As filed with the Securities and Exchange Commission on January 10, 2019

Registration No. 333-            

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form S-4

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

SPIRIT OF TEXAS BANCSHARES, INC.

(Exact name of registrant as specified in its charter)

Texas	6022	90-0499552
(State or other jurisdiction of incorporation or organization)	(Primary Standard Industrial Classification Code Number)	(I.R.S. Employer Identification No.)

1836 Spirit of Texas Way

Conroe, Texas 77301

(936) 521-1836

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

Dean O. Bass

Chairman and Chief Executive Officer

Spirit of Texas Bancshares, Inc.

1836 Spirit of Texas Way

Conroe, Texas 77301

(936) 521-1836

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

Copies to:

Peter G. Weinstock Beth A. Whitaker Hunton Andrews Kurth LLP 1445 Ross Avenue, Suite 3700 Dallas, Texas 75202 (214) 979-3000 (214) 880-0011 (facsimile) Robert N. Flowers Jacque Kruppa Fenimore, Kay, Harrison & Ford, LLP 5307 East Mockingbird Lane, Suite 950 Dallas, Texas 75206 (214) 273-6240 (214) 273-6241 (facsimile)

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

If the securities being registered on this form are to be offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box:  ☐

If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering:  ☐

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering:  ☐

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

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

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

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

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

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

Title of each class of securities to be registered	Amount to be registered(1)	Proposed maximum offering price per share	Proposed maximum aggregate offering price(2)	Amount of registration fee(3)
Common Stock, no par value	1,579,268	N/A	$35,964,774.70	$4,358.93

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

(2) Estimated solely for the purpose of calculating the registration fee required by Section 6(b) of the Securities Act, and computed pursuant to Rule 457(f)(2) and (f)(3) under the Securities Act, by multiplying the book value of Beeville common stock of approximately $608.15 per share as of September 30, 2018, the latest practicable date prior to the date of filing this registration statement, by 59,138, the estimated number of shares of Beeville common stock that may be exchanged for shares of Spirit common stock.

(3) Determined in accordance with Section 6(b) of the Securities Act at a rate equal to $121.20 per $1,000,000 of the proposed maximum aggregate offering price.

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

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

PRELIMINARY—SUBJECT TO COMPLETION, DATED JANUARY 10, 2019

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 November 30, 2018 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) $        on                     , 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              shares of Spirit common stock and $        in cash (or an aggregate value of $        ), respectively, and aggregate merger consideration of approximately $63.7 million and $        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

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

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                     2019 at             , 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                     , 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

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                 , 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-            ), 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                     , 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.

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

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
, 2019(4)				1,579,268 shares		26.7048 shares				32,375,000		547.45

(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 November 30, 2018. 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 November 30, 2018, the last date before the date of this document for which it was practicable to obtain this information, approximately 88.0% of Spirit common stock outstanding after the completion of the merger will be held by shareholders who were holders of Spirit common stock immediately before the effective time of the merger and approximately 12.0% 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                     2019 at                 , 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                     , 2019, the record date for the Beeville special meeting, which we refer to as the Beeville record date, Beeville had approximately                 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
, 2019(4)				1,579,268 shares		26.7048 shares				32,375,000		547.45

(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 November 30, 2018. 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;

13

• 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

14

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

15

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                     , 2019 was $         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.

16

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

17

	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

18

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.

19

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.

21

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

22

	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.

23

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		1,852,729
Deposits		1,543,335
FHLB advances		74,961
Trust preferred securities		2,411
Other liabilities		12,281
Total shareholders’ equity		219,741

24

	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

25

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 $22.48 per share, which was the closing price of Spirit common stock on January 3, 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

26

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.

27

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			7,983	(e)		16,283			—			30,306	(o)		46,589
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			(1,537	)(g)		2,042			1,023			(1,353	)(q)		1,712
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			929			1,852,729
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			34,248	(s)		203,736
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			(3,310	)		219,741
Total liabilities and shareholders’ equity	$	1,102,211		$	338,886		$	(965	)	$	1,440,132		$	411,668		$	929		$	1,852,729

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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		375			(331	)
Other real estate		33			1,410
Other assets		8,877			12,702
Total assets acquired		342,822			417,513
Liabilities of acquired bank:
Deposits	$	297,165		$	373,560
Trust preferred securities		2,411			—
Other liabilities		2,151			6,382	(u)
Total liabilities assumed		301,727			379,942
Net assets acquired	$	41,095		$	37,571
Common stock issued	$	40,693	(j)	$	35,502	(s)
Cash paid		12,200			32,375
Total purchase price	$	52,893			67,877
Excess of consideration paid over fair value of net assets acquired—Goodwill	$	11,798		$	30,306

(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 $11.8 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 $1.5 million consists of a deferred tax asset related to acquired loans fair value adjustment of $199 thousand, elimination of deferred tax asset related to Comanche existing allowance of $300 thousand, a deferred tax liability related to premises and equipment of $263 thousand, and a deferred tax liability related to core deposit intangible and time deposit fair value mark of $1.2 million.

29

(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 January 3, 2019 closing price of $22.48 for a total of $35.5 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 January 3, 2019 closing price of Spirit common stock of $22.48.

30

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 $22.48, the closing price of Spirit common stock on January 3, 2019.

	Purchase Price		Estimated Goodwill
	(Unaudited, dollars in thousands)
As presented in the pro forma combined results	$	67,877	$	30,306
20.0% increase in Spirit common stock price		74,977		37,406
20.0% decrease in Spirit common stock price		60,777		23,206
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 12,053,753 shares of Spirit common stock outstanding on November 30, 2018 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 12.0% 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 88.0% 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 240^th 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                 , 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                 2019 at 1400 East Houston Street, Beeville, Texas 78102, at                 , local time. On or about                 , 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                 , 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                  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 approximately                 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,              shares of Beeville common stock, representing approximately     % 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
, 2018(4)				1,579,268 shares		26.7048 shares				32,375,000		547.45

(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 November 30, 2018. 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
Veritex Holdings Inc.		TX	Liberty Bancshares Inc.	Fort Worth		459,263
D2 Alliances LLC		TX	Grandview Bancshares Inc.	Grandview		181,409
				Maximum		929,158
				Minimum		181,409
				Median		403,738

NOTE: Earnings for S-corp institutions have been tax-effected at 35%.

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The analysis yielded multiples of the purchase prices in these transactions as summarized below:

	Price/ Book (x)		Price/ Tg Book (x)		Price/ 8% Tg Book (x)		Price/ LTM* Earnings (x)		Price/ Assets (%)		Price/ Deposits (%)		Premium/ Deposits (%)
Maximum		2.35		2.40		2.21		33.0		20.1		27.8		13.4
Minimum		1.39		1.56		1.61		12.3		13.8		15.3		5.5
Median		1.88		1.93		1.98		17.3		16.9		20.1		9.1
Beeville		1.81		1.81		1.89		13.3		15.7		17.4		7.8

* Last-twelve-months

The transaction value multiples were somewhat below the medians of the Texas comparable group on a price to book, price to tangible book, price to 8% tangible book and price to LTM earnings basis (partially due to Beeville’s higher level of profitability), and slightly below on a price to assets, price to deposits and premium to deposits basis. All but three of the comparable banks were located in the Dallas-Fort Worth-Arlington, TX MSA or the Houston-The Woodlands-Sugar Land, TX MSA.

The second set of comparable transactions consisted of a group of selected transactions for banks and thrifts headquartered in the United States for which pricing data were available, with the following characteristics: deals that were announced since July 1, 2017 with target total assets $200 million and $600 million, a return on average assets greater than or equal to 0.50%, and a non-performing assets to total assets ratio less than 2.0%. These comparable transactions consisted of 41 mergers and acquisitions of banks and thrifts with total assets ranging between $214.6 million and $596.4 million that were announced between July 17, 2017 and October 29, 2018.

This group was further refined to those institutions with returns on average assets greater than 1.0%. This subset of seventeen transactions from the U.S. comparable group is presented below:

Buyer	State		Target	City	State		Total Assets ($000s)
OceanFirst Financial Corp.		NJ	Capital Bank of New Jersey	Vineland		NJ		483,138
Farmers & Merchants Bancorp		OH	Limberlost Bancshares Inc.	Geneva		IN		286,653
Citizens Community Bncp		WI	United Bank	Osseo		WI		280,833
CapStar Financial Hlgs Inc.		TN	Athens Bancshares Corporation	Athens		TN		482,273
National Commerce Corp.		AL	Landmark Bancshares Inc.	Marietta		GA		595,439
QCR Holdings Inc.		IL	Springfield Bancshares Inc.	Springfield		MO		563,166
Farmers & Merchants Bancorp		CA	Bank of Rio Vista	Rio Vista		CA		218,638
RCB Holding Co.		OK	Central B&TC	Hutchinson		KS		323,108
Heritage Commerce Corp		CA	United American Bank	San Mateo		CA		336,416
Heartland Financial USA Inc.		IA	Signature Bancshares Inc.	Minnetonka		MN		389,842
Suncrest Bank		CA	CBBC Bancorp	West Sacramento		CA		325,472
First Financial Bankshares		TX	Commercial Bancshares Inc.	Kingwood		TX		351,470
Bus. First Bancshares Inc.		LA	Minden Bancorp Inc	Minden		LA		322,946
First American Bank Corp.		IL	Southport Financial Corp.	Kenosha		WI		285,325
Home Bancorp Inc.		LA	Saint Martin Bancshares Inc.	Saint Martinville		LA		596,448
Equity Bancshares Inc.		KS	Eastman National Bcshs Inc.	Newkirk		OK		253,966
Equity Bancshares Inc.		KS	Cache Holdings Inc.	Tulsa		OK		319,977
				Maximum				596,448
				Minimum				218,638
				Median				325,472

NOTE: Earnings for S-corp institutions have been tax-effected at 35%.

