Amendment No. 1 to Form S-4
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As filed with the Securities and Exchange Commission on October 5, 2018

Registration No. 333-227225

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Amendment No. 1 to

Form S-4

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

SPIRIT OF TEXAS BANCSHARES, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Texas   6022   90-0499552

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification No.)

1836 Spirit of Texas Way

Conroe, Texas 77301

(936) 521-1836

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

Dean O. Bass

Chairman and Chief Executive Officer

Spirit of Texas Bancshares, Inc.

1836 Spirit of Texas Way

Conroe, Texas 77301

(936) 521-1836

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

 

Peter G. Weinstock

Beth A. Whitaker

Hunton Andrews Kurth LLP

1445 Ross Avenue, Suite 3700

Dallas, Texas 75202

(214) 979-3000

(214) 880-0011 (facsimile)

   

Chet A. Fenimore

William T. Teten

Fenimore, Kay, Harrison & Ford, LLP

812 San Antonio Street, Suite 600

Austin, Texas 78701

(512) 583-5900

(512) 583-5940 (facsimile)

 

 

Approximate date of commencement of proposed sale of the securities to the public: As soon as practicable after this registration statement becomes effective and all other conditions to the proposed merger described herein have been satisfied or waived.

If the securities being registered on this form are to be 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 the Securities Act registration statement number of the earlier effective registration statement for the same offering:  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filter  ☐      Accelerated filter  
Non-accelerated filter    ☒      Smaller reporting company  
     Emerging growth company  

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act.  ☐

If applicable, place an N in the box to designate the appropriate rule provision relied upon in conducting this transaction:

Exchange Act Rule 13e-4(i) (Cross-Border Issuer Tender Offer)  ☐

Exchange Act Rule 14d-1(d) (Cross-Border Third-Party Tender Offer)  ☐

 

 

Title of each class of

securities to be registered

  Amount
to be
registered(1)
  Proposed
maximum
offering price
per share
 

Proposed
maximum

aggregate

offering price(2)

 

Amount of

registration fee(3)

Common Stock, no par value

  2,142,857   N/A  

$37,526,541.40

  $4,672.06

 

 

 

(1)

Represents the number of shares of Spirit of Texas Bancshares, Inc., which we refer to as Spirit, estimated to be issuable upon completion of the merger of Comanche National Corporation, which we refer to as Comanche, with and into Spirit. The number included in the registration fee table does not include the additional shares that could be issued, upon Spirit’s election, to avoid the termination of the reorganization agreement by Comanche due to a decrease below a certain specified threshold of the average closing price of Spirit common stock over a specified period of time, pursuant to the reorganization agreement and described in more detail elsewhere in the joint proxy statement/prospectus. The shares that could be issued in that context cannot be determined at this time. If Spirit elects to avoid termination of the reorganization agreement by increasing the number of shares in accordance with the terms of the reorganization agreement, then Spirit will file a registration statement pursuant to Rule 462(b) or Rule 429 under the Securities Act of 1933, as amended, which we refer to as the Securities Act, as applicable, to reflect such increase.

(2)

Estimated solely for the purpose of calculating the registration fee required by Section 6(b) of the Securities Act, and computed pursuant to Rule 457(f)(2) and (f)(3) under the Securities Act, by multiplying the book value of Comanche common stock of approximately $93.99 per share as of June 30, 2018, the latest practicable date prior to the date of filing this registration statement, by 399,261, the estimated number of shares of Comanche common stock that may be exchanged for shares of Spirit common stock.

(3)

Determined in accordance with Section 6(b) of the Securities Act at a rate equal to $124.50 per $1,000,000 of the proposed maximum aggregate offering price. The registration fee was previously paid.

 

 

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 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this proxy statement/prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This proxy statement/prospectus is not an offer to sell these securities, and it is not soliciting an offer to buy these securities, in any state where the offer or sale is not permitted.

 

PRELIMINARY—SUBJECT TO COMPLETION, DATED OCTOBER 5, 2018

 

LOGO    LOGO

JOINT PROXY STATEMENT/PROSPECTUS

PROPOSED MERGER AND SHARE ISSUANCE—YOUR VOTE IS VERY IMPORTANT

Dear Shareholder:

On July 19, 2018, Spirit of Texas Bancshares, Inc., a Texas corporation, which we refer to as Spirit, and Comanche National Corporation, a Texas corporation, which we refer to as Comanche, entered into an Agreement and Plan of Reorganization, which we refer to as the reorganization agreement, that provides for the acquisition of Comanche by Spirit. Subject to the terms and conditions of the reorganization agreement, Comanche will merge with and into Spirit, with Spirit continuing as the surviving corporation, which we refer to as the merger.

At the effective time of the merger, all of the outstanding shares of Comanche common stock, other than shares of Comanche common stock held by Comanche and dissenting shares (as defined in this document), will be converted into the right to receive, in the aggregate, (i) 2,142,857 shares of Spirit common stock, which we refer to as the stock consideration, and (ii) $15,000,000.00 in cash minus the amount of Comanche’s transaction costs, which refer to as the cash consideration (but the cash consideration will not be reduced by more than $2,755,000.00), together with cash in lieu of a fractional share. We refer to the stock consideration and the cash consideration collectively as the merger consideration. Based on the number of shares of Comanche common stock issued and outstanding as of August 31, 2018 and based on the following closing prices of Spirit common stock: (i) $20.36 on July 18, 2018, the last trading day before public announcement of the reorganization agreement, and (ii)            , 2018, the latest practicable trading day before the date of this document, the merger consideration represented approximately $140.00 and $            , respectively, for each share of Comanche common stock and aggregate merger consideration of approximately $55.9 million and $            million, respectively. Each of the foregoing examples in the preceding sentence assumes that the only adjustment to the merger consideration is the reduction of the cash consideration by $2,755,000.00 and that there are no dissenting shares. Spirit common stock is listed on NASDAQ Global Select Market, which we refer to as NASDAQ, under the symbol “STXB.”

If the average of the closing price per share of Spirit common stock on NASDAQ for the 15 consecutive trading days ending on and including the tenth trading day preceding the date the merger is completed, which we refer to as the average closing price, is less than $16.80 per share and Spirit common stock underperforms a selected index of public bank holding companies listed on NASDAQ, which we refer to as the selected index, by more than 20.0%, Comanche has the right to terminate the reorganization agreement. Upon receipt of notice of such termination, Spirit has the right, but not the obligation, to increase the merger consideration to prevent a termination of the reorganization agreement by Comanche. Spirit may increase the merger consideration in its discretion by increasing the cash consideration and/or by increasing the number of shares of Spirit common stock in the stock consideration such that the sum of any additional cash consideration and the value of the stock consideration is equal to at least $36,000,000.00 (valuing the stock consideration based on the average closing price of Spirit common stock in accordance with the reorganization agreement). As a result, the number of shares of Spirit common stock that Comanche shareholders will receive in the merger may fluctuate with the market price of Spirit common stock and will not be known at the time that you vote at your company’s special meeting of its shareholders.

We urge you to obtain current market quotations for Spirit common stock. There are no current market quotations for Comanche common stock because Comanche is a privately-owned corporation and its common stock is not traded on any established public trading market.

Spirit will hold a special meeting of its shareholders in connection with the merger. At the Spirit special meeting, the holders of shares of Spirit common stock as of the Spirit record date, which we refer to as Spirit


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shareholders, will be asked to vote (i) to approve the reorganization agreement and the transactions contemplated thereby, which we refer to as the Spirit merger proposal, (ii) to approve the issuance of Spirit common stock in connection with the merger, which we refer to as the Spirit stock issuance proposal, and (iii) to approve the adjournment or postponement of the Spirit special meeting, if necessary or appropriate, to solicit additional proxies in favor of the Spirit merger proposal and the Spirit stock issuance proposal, which we refer to as the Spirit adjournment proposal. Approval of the Spirit merger proposal requires the affirmative vote of the holders of at least a majority of the shares of Spirit common stock entitled to vote on the Spirit merger proposal. Approval of each of the Spirit stock issuance proposal and the Spirit adjournment proposal requires the affirmative vote of a majority of the votes cast by Spirit shareholders at the Spirit special meeting, in person or by proxy.

Comanche will hold a special meeting of its shareholders in connection with the merger. At the Comanche special meeting, holders of outstanding shares of Comanche common stock as of the Comanche record date, which we refer to as Comanche shareholders, will be asked to vote to (i) approve the reorganization agreement and the transactions contemplated thereby, which we refer to as the Comanche merger proposal, and (ii) to approve the adjournment or postponement of the Comanche special meeting, if necessary or appropriate, to solicit additional proxies in favor of the Comanche merger proposal, which we refer to as the Comanche adjournment proposal. Approval of the Comanche merger proposal requires the affirmative vote of the holders of at least two-thirds of the outstanding shares of Comanche common stock entitled to vote on the Comanche merger proposal. Approval of the Comanche adjournment proposal requires the affirmative vote of a majority of the votes cast by Comanche shareholders at the Comanche special meeting, in person or by proxy.

Your vote is important regardless of the number of shares that you own. Whether or not you plan to attend your company’s special meeting, please take time to vote by following the voting instructions included in the enclosed proxy card. Submitting a proxy now will not prevent you from being able to vote in person at your company’s special meeting.

The Spirit special meeting will be held on                  at                 , at                 , local time. The Comanche special meeting will be held on                  at                 , at                 , local time.

The Spirit board of directors unanimously recommends that Spirit shareholders vote “FOR” the approval of the Spirit merger proposal, “FOR” the Spirit stock issuance proposal and “FOR” the Spirit adjournment proposal.

The Comanche board of directors unanimously recommends that Comanche shareholders vote “FOR” the approval of the Comanche merger proposal and “FOR” the Comanche adjournment proposal.

This joint proxy statement/prospectus, which we refer to as this document, describes the Spirit special meeting, the Comanche special meeting, the merger, the issuance of Spirit common stock in connection with the merger, the documents related to the merger and other related matters. Please carefully read this entire document, including “Risk Factors,” beginning on page 35, for a discussion of the risks related to the merger, Spirit’s business and Spirit’s industry and regulation.

 

Dean O. Bass    William K. Nix
Chairman and Chief Executive Officer    Chairman and Chief Executive Officer
Spirit of Texas Bancshares, Inc.    Comanche National Corporation
1836 Spirit of Texas Way    100 East Central Street
Conroe, Texas 77301    Comanche, Texas 76442

Neither the Securities and Exchange Commission, which we refer to as the SEC, nor any state securities commission has approved or disapproved of the securities to be issued in the merger or passed upon the adequacy or accuracy of this document. Any representation to the contrary is a criminal offense.

The securities to be issued in the merger are not savings or deposit accounts or other obligations of any bank or non-bank subsidiary of either Spirit or Comanche, and they are not insured by the Federal Deposit Insurance Corporation, which we refer to as the FDIC, or any other governmental agency.

The date of this document is                 , 2018, and it is first being mailed or otherwise delivered to the shareholders of Spirit and Comanche on or about                 , 2018.


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LOGO

1836 Spirit of Texas Way

Conroe, Texas 77301

 

NOTICE OF SPECIAL MEETING OF SHAREHOLDERS

 

To the Shareholders of Spirit of Texas Bancshares, Inc.:

Notice is hereby given that Spirit of Texas Bancshares, Inc., which we refer to as Spirit, will hold a special meeting of its shareholders on             , 2018 at                 , local time, at                  to consider and vote upon the following matters:

 

   

a proposal to approve the Agreement and Plan of Reorganization, which, as it may be amended from time to time, we refer to as the reorganization agreement, by and between Spirit and Comanche National Corporation, which we refer to as Comanche, and the transactions contemplated thereby, a copy of which is included with the joint proxy statement/prospectus as Annex A;

 

   

a proposal to approve the issuance of Spirit common stock in connection with the merger, which we refer to as the Spirit stock issuance proposal; and

 

   

a proposal to adjourn the Spirit special meeting, if necessary or appropriate, to solicit additional proxies in favor of the Spirit merger proposal and the Spirit stock issuance proposal, which we refer to as the Spirit adjournment proposal.

These proposals are described in more detail in the joint proxy statement/prospectus. Spirit has fixed the close of business on                 , 2018 as the record date for the Spirit special meeting. Only holders of record of Spirit common stock as of the Spirit record date are entitled to notice of, and to vote at, the Spirit special meeting, or any adjournment or postponement of the Spirit special meeting. Approval of the Spirit merger proposal requires the affirmative vote of the holders of at least a majority of the outstanding shares of Spirit common stock entitled to vote on the Spirit merger proposal. Approval of each of the Spirit stock issuance proposal and the Spirit adjournment proposal requires the affirmative vote of a majority of the votes cast by Spirit shareholders at the Spirit special meeting, in person or by proxy.

The Spirit board of directors has unanimously approved the reorganization agreement, has determined that the reorganization agreement and the transactions contemplated thereby, including the merger and the issuance of Spirit common stock in connection with the merger, are advisable and in the best interests of Spirit and its shareholders, and recommends that Spirit shareholders vote “FOR” the Spirit merger proposal, “FOR” the Spirit stock issuance proposal and “FOR” the Spirit adjournment proposal.

Your vote is very important. Spirit and Comanche cannot complete the merger unless Spirit shareholders approve the Spirit merger proposal and the Spirit stock issuance proposal. Regardless of whether you plan to attend the Spirit special meeting, please vote as soon as possible. If you hold shares of Spirit common stock in your name as the holder of record, you should follow the instructions on the proxy card to vote your shares (i) via the Internet at                 , (ii) by telephone by calling                 , (iii) by completing and returning the enclosed proxy card or (iv) by voting in person at the Spirit special meeting. If you hold your stock in “street name” through a bank, broker or other nominee, please follow the instructions on the voting instruction card furnished by such bank, broker or other nominee.


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The joint proxy statement/prospectus provides a detailed description of the Spirit special meeting, the proposals to be voted on at the Spirit special meeting, the merger, the documents related to such proposals and other related matters. Spirit urges you to read the joint proxy statement/prospectus, including any documents it refers you to, and its annexes carefully and in their entirety. We look forward to seeing and visiting with you at the Spirit special meeting.

 

BY ORDER OF THE BOARD OF DIRECTORS,
Dean O. Bass
Chairman and Chief Executive Officer


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LOGO

100 East Central Street

Comanche, Texas 76442

 

NOTICE OF SPECIAL MEETING OF SHAREHOLDERS

 

To the Shareholders of Comanche National Corporation:

Notice is hereby given that Comanche National Corporation, which we refer to as Comanche, will hold a special meeting of its shareholders on                 , 2018 at                 , local time, at                  to consider and vote upon the following matters:

 

   

a proposal to approve the Agreement and Plan of Reorganization, which, as it may be amended from time to time, we refer to as the reorganization agreement, by and between Spirit of Texas Bancshares, Inc., which we refer to as Spirit, and Comanche and the transactions contemplated thereby, a copy of which is included with the joint proxy statement/prospectus as Annex A, which we refer to as the Comanche merger proposal; and

 

   

a proposal to adjourn the Comanche special meeting, if necessary or appropriate, to solicit additional proxies in favor of the Comanche merger proposal, which we refer to as the Comanche adjournment proposal.

These proposals are described in more detail in the joint proxy statement/prospectus. Comanche has fixed the close of business on                 , 2018 as the record date for the Comanche special meeting. Only holders of record of Comanche common stock as of the Comanche record date are entitled to notice of, and to vote at, the Comanche special meeting, or any adjournment or postponement of the Comanche special meeting. Approval of the Comanche merger proposal requires the affirmative vote of the holders of at least two-thirds of the outstanding shares of Comanche common stock entitled to vote on the Comanche merger proposal. Approval of the Comanche adjournment proposal requires the affirmative vote of a majority of the votes cast by Comanche shareholders at the Comanche special meeting, in person or by proxy.

Comanche shareholders have the right to dissent from the merger and obtain payment in cash of the appraised fair value of their shares of Comanche common stock under applicable provisions of the Texas Business Organizations Code, which we refer to as the TBOC. In order for a Comanche shareholder to perfect his, her or its right to dissent, such Comanche shareholder must carefully follow the procedure set forth in the TBOC. A copy of the applicable statutory provisions of the TBOC is included with the joint proxy statement/prospectus as Annex B, and a summary of the provisions can be found under the section of the joint proxy statement/prospectus entitled “The Merger–Dissenters’ Rights in the Merger,” beginning on page 97.

The Comanche board of directors has unanimously approved the reorganization agreement, has determined that the reorganization agreement and the transactions contemplated thereby are advisable and in the best interests of Comanche and its shareholders, and recommends that Comanche shareholders vote “FOR” the Comanche merger proposal and “FOR” the Comanche adjournment proposal.

Your vote is very important. Spirit and Comanche cannot complete the merger unless Comanche shareholders approve the Comanche merger proposal. Regardless of whether you plan to attend the Comanche special meeting, please vote as soon as possible. If you hold shares of Comanche common stock in your name as the holder of record, please vote your shares (i) by completing and returning the enclosed proxy card in the enclosed postage-paid return envelope or (ii) by voting in person at the Comanche special meeting. If you hold your stock in “street name” through a bank, broker or other nominee, please follow the instructions on the voting instruction card furnished by such bank, broker or other nominee.


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The joint proxy statement/prospectus provides a detailed description of the Comanche special meeting, the Comanche merger proposal, the merger, the documents related to the merger and other related matters. Comanche urges you to read the joint proxy statement/prospectus, including any documents it refers you to, and its annexes carefully and in their entirety. We look forward to seeing and visiting with you at the Comanche special meeting.

 

BY ORDER OF THE BOARD OF DIRECTORS,
William K. Nix
Chairman and Chief Executive Officer


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ADDITIONAL INFORMATION

This document references important business and financial information about Spirit and Comanche from other documents that are not included in or delivered with this document. For more details on these documents, see the section of this document entitled “Where You Can Find More Information,” beginning on page 264. You can obtain those documents referred to in this document by accessing the SEC’s website maintained at http://www.sec.gov, for documents regarding Spirit, or by requesting copies in writing or by telephone from the appropriate company, as set forth below, for documents regarding either Spirit or Comanche:

 

Spirit of Texas Bancshares, Inc.

1836 Spirit of Texas Way

Conroe, Texas 77301

Attention: Jerry D. Golemon

Telephone: (281) 516-4904

  

Comanche National Corporation
100 East Central Street

Comanche, Texas 76442
Attention: Jeff D. Stewart

Telephone: (325) 356-2577

You will not be charged for any of these documents that you request. To receive timely delivery of these documents in advance of the meetings, you must make your request no later than five business days before the date of your company’s special meeting. This means that Spirit shareholders requesting documents must do so by                 , 2018 in order to receive them before the Spirit special meeting, and Comanche shareholders requesting documents must do so by                 , 2018 in order to receive them before the Comanche special meeting.

ABOUT THIS DOCUMENT

This document, which forms part of a registration statement on Form S-4 filed with the SEC by Spirit (File No. 333-                ), constitutes a prospectus of Spirit under Section 5 of the Securities Act with respect to the shares of Spirit common stock to be issued to Comanche shareholders pursuant to the reorganization agreement. This document also constitutes a joint proxy statement for both Spirit and Comanche under the Securities Exchange Act of 1934, as amended, which we refer to as the Exchange Act. It also constitutes a notice of special meeting with respect to each of the Spirit special meeting and the Comanche special meeting.

You should rely only on the information contained in and included with this document. No one has been authorized to provide you with information that is different from that contained in, or included with, this document. This document is dated                 , 2018, and you should assume that the information in this document is accurate only as of such date. Neither the mailing of this document to Spirit shareholders or Comanche shareholders nor the issuance by Spirit of shares of Spirit common stock in connection with the merger will create any implication to the contrary.

This document does not constitute an offer to sell, or a solicitation of an offer to buy, any securities or the solicitation of a proxy in any jurisdiction to or from any person to whom it is unlawful to make any such offer or solicitation in such jurisdiction. Except where the context otherwise indicates, information contained in this document regarding Spirit has been provided by Spirit and information contained in this document regarding Comanche has been provided by Comanche.

For more details, see the section of this document entitled “Where You Can Find More Information,” beginning on page 264.

 


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TABLE OF CONTENTS

 

QUESTIONS AND ANSWERS

     1  

SUMMARY

     11  

SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA FOR SPIRIT

     19  

SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA FOR COMANCHE

     22  

SELECTED UNAUDITED PRO FORMA FINANCIAL DATA

     24  

UNAUDITED PRO FORMA COMBINED CONSOLIDATED FINANCIAL STATEMENTS

     26  

UNAUDITED COMPARATIVE PER SHARE DATA

     34  

RISK FACTORS

     35  

CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS

     64  

THE SPIRIT SPECIAL MEETING

     67  

SPIRIT PROPOSALS

     70  

THE COMANCHE SPECIAL MEETING

     71  

COMANCHE PROPOSALS

     74  

THE MERGER

     75  

THE REORGANIZATION AGREEMENT

     101  

ACCOUNTING TREATMENT

     115  

MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER

     115  

DESCRIPTION OF CAPITAL STOCK OF SPIRIT

     119  

COMPARISON OF SHAREHOLDERS’ RIGHTS

     123  

COMPARATIVE MARKET PRICES AND DIVIDENDS

     135  

INFORMATION ABOUT SPIRIT

     138  

SPIRIT’S MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS AND OPERATIONS

     151  

INFORMATION ABOUT COMANCHE

     212  

COMANCHE’S MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

     214  

MANAGEMENT OF SPIRIT

     242  

EXECUTIVE COMPENSATION AND OTHER MATTERS

     246  

BENEFICIAL OWNERSHIP OF SPIRIT COMMON STOCK BY MANAGEMENT AND PRINCIPAL SHAREHOLDERS OF SPIRIT

     261  

BENEFICIAL OWNERSHIP OF COMANCHE COMMON STOCK BY MANAGEMENT AND PRINCIPAL SHAREHOLDERS OF COMANCHE

     263  

LEGAL MATTERS

     264  

EXPERTS

     264  

WHERE YOU CAN FIND MORE INFORMATION

     264  

INDEX TO FINANCIAL STATEMENTS

     F-1  

ANNEX A

     A-1  

ANNEX B

     B-1  

ANNEX C

     C-1  

ANNEX D

     D-1  


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QUESTIONS AND ANSWERS

The following are some questions that you, as a Spirit shareholder or a Comanche shareholder, may have about the merger or the Spirit special meeting or the Comanche special meeting, as applicable, and brief answers to those questions. Spirit and Comanche urge you to read carefully the remainder of this document because the information in this section does not provide all of the information that might be important to you with respect to the merger or the Spirit special meeting or the Comanche special meeting or the proposals presented at those meetings, as applicable. Additional important information is also contained in the annexes to this document. For details about where you can find additional important information, see the section of this document entitled “Where You Can Find More Information,” beginning on page 264.

Unless the context otherwise requires, references in this document to “Spirit” refer to Spirit of Texas Bancshares, Inc., a Texas corporation, and its affiliates, including Spirit of Texas Bank, SSB, a Texas state savings bank and wholly-owned subsidiary of Spirit, which we refer to as Spirit Bank. Additionally, unless the context otherwise requires, references in this document to “Comanche” refer to Comanche National Corporation, a Texas corporation, and its affiliates, including The Comanche National Bank, a national banking association and subsidiary of Comanche, which we refer to as Comanche Bank.

 

Q.

What is the merger?

 

A.

Spirit and Comanche entered into the reorganization agreement on July 19, 2018. Under the reorganization agreement, Comanche will merge with and into Spirit, with Spirit continuing as the surviving corporation. Immediately following the merger, Comanche National Corporation of Delaware, a Delaware corporation and wholly-owned subsidiary of Comanche, which we refer to as CNC Delaware, will merge with and into Spirit, with Spirit continuing as the surviving corporation, which we refer to as the second merger. Immediately following the second merger, Comanche Bank will merge with and into Spirit Bank, with Spirit Bank continuing as the surviving bank, which we refer to as the bank merger.

A copy of the reorganization agreement is included with this document as Annex A.

The merger cannot be completed unless, among other things:

 

   

the holders of at least a majority of the outstanding shares of Spirit common stock entitled to vote on the Spirit merger proposal vote in favor of Spirit merger proposal;

 

   

at least a majority of the votes cast by Spirit shareholders at the Spirit special meeting, in person or by proxy, are voted in favor of the Spirit stock issuance proposal; and

 

   

the holders of at least two-thirds of the outstanding shares of Comanche common stock entitled to vote on the Comanche merger proposal vote in favor of the Comanche merger proposal.

 

Q:

Why am I receiving this document?

 

A:

Spirit and Comanche are delivering this document to you because it is a joint proxy statement being used by both the Spirit board of directors and the Comanche board of directors to solicit proxies of their respective shareholders entitled to vote on the matters in connection with approval of the reorganization agreement and the issuance of Spirit common stock in the merger, as applicable, and related matters.

Spirit has called a special meeting of its shareholders to consider and vote on the Spirit merger proposal, the Spirit stock issuance proposal and the Spirit adjournment proposal. This document serves as the proxy statement for the Spirit special meeting and describes the proposals to be presented at the Spirit special meeting. This document also constitutes a notice of special meeting of shareholders with respect to the Spirit special meeting.

 

1


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Comanche has called a special meeting of its shareholders to consider and vote on the Comanche merger proposal and the Comanche adjournment proposal. This document serves as the proxy statement for the Comanche special meeting and describes the proposals to be presented at the Comanche special meeting. It also constitutes a notice of special meeting of shareholders with respect to the Comanche special meeting.

In addition, this document is a prospectus that is being delivered to Comanche shareholders because Spirit is offering shares of Spirit common stock to Comanche shareholders in connection with the merger.

This document contains important information about the merger, the proposals being voted on at the Spirit special meeting and the Comanche special meeting, the documents related to such proposals and important information to consider in connection with an investment in Spirit common stock. You should read it carefully and in its entirety. The enclosed materials allow you to have your shares of common stock voted by proxy without attending your company’s special meeting. Your vote is important, and Spirit and Comanche encourage you to submit your proxy as soon as possible.

 

Q.

What are Spirit shareholders being asked to vote on at the Spirit special meeting?

 

A.

Spirit is soliciting proxies from Spirit shareholders with respect to the following proposals:

 

   

the Spirit merger proposal;

 

   

the Spirit stock issuance proposal; and

 

   

the Spirit adjournment proposal.

Completion of the merger is not conditioned upon approval of the Spirit adjournment proposal.

 

Q.

What are Comanche shareholders being asked to vote on at the Comanche special meeting?

 

A:

Comanche is soliciting proxies from Comanche shareholders with respect to the following proposals:

 

   

the Comanche merger proposal; and

 

   

the Comanche adjournment proposal.

Completion of the merger is not conditioned upon approval of the Comanche adjournment proposal.

 

Q.

What will Comanche shareholders be entitled to receive in the merger?

 

A:

In the merger, all of the outstanding shares of Comanche common stock (other than shares of Comanche common stock held by Comanche and shares of Comanche common stock held by any Comanche shareholder who has properly exercised his, her or its right to dissent from the merger in accordance with the terms and provisions of Chapter 10, Subchapter H of the TBOC, which we refer to as dissenting shares), will be converted into the right to receive, in the aggregate, (i) 2,142,857 shares of Spirit common stock and (ii) $15,000,000.00 in cash minus the amount of Comanche’s transaction costs (but the cash consideration will not be reduced by more than $2,755,000.00).

The table below sets forth the implied value of the per share merger consideration based on the closing price of Spirit common stock on NASDAQ on the specified dates:

 

Date   Closing
Price

of Spirit
Common
Stock
    Aggregate
Stock
Consideration(1)
    Per Share
Stock
Consideration(2)
    Implied Value
of Per
Share Stock
Consideration(1)
    Aggregate
Cash
Consideration(1)(3)
    Per Share
Cash
Consideration(2)
    Implied Value
of Per
Share Merger
Consideration(1)
 

July 18, 2018(4)

  $ 20.36       2,142,857 shares       5.37 shares     $ 109.33     $ 12,245,000     $ 30.67     $ 140.00  

            , 2018(5)

             

 

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(1)

Assumes there is no adjustment to the merger consideration other than the reduction of the cash consideration by $2,755,000. For a discussion of the possible adjustments to the merger consideration, see the section of this document entitled “The Reorganization Agreement—Structure of the Merger—Adjustments to Merger Consideration,” beginning on page 102.

(2)

Calculated based on 399,261 shares of Comanche common stock issued and outstanding as of August 31, 2018. Also assumes there are no dissenting shares.

(3)

Assumes that the cash consideration is reduced by $2,755,000. For a discussion of the possible adjustments to the merger consideration, see the section of this document entitled “The Reorganization Agreement—Structure of the Merger—Adjustments to Merger Consideration,” beginning on page 102.

(4)

The last trading day before public announcement of the reorganization agreement.

(5)

The latest practicable trading day before the date of this document.

In addition, if the average closing price of Spirit common stock is less than $16.80 per share and Spirit common stock underperforms the selected index by more than 20.0%, Comanche has the right to terminate the reorganization agreement. Upon receipt of notice of such termination, Spirit has the right, but not the obligation, to increase the merger consideration to prevent termination of the reorganization agreement by Comanche. Spirit may increase the merger consideration in its discretion by increasing the cash consideration and/or by increasing the number of shares of Spirit common stock in the stock consideration such that the sum of any additional cash consideration and the value of the stock consideration is equal to at least $36,000,000.00 (valuing the stock consideration based on the average closing price of Spirit common stock in accordance with the reorganization agreement). As a result, the number of shares of Spirit common stock that Comanche shareholders will receive in the merger may fluctuate with the market price of Spirit common stock and will not be known at the time that you vote at your company’s special meeting.

Spirit will not issue fractional shares of Spirit common stock in the merger. Comanche shareholders who would otherwise be entitled to receive a fractional share of Spirit common stock in the merger will instead receive an amount of cash determined by multiplying the fractional share by $21.00.

As a result of the foregoing, based on the number of shares of Spirit common stock and Comanche common stock outstanding as of August 3, 2018, the last date before the date of this document for which it was practicable to obtain this information, approximately 82.0% of Spirit common stock outstanding after the completion of the merger will be held by shareholders who were holders of Spirit common stock immediately before the effective time of the merger and approximately 18.0% of Spirit common stock outstanding after the completion of the merger will be held by shareholders who were holders of Comanche common stock immediately before the effective time of the merger.

 

Q.

Will the value of the merger consideration change between the date of this document and the date the merger is completed?

 

A:

Yes. The value of the merger consideration will fluctuate between the date of this document and the date the merger is completed based upon the market value of Spirit common stock. Any fluctuation in the market price of Spirit common stock after the date of this document will change the value of the shares of Spirit common stock that Comanche shareholders will be entitled to receive. Consequently, you will not know the exact merger consideration to be paid to Comanche shareholders in the merger when you vote at your company’s special meeting.

In addition, if the average closing price of Spirit common stock is less than $16.80 per share and Spirit common stock underperforms the selected index by more than 20.0%, Comanche has the right to terminate the reorganization agreement. Spirit has the right, but not the obligation, to increase the merger consideration to prevent termination of the reorganization agreement by Comanche by increasing the cash consideration and/or by increasing the number of shares of Spirit common stock in the stock consideration such that the sum of any additional cash consideration and the value of the stock consideration is equal to at

 

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least $36,000,000.00 (valuing the stock consideration based on the average closing price of Spirit common stock in accordance with the reorganization agreement). As a result, the number of shares of Spirit common stock that Comanche shareholders will receive in the merger may fluctuate with the market price of Spirit common stock and will not be known at the time that you vote at your company’s special meeting.

 

Q.

What will Spirit shareholders be entitled to receive in the merger?

 

A:

Spirit shareholders will not be entitled to receive any merger consideration and will continue to hold the shares of Spirit common stock that they held immediately prior to the completion of the merger. After the merger is completed, shares of Spirit common stock will continue to be traded on NASDAQ under the symbol “STXB.”

 

Q.

How does the Spirit board of directors recommend that I vote at the Spirit special meeting?

 

A:

The Spirit board of directors unanimously recommends that you vote “FOR” the Spirit merger proposal, “FOR” the Spirit stock issuance proposal and “FOR” the Spirit adjournment proposal.

 

Q.

How does the Comanche board of directors recommend that I vote at the Comanche special meeting?

 

A:

The Comanche board of directors unanimously recommends that you vote “FOR” the Comanche merger proposal and “FOR” the Comanche adjournment proposal.

 

Q.

When and where are the special meetings?

 

A:

The Spirit special meeting will be held at                on                , at                , local time.

The Comanche special meeting will be held at                on                , at                , local time.

 

Q.

What do I need to do now?

 

A:

After you have carefully read this document and have decided how you wish to vote your shares, please vote your shares promptly so that your shares are represented and voted at your company’s special meeting.

Spirit shareholders. If you are a shareholder of record as of the Spirit record date, you can vote your shares (i) via the Internet at                , (ii) by telephone by calling                , (iii) by completing and returning the enclosed proxy card, or (iv) by voting in person at the Spirit special meeting. Spirit encourages you to vote via the Internet or by telephone. If you hold your shares in “street name,” please follow the instructions set forth on the voting instruction form provided by your bank, broker or other nominee.

Comanche shareholders. If you are a shareholder of record as of the Comanche record date, you can vote your shares (i) by completing and returning the enclosed proxy card or (ii) by voting in person at the Comanche special meeting. If you hold your shares in “street name,” please follow the instructions set forth on the voting instruction form provided by your bank, broker or other nominee.

If you hold your shares in “street name” through a bank, broker or other nominee, please direct your bank, broker or nominee how to vote in accordance with the instructions you have received from your bank, broker or nominee.

 

Q.

What is the difference between a shareholder of record and a “street name” holder?

 

A:

If you are a Spirit shareholder and if your shares of Spirit common stock are registered directly in your name with Computershare Trust Company, N.A., which we refer to as Computershare, Spirit’s stock

 

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  transfer agent, you are considered the shareholder of record with respect to those shares of Spirit common stock. This document and the enclosed Spirit proxy card have been sent directly to you by Computershare at Spirit’s request. On the close of business on                , 2018, the record date for the Spirit special meeting, which we refer to as the Spirit record date, Spirit had approximately                holders of record.

If you are a Comanche shareholder and if your shares of Comanche common stock are registered directly in your name, you are considered the shareholder of record with respect to those shares of Comanche common stock. On the close of business on                , 2018, the record date for the Comanche special meeting, which we refer to as the Comanche record date, Comanche had approximately                holders of record.

If your shares of Spirit common stock or Comanche common stock are held in a stock brokerage account or by a bank or other nominee, the bank, broker or nominee is considered the record holder of those shares. You are considered the beneficial owner of those shares, and your shares are held in “street name.” This document and the enclosed Spirit proxy card or Comanche proxy card, as applicable, have been forwarded to you by your bank, broker or nominee. As the beneficial owner, you have the right to direct your bank, broker or nominee concerning how to vote your shares by using the voting instructions you have received from them.

 

Q.

If my shares of Spirit common stock or Comanche common stock, as applicable, are held in “street name” by my bank, broker or other nominee, will my bank, broker or nominee automatically vote my shares for me?

 

A:

No. Your bank, broker or nominee cannot vote your shares without instructions from you. You should instruct your bank, broker or nominee how to vote your shares in accordance with the instructions provided to you. Please check the voting form used by your bank, broker or nominee. If you do not provide instructions to your bank, broker or nominee, your shares will not be voted, and this will have the effect of voting AGAINST the Spirit merger proposal and the Comanche merger proposal, as applicable.

