
company"), a Texas business corporation and the proposed holding company for
Eagle National Bank (the "bank"). ENB Bankshares proposes to issue up to 505,750
shares of its common stock to the shareholders of the bank as part of a
reorganization of the bank as the wholly owned subsidiary of the holding
company. The holding company does not have an operating history. We anticipate
that, after the reorganization, its common stock will trade, if at all, on a
very limited basis in private transactions.
This document is also a prospectus for the preemptive rights offering of up
to $2,500,000 aggregate principal amount of the holding company's 9.5%
convertible subordinated debentures (the "debentures"). The debentures are
being offered on a pro rata basis, with over subscription rights at the
discretion of the holding company, only to those shareholders who elect to
receive all holding company common stock pursuant to the reorganization. The
debentures will mature and their principal will be payable in five equal
installments, each being 20% of the original principal amount of the debentures.
The principal payments will begin on December 31, 2006 and will continue on
December 31 of each following year until December 31, 2010. The debentures will
bear interest at a rate of 9.5% per year, and we will make the first interest
payment on March 15, 2001. After that, we will pay interest on the debentures
each year on the 15th day of June, September, December and March. The
debentures are convertible into shares of our common stock at the price of
$15.00 per share, which price is subject to adjustment in certain events. The
debentures are unsecured obligations of the holding company and your right to
payment is subordinated in right of payment to all of our senior indebtedness.
We have the right to redeem the debentures after December 31, 2002. We plan to
use the proceeds from the offering of debentures to finance the purchase of
shares of the common stock of Eagle National Bank ("bank stock") pursuant to a
Stock Transfer and Branch Purchase Agreement and pursuant to the reorganization
discussed in this document. The debentures will not be listed on any securities
exchange or quoted on NASDAQ or any over-the-counter market and will trade, if
at all, on a very limited basis in private transactions.
<TABLE>
<CAPTION>
Per Debenture Total
------------- ----------
<S> <C> <C>
Public offering price.......................................... $1,000 $2,500,000
Underwriting discounts and commissions......................... $ 0 $ 0
Proceeds, before expenses to us................................ $1,000 $2,500,000
</TABLE>
This document is also a proxy statement of Eagle National Bank for its
Annual Meeting of Shareholders to be held on ___________, __________, 2000, at
______ ___.m., local time. At the meeting, shareholders will vote on a proposal
to approve and adopt the Agreement and Plan of Reorganization, providing for the
reorganization of the bank as the wholly owned subsidiary of the holding company
and the automatic exchange of each share of bank stock for, at the election of
each shareholder, (i) one share of common stock of the holding company, or (ii)
$15.00 cash. You may elect to exchange some of your shares of bank stock for
shares of holding company common stock and some of your shares of bank stock for
cash. At this meeting, shareholders will also vote on a proposal to fix the
number of directors at eleven and to elect eleven directors of the bank to hold
office until the next annual meeting of shareholders or until respective
successors are duly elected and qualified. The proposed reorganization and other
matters that shareholders will vote on at the meeting are described in this
document.
AN INVESTMENT IN THE DEBENTURES AND THE PROPOSED REORGANIZATION INVOLVES
ELEMENTS OF RISK, SOME OF WHICH ARE DESCRIBED UNDER THE CAPTION "RISK FACTORS"
BEGINNING ON PAGE 16.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION, THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BANK OF DALLAS, THE OFFICE OF THE
COMPTROLLER OF THE CURRENCY, THE TEXAS SECURITIES COMMISSION NOR ANY OTHER STATE
SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED
IF THIS DOCUMENT IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
1
<PAGE>
THE DEBENTURES AND THE SHARES OF HOLDING COMPANY COMMON STOCK OFFERED BY
THIS PROXY STATEMENT/PROSPECTUS ARE NOT SAVINGS ACCOUNTS, DEPOSITS, OR OTHER
OBLIGATIONS OF A BANK OR SAVINGS ASSOCIATION AND ARE NOT INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION ("FDIC") OR ANY OTHER GOVERNMENTAL AGENCY. THERE
CAN BE NO ASSURANCE THAT THE TRADING PRICE OF THE BANK STOCK OR VALUE OF THE
DEBENTURES BEING OFFERED WILL NOT DECREASE AT ANY TIME.
The date of this proxy statement/prospectus is June 30, 2000.
2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
SUMMARY...........................................................................................................4
QUESTIONS AND ANSWERS............................................................................................10
RISK FACTORS.....................................................................................................16
SELECTED FINANCIAL INFORMATION...................................................................................23
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS......................................................................25
SUMMARY OF HISTORICAL AND PRO FORMA PER SHARE SELECTED FINANCIAL DATA............................................29
PRICE RANGE OF BANK STOCK........................................................................................31
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS...........................32
DIVIDEND POLICY..................................................................................................52
CAPITALIZATION...................................................................................................53
BENEFICIAL OWNERSHIP OF THE BANK STOCK BY SIGNIFICANT SHAREHOLDERS, DIRECTORS AND EXECUTIVE OFFICERS.............54
INFORMATION ABOUT THE ANNUAL MEETING.............................................................................55
PROPOSAL 1: THE PROPOSED REORGANIZATION..........................................................................57
RIGHTS OF DISSENTING SHAREHOLDERS................................................................................70
PROPOSAL 2: ELECTION OF DIRECTORS................................................................................70
PROPOSAL 3: OTHER MATTERS THAT MAY COME BEFORE THE ANNUAL MEETING................................................72
DESCRIPTION OF THE HOLDING COMPANY...............................................................................72
DESCRIPTION OF THE BANK..........................................................................................79
MANAGEMENT.......................................................................................................83
DESCRIPTION OF THE BANK'S CAPITAL SECURITIES.....................................................................85
DESCRIPTION OF THE HOLDING COMPANY'S CAPITAL SECURITIES..........................................................88
COMPARISON OF SHAREHOLDER RIGHTS.................................................................................89
DESCRIPTION OF CONVERTIBLE DEBENTURES............................................................................94
INDEPENDENT AUDITORS.............................................................................................99
SHAREHOLDER PROPOSAL.............................................................................................99
PLAN OF DISTRIBUTION.............................................................................................99
LEGAL MATTERS....................................................................................................99
EXPERTS..........................................................................................................99
WHERE YOU CAN FIND MORE INFORMATION..............................................................................99
INDEX TO FINANCIAL STATEMENTS...................................................................................F-1
ANNEX A--Agreement and Plan of Reorganization...................................................................A-1
ANNEX B--Statutes Relating to Dissenters' Rights................................................................B-1
ANNEX C--Fairness Opinion of Hoefer & Arnett, Incorporated......................................................C-1
</TABLE>
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR REFERRED TO IN THIS
DOCUMENT OR ANY SUPPLEMENT. NEITHER THE HOLDING COMPANY NOR THE BANK HAS
AUTHORIZED ANYONE ELSE TO PROVIDE YOU WITH DIFFERENT OR ADDITIONAL INFORMATION.
This document does not constitute an offer of securities in any
jurisdiction in which, or to any person to whom, it is not permitted. You should
not assume that the information in this document or any supplement is accurate
as of any date other than the date indicated on those documents.
This proxy statement/prospectus does not cover resales of shares of the
holding company common stock or debentures after completion of the proposed
reorganization, and no person is authorized to make use of this document in
connection with any resale.
This proxy statement/prospectus incorporates important business and
financial information that is not included in or delivered with this proxy
statement/prospectus. This information is available without charge to security
holders upon written request or oral request. To obtain timely delivery,
security holders must request the information no later than ____________, 2000,
which is five days prior to the date that security holders must make their
investment decision. Requests should be directed to Patrick G. Adams, ENB
Bancshares, Inc., 5006 Verde Valley, Dallas, Texas 75240, telephone (972) 980-
4443.
3
<PAGE>
SUMMARY
The following is a brief summary of the material information relating to
the reorganization, the sale of the bank's Park Cities branch and the preemptive
rights offering of the debentures contained elsewhere in this document. This
summary is qualified in its entirety by the more detailed information contained
elsewhere in this document and the annexes to this document. The "holding
company" refers to ENB Bankshares, Inc. The "bank" refers to Eagle National
Bank. The "new bank" refers to New Eagle Bank. The Park Cities bank refers to
the bank being organized by the selling directors to purchase the Park Cities
branch of the bank. Capitalized terms not otherwise defined below have the
meanings ascribed to them elsewhere in this document. We urge you to read this
document and its annexes carefully and in their entirety.
Parties to the Reorganization
<TABLE>
<S> <C>
The Holding Company The holding company was organized as a Texas business corporation on May 18,
5006 Verde Valley, Dallas, Texas 75240, 2000 for the purpose of becoming a bank holding company subject
telephone: (972) 980-4443 (page 72) to supervision by the Board of Governors of the Federal Reserve System
("Federal Reserve"). If the reorganization is consummated, the holding
company will own all of the shares of bank stock of Eagle National Bank. The
holding company has no operating history. As a holding company, the holding
company's primary activities will be to assist the bank in the management
and coordination of its financial resources and to provide capital, business
development, long range planning and public relations for the bank.
Eagle National Bank The bank is a national banking association and currently operates banking
5006 Verde Valley, Dallas, Texas 75240, telephone: locations in Dallas and Highland Park, Texas. The bank engages in a full
(972) 980-4443 (page 79) service commercial and consumer banking business, including:
. the acceptance of time and demand deposits; and
. the making of secured and unsecured commercial and consumer loans.
The bank's primary service area is located in Dallas and Collin Counties,
Texas.
The Annual Meeting
New Eagle Bank The new bank is a proposed interim Texas chartered banking institution and
5006 Verde Valley, Dallas, Texas 75240, telephone: subsidiary of the holding company. It is being organized as an interim bank
(972) 980-4443 solely to facilitate the proposed reorganization.
Selling Directors (page 51) Randy L. Pack, Jon Roy Reid, John M. Yeaman and Thomas R. Youngblood, the
directors of the bank that are selling their 69,000 shares of bank stock to
the holding company and who are organizing the Park Cities bank to purchase
the bank's Park Cities branch.
Time, Place and Date of the Annual Meeting (page 55) The annual meeting will be held at ___ p.m., local time, on ____, 2000 at
the main office of the bank, 5006 Verde Valley, Dallas, Texas 75240.
</TABLE>
4
<PAGE>
<TABLE>
<S> <C>
Record Date and Shareholders Entitled to Vote (page 11) You are entitled to vote at the annual meeting if you owned shares of bank
stock at the close of business on ________, 2000, the record date for the
annual meeting. You will have one vote for each share of our bank stock you
owned on the record date, but you are entitled to cumulative voting in the
election of directors. As of the record date, there were 574,750 shares of
bank stock entitled to be voted held by approximately 128 shareholders
of record.
Purposes of the Meeting (page 56) You will be asked to consider and vote upon a proposal to approve the
Agreement and Plan of Reorganization, the reorganization and upon the
election of directors.
Vote Required (page 57) Reorganization Proposal. Approval of the reorganization requires the
affirmative vote of the holders of 66-2/3% of the outstanding shares of bank
stock. The continuing directors, officers, together with their respective
affiliates, collectively own 122,700 shares of the bank stock, or 21% of the
total currently outstanding shares. In addition, the selling directors, who
in the aggregate own 69,000 shares, or 12%, of bank stock have given a proxy
to continuing director Robert H. Lutz to vote their shares at the annual
meeting. Failure to vote FOR the reorganization, either by not returning the
enclosed proxy or by checking the ABSTAIN box on the proxy, will have the
same effect as a vote AGAINST the reorganization.
Election of Directors. Directors need the affirmative vote of holders of a
plurality of the voting power present at the annual meeting to be elected.
Solicitation of Proxies (page 57) The bank will pay all of the costs of soliciting proxies from our
shareholders. In addition to soliciting proxies by mail, our directors,
officers and employees, without receiving additional compensation, may
solicit proxies by personal interview, mail, telephone and facsimile.
Arrangements will also be made with brokerage firms and other custodians,
nominees and fiduciaries to forward solicitation materials to the beneficial
owners of shares held of record by such persons, and we will reimburse such
brokerage firms, custodians, nominees and fiduciaries for reasonable out-of-
pocket expenses incurred by them.
</TABLE>
5
<PAGE>
<TABLE>
<S> <C>
Purpose and Effect of the Reorganization (page 60) Upon completion of the reorganization:
. Through a consolidation with an interim bank subsidiary of the holding
company, the bank will become a wholly owned subsidiary of the holding
company;
. For each share of bank stock that you own on the effective date of the
reorganization (other than shares purchased from the selling directors
and other than shares as to which dissenters' rights are perfected), you
will be able to elect to receive either
. one share of holding company common stock;
. $15.00 in cash; or
. a combination of the foregoing.
Shareholders who elect to receive cash in the reorganization will be given a
right by the Park Cities bank to make an investment in the Park Cities bank.
In addition, shareholders who elect to receive all holding company common
stock in the reorganization will have the preemptive right to subscribe for
the debentures.
Reasons for the Reorganization (page 59) The following are the reasons for the reorganization:
. The holding company provides a vehicle to complete the transactions
contemplated by the Stock Transfer and Branch Sale Agreement.
. The holding company can be an effective vehicle in financing
acquisitions and in maintaining the independent franchise value of an
acquired institution.
. The formation of the holding company provides an immediate source of
liquidity to those shareholders who want or need to liquidate their
investment in the bank at this time.
. The formation of the holding company should provide a continuing, though
limited, source of liquidity for shareholders.
. Subject to the holding company's financial condition, purchases of newly
issued bank stock or direct capital contributions by the holding company
can be used to provide future injections of capital into the bank when
and if needed.
Recommendations of the Board of Directors (page 69) The bank's board of directors has unanimously approved the reorganization,
and has determined that the terms of the reorganization are fair to, and in
the best interests of, our shareholders. The bank's board of directors
unanimously recommends that you approve the Agreement and Plan of
Reorganization and the reorganization.
</TABLE>
6
<PAGE>
<TABLE>
<S> <C>
Opinion of Financial Advisor (page 64) On June 14, 2000, Hoefer & Arnett, Incorporated ("Hoefer & Arnett"), our
financial advisor, delivered their opinion to the bank's board of directors
that, as of the date of such opinion, the terms of the stock transfer and
bank sale contemplated by the Agreement and Plan of Reorganization and the
Stock Transfer and Branch Sale Agreement are fair from a financial point of
view. The full text of the Hoefer & Arnett opinion, which sets forth the
assumptions made, general procedures followed, matters considered and
limitations on the review undertaken in connection with the opinion, is
attached to this proxy statement as Annex C. You should read this opinion
-------
carefully and in its entirety.
Interests of Certain Persons in the Reorganization Our officers and directors have interests in the reorganization as
(page 17) employees and directors that are different from, or in addition to, your
interests as shareholders. The selling directors have agreed to sell their
shares of bank stock at $15.00 per share in connection with the purchase of
the Park Cities branch. Because of this additional feature, the $15.00 per
share cash purchase price may not be solely reflective of the fair value of
the bank stock.
The Reorganization Agreement
Effective Time of the Reorganization (page 66) The reorganization will become effective upon the receipt of a Certification
letter from the Office of the Comptroller of the Currency. The receipt of
such certificate is expected to occur shortly after approval of the
Agreement and Plan of Reorganization by the bank's shareholders at the
annual meeting and satisfaction or waiver of the other conditions to the
reorganization contained in the Agreement and Plan of Reorganization. We
cannot assure you that all conditions to the reorganization contained in the
Agreement and Plan of Reorganization will be satisfied or waived.
Conditions to Consummation of the Reorganization The completion of the reorganization depends upon satisfaction of a number
(page 66) of conditions, including, among other things:
. approval of the reorganization agreement by the shareholders of the
Company holding not less than 66-2/3% of the outstanding shares of bank
stock;
. receipt of all applicable regulatory approvals; and
. the purchase by the holding company of shares of bank stock owned by the
selling directors pursuant to the Stock Transfer and Branch Sale
Agreement.
The holding company may not be able to obtain regulatory approval if the
cash requirements of the reorganization and the stock transfer transaction
are greater than $3,000,000. In such event, the holding company will either
restructure or terminate the transaction.
</TABLE>
7
<PAGE>
<TABLE>
<S> <C>
Termination of Reorganization Agreement (page 65) The reorganization agreement provides that the Agreement and Plan of
Reorganization and the reorganization may be terminated by the mutual
consent of the parties, or by either party upon the occurrence or
nonoccurrence of certain events including mutual consent and the inability
to obtain regulatory approval.
Certain Federal Income Tax Consequences (page 67) The bank and the holding company will not recognize any gain or loss because
of the reorganization. Each shareholder who receives only holding company
common stock will not recognize any gain or loss because of the
reorganization. Each shareholder who receives only cash will recognize gain
or loss equal to the amount of cash received less his basis in bank stock
exchanged. Such gain will be capital gain to the extent the bank stock is
held as a capital asset.
Accounting Treatment (page 68) The reorganization will be accounted for as a "pooling of interests" in
accordance with generally accepted accounting principles.
Rights of Dissenting Shareholders (page 70) Under the National Bank Act, if holders of the shares of the bank stock
dissent and vote against approval and adoption of the reorganization
agreement and the reorganization, they are entitled to appraisal rights,
provided that they strictly comply with certain statutory procedures further
explained in detail in this document. A copy of Section 215 of the United
States Code, which sets forth the rights of dissenting shareholders under
the National Bank Act, is attached as Annex B to this document.
-------
Price Range of Bank Stock (page 31) There has never been an organized or regular public trading market for the
bank stock. The bank stock is traded in private transactions.
Selected Financial Information (page 23) Certain selected historical financial information is set forth under the
"Selected Financial Information," and "Pro Forma Consolidated Financial
Statements."
Management Ownership (page 54) At of June __, 2000, the bank's directors and executive officers owned, in
the aggregate, 191,900 shares of the outstanding bank stock, representing an
aggregate of approximately 33% of the outstanding shares.
The Preemptive Rights Offering of the Debentures (Page 94)
Issuer................................................ ENB Bankshares, Inc.
Offerees.............................................. Pro rata, with over subscription rights at the discretion of the holding
company, only to those shareholders who elect to receive all holding company
common stock in the reorganization.
Debentures Offered.................................... Up to $2,500,000 principal amount of 9.5% convertible subordinated
debentures
Principal Due......................................... We will pay the principal in five annual installments, each equal to 20% of
the original principal amount of the debentures, beginning on December 31,
2006 and continuing on December 31 of each following year until December 31,
2010
Price per Debenture................................... $1,000
</TABLE>
8
<PAGE>
<TABLE>
<S> <C>
Interest.............................................. Annual fixed rate - 9.5%
Interest payment frequency:
. First payment: March 31, 2001
. Remaining payments on the 15th day of March, June, September and
December
Ranking............................................... The debentures are unsecured, and are subordinate in right of payment to all
of our senior indebtedness, as more fully described in "Description of
Convertible Debentures."
Conversion Rights..................................... You may convert the debentures into the holding company's common stock at
any time, generally until December 31, 2006, at a conversion price of
$15.00, which price is subject to adjustment in certain events. This means
that for each $1,000 debenture you convert you will receive 66.67 shares of
holding company common stock.
Optional Redemption by Us............................. After December 31, 2002, we may redeem the Debentures at $1,000 per
debenture plus accrued interest. See "Description of Debentures."
Use of Proceeds....................................... We will use the proceeds from the sale of the debentures and bank
borrowings, if necessary, to provide the cash needed to complete the stock
purchase transaction provided for in the Stock Transfer and Branch Sale
Agreement and the reorganization provided for in the Agreement and Plan of
Reorganization.
</TABLE>
Forward-looking Statements - Cautionary Statements
This document contains certain forward-looking statements and information
relating to the bank that are based on the beliefs of the bank's management as
well as assumptions made by and information currently available to the bank's
management. When used in this report, the words "anticipate," "believe,"
"estimate," "expect" and "intend" and words or phrases of similar import, as
they relate to the bank or bank management, are intended to identify forward-
looking statements. Such statements reflect the current view of the bank with
respect to future events and are subject to certain risks, uncertainties and
assumptions related to certain factors including, without limitation,
competitive factors, general economic conditions, customer relations, the
interest rate environment, governmental regulation and supervision,
nonperforming asset levels, loan concentrations, changes in industry practices,
one time events and other factors described herein. Based upon changing
conditions, should any one or more of these risks or uncertainties materialize,
or should any underlying assumptions prove incorrect, actual results may vary
materially from those described herein as anticipated, believed, estimated,
expected or intended. The bank does not intend to update these forward-looking
statements.
9
<PAGE>
QUESTIONS AND ANSWERS
The following questions and answers are designed to help you understand the
overall transaction and the proposals to be voted upon at the annual meeting.
These questions and answers and the rest of the summary only highlight
information in this document. The remainder of the this document and attached
exhibits contain more detailed information. We urge you to read the entire
document and exhibits to fully understand the reorganization.
Questions Regarding the Annual Meeting
Q. Who is entitled to attend and vote at the meeting?
A. Persons holding the bank stock at the close of business on ____________,
2000, the record date, are entitled to attend and vote at the meeting. On
the record date, 574,750 shares of the bank stock were outstanding. Each
share of the bank stock entitles its holder to one vote with respect to all
matters presented at the meeting. In addition, you are entitled to
cumulative voting in the election of directors.
Q. Who is soliciting my proxy?
A. The board of directors of the bank.
Q. What am I being ask to vote upon?
A. The bank board of directors is asking you to vote:
. to approve or disapprove the Agreement and Plan of Reorganization,
which provides for the reorganization of the bank as a wholly owned
subsidiary of the holding company (Proposal 1);
. the election of directors of the bank (Proposal 2); and
. any other matter that may be properly be submitted to bank
shareholders at the annual meeting (Proposal 3).
The Agreement and Plan of Reorganization is attached to this document as
Annex A. We encourage you to read this agreement as it is the legal
document that governs the reorganization.
Q. Why are you reorganizing and forming a bank holding company?
A. The holding company formation is part of the transaction provided for in
the Stock Transfer and Branch Sale Agreement.
The Stock Transfer and Branch Sale Agreement effectively completes a break
up of the bank between two groups of directors. The Stock Transfer and
Branch Sale Agreement provides for the following two transactions:
. the sale of the bank stock owned by the selling directors and other
shareholders who so elect to the holding company for $15.00 per share
cash;
. the sale by the bank of its Park Cities branch to the Park Cities bank
established by the selling directors in a purchase and assumption
transaction in which the new bank will pay a purchase premium of
$500,000 plus the organization expenses and operating losses
associated with the Park Cities branch.
The board of directors of the bank recognizes that you may have a personal
preference regarding whether you would like to keep your investment in the
bank or join the selling directors in starting the Park Cities bank and
thus, believes that it is important that all shareholders have the
opportunity to choose whether to continue their investment in the bank
through ownership of holding company common stock or to sell their bank
stock for cash and either keep the proceeds of the sale or invest the
proceeds in the stock of the Park Cities bank. The formation of the holding
company facilitates the financing of these transactions.
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Q. Are there other reasons for forming the holding company?
A. Yes. We believe that the reorganization of the bank into a holding company
structure will provide greater flexibility in
. financing;
. providing liquidity to shareholders; and
. responding to changes in law.
Bank shareholders may elect to exchange part of their shares for holding
company common and part of their shares for cash. Shareholders who elect to
receive cash in the reorganization have been given the right by the selling
directors under the Stock Transfer and Branch Sale Agreement to subscribe
for shares of stock in the Park Cities bank at the initial offering price.
Q. What will happen to my bank stock if the reorganization is accomplished?
A. The Agreement and Plan of Reorganization provides that shareholders of the
bank, except for the selling directors who have agreed to sell their bank
stock for $15.00 cash and except those who exercise dissenting
shareholders' rights, will be entitled to receive one, or a combination of,
the following forms of consideration for each share of their bank stock
. one share of ENB Bankshares common stock; or
. $15.00 cash.
Q. How will the transaction affect the value of my bank stock?
A. If you elect to receive holding company common stock, two factors will
affect the value of that stock.
. Because the holding company will be acquiring at least 69,000 shares
of bank stock for cash from the selling directors, there will be fewer
number of shares of holding company common stock outstanding than
shares of bank stock outstanding. This will increase your percentage
of ownership of the holding company, and indirectly, the bank.
. Because the holding company is repurchasing shares of bank stock for
more than the tangible book value per share, the tangible book value
per share of the holding company stock after the transaction will be
less than the tangible book value of the bank stock immediately prior
to the transaction. We estimate that the amount of this dilution will
be approximately $1.98 per share assuming that the holding company
purchases 166,666 shares of bank stock for cash.
Q. How will the holding company finance the acquisition of bank stock from the
selling directors and other selling shareholders?
A. As indicated above, the holding company will pay a minimum of $1,035,000
cash for 69,000 shares of bank stock from the selling directors. Assuming
shareholders holding an aggregate of an additional 97,666 shares of bank
stock elect to receive cash, the holding company may pay up to $2,500,000
in cash as part of the transaction. To provide the funds for the cash
portion of the transaction, the holding company is offering for sale
$2,500,000 of its 9.5% debentures. The debentures are payable in five
equal installments of 20% of the original aggregate principal amount
beginning on December 31, 2006 and continuing until December 31, 2010. The
debentures are convertible, at any time at the option of the owner until
December 31, 2006, into shares of holding company common stock initially at
a conversion price of $15.00 per share.
In the event that the holding company is unable to sell enough debentures
to provide the entire cash requirements of the transaction, the holding
company will rely on commercial borrowings. The holding company has
obtained a loan commitment letter from Wells Fargo Bank providing for a
loan of up to $1,650,000. The loan is payable over 10 years and will bear
interest at floating Wall Street Journal prime rate. The loan will be
secured by a security interest in all of the bank stock owned by the
holding company.
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The holding company will not incur indebtedness (either in the form of
debentures or the loan or a combination of the debentures and the loan) of
more than $2,500,000. If the cash requirements of the transaction are more
than $2,500,000, the holding company believes that it will be required to
restructure the transaction in order to obtain regulatory approval. One
form of restructuring being considered is for the continuing directors to
convert a portion of the debentures that they purchase into holding company
common stock. If the holding company cannot successfully restructure the
transaction, the holding company will terminate the transaction and the
transaction will not be completed.
The bank hopes to complete the stock transfer, the branch sale and the
reorganization at the same time in the fall of 2000. The Stock Transfer
and Branch Sale Agreement, however, provides that the stock transfer and
reorganization can be completed separately from the branch sale. If the
branch sale occurs prior to the stock transfer and reorganization, ENB
Bankshares will pay to the shareholders who signed the Stock Transfer and
Branch Sale Agreement interest at the Wall Street Journal prime rate from
the date of the branch sale until the closing date of the stock transfer.
The Stock Transfer and Branch Sale Agreement provides that the agreement
may be terminated if the transactions are not completed by December 31,
2000.
Q. Will I have to turn in my stock certificates?
A. You must surrender your stock certificates, bearing the name "Eagle
National Bank," at the effective time of the reorganization. At that time,
you will receive, depending on the election you make, new stock
certificates bearing the name "ENB Bankshares, Inc.," a check for $15.00
per share for the bank stock surrendered, or a check for $15.00 per share
for each share of bank stock surrendered plus instructions relating to an
investment in the new bank that will own the Park Cities branch or a
combination of both. You will not receive these items until you surrender
your bank stock certificates and a properly completed letter of
transmittal. The holding company will not pay interest on the cash
consideration to be paid pursuant to the reorganization.
Q. Does formation of a holding company affect my federal income taxes?
A. If you elect to receive shares of holding company stock, you will not
recognize any gain or loss for federal income tax purposes upon your
receipt of holding company common stock in exchange for your shares of the
bank stock. However, if you elect to receive cash or if you dissent to the
transaction, you will recognize a gain or loss upon the receipt of cash
instead of holding company stock. You should consult your own tax advisors
concerning the specific tax consequences of the reorganization to you,
including any state or local tax consequences.
Q. How many directors are standing for election?
A. We are asking you to approve a proposal to fix the number of directors of
the bank at 11 and to elect the following 11 individuals as directors of
the bank to serve until the next annual meeting of shareholders or until
their respective successors are duly elected and qualified.
Donald A. Bailey
Harold L. Campbell
Christopher G. Griffith
Clyde W. Hensley
Robert H. Lutz
Randy L. Pack
Jon Roy Reid
Ronald W. Rhoades
John M. Yeaman
Thomas R. Youngblood
Patrick G. Adams
Q. Will there be any change in the directors once the share transfer and
reorganization is complete?
A. Yes. The Stock Transfer and Branch Sale Agreement provides that the four
directors who are selling their shares, Randy Pack, Jon Roy Reid, John
Yeaman and Tom
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Youngblood, will remain as directors of the bank until the sale of the Park
Cities branch is completed. Once the branch sale is completed, these four
individuals will resign as directors of the bank. The bank's board of
directors would then reduce the size of the bank's board to seven members.
Accordingly, after completion of the branch sale, there will be seven
directors of the bank.
Q. Will the operations and management of the bank change after the
reorganization?
A. The bank will continue to operate from its current location. However,
pursuant to the Stock Transfer and Branch Sale Agreement, the bank will
longer own the Park Cities branch.
On April 1, 2000, Tom Youngblood resigned as President of the bank to join
the group of directors seeking to form the new bank to own the Park Cities
branch. Upon consummation of the reorganization, Mr. Youngblood will no
longer be an employee of the bank. Mr. Youngblood will remain an employee
of the bank until the bank sells the Park Cities branch to the new bank.
Patrick Adams was appointed as the new President of the bank in April 2000.
Pursuant to the agreement between the bank and the selling directors, the
selling directors will resign as directors of the bank when the sale of the
Park Cities branch is completed. As a result, the Board of Directors of
the holding company and the bank will be the remaining seven directors.
Q. What will constitute a quorum at the meeting?
A. Each matter to be acted upon at the meeting requires the presence of a
quorum. The presence, in person or by proxy, of shareholders entitled to
cast at least a majority of the votes that all shareholders are entitled to
cast constitutes a quorum.
Q. How do I vote?
A. After carefully reading and considering the information contained in this
document, please fill out and sign the enclosed proxy form. Then mail the
proxy to the bank in the enclosed prepaid return envelope as soon as
possible so that your shares will be represented at the annual meeting.
Your proxy will instruct the persons named on the form as proxy holders to
vote your shares at the meeting as you direct on the proxy form. The bank's
board of directors recommends that you vote FOR the election of individuals
nominated by the board of directors as the directors of the bank and FOR
the reorganization proposal.
Q. What is the effect if I abstain from voting?
A. A bank shareholder who abstains from voting on the proposal to elect
directors of the bank will have no effect on the balloting, assuming that a
quorum is present. However, a bank shareholder who abstains from voting on
the reorganization proposal will, in effect, be voting against the
reorganization proposal. If you abstain from voting and do not follow the
requirements under federal law for dissenters' rights of appraisal, and if
at least 66-2/3% of the outstanding shares of bank stock vote in favor of
the reorganization, you will automatically, without any action on your
part, receive $15.00 cash in exchange for each share of bank stock that you
hold.
Q. May I change my vote after I have mailed my signed proxy form?
A. You may change your vote at any time before your shares are voted at the
annual meeting by:
. giving notice of revocation to Sue Higgs, Secretary of the bank, 5006
Verde Valley, Dallas, Texas 75240;
. delivering a properly executed proxy form bearing a later date to Sue
Higgs; or
. voting in person after giving notice to Sue Higgs.
Your attendance at the annual meeting will not by itself revoke your proxy.
Q. What vote is required to approve each proposal?
A. Approval and adoption of the Agreement and Plan of Reorganization requires
the affirmative vote of the holders of at least 66-2/3% of the outstanding
shares of
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the bank stock. The eleven directors of the bank who receive the
affirmative vote of a plurality of the shares present and entitled to vote
at the meeting, in person or by proxy, will be elected as directors.
Q. What percentage of the outstanding shares do the directors and executive
officers of the bank hold?
As of the date hereof, the bank's directors, executive officers and their
affiliates own 191,900, or approximately 33%, of the bank's outstanding
bank stock. Their shares represent about 50% of the affirmative votes
needed to approve the reorganization. We anticipate that all of these
shares will be voted for the election of directors and for the
reorganization.
Q. If the shareholders approve the reorganization, when will it occur?
A. We would like to complete the reorganization as soon as possible after the
annual meeting. In order to complete the reorganization, the bank, the new
bank, the Park Cities bank, and the holding company must obtain certain
regulatory approvals from the Texas Department for Banking, the FDIC, the
Office of the Comptroller of the Currency ("OCC"), and the Federal Reserve.
If the necessary approvals are issued in time, the bank and holding company
anticipate completing the reorganization in the fall of 2000.
Q. How will you treat the reorganization for accounting purposes?
A. We intend to account for the reorganization as a pooling-of-interests. The
pooling-of-interest method of accounting for a business combination
reflects the union of ownership between the entities involved. Because ENB
Bankshares will be a one-bank holding company, immediately after the
reorganization, its consolidated financial statements will (except for the
debt to be incurred by the holding company as part of the transaction) be
substantially the same to the bank's financial statements prior to the
reorganization. The holding company's parent-only financial statements will
reflect its investment in 100% of the shares of the bank stock.
Q. Does the proposed transaction carry risks for shareholders?
A. The proposed transaction will create certain new risks for shareholders
resulting from the debt to be incurred by the holding company as part of
the transaction. The holding company will borrow up to $2,500,000 to pay
cash to the selling directors and to the shareholders who elect to receive
cash pursuant to the reorganization. If the holding company borrows these
funds from Wells Fargo Bank, the holding company will pledge 100% of the
bank stock to Wells Fargo Bank as collateral for this debt. If the holding
company cannot repay this debt, Wells Fargo Bank may foreclose on the bank
stock. In this event, the holding company would have no remaining tangible
assets and shareholders would lose their entire investment.
Additionally, investment in the common stock of the holding company
involves a degree of risk, similar to the risk of investment in the bank
stock. The FDIC will not insure investments in the bank stock of the
holding company. Funds invested in holding company common stock will not
earn interest. Intense competition, government regulation, and economic
uncertainties result in a degree of risk for any investment in the holding
company common stock.
Q. What rights will I have under federal law if I vote against the Agreement
and Plan of Reorganization?
A. You will be entitled to receive cash payment of the fair value of your
shares of bank stock if the reorganization is completed if you:
. vote against the Agreement and Plan of Reorganization or file a
written objection to the reorganization with the bank prior to the
annual meeting; and
. comply with the statutory requirements of federal law concerning
dissenters' rights of appraisal.
If the reorganization is approved, the bank will then mail a further notice
to all dissenters who gave due notice and who did not vote in favor of the
reorganization. This further notice will provide instructions on how to
proceed further.
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Questions Regarding the Debentures
Q. Who can buy the Debentures?
A. Shareholders of the holding company have preemptive rights to acquire
additional unissued or treasury stock of the holding company or securities
convertible into holding company common stock with certain limited
exceptions. The debentures are being offered to holders of holding company
common stock pursuant to their preemptive rights. Only bank shareholders
who elect to receive all holding company common stock for their bank stock
are entitled to preemptive rights with respect to the debentures. Bank
shareholders who elect to receive cash for all or a portion of their bank
stock or who dissent from the reorganization will not be entitled to buy
debentures.
Q. If the holding company shareholders who have preemptive rights do not buy
all of the debentures, may I buy additional debentures?
A. Any debentures remaining unsold after the preemptive rights offering is
completed will be reoffered to holding company shareholders who purchase
debentures in the initial offering. The oversubscription right will be
allocated at our discretion. We may accept subscriptions from former bank
shareholders who elect to receive cash for all or a portion of their bank
stock, but we have no obligation to do so.
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RISK FACTORS
You should carefully consider all information in this document, especially
the risk factors below, in determining how to vote on the reorganization,
whether to elect to receive holding company common stock or cash pursuant to the
reorganization, or a combination thereof, and whether to subscribe for the
debentures. We have divided the risk factors into four groups:
. risks relating to the reorganization;
. risks relating to ownership of holding company common stock;
. risks relating to ownership of debentures; and
. risks that apply to the bank and will apply substantially equally to
the holding company because the holding company's primary asset will
be its ownership of the equity of the bank.
Risks relating to the Reorganization
The reorganization changes your investment.
No matter what form of consideration you choose, your investment will
change as a result of the reorganization. Currently, you are a shareholder of
Eagle National Bank, a national banking association. If the reorganization is
approved by 66-2/3% of the outstanding bank stock and the other conditions to
consummation are satisfied, the holding company will become the sole shareholder
of the bank. You may choose to continue your investment in the bank indirectly
by electing to receive holding company common stock in the reorganization. There
are risks associated with the holding company common stock as discussed below.
You may terminate your investment in the bank by electing to receive cash in the
reorganization. There are risks associated with the receipt of cash as discussed
below.
The $15.00 per share cash consideration may not reflect fair value of your bank
stock.
The amount of cash to be paid pursuant to the reorganization was based
upon the purchase price established in the Stock Transfer and Branch Sale
Agreement. While the Stock Transfer and Branch Sale Agreement was negotiated on
an arms-length basis between the four selling directors, the holding company and
the bank, this agreement also provides for the sale of the Park Cities branch.
Because of this additional feature, the $15.00 per share purchase price may not
be solely reflective of the fair value of the shares of bank stock.
To confirm that the $15.00 per share cash amount was fair to all
shareholders, the bank engaged Hoefer & Arnett Incorporated, an independent bank
valuation firm, to review the transaction. Hoefer & Arnett has issued an
opinion stating that the terms of the Stock Transfer and Branch Sale Agreement
and the Agreement and Plan of Reorganization, specifically including the $15.00
per share cash price, are fair to all shareholders of the bank from a financial
point of view. A copy of the Hoefer & Arnett opinion is included as Annex C.
-------
Despite our efforts to ensure that the terms of the reorganization are
fair, you may be able to obtain a greater cash price for your shares of bank
stock if you dissent to the reorganization. You should be aware, however, that
this is a very technical process requiring strict compliance. If you wish to
dissent, we urge you to engage your own attorney and bank valuation firm. You
should also be aware that the amount you receive for your shares of bank stock
if you dissent could be less than the $15.00 per share cash amount. You should
carefully review the section entitled "Rights of Dissenting Shareholders"
beginning on page 70 of this document before you decide to exercise dissenter's
rights.
The new bank that will own the park cities branch involves risk.
The four selling directors are establishing a new commercial bank that
will begin operations by acquiring the Park Cities branch. This will be a new
bank that will be completely independent of Eagle National Bank and ENB
Bankshares. The Stock Transfer and Branch Sale Agreement provides that any
shareholder of the bank who elects to receive cash in the reorganization will be
granted the right by the new bank to invest in that bank, which will own the
Park Cities branch. If you elect to receive cash in the reorganization, you may
subscribe for shares of the new bank pursuant to its offering at the initial
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offering price until the earlier of (1) 30 days after the effective date of the
reorganization, or (2) December 31, 2000. You must base your decision whether
to invest in the new bank solely upon the new bank's offering materials. The
bank and the holding company make absolutely no representations or warranties of
any kind regarding an investment in the new bank.
Risks Relating to the Ownership of Holding Company Stock
The ownership of holding company common stock creates certain new risks
that do not currently exist for shareholders of the bank. The holding company
will incur up to an aggregate of $2,500,000 in debt to finance the purchase of
the bank stock from the selling directors and selling shareholders in the stock
transfer transaction and to provide the cash consideration to be paid to
shareholders who elect to receive cash pursuant to the reorganization.
The holding company plans to sell debentures in an amount sufficient to
satisfy the cash requirements of the transaction. If the holding company cannot
sell a sufficient amount of debentures, the holding company will borrow up to
$1,650,000 from Wells Fargo Bank. This indebtedness, whether in the form of the
debentures or the loan could:
. affect our ability to fund our operations;
. impair our ability to obtain additional financing;
. make us more vulnerable to industry downturns and competitive
pressures;
. cause a substantial portion of our cash flow from operations to be
spent on principal and interest payments; and
. prevent us from meeting certain financial tests contained in banking
regulations, which could lead to supervisory action.
The bank stock will be subject to foreclosure if we cannot repay the Wells Fargo
loan.
The loan from Wells Fargo Bank, if necessary, will be secured by the
pledge of 100% of the bank stock. Unless you have pledged your bank stock to
secure your personal debt, the bank stock is currently free of liens and not
subject to foreclosure. However, upon completion of the reorganization, all of
the bank stock will be subject to a lien securing the holding company's debt.
If the holding company does not or cannot repay the loan, then Wells Fargo Bank
could foreclose on the bank stock. Because the holding company will not have
any other material tangible asset other than the bank stock, the foreclosure of
the bank stock by Wells Fargo Bank would result in a complete loss to the
shareholders of the holding company.
Our ability to pay dividends and repay our debts will be dependent upon the
profitability of the bank and its ability to pay dividends to us.
The profitability of the holding company and its ability to repay the debt
(either in the form of the debentures or the loan) will be dependent upon the
profitability of the bank. The bank will need to generate income sufficient to
enable the bank to pay dividends to the holding company to enable the holding
company to repay the debt. The bank's ability to pay dividends is restricted by
federal laws and regulations that require the bank to maintain adequate levels
of earnings and capital. There is no guarantee that the bank's earnings will be
sufficient to pay dividends to enable the holding company to repay its
indebtedness.
We do not expect to pay dividends for many years.
Without the reorganization, if the bank had earnings in excess of the
amount needed to maintain adequate capital levels, the bank could pay dividends
to shareholders. However, because the holding company must repay its
indebtedness, the holding company does not anticipate paying any dividends on
the holding company stock until the debt is repaid in full or significantly
reduced. You should be aware that federal regulations prohibit the holding
company from paying dividends if its debt to equity ratio is greater than 1:1.
If the holding company borrows $2,500,000 (the maximum amount of debt to be
incurred) and if the reorganization had been consummated as of March 31, 2000,
the holding company's debt to equity ratio would have been approximately 0.75:1.
You should not expect to receive dividends on the holding company stock for
several years.
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As a result of the reorganization and the sale of the Park Cities branch, the
book value of your investment will be diluted.
The transaction will result in dilution in the tangible book value of
your investment. Book value is sometimes used by investors in banks as a
benchmark from which to determine the market value of bank stocks. Book value
is not market value. However, it provides a reference point as to the amount of
equity in the organization. Book value per share is determined by dividing the
stockholders' equity by the number of shares outstanding.
The holding company will pay cash for shares of bank stock in the
transaction. As a result, there will be a fewer number of shares of holding
company common stock outstanding after the reorganization than the number of
shares of bank stock currently outstanding. This increases the percentage
ownership of the holding company by each shareholder who elects to receive
holding company common stock in the reorganization. However, because the amount
of cash to be paid ($15.00 per share) is greater than the book value per share
of the bank stock ($10.13 per share at March 31, 2000), the book value per share
of the holding company common stock will initially be less than the book value
per share of the bank stock.
Risks involved with Ownership of the Debentures.
The ownership of the debentures involves certain risks that are different
from ownership of holding company common stock or bank stock.
We may be unable to repay the Debentures.
We will not begin paying principal on the debentures until December 31,
2006. Our ability to make principal payments is dependent on the profitability
of the bank. We will not set aside any funds to repay any indebtedness
evidenced by the debentures.
The debentures are unsecured and subordinate to our other indebtedness.