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The analysis yielded multiples of the purchase prices in these transactions as summarized below:

	Price/ Book (x)		Price/ Tg Book (x)		Price/ 8% Tg Book (x)		Price/ LTM* Earnings (x)		Price/ Assets (%)		Price/ Deposits (%)		Premium/ Deposits (%)
Maximum		2.89		2.89		3.50		22.8		31.0		41.9		27.4
Minimum		1.47		1.61		1.49		5.6		13.0		14.7		6.7
Median		1.92		1.93		1.91		15.1		17.7		19.3		9.1
Beeville		1.81		1.81		1.89		13.3		15.7		17.4		7.8

* Last-twelve-months

The transaction value multiples were somewhat below the medians of this subset of the U.S. comparable group on a price to book and price to tangible book basis, and slightly below on a price to LTM earnings, price to assets, price to deposits and premium to deposits basis. The transaction value multiple was similar on a price to 8% tangible book basis.

Another subset of the U.S comparable group consisting of institutions located outside an MSA were selected from the 41 transactions. The 14 transactions are listed below:

Buyer	State		Target	City	State		Total Assets ($000s)
Peoples Bancorp Inc.		OH	First Prestonsburg Bcshs Inc*	Prestonsburg		KY		309,549
Farmers & Merchants Bancorp		OH	Limberlost Bancshares Inc.*	Geneva		IN		286,653
Spirit of Texas Bancshares Inc		TX	Comanche National Corp.	Comanche		TX		347,915
Citizens Community Bncp		WI	United Bank	Osseo		WI		280,833
CapStar Financial Hlgs Inc.		TN	Athens Bancshares Corporation	Athens		TN		482,273
Bus. First Bancshares Inc.		LA	Richland State Bancorp Inc.*	Rayville		LA		304,994
RCB Holding Co.		OK	Central B&TC*	Hutchinson		KS		323,108
CNB Bank Shares Inc		IL	Jacksonville Bancorp	Jacksonville		IL		336,767
Equity Bancshares Inc.		KS	Kansas Bank Corp.	Liberal		KS		310,079
FFP Group Inc.			Raton Capital Corp.	Raton		NM		320,800
SmartFinancial Inc.		TN	Tennessee Bancshares Inc.	Tullahoma		TN		243,865
Independent Bank Corp.		MI	TCSB Bancorp Inc	Traverse City		MI		346,915
MutualFirst Financial Inc.		IN	Universal Bancorp	Bloomfield		IN		398,308
Equity Bancshares Inc.		KS	Eastman National Bcshs Inc.	Newkirk		OK		253,966
				Maximum				482,273
				Minimum				243,865
				Median				315,440

NOTE: Earnings for S-corp institutions have been tax-effected at 35%.

The analysis yielded multiples of the purchase prices in these transactions as summarized below:

	Price/ Book (x)		Price/ Tg Book (x)		Price/ 8% Tg Book (x)		Price/ LTM* Earnings (x)		Price/ Assets (%)		Price/ Deposits (%)		Premium/ Deposits (%)
Maximum		2.89		2.89		3.50		24.7		31.0		41.9		27.4
Minimum		1.15		1.18		1.23		10.8		11.4		13.9		2.5
Median		1.61		1.65		1.73		17.2		16.8		19.6		7.2
Beeville		1.81		1.81		1.89		13.3		15.7		17.4		7.8

* Last-twelve-months

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The transaction value multiples were above the medians of this subset of the U.S. comparable group on a price to book, price to tangible book and price to 8% tangible book basis, and slightly below on a price to LTM earnings (partially due to Beeville’s higher level of profitability), price to assets and price to deposits basis. The transaction value multiple was similar on a premium to deposits basis.

Contribution Analysis:

Sheshunoff reviewed the relative contributions of Beeville and Spirit to the combined company based on regulatory income data as of June 30, 2018 and September 30, 2018 balance sheet data for Beeville and pro forma balance and income data Spirit including data for Comanche as of June 30, 2018. Sheshunoff compared the pro forma ownership interests (which excludes the cash component of the merger consideration) of Beeville and Spirit of 11.7% and 88.3%, respectively, to: (1) total assets of 22.4% and 77.6%, respectively; (2) total loans of 21.0% and 79.0%, respectively; (3) total deposits of 24.5% and 77.5%, respectively; (4) year-to-date annualized net-interest income of 22.7% and 77.3%, respectively; (5) year-to-date annualized non-interest income of 9.2% and 90.8%, respectively; (6) year-to-date annualized non-interest expenses of 15.6% and 84.4%, respectively; (7) year-to-date earnings of 31.5% and 68.5%, respectively; and (8) total tangible equity of 19.8% and 80.2%, respectively. The contribution analysis shows that the ownership of Beeville shareholders in the combined company is less than the contribution of the components listed due to the considerable amount of cash consideration in the merger. In a 100% stock transaction, Beeville shareholders would own 20.9% of the combined company. The contributions are shown in the following table.

($000s except shares)	Assets		%		Loans		%		Deposits		%
Spirit		1,429,677		77.6		1,049,460		79.0		1,150,322		75.5
Beeville		411,681		22.4		278,989		21.0		373,492		24.5
Combined Company		1,841,358		100.0		1,328,449		100.0		1,523,814		100.0

($000)	Net Interest Income		%		Non-Interest Income		%		Non-Interest Expenses		%
Spirit		54,263		77.3		11,469		90.8		48,100		84.4
Beeville		15,951		22.7		1,158		9.2		8,914		15.6
Combined Company		70,214		100.0		12,627		100.0		57,013		100.0

($000)	Earnings		%		Tangible Equity		%		Shares (Actual)		%
Spirit		12,832		68.5		145,297		80.2		11,955,338		88.3
Beeville		5,903		31.5		35,824		19.8		1,579,268		11.7
Combined Company		18,735		100.0		181,121		100.0		13,534,606		100.0

* Pro forma Spirit balance sheet with Comanche using June 30, 2018 financial information

Spirit pro forma income/expense data with Comanche is year-to-date as of June 30, 2018 annualized

First Beeville balance sheet is as of September 30, 2018

First Beeville income/expense data is year-to-date as of June 30, 2018 annualized

Shares include shares issued by Spirit for Comanche

Comparable Company Analysis:

Sheshunoff compared the operating and market results of Spirit to the results of other publicly-traded banking companies. The comparable publicly-traded companies in the U.S. were selected primarily on the basis of total asset size, return on average assets, and minimum average daily trading volume. Spirit was compared to banks with total assets between $800 million and $1.4 billion, a LTM return on average assets greater than

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0.50%, and an average daily trading volume greater than 5,000 shares per day. The companies listed below are the group that met this criteria:

Company Name	Ticker	Company Name	Ticker
1st Constitution Bancorp	FCCY	Mackinac Financial Corporation	MFNC
AmeriServ Financial, Inc.	ASRV	Malvern Bancorp, Inc.	MLVF
Avidbank Holdings, Inc.	AVBH	Marlin Business Services Corp.	MRLN
Bank of Commerce Holdings	BOCH	National Bankshares, Inc.	NKSH
Bank of Princeton	BPRN	Northeast Bancorp	NBN
BayCom Corp	BCML	Norwood Financial Corp.	NWFL
California BanCorp	CALB	Oak Valley Bancorp	OVLY
CB Financial Services, Inc.	CBFV	Ohio Valley Banc Corp.	OVBC
CBB Bancorp, Inc.	CBBI	OP Bancorp	OPBK
Citizens & Northern Corporation	CZNC	Pacific Financial Corporation	PFLC
Coastal Financial Corporation	CCB	Pacific Mercantile Bancorp	PMBC
Colony Bankcorp, Inc.	CBAN	Parke Bancorp, Inc.	PKBK
Community Bankers Trust Corporation	ESXB	Peoples Bancorp of North Carolina, Inc.	PEBK
DNB Financial Corporation	DNBF	Provident Bancorp, Inc. (MHC)	PVBC
Farmers & Merchants Bancorp, Inc.	FMAO	Provident Financial Holdings, Inc.	PROV
Fidelity D & D Bancorp, Inc.	FDBC	Riverview Bancorp, Inc.	RVSB
First Community Corporation	FCCO	SB Financial Group, Inc.	SBFG
First Financial Northwest, Inc.	FFNW	Select Bancorp, Inc.	SLCT
First Northwest Bancorp	FNWB	Severn Bancorp, Inc.	SVBI
First Western Financial, Inc.	MYFW	Standard AVB Financial Corp.	STND
FNCB Bancorp, Inc.	FNCB	Timberland Bancorp, Inc.	TSBK
FS Bancorp, Inc.	FSBW	Two River Bancorp	TRCB
FVCBankcorp, Inc.	FVCB	United Security Bancshares	UBFO

The data for the following table is based on GAAP financial information as of September 30, 2018 provided by S&P Global Market Intelligence. Some of the ratios presented are proprietary to S&P Global Market Intelligence and may not strictly conform to the common industry determination.