 

Q.

What is a broker non-vote?

 

A:

A broker non-vote occurs when a bank, broker or other nominee holding shares for a beneficial owner does not vote on a particular proposal because the bank, broker or nominee does not have discretionary voting power with respect to that item and has not received voting directions from the beneficial owner.

If you are a Spirit shareholder, your broker does not have discretionary authority to vote your shares with respect to the Spirit merger proposal, the Spirit stock issuance proposal or the Spirit adjournment proposal. If you wish for the vote of your shares to be counted, you must direct your bank, broker or nominee how to vote your shares.

If you are a Comanche shareholder, your broker does not have discretionary authority to vote your shares with respect to the Comanche merger proposal or the Comanche adjournment proposal. If you wish for the vote of your shares to be counted, you must direct your bank, broker or nominee how to vote your shares.

 

Q.

How are broker non-votes and abstentions treated?

 

A:

Abstentions and broker non-votes will be counted for purposes of determining the presence or absence of a quorum.

Abstentions and broker non-votes by Spirit shareholders will have the effect of a vote AGAINST the Spirit merger proposal because Spirit’s certificate of formation requires this proposal to be approved by the affirmative vote of the holders of at least a majority of the outstanding shares of Spirit common stock entitled to vote on the Spirit merger proposal.

 

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Abstentions and broker non-votes by Comanche shareholders will have the effect of a vote AGAINST the Comanche merger proposal because Texas law requires this proposal to be approved by the affirmative vote of the holders of at least two-thirds of the outstanding shares of Comanche common stock entitled to vote on the Comanche merger proposal.

Abstentions and broker non-votes by Spirit shareholders will have no effect on the Spirit stock issuance proposal.

Abstentions and broker non-votes will have no effect on the Spirit adjournment proposal or the Comanche adjournment proposal.

 

Q.

What constitutes a quorum for the Spirit special meeting?

 

A:

The presence (in person or by proxy) of holders of at least a majority of the voting power represented by all issued and outstanding shares of Spirit common stock entitled to be voted at the Spirit special meeting constitutes a quorum for transacting business at the Spirit special meeting. All shares of Spirit common stock present in person or represented by proxy, including abstentions and broker non-votes, if any, will be treated as present for purposes of determining the presence or absence of a quorum for all matters voted on at the Spirit special meeting.

 

Q.

What constitutes a quorum for the Comanche special meeting?

 

A:

The presence (in person or by proxy) of holders of at least a majority of the voting power represented by all issued and outstanding shares of Comanche common stock entitled to be voted at the Comanche special meeting constitutes a quorum for transacting business at the Comanche special meeting. All shares of Comanche common stock present in person or represented by proxy, including abstentions and broker non-votes, if any, will be treated as present for purposes of determining the presence or absence of a quorum for all matters voted on at the Comanche special meeting.

 

Q.

What is the vote required to approve each proposal at the Spirit special meeting?

 

A:

Spirit merger proposal: Approval of the Spirit merger proposal requires the affirmative vote of a majority of the outstanding shares of Spirit common stock entitled to vote on the Spirit merger proposal. If you mark “ABSTAIN” on your proxy card, fail to submit a proxy card or vote in person at the Spirit special meeting or fail to instruct your bank, broker or nominee how to vote with respect to the Spirit merger proposal, it will have the effect of a vote AGAINST the proposal.

Spirit stock issuance proposal: Approval of the Spirit stock issuance proposal requires the affirmative vote of a majority of the votes cast at the Spirit special meeting, in person or by proxy. If you mark “ABSTAIN” on your proxy card, fail to submit a proxy card or vote in person at the Spirit special meeting or fail to instruct your bank, broker or nominee how to vote with respect to the Spirit stock issuance proposal, it will have no effect on the proposal.

Spirit adjournment proposal: Approval of the Spirit adjournment proposal requires the affirmative vote of a majority of the votes cast at the Spirit special meeting, in person or by proxy, is required to approve the Spirit adjournment proposal. If you mark “ABSTAIN” on your proxy card, fail to submit a proxy card or vote in person at the Spirit special meeting or fail to instruct your bank, broker or nominee how to vote with respect to the Spirit adjournment proposal, it will have no effect on the proposal.

 

Q.

What is the vote required to approve each proposal at the Comanche special meeting?

 

A:

Comanche merger proposal: Approval of the Comanche merger proposal requires the affirmative vote of two-thirds of the outstanding shares of Comanche common stock entitled to vote on the Comanche merger

 

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  proposal. If you mark “ABSTAIN” on your proxy card, fail to submit a proxy card or vote in person at the Comanche special meeting or fail to instruct your bank, broker or nominee how to vote with respect to the Comanche merger proposal, it will have the effect of a vote AGAINST the proposal.

Comanche adjournment proposal: Approval of the Comanche adjournment proposal requires the affirmative vote of a majority of the votes cast at the Comanche special meeting, in person or by proxy. If you mark “ABSTAIN” on your proxy card, fail to submit a proxy card or vote in person at the Comanche special meeting or fail to instruct your bank, broker or nominee how to vote with respect to the Comanche adjournment proposal, it will have no effect on the proposal.

 

Q.

Why is my vote important?

 

A:

If you do not vote, it will be more difficult for Spirit or Comanche to obtain the necessary quorum to hold their respective special meetings and to obtain approval of the proposals to be voted upon at the special meetings. In addition, if you are a Comanche shareholder, your failure to vote will have the effect of a vote AGAINST the Comanche merger proposal and, if you are a Spirit shareholder, your failure to vote will have the effect of a vote AGAINST the Spirit merger proposal. The Spirit board of directors unanimously recommends that you, as a Spirit shareholder, vote “FOR” the Spirit merger proposal and “FOR” the Spirit stock issuance proposal. The Comanche board of directors unanimously recommends that you, as a Comanche shareholder, vote “FOR” the Comanche merger proposal.

 

Q.

Can I attend the special meeting?

 

A:

All Spirit shareholders and Comanche shareholders as of the Spirit record date and the Comanche record date, respectively (including shareholders of record and shareholders who hold their shares in “street name” through banks, brokers or other nominees) are invited to attend their respective special meetings. If you plan to attend your special meeting, you must hold your shares in your own name or have a letter from the bank, broker or other nominee that holds your shares confirming your ownership. In addition, all Spirit shareholders and Comanche shareholders must bring a form of personal photo identification in order to be admitted to the Spirit special meeting or Comanche special meeting, as applicable.

Spirit and Comanche reserve the right to refuse admittance to anyone without proper proof of share ownership or without proper photo identification. The use of cameras, sound recording equipment, communications devices or any similar equipment during the Spirit special meeting or the Comanche special meeting is prohibited without Spirit’s or Comanche’s express written consent, respectively.

 

Q.

If I attend the special meeting, can I vote my shares in person?

 

A:

Shareholders of record and beneficial owners of Spirit common stock as of the Spirit record date can vote in person at the Spirit special meeting. If you are a beneficial owner of Spirit common stock, you must obtain a proxy card, executed in your favor, from the record holder of your shares, such as a broker, bank or other nominee, to be able to vote in person at the Spirit special meeting.

Only Comanche shareholders of record as of the Comanche record date can vote in person at the Comanche special meeting. If you are a beneficial owner of Comanche common stock, you must obtain a proxy card, executed in your favor, from the record holder of your shares, such as a broker, bank or other nominee, to be able to vote in person at the Comanche special meeting.

 

Q.

Can I change my vote?

 

A:

Spirit shareholders: Yes. If you are a shareholder of record, you may change your vote or revoke any proxy at any time before the Spirit special meeting is called to order by: (i) delivering a written notice of

 

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  revocation to Spirit’s Corporate Secretary, (ii) completing and returning a new proxy card with a later date than your original proxy card prior to such time that the proxy card for any such Spirit shareholder must be received, and any earlier proxy will be revoked automatically, (iii) logging onto the Internet website specified on your proxy card in the same manner you would to submit your proxy electronically and following the instructions indicated on the proxy card or (iv) attending the Spirit special meeting in person, notifying the Corporate Secretary that you are revoking your proxy and voting by ballot at the Spirit special meeting. Your attendance by itself at the Spirit special meeting will not automatically revoke your proxy unless you give written notice of revocation to Spirit’s Corporate Secretary before the Spirit special meeting is called to order. A revocation or later-dated proxy received by Spirit after the Spirit special meeting is called to order will not be recognized and will not affect the vote. All written notices of revocation and other communications with respect to revocation or proxies should be sent to: Spirit of Texas Bancshares, Inc., 1836 Spirit of Texas Way, Conroe, Texas 77301, Attention: Corporate Secretary.

If you hold your shares of Spirit common stock in “street name” through a bank, broker or nominee, you should contact your bank, broker or nominee to change your vote or revoke your proxy.

Comanche shareholders: Yes. If you are a holder of record of Comanche common stock, you may change your vote or revoke any proxy at any time before it is voted by: (i) attending and voting in person at the Comanche special meeting; (ii) giving notice of revocation of the proxy at the Comanche special meeting; or (iii) delivering to the Secretary of Comanche (A) a written notice of revocation or (B) a duly executed proxy card relating to the same shares, bearing a date later than the proxy card previously executed. Attendance at the Comanche special meeting by itself will not automatically revoke your proxy. A revocation or later-dated proxy received by Comanche after the vote will not be recognized and will not affect the vote. All written notices of revocation and other communications with respect to revocation or proxies should be sent to: Comanche National Corporation, 100 East Central Street, Comanche, Texas 76442, Attention: Secretary.

If you hold your shares of Comanche common stock in “street name” through a bank, broker or nominee, you should contact your bank, broker or nominee to change your vote or revoke your proxy.

 

Q.

What are the expected U.S. federal income tax consequences of the merger?

 

A:

The obligations of Spirit and Comanche to complete the merger are conditioned on, among other things, the receipt by Spirit and Comanche of tax opinions from Hunton Andrews Kurth LLP, which we refer to as Hunton, and Fenimore, Kay, Harrison & Ford, LLP, which we refer to as Fenimore Kay, respectively, dated as of the date the merger is completed, to the effect that, on the basis of facts, representations and assumptions that are consistent with the facts existing at the effective time of the merger and as set forth and referred to in such opinions, the merger will qualify for U.S. federal income tax purposes as a “reorganization” within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended, which we refer to as the Code.

If the merger qualifies as a reorganization under Section 368(a) of the Code, for U.S. federal income tax purposes, Comanche shareholders generally will recognize gain, if any (but not loss), equal to the lesser of (i) the excess, if any, of the sum of the amount of cash consideration received and the fair market value of the shares of Spirit common stock received by that holder in the merger over that holder’s adjusted tax basis in his, her or its shares of Comanche common stock surrendered therefor, and (ii) the amount of cash consideration received by that holder in the merger. Comanche shareholders who properly exercise their dissenters’ rights and receive cash in exchange for their shares of Comanche common stock will recognize gain or loss for U.S. federal income tax purposes in an amount equal to the difference between the cash received and that shareholder’s tax basis in the Comanche common stock exchanged therefor. In addition, Comanche shareholders generally will recognize gain with respect to any cash received in lieu of fractional shares of Spirit common stock. If any of the tax opinion representations and assumptions are incorrect,

 

8


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incomplete or false or are violated, the validity of the opinions described above may be affected and the tax consequences of the merger could differ from those described in this document.

For further information, see the section of this document entitled “Material U.S. Federal Income Tax Consequences of the Merger” beginning on page 115. The U.S. federal income tax consequences described above may not apply to all Comanche shareholders. Your tax consequences will depend on your individual situation. Accordingly, Comanche shareholders are urged to consult their own tax advisors for a full understanding of the particular tax consequences to them of the merger.

 

Q.

Are Comanche shareholders entitled to dissenters’ rights?

 

A:

Yes. Comanche shareholders may assert dissenters’ rights. For further information, see the section of this document entitled “The Merger—Dissenters’ Rights in the Merger,” beginning on page 97, which discussion is qualified by the full text of the provisions of the TBOC relating to rights of dissenters, which is included with this document as Annex B hereto.

 

Q.

If I am a Comanche shareholder, should I send in my Comanche stock certificates now?

 

A:

No. Please do not send in your Comanche stock certificates with your proxy card. After the merger is completed, Spirit’s exchange agent, Computershare, will send you instructions for exchanging your certificate formerly representing shares of Comanche common stock for your portion of the merger consideration. See the section of this document entitled “The Merger Agreement—Conversion of Shares; Exchange of Certificates,” beginning on page 102.

 

Q.

Whom may I contact if I cannot locate my Comanche stock certificate(s)?

 

A:

If you are unable to locate your original Comanche stock certificate(s), you should contact Jeff D. Stewart at (325) 356-2577 or jstewart@comanchenational.com.

 

Q.

What should I do if I receive more than one set of voting materials?

 

A:

Spirit shareholders and Comanche shareholders may receive more than one set of voting materials, including multiple copies of this document and multiple proxy cards or voting instruction cards. For example, if you hold shares of Spirit common stock or Comanche common stock in more than one brokerage account, you will receive a separate voting instruction card for each brokerage account in which you hold such shares. If you are a Spirit shareholder or Comanche shareholder and your shares are registered in more than one name, you will receive more than one proxy card. In addition, if you are a holder of both Spirit common stock and Comanche common stock, you will receive one or more separate proxy cards or voting instruction cards for each company. Please complete, sign, date and return each proxy card and voting instruction card that you receive or otherwise follow the voting instructions set forth in this document to ensure that you vote every share of Spirit common stock and/or Comanche common stock that you own.

 

Q.

When do you expect to complete the merger?

 

A:

Spirit and Comanche currently expect to complete the merger in the fourth quarter of 2018. However, neither Spirit nor Comanche can assure you of when or if the merger will be completed. Before the merger is completed, Spirit must obtain the approval of Spirit shareholders for the Spirit merger proposal and the Spirit stock issuance proposal, Comanche must obtain the approval of Comanche shareholders for the Comanche merger proposal, necessary regulatory approvals must be obtained and certain other closing conditions must be satisfied.

 

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Q.

What happens if the merger is not completed?

 

A:

If the merger is not completed, Comanche shareholders will not receive any consideration for their shares of Comanche common stock. Instead, Comanche will remain an independent company. In addition, if the reorganization agreement is terminated in certain circumstances, Comanche may be required to pay a termination fee to Spirit. See the section of this document entitled “The Merger Agreement—Termination Fee,” beginning on page 113 for a complete discussion of the circumstances under which a termination fee would be required to be paid.

 

Q.

Whom should I call with questions?

 

A:

Spirit shareholders: If you have any questions concerning the merger or this document, would like additional copies of this document or need help voting your shares of Spirit common stock, please contact Jerry D. Golemon at (936) 521-1836 or jgolemon@sotb.com or Shareholder Services at Computershare at (800) 962-4284.

Comanche shareholders: If you have any questions concerning the merger or this document, would like additional copies of this document or need help voting your shares of Comanche common stock, please contact Jeff D. Stewart at (325) 356-2577 or jstewart@comanchenational.com.

 

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SUMMARY

This summary highlights selected information from this document. It may not contain all of the information that is important to you. Spirit and Comanche urge you to read carefully this document in its entirety, including the annexes, and the other documents to which they refer in order to fully understand the merger. A copy of the reorganization agreement is attached as Annex A. See the section of this document entitled “Where You Can Find More Information,” beginning on page 264. Each item in this summary refers to the page of this document on which that subject is discussed in more detail.

Information about the Companies

Spirit (page 138)

Spirit is a Texas corporation and registered bank holding company headquartered in Conroe, Texas. Through its wholly-owned subsidiary, Spirit Bank, Spirit provides a diversified range of commercial and retail banking services primarily to small- to medium-sized businesses and individuals in the Houston, Bryan-College Station and Dallas/Fort Worth metropolitan areas. Spirit believes the size, growth and increasing economic diversity of its market areas, when combined with its business-focused strategy of delivering relationship-driven financial services, provides Spirit with excellent opportunities for long-term sustainable growth. Since its inception in 2008, Spirit has implemented a growth strategy that includes organic loan and deposit generation through the establishment of de novo branches, as well as strategic acquisitions that have either strengthened its presence in existing markets or expanded its operations into new markets with attractive business prospects.

Spirit currently operates 15 full-service branches located primarily in the Houston and Dallas/Fort Worth metropolitan areas. As of June 30, 2018, Spirit had total assets of $1.1 billion, loans held for investment of $917.5 million, total deposits of $844.7 million and total stockholders’ equity of $148.0 million.

Spirit common stock is traded on NASDAQ under the symbol “STXB.”

Spirit’s principal office is located at 1836 Spirit of Texas Way, Conroe, Texas 77301, and its telephone number at that location is (936) 538-1000. Spirit’s website is https://www.sotb.com/. The information contained on or accessible from Spirit’s website does not constitute a part of this document and is not incorporated by reference herein. Additional information about Spirit and its subsidiaries is included in the section of this document entitled “Information About Spirit.”

Comanche (page 212)

Formed in 2000, Comanche is a Texas corporation that owns all of the outstanding shares of common stock of CNC Delaware, which owns all of the outstanding shares of common stock of Comanche Bank, a national banking association formed in 1889, with operational headquarters in Comanche, Texas. Comanche Bank is a traditional commercial bank offering a variety of banking services to commercial and consumer customers throughout the north central region of Texas. Comanche Bank offers a range of lending services, including real estate, agricultural, commercial and consumer loans to individuals and small- to medium-sized business and professional firms that are located in or conduct a substantial portion of their business in Comanche Bank’s market areas.

Comanche Bank operates eight banking locations in Comanche, Mingus, Santo, Palo Pinto, Millsap, Mineral Wells, Cool and Jacksboro, Texas. As of June 30, 2018, Comanche, on a consolidated basis, reported total assets of $347.9 million, total loans of $124.6 million, total deposits of $306.6 million and shareholders’ equity of $39.4 million. Comanche does not file reports with the SEC because Comanche is not a publicly-traded company.



 

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Comanche’s principal executive offices are located at 100 East Central, Comanche, Texas, and its telephone number at that location is (325) 356-2577. Additional information about Comanche and its subsidiaries is included in the section of this document entitled “Information About Comanche.”

In the Merger, Comanche Shareholders Will Be Entitled To Receive Cash and Shares of Spirit Common Stock (page 101)

Merger Consideration

In the merger, all of the outstanding shares of Comanche common stock (other than shares of Comanche common stock held by Comanche and dissenting shares), will be converted into the right to receive, in the aggregate, (i) 2,142,857 shares of Spirit common stock and (ii) $15,000,000.00 in cash minus the amount of Comanche’s transaction costs (but the cash consideration will not be reduced by more than $2,755,000.00).

The table below sets forth the implied value of the per share merger consideration based on the closing price of Spirit common stock on NASDAQ on the specified dates:

 

Date   Closing
Price

of Spirit
Common
Stock
    Aggregate
Stock
Consideration(1)
    Per Share
Stock
Consideration(2)
    Implied Value
of Per
Share Stock
Consideration(1)
    Aggregate
Cash
Consideration(1)(3)
    Per Share
Cash
Consideration(2)
    Implied Value
of Per
Share Merger
Consideration(1)
 

July 18, 2018(4)

  $ 20.36       2,142,857 shares       5.37 shares     $ 109.33     $ 12,245,000     $ 30.67     $ 140.00  

            , 2018(5)

             

 

(1)

Assumes there is no adjustment to the merger consideration other than the reduction of the cash consideration by $2,755,000. For a discussion of the possible adjustments to the merger consideration, see the section of this document entitled “The Reorganization Agreement—Structure of the Merger—Adjustments to Merger Consideration,” beginning on page 102.

(2)

Calculated based on 399,261 shares of Comanche common stock issued and outstanding as of August 31, 2018. Also assumes there are no dissenting shares.

(3)

Assumes that the cash consideration is reduced by $2,755,000. For a discussion of the possible adjustments to the merger consideration, see the section of this document entitled “The Reorganization Agreement—Structure of the Merger—Adjustments to Merger Consideration,” beginning on page 102.

(4)

The last trading day before public announcement of the reorganization agreement.

(5)

The latest practicable trading day before the date of this document.

Spirit will not issue fractional shares of Spirit common stock in the merger. Comanche shareholders who would otherwise be entitled to receive a fractional share of Spirit common stock in the merger will instead receive an amount of cash determined by multiplying the fractional share by $21.00.

Spirit common stock is listed on NASDAQ under the symbol “STXB.” See the section of this document entitled “Description of Capital Stock of Spirit,” beginning on page 119, for additional information about the Spirit common stock. See the sections of this document entitled “Comparison of Shareholders’ Rights” and “Comparative Market Prices and Dividends, ” beginning on pages 123 and 135, respectively, for comparative information about the Spirit common stock and the Comanche common stock and the rights of holders thereof.

The market value of the shares of Spirit common stock to be paid as consideration will fluctuate with the market price of Spirit common stock and will not be known at the time that Spirit shareholders vote on the Spirit merger proposal and the Spirit stock issuance proposal or that Comanche shareholders vote on the Comanche merger proposal.



 

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The reorganization agreement governs the merger. The reorganization agreement is included with this document as Annex A. All descriptions in this summary and elsewhere in this document of the terms and conditions of the merger are qualified by reference to the reorganization agreement. Please read the reorganization agreement carefully for a more complete understanding of the merger.

Adjustments to Merger Consideration

The cash consideration will be reduced by the amount of costs and expenses, up to $2,755,000.00, incurred by Comanche or Comanche Bank in connection with the merger and other transactions contemplated by the reorganization agreement.

In addition, if the average closing price of Spirit common stock is less than $16.80 per share and Spirit common stock underperforms the selected index by more than 20.0%, Comanche has the right to terminate the reorganization agreement. Upon receipt of notice of such termination, Spirit has the right, but not the obligation, to increase the merger consideration to prevent termination of the reorganization agreement by Comanche. Spirit may increase the merger consideration in its discretion by increasing the cash consideration and/or by increasing the number of shares of Spirit common stock in the stock consideration such that the sum of any additional cash consideration and the value of the stock consideration is equal to at least $36,000,000.00 (valuing the stock consideration based on the average closing price of Spirit common stock in accordance with the reorganization agreement). As a result, the number of shares of Spirit common stock that Comanche shareholders will receive in the merger may fluctuate with the market price of Spirit common stock and will not be known at the time that you vote at your company’s special meeting.

Comanche Support Agreements and Comanche Voting Agreement (page 114)

In connection with entering into the reorganization agreement, each of the directors of Comanche and Comanche Bank that is not a party to an employment agreement has entered into a director support agreement with Spirit, which we refer to as the Comanche support agreements, pursuant to which they agree to refrain from harming the goodwill of Spirit, Comanche or any of their respective subsidiaries and their respective customer, client and vendor relationships. By entering into such Comanche support agreements, each director also agreed to certain additional restrictive covenants.

In connection with entering into the reorganization agreement, Spirit entered into a voting agreement with Comanche and certain shareholders of Comanche, which we refer to as the Comanche voting agreement. The shareholders who are party to the Comanche voting agreement beneficially own in the aggregate approximately 60.67% of the outstanding shares of Comanche common stock. The Comanche voting agreement requires, among other things, that the shareholders party thereto vote all of their shares of Comanche common stock in favor of the merger and the other transactions contemplated by the reorganization agreement and against alternative transactions and generally prohibits them from transferring their shares of Comanche common stock prior to the termination of the Comanche voting agreement. The Comanche voting agreement will terminate upon the earlier of the termination of the reorganization agreement in accordance with its terms or the effective time of the merger.

Opinion of Spirit’s Financial Advisor (page 80 and Annex C)

On July 19, 2018, at the request of the Spirit board of directors, representatives of Stephens Inc., which we refer to as Stephens, financial advisor to Spirit, rendered its written opinion, dated July 19, 2018, that as of such date and based upon and subject to the qualifications, assumptions and other matters considered in connection with the preparation of its opinion, the merger consideration was fair, from a financial point of view, to Spirit. The full text of the written opinion of Stephens, dated July 19, 2018, which sets forth, among other things, the various qualifications, assumptions and limitations on the scope of the review undertaken, is included in this document as Annex C. The Stephens opinion does not constitute a recommendation to the Spirit board of

 

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directors or any holder of Spirit common stock or Comanche common stock as to how the Spirit board of directors, such shareholder or any other person should vote or otherwise act with respect to the merger or any other matter. See the section of this document entitled “The Merger—Opinion of Spirit’s Financial Advisor,” beginning on page 80.

Opinion of Comanche’s Financial Advisor (page 87 and Annex D)

On July 18, 2018, Piper Jaffray & Co, financial advisor to Comanche, which we refer to as Piper, rendered to the Comanche board of directors its written opinion with respect to the fairness, from a financial point of view, to the holders of Comanche common stock of the merger consideration. The references to Piper’s opinion in this document are qualified in their entirety by reference to the full text of Piper’s written opinion, which is included as Annex D to this document and Piper’s opinion sets forth the procedures followed, assumptions made, qualifications and limitations on the review undertaken and other matters considered by Piper in preparing its opinion. Piper’s opinion does not constitute a recommendation to the Comanche board of directors or any holder of Comanche common stock or Spirit common stock as to how the Comanche board of directors, such shareholder or any other person should vote or otherwise act with respect to the merger or any other matter. See the section of this document entitled “The Merger—Opinion of Comanche’s Financial Advisor,” beginning on page 87.

Interests of Comanche’s Directors and Executive Officers in the Merger (page 95)

In considering the recommendation of the Comanche board of directors with respect to the Comanche merger proposal, you should be aware that certain of Comanche’s directors and executive officers may have interests in the merger that are different from, or in addition to, the interests of Comanche shareholders generally. The Comanche board of directors was aware of these interests and considered them, among other matters, in approving the reorganization agreement. Interests of directors and executive officers that may be different from or in addition to the interests of Comanche shareholders include:

 

   

Support Agreements. Spirit has entered into separate director support agreements with each of the non-employee directors of Comanche. Each of those agreements provides, among other things, that each such director agrees to use reasonable efforts to refrain from harming the goodwill and customer and client relationships of Spirit, as well as certain confidentiality, non-competition and non-solicitation obligations. If the reorganization agreement is terminated prior to the completion of the merger, the support agreement will also be terminated.

 

   

Indemnification and Insurance. The directors and officers of Comanche will receive indemnification from Spirit for a period of four years after the completion of the merger to the same extent and subject to the conditions set forth in the certificate of formation and bylaws of Comanche and continued director and officer liability insurance coverage for such four-year period. Payment of the premium for the continued director and officer liability coverage will be considered a transaction cost under the reorganization agreement and could reduce the cash consideration, as more specifically described in the reorganization agreement.

 

   

Employee Benefit Plans. Employees of Comanche who continue on as employees of Spirit will be entitled to participate as newly hired employees in the employee benefit plans and programs maintained for employees of Spirit and Spirit Bank. These employees will receive credit for their years of service with Comanche for all purposes under the employee welfare benefit plans and other employee benefit plans and programs, sponsored by Spirit or Spirit Bank to the extent permitted by applicable law.

 

   

Employment Agreements. Spirit has entered into employment agreements with certain employees of Comanche, specifically, Jeff D. Stewart and William K. “Kendall” Nix, to be effective, if at all, upon



 

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the completion of the merger. Each of those agreements includes, among other things, certain compensation, benefits and severance obligations, as well as certain confidentiality, non-competition and non-solicitation obligations following the closing date of the merger. See the section of this document entitled “The Merger—Interests of Comanche’s Directors and Executive Officers in the Merger,” beginning on page 95 for a more detailed discussion of the employment agreements.

 

   

Deferred Cash Incentive Agreement. Mr. Stewart is party to a Deferred Cash Incentive Agreement with Comanche Bank. Under the agreement, the benefit payable to Mr. Stewart upon a change in control (as defined in the agreement) is an amount equal to 100.0% of the amount in his deferred account (as defined in the plan). As of August 29, 2018, the benefit payable to Mr. Stewart upon a change in control is $268,839.90. Benefits are payable in a lump sum within 60 days after the last day of the month in which the merger is completed.

 

   

Salary Continuation Agreement. Mr. Stewart is party to a Salary Continuation Agreement with Comanche. Under the agreement, upon Mr. Stewart’s termination of employment after the normal retirement age of 67, Spirit will pay Mr. Stewart an annual benefit equal to 50.0% of his highest single year base salary while employed by Spirit or Comanche. The benefit will be paid in monthly installments for a period of 15 years. In the event Mr. Stewart (x) has incurred a separation of service under 409A of the Code or (y) terminates his employment as a result of Spirit Bank or Comanche Bank, as applicable, among other things, reducing his compensation, benefits or duties, in each case after the completion of the merger, Mr. Stewart will be entitled to receive a benefit equal to 100.0% of his accrual balance as of the date of his termination.

Comanche Shareholders Are Entitled to Assert Dissenters’ Rights (page 97 and Annex B)

Comanche shareholders have the right to dissent from the merger and obtain payment in cash of the fair value of their shares of Comanche common stock under the TBOC. In order for such Comanche shareholder to perfect such Comanche shareholder’s right to dissent, such Comanche shareholder must carefully follow the procedure set forth in the applicable provisions of the TBOC.

Conditions that Must Be Satisfied or Waived for the Merger to Occur (page 109)

As more fully described in this document and in the reorganization agreement, the completion of the merger depends on a number of conditions being satisfied or, where legally permissible, waived. Spirit’s and Comanche’s respective obligations to complete the merger are subject to the following conditions, among others:

 

   

receipt of all required regulatory approvals;

 

   

approval of the Comanche merger proposal by Comanche shareholders;

 

   

approval of the Spirit merger proposal and the Spirit stock issuance proposal by Spirit shareholders;

 

   

the effectiveness of the registration statement of which this document forms a part;

 

   

the listing on NASDAQ of the shares of Spirit common stock to be issued in the merger;

 

   

the truth and correctness of the representations and warranties of each other party to the reorganization agreement, subject to the materiality standards contained in the reorganization agreement;

 

   

the performance or compliance by each party having in all material respects of their obligations and with their covenants under the reorganization agreement;

 

   

the absence of a material adverse change in the financial condition, assets, properties, deposits, results of operations, earnings, business or cash flows of either party or their respective banking subsidiaries or any event that could reasonably be expected to cause or result in a material adverse effect on either party or their respective banking subsidiaries;



 

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the absence of any government action that would prohibit, or materially impede any party’s ability to complete, the merger, the second merger, the bank merger or the issuance of shares of Spirit common stock in connection with the merger;

 

   

the receipt by Spirit of evidence that Comanche has obtained certain third-party consents and approvals;

 

   

the receipt by each party of an opinion of such party’s outside counsel to the effect that the merger will qualify as a “reorganization” under Section 368(a) of the Code.

 

   

the employment agreements executed by certain of Comanche and Comanche Bank’s officers remaining in full force and effect;

 

   

each of the Comanche support agreements remaining in full force and effect;

 

   

the releases executed by each of the directors and certain officers of Comanche and Comanche Bank remaining in full force and effect;

 

   

the exercise of dissenters’ rights by not more than 5.0% of the outstanding shares of Comanche common stock, in the aggregate;

 

   

accrual by Comanche for any costs and expenses, including legal fees and expenses and settlement costs, related to outstanding legal proceedings; and

 

   

the amendment or termination by Comanche of any employee benefit plans, as requested by Spirit.

Neither Spirit nor Comanche can provide assurance as to when or if all of the conditions to the merger can or will be satisfied or waived by the appropriate party, or that the merger will be completed.

Termination of the Reorganization Agreement (page 112)

Either Spirit or Comanche may terminate the reorganization agreement in various circumstances, including, without limitation, the following:

 

   

any order, decree or ruling or any other action enjoining or prohibiting the merger, the second merger or the bank merger is issued by a U.S. court of competent jurisdiction or other governmental body, and such order, decree, ruling or other action is final and non-appealable;

 

   

a governmental entity denies or withdraws approval of the merger, the second merger or the bank merger;

 

   

the merger has not been completed by January 15, 2019; provided the failure to complete the merger by such date is not caused by or does not result from the failure of the terminating party to fulfill any material obligation under the reorganization agreement;

 

   

Spirit shareholders fail to approve the Spirit merger proposal or the Spirit stock issuance proposal;

 

   

Comanche shareholders fail to approve the Comanche merger proposal; or

 

   

the other party has materially breached any representation, warranty, covenant or agreement in the reorganization agreement and such breach has not been cured within 15 days after the terminating party gives written notice of such failure to the breaching party.

Comanche may terminate the reorganization agreement, without the consent of Spirit, at any time before approval of Comanche merger proposal by Comanche shareholders, if the Comanche board of directors receives an unsolicited, bona fide alternative acquisition proposal (as defined in the reorganization agreement) and, under certain terms and conditions, determines that it is a superior proposal to that of the reorganization agreement and that the failure to accept such proposal would be inconsistent with its fiduciary duties; but, Spirit has the right to adjust the terms and conditions of the reorganization agreement so that the superior proposal no longer constitutes a superior proposal.



 

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Comanche may also terminate the reorganization agreement if the average closing price of Spirit common stock is less than $16.80 per share and Spirit common stock underperforms the selected index by more than 20.0%. Upon receipt of notice of such termination, Spirit has the right, but not the obligation, to increase the merger consideration to prevent termination of the reorganization agreement by Comanche by increasing the cash consideration and/or by increasing the number of shares of Spirit common stock in the stock consideration such that the sum of any additional cash consideration and the value of the stock consideration is equal to at least $36,000,000.00 (valuing the stock consideration based on the average closing price of Spirit common stock in accordance with the reorganization agreement). If Spirit elects to increase the merger consideration, Comanche will no longer have the right to terminate the reorganization agreement for these reasons.

In addition, Spirit may terminate the reorganization agreement, without the consent of Comanche, if:

 

   

any required regulatory approval is obtained subject to restrictions or conditions on the operations of Comanche, Comanche Bank, Spirit or Spirit Bank that are reasonably unacceptable to Spirit;

 

   

on or prior to October 17, 2018, the results of any environmental inspections or surveys of Comanche properties identify certain potential or current violations of environmental laws or requires certain remedial or clean up action that could have a material adverse effect on Comanche or that Spirit expects to cost more than $1.0 million;

 

   

Comanche breaches the non-solicitation obligations set forth in the reorganization agreement in a manner adverse to Spirit;

 

   

the Comanche board of directors accepts a superior proposal (as defined in the reorganization agreement); or

 

   

the Comanche board of directors withdraws or modifies, in any manner adverse to Spirit, its recommendation or approval of the reorganization agreement or recommends to Comanche shareholders acceptance or approval of any alternative acquisition proposal.

Termination Fee (page 113)

If the reorganization agreement is terminated under certain circumstances, including circumstances involving an alternative acquisition proposal and changes in the recommendation of the Comanche board of directors, Comanche may be required to pay to Spirit a termination fee equal to $2,200,000.00. This termination fee could discourage other companies from seeking to acquire or merge with Comanche.

Regulatory Approvals Required for the Merger (page 100)

The merger and the second merger require the approval of the Board of Governors of the Federal Reserve System, which we refer to as the Federal Reserve. On August 31, 2018, Spirit filed the required application with the Federal Reserve Bank of Dallas. Although neither Spirit nor Comanche knows of any reason why it cannot obtain these regulatory approvals in a timely manner, Spirit and Comanche cannot be certain when or if they will be obtained.

