424B3
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Filed Pursuant to Rule 424(b)(3)
Registration No. 333-229183

 

 

LOGO    LOGO

PROXY STATEMENT/PROSPECTUS

PROPOSED MERGER—YOUR VOTE IS VERY IMPORTANT

Dear Shareholder:

On November 27, 2018, Spirit of Texas Bancshares, Inc., a Texas corporation, which we refer to as Spirit, and First Beeville Financial Corporation, a Texas corporation, which we refer to as Beeville, entered into an Agreement and Plan of Reorganization, which we refer to as the reorganization agreement, that provides for the acquisition of Beeville by Spirit. Subject to the terms and conditions of the reorganization agreement, Beeville 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 Beeville common stock, other than shares of Beeville common stock held by Beeville and dissenting shares (as defined in this document), will be converted into the right to receive, in the aggregate, (i) $32,375,000 in cash, which we refer to as the cash consideration, and (ii) 1,579,268 shares of Spirit common stock, which we refer to as the stock consideration, subject to certain adjustments, 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 Beeville common stock issued and outstanding as of February 1, 2019 and based on the following closing prices of Spirit common stock: (i) $19.81 on November 26, 2018, the last trading day before public announcement of the reorganization agreement, and (ii) $21.48 on February 4, 2019, the latest practicable trading day before the date of this proxy statement/prospectus, the merger consideration for each share of Beeville common stock represented approximately 26.7048 shares of Spirit common stock and $547.45 in cash (or an aggregate value of $1,076.47) and 26.7048 shares of Spirit common stock and $547.45 in cash (or an aggregate value of $1,121.07), respectively, and aggregate merger consideration of approximately $63.7 million and $66.3 million, respectively. Each of the foregoing examples in the preceding sentence assumes that there are no adjustments to the merger consideration 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 Beeville’s total consolidated equity capital (determined in accordance with generally accepted accounting principles in the United States, which we refer to as GAAP), after giving effect to any unrealized gains or losses in its securities portfolio as of September 30, 2018, less intangible assets and transaction costs to the extent not already paid or accrued by Beeville, which we refer to as the adjusted equity capital, is less than $34,750,000 as of the close of business on the business day preceding the date the merger is completed, which we refer to as the minimum equity capital, then the cash consideration will be reduced, on a dollar for dollar basis, by an amount equal to the difference between the adjusted equity capital and the minimum equity capital.

If Beeville’s adjusted equity capital as of the close of business on the business day preceding the date the merger is completed exceeds the minimum equity capital, then immediately prior to the effective time of the merger, Beeville may declare and pay to its shareholders a cash dividend for each outstanding share of Beeville common stock equal to the quotient of (i) 50% of the amount that the adjusted equity capital exceeds the minimum equity capital, divided by (ii) the total number of shares of Beeville common stock outstanding as of the record date of such dividend.

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 $15.85 per share and Spirit common stock underperforms a selected


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index of public bank holding companies listed on NASDAQ, which we refer to as the selected index, by more than 20.0%, Beeville 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 Beeville. 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 $25,028,239 (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 Beeville 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 Beeville common stock because Beeville is a privately-owned corporation and its common stock is not traded on any established public trading market.

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

The Beeville special meeting will be held on March 13, 2019 at 2:00 p.m., local time, at 1400 East Houston Street, Beeville, Texas 78102.

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

This proxy statement/prospectus, which we refer to as this document, describes the Beeville 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 37, for a discussion of the risks related to the merger, Spirit’s business and Spirit’s industry and regulation.

 

Dean O. Bass    Brian K. Schneider
Chairman and Chief Executive Officer    Chairman and President
Spirit of Texas Bancshares, Inc.    First Beeville Financial Corporation
1836 Spirit of Texas Way    1400 East Houston Street
Conroe, Texas 77301    Beeville, Texas 78102

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 Beeville, 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 February 8, 2019, and it is first being mailed or otherwise delivered to Beeville shareholders on or about February 12, 2019.


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TABLE OF CONTENTS

 

QUESTIONS AND ANSWERS

     1  

SUMMARY

     8  

SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA FOR SPIRIT

     17  

SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA FOR COMANCHE

     20  

SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA FOR BEEVILLE

     22  

SELECTED UNAUDITED COMBINED CONDENSED CONSOLIDATED PRO FORMA FINANCIAL DATA

     24  

UNAUDITED PRO FORMA COMBINED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

     26  

UNAUDITED COMPARATIVE PER SHARE DATA

     36  

RISK FACTORS

     37  

CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS

     67  

THE BEEVILLE SPECIAL MEETING

     70  

BEEVILLE PROPOSALS

     73  

THE MERGER

     74  

THE REORGANIZATION AGREEMENT

     97  

ACCOUNTING TREATMENT

     111  

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

     112  

DESCRIPTION OF CAPITAL STOCK OF SPIRIT

     117  

COMPARISON OF SHAREHOLDERS’ RIGHTS

     121  

COMPARATIVE MARKET PRICES AND DIVIDENDS

     132  

INFORMATION ABOUT SPIRIT

     136  

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

     150  

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

     206  

INFORMATION ABOUT BEEVILLE

     231  

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

     233  

MANAGEMENT OF SPIRIT

     257  

EXECUTIVE COMPENSATION AND OTHER MATTERS

     262  

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

     277  

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

     279  

LEGAL MATTERS

     280  

EXPERTS

     280  

WHERE YOU CAN FIND MORE INFORMATION

     281  

INDEX TO FINANCIAL STATEMENTS

     F-1  


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LOGO

1400 East Houston Street

Beeville, Texas 78102

NOTICE OF SPECIAL MEETING OF SHAREHOLDERS

To the Shareholders of First Beeville Financial Corporation:

Notice is hereby given that First Beeville Financial Corporation, which we refer to as Beeville, will hold a special meeting of its shareholders on March 13, 2019 at 2:00 p.m., local time, at 1400 East Houston Street, Beeville, Texas 78102 to consider and vote upon the following matters:

 

   

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

 

   

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

These proposals are described in more detail in the proxy statement/prospectus. Beeville has fixed the close of business on February 1, 2019 as the record date for the Beeville special meeting. Only holders of record of Beeville common stock as of the Beeville record date are entitled to notice of, and to vote at, the Beeville special meeting, or any adjournment or postponement of the Beeville special meeting. Approval of the Beeville merger proposal requires the affirmative vote of the holders of at least two-thirds of the outstanding shares of Beeville common stock entitled to vote on the Beeville merger proposal. Approval of the Beeville adjournment proposal requires the affirmative vote of a majority of the votes cast by Beeville shareholders at the Beeville special meeting, in person or by proxy.

Beeville shareholders have the right to dissent from the merger and obtain payment in cash of the appraised fair value of their shares of Beeville common stock under applicable provisions of the Texas Business Organizations Code, which we refer to as the TBOC. In order for a Beeville shareholder to perfect his, her or its right to dissent, such Beeville 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 proxy statement/prospectus as Annex B, and a summary of the provisions can be found under the section of the proxy statement/prospectus entitled “The Merger—Dissenters’ Rights in the Merger,” beginning on page 92.

The Beeville 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 Beeville and its shareholders, and recommends that Beeville shareholders vote “FOR” the Beeville merger proposal and “FOR” the Beeville adjournment proposal.

Your vote is very important. Spirit and Beeville cannot complete the merger unless Beeville shareholders approve the Beeville merger proposal. Regardless of whether you plan to attend the Beeville special meeting, please vote as soon as possible. If you hold shares of Beeville 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 Beeville 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.

The proxy statement/prospectus provides a detailed description of the Beeville special meeting, the Beeville merger proposal, the merger, the documents related to the merger and other related matters. Beeville urges you to read the 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 Beeville special meeting.

 

BY ORDER OF THE BOARD OF DIRECTORS,

Brian K. Schneider

Chairman and President


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ADDITIONAL INFORMATION

This document references important business and financial information about Spirit and Beeville 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 281. 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 Beeville:

 

Spirit of Texas Bancshares, Inc.

1836 Spirit of Texas Way

Conroe, Texas 77301

Attention: Jerry D. Golemon

Telephone: (281) 516-4904

  

First Beeville Financial Corporation
1400 East Houston Street

Beeville, Texas 78102
Attention: Brian K. Schneider

Telephone: (361) 358-1530

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 the Beeville special meeting. This means that Beeville shareholders requesting documents must do so by March 6, 2019 in order to receive them before the Beeville 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. 333-229183), 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 Beeville shareholders pursuant to the reorganization agreement. This document also constitutes a proxy statement for Beeville 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 the Beeville 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 February 8, 2019, and you should assume that the information in this document is accurate only as of such date. Neither the mailing of this document to Beeville 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 Beeville has been provided by Beeville.

On November 14, 2018, Spirit completed its acquisition of Comanche National Corporation, a Texas corporation, which we refer to as Comanche, Comanche National Corporation of Delaware, a Delaware corporation and wholly-owned subsidiary of Comanche, and The Comanche National Bank, a national banking association and wholly-owned subsidiary of Comanche National Corporation of Delaware, which we refer to as Comanche Bank. Because the Comanche acquisition occurred after September 30, 2018, Spirit has not yet filed with the SEC a periodic report that reflects the Comanche acquisition in its financial statements. Accordingly, information about Comanche and its subsidiaries has been provided in this document, including the sections of this document entitled “Selected Historical Consolidated Financial Data for Comanche” and “Comanche’s Management’s Discussion and Analysis of Financial Condition and Results of Operation” and Comanche’s audited consolidated financial statements and the related notes included elsewhere with this document.

For more details, see the section of this document entitled “Where You Can Find More Information,” beginning on page 281.


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QUESTIONS AND ANSWERS

The following are some questions that you, as a Beeville shareholder, may have about the merger or the Beeville special meeting and brief answers to those questions. Beeville urges 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 Beeville special meeting or the proposals presented at such meeting. 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 281.

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 “Beeville” refer to First Beeville Financial Corporation, a Texas corporation, and its affiliates, including The First National Bank of Beeville, a national banking association and wholly-owned subsidiary of Beeville, which we refer to as Beeville Bank.

 

Q.

What is the merger?

 

A.

Spirit and Beeville entered into the reorganization agreement on November 27, 2018. Under the reorganization agreement, Beeville will merge with and into Spirit, with Spirit continuing as the surviving corporation. As soon as practicable after the merger, Beeville 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 two-thirds of the outstanding shares of Beeville common stock entitled to vote on the Beeville merger proposal vote in favor of the Beeville merger proposal.

 

Q:

Why am I receiving this document?

 

A:

Beeville is delivering this document to you because it is a proxy statement being used by the Beeville board of directors to solicit proxies of Beeville shareholders entitled to vote on the matters in connection with approval of the reorganization agreement and related matters. Beeville has called a special meeting of its shareholders to consider and vote on the Beeville merger proposal and the Beeville adjournment proposal. This document serves as the proxy statement for the Beeville special meeting and describes the proposals to be presented at the Beeville special meeting. It also constitutes a notice of special meeting of shareholders with respect to the Beeville special meeting.

In addition, this document is a prospectus that is being delivered to Beeville shareholders because Spirit is offering shares of Spirit common stock to Beeville shareholders in connection with the merger. This document contains important information about Spirit and an investment in Spirit common stock.

This document contains important information about the merger, the proposals being voted on at the Beeville 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 Beeville common stock voted by proxy without attending the Beeville special meeting. Your vote is important, and Beeville encourages you to submit your proxy as soon as possible.

 

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Q.

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

 

A:

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

 

   

the Beeville merger proposal; and

 

   

the Beeville adjournment proposal.

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

 

Q.

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

 

A:

In the merger, all of the outstanding shares of Beeville common stock (other than shares of Beeville common stock held by Beeville and shares of Beeville common stock held by any Beeville 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) $32,375,000 in cash and (ii) 1,579,268 shares of Spirit common stock, subject to certain adjustments.

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)
    Per Share
Cash
Consideration(2)
    Implied Value
of Per
Share Merger
Consideration(1)
 

November 26, 2018(3)

  $ 19.81       1,579,268 shares       26.7048 shares     $ 529.02     $ 32,375,000     $ 547.45     $ 1,076.47  

February 4, 2019(4)

    21.48       1,579,268 shares       26.7048 shares       573.62       32,375,000       547.45       1,121.07  

 

  (1)

Assumes there is no adjustment to the merger consideration. For a discussion of the possible adjustments to the merger consideration, see the section of this document entitled “The Reorganization Agreement—Adjustments to Merger Consideration,” beginning on page 97.

  (2)

Calculated based on 59,138 shares of Beeville common stock issued and outstanding as of February 1, 2019. Also assumes there are no dissenting shares.

  (3)

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

  (4)

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

If Beeville’s total consolidated equity capital, after giving effect to any unrealized gains or losses in its securities portfolio as of September 30, 2018, less intangible assets and transaction costs to the extent not already paid or accrued by Beeville, which we refer to as the adjusted equity capital, is less than $34,750,000 as of the close of business on the business day preceding the date the merger is completed, which we refer to as the minimum equity capital, then the cash consideration will be reduced, on a dollar for dollar basis, by an amount equal to the difference between the adjusted equity capital and the minimum equity capital.

If the adjusted equity capital as of the close of business on the business day preceding the date the merger is completed exceeds the minimum equity capital, then immediately prior to the effective time of the merger, Beeville may declare and pay to its shareholders a cash dividend for each outstanding share of Beeville common stock equal to the quotient of (i) 50% of the amount that the adjusted equity capital exceeds the minimum equity capital, divided by (ii) the total number of shares of Beeville common stock outstanding as of the record date of such dividend.

In addition, if the average closing price of Spirit common stock is less than $15.85 per share and Spirit common stock underperforms the selected index by more than 20.0%, Beeville 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 Beeville. Spirit may increase the merger consideration in its discretion by increasing the cash consideration

 

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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 $25,028,239 (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 Beeville 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. Beeville 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 $19.81.