	Spirit		U.S. Peer Group Median
	(%)		(%)
Return on Average Assets		0.94		0.92
Return on Average Equity		8.07		8.78
Net Interest Margin		4.60		3.82
Efficiency Ratio		71.8		63.2
Tangible Equity to Tangible Asset Ratio		13.10		10.80
Loan Loss Reserves to Loans Ratio		0.64		1.09
Ratio of Non-performing Assets to Total Assets		0.37		0.63

Spirit’s performance as measured by its return on average assets and return on average equity was similar to the peer group while that of its net interest margin was above that of its peer group median level. Spirit’s efficiency ratio was weaker (higher level) than its peers. Spirit’s tangible capital level was above its peers. Its asset quality, as measured by its ratio of non-performing assets to total assets, was slightly stronger than the peer group median, while its ratio of loan loss reserves to loans was lower than the median peer group level.

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Sheshunoff compared Spirit’s trading results to its peers. The results are summarized in the following table. The data for the following table is based on publicly-available GAAP financial information and market data as of November 26, 2018 provided by S&P Global Market Intelligence.

	Spirit			U.S. Peer Group Median
Market Price as a Multiple of Stated Book Value		1.29x			1.39x
Market Price as a Multiple of Stated Tangible Book Value		1.36x			1.47x
Market Price as a Multiple of LTM Earnings		22.0x			17.7x
Dividend Yield		0.00	%		1.31	%
Dividend Payout		0.00	%		20.5	%

Spirit’s price-to-book multiple as measured by its market price as a multiple of stated book value and its market price as a multiple of stated tangible book value were lower than the comparable peer group medians. Spirit’s price-to-earnings multiple, as shown by the price as a multiple of LTM earnings through November 26, 2018, was slightly higher than its peers. Spirit’s dividend yield and dividend payout ratio were both lower than its peers as it has not paid dividends.

Sheshunoff compared the operating and market results of Spirit to the results of selected publicly-traded banking companies trading on a major exchange, located in Texas or with major operations in the state of Texas. The criteria for selecting these banking companies were a year-to-date return on average assets greater than zero, not a merger target, and an average year-to-date trading volume greater than 3,000 shares. The list of comparable banks is shown below:

Institution Name	City	State		Ticker	Total Assets ($000)
Allegiance Bancshares, Inc.	Houston		TX	ABTX		3,035,539
Cadence Bancorporation	Houston		TX	CADE		11,759,837
Comerica Incorporated	Dallas		TX	CMA		71,448,000
Cullen/Frost Bankers, Inc.	San Antonio		TX	CFR		31,223,402
First Financial Bankshares, Inc.	Abilene		TX	FFIN		7,571,231
Guaranty Bancshares, Inc.	Mount Pleasant		TX	GNTY		2,242,580
Hilltop Holdings Inc.	Dallas		TX	HTH		13,764,536
Independent Bank Group, Inc.	McKinney		TX	IBTX		9,891,464
International Bancshares Corporation	Laredo		TX	IBOC		11,845,501
LegacyTexas Financial Group, Inc.	Plano		TX	LTXB		9,082,792
Prosperity Bancshares, Inc.	Houston		TX	PB		22,612,583
Southside Bancshares, Inc.	Tyler		TX	SBSI		6,105,354
Texas Capital Bancshares, Inc.	Dallas		TX	TCBI		27,127,107
Triumph Bancorp, Inc.	Dallas		TX	TBK		4,537,102
Veritex Holdings, Inc.	Dallas		TX	VBTX		3,275,846
Origin Bancorp, Inc.	Ruston		LA	OBNK		4,667,564
				Median		9,487,128
Spirit of Texas Bancshares, Inc.	Conroe		TX	STXB		1,102,211

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The data for the following table is based on GAAP financial information as of September 30, 2018 provided by S&P Global Market Intelligence. Some of the ratios presented are proprietary to S&P Global Market Intelligence and may not strictly conform to the common industry determination.

	Spirit		Texas Peer Group Median
	(%)		(%)
Return on Average Assets (Year-to-Date)		0.94		1.31
Tangible Equity to Tangible Asset Ratio		13.10		9.64
Ratio of Non-performing Assets to Total Assets		0.37		0.47

Spirit’s performance as measured by its return on average assets was below the Texas peer group while tangible capital level was above its peers. Its asset quality, as measured by its ratio of non-performing assets to total assets, was similar to the Texas peer group median.

Sheshunoff compared Spirit’s trading results to its Texas peers. The results are summarized in the following table. The data for the following table is based on publicly-available market data as of November 26, 2018 provided by S&P Global Market Intelligence.

	Spirit		Texas Peer Group Median
Market Price as a Multiple of Stated Book Value		1.29x		1.52x
Market Price as a Multiple of Stated Tangible Book Value		1.36x		1.82x
Market Price as a Multiple of Year-To-Date Earnings		22.0x		17.0x

Spirit’s price-to-book multiple as measured by its market price as a multiple of stated book value and its market price as a multiple of stated tangible book value were lower than the comparable peer group medians. Spirit’s price-to-earnings multiple, as shown by the price as a multiple of annualized year-to-date earnings through November 26, 2018, was slightly higher than its peers.

Sheshunoff compared selected stock market results of Spirit to publicly-traded banks in the SNL U.S. Bank $1 Billion-$5 Billion Index and the SNL Southwest Regional Bank Index since Spirit came public in May 2018. Spirit’s common stock underperformed both indices until August 2018 then has generally traded in-line with both indices through November 26, 2018 on a percentage stock price change basis.

No company or transaction used in the comparable company and comparable transaction analysis is identical to Beeville, Spirit, or Spirit as the surviving corporation in the merger. Accordingly, an analysis of the results of the foregoing necessarily involves complex considerations and judgments concerning differences in financial and operational characteristics of Beeville and Spirit and other factors that could affect the public trading value of the companies to which they are being compared. Mathematical analysis (such as determining the average or median) is not in and of itself a meaningful method of using comparable transaction data or comparable company data.

Pursuant to its engagement letter with Beeville, Sheshunoff will receive a fee of $35,000 for the fairness opinion that is not contingent on the completion of the merger and additional fees that are contingent upon consummation of the merger. In addition, Beeville agreed to reimburse Sheshunoff for its reasonable out-of-pocket expenses. Beeville also agreed to indemnify and hold harmless Sheshunoff and its officers and employees against certain liabilities in connection with its services under the engagement letter, except for liabilities resulting from the negligence, violation of law or regulation, or bad faith of Sheshunoff or any matter for which Sheshunoff may have strict liability.

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The fairness opinion is directed only to the question of whether the merger consideration is fair, from a financial point of view, to the Beeville shareholders, and does not constitute a recommendation to any of Beeville’s shareholders to vote in favor of the merger. No limitations were imposed on Sheshunoff regarding the scope of its investigation or otherwise by Beeville.

Based on the results of the various analyses described above, Sheshunoff concluded that the merger consideration to be paid by Spirit pursuant to the merger is fair, from a financial point of view, to the Beeville shareholders.

Interests of Beeville’s Directors and Executive Officers in the Merger

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 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

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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, 2018, 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 is 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 a 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 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.

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• 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 is approximately $67,713.80. Benefits are payable in a lump sum within 60 days after the merger is completed.

Public Trading Markets

Spirit common stock is listed for trading on NASDAQ under the symbol “STXB” and will continue to be listed under that symbol following the completion of the merger. Under the reorganization agreement, Spirit will cause the shares of Spirit common stock to be issued in the merger to be approved for listing on NASDAQ, subject to notice of issuance, and the reorganization agreement provides that neither Spirit nor Beeville will be required to complete the merger if such shares are not authorized for listing on NASDAQ, subject to notice of issuance.

Spirit’s Dividend Policy

Spirit has not historically declared or paid cash dividends on Spirit common stock and it does not expect to pay dividends on Spirit common stock for the foreseeable future. Instead, Spirit anticipates that all of its future earnings will be retained to support its operations and to finance the growth and development of Spirit’s business. In addition, the payment of dividends by bank holding companies is generally subject to legal and regulatory limitations. For further information, see the section of this document entitled “Comparative Market Prices and Dividends,” beginning on page 132.

Restrictions on Resale of Spirit Common Stock

The shares of Spirit common stock to be issued in the merger will be registered under the Securities Act, and will be freely transferable, except for shares issued to any shareholder who may be deemed to be an “affiliate” of Spirit for purposes of Rule 144 under the Securities Act. Persons who may be deemed to be affiliates of Spirit include individuals or entities that control, are controlled by, or are under common control with Spirit and may include the executive officers, directors and significant shareholders of Spirit.

Dissenters’ Rights in the Merger

General. If you hold one or more shares of Beeville common stock, you have the right to dissent from the merger and have the appraised fair value of your shares of Beeville common stock as of the date immediately prior to the closing date of the merger paid to you in cash under Chapter 10, Subchapter H of the TBOC. The appraised fair value may be more or less than the value of the stock consideration and the cash consideration being paid in the merger in exchange for shares of Beeville common stock. If you are contemplating exercising your right to dissent, Beeville urges you to read carefully the provisions of Chapter 10, Subchapter H of the TBOC, a copy of which is included with this document as Annex B, and which qualify in all respects the following discussion of those provisions, and consult with your legal counsel before electing or attempting to exercise these rights. The following discussion describes the steps you must take if you want to exercise your right to dissent. You should read this summary and the full text of the law carefully.