The bank merger requires the approval of the FDIC and the Texas Department of Savings and Mortgage Lending, which we refer to as the TDSML. On August 31, 2018, Spirit Bank filed the required application with the FDIC and the TDSML. Although neither Spirit nor Comanche knows of any reason why it cannot obtain these regulatory approvals in a timely manner, Spirit and Comanche cannot be certain when or if they will be obtained.

We expect to obtain all necessary regulatory approvals, although we cannot be certain if or when we will obtain them. The U.S. Department of Justice will have between 15 and 30 days following approval by the FDIC



 

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to challenge the approval on antitrust grounds. Spirit and Comanche are not aware of any material governmental approvals or actions that are required prior to the parties’ completion of the merger other than those described in this document. If any additional governmental approvals or actions are required, the parties presently intend to seek those approvals or actions. However, the parties cannot assure you that any of these additional approvals or actions will be obtained.

The Rights of Comanche Shareholders Will Change as a Result of the Merger (page 123)

The rights of Comanche shareholders will change as a result of the merger due to differences in Spirit’s and Comanche’s governing documents. See the section of this document entitled “Comparison of Shareholders’ Rights,” beginning on page 123, for a description of the material differences in shareholders’ rights under each of the Spirit and Comanche governing documents.

Market Prices of Securities; Dividends (page 135)

Shares of Spirit common stock are traded on NASDAQ under the ticker symbol “STXB.” The last reported sale price of Spirit common stock on July 18, 2018, the last trading day before public announcement of the reorganization agreement, was $20.36 per share. The last reported sale price of Spirit common stock on             , 2018 was $             per share. There is no established public trading market for the shares of Comanche common stock. Neither Spirit nor Comanche has historically paid dividends.

Risk Factors (page 35)

You should consider all the information contained in and provided with this document in deciding how to vote for the proposals presented in this document. In particular, you should consider the factors described under the section of this document entitled “Risk Factors,” beginning on page 35.



 

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SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA FOR SPIRIT

The following table sets forth certain of Spirit’s selected historical consolidated financial information for each of the periods indicated. The selected historical consolidated financial information as of and for the years ended December 31, 2017, 2016 and 2015 has been derived from Spirit’s audited consolidated financial statements included elsewhere in this document. The selected historical consolidated financial information as of and for the six months ended June 30, 2018 and 2017 has been derived from Spirit’s unaudited consolidated financial statements included elsewhere in this document. Spirit’s management believes that such amounts reflect all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of its results of operations and financial condition as of the dates and for the interim periods indicated. The historical results set forth below are not necessarily indicative of Spirit’s future performance.

You should read the following together with the section entitled “Spirit’s Management’s Discussion and Analysis of Financial Condition and Operations,” beginning on page 151, and Spirit’s audited consolidated financial statements and the related notes included elsewhere with this document.

 

    As of and for the
Six Months Ended June 30,
    As of and for the
Year Ended December 31,
 
    2018     2017     2017     2016     2015  
    (Dollars in thousands, except per share data)  

Selected Period-End Balance Sheet Data:

 

       

Total Assets

  $ 1,076,676     $ 1,012,317     $ 1,030,298     $ 980,489     $ 843,768  

Loans held for sale

    7,715       3,344       3,814       4,003       6,320  

Loans held for investment

    917,521       836,355       869,119       772,861       688,850  

Allowance for loan and lease losses

    (6,015     (4,891     (5,652     (4,357     (3,076

Loans, net

    911,506       831,464       863,467       768,504       685,774  

Total deposits

    844,683       836,204       835,368       814,438       661,391  

Short-term borrowings

    15,000       5,000       15,000       5,000       40,000  

Long-term borrowings

    66,191       70,575       76,411       66,016       51,850  

Total stockholders’ equity

    147,986       96,601       99,139       92,896       87,927  

Selected Period-End Income Statement Data:

 

       

Total interest income

  $ 26,141     $ 21,673     $ 46,907     $ 40,210     $ 38,767  

Total interest expense

    4,678       4,004       8,328       6,730       5,526  

Net interest income

    21,463       18,367       38,579       33,480       33,241  

Provision for loan losses

    974       1,200       2,475       1,617       1,580  

Net interest income after provision for loan losses

    20,489       17,167       36,104       31,863       31,661  

Total noninterest income

    4,891       5,629       9,638       8,342       7,871  

Total noninterest expense

    19,507       19,404       37,402       34,881       33,496  

Income before income tax expense

    5,873       3,392       8,340       5,324       6,036  

Income tax expense

    4,694       1,164       3,587       1,609       2,094  

Net income

    4,694       2,228       4,753       3,715       3,942  

Selected Share and Per Share Data:(1)

         

Earnings per common share—Basic

  $ 0.58     $ 0.31     $ 0.65     $ 0.51     $ 0.55  

Earnings per common share—Diluted

    0.56       0.29       0.63       0.50       0.52  

Book value per share(2)

    15.12       13.27       13.62       12.83       12.15  

Tangible book value per share(3)

    14.34       12.13       12.52       11.63       10.95  

Weighted average common shares outstanding—Basic

    8,104,370       7,187,125       7,268,297       7,235,479       7,230,023  

Weighted average common shares outstanding—Diluted

    8,445,960       7,482,695       7,554,458       7,375,945       7,578,755  

Shares outstanding at end of period

    9,786,611       7,277,763       7,280,183       7,239,763       7,234,738  


 

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    As of and for the
Six Months Ended June 30,
    As of and for the
Year Ended December 31,
 
    2018     2017     2017     2016     2015  
    (Dollars in thousands, except per share data)  

Selected Performance Ratios:

         

Return on average assets(4)

    0.91     0.45     0.47     0.41     0.49

Return on average stockholders’ equity(4)

    8.59       4.77       4.88       4.09       4.49  

Net interest margin(4)(5)

    4.52       4.07       4.19       4.09       4.54  

Noninterest expense to average assets(4)

    3.77       3.93       3.71       3.86       4.15  

Efficiency ratio

    74.02       80.86       77.57       83.40       81.47  

Average interest-earning assets to average interest-bearing liabilities

    129.02       126.07       126.42       125.04       125.69  

Loans to deposits

    108.62       100.02       104.04       94.90       104.15  

Yield on interest-earning assets

    5.44       4.84       4.97       4.79       5.18  

Cost of interest-bearing liabilities

    1.26       1.09       1.12       1.00       0.93  

Interest rate spread

    4.18       3.75       3.85       3.79       4.25  

Asset and Credit Quality Ratios:

         

Nonperforming loans to loans held for investment

    0.44     0.51     0.41     0.49     0.35

Nonperforming assets to loans plus OREO

    0.47       0.55       0.42       0.50       0.39  

Nonperforming assets to total assets

    0.40       0.45       0.35       0.39       0.32  

Net charge-offs to average loans(4)

    0.14       0.17       0.14       0.05       0.08  

Allowance for loan losses to nonperforming loans

    148.92       114.92       157.22       114.45       128.49  

Allowance for loan losses to loans held for investment

    0.66       0.58       0.65       0.56       0.45  

Capital Ratios:

         

Average equity to average total assets

    10.56     9.46     9.66     10.04     10.88

Tangible equity to tangible assets(6)

    13.13       8.79       8.92       8.67       9.49  

 

(1)

All share and per share information reflects the conversion of 170,236 shares of Spirit’s issued and outstanding Series A preferred stock into Spirit common stock on February 23, 2017 and the one-for-two reverse stock split that occurred on March 16, 2017 as if they had occurred on January 1, 2015.

(2)

Book value per share is calculated as total stockholders’ equity at the end of the relevant period divided by the outstanding number of shares of Spirit common stock at the end of the relevant period.

(3)

Tangible book value per share is calculated as total stockholders’ equity less goodwill and other intangible assets, net of accumulated amortization at the end of the relevant period, divided by the outstanding number of shares of Spirit common stock at the end of the relevant period. Tangible book value per share is a non-GAAP financial measure. The most directly comparable GAAP financial measure is book value per share. See Spirit’s reconciliation of non-GAAP financial measures to their most directly comparable GAAP financial measures in the section of this document entitled “Spirit’s Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Financial Measures,” beginning on page 206.

(4)

Interim periods annualized.

(5)

Net interest margin is shown on a fully taxable equivalent basis, which is a non-GAAP financial measure. Spirit calculates the GAAP-based net interest margin as interest income divided by average interest-earning assets. See Spirit’s reconciliation of non-GAAP financial measures to their most directly comparable GAAP financial measures in the section of this document entitled “Spirit’s Management Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Financial Measures,” beginning on page 206.

(6)

Spirit calculates tangible equity as total stockholders’ equity less goodwill and other intangible assets, net of accumulated amortization, and Spirit calculates tangible assets as total assets less goodwill and other intangible assets, net of accumulated amortization. Tangible equity to tangible assets is a non-GAAP financial measure. The most directly comparable GAAP financial measure is total stockholders’ equity to



 

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  total assets. See Spirit’s reconciliation of non-GAAP financial measures to their most directly comparable GAAP financial measures in the section of this document entitled “Spirit’s Management Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Financial Measures,” beginning on page 206. Tangible equity reflects the conversion of 170,236 shares of Spirit’s issued and outstanding Series A preferred stock into Spirit common stock on February 23, 2017 and the one-for-two reverse stock split that occurred on March 16, 2017.


 

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SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA FOR COMANCHE

The following table sets forth certain of Comanche’s selected historical consolidated financial information as of the dates and for the periods indicated. The selected historical consolidated financial information as of and for the years ended December 31, 2017 and 2016 has been derived from Comanche’s audited consolidated financial statements included elsewhere in this document. The selected historical consolidated financial information as of and for the six months ended June 30, 2018 and 2017 has been derived from Comanche’s unaudited consolidated financial statements appearing elsewhere in this document. Comanche’s management believes that such amounts reflect all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of its results of operations and financial condition as of the dates and for the interim periods indicated.

You should read the following together with the section of this document entitled “Comanche’s Management’s Discussion and Analysis of Financial Condition and Operations,” beginning on page 214.

 

     As of and for the
Six Months Ended June 30,
    As of and for the
Year Ended December 31,
 
     2018     2017     2017     2016  
     (Dollars in thousands, except per share data)  

Selected Period-End Balance Sheet Data:

        

Total Assets

   $ 348,033     $ 343,793     $ 358,383     $ 332,367  

Loans held for investment

     124,570       126,443       125,461       125,659  

Allowance for loan and lease losses

     (3,116     (3,003     (3,117     (3,003

Loans, net

     121,454       123,440       122,344       122,656  

Total deposits

     305,639       299,186       313,446       289,910  

Long-term borrowings

     2,811       3,311       3,311       3,811  

Total stockholders’ equity

     37,526       39,493       39,252       36,455  

Selected Period-End Income Statement Data:

        

Total interest income

   $ 6,342     $ 5,938     $ 11,955     $ 11,185  

Total interest expense

     904       731       1,489       1,367  

Net interest income

     5,438       5,207       10,466       9,818  

Provision for loan losses

                        

Net interest income after provision for loan losses

     5,438       5,207       10,466       9,818  

Total noninterest income

     796       843       1,581       1,663  

Total noninterest expense

     4,003       4,053       8,072       8,059  

Income before income tax expense

     2,231       1,997       3,975       3,422  

Income tax expense

     297       382       1,000       569  

Net income

     1,934       1,615       2,975       2,853  

Selected Share and Per Share Data:

        

Earnings per common share—Basic

   $ 4.83     $ 4.02     $ 7.40     $ 7.03  

Earnings per common share—Diluted

     4.83       4.02       7.40       7.03  

Book value per share(1)

     93.99       98.24       97.66       90.65  

Tangible book value per share(2)

     84.43       88.75       88.17       81.16  

Weighted average common shares outstanding—Basic

     400,091       402,080       402,002       405,565  

Weighted average common shares outstanding—Diluted

     400,091       402,080       402,002       405,565  

Shares outstanding at end of period

     399,261       402,017       401,912       402,152  

Selected Performance Ratios:

        

Return on average assets(3)

     1.09     0.96     0.88     0.88

Return on average stockholders’ equity(5)

     10.16       8.58       7.68       7.37  

Net interest margin(3)(4)

     3.37       3.49       3.47       3.40  


 

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     As of and for the
Six Months Ended June 30,
    As of and for the
Year Ended December 31,
 
     2018     2017     2017     2016  
     (Dollars in thousands, except per share data)  

Noninterest expense to average assets(3)

     2.26       2.42       2.39       2.48  

Efficiency ratio

     64.21       66.99       67.00       70.19  

Average interest-earning assets to average interest-bearing liabilities

     131.88       129.60       131.56       132.17  

Loans to deposits

     40.76       42.26       40.03       43.34  

Yield on interest-earning assets

     3.82       3.79       3.78       3.67  

Cost of interest-bearing liabilities

     0.72       0.60       0.62       0.59  

Interest rate spread

     3.10       3.19       3.16       3.08  

Asset and Credit Quality Ratios:

        

Nonperforming loans to loans held for investment

     0.96     0.35     0.39     0.95

Nonperforming assets to loans plus OREO

     1.05       0.38       0.48       0.98  

Nonperforming assets to total assets

     0.38       0.14       0.17       0.37  

Net charge-offs to average loans (recoveries)(3)

     0.00       0.00       (0.09     (0.03

Allowance for loan losses to nonperforming loans

     260.54       671.81       629.70       252.14  

Allowance for loan losses to loans held for investment

     2.50       2.37       2.48       2.39  

Capital Ratios:

        

Average equity to average total assets

     10.75     11.24     11.45     11.93

Tangible equity to tangible assets(5)

     9.79       10.49       9.99       9.93  

 

(1)

Book value per share is calculated as total stockholders’ equity at the end of the relevant period divided by the outstanding number of shares of Comanche common stock at the end of the relevant period.

(2)

Tangible book value per share is calculated as total stockholders’ equity less goodwill and other intangible assets, net of accumulated amortization at the end of the relevant period, divided by the outstanding number of shares of Comanche common stock at the end of the relevant period. Tangible book value per share is a non-GAAP financial measure. The most directly comparable GAAP financial measure is book value per share. See Comanche’s reconciliation of non-GAAP financial measures to their most directly comparable GAAP financial measures in the section of this document entitled “Comanche’s Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Financial Measures,” beginning on page 236.

(3)

Interim periods annualized.

(4)

Net interest margin is shown on a fully taxable equivalent basis, which is a non-GAAP financial measure. Comanche calculates the GAAP-based net interest margin as interest income divided by average interest-earning assets. See Comanche’s reconciliation of non-GAAP financial measures to their most directly comparable GAAP financial measures in the section of this document entitled “Comanche’s Management Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Financial Measures,” beginning on page 236.

(5)

Comanche calculates tangible equity as total stockholders’ equity less goodwill and other intangible assets, net of accumulated amortization, and Comanche calculates tangible assets as total assets less goodwill and other intangible assets, net of accumulated amortization. Tangible equity to tangible assets is a non-GAAP financial measure. The most directly comparable GAAP financial measure is total stockholders’ equity to total assets. See Comanche’s reconciliation of non-GAAP financial measures to their most directly comparable GAAP financial measures in the section of this document entitled “Comanche’s Management Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Financial Measures,” beginning on page 236.



 

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SELECTED UNAUDITED COMBINED CONDENSED CONSOLIDATED PRO FORMA FINANCIAL DATA

The following table shows selected unaudited pro forma combined condensed consolidated financial information about the financial condition and results of operations of Spirit giving effect to the merger. The selected unaudited pro forma combined condensed consolidated financial information assumes that the merger is expected to be accounted for under the acquisition method of accounting. Under the acquisition method of accounting, the assets and liabilities of Comanche, as of the date the merger is completed, will be recorded by Spirit at their respective fair values and the excess of the merger consideration over the fair value of Comanche’s net assets will be allocated to goodwill.

The table sets forth the information as if the merger had become effective on June 30, 2018, with respect to financial position data, and on January 1, 2017, with respect to the results of operations data. The selected unaudited pro forma combined condensed consolidated financial data has been derived from and should be read in connection with the unaudited pro forma combined condensed consolidated financial information, including the notes thereto, in the section of this document entitled “Unaudited Pro Forma Combined Condensed Consolidated Financial Statements,” beginning on page 26.



 

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The selected unaudited pro forma combined condensed consolidated financial information is presented for illustrative purposes only and does not necessarily indicate the financial results of the combined companies had the companies actually been combined at the beginning of the period presented. The selected unaudited pro forma combined condensed consolidated financial information also does not consider any potential impacts of current market conditions on revenues, potential revenue enhancements, anticipated cost savings and expense efficiencies or asset dispositions, among other factors. Further, as explained in more detail in the notes accompanying the detailed unaudited pro forma combined condensed consolidated financial information included in the section of this document entitled “Unaudited Pro Forma Combined Condensed Consolidated Financial Information,” beginning on page 26, the allocation of the purchase price reflected in the selected unaudited pro forma combined condensed consolidated financial data is subject to adjustments and may vary from the actual purchase price allocation that will be recorded at the time the merger is completed. Additionally, the final adjustments may be different from the unaudited pro forma adjustments presented in this document.

 

     As of
June 30, 2018
 
     (Dollars in
thousands)
 

Pro Forma Combined Condensed Consolidated Balance Sheet Data:

  

Cash and cash equivalents

   $ 49,783  

Loans, net

     1,035,730  

Total assets

     1,429,677  

Deposits

     1,150,322  

FHLB advances

     81,191  

Trust preferred securities

     2,412  

Other liabilities

     4,873  

Total shareholders’ equity

     190,879  

 

     For the Six Months
Ended June 30, 2018
     For the Year Ended
December 31, 2017
 
     (Dollars in thousands, except per share data)  

Pro Forma Combined Consolidated Statement of Income Data:

     

Net interest income

   $ 26,907      $ 49,058  

Provision for loan losses

     974        2,475  

Noninterest income

     5,687        11,219  

Noninterest expense

     23,851        46,222  

Income before income taxes

     7,769        11,580  

Net income

     6,363        7,243  

Pro Forma Combined Consolidated Per Share Data:

     

Earnings per common share:

     

Basic

   $ 0.62      $ 0.77  

Diluted

     0.60        0.75  

Weighted average common shares outstanding:

     

Basic

     10,247,227        9,376,640  

Diluted

     10,588,817        9,662,801  


 

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UNAUDITED PRO FORMA COMBINED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The following unaudited pro forma combined condensed consolidated balance sheet as of June 30, 2018 and the unaudited pro forma combined condensed consolidated statements of income for the six months ended June 30, 2018 and the year ended December 31, 2017, have been prepared to show the impact on Spirit’s historical financial position and results of operations of the completion of the merger, including the expected issuance of 2,142,857 shares of Spirit common stock to Comanche shareholders.

The unaudited pro forma combined condensed consolidated financial information and explanatory notes are based upon the following assumptions:

 

   

a closing price of Spirit common stock of $21.65 per share, which was the closing price of Spirit common stock on August 24, 2018, as to the expected issuance of 2,142,857 shares of Spirit common stock to Comanche shareholders; and

 

   

expected cash payment to Comanche shareholders of $15.0 million less transaction costs attributable to Comanche, which are estimated to be approximately $2.3 million.

The unaudited pro forma combined condensed consolidated financial statements give effect to the acquisition of Comanche as a business combination under GAAP. Accordingly, all Comanche assets and liabilities were recorded at their respective fair values and the excess of the merger consideration over the fair value of Comanche’s net assets was allocated to goodwill. Pro forma adjustments are included only to the extent they are (i) directly attributable to the acquisition, (ii) factually supportable and (iii) with respect to the unaudited pro forma combined condensed consolidated statement of income, expected to have a continuing impact on the combined results. The pro forma adjustments are based on estimates made for the purpose of preparing these pro forma statements and are described in the accompanying footnotes. Spirit’s management believes that the estimates used in these pro forma financial statements are reasonable under the circumstances.

The pro forma adjustments included herein are subject to change as additional information becomes available and additional analyses are performed. The final allocation of the purchase price will be determined after further valuation analyses under GAAP are performed with respect to the fair values of certain tangible and intangible assets and liabilities as of the date of acquisition. The final adjustments may be materially different from the unaudited pro forma adjustments presented herein. In addition, the pro forma financial statements do not include the effects of any potential cost savings which management believes will result from combining certain operating procedures.

Spirit anticipates that the acquisition of Comanche will provide the combined company with the ability to better serve its customers, reach new customers and reduce operating expenses. In addition, certain subjective estimates have been utilized in determining the pro forma adjustments applied to the historical results of operations of Comanche. The pro forma information, while helpful in illustrating the financial characteristics of the combined company under one set of assumptions, does not reflect the benefits of expected cost savings or opportunities to earn additional revenue and, accordingly, does not attempt to predict or suggest future results. It also does not necessarily reflect what the historical results of the combined company would have been had Spirit and Comanche been combined during these periods.

The unaudited pro forma combined condensed consolidated financial statements sets forth the information as if the merger had become effective on June 30, 2018, with respect to the unaudited pro forma combined condensed consolidated balance sheet and on January 1, 2017, with respect to the unaudited pro forma combined condensed consolidated income statement. The unaudited pro forma combined condensed consolidated financial information has been derived from, and should be read in conjunction with, the historical consolidated financial statements and related notes of Spirit and Comanche.



 

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UNAUDITED PRO FORMA COMBINED CONDENSED CONSOLIDATED BALANCE SHEET

AS OF JUNE 30, 2018

 

                 Pro Forma
Adjustments
       
     Spirit     Comanche     Debits            Credits            Pro Forma
Combined
Consolidated
 
     (Dollars in thousands, except per share data)  

Assets

                

Cash and cash equivalents

   $ 52,986     $ 12,997     $        $ 16,200        (a   $ 49,783  

Investment securities (available for sale, at fair value)

     34,519       193,196                         227,715  

Loans held for sale

     7,715                               7,715  

Loans held for investment

     917,521       124,570                346        (b     1,041,745  

Allowance for loan losses

     (6,015     (3,116     3,116        (c              (6,015
  

 

 

   

 

 

   

 

 

      

 

 

      

 

 

 

Loans, net

     911,506       121,454       3,116          346          1,035,730  
  

 

 

   

 

 

   

 

 

      

 

 

      

 

 

 

Premises and equipment, net

     44,945       5,433       2,000        (d              52,378  

Other real estate owned and repossessed assets

     289       113                         402  

Goodwill

     4,485       3,815       13,183        (e              21,483  

Core deposit intangible

     3,135             3,822        (f              6,957  

SBA servicing asset

     3,521                               3,521  

Deferred tax asset, net

     1,616       1,487                607        (g     2,496  

Bank-owned life insurance

     482       6,832                         7,314  

FHLB and other bank stock, at cost

     4,830       330                         5,160  

Other assets

     6,647       2,376                         9,023  
  

 

 

   

 

 

   

 

 

      

 

 

      

 

 

 

Total assets

   $ 1,076,676     $ 348,033     $ 22,121        $ 17,153        $ 1,429,677  
  

 

 

   

 

 

   

 

 

      

 

 

      

 

 

 

Liabilities and Shareholders’ Equity

                

Deposits:

                

Transaction accounts:

                

Noninterest-bearing

   $ 183,618     $ 64,533     $        $        $ 248,151  

Interest-bearing

     220,087       126,546                         346,633  

Total transaction accounts

     403,705       191,079                         594,784  

Time deposits

     440,978       114,560                         555,538  

Total deposits

     844,683       305,639                         1,150,322  

FHLB advances

     81,191                               81,191  

Trust preferred securities

           2,811       399        (h              2,412  

Other liabilities

     2,816       2,057                         4,873  
  

 

 

   

 

 

   

 

 

      

 

 

      

 

 

 

Total liabilities

     928,690       310,507       399                   1,238,798  
  

 

 

   

 

 

   

 

 

      

 

 

      

 

 

 

Stockholders’ equity:

                

Common stock

     127,344       18,347       18,347        (i     46,393        (j     173,737  

Retained earnings

     21,719       26,094       29,594        (i              18,219  

Accumulated other comprehensive loss

     (1,077     (3,990              3,990        (i     (1,077

Treasury stock, at cost

           (2,925              2,925        (i      
  

 

 

   

 

 

   

 

 

      

 

 

      

 

 

 

Total shareholders’ equity

     147,986       37,526       47,941          53,308          190,879  
  

 

 

   

 

 

   

 

 

      

 

 

      

 

 

 

Total liabilities and shareholders’ equity

   $ 1,076,676     $ 348,033     $ 48,340          53,308        $ 1,429,677  
  

 

 

   

 

 

   

 

 

      

 

 

      

 

 

 


 

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The estimated fair values of the assets acquired and liabilities assumed in the merger are as follows:

 

Assets of acquired bank:

  

Cash and cash equivalents

   $ 12,997  

Securities available for sale

     193,196  

Loans

     124,224  

Premises and equipment

     7,433  

Core deposit intangible

     3,822  

Deferred tax asset, net

     880  

Other real estate

     113  

Other assets

     9,538  
  

 

 

 

Total assets acquired

     352,203  
  

 

 

 

Liabilities of acquired bank:

  

Deposits

   $ 305,639  

Trust Preferred Securities

     2,412  

Other Liabilities

     2,057  
  

 

 

 

Total liabilities assumed

     310,108  
  

 

 

 

Net assets acquired

   $ 42,095  
  

 

 

 

Common stock issued

   $ 46,393 (j) 

Cash paid

     12,700  
  

 

 

 

Total purchase price

   $ 59,093  
  

 

 

 

Excess of consideration paid over fair value of net assets acquired - Goodwill

   $ 16,998  
  

 

 

 

 

(a)

Record cash paid at close of $15 million and estimated transaction costs attributable to Spirit of $1.2 million. Net cash paid to Comanche at merger closing will be $12.7 million which will include $2.3 million of closing costs attributable to Comanche.

(b)

Estimated fair market value adjustment on the acquired loan portfolio, which includes a $1.2 million adjustment for expected credit losses partially offset by a $900 thousand interest premium. The credit fair market value adjustment was estimated as 1% of the loan portfolio and the interest premium was estimated based upon loan portfolio yields for a group of ten of Comanche’s peer banks compared to the yield on Comanche’s loan portfolio. This fair market value adjustment is being amortized into interest income on a straight-line basis over the ten year average life of the portfolio.

(c)

Eliminate Comanche’s allowance for loan loss.

(d)

Estimated fair market value adjustment on premises acquired based upon tax appraisal amounts compared to net book value. Depreciation on the portion of the fair market value adjustment estimated to be attributable to buildings, furniture, and fixtures of $1.6 million will be taken over an estimated life of 30 years.

(e)

Record goodwill for amount of consideration and liabilities assumed over fair value of the assets received. Goodwill currently on Comanche’s consolidated balance sheet of $3.8 million will be eliminated and Goodwill as shown in the purchase price allocation above of $17.0 million will be recorded.

(f)

Estimated core deposit intangible at 2% of the acquired non time deposits. Amortization of core deposit intangible will occur over a ten year life using the sum of the years digits method.

(g)

Estimated fair market value adjustment on acquired deferred tax assets and liabilities, net using a 21.0% enacted tax rate. Fair market value adjustment of $607 thousand consists of a deferred tax asset related to acquired loans fair value adjustment of $73 thousand, a deferred tax asset related to premises and equipment of $420 thousand, a deferred tax liability related to core deposit intangible of $803 thousand, and the



 

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  elimination of the deferred tax asset related to Comanche’s historical allowance for loan losses of $297 thousand. Acquired deferred tax assets consists of deferred taxes on deferred compensation ($215 thousand), securities ($1.0 million), premises and equipment ($376 thousand), and loans ($86 thousand). Acquired deferred tax liabilities consists of deferred taxes on core deposit intangibles of $803 thousand and FHLB stock dividends of $1 thousand.
(h)

Estimated fair market value adjustment on trust preferred securities based upon broker bids obtained during due diligence. The adjustment is expected to be amortized into interest expense on a straight-line basis from the date of closing to maturity of the trust preferred securities in 2036.

(i)

Eliminate Comanche capital accounts. Adjustment to retained earnings includes $3.5 million in estimated closing costs, $1.2 million attributable to Spirit and $2.3 million attributable to Comanche.

(j)

Issue 2,142,857 shares of Spirit common stock at August 24, 2018 closing price of $21.65 for a total of $46.4 million in equity consideration. The total purchase price and amount of Goodwill recorded is subject to change based upon the change in Spirit common stock price between August 24, 2018 and the date the merger is completed. The following table shows how a 10.0% change in Spirit common stock price would affect the total purchase price and amount of Goodwill recorded.

 

     Purchase
Price
     Estimated
Goodwill
 
     (Unaudited, dollars in thousands)  

As presented in the pro forma combined results

   $ 59,093      $ 16,998  

10.0% increase in Spirit common stock price

     63,732        21,637  

10.0% decrease in Spirit common stock price

     54,454        12,359  

Minimum Spirit common stock price allowed under the definitive agreement. ($16.80)

     48,700        6,605  


 

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UNAUDITED PRO FORMA COMBINED CONDENSED CONSOLIDATED INCOME STATEMENT

FOR THE SIX MONTHS ENDED JUNE 30, 2018

 

     Spirit      Comanche      Pro Forma
Adjustments
          Pro Forma
Combined
 
     (Dollars in thousands, except per share data)  

Interest income:

            

Interest and fees on loans

   $ 25,369      $ 3,678        17       (a   $ 29,064  

Interest and dividends on investment securities

     409        2,588                2,997  

Other interest income

     363        76                439  
  

 

 

    

 

 

    

 

 

     

 

 

 

Total interest income

     26,141        6,342        17         32,500  
  

 

 

    

 

 

    

 

 

     

 

 

 

Interest expense:

            

Interest on deposits

     3,672        850                4,522  

Interest on FHLB advances and other borrowings

     1,006        54        11       (b     1,071  
  

 

 

    

 

 

    

 

 

     

 

 

 

Total interest expense

     4,678        904        11         5,593  
  

 

 

    

 

 

    

 

 

     

 

 

 

Net interest income

     21,463        5,438        6         26,907  

Provision for loan losses

     974                       974  
  

 

 

    

 

 

    

 

 

     

 

 

 

Net interest income after provision for loan losses

     20,489        5,438        6         25,933  
  

 

 

    

 

 

    

 

 

     

 

 

 

Noninterest income:

            

Service charges and fees

     776        438                1,214  

SBA loan servicing fees

     1,172                       1,172  

Gain on sales of loans, net

     2,515                       2,515  

Other noninterest income

     428        358                786  
  

 

 

    

 

 

    

 

 

     

 

 

 

Total noninterest income

     4,891        796                5,687  
  

 

 

    

 

 

    

 

 

     

 

 

 

Noninterest expense:

            

Salaries and employee benefits

     12,901        2,674                15,575  

Occupancy and equipment expenses

     2,457        499        28       (c     2,984  

Professional services

     625        92                717  

Data processing and network

     634        58                692  

Regulatory assessments and insurance

     521        119                640  

Amortization of intangibles

     351               313       (d     664  

Other operating expenses

     2,018        561                2,579  
  

 

 

    

 

 

    

 

 

     

 

 

 

Total noninterest expense

     19,507        4,003        341         23,851  
  

 

 

    

 

 

    

 

 

     

 

 

 

Income before income tax expense

     5,873        2,231        (335       7,769  

Income tax expense

     1,179        297        (70     (e     1,406  
  

 

 

    

 

 

    

 

 

     

 

 

 

Net income

   $ 4,694      $ 1,934      $ (265     $ 6,363  
  

 

 

    

 

 

    

 

 

     

 

 

 

Share and per share data:

            

Earnings per common share:

            

Basic

   $ 0.58      $ 4.83              $ 0.62  

Diluted

     0.56        4.83                0.60  

Weighted average common shares outstanding:

            

Basic

     8,104,370        400,091                10,247,227  

Diluted

     8,445,960        400,091                10,588,817  

 

(a)

Adjustment to interest income for accretion on Comanche acquired loans based on expected fair market value.



 

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(b)

Adjustment to interest expense for amortization on Comanche trust preferred securities based on expected fair market value.

(c)

Additional depreciation related to fair market value adjustment on premises.

(d)

Expected amortization of additional core deposit intangible of $3.8 million is based on a ten year life using the sum of the years digits amortization method.

(e)

Tax adjustment related to other pro forma adjustments calculated at a 21.0% rate.



 

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UNAUDITED PRO FORMA COMBINED CONDENSED CONSOLIDATED INCOME STATEMENT

FOR THE YEAR ENDED DECEMBER 31, 2017

 

     Spirit      Comanche      Pro Forma
Adjustments
          Pro Forma
Spirit

with Comanche
 
     (Dollars in thousands, except per share data)  

Interest income:

            

Interest and fees on loans

   $ 45,411      $ 7,452      $ 35       (a   $ 52,898  

Interest and dividends on investment securities

     517        4,426                4,943  

Other interest income

     979        77                1,056  
  

 

 

    

 

 

    

 

 

     

 

 

 

Total interest income

     46,907        11,955        35         58,897  
  

 

 

    

 

 

    

 

 

     

 

 

 

Interest expense:

            

Interest on deposits

     6,602        1,386                7,988  

Interest on FHLB advances and other borrowings

     1,726        103        22       (b     1,851  
  

 

 

    

 

 

    

 

 

     

 

 

 

Total interest expense

     8,328        1,489        22         9,839  
  

 

 

    

 

 

    

 

 

     

 

 

 

Net interest income

     38,579        10,466        13         49,058  

Provision for loan losses

     2,475                       2,475  
  

 

 

    

 

 

    

 

 

     

 

 

 

Net interest income after provision for loan losses

     36,104        10,466        13         46,583  
  

 

 

    

 

 

    

 

 

     

 

 

 

Noninterest income:

            

Service charges and fees

     1,501        936                2,437  

SBA loan servicing fees

     1,794                       1,794  

Gain on sales of loans, net

     5,684                       5,684  

Other noninterest income

     659        645                1,304  
  

 

 

    

 

 

    

 

 

     

 

 

 

Total noninterest income

     9,638        1,581                11,219  
  

 

 

    

 

 

    

 

 

     

 

 

 

Noninterest expense:

            

Salaries and employee benefits

     23,338        5,396                28,734  

Occupancy and equipment expenses

     5,123        1,032        53       (c     6,208  

Professional services

     1,845        178                2,023  

Data processing and network

     1,266        125                1,391  

Regulatory assessments and insurance

     924        255                1,179  

Amortization of intangibles

     703               695       (d     1,398  

Other operating expenses

     4,203        1,086                5,289  
  

 

 

    

 

 

    

 

 

     

 

 

 

Total noninterest expense

     37,402        8,072        748         46,222  
  

 

 

    

 

 

    

 

 

     

 

 

 

Income before income tax expense

     8,340        3,975        (735       11,580  

Income tax expense

     3,587        1,000        (250     (e     4,337  
  

 

 

    

 

 

    

 

 

     

 

 

 

Net income

   $ 4,753      $ 2,975      $ (485     $ 7,243  
  

 

 

    

 

 

    

 

 

     

 

 

 

Pro Forma Combined Per Share Data

            

Earnings per common share:

            

Basic

   $ 0.65      $ 7.40              $ 0.77  

Diluted

     0.63        7.40                0.75  

Weighted average common shares outstanding:

            

Basic

     7,233,783        402,002                9,376,640  

Diluted

     7,519,944        402,002                9,662,801  

 

(a)

Adjustment to interest income for accretion on Comanche acquired loans based on expected fair market value.

(b)

Adjustment to interest expense for amortization on Comanche’s trust preferred securities based on expected fair market value.



 

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(c)

Additional depreciation related to fair market value adjustment on premises.

(d)

Expected amortization of additional core deposit intangible of $3.8 million is based on a 10 year life using the sum of the years digits amortization method.