Based on the number of shares of Spirit common stock and Beeville common stock outstanding as of February 1, 2019, approximately 88.5% 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 11.5% of Spirit common stock outstanding after the completion of the merger will be held by shareholders who were holders of Beeville 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 Beeville shareholders will be entitled to receive. Consequently, you will not know the exact merger consideration to be paid to Beeville shareholders in the merger when you vote at the Beeville special meeting.

If Beeville’s adjusted equity capital is less than $34,750,000 as of the close of business on the business day preceding the date the merger is completed, then the cash consideration will be reduced, on a dollar for dollar basis, by an amount equal to the difference between the adjusted equity capital and such minimum equity capital.

In addition, if the average closing price of Spirit common stock is less than $15.85 per share and Spirit common stock underperforms the selected index by more than 20.0%, Beeville has the right to terminate the reorganization agreement. Spirit has the right, but not the obligation, to increase the merger consideration to prevent a termination of the reorganization agreement by Beeville. 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 $25,028,239 (valuing the stock consideration based on the average closing price in accordance with the reorganization agreement).

 

Q.

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

 

A:

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

 

Q.

When and where is the Beeville special meetings?

 

A:

The Beeville special meeting will be held on March 13, 2019 at 2:00 p.m., local time, at 1400 East Houston Street, Beeville, Texas 78102.

 

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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 the Beeville special meeting. If you are a shareholder of record as of the Beeville record date, you can vote your shares (i) by completing and returning the enclosed proxy card or (ii) by voting in person at the Beeville special meeting. 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 your shares of Beeville common stock are registered directly in your name, you are considered the shareholder of record with respect to those shares of Beeville common stock. On the close of business February 1, 2019, the record date for the Beeville special meeting, which we refer to as the Beeville record date, Beeville had approximately 153 holders of record.

If your shares of Beeville 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 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 Beeville 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 Beeville merger proposal.

 

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.

Your broker does not have discretionary authority to vote your shares with respect to the Beeville merger proposal or the Beeville 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 will have the effect of a vote AGAINST the Beeville 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 Beeville common stock entitled to vote on the Beeville merger proposal.

Abstentions and broker non-votes will have no effect on the Beeville adjournment proposal.

 

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Q.

What constitutes a quorum for the Beeville 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 Beeville common stock entitled to be voted at the Beeville special meeting constitutes a quorum for transacting business at the Beeville special meeting. All shares of Beeville 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 Beeville special meeting.

 

Q.

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

 

A:

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

Beeville adjournment proposal: Approval of the Beeville adjournment proposal requires the affirmative vote of a majority of the votes cast at the Beeville 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 Beeville special meeting or fail to instruct your bank, broker or nominee how to vote with respect to the Beeville 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 Beeville to obtain the necessary quorum to hold its special meeting and to obtain approval of the proposals to be voted on at the special meeting. In addition, your failure to vote will have the effect of a vote AGAINST the Beeville merger proposal. The Beeville board of directors unanimously recommends that you vote “FOR” the Beeville merger proposal.

 

Q.

Can I attend the special meeting?

 

A:

All Beeville shareholders as of the Beeville record date (including shareholders of record and shareholders who hold their shares in “street name” through banks, brokers or other nominees) are invited to attend the Beeville special meeting. If you plan to attend the 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 Beeville shareholders must bring a form of personal photo identification in order to be admitted to the Beeville special meeting.

Beeville reserves 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 Beeville special meeting is prohibited without Beeville’s express written consent.

 

Q.

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

 

A:

Only Beeville shareholders of record as of the Beeville record date can vote in person at the Beeville special meeting. If you are a beneficial owner of Beeville 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 Beeville special meeting.

 

Q.

Can I change my vote?

 

A:

Yes. If you are a holder of record of Beeville 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 Beeville special meeting;

 

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  (ii) giving notice of revocation of the proxy at the Beeville special meeting; or (iii) delivering to the Secretary of Beeville (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 Beeville special meeting by itself will not automatically revoke your proxy. A revocation or later-dated proxy received by Beeville 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: First Beeville Financial Corporation, 1400 East Houston Street, Beeville, Texas 78102, Attention: Secretary.

If you hold your shares of Beeville 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 Beeville to complete the merger are conditioned on, among other things, the receipt by Spirit and Beeville 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, Beeville 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 Beeville common stock surrendered therefor, and (ii) the amount of cash consideration received by that holder in the merger. Beeville shareholders who properly exercise their dissenters’ rights and receive cash in exchange for their shares of Beeville 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 Beeville common stock exchanged therefor. In addition, Beeville 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, 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 112. The U.S. federal income tax consequences described above may not apply to all Beeville shareholders. Your tax consequences will depend on your individual situation. Accordingly, you are urged to consult your own tax advisor for a full understanding of the particular tax consequences to them of the merger.

 

Q.

Are Beeville shareholders entitled to dissenters’ rights?

 

A:

Yes. Beeville 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 92, 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.

Should I send in my Beeville stock certificates now?

 

A:

No. Please do not send in your Beeville stock certificates with your proxy card. After the merger is completed, Spirit’s exchange agent, Computershare, will send you instructions for exchanging your

 

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  certificate formerly representing shares of Beeville common stock for your portion of the merger consideration. See the section of this document entitled “The Reorganization Agreement—Conversion of Shares; Exchange of Certificates,” beginning on page 98.

 

Q.

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

 

A:

If you are unable to locate your original Beeville stock certificate(s), you should contact Brian K. Schneider at (361) 358-1530 or brians@fnbsotx.com.

 

Q.

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

 

A:

Beeville 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 Beeville 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 your shares are registered in more than one name, you will receive more than one proxy card. 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 Beeville common stock that you own.

 

Q.

When do you expect to complete the merger?

 

A:

Spirit and Beeville currently expect to complete the merger in the second quarter of 2019. However, neither Spirit nor Beeville can assure you of when or if the merger will be completed. Before the merger is completed, Beeville must obtain the approval of Beeville shareholders for the Beeville merger proposal, necessary regulatory approvals must be obtained and certain other closing conditions must be satisfied.

 

Q.

What happens if the merger is not completed?

 

A:

If the merger is not completed, Beeville shareholders will not receive any consideration for their shares of Beeville common stock. Instead, Beeville will remain an independent company. In addition, if the reorganization agreement is terminated in certain circumstances, Beeville may be required to pay a termination fee to Spirit. See the section of this document entitled “The Reorganization Agreement—Termination Fee,” beginning on page 109 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:

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 Beeville common stock, please contact Brian K. Schneider at (361) 358-1530 or brians@fnbsotx.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. Beeville urges 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 281. 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 136)

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, Dallas/Fort Worth and Bryan/College Station 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.

On November 14, 2018, Spirit completed its acquisition of Comanche and Comanche Bank. Because the Comanche acquisition occurred after September 30, 2018, Spirit has not yet filed with the SEC a periodic report that reflects the Comanche acquisition. Accordingly, information about Comanche and its subsidiaries has been provided in this document, including the sections of this document entitled “Selected Historical Consolidated Financial Data for Comanche” and “Comanche’s Management’s Discussion and Analysis of Financial Condition and Results of Operation” and Comanche’s audited consolidated financial statements and the related notes included elsewhere with this document.

Spirit currently operates 23 full-service branches located primarily in the Houston, Dallas/Fort Worth and Bryan/College Station metropolitan areas. As of September 30, 2018, Spirit had, on a consolidated basis, total assets of $1.10 billion, loans held for investment of $954.1 million, total deposits of $872.6 million and total stockholders’ equity of $150.9 million. As of September 30, 2018, Comanche had, on a consolidated basis, total assets of $338.9 million, loans held for investment of $119.8 million, total deposits of $296.9 million and total stockholders’ equity of $37.0 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.”

Beeville (page 231)

Formed in 1984, Beeville is a Texas corporation that owns all of the outstanding shares of common stock of Beeville Bank, a national banking association formed in 1890, with operational headquarters in Beeville, Texas.



 

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Beeville Bank is a traditional commercial bank offering a variety of banking services to commercial and consumer customers throughout the southern region of Texas. Beeville 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 Beeville Bank’s market areas.

Beeville Bank operates three banking locations in each of Beeville, Seguin and Yorktown, Texas, as well as three loan production offices in each of Corpus Christi, Karnes City and New Braunfels, Texas. As of September 30, 2018, Beeville, on a consolidated basis, reported total assets of $411.7 million, total loans of $279.0 million, total deposits of $373.4 million and shareholders’ equity of $36.0 million. Beeville does not file reports with the SEC because Beeville is not a publicly-traded company.

Beeville’s principal executive offices are located at 1400 East Houston Street, Beeville, Texas 78102, and its telephone number at that location is (361) 358-1530. Additional information about Beeville and its subsidiaries is included in the section of this document entitled “Information About Beeville.”

In the Merger, Beeville Shareholders Will Be Entitled To Receive Cash and Shares of Spirit Common Stock (page 97)

Merger Consideration

In the merger, all of the outstanding shares of Beeville common stock (other than shares of Beeville common stock held by Beeville and dissenting shares), will be converted into the right to receive, in the aggregate, (i) $32,375,000 in cash and (ii) 1,579,268 shares of Spirit common stock, subject to certain adjustments.

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)
    Per Share
Cash
Consideration(2)
    Implied Value
of Per
Share Merger
Consideration(1)
 

November 26, 2018(3)

  $ 19.81       1,579,268 shares       26.7048 shares     $ 529.02     $ 32,375,000     $ 547.45     $ 1,076.47  

February 4, 2019(4)

    21.48       1,579,268 shares       26.7048 shares       573.62       32,375,000       547.45       1,121.07  

 

(1)

Assumes there is no adjustment to the merger consideration. For a discussion of the possible adjustments to the merger consideration, see the section of this document entitled “The Reorganization Agreement—Adjustments to Merger Consideration,” beginning on page 97.

(2)

Calculated based on 59,138 shares of Beeville common stock issued and outstanding as of February 1, 2019. Also assumes there are no dissenting shares.

(3)

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

(4)

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

Spirit will not issue fractional shares of Spirit common stock in the merger. Beeville 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 $19.81.

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 117, for additional information about Spirit common stock. See the sections of this document entitled “Comparison of Shareholders’ Rights” and “Comparative Market Prices and Dividends, ” beginning on pages 121 and 132, respectively, for comparative information about the Spirit common stock and the Beeville common stock and the rights of holders thereof.



 

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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 you vote on the Beeville merger proposal.

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

If Beeville’s adjusted equity capital is less than $34,750,000 as of the close of business on the business day preceding the date the merger is completed, then the cash consideration will be reduced, on a dollar for dollar basis, by an amount equal to the difference between the adjusted equity capital and such minimum equity capital.

In addition, if the average closing price of Spirit common stock is less than $15.85 per share and Spirit common stock underperforms the selected index by more than 20.0%, Beeville has the right to terminate the reorganization agreement. Spirit has the right, but not the obligation, to increase the merger consideration to prevent a termination of the reorganization agreement by Beeville. 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 $25,028,239 (valuing the stock consideration based on the average closing price in accordance with the reorganization agreement).

Special Dividend

If Beeville’s adjusted equity capital as of the close of business on the business day preceding the date the merger is completed exceeds the minimum equity capital, then immediately prior to the effective time of the merger, Beeville may declare and pay to its shareholders a cash dividend for each outstanding share of Beeville common stock equal to the quotient of (i) 50% of the amount that the adjusted equity capital exceeds the minimum equity capital, divided by (ii) the total number of shares of Beeville common stock outstanding as of the record date of such dividend.

Beeville Voting Agreement and Beeville Support Agreements (page 110)

In connection with entering into the reorganization agreement, Spirit entered into a voting agreement with Beeville and all of the directors of Beeville, which we refer to as the Beeville voting agreement. As of the Beeville record date, the directors who are party to the Beeville voting agreement beneficially own in the aggregate approximately 18.26% of the outstanding shares of Beeville common stock. The Beeville voting agreement requires, among other things, that the directors party thereto vote all of their shares of Beeville 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 Beeville common stock prior to the termination of the Beeville voting agreement. The Beeville 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.

In connection with entering into the reorganization agreement, each of the directors of Beeville and Beeville 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 Beeville support agreements, pursuant to which they agree to refrain from harming the goodwill of Spirit, Beeville or any of their respective subsidiaries and their respective customer, client and vendor relationships. By entering into such Beeville support agreements, each director also agreed to certain additional restrictive covenants.



 

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

On November 27, 2018, Sheshunoff & Co. Investment Banking, which we refer to as Sheshunoff, financial advisor to Beeville, rendered to the Beeville board of directors its written opinion with respect to the fairness, from a financial point of view, to the holders of Beeville common stock of the merger consideration. The references to Sheshunoff’s opinion in this document are qualified in their entirety by reference to the full text of Sheshunoff’s written opinion, which is included as Annex C to this document and Sheshunoff’s opinion sets forth the procedures followed, assumptions made, qualifications and limitations on the review undertaken and other matters considered by Sheshunoff in preparing its opinion. Sheshunoff’s opinion does not constitute a recommendation to the Beeville board of directors or any holder of Beeville common stock as to how the Beeville 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 Beeville’s Financial Advisor,” beginning on page 80.

Interests of Beeville’s Directors and Executive Officers in the Merger (page 90)

In considering the recommendation of the Beeville board of directors with respect to the Beeville merger proposal, you should be aware that certain of Beeville’s directors and executive officers may have interests in the merger that are different from, or in addition to, the interests of Beeville shareholders generally. Interests of directors and executive officers that may be different from or in addition to the interests of Beeville shareholders include:

 

   

Director Support Agreements. Spirit has entered into separate support agreements with each of the non-employee directors of Beeville. 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 Beeville 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 Beeville 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 Beeville 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 Beeville 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 Brian K. Schneider and Kent Fry to be effective, if at all, upon 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.