The debentures will be unsecured and subordinate in right of payment to
senior debt. We may borrow up to $1,650,000 from Wells Fargo Bank in connection
with the transaction. We may also incur other debt in the future that will be
senior to the debentures. If we have senior debt, if we file for bankruptcy or
liquidate our business, we will be able to pay the debentures, if at all, only
after any senior lender is paid in full and then only to the extent other
unsecured creditors are paid. In addition, if the bank stock is used as
collateral for a loan (as will be the case with the loan from Wells Fargo Bank),
then upon the foreclosure of the bank stock, we will not be able to pay the
indebtedness evidenced by the debentures.
The interest rate payable on the debentures is fixed.
We will pay a fixed rate of interest on the debentures equal to 9.5% per
year. This interest rate is currently approximately the amount charged by
commercial banks as their prime rate. However, interest rates are subject to
change. If interest rates increase, the amount of interest on the debentures
would be less than prevailing rates, making the debentures less valuable.
There is no active trading market for the debentures.
Like the bank stock and the holding company common stock, there will be
no active public market for the debentures.
Risks Shared by the Bank and the Holding Company
Investment in the common stock (and to a lesser extent, an investment in
the debentures) of the holding company also involves risks substantially similar
to risks for the current shareholders of the bank. The FDIC does not insure
money invested in the common stock or debentures of the holding company or in
bank stock, unlike money deposited with the bank. Funds invested in common stock
of the holding company will not earn interest. After the reorganization, the
following risk factors may influence the value of the holding company's common
stock and the debentures:
We may be unable to retain or replace members of the board of directors or
senior management or to hire and retain other skilled personnel.
The business success of the bank and holding company depends to a great
extent upon the services of the board of directors of the bank. The loss of key
personnel by the bank
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would have a material adverse effect upon the future prospects of the bank or
holding company.
Our future success is dependent on our ability to compete effectively in the
highly competitive banking industry.
We face substantial competition in all phases of our operations from a
variety of different competitors. Our future growth and success will depend on
our ability to compete effectively in this highly competitive environment. We
compete for loans, deposits and other financial services in our geographic
market with other commercial banks, savings and loan associations, credit
unions, finance companies, mutual funds, insurance companies, brokerage and
investment banking firms and various other nonbank competitors. Many of our
competitors offer services that we do not, and many have substantially greater
resources, name recognition and market presence that benefit them in attracting
business. In addition, larger competitors may be able to price loans and
deposits more aggressively than we do. Within Dallas County, Texas, as of June
30, 1999, the bank was 1 of 69 commercial banks and 13 savings institutions
competing for customers. At June 30, 1999, the bank held less than 1% of FDIC-
insured deposits in Dallas County and approximately 1.5% of FDIC-insured
deposits in Collin County, Texas. The nonbank financial institutions and
financial services organizations with which we compete are not subject to the
same degree of regulation as is imposed on banks. As a result, these nonbank
competitors have an advantage over us in providing certain services.
The banking industry is highly susceptible to economic change.
Commercial banking is affected by local, domestic and international
economic and political conditions, and by governmental monetary and fiscal
policies. Conditions such as inflation, recession, unemployment, volatile
interest rates, tight money supply, scarce natural resources, real estate
values, international conflicts and other factors beyond the bank's control can
adversely affect the profitability of the bank. Future rising interest rates,
while increasing the income yield on the bank's earning assets, can adversely
affect loan demand and, consequently, the profitability of the bank. Future
decreases in interest rates can adversely affect the bank's profitability
because they reduce the return that the bank earns on its assets. Economic
downturns could result in the delinquency of outstanding loans. In particular, a
downturn in the economic conditions in northern Texas, where the bank's lending
and deposit-gathering are concentrated, could reduce our growth rate, impair our
ability to collect loans and generally affect our financial condition and
results of operations.
Increases in interest rates could make us less profitable.
Our profitability is dependent to a large extent on our net interest
income. Net interest income is the difference between interest income on
interest-earning assets and interest expense on interest-bearing liabilities.
Like most financial institutions, we are affected by changes in general interest
rate levels, which are currently at relatively low levels, and by other economic
factors beyond our control. In addition, interest rate risks can result from
mismatches between the dollar amount of repricing or maturing assets and
liabilities and is measured in terms of the ratio of the interest rate
sensitivity gap to total assets. Although our management believes it has
implemented strategies to reduce the potential effects of changes in interest
rates on our results of operations, any substantial and prolonged increase in
market interest rates could adversely affect our operating results.
Our allowance for loan losses may prove to be insufficient to absorb potential
losses in our loan portfolio.
Lending money is a substantial part of our business. However, every loan
we make carries a certain risk of nonpayment. We cannot assure that our
allowance for loan losses will be sufficient to absorb actual loan losses. We
also cannot assure you that we will not experience significant losses in our
loan portfolios that may require significant increases to the allowance for loan
losses in the future. Although we evaluate every loan that we make against our
underwriting criteria, we may experience losses by reasons of factors beyond our
control. Some of these factors include changes in market conditions affecting
the value of real estate and unexpected problems affecting the creditworthiness
of our borrowers.
We determine the adequacy of our allowance of loan losses by considering
various factors, including:
. an analysis of the risk characteristics of various classifications of
loans;
19
<PAGE>
. previous loan loss experience;
. specific loans that would have loan loss potential;
. delinquency trends;
. estimated fair value of the underlying collateral;
. current economic conditions;
. the view of our regulators; and
. geographic and industry loan concentration.
Changes in real estate values may adversely impact our loans that are secured by
real estate.
A significant portion of our loan portfolio consists of residential and
commercial mortgages secured by real estate. These properties are concentrated
in north central Texas. Real estate values and real estate markets generally are
affected by, among other things, changes in national, regional or local economic
conditions, fluctuations in interest rates and the availability of loans to
potential purchasers, changes in the tax laws and other governmental statutes,
regulations and policies, and acts of nature. If real estate prices decline,
particularly in north central Texas, the value of the real estate collateral
securing the bank's loans could be reduced. This reduction in the value of the
collateral would increase the number of nonperforming loans and could have a
material negative impact on our financial performance. Additionally, the bank
has increased its level of commercial real estate loans, which are considered to
involve a higher degree of credit risk than that of the one-to-four family
residential loans.
Federal and state governmental entities extensively regulate and supervise the
banking industry.
The bank is subject to, and will continue to be subject to, extensive
governmental supervision, regulation and control. The bank is subject to federal
and state statutes applicable to national banks located in Texas and to banks
whose deposits are insured by the FDIC. The primary regulator of the bank is the
OCC, but the bank is also subject to regulation by the FDIC. Federal and state
banking laws and regulations govern the scope of a bank's business, a bank's
investments, a bank's reserves against deposits, a bank's loans, interest rates,
the activities of a bank with respect to mergers and consolidations, and the
establishment of branches.
The regulatory burden on banks is costly and makes competition with other
types of financial institutions, such as insurance companies and brokerage
houses, that are not subject to the same regulatory burden. See "Description of
the Bank--Supervision and Regulation of the Bank" below.
Changes in the law and regulations may affect our ability to do business, our
costs, and our profits.
We are subject to extensive state and federal supervision and regulation.
These laws and regulations are intended to protect depositors, not shareholders.
Any change in applicable laws or regulations may have a material effect on our
business and prospects. We cannot predict the nature or the extent of the effect
on our business or earnings that monetary policies, economic control, or new
federal or state regulations may have in the future. For example, we cannot
predict the full impact of the new financial services reform law, the Gramm-
Leach-Bliley Financial Services Modernization Act, signed into law on November
12, 1999, which will allow bank holding company subsidiaries and national bank
operating subsidiaries to offer a wide range of new financial services,
including securities underwriting. The new law also permits bank holding company
subsidiaries to engage in real estate development and insurance underwriting.
Regulatory restrictions on dividend payments from the bank may affect our
ability to pay dividends to our shareholders.
The ability of the holding company to pay cash dividends will be subject
to certain restrictions under federal law. In addition, because the cash that
the holding company uses to pay dividends will come from dividends the bank pays
to the holding company, the
20
<PAGE>
holding company's ability to pay dividends will depend upon the bank. The bank's
ability to pay dividends is subject to and limited by certain legal and
regulatory restrictions applicable to banks. Assuming a dividend would satisfy
the minimum legal requirements, we will decide whether or not to pay dividends
after considering the our capital requirements and current and projected net
income. See "Description of the Bank's Capital Securities--Dividends."
You will have a minimal influence on shareholder decisions.
The directors, officers and substantial investors will have sufficient
beneficial ownership of the common stock to control the holding company. At the
date of this document, the directors and officers of the bank who will continue
in their roles after the transaction owned approximately 21% of the bank stock.
As a result of the transaction with the selling directors and other selling
shareholders, the continuing directors and officers are expected to own at least
24% of common stock of the holding company upon completion of the proposed
reorganization if all shareholders of the bank other than selling directors
elect to receive holding company common stock in the reorganization. See
"Beneficial Ownership of the Bank Stock by Significant Shareholders, Directors
and Executive Officers."
The ownership of a substantial percentage of the outstanding common stock
by a limited number of shareholders with a common interest, particularly those
who share management of a company, may result in disproportionate control of the
holding company. Although a minority of total shareholders, this group may be
able to consistently determine the outcome of votes in matters submitted to a
vote of the holding company's shareholders. It would be difficult for another
shareholder group to defeat a proposal favored by the holding company's
directors and officers, or to approve a proposal opposed by the directors and
officers.
The ownership of a relatively large percentage of shares by the holding
company's board of directors and officers may assist the board of directors and
its appointed officers in retaining control of the holding company, even if the
other shareholders are dissatisfied with the board.
The ownership of a substantial number of shares by a limited number of
persons can also adversely affect the liquidity of the market for the common
stock because only a limited number of shares are widely dispersed and likely to
change hands. Stock prices in an illiquid market tend to increase and decrease
in a more volatile manner than stock prices in a liquid market, because prices
for a relatively small number of shares can have a significant impact on the
price quoted for the common stock. The holding company is unable to estimate the
number of shares of common stock that may be sold in the future by any of its
shareholders. These sales will depend upon a number of factors, including the
market price for the shares of common stock and the individual circumstances of
each shareholder.
The market for the bank stock is not active.
The bank stock trades on a limited basis in private transactions, primarily
in the bank's geographic service area. This will also be the case for the
holding company common stock. The holding company does not presently intend to
apply to the National Association of Securities Dealers to have its common stock
listed for trading on the National Association of Securities Dealers Automated
Quotation System or to apply for listing on any national securities exchange.
The charter documents of the holding company provide for the indemnification of
directors, officers and employees and limit the liability of directors.
The holding company's articles of incorporation and bylaws provide for
indemnification of its directors, officers, employees and agents to the fullest
extent permitted under federal and state corporate law. Indemnification will
only apply to persons who act in good faith, in a manner he reasonably believed
to be in the best interest of the company, without willful misconduct or
recklessness. The bank's bylaws provide similar indemnification provisions, but
for directors only.
The holding company's articles of incorporation and bylaws also limit the
liability of directors for monetary damages to acts of self-dealing, willful
misconduct or recklessness, unless the act constitutes a crime or involves
liability for the payment of taxes. We believe that these provisions will help
reduce baseless litigation, but they may also make it more difficult for
shareholders to sue these persons on behalf of the holding company. The bank's
bylaws provide similar limits on directors' liability.
21
<PAGE>
The forward-looking statements we make in this document are inherently
uncertain.
This proxy statement/prospectus contains forward-looking statements
including statements regarding intent, belief or current expectations about
matters (including statements as to "beliefs," "expectations," "anticipations,"
"intentions" or similar words) that may or may not occur in the future. A
forward-looking statement is any statement that is not a historical fact. These
statements are subject to risks, uncertainties and assumptions. These include
the risk that projected trends for the continued growth of the bank will not
occur. If one or more of these risks or uncertainties occurs or if underlying
assumptions prove incorrect, actual results, performance or achievements in 2000
and beyond could differ materially from those stated.
22
<PAGE>
SELECTED FINANCIAL INFORMATION
Prior to the closing of the reorganization, the holding company will not
have commenced operations and will have no material assets or liabilities.
Presented below is selected financial information for the bank.
<TABLE>
<CAPTION>
At and for the At and for the Ten
Three Months Ended March 31, At and for the Years Months from Inception
(unaudited) Ended December 31, February 28, 1997
------------------------------ ---------------------------
2000 1999 1999 1998 to December 31, 1997
------------- -------------- ------------- ----------- -----------------------
(dollars in thousands, except for share amounts)
<S> <C> <C> <C> <C> <C>
Selected Balance Sheet Data:
Total Assets $ 61,410 $ 42,526 $ 45,315 $ 44,666 $ 27,772
Investment Securities 851 353 851 256 673
Net Loans 43,672 34,110 37,260 33,718 18,666
Deposits 55,298 37,073 39,503 39,315 22,976
Shareholders' equity 5,824 5,314 5,715 5,186 4,709
Selected Operating Data:
Interest income 1,185 933 3,895 3,164 1,086
Interest expense 466 389 1,523 1,280 417
Net interest income 719 544 2,372 1,884 669
Provision for loan losses 45 38 98 180 225
Net interest income after provision
for loan losses 674 506 2,274 1,704 444
Noninterest income 67 38 228 121 37
Noninterest expense 573 416 1,809 1,512 1,049
Income before provision for income
taxes 168 128 693 313 (568)
Net income 109 128 529 477 (568)
Per Share Data:
Basic earnings per share 0.19 0.22 0.92 0.83 (0.99)
Diluted earnings per share 0.19 0.22 0.92 0.83 (0.99)
Cash dividends per share N/A N/A N/A N/A N/A
Book value per share 10.13 9.24 9.94 9.02 8.19
Weighted average number of
shares outstanding - basic 574,750 574,750 574,750 574,750 574,750
Weighted average number of shares
outstanding - diluted 578,050 574,750 576,730 574,750 574,750
Actual shares outstanding 574,750 574,750 574,750 574,750 574,750
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
At and for the Ten
Month Period from
At and for the Three At and for the Years Inception at
Months Ended March 31, Ended December 31, February 28, 1997
------------------------------ ---------------------------
2000 1999 1999 1998 to December 31, 1997
------------- -------------- ------------- ----------- -----------------------
(dollars in thousands, except for share amounts)
<S> <C> <C> <C> <C> <C>
Selected Financial Ratios and Other
Data:
Performance Ratios:
Return on average assets 0.82% 1.18% 1.16% 1.38% (4.02)%
Return on average stockholders' equity 7.52 10.04 9.74 9.82 (13.58)
Average stockholders' equity to
average assets 10.92 11.77 11.95 14.08 29.62
Efficiency ratio (1) 72.90 71.48 69.58 75.41 148.58
Interest rate spread (2) 4.80 4.41 4.64 4.73 3.61
Net Interest margin (3) 5.99 5.44 5.75 5.94 5.37
Dividend payout ratio -- -- -- -- --
Regulatory Capital Ratios:
Tier 1 capital (4) 15.01 17.00 17.06 17.17 24.36
Total capital (5) 16.23 18.25 18.31 18.42 25.53
Leverage (6) 10.97 12.26 12.05 12.28 18.66
</TABLE>
__________________
(1) The efficiency ratio is computed by dividing noninterest expense by the sum
of net interest income before provision for loan losses plus noninterest
income, excluding securities gains and losses.
(2) Interest rate spread represents the difference between average yield on
interest-earning assets and the average costs of interest-bearing
liabilities.
(3) Net interest margin represents net interest income divided by average
interest-earning assets.
(4) Tier 1 capital to risk weighted assets.
(5) Total capital to risk-weighted assets.
(6) Tier 1 capital to adjusted quarterly average assets.
24
<PAGE>
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The following Pro Forma Consolidated Balance Sheet as of March 31, 2000
and Pro Forma Consolidated Statements of Earnings for the three months ended
March 31, 2000 and the year ended December 31, 1999 are based upon the
historical consolidated financial statements of the bank and are intended to
give you a better picture of what the holding company might have looked like had
the reorganization been effective on January 1, 1999. The companies may have
performed differently if they had been combined as of that date.
The unaudited pro forma consolidated financial statements are presented
for illustrative purposes only. You should not rely on the pro forma
information as being indicative of the consolidated financial position or
results of future operations of the combined entity or of the actual results
that would have been achieved had the reorganization been consummated as of
January 1, 1999.
The unaudited pro forma consolidated financial statements assume that the
holding company:
. incurs an aggregate of $2,500,000 in indebtedness as a result of the
sale and issuance of the debentures offered hereby and borrowings from
Wells Fargo Bank;
. accrues interest on the debt at a rate of 9.50% with the first
interest payment to be made on March 15, 2001. No principal payments
will be made until December 31, 2006; and
. pays an aggregate of $2,500,000 in cash to acquire an aggregate of
166,666 shares of bank stock in connection with the purchase of shares
from the selling directors and shareholders and from shareholders who
elect to receive cash pursuant to the reorganization. The $2,500,000
aggregate indebtedness evidenced by the debentures and the Wells Fargo
Bank borrowings is the maximum amount that the holding company
believes that banking regulatory authorities will permit the holding
company to borrow. Because fewer shareholders may elect to receive
cash in the reorganization, the amount of cash paid for shares of bank
stock from these shareholders may be less than that assumed in the pro
forma financial statements.
25
<PAGE>
ENB BANKSHARES, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED BALANCE SHEET
At March 31, 2000
(Unaudited)
<TABLE>
<CAPTION>
ASSETS
------
ENB Eagle Pro Forma Pro Forma
Bankshares National Bank Adjustments Consolidated
----------- ------------- ------------ -------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Cash and cash equivalents
Cash and due from banks $ $ 2,395 $ $ 2,395
Federal funds sold 11,000 11,000
----------- ------------- ------------ -------------
Total cash and cash equivalents 13,395 13,395
Investment in subsidiary 5,824 (5,824) --
Securities
Available-for-sale 353 353
Held-to-maturity 498 498
----------- ------------- ------------ -------------
Total securities 851 851
Loans, net 43,672 43,672
Premises and equipment, net 2,622 2,622
Other assets 870 870
----------- ------------- ------------ -------------
Total assets $ 5,824 $ 61,410 $ (5,824) $ 61,410
=========== ============= ============ =============
LIABILITIES AND SHAREHOLDERS' EQUITY
-------------------------------------
Liabilities
Deposits
Noninterest-bearing $ $ 12,789 $ $ 12,789
Interest-bearing deposits 42,509 42,509
----------- ------------- ------------ -------------
Total deposits 55,298 55,298
Borrowed funds 2,500 -- 2,500
Accrued interest and other liabilities 196 288 484
----------- ------------- ------------ -------------
Total liabilities 2,696 55,586 58,282
Shareholders' equity
Common stock 2,040 2,874 (2,874) 2,040
Paid-in capital 1,284 2,871 (2,871) 1,284
Retained earnings (196) 79 (79) (196)
----------- ------------- ------------ -------------
Total shareholders' equity 3,128 5,824 (5,824) 3,128
----------- ------------- ------------ -------------
Total liabilities and
shareholders' equity $ 5,824 $ 61,410 $ (5,824) $ 61,410
=========== ============= ============ =============
</TABLE>
26
<PAGE>
ENB BANKSHARES, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF EARNINGS
For the three months ended March 31, 2000
(Unaudited)
<TABLE>
<CAPTION>
ENB Eagle Pro forma
Bankshares National Bank Adjustments Consolidated
----------- ------------- --------------- ----------------
(dollars in thousands, except per share data)
<S> <S> <C> <C> <C>
Interest income
Loans, including fees $ -- $1,089 $1,089
Securities -- 13 13
Federal funds sold -- 83 83
----------- ------------- ----------------
Total interest income -- 1,185 1,185
Interest expense
Deposits -- 466 466
Borrowed funds 59 -- 59
----------- ------------- ----------------
Total interest expense 59 466 525
----------- ------------- ----------------
Net interest income (59) 719 660
Provision for loan losses -- 45 45
----------- ------------- ----------------
Net interest income
after provision for
loan losses (59) 674 615
----------- ------------- ----------------
Noninterest income
Service charges on
deposits -- 54 54
Other income -- 13 13
----------- ------------- ----------------
Total noninterest income -- 67 67
Noninterest expense
Salaries and employee
benefits -- 298 298
Occupancy expense -- 79 79
Professional services 18 18
Other expenses -- 178 178
----------- ------------- ----------------
Total noninterest
expense -- 573 573
----------- ------------- ----------------
Income before income
taxes (59) 168 109
Income tax expense/
(benefit) (20) 59 39
----------- ------------- ----------------
NET INCOME $ (39) $ 109 $ 70
=========== ============= ================
Earnings per share:
Basic $(0.10) $0.19 $0.17
=========== ============= ================
Diluted $(0.10) $0.19 $0.17
=========== ============= ================
</TABLE>
27
<PAGE>
ENB BANKSHARES, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF EARNINGS
For the year ended December 31, 1999
(Unaudited)
<TABLE>
<CAPTION>
ENB Eagle Pro forma
Bankshares National Bank Adjustments Consolidated
----------- ------------- --------------- ----------------
(dollars in thousands, except per share data)
<S> <S> <C> <C> <C>
Interest income
Loans, including fees $ -- $3,576 $3,576
Securities -- 28 28
Federal funds sold -- 291 291
----------- ------------- ----------------
Total interest income -- 3,895 3,895
Interest expense
Deposits 1,523 1,523
Borrowed funds 238 -- 238
----------- ------------- ----------------
Total interest expense 238 1,523 1,761
----------- ------------- ----------------
Net interest income (238) 2,372 2,134
Provision for loan losses -- 98 98
----------- ------------- ----------------
Net interest income after provision
for loan losses (238) 2,274 2,036
----------- ------------- ----------------
Noninterest income
Service charges on deposits -- 190 190
Other income -- 38 38
----------- ------------- ----------------
Total noninterest income -- 228 228
Noninterest expense
Salaries and employee benefits -- 988 988
Occupancy expense -- 212 212
Professional services 48 48
Other expenses -- 561 561
----------- ------------- ----------------
Total noninterest expense -- 1,809 1,809
----------- ------------- ----------------
Income before income taxes (238) 693 455
Income tax expense/ (benefit) (81) 164 83
----------- ------------- ----------------
NET EARNINGS $ (157) $ 529 $ 372
=========== ============= ================
Earnings per share:
Basic $(0.30) $0.92 $0.91
=========== ============= ================
Diluted $(0.30) $0.92 $0.91
=========== ============= ================
</TABLE>
28
<PAGE>
SUMMARY OF HISTORICAL AND PRO FORMA PER SHARE SELECTED FINANCIAL DATA
Set forth below are the basic earnings, diluted earnings, cash dividends
and book value per common share data for Eagle National Bank on a historical
basis and for ENB Bankshares on a pro forma combined basis. Also included are
weighted average shares outstanding and shares outstanding at period end for
Eagle National Bank and for ENB Bankshares on a pro forma basis. The pro forma
information assumes that:
. the reorganization, stock transfer transaction and sale of debentures
and borrowing had been consummated as of January 1, 1999, and
. the holding company will pay an aggregate of $2,500,000 in cash for
bank stock in the stock transfer and reorganization.
The following information is based upon:
. 574,750 shares of bank stock outstanding on a historical basis;
. 408,084 shares of holding company common stock outstanding on a pro
forma basis; and
. none of the debentures being converted into shares of holding company
common stock.
The pro forma data was derived by combining the historical consolidated
financial information of Eagle National Bank and ENB Bankshares using a pooling
method of accounting for business combinations.
You should read the information below together with historical financial
statements and related notes and other information included in this document.
The unaudited pro forma combined data below is for illustrative purposes only.
You should not rely on this information as being indicative of future results
that the holding company will experience after the reorganization.
29
<PAGE>
<TABLE>
<CAPTION>
At or for the Three At or for the year
Months Ended March 31, Ended December 31,
2000 1999
----------------------- ----------------------
<S> <C> <C>
Basic earnings per share
Eagle National Bank $ 0.19 $ 0.92
Pro Forma ENB Bankshares $ 0.17 $ 0.91
Diluted earnings per share
Eagle National Bank $ 0.19 $ 0.92
Pro Forma ENB Bankshares $ 0.17 $ 0.91
Cash dividends per share -- --
Eagle National Bank $ -- $ --
Pro Forma ENB Bankshares -- --
Book Value per share
Eagle National Bank $ 10.13 $ 9.94
Pro Forma ENB Bankshares 7.67 7.49
Weighted average common
shares-basic
Eagle National Bank 574,750 574,750
Pro Forma ENB Bankshares 408,084 408,084
Weighted average common
shares-diluted
Eagle National Bank 578,050 576,730
Pro Forma ENB Bankshares 411,384 410,064
Number of shares of common
outstanding at end of period
Eagle National Bank 574,750 574,750
Pro Forma ENB Bankshares 408,084 408,084
</TABLE>
30
<PAGE>
PRICE RANGE OF BANK STOCK
Comparative Market Prices
There has never been an organized or regular public trading market for the
outstanding bank stock. The bank stock is traded in private transactions. As of
May 31, 2000, the highest trade price known to management for transactions of
the bank stock was for a trade of 6,000 shares at $17.00 per share on April 21,
2000. The most recent sale price as of May 31, 2000, was $15.00 per share. The
last reported sale of the bank stock prior to the public announcement of the
proposed reorganization was a trade of 200 shares at $15.00 per share on May 31,
2000. Due to the infrequency of trading and the fact that these trades are
generally private transactions, we are unable to determine actual trading prices
on any given date.
Because there is no organized or regular public trading market for the bank
stock, bid price information for the bank stock is not available. However, the
bank does have information on sale prices. The following table shows quarterly
high and low sale prices for the bank stock:
Trade Prices: Bank Stock
(Price per share)
<TABLE>
<CAPTION>
High Low
------ -------
<S> <C> <C>
For Quarter Ended:
March 31, 1998 N/A N/A
June 30, 1998..................................... $10.00 $10.00
September 30, 1998................................ 10.00 10.00
December 31, 1998................................. 15.00 15.00
March 31, 1999.................................... N/A N/A
June 30, 1999..................................... N/A N/A
September 30, 1999................................ N/A N/A
December 31, 1999................................. N/A N/A
March 31, 2000.................................... $17.00 $17.00
June 30, 2000 (through June 29, 2000)............. 17.00 15.00
</TABLE>
No shares of the holding company common stock will be outstanding until
consummation of the reorganization. Therefore, the holding company common stock
has not been traded and no market for it exists. We do not anticipate that an
active market for the holding company common stock will develop after the
reorganization.
31
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
General
The following discussion and analysis presents the more significant factors
affecting the bank's financial condition at March 31, 2000, December 31, 1999
and 1998, and results of operations for each of the quarters ended March 21,
2000 and 1999 and each of the three years in the period ended December 31, 1999.
This discussion and analysis should be read in conjunction with the bank's
financial statements, notes thereto and other financial information appearing
elsewhere in this document. All references to the year ended December 31, 1997
are for the period from February 28, 1997 (Inception) to December 31, 1997.
Forward-Looking Statements
When used in this discussion, the words or phrases "will likely result,"
"are expected to," "will continue," "is anticipated," "estimated," "projected,"
or similar expressions are intended to identify "forward looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995. Such
statements are subject to certain risks and uncertainties including changes in
economic conditions in the bank's market area, changes in policies by regulatory
agencies, fluctuations in interest rates, demand for loans in the bank's market
area and competition, that could cause actual results to differ materially from
historical earnings and those presently anticipated or projected. Factors
listed above could affect the bank's financial performance and could cause the
bank's results for future periods to differ materially from any statements
expressed with respect to future periods.
The bank does not undertake, and specifically disclaims any obligation, to
publicly revise any forward-looking statements to reflect events or
circumstances after the date of such statements or to reflect the occurrence of
anticipated or unanticipated events.
Analysis of Financial Condition
Assets
Total assets increased $16,095,000, or 35.5%, from $45,315,000 at December
31, 1999, to $61,410,000 at March 31, 2000. The increase was primarily due to an
increase in loans and federal funds sold funded by an overall increase in
deposits. Total assets increased only $649,000, or 1.5%, from $44,666,000 at
December 31, 1998, to $45,315,000 at December 31, 1999. Despite lack of
significant growth in total assets, the mix of total assets changed as federal
funds sold were reinvested in higher yielding loans and securities.
Cash and Cash Equivalents
Cash and cash equivalents includes cash and due from banks and federal
funds sold. Federal funds sold increased $9,200,000 from $1,800,000 at December
31, 1999 to $11,000,000 at March 31, 2000. The bank experienced a significant
increase in deposits during the quarter as a result of special promotions for
certificate of deposit accounts. The excess cash provided from these deposits
was invested in federal funds sold to provide liquidity to fund loan growth as
demand warrants. Federal funds sold decreased $4,740,000 from $6,540,000 at
December 31, 1998 to $1,800,000 at December 31, 1999. The decrease resulted as
management redirected such funds to invest in higher-yielding loans and
securities.
Securities
Securities remained constant with $851,000 at both December 31, 1999, and
March 31, 2000. Securities increased $595,000, from $256,000 at December 31,
1998, to $851,000 at December 31, 1999. The increase in 1999 was primarily due
to the purchase of an additional bond.
The bank's investments include obligations of U.S. government agencies and
stock holdings in the Federal Reserve Bank of Dallas and the Federal Home Loan
Bank of Dallas. The bank's equity securities are classified as available for
sale while the obligations of U.S. government agencies are classified as held to
maturity. The bank held no derivative securities or structured notes during any
period presented.
The following tables summarize the amounts and the distribution of the
bank's securities held at the dates indicated:
32
<PAGE>
<TABLE>
<CAPTION>
March 31, 2000 December 31, 1999
-------------- -----------------
Amount % Amount %
------ ----- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Carrying value:
U.S. Government agency obligations
held to maturity $ 498 58.5% $ 498 58.5%
Equity securities available for sale 353 41.5 353 41.5
------ ----- ------ -----
Total securities $ 851 100.0% $ 851 100.0%
====== ===== ====== =====
Total estimated fair value $ 851 $ 849
====== ======
</TABLE>
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------
1999 1998 1997
---------------- ---------------- ----------------
Amount % Amount % Amount %
------ ------ ------ ------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Carrying value:
U.S. Government agency
obligations held to
maturity $ 498 58.5% $ - -% $ 500 74.3%
Equity securities available
for sale 353 41.5 256 100.0 173 25.7
------ ------ ------ ------ ------ -----
Total securities $ 851 100.0% $ 256 100.0% $ 673 100.0%
====== ====== ====== ====== ====== =====
Total estimated fair value $ 849 $ 256 $ 673
====== ====== ======
</TABLE>
The following tables provide the maturity distribution and weighted average
interest rates of the bank's debt securities at March 31, 2000 and December 31,
1999. The yield has been computed by relating the forward income stream on the
securities, plus or minus the anticipated amortization of premiums or accretion
of discount, to the amortized cost of the securities. The amortized cost of
securities is their cost, adjusted for previous amortization or accretion.
<TABLE>
<CAPTION>
Estimated Weighted
Par Carrying Fair Average
Amount Value Value Yield
------ -------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C>
March 31, 2000
U.S. Government agency obligations held
to maturity:
Due within one year $ - $ - $ - -%
Due after one but within five years 500 498 498 6.13
------ -------- -------- -------
Total $ 500 $ 498 $ 498 6.13%
====== ======== ======== =======
<CAPTION>
Estimated Weighted
Par Carrying Fair Average
Amount Value Value Yield
------ -------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C>
December 31, 1999
U.S. Government agency obligations held
to maturity:
Due within one year $ - $ - $ - -%
Due after one but within five years 500 498 496 6.13
------ -------- -------- -------
Total $ 500 $ 498 $ 496 6.13%
====== ======== ======== =======
</TABLE>
Loan Portfolio
Total net loans increased $6,412,000, or 17.2%, from $37,260,000 at
December 31, 1999 to $43,672,000 at March 31, 2000. The increase was primarily a
result of an increase in interim construction loans which increased $5,789,000,
or 36.4%, from $15,896,000 at December 31, 1999 to $21,685,000 at March 31,
2000. The increase in interim construction loans was a result of management's
effort to increase this type of lending due to the higher yields that can be
achieved.
Total net loans increased $3,542,000, or 10.5%, from $33,718,000 at
December 31, 1998, to $37,260,000 at December 31, 1999. The increase was a
result of increases in commercial loans, which increased $1,972,000, or 21.2%,
and interim construction loans,
33
<PAGE>
which increased $1,428,000, or 9.9%. Management specifically targeted growth in
these categories of loans due to the higher yields that can be achieved. Changes
in other categories of loans were not significant.
The bank provides general commercial lending services for corporate and
other business clients as a part of the bank's efforts to serve the local
communities in which it operates. Certain risks are involved in granting loans,
primarily related to the borrowers' ability and willingness to repay the debt.
Before the bank extends a new loan to a customer, these risks are assessed
through a review of the borrower's past and current credit history, the
collateral being used to secure the transaction in case the customer does not
repay the debt, the borrower's character and other factors. Once the decision
has been made to extend credit, the bank's independent loan review function,
which is currently performed by an independent accounting and consulting firm,
and responsible credit officer monitor these factors throughout the life of the
loan. Any loan identified as a problem credit by management or during the loan
review is assigned to the bank's "watch loan list," and is subject to ongoing
monitoring to ensure appropriate action is taken when deterioration has
occurred.
Commercial and industrial loans include operating lines of credit and term
loans made to small businesses primarily based on their ability to repay the
loan from the business's cash flow. Business assets such as equipment and
inventory typically secure these loans. When the borrower is not an individual,
the bank generally obtains the personal guarantee of the business owner. As
compared to consumer lending, which includes loans secured by a single-family
residence, personal installment loans and automobile loans, commercial lending
entails significant additional risks. These loans typically involve larger loan
balances and are generally dependent on the business's cash flow and, thus, may
be subject to adverse conditions in the general economy or in a specific
industry. Management reviews the borrower's cash flows when deciding whether to
grant the credit to evaluate whether estimated future cash flows will be
adequate to service principal and interest of the new obligation in addition to
existing obligations.
Commercial real estate loans are primarily secured by borrower-occupied
business real estate and are dependent on the ability of the related business to
generate adequate cash flow to service the debt. Commercial real estate loans
are generally originated with a loan-to-value ratio of 80% or less. Management
performs much the same analysis when deciding whether to grant a commercial real
estate loan as a commercial loan.
Construction loans are secured by residential and business real estate,
generally occupied by the borrower on completion. The bank's construction
lending program is established in a manner to minimize risk of this type of
lending by not making a significant amount of loans on speculative projects.
The bank does not generally make the permanent loan at the end of the
construction phase. Construction loans also are generally made in amounts of 80%
or less of the value of collateral.
Although not a significant portion of the bank's portfolio, on occasion,
the bank originates short-term residential real estate loans and home equity
lines of credit which are secured by the borrower's residence. Such loans are
made based on the borrower's ability to make repayment from employment and other
income. Management assesses the borrower's ability to repay the debt through
review of credit history and ratings, verification of employment and other
income, review of debt-to-income ratios and other measures of repayment ability.
The bank generally makes these loans in amounts of 80% or less of the value of
collateral. An appraisal is obtained from a qualified real estate appraiser for
substantially all loans secured by real estate.
Consumer installment loans to individuals include loans secured by
automobiles and other consumer assets. Consumer loans for the purchase of new
automobiles generally do not exceed 80% of the sticker price of the car. Loans
for used cars generally do not exceed average loan value as stipulated in a
recent auto industry used car price guide. Overdraft protection loans are
unsecured personal lines of credit to individuals of demonstrated good credit
character with reasonably assured sources of income and satisfactory credit
histories. Consumer loans generally involve more risk than residential mortgage
loans because of the type and nature of collateral and, in certain types of
consumer loans, the absence of collateral. Since these loans are generally
repaid from ordinary income of an individual or family unit, repayment may be
adversely affected by job loss, divorce, ill health or by general decline in
economic conditions. The bank assesses the borrower's ability to make repayment
through a review of credit history, credit ratings, debt-to-income ratios and
other measures of repayment ability.
The following tables present the bank's loan balances at the dates
indicated separated by loan type:
34
<PAGE>
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
--------- ------------
(In thousands)
<S> <C> <C>
Commercial loans $ 10,624 $ 11,266
Installment loans 3,102 2,740
Real estate loans 8,963 7,981
Interim construction loans 21,685 15,896
--------- ------------
Gross loans 44,374 37,883
Less:
Deferred loan fees (228) (192)
Allowance for loan losses (474) (431)
--------- ------------
Net loans $ 43,672 $ 37,260
--------- ------------
</TABLE>
<TABLE>
<CAPTION>
December 31,
--------------------------------------
1999 1998 1997
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Commercial loans $11,266 $ 9,294 $ 4,684
Installment loans 2,740 1,929 1,600
Real estate loans 7,981 8,536 7,189
Interim construction loans 15,896 14,468 5,518
------- ------- -------
Gross loans 37,883 34,277 18,991
Less:
Deferred loan fees (192) (104) (100)
Allowance for loan losses (431) (405) (225)
------- ------- -------
Net loans $37,260 $33,718 $18,666
======= ======= =======
</TABLE>
Loan concentrations are considered to exist when there are amounts loaned
to a multiple number of borrowers engaged in similar activities that would cause
them to be similarly impacted by economic or other conditions. The bank had no
concentrations of loans at March 31, 2000, or December 31, 1999, except for
those categories of loans detailed in the above tables. The bank had no loans
outstanding to foreign countries or borrowers headquartered in foreign countries
at March 31, 2000 or December 31, 1999.
Management of the bank may renew loans at maturity when requested by a
customer whose financial strength appears to support such renewal or when such
renewal appears to be in the bank's best interest. The bank requires payment of
accrued interest in such instances and may adjust the rate of interest, require
a principal reduction or modify other terms of the loan at the time of renewal.
35
<PAGE>
The following tables present the distribution of the maturity of the bank's
loans and the interest rate sensitivity of those loans, excluding installment
loans, at March 31, 2000 and December 31, 1999. The tables also present the
portion of loans that have fixed interest rates or interest rates that fluctuate
over the life of the loans in accordance with changes in the interest rate
environment as represented by the prime rate.
<TABLE>
<CAPTION>
One to Over Total
One Year Five Five Carrying
and Less Years Years Value
-------- ------ ------ --------
(In thousands)
<S> <C> <C> <C> <C>
March 31, 2000
Commercial loans $ 9,195 $1,429 $ - $10,624
Real estate loans 4,761 3,843 359 8,963
Interim construction loans 21,685 - - 21,685
------- ------ ------ -------
Total loans $35,641 $5,272 $ 359 $41,272
======= ====== ====== =======
With fixed interest rates $26,443 $4,342 $ 359 $31,144
With variable interest rates 9,198 930 - 10,128
------- ------ ------ -------
Total loans $35,641 $5,272 $ 359 $41,272
======= ====== ====== =======
December 31, 1999
Commercial loans $ 8,652 $2,614 $ - $11,266
Real estate loans 1,141 4,147 2,693 7,981
Interim construction loans 15,896 - - 15,896
------- ------ ------ -------
Total loans $25,689 $6,761 $2,693 $35,143
======= ====== ====== =======
With fixed interest rates $15,661 $5,819 $2,693 $24,173
With variable interest rates 10,028 942 - 10,970
------- ------ ------ -------
Total loans $25,689 $6,761 $2,693 $35,143
======= ====== ====== =======
</TABLE>
Nonperforming Assets
Nonperforming loans consist of nonaccrual, past due and restructured loans.
A past due loan is an accruing loan that is contractually past due 90 days or
more as to principal or interest payments. Loans for which management does not
expect to collect interest in the normal course of business are placed on
nonaccrual or are restructured. When a loan is placed on nonaccrual, any
interest previously accrued but not yet collected is reversed against current
income unless, in the opinion of management, the outstanding interest remains
collectible. Thereafter, interest is included in income only to the extent of
cash received. A loan is restored to accrual status when all interest and
principal payments are current and the borrower has demonstrated to management
the ability to make payments of principal and interest as scheduled.
A "troubled debt restructuring" is a restructured loan upon which interest
accrues at a below market rate or upon which certain principal has been forgiven
so as to aid the borrower in the final repayment of the loan, with any interest
previously accrued, but not yet collected, being reversed against current
income. Interest is accrued based upon the new loan terms.
As of March 31, 2000 and December 31, 1999, 1998 and 1997, the bank had no
nonaccrual loans, accruing loans contractually past due over 90 days or
restructured loans. Additionally, at such dates, the bank had no investments in
repossessed real estate or other assets.
A potential problem loan is defined as a loan where information about
possible credit problems of the borrower is known, causing management to have
serious doubts as to the ability of the borrower to comply with the present loan
repayment terms and which may result in the inclusion of such loan in one of the
nonperforming asset categories. As of March 31, 2000 and December 31, 1999, the
bank does not believe it has any potential problem loans.
The bank maintains an internally classified loan list that helps management
assess the overall quality of the loan portfolio and the adequacy of the
allowance. Loans classified as "substandard" are those loans with clear and
defined weaknesses such as highly leveraged positions, unfavorable financial
ratios, uncertain repayment sources or poor financial condition, which may
jeopardize recoverability of the loan. Loans classified as "doubtful" are those
loans that have characteristics similar to substandard loans, but also have an
increased risk that a loss may occur or at least a portion of the loan may
require a charge-off if liquidated at present. Although loans classified as
substandard do not duplicate loans classified as doubtful, both substandard and
doubtful loans may include some loans that are past due at least 90 days, are on
nonaccrual status or have been restructured. Loans classified as "loss" are
those loans that are in the process of being
36
<PAGE>
charged off. There were no loans classified in these categories at March 31,
2000 or December 31, 1999.
Allowance for Loan Losses
Implicit in the bank's lending activities is the fact that loan losses will
be experienced and that the risk of loss will vary with the type of loan being
made and the creditworthiness of the borrower over the term of the loan. To
reflect the currently perceived risk of loss associated with the bank's loan
portfolio, additions are made to the bank's allowance for loan losses (the
"allowance"). The allowance is created by direct charges against income (the
"provision" for loan losses), and the allowance is available to absorb possible
loan losses. See "Results of Operations - Provision for Loan Losses" below.
The amount of the allowance equals the cumulative total of the provisions
made from time to time, reduced by loan charge-offs and increased by recoveries
of loans previously charged off. The bank's allowance was $474,000, or 1.07%, of
gross loans at March 31, 2000, compared to $431,000, or 1.14% of gross loans at
December 31, 1999 and $405,000, or 1.18% of gross loans, at December 31, 1998.
Credit and loan decisions are made by management and the Board of Directors
of the bank in conformity with loan policies established by the Board of
Directors of the bank. The bank's practice is to charge off any loan or portion
of a loan when the loan is determined by management to be uncollectible due to
the borrower's failure to meet repayment terms, the borrower's deteriorating or
deteriorated financial condition, the depreciation of the underlying collateral,
the loan's classification as a loss by regulatory examiners or for other
reasons. The bank charged off $2,000 in installment loans during the first
quarter of 2000 and $72,000 in commercial loans, during calendar year 1999,
respectively. No other charge-offs have been experienced by the bank since its
inception in 1997.
The following tables present the provisions for loan losses, loans charged
off and recoveries on loans previously charged off, the amount of the allowance,
the average loans outstanding and certain pertinent ratios for the quarters
ended March 31, 2000 and 1999, and for the last three years since inception.