How to Exercise and Perfect Your Right to Dissent. To be eligible to exercise your right to dissent to the merger:

• you must, prior to the Beeville special meeting, provide Beeville with a written objection to the merger that states that you intend to exercise your right to dissent if the reorganization agreement is approved and the merger is completed and that provides an address to which a notice of effectiveness of the merger should be delivered or mailed to you if the merger is completed;

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• you must vote your shares of Beeville common stock against approval of the Beeville merger proposal at the Beeville special meeting in person or by proxy;

• you must, not later than the 20th day after Spirit (which will be the ultimate successor to Beeville) sends you notice that the merger was completed, deliver to Spirit a written demand for payment of the fair value of the shares of Beeville common stock you own that states the number and class of shares of Beeville common stock you own, your estimate of the fair value of such stock and an address to which a notice relating to the dissent and appraisal procedures may be sent; and

• you must, not later than the 20th day after you make your demand for payment to Spirit as described above, submit your certificates representing Beeville common stock to Spirit.

If you intend to exercise your right to dissent from the merger, prior to the Beeville special meeting you must send the notice of objection to Beeville, addressed to:

Beeville National Corporation

1400 East Houston Street

Beeville, Texas 78102

Attention: President and Corporate Secretary

If you fail to send the written objection to the merger in the proper form and prior to the Beeville special meeting, to vote your shares of Beeville common stock at the Beeville special meeting against the approval of the Beeville merger proposal or to submit your demand for payment in the proper form and on a timely basis, you will lose your right to dissent from the merger. If you fail to submit to Spirit on a timely basis your certificates formerly representing the shares of Beeville common stock after you have submitted the demand for payment as described above, Spirit will have the option to terminate your right of dissent as to your shares of Beeville common stock. In any instance of a termination or loss of your right of dissent, you will instead receive the merger consideration as set forth in the reorganization agreement. If you comply with the first two items above and the merger is completed, Spirit will send you a written notice advising you that the merger has been completed. Spirit must deliver this notice to you within ten days after the merger is completed.

Your Demand for Payment. If the merger is completed, you have provided your written objection to the merger to Beeville in a timely manner and in proper form and you have voted against the reorganization agreement at the Beeville special meeting as described above and you desire to receive the fair value of your shares of Beeville common stock in cash, you must, within 20 days of the date on which Spirit sends to you the notice of that the merger was completed, give Spirit a written demand for payment of the fair value of your shares of Beeville common stock. The fair value of your shares of Beeville common stock will be the value of the shares on the day immediately preceding the completion of the merger, excluding any appreciation or depreciation in anticipation of the merger. After the merger is completed, your written demand and any notice sent to Spirit must be addressed to:

Spirit of Texas Bancshares, Inc.

1836 Spirit of Texas Way

Conroe, Texas 77301

Attention: President and Corporate Secretary

Your written demand must include a demand for payment for your shares for which rights of dissent and appraisal are sought and must state the number of shares and class of Beeville common stock you own and your estimate of the fair value of your shares of Beeville common stock and an address to which a notice relating to the dissent and appraisal procedures may be sent. This written demand must be delivered to Spirit within 20 days of the date on which Spirit sends to you the notice of the effectiveness of the merger. If your written demand for payment in proper form is not received by Spirit within that 20 day period, you will be bound by the merger and

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you will not be entitled to receive a cash payment representing the fair value of your shares of Beeville common stock. Instead, you will receive shares of Spirit common stock and cash as the merger consideration set forth in the reorganization agreement.

Delivery of Stock Certificates. If you have satisfied the requirements for the exercise of your right to dissent described above, including the delivery of the written demand for payment to Spirit as described above, you must, not later than the 20th day after you make your written demand for payment to Spirit, submit to Spirit your certificate or certificates formerly representing the shares of Beeville common stock you own. You may submit those certificates with your demand for payment if you prefer. In accordance with the provisions of the TBOC, Spirit will note on each such certificate that you have demanded payment of the fair value of the shares of Beeville common stock that were represented by such certificate under the provisions of the TBOC relating to the rights of dissenting owners. After making those notations on those certificates, Spirit will return each such certificate to you at your request. If you fail to submit all of the certificates representing the shares of Beeville common stock for which you have exercised the right of dissent in a timely fashion, Spirit will have the right to terminate your rights of dissent and appraisal with respect to all of your shares of Beeville common stock unless a court, for good cause shown, directs Spirit not to terminate those rights.

Spirit’s Actions Upon Receipt of Your Demand for Payment. Within 20 days after Spirit receives your written demand for payment and your estimate of the fair value of your shares of Beeville common stock submitted as described above, Spirit must send you written notice stating whether or not it accepts your estimate of the fair value of your shares.

If Spirit accepts your estimate, Spirit will notify you that it will pay the amount of your estimated fair value within 90 days after the effective date of the merger. Spirit will make this payment to you only if you have surrendered the share certificates representing your shares of Beeville common stock, duly endorsed for transfer, to Spirit.

If Spirit does not accept your estimate, Spirit will notify you of this fact and will make an offer of an alternative estimate of the fair value of your shares that it is willing to pay you within 120 days after the effective date of the merger, which you may accept within 90 days after the effective date of the merger or decline.

Payment of the Fair Value of Your Shares of Beeville Stock upon Agreement of an Estimate. If you and Spirit have reached an agreement on the fair value of your shares of Beeville common stock within 90 days after the effective date of the merger, Spirit must pay you the agreed amount within 120 days after the date the merger is completed, provided that you have surrendered the certificates formerly representing your shares of Beeville common stock, duly endorsed for transfer, to Spirit.

Commencement of Legal Proceedings if a Demand for Payment Remains Unsettled. If you and Spirit have not reached an agreement as to the fair market value of your shares of Beeville common stock within 90 days after the effective date of the merger, you or Spirit may, within 60 days after the expiration of the 90-day period, commence proceedings in Montgomery County, Texas asking the court to determine the fair value of your shares of Beeville common stock. The court will determine if you have complied with the provisions of the TBOC regarding your right of dissent and if you have become entitled to receive payment for your shares of Beeville common stock. The court will appoint one or more qualified persons to act as appraisers to determine the fair value of your shares in the manner prescribed by the TBOC. The appraisers will determine the fair value of your shares and will report this value to the court. Once the appraisers’ report is filed with the court, you will receive a notice from the court indicating that the report has been filed. You will be responsible for obtaining a copy of the report from the court. If you or Spirit objects to the report or any part of it, the court will hold a hearing to determine the fair value of your shares of Beeville common stock. Both you and Spirit may address the court about the report. The court will determine the fair value of your shares and direct Spirit to pay that amount, plus interest, which will begin to accrue 91 days after the merger is completed. The court may require you to share in the court costs relating to the matter to the extent the court deems it fair and equitable that you do so.

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Rights as a Shareholder. If you have made a written demand on Spirit for payment of the fair value of your shares of Beeville common stock, you will not thereafter be entitled to vote or exercise any other rights as a shareholder of Spirit, but will only have the right to receive payment for your shares as described herein and the right to maintain an appropriate action to obtain relief on the ground that the merger would be or was fraudulent. In the absence of fraud in the transaction, your right under the dissent provisions described herein is the exclusive remedy for the recovery of the value of your shares of Beeville common stock or money damages with respect to the merger.

Withdrawal of Demand. If you have made a written demand on Spirit for payment of the fair value of your Beeville common stock, you may withdraw such demand at any time before payment for your shares has been made or before a petition has been filed with a court for determination of the fair value of your shares. If you withdraw your demand or are otherwise unsuccessful in asserting your dissenters’ rights, you will be bound by the merger and you will have the same rights to receive of the merger consideration with respect to your shares of Beeville common stock as you would have had if you had not made a demand for payment as to those shares, as well as to participate to the appropriate extent in any dividends or distributions on the shares of Spirit common stock that may have been paid to Spirit shareholders after the effective date of the merger. Such rights will, however, be subject to any change in or adjustment to those shares made because of an action taken after the date your demand for payment.

Beneficial Owners. Persons who beneficially own shares of Beeville common stock that are held of record in the name of another person, such as a bank, broker, trustee or other nominee, and who desire to have the right of dissent exercised as to those shares must act promptly to cause the record holder of those shares to take the actions required under Texas law to exercise the dissenters’ rights with respect to those shares. Only the persons in whose names shares of Beeville common stock are registered on the share transfer records of Beeville may exercise the right of dissent and appraisal discussed above.

U.S. Federal Income Tax Consequences. See the section of this document entitled “Material U.S. Federal Income Tax Consequences of the Merger,” beginning on page 95, for a discussion on how the federal income tax consequences of your action will change if you elect to dissent from the merger.

You should remember that if you return a signed proxy card, but fail to provide instructions as to how your shares of Beeville common stock are to be voted, you will be considered to have voted in favor of the reorganization agreement and you will not be able to assert dissenters’ rights. You should also remember that if you otherwise vote at the Beeville special meeting in favor of the reorganization agreement, you will not be able to assert dissenters’ rights.