The employment agreement with Mr. Schneider is for an initial term of one year after the date the merger is completed and the term will be automatically extended for successive periods of one year on a continuing basis until either Mr. Schneider or Spirit gives written notice of intention not to extend. The employment agreement entitles Mr. Schneider to receive an annual base salary and to participate in annual and long-term incentive programs, plus reimbursement of certain business expenses and participation in certain employee benefit programs. The employment agreement also contains



 

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non-competition and non-solicitation obligations for the term of Mr. Schneider’s employment with Spirit and for one year after the termination of his employment with Spirit. For the initial one-year term, the aggregate value of the employment agreement for Mr. Schneider is $275,000.

The employment agreement with Mr. Fry is for an initial term of one year and entitles Mr. Fry to receive an annual base salary and participate in annual and long-term incentive programs, plus reimbursement of certain business expenses and participation in certain employee benefit programs. The employment agreement also contains non-competition and non-solicitation obligations for the term of Mr. Fry’s employment with Spirit and for one year after the termination of his employment with Spirit. For the initial one-year term, the aggregate value of the employment agreement for Mr. Fry is $225,000.

The employment agreements also entitle each of Mr. Schneider and Mr. Fry, after termination of employment with Spirit prior to and in connection with a change of control or within two years after the occurrence of a change in control (a) by Spirit for any reason other than death, disability or cause (as defined in the employment agreements) or (b) by Mr. Schneider or Mr. Fry, respectively, for good reason (as defined in the employment agreements), to receive payment of (i) base salary through the date of termination (as defined in the employment agreements), plus any earned vacation pay, plus any benefits or awards (including both the cash and stock components) that pursuant to the terms of any plans have been earned or become payable, but which have not yet been paid to Mr. Schneider or Mr. Fry, respectively; plus (ii) an amount equal to the aggregate of base salary for the calendar year in which the date of termination occurs and all bonus, profit sharing and other annual incentive payments made by Spirit to Mr. Schneider or Mr. Fry, respectively, with respect to the most recent full year preceding the year in which the date of termination occurs; plus (iii) benefits equal in value to each life, health, accident or disability benefit to which Mr. Schneider or Mr. Fry, respectively, was entitled immediately before the date of termination.

 

   

Change in Control Agreement. Mr. Schneider is party to a Change in Control Agreement with Beeville. Under the agreement, the benefit payable to Mr. Schneider upon a change in control (as defined in the agreement) is an amount equal to 2.99 times his average annual compensation for the three calendar years preceding the calendar year in which the change in control occurs. As of December 31, 2018, the benefit payable to Mr. Schneider upon a change in control is approximately $1,360,000. Benefits are payable in a lump sum within 30 days after the merger is completed.

 

   

Stock Appreciation Rights Plan Award Agreements. Mr. Schneider and Mr. Fry are also party to Stock Appreciation Rights Plan Award Agreements with Beeville. Under the agreements, the benefit payable to Mr. Schneider upon a change in control (as defined in the agreements) is an amount equal to (a) the difference between (i) the per share price paid by the acquiror in the change in control and (ii) the initial value of the stock appreciation rights as set forth in each agreement, multiplied by the number of stock appreciation rights granted under each agreement. As of January 3, 2019, based upon the per share price paid in the change in control, the benefit payable to Mr. Schneider and Mr. Fry upon a change in control was approximately $2,025,550 and $653,890, respectively. The value of the benefit payable to Mr. Schneider and Mr. Fry upon a change in control will fluctuate between the date of this document and the date the merger is completed based upon the market value of Spirit common stock. As a result, the actual benefit payable to Mr. Schneider and Mr. Fry upon a change in control may higher or lower than the amounts indicated. Mr. Schneider’s benefits are payable in a lump sum within 30 days after the merger is completed and Mr. Fry’s benefits are payable in a lump sum within 30 days following the last day of the month in which the merger is completed.

 

   

Salary Continuation Agreements. Beeville has entered into Salary Continuation Agreements with certain of its employees, including Mr. Schneider, Mr. Fry, Gwenyth Burris and Brenda Trevino. Under the agreements, upon each individual’s termination of employment after the normal retirement age set forth in their respective agreements, Beeville will pay such individual an annual benefit to be



 

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paid in monthly installments for a period of ten years. In the event that an individual has incurred a separation of service under 409A of the Code, such individual will be entitled to receive a benefit equal to 100.0% of his or her accrual balance as of the date of his or her termination. As of November 27, 2018, the accrual balance for each of Mr. Schneider, Mr. Fry, Ms. Burris and Ms. Trevino was $90,907.64, $91,491.91, $251,849.14 and $91,491.91, respectively. Benefits are payable in a single lump sum within 60 days following the last day of the month in which his or her employment is terminated.

 

   

Deferred Cash Incentive Agreement. Mr. Fry is also party to a Deferred Cash Incentive Agreement with Beeville Bank. Under the agreement, the benefit payable to Mr. Fry upon a change in control (as defined in the agreement) is an amount equal to 100.0% of the amount in his deferral account (as defined in the plan). As of November 27, 2018, the benefit payable to Mr. Fry upon a change in control was approximately $67,713.80. Benefits are payable in a lump sum within 60 days after the merger is completed.

Beeville Shareholders Are Entitled to Assert Dissenters’ Rights (page 92 and Annex B)

Beeville shareholders have the right to dissent from the merger and obtain payment in cash of the fair value of their shares of Beeville common stock under the TBOC. In order for such Beeville shareholder to perfect such Beeville shareholder’s right to dissent, such Beeville 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 105)

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 Beeville’s respective obligations to complete the merger are subject to the following conditions, among others:

 

   

receipt of all required regulatory approvals;

 

   

approval of the Beeville merger proposal by Beeville 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;

 

   

the absence of any government action that would prohibit, or materially impede any party’s ability to complete, the 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 Beeville 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;



 

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

Neither Spirit nor Beeville 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 107)

Either Spirit or Beeville 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 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;

 

   

any of the transactions contemplated by the reorganization agreement are not approved by the appropriate governmental body or the applications or notices are suggested or recommended to be withdrawn by any governmental body;

 

   

the merger has not been completed by May 26, 2019 (unless one or more of the required regulatory approvals has not been received on or before May 26, 2019, in which case this deadline will be extended to July 25, 2019) or such later date approved in writing by the Spirit board of directors and the Beeville board of directors, unless the failure to complete the merger by that time is caused by or results from the failure of the party that seeks to terminate the reorganization agreement to fulfill any material obligation under the reorganization agreement;

 

   

Beeville shareholders fail to approve the Beeville merger proposal; or

 

   

the other party materially breaches its representations and warranties or any covenant or agreement contained 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.

Beeville may terminate the reorganization agreement, without the consent of Spirit, at any time before approval of Beeville merger proposal by Beeville shareholders, if the Beeville 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.

Beeville may also terminate the reorganization agreement if the average closing price of Spirit common stock is less than $15.85 per share and Spirit common stock underperforms the selected index by more than



 

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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 Beeville 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 $25,028,239 (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, Beeville 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 Beeville, if:

 

   

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

 

   

on or prior to February 25, 2019, the results of any environmental inspections or surveys of Beeville 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 Beeville or that Spirit expects to cost more than $1.0 million;

 

   

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

 

   

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

 

   

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

Termination Fee (page 109)

If the reorganization agreement is terminated under certain circumstances, including circumstances involving an alternative acquisition proposal and changes in the recommendation of the Beeville board of directors, Beeville may be required to pay to Spirit a termination fee equal to $2,500,000. This termination fee could discourage other companies from seeking to acquire or merge with Beeville.

Regulatory Approvals Required for the Merger (page 95)

The merger requires the approval of the Board of Governors of the Federal Reserve System, which we refer to as the Federal Reserve. On December 18, 2018, Spirit filed the required application with the Federal Reserve Bank of Dallas. Spirit also submitted to the Texas Department of Banking, which we refer to as the TDB, a copy of the application it filed with the Federal Reserve Bank of Dallas. Although neither Spirit nor Beeville knows of any reason why it cannot obtain these regulatory approvals in a timely manner, Spirit and Beeville 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 December 18, 2018, Spirit Bank filed the required application with the FDIC and the TDSML. Although neither Spirit nor Beeville knows of any reason why it cannot obtain these regulatory approvals in a timely manner, Spirit and Beeville 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 Beeville 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 Beeville Shareholders Will Change as a Result of the Merger (page 121)

The rights of Beeville shareholders will change as a result of the merger due to differences in Spirit’s and Beeville’s governing documents. See the section of this document entitled “Comparison of Shareholders’ Rights,” beginning on page 121, for a description of the material differences in shareholders’ rights under each of the Spirit and Beeville governing documents.

Market Prices of Securities; Dividends (page 132)

Shares of Spirit common stock are traded on NASDAQ under the ticker symbol “STXB.” The last reported sale price of Spirit common stock on November 26, 2018, the last trading day before public announcement of the reorganization agreement, was $19.81 per share. The last reported sale price of Spirit common stock on February 4, 2019 was $21.48 per share. There is no established public trading market for the shares of Beeville common stock. Spirit has not historically paid dividends. Beeville has historically paid dividends on outstanding shares of Beeville common stock. Beeville paid cash dividends to its shareholders of approximately $443,000, $446,000, and $297,000 in 2017, 2016, and 2015, respectively.

Risk Factors (page 37)

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 37.

Recent Developments

On January 30, 2019, Spirit issued a press release announcing its unaudited financial results for the three months ended December 31, 2018, as well as a consolidated financial summary for such periods. The press release and consolidated financial summary were included as an exhibit to the Current Report on Form 8-K/A furnished by Spirit on February 4, 2019. Spirit reported net income of $2.5 million, or $0.22 per diluted share, for the three months ended December 31, 2018. Net interest income was $13.9 million and net interest margin was 4.59% for the three months ended December 31, 2018. Total noninterest income was $3.0 million for the three months ended December 31, 2018. Total noninterest expense was $13.6 million for the three months ended December 31, 2018. Spirit recorded a provision for loan losses of $700 thousand for the three months ended December 31, 2018. At December 31, 2018, the provision for loan losses totaled $6.3 million and Spirit’s nonperforming loans to loans held for investment ratio was 0.46%. At December 31, 2018, Spirit reported total assets of $1.47 billion, total loans of $1.09 billion, total deposits of $1.18 billion, total liabilities of $1.27 billion and total stockholders’ equity of $198.8 million.



 

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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 and 2016 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 years ended December 31, 2015 has been derived from Spirit’s audited consolidated financial statements not included in this document. The selected historical consolidated financial information for the nine months ended September 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 150, and Spirit’s audited consolidated financial statements and the related notes included elsewhere with this document.

 

    As of and for the
Nine Months Ended September 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

  $ 1,102,211     $ 1,026,032     $ 1,030,298     $ 980,489     $ 843,768  

Loans held for sale

    5,500       3,495       3,814       4,003       6,320  

Loans held for investment

    954,074       863,620       869,119       772,861       688,850  

Allowance for loan and lease losses

    (6,156     (5,464     (5,652     (4,357     (3,076

Loans, net

    947,918       858,156       863,467       768,504       685,774  

Total deposits

    872,610       843,143       835,368       814,438       661,391  

Short-term borrowings

    10,000       5,000       15,000       5,000       40,000  

Long-term borrowings

    64,961       77,822       76,411       66,016       51,850  

Total stockholders’ equity

    150,893       98,805       99,139       92,896       87,927  

Selected Period-End Income Statement Data:

 

       

Total interest income

  $ 40,471     $ 34,615     $ 46,907     $ 40,210     $ 38,767  

Total interest expense

    7,264       6,093       8,328       6,730       5,526  

Net interest income

    33,153       28,522       38,579       33,480       33,241  

Provision for loan losses

    1,460       1,804       2,475       1,617       1,580  

Net interest income after provision for loan losses

    31,693       26,718       36,104       31,863       31,661  

Total noninterest income

    7,458       7,722       9,638       8,342       7,871  

Total noninterest expense

    29,788       27,943       37,402       34,881       33,496  

Income before income tax expense

    9,363       6,497       8,340       5,324       6,036  

Income tax expense

    1,898       2,267       3,587       1,609       2,094  

Net income

    7,456       4,230       4,753       3,715       3,942  

Selected Share and Per Share Data:(1)

         

Earnings per common share—Basic

  $ 0.86     $ 0.58     $ 0.65     $ 0.51     $ 0.55  

Earnings per common share—Diluted

    0.82       0.56       0.63       0.50       0.52  

Book value per share(2)

    15.38       13.57       13.62       12.83       12.15  

Tangible book value per share(3)

    14.62       12.45       12.52       11.63       10.95  

Weighted average common shares outstanding—Basic

    8,673,106       7,218,147       7,268,297       7,235,479       7,230,023  


 

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

Weighted average common shares outstanding—Diluted

    9,094,691       7,504,208       7,554,458       7,375,945       7,578,755  

Shares outstanding at end of period

    9,812,481       7,280,183       7,280,183       7,239,763       7,234,738  

Selected Performance Ratios:

         

Return on average assets(4)

    0.94     0.56     0.47     0.41     0.49

Return on average stockholders’ equity(4)

    8.08       5.64       4.88       4.09       4.49  

Net interest margin(4)(5)

    4.56       4.13       4.19       4.09       4.54  

Noninterest expense to average assets(4)

    3.76       3.71       3.71       3.86       4.15  

Efficiency ratio

    73.35       77.10       77.57       83.40       81.47  

Average interest-earning assets to average interest-bearing liabilities

    131.40       127.70       126.42       125.04       125.69  

Loans to deposits

    109.34       102.43       104.04       94.90       104.15  

Yield on interest-earning assets

    5.51       4.89       4.97       4.79       5.18  

Cost of interest-bearing liabilities

    1.30       1.10       1.12       1.00       0.93  

Interest rate spread

    4.21       3.79       3.85       3.79       4.25  

Asset and Credit Quality Ratios:

         

Nonperforming loans to loans held for investment

    0.39     0.60     0.41     0.49     0.35

Nonperforming assets to loans plus OREO

    0.42       0.60       0.42       0.50       0.39  

Nonperforming assets to total assets

    0.37       0.51       0.35       0.39       0.32  

Net charge-offs to average loans(4)

    0.14       0.11       0.14       0.05       0.08  

Allowance for loan losses to nonperforming loans

    164.42       106.10       157.22       114.45       128.49  

Allowance for loan losses to loans held for investment

    0.65       0.63       0.65       0.56       0.45  

Capital Ratios:

         

Average equity to average total assets

    11.68     9.96     9.66     10.04     10.88

Tangible equity to tangible assets(6)

    13.10       8.91       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 199.