<TABLE>
<CAPTION>
March 31,
------------------
2000 1999
------- ------
(Dollars in thousands)
<S> <C> <C>
Analysis of allowance for loan losses:
Beginning balance, January 1 $ 431 $ 405
Provision for loan losses 45 38
Loans charged off:
Commercial loans - (12)
Installment loans - -
Real estate loans - -
Interim construction loans (2) -
------- -------
Total charge-offs (2) (12)
------- -------
Recoveries of loans previously charged off:
Commercial loans - -
Installment loans - -
Real estate loans - -
Interim construction loans - -
------- -------
Total recoveries - -
------- -------
Net loans charge-offs (2) (12)
------- -------
Ending balance, March 31 $ 474 $ 431
======= =======
Average loans outstanding, net of deferred fees $41,409 $34,271
======= =======
Ratio of net loan charge-offs to average loans
outstanding, net of deferred fees (annualized) 0.02% 0.14%
======= =======
Ratio of allowance for loan losses to
gross loans at March 31 1.07% 0.99%
======= =======
</TABLE>
37
<PAGE>
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
Analysis of allowance for loan losses: (Dollars in thousands)
<S> <C> <C> <C>
Beginning balance, January 1 $ 405 $ 225 $ -
Provision for loan losses 98 180 225
Loans charged off:
Commercial loans (72) - -
Real estate loans - - -
Installment loans - - -
Interim construction loans - - -
------- ------- -------
Total charge-offs (72) - -
------- ------- -------
Recoveries of loans previously charged off:
Commercial loans - - -
Real estate loans - - -
Installment loans - - -
Interim construction loans - - -
------- ------- -------
Total recoveries - - -
------- ------- -------
Net loans charged off (72) - -
------- ------- -------
Ending balance, December 31 $ 431 $ 405 $ 225
======= ======= =======
Average loans outstanding, net of deferred fees $34,971 $27,362 $ 7,298
======= ======= =======
Ratio of net loan charge-offs to average loans,
net of deferred fees 0.21% N/A N/A
=======
Ratio of allowance for loan losses to gross loans
at December 31 1.14% 1.18% 1.18%
======= ======= =======
</TABLE>
The amount of the allowance is established by management based upon
estimated risks inherent in the existing loan portfolio. Management reviews the
loan portfolio on a continuing basis to evaluate potential problem loans. This
review encompasses management's estimate of current economic conditions and the
potential impact on various industries, prior loan loss experience and financial
conditions of individual borrowers. Loans that have been specifically identified
as problem or nonperforming loans are reviewed on at least a quarterly basis,
and management critically evaluates the prospect of the ultimate losses arising
from such loans, based on the borrower's financial condition and the value of
available collateral. When a risk can be specifically quantified for a loan,
that amount is specifically allocated in the allowance. In addition, the bank
allocates the allowance based upon the loan loss experience of the different
types of loans. Despite such allocation, both the allocated and unallocated
portions of the allowance are available for charge-offs of all loans.
The following tables show the allocations in the allowance and the
respective percentages of each loan category to total loans at March 31, 2000
and December 31, 1999 and at year-end for each of the past three years since
inception.
<TABLE>
<CAPTION>
March 31, 2000 December 31, 1999
-------------------------- --------------------------
Amount of Percent of Amount of Percent of
Allowance Loans by Allowance Loans by
Allocated to Category to Allocated to Category to
Category Gross Loans Category Gross Loans
------------ ------------ ------------ ------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Commercial loans $ 212 23.9% $ 225 29.7%
Installment loans 47 7.0 41 7.2
Real estate loans 90 20.2 80 21.1
Interim construction loans 108 48.9 79 42.0
------- ----- ------- -----
Total allocated 457 100.0% 425 100.0%
===== =====
Unallocated 17 6
------- -------
Total allowance for loan losses $ 474 $ 431
======= =======
</TABLE>
38
<PAGE>
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------------------------------
1999 1998 1997
-------------------------- -------------------------- --------------------------
Amount of Percent of Amount of Percent of Amount of Percent of
Allowance Loans by Allowance Loans by Allowance Loans by
Allocated to Category to Allocated to Category to Allocated to Category to
Category Gross Loans Category Gross Loans Category Gross Loans
------------ ------------ ------------ ------------ ------------ ------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Commercial loans $ 225 29.7% $ 186 27.1% $ 94 24.7
Installment loans 41 7.2 29 5.6 24 8.4
Real estate loans 80 21.1 85 24.9 72 37.9
Interim construction loans 79 42.0 72 42.4 28 29.0
-------- ----- -------- ----- -------- -----
Total allocated 425 100.0% 372 100.0% 218 100.0%
===== ===== =====
Unallocated 6 33 7
-------- -------- --------
Total allowance for possible
loan losses $ 431 $ 405 $ 225
======== ======== ========
</TABLE>
Premises and Equipment
Premises and equipment increased $143,000, or 5.8%, during the first
quarter of 2000, from $2,479,000 at December 31, 1999 to $2,622,000 at March 31,
2000, and increased $695,000, or 39.0%, from $1,784,000 at December 31, 1998 to
$2,479,000 at December 31, 1999. The increase during the first quarter of 2000
was related to leasehold improvements and additional furniture and equipment
purchased in connection with the opening of a new branch in the Park Cities area
of Dallas, Texas. The increase in 1999 over 1998 was due to a $694,000 purchase
of land for a potential future branch location in Allen, Texas.
Deposits
Deposits are attracted principally from within the bank's primary market
area through the offering of a broad selection of deposit instruments, including
checking accounts, money market accounts, regular savings accounts, term
certificate accounts and individual retirement accounts. Interest rates paid,
maturity terms, service fees and withdrawal penalties for the various types of
accounts are established periodically by management based on the bank's
liquidity requirements, growth goals and interest rates paid by competitors. The
bank does not use brokers to attract deposits.
Total deposits increased $15,795,000, or 40.0%, from $39,503,000 at
December 31, 1999, to $55,298,000 at March 31, 2000. The increase in deposits
was primarily in certificates of deposit, which increased $12,226,000, or 58.9%,
from $20,748,000 at December 31, 1999 to $32,974,000 at March 31, 2000. The
increase in certificates of deposit was the result of special interest rate
promotions offered by the bank to attract such deposits. The bank also
experienced a $2,918,000, or 29.6%, increase in noninterest-bearing demand
deposits over the quarter as result of additional deposits received from new
loan customers and normal bank growth. Total deposits increased $188,000, or
0.48%, from $39,315,000 at December 31, 1998, to $39,503,000 at December 31,
1999. Despite little increase in total deposits in 1999, the bank experienced a
slight shift in the mix of the portfolio as noninterest-bearing demand deposits
increased from 18.4% of total deposits at December 31, 1998 to 25.0% of total
deposits at December 31, 1999, while certificates of deposit decreased from
58.6% of total deposits at December 31, 1998 to 52.5% of total deposits at
December 31, 1999. Fluctuations in other categories of deposits were not
significant.
The following tables present the average amounts of, and the average rates
paid on, deposits of the bank for the quarters ended March 31, 2000 and 1999 and
for each of the last three years since inception:
<TABLE>
<CAPTION>
Quarter Ended March 31,
-----------------------------------
2000 1999
---------------- ----------------
Average Average Average Average
Amount Rate Amount Rate
------- ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Noninterest-bearing demand deposits $10,485 N/A $ 6,418 N/A
Interest-bearing demand, savings and
money market deposits 8,588 3.68% 9,028 3.94%
Time deposits of less than $100,000 16,986 5.53 14,678 5.37
Time deposits of $100,000 or more 11,091 5.51 7,916 5.20
------- -------
Total deposits $47,150 3.95% $38,040 4.09%
======= =======
</TABLE>
39
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------
1999 1998 1997
---------------- ---------------- ----------------
Average Average Average Average Average Average
Amount Rate Amount Rate Amount Rate
------- ------- ------- ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing
demand deposits $ 8,007 N/A $ 5,073 N/A $ 1,745 N/A
Interest-bearing demand,
savings and money
market deposits 9,623 3.84% 6,786 4.11% 3,257 4.24%
Time deposits of less
than $100,000 13,938 5.26 11,774 5.71 2,493 5.78
Time deposits of $100,000
or more 8,195 5.13 5,835 5.64 2,414 5.59
------- ------- -------
Total deposits $39,763 3.83% $29,468 4.34 $ 9,909 4.21%
======= ======= =======
</TABLE>
The maturity distribution of time deposits of $100,000 or more at March 31,
2000 and December 31, 1999, is presented below.
<TABLE>
<CAPTION>
At March 31, 2000 December 31, 1999
------------------ ------------------
(In thousands) (In thousands)
<S> <C> <C>
3 months or less $ 2,815 $ 1,448
Over 3 through 6 months 6,532 4,324
Over 6 through 12 months 3,172 1,942
Over 12 months 630 634
-------------- ------------
Total time deposits of $100,000 or more $ 13,149 $ 8,348
============== ============
</TABLE>
Time deposits of $100,000 or more are a more volatile and costly source of
funds than other deposits and are most likely to affect the bank's future
earnings because of interest rate sensitivity. At March 31, 2000 and December
31, 1999 and 1998, deposits of $100,000 or more totaled 23.8%, 21.1% and 21.1%,
of the bank's total deposits.
Results of Operations
Net Income
General economic conditions, the monetary and fiscal policies of federal
agencies and the regulatory policies of agencies that regulate financial
institutions affect the operating results of the bank. Interest rates on
competing investments and general market rates of interest influence the bank's
cost of funds. Lending activities are influenced by the demand for various
types of loans, which in turn is affected by the interest rates at which such
loans are made, general economic conditions and the availability of funds for
lending activities.
The bank's net income is primarily dependent upon its net interest income,
which is the difference between interest income generated on interest-earning
assets and interest expense incurred on interest-bearing liabilities.
Provisions for loan losses, service charges, gains on the sale of assets and
other income, noninterest expense and income taxes also affect net income.
Net income for the quarter ended March 31, 2000, amounted to $109,000
($0.19 basic and diluted earnings per common share) compared to net income of
$128,000 ($0.22 basic and diluted earnings per common share, respectively) for
the quarter ended March 31, 1999. Despite an increase in net income before tax
resulting from an increase in net interest income, net income decreased in 2000
primarily due to the recognition of income tax expense.
Net income for the year ended December 31, 1999, amounted to $529,000 ($0.92
basic and diluted earnings per common share) compared to net income of $477,000
($0.83 basic and diluted earnings per common share) for the year ended December
31, 1998, and compared to a net loss of $568,000 ($0.99 basic and diluted loss
per common share) for the year ended December 31, 1997. Net income for 1998
increased over 1997 due to an increase in interest income resulting from an
increased volume of loans. Net income in 1999 increased over 1998 due to
similar reasons.
Two key measures of performance within the banking industry are return on
average assets and return on average stockholders' equity. Return on average
assets ("ROA") measures net income in relation to average total assets and
indicates a company's ability to employ
40
<PAGE>
its resources profitably. The bank's ROA was 1.16% for 1999 compared to 1.38%
for 1998 and (4.02)% for 1997.
Return on average stockholders' equity ("ROE") is determined by dividing
net income by average stockholders' equity and indicates how effectively a
company can generate net income on the capital invested by its stockholders.
During 1999, the bank's ROE was 9.74%, compared to 9.82% for 1998 and (13.58)%
for 1997.
Net Interest Income
Net interest income is the largest component of the bank's income and is
affected by the interest rate environment and the volume and composition of
interest-earning assets and interest-bearing liabilities.
The general market rates of interest, including the deposit and loan rates
offered by many financial institutions, are influenced by the FRB through
adjustments to the discount rate. The discount rate is the interest rate at
which member institutions can borrow funds from the Federal Reserve if
necessary. The discount rate began 1997 at 5.00% and remained stable until the
fourth quarter of 1998 when the rate was decreased in two separate adjustments
of 25 basis points each. In 1999, the discount rate was increased by 25 basis
points in the third quarter and again in the fourth quarter to end the year at
5.00%. During the first quarter of 2000, the discount rate was increased 50
basis points to end the quarter at 5.50%. Over the same period, the bank's
prime interest rate, the rate offered on loans to borrowers with strong credit,
adjusted in a similar pattern. The prime rate began 1997 at 8.50% and remained
stable until the end of the third quarter of 1998 when the rate was decreased 25
basis points. The rate later decreased an additional 50 basis points during the
fourth quarter of 1998 and remained stable until the third quarter of 1999. In
1999, the prime rate increased 50 basis points in the third quarter and 25 basis
points in the fourth quarter to end the year at 8.50%. During the first quarter
of 2000, the prime rate increased 50 basis points to end the quarter at 9.00%.
As of March 31, 2000 and December 31, 1999 and 1998, the bank was in a
slightly positive gap position, or asset sensitive, on a one-year time horizon.
The "gap" is the difference between the repricing of interest-earning assets and
interest-bearing liabilities within certain time periods. Accordingly, the
bank's interest-earning assets will generally reprice more quickly than its
interest-bearing liabilities. Therefore, the bank's net interest margin is
likely to increase in periods of rising interest rates in the market and
decrease in periods of falling interest rates. Further analysis of the bank's
net interest margin is provided below. Also see discussion under the heading
"Asset and Liability Management and Quantitative and Qualitative Disclosures
About Market Risk" below.
Net interest income totaled $719,000 for the first quarter of 2000, an
increase of $175,000, or 32.2%, from the first quarter of 1999. The increase in
2000 was primarily due to an increase in the average volume of loans combined
with an increase in the average yield earned on such investments compared to the
prior year. The average yield earned on loans increased from 10.08% for the
first quarter of 1999 to 10.52%% for the first quarter of 2000. Similarly, the
net interest margin, which is calculated by dividing net interest income by
average interest-earning assets, increased from 5.44% to 5.99% over the
comparable periods.
Net interest income totaled $2,372,000 for 1999, increasing $488,000, or
25.9%, from 1998. Net interest income for 1998 was $1,884,000, increasing
$1,215,000, or 181.6%, from 1997. The increases over the comparable periods were
primarily due to an increase in the average volume of loans partly offset by a
decrease in the average yield earned on such investments. The average yield
earned on loans decreased from 10.94% in 1997 to 10.73% in 1998 and 10.23% in
1999. Despite the 50 basis point decrease in the yield on loans in 1999, the net
interest margin decreased only 19 basis points from 5.94% in 1998 to 5.81% in
1999. The impact on net interest income resulting from the decrease in the
average yield earned on loans was partly offset by a 45 basis point decrease in
the average rate paid on deposits. The average rate paid on deposits totaled
4.80% in 1999, 5.25% in 1998 and 5.11% in 1997. The net interest margin
increased 57 basis points from 5.37% in 1997 to 5.94% in 1998. In 1998, the
bank had a larger proportion of average interest-earning assets invested in
higher yielding loans compared to 1997. As such, the bank's average yield on
interest-earning assets increased from 8.72% in 1997 to 9.98% in 1998 despite a
20 basis point decrease in the average yield earned on loans. The increase in
the average yield earned on interest-earning assets offset the impact of a 14
basis point increase in the average rate paid on deposits and resulted in an
increased net interest margin for 1998.
The following tables set forth information relating to the bank's average
balance sheet and reflects the average yield on interest-earning assets and the
average cost of
41
<PAGE>
interest-bearing liabilities for the periods indicated. Such yields and costs
are derived by dividing income or expense by the average balance of interest-
earning assets or interest-bearing liabilities, for the periods presented.
Average balances are derived from daily balances, which include nonaccruing
loans in the loan portfolio.
<TABLE>
<CAPTION>
Quarter Ended March 31,
--------------------------------------------------------------
2000 1999
------------------------------ -----------------------------
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
------- -------- ---------- ---------- -------- ------
ASSETS (Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans, net (1) $41,409 $1,089 10.52% $ 34,271 $ 864 10.08%
Securities (2) 852 13 6.10 259 4 6.18
Federal funds sold 5,714 83 5.81 5,476 65 4.75
------- ------ ---------- --------
Total interest-earning assets 47,975 1,185 9.88 40,006 933 9.33
------- ------ ---------- --------
Noninterest-earning assets:
Cash and due from banks 2,459 1,394
Premises and equipment 2,555 1,776
Other assets 565 562
Allowance for loan losses (450) (419)
------- ----------
Total noninterest-earning
assets 5,129 3,313
------- ----------
Total assets $53,104 $ 43,319
======= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
NOW, savings and money
market deposits $ 8,588 $ 78 3.63 $ 9,028 $ 89 3.94
Time deposits 28,077 388 5.53 22,594 300 5.31
------- ------ ---------- -------- ------
Total interest-bearing
liabilities 36,665 466 5.08 31,622 389 4.92
------- ------ ---------- ---------- -------- ------
Noninterest-bearing liabilities:
Demand deposits 10,485 6,418
Other liabilities 157 181
------- ----------
Total noninterest-bearing
liabilities 11,002 6,599
------- ----------
Total liabilities 47,307 38,221
Stockholders' equity 5,797 5,098
------- ----------
Total liabilities and
stockholders' equity $53,104 $ 43,319
======= ==========
Average cost of all deposits 3.95% 4.09%
========== ======
Net interest income $ 719 $ 544
====== ========
Interest rate spread (3) 4.80% 4.41%
========== ======
Net interest margin (4) 5.99% 5.44%
========== ======
</TABLE>
___________________________________________
(1) Calculated net of deferred loan fees.
(2) Average balance includes unrealized gains and losses on available for sale
securities while yield is based on amortized cost.
(3) The interest rate spread is the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(4) The net interest margin is equal to net interest income divided by average
interest-earning assets.
42
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------------------------------
1999 1998 1997(1)
--------------------------- --------------------------- ------------------------------
Interest Interest Interest
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
-------- -------- ------- --------- ------- ------- --------- ---------- -------
ASSETS (Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans, net (2) $34,971 $3,576 10.23% $27,362 $2,936 10.73% $ 7,298 $ 798 10.93%
Securities (3) 456 28 6.14 343 19 5.54 896 53 5.92
Federal funds sold 5,837 291 4.99 3,989 209 5.24 4,255 235 5.52
------- ------ -------- ------- -------- -------
Total interest-earning assets 41,264 3,895 9.44 31,694 3,164 9.98 12,449 1,086 8.72
------- ------ -------- ------- -------- -------
Noninterest-earning assets:
Cash and due from banks 1,822 1,026 489
Premises and equipment, net 2,183 1,748 1,098
Other assets 579 332 141
Allowance for loan losses (425) (314) (53)
------- -------- --------
Total noninterest-
earning assets 4,159 2,792 1,675
------- -------- --------
Total assets $45,423 $34,486 $14,124
======= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Demand, savings and money
market deposits $ 9,623 $ 370 3.84% $ 6,786 $ 279 4.11% $ 3,257 $ 138 4.24%
Time deposits 22,133 1,153 5.21 17,609 1,001 5.68 4,907 279 5.69
------- ------ -------- ------- -------- -------
Total interest-
bearing deposits 31,756 1,523 4.80 24,395 1,280 5.25 8,164 417 5.11
----- ------ ------
Noninterest-bearing liabilities:
Demand deposits 8,007 5,073 1,745
Other liabilities 231 163 32
------- -------- --------
Total noninterest-
bearing liabilities 8,238 5,236 1,777
------- -------- --------
Total liabilities 39,994 29,631 9,941
Stockholders' equity 5,429 4,855 4,183
------- -------- --------
Total liabilities
and stockholders'
equity $45,423 $34,486 $14,124
======= ======== ========
Average cost of all deposits 3.83% 4.34% 4.21%
===== ====== ======
Net interest income $2,372 $1,884 $ 669
====== ======= =======
Interest rate spread (4) 4.64% 4.73% 3.61%
===== ====== ======
Net interest margin (5) 5.75% 5.94% 5.37%
===== ====== ======
</TABLE>
____________________________
(1) 1997 includes the period from February 28, 1997 (Inception) through
December 31, 1997.
(2) Calculated net of deferred loan fees.
(3) Average balance includes unrealized gains and losses on available for sale
securities while yield is based on amortized cost.
(4) The interest rate spread is the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(5) The net interest margin is equal to net interest income divided by average
interest-earning assets.
43
<PAGE>
The following tables present the changes in the components of net interest
income and identifies the part of each change due to differences in the average
volume of interest-earning assets and interest-bearing liabilities and the part
of each change due to the average rate on those assets and liabilities. The
changes in interest due to both volume and rate in the tables have been
allocated to volume or rate change in proportion to the absolute amounts of the
change in each.
<TABLE>
<CAPTION>
March 31, 2000 vs 1999
------------------------------
Increase (Decrease) Due To
Changes In
------------------------------
Volume Rate Total
-------- ------ -------
(In thousands)
<S> <C> <C> <C>
Interest-earning assets:
Loans, net $ 186 $ 39 $ 225
Securities 10 (1) 9
Federal funds sold 12 6 18
------ ----- ------
Total interest income 208 44 252
------ ----- ------
Interest-bearing liabilities:
Deposits:
NOW, savings and money market deposits (9) (2) (11)
Time deposits 73 15 88
------ ----- ------
Total interest expense 64 13 77
------ ----- ------
Net interest income $ 144 $ 31 $ 175
====== ===== ======
</TABLE>
<TABLE>
<CAPTION>
1999 vs 1998 1998 vs 1997
-------------------------- --------------------------
Increase (Decrease) Due To Increase (Decrease) Due To
Changes In: Changes In:
-------------------------- --------------------------
Volume Rate Total Volume Rate Total
------ ------ ------- ------ ------ -------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans, net of unearned
income $ 777 $ (137) $ 640 $2,185 $ (47) $ 2,138
Securities 7 2 9 (32) (2) (34)
Federal funds sold 91 (9) 82 (14) (12) (26)
------ ------ ------ ------ ------ -------
Total interest income 875 (144) 731 2,139 (61) 2,078
------ ------ ------ ------ ------ -------
Interest-bearing liabilities:
Deposits:
NOW, savings and money
market deposits 110 (19) 91 145 (4) 141
Time deposits 241 (89) 152 722 - 722
------ ------ ------ ------ ------ -------
Total interest expense 351 (108) 243 867 (4) 863
------ ------ ------ ------ ------ -------
Net interest income $ 524 $ (36) $ 488 $1,272 $ (57) $ 1,215
====== ====== ====== ====== ====== =======
</TABLE>
44
<PAGE>
Provision for Loan Losses
The provision for loan losses is determined by management as the amount to
be added to the allowance for loan losses after net charge-offs have been
deducted to bring the allowance to a level which is considered adequate to
absorb losses inherent in the loan portfolio. The amount of the provision is
based on management's review of the loan portfolio and consideration of such
factors as historical loss experience, general prevailing economic conditions,
changes in the size and composition of the loan portfolio and specific borrower
considerations, including the ability of the borrower to repay the loan and the
estimated value of the underlying collateral.
The provision for loan losses for the quarter ended March 31, 2000 was
$45,000 compared to $38,000 for the quarter ended March 31, 1999. The provision
for loan losses for the year ended December 31, 1999, was $98,000 compared to
$180,000 in 1998 and $225,000 in 1997. The bank experienced charge-offs of
$2,000, which were related to installment loans, during the first quarter of
2000 and $12,000, which were related to commercial loans, during the first
quarter of 1999. Total charge-offs for 1999 were $72,000, all of which were
related to commercial loans, while there were no charge-offs experienced in 1998
or 1997. The amount of the provision for loan losses over the comparable periods
has declined based on the low levels of charge-offs experienced. Notwithstanding
the low level of charge-offs, management believes it is prudent to continue
increasing the allowance for loan losses as total loans, particularly higher
risk interim construction and commercial loans, increase. Accordingly,
management anticipates it will continue its provisions to the allowance for loan
losses at current levels for the near future, providing volume of nonperforming
loans remains insignificant.
Noninterest Income
Total noninterest income increased $29,000, or 76.3%, from $38,000 during
the first quarter of 1999 to $67,000 during the first quarter of 2000 and
increased $107,000, or 88.4%, from $121,000 in 1998 to $228,000 in 1999. The
amount for 1998 increased $84,000, or 227.0%, from $37,000 in 1997. The
increases were primarily the result of increases in services charges on deposit
accounts due to the overall growth total deposits over the comparable periods.
Noninterest Expenses
Total noninterest expenses increased $157,000, or 37.7%, from $416,000
during the first quarter of 1999 to $573,000 during the first quarter of 2000
and increased $297,000, or 19.6%, from $1,512,000 in 1998 to $1,809,000 in 1999.
Total noninterest expense increased $463,000, or 44.1%, from $1,049,000 in 1997
to $1,512,000 in 1998. Significant changes in the various components of
noninterest expense are discussed below. As discussed above, financial
information for 1997 includes period from February 28, 1997 (Inception) through
December 31, 1999.
Salaries and employee benefits totaled $235,000 for the first quarter of
1999 compared to $298,000 for the corresponding period of 2000 and $988,000
during the year ended December 31, 1999 compared to $815,000 and $527,000 in
1998 and 1997. The increase in salaries and employee benefits over the
comparable periods is the result of the addition of staff due to growth in the
bank and normal, annual merit increases.
Occupancy expense totaled $79,000 for the first quarter of 2000 compared to
$47,000 during the same period in 1999 and $212,000 during the year ended
December 31, 1999 compared to $195,000 in 1998 and $127,000 in 1997. The
increase in 1999 compared to 1998 resulted from increases in normal costs
associated with operating bank's main facility. The increase in 1998 compared to
1997 is the result of the recognition of a full year expense in 1998.
Other noninterest expense totaled $178,000 for the first quarter of 2000
compared to $126,000 for the first quarter of 1999 and $561,000 during the year
ended December 31, 1999 compared to $455,000 in 1998 and $369,000 in 1997.
Other noninterest expense includes supplies, telephone, data processing,
collection and advertising expenses, as well as directors fees and franchise
taxes, among other things. Increases in these types of expenses over the
comparable periods is consistent with the overall growth in the bank. No single
category of other noninterest expense makes up a significant portion of the
increases over the comparable periods.
45
<PAGE>
Federal Income Taxes
The change in income tax expense/(benefit) is primarily attributable to the
change in income/(loss) before income taxes. The provision for income taxes
totaled $59,000, for an effective rate of 35.1%, during the first quarter of
2000 while no provision for income taxes was recognized during the first quarter
of 1999. The provision for income taxes totaled $164,000, for an effective rate
of 23.7%, in 1999 and $(164,000), for an effective rate of (52.4)%, in 1998,
while no provision for income tax was recognized in 1997.
Asset and Liability Management and Quantitative and Qualitative Disclosures
About Market Risk
The bank's primary market risk exposure is interest rate risk and, to a
lesser extent, liquidity risk. Interest rate risk is the risk that the bank's
financial condition will be adversely affected due to movements in interest
rates. The income of financial institutions is primarily derived from the excess
of interest earned on interest-earning assets over the interest paid on
interest-bearing liabilities. Accordingly, the bank places great importance on
monitoring and controlling interest rate risk.
There are several methods employed by the bank to monitor and control
interest rate risk. One such method is using a gap analysis. As discussed above
in management's analysis of net interest income, the gap is defined as the
repricing variance between rate sensitive assets and rate sensitive liabilities
within certain periods. The repricing can occur due to changes in rates on
variable rate products as well as maturities of interest-earning assets and
interest-bearing liabilities. A high ratio of interest sensitive assets,
generally referred to as a positive gap, tends to benefit net interest income
during periods of rising interest rates as the average rate earned on interest-
earning assets rises faster than the average rate paid on interest-bearing
liabilities. The opposite holds true during periods of falling interest rates.
The bank attempts to minimize the interest rate risk through management of the
gap in order to achieve consistent return. As of March 31, 2000 and December 31,
1999, the bank's ratio of rate sensitive assets to rate sensitive liabilities
was 165.41% and 189.56% on a one-year time horizon. One strategy used by the
bank in gap management is to originate variable rate loans tied to market
indices. Such loans reprice on an annual, quarterly, monthly or daily basis as
the underlying market indices change. Additionally, all of the bank's fixed-rate
interim construction loans are originated with original maturities of twelve
months or less. The bank also invests excess funds in liquid federal funds that
mature and reprice on a daily basis.
In addition to the gap analysis, management measures the bank's interest
rate risk by computing estimated changes in net interest income and the "net
portfolio value" ("NPV") of its cash flows from assets, liabilities and off-
balance sheet items in the event of a range of assumed changes in market
interest rates. The bank's senior management and the Board of Directors review
the exposure to interest rates at least quarterly. Exposure to interest rate
risk is measured with the use of an interest rate sensitivity analysis to
determine the change in NPV in the event of hypothetical changes in interest
rates, while the gap analysis is used to determine the repricing characteristics
of assets and liabilities.
NPV represents the market value of portfolio equity and is equal to the
market value of assets minus the market value of liabilities, with adjustments
made for off-balance sheet items. The application of the methodology attempts to
quantify interest rate risk as the change in the NPV that would result from
theoretical 100, 200 and 300 basis point (1 basis point equals 0.01%) changes in
market interest rates. Both increases and decreases in market interest rates are
considered.
The following tables present, as of March 31, 2000 and December 31, 1999
and 1998, an analysis of the bank's interest rate risk as measured by changes in
NPV for instantaneous and sustained parallel shifts of 100, 200 and 300 basis
points in market interest rates.
46
<PAGE>
<TABLE>
<CAPTION>
March 31, 2000
----------------------------
Change in $ Amount % Change
Interest Rate of in
------------- -------- --------
NPV NPV
-------- --------
(Dollars in thousands)
<S> <C> <C>
+ 300 bp $6,157 5.72%
+ 200 bp 6,045 3.79
+ 100 bp 5,948 2.13
Base 5,824 --
- 100 bp 5,700 (2.13)
- 200 bp 5,568 (4.40)
- 300 bp 5,437 (6.64)
</TABLE>
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
-------------------------- --------------------------
Change in $ Amount % Change $ Amount % Change
Interest Rate of NPV in NPV of NPV in NPV
------------- -------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
+ 300 bp $5,958 4.25% $5,247 1.18%
+ 200 bp 5,875 2.80 5,227 0.79
+ 100 bp 5,795 1.40 5,207 0.40
Base 5,715 -- 5,186 --
- 100 bp 5,628 (1.52) 5,166 (0.39)
- 200 bp 5,532 (3.20) 5,146 (0.77)
- 300 bp 5,435 (4.90) 5,125 (1.18)
</TABLE>
As illustrated in the above tables, the bank's NPV improves in periods
rising rates due to the bank's positive gap position. This is principally
because, as interest rates rise, the bank is able to reinvest a larger
proportion of its interest-earning assets at higher rates more quickly than it
would be forced to increase its rates paid on deposits, particularly longer-term
fixed-rate certificates of deposit.. Thus, in a rising interest rate
environment, the amount of interest the bank would receive on its loans would
increase relatively quickly as variable-rate loans adjust upward and short-term
fixed-rate loans mature and new loans at higher rates are made.
Computations of prospective effects of hypothetical interest rate changes
are based on numerous assumptions, including relative levels of market interest
rates, loan prepayments and deposit decay rates, and should not be relied upon
as indicative of actual results. Further, the computations do not contemplate
any actions the bank may undertake in response to changes in interest rates.
As with any method of measuring interest rate risk, certain shortcomings
are inherent in the NPV approach. For example, although certain assets and
liabilities may have similar maturities or periods of repricing, they may react
in different degrees to changes in market interest rates. Also, the interest
rates on certain types of assets and liabilities may fluctuate in advance of
changes in market interest rates, while interest rates on other types may lag
behind changes in market rates. Further, in the event of a change in interest
rates, expected rates of prepayment on loans and early withdrawal levels from
certificates of deposit would likely deviate significantly from those assumed in
making risk calculations.
47
<PAGE>
Selected Financial Ratios
-------------------------
The following table presents selected financial ratios for the quarters
ended March 31, 2000 (annualized) and 1999 and for each of the last three fiscal
years since inception:
<TABLE>
<CAPTION>
Quarter Ended
March 31, Year Ended December 31,
------------------ ---------------------------------
2000 1999 1999 1998 1997
------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C>
Net income to:
Average assets 0.82% 1.18% 1.16% 1.38% (4.02)%
Average interest-earning assets 0.91 1.28 1.28 1.52 (4.56)
Average stockholders' equity 7.52 10.04 9.74 9.82 (13.58)
Dividend payout to:
Net income -- -- -- -- --
Average stockholders' equity -- -- -- -- --
Average stockholders' equity to:
Average total assets 10.92 11.77 11.95 14.08 29.62
Average loans (1) 14.00 14.88 15.52 17.74 57.32
Average total deposits 12.29 13.40 13.65 16.48 42.21
Average interest-earning assets to:
Average total assets 90.34 92.35 90.84 91.90 88.14
Average total deposits 101.75 105.17 103.77 107.55 125.63
Average total liabilities 101.41 104.67 103.18 106.96 125.23
Ratio to total average deposits of:
Average loans (1) 87.82 90.09 87.95 92.85 73.65
Average noninterest-bearing deposits 22.24 16.87 20.14 17.22 17.61
Average interest-bearing deposits 77.76 83.13 79.86 82.78 82.39
Total interest expense to total interest income 39.32 41.69 39.10 40.46 38.40
Efficiency ratio (2) 72.90 71.48 69.58 75.41 148.58
</TABLE>
-------------------------
(1) Before allowance for loan losses.
(2) Calculated as noninterest expense divided by the sum of net interest income
before provision for loan losses and total noninterest income, excluding
securities gains and losses.
Liquidity
Liquidity is the ability of the bank to fund customers' needs for borrowing
and deposit withdrawals. The purpose of liquidity management is to assure
sufficient cash flow to meet all of the financial commitments and to capitalize
on opportunities for business expansion. This ability depends on the
institution's financial strength, asset quality and types of deposit and
investment instruments offered by the bank to its customers. The bank's
principal sources of funds are deposits, loan and securities repayments, and
other funds provided by operations. The bank also has the ability to borrow
from the Federal Home Loan bank (FHLB). While scheduled loan repayments and
maturing investments are relatively predictable, deposit flows and early loan
prepayments are more influenced by interest rates, general economic conditions
and competition. The bank maintains investments in liquid assets based upon
management's assessment of (1) need for funds, (2) expected deposit flows, (3)
yields available on short-term liquid assets and (4) objectives of the
asset/liability management program.
Cash and cash equivalents totaled $13,395,000, or 21.8% of total assets, at
March 31, 2000 compared to $4,017,000, or 8.86% of total assets, at December 31,
1999 and $8,094,000, or 18.1% of total assets, at December 31, 1998. The bank
has the ability to borrow funds from the FHLB and has various federal fund
sources from correspondent banks, should the bank need to supplement its future
liquidity needs in order to meet deposit flows, loan demand or to fund
investment opportunities. Management believes the bank's liquidity position is
strong based on its high level of cash, cash equivalents, core deposits, the
stability of its other funding sources and the support provided by its capital
base.
As summarized in the Statements of Cash Flows, the most significant
transactions which affected the bank's level of cash and cash equivalents, cash
flows and liquidity during the first quarter of 2000 were the net increase in
loans of $6,457,000 and the net increase in deposits of $15,795,000. The most
significant transactions which affected the bank's level of cash and cash
equivalents, cash flows and liquidity during the year ended December 31, 1999
were the net increase in loans of $3,640,000, securities purchases of $595,000
and capital expenditures of $787,000.
48
<PAGE>
Capital Resources
At March 31, 2000, stockholders' equity totaled $5,824,000, or 9.5% of
total assets, compared to $5,715,000, or 12.6% of total assets, at December 31,
1999 and $5,186,000, or 11.6% of total assets, at December 31, 1998. The
increases in stockholders' equity are the result of earnings retained. Since its
inception in 1997, the bank has not paid any dividends.
The bank is subject to regulatory capital requirements administered by
federal banking agencies. bank regulators monitor capital adequacy very closely
and consider it an important factor in ensuring the safety of depositors'
accounts. As a result, bank regulators have established standard risk based
capital ratios that measure the amount of an institutions capital in relation to
the degree of risk contained in the balance sheet, as well as off-balance sheet
exposure. Federal law requires each federal banking regulatory agency to take
prompt corrective action to resolve problems of insured depository institutions
including, but not limited to, those that fall below one or more prescribed
capital ratios. According to the regulations, institutions whose Tier 1 and
total capital ratios meet or exceed 6.0% and 10.0% of risk-weighted assets,
respectively, are considered "well capitalized." Institutions whose Tier 1 and
total capital ratios meet or exceed 4.0% and 8.0% of risk-weighted assets,
respectively, are considered "adequately capitalized." Tier 1 capital is
shareholders' equity excluding the unrealized gain or loss securities classified
as available for sale and intangible assets. Tier 2 capital, or total capital,
includes Tier 1 capital plus the allowance for loan losses not to exceed 1.25%
of risk weighted assets. Risk weighted assets are the bank's total assets after
such assets are assessed for risk and assigned a weighting factor based on their
inherent risk. In addition to the risk-weighted ratios, all institutions are
required to maintain Tier 1 leverage ratios of at least 5.0% to be considered
"well capitalized" and 4.0% to be considered "adequately capitalized." The
leverage ratio is defined as Tier 1 capital divided by adjusted average assets
for the most recent quarter.
The tables below set forth the bank's actual capital levels in addition to
the capital requirements under the prompt corrective action regulations as of
March 31, 2000 and December 31, 1999.
<TABLE>
<CAPTION>
March 31, 2000 December 31, 1999
-------------- -----------------
(Dollars in thousands)
<S> <C> <C>
Tier 1 capital:
Common stockholders' equity, excluding unrealized
loss on available-for-sale securities $ 5,824 $ 5,715
Intangible assets - -
------- -------
Total Tier 1 capital 5,824 5,715
------- -------
Tier 2 capital:
Allowance for loan losses -limited to 1.25% of
risk-weighted assets 474 419
------- -------
Total Tier 2 capital 474 419
------- -------
Total capital $ 6,298 $ 6,134
======= =======
Risk-weighted assets $38,810 $33,503
======= =======
Adjusted quarterly average assets $53,104 $47,421
======= =======
</TABLE>
49
<PAGE>
<TABLE>
<CAPTION>
Regulatory Well-capitalized Actual
Minimum Minimum Ratio
----------- ---------------- ------
<S> <C> <C> <C>
March 31, 2000
--------------
Tier 1 capital to risk-weighted assets ratio 4.00% 6.00% 15.01%
Total capital to risk-weighted assets ratio 8.00 10.00 16.23
Leverage ratio 4.00 5.00 10.97
December 31, 1999
-----------------
Tier 1 capital to risk-weighted assets ratio 4.00 6.00 17.06
Total capital to risk-weighted assets ratio 8.00 10.00 18.31
Leverage ratio 4.00 5.00 12.05
</TABLE>
As of March 31, 2000 and December 31, 1999 the bank met the level of
capital required to be categorized as well capitalized under prompt corrective
action regulations. Management is not aware of any conditions subsequent to
March 31, 2000 and December 31, 1999 that would change the bank's capital
category.
On May 31, 2000, the bank entered into a "Stock Transfer and Branch Sale
Agreement" (the "Agreement") with ENB Bankshares, Inc. and certain Directors of
the bank. The Directors, Randy L. Pack, Jon Roy Reid, John M. Yeaman and Thomas
R. Youngblood (collectively referred to as the "Selling Directors"), may be
joined by other shareholders who sign a counterpart of the Agreement. ENB
Bankshares, Inc. is a Texas corporation located in Dallas, Texas formed for the
purpose of becoming a registered bank holding company through the acquisition of
100% of the voting common stock of the bank.
The Agreement provides for the following two transactions:
. The sale of bank stock owned by the Selling Directors and other
shareholders who sign a counterpart of the Agreement to the holding
company for $15.00 per share cash. The selling directors collectively
own 69,000 shares of bank stock. The Selling Directors are also aware
of other shareholders (the "Selling Shareholders") of the bank who may
desire to sell their shares of bank stock to ENB Bankshares.
. The sale by the bank of its Park Cities branch to a new bank
established by the Selling Directors in a purchase and assumption
transaction in which the new bank will pay a purchase premium of
$500,000 plus the organization expenses and operating losses
associated with the Park Cities branch. The bank began operations of
the Park Cities branch on March 27, 2000. The Park Cities branch is a
full-service branch facility located at 6829 Hillcrest, Dallas, Texas
75205.
ENB Bankshares and the bank have entered into an Agreement and Plan of
Reorganization (the "Reorganization Plan"). As a result of the reorganization,
the bank will become a wholly owned subsidiary of ENB Bankshares. The bank will
continue to operate from its current location. However, pursuant to the Stock
Transfer and Branch Sale Agreement, the bank will no longer own the Park Cities
branch and the Selling Directors will no longer be directors or employees of the
bank.
The Reorganization Plan provides that each shareholder of the bank (other
than the selling directors and other shareholders who have signed the Stock
Transfer and Branch Sale Agreement) may choose to receive one share of ENB
Bankshares stock or $15.00 cash for each share of bank stock they own. The
selling directors have agreed to cause the Park Cities bank to provide bank
shareholders who elect to receive cash in the reorganization the right to
subscribe for shares of stock of the new bank that will own the Park Cities
branch at the initial offering price.
To provide the funds for the cash portion of the transaction, ENB
Bankshares is offering for sale up to $2,500,000 of 9.5% fixed-rate debentures.
The debentures are payable in five equal installments of, each being 20% of the
original amount of the debentures. The principal payments will begin on
December 31, 2006 and continue until December 31, 2010. The debentures are
convertible, at any time at the option of the owner until December 31, 2006,
into shares of ENB Bankshares bank stock at $15.00 per share. In the event that
ENB Bankshares is unable to sell enough debentures to provide the entire cash
requirements of the transaction, ENB Bankshares has obtained a loan commitment
letter from another financial institution providing for a loan of $1,650,000.
The loan is payable over 10 years and bearing interest at floating Wall Street
Journal prime rate. The loan will be secured by a security interest in all of
the bank stock owned by ENB Bankshares.
ENB Bankshares will not incur indebtedness (either in the form of
debentures or the loan) of more than $2,500,000. If the cash requirements of the
transaction are more than
50
<PAGE>
$2,500,000, the directors of the bank who purchase debentures have indicated
that they may convert a sufficient amount of their debentures into holding
company stock so that the aggregate amount of debt is not more than $2,500,000.
The Agreement and the Reorganization Plan are subject to regulatory and
shareholder approval. Assuming the appropriate approvals are received, the bank
expects to complete the stock transfer, the branch sale and the reorganization
at the same time in the fourth quarter of 2000.
Impact of Inflation and Changing Prices
The financial statements and notes included herein have been prepared in
accordance with generally accepted accounting principles ("GAAP"). Presently
GAAP requires the bank to measure financial position and operating results
primarily in terms of historic dollars. Changes in the relative value of money
due to inflation or recession are generally not considered. The primary effect
of inflation on the operations of the bank is reflected in increased operating
costs.
Unlike most industrial companies, virtually all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
changes in interest rates have a more significant effect on the performance of a
financial institution than do the effects of changes in the general rate of
inflation and changes in prices. Interest rates do not necessarily move in the
same direction or in the same magnitude as the prices of goods and services.
Interest rates are highly sensitive to many factors that are beyond the control
of the bank, including the influence of domestic and foreign economic conditions
and the monetary and fiscal policies of the United States government and federal
agencies, particularly the Federal Reserve. The Federal Reserve implements
national monetary policy such as seeking to curb inflation and combat recession
by its open market operations in United States government securities, control of
the discount rate applicable to borrowing by banks, and establishment of reserve
requirements against bank deposits. The actions of the Federal Reserve in these
areas influence the growth of bank loans, investments and deposits, and affect
the interest rates charged on loans and paid on deposits. The nature, timing and
impact of any future changes in federal monetary and fiscal policies on the bank
and its results of operations are not predictable.