The foregoing summary is not intended to be a complete statement of the procedures for exercising dissenter’s rights under the TBOC and is qualified in its entirety by reference to the full text of Chapter 10, Subchapter H of the TBOC, a copy of which is included with this document as Annex B. Beeville urges any Beeville shareholder wishing to exercise dissenters’ rights, if any, to read this summary and the TBOC provisions carefully, and to consult legal counsel before attempting to exercise dissenters’ rights. Failure to comply strictly with all of the procedures set forth in of Chapter 10, Subchapter H of the TBOC may result in the loss of your statutory dissenters’ rights.

Regulatory Approvals Required for the Merger

The merger requires the approval of the Federal Reserve. On December 18, 2018, Spirit filed the required application 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. Spirit also submitted to the TDB a copy of the application it filed with the Federal Reserve Bank of Dallas.

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The bank merger requires the approval of the FDIC and 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.

The Department of Justice has between 15 and 30 days following approval by the Federal Reserve and the FDIC to challenge the approval on antitrust grounds. While Spirit and Beeville do not know of any reason that the Department of Justice would challenge regulatory approval by the Federal Reserve and the FDIC and believe that the likelihood of such action is remote, there can be no assurance that the Department of Justice will not initiate such a proceeding, or if such a proceeding is initiated, as to the result of any such challenge.

Notifications and/or applications requesting approval may be submitted to various other federal and state regulatory authorities and self-regulatory organizations.

The approval of any notice or application merely implies satisfaction of regulatory criteria for approval, and does not include review of the merger from the standpoint of the adequacy of the consideration to be received by, or fairness to, shareholders. Regulatory approval does not constitute an endorsement or recommendation of the proposed transaction.

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.

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THE REORGANIZATION AGREEMENT

The following describes certain aspects of the merger, including certain material provisions of the reorganization agreement. The following description of the reorganization agreement is subject to, and qualified in its entirety by reference to, the reorganization agreement, which is attached to this document as Annex A and is incorporated into this document by reference. Beeville urges you to read the reorganization agreement carefully and in its entirety, as it is the legal document governing the merger.

Structure of the Merger

Each of the Spirit board of directors and the Beeville board of directors has unanimously approved the reorganization agreement. Under the reorganization agreement, Beeville will merge with and into Spirit, with Spirit continuing as the surviving corporation. Immediately after the merger, Beeville Bank will merge with and into Spirit Bank, with Spirit Bank continuing as the surviving bank.

Prior to the completion of the merger, Spirit may modify the structure of the transactions contemplated by the reorganization agreement, except that no such modification may (i) result in adverse U.S. federal income tax consequences to Beeville shareholders, (ii) change in kind or reduce the merger consideration to be paid to the holders of Beeville common stock, or (iii) materially delay or jeopardize receipt of any required regulatory approvals.

Merger Consideration

In the merger, all of the outstanding shares of Beeville common stock (other than cancelled shares 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 as described in the section of this document entitled “—Adjustments to Merger Consideration.” 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.” The value of the stock consideration may fluctuate with the market price of Spirit common stock and will not be known at the time of the Beeville special meeting. In addition, the exact value of the cash consideration cannot be determined at the time of the Beeville special meeting because it is subject to adjustment based on Beeville’s total consolidated equity capital.

Based on the number of shares of Spirit common stock and Beeville common stock outstanding as of November 30, 2018, the last date before the announcement of the merger, approximately 88.0% of Spirit common stock outstanding after the completion of the merger will be held by shareholders who were holders of Spirit common stock immediately before the effective time of the merger and approximately 12.0% 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.

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 carefully read the reorganization agreement 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 the minimum equity capital.

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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).

Fractional Shares

Spirit will not issue any 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 be entitled to receive, in lieu of the fractional share, an amount of cash (rounded to the nearest cent) determined by multiplying (i) the fraction of a share of Spirit common stock which such shareholder would otherwise be entitled to receive by (ii) $19.81.

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.

Governing Documents; Directors and Officers; Governance Matters

At the effective time, the certificate of formation and bylaws of Spirit in effect immediately prior to the effective time of the merger will be the certificate of formation and bylaws of the surviving corporation after the completion of the merger, until thereafter amended in accordance with applicable law. The directors of Spirit immediately prior to the effective time of the merger will be the initial directors of the surviving corporation, except that Spirit will appoint Allen C. Jones, IV to the Spirit board of directors upon completion of the merger. The officers of Spirit immediately prior to the effective time of the merger will be the initial officers of the surviving corporation, except as described in the section of this document entitled “The Merger—Interests of Beeville’s Directors and Executive Officers in the Merger,” beginning on page 90. In addition, Brannon Brooke and George G. Latcham, directors of Beeville Bank will be appointed to the Spirit Bank board of directors.

Completion and Effective Time of the Merger

The merger will become effective at the date and time specified in the certificate of merger to be filed with the Secretary of State of the State of Texas. If the Beeville shareholders approve the Beeville merger proposal at the special meeting, and if all required regulatory approvals are obtained and the other conditions to the parties’ obligations to effect the merger are met or waived by the party entitled to do so, we anticipate that the merger will be completed in the second quarter of 2019, although delays could occur.

We cannot assure you that we can obtain the required shareholder and regulatory approvals or that the other conditions to the completion of the merger can or will be satisfied.

Conversion of Shares; Exchange of Certificates

The conversion of Beeville common stock into the right to receive the merger consideration will occur automatically at the effective time of the merger. After completion of the merger, Computershare, as the

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exchange agent, will exchange certificates formerly representing shares of Beeville common stock for the merger consideration to be received pursuant to the reorganization agreement.

Within five business days after the effective time of the merger, Computershare will mail a letter of transmittal and instructions to you for use in surrendering your Beeville stock certificates. When you properly surrender your certificates or provide other satisfactory evidence of ownership, and return the properly completed and duly executed letter of transmittal, within ten days after such surrender, Computershare will cancel your surrendered Beeville stock certificates and deliver to you the number of shares of Spirit common stock and cash that you are entitled to receive under the reorganization agreement.

You should not send in your certificates until you receive the letter of transmittal and instructions.

At the effective time of the merger, and until surrendered as described above, each certificate formerly representing shares of Beeville common stock will be deemed for all purposes to represent only the right to receive the merger consideration to be paid pursuant to the reorganization agreement. If a Beeville stock certificate has been lost, stolen or destroyed, Computershare will issue the merger consideration upon receipt of (i) an affidavit of that fact by the claimant and (ii) if required by Spirit or Computershare, the posting of a bond in an amount as Spirit or Computershare, as applicable, may direct as indemnity against any claim that may be made against it with respect to such certificate. After the effective time of the merger, Beeville’s transfer books will be closed and no transfer of the shares of Beeville common stock outstanding immediately prior to the effective time of the merger, other than to settle transfers of Beeville common stock that occurred prior to the effective time of the merger.

To the extent permitted by applicable law, you will be entitled to vote after the effective time of the merger at any meeting of Spirit shareholders the number of whole shares of Spirit common stock into which your shares of Beeville common stock are converted, regardless of whether you have surrendered your Beeville stock certificates to Computershare for exchange for Spirit stock certificates. If and when Spirit declares a dividend or other distribution on Spirit common stock that has a record date after the effective time of the merger, the declaration will include dividends or other distributions on all shares of Spirit common stock issuable pursuant to the reorganization agreement. However, no dividend or other distribution payable to the holders of record of Spirit common stock will be delivered to you until you surrender your Beeville stock certificates for exchange as described above. Upon surrender of your Beeville stock certificates, book-entry shares of Spirit common stock into which your shares of Beeville common stock have been converted, together with cash in lieu of any fractional share of Spirit common stock to which you would otherwise be entitled and any undelivered dividends, will be delivered and paid to you, without interest.

Representations and Warranties

The representations, warranties and covenants described below and included in the reorganization agreement were made by Spirit and Beeville for purposes of the reorganization agreement and as of specific dates, may be subject to limitations, qualifications or exceptions agreed upon by the parties, including those included in confidential disclosures made for the purposes of, among other things, allocating contractual risk between Spirit and Beeville rather than establishing matters as facts, and may be subject to standards of materiality that differ from those standards relevant to investors. You should not rely on the representations, warranties, covenants or any description thereof as characterizations of the actual state of facts or condition of Spirit, Beeville or any of their respective subsidiaries or affiliates. Moreover, information concerning the subject matter of the representations, warranties and covenants may change after the date of the reorganization agreement, which subsequent information may or may not be fully reflected in public disclosures by Spirit or Beeville. The representations and warranties and other provisions of the reorganization agreement should not be read alone, but instead should be read only in conjunction with the information provided elsewhere in this document. See the section of this document entitled “Where You Can Find More Information,” beginning on page 281.

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The reorganization agreement contains customary representations and warranties of each of Spirit and Beeville relating to their respective businesses. The representations and warranties in the reorganization agreement do not survive the effective time of the merger.