(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



 

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  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 199.
(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 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 199. 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 September 30, 2018 and for the nine months ended September 30, 2018 and 2017 has been derived from Comanche’s unaudited consolidated financial statements appearing elsewhere in this document. The selected historical consolidated data as of September 30, 2017 has been derived from Comanche’s unaudited consolidated financial statements not included 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 206.

 

    As of and for the
Nine Months Ended September 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

  $ 338,886     $ 333,595     $ 358,383     $ 332,367  

Loans held for investment

    119,772       127,387       125,461       125,659  

Allowance for loan and lease losses

    (3,092     (3,009     (3,117     (3,003

Loans, net

    116,680       124,378       122,344       122,656  

Total deposits

    296,880       288,330       313,446       289,910  

Long-term borrowings

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

Total stockholders’ equity

    37,043       40,142       39,252       36,455  

Selected Period-End Income Statement Data:

       

Total interest income

  $ 9,444     $ 8,944     $ 11,955     $ 11,185  

Total interest expense

    1,407       1,104       1,489       1,367  

Net interest income

    8,037       7,840       10,466       9,818  

Provision for loan losses

    —         —         —         —    

Net interest income after provision for loan losses

    8,037       7,840       10,466       9,818  

Total noninterest income

    1,193       1,279       1,581       1,663  

Total noninterest expense

    6,246       6,087       8,072       8,059  

Income before income tax expense

    2,984       3,032       3,975       3,422  

Income tax expense

    406       587       1,000       569  

Net income

    2,578       2,445       2,975       2,853  

Selected Share and Per Share Data:

       

Earnings per common share—Basic

  $ 6.45     $ 6.08     $ 7.40     $ 7.03  

Earnings per common share—Diluted

    6.45       6.08       7.40       7.03  

Book value per share(1)

    92.78       99.88       97.66       90.65  

Tangible book value per share(2)

    83.22       90.39       88.17       81.16  

Weighted average common shares outstanding—Basic

    399,811       402,032       402,002       405,565  

Weighted average common shares outstanding—Diluted

    399,811       402,032       402,002       405,565  

Shares outstanding at end of period

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


 

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

Selected Performance Ratios:

       

Return on average assets(3)

    0.98     0.97     0.88     0.88

Return on average stockholders’ equity(5)

    9.04       8.54       7.68       7.37  

Net interest margin(3)(4)

    3.35       3.49       3.47       3.40  

Noninterest expense to average assets(3)

    2.38       2.41       2.39       2.48  

Efficiency ratio

    67.67       66.75       67.00       70.19  

Average interest-earning assets to average interest-bearing liabilities

    132.27       130.64       131.56       132.17  

Loans to deposits

    40.34       43.03       40.03       43.34  

Yield on interest-earning assets

    3.84       3.79       3.78       3.67  

Cost of interest-bearing liabilities

    0.76       0.61       0.62       0.59  

Interest rate spread

    3.08       3.18       3.16       3.08  

Asset and Credit Quality Ratios:

       

Nonperforming loans to loans held for investment

    0.02     0.02     0.39     0.95

Nonperforming assets to loans plus OREO

    0.06       0.05       0.48       0.98  

Nonperforming assets to total assets

    0.02       0.02       0.17       0.37  

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

    0.03       -0.01       (0.09     (0.03

Allowance for loan losses to nonperforming loans

    7,730.00       9,706.45       629.70       252.14  

Allowance for loan losses to loans held for investment

    2.58       2.36       2.48       2.39  

Capital Ratios:

       

Average equity to average total assets

    10.86     11.36     11.45     11.93

Tangible equity to tangible assets(5)

    9.92       11.02       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 228.

(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 228.

(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 228.



 

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SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA FOR BEEVILLE

The following table sets forth certain of Beeville’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 Beeville’s audited consolidated financial statements included elsewhere in this document. The selected historical consolidated financial information as of September 30, 2018 and for the nine months ended September 30, 2018 and 2017 has been derived from Beeville’s unaudited consolidated financial statements appearing elsewhere in this document. The selected historical consolidated data as of September 30, 2017 has been derived from Beeville’s unaudited consolidated financial statements not included in this document. Beeville’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 “Beeville’s Management’s Discussion and Analysis of Financial Condition and Operations,” beginning on page 233.

 

    As of and for the
Nine Months Ended September 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

  $ 411,668     $ 364,955     $ 386,795     $ 320,413  

Loans held for investment

    278,989       247,364       263,651       239,316  

Allowance for loan losses

    (3,375     (2,968     (3,128     (2,657

Loans, net

    275,614       244,378       260,523       236,659  

Total deposits

    373,360       329,335       351,378       288,370  

Long-term borrowings

    —         597       —         926  

Total stockholders’ equity

    35,965       32,747       32,209       29,358  

Selected Period-End Income Statement Data:

       

Total interest income

  $ 13,140     $ 10,629     $ 14,562     $ 12,851  

Total interest expense

    1,290       813       1,184       764  

Net interest income

    11,850       9,816       13,378       12,087  

Provision for loan losses

    445       756       1,001       1,548  

Net interest income after provision for loan losses

    11,405       9,060       12,377       10,539  

Total noninterest income

    867       1,458       1,719       1,743  

Total noninterest expense

    6,730       6,184       8,154       7,545  

Income before income tax expense

    5,542       4,334       5,942       4,736  

Income tax expense

    1,039       1,183       2,280       1,473  

Net income

    4,503       3,151       3,663       3,264  

Selected Share and Per Share Data:

       

Earnings per common share—Basic

  $ 76.14     $ 53.02     $ 61.71     $ 54.90  

Earnings per common share—Diluted

    76.14       53.02       61.71       54.90  

Book value per share(1)

    608.15       553.74       544.64       493.88  

Tangible book value per share(2)

    608.15       553.74       544.64       493.88  

Weighted average common shares outstanding—Basic

    59,138       59,427       59,355       59,444  

Weighted average common shares outstanding—Diluted

    59,138       59,427       59,355       59,444  

Shares outstanding at end of period

    59,138       59,138       59,138       59,444  


 

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

Selected Performance Ratios:

       

Return on average assets(3)

    1.52     1.25     1.05     1.04

Return on average stockholders’ equity(5)

    17.78       13.23       11.42       10.93  

Net interest margin(3)(4)

    4.25       4.14       4.09       4.11  

Noninterest expense to average assets(3)

    2.27       2.45       2.35       2.41  

Efficiency ratio

    52.92       54.85       54.01       55.57  

Average interest-earning assets to average interest-bearing liabilities

    135.33       136.74       135.31       137.03  

Loans to deposits

    74.72       75.11       75.03       82.99  

Yield on interest-earning assets

    4.68       4.46       4.43       4.34  

Cost of interest-bearing liabilities

    0.62       0.47       0.49       0.35  

Interest rate spread

    4.06       3.99       3.95       3.98  

Asset and Credit Quality Ratios:

       

Nonperforming loans to loans held for investment

    0.00     1.06     1.76     1.31

Nonperforming assets to loans plus OREO

    0.50       1.51       2.28       1.78  

Nonperforming assets to total assets

    0.34       1.03       1.56       1.33  

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

    0.10       0.23       0.21       0.65  

Allowance for loan losses to nonperforming loans

    —         113.97       67.56       84.62  

Allowance for loan losses to loans held for investment

    1.21       1.21       1.19       1.11  

Capital Ratios:

       

Average equity to average total assets

    8.53     9.43     9.24     9.52

Tangible equity to tangible assets(5)

    8.53       9.43       9.24       9.52  

 

(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 Beeville 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 Beeville common stock at the end of the relevant period. Tangible book value per share is a non-GAAP financial measure. Beeville did not have goodwill or other intangible assets during any of the periods presented and therefore, tangible book value per share is equal to book value per share.

(3)

Interim periods annualized.

(4)

Net interest margin is shown on a fully taxable equivalent basis, which is a non-GAAP financial measure. Beeville calculates the GAAP-based net interest margin as interest income divided by average interest-earning assets. See Beeville’s reconciliation of non-GAAP financial measures to their most directly comparable GAAP financial measures in the section of this document entitled “Beeville’s Management Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Financial Measures,” beginning on page 253.

(5)

Beeville calculates tangible equity as total stockholders’ equity less goodwill and other intangible assets, net of accumulated amortization, and Beeville 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. Beeville did not have goodwill or other intangible assets during any of the periods presented and therefore, tangible equity equaled total stockholders’ equity and tangible assets equaled total assets for each period presented.



 

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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 Comanche acquisition and the merger. The selected unaudited pro forma combined condensed consolidated financial information assumes that the Comanche acquisition is and 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 and Beeville, as of the date the Comanche acquisition has completed and as of the date the merger is completed, respectively, will be recorded by Spirit at their respective fair values and the excess of the merger consideration over the fair value of Comanche’s and Beeville’s net assets will be allocated to goodwill.

The table sets forth the information as if the Comanche acquisition and the merger had become effective on September 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.

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 Statements,” 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
September 30, 2018
 
     (Dollars in
thousands)
 

Pro Forma Combined Condensed Consolidated Balance Sheet Data:

  

Cash and cash equivalents

   $ 102,899  

Loans, net

     1,342,585  

Total assets

     1,851,150  

Deposits

     1,543,335  

FHLB advances

     74,961  

Trust preferred securities

     2,411  

Other liabilities

     12,281  

Total shareholders’ equity

     218,162  


 

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     For the Nine Months
Ended September 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

   $ 53,501      $ 63,307  

Provision for loan losses

     1,905        3,476  

Noninterest income

     9,518        12,938  

Noninterest expense

     44,596        56,459  

Income before income taxes

     16,518        16,310  

Net income

     13,463        10,105  

Pro Forma Combined Consolidated Per Share Data:

     

Earnings per common share:

     

Basic

   $ 1.09      $ 0.92  

Diluted

     1.05        0.90  

Weighted average common shares outstanding:

     

Basic

     12,395,109        10,955,786  

Diluted

     12,816,694        11,241,947  


 

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UNAUDITED PRO FORMA COMBINED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The following unaudited pro forma combined condensed consolidated balance sheet as of September 30, 2018 and the unaudited pro forma combined condensed consolidated statements of income for the nine months ended September 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 (i) the completion of the Comanche acquisition on November 14, 2018, including the issuance of 2,142,857 shares of Spirit common stock to Comanche shareholders, and (ii) the completion of the merger, including the expected issuance of 1,579,268 shares of Spirit common stock to Beeville 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 $18.99, which was the closing price of Spirit common stock on November 14, 2018, as to the issuance of 2,142,857 shares of Spirit common stock to Comanche shareholders; and

 

   

net cash payment to Comanche shareholders of $12,200,000.

 

   

a closing price of Spirit common stock of $21.48 per share, which was the closing price of Spirit common stock on February 4, 2019, as to the expected issuance of 1,579,268 shares of Spirit common stock to Beeville shareholders;

 

   

expected cash payment to Beeville shareholders of $32,375,000;

 

   

Beeville’s adjusted equity capital as of the close of business on the business day preceding the date the merger is completed does not exceed the minimum equity capital; and

 

   

no dissenting shares by Beeville shareholders.

The unaudited pro forma combined condensed consolidated financial statements give effect to the Comanche acquisition and the merger as business combinations under GAAP. Accordingly, all Comanche and Beeville assets and liabilities were recorded at their respective fair values and the excess of the merger consideration over the fair value of Comanche’s and Beeville’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 merger 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 and Beeville. 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



 

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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, Comanche and Beeville been combined during these periods.

The unaudited pro forma combined condensed consolidated financial statements sets forth the information as if the Comanche acquisition and the merger had become effective on September 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 statements. 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, Beeville and Comanche.