Year 2000 Preparedness
The bank successfully completed its Year 2000 changeover without any
problems in its core business processes. The bank has confirmed normal business
operations across all products and markets on a sustained basis.
While management believes it is unlikely, problems associated with
noncompliant third parties could still occur. Management will continue to
monitor all business processes and relationships with third parties during 2000
to ensure that all processes continue to function properly.
Costs related to the bank's Year 2000 conversion project, including
equipment replacement or upgrade, vendor payments, customer communications and
education, were not significant.
Recent Accounting Pronouncements
Beginning January 1, 2001 a new accounting standard, Statement of Financial
Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments
and Hedging Activities," will require all derivatives to be recorded at fair
value. Unless designated as hedges, changes in these fair values will be
recorded in the income statement. Fair value changes involving hedges will
generally be recorded by offsetting gains and losses on the hedge and on the
hedged item, even if the fair value of the hedged item is not otherwise
recorded. This standard is not expected to have a material effect, but the
effect will depend on derivative holdings when this standard applies.
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<PAGE>
DIVIDEND POLICY
The Holding Company
It is the holding company's current intention to retain earnings for the
foreseeable future to support operations and finance expansion. The payment of
any future dividends will be at the discretion of the holding company's board of
directors and will depend on, among other things, the holding company's
earnings, financial condition, cash flow from operations, capital requirements,
expansion plans, the income tax laws then in effect, the requirements of Texas
corporate law and bank regulatory requirements, dividends by the bank and
restrictions that may be imposed by the holding company's current and future
financing arrangements.
The holding company's ability to pay dividends is restricted by Texas
statute and federal regulations. Article 2.38 of the Texas Business Corporation
Act provides that the holding company may not pay dividends if (1) after giving
effect to the dividend, the holding company would be insolvent, or (2) the
dividend exceeds the surplus of the holding company.
The holding company's ability to pay cash dividends on the holding company
common stock is also restricted by the requirement that it maintain a certain
level of capital in accordance with regulatory guidelines promulgated by the
Federal Reserve Board. Under the current guidelines of the Federal Reserve
Board, the holding company may not pay dividends on the holding company common
stock without the prior consent of the Federal Reserve Bank of Dallas until the
holding company has achieved a debt-to-equity ratio of 1:1 or less. As of March
31, 2000, the holding company's debt-to-equity ratio on a pro forma basis,
calculated in accordance with Federal Reserve Board guidelines, would have been
approximately .75:1 just after consummation of the reorganization. The holding
company does not anticipate paying dividends on the holding company common stock
until its long-term debt incurred in the reorganization has been significantly
reduced.
Finally, and most importantly, the holding company's principal source of
revenue is dividends from the bank. The holding company's ability to satisfy
its obligations and pay dividends is dependent upon the bank's ability to pay
dividends to the holding company.
The Bank
The ability of the bank to pay dividends is restricted (i) by the
requirement that it maintain an adequate level of capital in accordance with
regulatory guidelines, and (ii) by statute. Federal regulatory authorities have
adopted capital guidelines that require capital based upon a percentage of an
asset's face value, depending upon the perceived credit risk associated with
categories of assets. Further, the regulations provide for a two tier concept
of capital, with "Tier 1" capital consisting primarily of common shareholders'
equity and "Tier 2" capital consisting of a percentage of the allowance for loan
losses, hybrid capital investments and mandatory convertible debt securities,
and term subordinated debt and intermediate term preferred stock. The capital
adequacy standards require a minimum total capital (Tier 1 capital plus Tier 2
capital) to risk weighted assets ratio of 8.0%. At March 31, 2000, the bank's
total capital to risk weighted assets was 16.23%, calculated in accordance with
regulatory guidelines.
In addition to "risk-based" minimum capital requirements, the federal
regulations include minimum capital requirements related strictly to "Tier 1"
capital. The regulations reflect the position of banking regulatory authorities
that every institution, regardless of how credit risk-free it may be, must
maintain an absolute minimum level of equity. The minimum level of "Tier 1"
capital required by the regulations for banks in exceptional financial
condition is 3%. Banks not meeting the specific requirements in the regulations
relating to their condition must maintain higher levels of "Tier 1" capital. At
March 31, 2000, the bank's Tier 1 capital "leverage" ratio was 10.97%,
calculated in accordance with regulatory guidelines.
Certain statutory provisions also restrict the payment of dividends. One
federal statute provides that prior to declaring a dividend, a bank must
transfer to its surplus account an amount equal to or greater than 10% of the
net profits earned by the bank since its last dividend was declared, unless such
transfer would increase the surplus of the bank to an amount greater than the
bank's stated capital. Also, federal banking laws provide that the approval of
the OCC is required for any dividend if the total of all dividends, including
the proposed dividend, declared by the bank in any calendar year exceeds the
total of its net profits for such year combined with its retained net profits
for the preceding two years, less any required transfers to surplus. Further,
federal law prohibits the payment of a dividend in an amount greater than a
bank's undivided profits
52
<PAGE>
then on hand and, if accumulated losses exceed the bank's accumulated profits,
then no dividend may be paid.
The bank is not currently prohibited by such statutes and regulations from
paying dividends. However, THERE CAN BE NO ASSURANCE THAT THE BANK WILL BE ABLE
TO PAY DIVIDENDS TO THE HOLDING COMPANY IN THE FUTURE. IF THE BANK IS
PROHIBITED FROM PAYING DIVIDENDS TO THE HOLDING COMPANY IN THE FUTURE, THE
HOLDING COMPANY WILL NOT BE ABLE SATISFY ITS FINANCIAL OBLIGATIONS OR TO PAY
DIVIDENDS ON THE HOLDING COMPANY COMMON STOCK.
CAPITALIZATION
The following table sets forth the bank's historical and the holding
company's long-term debt and capitalization:
. as if the holding company existed on March 31, 2000 and the stock
transfer and branch sale and reorganization was completed as of March
31, 2000;
. as adjusted to give effect to the reorganization and the stock
transfer and branch sale transaction, assuming that the holding
company pays an aggregate of $2,500,000 for 166,666 shares of bank
stock; and
. as adjusted to give effect to the borrowing of $2,500,000 through a
combination of sale and issuance of the debentures and borrowings from
Wells Fargo Bank.
This table should be read together with the bank's historical financial
statements and related notes appearing elsewhere in this document.
<TABLE>
<CAPTION>
At March 31, 2000
---------------------------
Holding
Bank Company Pro
Actual Forma
-------- --------------
(Dollars in Thousands)
<S> <C> <C>
Convertible debentures/borrowings from
Wells Fargo Bank $ 0 $ 2,500
Tangible stockholders' equity
Common stock, par value $5.00 per
share; 1,000,000 shares authorized 2,874 2,040
Paid-in capital 2,871 1,284
Retained earnings 79 --
-------- --------
Total tangible stockholders'
equity $ 5,824 $ 3,324
======== ========
Total tangible capitalization $ 5,824 $ 5,824
======== ========
Total shares issued and outstanding (1) 574,750 408,084
</TABLE>
(1) As of March 31, 2000, excludes stock options to purchase 15,000 shares of
our bank stock granted to employees and directors at a weighted average
exercise price of $10.00 per share. Also, excludes any issuance of holding
company common stock upon conversion of the debentures.
53
<PAGE>
BENEFICIAL OWNERSHIP OF THE BANK STOCK BY SIGNIFICANT SHAREHOLDERS, DIRECTORS
AND EXECUTIVE OFFICERS
Security Ownership of Management
The following table and notes to the table provide certain information
with respect to bank stock beneficially owned, as of the record date for the
annual meeting by:
. each executive officer of the bank,
. each director and nominee for director of the bank; and
. all executive officers and directors of the bank as a group.
We determined beneficial ownership by applying the General Rules and
Regulations of the Commission, which state that a person may be credited with
the ownership of bank stock:
. owned by or for the person's spouse, minor children or any other
relative sharing the person's home;
. of which the person shares voting power, which includes the power to
vote or to direct the voting of the stock;
. of which the person has investment power, which includes the power to
dispose or direct the disposition of the stock; and
. of which the person can acquire within 60 days upon the exercise of
stock options.
<TABLE>
<CAPTION>
Amount and Nature of Beneficial Percentage of Bank Stock
Name of Person or Group Ownership of Bank Stock Beneficially Owned(1)
------------------------------------------------- ------------------------------------ ------------------------------
<S> <C> <C>
Patrick G. Adams 200 0.03%
Donald A. Bailey 2,500 0.43%
Harold L. Campbell 50,000 (2) 8.70%
Christopher G. Griffith 7,500 1.30%
Clyde W. Hensley 9,500 (3) 1.64%
Sue Higgs 200 0.03%
Robert H. Lutz 55,000 (4) 9.51%
Randy L. Pack 35,000 (5) 6.09%
Jon Roy Reid 23,800 (6) 4.14%
Ronald W. Rhoades 2,500 0.43%
John M. Yeaman 10,000 1.74%
Thomas R. Youngblood 4,700 (7) 0.81%
All executive officers and directors as a
group (12 persons) 200,900 34.41%
</TABLE>
_________________________
(1) The percentage of bank stock indicated is based upon 574,750 shares of bank
stock outstanding date for the annual meeting.
(2) Includes 40,000 shares of bank stock held jointly of record by Mr. Campbell
and his spouse, 5,000 shares held of record by his spouse's IRA and 5,000
shares held of record by Southwest Securities for the benefit of Mr.
Campbell.
(3) Includes 4,500 shares of bank stock that may be acquired within 60 days
upon exercise of stock options granted under the bank's Stock Option Plan.
(4) Includes 50,000 shares held of record by Mr. Lutz and 5,000 shares held of
record by Southwest Securities for the benefit of Mr. Lutz.
(5) Includes 20,000 shares held of record by Mr. Pack and 15,000 shares held of
record by Southwest Securities for the benefit of Mr. Pack.
(6) Includes 12,800 shares held of record by Mr. Reid and 11,000 shares held of
record by Southwest Securities for the benefit of Mr. Reid.
(7) Includes 4,500 shares of bank stock that may be acquired within 60 days
upon exercise of stock options granted under bank's Stock Option Plan.
54
<PAGE>
Security Ownership of Certain Beneficial Owners
The following entity is known by the bank to own beneficially more than 5%
of the bank stock on the record date.
<TABLE>
<CAPTION>
Name and Address Number of Shares Percent of Class (1)
---------------------------------------- -------------------- ------------------------
<S> <C> <C>
Harold L. Campbell 50,000 8.70%
5006 Verde Valley
Dallas, Texas 75240
Jarman Family Investments, Ltd. 40,000 6.96%
5344 Blake Drive
Plano, Texas 75093
Robert H. Lutz 55,000 9.57%
17300 Dallas Parkway, Suite 3180
Dallas, Texas 75248
Randy L. Pack 35,000 6.09%
P.O. Box 3049
Grapevine, Texas 76099
</TABLE>
______________________
(1) The percentage of bank stock indicated is based on 574,750 shares of bank
stock outstanding on the record date.
The required vote for the approval of the reorganization is the affirmative
vote of at least 66-2/3 of the outstanding shares of bank stock. In terms of
the number of shares, as of _____________, 2000, the affirmative votes of the
holders of at least approximately 383,186 shares will result in the approval of
the proposed reorganization. The officers and directors, as a group, own 191,900
shares, or approximately 50% of the currently outstanding shares of bank stock.
The seven continuing directors have represented that they will vote FOR the
reorganization proposal. In addition, the selling directors have granted the
selling directors a proxy for their 69,000 shares of bank stock, which will be
voted FOR the reorganization proposal.
INFORMATION ABOUT THE ANNUAL MEETING
Time and Place of Annual Meeting
The Board of Directors of Eagle National Bank, a national banking
association, is furnishing this proxy statement to solicit your proxy for use at
the Annual Meeting of Shareholders of the bank and any adjournment(s) of the
meeting. The annual meeting will be held at the main office of the bank, 5006
Verde Valley, Dallas, Texas 75240, on __________, ___________, 2000, at ______
___.m., local time.
Purpose of the Annual Meeting
At the annual meeting, the Board of Directors of the bank will request
shareholders:
. to consider and act upon a proposal to approve and adopt the Agreement
and Plan of Reorganization dated __________, 2000, providing for the
reorganization of the bank as the wholly owned subsidiary of the
holding company through the consolidation of the bank with New Eagle
Bank, a proposed Texas chartered banking institution and subsidiary of
the holding company;
. to consider and act upon a proposal to fix the number of directors to
be elected at eleven and to elect eleven directors of the bank to hold
office until the next annual meeting of shareholders or until their
respective successors are duly elected and qualified; and
. to transact any other business that may properly come before the
annual meeting and any adjournment(s) of the meeting.
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<PAGE>
Voting Rights, Quorum and Vote Required
The Board of Directors of the bank has fixed June ___, 2000, as the record
date for the determination of shareholders of the bank entitled to vote at the
annual meeting. Only holders of record of the outstanding shares of bank stock
at the close of business on the record date are entitled to notice of, and to
vote at, the annual meeting or any adjournment(s) of the annual meeting. On the
record date, the bank had outstanding 574,750 shares of bank stock, the only
authorized class of stock. At such date, the bank stock was held by
approximately _______ shareholders. Each outstanding share of bank stock
entitles the record holder to one vote. Shareholders are also entitled to
cumulative voting in the election of directors. Under cumulative voting, each
shareholder is entitled to an aggregate number of votes equal to the number of
directors to be elected multiplied by the number of shares the shareholder owns.
You may divide this aggregate number votes among the nominees for election of
directors as you choose.
Under federal law and the bylaws of the bank, the presence of a quorum is
required for each matter to be acted upon at the annual meeting. Holders of a
majority interest of all outstanding bank stock must be present at the meeting,
either in person or by proxy, to establish a quorum. For purposes of
establishing a quorum, the bank will count as present shareholders represented
by proxies marked "withhold" or "abstain." "Broker nonvotes" will also be
counted in determining the presence of a quorum for the particular matter.
"Broker nonvotes" are shares represented at the meeting held by brokers or
nominees as to which instructions have not been received from the beneficial
owners or persons entitled to vote and the broker or nominee does not have the
discretionary voting power on a particular matter. In the absence of a quorum,
the Board of Directors of the bank intends to adjourn the meeting to another
place and time without further notice to shareholders, until the necessary
shareholders are present.
The required vote for the approval of the reorganization is the affirmative
vote of at least 66-2/3% of the outstanding shares of bank stock. Abstentions
and broker nonvotes are not votes cast and therefore do not count either for or
against the approval and adoption of matters before the meeting. Although
abstentions and broker nonvotes are not votes cast, they have the practical
effect of votes cast AGAINST the reorganization proposal.
In the election of directors, directors must receive a plurality of the
bank stock present and voting in person or by proxy, provided a quorum exists. A
plurality means receiving the largest number of votes, regardless of whether
that is a majority. All matters other than the reorganization and the election
of directors submitted to you at the annual meeting will be decided by a
majority of the votes cast on the matter, provided a quorum exists, except as
otherwise provided by law or our articles of association or bylaws. Those who
fail to return a proxy or attend the annual meeting will not count towards
determining any required plurality, majority or quorum.
If for any reason the Board of Directors of the bank believes additional
time should be allowed to obtain proxies, the Board may adjourn the meeting to
another place and time with a vote of a majority of shares present at the
meeting.
Solicitation of Proxies
The bank's Board of Directors is sending this proxy statement and the
enclosed proxy form to shareholders of the bank on or about ____________, 2000.
In addition to the solicitation of proxies by use of the mail, officers,
directors and regular employees of the bank may solicit the return of proxies by
personal interview, mail, telephone, facsimile and/or through the Internet.
These persons will not be additionally compensated, but will be reimbursed for
out-of-pocket expenses. The bank will also request brokerage houses and other
custodians, nominees and fiduciaries to forward solicitation material to the
beneficial owners of shares. The bank encourages the personal attendance of its
shareholders at the annual meeting. An execution of the accompanying proxy will
not affect a shareholder's right to attend the annual meeting and to vote in
person.
In connection with the solicitation of proxies, the bank will:
. bear the cost of soliciting proxies; and
. reimburse brokerage firms and other custodians, nominees and
fiduciaries for their reasonable expenses in soliciting proxies;
56
<PAGE>
Voting by Proxy and Revocation of Proxies
By properly completing and signing a proxy and returning it to the bank
prior to the annual meeting, you will be appointing the proxy holders to vote
your shares at the annual meeting according to your instructions on the proxy.
If a proxy is completed, signed and returned without indicating any voting
instructions, the shares represented by the proxy will be voted:
. FOR the approval and adoption of the Agreement and Plan of
Reorganization, and
. FOR approval of the proposal to set the number of directors at eleven
and to elect the eleven nominees for director set forth in this proxy
statement/prospectus.
The proxy holders will not vote any proxy that withholds authority. A proxy
also gives the persons named as proxy holders the right to vote on other matters
incidental to the conduct of the annual meeting. If other matters are properly
brought before the meeting, the proxy holders will vote your proxy in accordance
with the discretion of the proxies.
Execution and return of the enclosed proxy will not affect your right to
attend the annual meeting and vote in person if you first give notice to Sue
Higgs, Secretary of the bank. A shareholder of the bank who returns a proxy may
revoke the proxy prior to the time it is voted:
. by giving written notice of revocation dated at any time before the
proxy is voted to Sue Higgs, Secretary of Eagle National Bank, 5006
Verde Valley, Dallas, Texas 75240;
. by delivering a properly executed proxy bearing a later date to Sue
Higgs, Secretary of the bank; or
. by attending the annual meeting and voting in person after giving
notice to Sue Higgs, Secretary of the bank.
Attendance by a shareholder at the annual meeting will not itself revoke
the proxy. A revocation letter or later-dated proxy will not be effective until
received by Sue Higgs, Secretary of the bank, at or prior to the annual meeting.
PROPOSAL 1:
THE PROPOSED REORGANIZATION
Description of Reorganization Proposal
We are asking that you approve an Agreement and Plan of Reorganization that
would result in the reorganization of the bank as a subsidiary of the holding
company.
Background
The Board of Directors has been considering a number of alternatives
regarding the strategic direction of the bank for some time. The stock transfer
transaction and the reorganization are a result of decisions made during this
process.
During the fall of 1999, the Board of Directors considered several
alternatives regarding the direction of the bank. During this time, the bank
continued with efforts to expand into the Park Cities area of Dallas by
preparing to open the Park Cities branch. The Board also considered the
possibility of forming a bank holding company to own the bank. The bank began
taking preliminary steps toward the formation of a bank holding company in late
1999.
In early 2000, the bank began receiving unsolicited offers to acquire 100%
of the stock of the bank. The Board held informal conversations with interested
purchasers in January and February regarding a potential transaction. However,
the Board ultimately decided not to proceed further with these inquiries
primarily because the Board concluded the proposed consideration was determined
to be inadequate for a change of control transaction.
During these discussions, it became apparent that the directors had
different opinions regarding the strategic plan for the bank. As a result, in
early March 2000 the
57
<PAGE>
selling directors and the remaining directors began discussing the possibility
of splitting the bank into two entities, with the remaining directors keeping
the bank at its north Dallas office and the selling directors selling their
shares of bank stock and forming the Park Cities bank to own the Park Cities
branch.
In late March, the Board approved the concept of the transaction,
authorizing the execution of a letter of intent, and authorizing Harold Campbell
to negotiate the terms of a definitive agreement on behalf of the bank.
On April 3, 2000, the bank entered into a letter of intent with the selling
directors. The letter of intent provided, among other things, that:
. the selling directors would sell their stock for $15.00 per share;
. the bank would sell the Park Cities branch to a new bank established
by the selling directors for a purchase premium of $500,000 plus
organization expenses and operating losses; and
. Tom Youngblood would resign as President of the bank effective as of
April 1, 2000, but would remain the employee primarily responsible for
the Park Cities branch.
During April and May 2000, the bank and the selling directors negotiated
the terms of the Stock Transfer and Branch Sale Agreement. Meetings between
Harold Campbell and Tom Youngblood and the selling directors were held on
various dates during this period. On April 26, 2000, Harold Campbell and Tom
Youngblood held a meeting with separate legal counsel representing the bank and
the selling directors to negotiate the agreement. Harold Campbell, Robert H.
Lutz, Chris Griffith and Patrick Adams met with the bank's legal counsel on May
17, 2000, to discuss the agreement. Harold Campbell met individually with the
other remaining directors during late May, 2000 to discuss the agreement.
By Unanimous Consent dated effective as of May 31, 2000, the Board of
Directors approved the Stock Transfer and Branch Sale Agreement and authorized
Harold Campbell to execute the agreement on behalf of the bank. The Stock
Transfer and Branch Sale Agreement was signed effective as of May 31, 2000.
Stock Transfer and Branch Sale Agreement
Pursuant to the Stock Transfer and Branch Sale Agreement, the holding
company will purchase the 69,000 shares of bank stock owned by the selling
directors at a per share price of $15.00. The Stock Transfer and Branch Sale
Agreement includes a list of shareholders who the selling directors believe may
also desire to sell their shares of bank stock to the holding company (the
"selling shareholders"). These shareholders collectively own 68,700 shares of
bank stock. The Stock Transfer and Branch Sale Agreement provides that the
selling directors may contact the selling shareholders to determine if they in
fact desire to sell their shares of bank stock pursuant to the Stock Transfer
and Branch Sale Agreement. As of the date of this document, none of the
shareholders who were listed in the Stock Transfer and Branch Sale Agreement
have agreed to sell their shares of bank stock pursuant to the Stock Transfer
and Branch Sale Agreement.
The purchase price for the selling shareholder shares is also $15.00 per
share. The purchase price under the Stock Transfer and Branch Sale Agreement
may be increased if the sale of the branch by the bank to the new bank is
consummated prior to consummation of the stock transfer. In such event, then
the purchase price will be increased by a daily interest rate equal to Wall
Street Journal prime rate for the number of days between the closing of the
branch sale and the closing of the stock transfer. The purchase price is
payable in cash at closing of the stock transfer.
The Stock Transfer and Branch Sale Agreement also provides that Tom
Youngblood will cancel his option to purchase 7,500 shares of bank stock. In
February, 1997, the bank granted to Mr. Youngblood an option to purchase 7,500
shares of bank stock at $10.00 per share. In consideration of his cancellation
of the option, the holding company will pay him $5.00 per share for each share
subject to the option, reflecting the difference between the $15.00 per share
price to be paid to the selling directors and the selling shareholders and the
per share exercise price of the option. Such payment is to be made in cash at
the closing of the stock transfer.
58
<PAGE>
The Stock Transfer and Branch Sale Agreement also provides for the sale of
the Park Cities branch by the bank to the selling director's new bank. The Park
Cities branch will be sold pursuant to a purchase and assumption transaction
where the new bank will purchase the assets of the Park Cities branch (loans,
leasehold improvements, furniture, fixtures and equipment, the branch name,
etc.) and assume the liabilities of the Park Cities branch (primarily deposits
and the branch facility lease). The new bank will pay book value for the assets
such as loans, leasehold improvements, and furniture fixtures and equipment. The
new bank will also pay a purchase premium for the deposits equal to
. $500,000; plus
----
. $2.50 multiplied by the difference between (a) 110,000 less (b) the
----
number of shares of bank stock delivered by the selling directors and
selling shareholders for sale pursuant to the Stock Transfer and
Branch Sale Agreement; plus
----
. the organization costs of the Park Cities branch ($89,571.96); plus
----
. the net loss, if any, arising from the operation of the Park Cities
branch from the date it opened (March 27, 2000) to the closing of the
branch sale.
The closing of the branch sale will be within thirty days after receipt
of regulatory approvals for the new bank to open for business and acquire the
Park Cities branch.
Holding Company Formation
In proceeding with the Stock Transfer and Branch Sale Agreement, the
Board of Directors of the bank required that these transactions be fair to the
shareholders of the bank. To that end, the Stock Transfer and Branch Sale
Agreement provides
. the holding company will acquire the bank in a corporate
reorganization that provides shareholders with a choice of receiving
holding company stock or $15.00 per share cash for their shares of
bank stock;
. shareholders who elect to receive cash in the reorganization have the
right to purchase shares of the new bank that will own the Park Cities
branch at the initial offering price of the new bank stock; and
. the bank will obtain a fairness opinion from an independent bank
valuation firm that the transactions are fair to the shareholders of
the bank from a financial point of view.
Reasons for the Formation of the Holding Company
A bank holding company is an entity that controls a bank through ownership
or other control of the voting stock of such bank. As a result of the
reorganization and the Stock Transfer and Branch Sale Agreement, the holding
company will own 100% of the issued and outstanding shares of the bank.
The reasons for the establishment of the holding company to own the bank
include the following:
. The holding company provides a vehicle to complete the transactions
contemplated by the Stock Transfer and Branch Sale Agreement.
. As part of its strategic planning, the bank is considering expansion
of its geographic markets through the acquisition of, or merger with,
other banks. The holding company can be an effective vehicle in
financing such acquisitions and in maintaining the independent
franchise value of an acquired institution. The holding company has no
specific plans to acquire any particular financial institution at this
time.
. By offering the opportunity for shareholders to elect to receive cash
for their shares of bank stock as part of the reorganization, the
formation of the holding company provides an immediate source of
liquidity to those shareholders who want or need to liquidate their
investment in the bank at this time.
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<PAGE>
. A bank is restricted by regulation from purchasing its own stock,
while a bank holding company is generally subject to less regulatory
restrictions. Because the holding company could create a market for
and is permitted to purchase its own stock, holders of the holding
company bank stock will have an additional prospective purchaser of
such stock. The formation of the holding company should provide a
continuing, though limited, source of liquidity for shareholders.
. Subject to the holding company's financial condition, purchases of
newly issued bank stock or direct capital contributions by the holding
company can be used to provide future injections of capital into the
bank when and if needed. If the holding company were not formed and
the bank sought additional capital injections through the issuance of
additional shares of bank stock, shareholders desiring to avoid
dilution of their percentage ownership of the bank would be required
to purchase additional shares of bank stock with their personal funds.
With the bank wholly owned by the holding company, such future
injections of capital could be made by the holding company through
borrowing without change in the percentage ownership of the
shareholders of the holding company. The holding company's ability to
obtain the necessary funds through borrowing instead of through the
issuance of stock would be subject, of course, to regulatory
restrictions and financial considerations.
Description and Effects of the Reorganization
As a step toward establishing a holding company for the bank, the Board
of Directors of the bank incorporated the holding company on May 18, 2000, to
serve as the bank holding company. The holding company has taken no actions
except those aimed at consummating the reorganization and achieving bank holding
company status. No shares of holding company bank stock have as yet been issued
and the holding company is being managed by its initial sole director, Mr.
Harold Campbell. The holding company plans to increase its board to at least
four members and to elect as additional directors Messrs. Adams, Griffith, and
Lutz, immediately prior to consummation of the reorganization. The holding
company is also considering whether all continuing bank directors should serve
as directors of the holding company. The holding company has not engaged nor
will it engage in any business other than taking such actions as necessary to
effect the transactions described in this document.
The establishment of the holding company as a bank holding company is to
be accomplished by the reorganization pursuant to the terms of the Agreement and
Plan of Reorganization, a copy of which is attached as Annex A. The bank will
-------
be the resulting bank from the reorganization and will be wholly owned by the
holding company. Upon consummation of the reorganization, the bank will
continue to possess all of its property, rights, and interests and will be
liable for all of its liabilities and obligations. The bank will continue its
banking business at the same location with the same management as immediately
prior to the effective date of the reorganization. However, as a result of the
Stock Transfer and Branch Sale Agreement, the bank will no longer own the Park
Cities branch and Randy Pack, Jon Roy Reid, John Yeaman and Tom Youngblood will
no longer be directors or employees of the bank.
Conversion and Exchange of Shares
The Agreement and Plan of Reorganization provides that the shareholders
(other than the selling directors and shareholders who sell their shares to the
holding company pursuant to the Stock Transfer and Branch Sale Agreement) will
be entitled to receive, for each share of bank stock they own on the effective
date of the reorganization, at their option,
. one share of holding company common stock; or
. $15.00 cash.
As noted above, shareholders who elect to receive cash in the reorganization
have been granted the right by the new bank to subscribe for shares of the new
bank that will own the Park Cities branch. The Stock Transfer and Branch Sale
Agreement provides that such shareholders may subscribe for shares of the new
bank at the initial offering price until the earlier of
. 30 days after the effective date of the reorganization; or
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<PAGE>
. December 31, 2000.
Shareholders may elect to receive holding company stock for part of their shares
of bank stock and cash for part of their shares of bank stock.
The directors of the bank who are not selling their shares pursuant to
the Stock Transfer and Branch Sale Agreement are:
Patrick G. Adams
Donald A. Bailey
Harold L. Campbell
Christopher G. Griffith
Clyde W. Hensley
Robert H. Lutz
Ronald W. Rhoades
These directors beneficially own an aggregate of 122,700 shares of bank stock,
constituting approximately 21% of the shares of the outstanding bank stock. All
of these directors have indicated that they will elect to receive shares of
holding company stock for their shares of bank stock.
We believe that the maximum amount of indebtedness (either in the form of
the debentures or the loan from Wells Fargo Bank) that banking regulators will
approve for the holding company is $2,500,000. This means that the maximum
number of shares of the bank stock for which the holding company could pay cash
for is 166,667 shares. As mentioned above, the holding company will purchase
69,000 shares for cash from the selling directors. This leaves 97,667 shares
that the holding company may acquire for cash pursuant to the reorganization. If
bank shareholders owning more than 97,667 shares elect to receive cash in the
reorganization, the transaction will have to be restructured. One form of
restructuring being considered is for the continuing directors to convert a
portion of their debentures into holding company common stock. If the holding
company is unable to restructure the transaction so that it will be approved by
banking regulators, the transaction will be terminated.
At consummation of the reorganization, the 1,000 shares of bank stock of
the interim bank outstanding and held by the holding company will be converted
into and become 574,750 shares of the bank as the bank is the entity surviving
the reorganization. The shares of bank stock issued and outstanding immediately
prior to the reorganization and held by shareholders of the bank other than the
holding company will represent, after the reorganization, the right to receive
the consideration described above.
The following table indicates the aggregate amount of consideration to be
received by the remaining directors as a group, the selling directors who sell
pursuant to the Stock Transfer and Branch Sale Agreement as a group, and all
other shareholders as a group assuming that all shareholders other than the
selling directors elect to receive holding company stock for their shares of
bank stock.
<TABLE>
<CAPTION>
Aggregate Number of Shares of Aggregate Number of Shares of
Bank Stock Prior to Holding Company Stock After the
Group Reorganization (%) Merger (%)(1) Cash
------------------------------- -------------------------------- ----------------------------------- ---------------
<S> <C> <C> <C>
Remaining Directors 122,700 (21%) 122,700 (24%) 0
Selling Directors and Selling 69,000 (12%) (0%) $1,035,000
Shareholders (2)
All Other Shareholders 383,050 (67%) 383,050 (76%) 0
----------------------- --------------------- ---------------
Total 574,750 (100%) 505,750 (100%) $1,035,000
======================= ===================== ===============
</TABLE>
(1) Based upon 505,750 shares of holding company stock assumed to be
outstanding and does not include shares issuable upon the exercise of stock
options assumed by the holding company in the reorganization.
(2) Reflects number of shares to be sold and consideration to be paid pursuant
to the Stock Transfer and Branch Sale Agreement.
The following table indicates the aggregate amount of consideration to be
received by the remaining directors as a group, the selling directors who sell
pursuant to the Stock Transfer and Branch Sale Agreement as a group, and all
other shareholders as a group
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<PAGE>
assuming that shareholders holding 97,666 shares of bank stock (the maximum
amount of shares the holding company believes it can acquire from shareholders
other than the selling directors and to obtain regulatory approval) elect to
receive cash for their shares of bank stock.
<TABLE>
<CAPTION>
Aggregate Number of Shares of Aggregate Number of Shares of
Bank Stock Prior to Holding Company Stock After the
Group Reorganization (%) Merger (%)(1) Cash
------------------------------- -------------------------------- ----------------------------------- ---------------
<S> <C> <C> <C>
Remaining Directors 122,700 (21%) 122,700 (30%) 0
Selling Directors and Selling 69,000 (12%) (0%) $1,035,000
Shareholders (2)
All Other Shareholders 383,050 (67%) 285,384 (70%) 1,464,990
----------------------- --------------------- ---------------
Total 574,750 (100%) 408,084 (100%) $2,499,990
======================= ===================== ===============
</TABLE>
(1) Based upon 408,084 shares of holding company assumed stock to be
outstanding and does not include shares issuable upon the exercise of stock
options assumed by the holding company in the reorganization.
(2) Reflects number of shares to be sold and consideration to be paid pursuant
to the Stock Transfer and Branch Sale Agreement.
As indicated above, all of the remaining directors of the bank have
indicated that they intend to elect to receive shares of holding company stock
pursuant to the reorganization. The remaining directors of the bank will not
receive any additional consideration pursuant to the reorganization other than
the consideration to which they are entitled to receive by virtue of their
position as shareholders of the bank.
After the effective date of the reorganization, each outstanding
certificate (except those held by any shareholders exercising dissenters'
rights), which prior to the effective date represented shares of bank stock,
shall be deemed for all purposes to evidence solely the right to exchange those
certificates for the consideration described in the Agreement and Plan of
Reorganization. As soon as practicable after the consummation of the
reorganization, transmittal forms will be sent to the former shareholders of the
bank for use in surrendering their bank stock certificates.
Fairness Opinion
The Board of Directors of the bank believes that the terms of the
reorganization are fair and reasonable. To support this position, The bank's
Board of Directors retained Hoefer & Arnett to render a written opinion (the
"Fairness Opinion") as investment bankers as to the fairness, from a financial
point of view, to the Board of Directors and shareholders of the bank of the
$15.00 per share cash purchase price to be paid by the holding company for less
than 50% of the outstanding common stock of the bank. In addition, the Board of
Directors of the bank has requested Hoefer & Arnett's opinion as investment
bankers as to the fairness, from a financial point of view, to all of the
shareholders of the bank of the proposed transfer of the Park Cities Branch to
certain shareholders of the bank for $500,000 plus certain other adjustments as
described in detail in the Stock Transfer and Branch Sale Agreement. No
limitations were imposed by the bank's Board of Directors upon Hoefer & Arnett
with respect to the investigations made or procedures followed in rendering the
Fairness Opinion.
A copy of the Fairness Opinion of Hoefer & Arnett, dated as of June 14,
2000, which sets forth certain assumptions made, matters considered and limits
on the review undertaken by Hoefer & Arnett, is attached as Annex C to this
-------
document. The bank shareholders are urged to read the Fairness Opinion in its
entirety. The following summary of the procedures and analysis performed, and
assumptions used by Hoefer & Arnett is qualified in its entirety by reference to
the text of such Fairness Opinion. Hoefer & Arnett's Fairness Opinion is
directed to the bank's Board of Directors only and is directed only to the
financial terms of the transaction and does not constitute a recommendation to
any bank shareholder as to how such shareholder should vote at the annual
meeting.
In arriving at its opinion, Hoefer & Arnett reviewed and analyzed, among
other things, the following:
. the Stock Transfer and Branch Sale Agreement;
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<PAGE>
. Audited financial statements for the bank as of December 31, 1998 and
December 31, 1999;
. Quarterly FDIC Call reports for the bank for the quarters ended March
31, 2000, December 31, 1999, September 30, 1999, June 30, 1999, March
31, 1999 and December 31, 1998;
. certain other publicly available financial and other information
concerning the bank; and
. publicly available information concerning other banks and holding
companies, the trading markets for their securities and the nature and
terms of certain other transactions that Hoefer & Arnett believed to
be relevant to its inquiry. Hoefer & Arnett held discussions with
senior management of the bank concerning their past and current
operations, financial condition and prospects, as well as the results
of regulatory examinations.
Hoefer & Arnett reviewed with senior management of the bank earnings
projections for the years 2000 through 2004 for the bank as a stand-alone
entity, assuming the reorganization would not occur. The projections utilized
for the bank were as follows:
<TABLE>
<CAPTION>
Eagle National Bank
----------------------------------------
Return on
Asset Average
Year Growth Assets
---------- ----------- -------------
<S> <C> <C>
2000 45.00% 1.00%
2001 15.00% 1.05%
2002 12.00% 1.10%
2003 10.00% 1.15%
2004 10.00% 1.20%
</TABLE>
In conducting its review and in arriving at its opinion, Hoefer & Arnett
relied upon and assumed the accuracy and completeness of the financial and other
information provided to it or publicly available, and did not attempt to
independently verify the same. Hoefer & Arnett relied upon the management of
the bank as to the reasonableness of the financial and operating forecasts, and
projections (and the assumptions and bases therefor) provided to it, and Hoefer
& Arnett assumed that such forecasts and projections reflect the best currently
available estimates and judgments of the bank management. Hoefer & Arnett also
assumed, without independent verification, that the allowance for loan losses
for the bank was adequate to cover such losses. Hoefer & Arnett did not make or
obtain any evaluations or appraisals of the properties of the bank, nor did it
examine any individual loan credit files. For purposes of its opinion, Hoefer &
Arnett assumed that the reorganization will have the tax, accounting and legal
effects described in the Stock Transfer and Branch Sale Agreement and relied, as
to legal matters, exclusively on counsel to the bank, as to the accuracy of the
disclosures set forth in the Stock Transfer and Branch Sale Agreement. Hoefer &
Arnett's opinion is limited to the fairness, from a financial point of view, to
all of the holders of the common shares of the bank stock with respect to the
sale of less than 50% of the bank stock to the Company at $15.00 per share and
the transfer of the Park Cities branch to the Park Cities bank for $500,000 plus
certain adjustments and does not address the bank's underlying business decision
to proceed with the proposed transaction.
As more fully discussed below, Hoefer & Arnett considered such financial
and other factors as Hoefer & Arnett deemed appropriate under the circumstances,
including among others the following:
. the historical and current financial position and results of
operations of the bank, including interest income, interest expense,
net interest income, net interest margin, provision for loan losses,
noninterest income, noninterest expense, earnings, dividends, internal
capital generation, book value, intangible assets, return on assets,
return on shareholders' equity, capitalization, the amount and type of
nonperforming assets, loan losses and the reserve for loan losses, all
as set forth in the financial statements for the bank;
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<PAGE>
. the assets and liabilities of the bank, including the loan, investment
and mortgage portfolios, deposits, other liabilities, historical and
current liability sources and costs and liquidity;
. the nature and terms of certain other merger transactions involving
banks and bank holding companies; and
. Hoefer & Arnett's assessment of general economic, market and financial
conditions and its experience in other transactions, as well as its
experience in securities valuation and its knowledge of the banking
industry generally.
Hoefer & Arnett's opinion is necessarily based upon conditions as they
existed and can be evaluated on the date of its opinion and the information made
available to it through that date.
In connection with rendering its Fairness Opinion to the bank's Board of
Directors, Hoefer & Arnett performed certain financial analyses, which are
summarized below. Hoefer & Arnett believes that its analysis must be considered
as a whole and that selecting portions of such analysis and the factors
considered therein, without considering all factors and analysis, could create
an incomplete view of the analysis and the processes underlying Hoefer &
Arnett's Fairness Opinion. The preparation of a fairness opinion is a complex
process involving subjective judgments and is not necessarily susceptible to
partial analysis or summary description. In its analyses, Hoefer & Arnett made
numerous assumptions with respect to industry performance, business and economic
conditions, and other matters, many of which are beyond the control of the bank.
Any estimates contained in Hoefer & Arnett's analyses are not necessarily
indicative of future results or values, which may be significantly more or less
favorable than such estimates. Estimates of values of companies do not purport
to be appraisals or necessarily reflect the prices at which companies or their
securities may actually be sold. Except as described below, none of the
financial analyses performed by Hoefer & Arnett was assigned a greater
significance by Hoefer & Arnett than any other.
The financial forecasts and projections of the bank prepared by Hoefer &
Arnett were based on projections provided by the bank as well as Hoefer &
Arnett's own assessment of general economic, market and financial conditions.
All such information was reviewed with the respective management of the bank.
The bank does not publicly disclose internal management financial forecasts and
projections of the type provided to Hoefer & Arnett in connection with its
review of the proposed reorganization. Such forecasts and projections were not
prepared with a view towards public disclosure. The forecasts and projections
prepared by Hoefer & Arnett were based on numerous variables and assumptions,
which are inherently uncertain, including, without limitation, factors related
to general economic and market conditions. Accordingly, actual results could
vary significantly from those set forth in such forecasts and projections.
Summary of Proposal. Hoefer & Arnett reviewed the terms of the proposed
transaction. A purchase price of $15.00 per share represents a price to stated
book value at April 30, 2000 of 1.47, price to estimated 2000 earnings of 15.53
and a price to total assets of 19.03%.
Guideline Company Analysis. Hoefer & Arnett reviewed certain information
relating to selected publicly traded Texas banking organizations as of May 31,
2000 (the "Guideline Companies"). This data was obtained from SNL Securities,
L.P.
On the basis of the trading multiples of the Guideline Companies, Hoefer &
Arnett calculated a range of purchase prices as a multiple of stated book value,
earnings and assets. The chart below shows the low, high and median for the
Guideline Companies and the resulting price range for the bank.
<TABLE>
<CAPTION>
Pricing Multiples for Per Share Value
Guideline Companies for the Bank
---------------------------------- ---------------------------------
Low High Median Low High Median
-------- -------- --------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Price/Book Value 0.94x 2.79x 1.78x $9.57 $28.40 $18.12
Price/Earnings 6.9x 20.9x 11.7x $6.69 $20.27 $11.35
Price/Assets 7.40% 19.80% 13.39% $7.39 $19.77 $13.37
</TABLE>
The price to book value multiple resulting from the terms of the Agreement is
below the median for the trading multiples for the Guideline Companies. The
price to earnings multiple and price to assets multiple are higher than the
median price to earnings multiple and price to assets multiple for the trading
multiples for the Guideline
64
<PAGE>
Companies. Given the bank's high capital to asset ratio when compared to the
Guideline Companies (10.20% compared to 7.52%), we would expect a lower price to
book multiple.
Discounted Cash Flow Analysis. Hoefer & Arnett performed a discounted cash
flow analysis to determine hypothetical present values for a share of the bank
stock as a five-year investment. Under this analysis, Hoefer & Arnett
considered certain scenarios for the performance of the bank stock using an
asset growth rate ranging from 45.00% to 10% and a return on average assets
ranging from 1.00% to 1.20% and a multiple of 1.78 times book value and 11.7
times earnings as the terminal value for the bank stock. A discount rate of 14%
was applied to these growth and terminal value scenarios. This discount rate,
growth rate and terminal value were chosen based upon what Hoefer & Arnett, in
its judgment, considered to be appropriate taking into account, among other
things, the bank's past and present performance, the general level of inflation,
rates of return for fixed income and equity securities in the marketplace
generally and for companies with similar risk profiles. In the scenarios
considered, the present value of a share of the bank stock was calculated to
average slightly less than that of the proposed offer. Thus, Hoefer & Arnett's
discounted cash flow analysis indicated that the bank shareholders would be
fairly compensated at the $15.00 per share cash purchase price. This analysis
also indicates that the shareholders of the bank that are not selling are not
adversely affected at the $15.00 per share cash purchase price.