The reorganization agreement contains representations and warranties made by Beeville and Spirit relating to a number of matters, including the following:

• corporate organization, existence and standing;

• capitalization;

• authority to execute and deliver the reorganization agreement and to complete the transactions contemplated thereby;

• the absence of conflicts between the execution and delivery of the reorganization agreement and completion of the transactions contemplated by the reorganization agreement and certain other agreements;

• third-party consents;

• pending or threatened litigation and other proceedings;

• the accuracy of their financial statements, reports and internal controls;

• compliance with applicable laws and regulatory filings and its ability to receive required regulatory approvals;

• the absence of certain changes and events;

• compliance with tax laws, payment of taxes and filing of tax returns;

• its compensation and benefit plans;

• its brokers’, finders’ and financial advisors’ fees; and

• their receipt of fairness opinions.

Beeville also has made additional representations and warranties to Spirit with respect to (among other things):

• its subsidiaries;

• its organizational documents;

• its investments;

• its loan portfolio and reserve for loan losses;

• the existence of certain loans and related matters;

• the accuracy of its minute books and stock transfer records;

• the performance of fiduciary responsibilities by Beeville and each of its subsidiaries;

• its real property and leases;

• its personal property;

• its compliance with environmental laws;

• the existence of certain contracts and commitments;

• its fidelity bonds and insurance coverage;

• actions taken by regulatory authorities;

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• certain employee matters;

• the existence of certain deferred compensation and salary continuation agreements;

• its internal accounting controls;

• the absence of derivative contracts;

• its deposit accounts;

• its intellectual property rights;

• its shareholders list;

• dissenting shareholders; and

• anti-takeover laws.

Spirit has also made additional representations and warranties to Beeville with respect to its compliance with its SEC reporting obligations and the accuracy of such reports, its compensation and benefit plans, and its ability to pay the cash consideration without obtaining any financing.

Certain representations and warranties of Spirit and Beeville are qualified as to “materiality” or “material adverse effect.” For purposes of the reorganization agreement, a “material adverse effect,” when used in reference to either Beeville, Spirit or the surviving corporation, means any effect, change, development or occurrence that individually, or in the aggregate together with all other effects, changes, developments or occurrences, (i) is material and adverse to the financial condition, assets, properties, deposits, results of operations, earnings, business or cash flows of that party, taken as a whole, other than any effect on the referenced party which is caused by (A) changes in laws and regulations or interpretations thereof that are generally applicable to the banking or savings industries; (B) changes in GAAP or regulatory accounting principles that are generally applicable to the banking or savings industries; (C) changes in global, national or regional political conditions or general economic or market conditions in the United States or the State of Texas, including changes in prevailing interest rates, credit availability and liquidity, currency exchange rates, and price levels or trading volumes in the United States or foreign securities markets affecting other companies in the financial services industry; (D) general changes in the credit markets or general downgrades in the credit markets; (E) actions or omissions of a party required by the Agreement or taken with the prior informed written consent of the other party or parties in contemplation of the transactions contemplated thereby; or (F) any outbreak or escalation of hostilities, declared or undeclared acts of war or terrorism; except to the extent that the effects of such changes in the foregoing (A) through (F) disproportionately affect such party and its subsidiaries, taken as a whole, as compared to other companies in the industry in which such party and its subsidiaries operate; or (ii) prevents or materially impairs any party from completing the merger, or any of the transactions contemplated by the reorganization agreement, including the bank merger to which such party is a party.

Covenants and Agreements

Conduct of Businesses Prior to the Completion of the Merger

From the date of the reorganization agreement to and including the closing date of the merger, Beeville has agreed to, and has agreed to cause Beeville Bank to:

• conduct its affairs only in the ordinary course of business consistent with past practices and safe and sound banking principles;

• use commercially reasonable efforts to preserve intact its present business organization, keep available the services of its present officers, directors, employees and agents, and preserve its relationships and goodwill with customers and advantageous business relationships;

• promptly give written notice to Spirit of (i) any material changes in its business, operations or prospects, (ii) any complaints, investigations or hearings (or communications indicating the same may

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be contemplated) of any governmental body, (iii) the commencement or threat of any proceeding or litigation against Beeville or any of its subsidiaries or (iv) the occurrence of any event or the failure of any event to occur or the existence of any circumstance that would reasonably be expected to cause a breach of any covenant, condition or agreement contained in the reorganization agreement, any of the representations or warranties of Beeville in the reorganization agreement to be materially untrue or a material adverse effect on Beeville; and

• take no action which would adversely affect or delay the ability of Beeville or Spirit to obtain any regulatory or other approvals required for the completion of the transactions contemplated by the reorganization agreement or to perform its obligations and agreements under the reorganization agreement.

From the date of the reorganization agreement to and including the effective time of the merger, except as expressly permitted by the reorganization agreement or as may be required by applicable law or an order or policy of a governmental body, and unless Spirit otherwise consents in writing, Beeville has agreed not to, and has agreed not to permit Beeville Bank to:

• adjust, split, combine or reclassify any Beeville common stock;

• make, acquire, modify or renew, or agree to make, acquire, modify or renew, any loans, loan participations or other extensions of credit that would be a material violation of its policies and procedures in effect as of the date of the reorganization agreement, or would not be in the ordinary course of business consistent with past practices and safe and sound banking principles;

• issue or sell, or obligate itself to issue or sell, any shares of its capital stock or any warrants, rights or options to acquire, or any securities convertible into, any shares of its capital stock;

• grant any stock appreciation rights, stock appreciation units, restricted stock, stock options or other form of incentive compensation;

• open, close or relocate any branch office, or acquire or sell or agree to acquire or sell any branch office or any deposit liabilities;

• hire any employee or independent contractor with an annual salary in excess of $50,000;

• grant any severance or termination payment to, or enter into any collective bargaining, change-in-control, retention, noncompetition, retirement, parachute, severance or indemnification agreement with, any officer, director, employee or agent of Beeville or any of its subsidiaries;

• increase the compensation or fringe benefits of any of its employees, directors, consultants or other service providers other than in the ordinary course of business consistent with past practice and pursuant to policies in effect as of the date of the reorganization agreement, or pay any perquisite such as automobile allowance, club membership or dues or other similar benefits other than in accordance with past practice, or institute any employee welfare, retirement or similar plan or arrangement;

• amend any Beeville employee plan, other than as required to maintain the tax qualified status of such plan or as contemplated under the reorganization agreement;

• declare, pay or set aside for payment any dividend or other distribution (whether in cash, stock or property) in respect of Beeville common stock, or directly or indirectly, purchase, redeem or otherwise acquire any shares of Beeville common stock, other than (i) the payment of dividends from Beeville Bank to Beeville, (ii) the payment by Beeville of a $120,000 cash dividend to be paid to Beeville shareholders in the fourth quarter of 2018 or (iii) the special dividend;

• make any change in accounting methods, principles and practices, except as may be required by GAAP or any governmental body;

• sell, transfer, convey, mortgage, encumber or otherwise dispose of any material properties or assets (including other real estate owned) or interest therein, other than in the ordinary course of business consistent with past practices and safe and sound banking practices;

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• foreclose upon or otherwise acquire any commercial real property before receipt and approval by Spirit of a Phase I environmental review thereof;

• increase or decrease the rate of interest paid on deposit accounts, except in the ordinary course of business consistent with past practices and safe and sound banking practices;

• charge off any loan or other extension of credit greater than $50,000 without two business days’ prior written notice to Spirit of the amount of such charge-off;

• establish any new subsidiary or affiliate or enter into any new line of business, or except pursuant to contracts or agreements in force at the date of or permitted by the reorganization agreement, make any equity investment in, or purchase outside the ordinary course of business any property or assets of, any other individual, corporation or other entity;

• materially deviate from policies and procedures existing as of the date of the reorganization agreement with respect to classification of assets, the allowance for loan losses and accrual of interest on assets, except as otherwise required by the provisions of the reorganization agreement, applicable law or regulation or any governmental body;

• amend or change any provision of the certificate of formation, bylaws or the governing documents of Beeville or any of its subsidiaries;

• make any capital expenditure which would exceed an aggregate of $50,000;

• excluding deposits and certificates of deposit, incur or modify any indebtedness for borrowed money, including FHLB advances, except in the ordinary course of business consistent with past practices and safe and sound banking practices;

• prepay any indebtedness or other similar arrangements so as to cause Beeville to incur any prepayment penalty thereunder;

• settle any claim, action or proceeding involving payment by Beeville or Beeville Bank of money damages in excess of $50,000 in the aggregate or imposing any restriction on the operations of Beeville or any of its subsidiaries;

• make any changes to its investment securities portfolio from that as of September 30, 2018, or the manner in which the portfolio is classified or reported, except in the ordinary course of business consistent with past practices and safe and sound banking practices;

• make or change any tax election or tax method of accounting, settle or compromise any tax liability, enter into any tax closing agreement, surrender any right to claim a return of taxes, file any amended tax return, or consent to any extension or waiver of any statute of limitations;

• take, or knowingly fail to take, any action that would reasonably be expected to prevent the merger or the bank merger from qualifying as a “reorganization” under the Section 368(a) of the Code; or

• agree to do any of the foregoing.

For a complete description of such restrictions on the conduct of the business of Beeville, we refer you to the reorganization agreement, which is attached as Annex A to this document.

Regulatory Matters

Spirit and Beeville have agreed to take all reasonable actions to aid and assist in the completion of the merger and to use commercially reasonable efforts to take or cause to be taken all other actions necessary, proper or advisable to complete the transactions contemplated by the reorganization agreement, including such actions which are necessary, proper or advisable in connection with filing applications with, or obtaining approvals from all regulatory authorities having jurisdiction over the transactions contemplated by the reorganization agreement.