 

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UNAUDITED PRO FORMA COMBINED CONDENSED CONSOLIDATED BALANCE SHEET

AS OF SEPTEMBER 30, 2018

 

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

Assets

             

Cash and cash equivalents

  $ 44,138     $ 51,870     $ (16,700 )(a)    $ 79,308     $ 58,813     $ (35,222 )(l)    $ 102,899  

Investment securities (available for sale,
at fair value)

    33,449       150,334       —         183,783       54,793       —         238,576  

Loans held for sale

    5,500       —         —         5,500       —         —         5,500  

Loans held for investment

    954,074       119,772       (946 )(b)      1,072,900       278,989       (3,148 )(m)      1,348,741  

Allowance for loan losses

    (6,156     (3,092     3,092  (c)      (6,156     (3,375     3,375  (c)      (6,156
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans, net

    947,918       116,680     $ 2,146       1,066,744       275,614       227       1,342,585  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Premises and equipment, net

    46,135       5,364       1,153  (d)      52,652       7,314       1,250  (n)      61,216  

Other real estate owned and repossessed
assets

    289       33       —         322       1,410       —         1,732  

Goodwill

    4,485       3,815       8,334  (e)      16,634       —         28,727  (o)     45,361  

Core deposit intangible

    2,959       —         5,990  (f)      8,949       —         5,721  (p)      14,670  

SBA servicing asset

    3,561       —         —         3,561       —         —         3,561  

Deferred tax asset, net

    1,667       1,912       (1,888 )(g)      1,691       1,023       (1,353 )(q)      1,361  

Bank-owned life insurance

    483       6,875       —         7,358       7,813       —         15,171  

FHLB and other bank stock, at cost

    4,861       331       —         5,192       1,249       —         6,441  

Other assets

    6,766       1,672       —         8,438       3,639       —         12,077  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

    1,102,211       338,886       (965     1,440,132       411,668       (650     1,851,150  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities and Shareholders’ Equity

             

Deposits:

             

Transaction accounts:

             

Noninterest-bearing

  $ 207,727     $ 61,804     $ —       $ 269,531     $ 96,443     $ —       $ 365,974  

Interest-bearing

    222,245       130,555       —         352,800       219,052       —         571,852  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total transaction accounts

    429,972       192,359       —         622,331       315,495       —         937,826  

Time deposits

    442,638       104,521       285  (h)      547,444       57,865       200  (r)      605,509  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total deposits

    872,610       296,880       285       1,169,775       373,360       200       1,543,335  

FHLB advances

    74,961       —         —         74,961       —         —         74,961  

Trust preferred securities

    —         2,811       (400 )(i)      2,411       —         —         2,411  

Other liabilities

    3,747       2,152       —         5,899       2,343       4,039  (u)      12,281  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

    951,318       301,843       (115     1,253,046       375,703       4,239       1,632,988  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Stockholders’ equity:

             

Common stock

    127,541       18,347       22,346  (j)      168,234       1,254       32,669  (s)      202,157  

Retained earnings

    24,490       26,738       (31,238 )(k)      19,990       38,473       (41,320 )(t)      17,143  

Accumulated other comprehensive loss

    (1,138     (5,117     5,117  (k)      (1,138     (1,011     1,011  (t)      (1,138

Treasury stock, at cost

    —         (2.925     2,925  (k)      —         (2,751     2,751  (t)      —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total shareholders’ equity

    150,893       37,043       (850     187,086       35,965       (4,889     218,162  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and shareholders’ equity

  $ 1,102,211     $ 338,886     $ (965   $ 1,440,132     $ 411,668     $ (650   $ 1,851,150  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 


 

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

 

     Comanche     Beeville  

Assets of acquired bank:

    

Cash and cash equivalents

   $ 51,870     $ 58,813  

Securities available for sale

     150,334       54,793  

Loans

     118,826       275,841  

Premises and equipment

     6,517       8,564  

Core deposit intangible

     5,990       5,721  

Deferred tax asset, net

     24       (330

Other real estate

     33       1,410  

Other assets

     8,878       12,701  
  

 

 

   

 

 

 

Total assets acquired

     342,472       417,513  
  

 

 

   

 

 

 

Liabilities of acquired bank:

    

Deposits

   $ 297,165     $ 373,560  

Trust preferred securities

     2,411       —    

Other liabilities

     2,152       6,382  (u) 
  

 

 

   

 

 

 

Total liabilities assumed

     301,728       379,942  
  

 

 

   

 

 

 

Net assets acquired

   $ 40,744     $ 37,571  
  

 

 

   

 

 

 

Common stock issued

   $ 40,693  (j)    $ 33,923  (s) 

Cash paid

     12,200       32,375  
  

 

 

   

 

 

 

Total purchase price

   $ 52,893       66,298  
  

 

 

   

 

 

 

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

   $ 12,149     $ 28,727  
  

 

 

   

 

 

 

 

(a)

Record cash paid at close of $12.2 million and estimated transaction costs attributable to Spirit of $1.7 million and $2.8 million of closing costs attributable to Comanche.

(b)

Estimated fair market value adjustment on the acquired loan portfolio, which includes a $1.6 million adjustment for expected credit losses partially offset by a $682 thousand interest premium. The fair market value adjustment was estimated based upon third party loan valuation analysis. This fair market value adjustment is being accreted into interest income on a straight-line basis over the four year average life of the portfolio.

(c)

Eliminate acquiree’s allowance for loan losses.

(d)

Estimated fair market value adjustment on premises acquired based upon appraisals. Depreciation on the portion of the fair market value adjustment estimated to be attributable to buildings of $1.1 million will be taken over an estimated life of 30 years on a straight-line basis.

(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 $12.1 million will be recorded.

(f)

Estimated core deposit intangible based upon third party analysis performed. Amortization of core deposit intangible will occur over a six year life using the sum of the years digits method. Estimated amortization in years one through six are $1.7 million, $1.4 million, $1.1 million, $856 thousand, $570 thousand, and $285 thousand, respectively.

(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 $1.9 million consists of a deferred tax liability related to the elimination of the deferred tax asset related to Comanche existing allowance and the deferred tax asset arising from the acquired loans fair value adjustment of $204 thousand, a deferred tax liability related to premises and equipment of $318 thousand, a deferred tax liability related to core deposit intangible and time deposit fair value mark of $1.3 million, and the elimination of Comanche existing deferred tax asset for transaction costs of $48 thousand.



 

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(h)

Estimated fair market value of time deposits based upon third party analysis performed. Amortization of adjustment on time deposits will occur over a 2.5 year life using the sum of the years digits method.

(i)

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.

(j)

Eliminate Comanche common stock of $18.4 million and issue 2,142,857 shares of Spirit common stock at November 14, 2018 closing price of $18.99 for a total of $40.7 million for a net adjustment of $22.3 million.

(k)

Eliminate Comanche capital accounts. Adjustment to retained earnings includes $4.5 million in estimated closing costs yet to be incurred as of September 30, 2018.

(l)

Record cash paid at close of $32.4 million and estimated transaction costs yet to be incurred attributable to Spirit of $2.0 million and attributable to Beeville of $847 thousand.

(m)

Estimated fair market value adjustment on the acquired loan portfolio, which includes a $3.3 million adjustment for expected credit losses partially offset by a $200 thousand interest premium. The credit fair market value adjustment was estimated as 1.2% of the loan portfolio and the interest premium was estimated based upon loan portfolio yields for a group of ten of Beeville’s peer banks compared to the yield on Beeville’s loan portfolio. This fair market value adjustment is being accreted into interest income on a straight-line basis over the ten year average life of the portfolio.

(n)

Estimated fair market value adjustment on premises acquired based upon insured value. Depreciation on the portion of the fair market value adjustment estimated to be attributable to buildings, furniture, and fixtures of $1.2 million will be taken over an estimated life of 30 years on a straight-line basis.

(o)

Record goodwill for amount of consideration and liabilities assumed over fair value of the assets received.

(p)

Estimated core deposit intangible calculated as 2.0% of non time deposits excluding public funds up for bid. Amortization of core deposit intangible will occur over a ten year life using the sum of the years digits method. Estimated amortization in years one through five are $1.0 million, $936 thousand, $832 thousand, $728 thousand and $624 thousand respectively.

(q)

Estimated fair market value adjustment on acquired deferred tax assets and liabilities, net using a 21.0% enacted tax rate. The fair market value adjustment of the deferred tax asset is $1.4 million. The significant components are a deferred tax asset related to acquired loans fair value adjustment of $661 thousand, a deferred tax liability related to premises and equipment of $263 thousand, a deferred tax liability related to core deposit intangible of $1.2 million, and the elimination of the deferred tax asset related to Beeville’s historical allowance for loan losses of $422 thousand. Acquired deferred tax assets consists of deferred taxes on deferred compensation ($412 thousand), and premises and equipment ($299 thousand). Acquired deferred tax liabilities consists of deferred taxes on core deposit intangibles of $1.2 million and FHLB stock dividends of $10 thousand.

(r)

Estimated fair market value adjustment on time deposits based upon published market time deposit rates compared to the yield on Beeville’s time deposits.

(s)

Issue 1,579,268 shares of Spirit common stock at February 4, 2019 closing price of $21.48 for a total of $33.9 million in equity consideration.

(t)

Eliminate Beeville capital accounts. Adjustment to retained earnings includes $2.8 million in estimated closing costs yet to be incurred as of September 30, 2018. If the adjusted equity capital is less than $34.8 million as of the close of business on the business day preceding the date the merger is completed, then the cash consideration will be reduced on a dollar of dollar basis. If Beeville’s adjusted equity capital exceeds the minimum equity capital as of the close of business on the business day preceding the date the merger is completed, then Beeville may declare and pay to its shareholders a cash dividend. If the average closing price of Spirit common stock is less than $15.85 per share, the merger consideration may be increased in order to prevent the termination of the reorganization agreement.

(u)

Liability arising from Change in Control Agreement and Stock Appreciation Rights Plan Award Agreements that were in place prior to the reorganization agreement. The value of the stock appreciation rights was derived using the February 4, 2019 closing price of Spirit common stock of $21.48.



 

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Any change in the price of Spirit common stock would change the purchase price allocated to goodwill with respect to the merger with Beeville. The following table represents the sensitivity of the purchase price and resulting goodwill to be recorded with respect to the merger with Beeville to changes in the price of Spirit common stock of $21.48, the closing price of Spirit common stock on February 4, 2019.

 

     Purchase
Price
     Estimated
Goodwill
 
     (Unaudited, dollars in thousands)  

As presented in the pro forma combined results

   $ 66,298      $ 28,727  

20.0% increase in Spirit common stock price

     73,082        35,511  

20.0% decrease in Spirit common stock price

     59,513        21,942  

Minimum Spirit common stock price allowed under the definitive agreement. ($15.85)

     57,406        19,835  


 

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UNAUDITED PRO FORMA COMBINED CONDENSED CONSOLIDATED STATEMENT OF INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2018

 

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

Interest income:

             

Interest and fees on loans

  $ 39,270     $ 5,613     $ 177  (a)    $ 45,060     $ 11,646     $ 236  (g)    $ 56,942  

Interest and dividends on investment securities

    611       3,627       —         4,238       875       —         5,113  

Other interest income

    536       204       —         740       619       —         1,359  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

    40,471       9,444       177       50,038       13,140       236       63,414  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense:

             

Interest on deposits

  $ 5,869     $ 1,325     $ (15 )(b)    $ 7,179     $ 1,288     $ (50 )(h)    $ 8,417  

Interest on FHLB advances and other borrowings

    1,395       82       17  (c)      1,494       2       —         1,496  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense

    7,264       1,407       2       8,673       1,290       (50     9,913  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

    33,153       8,037       175       41,365       11,850       286       53,501  

Provision for loan losses

    1,460       —         —         1,460       445       —         1,905  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after provision for loan losses

    31,693       8,037       175       39,905       11,405       286       51,596  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Noninterest income:

             

Service charges and fees

  $ 1,238     $ 656     $ —       $ 1,894     $ 638     $ —       $ 2,532  

SBA loan servicing fees

    1,701       —         —         1,701       —         —         1,701  

Gain on sales of loans, net

    3,884       —         —         3,884       —         —         3,884  

Other noninterest income

    635       537       —         1,172       229       —         1,401  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest income

    7,458       1,193       —         8,651       867       —         9,518  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Noninterest expense:

             

Salaries and employee benefits

  $ 19,524     $ 4,050     $ —       $ 23,574     $ 4,005     $ —       $ 27,579  

Occupancy and equipment expenses

    3,736       735       29  (d)      4,500       790       31  (i)      5,321  

Professional services

    1,249       113       —         1,362       149       —         1,511  

Data processing and network

    936       94       —         1,030       414       —         1,444  

Regulatory assessments and insurance

    787       174       —         961       266       —         1,227  

Amortization of intangibles

    527       —         1,070  (e)      1,597       —         702  (j)      2,299  

Other operating expenses

    3,029       1,080       —         4,109       1,106       —         5,215  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest expense

    29,788       6,246       1,099       37,133       6,730       733       44,596  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income tax expense

    9,363       2,984       (924     11,423       5,542       (447     16,518  

Income tax expense

    1,898       406       (194 )(f)      2,110       1.039       (94 )(f)      3,055  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

  $ 7,465     $ 2,578     $ (730   $ 9,313     $ 4.503     $ (353   $ 13,463  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Share and per share data:

             

Earnings per common share:

             

Basic

  $ 0.86     $ 6.45       $ 0.86     $ 76.14       $ 1.09  

Diluted

  $ 0.82     $ 6.45       $ 0.83     $ 76.14       $ 1.05  

Weighted average common shares outstanding:

             

Basic

    8,673,106       399,811         10,815,917       59,138         12,395,109  

Diluted

    9,094,691       399,811         11,237,502       59,138         12,816,694  

 

(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 time deposits based on expected fair market value.

(c)

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

(d)

Additional depreciation related to fair market value adjustment on premises.

(e)

Expected amortization of additional core deposit intangible of $6.0 million is based on a six year life using the sum of the years digits amortization method.



 

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(f)

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

(g)

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

(h)

Adjustment to interest expense for amortization on Beeville’s time deposits based on expected fair market value.

(i)

Additional depreciation related to fair market value adjustment on premises.

(j)

Expected amortization of additional core deposit intangible of $5.7 million is based on a ten year life using the sum of the years digits amortization method.