Park Cities Branch Transfer Analysis. Hoefer & Arnett analyzed the
premiums paid for other bank branches in 1999 in both the nation and in the
Southwestern region of the United States. In 1999, there were 176 branch
transactions in the United States with a medium premium to total deposits of
8.50%. In the Southwest there were 14 branch transactions in 1999 with a median
premium to total deposits of 9.64%. At April 30, 2000, the Park Cities branch
had total deposits of $2,218,517 with significant growth potential in an
attractive market. Therefore, based on its analysis of all relevant factors,
Hoefer & Arnett opined that the proposed branch sale for $500,000 plus certain
adjustments as defined in the Stock Transfer and Branch Sale Agreement is fair
to all shareholders of the bank, from a financial point of view.
Other Analysis. Hoefer & Arnett prepared an overview of historical
financial performance of the bank.
The opinion expressed by Hoefer & Arnett was based upon market, economic
and other relevant considerations as they existed and have been evaluated as of
the date of the opinion. Events occurring after the date of issuance of the
opinion, including but not limited to, changes affecting the securities markets,
the results of operations or material changes in the assets or liabilities of
the bank could materially affect the assumptions used in preparing the opinion.
Financial Advisory Fees. The bank engaged Hoefer & Arnett to review the
terms of the transaction and to render a fairness opinion in connection with the
proposed reorganization for $20,000, including all out-of-pocket expenses.
Negotiation of the Terms of the Reorganization
The structure and terms of the Stock Transfer and Branch Sale Agreement
were determined through arm's-length negotiations between the bank and the
selling directors. The structure and terms of the Agreement and Plan of
Reorganization were based upon the structure and terms of the Stock Transfer and
Branch Sale Agreement. However, the holding company was organized solely for
the purpose of becoming a bank holding company, and certain of the officers and
directors of the bank also serve as officers and directors of the holding
company. For the foregoing reasons, the terms of the Agreement and Plan of
Reorganization cannot be considered solely the result of arm's-length
negotiations.
The holding company will file an application to become a bank holding
company with the Federal Reserve Bank of Dallas. The bank will file an
application with the FDIC for approval of the reorganization. Management
anticipates receiving all necessary approvals following the shareholders'
meeting. You should be aware that regulatory approval reflects only the view
that the transaction does not contravene applicable competitive standards
imposed by law, and that the transaction is consistent with regulatory policies
relating to safety and soundness. Regulatory approval is not an opinion that
the proposed transaction is favorable to the shareholders from a financial point
of view or that the regulatory authority has considered the adequacy of the
terms of the transaction. REGULATORY APPROVAL IS NOT AN ENDORSEMENT OR
RECOMMENDATION OF THE REORGANIZATION.
The Boards of Directors of the bank and the holding company believe that
the conversion and exchange of bank stock described above is a fair and
equitable method of effecting the reorganization. While the Board of Directors
of the bank advises each
65
<PAGE>
shareholder to make his or her own decision with respect to the vote on the
reorganization based on such shareholder's own investment needs, we recommend
that you vote IN FAVOR OF the reorganization.
Conditions to Consummation of the Reorganization
Consummation of the reorganization is conditioned upon the approval and
consent to the Agreement and Plan of Reorganization by the holders of at least
two-thirds of the outstanding shares of bank stock, pursuant to the National
Bank Act (12 U.S.C. (S)215).
Consummation of the reorganization is also subject to the receipt of all
required regulatory approvals and to consummation of the acquisition of shares
of bank stock from the selling directors and selling shareholders pursuant to
the Stock Transfer and Branch Sale Agreement. If all conditions precedent are
satisfied, it is anticipated that the reorganization will be consummated in the
fall of 2000.
The Agreement and Plan of Reorganization may be amended by mutual
agreement, in writing, of the parties to the agreement with the approval of
their respective Boards of Directors and without the necessity of further action
by the shareholders. Should there be any material amendment to the Agreement
and Plan of Reorganization prior to the annual meeting, all shareholders of the
bank will receive information relating to such amendment prior to such meeting.
There will be no amendment to the Agreement and Plan of Reorganization following
approval of the reorganization by the shareholders of the bank that would
materially affect the consideration to be received by any shareholders of the
bank, unless prior notice, to the extent such notice is required by law, is
given to all shareholders and shareholder approval, to the extent such approval
is required by law, is obtained.
Operations of the Bank After the Reorganization
After the effective date of the reorganization, the holding company will
own the bank and former shareholders of the bank who elect to receive holding
company common stock in the reorganization will be shareholders of the holding
company. The bank will continue to conduct the business it presently conducts
except that it will operate only from its main office at 5006 Verde Valley,
Dallas, Texas because it will have sold the Park Cities branch to the new bank
being established by the selling directors. Following the reorganization, the
present officers and directors of the bank will continue in those positions
except that Randy Pack, Jon Roy Reid, John Yeaman and Tom Youngblood will have
resigned as directors and employees of the bank. There will be no change in the
supervision and regulation of the bank by banking regulatory authorities. See
"Governmental Regulation."
Borrowings by the Holding Company
To fund the cash requirements of the stock transfer transaction and the
reorganization, the holding company intends to utilize two sources. First, the
holding company is offering $2,500,000 of its debentures. We are offering the
debentures to shareholders of the bank who elect to receive holding company
stock in connection with the reorganization. The terms of the debentures are
described beginning on page 95.
If you elect to become a shareholder of the holding company, you should be
aware that the debentures represent indebtedness of the holding company. As
such, the holding company is obligated to pay interest on the debentures
annually at 9.5%. The holding company is also obligated to repay the principal
amount of the debentures over five years beginning in 2006. The repayment of
the debentures will reduce the amount of earnings available for the holding
company and the bank to retain to supplement capital to support growth and/or to
pay dividends to shareholders of the holding company.
The debentures will be unsecured. This means that the holders of the
debentures will have no collateral against which they can collect if the holding
company fails to make payments when due.
If we are successful in selling all $2,500,000 of the debentures and
assuming the amount of aggregate cash requirements of the stock transfer
transaction and the reorganization are less than $2,500,000, the holding company
will not borrow any funds from Wells Fargo Bank. However, if we sell an amount
of debentures that is less than the aggregate amount of the cash requirements of
the stock transfer transaction and the reorganization, then the holding company
will borrow funds from Wells Fargo Bank.
Wells Fargo Bank has issued a commitment letter indicating that it will
loan up to $1,650,000 to the holding company. The commitment letter provides
that the obligation to
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<PAGE>
make the loan is subject to execution of loan documents, due diligence review of
the bank and final loan committee approval.
The commitment letter provides that the loan will be repaid over a ten year
period. Interest will be due and payable upon demand, but if demand is not made,
will be due and payable quarterly. The loan will bear interest on the unpaid
balance at a rate equal to the prime rate in effect from time to time at Wells
Fargo Bank. The loan will be secured by a pledge of the bank stock obtained by
the holding company. In the event the holding company should default in the
repayment of the indebtedness, Wells Fargo Bank could foreclose upon the bank
stock to satisfy the remaining indebtedness. In that event, the holding company
would lose its ownership of the bank stock, the holding company's only material
asset. If this happens and you own holding company stock or debentures, you
will lose your entire investment.
The holding company's ability to repay the debt owed to Wells Fargo Bank
and the debt represented by the debentures, and to meet its operating expenses
will depend on the profitability of the bank and the bank's ability to pay
dividends to the holding company. The bank's ability to pay dividends to the
holding company is restricted by federal law and regulations. See "Dividends
Policy" and "Governmental Regulation."
You should also be aware that the holding company's ability to pay
dividends on its common stock is also restricted. See "Dividends Policy" and
"Governmental Regulations." In addition, the holding company plans to retain
earnings and not pay dividends on its common stock until its debt is
substantially reduced.
Difference in Book Value
Book value is sometimes used by investors in banks as a benchmark from
which to determine the market value of bank stocks. Book value per share is not
fair market value per share. However, it provides a reference point as to the
amount of equity in the organization. The book value of the bank stock and the
holding company stock is effected by several factors, including the amount of
stockholders' equity and the number of shares of stock outstanding.
The tangible book value per share of the bank stock is determined by
dividing the stockholders' equity of the bank by the number of shares
outstanding. At the effective date of the reorganization, the tangible book
value per share of the holding company stock will initially be somewhat less
than the tangible book value per share of the bank stock. This is because the
$15.00 per share amount of cash to be paid pursuant to the stock transfer
transaction and the reorganization is greater than $10.13, the tangible book
value per share of the bank stock as of March 31, 2000.
The following table reflects the potential for dilution in book value
resulting from the transaction:
<TABLE>
<CAPTION>
Potential
Dilution(1)
------------
<S> <C>
Tangible Book Value Per Share of Bank Stock(2) $10.13
Tangible Book Value Per Share of Holding Company Stock(3) $ 8.15
------------
Amount of Dilution Per Share $ 1.98
============
</TABLE>
____________________
(1) Assumes and reflects the payment of $2,500,000 for an aggregate of 166,666
shares being sold by the selling directors and other shareholders who elect
to receive cash in the reorganization.
(2) At of March 31, 2000.
(3) Assumes that the transactions had been completed as of March 31, 2000.
Expenses of the Reorganization
The bank will pay for the expenses associated with solicitation of proxies
for the annual shareholders meeting and for all other expenses associated with
the reorganization.
Material Federal Income Tax Consequences
The following discussion is a general summary of certain United States
federal income tax consequences of the reorganization. This discussion is based
upon the Internal
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<PAGE>
Revenue Code, regulations promulgated by the United States Treasury Department,
judicial authorities, and current rulings and administrative practice of the
Internal Revenue Service "IRS") in each case as in effect as of the date of this
document and all of which are subject to change at any time, possibly with
retroactive effect. For purposes of this discussion, it is assumed that shares
of bank stock are held as "capital assets" within the meaning of Section 1221 of
the Code (i.e., property held for investment). This discussion does not address
all aspects of federal income taxation that might be relevant to particular
holders of the bank stock in light of their status or personal investment
circumstances; nor does it discuss the consequences to such holders who are
subject to special treatment under the federal income tax laws such as foreign
persons, dealers in securities, regulated investment companies, life insurance
companies, other financial institutions, tax-exempt organizations, pass-through
entities, taxpayers who hold bank stock as part of a "straddle," "hedge" or
"conversion transaction" or who have a "functional currency" other than the
United States dollar or to persons who have received their bank stock as
compensation. Further, this discussion does not address the state, local or
foreign tax consequences of the reorganization.
The reorganization should not qualify as a reorganization under Section
368(a)(2)(E) of the Code. Rather, for federal income tax purposes the
reorganization is intended to constitute a non taxable incorporation pursuant to
Section 351 of the Code.
Assuming the reorganization is treated as a non taxable incorporation
within the meaning of Section 351 of the Code, the reorganization will result in
the following federal income tax consequences to the bank shareholders:
. The bank, the holding company and the interim bank will recognize no
gain or loss because of the reorganization.
. The bank will recognize taxable gain or loss upon the sale of the Park
Cities branch pursuant to the Stock Transfer and Branch Sale
Agreement.
. Each shareholder who receives only holding company common stock will
not recognize any gain or loss because of the reorganization.
. Each shareholder who receives only cash will recognize gain equal to
the amount of cash received, less the shareholder's basis in the bank
stock exchanged therefor. The gain recognized upon the receipt of cash
will be a capital gain to the extent the shares of bank stock were
held by the shareholder as a capital asset.
. A shareholder's aggregate tax basis in the shares of holding company
common stock received pursuant to the reorganization in exchange for
bank stock will be equal to the aggregate tax basis of the shares of
bank stock surrendered in exchange therefor.
. Each shareholder will include in his holding period for holding
company common stock received in the reorganization the holding period
of the shares of bank stock surrendered in exchange therefor, provided
that the bank stock is held as a capital asset on the date of the
exchange.
The foregoing is a summary discussion of material federal income tax
consequence of the reorganization. The discussion is included for general
information purposes only and may not apply to a particular bank shareholder in
light of such shareholder's particular circumstances. Bank shareholders should
consult their own tax advisors as to the particular tax consequences to them of
the reorganization, including the application of state, local and foreign tax
laws and possible future changes in federal income tax laws and the
interpretation thereof, which can have retroactive effects.
Accounting Treatment
We intend to treat the proposed reorganization as a pooling of interests
for financial accounting purposes. The pooling -of-interest method of accounting
for a business combination reflects the union of ownership between the entities
involved. Results of operations are restated for prior periods as if the
entities involved had always been combined. Because ENB Bankshares will be a
one-bank holding company, immediately after the reorganization, its consolidated
financial statements will be substantially equivalent to the bank's financial
statements prior to the reorganization except that the holding company's
financial statements will reflect the debt to be incurred by the holding company
as part of the transaction. The holding company's parent-
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only financial statements will reflect its investment in 100% of the shares of
the bank stock.
Trading and Resale of Holding Company Stock
The bank's shares are sold from time to time in private transactions.
Initially, we do not expect that holding company common stock will trade on a
more established basis following the reorganization. Currently, we have no
plans to list shares of the holding company common stock on any stock exchange
or automated quotation system, although we may do so in the future.
The holding company is registering its common stock to be issued in the
reorganization with the Commission under the Securities Act. Following the
reorganization, former shareholders may freely resell or otherwise transfer
their shares, except those former shareholders who are deemed "affiliates" of
the bank, within the meaning of Commission Rules 144 and 145. In general terms,
any person who is an executive officer, director or 10% shareholder of the bank
at the time of the shareholders' meeting may be deemed to be an affiliate of the
bank for purposes of Commission Rules 144 and 145. This proxy
statement/prospectus does not cover resales of shares of the holding company
common stock to be issued to affiliates of the bank in connection with the
transaction.
The holding company common stock received by persons who are deemed to be
affiliates of the bank may be resold only:
. in compliance with the resale provisions of Commission Rule 145(d);
. in compliance with the provisions of another applicable exemption from
the registration requirements of the Securities Act; or
. pursuant to an effective registration statement filed with the
Commission.
In general terms, Commission Rules 144 and 145(d) permit an affiliate of
the bank to sell shares of the holding company common stock received by him or
her or her in ordinary brokerage transactions subject to certain limitations on
the number of shares that may be resold in any consecutive three-month period.
Generally, the affiliate, not acting in concert with others, may not sell that
number of shares which is more than 1% of the outstanding shares of the holding
company common stock during the three-month period.
The ability of affiliates to resell shares of the holding company common
bank stock received in the transaction under Rule 144 or Rule 145 is subject to
the holding company's having satisfied its Securities Exchange Act of 1934
("Exchange Act") reporting requirements, if any, for specified periods prior to
the time of sale.
Finally, an affiliate of the bank may not, as a general rule and subject
to an exception in a case of certain very small sales:
. sell any shares of the holding company common stock during the 30-day
period immediately preceding the day of the reorganization; or
. sell any shares of the holding company's stock received by him or her
in exchange for shares of the bank stock until after the publication
of financial results covering at least 30 days of post-reorganization
operations.
Proposed Resolution and Board Recommendation
Shareholders will be asked to consider and act upon the following
resolution in connection with the proposed reorganization:
RESOLVED, that the Agreement and Plan of Reorganization
entered by and between Eagle National Bank and New
Eagle Bank, and joined in by ENB Bankshares, Inc. is
hereby approved and adopted and that the consolidation
provided for therein is authorized and approved.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS VOTE IN
FAVOR OF THE FOREGOING RESOLUTION APPROVING AND ADOPTING THE REORGANIZATION
AGREEMENT AND AUTHORIZING THE CONSOLIDATION.
Other Aspects of the Vote. By voting in favor of the reorganization,
shareholders will be waiving their preemptive rights to acquire up to 40,000
shares of holding company
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common stock that may be issued as of a result of the exercise of options
granted to officers of the bank pursuant to the bank's existing stock option
plan to be adopted by the holding company.
RIGHTS OF DISSENTING SHAREHOLDERS
Pursuant to the provisions of Section 9 of the Agreement and Plan of
Reorganization and 12 U.S.C. (S)215, any shareholder of the bank who votes
against the reorganization at the annual meeting or who gives notice in writing
at or prior to the annual meeting to the presiding officer that such shareholder
dissents to the reorganization shall, following consummation of the
reorganization, be entitled to receive the value of the shares so held by him or
her as of the effective date of the reorganization, upon written request made to
the bank at any time within thirty days after the effective date of the
reorganization. The written request must be accompanied by the surrender of
such shareholder's bank stock certificates. Any dissenting shareholder of the
bank who does not follow the prescribed procedure will not be entitled to
appraisal rights with respect to his shares. FAILURE BY A SHAREHOLDER TO EITHER
(1) VOTE AGAINST THE REORGANIZATION OR (2) GIVE NOTICE IN WRITING AT OR PRIOR TO
THE ANNUAL MEETING THAT HE OR SHE IS DISSENTING TO THE REORGANIZATION WILL BE
CONSTRUED AS A WAIVER OF APPRAISAL RIGHTS.
The value of the shares of any dissenting shareholder will be ascertained,
as of the effective date of the reorganization, by an appraisal made by a
committee of three persons comprised of (i) one person selected by the vote of
the holders of the majority of the stock, the owners of which are entitled to
payment in cash (by reason of such request for appraisal), (ii) one person
selected by the directors of the bank, and (iii) one person selected by the two
persons who are selected in the foregoing manner. The valuation agreed upon by
any two of the three appraisers will govern. If the value so fixed is not
satisfactory to any dissenting shareholder who has requested payment, that
shareholder may, within five days after being notified of the appraised value of
such shares, appeal to the OCC who will then cause a reappraisal to be made,
which will be final and binding as to the value of the shares of such
shareholder.
If, within ninety days from the effective date of the reorganization, for
any reason one or more of the appraisers is not selected as provided above or
the appraisers fail to determine the value of such shares, the OCC will, upon
written request of any interested party, cause an appraisal to be made by an
independent professional appraiser, which appraisal will be final and binding
upon all parties. The expenses of the OCC in making the appraisal or the
reappraisal, as the case may be, will be paid by the Resulting bank. The value
of the shares ascertained must be promptly paid to the dissenting shareholders.
The shares of holding company stock which would have been delivered to such
dissenting shareholders, if applicable, had they not requested payment must be
sold in such manner as satisfies the requirements of 12 U.S.C. (S)215, a copy of
the relevant portions of which is attached as Annex B. If such shares are sold
-------
at a price greater than the amount paid to such dissenting shareholders, the
excess in such sale price must be paid to such dissenting shareholders.
Any shareholder of the bank who votes against the reorganization or who
gives notice of such dissent in writing at or prior to the Annual Meeting will
be notified in writing of the effective date of the reorganization.
THE FOREGOING SUMMARY OF DISSENTERS' RIGHTS DOES NOT PURPORT TO BE A
COMPLETE STATEMENT OF THE APPRAISAL RIGHTS OF DISSENTING SHAREHOLDERS. BECAUSE
OF THE COMPLEXITY OF THE PROCEDURES DESCRIBED ABOVE, WE URGE YOU TO CONSULT WITH
INDEPENDENT LEGAL COUNSEL IF YOU DESIRE TO EXERCISE THE RIGHT TO AN APPRAISAL.
PROPOSAL 2:
ELECTION OF DIRECTORS
One of the purposes of the annual meeting is to elect directors of the
bank to hold office until the next annual meeting of shareholders or until their
respective successors are duly elected and qualified. The bylaws of the bank
provide that the shareholders set the number of members of the Board of
Directors at the annual meeting. The Board of Directors has proposed that the
shareholders set the board at eleven members.
The directors will be elected at the annual meeting to serve for a one-
year term expiring at the bank's annual meeting in the year 2001. Each nominee
elected as a director will continue in office until his successor has been duly
elected and qualified, or until the earliest of his or her death, resignation or
retirement.
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The tables below set forth for each nominee for director:
. the name;
. age and the principal occupation of each nominee during the previous
five years;
. the directorships of public companies, if any, held by each nominee;
and
. the year he first became a director of the bank.
The current Board of Directors of the bank has nominated the following
persons to serve as directors:
<TABLE>
<CAPTION>
Year First
Became a
Current Position Director of Principal Occupation during
Name and Age with the Bank the Board Past Five Years
--------------------------- ----------------------------------- -------------- ------------------------------------------------
<S> <C> <C> <C>
Patrick G. Adams (47) President and Director 2000 President of Eagle National Bank (April 2000 to
present); Previously Senior Vice President of
First State Bank of Texas
Donald A. Bailey (58) Director 1997 President and Chairman of the Board of Human
Resources Corporation
Harold L. Campbell (65) Chairman of the Board and Director 1997 Chairman of the Board of Eagle National Bank
Christopher G. Griffith (53) Director 1997 President and CEO of The Wyndham Group, Inc.
(real estate development)
Clyde W. Hensley (58) Vice Chairman of the Board 1997 Vice Chairman of the Board of Eagle National
and Director Bank
Robert H. Lutz (49) Director 1997 Personal investments
Randy L. Pack (48) Director 1997 CEO of Floors, Inc.
Jon Roy Reid (52) Director 1997 President of Trinity Floor Company
Ronald W. Rhoades (51) Director 1997 Real estate development firm partner
John M. Yeaman (58) Director 1997 Director of Real Estate of Electronic Data
Systems, Inc.
Thomas R. Youngblood (52) Director 1997 Manager of Park Cities Branch of the bank
(April 2000 to present); President of Eagle
National Bank (February 1997 to April 2000)
</TABLE>
Unless otherwise indicated on any duly executed and dated proxy, the
proxies will be voted "FOR" the election of the nominees listed in the table
above for the term specified. The bank does not anticipate that any of the
above-named nominees will refuse or be unable to accept or serve as a director
of the bank for the term specified. However, if any nominee is unable or
unwilling to serve as a director, the proxies will vote for the election of such
other person(s) as may be nominated by management, unless you indicate to vote
otherwise. Assuming the receipt by each nominee of the affirmative vote of at
least a plurality of the shares of bank stock present or represented at the
annual meeting, the eleven nominees receiving the greatest number of votes will
be elected as directors.
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Information regarding the stock ownership of the above nominees can be
found in the Information About the Annual Meeting section of this document
beginning on page 54. Information regarding the compensation paid to these
nominees and information regarding transactions between these nominees and the
bank and the holding company, and information regarding the indemnification of
these nominees can be found in the Description of the Bank section of this
document beginning on page 79.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR"
THE ELECTION OF EACH OF THE INDIVIDUALS
NOMINATED FOR ELECTION AS A DIRECTOR
PROPOSAL 3:
OTHER MATTERS THAT MAY COME BEFORE THE ANNUAL MEETING
The Board of Directors of the bank is not aware of any matters, other than
those referred to in the accompanying Notice of Annual Meeting of Shareholders,
which properly may come before the annual meeting. However, if any other matter
should be properly presented for consideration and voting at the annual meeting
or any adjournment(s) thereof, it is the intention of the persons named as
proxies on the enclosed proxy card to vote the proxy cards in accordance with
their judgment.
DESCRIPTION OF THE HOLDING COMPANY
Organization and Description of Business
We organized the holding company as a Texas business corporation on May 18,
2000, for the purpose of forming a bank holding company. The articles of
incorporation of the holding company authorize the issuance of up to 1,000,000
shares of bank stock, par value, $5.00 per share. The holding company has not
issued any shares and is being managed by its initial Board of Directors.
The primary function of the holding company is to own of all of the bank
stock. Its profitability will be dependent on the financial results of its
operating subsidiary, the bank. In the future, we may decide to acquire or form
additional subsidiaries, including other banks.
At present, the holding company does not own or lease any property and has
no paid employees. It will not actively engage in business until after the
completion of the proposed reorganization. Until the day of the reorganization,
the holding company will use the bank's space and employees without payment.
After the reorganization, it will reimburse the bank on a fair and reasonable
basis for all services furnished to it and for all expenses that the bank pays
on its behalf. The holding company has not been involved in any litigation.
Properties
The holding company does not own or lease any properties. For information
about properties that the bank owns or leases, see "Description of the Bank--
Properties."
Management
Currently, Harold Campbell is the sole director of the holding company.
Prior to consummation of the reorganization, the holding company plans to
increase its board to at least four members and to elect as additional directors
Messrs. Adams, Griffith and Lutz. The holding company is also considering
whether all continuing bank directors should serve as directors of the holding
company. See "Description of the Bank--Directors and Executive Officers" below.
After the reorganization, the holding company will be the sole shareholder of
the bank and will elect the directors of the bank annually. The board of
directors of the holding company will appoint the officers of the holding
company to serve for one-year terms.
The following table provides information about the current officers of the
holding company. Both of these officers also serve as officers of the bank and
are employees of the bank.
<TABLE>
<CAPTION>
Age as of Position with
Name May 31, 2000 Holding Company Position with Bank
------------------------ ------------------- -------------------------------- ------------------------
<S> <C> <C> <C>
Harold L. Campbell 65 President Chairman of the Board
Patrick G. Adams Vice President and Secretary President and Chief
Secretary Executive Officer
</TABLE>
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Executive and Director Compensation
Because the holding company was not in existence in 1999, it paid no
compensation to its directors and officers for that year. Further, the holding
company has paid no compensation to its directors or officers to date during
2000. We anticipate that together the holding company and the bank will pay
directors and officers the same compensation that they currently receive, with
such increases in the future as may have occurred had the proposed
reorganization not occurred. Although the holding company will hold several
board meetings each year, we expect the total amount spent on directors for
their attendance at board meetings to remain the same as before the
reorganization. The holding company will not pay its directors separate
compensation for their attendance at board meetings, but the bank will continue
to compensate directors for their attendance at bank board meetings. See
"Description of the Bank--Executive Compensation" and "Description of the Bank--
Director Compensation" below.
Information about Beneficial Ownership of Significant Shareholders, Directors
and Executive Officers
Because of the stock transfer and branch sale transaction and the payment
of cash for bank stock pursuant to the reorganization, there will be fewer
shares of holding company stock than shares of bank stock outstanding after the
reorganization. As a result, after the reorganization, the percentage ownership
of the holding company by all shareholders who elect to receive holding company
stock, including significant shareholders, directors and executive officers,
will be greater than their percentage ownership in the bank stock immediately
prior to the reorganization. See Beneficial Ownership of the by Significant
Shareholders, Directors and Executive Officers."
Certain Relationships and Related Transactions
The information regarding certain relationships between the directors and
officers of the bank and transactions between the directors and officers of the
bank and the bank also applies to the holding company. Please refer to
"Description of the Bank--Certain Relationships and Related Transactions."
Directors' and Officers' Indemnification and Limits on Liability
The holding company's articles of incorporation and bylaws provide for
indemnification of its directors, officers, employees and agents against
liabilities and expenses incurred in legal proceedings concerning the holding
company, to the fullest extent permitted under Texas corporate law.
Indemnification will only apply to persons who act in good faith, in a manner he
or she reasonably believed to be in the best interest of the company, without
willful misconduct or recklessness.
We expect to extend the bank's present directors' and officers' liability
insurance policy to cover the holding company's directors and officers without
significant additional cost. This liability policy would cover the typical
errors and omissions liability associated with the activities of the holding
company. The provisions of the insurance policy would probably not indemnify any
of the holding company's officers and directors against liability arising under
the Securities Act. Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and persons controlling
the holding company pursuant to the foregoing provision, we have been informed
that in the opinion of the Commission, such indemnification is against public
policy and unenforceable.
The holding company's articles of incorporation and bylaws also limit the
liability of directors for monetary damages to acts of self-dealing, willful
misconduct or recklessness, unless the act constitutes a crime or involves
liability for the payment of taxes or an unlawful dividend. We believe that
these provisions will help reduce baseless litigation, but they may also make it
more difficult for shareholders to sue these persons on behalf of the holding
company.
Supervision and Regulation of the Holding Company
The Securities Act of 1933--The Offer and Sale of Securities. Under the
Securities Act, the holding company will be subject to the jurisdiction of the
Commission and of state securities commissions for matters relating to the offer
and sale of its securities. Presently, the bank is exempt from these
registration requirements. Accordingly, additional issuances of the holding
company's stock to raise capital or for dividend reinvestment, stock option and
other plans will require registration (absent any exemption
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from registration). Registration will result in additional costs that the bank
does not presently have to incur because of an exemption for bank stock under
the Securities Act.
The Securities Exchange Act of 1934--Periodic Reporting Requirements. The
bank stock is not registered under Section 12 of the Exchange Act. After the
reorganization, Section 12 of the Exchange Act will require that the holding
company register its stock. The holding company will file periodic reports,
proxy statements and other information with the Commission. The reports will
include consolidated financial information about both the holding company and
the bank.
The Bank Holding Company Act of 1956--Supervision by the Federal Reserve
Board. On the day of the reorganization, the holding company will become subject
to the provisions of the Bank Holding Company Act of 1956, as amended, and to
supervision by the Federal Reserve Board. The following restrictions will apply:
. General Supervision by the Federal Reserve Board. As a bank holding
company, our activities will be limited to the business of banking and
activities closely related or incidental to banking. Bank holding
companies are required to file periodic reports with and are subject to
examination by the Federal Reserve Board. The Board has adopted a risk-
focused supervision program for small shell bank holding companies which
is tied to the examination results of the subsidiary bank. The Federal
Reserve Board has issued regulations under the Bank Holding Company Act
that require a bank holding company to serve as a source of financial and
managerial strength to its subsidiary banks. As a result, the Federal
Reserve Board may require that the holding company stand ready to provide
adequate capital funds to The Fidelity Deposit and Discount Bank during
periods of financial stress or adversity.
. Restrictions on Acquiring Control of other Banks and Companies. A bank
holding company may not
. acquire direct or indirect control of more than 5% of the
outstanding shares of any class of voting stock, or substantially
all of the assets of, any bank, or
. merge or consolidate with another bank holding company without prior
approval of the Federal Reserve Board.
In addition, a bank holding company may not
. engage in a nonbanking business, or
. acquire ownership or control of more than 5% of the outstanding shares
of any class of voting stock of any company engaged in a nonbanking
business
unless the business is determined by the Federal Reserve Board to be so
closely related to banking as to be a proper incident to banking. In making
this determination, the Federal Reserve Board considers whether these
activities offer benefits to the public that outweigh any possible adverse
effects.
. Anti-Tie-In Provisions. A bank holding company and its subsidiaries may
not engage in certain tie-in arrangements in connection with any
extension of credit or provision of any property or services. The so-
called "anti-tie-in" provisions state generally that a bank may not
. extend credit,
. lease or sell property, or
. furnish any service to a customer on the condition that the customer
provide additional credit or service to the bank or its affiliates,
or on the condition that the customer not obtain other credit or
service from a competitor of the bank.
. Restrictions on Extensions of Credit by Banks to their Holding Companies.
Subsidiary banks of a bank holding company are also subject to certain
restrictions imposed by the Federal Reserve Act on
. any extensions of credit to the bank holding company or any of its
subsidiaries,
. investments in the stock or other securities of the bank holding
company, and
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. taking these stock or securities as collateral for loans to any
borrower.
. Risk-Based Capital Guidelines. Bank holding companies must comply with the
Federal Reserve Board's risk- based capital guidelines. The required
minimum ratio of total capital to risk-weighted assets, including certain
off-balance sheet activities, such as standby letters of credit, is 8%. At
least half of the total capital is required to be "Tier I Capital,"
consisting principally of bank stockholders' equity, less certain
intangible assets. The remainder, "Tier II Capital," may consist of:
. certain preferred stock,
. a limited amount of subordinated debt,
. certain hybrid capital instruments,
. other debt securities, and
. a limited amount of the general loan loss allowance.
The risk-based capital guidelines are required to take adequate account of
interest rate risk, concentration of credit risk, and risks of nontraditional
activities.
. Capital Leverage Ratio Requirements. The Federal Reserve Board requires a
banking holding company to maintain a leverage ratio of a minimum level of
Tier I capital (as determined under the risk-based capital guidelines)
equal to 3% of average total consolidated assets for those bank holding
companies that have the highest regulatory examination rating and are not
contemplating or experiencing significant growth or expansion. All other
bank holding companies are required to maintain a ratio of at least 1% to
2% above the stated minimum. The Bank is subject to almost identical
capital requirements adopted by the OCC.
. Restrictions on Control Changes. The Change in Bank Control Act of 1978
requires persons seeking control of a bank or bank holding company to
obtain approval from the appropriate federal banking agency before
completing the transaction. "Control" is generally presumed to be the power
to vote 10% or more of a company's voting stock. The Federal Reserve Board
is responsible for reviewing changes in control of bank holding companies.
In doing so, the Federal Reserve Board reviews the financial position,
experience and integrity of the acquiring person and the effect on the
financial condition of the bank holding company, relevant markets and
federal deposit insurance funds.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 -
Interstate Banking. Prior to the passage of the Riegle-Neal Interstate Banking
and Branching Efficiency Act of 1994, also known as the Interstate Banking Act,
the Bank Holding Company Act prohibited a bank holding company located in one
state from acquiring a bank located in another state, unless the law of the
state where the bank to be acquired was located specifically authorized the
acquisition. Similarly, prior law generally prohibited interstate branching by a
single bank. The Interstate Banking Act permits an adequately capitalized and
adequately managed bank holding company to acquire a bank in another state
whether or not the law of that other state permits the acquisition, subject to
certain deposit concentration caps and approval by the Federal Reserve Board.
The law permits states to require stricter concentration limitations or to
require that the target be in existence for up to 5 years before an out-of-state
bank or bank holding company may acquire it. In contrast to interstate
acquisitions and mergers, the Interstate Banking Act permits acquisitions of
less than all branches of a bank only if the state's laws permit it.
In addition, under the Interstate Banking Act, an adequately capitalized and
well managed bank can engage in interstate expansion by merging with a bank in
another state, unless the other state affirmatively opted out of the legislation
before June 1, 1997. The Interstate Banking Act also permits the establishment
of new branches in another state, but only if a state affirmatively opts in by
adopting appropriate legislation. Pennsylvania, Delaware, Maryland and New
Jersey, as well as other states, have adopted "opt in" legislation which allows
these transactions.
A bank holding company or bank may not acquire a bank outside its home state
primarily for the purpose of deposit production, and the transaction must not
have a negative impact on the communities that the target bank serves.
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Permitted Activities
The Federal Reserve Board permits bank holding companies to engage in
activities so closely related to banking or managing or controlling banks as to
be a proper incident of banking. In 1997, the Federal Reserve Board
significantly expanded its list of permissible nonbanking activities to improve
the competitiveness of bank holding companies. The following list includes
activities that a holding company may presently conduct and is subject to change
by the Federal Reserve Board:
. Making, acquiring or servicing loans and other extensions of credit for its
own account or for the account of others.
. Any activity used in connection with making, acquiring, brokering, or
servicing loans or other extensions of credit, as determined by the Federal
Reserve Board. The Board has determined that the following activities are
permissible:
. Real estate and personal property appraising;
. Arranging commercial real estate equity financing;
. Check-guaranty services;
. Collection agency services;
. Credit bureau services;
. Asset management, servicing, and collection activities;
. Acquiring debt in default, if the holding company divests shares or
assets securing debt in default that are not permissible investments
for bank holding companies within prescribed time periods, and meets
certain other conditions; and
. Real estate settlement services.
. Leasing personal and real property or acting as agent, broker, or advisor
in leasing property, provided that:
. The lease is a nonoperating lease;
. The initial term of the lease is at least 90 days;
. If real property is being leased, the transaction will compensate the
lessor for at least the lessor's full investment in the property and
costs, with certain other conditions.
. Operating nonbank depository institutions, including an industrial bank or
savings association.
. Performing functions or activities that may be performed by a trust company
(including activities of a fiduciary, agency or custodial nature), in the
manner authorized by federal or state law, so long as the holding company
is not a bank.
. Acting as investment or financial advisor to any person, including:
. serving as investment advisor to an investment company registered
under the Investment Company Act of 1940;
. furnishing general economic information and advice, general economic
statistical forecasting services, and industry studies;
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. providing advice in connection with mergers, acquisitions,
divestitures, investments, joint ventures, capital structuring,
financing transactions, and conducting financial feasibility studies;
. providing general information, statistical forecasting, and advice
concerning any transaction in foreign exchange, swaps and similar
transactions, commodities, and options, futures and similar
instruments;
. providing educational courses and instructional materials to
consumers on individual financial management matters; and
. providing tax planning and tax preparation services to any person.
. Agency transactional services for customer investments, including:
. Securities brokerage. Providing securities brokerage services,
whether alone or in combination with investment advisory services,
and incidental activities, including related securities credit
activities compliant with Federal Reserve Board Regulation T and
custodial services, if the securities brokerage services are
restricted to buying and selling securities solely as agent for the
account of customers and do not include securities underwriting or
dealing.
. Riskless-principal transactions. Buying and selling all types of
securities in the secondary market on the order of customers as a
"riskless principal."
. Private-placement services. Acting as agent for the private placement
of securities in accordance with the requirements of the Securities
Act and the rules of the Commission.
. Futures commission merchant. Acting as a futures commission merchant
for unaffiliated persons in the execution and clearance of any
futures contract and option on a futures contract traded on an
exchange in the United States or abroad ,if the activity is conducted
through a separately incorporated subsidiary of the bank holding
company and the company satisfies certain other conditions.
. Investment transactions as principal:
. Underwriting and dealing in government obligations and money
market instruments, including bankers' acceptances and
certificates of deposit, under the same limitations applicable
if the activity were performed by the bank holding company's
subsidiary member banks.
. Engaging as principal in:
. foreign exchanges, and
. forward contracts, options, futures, options on futures,
swaps, and similar contracts, with certain conditions.
. Buying and selling bullion, and related activities.
. Management consulting and counseling activities:
. Subject to certain limitations, management consulting on any matter
to unaffiliated depository institutions, or on any financial,
economic, accounting, or audit matter to any other company.
. Providing consulting services to employee benefit, compensation, and
insurance plans, including designing plans, assisting in the
implementation of plans, providing administrative services to plans,
and developing employee communication programs for plans.
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. Providing career counseling services to:
. a financial organization and individuals currently employed by, or
. recently displaced from, a financial organization;
. individuals who are seeking employment at a financial organization;
and
. individuals who are currently employed in or who seek positions in
the finance, accounting, and audit departments of any company.
. Support services:
. Providing limited courier services; and
. Printing and selling checks and related items requiring magnetic ink
character recognition.
. Insurance agency and underwriting:
. Subject to certain limitations, acting as principal, agent, or broker
for credit life, accident, health and unemployment insurance that is
directly related to an extension of credit by the bank holding
company or any of its subsidiaries.
. Engaging in any insurance agency activity in a place where the bank
holding company or a subsidiary of the bank holding company has a
lending office and that has a population not exceeding 5,000 or has
inadequate insurance agency facilities, as determined by the Federal
Reserve Board.
. Supervising, on behalf of insurance underwriters, the activities of
retail insurance agents who sell fidelity insurance and property and
casualty insurance on the real and personal property used in the bank
holding company's operations or its subsidiaries, and group insurance
that protects the employees of the bank holding company or its
subsidiaries.
. Engaging in any insurance agency activities if the bank holding
company has total consolidated assets of $50 million or less, with
the sale of life insurance and annuities being limited to sales in
small towns or as credit insurance.
. Making equity and debt investments in corporations or projects designed
primarily to promote community welfare, and providing advisory services to
these programs.
. Subject to certain limitations, providing others financially oriented data
processing or bookkeeping services.
. Issuing and selling money orders, travelers' checks and United States
savings bonds.
. Providing consumer financial counseling that involves counseling,
educational courses and distribution of instructional materials to
individuals on consumer-oriented financial management matters, including
debt consolidation, mortgage applications, bankruptcy, budget management,
real estate tax shelters, tax planning, retirement and estate planning,
insurance and general investment management, so long as this activity does
not include the sale of specific products or investments.
. Providing tax planning and preparation advice.
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DESCRIPTION OF THE BANK
History
Eagle National Bank opened for business on February 28, 1997, as a national
banking association. Deposits held by the bank are insured by the FDIC to the
maximum extent permitted by law. The bank's principal office is located at 5006
Verde Valley, Dallas, Texas 75240. The bank also operates a full service branch
known as "Park Cities bank" located at 6829 Hillcrest, Dallas, Texas. The Park
Cities branch is being sold to the selling directors pursuant to the terms and
conditions of the Stock Transfer and Branch Sale Agreement.
Description of Business
The bank engages in a full service commercial and consumer banking
business, including the following services:
. accepting time and demand deposits;
. providing personal and business checking accounts at competitive rates;
and
. making secured and unsecured commercial and consumer loans.
The bank is a locally managed community bank that seeks to provide personal
attention and professional assistance to its customer base, which consists
principally of individuals and small and medium-sized businesses. The bank's
philosophy includes offering direct access to its officers and personnel,
providing friendly, informed and courteous service, local and timely decision
making, flexible and reasonable operating procedures, and consistently-applied
credit policies.
The bank's primary service area is located in the Dallas metropolitan area.
The Bank encounters competition in the scope and type of services it offers,
interest rates it pays on time deposits, its ability to attract new deposits,
and other aspects of its banking business.
The bank's acceptance of time demand and savings deposits includes NOW
accounts, money market accounts, regular savings accounts, and certificates of
deposit. The bank also offers overdraft protection to its checking customers.
The bank makes secured and unsecured commercial, consumer, installment and
construction loans. Residential mortgages and small business loans have always
been at the core of the bank's portfolio. Consumer loans include revolving
credit lines and commercial lending.
The bank offers the following support services to make financial
management more efficient and convenient for its customers:
. on-line home and business banking;
. telephone banking;
. direct deposit, drive-in banking;
. federal tax depository;
. MasterCard/Visa credit card services;
. night deposit services;
. notary public services;
. safe deposit boxes;
. travelers checks;
. U.S. savings bonds; and
. individual retirement accounts.
At March 31, 2000, the bank had
. total assets of $61,410,000,
. total shareholders' equity of $5,824,000, and
. total liabilities of $55,586,000, which includes $55,298,000 of
deposits.
On May 31, 2000, the bank had approximately 21 full time employees and no
part-time employees. Management considers relations with our employees to be
good.
Properties
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Below is a schedule of all the bank's properties, showing the location,
square footage whether the property is owned or leased and its use:
<TABLE>
<CAPTION>
Square Type of
Property Location Footage Ownership Use
------------ ---------------------- ------------- --------------- ----------------------
<S> <C> <C> <C> <C>
1 5006 Verde Valley 6,500 Own Main Office
Dallas, Texas 75240
2 6829 Hillcrest 1,500 Lease Park Cities Branch
Dallas, Texas 75205
-----------------------------------------------------------------------------------------------------
</TABLE>
Assuming that the stock transfer transaction and the reorganization are
completed, the bank will sell the Park Cities branch.
In addition, the bank owns a tract of land in Allen, Texas at which the
bank is considering establishing an additional branch.
Supervision and Regulation of the Bank
As an FDIC-insured, national banking association located in Texas, the bank
is subject to supervision, regulation and examination by the OCC and the FDIC.
The bank is also subject to requirements and restrictions under federal and
state law, including:
. requirements to maintain reserves against loans and lease losses,
. restrictions on the types and amounts of loans that may be granted and
. the interest that may be charged on the loans,
. limitations on the types of investments the bank may make and the types
of services the bank may offer, and
. restrictions on loans to insiders of the bank or other insider
transactions.
Various consumer loans regulations also affect the operations of the bank.
In addition, the actions of the Federal Reserve Board, as it attempts to control
the money supply and credit availability in order to influence the economy,
impact commercial banks. The proposed reorganization will not significantly
change the authority of these agencies over the bank. The information below
highlights various aspects of regulation of the bank under federal and state
laws.