(e)

Tax adjustment related to other pro forma adjustments calculated at a 34.0% rate.



 

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UNAUDITED COMPARATIVE PER SHARE DATA

The following table shows unaudited earnings and book value per share data for Spirit and Comanche on a historical and pro forma combined company basis after giving effect to the acquisition of Comanche by Spirit as of and for the six months ended June 30, 2018 and year ended December 31, 2017. The information should be read together with the historical consolidated financial statements of Spirit and Comanche and the pro forma combined condensed consolidated financial statements, including the notes thereto, which are included elsewhere in this document.

The selected unaudited pro forma information, while helpful in illustrating the financial characteristics of the combined company under a set of assumptions including the effect of the merger, does not reflect the impact of other factors that may result as a consequence of the merger or consider any potential impacts of current market conditions or the merger on revenues, expense efficiencies or asset dispositions, among other factors, nor the impact of possible business model changes. As a result, unaudited pro forma data is presented for illustrative purposes only and does not represent an attempt to predict or suggest future results. Upon completion of the merger, the operating results of Comanche will be reflected in the consolidated financial statements of Spirit on a prospective basis.

The per equivalent Comanche share data shows the effect of the merger and the issuance of 2,142,857 shares of Spirit common stock to Comanche shareholders.

 

     Spirit
Historical
     Comanche
Historical
     Pro
Forma
Combined
     Per
Equivalent
Comanche
Share
 

Book value per share:

           

At June 30, 2018

   $ 15.12      $ 93.99      $ 16.29      $ 87.43  

Basic earnings per share:

           

Six months ended June 30, 2018

   $ 0.58      $ 4.83      $ 0.62      $ 3.33  

Year ended December 31, 2017

     0.65        7.40        0.75        4.03  

Diluted earnings per share:

           

Six months ended June 30, 2018

   $ 0.56      $ 4.83      $ 0.60      $ 3.22  

Year ended December 31, 2017

     0.63        7.40        0.73        3.92  


 

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RISK FACTORS

An investment by Comanche shareholders in Spirit common stock as a result of the exchange of shares of Spirit common stock for shares of Comanche common stock in the merger involves certain risks. Similarly, a decision on the part of Spirit shareholders to approve the reorganization agreement and the issuance of Spirit common stock in connection with that merger also involves risks for Spirit shareholders, who will continue to hold their shares of Spirit common stock after the merger. Certain material risks and uncertainties connected with the merger and ownership of Spirit common stock are discussed below.

Comanche shareholders and Spirit shareholders should carefully read and consider all of these risks and all other information contained in this document in deciding whether to vote for approval of the various proposals for which they may vote at the Comanche special meeting or the Spirit special meeting described in this document. If any of the risks described in this document result in effects on Spirit or Spirit Bank, the value of Spirit common stock that you, as an existing Spirit shareholder, currently hold or that you, as an existing Comanche shareholder, would hold upon consummation of the merger could decline significantly, and the current Spirit shareholders and/or Comanche shareholders could lose all or part of their respective investments in Spirit common stock.

Risks Relating to the Merger

The merger may not be consummated unless important conditions are satisfied.

Spirit and Comanche expect the merger to close during the fourth quarter of 2018, but the acquisition is subject to a number of closing conditions. Satisfaction of many of these conditions is beyond Spirit’s control. If these conditions are not satisfied or waived, the merger will not be completed or may be delayed and each of Spirit and Comanche may lose some or all of the intended benefits of the merger. Certain of the conditions that remain to be satisfied include, but are not limited to:

 

   

the continued accuracy of the representations and warranties made by the parties in the reorganization agreement;

 

   

the performance by each party of its respective obligations under the reorganization agreement;

 

   

the absence of any material adverse change in the financial condition, business or results of operations of Spirit, Spirit Bank, Comanche or Comanche Bank;

 

   

the receipt of required regulatory approvals, including the approval of the Federal Reserve, the FDIC and the TDSML;

 

   

the absence of any injunction, order or decree restraining, enjoining or otherwise prohibiting the merger;

 

   

receipt by Spirit and Comanche from their respective tax counsel of a federal tax opinion that the merger qualifies as a “reorganization” within the meaning of Section 368(a) of the Code;

 

   

the effectiveness of the registration statement covering the shares of Spirit common stock that are expected to be issued to Comanche shareholders as consideration for the merger;

 

   

the approval of Spirit’s shareholders with respect to the reorganization agreement and the shares of Spirit common stock that are expected to be issued to Comanche shareholders as consideration for the merger; and

 

   

the approval by Comanche shareholders of the reorganization agreement.

If these conditions are not satisfied or waived, the merger may not close as scheduled or at all. In addition, either Spirit or Comanche may terminate the reorganization agreement under certain circumstances. For additional information regarding the conditions to the merger, see the section of this document entitled “The Reorganization Agreement—Conditions to the Completion of the Merger,” beginning on page 109.

 

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Because the market price of Spirit common stock will fluctuate, Comanche shareholders cannot be certain of the precise value of the merger consideration they will be entitled to receive.

Upon completion of the merger, each holder of Comanche common stock immediately prior to the completion of the merger will receive his, her or its proportional share of (i) 2,142,857 shares of Spirit common stock, and (ii) $15,000,000.00 in cash minus the amount of Comanche’s transaction costs (but the cash consideration will not be reduced by more than $2,755,000.00), together with cash in lieu of a fractional share of Spirit common stock. In addition, if the average closing price of Spirit common stock is less than $16.80 per share and Spirit common stock underperforms the selected index by more than 20.0%, Spirit has the right but not the obligation to increase the merger consideration in the form of cash consideration and/or stock consideration to prevent a termination of the reorganization agreement by Comanche. For a discussion of the possible upward adjustment to the merger consideration, see the section of this document entitled “The Reorganization Agreement—Structure of the Merger—Adjustments to Merger Consideration,” beginning on page 102. There will be a lapse of time between each of the date of this document, the date of the Spirit special meeting, the date of the Comanche special meeting and the date on which Comanche shareholders entitled to receive the merger consideration actually receive the merger consideration. The market value of Spirit common stock may fluctuate during these periods as a result of a variety of factors, including general market and economic conditions, changes in Spirit’s businesses, operations and future prospects and regulatory considerations. Many of these factors are outside of the control of Spirit and Comanche. The value of the merger consideration will depend on the market value of shares of Spirit common stock on the date the merger consideration is received. Consequently, at the time Comanche shareholders must decide whether to approve the reorganization agreement, they will not know the actual market value of the shares of Spirit common stock they may receive when the merger is completed.

Regulatory approvals may not be received, may take longer than expected or may impose conditions that Spirit does not anticipate or that cannot be met.

Before the merger may be completed, various approvals or waivers must be obtained from bank regulatory authorities, including the Federal Reserve, the FDIC and the TDSML. These regulators may impose conditions on the completion of, or require changes to the terms of, the merger. Such conditions or changes and the process of obtaining regulatory approvals or waivers could have the effect of delaying the completion of the merger or of imposing additional costs or limitations on Spirit following the completion of the merger. The regulatory approvals may not be received at all, may not be received in a timely fashion or may contain conditions on the completion of the merger that are burdensome, not anticipated or cannot be met. If the completion of the merger is delayed, including by a delay in receipt of necessary regulatory approvals, the business, financial condition and results of operations of Spirit and Comanche may also be materially adversely affected.

The market price of Spirit common stock after the merger may be affected by factors different from those affecting Comanche common stock or Spirit common stock currently.

The businesses of Spirit and Comanche differ in some respects and, accordingly, the results of operations of the combined company and the market price of Spirit common stock after the merger is completed may be affected by factors different from those currently affecting the results of operations of each of Spirit and Comanche. For a discussion of the business of Spirit and of certain factors to consider in connection with that business, see the risk factors in the sections of this document entitled “—Risks Related to Spirit’s Business,” “—Risks Related to Spirit’s Industry and Regulation” and “—Risks Related to Spirit Common Stock,” beginning on pages 40, 53 and 57, respectively.

Combining the two companies may be more difficult, costly or time consuming than expected, and the anticipated benefits and cost savings of the merger may not be realized.

Spirit and Comanche have operated and, until the completion of the merger, will continue to operate, separately. The success of the merger, including anticipated benefits and cost savings, will depend, in part, on

 

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Spirit’s ability to successfully combine and integrate the businesses of Spirit and Comanche in a manner that permits growth opportunities and does not materially disrupt existing customer relations nor result in decreased revenues due to loss of customers. It is possible that the integration process could result in the loss of key employees, the disruption of either company’s ongoing businesses or inconsistencies in standards, controls, procedures and policies that adversely affect the combined company’s ability to maintain relationships with clients, customers, depositors, employees and other constituents or to achieve the anticipated benefits and cost savings of the merger. The loss of key employees could adversely affect Spirit’s ability to successfully conduct its business, which could have an adverse effect on Spirit’s financial results and the value of Spirit common stock. If Spirit experiences difficulties with the integration process, the anticipated benefits of the merger may not be realized fully or at all, or may take longer to realize than expected. As with any merger of financial institutions, there also may be business disruptions that cause Spirit and/or Comanche to lose customers or cause customers to remove their accounts from Spirit and/or Comanche and move their business to competing financial institutions. Integration efforts between the two companies will also divert management attention and resources. These integration matters could have an adverse effect on each of Comanche and Spirit during this transition period and on the combined company for an undetermined period after the completion of the merger. In addition, the actual cost savings of the merger could be less than anticipated.

Spirit’s and Comanche’s historical and pro forma combined consolidated financial information may not be representative of Spirit’s results as a combined company.

The unaudited pro forma combined consolidated financial statements in this document are presented for illustrative purposes only and are not necessarily indicative of what Spirit’s actual financial condition or results of operations would have been had the merger been completed on the dates indicated. The unaudited pro forma combined consolidated financial statements reflect adjustments to illustrate the effect of the merger had they been completed on the dates indicated. Such unaudited pro forma combined consolidated financial statements are based upon preliminary estimates to record the Comanche identifiable assets acquired and liabilities assumed at fair value and the resulting goodwill recognized. Accordingly, the final acquisition accounting adjustments may differ materially from the pro forma adjustments reflected in this document. For more information, see the section of this document entitled “Unaudited Pro Forma Combined Consolidated Financial Statements,” beginning on page 26.

Spirit will incur significant transaction and integration costs in connection with the merger.

Spirit expects to incur significant costs associated with completing the merger and integrating Comanche’s operations into Spirit’s operations and is continuing to assess the impact of these costs. Although Spirit believes that the elimination of duplicate costs, as well as the realization of other efficiencies related to the integration of Comanche’s business with Spirit’s business, will offset incremental transaction and integration costs over time, this net benefit may not be achieved in the near term, or at all.

Comanche’s officers and directors have interests in the merger in addition to or different from the interests that they share with you as a Comanche shareholder.

Some of Comanche’s executive officers participated in negotiations of the reorganization agreement with Spirit, and the Comanche board of directors approved the reorganization agreement and is recommending that Comanche shareholders vote to approve the reorganization agreement. In considering these facts, you should be aware that certain of Comanche’s executive officers and directors have economic interests in the merger that are different from or in addition to the interests that they share with you as a Comanche shareholder. These interests include, as a result of the merger, the payment of certain benefits to Jeff D. Stewart, among other Comanche officers, to which they are entitled under existing agreements and arrangements with Comanche. In addition, in connection with the merger, Mr. Stewart and William K. “Kendall” Nix have entered into employment agreements pursuant to which they will serve as Regional President – North Central Texas of Spirit and Vice Chairman of Spirit Bank, respectively, after the merger is completed. Additionally, upon completion of the

 

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merger, Spirit has agreed to appoint Mr. Nix to the Spirit board of directors. For further discussion of the interests of Comanche’s directors and officers in the merger, see the section of this document entitled “The Merger—Interests of Comanche’s Directors and Executive Officers in the Merger,” beginning on page 95.

Holders of Comanche common stock and Spirit common stock will have a reduced ownership and voting interest after the merger and will exercise less influence over management.

Holders of Comanche common stock and Spirit common stock currently have the right to vote in the election of the board of directors and on other matters affecting Comanche and Spirit, respectively. After the merger is completed, each Comanche shareholder who receives shares of Spirit common stock will become a Spirit shareholder with a percentage ownership of Spirit that is smaller than his, her or its percentage ownership of Comanche. Based on 9,787,449 shares of Spirit common stock outstanding on August 3, 2018 and 2,142,857 shares of Spirit common stock to be issued in the merger, it is currently expected that stock consideration that the former Comanche shareholders as a group will receive in the merger will constitute approximately 18% of the issued and outstanding shares of Spirit common stock immediately after the completion of the merger. As a result, current Spirit shareholders as a group will own approximately 82% of the issued and outstanding shares of Spirit common stock immediately after the completion of the merger. Because of this reduced ownership percentage, Comanche shareholders may have less influence on the management and policies of Spirit than they now have on the management and policies of Comanche, and current Spirit shareholders may have less influence than they now have on the management and policies of Spirit.

The reorganization agreement limits Comanche’s ability to pursue alternatives to the merger.

The reorganization agreement prohibits Comanche from initiating, soliciting, encouraging or facilitating certain third-party acquisition proposals. In addition, Comanche has agreed to pay Spirit a termination fee of $2,200,000.00 if the transaction is terminated (i) because Comanche fails to call or does not receive the required vote to approve the reorganization agreement at the Comanche special meeting and an acquisition proposal (as defined in the reorganization agreement) exists or (ii) if the merger is not completed before 180 days after the date of the reorganization agreement (unless one or more of the regulatory approvals has not been received on or before such date, in which case the merger is not completed before the 240th day following the date of the reorganization agreement) and if at the time of termination, Comanche has not obtained the required approval of Comanche shareholders of the reorganization agreement and an acquisition proposal (as defined in the reorganization agreement) exists, and within 12 months of the date of termination Comanche enters into acquisition agreement (as defined in the reorganization agreement) with respect to such proposal. These provisions could discourage a potential competing acquirer that might have an interest in acquiring all or a significant part of Comanche from considering or proposing that acquisition, even if it were prepared to pay consideration with a higher per share price than that proposed in the merger, or might result in a potential competing acquirer proposing to pay a lower per share price to acquire Comanche than it might otherwise have proposed to pay.

The fairness opinions rendered to the Spirit board of directors and the Comanche board of directors by their respective financial advisors were based on the respective financial analyses performed by each of the financial advisors as of the date of their respective opinions.

The opinions rendered on July 18, 2018 by Piper, and on July 19, 2018 by Stephens, were based on the respective financial analyses performed, which considered market and other conditions then in effect, and financial forecasts and other information made available to them, as of the date of their respective opinions, which may have changed, or may change, after the date of the opinions. Neither opinion has been updated to reflect changes that may occur or may have occurred after the date on which it was delivered, including changes to the operations and future prospects of Spirit or Comanche, changes in general market and economic conditions or other changes. Any such changes may alter the relative value of Spirit or Comanche or the prices of shares of Spirit common stock or Comanche common stock by the time the merger is completed. The opinions do not

 

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speak as of the date the merger will be completed or as of any date other than the date of such opinions. For a description of the opinion that Spirit received from its financial advisor, please see “The Merger—Opinion of Spirit’s Financial Advisor,” beginning on page 80. The full Stephens fairness opinion is included with this document as Annex C. For a description of the opinion that Comanche received from its financial advisor, see the section of this document entitled “The Merger—Opinion of Comanche’s Financial Advisor,” beginning on page 87. The full Piper fairness opinion is included with this document as Annex D.

The shares of Spirit common stock to be received by Comanche shareholders as a result of the merger will have different rights than the shares of Comanche common stock and, in some cases, may be less favorable.

The rights associated with Comanche common stock are different from the rights associated with Spirit common stock. In some cases, the rights associated with Spirit common stock may be less favorable to shareholders than those associated with Comanche common stock. For example, Comanche shareholders currently elect each member of their board of directors at each annual meeting of Comanche shareholders. Upon completion of the merger, Comanche shareholders will hold Spirit common stock that provides that the members of only one of three classes of directors are elected at each annual meeting of Spirit shareholders, which could have an anti-takeover effect and may delay, discourage or prevent an attempted acquisition or change in control of Spirit. See the section of this document entitled “Comparison of Shareholders’ Rights,” beginning on page 123, for a more detailed description of the rights of each of Comanche shareholders and Spirit shareholders.

The dissenters’ rights appraisal process relating to shares of Comanche common stock is uncertain.

Comanche shareholders may or may not be entitled to receive more than the amount of merger consideration provided for in the reorganization agreement for their shares of Comanche common stock if they elect to exercise their right to dissent from the merger, depending on the appraisal of the fair value of the Comanche common stock pursuant to the dissenting shareholder procedures under the TBOC. See the section of this document entitled “The Merger—Dissenters’ Rights in the Merger,” beginning on page 97, and Annex B. For this reason, the amount of cash that such Comanche shareholders might be entitled to receive should they elect to exercise their right to dissent from the merger may be more or less than the value of the merger consideration to be paid pursuant to the reorganization agreement. In addition, it is a condition to the completion of the merger that holders of not more than 5.0% of the issued and outstanding shares of Comanche common stock exercised their statutory dissenters’ rights under the TBOC. The number of shares of Comanche common stock for which holders will exercise dissenters’ rights under the TBOC is not known and therefore there is no assurance that this condition will be satisfied.

Spirit and Comanche have structured the merger to qualify as a reorganization for U.S. federal income tax purposes. However, no ruling has been or will be sought from the IRS regarding the U.S. federal income tax consequences of the merger.

The obligations of Spirit and Comanche to complete the merger are conditioned on, among other things, the receipt by Spirit and Comanche of tax opinions from Hunton and Fenimore Kay, respectively, dated as of the date of the completion of the merger, to the effect that, on the basis of facts, representations and assumptions that are consistent with the facts existing at the effective time of the merger and as set forth and referred to in such opinions, the merger will qualify for U.S. federal income tax purposes as a “reorganization” within the meaning of Section 368(a) of the Code. However, no ruling has been or will be sought from the U.S. Internal Revenue Service, which we refer to as the IRS, as to the U.S. federal income tax consequences of the merger. There can be no assurance that the IRS will not successfully challenge the intended tax treatment of the merger. In addition, these opinions will be based on certain tax opinion representations and assumptions (as set forth in the section entitled “Material U.S. Federal Income Tax Consequences of the Merger”). If any of the tax opinion representations and assumptions are incorrect, incomplete or false, or are violated, the validity of the opinions described above may be affected and the tax consequences of the merger could differ from those described in this document.

 

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Each Spirit shareholder and Comanche shareholder is urged to read the discussion under “Material U.S. Federal Income Tax Consequences of the Merger,” and to consult his, her or its own tax advisor for a full understanding of the tax consequences to such shareholder of the merger.

Risks Related to Spirit’s Business

Spirit conducts its operations exclusively in Texas, specifically in the Houston, Dallas/Fort Worth and Bryan/College Station metropolitan areas, which imposes risks and may magnify the consequences of any regional or local economic downturn affecting its Texas markets, including any downturn in the energy, technology or real estate sectors.

Spirit conducts its operations exclusively in Texas, specifically in the Houston, Dallas/Fort Worth and Bryan/College Station metropolitan areas, and, as of June 30, 2018, the substantial majority of the loans in Spirit’s loan portfolio were made to borrowers who live and/or conduct business in its Texas markets. Likewise, as of such date, the substantial majority of Spirit’s secured loans were secured by collateral located in Texas. Accordingly, Spirit is exposed to risks associated with a lack of geographic diversification. The economic conditions in Texas significantly affect Spirit’s business, financial condition, results of operations and future prospects, and any adverse economic developments, among other things, could negatively affect the volume of loan originations, increase the level of non-performing assets, increase the rate of foreclosure losses on loans and reduce the value of Spirit’s loans and loan servicing portfolio. Any regional or local economic downturn that affects Spirit’s Texas markets, its existing or prospective borrowers or property values in its market areas may affect Spirit and its profitability more significantly and more adversely than Spirit’s competitors whose operations are less geographically focused.

The economies in Spirit’s Texas markets are also highly dependent on the energy sector as well as the technology and real estate sectors. In particular, a decline in or volatility of the prices of crude oil or natural gas could adversely affect many of Spirit’s customers. Any downturn or adverse development in its Texas markets, including as a result of a downturn in the energy, technology or real estate sectors could have a material adverse impact on Spirit’s financial condition and results of operations.

Spirit may not be able to implement aspects of its growth strategy, which may affect its ability to maintain its historical earnings trends.

Spirit’s strategy focuses on organic growth, supplemented by acquisitions. Spirit may not be able to execute on aspects of its growth strategy to sustain its historical rate of growth or may not be able to grow at all. More specifically, Spirit may not be able to generate sufficient new loans and deposits within acceptable risk and expense tolerances, obtain the personnel or funding necessary for additional growth or find suitable acquisition candidates. Various factors, such as economic conditions and competition, may impede or prohibit the growth of Spirit’s operations, the opening of new branches and the consummation of acquisitions. Further, Spirit may be unable to attract and retain experienced bankers, which could adversely affect its growth. The success of Spirit’s strategy also depends on its ability to effectively manage growth, which is dependent upon a number of factors, including Spirit’s ability to adapt its existing credit, operational, technology and governance infrastructure to accommodate expanded operations. If Spirit fails to implement one or more aspects of its strategy, Spirit may be unable to maintain its historical earnings trends, which could have an adverse effect on its business.

Difficult market conditions and economic trends have adversely affected the banking industry and could adversely affect Spirit’s business, financial condition and results of operations.

Spirit is operating in a challenging and uncertain economic environment, including generally uncertain conditions nationally and locally in its industry and markets. Although economic conditions have improved in recent years, financial institutions continue to be affected by volatility in the real estate market in some parts of the country, a prolonged period of lower crude oil and natural gas prices and uncertain regulatory and interest

 

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rate conditions. Spirit retains direct exposure to the residential and commercial real estate markets in Texas, particularly in the Houston, Dallas/Fort Worth and Bryan/College Station metropolitan areas, and is affected by these conditions. Spirit’s markets have also recently been affected by Hurricane Harvey, which could have a materially adverse impact on its business, financial condition and operations. See “—Spirit’s primary markets are susceptible to severe weather events that could negatively impact the economies of its markets, its operations or its customers, any of which impacts could have a material adverse effect on Spirit’s business, financial condition and results of operations.”

Spirit’s ability to assess the creditworthiness of customers and to estimate the losses inherent in its loan portfolio is made more complex by uncertain market and economic conditions, including a prolonged period of lower crude oil and natural gas prices and market and economic conditions resulting from severe weather events. Another national economic recession or deterioration of conditions in Spirit’s markets could drive losses beyond that which is provided for in its allowance for loan and lease losses and result in the following consequences:

 

   

increases in loan delinquencies;

 

   

increases in non-performing assets and foreclosures;

 

   

decreases in demand for Spirit’s products and services, which could adversely affect its liquidity position; and

 

   

decreases in the value of the collateral securing Spirit’s loans, especially real estate, which could reduce customers’ borrowing power and repayment ability.

Although real estate markets have stabilized in portions of the United States, a resumption of declines in real estate values, home sales volumes and financial stress on borrowers as a result of the uncertain economic environment, including job losses, including a prolonged period of lower crude oil and natural gas and market and economic conditions resulting from severe weather events, could have an adverse effect on Spirit’s borrowers or their customers, which could adversely affect Spirit’s business, financial condition and results of operations.

Spirit’s primary markets are susceptible to severe weather events that could negatively impact the economies of its markets, its operations or its customers, any of which impacts could have a material adverse effect on Spirit’s business, financial condition and results of operations.

Tornadoes, droughts, wildfires, flooding, hurricanes, hailstorms, damaging winds, tropical storms and other natural disasters and severe weather events can have an adverse impact on Spirit’s business, financial condition and operations, cause widespread property damage and have the potential to significantly depress the local economies in which Spirit operates. Spirit operates banking locations in the Houston, Dallas/Fort Worth and Bryan/College Station metropolitan areas, which are susceptible to hurricanes, tropical storms and other natural disasters and severe weather conditions. For example, in late August 2017, Hurricane Harvey, a Category 4 hurricane when it made landfall on the Texas gulf coast, caused extensive and costly damage across Southeast Texas. The Houston area received between 36 and 48 inches of rainfall, which resulted in catastrophic flooding and unprecedented damage to residences and businesses. Spirit is currently unable to predict with certainty the full impact of the storm on the markets in which Spirit operates, including any adverse impact on its customers and its loan and deposit activities and credit exposures.

Future severe weather events in Spirit’s markets could potentially result in extensive and costly property damage to businesses and residences, force the relocation of residents and significantly disrupt economic activity in its markets. Spirit cannot predict the extent of damage that may result from such severe weather events, which will depend on a variety of factors that are beyond Spirit’s control, including, but not limited to, the severity and duration of the event, the timing and level of government responsiveness and the pace of economic recovery. If the economies in Spirit’s primary markets experience an overall decline as a result of a catastrophic event, demand for loans and Spirit’s other products and services could decline. In addition, the rates of delinquencies,

 

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foreclosures, bankruptcies and losses on Spirit’s loan portfolios may increase substantially after events such as hurricanes, as uninsured property losses, interruptions of Spirit’s customers’ operations or sustained job interruption or loss may materially impair the ability of borrowers to repay their loans. Moreover, the value of real estate or other collateral that secures Spirit’s loans could be materially and adversely affected by a catastrophic event. A severe weather event, therefore, could have a materially adverse impact on Spirit’s financial condition, results of operations and business, as well as potentially increase its exposure to credit and liquidity risks.

Spirit’s strategy of pursuing acquisitions exposes it to financial, execution and operational risks that could have a material adverse effect on its business, financial condition, results of operations and future prospects.

Spirit intends to continue pursuing a strategy that includes acquisitions. An acquisition strategy involves significant risks, including the following:

 

   

finding suitable candidates for acquisition;

 

   

attracting funding to support additional growth within acceptable risk tolerances;

 

   

maintaining asset quality;

 

   

retaining customers and key personnel;

 

   

obtaining necessary regulatory approvals, which Spirit may have difficulty obtaining or be unable to obtain;

 

   

conducting adequate due diligence and managing known and unknown risks and uncertainties;

 

   

integrating acquired businesses; and

 

   

maintaining adequate regulatory capital.

The market for acquisition targets is highly competitive, which may adversely affect Spirit’s ability to find acquisition candidates that fit its strategy and standards. Spirit faces significant competition in pursuing acquisition targets from other banks and financial institutions, many of which possess greater financial, human, technical and other resources than Spirit does. Spirit’s ability to compete in acquiring target institutions will depend on its available financial resources to fund the acquisitions, including the amount of cash and cash equivalents Spirit has and the liquidity and market price of the Spirit common stock. In addition, increased competition may also drive up the acquisition consideration that Spirit will be required to pay in order to successfully capitalize on attractive acquisition opportunities. To the extent that Spirit is unable to find suitable acquisition targets, an important component of its growth strategy may not be realized.

Acquisitions of financial institutions also involve operational risks and uncertainties, such as unknown or contingent liabilities with no available manner of recourse, exposure to unexpected problems such as asset quality, the retention of key employees and customers and other issues that could negatively affect Spirit’s business. Spirit may not be able to complete future acquisitions or, if completed, Spirit may not be able to successfully integrate the operations, technology platforms, management, products and services of the entities that it acquires or successfully eliminate redundancies. The integration process may also require significant time and attention from Spirit’s management that would otherwise be directed toward servicing existing business and developing new business. Failure to successfully integrate the entities Spirit acquires into its existing operations in a timely manner may increase Spirit’s operating costs significantly and adversely affect its business, financial condition and results of operations. Further, acquisitions in Texas typically involve the payment of a premium over book and market values. Therefore, some dilution of Spirit’s tangible book value and earnings per share may occur in connection with any future acquisition, and the carrying amount of any goodwill that Spirit currently maintains or may acquire may be subject to impairment in future periods.

 

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SBA lending is an important part of Spirit’s business. Spirit’s SBA lending program is dependent upon the federal government and Spirit’s status as a participant in the SBA’s Preferred Lenders Program, and Spirit faces specific risks associated with originating SBA loans and selling the guaranteed portion thereof.

Spirit has been approved by the Small Business Administration, which we refer to as the SBA, to participate in the SBA’s Preferred Lenders Program. As an SBA Preferred Lender, Spirit enables its clients to obtain SBA loans without being subject to the potentially lengthy SBA approval process necessary for lenders that are not SBA Preferred Lenders. The SBA periodically reviews the lending operations of participating lenders to assess, among other things, whether the lender exhibits prudent risk management. When weaknesses are identified, the SBA may request corrective actions or impose enforcement actions, including revocation of the lender’s Preferred Lender status. If Spirit loses its status as an SBA Preferred Lender, it may lose some or all of its customers to lenders who are SBA Preferred Lenders, which could adversely affect Spirit’s business, financial condition and results of operations.

Spirit generally sells the guaranteed portion of its SBA 7(a) loans in the secondary market. These sales have resulted in both premium income for Spirit at the time of sale, and created a stream of future servicing income. There can be no assurance that Spirit will be able to continue originating these loans, that a secondary market for these loans will continue to exist or that Spirit will continue to realize premiums upon the sale of the guaranteed portion of these loans. When Spirit sells the guaranteed portion of its SBA 7(a) loans, Spirit incurs credit risk on the non-guaranteed portion of the loans, and if a customer defaults on the non-guaranteed portion of a loan, Spirit shares any loss and recovery related to the loan pro-rata with the SBA.

The laws, regulations and standard operating procedures that are applicable to SBA loan products may change in the future. Spirit cannot predict the effects of these changes on its business and profitability. Because government regulation greatly affects the business and financial results of all commercial banks and bank holding companies, especially Spirit’s organization, changes in the laws, regulations and procedures applicable to SBA loans could adversely affect Spirit’s ability to operate profitably. In addition, the aggregate amount of SBA 7(a) and 504 loan guarantees by the SBA must be approved each fiscal year by the federal government. Spirit cannot predict the amount of SBA 7(a) loan guarantees in any given fiscal year. If the federal government were to reduce the amount of SBA loan guarantees, such reduction could adversely impact Spirit’s SBA lending program, including making and selling the guaranteed portion of fewer SBA 7(a) and 504 loans.

The SBA may not honor its guarantees if Spirit does not originate loans in compliance with SBA guidelines.

As of June 30, 2018, SBA 7(a) and 504 program loans of $72.4 million comprised 7.9% of Spirit’s loan portfolio and Spirit intends to grow this segment of its portfolio in the future. SBA lending programs typically guarantee 75.0% of the principal on an underlying loan. If the SBA establishes that a loss on an SBA guaranteed loan is attributable to significant technical deficiencies in the manner in which the loan was originated, funded or serviced by Spirit, the SBA may seek recovery of the principal loss related to the deficiency from Spirit notwithstanding that a portion of the loan was guaranteed by the SBA, which could adversely affect Spirit’s business, financial condition and results of operations. While Spirit follows the SBA’s underwriting guidelines, Spirit’s ability to do so depends on the knowledge and diligence of its employees and the effectiveness of controls it has established. If Spirit’s employees do not follow the SBA guidelines in originating loans and if Spirit’s loan review and audit programs fail to identify and rectify such failures, the SBA may reduce or, in some cases, refuse to honor its guarantee obligations and Spirit may incur losses as a result.

Loans to and deposits from foreign nationals are an important part of Spirit’s business and Spirit faces specific risks associated with foreign nationals.

As of June 30, 2018, loans to foreign nationals of $123.7 million comprised 13.5% of Spirit’s loan portfolio and deposits from foreign nationals of $24.3 million comprised 2.9% of Spirit’s total deposits. Spirit defines foreign nationals as those who derive more than 50.0% of their personal income from non-U.S. sources. Spirit

 

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intends to grow this segment of its loan and deposit portfolio in the future. These borrowers typically lack a U.S. credit history and have a potential to leave the United States without fulfilling their mortgage obligation and leaving Spirit with little recourse to them personally. Additionally, transactions with foreign nationals place additional pressure on Spirit’s policies, procedures and systems for complying with the Bank Secrecy Act and other anti-money laundering statutes and regulations.

Spirit’s ability to develop bankers, retain bankers and recruit additional successful bankers is critical to the success of its business strategy, and any failure to do so could adversely affect Spirit’s business, financial condition, results of operations and future prospects.

Spirit’s ability to retain and grow its loans, deposits and fee income depends upon the business generation capabilities, reputation and relationship management skills of its bankers, many of whom Spirit develops internally. If Spirit were to lose the services of any of its bankers, including successful bankers employed by financial institutions that Spirit may acquire, to a new or existing competitor or otherwise, or fail to successfully develop bankers internally, Spirit may not be able to retain valuable relationships and some of its customers could choose to use the services of a competitor instead of Spirit’s services. Spirit’s growth strategy also relies on its ability to attract and retain additional profitable bankers. Spirit may face difficulties in recruiting and retaining bankers of its desired caliber due to competition from other financial institutions. In particular, many of Spirit’s competitors are significantly larger with greater financial resources, and may be able to offer more attractive compensation packages and broader career opportunities. Additionally, Spirit may incur significant expenses and expend significant time and resources on training, integration and business development before it is able to determine whether a new banker will be profitable or effective. If Spirit is unable to develop, attract or retain successful bankers, or if its bankers fail to meet its expectations in terms of customer relationships and profitability, Spirit may be unable to execute its business strategy and Spirit’s business, financial condition, results of operations and future prospects may be adversely affected.

Loss of Spirit’s executive officers or other key employees could impair Spirit’s relationships with its customers and adversely affect its business.

Spirit’s success is dependent upon the continued service and skills of its executive management team. Spirit’s goals, strategies and marketing efforts are closely tied to the banking philosophy and strengths of Spirit’s executive management, including its Chairman and Chief Executive Officer, Dean O. Bass, and its President, David M. McGuire. Spirit’s success is also dependent in part on the continued service of its market presidents and relationship managers. The loss of services of any of these key personnel could adversely affect Spirit’s business because of their skills, years of industry experience, relationships with customers and the difficulty of promptly finding qualified replacement personnel. Although Spirit has employment agreements with many of its executive officers and key employees, Spirit cannot guarantee that these executive officers or key employees will continue to be employed with Spirit in the future.

Greater seasoning of Spirit’s loan portfolio could expose Spirit to increased credit risks.

The business of lending is inherently risky, including risks that the principal of or interest on any loan will not be repaid timely or at all or that the value of any collateral supporting the loan will be insufficient to cover Spirit’s outstanding exposure. Spirit’s loan portfolio has grown to $917.5 million as of June 30, 2018, from $869.1 million as of December 31, 2017, and $839.7 million as of June 30, 2017. It is difficult to assess the future performance of acquired or recently originated loans because Spirit’s relatively limited experience with such loans does not provide it with a significant payment history from which to judge future collectability. These loans may experience higher delinquency or charge-off levels than Spirit’s historical loan portfolio experience, which could adversely affect Spirit’s business, financial condition and results of operations.

 

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The small- to medium-sized businesses that Spirit lends to may have fewer resources to weather adverse business developments, which may impair a borrower’s ability to repay a loan, and such impairment could adversely affect Spirit’s results of operations and financial condition.