 

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UNAUDITED PRO FORMA COMBINED CONDENSED CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 2017

 

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

Interest income:

             

Interest and fees on loans

  $ 45,411     $ 7,452     $ 237  (a)    $ 53,100     $ 13,355     $ 315  (g)    $ 66,770  

Interest and dividends on investment securities

    517       4,426       —         4,943       894       —         5,837  

Other interest income

    979       77       —         1,056       313       —         1,369  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

    46,907       11,955       237       59,099       14,562       315       73,976  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense:

             

Interest on deposits

  $ 6,602     $ 1,386     $ (267 ) (b)    $ 7,721     $ 1,134     $ (87 )(h)    $ 8,768  

Interest on FHLB advances and other borrowings

    1,726       103       22  (c)      1,851       50       —         1,901  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense

    8,328       1,489       (245     9,572       1,184       (87     10,669  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

    38,579       10,466       482       49,527       13,378       402       63,307  

Provision for loan losses

    2,475       —         —         2,475       1,001       —         3,476  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after provision for loan losses

    36,104       10,466       482       47,052       12,377       402       59,831  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Noninterest income:

             

Service charges and fees

  $ 1,501     $ 936     $ —       $ 2,437     $ 902     $ —       $ 3,339  

SBA loan servicing fees

    1,794       —         —         1,794       —         —         1,794  

Gain on sales of loans, net

    5,684       —         —         5,684       —         —         5,684  

Other noninterest income

    659       645       —         1,304       817       —         2,121  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest income

    9,638       1,581       —         11,219       1,719       —         12,938  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Noninterest expense:

             

Salaries and employee benefits

  $ 23,338     $ 5,396     $ —       $ 28,734     $ 4,707     $ —       $ 33,441  

Occupancy and equipment expenses

    5,123       1,032       39  (d)      6,194       996       42  (i)      7,232  

Professional services

    1,845       178       —         2,023       299       —         2,322  

Data processing and network

    1,266       125       —         1,391       461       —         1,852  

Regulatory assessments and insurance

    924       255       —         1,179       240       —         1,419  

Amortization of intangibles

    703       —         1,711  (e)      2,414       —         1,040  (j)      3,454  

Other operating expenses

    4,203       1,086       —         5,289       1,450       —         6,739  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest expense

    37,402       8,072       1,750       47,224       8,153       1,082       56,459  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income tax expense

    8,340       3,975       (1,268     11,047       5,943       (680     16,310  

Income tax expense

    3,587       1,000       (431 )(f)      4,156       2,280       (231 )(f)      6,205  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

  $ 4,753     $ 2,975     $ (837   $ 6,891     $ 3,663     $ (449   $ 10,105  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Share and per share data:

             

Earnings per common share:

             

Basic

  $ 0.65     $ 7.40       $ 0.73     $ 61.71       $ 0.92  

Diluted

  $ 0.63     $ 7.40       $ 0.71     $ 61.71       $ 0.90  

Weighted average common shares outstanding:

             

Basic

    7,233,783       402,002         9,376,640       59,355         10,955,786  

Diluted

    7,519,944       402,002         9,662,801       59,355         11,241,947  

 

(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 time deposits based on expected fair market value.

(c)

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



 

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(d)

Additional depreciation related to fair market value adjustment on premises.

(e)

Expected amortization of additional core deposit intangible of $6.0 million is based on a six year life using the sum of the years digits amortization method.

(f)

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

(g)

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

(h)

Adjustment to interest expense for amortization on Beeville’s time deposits based on expected fair market value.

(i)

Additional depreciation related to fair market value adjustment on premises.

(j)

Expected amortization of additional core deposit intangible of $5.7 million is based on a ten year life using the sum of the years digits amortization method.



 

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UNAUDITED COMPARATIVE PER SHARE DATA

The following table shows unaudited earnings and book value per share data for Spirit, Comanche and Beeville on a historical and pro forma combined company basis after giving effect to the Comanche acquisition and the merger as of and for the nine months ended September 30, 2018 and year ended December 31, 2017. The information should be read together with the historical consolidated financial statements of Spirit, Comanche and Beeville 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 Comanche acquisition and the merger, does not reflect the impact of other factors that may result as a consequence of the Comanche acquisition or the merger or consider any potential impacts of current market conditions, the Comanche acquisition or the merger on revenues, expense efficiencies or asset dispositions, among other factors, or 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 Beeville will be reflected in the consolidated financial statements of Spirit on a prospective basis.

The per equivalent Beeville share data shows the effect of (i) the Comanche acquisition, including the issuance of 2,142,857 shares of Spirit common stock to Comanche shareholders, and (ii) the merger, including the issuance of 1,579,268 shares of Spirit common stock to Beeville shareholders.

 

     Spirit
Historical
     Comanche
Historical
     Beeville
Historical
     Pro
Forma
Combined
     Per
Equivalent
Beeville
Share
 

Book value per share:

              

At September 30, 2018

   $ 15.38      $ 92.78      $ 608.15      $ 16.41      $ 438.23  

Basic earnings per share:

              

Nine months ended September 30, 2018

   $ 0.86      $ 6.45      $ 76.14      $ 1.09      $ 28.84  

Year ended December 31, 2017

     0.65        7.40        61.71        0.92        24.84  

Diluted earnings per share:

              

Nine months ended September 30, 2018

   $ 0.82      $ 6.45      $ 76.14      $ 1.05      $ 28.04  

Year ended December 31, 2017

     0.63        7.40        61.71        0.90        24.30  


 

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RISK FACTORS

An investment by Beeville shareholders in Spirit common stock as a result of the exchange of shares of Spirit common stock for shares of Beeville common stock in the merger involves certain risks. Certain material risks and uncertainties connected with the merger and ownership of Spirit common stock are discussed below.

Beeville 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 Beeville 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 would hold upon consummation of the merger could decline significantly, and the Beeville shareholders could lose all or part of their investments in Spirit common stock.

Risks Relating to the Merger

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

Spirit and Beeville expect the merger to close during the second quarter of 2019, but the merger 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 Beeville 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, Beeville or Beeville Bank;

 

   

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

 

   

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

 

   

receipt by Spirit and Beeville 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 Beeville shareholders as consideration for the merger; and

 

   

the approval by Beeville 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 Beeville 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 105.

Because the market price of Spirit common stock will fluctuate, Beeville 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 Beeville common stock immediately prior to the completion of the merger will receive his, her or its proportional share of (i) $32,375,000 in cash and (ii) 1,579,268 shares of Spirit common stock, subject to certain adjustments, together with cash in lieu of a fractional share of Spirit

 

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common stock. In addition, if the average closing price of Spirit common stock is less than $15.85 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 Beeville. For a discussion of the possible upward adjustment to the merger consideration, see the section of this document entitled “The Reorganization Agreement—Adjustments to Merger Consideration,” beginning on page 97. There will be a lapse of time between each of the date of this document, the date of the Beeville special meeting and the date on which Beeville 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 Beeville. 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 Beeville 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 TDB, 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 Beeville 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 Beeville common stock or Spirit common stock currently.

The businesses of Spirit and Beeville 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 Beeville. 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 44, 55 and 60, respectively.

Combining the two companies (and continuing to integrate Comanche Bank) may be more difficult, costly or time consuming than expected, and the anticipated benefits and cost savings of the merger and/or the Comanche acquisition may not be realized.

Spirit and Beeville 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 Spirit’s ability to successfully combine and integrate the businesses of Spirit and Beeville 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 of Beeville 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

 

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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. In addition, the integration of Comanche continues to occupy the time and resources of Spirit’s management team. If Spirit experiences difficulties with the integration process of Comanche and/or Beeville, 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 Beeville to lose customers or cause customers to remove their accounts from Spirit and/or Beeville 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 Beeville 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 Beeville’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 Comanche acquisition and the merger been completed on the dates indicated. The unaudited pro forma combined consolidated financial statements reflect adjustments to illustrate the effect of the Comanche acquisition and 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 Beeville 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 Beeville’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 Beeville’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.

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

Some of Beeville’s executive officers participated in negotiations of the reorganization agreement with Spirit, and the Beeville board of directors approved the reorganization agreement and is recommending that Beeville shareholders vote to approve the reorganization agreement. In considering these facts, you should be aware that certain of Beeville’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 Beeville shareholder. These interests include, as a result of the merger, the payment of certain benefits to Brian K. Schneider and Kent Fry, among other Beeville officers, to which they are entitled under existing agreements and arrangements with Beeville. In addition, in connection with the merger, Mr. Schneider and Mr. Fry have entered into employment agreements pursuant to which they will serve as Regional President—South Texas Region of Spirit Bank and Chief Lending Officer—South Texas Region of Spirit Bank, respectively, after the merger is completed. Additionally, upon completion of the merger, Spirit has agreed to appoint Allen C. Jones, IV to the Spirit board of directors and Brannon Brooke and George G. Latcham to the board of directors of Spirit Bank. For further discussion of the interests of Beeville’s directors and officers in the merger, see the section of this document entitled “The Merger—Interests of Beeville’s Directors and Executive Officers in the Merger,” beginning on page 90.

 

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Holders of Beeville 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 Beeville 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 Beeville and Spirit, respectively. After the merger is completed, each Beeville 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 Beeville. Based on 12,136,616 shares of Spirit common stock outstanding on February 1, 2019 and 1,579,268 shares of Spirit common stock to be issued in the merger, it is currently expected that stock consideration that the former Beeville shareholders as a group will receive in the merger will constitute approximately 11.5% 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 88.5% of the issued and outstanding shares of Spirit common stock immediately after the completion of the merger. Because of this reduced ownership percentage, Beeville shareholders may have less influence on the management and policies of Spirit than they now have on the management and policies of Beeville, and current Spirit shareholders may have less influence than they now have on the management and policies of Spirit.

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

The reorganization agreement prohibits Beeville from initiating, soliciting, encouraging or facilitating certain third-party acquisition proposals. In addition, Beeville has agreed to pay Spirit a termination fee of $2,500,000 if the transaction is terminated (i) because Beeville fails to call or does not receive the required vote to approve the reorganization agreement at the Beeville 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, Beeville has not obtained the required approval of Beeville 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 Beeville 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 Beeville 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 Beeville than it might otherwise have proposed to pay.

The fairness opinion rendered to the Beeville board of directors by its financial advisor was based on the financial analyses performed by such financial advisor as of the date of its opinion.

The opinion rendered on November 27, 2018 by Sheshunoff was based on the financial analyses performed, which considered market and other conditions then in effect, and financial forecasts and other information made available to it, as of the date of its opinion, which may have changed, or may change, after the date of the opinion. The opinion has not 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 Beeville, changes in general market and economic conditions or other changes. Any such changes may alter the relative value of Beeville or the prices of shares of Spirit common stock or Beeville common stock by the time the merger is completed. The opinion does not speak as of the date the merger will be completed or as of any date other than the date of such opinion. For a description of the opinion that Beeville received from its financial advisor, see the section of this document entitled “The Merger—Opinion of Beeville’s Financial Advisor,” beginning on page 80. The full Sheshunoff fairness opinion is included with this document as Annex C.

 

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

The rights associated with Beeville 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 Beeville common stock. For example, Beeville shareholders currently elect each member of their board of directors at each annual meeting of Beeville shareholders. Upon completion of the merger, Beeville 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 121, for a more detailed description of the rights of each of Beeville shareholders and Spirit shareholders.

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

Beeville 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 Beeville common stock if they elect to exercise their right to dissent from the merger, depending on the appraisal of the fair value of the Beeville 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 92, and Annex B. For this reason, the amount of cash that such Beeville 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 Beeville common stock exercised their statutory dissenters’ rights under the TBOC. The number of shares of Beeville 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 Beeville 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 Beeville to complete the merger are conditioned on, among other things, the receipt by Spirit and Beeville 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.

Each Beeville 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.

 

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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 and North Central Texas, 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 North Central Texas, and, as of September 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 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 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

 

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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 and North Central Texas, 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, 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

 

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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.

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

 

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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 September 30, 2018, SBA 7(a) and 504 program loans of $75.9 million comprised 8.0% 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 September 30, 2018, loans to foreign nationals of $125.1 million comprised 13.1% of Spirit’s loan portfolio and deposits from foreign nationals of $29.6 million comprised 3.4% 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 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.

 

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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 $954.1 million as of September 30, 2018, from $869.1 million as of December 31, 2017, and $863.6 million as of September 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.

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

 

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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 September 30, 2018, Spirit’s allowance for loan and lease losses was $6.2 million, which represents 0.65% of its loans held for investment and 164.42% 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.

In the aftermath of the 2008 financial crisis, the Financial Accounting Standards Board, or FASB, decided to review how banks estimate losses in the allowance calculation, and it issued the final current expected credit loss standard, or CECL, in June 2016. Currently, the impairment model is based on incurred losses, and investments are recognized as impaired when there is no longer an assumption that future cash flows will be collected in full under the originally contracted terms. This model will be replaced by the new CECL model that will become effective for us, as an emerging growth company, for the first interim and annual reporting periods beginning after December 15, 2021. Under the new CECL model, financial institutions will be required to use historical information, current conditions and reasonable forecasts to estimate the expected loss over the life of the loan. The transition to the CECL model will bring with it significantly greater data requirements and changes to methodologies to accurately account for expected losses under the new parameters.

Management is currently evaluating the impact of these changes to our financial position and results of operations. The allowance is a material estimate of ours, and given the change from an incurred loss model to a

 

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methodology that considers the credit loss over the life of the loan, there is the potential for an increase in the allowance at adoption date. We anticipate a significant change in the processes and procedures to calculate the allowance, including changes in assumptions and estimates to consider expected credit losses over the life of the loan versus the current accounting practice that utilizes the incurred loss model. We expect to continue developing and implementing processes and procedures to ensure we are fully compliant with the CECL requirements at its adoption date.

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 September 30, 2018, $159.8 million, or 16.8% 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, 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 September 30, 2018, $244.6 million, or 25.6% 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 and North Central Texas, 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 September 30, 2018, $324.2 million, or 34.0% 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

 

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$155.8 million, or 16.3% 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.

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,

 

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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 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 September 30, 2018, the aggregate amount of loans to Spirit’s 10 and 20 largest borrowers (including related entities) amounted to $97.6 million, or 10.2% of loans held for investment, and $158.1 million, or 16.6% 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 September 30, 2018, $51.5 million, or 5.4% 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

 

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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 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

 

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interest sensitivity profile was asset sensitive as of September 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.

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 (3.0% as of September 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 September 30, 2018, the fair value of Spirit’s available for sale investment securities portfolio was $33.4 million, which included a net unrealized loss of $1.4 million. On a pro forma basis, approximately 12.9% 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 $238.6 million as of September 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 and North Central Texas. 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.

 

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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.

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 $25.1 million as of September 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

 

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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.

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

 

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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 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

 

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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 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

 

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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 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.

 

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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 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

 

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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 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

 

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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 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;

 

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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.

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

 

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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.

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.

 

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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.

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

 

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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 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.

 

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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.

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.