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Spirit agreed, at its expense, to file all notices and applications for all regulatory approvals required to be obtained by Spirit or Spirit Bank in connection with the reorganization agreement and the transactions contemplated thereby and to provide Beeville copies of such filings for which confidential treatment has not been requested. Beeville agreed, to the extent permitted by applicable law, to provide Spirit all information concerning Beeville required for inclusion in this document, or any other application, filing, statement or document to be made or filed in connection with the merger, the bank merger or the other transactions contemplated by the reorganization agreement.

Director and Officer Indemnification and Insurance

Spirit agreed to indemnify and hold harmless the directors and officers of Beeville and each of its subsidiaries as of the effective time of the merger and for four years thereafter, subject to the limitations of any governmental body and the certificate of formation, bylaws and other governing documents of Beeville and each of its subsidiaries, against costs or expenses, judgments, fines, losses, claims, damages or liabilities incurred in connection with any claim, action, suit, proceeding or investigation, whether civil, criminal, administrative or investigative, arising out of matters existing or occurring at or before the effective time of the merger, whether asserted or claimed before, at or after the effective time of the merger, arising in whole or in part out of or pertaining to the fact that he or she was acting in his or her capacity as a director or officer of Beeville or any of its subsidiaries to the fullest extent that the indemnified party would be entitled under the certificate of formation, bylaws or other governing documents of Beeville or any of its subsidiaries, as applicable, as in effect on the date of the reorganization agreement and to the extent permitted by applicable law.

Beeville agreed to purchase (a) for a period of not less than four years after the effective time of the merger, past acts and extended reporting period insurance coverage for no less than the four-year period immediately preceding the effective time of the merger under its current (i) directors and officers insurance (or comparable coverage), (ii) employment practices liability insurance, (iii) financial institutions bond (or comparable coverage), (iv) bankers professional liability insurance, (v) mortgage errors and omissions insurance and (vi) fiduciary liability insurance (b) for a period of not less than three years after the effective time of the merger, tail coverage for no less than the three-year period immediately preceding the effective time of the merger under its current cyber liability insurance, for each person and entity, including, without limitation, Beeville, its subsidiaries and their respective directors, officers and employees, currently covered under those policies held by Beeville or its subsidiaries.

Agreement Not to Solicit Other Offers

Beeville agreed that neither it nor any of its subsidiaries will, and it will instruct their respective directors, officers, agents or representatives not to, directly or indirectly take any action to solicit, initiate, encourage or facilitate the making of any inquiries or proposal with respect to, or provide any information to, conduct any assessment of, engage in negotiations with or have any discussions with any other party concerning any acquisition proposal or which could reasonably be expected to lead to an acquisition proposal.

If Beeville or any of its representatives receives an unsolicited bona fide acquisition proposal before the Beeville special meeting that the Beeville board of directors has:

• determined in its good faith judgment (after consultation with its financial advisors and outside legal counsel) that such acquisition proposal constitutes or would reasonably be expected to result in a superior proposal;

• determined in its good faith judgment (after consultation with outside legal counsel) that the failure to take such action would cause, or would be reasonably expected to cause, it to violate its fiduciary duties under applicable law; and

• obtained from such person or entity an executed confidentiality agreement,

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then Beeville or its representatives may furnish information to and enter into discussions and negotiations with such other party.

Beeville agreed to notify Spirit in writing within three business days after receipt of any unsolicited acquisition proposal and to provide reasonable detail as to the identity of the individual, corporation or other entity making such proposal and the material terms of such acquisition proposal.

Conditions to the Completion of the Merger

The reorganization agreement contains a number of conditions to the obligations of Spirit and Beeville to complete the merger which must be satisfied as of the closing date, including, but not limited to, the following:

• having received all required regulatory approvals of the transactions contemplated by the reorganization agreement, including the merger and the bank merger, in a manner that does not impose any restrictions on the operations of Spirit or the continuing corporation which are reasonably unacceptable to Spirit;

• the Beeville shareholders having approved the Beeville merger proposal;

• the registration statement of which this document forms a part having become effective and no stop order suspending its effectiveness being in effect and no proceedings for that purpose having been initiated and continuing or threatened by the SEC, and all necessary approvals under state securities laws relating to the issuance or trading of the Spirit common stock to be issued having been received;

• the shares of Spirit common stock to be issued to Beeville shareholders having been authorized for listing on NASDAQ;

• except as explicitly provided in the reorganization agreement, the other party’s representations and warranties contained in the reorganization agreement being true and correct as of the date of the reorganization agreement and being true and correct in all material respects as of the closing date of the merger and each party having received a certificate signed by an appropriate representative of the other party to that effect;

• each party having performed or complied in all material respects with its respective covenants and obligations required by the reorganization agreement to be performed or complied with before the closing of the merger and each party having received of a certificate signed by an appropriate representative of the other party to that effect;

• 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 action having been taken, and any law, statute, rule, regulation or order, judgment, order or ruling being promulgated, enacted, entered, enforced or deemed applicable to the reorganization agreement or the transactions contemplated hereby by any federal, state or foreign governmental body or by any court, which, if successful, (i) would make the reorganization agreement or any other related agreement, or the transactions contemplated by the reorganization agreement or other related agreement, including the merger and the issuance of shares of Spirit common stock in connection with the merger, illegal, invalid or unenforceable, (ii) would impose material limits on the ability of any party to complete the reorganization agreement or any other related agreement, or the transactions contemplated by the reorganization agreement or other related agreement, including the merger and the issuance of shares of Spirit common stock in connection with the merger, or (iii) would, subject Beeville, Spirit or any of their subsidiaries or any officer, director, shareholder or employee of Beeville, Spirit or their respective subsidiaries to criminal or civil liability;

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• each party having obtained certain third-party consents and approvals as identified in the reorganization and each party having received evidence from the other party of such consents and approvals in form and substance satisfactory to it; and

• each party having received 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.

In addition to the conditions listed above, Spirit’s obligation to complete the merger is subject to the satisfaction of the following conditions:

• certain officers of Beeville and/or Beeville Bank each having entered into employment agreements with Spirit, which employment agreements have been executed, and such employment agreements remaining in full force and effect as of the effective time of the merger;

• each of the non-employee directors of Beeville and Beeville Bank having entered into a support agreement with Spirit, which support agreements have been executed, and such support agreements remaining in full force and effect as of the effective time of the merger;

• each of the directors and certain officers of Beeville and Beeville Bank having executed a release agreement, releasing Beeville and Beeville Bank from any and all claims of such directors and officers, subject to certain limited exceptions, and such releases remaining in full force and effect as of the effective time of the merger;

• holders of no more than 5.0% of the outstanding Beeville common stock, in the aggregate, having demanded or being entitled to demand payment of the appraised fair value of their shares as dissenting shareholders;

• Beeville having accrued for any costs and expenses, including legal fees and expenses and settlement costs, related to outstanding legal proceedings;

• Beeville, as requested by Spirit, having amended or terminated any employee benefit plans; and

• Beeville having deliver to Spirit all other instruments and documents which Spirit or its counsel may reasonably request to effectuate the merger and the other transactions contemplated by the reorganization agreement.

Any condition to the completion of the merger, except the required shareholder and regulatory approvals, and the absence of an order or ruling prohibiting the merger, may be waived in writing by the party to the reorganization agreement entitled to the benefit of such condition.

Additional Agreements

In addition to the agreements described above, each party has agreed in the reorganization agreement to take certain other actions, including but not limited to:

• Beeville agreed to give Spirit access to all of its properties, books and records and to provide additional financial and operating data and other information about its business and properties;

• Beeville agreed to deliver or make available to Spirit all unaudited monthly and quarterly financial statements and all call reports filed by Beeville Bank;

• each party has agreed to hold in confidence documents and information concerning the other in accordance with the terms of the non-disclosure and confidentiality agreement, dated May 7, 2018, by and between Spirit and Beeville;

• each party has agreed that it will not, and will not permit any of their officer, director or representatives to, issue or cause the publication of any press release or public announcement with respect to the transactions contemplated by the reorganization agreement without the consent of the other party, except as required by applicable law or securities exchange rules or in connection with the regulatory approval process;

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• Beeville agreed to use commercially reasonable efforts to ensure that, at Spirit’s request, its current data processing contracts and other contracts will be terminated prior to the data processing conversion and the operational integration occurs between Beeville Bank and Spirit Bank;

• Beeville agreed to cause Beeville Bank to maintain its allowance for loan losses at a level consistent with Beeville Bank’s historical methodology, past practices, policies in existence as of the execution of the reorganization agreement and in compliance with GAAP and, at a minimum, to take or cause to be taken all action necessary to ensure that Beeville Bank’s allowance for loan losses as of the close of business on the business day preceding the date the merger is completed is at least 1.17% of total loans;

• Beeville agreed to use its commercially reasonable efforts to obtain all consents, approvals, authorizations or waivers as described on a disclosure schedule;

• Beeville agreed to provide Spirit real time access to a data share file portal containing documents, reports and other materials prepare for and/or provided to the senior loan officers and members of Beeville Bank’s loan committee;