Spirit focuses its business development and marketing strategy primarily on small- to medium-sized businesses, which it defines as commercial borrowing relationships with customers with revenues of $3.0 million to $30.0 million. Small- to medium-sized businesses frequently have smaller market shares than their competition, may be more vulnerable to economic downturns, often need substantial additional capital to expand or compete and may experience substantial volatility in operating results, any of which may impair a borrower’s ability to repay a loan. In addition, the success of a small and medium-sized business often depends on the management skills, talents and efforts of one or two people or a small group of people, and the death, disability or resignation of one or more of these people could have a material adverse impact on the business and its ability to repay its loan. If general economic conditions negatively impact Spirit’s primary service areas specifically or Texas generally and small- to medium-sized businesses are adversely affected or Spirit’s borrowers are otherwise affected by adverse business developments, Spirit’s business, financial condition and results of operations could be adversely affected.

If Spirit’s allowance for loan and lease losses is not sufficient to cover actual loan losses, Spirit’s earnings may be affected.

Spirit establishes its allowance for loan and lease losses and maintains it at a level considered adequate by management to absorb probable loan losses based on Spirit’s analysis of its loan portfolio and market environment. Management maintains an allowance for loan and lease losses based upon, among other things, (i) historical experience, (ii) an evaluation of local, regional and national economic conditions, (iii) regular reviews of delinquencies and loan portfolio quality, (iv) current trends regarding the volume and severity of past due and problem loans, (v) the existence and effect of concentrations of credit and (vi) results of regulatory examinations. Based on such factors, management makes various assumptions and judgments about the ultimate collectability of the respective loan portfolios. Although Spirit believes that the allowance for loan and lease losses is adequate, there can be no assurance that the allowance will prove sufficient to cover future losses. Future adjustments may be necessary if economic conditions differ or adverse developments arise with respect to nonperforming or performing loans. Material additions to the allowances for loan losses would result in a decrease in Spirit’s net income and its capital balance. The amount of future loan losses is susceptible to changes in economic, operating and other conditions, including changes in interest rates, that may be beyond Spirit’s control and these losses may exceed current estimates.

As of June 30, 2018, Spirit’s allowance for loan and lease losses was $6.0 million, which represents 0.66% of its loans held for investment and 148.92% of its total nonperforming loans. Loans acquired are initially recorded at fair value, which includes an estimate of credit losses expected to be realized over the remaining lives of the loans, and therefore no corresponding allowance for loan and lease losses is recorded for these loans at acquisition. Additional loan losses will likely occur in the future and may occur at a rate greater than Spirit has previously experienced. Spirit may be required to take additional provisions for loan and lease losses in the future to further supplement the allowance for loan and lease losses, either due to management’s decision to do so or requirements by Spirit’s banking regulators. In addition, bank regulatory agencies will periodically review Spirit’s allowance for loan and lease losses and the value attributed to nonaccrual loans or to real estate acquired through foreclosure. Such regulatory agencies may require Spirit to recognize future charge-offs. These adjustments could adversely affect Spirit’s business, financial condition and results of operations.

A large portion of Spirit’s loan portfolio is comprised of commercial loans secured by receivables, promissory notes, inventory, equipment or other commercial collateral, the deterioration in value of which could increase the potential for future losses.

As of June 30, 2018, $150.0 million, or 16.4% of Spirit’s loans held for investment, was comprised of commercial loans to businesses. In general, these loans are collateralized by general business assets including,

 

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among other things, accounts receivable, promissory notes, inventory and equipment and most are backed by a personal guaranty of the borrower or principal. These commercial loans are typically larger in amount than loans to individuals and, therefore, have the potential for larger losses on a single loan basis. Additionally, the repayment of commercial loans is subject to the ongoing business operations of the borrower. The collateral securing such loans generally includes moveable property such as equipment and inventory, which may decline in value more rapidly than Spirit anticipates exposing Spirit to increased credit risk. A portion of Spirit’s commercial loans are secured by promissory notes that evidence loans made by Spirit to borrowers that in turn make loans to others that are secured by real estate. Accordingly, negative changes in the economy affecting real estate values and liquidity could impair the value of the collateral securing these loans. Significant adverse changes in the economy or local market conditions in which Spirit’s commercial lending customers operate could cause rapid declines in loan collectability and the values associated with general business assets resulting in inadequate collateral coverage that may expose Spirit to credit losses and could adversely affect Spirit’s business, financial condition and results of operations.

Because a portion of Spirit’s loan portfolio is comprised of 1-4 single family residential real estate loans, negative changes in the economy affecting real estate values and liquidity could impair the value of collateral securing Spirit’s real estate loans and result in loan and other losses.

As of June 30, 2018, $238.6 million, or 26.0% of Spirit’s loans held for investment, was comprised of loans with 1-4 single family residential real estate as a primary component of collateral. As a result, adverse developments affecting real estate values in Texas, particularly in the Houston, Dallas/Fort Worth and Bryan/College Station metropolitan areas, could increase the credit risk associated with Spirit’s real estate loan portfolio. Real estate values in many Texas markets have experienced periods of fluctuation over the last five years. The market value of real estate can fluctuate significantly in a short period of time. Adverse changes affecting real estate values and the liquidity of real estate in one or more of Spirit’s markets could increase the credit risk associated with its loan portfolio and could result in losses that adversely affect Spirit’s credit quality, financial condition and results of operations. Negative changes in the economy affecting real estate values and liquidity in Spirit’s market areas could significantly impair the value of property pledged as collateral on loans and affect Spirit’s ability to sell the collateral upon foreclosure without a loss or additional losses. Collateral may have to be sold for less than the outstanding balance of the loan, which could result in losses on such loans. Such declines and losses could have a material adverse impact on Spirit’s business, results of operations and growth prospects. If real estate values decline, it is also more likely that Spirit would be required to increase its allowance for loan and lease losses, which could adversely affect Spirit’s business, financial condition and results of operations.

Spirit’s commercial real estate and construction, land and development loan portfolios expose it to credit risks that could be greater than the risks related to other types of loans.

As of June 30, 2018, $305.4 million, or 33.3% of Spirit’s loans held for investment, was comprised of commercial real estate loans (including owner-occupied commercial real estate loans and multifamily loans) and $152.6 million, or 16.6% of Spirit’s loans held for investment, was comprised of construction, land and development loans. These loans typically involve repayment dependent upon income generated, or expected to be generated, by the property securing the loan in amounts sufficient to cover operating expenses and debt service. The availability of such income for repayment may be adversely affected by changes in the economy or local market conditions. These loans expose a lender to greater credit risk than loans secured by other types of collateral because the collateral securing these loans is typically more difficult to liquidate due to the fluctuation of real estate values. Additionally, nonowner-occupied commercial real estate loans generally involve relatively large balances to single borrowers or related groups of borrowers. Unexpected deterioration in the credit quality of Spirit’s nonowner-occupied commercial real estate loan portfolio could require Spirit to increase its allowance for loan and lease losses, which would reduce its profitability and could have a material adverse effect on Spirit’s business, financial condition and results of operations.

 

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Construction, land and development loans also involve risks attributable to the fact that loan funds are secured by a project under construction and the project is of uncertain value prior to its completion. It can be difficult to accurately evaluate the total funds required to complete a project, and this type of lending often involves the disbursement of substantial funds with repayment dependent, in part, on the success of the ultimate project rather than the ability of a borrower or guarantor to repay the loan. If Spirit is forced to foreclose on a project prior to completion, it may be unable to recover the entire unpaid portion of the loan. In addition, Spirit may be required to fund additional amounts to complete a project and may have to hold the property for an indeterminate period of time, any of which could adversely affect Spirit’s business, financial condition and results of operations.

A failure in or breach of Spirit’s operational or security systems, or those of its third-party service providers, including as a result of cyber-attacks, could disrupt Spirit’s business, result in unintentional disclosure or misuse of confidential or proprietary information, damage its reputation, increase its costs and cause losses.

As a financial institution, Spirit’s operations rely heavily on the secure data processing, storage and transmission of confidential and other information on Spirit’s computer systems and networks. Any failure, interruption or breach in security or operational integrity of these systems could result in failures or disruptions in Spirit’s online banking system, customer relationship management, general ledger, deposit and loan servicing and other systems. The security and integrity of Spirit’s systems could be threatened by a variety of interruptions or information security breaches, including those caused by computer hacking, cyber-attacks, electronic fraudulent activity or attempted theft of financial assets. Spirit cannot assure you that any such failures, interruptions or security breaches will not occur, or if they do occur, that they will be adequately addressed. While Spirit has certain protective policies and procedures in place, the nature and sophistication of the threats continue to evolve. Spirit may be required to expend significant additional resources in the future to modify and enhance its protective measures.

Additionally, Spirit faces the risk of operational disruption, failure, termination or capacity constraints of any of the third parties that facilitate its business activities, including exchanges, clearing agents, clearing houses or other financial intermediaries. Such parties could also be the source of an attack on, or breach of, Spirit’s operational systems. Any failures, interruptions or security breaches in Spirit’s information systems could damage its reputation, result in a loss of customer business, result in a violation of privacy or other laws, or expose Spirit to civil litigation, regulatory fines or losses not covered by insurance.

Spirit’s business is dependent on the successful and uninterrupted functioning of its information technology and telecommunications systems and third-party service providers. The failure of these systems, or the termination of a third-party software license or service agreement on which any of these systems is based, could interrupt Spirit’s operations. Because Spirit’s information technology and telecommunications systems interface with and depend on third-party systems, Spirit could experience service denials if demand for such services exceeds capacity or such third-party systems fail or experience interruptions. If significant, sustained or repeated, a system failure or service denial could compromise Spirit’s ability to operate effectively, damage its reputation, result in a loss of customer business and/or subject Spirit to additional regulatory scrutiny and possible financial liability, any of which could materially adversely affect Spirit’s business, financial condition, results of operations and future prospects.

Spirit may be subject to additional credit risk with respect to loans that it makes to other lenders.

As a part of its commercial lending activities, Spirit may make loans to customers that, in turn, make commercial and residential real estate loans to other borrowers. When Spirit makes a loan of this nature, it takes as collateral the promissory notes issued by the end borrowers to Spirit’s customer, which are themselves secured by the underlying real estate. Although the loans to Spirit’s customers are subject to the risks inherent in commercial lending generally, Spirit is also exposed to additional risks, including those related to commercial and residential real estate lending, as the ability of Spirit’s customer to repay the loan from Spirit can be affected

 

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by the risks associated with the value and liquidity of the real estate underlying Spirit’s customer’s loans to the end borrowers. Moreover, because Spirit is not lending directly to the end borrower, and because Spirit’s collateral is a promissory note rather than the underlying real estate, Spirit may be subject to risks that are different from those Spirit is exposed to when it makes a loan directly that is secured by commercial or residential real estate. Because the ability of the end borrower to repay its loan from Spirit’s customer could affect the ability of Spirit’s customer to repay its loan from Spirit, Spirit’s inability to exercise control over the relationship with the end borrower and the collateral, except under limited circumstances, could expose it to credit losses that adversely affect Spirit’s business, financial condition and results of operations.

Spirit has a concentration of loans outstanding to a limited number of borrowers, which may increase Spirit’s risk of loss.

Spirit has extended significant amounts of credit to a limited number of borrowers, and as of June 30, 2018, the aggregate amount of loans to Spirit’s 10 and 20 largest borrowers (including related entities) amounted to $66.5 million, or 7.3% of loans held for investment, and $116.7 million, or 12.7% of loans held for investment, respectively. In the event that one or more of these borrowers is not able to make payments of interest and principal in respect of such loans, the potential loss to Spirit is more likely to have a material adverse effect on Spirit’s business, financial condition and results of operations.

Spirit’s municipal loan portfolio may be impacted by the effects of economic stress on municipalities and political subdivisions.

As of June 30, 2018, $50.9 million, or 5.5% of Spirit’s loans held for investment, was comprised of loans outstanding to municipalities and political subdivisions. Widespread concern currently exists regarding the stress on local governments emanating from declining revenues, large unfunded liabilities to government workers and entrenched cost structures. Debt-to-gross domestic product ratios for many municipalities and political subdivisions have been deteriorating due to, among other factors, declines in federal monetary assistance provided as the United States is currently experiencing the largest deficit in its history and lower levels of sales and property tax revenue. Spirit may not be able to mitigate the exposure in its municipal loan portfolio if municipalities and political subdivisions are unable to fulfill their obligations. The risk of widespread borrower defaults may also increase if there are changes in legislation that permit municipalities and political subdivisions to file for bankruptcy protection or if there are judicial interpretations that, in a bankruptcy or other proceeding, lessen the value of any structural protections.

A lack of liquidity could impair Spirit’s ability to fund operations and adversely affect its operations and jeopardize Spirit’s business, financial condition and results of operations.

Liquidity is essential to Spirit’s business. Spirit relies on its ability to generate deposits and effectively manage the repayment and maturity schedules of its loans and investment securities, respectively, to ensure that Spirit has adequate liquidity to fund its operations. An inability to raise funds through deposits, borrowings, the sale of its investment securities, the sale of loans and other sources could have a substantial negative effect on Spirit’s liquidity. Spirit’s most important source of funds is deposits. Deposit balances can decrease when customers perceive alternative investments as providing a better risk/return tradeoff. If customers move money out of bank deposits and into other investments such as money market funds, Spirit would lose a relatively low-cost source of funds, increasing its funding costs and reducing its net interest income and net income.

Other primary sources of funds consist of cash flows from operations, maturities and sales of investment securities and proceeds from the issuance and sale of Spirit’s equity and debt securities to investors. Additional liquidity is provided by the ability to borrow from the Federal Reserve Bank of Dallas and the Federal Home Loan Bank of Dallas, which we refer to as the FHLB. Spirit also may borrow funds from third-party lenders, such as other financial institutions. Spirit’s access to funding sources in amounts adequate to finance or capitalize its activities, or on terms that are acceptable to Spirit, could be impaired by factors that affect Spirit specifically

 

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or the financial services industry or economy generally, such as disruptions in the financial markets or negative views and expectations about the prospects for the financial services industry. Spirit’s access to funding sources could also be affected by a decrease in the level of its business activity as a result of a downturn in the Texas economy, particularly the local economies in the Houston, Dallas/Fort Worth and Bryan/College Station metropolitan areas, or by one or more adverse regulatory actions against Spirit.

Any decline in available funding could adversely impact Spirit’s ability to originate loans, invest in securities, meet its expenses or fulfill obligations such as repaying its borrowings or meeting deposit withdrawal demands, any of which could have a material adverse impact on Spirit’s liquidity and could, in turn, adversely affect Spirit’s business, financial condition and results of operations.

Spirit may need to raise additional capital in the future, and if it fails to maintain sufficient capital, whether due to losses, an inability to raise additional capital or otherwise, Spirit’s financial condition, liquidity and results of operations, as well as Spirit’s ability to maintain regulatory compliance, could be adversely affected.

Spirit faces significant capital and other regulatory requirements as a financial institution. Spirit may need to raise additional capital in the future to provide it with sufficient capital resources and liquidity to meet its commitments and business needs, which could include the possibility of financing acquisitions. In addition, Spirit, on a consolidated basis, and Spirit Bank, on a stand-alone basis, must meet certain regulatory capital requirements and maintain sufficient liquidity. Importantly, regulatory capital requirements could increase from current levels, which could require Spirit to raise additional capital or reduce its operations. Spirit’s ability to raise additional capital depends on conditions in the capital markets, economic conditions and a number of other factors, including investor perceptions regarding the banking industry, market conditions and governmental activities, and on Spirit’s financial condition and performance. Accordingly, Spirit cannot assure you that it will be able to raise additional capital if needed or on terms acceptable to Spirit. If Spirit fails to maintain capital to meet regulatory requirements, Spirit’s liquidity, business, financial condition and results of operations could be adversely affected.

Fluctuations in interest rates could reduce net interest income and otherwise negatively impact Spirit’s financial condition and results of operations.

The majority of Spirit’s banking assets are monetary in nature and subject to risk from changes in interest rates. Spirit’s profitability depends to a great extent upon the level of Spirit’s net interest income, or the difference between the interest income it earns on loans, investments and other interest-earning assets, and the interest it pays on interest-bearing liabilities, such as deposits and borrowings. Changes in interest rates can increase or decrease Spirit’s net interest income, because different types of assets and liabilities may react differently and at different times to market interest rate changes. When interest-bearing liabilities mature or reprice more quickly, or to a greater degree than interest-earning assets in a period, an increase in interest rates could reduce net interest income. Similarly, when interest-earning assets mature or reprice more quickly, or to a greater degree than interest-bearing liabilities, falling interest rates could reduce net interest income. Spirit’s interest sensitivity profile was asset sensitive as of June 30, 2018, meaning that Spirit estimates its net interest income would increase more from rising interest rates than from falling interest rates.

Additionally, an increase in interest rates may, among other things, reduce the demand for loans and Spirit’s ability to originate loans and decrease loan repayment rates. A decrease in the general level of interest rates may affect Spirit through, among other things, increased prepayments on its loan portfolio and increased competition for deposits. Accordingly, changes in the level of market interest rates affect Spirit’s net yield on interest-earning assets, loan origination volume, loan portfolio and its overall results. Although Spirit’s asset-liability management strategy is designed to control and mitigate exposure to the risks related to changes in market interest rates, those rates are affected by many factors outside of Spirit’s control, including governmental monetary policies, inflation, deflation, recession, changes in unemployment, the money supply, international disorder and instability in domestic and foreign financial markets.

 

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Spirit could recognize losses on investment securities held in its securities portfolio, particularly if interest rates increase or economic and market conditions deteriorate

While Spirit attempts to invest a significant majority of its total assets in loans, Spirit invests a percentage of its total assets (3.2% as of June 30, 2018) in investment securities with the primary objectives of providing a source of liquidity, providing an appropriate return on funds invested, managing interest rate risk, meeting pledging requirements and meeting regulatory capital requirements. As of June 30, 2018, the fair value of Spirit’s available for sale investment securities portfolio was $34.5 million, which included a net unrealized loss of $1.4 million. On a pro forma basis, approximately 15.9% of Spirit’s total assets will be invested in investment securities and the fair value of Spirit’s available for sale investment securities portfolio will be $227.7 million as of June 30, 2018. Factors beyond Spirit’s control can significantly and adversely influence the fair value of securities in its portfolio. For example, fixed-rate securities are generally subject to decreases in market value when interest rates rise. Additional factors include, but are not limited to, rating agency downgrades of the securities, defaults by the issuer or individual borrowers with respect to the underlying securities, and instability in the credit markets. Any of the foregoing factors could cause other-than-temporary impairment in future periods and result in realized losses. The process for determining whether impairment is other-than-temporary usually requires difficult, subjective judgments about the future financial performance of the issuer and any collateral underlying the security in order to assess the probability of receiving all contractual principal and interest payments on the security. Because of changing economic and market conditions affecting interest rates, the financial condition of issuers of the securities and the performance of the underlying collateral, Spirit may incur realized or unrealized losses in future periods, which could have an adverse effect on Spirit’s business, financial condition and results of operations.

Spirit faces strong competition from financial services companies and other companies that offer banking services, which could adversely affect Spirit’s business, financial condition and results of operations.

Spirit conducts its operations exclusively in Texas, particularly the Houston, Dallas/Fort Worth and Bryan/College Station metropolitan areas. Many of Spirit’s competitors offer the same, or a wider variety of, banking services within Spirit’s market areas. These competitors include banks with nationwide operations, regional banks and other community banks. Spirit also faces competition from many other types of financial institutions, including savings banks, credit unions, finance companies, mutual funds, insurance companies, brokerage and investment banking firms, asset-based non-bank lenders and certain other non-financial entities, such as retail stores which may maintain their own credit programs and certain governmental organizations which may offer more favorable financing or deposit terms than Spirit can. In addition, a number of out-of-state financial intermediaries have production offices or otherwise solicit loan and deposit products in Spirit’s market areas. Increased competition in Spirit’s markets may result in reduced loans and deposits, as well as reduced net interest margin, fee income and profitability. Ultimately, Spirit may not be able to compete successfully against current and future competitors. If Spirit is unable to attract and retain banking customers, it may be unable to continue to grow its loan and deposit portfolios, and Spirit’s business, financial condition and results of operations could be adversely affected.

Spirit’s ability to compete successfully depends on a number of factors, including, among other things:

 

   

the ability to develop, maintain and build long-term customer relationships based on top quality service, high ethical standards and safe, sound assets;

 

   

the scope, relevance and pricing of products and services offered to meet customer needs and demands;

 

   

the rate at which Spirit introduces new products and services relative to its competitors;

 

   

customer satisfaction with Spirit’s level of service;

 

   

the ability to expand Spirit’s market position; and

 

   

industry and general economic trends.

 

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Failure to perform in any of these areas could significantly weaken Spirit’s competitive position, which could adversely affect its growth and profitability, which, in turn, could adversely affect Spirit’s business, financial condition and results of operations.

Spirit may not be able to compete with larger competitors for larger customers because Spirit’s lending limits are lower than its competitors.

Spirit’s legal lending limit is significantly less than the limits for many of its competitors, and this may hinder Spirit’s ability to establish relationships with larger businesses in its primary service area. Based on the capitalization of Spirit Bank, Spirit’s legal lending limit was approximately $24.4 million as of June 30, 2018. This legal lending limit will increase or decrease as Spirit Bank’s capital increases or decreases, respectively, as a result of its earnings or losses, among other reasons. Based on Spirit’s current legal lending limit, Spirit may need to sell participations in its loans to other financial institutions in order to meet the lending needs of its customers requiring extensions of credit above these limits. However, Spirit’s ability to accommodate larger loans by selling participations in those loans to other financial institutions may not be successful.

Negative public opinion regarding Spirit or failure to maintain Spirit’s reputation in the communities it serves could adversely affect Spirit’s business and prevent it from growing its business.

As a community bank, Spirit’s reputation within the communities it serves is critical to its success. Spirit believes it has set itself apart from its competitors by building strong personal and professional relationships with its customers and being active members of the communities it serves. As such, Spirit strives to enhance its reputation by recruiting, hiring and retaining employees who Spirit believes share its core values of being an integral part of the communities it serves and delivering superior service to its customers. If Spirit’s reputation is negatively affected by the actions of its employees or otherwise, Spirit may be less successful in attracting new customers, and Spirit’s business, financial condition, results of operations and future prospects could be materially and adversely affected. Further, negative public opinion can expose Spirit to litigation and regulatory action or delay in acting as Spirit seeks to implement its growth strategy.

If Spirit fails to maintain an effective system of disclosure controls and procedures and internal control over financial reporting, Spirit may not be able to accurately report its financial results or prevent fraud.

Spirit’s management is responsible for establishing and maintaining adequate internal control over financial reporting and for evaluating and reporting on that system of internal control. Ensuring that Spirit has adequate disclosure controls and procedures, including internal control over financial reporting, in place so that it can produce accurate financial statements on a timely basis is costly and time-consuming and needs to be reevaluated frequently. Spirit’s management may conclude that its internal control over financial reporting is not effective due to its failure to cure any identified material weakness or otherwise. Moreover, even if Spirit’s management concludes that its internal control over financial reporting is effective, Spirit’s independent registered public accounting firm may not conclude that its internal control over financial reporting is effective. In addition, during the course of the evaluation, documentation and testing of its internal control over financial reporting, Spirit may identify deficiencies that Spirit may not be able to remediate in time to meet the deadline imposed by the Securities and Exchange Commission, which we refer to as the SEC, for compliance with the requirements of Section 404 of the Sarbanes-Oxley Act or the FDIC for compliance with the requirement of FDICIA. Any such deficiencies may also subject Spirit to adverse regulatory consequences. If Spirit fails to achieve and maintain the adequacy of its internal control over financial reporting, as these standards are modified, supplemented or amended from time to time, Spirit may be unable to report its financial information on a timely basis, Spirit may not be able to conclude on an ongoing basis that it has effective internal control over financial reporting in accordance with the Sarbanes-Oxley Act or FDICIA, and Spirit may suffer adverse regulatory consequences or violations of listing standards. There could also be a negative reaction in the financial markets due to a loss of investor confidence in the reliability of Spirit’s financial statements.

 

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Spirit could be subject to losses, regulatory action or reputational harm due to fraudulent, negligent or other acts on the part of Spirit’s loan customers, employees or vendors.

Employee errors or employee or customer misconduct could subject Spirit to financial losses or regulatory sanctions and seriously harm Spirit’s reputation. Misconduct by Spirit’s employees could include hiding from Spirit unauthorized activities, improper or unauthorized activities on behalf of Spirit’s customers or improper use of confidential information. It is not always possible to prevent employee errors or employee or customer misconduct, and the precautions Spirit takes to prevent and detect this activity may not be effective in all cases. Employee errors could also subject Spirit to financial claims for negligence.

Spirit maintains a system of internal controls to help mitigate against operational risks, including data processing system failures and errors and fraud, as well as insurance coverage designed to protect Spirit from material losses associated with these risks including losses resulting from any associated business interruption. If Spirit’s internal controls fail to prevent or detect an occurrence or if any resulting loss is not insured or exceeds applicable insurance limits, it could adversely affect Spirit’s business, financial condition and results of operations.

In addition, in deciding whether to extend credit or enter into other transactions with customers and counterparties, Spirit may rely on information furnished by or on behalf of customers and counterparties, including financial statements, property appraisals, title information, employment and income documentation, account information and other financial information. Spirit may also rely on representations of customers and counterparties as to the accuracy and completeness of such information and, with respect to financial statements, on reports of independent auditors. Any such misrepresentation or incorrect or incomplete information may not be detected prior to funding a loan or during Spirit’s ongoing monitoring of outstanding loans. In addition, one or more of Spirit’s employees or vendors could cause a significant operational breakdown or failure, either as a result of human error or where an individual purposefully sabotages or fraudulently manipulates Spirit’s loan documentation, operations or systems. Any of these developments could have a material adverse effect on Spirit’s business, financial condition, results of operations and future prospects.

Spirit has a continuing need for technological change, and it may not have the resources to effectively implement new technology, or it may experience operational challenges when implementing new technology.

The financial services industry is undergoing rapid technological changes with frequent introductions of new technology-driven products and services. In addition to better serving customers, the effective use of technology increases efficiency and enables financial institutions to reduce costs. Spirit’s future success will depend, at least in part, upon its ability to respond to future technological changes and its ability to address the needs of its customers by using technology to provide products and services that will satisfy customer demands for convenience as well as to create additional efficiencies in Spirit’s operations as it continues to grow and expand its product and service offerings. Spirit may experience operational challenges as it implements these new technology enhancements or products, which could result in Spirit not fully realizing the anticipated benefits from such new technology or require it to incur significant costs to remedy any such challenges in a timely manner.

These changes may be more difficult or expensive than Spirit anticipates. Many of Spirit’s larger competitors have substantially greater resources to invest in technological improvements. As a result, they may be able to offer additional or superior products compared to those that Spirit will be able to provide, which would put Spirit at a competitive disadvantage. Accordingly, Spirit may lose customers seeking new technology-driven products and services to the extent it is unable to provide such products and services.

Spirit’s operations could be interrupted if its third-party service providers experience difficulty, terminate their services or fail to comply with banking regulations.

Spirit depends on a number of relationships with third-party service providers. Specifically, Spirit receives certain third-party services including, but not limited to, core systems processing, essential web hosting and other

 

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Internet systems, online banking services, deposit processing and other processing services. If these third-party service providers experience difficulties or terminate their services, and Spirit is unable to replace them with other service providers, particularly on a timely basis, Spirit’s operations could be interrupted. If an interruption were to continue for a significant period of time, Spirit’s business, financial condition and results of operations could be adversely affected, perhaps materially. Even if Spirit is able to replace third-party service providers, it may be at a higher cost to Spirit, which could adversely affect Spirit’s business, financial condition and results of operations.

Spirit is subject to environmental liability risk associated with lending activities.

A significant portion of Spirit’s loan portfolio is secured by real property. During the ordinary course of business, Spirit may foreclose on and take title to properties securing certain loans. In doing so, there is a risk that hazardous or toxic substances could be found on these properties. If hazardous or toxic substances are found, Spirit may be liable for remediation costs, as well as for personal injury and property damage. Environmental laws may require Spirit to incur substantial expenses and may materially reduce the affected property’s value or limit Spirit’s ability to use or sell the affected property. In addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws may increase Spirit’s exposure to environmental liability. The remediation costs and any other financial liabilities associated with an environmental hazard could adversely affect Spirit’s business, financial condition and results of operations.

Risks Related to Spirit’s Industry and Regulation

Spirit operates in a highly regulated environment and the laws and regulations that govern Spirit’s operations, corporate governance, executive compensation and accounting principles, or changes in them, or Spirit’s failure to comply with them, could adversely affect Spirit.

Spirit is subject to extensive regulation, supervision and legal requirements that govern almost all aspects of its operations. These laws and regulations are not intended to protect Spirit shareholders. Rather, these laws and regulations are intended to protect customers, depositors, the Deposit Insurance Fund and the overall financial stability of the banking system in the United States. These laws and regulations, among other matters, prescribe minimum capital requirements, impose limitations on the business activities in which Spirit can engage, limit the dividend or distributions that Spirit Bank can pay to Spirit, restrict the ability of institutions to guarantee any debt Spirit may issue and impose certain specific accounting requirements on Spirit that may be more restrictive and may result in greater or earlier charges to earnings or reductions in Spirit’s capital than generally accepted accounting principles would require. Compliance with laws and regulations can be difficult and costly, and changes to laws and regulations often impose additional compliance costs. Spirit’s failure to comply with these laws and regulations, even if the failure follows good faith effort or reflects a difference in interpretation, could subject Spirit to restrictions on its business activities, fines and other penalties, any of which could adversely affect Spirit’s results of operations, capital base and the price of its securities. Further, any new laws, rules and regulations could make compliance more difficult or expensive or otherwise adversely affect Spirit’s business, financial condition and results of operations. The banking industry remains heavily regulated. Compliance with such regulations may increase Spirit’s costs and limit its ability to pursue business opportunities.

The ongoing implementation of the Dodd-Frank Act could adversely affect Spirit’s business, financial condition, and results of operations.

On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, which we refer to as the Dodd-Frank Act, was signed into law, and the process of implementation is ongoing. The Dodd-Frank Act imposes significant regulatory and compliance changes on many industries, including Spirit’s. There remains significant uncertainty surrounding the manner in which several of the provisions of the Dodd-Frank Act will ultimately be implemented by the various regulatory agencies, and the full extent of the impact of the requirements on Spirit’s operations is unclear. However, the legal and regulatory changes that have resulted from

 

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the Dodd-Frank Act impacted the profitability of Spirit’s business activities, required changes to certain of its business practices, required the development of new compliance infrastructure, imposed upon Spirit more stringent capital, liquidity and leverage requirements and adversely affected Spirit’s business. These changes may also require Spirit to invest significant management attention and resources to evaluate and make any changes necessary to comply with new statutory and regulatory requirements. Failure to comply with the resulting new requirements or with any future changes in laws or regulations may negatively impact Spirit’s business, financial condition and results of operations.

As a result of the Dodd-Frank Act, Spirit is subject to more stringent capital requirements.

In July 2013, federal banking agencies approved the implementation of the Basel III regulatory capital reforms, which we refer to in Basel III, and issued rules effecting certain changes required by the Dodd-Frank Act. Basel III is applicable to all U.S. banks that are subject to minimum capital requirements as well as to bank and saving and loan holding companies, other than “small bank holding companies” (generally bank holding companies with consolidated assets of less than $1.0 billion). Basel III not only increased most of the required minimum regulatory capital ratios, it introduced new leverage requirements and the concept of a capital conversation buffer. The Basel III capital rules became effective as applied to Spirit and Spirit Bank on January 1, 2015 with a phase-in period that generally extends through January 1, 2019 for many of the changes

The failure to meet applicable regulatory capital requirements could result in one or more of Spirit’s banking regulators placing limitations or conditions on its activities, including its growth initiatives, or restricting the commencement of new activities, and could affect customer and investor confidence, its costs of funds and FDIC insurance costs, its ability to pay dividends on Spirit common stock and its ability to make acquisitions, and Spirit’s business, financial condition and results of operations could be adversely affected. However, the capital simplification provisions of S. 2155 (as described in “–Legislative and regulatory actions taken now or in the future may increase Spirit’s costs and impact its business, governance structure, financial condition and results of operations”) may limit the impact of the regulatory capital requirements on Spirit due to its size.

State and federal banking agencies periodically conduct examinations of Spirit’s business, including compliance with laws and regulations, and Spirit’s failure to comply with any supervisory actions to which it becomes subject as a result of such examinations could adversely affect it.

Texas and federal bank regulatory agencies, including the TDSML, the FDIC and the Federal Reserve, periodically conduct examinations of Spirit’s business, including compliance with laws and regulations. If, as a result of an examination, a Texas or federal bank regulatory agency were to determine that the financial condition, capital resources, asset quality, earnings prospects, management, liquidity or other aspects of any of Spirit’s operations had become unsatisfactory, or that Spirit, Spirit Bank or their respective management, were in violation of any law or regulation, it may take a number of different remedial actions as it deems appropriate. These actions include the power to enjoin “unsafe or unsound” practices, to require affirmative actions to correct any conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced, to direct an increase in Spirit’s capital levels, to restrict Spirit’s growth, to assess civil monetary penalties against Spirit, Spirit Bank or their respective officers or directors, to remove officers and directors and, if it is concluded that such conditions cannot be corrected or there is an imminent risk of loss to depositors, to terminate Spirit Bank’s deposit insurance, with the result that Spirit Bank would be closed. If Spirit becomes subject to such regulatory actions, Spirit’s business, financial condition, results of operations and reputation could be adversely affected.

Many of Spirit’s new activities and expansion plans require regulatory approvals, and failure to obtain them may restrict Spirit’s growth.

Spirit intends to complement and expand its business by pursuing strategic acquisitions of financial institutions and other complementary businesses. Generally, Spirit must receive state and federal regulatory

 

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approval before it can acquire an FDIC-insured depository institution or related business. In determining whether to approve a proposed acquisition, federal banking regulators will consider, among other factors, the effect of the acquisition on competition, Spirit’s financial condition, Spirit’s future prospects and the impact of the proposal on U.S. financial stability. The regulators also review current and projected capital ratios and levels, the competence, experience and integrity of management and its record of compliance with laws and regulations, the convenience and needs of the communities to be served (including Spirit’s record of compliance with the Community Reinvestment Act, which we refer to as the CRA) and Spirit’s effectiveness in combating money laundering activities. Such regulatory approvals may not be granted on terms that are acceptable to Spirit, or at all. Spirit may also be required to sell branches or other business lines as a condition to receiving regulatory approval, which condition may not be acceptable to Spirit or, if acceptable to Spirit, may reduce the benefit of any acquisition.

Financial institutions, such as Spirit Bank, face a risk of noncompliance with the Bank Secrecy Act and other anti-money laundering statutes and regulations, and associated enforcement actions.

The Bank Secrecy Act, the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, which refer to as the USA PATRIOT Act, and other laws and regulations require financial institutions, among other duties, to institute and maintain an effective anti-money laundering program and file suspicious activity and currency transaction reports as appropriate. The Financial Crimes Enforcement Network, established by the U.S. Department of the Treasury, which we refer to as the Treasury Department, to administer the Bank Secrecy Act, is authorized to impose significant civil money penalties for violations of those requirements, and has recently engaged in coordinated enforcement efforts with the individual federal banking regulators, as well as the U.S. Department of Justice, which we refer to as the Justice Department,, the Drug Enforcement Administration and the IRS. There is also increased scrutiny of compliance with the sanctions programs and rules administered and enforced by the Treasury Department’s Office of Foreign Assets Control.