 

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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 Beeville 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 Beeville’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 Beeville’s shareholders to approve the Beeville merger proposal;

 

   

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

 

   

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

 

   

risks related to the concentration of Spirit’s business in Texas, and in the Houston, Dallas/Fort Worth and Bryan/College Station metropolitan areas and North Central Texas 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;

 

   

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

 

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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 Beeville 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 Beeville 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 BEEVILLE SPECIAL MEETING

This section contains information for Beeville shareholders about the Beeville special meeting that Beeville has called to allow its shareholders to consider and vote on the Beeville merger proposal. Beeville is mailing this document to you, as a Beeville shareholder, on or about February 12, 2019. This document is accompanied by a notice of the Beeville special meeting and a form of proxy card that the Beeville board of directors is soliciting for use at the Beeville special meeting and at any adjournments or postponements of the Beeville special meeting.

Date, Time and Place

The Beeville special meeting will be held on March 13, 2019 at 1400 East Houston Street, Beeville, Texas 78102, at 2:00 p.m., local time. On or about February 12, 2019, Beeville commenced mailing this document and the form of Beeville proxy card to its shareholders entitled to vote at the Beeville special meeting.

Matters to Be Considered

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

 

   

the Beeville merger proposal; and

 

   

the Beeville adjournment proposal.

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

Recommendation of the Beeville Board of Directors

On November 27, 2018, the Beeville board of directors unanimously approved the reorganization agreement and the transactions contemplated thereby. Based on Beeville’s reasons for the merger described in the section of this document entitled “The Merger—Beeville’s Reasons for the Merger; Recommendation of the Beeville Board of Directors,” beginning on page 78, the Beeville board of directors believes that the merger is in the best interests of Beeville shareholders.

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

Beeville Record Date and Quorum

The Beeville board of directors has fixed the close of business on February 1, 2019 for determining the holders of Beeville common stock entitled to receive notice of and to vote at the Beeville special meeting.

As of the Beeville record date, there were 59,138 shares of Beeville common stock outstanding and entitled to notice of, and to vote at, the Beeville special meeting or any adjournment or postponement thereof, and such outstanding shares of Beeville common stock were held by approximately153 holders of record. Each share of Beeville common stock entitles the holder to one vote at the Beeville special meeting on each proposal to be considered at the Beeville special meeting.

No business may be transacted at the Beeville 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 Beeville common stock entitled to be voted at the Beeville special meeting constitutes a quorum for transacting business at the Beeville special meeting. All shares of Beeville 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 Beeville special meeting.

 

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

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

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

Shares Held by Directors and Executive Officers

As of the Beeville record date, the directors and executive officers of Beeville and their affiliates beneficially owned and were entitled to vote, in the aggregate, 10,855 shares of Beeville common stock, representing approximately 18.36% of the shares of Spirit common stock outstanding on that date. Certain directors of Beeville have entered into a voting agreement with Spirit, solely in their capacity as Beeville shareholders, pursuant to which they have agreed to vote in favor of the reorganization agreement and the transactions contemplated thereby. The Beeville shareholders who are party to the voting agreement beneficially own and are entitled to vote in the aggregate approximately 18.26% of the outstanding shares of Beeville common stock as of the Beeville record date. As of the Beeville record date, Spirit beneficially owned no shares of Beeville common stock, and the directors and executive officers of Spirit and their affiliates beneficially owned no shares of Beeville common stock.

Voting by Proxy or in Person; Incomplete Revocation of Proxies

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

If you hold your shares of Beeville 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 Beeville common stock represented by valid proxies that Beeville 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 Beeville common stock voted before signing and returning it, your proxy will be voted as recommended by the Beeville board of directors. No matters other than the matters described in this document are anticipated to be presented for action at the Beeville 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 Beeville 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 Beeville special meeting, but with

 

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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 Beeville merger proposal and the Beeville adjournment proposal are non-routine matters. If your bank, broker or other nominee holds your shares of Beeville common stock in “street name,” your broker, bank or nominee will vote your shares of Beeville 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 Beeville Shareholder’s Vote

If you hold shares of Beeville common stock in your name as a shareholder of record as of the Beeville record date, you may change your vote or revoke any proxy at any time before the Beeville special meeting is called to order by (i) attending and voting in person at the Beeville special meeting; (ii) giving notice of revocation of the proxy at the Beeville special meeting; or (iii) delivering to the Secretary of Beeville (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 Beeville shareholder entitled to vote in person at the Beeville special meeting may vote in person regardless of whether a proxy has been previously given, but your attendance by itself at the Beeville special meeting will not automatically revoke your proxy unless you give written notice of revocation to the Secretary of Beeville before the Beeville special meeting is called to order.

All written notices of revocation and other communications about revoking your proxy should be addressed to First Beeville Financial Corporation, 1400 East Houston Street, Beeville, Texas 78102, Attention: Secretary.

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

Attending the Beeville Special Meeting

All Beeville shareholders, including holders of record as of the Beeville record date and shareholders who hold their shares through banks, brokers, nominees or other record holders, are invited to attend the Beeville special meeting. Beeville shareholders of record as of the Beeville record date can vote in person at the Beeville special meeting. If you are not a Beeville shareholder of record as of the Beeville record date, you must obtain a proxy executed in your favor from the record holder of your shares of Beeville common stock, such as a broker, bank or other nominee, to be able to vote in person at the Beeville special meeting. If you plan to attend the Beeville special meeting, you must hold your shares of Beeville 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. Beeville 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 Beeville special meeting is prohibited without Beeville’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 Beeville common stock, please contact Brian K. Schneider at (361) 358-1530 or brians@fnbsotx.com.

 

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BEEVILLE PROPOSALS

Beeville Merger Proposal

Beeville is asking its shareholders to approve the reorganization agreement and the transactions contemplated thereby. Beeville 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 Beeville 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 Beeville and its shareholders. See the section of this document entitled “The Merger—Beeville’s Reasons for the Merger; Recommendation of the Beeville Board of Directors,” beginning on page 78 for a more detailed discussion of the recommendation of the Beeville board of directors.

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

Beeville Adjournment Proposal

The Beeville 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 Beeville merger proposal.

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

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

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

Other Matters to Come Before the Beeville Special Meeting

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

 

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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 and incorporated herein by reference. Beeville urges 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.

Terms of the Merger

In the merger, all of the outstanding shares of Beeville common stock (other than shares of Beeville common stock held by Beeville and dissenting shares), will be converted into the right to receive, in the aggregate, (i) $32,375,000 in cash and (ii) 1,579,268 shares of Spirit common stock, subject to certain adjustments.

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)
    Per Share
Cash
Consideration(2)
    Implied Value
of Per
Share Merger
Consideration(1)
 

November 26, 2018(3)

  $ 19.81       1,579,268 shares       26.7048 shares     $ 529.02     $ 32,375,000     $ 547.45     $ 1,076.47  

February 4, 2018(4)

    21.48       1,579,268 shares       26.7048 shares       573.62       32,375,000       547.45       1,121.07  

 

(1)

Assumes there is no adjustment to the merger consideration. For a discussion of the possible adjustments to the merger consideration, see the section of this document entitled “The Reorganization Agreement—Adjustments to Merger Consideration,” beginning on page 97.

(2)

Calculated based on 59,138 shares of Beeville common stock issued and outstanding as of February 1, 2019. Also assumes there are no dissenting shares.

(3)

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

(4)

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

If Beeville’s adjusted equity capital, is less than $34,750,000 as of the close of business on the business day preceding the date the merger is completed, then the cash consideration will be reduced, on a dollar for dollar basis, by an amount equal to the difference between the adjusted equity capital and the minimum equity capital.

If the adjusted equity capital as of the close of business on the business day preceding the date the merger is completed exceeds the minimum equity capital, then immediately prior to the effective time of the merger, Beeville may declare and pay to its shareholders a cash dividend for each outstanding share of Beeville common stock equal to the quotient of (i) 50% of the amount that the adjusted equity capital exceeds the minimum equity capital, divided by (ii) the total number of shares of Beeville common stock outstanding as of the record date of such dividend.

In addition, if the average closing price of Spirit common stock is less than $15.85 per share and Spirit common stock underperforms the selected index by more than 20.0%, Beeville 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 Beeville. 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 $25,028,239 (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 Beeville 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 Beeville’s special meeting.

 

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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. Beeville 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 $19.81.

Background of the Merger

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

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

On February 1, 2018, the Beeville board of directors engaged Sheshunoff to provide financial and market advice related to the sale of Beeville and Beeville Bank. Beeville had been considering a sale of Beeville and Beeville Bank due to, among other reasons, the liquidity needs of an aging shareholder base. Sheshunoff and the board identified twelve possible buyers that were a mix of publicly-traded institutions as well as privately-held institutions. Sheshunoff held preliminary discussions with all of these potential buyers that resulted in three parties expressing a desire to have more in-depth conversations. Two of these parties proceeded to execute a non-disclosure agreement.

Besides Spirit, a subcommittee designated by the Beeville board of directors consisting of two independent directors and Brian Schneider met on multiple occasions with one regional publicly-traded bank and one privately-held bank. The subcommittee did receive one verbal offer from another financial institution; however, the subcommittee determined to reject that offer due to the price and illiquid stock that was included as part of the offer. The subcommittee determined that a transaction with Spirit would provide both the best short-term and long-term opportunities for the Beeville shareholders. Among other reasons, the proposed cash component of Spirit’s offer would be a good fit for those shareholders desiring immediate liquidity while the stock component would provide a longer-term opportunity for those shareholders willing to hold Spirit shares for a few years. Spirit’s recent initial public offering, which we refer to as the IPO, and relatively small size were perceived by the Beeville board of directors as opportunities to partner with a company whose stock appeared to have room to grow.

On May 7, 2018, Spirit and Beeville 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 June 18, 2018 in Corpus Christi, Texas. At that meeting, the Beeville and Spirit teams were introduced and the parties agreed there was a mutual interest in a strategic combination. On June 29, 2018, Spirit submitted a non-binding Letter of Intent, which we refer to as the LOI, to Beeville. The LOI provided that Spirit would acquire Beeville for $12.4 million in cash and 2,156,500 shares of Spirit common stock, subject to certain adjustments. Under the terms of the LOI, the price would be reduced if Beeville’s total equity capital on a consolidated basis at the completion of the merger, including unrealized security gains or less and after giving effect to transaction costs and a loan loss reserve at the completion of the merger, was less than $32.8 million. The LOI included a “fiduciary out” provision permitting Beeville to evaluate a superior proposal, should one arise, following the signing of the reorganization agreement and prior to the completion of the merger. The LOI also included the appointment of one Beeville representative to the Spirit board of directors, an exclusivity period during which Spirit and Beeville could conduct due diligence on each other, and other customary provisions.

A follow-up meeting was held between the two teams at Spirit’s headquarters in Conroe, Texas on July 25, 2018. In the weeks that followed, the parties both conferred with their financial advisors and exchanged further information related to Beeville’s historical and projected financial performance, Beeville’s estimated transaction costs and other limited due diligence matters. Following these additional discussions and the exchange of

 

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information, Spirit returned a revised draft of the LOI to Beeville on August 2, 2018, which we refer to as the revised LOI. The revised LOI provided that the total purchase price would equal $64.0 million, and the number of shares of Spirit common stock would be determined using the volume weighted average price of shares of Spirit common stock for the twenty trading days prior to the date the reorganization agreement was signed; provided, that the minimum amount of cash consideration would be $16.0 million. In addition, the revised LOI provided that the minimum equity capital was increased from $32.8 million to $34.75 million on January 31, 2019, and to the extent that closing occurred after January 31, 2019 and Beeville’s total equity capital on a consolidated basis was greater than $34.75 million, Beeville could pay a special cash dividend to its shareholders in an amount equal to 50% of the difference between the equity capital at the completion of the merger minus $34.75 million.

Following the revised LOI, the parties continued negotiating minor changes to the revised LOI, including the loan loss reserve amount. The parties then executed the LOI on August 8, 2018.

Spirit and Beeville 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 discussions with selected members of the senior management of the other party. Spirit provided an initial draft of the reorganization agreement to Beeville on September 14, 2018. Over the next few months, Spirit and Beeville, 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 representations, warranties, covenants of the parties and the closing conditions. In addition, Spirit and Beeville discussed and negotiated employment agreements with Mr. Schneider and Mr. Fry to be executed concurrently with the reorganization agreement.

On November 14, 2018, the Beeville board of directors met in Beeville, 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, as well as the board of directors’ fiduciary duties. Also at the meeting, a representative of Sheshunoff 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 Beeville board of directors. Sheshunoff also discussed the potential for Beeville remaining independent.

On November 15, 2018, Stephens Inc., Spirit’s financial advisor, which we refer to as Stephens, reached out to Sheshunoff to discuss the recent volatility of bank stock prices and the potential decrease in overall transaction value resulting from such volatility. Following discussions between the management teams of Spirit and Beeville and their respective financial advisors, a compromise was negotiated that would increase the price of the transaction to $64,750,000, increasing the cash portion to $32,375,000 and fixing the number of shares of Spirit common stock to be issued at 1,579,268. In addition, Spirit offered two seats to Beeville representatives on the Spirit Bank board of directors.

On November 27, 2018, the Beeville board of directors met in Beeville, Texas to again review and consider the merger. At that meeting, a representative of Fenimore Kay explained the changes in the terms of the reorganization agreement and related transaction documents since the November 14, 2018 board meeting. Also at the meeting, a representative of Sheshunoff explained the changes in the financial aspects of the merger since the November 14, 2018 board meeting and summarized the strategic and financial rationale in favor of the transaction for both parties and responded to questions by the Beeville board of directors. At the request of the Beeville board of directors, Sheshunoff then delivered its oral opinion, which was confirmed in writing and dated November 27, 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 Sheshunoff as set forth in its opinion, the aggregate merger consideration was fair, from a financial point of view, to the Beeville shareholders. After further discussion among the directors and Beeville’s advisors, the Beeville board of directors determined that the merger and the reorganization agreement were advisable, fair to and in the best interests of, Beeville and

 

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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 Beeville shareholders.