Federal Banking Law
Federal banking laws applicable to the bank include, among other things,
provisions that:
. limit the scope of the bank's business;
. require the maintenance of certain reserves against loans and lease
losses;
. restrict investments and borrowings by the bank;
. limit the payment of dividends; and
. regulate branching activities and mergers and acquisitions.
Generally, the bank must obtain prior approval from the OCC for the
acquisition of shares of stock. The bank may purchase, sell and hold investments
in the form of bonds, notes and debentures to the extent permitted by federal
law.
Federal banking law also requires that a bank obtain the approval of the
OCC for any merger where the surviving bank would be a national bank. In
reviewing the merger application, the OCC considers, among other things, whether
the merger would be consistent with adequate and sound banking practices and is
in the public interest, on the basis of
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several factors, including the potential effect of the merger on competition and
the convenience and needs of the affected communities.
Any person intending to acquire more than 10% of outstanding voting shares
of stock in a national bank must obtain the prior approval of the OCC.
In addition, the OCC conducts regular examinations of the bank.
The FDIC insures the bank's deposits pursuant to the system of federal
deposit insurance initially established by the Banking Act of 1933. The bank
must comply with the FDIC's risk- based capital guidelines. Under the Federal
Deposit Insurance Corporation Improvement Act of 1991, the FDIC has regulations
defining the levels at which an insured institution would be considered:
. well capitalized;
. adequately capitalized;
. undercapitalized;
. significantly undercapitalized;
. critically undercapitalized.
To be adequately capitalized, the required minimum ratio of total capital
to risk-weighted assets, including certain off-balance sheet activities, such as
standby letters of credit, is 8%. To be well capitalized, this risk-based ratio
must be at least 10%. At least half of the total capital is required to be "Tier
I Capital," consisting principally of bank stockholders' equity, less certain
intangible assets. The remainder, "Tier II Capital," may consist of
. certain preferred stock;
. a limited amount of subordinated debt;
. certain hybrid capital instruments;
. other debt securities; and
. a limited amount of the general loan loss allowance.
The risk-based capital guidelines must take into account interest rate
risk, concentration of credit risk, and risks of nontraditional activities. As
of June 30, 1999, the bank satisfied the criteria to be classified as "well
capitalized," and we do not expect the proposed reorganization to change the
bank's capitalization.
The FDIC could, under certain circumstances, reclassify a "well-
capitalized" institution as "adequately capitalized" or require an "adequately
capitalized" or "undercapitalized" institution to comply with supervisory
actions as if it were in the next lower category. A reclassification could be
made if the regulatory agency determines that the institution is in an unsafe or
unsound condition (which could include unsatisfactory examination ratings). In
the event an institution's capital deteriorates to the undercapitalized category
or below, the law prescribes an increasing amount of regulatory intervention.
The bank is also subject to rules requiring a minimum ratio of classified
assets to capital, minimum earnings necessary to absorb losses, and a minimum
ratio of market value to book value for publicly held institutions.
The bank's deposits have the maximum insurance coverage provided by the
FDIC, currently $100,000 per account. The bank pays insurance premiums into the
Bank Insurance Fund according to rates established by the FDIC. The FDIC has
discretion to increase premiums in the future in response to changes in the
economic climate of the banking industry. As a result, the future cost of
deposit insurance for the bank is, in large part, dependent upon the extent of
future bank failures and the amount of insurance coverage provided by the FDIC
for each deposit account.
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The FDIC has implemented a risk-related premium schedule for all insured
depository institutions that results in the assessment of premiums based on
capital and supervisory measures. Under the risk-related premium schedule, the
FDIC assigns, on a semiannual basis, each depository institution to one of three
capital groups, as follows:
. well-capitalized;
. adequately capitalized; or
. undercapitalized;
and further assigns such institutions to a subgroup within a capital group. The
institution's subgroup assignment is based upon the FDIC's judgment of the
institution's strength in light of supervisory evaluations, including
examination reports, statistical analyses and other information relevant to
measuring the risk posed by the institution. Only institutions with a total
capital to risk-adjusted assets ratio of 10% or greater, a Tier I capital to
risk-based assets ratio of 6% or greater, and a Tier I leverage ratio of 5% or
greater, are assigned to the well-capitalized group. At June 30, 1999, the bank
was well capitalized for purposes of calculating insurance assessments.
The Bank Insurance Fund is presently fully funded at more than the minimum
amount required by law. Accordingly, the 1999 BIF assessment rates range from
zero for those institutions with the least risk, to $0.27 for every $100 of
insured deposits for institutions deemed to have the highest risk. The bank is
in the category of institutions that presently pay nothing for deposit
insurance. The FDIC adjusts the rates every six months.
While the bank presently pays no premiums for deposit insurance, it is
subject to assessments to pay the interest on bonds issued by the Financing
Corporation, which is known as FICO. FICO was created by Congress to issue bonds
to finance the resolution of failed thrift institutions. Prior to 1997, only
thrift institutions were subject to assessments to raise funds to pay the FICO
bonds.
On September 30, 1996, as part of the Omnibus Budget Act, Congress enacted
the Deposit Insurance Funds Act of 1996, which recapitalized the Savings
Association Insurance Fund and provided that commercial banks would be subject
to 1/5 of the assessment to which savings and loan associations are subject for
FICO bond payments through 1999. Beginning in 2000, commercial banks and savings
and loan associations will be subject to the same assessment for FICO bonds.
Under the Community Reinvestment Act of 1977, the OCC must determine
whether the bank is meeting the credit needs of the community, including low and
moderate income neighborhoods, that it serves and must take this record into
account in its evaluation of most regulatory applications the bank files with
the OCC. The OCC makes publicly available its evaluation of the bank's record of
meeting the credit needs of its entire community. This evaluation includes a
descriptive rating of:
. outstanding;
. satisfactory;
. needs to improve, or
. substantial noncompliance.
At March 31, 2000, the bank had a satisfactory CRA rating.
The Bank Enterprise Act of 1991 requires "truth-in-savings" on consumer
deposit accounts so that consumers can make meaningful comparisons between the
competing claims of banks with regard to deposit accounts and products. Under
this provision, the bank is required to provide information to depositors
concerning the terms of their deposit accounts, and in particular, to disclose
the annual percentage yield. There are some operational costs of complying with
this law.
Suspicious Activities Reports. Under the Bank Secrecy Act, banks must
report to the IRS currency transactions of more than $10,000 or multiple
transactions in any one day that aggregate in excess of $10,000.
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Interstate Banking. The Bank may engage in interstate banking, subject to
certain limitations. See "Description of the Holding Company--Supervision and
Regulation--The Riegle-Neal Interstate Banking and Branching Efficiency Act of
1994--Interstate Banking."
New Legislation
Proposed legislation is introduced in almost every legislative session that
would dramatically affect the regulation of the banking industry. At this time,
we cannot predict whether or not Congress will enact legislation and what effect
the legislation might have on the bank. For example, we cannot predict the full
impact of the Gramm-Leach-Bliley Financial Services Modernization Act, signed
into law on November 12, 1999, which will allow bank holding company
subsidiaries and national bank operating subsidiaries to offer a wide range of
new financial services, including securities underwriting. The new law also
permits bank holding company subsidiaries to engage in real estate development
and insurance underwriting.
Legal Proceedings
The nature of the bank's business generates a certain amount of litigation
involving matters arising in the ordinary course of business. In the opinion of
management of the bank, however, no legal proceedings are pending, which, if
determined adversely to the bank, would materially affect the bank's undivided
profits or financial condition. There are no proceedings pending other than
ordinary routine litigation incidental to the business of the bank. In addition,
to management's knowledge, no government authorities have initiated or
contemplated any material legal actions against the bank.
MANAGEMENT
Principal Officers
The following table shows selected information regarding principal officers
of the bank and the holding company. The Board of Directors elects the officers
for one-year terms, and the board has the discretionary authority to remove
these individuals from office.
<TABLE>
<CAPTION>
Office and Position Held Office and Position with Held
Name (Age) with the Bank Since the Holding Company Since
------------------------ --------------------------------- ----- ---------------------------- -----
<S> <C> <C> <C> <C>
Patrick G. Adams (47) President 2000 Vice President and Secretary 2000
Harold L. Campbell (65) Chairman of the Board 1997 President 2000
Clyde W. Hensley (58) Vice Chairman of the Board 1997 Director 2000
Sue Higgs (58) Senior Vice President and Cashier 1997 -- --
</TABLE>
Directors
The bank's Board of Directors presently consists of 11 members.
Shareholders elect directors annually to serve for a term of one year. Some of
the directors who serve on the bank's Board of Directors currently serve on the
holding company's Board of Directors. After the reorganization, the shareholders
of the bank who elect will become shareholders of the holding company and will
elect the Board of Directors of the holding company. The holding company will be
the sole shareholder of the bank and will elect the bank's Board of Directors.
See "Election of Directors" for more detailed information about the directors of
the bank and the holding company.
Executive Compensation
The following table provides the annual compensation for services in all
capacities to the bank for the fiscal years ended December 31, 1999, 1998, and
the ten month period ended December 31, 1997, for those persons who were at
December 31, 1999,
. the Chief Executive Officer, and
. the four other most highly compensated executive officers of the bank
to the extent such person's total annual salary and bonus exceeded
$100,000.
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Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
------------------------------------------ -------------------------------------------------------
Securities
Restricted Underlying LTIP
Name and Principal Other Annual Stock Award(s) Options/SARs Payouts All Other
Position Year Salary ($) Bonus ($) Compensation ($) (#) ($) Compensation
--------------------- ---- ---------- --------- ------------ --------------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Tom Youngblood 1999 122,000 26,000 8,400 -- -- -- --
President and Chief 1998 105,000 15,000 8,400 -- -- -- --
Executive Officer 1997 90,000 10,000 8,400 -- 7,500 -- --
</TABLE>
------------------
(1) Includes the bank's contributions to the 401(k) and deferred profit sharing
plan of $5,660, $2,175 and $0 on behalf of Mr. Youngblood for 1999, 1998,
and 1997, respectively. It also includes country club membership dues of
$5,131, $5,131 and $5,131 paid on behalf of Mr. Youngblood in 1999, 1998
and 1997, respectively.
(2) In addition to annual salary, Mr. Youngblood receives the following
benefits: medical, dental, life and disability insurance, and other
customary benefits. Includes payments for medical, dental, life and
disability insurance made by the bank, on behalf of Mr. Youngblood, of
$13,098, $10,810 and $7,786 in 1999, 1998, and 1997, respectively.
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Stock Option Awards
No stock options were granted to, or exercised by, the Chief Executive
Officer or any of the next four most highly compensated officers since January
1, 1999.
The following table sets forth certain information regarding the bank stock
underlying outstanding stock options at December 31, 1999:
Securities Underlying Unexercised Options At Fiscal Year End
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised In-
Underlying Unexercised Options the-Money Options at Fiscal
at Fiscal Year End (#) Year End ($)(2)
------------------------------ -----------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
------------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Clyde W. Hensley 4,500 3,000 $22,500 $15,000
Tom Youngblood (1) 4,500 3,000 22,500 15,000
</TABLE>
_______________
(1) Pursuant to the Stock Transfer and Branch Sale Agreement, Mr. Youngblood
will transfer all rights in his stock options to the holding company for
$37,500 cash.
(2) Based upon the $15.00 price set forth in the reorganization proposal.
Compensation of Directors
During 1999, the bank paid directors' fees of $500 per meeting attended to
bank directors for attending and participating in board of director's meetings
and $100 for committee meetings. In the aggregate, the bank paid the Board of
Directors $75,000 for all services rendered in 1999. The Board of Directors held
thirteen regular meetings and 31 committee meetings in 1999. The Board
committees include a Loan Appraisal Committee, Audit/Budget Committee and an
Executive/Compensation Committee.
Certain Relationships and Related Transactions
Except as described below and under "Proposal 1: The Proposed
Reorganization," the bank has not entered into and does not intend to enter into
any material transactions with any director or executive officer of the bank or
their associates.
Some of our directors and officers and the companies with which they are
associated had banking transactions with the bank in the ordinary course of its
business during 1999, and the bank expects to continue such banking transactions
in the future.
Total loans outstanding from the bank at March 31, 2000, to the bank's
officers and directors as a group, members of their immediate families and
companies in which they had an ownership interest of 10% or more, amounted to
$2,277,339, or approximately 39.1% of the total equity capital of the bank. The
bank made these loans 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 they did not involve
more than the normal risk of collection or present other unfavorable features.
The largest total amount of indebtedness outstanding during 1999 to the
above described group was approximately $2,325,376. The aggregate amount of
indebtedness outstanding as of the latest practicable date, March 31, 2000, to
the above group was approximately $2,277,339.
DESCRIPTION OF THE BANK'S CAPITAL SECURITIES
Bank Stock
Eagle National Bank is authorized to issue 1,000,000 shares of bank stock,
par value $5.00 per share, of which 574,750 shares were issued and outstanding
as of March 31, 2000. No other shares of capital stock were issued or
outstanding. The bank is not authorized to issue any other class of stock. At of
March 31, 2000, the bank had approximately 128 shareholders.
Voting Rights. Each share of bank stock is entitled to one vote on all
matters that may be brought before shareholders' meetings, except that the
holders of bank stock have cumulative voting rights in the election of
directors. Cumulative voting for the election of directors entitles each
shareholder to multiply the number of votes to which the
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shareholder is entitled by the total number of directors to be elected, and the
shareholder may cast the whole number of these votes for one candidate or may
distribute them among two or more candidates.
Preemptive Rights. Shareholders of the bank have the preemptive right to
purchase additional shares of bank stock to be issued by the bank, except with
respect to 40,000 shares of bank stock to be issued pursuant to the bank's Stock
Option Plan.
Liquidation. In the event of liquidation, dissolution or winding up of the
bank, shareholders of the bank are entitled to share ratably in all assets
remaining after payment of liabilities.
Liability for Further Assessments. The bank's shareholders are not subject
to further assessments by the bank on their shares of bank stock.
Sinking Fund Provision. The bank's shares do not require a "sinking fund,"
which is a separate capital reserve maintained to pay shareholders who have
certain preferential rights with respect to their investment in the event of
liquidation or redemption.
Redemption Provision. The bank's shareholders are not subject to having
their shares of bank stock redeemed or purchased by the holding company and do
not have a right to cause such a redemption.
Dividends. Each shareholder of the bank is entitled to receive dividends
that may be declared by the Board of Directors out of legally available funds.
The bank, as a relatively new bank, has historically not paid dividends to its
shareholders. Payment of dividends is subject to the restrictions under federal
banking laws, which provide that a bank may declare and pay dividends only out
of accumulated net earnings and only if the bank meets certain capital
requirements. Further, an insured bank may not declare and pay dividends if it
is subject to a supervisory order. Directors are specifically liable for
unlawful dividends.
Stock Option Plans
Stock Option Plan. The bank has reserved 40,000 shares of bank stock for
the grant of nonqualified stock options under the Stock Option Plan. The
purposes of the Stock Option Plan are:
. to attract, retain and compensate, as key employees of the bank,
highly qualified individuals;
. to more significantly align the interests of the key employees with
those of the bank's shareholders by underscoring their common
interests;
. to encourage key employees to have a greater personal financial stake
in the bank through the ownership of bank stock; and
. to increase the long-term value of the bank stock.
The Stock Option Plan has the following significant terms:
. Duration of Plan. The Stock Option Plan will terminate upon the
earlier of the Board's adoption of a resolution terminating the Stock
Option Plan or 10 years from the date the Stock Option Plan was
approved and adopted, which became effective on February 28, 1997.
. Shares Issuable. The Bank may issue no more than 40,000 shares of bank
stock under the plan, and this number may be adjusted from time to
time due to stock splits, payments of stock dividends or other changes
in the capital structure of the bank. Also, the shares under the plan
may be exchanged for the securities of another entity, for example, if
a merger or consolidation such as that contemplated by the
reorganization occurs.
. Eligible Participants, Annual Awards. Employees of the bank are
eligible to receive awards under the plan.
. Purchase Price. The purchase price of bank stock subject to a stock
option is determined by the compensation committee of the bank at the
time of grant.
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. Term of Stock Options. No stock option is exercisable after 10 years
from the date of grant.
. Vesting Periods. The bank may grant stock options with varying vesting
periods.
. Change in Control Provisions. The Stock Option Plan contains certain
change in control provisions that permit the options granted to become
exercisable upon the occurrence of a change in control of the bank as
described in the plan.
. Plan Administration. A committee comprised of three directors
administers the Stock Option Plan. It is possible for directors
participating in such administration to receive awards under the plan
if they are employees of the bank. The body established to administer
the Stock Option Plan is vested with the authority and discretion to
interpret the Stock Option Plan, and to make any rules or regulations
pertaining to it. Any interpretations and decisions of the
administrative body are final and binding.
. Death, Retirement or Disability of Employee. In the event that a
participant ceases to be an employee of the bank then options not yet
subject to exercise, or the unexercised portions of any option the
subject to exercise, shall terminate upon:
. immediately upon the date on which employment is terminated
for "cause"; or
. 3 months after the date on which employment is terminated
other than for "cause," death or total disability; or
. one year after employment is terminated due to death or
total disability.
. Nontransferability. Except as otherwise provided by the Board of
Directors, awards made under the Stock Option Plan are nontransferable
other than by will or the laws of descent and distribution. During the
employee's lifetime, only the employee may exercise his or her stock
options granted under the plan, or, in the event of his or her
disability or death, a legal representative may exercise the options.
. Capital Changes. The Stock Option Plan provides that, if the bank, at
any time, increases or decreases the number of its outstanding shares
of bank stock or changes, in any way, the rights and privileges of
such shares through a stock dividend, or through a stock split,
reclassification or other recapitalization involving the bank stock,
then the bank shall increase, decrease or change, in like manner, the
numbers, rights and privileges of shares issuable under the Stock
Option Plan.
. Amendments. The Board of Directors may amend the Stock Option Plan at
any time without shareholder approval, provided, however, that
amendment of the Stock Option Plan may not materially and adversely
affect any right of a participant with respect to shares of bank stock
previously issued without the participant's written consent.
As of May 31, 2000, the bank had issued options to key employees to purchase an
aggregate of 15,000 shares of bank stock at an exercise price of $10.00 per
share. Shares issued under this plan may dilute the ownership interests and
voting power of existing shareholders. Pursuant to the Stock Transfer and Branch
Sale Agreement, the holding company will pay an aggregate of $37,500 to Tom
Youngblood in exchange for the cancellation of his option to purchase 7,500
shares of bank stock. Upon consummation of the proposed reorganization, the
holding company will issue substituted or replacement options for the bank's
outstanding options under the Stock Option Plan. See "Information about the
Reorganization--Stock Option Plans."
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DESCRIPTION OF THE HOLDING COMPANY'S CAPITAL SECURITIES
Holding Company Common Stock
The authorized capital stock of the holding company consists of 1,000,000
shares of common stock, par value $5.00 per share. Until completion of the
reorganization, no shares of the holding company common stock will be issued or
outstanding.
Voting Rights. Each share of holding company common stock entitles its
holder to one vote on all matters upon which shareholders have the right to
vote, except that the holders of holding company common stock have cumulative
voting rights in the election of directors. The holders of holding company
common stock will possess the exclusive voting rights in the holding company.
Preemptive Rights. Shareholders of the holding company have the preemptive
right to acquire additional shares to be issued by the holding company. By
approving the reorganization, shareholders of the bank who elect to receive
holding company stock will be agreeing to the issuance of holding company stock
without preemptive rights under the following circumstances:
. issuance of shares to employees pursuant to approval by the
affirmative vote of the holders of a majority of the shares entitled
to vote on such issuance or when authorized by and consistent with a
plan previously approved by such a vote of shareholders;
. issuance of shares sold otherwise than for cash;
In addition, assuming the approval of the reorganization by shareholders of
the bank, shareholders of the holding company will not have preemptive rights
with respect to the issuance of shares of holding company common stock to
employees of the holding company or the bank pursuant to the exercise of options
granted in replacement or substitution for options granted under the bank's
Stock Option Plan.
Also, shareholders will not have preemptive rights with respect to the
issuance of shares to holders of the holding company's debentures upon the
conversion of the debentures into holding company common stock pursuant to the
terms of the debentures.
Liquidation. In the event of liquidation, dissolution or winding up of the
holding company, the holders of holding company common stock are entitled to
share ratably in all assets remaining after payment of liabilities.
Liability for Further Assessments. The holding company's shareholders are
not subject to further assessments by the holding company on their shares.
Sinking Fund Provision. The holding company common stock does not require a
"sinking fund," which is a separate capital reserve maintained to pay
shareholders who have certain preferential rights with respect their investment
in the event of liquidation or redemption.
Redemption Provision. The holders of holding company common stock are not
subject to having their shares "redeemed" or purchased by the holding company
and do not have a right to cause such a redemption.
Dividends. Each shareholder is entitled to receive dividends that may be
declared by the Board of Directors from time to time out of legally available
funds. The bank has not paid any dividends since its inception in 1997. We
presently intend to continue a dividend policy of retaining earnings and not
paying dividends for several years while the holding company's debt is being
repaid. Future dividends will ultimately depend upon future earnings and
financial condition of the holding company and the bank, and appropriate legal
restrictions and other relevant factors.
Under the Texas Business Corporation Act ("TCBA"), the holding company may
not pay a dividend if:
. after the payment of the dividend, the holding company would be unable
to pay its debts as they become due, or
. the amount of the dividend is greater than the excess of the net
assets of the holding company over its stated capital.
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Cash available for dividend distribution to shareholders of the holding
company must initially come from dividends that the bank pays to the holding
company. As a result, the legal restrictions on the bank's dividend payments
also affect the ability of the holding company to pay dividends. See
"Description of the Bank's Capital Securities--Bank Stock."
Stock Option Plan. The holding company intends to establish a Stock Option
Plan, pursuant to which continuing grantees of stock options under the bank's
Stock Option Plan will receive substituted options to purchase the common stock
of the holding company. See "Description of the Bank's Capital Securities--Stock
Option Plans."
COMPARISON OF SHAREHOLDER RIGHTS
While we believe that the description covers the material differences
between the rights of holders of bank stock and the rights of holders of holding
company common stock, this summary may not contain all of the information that
is important to you. You should carefully read this entire document and the
other documents we refer to for a more complete understanding of the differences
between being a shareholder of the bank and being a shareholder of the holding
company.
After the reorganization, the shareholders of the bank who elect to receive
holding company common stock in the reorganization will become shareholders of
the holding company. There are certain differences in the rights of shareholders
of these two entities. These differences arise from differences in the laws that
govern the two entities and differences in their articles and bylaws. The bank
is incorporated under National Bank Act which presently governs the rights of
shareholders of the bank. The holding company is incorporated under the TBCA,
which will govern the rights of shareholders of the holding company. A number of
provisions of the TBCA and the holding company's charter documents may have the
effect of delaying, deferring or preventing a change of control of the holding
company.
The following table summarizes the material differences between the rights
of shareholders of the bank and the rights of shareholders of the holding
company:
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<TABLE>
<CAPTION>
The Bank Stock The Holding Company Common Stock
------------------------- ----------------------------------------------- -----------------------------------------------
<S> <C> <C>
Capitalization 1,000,000 shares, par value $5.00 per share, 1,000,000 shares, par value $5.00 per share,
authorized, of which 574,750 were outstanding authorized, of which 505,750 shares would be
on May 31, 2000. outstanding after the reorganization assuming
all shareholders other than the selling
directors elect to receive holding company
stock.
Number of Directors By law, the bank must have at least five By law, the holding company must have at
directors and no more than twenty-five least one director and may have an unlimited
directors. The number of directors is number of directors. The bylaws of the holding
established by vote of majority of company provide that the holding company will
shareholders at the annual meeting. The have at least five directors and no more than
number of directors is currently set at twenty-five directors. The number of directors
eleven. is established by vote of a majority of
shareholders at the annual meeting. The number
of directors is currently set at one, but
is expected to be expanded to at least four prior
to consummation of the reorganization.
Terms of Directors One year. One year.
Voting Rights One vote per share with cumulative voting One vote per share with cumulative voting
in the election of directors. in the election of directors.
Removal of Directors A director may be removed by vote of a A director may be removed by vote of a
majority of shareholders utilizing cumulative majority of shareholders, utilizing cumulative
voting, at a special meeting called for that voting, at a special meeting called for that
purpose. purpose.
Filling Vacancies on the The Board may fill vacancies in the Board The Board may fill vacancies in the Board
Board of Directors by the provided that if the Board has 15 or fewer provided that the Board may not fill more
Board of Directors members, the Board can only fill two than two vacancies.
vacancies and if the Board has 16 to 25
members, the Board can only fill four
vacancies.
Director Voting Majority of authorized directors Majority of authorized directors
Preemptive Rights Preemptive rights to subscribe for additional Preemptive rights to subscribe for additional
shares on a pro rata basis, except that there shares on a pro rata basis except there are
are no preemptive rights with respect to no preemptive rights for shares issued for
40,000 shares that may be issued pursuant to other than cash and for shares issued to
the bank's Stock Option Plan. employees pursuant to the approval by the
affirmative vote of the holders of a majority
of the shares entitled to vote on such
issuance or when authorized by and consistent
</TABLE>
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<TABLE>
<CAPTION>
The Bank Stock The Holding Company Common Stock
--------------------------- ----------------------------------------------- -----------------------------------------------
<S> <C> <C>
with a plan previously approved by such a vote of
shareholders. Shareholders will not have preemptive
rights to acquire shares of holding company common
stock issued (i) pursuant to the stock option plan
to be adopted in substitution for the bank's Stock
Option Plan or (ii) upon conversion of the
debentures into holding company common stock.
Dividends As declared by the Board of Directors. As declared by the Board of Directors. The
Dividends may be paid only out of accumulated bank's dividend restrictions apply indirectly
net earnings of the bank. Also, the bank must to the holding company because cash available
have made any required transfers of net for dividend distributions will initially
earnings to surplus in order to maintain come from dividends the bank pays to the
surplus at least equal to capital, prior to holding company. In addition, the holding
declaring the dividend. Surplus must not be company may not pay a dividend, if:
reduced. Directors are specifically liable
for unlawful dividends.
. after issuing the dividend, the holding
company would be unable to pay its debts
as they become due, or
. the amount of the dividend is greater than
the holding company's surplus.
Amendment of articles of Approval by a majority of the votes which all Approval by 66-2/3rds of the votes which all
incorporation (other than shareholders are entitled to cast. shares are entitled to cast.
authorization of additional
shares)
Authorization of Additional Approval by vote of shareholders entitled to Approval by vote of 66-2/3rds of the votes
Shares (through amendment cast at least a majority of votes which all cast by all shareholders entitled to vote and
of articles of shareholders are entitled to cast and the the affirmative vote of a majority of the
incorporation) affirmative vote of the holders of a majority votes cast in a vote of the holders of
of the outstanding shares of the affected outstanding shares of the affected class or
class or series of stock. series of stock.
Increase in Capital Stock Approval by vote of a majority of the Approval by vote of a majority of the
through Issuance of directors. directors.
Additional Outstanding
Shares (shares already
authorized under articles
of incorporation)
Shareholder Action to Approval by a vote of at least 66-2/3% of Approval by a vote of at least 66-2/3% of
Approve Mergers, outstanding shares. outstanding shares.
Consolidations,
Liquidation, Sales of
Substantially All Assets
Business Combination No restrictions. By law, the holding company cannot enter into
Following a Change of a business combination within 3 years after a
Control person acquires 20% of the holding company
common stock unless (1) the board of
directors of the holding company approves
such person's acquisition of shares prior to
</TABLE>
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<TABLE>
<CAPTION>
The Bank Stock The Holding Company Common Stock
---------------------------- ------------------------------------------- ---------------------------------------------------
<S> <C> <C>
the acquisition, or (2) the business
combination is approved by 66-2/3% of the
outstanding shares of the holding company
common stock not owned by the person who
acquired 20% of the shares at a meeting held
at least six months after such person's
acquisition of shares.
Amendment of Bylaws Approval by the affirmative vote of the Approval by the affirmative vote of the
majority of shares represented at a legally majority of shares represented at a legally
called meeting of shareholders, or by a called meeting of shareholders, or by a
majority vote of members of the Board of majority vote of members of the Board of
Directors present at any meeting of the Directors present at any meeting of the
Board, subject to the power of the bank Board, subject to the power of holding
shareholders to change such action. company shareholders to change such action.
Right to Call Special Upon request by a majority of the Board of Upon request by a majority of the Board of
Shareholder Meetings Directors or one or more shareholders Directors or one or more shareholders
entitled to cast at least 10% of the votes entitled to cast at least 10% of the votes
that all shareholders are entitled to cast at that all shareholders are entitled to cast at
a particular meeting. a particular meeting.
Indemnification of Directors Yes. Directors and officers are indemnified Yes. Directors and officers are indemnified
and Officers to the fullest extent permitted by law. to the fullest extent permitted by law.
Indemnification is against judgments, Indemnification is against judgments,
settlements and costs incurred in any action settlements and costs incurred in any action
that relates to service as a director or that relates to service as a director or
officer of the bank. No indemnification is officer of the bank. No indemnification is
provided if the action is for civil money provided if the action is for civil money
penalties or if restitution is assessed by penalties or if restitution is assessed by
banking regulators. If an improper benefit is banking regulators. If an improper benefit is
found or an action is brought by the bank found or an action is brought by the bank
against a director or officer, against a director or officer,
indemnification is limited to reasonable indemnification is limited to reasonable
expenses. The bank must advance reasonable expenses. The bank must advance reasonable
expenses to defend the action if the director expenses to defend the action if the director
or officer signs a written affirmation that or officer signs a written affirmation that
he meets the standard for indemnification and he meets the standard for indemnification and
agrees to repay the expenses advance if agrees to repay the expenses advance if
indemnification is found to be improper. The indemnification is found to be improper. The
bank is authorized to purchase insurance for bank is authorized to purchase insurance for
indemnification obligations. indemnification obligations.
Repurchase of Shares Cannot reduce or retire any part of its Stock can be repurchased if, after the
capital stock without prior regulatory repurchase:
approvals and shareholder approval.
</TABLE>
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<TABLE>
<CAPTION>
The Bank Stock The Holding Company Common Stock
----------------------------- -------------------------------------------- --------------------------------------------------
<S> <C> <C>
. the holding company would still be able to
pay its debts as they become due; or
. may be subject to regulatory approval if
the repurchase price paid for all shares
within a 12 month period is 10% or more of
the holding company's net worth.
Appraisal Rights Each bank shareholder has the right to Each holding company shareholder has the
receive the value of his shares as of the right to receive the value or her
effective date of transaction in cash in shares as of the day before date of the
corporate reorganization if the shareholder meeting of shareholders to consider the
either (a) votes against reorganization, or corporate reorganization in cash. Shareholder
(b) gives written notice prior to must give written notice of objection to the
shareholders' meeting objecting to reorganization prior to shareholders'
reorganization. If the bank and the meeting. If the holding company and the
dissenting shareholder cannot agree upon the dissenting shareholder cannot agree upon the
value of the shares, an appraisal will be value of the shares, the dissenting
made by committee of appraisers selected by shareholder may file an action in state
the resulting bank, the dissenting district court. The court then appoints one
shareholders and the two appraisers. If the or more appraisers to determine the value of
value is not satisfactory to the dissenting the shares and to file a report with the
request that the OCC reappraise the shares, court. The court will then enter a judgment
which reappraisal shall be final. as to the value of the shares, which is final.
Inspection of Shareholders Shareholders and creditors of the bank have The holding company must prepare and keep on
List the right to inspect the list of shareholders file at the corporate office of the holding
at any time during normal business hours. company at least 10 days prior to each
The list must include the name and address shareholders' meeting a list of shareholders.
of, and number of shares held by, each Shareholders have the right to inspect the
shareholder. shareholder list during this 10 day period
during normal business hours. The list must
include the name and address of, and the
number of shares held by, each shareholder.
The holding company must also keep a record
of transfers of its stock indicating the
name and addresses of, and shares held by,
each shareholder. Any shareholder who (a) has
been a shareholder for at least six months,
or (b) owns at least 5% of the outstanding
shares of holding company stock, has the
right to inspect the stock transfer records.
</TABLE>
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DESCRIPTION OF CONVERTIBLE DEBENTURES
We will issue the debentures under debenture agreements between the holding
company and subscribers for the debentures. The terms and conditions applicable
to the debentures will be contained in the debenture agreements. The following
summarizes the material provisions of the debentures and the debenture
agreements. Prospective buyers of the debentures should refer to the actual
terms of the debentures and the form of debenture agreements for the definitive
terms and conditions. Copies of the proposed forms of debentures and debenture
agreement are filed as exhibits to the Registration Statement of which this
proxy statement/prospectus is a part.
General
We are offering the debentures only to those shareholders who elect to
exchange all of their bank stock for holding company common stock pursuant to
the reorganization. The debentures are being offered to such shareholders, pro
rata, based upon the percentage of the holding company common stock they will
own (which will be more than the percentage of bank stock they currently own).
If such shareholders do not subscribe to purchase all of their pro rata part of
the debentures, any unsubscribed for debentures will be allocated among the
shareholders who subscribed for their full pro rata portion of the debentures.
This is called an over subscription right. Such allocation will be determined by
the holding company in its sole discretion. Certain of the remaining directors
have indicated that they currently intend to purchase at least their pro rata
portion of the debentures any unsubscribed for debentures.
The total principal amount of the debentures will be limited to $2,500,000.
The debentures represent our general unsecured obligations and are subordinate
in right of payment to our senior debt as described under "--Subordination"
below. We will issue the debentures in fully registered form only, without
coupons, in denominations of $1,000 each and any integral multiple of $1,000.
The debentures will mature beginning on December 31, 2006 unless converted,
redeemed or repurchased before the maturity date. See "--Conversion," "--
Optional Redemption by Us" and "--Repurchase at Option of Holder" below.
The debentures will accrue interest at an annual rate of 9.5%. We will pay
the first interest payment on March 15, 2001, and quarterly after that date on
the 15th day of June, September, December, March. We will also pay all accrued
interest upon maturity, conversion, redemption and repurchase of the debentures.
Interest will be payable to the person in whose name the debenture is registered
at the close of business on the regular record date for the interest
installment, which is the 15th day of the calendar month preceding each interest
payment date. If any payment date falls on a day that is not a business day, we
will make the payment on the next business day and we will not pay any
additional interest. We will generally make all interest payments on the
debentures by check mailed to the holders entitled to the interest. Whenever
interest is paid, the payment will include interest accrued to, but excluding,
the interest payment date or the date of redemption, conversion, repurchase or
maturity. We will compute interest on the debentures on the basis of a 360-day
year comprised of 12 30-day months.
The debentures will have no sinking fund. A sinking fund is a custodial or
similar account into which regularly scheduled deposits are made for purposes of
funding the redemption or repurchase of the principal amount of the debentures.
The holder of any debenture may present such debenture for transfer or
exchange at the holding company's main office. The holding company will maintain
a registry for the debentures. We will not charge any fee for registration,
transfer or exchange of any debentures. We may request reimbursement for taxes
incurred by us in connection with any registration, transfer or exchange of
debentures. We are not required to register the transfer or exchange of any
debenture that has been previously surrendered for repurchase, conversion or
redemption.
Conversion
You may convert your debenture, in whole or in part, into our common stock
at a conversion price equal to $15.00 principal amount of debentures for each
share of common stock, subject to adjustment as described below. You may convert
your debenture at any time before the close of business on December 31, 2006. If
we call the debentures for redemption or you submit the debentures for
repurchase, your conversion rights will expire at the close of business on the
redemption date.
You may exercise the right to convert your debentures in denominations of
integral multiples of $1,000 by delivering your debentures to the holding
company's head office accompanied by a written notice that you elect to convert
your debentures. If the date of
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conversion occurs after a regular record date, but before the next interest
payment date, and we have not called the debentures for redemption, we will pay
you the interest due on the next interest payment date, regardless of the
conversion, but only interest to the date of conversion. If the principal amount
you wish to convert is not evenly divisible by the conversion price, instead of
issuing a fractional share, we will pay you a cash adjustment in an amount equal
to the same fraction of the conversion price per share of bank stock.
If you present a debenture for conversion, you will not be required to pay
any taxes or duties relating to the issuance of our common stock (except to the
extent relating to exchange or currency control matters or the status of the
person converting the debentures), but you will be required to pay any tax or
duty resulting from the issuance of holding company common stock in the name of
any other person.
The conversion price may be adjusted upon certain events including:
. our issuing common stock or other capital stock as a dividend or
distribution to the holders of our common stock;
. our dividing or combining our outstanding shares of holding company
common stock into a different number of shares;
. our issuing common stock as a result of reclassification of our common
stock; and
. subject to certain exceptions, our fixing a record date for making a
rights offering to our shareholders.
In the event of prepayment of the debenture or upon our consolidation,
merger or combination with or into another entity or a sale or conveyance to
another person of our property and assets as an entirety or substantially as an
entirety, you will be entitled to convert your debentures into holding company
common stock prior to such event, even if such event occurs after December 31,
2006.
You may, in certain circumstances, be deemed to have received a
distribution or dividend subject to U. S. income tax as a result of an
adjustment (or the nonoccurrence of an adjustment) to the conversion price of
your debentures. See "--Certain United States Federal Income Tax Considerations
related to the Convertible Debentures."
Unless the adjustment in the conversion price requires an increase or
decrease of at least $.01 per share, we will not be required to make any
adjustments in the conversion price. Any adjustment not made will be taken into
account in subsequent adjustments.
Optional Redemption By Us
On or after December 15, 2002, we may elect to redeem the debentures. We
will not be allowed to redeem the debentures before December 15, 2002. We will
provide the holders of the debentures at least 30 days' notice of our intent to
redeem the debentures.
The redemption price for the debentures will be the principal amount of the
debenture plus all accrued but unpaid dividends through the redemption date. If
an interest payment date occurs before the redemption date, the interest payable
on such interest payment date will be paid to the holder of record as of the
relevant record date. Interest not so paid will be paid to the party to whom the
redemption price is paid.
Subordination
All payments under the debentures are subordinate and junior to the prior
payment in full of all senior debt. The subordination provisions apply to
existing senior debt as well as senior debt incurred after the date of this
proxy statement/prospectus.
Upon any distribution of our assets, dissolution, winding up, liquidation
or reorganization of us, the payments on the debentures will be subordinated in
right of payment to the prior payment in full of all senior debt. Moreover, if
the debentures are accelerated following an event of default, the holders of any
senior debt then outstanding will be entitled to payment in full before the
holders of the debentures are entitled to receive any payment on the debentures.
However, our obligations to make payments with respect to the debentures will
not otherwise be affected. We are the sole obligor on the debentures.
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The subordination provisions of the debenture agreements and the debentures
will not prevent the occurrence of any default or event of default or limit the
rights of any holder of debentures to pursue any other rights or remedies with
respect to the debentures.
As a result of the subordination provisions, in the event of the
liquidation, bankruptcy, reorganization, insolvency, receivership or similar
proceedings, holders of the debentures may receive less than other creditors (on
a ratable basis).
Events of Default and Remedies
The following events are included as "events of default" in the debenture
agreements:
. our failure to pay interest on the debentures when due if the failure
continues for 180 days;
. our failure to pay the principal of, or premium, if any, on any of the
debentures when due; and
. certain events involving bankruptcy, insolvency or reorganization of
us.
If an event of default has occurred and is continuing, any holder of the
debentures, may declare all amounts outstanding on the debentures to be
immediately due and payable. If an event of default occurs resulting from the
bankruptcy, insolvency or reorganization of us, all unpaid principal of an
accrued interest on the outstanding debentures would become due and payable
immediately without any declaration or other act on the part of the holding
company or holders of debentures.
Governing Law
The debenture agreements and the debentures will be governed by the
substantive laws of the State of Texas without regard to its conflict of law
provisions.
Certain United States Federal Income Tax Considerations Related to the
Convertible Debentures
General. The following is a summary of certain U.S. federal income tax
considerations applicable to U.S. holders of debentures relating to the
purchase, ownership and disposition of the debentures and of holding company
common stock into which debentures may be converted, but is not a complete
analysis of all potential tax considerations. The summary assumes that the
debentures will be treated as "debt" and not "equity" for federal income tax
purposes. This summary is based on laws, regulations, rulings and decisions now
in effect, which may change in the future. It relates only to those of you who
will hold debentures and holding company common stock into which debentures may
be converted as "capital assets" (within the meaning of Section 1221 of the
Internal Revenue Code) and does not address particular tax considerations or
individual circumstances. You may be subject to special tax rules not discussed
in this summary if you are:
. subject to the alternative minimum tax;
. a bank or other financial institution;
. a tax-exempt organization;
. an insurance company;
. a foreign person or entity;
. a broker or dealer in securities or currencies;
. holding debentures as a position in a hedging transaction, "straddle"
or "conversion transaction"; or
. deemed to sell debentures or bank stock under the constructive sale
provisions of the Internal Revenue Code
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This summary discusses the tax considerations applicable to those of you
who are the initial purchasers of the debentures and who purchase the debentures
at their "issue price" as defined in Section 1273 of the Internal Revenue Code.
It does not discuss the tax considerations applicable to subsequent purchasers
of the debentures. The summary does not, therefore, discuss application of (i)
the "market discount" rules of Internal Revenue Code Sections 1276 to 1278 or
(ii) the "bond premium" amortization rules of Internal Revenue Code Section 171.
Moreover, the "original issue discount" rules of Internal Revenue Code Sections
1271 to 1275 are not generally discussed herein because debentures are not
anticipated to be issued at a discount from their face value.
We have not sought any ruling from the IRS or an opinion of counsel with
respect to the statements we make and the conclusions we reach in the following
summary, and we are not certain that the IRS will agree with our statements and
conclusions. The IRS may successfully adopt a contrary position. Our summary
does not consider the effect of the federal estate or gift tax laws, the
alternative minimum tax or the tax laws of any applicable foreign, state, local
or other jurisdiction.
Those of you considering the purchase of debentures should consult your own
tax advisors with respect to the application of the U.S. federal income tax laws
to your particular situation as well as any tax consequences arising under the
federal estate or gift tax rules, under the laws of any state, local or foreign
taxing jurisdiction or under any applicable tax treaty.
Taxation of Interest. Interest paid on the debentures will be included in
your income as ordinary income at the time it is treated as received or accrued,
in accordance with your regular method of tax accounting.
Sale, Exchange or Redemption of the Convertible Debentures. When you sell
or exchange a debenture or a debenture is redeemed, other than in the case of a
conversion (discussed below), you will generally recognize capital gain or loss
equal to the difference between:
. the amount of cash proceeds and the fair market value of any property
received on the sale, exchange or redemption (except to the extent the
amount is attributable to accrued interest income not previously
included in your taxable income, which will be taxable as ordinary
income, or is attributable to accrued interest that was previously
included in income, which amount may be received without generating
further taxable income); and
. your adjusted tax basis in the debenture.
Your adjusted tax basis in a debenture generally will equal the amount you
paid for the debenture. Capital gain or loss will be long-term capital gain or
loss if your holding period for the debenture is more than one year at the time
of sale, exchange or redemption.