In order to comply with regulations, guidelines and examination procedures in this area, the dedication of significant resources to an anti-money laundering program is required. Additionally, Spirit’s business relationships with foreign nationals may expose it to greater risk of noncompliance with the Bank Secrecy Act and other anti-money laundering statutes and regulations than other financial institutions who have less expansive business relationships with foreign nationals than Spirit. If Spirit’s policies, procedures and systems are deemed deficient, Spirit could be subject to liability, including fines and regulatory actions such as restrictions on its ability to pay dividends and on expansion opportunities, including acquisitions.

Spirit is subject to numerous lending laws designed to protect consumers, including the CRA and fair lending laws, and failure to comply with these laws could lead to material sanctions and penalties and restrictions on Spirit’s expansion opportunities.

The CRA, the Equal Credit Opportunity Act, the Fair Housing Act and other fair lending laws and regulations impose nondiscriminatory lending requirements on financial institutions. The Consumer Financial Protection Bureau, which we refer to as the CFPB, the FDIC, the Justice Department and other federal agencies are responsible for enforcing these laws and regulations. A successful challenge to an institution’s performance under the CRA or fair lending laws and regulations could result in a wide variety of sanctions, including the required payment of damages and civil money penalties, injunctive relief, imposition of restrictions on mergers and acquisitions activity, and restrictions on expansion activity. Private parties may also have the ability to challenge an institution’s performance under fair lending laws in private class action litigation.

The FDIC’s restoration plan and the related increased assessment rate could adversely affect Spirit’s earnings and results of operations.

As a result of economic conditions and the enactment of the Dodd-Frank Act, the FDIC has increased deposit insurance assessment rates, which in turn raised deposit premiums for many insured depository

 

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institutions. If these increases are insufficient for the Deposit Insurance Fund to meet its funding requirements, further special assessments or increases in deposit insurance premiums may be required. Spirit is generally unable to control the amount of premiums that it is required to pay for FDIC insurance. If there are additional financial institution failures that affect the Deposit Insurance Fund, Spirit may be required to pay FDIC premiums higher than current levels. Spirit’s FDIC insurance related costs were $764 thousand, $547 thousand and $431 thousand for the years ended December 31, 2017, 2016 and 2015, respectively. Any future additional assessments, increases or required prepayments in FDIC insurance premiums could adversely affect Spirit’s earnings and results of operations.

The Federal Reserve may require Spirit to commit capital resources to support Spirit Bank.

The Dodd-Frank Act and Federal Reserve require a bank holding company to act as a source of financial and managerial strength to its subsidiary banks and to commit resources to support its subsidiary banks. Under the “source of strength” doctrine, a bank holding company may be required to make capital injections into a troubled subsidiary bank at times when the bank holding company may not be inclined to do so and may charge the bank holding company with engaging in unsafe and unsound practices for failure to commit resources to such a subsidiary bank. Accordingly, Spirit could be required to provide financial assistance to Spirit Bank if it experiences financial distress.

Such a capital injection may be required at a time when Spirit’s resources are limited and Spirit may be required to raise capital or borrow the funds to make the required capital injection. In the event of a bank holding company’s bankruptcy, the bankruptcy trustee will assume any commitment by the holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank. Moreover, bankruptcy law provides that claims based on any such commitment will be entitled to a priority of payment over the claims of the holding company’s general unsecured creditors, including the holders of any note obligations. Thus, any borrowing that must be done by the holding company in order to make the required capital injection becomes more difficult and expensive and will adversely impact the holding company’s business, financial condition and results of operations.

Spirit could be adversely affected by the soundness of other financial institutions.

Financial services institutions are interrelated as a result of trading, clearing, counterparty or other relationships. Spirit has exposure to many different industries and counterparties, and routinely execute transactions with counterparties in the financial services industry, including commercial banks, brokers and dealers, investment banks and other institutional clients. Many of these transactions expose Spirit to credit risk in the event of a default by a counterparty or client. In addition, Spirit’s credit risk may be exacerbated when its collateral cannot be foreclosed upon or is liquidated at prices not sufficient to recover the full amount of the credit or derivative exposure due. Any such losses could adversely affect Spirit’s business, financial condition and results of operations.

Monetary policies and regulations of the Federal Reserve could adversely affect Spirit’s business, financial condition and results of operations.

In addition to being affected by general economic conditions, Spirit’s earnings and growth are affected by the policies of the Federal Reserve. An important function of the Federal Reserve is to regulate the U.S. money supply and credit conditions. Among the instruments used by the Federal Reserve to implement these objectives are open market operations in U.S. government securities, adjustments of both the discount rate and the federal funds rate and changes in reserve requirements against bank deposits. These instruments are used in varying combinations to influence overall economic growth and the distribution of credit, bank loans, investments and deposits. Their use also affects interest rates charged on loans or paid on deposits.

The monetary policies and regulations of the Federal Reserve have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future. Although Spirit

 

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cannot determine the effects of such policies on it at this time, such policies could adversely affect Spirit’s business, financial condition and results of operations.

Legislative and regulatory actions taken now or in the future may increase Spirit’s costs and impact its business, governance structure, financial condition and results of operations.

The Dodd-Frank Act, among other things, imposed new capital requirements on bank holding companies; changed the base for FDIC insurance assessments from a bank’s deposits to a bank’s average consolidated total assets minus average tangible equity; permanently raised the current standard deposit insurance limit to $250,000; and expanded the FDIC’s authority to raise insurance premiums. The Dodd-Frank Act established the CFPB, which has broad rulemaking, supervisory and enforcement authority over consumer financial products and services, including deposit products, residential mortgages, home-equity loans and credit cards and contains provisions on mortgage-related matters, such as steering incentives, determinations as to a borrower’s ability to repay and prepayment penalties. Compliance with the Dodd-Frank Act and its implementing regulations has and will continue to result in additional operating and compliance costs that could have a material adverse effect on Spirit’s business, financial condition, results of operation and future prospects. Moreover, although the applicability of certain elements of the Dodd-Frank Act is limited to institutions with more than $10.0 billion in assets, there can be no guarantee that such applicability will not be extended in the future or that regulatory agencies or other third parties will not seek to impose such requirements on institutions with less than $10.0 billion in assets, such as Spirit.

The Economic Growth, Regulatory Relief and Consumer Protection Act, which we refer to as S. 2155, was signed into law by President Donald J. Trump on May 24, 2018 and repealed or modified provisions of the Dodd-Frank Act and eased regulations on all but the largest banks.

S. 2155 includes provisions which are designed to improve consumer access to mortgage credit. In addition, S. 2155 includes regulatory relief for certain institutions, whereby, among other things, the law simplifies capital calculations of leverage ratios for community banks that have less than $10.0 billion in total assets, exempts community banks with less than $10.0 billion in total assets from the Volcker Rule, narrows and simplifies the definition of high volatility commercial real estate, and requires the federal banking regulators to raise the asset threshold under the Small Bank Holding Company Policy Statement from $1.0 billion to $3.0 billion. S. 2155 also adds certain protections for consumers, including veterans and active duty military personnel and student borrowers, expanded credit freezes and creation of an identity theft protection database.    S. 2155 requires the enactment of a number of implementing regulations, the details of which may have a material effect on the ultimate impact of the law.

In addition, other new proposals for legislation continue to be introduced in Congress that could further substantially increase regulation of the bank and non-bank financial services industries and impose restrictions on the operations and general ability of firms within the industry to conduct business consistent with historical practices. Federal and state regulatory agencies also frequently adopt changes to their regulations or change the manner in which existing regulations are applied. Certain aspects of current or proposed regulatory or legislative changes to laws applicable to the financial industry, if enacted or adopted, may impact the profitability of Spirit’s business activities, require more oversight or change certain of its business practices, including the ability to offer new products, obtain financing, attract deposits, make loans and achieve satisfactory interest spreads, and could expose it to additional costs, including increased compliance costs. These changes also may require Spirit to invest significant management attention and resources to make any necessary changes to operations to comply and could adversely affect Spirit’s business, financial condition and results of operations.

Risks Related to Spirit Common Stock

An active trading market for Spirit common stock may not develop.

Spirit completed the initial public offering of its common stock, which we refer to as the IPO, and Spirit common stock began trading on NASDAQ in May 2018. An active trading market for shares of Spirit common

 

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stock may not be sustained. If an active trading market is not sustained, you may have difficulty selling your shares of Spirit common stock at an attractive price, or at all. Consequently, you may not be able to sell your shares of Spirit common stock at or above an attractive price at the time that you would like to sell. An inactive market may also impair Spirit’s ability to raise capital by selling Spirit common stock and may impair Spirit’s ability to expand its business by using Spirit common stock as consideration in an acquisition.

The market price of Spirit common stock could be volatile and may fluctuate significantly, which could cause the value of an investment in Spirit common stock to decline.

The market price of Spirit common stock could fluctuate significantly due to a number of factors, many of which are beyond Spirit’s control, including, but not limited to:

 

   

Spirit’s quarterly or annual earnings, or those of other companies in its industry;

 

   

actual or anticipated fluctuations in Spirit’s operating results;

 

   

changes in accounting standards, policies, guidance, interpretations or principles;

 

   

the perception that investment in Texas is unattractive or less attractive during periods of low oil or gas prices;

 

   

the public reaction to Spirit’s press releases, its other public announcements or its filings with the SEC;

 

   

announcements by Spirit or its competitors of significant acquisitions, dispositions, innovations or new programs and services;

 

   

threatened or actual litigation;

 

   

any major change in Spirit’s board of directors or management;

 

   

changes in financial estimates and recommendations by securities analysts following Spirit common stock;

 

   

changes in earnings estimates by securities analysts or Spirit’s ability to meet those estimates;

 

   

the operating and stock price performance of other comparable companies;

 

   

general economic conditions and overall market fluctuations;

 

   

the trading volume of Spirit common stock;

 

   

changes in business, legal or regulatory conditions, or other developments affecting participants in Spirit’s industry, or publicity regarding Spirit’s business or any of its significant customers or competitors;

 

   

changes in governmental monetary policies, including the policies of the Federal Reserve;

 

   

future sales of Spirit common stock by Spirit or its directors, executive officers and significant shareholders; and

 

   

changes in economic conditions in and political conditions affecting Spirit’s target markets.

In particular, the realization of any of the risks described in this “Risk Factors” section could have a material adverse effect on the market price of Spirit common stock and cause the value of Spirit common stock to decline. In addition, the stock market in general, and the market for banks and financial services companies in particular, has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. Securities class action litigation has often been instituted against companies following periods of volatility in the overall market and in the market price of a company’s securities. This litigation, if instituted against Spirit, could result in substantial costs, divert its management’s attention and resources and harm Spirit’s business, operating results and financial condition.

 

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The obligations associated with being a public company require significant resources and management attention.

As a public company, Spirit faces increased legal, accounting, administrative and other costs and expenses that Spirit has not incurred as a private company, mainly after it is no longer an emerging growth company. Spirit expects to incur significant incremental costs related to operating as a public company, particularly when it no longer qualifies as an emerging growth company. Spirit is subject to the reporting requirements of the Exchange Act, which require that Spirit file annual, quarterly and current reports with respect to its business and financial condition and proxy and other information statements, and the rules and regulations implemented by the SEC, the Sarbanes-Oxley Act, the Dodd-Frank Act, the Public Company Accounting Oversight Board, which we refer to as the PCAOB, and NASDAQ, each of which imposes additional reporting and other obligations on public companies. As a public company, Spirit is required to:

 

   

prepare and distribute periodic reports, proxy statements and other shareholder communications in compliance with the federal securities laws and rules;

 

   

expand the roles and duties of Spirit’s board of directors and committees thereof;

 

   

maintain an internal audit function;

 

   

institute more comprehensive financial reporting and disclosure compliance procedures;

 

   

involve and retain to a greater degree outside counsel and accountants in the activities listed above;

 

   

enhance Spirit’s investor relations function;

 

   

establish new internal policies, including those relating to trading in Spirit’s securities and disclosure controls and procedures;

 

   

retain additional personnel;

 

   

comply with NASDAQ listing standards; and

 

   

comply with the Sarbanes-Oxley Act.

Spirit expects these rules and regulations and changes in laws, regulations and standards relating to corporate governance and public disclosure, which have created uncertainty for public companies, to increase legal and financial compliance costs and make some activities more time consuming and costly. These laws, regulations and standards are subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. Spirit’s investment in compliance with existing and evolving regulatory requirements will result in increased administrative expenses and a diversion of management’s time and attention from revenue-generating activities to compliance activities, which could have a material adverse effect on Spirit’s business, financial condition and results of operations. These increased costs could require Spirit to divert a significant amount of money that Spirit could otherwise use to expand its business and achieve its strategic objectives.

In connection with the audit of Spirit’s 2016 financial statements, a material weakness in Spirit’s internal control over financial reporting was identified.

In connection with the audit of Spirit’s 2016 financial statements, control deficiencies were identified in Spirit’s financial reporting process that constituted a material weakness for the years ended December 31, 2016 and 2015. The material weakness related to the lack of appropriate level of knowledge, experience and training in generally accepted accounting principles, which we refer to as GAAP, and SEC reporting requirements with respect to equity transactions and Spirit’s SBA servicing asset, resulting in several adjustments to Spirit’s financial statements and also a restatement of its previously issued financial statements as of and for the years ended December 31, 2016 and 2015.

 

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Spirit has since initiated certain measures to remediate this material weakness. For example, Spirit hired a new Chief Financial Officer, a new Chief Accounting Officer and a new Controller, each with what Spirit believes are the necessary skills and expertise to facilitate Spirit’s compliance with FDICIA, the requirements of GAAP, SEC reporting requirements, the Sarbanes-Oxley Act and other regulatory requirements for a publicly-traded financial institution. Spirit believes that it has fully remediated this material weakness and no additional material weaknesses have been identified. However, there can be no assurance that Spirit’s remedial actions will prevent this weakness from re-occurring in the future.

Further, there can be no assurance that Spirit will not suffer from other material weaknesses or significant deficiencies in the future. If Spirit fails to maintain effective internal controls over financial reporting in the future, such failure could result in a material misstatement of Spirit’s annual or quarterly financial statements that would not be prevented or detected on a timely basis and that could cause investors and other users of Spirit’s financial statements to lose confidence in its financial statements, limit its ability to raise capital or make acquisitions and have a negative effect on the trading price of Spirit common stock. Additionally, failure to maintain effective internal controls over financial reporting may also negatively impact Spirit’s operating results and financial condition, impair Spirit’s ability to timely file its periodic and other reports with the SEC, subject Spirit to additional litigation and regulatory actions and cause Spirit to incur substantial additional costs in future periods relating to the implementation of remedial measures.

If securities or industry analysts change their recommendations regarding Spirit common stock or if Spirit’s operating results do not meet their expectations, its stock price could decline.

The trading market for Spirit common stock could be influenced by the research and reports that industry or securities analysts may publish about Spirit or its business. Spirit cannot predict whether any research analysts will cover Spirit and Spirit common stock nor does Spirit have any control over these analysts. If one or more of these analysts cease coverage of Spirit or fail to publish reports on Spirit regularly, Spirit could lose visibility in the financial markets, which in turn could cause its stock price or trading volume to decline and Spirit common stock to be less liquid. Moreover, if one or more of the analysts who cover Spirit downgrade its stock or if Spirit’s operating results do not meet their expectations, either absolutely or relative to Spirit’s competitors, the price of Spirit common stock could decline significantly.

Future sales or the possibility of future sales of a substantial amount of Spirit common stock may depress the price of shares of Spirit common stock.

Spirit may seek to raise additional funds, finance acquisitions or develop strategic relationships by issuing additional shares of Spirit common stock. Future sales or the availability for sale of substantial amounts of Spirit common stock in the public market could adversely affect the prevailing market price of Spirit common stock and could impair its ability to raise capital through future sales of equity securities.

Spirit may issue shares of Spirit common stock or other securities from time to time as consideration for future acquisitions and investments and pursuant to compensation and incentive plans. If any such acquisition or investment is significant, the number of shares of Spirit common stock, or the number or aggregate principal amount, as the case may be, of other securities that Spirit may issue may in turn be substantial. Spirit may also grant registration rights covering those shares of Spirit common stock or other securities in connection with any such acquisitions and investments.

Spirit cannot predict the size of future issuances of Spirit common stock or the effect, if any, that future issuances and sales of Spirit common stock will have on the market price of Spirit common stock. Sales of substantial amounts of Spirit common stock (including shares of Spirit common stock issued in connection with an acquisition or under a compensation or incentive plan), or the perception that such sales could occur, may adversely affect prevailing market prices for Spirit common stock and could impair Spirit’s ability to raise capital through future sales of its securities.

 

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Spirit may issue shares of preferred stock in the future, which could make it difficult for another company to acquire Spirit or could otherwise materially adversely affect Spirit shareholders, which could depress the price of Spirit common stock.

Spirit’s certificate of formation authorizes Spirit to issue up to 5,000,000 shares of one or more series of preferred stock. The Spirit board of directors has the authority to determine the preferences, limitations and relative rights of shares of preferred stock and to fix the number of shares constituting any series and the designation of such series, without any further vote or action by Spirit shareholders. Spirit preferred stock could be issued with voting, liquidation, dividend and other rights superior to the rights of Spirit common stock. The potential issuance of preferred stock may delay or prevent a change in control of Spirit, discourage bids for Spirit common stock at a premium over the market price and materially adversely affect the market price and the voting and other rights of Spirit shareholders.

Spirit currently has no plans to pay dividends on Spirit common stock, so you may not receive funds without selling your shares of Spirit common stock.

Spirit does not anticipate paying any dividends on Spirit common stock in the foreseeable future. Spirit’s ability to pay dividends on Spirit common stock is dependent on Spirit Bank’s ability to pay dividends to Spirit, which is limited by applicable laws and banking regulations, and may in the future be restricted by the terms of any debt or preferred securities Spirit may incur or issue. Payments of future dividends, if any, will be at the discretion of the Spirit board of directors after taking into account various factors, including Spirit’s business, operating results and financial condition, current and anticipated cash needs, plans for expansion and any legal or contractual limitations on its ability to pay dividends. In addition, Spirit’s current line of credit restricts its ability to pay dividends and in the future Spirit may enter into other borrowing or other contractual arrangements that restrict its ability to pay dividends. Accordingly, shares of Spirit common stock should not be purchased by persons who need or desire dividend income from their investment.

Spirit is dependent upon Spirit Bank for cash flow, and Spirit Bank’s ability to make cash distributions is restricted, which could impact Spirit’s ability to satisfy its obligations.

Spirit’s primary asset is Spirit Bank. As such, Spirit depends upon Spirit Bank for cash distributions through dividends on Spirit Bank’s stock to pay Spirit’s operating expenses and satisfy its obligations, including debt obligations. There are numerous laws and banking regulations that limit Spirit Bank’s ability to pay dividends to Spirit. If Spirit Bank is unable to pay dividends to Spirit, Spirit will not be able to satisfy its obligations. Federal and state statutes and regulations restrict Spirit Bank’s ability to make cash distributions to Spirit. These statutes and regulations require, among other things, that Spirit Bank maintain certain levels of capital in order to pay a dividend. Further, federal and state banking authorities have the ability to restrict Spirit Bank’s payment of dividends through supervisory action.

Spirit is an “emerging growth company,” and Spirit cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make Spirit common stock less attractive to investors.

Spirit is an “emerging growth company,” as defined in the JOBS Act, and Spirit has taken advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies. These exemptions allow Spirit, among other things, to present only two years of audited financial statements and discuss Spirit’s results of operations for only two years in related Management’s Discussions and Analyses; not to provide an auditor attestation of Spirit’s internal control over financial reporting; to choose not to comply with any new requirements adopted by the PCAOB requiring mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and Spirit’s audited financial statements; to provide reduced disclosure regarding Spirit’s executive compensation arrangements pursuant to the rules applicable to smaller reporting companies, which means Spirit does not have to include a compensation discussion and analysis and certain other disclosure regarding its executive

 

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compensation; and not to seek a non-binding advisory vote on executive compensation or golden parachute arrangements. In addition, even if Spirit decides to comply with the greater disclosure obligations of public companies that are not emerging growth companies, Spirit may avail itself of these reduced requirements applicable to emerging growth companies from time to time in the future, so long as it is an emerging growth company. Spirit will remain an emerging growth company for up to five years, though Spirit may cease to be an emerging growth company earlier under certain circumstances, including if, before the end of such five years, it is deemed to be a large accelerated filer under the rules of the SEC (which depends on, among other things, having a market value of common stock held by non-affiliates in excess of $700.0 million). Investors and securities analysts may find it more difficult to evaluate Spirit common stock because Spirit may rely on one or more of these exemptions, and, as a result, investor confidence and the market price of Spirit common stock may be materially and adversely affected.

Spirit shareholders may be deemed to be acting in concert or otherwise in control of Spirit, which could impose notice, approval and ongoing regulatory requirements and result in adverse regulatory consequences for such holders.

Spirit is subject to the Bank Holding Company Act of 1956, as amended, which we refer to as the BHC Act, and federal and state banking regulation, that will impact the rights and obligations of owners of Spirit common stock, including, for example, Spirit’s ability to declare and pay dividends on Spirit common stock. Shares of Spirit common stock are voting securities for purposes of the BHC Act and any bank holding company or foreign bank that is subject to the BHC Act may need approval to acquire or retain 5.0% or more of the then outstanding shares of Spirit common stock, and any holder (or group of holders deemed to be acting in concert) may need regulatory approval to acquire or retain 10.0% or more of the shares of Spirit common stock. A holder or group of holders may also be deemed to control Spirit if they own 25.0% or more of its total equity. Under certain limited circumstances, a holder or group of holders acting in concert may exceed the 25.0% threshold and not be deemed to control Spirit until they own 33.3% or more of its total equity. The amount of total equity owned by a holder or group of holders acting in concert is calculated by aggregating all shares held by the holder or group, whether as a combination of voting or non-voting shares or through other positions treated as equity for regulatory or accounting purposes and meeting certain other conditions. Spirit shareholders should consult their own counsel with regard to regulatory implications.

Spirit’s directors and executive officers could have the ability to influence shareholder actions in a manner that may be adverse to your personal investment objectives.

Due to the significant ownership interests of Spirit’s directors and executive officers, its directors and executive officers are able to exercise significant influence over its management and affairs. For example, Spirit’s directors and executive officers may be able to influence the outcome of director elections or block significant transactions, such as a merger or acquisition, or any other matter that might otherwise be approved by the shareholders.

An investment in Spirit common stock is not an insured deposit and is not guaranteed by the FDIC, so you could lose some or all of your investment.

An investment in Spirit common stock is not a bank deposit and, therefore, is not insured against loss or guaranteed by the FDIC, any other deposit insurance fund or by any other public or private entity. An investment in Spirit common stock is inherently risky for the reasons described herein. As a result, if you acquire Spirit common stock, you could lose some or all of your investment.

 

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Spirit’s corporate organizational documents and certain corporate and banking provisions of Texas law to which it is subject contain certain provisions that could have an anti-takeover effect and may delay, make more difficult or prevent an attempted acquisition of Spirit that you may favor.

Spirit’s certificate of formation and bylaws contain certain provisions that may have an anti-takeover effect and may delay, discourage or prevent an attempted acquisition or change of control of Spirit. These provisions include:

 

   

staggered terms for directors, who may only be removed for cause;

 

   

authorization for the Spirit board of directors to issue shares of one or more series of preferred stock without shareholder approval and upon such terms as the Spirit board of directors may determine;

 

   

a prohibition of shareholder action by less than unanimous written consent;

 

   

a prohibition of cumulative voting in the election of directors;

 

   

a provision establishing certain advance notice procedures for nomination of candidates for election of directors and for shareholder proposals; and

 

   

a limitation on the ability of shareholders to call special meetings to those shareholders or groups of shareholders owning at least 50.0% of the shares of Spirit common stock that are issued, outstanding and entitled to vote.

These provisions could discourage potential acquisition proposals and could delay or prevent a change in control of Spirit, even in the case where Spirit shareholders may consider such proposals, if effective, desirable.

Spirit’s certificate of formation does not provide for cumulative voting for directors and authorizes the Spirit board of directors to issue shares of preferred stock without shareholder approval and upon such terms as the Spirit board of directors may determine. The issuance of Spirit preferred stock, while providing desirable flexibility in connection with possible acquisitions, financings and other corporate purposes, could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from acquiring, a controlling interest in Spirit. In addition, certain provisions of Texas law, including a provision which restricts certain business combinations between a Texas corporation and certain affiliated shareholders, may delay, discourage or prevent an attempted acquisition or change in control.

In addition, banking laws impose notice, approval, and ongoing regulatory requirements on any shareholder or other party that seeks to acquire direct or indirect “control” of an FDIC-insured depository institution. These laws include the BHC Act and the Change in Bank Control Act. These laws could delay or prevent an acquisition.

Spirit’s certificate of formation contains an exclusive forum provision that limits the judicial forums where Spirit shareholders may initiate derivative actions and certain other legal proceedings against Spirit and its directors and officers.

Spirit’s certificate of formation provides that the state and federal courts located in Montgomery County, Texas will, to the fullest extent permitted by law, be the sole and exclusive forum for (i) any actual or purported derivative action or proceeding brought on Spirit’s behalf, (ii) any action asserting a claim of breach of a fiduciary duty, (iii) any action asserting a claim against Spirit or any of its directors or officers arising pursuant to the TBOC, Spirit’s certificate of formation or bylaws, (iv) any action to interpret, apply, enforce or determine the validity of Spirit’s certificate of formation or bylaws, or (v) any action asserting a claim against Spirit or any of its directors or officers that is governed by the internal affairs doctrine. The choice of forum provision in Spirit’s certificate of formation may limit Spirit shareholders’ ability to obtain a favorable judicial forum for disputes with Spirit. Alternatively, if a court were to find the choice of forum provision contained in Spirit’s certificate of formation to be inapplicable or unenforceable in an action, Spirit may incur additional costs associated with resolving such action in other jurisdictions, which could harm Spirit’s business, operating results and financial condition.

 

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CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS

This document and any other written or oral statements made by Spirit and Comanche from time to time may contain “forward-looking statements” within the meaning of Section 27A of the Securities Act, and Section 21E of the Exchange Act. All statements, other than statements of historical fact, included in this document, regarding strategy, future operations, financial position, estimated revenues and income or losses, projected costs and capital expenditures, prospects, plans and objectives of management are forward-looking statements. When used in this document and the documents incorporated or deemed incorporated into this document by reference, the words “plan,” “endeavor,” “will”, “would,” “could,” “believe,” “anticipate,” “intend,” “estimate,” “expect,” “project,” “forecast” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words. These forward-looking statements are (or were when made) based on current expectations and assumptions about future events and are (or were when made) based on currently available information as to the outcome and timing of future events. When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements described in the “Risk Factors” section of this document.

There are or will be important factors that could cause Spirit’s or Comanche’s actual results to differ materially from those expressed in the forward-looking statements, including, but not limited to, the following:

 

   

risks related to the merger, including the failure of Comanche’s shareholders to approve the Comanche merger proposal or the failure of Spirit’s shareholders to approve either the Spirit merger proposal or the Spirit stock issuance proposal;

 

   

the ability of Spirit and Comanche to obtain the required regulatory approvals of the merger, the second merger and the bank merger on the proposed terms and schedule;

 

   

the ability of Spirit to successfully combine and integrate the businesses of Spirit and Comanche;

 

   

risks related to the concentration of Spirit’s business in Texas, and in the Houston, Bryan/College Station and Dallas/Fort Worth metropolitan areas in particular, including risks associated with any downturn in the real estate sector and risks associated with a decline in the values of single family homes in its Texas markets;

 

   

general market conditions and economic trends nationally, regionally and particularly in Spirit’s Texas markets, including a decrease in or the volatility of oil and gas prices;

 

   

risks related to Spirit’s concentration in Spirit’s primary markets, which are susceptible to severe weather events that could negatively impact the economies of its markets, its operations or its customers, any of which could have a material adverse effect on Spirit’s business, financial condition and results of operations;

 

   

Spirit’s ability to implement its growth strategy, including identifying and consummating suitable acquisitions;

 

   

risks related to the integration of any acquired businesses, including exposure to potential asset quality and credit quality risks and unknown or contingent liabilities, the time and costs associated with integrating systems, technology platforms, procedures and personnel, the need for additional capital to finance such transactions and possible failures in realizing the anticipated benefits from acquisitions;

 

   

changes in Small Business Administration, which we refer to as SBA, loan products, including specifically the Section 7(a) program and Section 504 loans, or changes in SBA standard operating procedures;

 

   

risks associated with Spirit’s loans to and deposit accounts from foreign nationals;

 

   

Spirit’s ability to develop, recruit and retain successful bankers that meet its expectations in terms of customer relationships and profitability;

 

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Spirit’s dependence on its management team, including its ability to retain executive officers and key employees and their customer and community relationships;

 

   

risks associated with the relatively unseasoned nature of a significant portion of Spirit’s loan portfolio;

 

   

risks related to Spirit’s strategic focus on lending to small to medium-sized businesses;

 

   

the accuracy and sufficiency of the assumptions and estimates Spirit makes in establishing reserves for potential loan losses and other estimates;

 

   

the risk of deteriorating asset quality and higher loan charge-offs;

 

   

the time and effort necessary to resolve nonperforming assets;

 

   

risks associated with Spirit’s commercial loan portfolio, including the risk for deterioration in value of the general business assets that generally secure such loans;

 

   

risks associated with Spirit’s nonfarm, nonresidential and construction loan portfolios, including the risks inherent in the valuation of the collateral securing such loans;

 

   

potential changes in the prices, values and sales volumes of commercial and residential real estate securing Spirit’s real estate loans;

 

   

risks related to the significant amount of credit that Spirit has extended to a limited number of borrowers and in a limited geographic area;

 

   

Spirit’s ability to maintain adequate liquidity and to raise necessary capital to fund its acquisition strategy and operations or to meet increased minimum regulatory capital levels;

 

   

material decreases in the amount of deposits Spirit holds, or a failure to grow Spirit’s deposit base as necessary to help fund its growth and operations;

 

   

changes in market interest rates that affect the pricing of Spirit’s loans and deposits and its net interest income;

 

   

potential fluctuations in the market value and liquidity of Spirit’s investment securities;

 

   

the effects of competition from a wide variety of local, regional, national and other providers of financial, investment and insurance services;

 

   

Spirit’s ability to maintain an effective system of disclosure controls and procedures and internal controls over financial reporting;

 

   

risks associated with fraudulent, negligent, or other acts by Spirit’s customers, employees or vendors;

 

   

Spirit’s ability to keep pace with technological change or difficulties when implementing new technologies;

 

   

risks associated with system failures or failures to protect against cybersecurity threats, such as breaches of Spirit’s network security;

 

   

risks associated with data processing system failures and errors;

 

   

potential impairment on the goodwill Spirit has recorded or may record in connection with business acquisitions;

 

   

the initiation and outcome of litigation and other legal proceedings against Spirit or to which Spirit becomes subject;

 

   

Spirit’s ability to comply with various governmental and regulatory requirements applicable to financial institutions, including regulatory requirements to maintain minimum capital levels;

 

   

the impact of recent and future legislative and regulatory changes, including changes in banking, securities and tax laws and regulations and their application by Spirit’s regulators, such as further implementation of the Dodd-Frank Act;

 

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governmental monetary and fiscal policies, including the policies of the Federal Reserve as well as legislative and regulatory changes, including as a result of initiatives of the administration of President Donald J. Trump;

 

   

Spirit’s ability to comply with supervisory actions by federal and state banking agencies;

 

   

changes in the scope and cost of FDIC insurance and other coverage; and

 

   

systemic risks associated with the soundness of other financial institutions.

Other factors not identified above, including those described under the headings “Risk Factors” in this document, may also cause actual results to differ materially from those described in any forward-looking statements. Most of these factors are difficult to anticipate, are generally beyond the control of Spirit and Comanche and may prove to be inaccurate. You should consider these factors in connection with considering any forward-looking statements.

All forward-looking statements, expressed or implied, included in this document are expressly qualified in their entirety by these cautionary statements. These cautionary statements should also be considered in connection with any subsequent written or oral forward-looking statements that we or persons acting on our behalf may issue.

Forward-looking statements speak only as of the date they were made. Except as otherwise required by applicable law, Spirit and Comanche disclaim any duty to update any forward-looking statements, all of which are expressly qualified by the statements in this section, to reflect new information obtained or events or circumstances that occur after the date any such forward-looking statement is made.

 

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THE SPIRIT SPECIAL MEETING

This section contains information for Spirit shareholders about the Spirit special meeting that Spirit has called to allow its shareholders to consider and vote on the Spirit merger proposal and the Spirit stock issuance proposal. Spirit is mailing this document to you, as a Spirit shareholder, on or about                , 2018. This document is accompanied by a notice of the Spirit special meeting and a form of proxy card that the Spirit board of directors is soliciting for use at the Spirit special meeting and at any adjournments or postponements of the Spirit special meeting.

Date, Time and Place

The Spirit special meeting will be held on                , 2018 at                , located at                , at                 local time. On or about                , 2018, Spirit commenced mailing this document and the form of Spirit proxy card to its shareholders entitled to vote at the Spirit special meeting.

Matters to Be Considered

At the Spirit special meeting, you, as a Spirit shareholder, will be asked to consider and vote upon the following matters:

 

   

the Spirit merger proposal;

 

   

the Spirit stock issuance proposal; and

 

   

the Spirit adjournment proposal.

Completion of the merger is conditioned on, among other things, Spirit shareholder approval of the Spirit merger proposal and the Spirit stock issuance proposal. No other business may be conducted at the Spirit special meeting.

Recommendation of the Spirit Board of Directors

On July 19, 2018, the Spirit board of directors unanimously approved the reorganization agreement and the transactions contemplated thereby. Based on Spirit’s reasons for the merger described in the section of this document entitled “The Merger—Spirit’s Reasons for the Merger; Recommendation of the Spirit Board of Directors,” beginning on page 78, the Spirit board of directors believes that the merger is in the best interests of Spirit shareholders.

Accordingly, the Spirit board of directors recommends that Spirit shareholders vote “FOR” the Spirit merger proposal, “FOR” the Spirit stock issuance proposal and “FOR” the Spirit adjournment proposal.

The Spirit Record Date and Quorum

The Spirit board of directors has fixed the close of business on                , 2018 for determining the holders of Spirit common stock entitled to receive notice of and to vote at the Spirit special meeting.

As of the Spirit record date, there were                shares of Spirit common stock outstanding and entitled to notice of, and to vote at, the Spirit special meeting or any adjournment or postponement thereof, and such outstanding shares of Spirit common stock were held by approximately                holders of record. Each share of Spirit common stock entitles the holder to one vote at the Spirit special meeting on each proposal to be considered at the Spirit special meeting.

No business may be transacted at the Spirit special meeting unless a quorum is present. The presence (in person or by proxy) of holders of at least a majority of the voting power represented by all issued and outstanding

 

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shares of Spirit common stock entitled to be voted at the Spirit special meeting constitutes a quorum for transacting business at the Spirit special meeting. All shares of Spirit common stock present in person or represented by proxy, including abstentions and broker non-vote (as defined below), if any, will be treated as present for purposes of determining the presence or absence of a quorum for all matters voted on at the Spirit special meeting.