On November 27, 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 with the Spirit board of directors their fiduciary duties and 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. 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” beginning on page 77, the Spirit board of directors unanimously authorized and approved the reorganization agreement. After this meeting, the parties entered into the reorganization agreement and announced the contemplated transaction in a joint press release following the close of trading on November 27, 2018.

Spirit’s Reasons for the Merger

After careful consideration, the Spirit board of directors unanimously approved the reorganization agreement and the transactions contemplated thereby at a meeting held on November 27, 2018.

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 evaluated the reorganization agreement and the merger in consultation with members of Spirit’s management, as well as Spirit’s legal counsel 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 Beeville’s branch footprint supplements Spirit’s South Texas operations and will create future opportunities to expand Spirit’s overall footprint in the San Antonio and Corpus Christi metropolitan areas;

 

   

the fact that the merger would respond immediately to Spirit’s need for more scale in the attractive South Texas markets;

 

   

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

 

   

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

 

   

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

 

   

the nature and quality of Beeville’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 Beeville 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 Beeville and the potential financial impact of the merger on the combined company;

 

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

 

   

the financial presentation, dated November 27, 2018, of Stephens to the Spirit board of directors;

 

   

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 Beeville’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 37 and 67, respectively.

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 67.

For the reasons set forth above, the Spirit board of directors approved the reorganization agreement and the transactions contemplated thereby.

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

After careful consideration, at its meeting on November 27, 2018, the Beeville board of directors determined that the merger is in the best interests of Beeville and its shareholders and that the consideration to be received in the merger is fair to Beeville shareholders. Accordingly, the Beeville board of directors unanimously approved the reorganization agreement and the transactions contemplated thereby and recommended that Beeville shareholders vote “FOR” the Beeville merger proposal.

The Beeville board of directors believes that partnering with Spirit will maximize the long-term value of its shareholders’ investment in Beeville, 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 Beeville board of directors evaluated the merger and the reorganization agreement, in consultation with Beeville’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

 

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competition, the current financial market and regulatory conditions and the likely effects of these factors on the potential growth of Beeville’s development, productivity, profitability and strategic options;

 

   

the complementary aspects of Beeville’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 Beeville shareholders to participate in the future performance of a combined company that would have better future prospects than Beeville 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 Beeville shareholders to participate as Spirit shareholders in the growth of Spirit and in any synergies resulting from the merger;

 

   

the limited liquidity that Beeville shareholders have with respect to their investment in Beeville, for which there is no active public market, and the fact that as Spirit shareholders, Beeville’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 Beeville 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 Beeville shareholders;

 

   

the terms of the reorganization agreement, and the presentation by Beeville’s legal advisors regarding the merger and the reorganization agreement;

 

   

the financial presentation of Sheshunoff, dated November 27, 2018, to the Beeville board of directors and the opinion of Sheshunoff, dated November 27, 2018, to the Beeville board of directors to the effect that, as of November 27, 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 Beeville shareholders, as more fully described in the section of this document entitled “—Opinion of Beeville’s Financial Advisor,” beginning on page 80;

 

   

the fact that the merger provides the opportunity to reallocate Beeville 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

 

   

the likelihood of Spirit consummating the merger based upon Spirit’s history of completing other merger transactions.

The Beeville 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 Beeville 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 Beeville shareholders compared to a transaction in which they would

 

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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 Beeville’s shareholders;

 

   

the provisions of the reorganization agreement restricting Beeville’s solicitation of third party acquisition proposals and the fact that Beeville 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 Beeville’s directors and executive officers in the merger that are different from, or in addition to, their interests as Beeville shareholders, which are further described in the section of this document entitled “—Interests of Beeville’s Directors and Executive Officers in the Merger,” beginning on page 90.

The foregoing discussion of the factors considered by the Beeville board of directors is not intended to be exhaustive, but is believed to include the material factors considered by the Beeville board of directors. The Beeville 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 Beeville 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 Beeville 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 Beeville board of directors may have given different weight to different factors. The Beeville board of directors conducted an overall analysis of the factors described above including thorough discussions with Beeville management and Beeville’s advisors, and considered the factors overall to be favorable to, and to support, its determination.

Opinion of Beeville’s Financial Advisor

Beeville retained Sheshunoff to provide an opinion as to the fairness from a financial point of view to the Beeville shareholders of the merger consideration to be received by the Beeville shareholders. As part of its investment banking business, Sheshunoff is regularly engaged in the valuation of securities in connection with mergers and acquisitions and valuations for estate, corporation and other purposes. Beeville retained Sheshunoff based upon its experience as a financial advisor in mergers and acquisitions of financial institutions and its knowledge of financial institutions.

On November 27, 2018, Sheshunoff rendered its fairness opinion to the board of directors of Beeville that, as of such date, the merger consideration was fair, from a financial point of view, to the Beeville shareholders. The full text of the fairness opinion which sets forth, among other things, assumptions made, procedures followed, matters considered, and limitations on the review undertaken, is attached as Annex C to this document. You are urged to read Sheshunoff’s fairness opinion carefully and in its entirety. The fairness opinion is addressed to the Beeville board of directors and does not constitute a recommendation to any Beeville shareholder as to how he or she should vote at the special meeting of Beeville shareholders.

In connection with the fairness opinion, Sheshunoff:

 

   

reviewed the latest draft of the reorganization agreement delivered to Sheshunoff dated November 27, 2018;

 

   

discussed the terms of the reorganization agreement with the management of Beeville and Beeville’s legal counsel;

 

   

conducted conversations with the management of Beeville regarding recent and projected financial performance of Beeville;

 

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evaluated the financial condition of Beeville based upon a review of regulatory reports for the five-year period ended December 31, 2017 and the three quarterly periods ending September 30, 2018, and internally-prepared financial information as of September 30, 2018;

 

   

compared Beeville’s recent operating results and the pricing multiples for Beeville in the merger with those of certain other recently-acquired banks in the United States with similar characteristics to Beeville that Sheshunoff deemed appropriate;

 

   

analyzed the present value of the after-tax cash flows based on projections on a stand-alone basis provided by Beeville management through the year 2022;

 

   

discussed certain matters regarding Spirit’s regulatory standing, financial performance, and business prospects with Spirit executives and representatives;

 

   

reviewed certain internal and publicly-available information regarding Spirit that Sheshunoff deemed relevant;

 

   

compared Spirit’s recent operating results and pricing multiples with those of certain other publicly-traded banks in the state of Texas and the U.S. that Sheshunoff deemed relevant;

 

   

compared the historical stock price data and trading volume of Spirit to certain relevant indices;

 

   

reviewed available stock analysts’ research reports concerning Spirit; and

 

   

performed such other analyses deemed appropriate.

For the purposes of this opinion, Sheshunoff assumed and relied upon, without independent verification, the accuracy and completeness of the information provided to it by Beeville in conjunction with this opinion. Sheshunoff assumed that any projections provided by or approved by Beeville were reasonably prepared on a basis reflecting the best currently available estimates and judgments of Beeville’s management. Sheshunoff assumed such forecasts and projections will be realized in the amounts and at times contemplated thereby.

Sheshunoff did not make an independent evaluation of the assets or liabilities (including any contingent, derivative or off-balance-sheet assets or liabilities) of Beeville or Spirit nor was Sheshunoff furnished with any such appraisal. Sheshunoff assumed that any off-balance-sheet activities of Beeville or Spirit will not materially and adversely impact the future financial position or results of operation of Spirit after the merger. Sheshunoff is not an expert in the evaluation of loan portfolios for the purposes of assessing the adequacy of the allowance for loan and lease losses and assumed that such allowances for Beeville and Spirit are, respectively, adequate to cover such losses.

Sheshunoff assumed that the reorganization agreement, as provided to Sheshunoff, will be without any material amendment or waiver of, or delay in the fulfillment of, any terms or conditions set forth in the terms provided to Sheshunoff or any subsequent development that would have a material adverse effect on Beeville or Spirit and thereby on the results of Sheshunoff’s analyses. Sheshunoff assumed that any and all regulatory approvals, if required, will be received in a timely fashion and without any conditions or requirements that could adversely affect the operations or financial condition of Spirit after the completion of the merger.

The fairness opinion is necessarily based on economic, market, regulatory, and other conditions as in effect on, and the information made available to Sheshunoff as of November 27, 2018.

In rendering the fairness opinion, Sheshunoff performed a variety of financial analyses. The preparation of an opinion involves various determinations as to the most appropriate and relevant methods of financial analysis and the application of those methods to the particular circumstances. Consequently, the fairness opinion is not readily susceptible to partial analysis or summary description. Moreover, the evaluation of the fairness, from a financial point of view, of the merger consideration is to some extent subjective, based on the experience and judgment of Sheshunoff, and not merely the result of mathematical analysis of financial data. Sheshunoff did not

 

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attribute particular weight to any analysis or factor considered by it. Accordingly, notwithstanding the separate factors summarized below, Sheshunoff believes that its analyses must be considered as a whole and that selecting portions of its analyses and of the factors considered, without considering all analyses and factors, could create an incomplete view of the evaluation process underlying its opinion. The ranges of valuations resulting from any particular analysis described below should not be taken to be Sheshunoff’s view of the actual value of Beeville, Spirit or the combined entity.

In performing its analyses, Sheshunoff made numerous assumptions with respect to industry performance, business and economic conditions, and other matters, many of which are beyond the control of Beeville or Spirit. The analyses performed by Sheshunoff are not necessarily indicative of actual values or future results, which may be significantly more or less favorable than suggested by such analyses. In addition, Sheshunoff’s analyses should not be viewed as determinative of the opinion of the board of directors or the management of Beeville with respect to the value of Beeville or Spirit or to the fairness of the merger consideration.

The following is a summary of the analyses performed by Sheshunoff in connection with its opinion. The discussion utilizes financial information concerning Beeville and Spirit as of September 30, 2018 that is believed to be reliable, accurate and complete; however, Sheshunoff cannot guarantee the reliability, accuracy or completeness of any such publicly-available information.

Pursuant to the draft reorganization agreement dated November 27, 2018, Spirit has agreed to exchange approximately $32.4 million in cash and 1,579,268 shares of Spirit common stock for all of the outstanding shares of common stock of Beeville, subject to adjustment. The merger consideration to be received by Beeville shareholders was approximately $63.7 million based on the closing price of Spirit common stock of $19.81 on November 26, 2018. If Beeville’s adjusted equity capital is less than $34,750,000, as of the close of business on the business day preceding the date the merger is completed, then the cash consideration will be reduced, on a dollar for dollar basis, by an amount equal to the difference between the adjusted equity capital and such minimum equity capital. If Beeville’s adjusted equity capital as of the close of business on the business day preceding the date the merger is completed exceeds the minimum equity capital, then immediately prior to the effective time of the merger, Beeville may declare and pay to its shareholders a cash dividend for each outstanding share of Beeville common stock equal to the quotient of (i) 50% of the amount that the adjusted equity capital exceeds the minimum equity capital, divided by (ii) the total number of shares of Beeville common stock outstanding as of the record date of such dividend.

Beeville Discounted Cash Flow Analysis:

Using discounted cash flow analysis, Sheshunoff estimated the present value of the future after-tax cash flow streams that Beeville could produce on a stand-alone basis through December 31, 2022 under various circumstances, assuming that it performed in accordance with the projections provided by Beeville’s management.

 

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Sheshunoff estimated the terminal value for Beeville at the end of December 31, 2022 by (1) multiplying the final period projected earnings by one plus the assumed annual long-term growth rate of the earnings of Beeville of 3.5% (or 1.035) and (2) dividing this product by the difference between the required rates of return shown below and the assumed annual long-term growth rate of earnings of 3.5% in (1) above. Sheshunoff discounted the annual cash flow streams (defined as all earnings in excess of that which is required to maintain a tangible common equity to tangible asset ratio of 8.0%) and the terminal values using discount rates ranging from 12.5% to 14.5%. The discount rate range was chosen to reflect different assumptions regarding the required rates of return of Beeville and the inherent risk surrounding the underlying projections. This discounted cash flow analysis indicated a range of values per share of $896.46 to $1,103.78, as shown in the table below, compared to the estimated merger consideration of $1,095.77 per share.

 

     Discount Rate  
     14.5%      13.5%      12.5%  

Present value (in thousands)

   $ 53,015      $ 58,517      $ 65,275  

Present value (per share)

   $ 896.46      $ 989.50      $ 1,103.78  

Analysis of Selected Transactions:

Sheshunoff performed an analysis of premiums paid in selected recently announced acquisitions of banking organizations with comparable characteristics to Beeville. Three sets of transactions were selected to ensure a thorough analysis.

The first set of comparable transactions consisted of a group of selected transactions for banks and thrifts in the state of Texas announced after July 1, 2017 for which pricing data were available, with the following characteristics: targets with total assets between $150 million and $1 billion and reporting a return on average assets greater than 0.0%. These comparable transactions consisted of ten mergers and acquisitions of banks and thrifts with total assets ranging between $181.4 million and $929.2 million that were announced between July 3, 2017 and November 13, 2018. A listing of the transactions in this comparable group is presented below:

 

Buyer

   State     

Target

   City    Total
Assets
($000s)
 

BancorpSouth Bank

     MS      Casey Bancorp, Inc.*    Dallas      353,086  

Spirit of Texas Bancshares Inc

     TX      Comanche National Corp.    Comanche      347,915  

Hilltop Holdings Inc.

     TX      Bank of River Oaks    Houston      454,391  

Guaranty Bancshares Inc.

     TX      Westbound Bank    Katy      228,037  

Heartland Financial USA Inc.

     IA      First Bank Lubbock Bcshs Inc.    Lubbock      929,158  

Independent Bk Group Inc.

     TX      Integrity Bancshares Inc.    Houston      804,901  

First Financial Bankshares

     TX      Commercial Bancshares Inc.    Kingwood      351,470  

Susser Bank Holdings LLC

     TX      BancAffiliated Inc.    Arlington      620,086  <