Conversion of the Debentures. You will generally not recognize any income,
gain or loss upon conversion of a debenture into holding company common stock
except to the extent that the holding company common stock is considered
attributable to accrued interest not previously included in your taxable income
(which is taxable as ordinary income) or with respect to cash received in lieu
of a fractional share of holding company common stock. Your tax basis in the
holding company common stock received on conversion of a debenture will be the
same as your adjusted tax basis in the debenture at the time of conversion
(reduced by any basis allocable to a fractional share interest), and the holding
period of the holding company common stock will include the holding period of
the converted debenture. However, your tax basis in shares of holding company
common stock considered attributable to any accrued interest generally will
equal the amount of the accrued interest included in income, and the holding
period for such holding company common stock will begin on the date of
conversion. An adjustment of the conversion ratio of the debentures, in some
circumstances, could be treated as a constructive distribution, as discussed
under "Dividends" below.
Cash you receive in lieu of a fractional share of holding company common
stock upon conversion will be treated as payment in exchange for the fractional
share of holding company common stock. Accordingly, cash you receive in lieu of
a fractional share of holding company common stock generally will result in
capital gain or loss (measured by the difference between the cash received for
the fractional share and your adjusted tax basis in the fractional share).
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Dividends. Any dividends paid to you on the holding company common stock
after a conversion generally will be included in your taxable income as ordinary
income to the extent of our current or accumulated earnings and profits. You
may, in certain circumstances, be deemed to have received constructive
distributions if the conversion ratio of the debentures is adjusted.
Adjustments to the conversion ratio made pursuant to a bona fide reasonable
adjustment formula which has the effect of preventing the dilution of your
interest as a holder of the debenture will generally not be considered to result
in a constructive distribution. Certain of the possible adjustments provided in
the debentures (including, without limitation, adjustments in respect to taxable
dividends to our shareholders) will not qualify as being made pursuant to a bona
fide reasonable adjustment formula. If these adjustments are made, you, as a
debenture holder, might be deemed to have received constructive distributions
taxable as dividends even though you have not received any cash or property as a
result of the adjustments. In certain circumstances, the failure of the
debentures to provide for such an adjustment may result in taxable dividend
income to the holders of holding company common stock.
Sale of Holding Company Common Stock. Upon the sale or exchange of holding
company common stock, you will generally recognize capital gain or loss equal to
the difference between:
. the amount of cash and the fair market value of any property you
receive upon the sale or exchange; and
. your adjusted tax basis in the holding company common stock.
Capital gain or loss will be long-term capital gain or loss if your holding
period in holding company common stock is more than one year at the time of the
sale or exchange. Your basis and holding period in holding company common stock
received upon conversion of a debenture are determined as discussed above under
"Conversion of the Debentures."
Information Reporting and Backup Withholding Tax. In general, information
reporting requirements will apply to payments of principal, redemption premium,
if any, interest on a debenture, payments of dividends on holding company common
stock, payments of the proceeds of the sale of a debenture and payments of the
proceeds of the sale of holding company common stock. A 31% backup withholding
tax may apply to some or all of these payments unless you:
. certify that you are a corporation, or come within certain other
exempt categories of recipients when required to demonstrate this
fact; or
. provide a taxpayer identification number on IRS Form W-9 promptly when
requested, certify as to no loss of exemption from backup withholding;
and
. otherwise comply with applicable requirements of the backup
withholding rules.
Any amounts withheld under the backup withholding rules from your payment
will be allowed as a credit against your U.S. federal income tax and may entitle
you to a refund, provided that you furnish required information to the IRS.
THE PRECEDING DISCUSSION OF CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES IS
FOR GENERAL INFORMATION ONLY AND IS NOT TAX ADVICE. ACCORDINGLY, YOU SHOULD
CONSULT YOUR OWN TAX ADVISOR AS TO THE PARTICULAR U.S. FEDERAL, STATE, AND LOCAL
TAX CONSEQUENCES OF PURCHASING, HOLDING AND DISPOSING OF OUR DEBENTURES AND
HOLDING COMPANY COMMON STOCK. YOU SHOULD ALSO CONSULT A TAX ADVISOR AS TO THE
UNITED STATES ESTATE AND GIFT TAX CONSEQUENCES AND THE FOREIGN TAX CONSEQUENCES
OF PURCHASING, HOLDING AND DISPOSING OF OUR DEBENTURES AND HOLDING COMPANY
COMMON STOCK, AS WELL AS THE CONSEQUENCES OF ANY PROPOSED CHANGE IN APPLICABLE
LAWS.
98
<PAGE>
INDEPENDENT AUDITORS
Fisk & Robinson, P.C., Certified Public Accountants, of Dallas, Texas,
served as the bank's independent auditors for the 1999 fiscal year. In addition
to performing customary audit services, Fisk & Robinson, P.C. assisted the bank
with the preparation of its federal and state tax returns and assisted with
various regulatory matters, charging the bank at its customary hourly billing
rates. The Bank's Board of Directors approved these nonaudit services after due
consideration of the auditors' objectivity and after finding them to be wholly
independent. Fisk & Robinson, P.C. has advised the bank that none of its members
has any financial interest in the bank. Fisk & Robinson, P.C. has been engaged
as the bank's independent' auditor for the fiscal year ending December 31, 2000.
If the proposed reorganization is approved and implemented, it is anticipated
that the holding company will also select Fisk & Robinson, P.C. as its auditor.
SHAREHOLDER PROPOSALS
In the event the proposed reorganization is approved and the holding
company becomes the one-bank holding company for the bank, any shareholder who,
in accordance with the proxy rules of the Commission, desires to submit a
proposal for inclusion in the holding company's proxy statement for its 2001
annual meeting of shareholders must deliver the proposal in writing to Patrick
Adams, Secretary, at the holding company's principal executive offices, 5006
Verde Valley, Dallas, Texas 75240, no later than ____________, 2001.
Also, if the holding company does not receive notice of a shareholder
proposal by ____________, 2001, the proxy holders at the 2001 annual meeting may
vote on the proposal at their discretion, as they consider in the best interests
of the holding company.
PLAN OF DISTRIBUTION
This Prospectus covers the offer and sale of up to 505,750 shares of the
holding company's common stock in the reorganization and $2,500,000 aggregate
principal amount of the holding company's debentures.
All expenses of this offering will be paid by the holding company. The
offering will be made by officers and directors of the holding company who will
not receive any separate compensation but who will be reimbursed for out of
pocket expenses. No underwriting discounts or commissions will be paid in
connection with the issuance of shares of the holding company's common stock or
debentures.
LEGAL MATTERS
The validity of the shares of common stock and convertible debt
securities offered hereby will be passed upon for the holding company by Haynie,
Rake & Repass, P.C., Dallas, Texas.
EXPERTS
The financial statements of Eagle National Bank at December 31, 1998 and
1999 and for the period from inception, February 28, 1997, through December 31,
1997, as detailed in the index on page F-1, included in this document, have been
audited by Fisk & Robinson, P.C., independent accountants, as indicated in their
report with respect to these financial statements and are included in this
document in reliance upon such report given upon the authority of this firm as
experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
The Holding Company's Registration Statement
The holding company has filed with the Securities and Exchange Commission
in Washington, D.C., a registration statement under the Securities Act for its
common stock to be issued in the proposed reorganization and for its debentures
being offered hereby. This document is a part of the registration statement.
This document does not contain all of the information, exhibits and
undertakings contained in the registration statement, which is on file with the
Commission in Washington, D.C. The registration statement and exhibits may be
examined during normal business hours, or copies obtained by mail at prescribed
rates, at the Commission's public reference room located at Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. You may obtain
information on the operation of the public reference room by
99
<PAGE>
calling the Commission at 1-800-SEC-0330. The registration statement may also be
examined at the Commission's regional offices:
. 7 World Trade Center, Suite 1300, New York, New York 10048 (telephone:
212-748-8000); and
. Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661.
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 Commission's Web site is
http://www.sec.gov. The registration statement may be accessed from this Web
site.
Periodic Reports and Information Filed with the Commission Following the
Reorganization
Following the reorganization, the holding company will be subject to the
information reporting requirements pursuant to Section 15(d) of the Exchange
Act, and will file periodic reports and other information with the Commission.
The financial information filed with the Commission will be consolidated with
the bank's financial information. You may inspect and copy such reports, proxy
statements and other information at the Commission's public reference facilities
described above. You may also obtain these documents at the Commission's Web
site at http://www.sec.gov. In addition, the holding company will provide
consolidated annual financial reports to shareholders.
The holding company's obligation to file periodic reports and other
information under Section 15(d) of the Exchange Act will be suspended
automatically upon the beginning of its first fiscal year in which it has less
than 300 holders of holding company common stock. Therefore, the holding company
anticipates that its reporting obligations will be suspended as of the beginning
of its next fiscal year.
By Order of the Board of Directors
/s/ Harold Campbell
--------------------------------------------------
Chairman of the Board of Directors of the Bank/
President of the Holding Company
Dallas, Texas
__________, 2000
It is important to us that you return your proxy promptly. If you do not
expect to attend the annual meeting and wish your stock to be voted, then you
shall date, sign and return the accompanying proxy in the enclosed self-
addressed envelope. No postage is required if mailed in the United States.
100
<PAGE>
EAGLE NATIONAL BANK
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Unaudited Interim Balance Sheets as of March 31, 2000 and December 31,
1999 F-2
Unaudited Interim Statements of Operations for the Three Months Ended
March 31, 2000 and 1999 F-3
Unaudited Interim Statements of Changes in Stockholders' Equity for the
Three Months Ended March 31, 2000 and 1999 F-4
Unaudited Interim Statements of Cash Flows for the Three Months Ended
March 31, 2000 and 1999 F-5
Notes to Unaudited Interim Financial Statements F-6
Report of Independent Auditors F-14
Balance Sheets as of December 31, 1999 and 1998 F-15
Statements of Operations for the Years Ended December 31, 1999 and 1998
and the Period from February 28, 1997 (Inception) to December 31, 1997 F-16
Statements of Changes in Stockholders' Equity for the Years Ended
December 31, 1999 and 1998 and the Period from February 28, 1997
(Inception) to December 31, 1997 F-17
Statements of Cash Flows for the Years Ended December 31, 1999 and 1998
and the Period from February 28, 1997 (Inception) to December 31, 1997 F-18
Notes to Financial Statements F-19
</TABLE>
F-1
<PAGE>
EAGLE NATIONAL BANK
Interim Balance Sheets
March 31, 2000 and December 31, 1999
(Dollars in Thousands, Except Per Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
March 31, 2000 December 31, 1999
-------------- -----------------
<S> <C> <C>
ASSETS
------
Cash and due from banks $ 2,395 $ 2,217
Federal funds sold 11,000 1,800
--------- ---------
Total cash and cash equivalents 13,395 4,017
Securities available for sale 353 353
Securities held to maturity 498 498
Loans, net 43,672 37,260
Bank premises and equipment, net 2,622 2,479
Other 870 708
--------- ---------
$ 61,410 $ 45,315
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Deposits:
Noninterest-bearing $ 12,789 $ 9,871
Interest-bearing 42,509 29,632
--------- ---------
Total deposits 55,298 39,503
Other liabilities 288 97
Commitments and contingencies - -
Stockholders' equity:
Common stock, $5 par value; 1,000,000 shares authorized;
574,750 shares issued and outstanding 2,874 2,874
Paid-in capital 2,871 2,871
Retained earnings (accumulated deficit) 79 (30)
--------- ---------
Total stockholders' equity 5,824 5,715
--------- ---------
$ 61,410 $ 45,315
========= =========
</TABLE>
See accompanying notes to financial statements.
F-2
<PAGE>
EAGLE NATIONAL BANK
Interim Statements of Operations
For the Three Months Ended March 31, 2000 and 1999
(Dollars in Thousands, Except Per Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
2000 1999
---- ----
<S> <C> <C>
Interest income:
Loans, including fees $ 1,089 $ 864
Securities 13 4
Federal funds sold 83 65
-------- ------
Total interest income 1,185 933
Interest expense on deposit accounts 466 389
-------- ------
Net interest income 719 544
Provision for loan losses 45 38
-------- ------
Net interest income after provision 674 506
-------- ------
Noninterest income:
Service charges on deposit accounts 54 30
Other 13 8
-------- ------
Total noninterest income 67 38
-------- ------
Noninterest expense:
Salaries and employee benefits 298 235
Occupancy expense 79 47
Professional services 18 8
Other 178 126
-------- ------
Total noninterest expense 573 416
-------- ------
Income before income taxes 168 128
Income tax expense 59 -
-------- ------
Net income $ 109 $ 128
======== ======
Earnings Per Share:
Basic $ 0.19 $ 0.22
======== ======
Diluted $ 0.19 $ 0.22
======== ======
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
EAGLE NATIONAL BANK
Interim Statements of Changes in Stockholders' Equity
For the Three Months Ended March 31, 2000 and 1999
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Retained
Earnings
Common Stock Paid-In (Accumulated
Shares Amount Capital Deficit) Total
------ ------ ------- -------- -----
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1999 574,750 $ 2,874 $ 2,871 $ (559) $ 5,186
Net income - - - 128 128
------- ------- ------- ------- --------
Balance at March 31, 1999 574,750 $ 2,874 $ 2,871 $ (431) $ 5,314
======= ======= ======= ======= ========
Balance at January 1, 2000 574,750 $ 2,874 $ 2,871 $ (30) $ 5,715
Net income - - - 109 109
------- ------- ------- ------- --------
Balance at March 31, 2000 574,750 $ 2,874 $ 2,871 $ 79 $ 5,824
======= ======= ======= ======= ========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
EAGLE NATIONAL BANK
Interim Statements of Cash Flows
For the Three Months Ended March 31, 2000 and 1999
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
2000 1999
---- -----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 109 $ 128
Adjustments to reconcile net loss to net cash from
operating activities:
Depreciation and amortization 20 21
Provision for loan losses 45 38
Net change in other assets (162) (42)
Net change in other liabilities 191 (25)
---------- ----------
Net cash from operating activities 203 120
---------- ----------
Cash flows from investing activities:
Purchases of securities available for sale - (97)
Net change in loans (6,457) (330)
Net capital expenditures (163) (3)
---------- ----------
Net cash from investing activities (6,620) (430)
---------- ----------
Cash flows from financing activities:
Net change in demand deposits, NOW and savings accounts 3,569 (1,960)
Net change in certificates of deposit 12,226 (282)
---------- ----------
Net cash from financing activities 15,795 (2,242)
---------- ----------
Net change in cash and cash equivalents 9,378 (2,552)
Cash and cash equivalents at beginning of period 4,017 8,094
---------- ----------
Cash and cash equivalents at end of period $ 13,395 $ 5,542
========== ==========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
EAGLE NATIONAL BANK
Notes to Interim Financial Statements
(Dollars in Thousands, Except Per Share Amounts)
(Unaudited)
1. Summary of Significant Accounting Policies
------------------------------------------
These interim financial statements are prepared without audit and reflect all
adjustments that, in the opinion of management, are necessary to present fairly
the financial position of Eagle National Bank (Bank) at March 31, 2000, and its
results of operations and cash flows for the periods presented. All such
adjustments are normal and recurring in nature. The accompanying financial
statements have been prepared in accordance with the instructions of Form 10-
QSB, as established by the Securities and Exchange Commission (SEC).
Accordingly, these financial statements do not purport to contain all necessary
financial disclosures required by generally accepted accounting principles that
might otherwise be necessary in the circumstances, and should be read in
conjunction with financial statements, and notes thereto, of the Bank for the
year ended December 31, 1999, included elsewhere in this registration statement.
The accounting policies of the Bank conform to generally accepted accounting
principles and practices generally followed within the banking industry. Refer
to the accounting policies of the Bank described in the notes to financial
statements contained in the 1999 financial statements. The Bank has consistently
followed these policies in preparing these interim financial statements.
The Bank provides a full range of banking services to individual and corporate
customers and is subject to competition from other financial institutions. The
Bank is subject to the regulations of certain federal agencies and periodic
examinations by those regulatory authorities.
To prepare financial statements in conformity with generally accepted accounting
principles, management makes estimates and assumptions based on available
information. These estimates and assumptions affect the amounts reported in the
financial statements and the disclosures provided, and actual future results
could differ. The allowance for loan losses, fair values of financial
instruments, and status of contingencies are particularly subject to change.
Beginning January 1, 2001, a new accounting standard, Statement of Financial
Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments
and Hedging Activities," will require all derivatives to be recorded at fair
value. Unless designated as hedges, changes in these fair values will be
recorded in the income statement. Fair value changes involving hedges will
generally be recorded by offsetting gains and losses on the hedge and on the
hedged item, even if the fair value of the hedged item is not otherwise
recorded. This standard is not expected to have a material effect but the effect
will depend on derivative holdings when this standard applies.
Some items in prior financial statements have been reclassified to conform to
the current presentation.
F-6
<PAGE>
EAGLE NATIONAL BANK
2. Statements of Cash Flows
------------------------
The Bank has chosen to report on a net basis its cash receipts and cash payments
for time deposits accepted and repayments of those deposits and loans made to
customers and principal collections on those loans.
The Bank has chosen to report its cash flows by the indirect method. Other
supplemental cash flow information is presented below:
2000 1999
---- ----
Cash paid for:
Interest $ 369 $ 437
======= =======
Income taxes $ -- $ --
======= =======
3. Earnings Per Share
------------------
Earnings per share is computed in accordance with SFAS No. 128, "Earnings Per
Share," which requires dual presentation of basic and diluted earnings per share
("EPS") for entities with complex capital structures. Basic EPS is based on net
income divided by the weighted-average number of shares outstanding during the
period. Diluted EPS includes the dilutive effect of stock options granted using
the treasury stock method.
Earnings per common share is computed by dividing net income by the weighted-
average number of shares outstanding for the year. The weighted-average number
of common shares outstanding for basic and diluted earnings per share
computations were as follows:
Three Months Ended March 31,
----------------------------
2000 1999
---- ----
Weighted-average shares outstanding - Basic 574,750 574,750
Effect of stock options 3,300 -
-------- -------
Weighted-average shares outstanding - Diluted 578,050 574,750
======== =======
F-7
<PAGE>
EAGLE NATIONAL BANK
4. Securities
----------
Debt and equity securities have been classified in the accompanying balance
sheet according to management's holding intent. The amortized cost of securities
and their estimated fair values at March 31, 2000 and December 31, 1999 are as
follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Securities Available for Sale
-----------------------------
March 31, 2000:
Equity securities $ 353 $ - $ - $ 353
===== ===== ===== =====
December 31, 1999:
Equity securities $ 353 $ - $ - $ 353
===== ===== ===== =====
Securities Held to Maturity
---------------------------
March 31, 2000:
U.S. government agency
obligations $ 498 $ - $ - $ 498
===== ===== ===== =====
December 31, 1999:
U.S. government agency
obligations $ 498 $ - $ 2 $ 496
===== ===== ===== =====
</TABLE>
There were no sales of securities during the three months ended March 31, 2000
and 1999. There were no securities pledged at March 31, 2000 or December 31,
1999.
F-8
<PAGE>
EAGLE NATIONAL BANK
The amortized cost and estimated fair values of securities at March 31, 2000, by
contractual maturity, are shown below. Expected maturities may differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties. Equity securities are
shown separately since they do not have stated maturity dates.
<TABLE>
<CAPTION>
Securities Available for Securities Held to
Sale Maturity
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Due in one to five years $ - $ - $ 498,000 $ 498,000
Equity securities 353,000 353,000 - -
---------- --------- ---------- ----------
$ 353,000 $ 353,000 $ 498,000 $ 498,000
========== ========= ========== ==========
</TABLE>
5. Loans and Allowance for Loan Losses
-----------------------------------
Loans at March 31, 2000 and December 31, 1999 consisted of the following:
<TABLE>
<CAPTION>
March 31, 2000 December 31, 1999
-------------- -----------------
<S> <C> <C>
Commercial $ 10,624 $ 11,266
Real estate 8,963 7,981
Interim construction 21,685 15,896
Installment 3,102 2,740
--------- ---------
Gross loans 44,374 37,883
Deferred loan fees (228) (192)
Allowance for loan losses (474) (431)
--------- ---------
$ 43,672 $ 37,260
========= =========
</TABLE>
F-9
<PAGE>
EAGLE NATIONAL BANK
An analysis of the allowance for loan losses for the three months ended March
31, 2000 and 1999 is as follows:
Three Months Ended March 31,
----------------------------
2000 1999
---- ----
Balance at the beginning of the period $ 431 $ 405
Provision charged to earnings 45 38
Loans charged to the allowance (2) (12)
Recoveries on loans previously charged-off - -
----- -----
Balance at the end of the period $ 474 $ 431
===== =====
There were no impaired loans during the three months ended March 31, 2000 and
1999 that were required to be recognized in conformity with SFAS No. 114
"Accounting by Creditors For Impairment of a Loan".
The Bank extends consumer and commercial credit primarily to customers in the
State of Texas. At March 31, 2000 and December 31, 1999, substantially all of
the Bank's loans were collateralized with real estate, inventory, accounts
receivable, equipment, marketable securities, or other assets.
The Bank is not committed to lend additional funds to debtors whose loans have
been modified.
6. Deposits
--------
Deposits at March 31, 2000 and December 31, 1999 are summarized as follows:
<TABLE>
<CAPTION>
March 31, 2000 December 31, 1999
-------------------------- --------------------------
Amount Percent Amount Percent
------ -------- ------ -------
<S> <C> <C> <C> <C>
Noninterest-bearing demand deposits $ 12,789 23.1% $ 9,871 25.0%
Interest-bearing demand deposits 1,118 2.0 1,191 3.0
Limited access money market accounts 8,114 14.7 7,448 18.9
Savings accounts 303 0.5 245 0.6
Certificates of deposit, less
Certificates of deposit, less than $100,000 19,825 35.9 12,400 31.4
Certificates of deposit, $100,000 and greater 13,149 23.8 8,348 21.1
--------- ----- --------- -----
$ 55,298 100.0% $ 39,503 100.0%
========= ===== ========= =====
</TABLE>
F-10
<PAGE>
EAGLE NATIONAL BANK
7. Other Noninterest Expense
-------------------------
Other noninterest expenses consisted of the following:
Three Months Ended March 31,
----------------------------
2000 1999
---- ----
Supplies $ 16 $ 9
Telephone 9 7
Data processing 34 24
Advertising 22 12
Directors fees 18 19
Franchise taxes 14 4
Other 65 51
-------- --------
Total other noninterest expense $ 178 $ 126
======== ========
8. Financial Instruments With Off-Balance Sheet Risk
-------------------------------------------------
The Bank is party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit and standby letters
of credit. Those instruments involve, to varying degrees, elements of credit
and interest rate risk in excess of the amount recognized in the balance sheet.
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 amount of these instruments.
The Bank uses the same credit policies in making commitments and conditional
obligations as it does for on-balance-sheet instruments. At March 31, 2000 and
December 31, 1999, the amounts of these financial instruments were as follows:
March 31, 2000 December 31, 1999
-------------- -----------------
Financial instruments whose contract
amounts represent credit risk:
Commitments to extend credit $ 15,223 $ 14,287
Standby letters of credit 60 10
-------- --------
$ 15,283 $ 14,297
======== ========
F-11
<PAGE>
EAGLE NATIONAL BANK
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. The Bank evaluates each customer's credit
worthiness 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 counterparty. Collateral held varies but may include accounts
receivable, inventory, property, plant and equipment and income-producing
commercial properties.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers.
The Bank does not anticipate any material losses as a result of the commitments
and contingent liabilities.
9. Subsequent Event
----------------
On May 31, 2000, the Bank entered into a "Stock Transfer and Branch Sale
Agreement" (the "Agreement") with ENB Bankshares, Inc. and certain Directors of
the Bank. The Directors, Randy L. Pack, Jon Roy Reid, John M. Yeaman and Thomas
R. Youngblood (collectively referred to as the "Selling Directors"), may be
joined by other shareholders who sign a counterpart of the Agreement. ENB
Bankshares, Inc. is a Texas corporation located in Dallas, Texas formed for the
purpose of becoming a registered bank holding company through the acquisition of
100% of the voting common stock of the Bank.
The Agreement provides for the following two transactions:
. The sale of Bank stock owned by the Selling Directors and other
shareholders who sign a counterpart of the Agreement to ENB Bankshares for
$15.00 per share cash. The Selling Directors collectively own 69,000 shares of
Bank stock. The Selling Directors are also aware of other shareholders (the
"Selling Shareholders") of the Bank who may desire to sell their shares of Bank
stock to ENB Bankshares.
. The sale by the Bank of its Park Cities branch to a new bank established by
the Selling Directors in a purchase and assumption transaction in which the new
bank will pay a purchase premium of $500,000 plus the organization expenses and
operating losses associated with the Park Cities branch. The Bank began
operations of the Park Cities branch on March 27, 2000. The Park Cities branch
is a full-service branch facility located at 6829 Hillcrest, Dallas, Texas
75205.
ENB Bankshares and the Bank have entered into an Agreement and Plan of
Reorganization (the "Reorganization Plan"). As a result of the reorganization,
the Bank will become a wholly-owned subsidiary of ENB Bankshares. The Bank will
continue to operate from its current location. However, pursuant to the Stock
Transfer and Branch Sale Agreement, the Bank will no longer own the Park Cities
branch and the Selling Directors will no longer be directors or employees of the
Bank.
The Reorganization Plan provides that each shareholder of the Bank (other than
the Selling Directors and other shareholders who have signed the Stock Transfer
and Branch Sale Agreement) may choose to receive one share of ENB Bankshares
stock or $15.00 cash for each share of Bank stock they own. The Selling
Directors have agreed to cause the new bank to provide Bank shareholders who
elect to receive cash in the reorganization the right to subscribe for shares of
stock of the new bank that will own the Park Cities branch at the initial
offering price.
F-12
<PAGE>
EAGLE NATIONAL BANK
To provide the funds for the cash portion of the transaction, ENB Bankshares is
offering for sale up to $2,500,000 of 9.5% fixed-rate debentures. The debentures
are payable in five equal installments, each being 20% of the original principal
amount of the debentures. The principal payments will begin on December 31,
2006 and continue until December 31, 2010. The debentures are convertible, at
any time at the option of the owner until December 31, 2006, into shares of ENB
Bankshares bank stock at $15.00 per share. In the event that ENB Bankshares is
unable to sell enough debentures to provide the entire cash requirements of the
transaction, ENB Bankshares has obtained a loan commitment letter from another
financial institution providing for a loan of $1,650,000. The loan is payable
over 10 years and will bear interest at floating Wall Street Journal prime rate.
The loan will be secured by a security interest in all of the Bank stock owned
by ENB Bankshares.
ENB Bankshares will not incur indebtedness (either in the form of debentures or
the loan) of more than $2,500,000. If the cash requirements of the transaction
are more than $2,500,000, the directors of the Bank who purchase debentures have
indicated that they may convert a sufficient amount of their debentures into
holding company stock so that the aggregate amount of debt is not more than
$2,500,000.
The Agreement and the Reorganization Plan are subject to regulatory and
shareholder approval. Assuming the appropriate approvals are received, the Bank
expects to complete the stock transfer, the branch sale and the reorganization
at the same time in the fourth quarter of 2000.
F-13
<PAGE>
Independent Auditors' Report
----------------------------
The Board of Directors
Eagle National Bank
We have audited the accompanying balance sheets of Eagle National Bank as of
December 31, 1999 and 1998 and the related statements of operations, changes in
stockholders' equity and cash flows for the years ended December 31, 1999 and
1998 and the period from February 28, 1997 (Inception) through December 31,
1997. These financial statements are the responsibility of the Bank's
management. Our responsibility is to express an opinion on these 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 audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Eagle National Bank as of
December 31, 1999 and 1998, and the results of its operations and cash flows for
the years ended December 31, 1999 and 1998 and the period from February 28, 1997
(Inception) through December 31, 1997 in conformity with generally accepted
accounting principles.
Fisk & Robinson, P.C.
January 14, 2000
(Except for Note 18 for which
the date is May 31, 2000)
F-14
<PAGE>
EAGLE NATIONAL BANK
Balance Sheets
December 31, 1999 and 1998
(Dollars in Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
ASSETS
------
Cash and due from banks $ 2,217 $ 1,554
Federal funds sold 1,800 6,540
-------- ----------
Total cash and cash equivalents 4,017 8,094
Securities available for sale 353 256
Securities held to maturity 498 -
Loans, net 37,260 33,718
Bank premises and equipment, net 2,479 1,784
Other 708 814
-------- ----------
$ 45,315 $ 44,666
======== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Deposits:
Noninterest-bearing 9,871 $ 7,232
Interest-bearing 29,632 32,083
-------- ----------
Total deposits 39,503 39,315
Other liabilities 97 165
Commitments and contingencies - -
Stockholders' equity:
Common stock, $5 par value; 1,000,000 shares authorized;
574,750 shares issued and outstanding 2,874 2,874
Paid-in capital 2,871 2,871
Accumulated deficit (30) (559)
-------- ----------
Total stockholders' equity 5,715 5,186
-------- ----------
$ 45,315 $ 44,666
======== ==========
</TABLE>
See accompanying notes to financial statements.
F-15
<PAGE>
EAGLE NATIONAL BANK
Statements of Operations
For the Years Ended December 31, 1999 and 1998 and the Period
From February 28, 1997 (Inception) through December 31, 1997
(Dollars in Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
Years Ended December 31, Period Ended
----------------------------
1999 1998 December 31, 1997
---- ---- -----------------
<S> <C> <C> <C>
Interest income:
Loans, including fees $ 3,576 $ 2,936 $ 798
Securities 28 19 53
Federal funds sold 291 209 235
------- -------- -------
Total interest income 3,895 3,164 1,086
Interest expense on deposit accounts 1,523 1,280 417
------- -------- -------
Net interest income 2,372 1,884 669
Provision for loan losses 98 180 225
------- -------- -------
Net interest income after provision 2,274 1,704 444
------- -------- -------
Noninterest income:
Service charges on deposit accounts 190 95 29
Other 38 26 8
------- -------- -------
Total noninterest income 228 121 37
------- -------- -------
Noninterest expense:
Salaries and employee benefits 988 815 527
Occupancy expense 212 195 127
Professional services 48 47 26
Other 561 455 369
------- -------- -------
Total noninterest expense 1,809 1,512 1,049
------- -------- -------
Income (loss) before income taxes 693 313 (568)
Income tax expense (benefit) 164 (164) -
------- -------- -------
Net income (loss) $ 529 $ 477 (568)
======= ======== =======
Earnings per share:
Basic $ 0.92 $ 0.83 $ (0.99)
======= ======== =======
Diluted $ 0.92 $ 0.83 $ (0.99)
======= ======== =======
</TABLE>
See accompanying notes to financial statements.
F-16
<PAGE>
EAGLE NATIONAL BANK
Statements of Changes in Stockholders' Equity
For the Years Ended December 31, 1999 and 1998 and the Period
From February 28, 1997 (Inception) through December 31, 1997
(Dollars in Thousands)
<TABLE>
<CAPTION>
Common Stock Paid-In Accumulated
Shares Amount Capital Deficit Total
------ ------ ------- ------- -----
<S> <C> <C> <C> <C> <C>
Balance at February 28, 1997
(Inception) 574,750 $ 2,874 $ 2,871 $ (468) $ 5,277
Net loss - - - (568) (568)
-------- -------- -------- -------- --------
Balance at December 31, 1997 574,750 2,874 2,871 (1,036) 4,709
Net income - - - 477 477
-------- -------- -------- -------- --------
Balance at December 31, 1998 574,750 2,874 2,871 (559) 5,186
Net income - - - 529 529
-------- -------- -------- -------- --------
Balance at December 31, 1999 574,750 $ 2,874 $ 2,871 $ (30) $ 5,715
======== ======== ======== ======== ========
</TABLE>
See accompanying notes to financial statements.
F-17
<PAGE>
EAGLE NATIONAL BANK
Statements of Cash Flows
For the Years Ended December 31, 1999 and 1998 and the Period
From February 28, 1997 (Inception) through December 31, 1997
(Dollars in Thousands)
<TABLE>
<CAPTION>
Years Ended December 31, Period Ended
------------------------------
1999 1998 December 31, 1997
---- ---- -----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 529 $ 477 $ (568)
Adjustments to reconcile net loss to net cash
from operating activities:
Depreciation and amortization 92 80 33
Net accretion of discounts on securities - - (20)
Provision for loan losses 98 180 225
Net change in other assets 106 (511) 55
Net change in other liabilities (68) 77 (742)
--------- --------- ----------
Net cash from operating activities 757 303 (1,017)
--------- --------- ----------
Cash flows from investing activities:
Purchases of securities available for sale (97) (83) (173)
Purchases of securities held to maturity (498) - (980)
Maturities of securities held to maturity - 500 500
Net change in loans (3,640) (15,236) (18,991)
Net capital expenditures (787) (135) (1,659)
--------- --------- ----------
Net cash from investing activities (5,022) (14,954) (21,303)
--------- --------- ----------
Cash flows from financing activities:
Net change in demand deposits, NOW and
savings accounts 2,472 6,269 10,014
Net change in certificates of deposit (2,284) 10,070 12,962
--------- --------- ----------
Net cash from financing activities 188 16,339 22,976
--------- --------- ----------
Net change in cash and cash equivalents (4,077) 1,688 656
Cash and cash equivalents at beginning of period 8,094 6,406 5,750
--------- --------- ----------
Cash and cash equivalents at end of period $ 4,017 $ 8,094 $ 6,406
========= ========= ==========
</TABLE>
See accompanying notes to financial statements.
F-18
<PAGE>
EAGLE NATIONAL BANK
Notes to Financial Statements
As of and for the Years Ended December 31, 1999 and 1998 and the
Period from February 28, 1997 (Inception) Through December 31, 1997
(Dollars in Thousands, Except Per Share Amounts)
1. Summary of Significant Accounting Policies
------------------------------------------
Basis of Presentation
---------------------
The accounting policies of Eagle National Bank (Bank) conform to generally
accepted accounting principles and practices generally followed within the
banking industry. The following are descriptions of the more significant of
these policies.
The Bank commenced operations on February 28, 1997. The excess of expenses
incurred over income earned prior to February 28, 1997, of $468 were recorded as
accumulated deficit. Such pre-opening expenses consist primarily of personnel,
occupancy, legal and marketing costs, net of interest income.
The Bank provides a full range of banking services to individual and corporate
customers and is subject to competition from other financial institutions. The
Bank is subject to the regulations of certain federal agencies and periodic
examinations by those regulatory authorities.
Use of Estimates
----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect certain reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period.
Accordingly, actual results could differ 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 losses and
valuation of other real estate owned. In connection with the determination of
the allowance for loan losses and valuation of other real estate owned,
management normally obtains independent appraisals for significant properties.
A significant portion of the Bank's loans are secured by real estate and related
assets located in local markets. Accordingly, the ultimate collectibility of
this portion of the Bank's loan portfolio is susceptible to changes in local
market conditions.
F-19
<PAGE>
EAGLE NATIONAL BANK
Cash and Cash Equivalents
-------------------------
For purposes of reporting cash flows, cash and cash equivalents include cash on
hand, amounts due from banks, federal funds sold and interest bearing deposits
at other banks. All highly liquid investments with an initial maturity of less
than ninety days are considered to be cash equivalents.
Securities Available For Sale
-----------------------------
Available for sale securities consist of certain equity securities not
classified as trading securities nor as held to maturity securities. Available
for sale securities are carried at fair value with unrealized gains and losses
reported in other comprehensive income.
Gains and losses on the sale of available for sale securities are all recorded
on the trade date and are determined using the specific identification method.
Premiums and discounts are recognized in interest income using the interest
method over the period to maturity.
Declines in the fair value of individual held to maturity and available for sale
securities below their cost that are other than temporary, if any, would result
in write-downs of the individual securities to their fair value. The related
write-downs, if any, would be included in earnings as realized losses.
Securities Held to Maturity
---------------------------
Bonds and notes for which the Bank has the positive intent and ability to hold
to maturity are reported at cost, adjusted for premiums and discounts that are
recognized in interest income using the interest method over the period to
maturity.
Loans
-----
Loans that management has the intent and ability to hold for the foreseeable
future or until maturity or pay-off are reported at their outstanding principal
adjusted for any charge-offs, the allowance for loan losses, and any deferred
fees or costs on originated loans and unamortized premiums or discounts on
purchased loans.
Fees associated with originating loans are generally deferred and recognized
over the life of the related loan. Costs associated with originating loans are
generally recognized in income in the period in which fees were received and/or
costs were incurred. Under generally accepted accounting principles, such costs
are to be deferred and recognized over the life of the loan as an adjustment of
the yield. For the periods ended December 31, 1999, 1998 and 1997, management
believes that the effect of not deferring such costs, and amortizing them over
the life of the related loan does not materially affect the financial position
or results of operations of the Bank.
F-20
<PAGE>
EAGLE NATIONAL BANK
The accrual of interest on commercial and real estate loans is discontinued at
the time the loan is 90 days delinquent unless the credit is well-secured and in
process of collection. Other personal loans are typically charged-off no later
than 180 days past due. All interest accrued but not charged-off is reversed
against interest income. The interest on these loans is accounted for on the
cash basis until qualifying for return to accrual. Loans are returned to
accrual status when all the principal and interest amounts contractually due are
brought current and future payments are reasonably assured.
A loan is considered to be impaired if, based on current information and events,
management believes it is probable that the Bank will be unable to collect all
amounts due, both interest and principal, according to the contractual terms of
the loan agreement. Impairment is evaluated in total for smaller-balance loans
of similar nature such as residential mortgage and consumer loans and on an
individual loan basis for other loans. An allowance for credit losses related
to impaired loans, if any, is determined based on the present value of expected
cash flows discounted at the loan's effective interest rate, or the loan's
observable market price, or the fair value of collateral if the loan is
collateral dependent. Interest revenue received on impaired loans continues to
be either applied against principal or realized as interest revenue, according
to management's judgment as to the collectibility of principal.
Allowance for Loan Losses
-------------------------
The allowance for loan losses is a reserve established through a provision for
loan losses charged to expense which represents the amount available to absorb
possible losses on loans. The allowance, in the judgment of management, is
adequate to reserve for known loan losses and risks inherent in the loan
portfolio. Material estimates that are particularly susceptible to significant
change in the near term are required in the determination of the allowance for
loan losses. In connection with the determination of the allowance for loan
losses on real estate loans, management obtains independent appraisals for
significant properties.
While management uses available information to recognize losses on loans, future
additions to the allowance may be necessary based on changes in economic
conditions in the market area. In addition, various regulatory agencies, as an
integral part of their examination process, periodically review the Bank's
allowance for loan losses. Such agencies may require the Bank to recognize
additions to the allowance based on their judgments of information available to
them at the time of their examinations.
Bank Premises and Equipment
---------------------------
Land is carried at cost. Bank premises, furniture and equipment are carried at
cost, less accumulated depreciation and amortization computed principally by the
straight-line method.
F-21
<PAGE>
EAGLE NATIONAL BANK
Income Taxes
------------
Deferred tax assets and liabilities are reflected at currently enacted income
tax rates applicable to the period in which the deferred tax assets and
liabilities are expected to be realized or settled. As changes in tax laws or
rates are enacted, deferred tax assets and liabilities are adjusted through the
provision for income taxes.
Fair Values of Financial Instruments
------------------------------------
Fair values of financial instruments are estimated using relevant market
information and other assumptions. Fair value estimates involve uncertainties
and matters of significant judgment regarding interest rates, credit risk,
prepayments, and other factors, especially in the absence of broad markets for
particular items. Changes in assumptions or in market conditions could
significantly affect the estimates. The fair value estimates of existing on-
and off-balance sheet financial instruments do not include the value of
anticipated future business or the value of assets and liabilities not
considered financial instruments.
Financial Instruments With Off-Balance Sheet Risk
-------------------------------------------------
In the ordinary course of business the Bank has entered into off-balance-sheet
financial instruments consisting of commitments to extend credit and standby
letters of credit. Such financial instruments are recorded in the financial
statements when they are funded.
Comprehensive Income
The Bank adopted Statement of Financial Accounting Standards (SFAS) No. 130,
"Reporting Comprehensive Income", as of January 1, 1998. Generally accepted
accounting principles generally require that recognized revenue, expenses, gains
and losses be included in net income. Although certain changes in assets and
liabilities, such as unrealized gains and losses on available for sale
securities, are reported as a separate component of the equity section of the
balance sheet, changes in such items, along with net income, are components of
comprehensive income. The adoption of SFAS No. 130 had no effect on the Bank's
net income or shareholders' equity.
Reclassification
----------------
Certain amounts previously reported have been reclassified to conform to the
current format.
F-22
<PAGE>
EAGLE NATIONAL BANK
2. Recent Accounting Pronouncements
--------------------------------
The Financial Accounting Standards Board (FASB) issued SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities", as amended by SFAS No. 137,
which establishes accounting and reporting standards for derivative instruments
and hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the balance sheet and measure those instruments
at fair value. Management does not believe the pronouncement will have a
significant effect on its operations. Adoption of SFAS No. 133 will be required
for the Bank during the year ended December 31, 2001.
3. Earnings Per Share
------------------
Earnings per share is computed in accordance with SFAS No. 128, "Earnings Per
Share", which requires presentation of basic and diluted earnings per share
("EPS") for entities with complex capital structures. Basic EPS is based on net
income divided by the weighted-average number of shares outstanding during the
period. Diluted EPS includes the dilutive effect of stock options granted using
the treasury stock method.
Earnings per common share is computed by dividing net income by the weighted-
average number of shares outstanding for the year. The weighted-average number
of common shares outstanding for basic and diluted earnings per share
computations were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Weighted-average shares outstanding - Basic 574,750 574,750 574,750
Effect of stock options 1,980 - -
---------- ---------- ---------
Weighted-average shares outstanding - Diluted 576,730 574,750 574,750
========== ========== =========
</TABLE>
F-23
<PAGE>
EAGLE NATIONAL BANK
4. Statements of Cash Flows
------------------------
The Bank has chosen to report on a net basis its cash receipts and cash payments
for time deposits accepted and repayments of those deposits and loans made to
customers and principal collections on those loans.
The Bank has chosen to report its cash flows by the indirect method. Other
supplemental cash flow information is presented below:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Cash paid for:
Interest $ 1,522 $ 1,208 $ 330
========= ========= =========
Income taxes $ 121 $ - $ -
========= ========= =========
</TABLE>
5. Securities
----------
Debt and equity securities have been classified in the accompanying balance
sheet according to management's holding intent. The amortized cost of
securities and their estimated fair values at December 31, 1999 and 1998 are as
follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Securities Available for Sale
-----------------------------
December 31, 1999:
Equity securities $ 353 $ - $ - $ 353
========= =========== =========== ==========
December 31, 1998:
Equity securities $ 256 $ - $ - $ 256
========= =========== =========== ==========
Securities Held to Maturity
---------------------------
December 31, 1999:
U.S. government agency
obligations $ 498 $ - $ 2 $ 496
========= =========== =========== ==========
</TABLE>
F-24
<PAGE>
EAGLE NATIONAL BANK
There were no sales of securities during 1999, 1998 or 1997. There were no
securities pledged at December 31, 1999 or 1998.
The amortized cost and estimated fair values of securities at December 31, 1999,
by contractual maturity, are shown below. Expected maturities may differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties. Equity securities are
shown separately since they do not have stated maturity dates.