Required Vote; Treatment of Abstentions; Broker Non-Votes and Failure to Vote

Spirit merger proposal: Approval of the Spirit merger proposal requires the affirmative vote of a majority of the outstanding shares of Spirit common stock entitled to vote on the Spirit merger proposal. If you mark “ABSTAIN” on your proxy card, fail to submit a proxy card or vote in person at the Spirit special meeting or fail to instruct your bank or broker how to vote with respect to the Spirit merger proposal, it will have the effect of a vote AGAINST the proposal.

Spirit stock issuance proposal: Approval of the Spirit stock issuance proposal requires the affirmative vote of a majority of the votes cast at the Spirit special meeting, in person or by proxy. If you mark “ABSTAIN” on your proxy card, fail to submit a proxy card or vote in person at the Spirit special meeting or fail to instruct your bank, broker or nominee how to vote with respect to the Spirit stock issuance proposal, it will have no effect on the proposal.

Spirit adjournment proposal: Approval of the Spirit adjournment proposal requires the affirmative vote of a majority of the votes cast at the Spirit special meeting, in person or by proxy, is required to approve the Spirit adjournment proposal. If you mark “ABSTAIN” on your proxy card, fail to submit a proxy card or vote in person at the Spirit special meeting or fail to instruct your bank, broker or nominee how to vote with respect to the Spirit adjournment proposal, it will have no effect on the proposal.

Shares Held by Spirit Directors and Executive Officers

As of the Spirit record date, the directors and executive officers of Spirit and their affiliates beneficially owned and were entitled to vote, in the aggregate,                shares of Spirit common stock, representing approximately         % of the shares of Spirit common stock outstanding on that date. Spirit currently expects that each of its directors and executive officers will vote their shares of Spirit common stock in favor of the Spirit merger proposal, the Spirit stock issuance proposal and the Spirit adjournment proposal, although none of them has entered into any agreement obligating him or her to do so. As of the Spirit record date, Comanche beneficially owned no shares of Spirit common stock, and the directors and executive officers of Comanche and their affiliates beneficially owned, in the aggregate,                shares of Spirit common stock or         % of the outstanding Spirit common stock.

Voting by Proxy or in Person; Incomplete Revocation of Proxies

Each copy of this document mailed to Spirit shareholders is accompanied by a form of proxy card with instructions for voting. If you hold shares of Spirit common stock in your name as a Spirit shareholder of record as of the Spirit record date, you should follow the instructions on the proxy card to vote your shares (i) via the Internet at            , (ii) by telephone by calling            , (iii) by completing and returning the enclosed proxy card, or (iv) by voting in person at the Spirit special meeting.

If you hold your shares of Spirit common stock in “street name” through a bank, broker or other nominee, you must direct your bank, broker or nominee how to vote in accordance with the instructions you have received from your bank, broker or nominee.

All shares of Spirit common stock represented by valid proxies that Spirit receives through this solicitation, and that are not revoked, will be voted in accordance with your instructions on the proxy card. If you make no

 

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specification on your proxy card as to how you want your shares of Spirit common stock voted before signing and returning it, your proxy will be voted as recommended by the Spirit board of directors. No matters other than the matters described in this document are anticipated to be presented for action at the Spirit special meeting or at any adjournment or postponement thereof.

Shares Held in “Street Name”

Under stock exchange rules, banks, brokers and other nominees who hold shares of Spirit common stock in “street name” for a beneficial owner of those shares typically have the authority to vote in their discretion on “routine” proposals when they have not received instructions from beneficial owners. However, banks, brokers and other nominees are not allowed to exercise their voting discretion with respect to the approval of matters determined to be “non-routine,” without specific instructions from the beneficial owner. Broker non-votes are shares held by a broker, bank or other nominee that are represented at the Spirit special meeting, but with respect to which the broker or nominee is not instructed by the beneficial owner of such shares to vote on the particular proposal and the broker does not have discretionary voting power on such proposal. The Spirit merger proposal, the Spirit stock issuance proposal and the Spirit adjournment proposal are all non-routine matters. If your bank, broker or other nominee holds your shares of Spirit common stock in “street name,” your broker, bank or nominee will vote your shares of Spirit common stock only if you provide instructions on how to vote by filling out the voter instruction form sent to you by your broker, bank or nominee with this document.

Revocability of Proxies and Changes to a Spirit Shareholder’s Vote

If you hold stock in your name as a Spirit shareholder of record as of the Spirit record date, you may change your vote or revoke any proxy at any time before the Spirit special meeting is called to order by (i) delivering a written notice of revocation to Spirit’s Corporate Secretary, (ii) completing, signing and returning a new proxy card with a later date than your original proxy card prior to such time that the proxy card for any such Spirit shareholder must be received, and any earlier proxy will be revoked automatically, (iii) logging onto the Internet website specified on your proxy card in the same manner you would to submit your proxy electronically and following the instructions indicated on the proxy card or (iv) attending the Spirit special meeting in person, notifying the Corporate Secretary that you are revoking your proxy and voting by ballot at the Spirit special meeting.

Any Spirit shareholder entitled to vote in person at the Spirit special meeting may vote in person regardless of whether a proxy has been previously given, but your attendance by itself at the Spirit special meeting will not automatically revoke your proxy unless you give written notice of revocation to the Corporate Secretary of Spirit before the Spirit special meeting is called to order.

All written notices of revocation and other communications about revoking your proxy should be addressed to Spirit of Texas Bancshares, Inc., 1836 Spirit of Texas Way, Conroe, Texas 77301, Attention: Corporate Secretary.

If you hold your shares of Spirit common stock in “street name” through a bank, broker or other nominee, you should contact your bank, broker or nominee to change your vote or revoke your proxy.

Solicitation of Proxies

Spirit is soliciting your proxy in conjunction with the Spirit merger proposal and the Spirit stock issuance proposal. Spirit will bear the entire cost of soliciting proxies from you. In addition to solicitation of proxies by mail, Spirit will request that banks, brokers and other nominees send proxies and proxy material to the beneficial owners of Spirit common stock and secure their voting instructions. Spirit will reimburse the nominees for their reasonable expenses in taking those actions. If necessary, Spirit may use its directors and several of its regular employees, who will not be specially compensated, to solicit proxies from the Spirit shareholders, either personally or by telephone, facsimile, letter or electronic means.

 

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Attending the Spirit Special Meeting

All Spirit shareholders, including shareholders of record and shareholders who hold their shares through banks, brokers or other nominees as of the Spirit record date, are invited to attend the Spirit special meeting. Spirit shareholders of record as of the Spirit record date can vote in person at the Spirit special meeting. If you are not a Spirit shareholder of record as of the Spirit record date, you must obtain a proxy executed in your favor from the record holder of your shares of Spirit common stock, such as a broker, bank or other nominee, to be able to vote in person at the Spirit special meeting. If you plan to attend the Spirit special meeting, you must hold your shares of Spirit common stock in your own name or have a letter from the record holder of your shares confirming your ownership. In addition, you must bring a form of personal photo identification with you in order to be admitted. Spirit reserves the right to refuse admittance to anyone without proper proof of share ownership and without proper photo identification. The use of cameras, sound recording equipment, communications devices or any similar equipment during the Spirit special meeting is prohibited without Spirit’s express written consent.

Assistance

If you have any questions concerning the merger, the Spirit stock issuance proposal or this document, would like additional copies of this document or need help voting your shares of Spirit common stock, please contact Jerry D. Golemon at (281) 516-4904 or jgolemon@sotb.com or Shareholder Services at Computershare at (800) 962-4284.

SPIRIT PROPOSALS

Spirit Merger Proposal

Spirit is asking its shareholders to approve the reorganization agreement and the transactions contemplated thereby. Spirit shareholders should read this document carefully and in its entirety, including the annexes, for more detailed information concerning the reorganization agreement and the merger. A copy of the reorganization agreement is included with this document as Annex A.

After careful consideration, the Spirit board of directors unanimously approved the reorganization agreement and determined the reorganization agreement and the transactions contemplated thereby, including the merger, to be advisable and in the best interests of Spirit and its shareholders. See “The Merger—Spirit’s Reasons for the Merger; Recommendation of the Spirit Board of Directors,” beginning on page 78, for a more detailed discussion of the Spirit board of directors’ recommendation.

The Spirit board of directors recommends that Spirit shareholders vote “FOR” the Spirit merger proposal.

Spirit Stock Issuance Proposal

Under the NASDAQ Listing Rules, a company listed on NASDAQ is required to obtain shareholder approval prior to the issuance of common stock in connection with the acquisition of the stock of another company if the common stock will have upon issuance voting power equal to or in excess of 20.0% of the voting power outstanding before the issuance of stock, or the number of shares of common stock to be issued is or will be equal to or in excess of 20.0% of the number of shares of common stock outstanding before the issuance of the stock. If Spirit and Comanche complete the merger, the number of shares of Spirit common stock issued in the merger will exceed 20.0% of the shares of Spirit common stock outstanding before such issuance. Accordingly, Spirit must obtain the approval of Spirit shareholders for the issuance of Spirit common stock in connection with the merger.

 

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Spirit is asking its shareholders to approve the issuance of Spirit common stock in accordance with the terms and conditions of the reorganization agreement. Spirit shareholders should read this document carefully and in its entirety, including the annexes, for more detailed information concerning the reorganization agreement, the merger and the Spirit stock issuance proposal. A copy of the reorganization agreement is included with this document as Annex A.

After careful consideration, the Spirit board of directors unanimously approved the reorganization agreement and determined the reorganization agreement and the transactions contemplated thereby, including the issuance of Spirit common stock in connection with the merger, to be advisable and in the best interests of Spirit and its shareholders. See the section of this document entitled “The Merger—Spirit’s Reasons for the Merger; Recommendation of the Spirit Board of Directors,” beginning on page 78 for a more detailed discussion of the Spirit board of directors’ recommendation.

The Spirit board of directors recommends that Spirit shareholders vote “FOR” the Spirit stock issuance proposal.

Spirit Adjournment Proposal

The Spirit special meeting may be adjourned to another time or place, if necessary or appropriate, to permit, among other things, further solicitation of proxies if necessary to obtain additional votes in favor of the Spirit merger proposal or the Spirit stock issuance proposal.

If, at the Spirit special meeting, the number of shares of Spirit common stock present or represented and voting in favor of the Spirit merger proposal or the Spirit stock issuance proposal is insufficient to approve either proposal, Spirit intends to move to adjourn the Spirit special meeting in order to solicit additional proxies for the approval of such proposal. In that event, Spirit will ask its shareholders to vote upon the Spirit adjournment proposal, but not the Spirit merger proposal or the Spirit stock issuance proposal. In accordance with Spirit’s bylaws, in the absence of a quorum, a vote to approve the proposal to adjourn the Spirit special meeting may be taken.

In this proposal, Spirit is asking its shareholders to authorize the holder of any proxy solicited by the Spirit board of directors on a discretionary basis to vote in favor of adjourning the Spirit special meeting to another time and place for the purpose of soliciting additional proxies, including the solicitation of proxies from Spirit shareholders who have previously voted.

The Spirit board of directors recommends that Spirit shareholders vote “FOR” the Spirit adjournment proposal.

Other Matters to Come Before the Spirit Special Meeting

No other matters are intended to be brought before the Spirit special meeting by Spirit, and Spirit does not know of any matters to be brought before the Spirit special meeting by others. If, however, any other matters properly come before the Spirit special meeting, the persons named in the proxy will vote the shares of Spirit common stock represented thereby in accordance with their best judgment on any such matter.

THE COMANCHE SPECIAL MEETING

This section contains information for Comanche shareholders about the Comanche special meeting that Comanche has called to allow its shareholders to consider and vote on the Comanche merger proposal. Comanche is mailing this document to you, as a Comanche shareholder, on or about                , 2018. This document is accompanied by a notice of the Comanche special meeting and a form of proxy card that the Comanche board of directors is soliciting for use at the Comanche special meeting and at any adjournments or postponements of the Comanche special meeting.

 

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Date, Time and Place

The Comanche special meeting will be held on                , 2018 at                , located at                , at                 local time. On or about                , 2018, Comanche commenced mailing this document and the form of Comanche proxy card to its shareholders entitled to vote at the Comanche special meeting.

Matters to Be Considered

At the Comanche special meeting, you, as a Comanche shareholder, will be asked to consider and vote upon the following matters:

 

   

the Comanche merger proposal; and

 

   

the Comanche adjournment proposal.

Completion of the merger is conditioned on, among other things, Comanche shareholder approval of the Comanche merger proposal. No other business may be conducted at the Comanche special meeting.

Recommendation of the Comanche Board of Directors

On July 18, 2018, the Comanche board of directors unanimously approved the reorganization agreement and the transactions contemplated thereby. Based on Comanche’s reasons for the merger described in the section of this document entitled “The Merger—Comanche’s Reasons for the Merger; Recommendation of the Comanche Board of Directors,” beginning on page 85, the Comanche board of directors believes that the merger is in the best interests of Comanche shareholders.

Accordingly, the Comanche board of directors recommends that Comanche shareholders vote “FOR” the Comanche merger proposal and “FOR” the Comanche adjournment proposal.

Comanche Record Date and Quorum

The Comanche board of directors has fixed the close of business on                , 2018 for determining the holders of Comanche common stock entitled to receive notice of and to vote at the Comanche special meeting.

As of the Comanche record date, there were                 shares of Comanche common stock outstanding and entitled to notice of, and to vote at, the Comanche special meeting or any adjournment or postponement thereof, and such outstanding shares of Comanche common stock were held by approximately                 holders of record. Each share of Comanche common stock entitles the holder to one vote at the Comanche special meeting on each proposal to be considered at the Comanche special meeting.

No business may be transacted at the Comanche special meeting unless a quorum is present. The presence (in person or by proxy) of holders of at least a majority of the voting power represented by all issued and outstanding shares of Comanche common stock entitled to be voted at the Comanche special meeting constitutes a quorum for transacting business at the Comanche special meeting. All shares of Comanche common stock present in person or represented by proxy, including abstentions and broker non-votes, if any, will be treated as present for purposes of determining the presence or absence of a quorum for all matters voted on at the Comanche special meeting.

Required Vote; Treatment of Abstentions; Broker Non-Votes and Failure to Vote

Comanche merger proposal: Approval of the Comanche merger proposal requires the affirmative vote of at least two-thirds of the outstanding shares of Comanche common stock entitled to vote on the Comanche merger proposal. If you mark “ABSTAIN” on your proxy card, fail to submit a proxy card or vote in person at the Spirit special meeting or fail to instruct your bank or broker how to vote with respect to the Comanche merger proposal, it will have the effect of a vote AGAINST the proposal.

 

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Comanche adjournment proposal: Approval of the Comanche adjournment proposal requires the affirmative vote of a majority of the votes cast at the Comanche special meeting, in person or by proxy, is required to approve the Comanche adjournment proposal. If you mark “ABSTAIN” on your proxy card, fail to submit a proxy card or vote in person at the Comanche special meeting or fail to instruct your bank, broker or nominee how to vote with respect to the Comanche adjournment proposal, it will have no effect on the proposal.

Shares Held by Directors and Executive Officers

As of the Comanche record date, the directors and executive officers of Comanche and their affiliates beneficially owned and were entitled to vote, in the aggregate,                shares of Comanche common stock, representing approximately         % of the shares of Spirit common stock outstanding on that date. Certain directors and certain executive officers of Comanche have entered into a voting agreement with Spirit, solely in their capacity as Comanche shareholders, pursuant to which they have agreed to vote in favor of the reorganization agreement and the transactions contemplated thereby. The Comanche shareholders who are party to the voting agreement beneficially own and are entitled to vote in the aggregate approximately 60.67% of the outstanding shares of Comanche common stock as of the Comanche record date. As of the Comanche record date, Spirit beneficially owned no shares of Comanche common stock, and the directors and executive officers of Spirit and their affiliates beneficially owned, in the aggregate,                shares of Comanche common stock or         % of the outstanding Comanche common stock.

Voting by Proxy or in Person; Incomplete Revocation of Proxies

Each copy of this document mailed to Comanche shareholders is accompanied by a form of proxy card with instructions for voting. If you hold shares of Comanche common stock in your name as a Comanche shareholder of record as of the Comanche record date, you should complete and return the proxy card accompanying this document, regardless of whether you plan to attend the Comanche special meeting.

If you hold your shares of Comanche common stock in “street name” through a bank, broker or other nominee, you must direct your bank, broker or nominee how to vote in accordance with the instructions you have received from your bank, broker or nominee.

All shares of Comanche common stock represented by valid proxies that Comanche receives through this solicitation, and that are not revoked, will be voted in accordance with your instructions on the proxy card. If you make no specification on your proxy card as to how you want your shares of Comanche common stock voted before signing and returning it, your proxy will be voted as recommended by the Comanche board of directors. No matters other than the matters described in this document are anticipated to be presented for action at the Comanche special meeting or at any adjournment or postponement thereof.

Shares Held in “Street Name”

Under stock exchange rules, banks, brokers and other nominees who hold shares of Comanche common stock in “street name” for a beneficial owner of those shares typically have the authority to vote in their discretion on “routine” proposals when they have not received instructions from beneficial owners. However, banks, brokers and other nominees are not allowed to exercise their voting discretion with respect to the approval of matters determined to be “non-routine,” without specific instructions from the beneficial owner. Broker non-votes are shares held by a bank, broker or other nominee that are represented at the Comanche special meeting, but with respect to which the bank, broker or nominee is not instructed by the beneficial owner of such shares to vote on the particular proposal and the broker does not have discretionary voting power on such proposal. The Comanche merger proposal and the Comanche adjournment proposal are non-routine matters. If your bank, broker or other nominee holds your shares of Comanche common stock in “street name,” your broker, bank or nominee will vote your shares of Comanche common stock only if you provide instructions on how to vote by filling out the voter instruction form sent to you by your broker, bank or nominee with this document.

 

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Revocability of Proxies and Changes to a Comanche Shareholder’s Vote

If you hold shares of Comanche common stock in your name as a shareholder of record as of the Comanche record date, you may change your vote or revoke any proxy at any time before the Comanche special meeting is called to order by (i) attending and voting in person at the Comanche special meeting; (ii) giving notice of revocation of the proxy at the Comanche special meeting; or (iii) delivering to the Secretary of Comanche (A) a written notice of revocation or (B) a duly executed proxy card relating to the same shares, bearing a date later than the proxy card previously executed.

Any Comanche shareholder entitled to vote in person at the Comanche special meeting may vote in person regardless of whether a proxy has been previously given, but your attendance by itself at the Comanche special meeting will not automatically revoke your proxy unless you give written notice of revocation to the Secretary of Comanche before the Comanche special meeting is called to order.

All written notices of revocation and other communications about revoking your proxy should be addressed to Comanche National Corporation, 100 East Central Street, Comanche, Texas 76442, Attention: Secretary.

If you hold your shares of Comanche common stock in “street name” through a bank, broker or other nominee, you should contact your bank, broker or nominee to change your vote or revoke your proxy.

Solicitation of Proxies

In addition to solicitation by mail, Comanche’s directors, officers, and employees may solicit proxies by personal interview, telephone or electronic mail. Comanche will reimburse brokerage houses, custodians, nominees, and fiduciaries for their expenses in forwarding proxies and proxy material to their principals. Comanche will bear the entire cost of soliciting proxies from you.

Attending the Comanche Special Meeting

All Comanche shareholders, including holders of record as of the Comanche record date and shareholders who hold their shares through banks, brokers, nominees or other record holders, are invited to attend the Comanche special meeting. Comanche shareholders of record as of the Comanche record date can vote in person at the Comanche special meeting. If you are not a Comanche shareholder of record as of the Comanche record date, you must obtain a proxy executed in your favor from the record holder of your shares of Comanche common stock, such as a broker, bank or other nominee, to be able to vote in person at the Comanche special meeting. If you plan to attend the Comanche special meeting, you must hold your shares of Comanche common stock in your own name or have a letter from the record holder of your shares confirming your ownership. In addition, you must bring a form of personal photo identification with you in order to be admitted. Comanche reserves the right to refuse admittance to anyone without proper proof of share ownership and without proper photo identification. The use of cameras, sound recording equipment, communications devices or any similar equipment during the Comanche special meeting is prohibited without Comanche’s express written consent.

Assistance

If you have any questions concerning the merger or this document, would like additional copies of this document or need help voting your shares of Comanche common stock, please contact Jeff D. Stewart at (325) 356–2577 or jstewart@comanchenational.com.

COMANCHE PROPOSALS

Comanche Merger Proposal

Comanche is asking its shareholders to approve the reorganization agreement and the transactions contemplated thereby. Comanche shareholders should read this document carefully and in its entirety, including

 

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the annexes, for more detailed information concerning the reorganization agreement and the merger. A copy of the reorganization agreement is included with this document as Annex A.

After careful consideration, the Comanche board of directors unanimously approved the reorganization agreement and determined the reorganization agreement and the transactions contemplated thereby, including the merger, to be advisable and in the best interests of Comanche and its shareholders. See the section of this document entitled “The Merger—Comanche’s Reasons for the Merger; Recommendation of the Comanche Board of Directors,” beginning on page 85, for a more detailed discussion of the recommendation of the Comanche board of directors.

The Comanche board of directors recommends that Comanche shareholders vote “FOR” the Comanche merger proposal.

Comanche Adjournment Proposal

The Comanche special meeting may be adjourned to another time or place, if necessary or appropriate, to permit, among other things, further solicitation of proxies if necessary to obtain additional votes in favor of the Comanche merger proposal.

If, at the Comanche special meeting, the number of shares of Comanche common stock present or represented and voting in favor of the Comanche merger proposal is insufficient to approve the proposal, Comanche intends to move to adjourn the Comanche special meeting in order to solicit additional proxies for the approval of such proposal. In that event, Comanche will ask its shareholders to vote upon the Comanche adjournment proposal, but not the Comanche merger proposal. In accordance with Comanche’s bylaws, in the absence of a quorum, a vote to approve the proposal to adjourn the Comanche special meeting may be taken.

In this proposal, Comanche is asking its shareholders to authorize the holder of any proxy solicited by the Comanche board of directors on a discretionary basis to vote in favor of adjourning the Comanche special meeting to another time and place for the purpose of soliciting additional proxies, including the solicitation of proxies from Comanche shareholders who have previously voted.

The Comanche board of directors recommends that Comanche shareholders vote “FOR” the Comanche adjournment proposal.

Other Matters to Come Before the Comanche Special Meeting

No other matters are intended to be brought before the Comanche special meeting by Comanche, and Comanche does not know of any matters to be brought before the Comanche special meeting by others. If, however, any other matters properly come before the Comanche special meeting, the persons named in the proxy will vote the shares of Comanche common stock represented thereby in accordance with their best judgment on any such matter.

THE MERGER

The following discussion contains certain information about the merger. The discussion is subject, and qualified in its entirety by reference, to the reorganization agreement, a copy of which is included with this document as Annex A to this document and incorporated herein by reference. Spirit and Comanche urge you to read this document carefully and in its entirety, including the reorganization agreement, a copy of which is included with this document as Annex A, for a more complete understanding of the merger.

 

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Terms of the Merger

In the merger, all of the outstanding shares of Comanche common stock (other than shares of Comanche common stock held by Comanche and dissenting shares), will be converted into the right to receive, in the aggregate, (i) 2,142,857 shares of Spirit common stock and (ii) $15,000,000.00 in cash minus the amount of Comanche’s transaction costs (but the cash consideration will not be reduced by more than $2,755,000.00).

The table below sets forth the implied value of the per share merger consideration based on the closing price of Spirit common stock on NASDAQ on the specified dates:

 

Date   Closing
Price

of Spirit
Common
Stock
    Aggregate
Stock
Consideration(1)
    Per Share
Stock
Consideration(2)
    Implied Value
of Per
Share Stock
Consideration(1)
    Aggregate
Cash
Consideration(1)(3)
    Per Share
Cash
Consideration(2)
    Implied Value
of Per
Share Merger
Consideration(1)
 

July 18, 2018(4)

  $ 20.36       2,142,857 shares       5.37 shares     $ 109.33     $ 12,245,000     $ 30.67     $ 140.00  

            , 2018(5)

             

 

(1)

Assumes there is no adjustment to the merger consideration other than the reduction of the cash consideration by $2,755,000. For a discussion of the possible adjustments to the merger consideration, see the section of this document entitled “The Reorganization Agreement—Structure of the Merger—Adjustments to Merger Consideration,” beginning on page 102.

(2)

Calculated based on 399,261 shares of Comanche common stock issued and outstanding as of August 31, 2018. Also assumes there are no dissenting shares.

(3)

Assumes that the cash consideration is reduced by $2,755,000. For a discussion of the possible adjustments to the merger consideration, see the section of this document entitled “The Reorganization Agreement—Structure of the Merger—Adjustments to Merger Consideration,” beginning on page 102.

(4)

The last trading day before public announcement of the reorganization agreement.

(5)

The latest practicable trading day before the date of this document.

The cash consideration will be reduced by the amount of costs and expenses, up to $2,755,000.00, incurred by Comanche or Comanche Bank in connection with the merger and other transactions contemplated by the reorganization agreement.

In addition, if the average closing price of Spirit common stock is less than $16.80 per share and Spirit common stock underperforms the selected index by more than 20.0%, Comanche has the right to terminate the reorganization agreement. Upon receipt of notice of such termination, Spirit has the right, but not the obligation, to increase the merger consideration to prevent termination of the reorganization agreement by Comanche. Spirit may increase the merger consideration in its discretion by increasing the cash consideration and/or by increasing the number of shares of Spirit common stock in the stock consideration such that the sum of any additional cash consideration and the value of the stock consideration is equal to at least $36,000,000.00 (valuing the stock consideration based on the average closing price of Spirit common stock in accordance with the reorganization agreement). As a result, the number of shares of Spirit common stock that Comanche shareholders will receive in the merger may fluctuate with the market price of Spirit common stock and will not be known at the time that you vote at your company’s special meeting.

Spirit will not issue any fractional shares of Spirit common stock in connection with the merger but will instead pay cash for any fractional share interests. Comanche shareholders who would otherwise be entitled to receive a fractional share of Spirit common stock in the merger will instead receive an amount of cash determined by multiplying the fractional share by $21.00.

Background of the Merger

From time to time, the Comanche board of directors has reviewed and discussed Comanche’s long term strategies and objectives, considering various alternatives to enhance Comanche’s shareholder value, performance and prospects in light of competitive factors, geography, risk appetite and other relevant factors.

 

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The strategic alternatives considered by Comanche include continued organic growth, de novo expansion into surrounding communities, acquiring nearby banks, or merging with another financial institution.

In 2015, Comanche engaged a financial advisor and elected to explore a strategic combination, by merger or otherwise, with another financial institution. That engagement was terminated by Comanche in early 2016 due to the significant economic impact to Texas banks resulting from the oil price downturn that began early in 2015. Following the rebound in commodity prices in late 2016 and early 2017, Comanche again considered approaching the market and exploring a partnership with a larger or like-sized financial institution that would leverage Comanche’s strong deposit franchise, dominant market share in the communities it served and strong financial and management performance.

In late 2017, Comanche approached Piper and asked Piper to provide financial and market advice and make introductions to parties selected and agreed upon by both Comanche and Piper. Piper then facilitated a series of meetings between senior management of Comanche and senior management of other financial institutions who exhibited strong growth potential and an interest in the core markets and customers that Comanche serves, including one publicly-traded company, two private companies and Spirit. Comanche engaged Piper as its financial advisor on December 8, 2017.

On December 26, 2017, Spirit and Comanche entered into a mutual non-disclosure agreement to ensure the confidentiality of their discussions. After exchanging basic information on their companies, the parties met in person on February 23, 2018 in Fort Worth, Texas. At that meeting, the Comanche and Spirit teams were introduced and the parties agreed there was a mutual interest in a strategic combination. A follow-up meeting was held between the two teams at Spirit’s headquarters in Conroe, Texas on March 7, 2018. During these meetings, the Spirit team advised that they needed to delay further discussions regarding a strategic combination with Comanche until Spirit completed its IPO.

Following the completion of the Spirit’s IPO on May 8, 2018, the financial advisors to both companies resumed discussions about the viability of a strategic combination. This resulted in Spirit submitting a non-binding Letter of Intent, which we refer to as the LOI, to Comanche on May 11, 2018. The LOI provided that Spirit would acquire Comanche for $60.0 million, with such amount consisting of 60.0% in shares of Spirit common stock and 40.0% in cash. Under the terms of the LOI, the price would be reduced by certain of Comanche’s transaction costs, and the exchange ratio on the stock portion of the merger consideration would be calculated based upon the volume weighted average price of Spirit common stock for the 15 days preceding the completion of the merger. The LOI also included a 60-day exclusivity period in which Spirit and Comanche could conduct due diligence on each other, and other customary provisions.

In the two weeks that followed, the parties both conferred with their financial advisors and exchanged further information related to Comanche’s historical and projected financial performance, Comanche’s estimated transaction costs and other limited due diligence matters. Following these additional discussions and the exchange of information, Comanche returned a revised draft of the LOI to Spirit on May 22, 2018, which we refer to as the revised LOI. The revised LOI preserved the initial purchase price of $60.0 million, but adjusted the consideration mix to consist of 75.0% in shares of Spirit common stock and 25.0% in cash. In addition, the revised LOI provided that the exchange ratio on the stock portion of the merger consideration would be calculated based upon the volume weighted average price of Spirit common stock for the 15 days preceding the signing of the reorganization agreement (instead of the completion of the merger) and clarified that the transaction costs would be tax effected. The revised LOI also stipulated that the reorganization agreement would have a “fiduciary out” provision permitting Comanche to evaluate a superior proposal, should one arise, following the signing of the reorganization agreement and prior to the completion of the merger. Finally, the revised LOI reduced the exclusivity period from 60 days to 45 days. The parties signed the revised LOI on May 23, 2018.

Spirit and Comanche then commenced extensive due diligence on each other, which included, among other things, an evaluation of the other party’s operations, material contracts and loan portfolio, and each party held

 

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discussions with selected members of the senior management of the other party. Spirit provided an initial draft of the reorganization agreement to Comanche on June 20, 2018. Over the next few weeks, Spirit and Comanche, together with their legal and financial advisors, discussed and negotiated the various legal and business terms of the reorganization agreement, its ancillary agreements (including a voting agreement) and the contemplated transaction. The negotiations of the reorganization agreement primarily concentrated on the mechanics for calculating the stock portion of the merger consideration, how to deal with and manage the unrealized losses in Comanche’s securities portfolio, the scope and amount of transaction expenses (including unrealized losses in the securities portfolio) that may be used to reduce the purchase price, the representations, warranties, covenants of the parties and the closing conditions.

On July 18, 2018, the Comanche board of directors met in Stephenville, Texas to review and consider the merger. At that meeting, a representative of Fenimore Kay explained the terms of the reorganization agreement and related transaction documents. Also at the meeting, a representative of Piper explained the financial aspects of the merger and summarized the strategic and financial rationale in favor of the transaction for both parties and responded to questions by the Comanche board of directors. At the request of the Comanche board of directors, Piper then delivered its oral opinion, which was confirmed in writing and dated July 19, 2018, to the effect that, as of such date and subject to the procedures followed, assumptions made, matters considered and qualifications and limitations on the review undertaken by Piper as set forth in its opinion, the aggregate merger consideration was fair, from a financial point of view, to the Comanche shareholders. After further discussion among the directors and Comanche’s advisors, the Comanche board of directors determined that the merger and the reorganization agreement were advisable, fair to and in the best interests of, Comanche and its shareholders, and unanimously approved the reorganization agreement and related transactions and recommended the adoption and approval of the reorganization agreement and the merger to the Comanche shareholders.

On July 19, 2018, the Spirit board of directors held a meeting at which senior management, Stephens and Hunton were present. At this meeting, Spirit management reviewed with the Spirit board of directors the final terms of the transaction. Hunton also reviewed the final terms of the proposed reorganization agreement. At the request of the Spirit board of directors, Stephens reviewed with the Spirit board of directors its financial analysis of the merger consideration and rendered to the Spirit board of directors an oral opinion, confirmed by delivery of a written opinion dated July 19, 2018, to the effect that, as of such date and based upon and subject to factors and assumptions set forth therein, the merger consideration to be paid by Spirit in the merger was fair, from a financial point of view, to Spirit. After further discussion and taking into account, among other things, the factors described in the section of this document entitled “—Spirit’s Reasons for the Merger; Recommendation of the Spirit Board of Directors,” beginning on page 78, the Spirit board of directors unanimously authorized and approved the reorganization agreement.

After this meeting, the parties continued work to finalize the reorganization agreement and entered into the reorganization agreement and announced the contemplated transaction in a joint press release following the close of trading on July 19, 2018.

Spirit’s Reasons for the Merger; Recommendation of the Spirit Board of Directors

After careful consideration, the Spirit board of directors unanimously approved the reorganization agreement and the transactions contemplated thereby at a meeting held on July 19, 2018. Accordingly, the Spirit board of directors unanimously recommends that Spirit shareholders vote “FOR” the Spirit merger proposal and “FOR” the Spirit stock issuance proposal.

In reaching its decision to approve the reorganization agreement, the merger and the other transactions contemplated by the reorganization agreement, and to recommend that Spirit shareholders approve the Spirit merger proposal and Spirit stock issuance proposal, the Spirit board of directors evaluated the reorganization agreement and the merger in consultation with members of Spirit’s management, as well as Spirit’s legal counsel

 

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and financial advisors, and considered a number of factors in favor of the merger, including the following material factors, which are not presented in order of priority:

 

   

the fact that the merger is consistent with Spirit’s long-term strategic goal of creating shareholder value by being and remaining a preeminent community bank in the Houston, Dallas/Fort Worth and Bryan/College Station metropolitan areas, including through growth by acquisitions;

 

   

the fact that Comanche’s branch footprint complements Spirit’s Tarrant County operations and will create future opportunities to expand Spirit’s overall footprint in the Dallas/Fort Worth metropolitan area;

 

   

the fact that the merger would respond immediately to Spirit’s need for more scale in the attractive Dallas/Fort Worth market;

 

   

the complementary cultures of Spirit and Comanche and prospects for a smooth integration of key personnel and systems;

 

   

the employment agreements entered into with certain of Comanche’s employees to help maintain continuity of Comanche’s key personnel, customers and loan and deposit portfolios;

 

   

each of Spirit’s and Comanche’s businesses, operations, financial condition, earnings and prospects, including the view of the Spirit board of directors that Comanche’s business and operations complement Spirit’s existing operations and lines of business;

 

   

the nature and quality of Comanche’s deposit base and loan portfolio;

 

   

the fact that the merger will enhance Spirit’s operating scale at reasonable pricing;

 

   

the current and prospective environment in which Spirit and Comanche operate, including national, regional and local economic conditions, the competitive environment for financial institutions generally and the likely effect of these factors on Spirit both with and without the merger;

 

   

its review and discussions with Spirit’s management and its legal counsel and financial advisors concerning the due diligence investigation of Comanche and the potential financial impact of the merger on the combined company;

 

   

the expectation of Spirit’s management that Spirit will retain its strong capital position upon completion of the merger;

 

   

the financial presentation, dated July 19, 2018, of Stephens to the Spirit board of directors and the opinion, dated July 19, 2018, of Stephens to the Spirit board of directors as to the fairness, from a financial point of view and as of the date of the opinion, to Spirit of the merger consideration, as described in more detail under the section of this document entitled “—Opinion of Spirit’s Financial Advisor,” beginning on page 80;

 

   

the terms of the reorganization agreement, including the expected tax treatment and deal protection and termination fee provisions, which it reviewed with Spirit’s legal and financial advisors; and

 

   

the expectation that the regulatory and other approvals required in connection with the merger will be received in a timely manner and without the imposition of unacceptable conditions.

The Spirit board of directors also considered potential risks associated with the merger in connection with its deliberations of the merger, including (i) the potential risk of diverting management attention and resources from the operation of Spirit’s business and towards the completion of the merger; (ii) the potential risks associated with achieving anticipated cost synergies and savings and successfully integrating Comanche’s business, operations and workforce with those of Spirit; and (iii) the other risks identified in the sections of this document entitled “Risk Factors” and “Cautionary Statements Regarding Forward-Looking Statements,” beginning on pages 35 and 64, respectively.

 

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The foregoing discussion of the factors considered by the Spirit board of directors is not intended to be exhaustive, but, rather, includes the material factors considered by the Spirit board of directors in reaching its decision to approve the reorganization agreement, the merger and the other transactions contemplated by the reorganization agreement. The Spirit board of directors did not quantify or assign any relative weights to the factors considered, and individual directors may have given different weights to different factors. The Spirit board of directors considered all these factors as a whole and overall considered the factors to be favorable to, and to support, its determination. It should be noted that this explanation of the Spirit board of directors’ reasoning and all other information presented in this section is forward-looking in nature and, therefore, should be read in light of the factors discussed in the section of this document entitled “Cautionary Statements Regarding Forward-Looking Statements,” beginning on page 64.

For the reasons set forth above, the Spirit board of directors approved the reorganization agreement and the transactions contemplated thereby. The Spirit board of directors unanimously recommends that the Spirit shareholders vote “FOR” the Spirit merger proposal, “FOR” the Spirit stock issuance proposal and “FOR” the Spirit adjournment proposal.

Opinion of Spirit’s Financial Advisor

Spirit engaged Stephens to serve as financial advisor to Spirit and to render a fairness opinion to Spirit in connection with the proposed acquisition of Comanche. As part of the engagement, Stephens was asked to assess the fairness to Spirit, from a financial point of view, of the merger consideration to be paid by Spirit in the acquisition. Spirit engaged Stephens because it is a nationally recognized investment banking firm with offices throughout the United States and has substantial experience in transactions similar to the merger. As part of its investment banking business, Stephens is continually engaged in providing M&A advisory services and in the valuation of banking businesses and their securities in connection with mergers and acquisitions, negotiated underwritings, competitive biddings, secondary distributions of listed and unlisted securities, private placements and valuations for corporate and other purposes. As specialists in the securities of banking companies, Stephens has experience in, and knowledge of, the valuation of banking enterprises.

As part of its engagement, at the request of Spirit, representatives of Stephens attended a meeting of the Spirit board of directors on July 19, 2018 at which the Spirit board of directors evaluated the proposed merger. At that meeting, the Spirit board of directors requested and received reports, discussion and commentary from its advisors, management and members regarding the proposed merger. As one of Spirit’s advisors at that meeting, Stephens reviewed the financial aspects of the proposed transaction and rendered its opinion that, as of such date and based upon and subject to the factors and assumptions referenced in its opinion letter, the consideration to be paid in the merger was fair, from a financial point of view, to Spirit. The Spirit board of directors, after considering advice, reports, discussion and commentary from its advisors, management and members, approved the reorganization agreement and the transactions contemplated thereby, including the merger and the issuance of Spirit common stock in connection with the merger, at that meeting.

The full text of Stephens’ written opinion, dated July 19, 2018, is included with this document as Annex C and incorporated into this document by reference. Spirit shareholders are urged to read the opinion in its entirety for a description of the procedures followed, assumptions made, matters considered and qualifications and limitations on the review undertaken by Stephens. The description of the opinion in this document is qualified in its entirety by reference to the full text of such opinion.

Stephens’s opinion speaks only as of its date, and Stephens has undertaken no obligation to update or revise its opinion. The opinion was for the use and benefit of the Spirit board of directors and addresses only the fairness, from a financial point of view, of the consideration to be paid in the merger by Spirit. It does not address the underlying business decision to proceed with the merger. The opinion does not constitute a recommendation to any Spirit shareholder as to how the shareholder should vote or act with respect to the merger or any related matter. Spirit and Comanche determined the merger consideration through the negotiation process.

 

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In rendering its opinion, Stephens, among other things:

 

   

analyzed certain publicly available financial statements and reports regarding Spirit and Comanche;

 

   

analyzed certain audited financial statements regarding Spirit and Comanche;

 

   

analyzed certain internal financial statements and other financial and operating data concerning Spirit and Comanche prepared by management of Spirit and Comanche, respectively;

 

   

analyzed, on a pro forma basis, in reliance upon consensus research estimates and upon financial projections and other information and assumptions concerning Spirit provided by the management team of Spirit, the effect of the merger on the balance sheet, capitalization ratios, earnings and book value both in the aggregate and, where applicable, on a per share basis of Spirit;

 

   

reviewed the reported prices and trading activity for the common stock of Spirit;

 

   

compared the financial performance of Spirit and Comanche with that of certain other publicly-traded companies and their securities that Stephens deemed relevant to its analysis of the merger;

 

   

reviewed the financial terms, to the extent publicly available, of certain merger or acquisition transactions that Stephens deemed relevant to its analysis of the merger;

 

   

reviewed the most recent draft of the reorganization agreement and related documents provided to Stephens by Spirit;

 

   

discussed with management of Spirit the operations of and future business prospects for Spirit and Comanche and the anticipated financial consequences of the merger to Spirit;

 

   

assisted in Spirit’s deliberations regarding the material terms of the merger and Spirit’s negotiations with Comanche; and

 

   

performed such other analyses and provided such other services as Spirit deemed appropriate.

Stephens’ opinion was necessarily based upon conditions as they existed and could be evaluated on the date of the opinion and the information made available to Stephens through the date of the opinion. In conducting its review and arriving at its opinion, Stephens relied upon the accuracy and completeness of all of the financial and other information provided to it or otherwise publicly available. Stephens did not independently verify the accuracy or completeness of any such information or assume any responsibility for such verification or accuracy. Stephens relied upon Spirit’s management as to the reasonableness and achievability of any financial and operating forecasts and projections (and the assumptions and basis therefore) provided to Stephens, including forecasts of potential cost savings and of potential synergies. Stephens assumed that such forecasts and projections reflected the best currently available estimates and judgments of such management and that such forecasts and projections will be realized in the amounts and in the time periods currently estimated by such management. Stephens is not an expert in the independent verification of the adequacy of allowances for loan and lease losses and has assumed, with Spirit’s consent, that the aggregate allowance for loan and lease losses for Spirit and Comanche was adequate to cover such losses. Stephens did not make or obtain any evaluation or appraisal of the assets or liabilities of Spirit, Comanche or their respective affiliates, nor did it examine any individual credit files. Stephens was not asked to and did not undertake any independent verification of any such information, and Stephens did not assume any responsibility or liability for the accuracy and completeness thereof.

For purposes of rendering its opinion, Stephens assumed that, in all respects material to its analyses:

 

   

the merger will be completed substantially in accordance with the terms set forth in the reorganization agreement, without material waiver or modification;

 

   

the representations and warranties of each party in the reorganization agreement and in all related documents and instruments referred to in the reorganization agreement are true and correct; and

 

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in the course of obtaining the necessary regulatory, lending or other consents or approvals (contractual or otherwise) for the merger, no restrictions, including any divestiture requirements or amendments or modifications, will be imposed that would have a material adverse effect on the contemplated benefits of the merger to Spirit.

Stephens’ opinion is limited to whether the consideration to be paid in the merger by Spirit is fair from a financial point of view to Spirit. Stephens was not asked to, and it did not, offer any opinion as to the terms of the reorganization agreement or the form of the merger or any aspect of the merger, other than the fairness, from a financial point of view, of the consideration to be paid by Spirit in the merger. The opinion did not address, and Stephens expressed no view or opinion with respect to, the relative merits or effect of the merger as compared to any other strategic alternatives or business strategies or combinations that may be or may have been available to or contemplated by Spirit or the Spirit board of directors. Moreover, Stephens did not express an opinion as to the fairness of the amount or nature of any compensation payable to or to be received by any officers, directors or employees of any of the parties to the merger relative to the merger consideration. Additionally, the opinion was not an expression of an opinion as to the price at which shares of Spirit common stock would trade at the time of issuance to Comanche shareholders under the reorganization agreement or the prices at which Spirit common stock or Comanche common stock may trade at any time.

In performing its analyses, Stephens made numerous assumptions with respect to general business, economic, market, industry and financial conditions and other matters, which were beyond the control of Stephens, Spirit and Comanche. Any estimates contained in the analyses performed by Stephens were not necessarily indicative of actual values or future results, which may be significantly more or less favorable than suggested by these analyses. Additionally, estimates of the value of businesses or securities did not purport to be appraisals or to reflect the prices at which such businesses or securities might actually be sold.

Accordingly, these analyses and estimates are inherently subject to substantial uncertainty. In addition, the Stephens opinion was one factor among many factors taken into consideration by the Spirit board of directors in making its determination to approve the reorganization agreement and the transactions contemplated thereby, include the merger and the issuance of Spirit common stock in connection with the merger. Consequently, the analyses described below should not be viewed as determinative of the decision of the Spirit board of directors with respect to the fairness of the merger consideration.

The following is a summary of the material analyses performed by Stephens and presented by it to the Spirit board of directors on July 19, 2018, in connection with its fairness opinion. The summary is not a complete description of the analyses underlying the Stephens opinion or the presentation made by Stephens to the Spirit board of directors, but summarizes the material analyses performed and presented in connection with such opinion. The preparation of a fairness opinion is a complex analytic process involving various determinations as to the appropriate and relevant methods of financial analysis and the application of those methods to the particular circumstances. Therefore, a fairness opinion is not readily susceptible to partial analysis or summary description. In arriving at its opinion, Stephens did not attribute any particular weight to any analysis or factor that it considered, but rather made qualitative judgments as to the significance and relevance of the analyses and factors considered. The financial analyses summarized below include information presented in tabular format. The tables alone do not constitute a complete description of the financial analyses. Accordingly, Stephens’ analyses and the summary of its analyses must be considered as a whole, and selecting portions of its analyses and factors or focusing on the information presented below in tabular format, without considering all analyses and factors or the full narrative description of the financial analyses, including the methodologies and assumptions underlying the analyses, could create a misleading or incomplete view of the process underlying its analyses and opinion.

Summary of Proposal. Under the terms of the reorganization agreement, Spirit will pay consideration in the form of 2,142,857 shares of Spirit common stock and $15,000,000 in cash, minus the amount of final transaction costs incurred by Comanche up to $2,755,000.

 

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Selected Public Companies Analysis. Using publicly available information, Stephens compared certain performance metrics of Comanche to selected groups of financial institutions deemed relevant by Stephens. Transaction multiples for the merger were derived from an aggregate estimated transaction value of $55.9 million based on the closing price of Spirit common stock on July 18, 2018, the day before the execution of the reorganization agreement.

Stephens selected a peer group for Comanche consisting of the following nationwide publicly traded banks and thrifts with assets between $100.0 and $750.0 million, and a last-twelve-months core return on average assets greater than 50 bps, excluding merger targets:

 

   

Plumas Bancorp;

 

   

Union Bankshares Inc.;

 

   

HMN Financial Inc.;

 

   

Sound Financial Bancorp Inc.;

 

   

Bank of the James Financial Group Inc.;

 

   

Summit State Bank;

 

   

Esquire Financial Holdings Inc.;

 

   

MSB Financial Corp.;

 

   

Elmira Savings Bank;

 

   

United Community Bancorp;

 

   

PB Bancorp Inc.;

 

   

United Bancorp Inc.;

 

   

Citizens First Corp.;

 

   

Bank of South Carolina Corp.;

 

   

Home Federal Bancorp Inc. LA; and

 

   

WVS Financial Corp.

To perform this analysis, Stephens used financial information as of and for the 12 months ended March 31, 2018. Market price information was as of July 18, 2018. Stephens’ analysis showed the following concerning Comanche and this peer group’s minimum, median and maximum performance metrics:

 

Comanche Peer Multiples

    

Comanche Implied Valuation (millions)

 
     Price /           Price /  
     TBV (X)      LTM EPS (X)           TBV ($)      LTM EPS ($)  

75th Percentile

     1.86        25.2      75th Percentile      63.0        89.8  

Median

     1.60        17.6           

25th Percentile

     1.34        14.8      25th Percentile      45.3        52.8  

Spirit of Texas / Comanche

     1.65        15.7           

No company used as a comparison in the above analysis is identical to Comanche, Spirit of Texas or the proposed transaction. Accordingly, an analysis of these results is not mathematical. Rather, it involves complex considerations and judgments concerning differences in financial and operating characteristics of the companies.

 

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Selected Transactions Analysis. Stephens reviewed publicly available information related to recent Texas bank and thrift acquisition transactions since 2017 with a disclosed deal value, where the target was between $100 and $750 million in total assets. The transactions included in this group were:

 

Buyer

  

Seller

Hilltop Holdings Inc.    Bank of River Oaks
Guaranty Bancshares, Inc.    Westbound Bank
First Financial Bankshares, Inc.    Commercial Bancshares Inc.
Veritex Holdings, Inc.    Liberty Bancshares, Inc.
D2 Alliances, LLC    Grandview Bancshares, Inc.
First Guaranty Bancshares, Inc.    Premier Bancshares, Inc.

Transaction multiples for the merger were derived from an aggregate estimated transaction value of $55.9 million based on the closing price of Spirit common stock on July 18, 2018, the day before the execution of the reorganization agreement. Using the comparable transactions, Stephens derived and compared, among other things, the implied deal value paid for Comanche to:

 

   

tangible common equity of the acquired company based on the most recent publicly available financial statements prior to announcement;

 

   

adjusted tangible common equity of the acquired company, defined as 8.5% of tangible assets of the acquired company, based on the most recent publicly available financial statements prior to announcement;

 

   

the last 12 months’ earnings per share of the acquired company based on the most recent publicly available financial statements prior to announcement, adjusted for one-time deferred tax asset revaluation associated with tax legislation of $266 thousand; and

 

   

the premium paid on tangible common equity divided by the core deposits (core deposits defined as total deposits less time deposits greater than $100,000) of the acquired company based on the most recent publicly available financial statements prior to announcement.

As illustrated in the following table, Stephens compared the proposed transaction ratios to the minimum, median and maximum transaction ratios of the selected comparable transactions.

 

Comanche Comparable Transaction Multiples

    

Comanche Implied Valuation (millions)

 
     Price/           Price/  
     TBV (x)      8.5%
TBV

(x)
     LTM
EPS (x)
     Core
Deposit
Premium
          TBV ($)      8.5%
TBV

(x)
     LTM
EPS ($)
     Core
Deposit
Premium
 

75th Percentile

     1.94        2.03        30.1        12.1      75th Percentile      65.6        64.2        107.2        61.1  

Median

     1.88        1.90        20.8        11.2                 

25th Percentile

     1.63        1.69        15.9        7.5      25th Percentile      55.4        54.1        56.7        50.7  

Spirit / Comanche

     1.65        1.74        15.7        9.8                 

No company or transaction used as a comparison in the above analysis is identical to Comanche, Spirit or the proposed transaction. Accordingly, an analysis of these results is not mathematical. Rather, it involves complex considerations and judgments concerning differences in financial and operating characteristics of the companies.

Discounted Cash Flow Analysis. Stephens performed a discounted cash flow analysis to estimate a range of present values of after-tax cash flows that Comanche could contribute to Spirit through 2024, standalone as well as including estimated cost savings of 25.0% of Comanche’s projected noninterest expense. In performing this analysis, Stephens discounted the projected free cash flows for Comanche based on budgeted net income for 2018 and 2019, and an assumed 10.0% growth rate thereafter based on guidance from Spirit management to

 

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derive projected after-tax cash flows for fiscal years 2019-2024. Stephens assumed that Comanche would maintain a tangible common equity to tangible asset ratio of 8.5% and would retain sufficient earnings to maintain that level. Any earnings in excess of what would need to be retained represented dividendable cash flows for Comanche. The analysis assumed discount rates ranging from 9.0% to 11.0% and terminal multiples ranging from 14.0 times to 16.0 times fiscal year 2024 forecasted earnings. On a standalone basis, this analysis resulted in a range of values of Comanche from $60.4 million to $73.8 million. Including estimated cost savings of 25.0% of Comanche’s projected noninterest expense, this analysis resulted in a range of values of Comanche from $86.4 million to $104.7 million. The discounted cash flow present value analysis is a widely used valuation methodology that relies on numerous assumptions, including asset and earnings growth rates, terminal values and discount rates and the results of such methodology are highly dependent on the assumptions made. The analysis did not purport to be effective to determine the actual current or expected future values of Comanche.

Financial Impact Analysis. Stephens performed pro forma merger analyses that combined projected income statement and balance sheet information of Spirit and Comanche. Analytic assumptions obtained from management of Spirit regarding the accounting treatment, acquisition adjustments and cost savings were used to calculate the financial impact that the merger could have on certain projected financial results of Spirit. In the course of this analysis, Stephens used earnings estimates for Spirit for 2018-2019 based on analyst consensus “street estimates” for the institution, and assumed growth rates thereafter provided by Spirit management. This analysis indicated that the merger is expected to be accretive to Spirit’s estimated earnings per share in 2019, excluding estimated one-time buyer transaction costs, and accretive to Spirit’s estimated earnings per share in 2020. The analysis also indicated that following the merger the pro forma entity would maintain well capitalized capital ratios. For all of the above analyses, the actual results achieved by Spirit following the merger will likely vary from the projected results, and the variations may be material.

Relationships. In the ordinary course of its business as a broker-dealer, Stephens may, from time to time, purchase securities from, and sell securities to, Spirit or their respective affiliates. Stephens may also from time to time have a long or short position in, and buy or sell, debt or equity securities of Spirit or their respective affiliates for its own account and for the accounts of its customers. In addition, as a market maker in securities, Stephens and its affiliates may from time to time have a long or short position in, and buy or sell, debt or equity securities of Spirit for its and their own accounts and for the accounts of its and their respective customers and clients.

Stephens’ opinion was for the use and benefit of the Spirit board of directors in connection with its consideration of the merger, and Stephens was paid a fee of $150 thousand for providing its fairness opinion. Stephens has consented to the inclusion of its opinion in the Registration Statement on Form S-4 of which this document forms a part. Spirit has also agreed to pay Stephens a fee, which is contingent on the completion of the merger, for financial advisory services provided by Stephens in connection with the proposed merger. In addition, Spirit has agreed to reimburse Stephens for reasonable and customary out-of-pocket expenses and disbursements, including fees and reasonable expenses of counsel, and to indemnify Stephens against certain liabilities. In addition to the services provided to Spirit in connection with the merger, during the two years preceding the date of its opinion, Stephens has received fees from Spirit in connection with investment banking and financial advisory services that Stephens has provided to assist Spirit in its $48.3 million IPO. The total amount of the fee paid to Stephens associated with the IPO was approximately $1.5 million. Stephens has not received any fees from Comanche in connection with investment banking and financial advisory services during the two years preceding the date of Stephens’s opinion.

Comanche’s Reasons for the Merger; Recommendation of the Comanche Board of Directors

After careful consideration, at its meeting on July 18, 2018, the Comanche board of directors determined that the merger is in the best interests of Comanche and its shareholders and that the consideration to be received in the merger is fair to Comanche shareholders. Accordingly, the Comanche board of directors unanimously approved the reorganization agreement and the transactions contemplated thereby and recommended that Comanche shareholders vote “FOR” the Comanche merger proposal.

 

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The Comanche board of directors believes that partnering with Spirit will maximize the long-term value of its shareholders’ investment in Comanche, and that the merger will provide the combined company with additional resources necessary to compete more effectively in the north central region of Texas.

In reaching its decision to approve the reorganization agreement and recommend the merger to its shareholders, the Comanche board of directors evaluated the merger and the reorganization agreement, in consultation with Comanche’s management, as well as its legal and financial advisors, and considered a number of positive factors, including the following material factors, which are not presented in order of priority:

 

   

the strong business, operations, financial and regulatory condition and prospects of Spirit;

 

   

its knowledge of the current environment in the financial services industry, including national and regional economic conditions, increased regulatory burdens, evolving trends in technology, increasing competition, the current financial market and regulatory conditions and the likely effects of these factors on the potential growth of Comanche’s development, productivity, profitability and strategic options;

 

   

the complementary aspects of Comanche’s and Spirit’s respective businesses, including customer focus, geographic coverage, business orientation and compatibility of the companies’ management and operating styles;

 

   

its belief that a merger with Spirit would allow Comanche shareholders to participate in the future performance of a combined company that would have better future prospects than Comanche was likely to achieve on a stand-alone basis or through other strategic alternatives;

 

   

the fact that the merger consideration paid in the form of Spirit common stock would allow former Comanche shareholders to participate as Spirit shareholders in the growth of Spirit and in any synergies resulting from the merger;

 

   

the limited liquidity that Comanche shareholders have with respect to their investment in Comanche, for which there is no active public market, and the fact that as Spirit shareholders, Comanche’s shareholders would be expected to have increased liquidity in the form of a publicly-traded, NASDAQ-listed security;

 

   

the value of the merger consideration compared to the current and projected book value of Comanche and compared to similar recent transactions in the industry;

 

   

the fact that the merger consideration paid in the form of Spirit common stock is expected to be tax-free to Comanche shareholders;

 

   

the terms of the reorganization agreement, and the presentation by Comanche’s legal advisors regarding the merger and the reorganization agreement;

 

   

the financial presentation of Piper, dated July 18, 2018, to the Comanche board of directors and the opinion of Piper, dated July 18, 2018, to the Comanche board of directors to the effect that, as of July 18, 2018, and subject to the assumptions, limitations and qualifications set forth in the opinion, the merger consideration was fair, from a financial point of view, to Comanche shareholders, as more fully described in the section of this document entitled “—Opinion of Comanche’s Financial Advisor,” beginning on page 87;

 

   

the fact that the merger helps resolve issues of board management succession and provides access to personnel that will provide additional support in serving the north central Texas market;

 

   

the fact that the merger provides the opportunity to reallocate Comanche assets into asset classes with the prospect of higher yields;

 

   

the likelihood that the regulatory and other approvals needed to complete the merger will be obtained within a reasonable time and without unacceptable conditions; and

 

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the likelihood of Spirit consummating the merger based upon Spirit’s history of completing other merger transactions.

The Comanche board of directors also considered potential risks and potentially negative factors concerning the merger in connection with its deliberations of the proposed transaction, including the following material factors:

 

   

the challenges of combining the businesses, assets and workforces of two financial institutions;

 

   

the potential risk of diverting management focus and resources from other strategic opportunities and from operational matters while working to implement the merger;

 

   

the risks and costs to Comanche if the merger is not completed;

 

   

the fact that the merger consideration, which partially consists of shares of Spirit common stock, provides less certainty of value to Comanche shareholders compared to a transaction in which they would receive only cash consideration due to the potential for a decline in the value of Spirit common stock—whether before or after the completion of the merger—which would reduce the value of the merger consideration received by Comanche’s shareholders;

 

   

the provisions of the reorganization agreement restricting Comanche’s solicitation of third party acquisition proposals and the fact that Comanche would be obligated to pay a termination fee or Spirit’s expenses following the termination of the reorganization agreement in certain circumstances;

 

   

the potential for unintended delays in the regulatory approval process; and

 

   

the interests of certain of Comanche’s directors and executive officers in the merger that are different from, or in addition to, their interests as Comanche shareholders, which are further described in the section of this document entitled “—Interests of Comanche’s Directors and Executive Officers in the Merger,” beginning on page 95.

The foregoing discussion of the factors considered by the Comanche board of directors is not intended to be exhaustive, but is believed to include the material factors considered by the Comanche board of directors. The Comanche board of directors collectively reached the unanimous conclusion to approve the reorganization agreement and the merger in light of the various factors described above and other factors that each member of the Comanche board of directors determined was appropriate. In view of the wide variety of the factors considered in connection with its evaluation of the merger and the complexity of these matters, the Comanche board of directors did not find it useful, and did not attempt, to quantify, rank or otherwise assign relative weights to these factors. In considering the factors described above, the individual members of the Comanche board of directors may have given different weight to different factors. The Comanche board of directors conducted an overall analysis of the factors described above including thorough discussions with Comanche management and Comanche’s advisors, and considered the factors overall to be favorable to, and to support, its determination.

Opinion of Comanche’s Financial Advisor

On December 8, 2017, Piper was engaged to advise the Comanche board of directors with respect to ongoing strategic planning and the consideration of alternative strategies, including a possible merger. On July 18, 2018, Piper rendered to the Comanche board of directors its written opinion with respect to the fairness, from a financial point of view, to the Comanche shareholders, of the merger consideration.

Piper’s opinion was directed to the Comanche board of directors and only addressed the fairness, from a financial point of view, to the Comanche shareholders of the merger consideration and did not address any other aspect or implication of the merger, or any agreement or arrangement of understanding entered into in connection with the merger or otherwise, including without limitation the amount or nature of, or any other aspect relating to, any compensation to any officers, trustees, directors or

 

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employees or any party to the merger, or such persons relative to the merger, merger consideration or otherwise. The references to Piper’s opinion in this joint proxy statement/prospectus are qualified in their entirety by reference to the full text of Piper’s written opinion, which is included as Annex D to this document and sets forth the procedures followed, assumptions made, qualifications and limitations on the review undertaken and other matters considered by Piper in preparing its opinion. Neither Piper’s opinion, nor the summary of its opinion and the related analyses set forth in this document are intended to be, and they do not constitute, advice or a recommendation to the Comanche board of directors or any shareholder of Comanche as to how to act or vote with respect to any matter relating to the reorganization agreement or otherwise. Piper’s opinion was furnished for the sole use and benefit of the Comanche board of directors (in its capacity as such) in connection with its evaluation of the merger and should not be construed as creating, and Piper will not be deemed to have, any fiduciary duty to the Comanche board of directors, Comanche, any security holder or creditor of Comanche or any other person, regardless of any prior or ongoing advice or relationships. Piper’s opinion was approved for issuance by the Piper opinion committee.

In issuing its opinion, among other things, Piper:

 

   

reviewed a draft, dated July 13, 2018, of the reorganization agreement;

 

   

reviewed certain publicly available business and financial information relating to Comanche, Comanche Bank, Spirit and Spirit Bank;

 

   

reviewed certain other business, financial and operating information relating to Comanche, Comanche Bank, Spirit and Spirit Bank provided to Piper by the management of Comanche and the management of Spirit, including financial forecasts for Comanche for the 2018 to 2022 fiscal years ending December 31, and financial forecasts for Spirit for the 2018 to 2022 fiscal years ending December 31;

 

   

met with, either by phone or in person, certain members of the management of Comanche and Spirit to discuss the business and prospects of Comanche and Spirit and the proposed merger;

 

   

reviewed certain financial terms of the proposed transaction and compared certain of those terms with the publicly available financial terms of certain transactions that have recently been effected or announced;

 

   

reviewed certain financial data of Comanche and Spirit, and compared that data with similar data for companies with publicly traded equity securities that Piper deemed relevant;

 

   

reviewed the stock price performance of Spirit since its IPO completed May 4, 2018 and compared that to the performance of selected companies and indexes;

 

   

reviewed and compared certain financial metrics of Comanche with certain financial metrics of Spirit that Piper deemed relevant; and

 

   

considered such other information, financial studies, analyses and investigations and financial, economic and market criteria that Piper deemed relevant.

In connection with its review, Piper has not independently verified any of the foregoing information and Piper has assumed and relied upon such information being complete and accurate in all material respects. With respect to the financial forecasts for Comanche that Piper used in its analyses, the management of Comanche has advised Piper, and it has assumed, that such forecasts have been reasonably prepared on bases reflecting the best currently available estimates and judgments of the management of Comanche as to the future financial performance of Comanche and Piper expresses no opinion with respect to such estimates or the assumptions on which they are based. Piper has relied upon and assumed, without independent verification, that there has been no change in the business, assets, liabilities, financial condition, results of operations, cash flows or prospects of Comanche and Spirit since the respective dates of the most recent financial statements and other information, financial or otherwise, provided to Piper that would be material to its analyses or its opinion, and that there is no

 

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information or any facts that would make any of the information reviewed by Piper incomplete or misleading. Piper has also assumed, with Comanche’s consent, that, in the course of obtaining any regulatory or third party consents, approvals or agreements in connection with the merger, no delay, limitation, restriction or condition will be imposed that would have an adverse effect on Comanche, Spirit or the contemplated benefits of the merger and that the merger will be consummated in accordance with the terms of the reorganization agreement without waiver, modification or amendment of any term, condition or provision thereof that would be material to Piper’s analyses or its opinion. Piper has assumed, with Comanche’s consent, that the reorganization agreement, when executed by the parties thereto, conformed to the draft reviewed by Piper in all respects material to its analyses.

Piper’s opinion was necessarily based upon information made available to it as of the date the opinion was delivered of July 18, 2018, and financial, economic, market and other conditions as they existed and could be evaluated on the date the opinion was delivered. Piper has no obligation to update, revise, reaffirm or withdraw its opinion, or otherwise comment on or consider events occurring after the date the opinion was delivered. Piper’s opinion does not address the relative merits of the merger as compared to alternative transactions or strategies that might be available to Comanche, nor does it address the underlying business decision of Comanche or the Comanche board of directors to approve, recommend or proceed with the merger. Furthermore, no opinion, counsel or interpretation is intended in matters that require legal, regulatory, accounting, insurance, tax or other similar professional advice. It is assumed that such opinions, counsel or interpretations have been or will be obtained from the appropriate professional sources. Furthermore, Piper has relied on, with Comanche’s consent, advice of the outside counsel and the independent accountants of Comanche, and on the assumptions of the management of Comanche, as to all legal, regulatory, accounting, insurance and tax matters with respect to Comanche, Spirit, and the merger.

In preparing its opinion to the Comanche board of directors, Piper performed a variety of analyses, including those described below. The summary of Piper’s analyses is not a complete description of the analyses underlying Piper’s opinion. The preparation of a fairness opinion is a complex process involving various quantitative and qualitative judgments and determinations with respect to the financial, comparative and other analytic methods employed and the adaptation and application of those methods to the unique facts and circumstances presented. As a consequence, neither Piper’s opinion nor the analyses underlying its opinion are readily susceptible to partial analysis or summary description. Piper arrived at its opinion based on the results of all analyses undertaken by it and assessed as a whole and did not draw, in isolation, conclusions from or with regard to any individual analysis, analytic method or factor. Accordingly, Piper believes that its analyses must be considered as a whole and that selecting portions of its analyses, analytic methods and factors, without considering all analyses and factors or the narrative description of the analyses, could create a misleading or incomplete view of the processes underlying its analyses and opinion.

In performing its analyses, Piper considered business, economic, industry and market conditions, financial and otherwise, and other matters as they existed on, and could be evaluated as of, the date of its opinion. While the results of each analysis were taken into account in reaching its overall conclusion with respect to fairness, Piper did not make separate or quantifiable judgments regarding individual analyses. The implied value reference ranges indicated by Piper’s analyses are illustrative and not necessarily indicative of actual values nor predictive of future results or values, which may be significantly more or less favorable than those suggested by the analyses. In addition, any analyses relating to the value of assets, businesses or securities do not purport to be appraisals or to reflect the prices at which businesses or securities actually may be sold, which may depend on a variety of factors, many of which are beyond Comanche’s control, Spirit’s control and Piper’s control. Much of the information used in, and accordingly the results of, Piper’s analyses are inherently subject to substantial uncertainty.

Piper’s opinion and analyses were provided to the Comanche board of directors in connection with its consideration of the proposed merger and were among many factors considered by the Comanche board of directors in evaluating the proposed merger. Neither Piper’s opinion nor its analyses were determinative of the merger consideration or of the views of Comanche board of directors with respect to the proposed merger.

 

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The following is a summary of the material financial analyses performed in connection with Piper’s opinion rendered to the Comanche board of directors on July 18, 2018. No company or transaction used in the analyses described below is identical or directly comparable to Comanche or the proposed transaction. The analyses summarized below include information presented in tabular format. The tables alone do not constitute a complete description of the analyses. Considering the data in the tables below without considering the full narrative description of the analyses, as well as the methodologies underlying, and the assumptions, qualifications and limitations affecting, each analysis, could create a misleading or incomplete view of Piper’s analyses.

Summary of Merger Consideration and Implied Transaction Metrics

Piper reviewed the financial terms of the proposed merger. The merger consideration consists of certain shares of Spirit common stock and cash. Based on an assumption that each outstanding share of Comanche common stock will be converted into the right to receive 5.367 shares of Spirit common stock, the value of the stock portion of the merger consideration is equal to $43.8 million (based upon the value of a share of Spirit common stock as of July 16, 2018). The cash portion of the merger consideration is equal to $12.2 million (or $15.0 million minus $2.755 million in transaction costs incurred by Comanche in connection with the reorganization agreement). Based on the foregoing, Piper calculated that the merger consideration is equal to $56.1 million (based upon the value of a share of Spirit common stock as of July 16, 2018).

Based upon historical financial information for Comanche as of or for the last 12 months, which refer to as LTM, ended June 30, 2018 and projected financial information for 2018 and 2019 as provided by the senior management of Comanche, Piper calculated the implied transaction metrics listed in the table below. Note that Comanche’s reported LTM earnings were adjusted to exclude the impact of the corporate tax rate change in the fourth quarter of 2017.

 

Transaction Value / Book Value

     149%  

Transaction Value / Tangible Book Value

     165%  

Transaction Value / LTM Earnings

     15.8x  

Transaction Value / 2018E Earnings

     15.3x  

Transaction Value / 2019E Earnings

     14.4x  

Core Deposit Premium

     8.4%  

Selected Regional Transactions Analysis. Piper analyzed publicly available financial information relating to selected nationwide business combinations and other transactions Piper deemed relevant. Piper considered transactions with publicly disclosed deal values announced between January 1, 2016 and July 18, 2018 involving targets headquartered in Texas, Colorado, Louisiana, New Mexico, Oklahoma or Utah with total assets between $200.0 million and $600.0 million, last 12 months’ return on average assets greater than 0.70%, and nonperforming assets to assets less than 1.0%. These transactions were selected because the target companies were deemed to be similar to Comanche in one or more respects. Except as described above, no specific numeric or other similar criteria were used to select the selected transactions. Piper identified a sufficient number of transactions for purposes of its analysis but may not have included all transactions that might be deemed comparable to the proposed merger. The 10 selected transactions used in this analysis included (buyer / seller – announce date):

 

   

Business First Bancshares, Inc./ Richland State Bancorp, Inc. – June 4, 2018

 

   

Hanmi Financial Corporation/ SWNB Bancorp, Inc. – May 21, 2018

 

   

Guaranty Bancshares, Inc./ Westbound Bank – January 29, 2018

 

   

First Financial Bankshares, Inc./ Commercial Bancshares, Inc. – October 12, 2017

 

   

Veritex Holdings, Inc./ Liberty Bancshares, Inc. – August 1, 2017

 

   

Equity Bancshares, Inc./ Cache Holdings, Inc. – July 17, 2017

 

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Equity Bancshares, Inc./ Eastman National Bancshares, Inc. – July 17, 2017

 

   

Glacier Bancorp, Inc./ Columbine Capital Corporation – June 6, 2017

 

   

Investar Holding Corporation/ Citizens Bancshares, Inc. – March 8, 2017