<TABLE>
<CAPTION>
Securities Available for Sale Securities Held to Maturity
--------------------------------- --------------------------------
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Due in one to five years $ - $ - $ 498 $ 496
Equity securities 353 353 - -
--------- ----------- ----------- -----------
$ 353 $ 353 $ 498 $ 496
========= =========== =========== ===========
</TABLE>
6. Loans and Allowance for Loan Losses
-----------------------------------
Loans at December 31, 1999 and 1998, consisted of the following:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Commercial $ 11,266 $ 9,294
Real estate 7,981 8,536
Interim construction 15,896 14,468
Installment 2,740 1,929
--------- ---------
Gross loans 37,883 34,227
Deferred loan fees (192) (104)
Allowance for loan losses (431) (405)
--------- ---------
$ 37,260 $ 33,718
========= =========
</TABLE>
F-25
<PAGE>
EAGLE NATIONAL BANK
An analysis of the allowance for loan losses for 1999, 1998 and 1997 is as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Balance at the beginning of the period $ 405 $ 225 $ -
Provision charged to earnings 98 180 225
Loans charged to the allowance (72) - -
Recoveries on loans previously charged-off - - -
-------- -------- --------
Balance at the end of the period $ 431 $ 405 $ 225
======== ======== ========
</TABLE>
There were no impaired loans that were required to be recognized in conformity
with SFAS No. 114, "Accounting by Creditors For Impairment of a Loan," during
any of the periods presented.
The Bank extends consumer and commercial credit primarily to customers in the
State of Texas. At December 31, 1999 and 1998, substantially all of the Bank's
loans were collateralized with real estate, inventory, accounts receivable,
equipment, marketable securities, or other assets.
The Bank is not committed to lend additional funds to debtors whose loans have
been modified.
7. Bank Premises and Equipment
---------------------------
Bank premises and equipment at December 31, 1999 and 1998, consisted of the
following:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Land $ 1,434 $ 740
Buildings and improvements 811 780
Furniture, fixtures and equipment 370 315
Computer software 41 39
Automobiles 23 23
-------- --------
2,679 1,897
Accumulated depreciation (200) (113)
-------- --------
$ 2,479 $ 1,784
======== ========
</TABLE>
F-26
<PAGE>
EAGLE NATIONAL BANK
Depreciation expense totaled $92, $80 and $33 in 1999, 1998 and 1997.
Land and improvements at December 31, 1999 includes an investment in undeveloped
land acquired for future expansion. The land is carried at cost and is valued at
$694.
8. Deposits
--------
Deposits at December 31, 1999 and 1998 are summarized as follows:
<TABLE>
<CAPTION>
1999 1998
----------------------- -------------------------
Amount Percent Amount Percent
------ ------- ------ -------
<S> <C> <C> <C> <C>
Noninterest-bearing demand deposits $ 9,871 25.0% $ 7,232 18.4%
Interest-bearing demand deposits 1,191 3.0 810 2.1
Limited-access money market accounts 7,448 18.9 8,122 20.6
Savings accounts 245 0.6 119 0.3
Certificates of deposit
Certificates of deposit, less than $100,000 12,400 31.4 14,754 37.5
Certificates of deposit, $100,000 and greater 8,348 21.1 8,278 21.1
--------- ----- ---------- -----
$ 39,503 100.0% $ 39,315 100.0%
========= ===== ========== =====
</TABLE>
The weighted average interest rate on deposits was approximately 3.0% and 3.2%
at December 31, 1999 and 1998.
At December 31, 1999, the scheduled maturities of certificates of deposit were
as follows:
Year Amount
---- ------
2000 $ 18,755
2001 1,991
2002 -
2003 2
2004 -
Thereafter -
---------
$ 20,748
=========
F-27
<PAGE>
EAGLE NATIONAL BANK
9. Other Noninterest Expense
-------------------------
Other noninterest expense consisted of the following for 1999, 1998 and 1997.
1999 1998 1997
---- ---- ----
Supplies $ 37 $ 41 $ 39
Telephone 29 25 24
Data processing 106 74 47
Advertising 80 89 88
Loan and collection expense 3 10 37
Directors fees 75 21 -
Franchise taxes 29 12 -
Other 202 183 134
----- ------ -------
Total other noninterest expense $ 561 $ 455 $ 369
===== ====== =======
10. Income Taxes
------------
Income tax expense (benefit) consisted of the following for 1999, 1998 and 1997.
1999 1998 1997
---- ---- ----
Current $ 67 $ - $ -
Deferred:
Federal 164 (16) (215)
Valuation allowance (67) (148) 215
------- -------- -------
$ 164 $ (164) $ -
======= ======== =======
F-28
<PAGE>
EAGLE NATIONAL BANK
Deferred income taxes reflect the net tax effects of temporary differences
between the recorded amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Bank's deferred tax assets and liability as of December 31, 1999 and 1998
are as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Deferred tax assets:
Charitable contribution for book in excess of tax $ - $ 2
Loan loss reserve for book in excess of tax 118 76
Preopening expenses deferred for tax purposes 73 105
Net operating loss carryforward - 183
-------- --------
Total deferred tax assets 191 366
Deferred tax liability:
Bank premises and equipment basis for book in excess of tax 45 19
Accrual to cash conversion 79 116
-------- --------
Total deferred tax liabilities 124 135
-------- --------
Valuation allowance - (67)
-------- --------
Net deferred tax asset $ 67 $ 164
======== ========
</TABLE>
The difference between the financial statement income tax expense (benefit) and
amounts computed by applying the statutory federal income tax rate of 34.0% to
income before income taxes was as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Income taxes computed at the statutory
federal tax rate on pre-tax income $ 236 $ 106 $ (193)
Tax effect of:
Valuation allowance (67) (148) 215
Other (5) (122) (22)
------- -------- --------
$ 164 $ (164) $ -
======= ======== ========
Effective tax rate 23.7% (52.4)% -%
======= ======== ========
</TABLE>
F-29
<PAGE>
EAGLE NATIONAL BANK
11. Employee Benefits
-----------------
In 1998, the Bank implemented a 401(k) savings plan (Plan) which covers all
eligible employees. Under the Plan, the Bank matches 50% of voluntary
contributions of eligible employees up to 4% of eligible compensation. The Bank
contributed $24 and $11 to the Plan during 1999 and 1998.
The Bank has a nonqualified stock option plan covering certain executive
officers. Under the provisions of the plan, 40,000 shares were allocated for
grant. Options granted under the plan vest and become fully exercisable based on
a vesting schedule as determined on the date of grant by an oversight committee
assigned by the Bank's Board of Directors. Under the stock option plan, options
are exercisable during the lifetime of the officer, unless otherwise provided by
the Board of Directors. The exercise price of the options granted is equal to
the estimated fair market value of the stock, as determined by the Board of
Directors, on the date of grant. In 1997, Bank granted options to purchase
15,000 shares at an exercise price of $10.00 per share. The options were
immediately vested, however, as of December 31, 1999, none of the options have
been exercised. As of December 31, 1999, there were 15,000 options outstanding,
all of which were exercisable, and 25,000 options available for grant under the
plan.
No compensation expense was recorded in 1999, 1998 or 1997 as a result of the
stock options. The Bank applies Accounting Principles Board (APB) Opinion No. 25
in accounting for its stock option plan. The fair value of options granted in
1997 was not significant. Had compensation cost been determined on the basis of
fair value pursuant to SFAS 123, the pro forma impact on net income for 1999,
1998 or 1997 would not be materially different.
F-30
<PAGE>
EAGLE NATIONAL BANK
12. Financial Instruments With Off-Balance Sheet Risk
-------------------------------------------------
The Bank is party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit and standby letters
of credit. Those instruments involve, to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized in the balance sheet.
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 amount of these instruments.
The Bank uses the same credit policies in making commitments and conditional
obligations as it does for on-balance-sheet instruments. At December 31, 1999
and 1998, the amounts of these financial instruments were as follows:
1999 1998
---- ----
Financial instruments whose contract amounts
represent credit risk:
Commitments to extend credit $ 14,287 $ 8,990
Standby letters of credit 10 1
--------- --------
$ 14,297 $ 8,991
========= ========
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. The Bank evaluates each customer's credit
worthiness 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 counterparty. Collateral held varies but may include accounts
receivable, inventory, property, plant and equipment and income-producing
commercial properties.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers.
The Bank does not anticipate any material losses as a result of the commitments
and contingent liabilities.
F-31
<PAGE>
EAGLE NATIONAL BANK
13. Related Party Transactions
--------------------------
In the ordinary course of business, the Bank has and expects to continue to have
transactions including borrowings with its employees, directors and their
affiliates. In the opinion of management, such transactions are on the same
terms, including interest rates and collateral requirements, as those prevailing
at the time for comparable transactions with unaffiliated persons. The aggregate
amount of such loans was $2,355 and $1,800 at December 31, 1999 and 1998. During
1999, new loans funded totaled $2,210 and repayments totaled $1,655.
14. Commitments and Contingencies
-----------------------------
The Bank leases a branch facility under a noncancellable operating lease
agreement. This lease agreement expires in December 2004 and requires monthly
payments of $6.
Future minimum rental payments under the noncancellable operating lease
agreement for each of the net five years and thereafter are as follows:
Year Amount
---- ------
2000 $ 72
2001 72
2002 72
2003 72
2004 72
------
$ 360
======
15. Significant Group Concentrations of Credit Risk
-----------------------------------------------
The Bank's loans, commitments and standby letters of credit have generally been
granted to customers in the Bank's market area. Such customers are normally
also depositors of the Bank. The concentrations of credit by type of loan are
set forth in Note 6. Generally these loans are collateralized and are expected
to be repaid from cash flow or proceeds from sale of selected assets of the
borrowers. Standby letters of credit are granted primarily to commercial
borrowers.
F-32
<PAGE>
EAGLE NATIONAL BANK
16. Regulatory Matters
------------------
Under banking law, there are legal restrictions limiting the amount of dividends
Banks can declare. Approval of the regulatory authorities is required if the
effect of dividends declared would cause the regulatory capital of the Bank to
fall below specified minimum levels.
The Bank is subject to various regulatory capital requirements administered by
banking agencies. Failure to meet minimum capital requirements can initiate
certain mandatory and possibly additional discretionary actions by regulators
that, if undertaken, could have a direct material effect on the Bank's financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Bank must meet specific capital guidelines that
involve quantitative measures of the Bank's assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices. The
Bank'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 Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital (as defined in the regulations) to risk
weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). Management believes the Bank met all capital adequacy
requirements to which it was subject as of December 31, 1999 and 1998.
As of December 31, 1999 and 1998, the Bank met the level of capital required to
be categorized as was "well capitalized" under the regulatory framework for
prompt corrective action. To be categorized as "well capitalized" the Bank must
maintain minimum total risk based, Tier I risk based, and Tier I leverage ratios
as set forth in the table. Management is not aware of any conditions or events
subsequent to December 31, 1999 that would change the Bank's capital category.
The Bank's actual capital amounts and ratios are presented in the following
table.
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------ ------------------ ------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
December 31, 1999:
Total capital to risk weighted assets $ 6,134 18.31% $ 2,680 8.0% $ 3,350 10.0%
Tier I capital to risk weighted assets 5,715 17.06 1,340 4.0 2,010 6.0
Tier I capital to average assets 5,715 12.05 1,897 4.0 2,371 5.0
December 31, 1998:
Total capital to risk weighted assets $ 5,564 18.42% $ 2,416 8.0% $ 3,020 10.0%
Tier I capital to risk weighted assets 5,186 17.17 1,208 4.0 1,812 6.0
Tier I capital to average assets 5,186 12.28 1,689 4.0 2,111 5.0
</TABLE>
F-33
<PAGE>
EAGLE NATIONAL BANK
17. Fair Value of Financial Instruments
-----------------------------------
The estimated fair value approximates carrying value for financial instruments
except those described below:
Securities: Fair values for securities are based on quoted market prices or
----------
dealer quotes. If a quoted market price is not available, fair value is
estimated using quoted market prices for similar instruments.
Loans: The fair value of fixed-rate loans and variable-rate loans which reprice
-----
on an infrequent basis is estimated by discounting future cash flows using the
current interest rates at which similar loans with similar terms would be made
to borrowers of similar credit quality.
Deposits: The fair value of deposit liabilities with defined maturities is
--------
estimated by discounting future cash flows using the interest rates currently
offered for deposits of similar remaining maturities.
Off-Balance-Sheet Instruments: The fair values of these items are not material
-----------------------------
and are therefore not included on the following schedule.
The estimated year-end fair values of financial instruments were as follows:
<TABLE>
<CAPTION>
1999 1998
---------------------------- --------------------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 4,017 $ 4,017 $ 8,094 $ 8,094
Securities available for sale 353 353 256 256
Securities held to maturity 498 496 - -
Loans, net 37,260 37,864 33,718 34,353
Accrued interest receivable 532 532 589 589
Financial liabilities:
Noninterest-bearing deposits $ (9,871) $ (9,871) $ (7,232) $ (7,232)
Interest-bearing deposits (29,632) (29,247) (32,083) (32,271)
Accrued interest payable (129) (129) (159) (159)
</TABLE>
18. Subsequent Event
----------------
On May 31, 2000, the Bank entered into a "Stock Transfer and Branch Sale
Agreement" (the "Agreement") with ENB Bankshares, Inc. and certain Directors of
the Bank. The Directors, Randy L. Pack, Jon Roy Reid, John M. Yeaman and Thomas
R. Youngblood (collectively referred to as the "Selling Directors"), may be
joined by other shareholders who sign a counterpart of the Agreement. ENB
Bankshares, Inc. is a Texas corporation located in Dallas, Texas formed for the
purpose of becoming a registered bank holding company through the acquisition of
100% of the voting common stock of the Bank.
F-34
<PAGE>
EAGLE NATIONAL BANK
The Agreement provides for the following two transactions:
. The sale of Bank stock owned by the Selling Directors and other
shareholders who sign a counterpart of the Agreement to ENB
Bankshares for $15.00 per share cash. The Selling Directors
collectively own 69,000 shares of Bank stock. The Selling Directors
are also aware of other shareholders (the "Selling Shareholders") of
the Bank who may desire to sell their shares of Bank stock to ENB
Bankshares.
. The sale by the Bank of its Park Cities branch to a new bank
established by the Selling Directors in a purchase and assumption
transaction in which the new bank will pay a purchase premium of
$500,000 plus the organization expenses and operating losses
associated with the Park Cities branch. The Bank began operations of
the Park Cities branch on March 27, 2000. The Park Cities branch is a
full-service branch facility located at 6829 Hillcrest, Dallas, Texas
75205.
ENB Bankshares and the Bank have entered into an Agreement and Plan of
Reorganization (the "Reorganization Plan"). As a result of the reorganization,
the Bank will become a wholly-owned subsidiary of ENB Bankshares. The Bank will
continue to operate from its current location. However, pursuant to the Stock
Transfer and Branch Sale Agreement, the Bank will no longer own the Park Cities
branch and the Selling Directors will no longer be directors or employees of the
Bank.
The Reorganization Plan provides that each shareholder of the Bank (other than
the Selling Directors and other shareholders who have signed the Stock Transfer
and Branch Sale Agreement) may choose to receive one share of ENB Bankshares
stock or $15.00 cash for each share of Bank stock they own. The Selling
Directors agreed to cause the new bank to provide Bank shareholders who elect to
receive cash in the reorganization the right to subscribe for shares of stock of
the new bank that will own the Park Cities branch at the initial offering price.
To provide the funds for the cash portion of the transaction, ENB Bankshares is
offering for sale up to $2,500,000 of 9.5% fixed-rate debentures. The debentures
are payable in five equal installments, each being 20% of the original principal
amount of the debentures. The principal paymets will begin on December 31, 2006
and continue until December 31, 2010. The debentures are convertible, at any
time at the option of the owner until December 31, 2006, into shares of ENB
Bankshares bank stock at $15.00 per share. In the event that ENB Bankshares is
unable to sell enough debentures to provide the entire cash requirements of the
transaction, ENB Bankshares has obtained a loan commitment letter from another
financial institution providing for a loan of $1,650,000. The loan is payable
over 10 years and bearing interest at floating Wall Street Journal prime rate.
The loan will be secured by a security interest in all of the Bank stock owned
by ENB Bankshares.
ENB Bankshares will not incur indebtedness (either in the form of debentures or
the loan) of more than $2,500,000. If the cash requirements of the transaction
are more than $2,500,000, the directors of the Bank who purchase debentures have
indicated that they may convert a sufficient amount of their debentures into
holding company stock so that the aggregate amount of debt is not more than
$2,500,000.
The Agreement and the Reorganization Plan are subject to regulatory and
shareholder approval. Assuming the appropriate approvals are received, the Bank
expects to complete the stock transfer, the branch sale and the reorganization
at the same time in the fourth quarter of 2000.
F-35
<PAGE>
ANNEX A
AGREEMENT AND PLAN OF REORGANIZATION
A-1
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Consolidation
Agreement"), made this ____ day of June, 2000, between EAGLE NATIONAL BANK,
DALLAS, TEXAS ("Existing Bank") and NEW EAGLE BANK, DALLAS, TEXAS ("Other
Bank"), and joined in by ENB BANKSHARES, INC. a Texas corporation
("Corporation") provides as follows:
W I T N E S S E T H:
A. Existing Bank is a national banking association duly organized and
existing under the laws of the United States, having its principal office in the
City of Dallas, County of Dallas, State of Texas;
B. Existing Bank has, and will have as of the Effective Time
(hereinafter defined), authorized capital stock of $5,000,000 divided into
1,000,000 shares of common stock, $5.00 par value per share ("Existing Bank
Common Stock"), of which 574,750 shares are issued and outstanding;
C. Other Bank is an uninsured state banking association in
organization, having its principal office in the City of Dallas, County of
Dallas, State of Texas; Other Bank has been formed solely for the purpose of
facilitating the transactions described herein, and prior to the consummation of
the transactions described herein, it will conduct no business except incident
to its organization;
D. Other Bank has, or will have as of the Effective Time, authorized
capital stock of $5,000.00, divided into 1,000 shares of common stock, $5.00 par
value per share ("Other Bank Common Stock"), all of which are, or will be as of
the Effective Time, issued and outstanding and owned by the Corporation;
E. Corporation is a corporation duly organized and existing under the
laws of the State of Texas, having its principal office in the City of Dallas,
County of Dallas, State of Texas, with authorized capital stock of
$5,000,000.00, divided into 1,000,000 shares of common stock, $5.00 par value
per share ("Corporation Common Stock"), of which no shares are issued and
outstanding;
F. The majorities of the Boards of Directors of Existing Bank and of
Other Bank, pursuant to the authority given by and in accordance with the
provisions of the Act of November 7, 1918, as amended (12 U.S.C. ss.215), have
approved this Consolidation Agreement under which Other Bank shall be
consolidated with and into Existing Bank in a transaction having the effect of a
merger (the "Consolidation") and have authorized the execution and performance
hereof; and the Board of Directors of Corporation has approved this
Consolidation Agreement, authorized the Corporation to join in and be bound by
this Consolidation Agreement, and authorized the undertakings herein made by
Corporation; and
Page 1
<PAGE>
G. As and when required by the provisions of this Consolidation
Agreement, all such action as may be necessary or appropriate shall be taken by
Existing Bank, Other Bank and Corporation in order to consummate the
Consolidation.
NOW, THEREFORE, in consideration of the premises, Existing Bank and
Other Bank, joined by Corporation, hereby agree that Other Bank shall be
consolidated with and into Existing Bank pursuant to 12 U.S.C. ss.215 in a
transaction having the effect of a merger on the following terms and conditions:
1. Consolidation of Other Bank into Existing Bank. At the Effective
----------------------------------------------
Time, Other Bank shall be consolidated with and into Existing Bank pursuant to
the provisions of and with the effect provided in the Act of November 7, 1918,
as amended (12 U.S.C. 215). The Articles of Association and Bylaws of Existing
Bank shall continue in effect as the Articles of Association and Bylaws of the
bank surviving such consolidation (hereinafter referred to as the "Receiving
Bank"), until the same shall be amended and changed as provided by law.
2. Receiving Bank. The name of the Receiving Bank shall be "Eagle
--------------
National Bank" The established office and facilities of Existing Bank
immediately prior to the Consolidation shall continue as the established office
and facilities of the Receiving Bank.
3. Rights and Property of Receiving Bank. At the Effective Time, the
-------------------------------------
corporate existence of Existing Bank and Other Bank shall, as provided in the
Act of November 7, 1918, as amended (12 U.S.C. 215), be consolidated into and
continued in the Receiving Bank. The Receiving Bank shall be deemed to be the
same corporation as Existing Bank and Other Bank. All rights, franchises and
interests of Existing Bank and Other Bank, respectively, in and to every type of
property (real, personal and mixed) and choses in action shall be transferred to
and vested in the Receiving Bank by virtue of the Consolidation without any deed
or other transfer. The Receiving Bank at the Effective Time, and without any
order or other action on the part of any court or otherwise, shall hold and
enjoy all rights of property, franchises and interests, including appointments,
designations and nominations, and all other rights and interests as trustee,
executor, administrator, transfer agent and registrar of stocks and bonds,
guardian of estates, assignee, receiver, and in every other fiduciary capacity,
and in every agency capacity, in the same manner and to the same extent as such
rights, franchises and interests were held or enjoyed by Existing Bank and Other
Bank, respectively, at the Effective Time.
4. Liabilities and Obligations of Receiving Bank. At the Effective
---------------------------------------------
Time, the Receiving Bank shall be liable for all liabilities of Existing Bank
and of Other Bank, respectively; and all deposits, debts, liabilities,
obligations and contracts of Existing Bank and of Other Bank, respectively,
matured or unmatured, whether accrued, absolute, contingent or otherwise, and
whether or not reflected or reserved against on balance sheets, books of account
or records of Existing Bank or Other Bank, as the case may be, including all
liabilities of Existing Bank and Other Bank for taxes, whether existing at the
Effective Time or arising as a result of or pursuant to the Consolidation, shall
be those of the Receiving Bank and shall not be released or impaired by the
Page 2
<PAGE>
Consolidation; and all rights of creditors and other obligees and all liens on
property of either Existing Bank or Other Bank shall be preserved unimpaired.
5. Exchange and Conversion of Shares. At the Effective Time:
---------------------------------
a. Consideration to Existing Bank Shareholders. Holders of
-------------------------------------------
Existing Bank Common Stock other than the Corporation shall be entitled
to receive, for each share of Existing Bank Common Stock that they own
at the Effective Time, at their option either (i) one share of
Corporation Common Stock, or (ii) $15.00 cash (payable in the form of a
check) (the "Cash Consideration"). Holders of Existing Bank Common
Stock who do not indicate to the Existing Bank which form of
consideration they elect to receive in the manner required by the
Existing Bank shall be deemed to have elected to receive the Cash
Consideration.
b. Stock Held by Corporation. Notwithstanding any other provision
-------------------------
of this Agreement, the shares of Existing Bank Common Stock owned by
the Corporation at the Effective Time shall, by operation of law and
without any action by the Corporation, be converted into and become
shares of capital stock of the Receiving Bank.
c. Conversion of Other Bank Common Stock. The shares of Other Bank
-------------------------------------
Common Stock outstanding at the Effective Time shall, by virtue of the
Consolidation and without any action on the part of the Corporation or
any other party as holder thereof, be converted into and become shares
of capital stock of Receiving Bank. By virtue of this Consolidation
Agreement and without any action by any party, the number of shares of
capital stock of the Receiving Bank to be outstanding after the
Effective Time shall be 574,750 shares of common stock, $5.00 par value
per share.
d. Conversion of Existing Bank Common Stock. The shares of
----------------------------------------
Existing Bank Common Stock issued and outstanding at the Effective Time
shall, by operation of law and without any action on the part of
holders thereof, be converted into the right to receive the
consideration set forth in subsection (a) of this Section 5.
6. Surrender of Existing Bank Common Stock. After the Effective Time,
---------------------------------------
each holder of an outstanding certificate of Existing Bank Common Stock may
surrender the same to Corporation or any successor thereto, and each such holder
shall be entitled upon such surrender to receive from Corporation in exchange
therefor the items described in Section 5(a) hereof. Until so surrendered, each
such outstanding certificate which, prior to the Effective Time, represented
shares of Existing Bank Common Stock shall be deemed for all purposes, subject
to the provisions of Section 9 hereof, to evidence solely the right to receive
the items described in Section 5(a) hereof. The Corporation shall not pay
interest on the cash to be delivered pursuant to Section 5(a) hereof. Upon the
holder's exchange of Existing Bank Common Stock for Corporation Common Stock,
the holder shall be paid the amount (without interest thereon) of all
distributions that have become payable since the Effective Time, if any, with
respect to the number of shares of Corporation Common Stock, represented by the
certificates issued upon such exchange. The stock transfer books of Existing
Page 3
<PAGE>
Bank shall be closed as of the close of business on the Closing Date
(hereinafter defined), and no transfer of record of any of the shares of
Existing Bank Common Stock shall take place thereafter.
7. Directors, Officers and Committees. The directors, advisory
----------------------------------
directors and officers of the Receiving Bank at the Effective Time shall be
those persons who are directors, advisory directors and officers, respectively,
of Existing Bank immediately before the Effective Time. The committees of the
Board of Directors of the Receiving Bank at the Effective Time shall be the same
as, and shall be composed of the same persons who are serving on, committees of
the Board of Directors of Existing Bank as they existed immediately before the
Effective Time.
8. Shareholder Approval. This Consolidation Agreement shall be
--------------------
submitted to the shareholders of Existing Bank and Other Bank, at meetings
called to be held as promptly as practicable or by unanimous consent. Upon
approval by the requisite votes of the shareholders of Existing Bank and Other
Bank, this Consolidation Agreement shall be made effective as soon as
practicable thereafter in the manner provided in Section 14 hereof.
9. Dissenting Stockholders. Any stockholder of Existing Bank who
-----------------------
objects to the Consolidation and follows the procedure for dissent set for in 12
U.S.C.ss. 215, as amended, shall be entitled to the rights and benefits afforded
to dissenting shareholders by such statute.
10. Conditions to Consolidation. Consummation of the Consolidation as
---------------------------
provided herein shall be conditioned upon (a) the approval of the Consolidation
by the shareholders of Existing Bank and Other Bank, (b) the receipt of all
consents, orders, and approvals and satisfaction of all other requirements
prescribed by law which are necessary for the consummation of the Consolidation,
including without limitation, the approval of the Board of Governors of the
Federal Reserve System, the Office of the Comptroller of the Currency, the
Federal Deposit Insurance Corporation, and the State Banking Commissioner, and
(c) consummation of the purchase by the Corporation of shares of Existing Bank
Common Stock pursuant to the Stock Transfer and Branch Sale Agreement dated May
31, 2000.
11. Voluntary Termination. This Consolidation Agreement may be
---------------------
terminated and abandoned at any time prior to or on the Closing Date, whether
before or after action thereon by the stockholders of Existing Bank or Other
Bank, by the mutual consent in writing of Existing Bank and Corporation.
12. Liability for Voluntary Termination. In the event of the
-----------------------------------
termination and abandonment of this Consolidation Agreement pursuant to the
provisions of Section 11 hereof, the same shall be of no further force or
effect, and there shall be no liability by reason of this Consolidation
Agreement or the termination thereof on the part of either Existing Bank, Other
Bank, Corporation or the directors, officers, employees, agents or stockholders
of any of them.
13. Waiver and Amendment. Any of the terms or conditions of this
--------------------
Consolidation Agreement may be waived at any time, whether before or after
action thereon by the shareholders of Existing Bank or Other Bank, by the party
that is entitled to the benefits thereof; and this
Page 4
<PAGE>
Consolidation Agreement may be modified or amended at any time, whether before
or after action thereon by the shareholders of Existing Bank or Other Bank;
provided, however, that after action hereon by the shareholders of Existing
Bank, no amendment or modification may be made which would reduce the
consideration to be paid to shareholders of Existing Bank under Section 5
hereof. Any waiver, modification or amendment shall be in writing.
14. Closing Date and Effective Time. The closing date (the "Closing
-------------------------------
Date") shall be within 30 days of the expiration of the mandatory waiting period
associated with the last required regulatory approval of the Consolidation.
Subject to the terms, and upon satisfaction on or before the Closing Date of all
requirements of law and the conditions specified in this Consolidation
Agreement, the Consolidation shall become effective at the opening of business
on the date specified in the Certificate of Authority to be issued by the Office
of the Comptroller of the Currency under the seal of his office authorizing the
Receiving Bank to conduct the business of banking, such time being herein called
the "Effective Time." If a time other than the opening of business is specified
in said Certificate, the Effective Time shall be the time so specified.
15. Multiple Counterparts. For the convenience of the parties hereto
---------------------
and to facilitate the filing and recording of this Consolidation Agreement, any
number of counterparts thereof may be executed, each of which shall for all
purposes be deemed to be an original and all of which shall constitute the same
instrument, but only one of which need be produced.
16. Captions. The captions contained in the Consolidation Agreement
--------
are solely for convenience of reference and shall not be deemed to affect the
meaning or interpretation of any provision contained herein.
[Signature Page Follows]
Page 5
<PAGE>
IN WITNESS WHEREOF, a majority of the directors of Existing Bank and
Other Bank have approved this Consolidation Agreement and Existing Bank and
Other Bank have caused this Consolidation Agreement to be executed in
counterparts by their duly authorized officers and their corporate seals to be
hereunto affixed as of the date first above written.
EAGLE NATIONAL BANK
[SEAL]
By: ___________________________
President
ATTEST:
______________________________
Cashier
NEW EAGLE BANK
[SEAL]
By: ___________________________
President
ATTEST:
______________________________
Secretary
Page 6
<PAGE>
The Corporation hereby joins in the foregoing Consolidation Agreement,
and undertakes that it will be bound thereby and will do and perform all acts
and things therein referred to or provided to be done by it.
IN WITNESS WHEREOF, Corporation has caused this undertaking to be made
in counterparts by its duly authorized officers and its corporate seal to be
hereunto affixed as of the date first above written.
ENB BANKSHARES, INC.
[SEAL] By: ___________________________
President
ATTEST:
______________________________
Secretary
Page 7
<PAGE>
ANNEX B
STATUTES REGARDING DISSENTERS' RIGHTS
[TO BE FILED BY AMENDMENT]
B-1
<PAGE>
ANNEX C
FAIRNESS OPINION OF HOEFER & ARNETT INCORPORATED
HOEFER & ARNETT
INCORPORATED
INVESTMENT BANKERS
101 W. SIXTH STREET, SUITE 416
AUSTIN. TEXAS 78701
June 14, 2000
Members of the Board of Directors
Eagle National Bank
5006 Verde Valley Lane
Dallas, TX 75240
Members of the Board:
You have requested our opinion as investment bankers as to the fairness, from a
financial point of view, to all of the shareholders of Eagle National Bank,
Dallas, Texas (the "Bank") of the $15.00 per share cash purchase price to be
paid by ENB Bankshares, Inc., Dallas, Texas (the "Company") for less than 50% of
the outstanding common stock of the Bank. In addition, you have requested our
opinion as investment bankers as to the fairness, from a financial point of
view, to all of the shareholders of the Bank of the proposed transfer of the
Park Cities Branch to certain selling shareholders of the Bank for $500,000 plus
certain other adjustments as described in detail in the Stock Transfer and
Branch Sale Agreement (the "Agreement").
As part of its investment banking business, Hoefer & Arnett, Incorporated is
continually engaged in the valuation of bank, bank holding company and thrift
securities in connection with mergers and acquisitions nationwide.
In arriving at our opinion, we have reviewed and analyzed, among other things,
the following: (1) December 31, 1998 and December 31, 1999 audited financial
statements for the Bank, (II') Quarterly FDIC Call reports for the quarters
ended June 30, 1999, September 30, 1999, December 31, 1999 and March 31, 2000
for the Bank; (iii) certain other publicly available financial and other
information concerning the Bank; (iv) publicly available information concerning
other banks and holding companies, the trading markets for their securities and
the nature and terms of certain other stock offerings we believe relevant to our
inquiry. We have held discussions with senior management of the Bank concerning
its past and current operations, financial condition and prospects, as well as
the results of regulatory examinations.
We have reviewed with senior management of the Bank earning projections for 2000
through 2004 for the Bank as a stand-alone entity, prepared by the Bank.
Certain pro forma financial projections for the years 2000 through 2004 for the
pro forma entity were derived by us based partially upon the projections
discussed above, as well as our own assessment of general economic, market and
financial conditions.
In conducting our review and in arriving at our opinion, we have relied upon and
assumed the accuracy and completeness of the financial and other information
provided to us or publicly available, and we have not assumed any responsibility
for independent verification of the same. We have relied upon the management of
the Bank as to the reasonableness of the financial and operating forecasts and
projections (and the assumptions and bases therefor) provided to us, and we have
assumed that such forecasts and projections reflect the best currently available
estimates and judgments of management. We have also assumed, without assuming
any responsibility for the independent verification of the same, that the
allowance for loan losses for the Bank is adequate to cover such losses. We
have not made or obtained any evaluations or appraisals of the property of the
Bank, nor have we examined any individual loan credit files. Our opinion as
expressed herein is limited to the fairness, from a financial point of view, to
all of the holders of the common shares of the Bank with respect to the sale of
less than 50% of the common shares of the Bank to the Company at $15.00 per
share and the transfer of the
C-1
<PAGE>
Park Cities Branch to such selling shareholders of the Bank for $500,000 plus
certain adjustments and does not address the Bank's underlying business decision
to proceed with the proposed transaction.
We have considered such financial and other factors as we have deemed
appropriate under the circumstances, including among others the following: (i)
the historical and current financial position and results of operations of the
Bank, including interest income, interest expense, net interest income, net
interest margin, provision for loan losses, non-interest income, non-interest
expense, earnings, dividends, internal capital generation, book value,
intangible assets, return on assets, return on shareholders' equity,
capitalization, the amount and type of non-performing assets, loan losses and
the reserve for loan losses, all as set forth in the financial statements for
the Bank; (ii) the assets and liabilities of the Bank, including the loan,
investment and mortgage portfolios, deposits, other liabilities, historical and
current liability sources and costs and liquidity; and (iii) publicly available
information concerning other banks and holding companies, the trading markets
for their securities and the nature and terms of certain other stock offerings
we believe relevant to our inquiry. We have also taken into account our
assessment of general economic, market and financial conditions and our
experience in securities valuation and our knowledge of the banking industry
generally. Our opinion is necessarily based upon conditions as they exist and
can be evaluated on the date hereof and the information made available to us
through the date hereof.
Based upon and subject to the foregoing, we are of the opinion as investment
bankers that, as of the date hereof, the terms of the proposed stock transfer
and branch sale as previously described is fair, from a financial point of view,
to all of the holders of the common shares of the Bank.
It is understood that this letter is for the information of the Board of
Directors of the Bank and does not constitute a recommendation to the Board of
Directors or to any shareholder of the Bank with respect to any approval of the
proposed transaction. We hereby consent to the reference to our firm in the
proxy statement or prospectus related to the proposed transaction and to the
inclusion of our opinion as an exhibit to the proxy statement or prospectus
related to the proposed transaction.
Respectfully Submitted,
/s/ Hoefer & Arnett, Incorporated
Hoefer & Arnett, Incorporated
C-2
<PAGE>
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers.
-------- -----------------------------------------
Article 2.02-1 of the Texas Business Corporations Act ("TBCA") authorizes a
court to award or a corporation's Board of Directors to grant indemnification to
directors and officers in terms sufficiently broad to permit such
indemnification under certain circumstances for liabilities (including
reimbursement for expenses incurred) arising under the Securities Act of 1933,
as amended (the "Securities Act"). Article III, Section 14 of the holding
company's bylaws provides for mandatory indemnification of its directors,
officers, employees and agents to the maximum extent permitted by the TBCA.
Article VII of the holding company's Articles of Incorporation provides for
mandatory indemnification of its directors and officers and former directors and
officers and other persons who may have served in another capacity of another
entity under certain circumstances. This provision in the Articles of
Incorporation does not eliminate the directors' fiduciary duty, and in
appropriate circumstances equitable remedies such as injunctive or other forms
of nonmonetary relief will remain available under Texas law. In addition, each
director will continue to be subject to liability for breach of faith or
involving intentional misconduct, for knowing violations of law for actions
leading to improper personal benefit to the director, and for payment of
dividends or approval of stock repurchases or redemptions that are unlawful
under Texas law.
The holding company intends to purchase directors' and officers' liability
insurance that covers the directors and officers of the holding company.
Insofar has indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers or other persons controlling the
Registrant pursuant to the foregoing provisions, the Registrant has been
informed that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is
therefore unenforceable.
Item 21. Exhibits and Financial Statement Schedules.
-------- ------------------------------------------
(a) Exhibits:
2.1 Agreement and Plan of Reorganization dated as of ____________,
2000, between Eagle National Bank and New Eagle Bank and joined
in by ENB Bankshares, Inc. (included as Annex A to the Proxy
-------
Statement/Prospectus contained herein).
3.1 Articles of Incorporation of Registrant.**
3.2 Bylaws of Registrant.**
4.1 Form of Debenture Agreement and Convertible Debenture.*
4.2 Form of stock certificate of Registrant's common stock.*
5.1 Opinion of Haynie Rake & Repass, P.C., Special Counsel to
Registrant, dated ____________, 2000, as to the legality of the
shares of Registrant's common stock being registered.*
10.1 Stock Transfer and Branch Sale Agreement dated ________, 2000
between Eagle National Bank, Randy Pack, Jon Roy Reid, John
Yeaman and Tom Youngblood.*
10.2. Stock Option Plan of Eagle National Bank.*
10.3 Form of Nonqualified Stock Option Agreement.*
23.1 Consent of Haynie, Rake & Repass, P.C., Special Counsel to
Registrant (included in their opinion to be filed as Exhibit
5.1).
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23.2 Consent of Fisk & Robinson, P.C., Certified Public Accountants.**
24.1 Power of Attorney given by the Officers and Directors of the
Registrant (included on Signature Page of the Registration
Statement).
99.1 Letter to Shareholders of Eagle National Bank.**
99.2 Notice of Annual Meeting of Shareholders of Eagle National
Bank.**
99.3 Form of Proxy for use by the Shareholders of Eagle National
Bank.**
99.4 Form of Shareholder Election**
99.5 Article 2.02-1 of the TBCA, as amended, relating to
indemnification.*
99.6 Statutes Relating to Dissenters' Rights (included as Annex B to
-------
the Proxy Statement/Prospectus contained herein).*
* To be filed by amendment.
** Filed herewith.
(b) Financial Statement Schedules:
None required.
(c) Opinions:
The opinion of Haynie, Rake & Repass, P.C., Special Counsel to Registrant,
is included as Exhibit 5.1.
Item 22. Undertakings.
-------- ------------
(a) Undertakings furnished pursuant to Item 512 of the Commission's Regulation
S-K:
(1) The undersigned Registrant hereby undertakes:
(A) 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 Proxy Statement/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 set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease
in volume of securities offered (if the total dollar
value of securities offered would not exceed that which
was registered) and any deviation from the low or high
end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) (Section 230.424(b)
of this chapter) if, in the aggregate, the changes in
volume and price represent no more than a 20% change in
the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the
effective registration statement;
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<PAGE>
(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
such information in the registration statement;
(B) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be
deemed to be a new registration statement relating to the
securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial
bona fide offering thereof.
(C) 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.
(b) The undersigned Registrant hereby undertakes that, for purposes of
determining 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 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Exchange Act) that is
incorporated by reference in this registration statement shall be deemed to
be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(g) (1) The undersigned Registrant hereby undertakes as follows: That prior to
any public reoffering of the securities registered hereunder through
use of a prospectus which is a part of this registration statement, by
any person or party who is deemed to be an underwriter within the
meaning of Rule 145(c), the issuer undertakes that such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be
deemed underwriters, in addition to the information called for by the
other Items of the applicable form.
(2) The Registrant undertakes that every prospectus (i) that is filed
pursuant to paragraph (1) immediately preceding, or (ii) that purports
to meet the requirements of section 10(a)(3) of the Act and is used in
connection with an offering of securities subject to Rule 415
(ss.230.415 of this chapter), will be filed as part of an amendment to
the registration statement and will not be used until such amendment
is effective, and that, for the purposes of determining any liability
under the Securities Act, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(h) Undertakings furnished pursuant to Item 22(b) and (c):
(1) The undersigned Registrant hereby undertakes to respond to requests
for information that is incorporated by reference into the Proxy
Statement/ Prospectus pursuant to Items 4, 10(b), 11, or 13 of this
Form, within one business day of receipt of such request, and to send
the incorporated documents by first class mail or other equally prompt
means. This includes information contained in documents filed
subsequent to the effective date of the registration statement through
the date of responding to the request.
(2) The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and
the company being acquired involved therein, that was not the subject
of and included in the registration statement when it became
effective.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in Dallas, Dallas County, State of
Texas, on the 30th day of June, 2000.
ENB BANKSHARES, INC.
(Registrant)
By: /s/ Harold L. Campbell
------------------------------
Harold L. Campbell,
President
Pursuant to the requirements of the Securities Act, this amendment to the
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
POWER OF ATTORNEY
Know all persons by these presents that each individual whose signature
appears below constitutes and appoints Robert H. Lutz and Christopher Griffith
and each of them, his true and lawful attorneys-in-fact and agents, with full
power of substitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective amendments)
to this registration statement, and to sign any registration statement for the
same offering covered by this registration statement that is to be effective
upon filing pursuant to Rule 462 promulgated under the Securities Act, and all
post-effective amendments thereto, and to file the same, with all exhibits
thereto and all documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or any of them, or his or
their substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Signature Title Date
------------------------- -------------------------------------- ------------
/s/ Harold L. Campbell President (Principal Executive June 30,2000
-------------------------
Harold L. Campbell Officer) and Director
/s/ Patrick G. Adams Vice President, Secretary and Director June 30, 2000
-------------------------
Patrick G. Adams (Principal Accounting and Financial
Officer)
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<PAGE>
INDEX TO EXHIBITS
Exhibit
Number
-------
2.1 Agreement and Plan of Reorganization dated as of ____________, 2000,
between Eagle National Bank and New Eagle Bank and joined in by ENB
Bankshares, Inc.(included as Annex A to the Proxy Statement/Prospectus
-------
contained herein).
3.1 Articles of Incorporation of Registrant.**
3.2 Bylaws of Registrant.**
4.1 Form of Debenture Agreement and Convertible Debenture.**
4.2 Form of stock certificate of Registrant's common stock.*
5.1 Opinion of Haynie Rake & Repass, P.C., Special Counsel to Registrant,
dated ____________, 2000, as to the legality of the shares of
Registrant's common stock being registered.*
10.1 Stock Transfer and Branch Sale Agreement dated _________, 2000 between
Eagle National Bank, Randy Pack, Jon Roy Reid, John Yeaman and Tom
Youngblood.*
10.2. Stock Option Plan of Eagle National Bank.*
10.3 Form of Nonqualified Stock Option Agreement*
23.1 Consent of Haynie, Rake & Repass, P.C., Special Counsel to Registrant
(included in their opinion to be filed as Exhibit 5.1).
23.2 Consent of Fisk & Robinson, P.C., Certified Public Accountants.**
24.1 Power of Attorney given by the Officers and Directors of the Registrant
(included on Signature Page of the Registration Statement).
99.1 Letter to Shareholders of Eagle National Bank.**
99.2 Notice of Annual Meeting of Shareholders of Eagle National Bank.**
99.3 Form of Proxy for use by the Shareholders of Eagle National Bank.**
99.4 Form of Shareholder Election**
99.5 Article 2.02-1 of the TBCA, as amended, relating to indemnification.*
99.6 Statutes Relating to Dissenters' Rights (included as Annex B to the
-------
Proxy Statement/Prospectus contained herein).*
* To be filed by amendment.
** Filed herewith.