• Beeville agreed to cause Beeville Bank to coordinate with Spirit and Spirit Bank as necessary in conjunction with all approvals, filings and other steps necessary to cause the completion of the bank merger;

• Spirit agreed to prepare and file a registration statement with the SEC with respect to the shares of Spirit common stock to be issued pursuant to the reorganization agreement, and use its commercially reasonable efforts to cause the registration statement to become effective;

• Spirit agreed to file all documents required to be filed to have the shares of the Spirit common stock to be issued pursuant to the reorganization agreement included for listing on NASDAQ and use its commercially reasonable efforts to effect said listing;

• Spirit agreed that the employees of Beeville and its subsidiaries who continue their employment after the completion of the merger will be entitled to participate as employees in the employee benefit plans and programs maintained for employees of Spirit and Spirit Bank, such employees will be entitled to credit for prior service with Beeville and Spirit will take all necessary acts to facilitate such coverage, including, without limitation, waiving any eligibility waiting periods and pre-existing condition exclusions, to the extent permitted by Spirit’s plans and applicable law and subject to the provisions set forth in the reorganization agreement;

• Spirit agreed to appoint Allen C. Jones as a director of Spirit upon the completion of the merger and, at the 2019 annual meeting of shareholders, to nominate Mr. Jones, or cause him to be nominated, as a director; and

• Spirit agreed, as the sole shareholder of Spirit Bank, to cause Spirit Bank to appoint each of Brannon Brooke and George G. Latcham (i) as a director of Spirit Bank to commence serving immediately following the completion of the merger and (ii) as a director of Spirit Bank at the next following general election of Spirit Bank directors that follows the completion of the merger.

Termination of the Reorganization Agreement

Spirit and Beeville can mutually agree at any time to terminate the reorganization agreement without completing the merger. In addition, either Spirit or Beeville may decide, without the consent of the other, to terminate the reorganization agreement if:

• 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;

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• 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 Beeville shareholders approve the reorganization agreement, 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; provided that Beeville gives Spirit five business days’ notice of its intent to accept such proposal and, to the extent Spirit desires, negotiates with Spirit to make adjustments to the terms and conditions of the reorganization agreement so that the superior proposal no longer constitutes a superior proposal, and the Beeville board of directors determines that the alternative acquisition proposal is still a superior proposal to that of the reorganization agreement after giving effect to the adjustments to the terms and conditions of the reorganization agreement proposed by Spirit.

Beeville may also terminate the reorganization agreement if (i) the average closing price of Spirit common stock is less than $15.85 and (ii) the number obtained by dividing the average closing price of Spirit common stock by $19.81 is less than the number obtained by dividing (a) the final index price by (b) the initial index price and subtracting 0.20 from such quotient. Upon receipt of such notice, Spirit has the discretion, but not the obligation, within two business days after receipt of Beeville’s written notice of such termination, to increase the merger consideration by increasing the cash consideration and/or by increasing 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. The final index price, as such term is used in this document, is the average of the daily closing value of the selected index for the 15 consecutive trading days ending on and including the fifth trading day preceding the closing date of the merger. The initial index price, as such term is used in this document, is $3,748.03 (the closing value of the selected index on the date immediately prior to the date of 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, if 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;

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

• if the Beeville board of directors agrees to accept a superior proposal (as defined in the reorganization agreement); or

• if 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.

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Termination Fee

If the reorganization agreement is terminated by:

• Beeville because the Beeville board of directors receives an unsolicited, bona fide alternative acquisition proposal and, under certain terms and conditions, determines that it is a superior proposal to that of the reorganization agreement taking into account any adjustments made by Spirit to the terms of the reorganization agreement;

• Spirit because Beeville breaches the non-solicitation obligations set forth in the reorganization agreement in a manner adverse to Spirit, the Beeville board resolves to accept a superior proposal or the Beeville board effects a change in its recommendation to Beeville shareholders as to how to vote on the Beeville merger proposal;

• Spirit or Beeville because the merger has not been completed by May 26, 2019 (or July 25, 2019, if regulatory approval has not been obtained by May 26, 2019), at the time of termination, the registration statement has been declared effective for at least 25 business days and Beeville has failed to call, give notice of, convene and hold the Beeville special meeting;

• Spirit or Beeville because Beeville shareholders fail to approve the reorganization agreement and, at the time of the termination, the Beeville board of directors has received a bona fide, alternative acquisition proposal; or

• Spirit or Beeville because Beeville shareholders fail to approve the reorganization agreement by May 26, 2019 (or July 25, 2019, if regulatory approval has not been obtained by May 26, 2019), at the time of termination, the Beeville board of directors has received a bona fide, alternative acquisition proposal, and within 12 months of termination of the reorganization agreement, Beeville enters into an acquisition agreement with a third party with respect to such acquisition proposal,

then Beeville will be required to pay Spirit a termination fee of $2.5 million.

Effect of Termination

Except with respect to the termination fee, as discussed above, if the reorganization agreement is terminated, it will become void and have no effect, without liability on the part of any party or the directors, officers or shareholders of any party, except that (i) each of Spirit and Beeville will remain liable for any liabilities or damages arising out of its breach of any provision of the reorganization agreement and (ii) designated provisions of the reorganization agreement will survive the termination, including those relating to payment of fees and expenses and the confidential treatment of information.

Expenses and Fees

Beeville and Spirit will each pay their respective expenses incurred in connection with the preparation and performance of their respective obligations under the reorganization agreement, whether or not the transactions provided for in the reorganization agreement are completed, including, but not limited to, fees and expenses of their own outside legal counsel, financial or other advisors, investment bankers and accountants, and filing, registration, application and printing fees. Similarly, each of Beeville and Spirit agreed to indemnify the other party against any cost, expense or liability (including reasonable attorneys’ fees) in respect of any claim made by any party for a broker’s or finder’s fee in connection with the merger other than one based on communications between the party and the claimant seeking indemnification.

Amendment, Waiver and Extension of the Reorganization Agreement

The reorganization agreement may be amended by the parties in writing at any time before or after approval of the reorganization agreement by Beeville shareholders, except that after such approval, if the amendment will reduce the value of or change the form of the merger consideration, the amendment must be approved by Beeville shareholders.

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At any time prior to the completion of the merger, the parties may, to the extent legally allowed, extend the time for the performance of any of the obligations or other acts of the other party, waive any inaccuracies in the representations and warranties contained in the reorganization agreement or in any document delivered pursuant to the reorganization agreement, and waive compliance with any of the agreements or satisfaction of any conditions contained in the reorganization agreement.

Beeville Support Agreements and Beeville Voting Agreement

Beeville Support Agreements

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 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 the Beeville support agreements, each director also agreed to certain additional restrictive covenants.

The foregoing description of the Beeville support agreements is subject to, and qualified in its entirety by reference to, the Beeville support agreements, the form of which is attached to the reorganization agreement that is included with this document as Annex A and is incorporated into this document by reference.

Beeville Voting Agreement

In connection with entering into the reorganization agreement, Spirit entered into a voting agreement with each director of Beeville. 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.

The foregoing description of the Beeville voting agreement is subject to, and qualified in its entirety by reference to, the Beeville voting agreement, the form of which is attached to the reorganization agreement that is included with this document as Annex A and is incorporated into this document by reference.

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ACCOUNTING TREATMENT

The accounting principles applicable to the merger as described in the Financial Accounting Standards Board, which we refer to as FASB, Accounting Standards Codification, which we refer to as ASC, 805 provide transactions that represent business combinations are to be accounted for under the acquisition method. The acquisition method requires all of the following steps: (i) identifying the acquirer; (ii) determining the acquisition date; (iii) recognizing and measuring the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree; and (iv) recognizing and measuring goodwill or a gain from a bargain purchase.

The expected accounting treatment for the merger is as a business combination under the acquisition method. On the acquisition date, as defined by ASC 805, Spirit (the acquirer) will record at fair value the identifiable assets acquired and liabilities assumed, any noncontrolling interest, and goodwill (or a gain from a bargain purchase). The results of operations for the combined company will be reported prospectively subsequent to the acquisition date.

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

The following discussion constitutes the opinion of Hunton and Fenimore Kay, subject to assumptions and qualifications set forth below and in their respective tax opinions, which have been filed as Exhibits 8.1 and 8.2 to the registration statement to which this document is a part, as to material U.S. federal income tax consequences of the merger to U.S. Holders (as defined below) of Beeville common stock. This discussion is based on the Code, Treasury Regulations, administrative rulings and judicial decisions, all as in effect as of the effective date of this document and all of which are subject to change (possibly with retroactive effect) and to differing interpretations. Accordingly, the U.S. federal income tax consequences of the merger to Beeville shareholders could differ from those described below.

This discussion applies only to U.S. Holders that hold their Beeville common stock, and will hold the Spirit common stock received in exchange for their Beeville common stock, as a capital asset within Section 1221 of the Code at all relevant times (generally, assets held for investment). In addition, this discussion does not address any alternative minimum tax or any state, local or foreign tax consequences of the merger, the “Medicare tax” on net investment income or any tax consequences of the merger under any U.S. federal tax laws other those pertaining to income tax. This discussion does not address any tax consequences arising under the laws of any state, local or foreign jurisdiction, or under any U.S. federal laws other than those pertaining to the income tax. Further, this discussion is for general information only and does not address all aspects of U.S. federal taxation that may be relevant to a particular U.S. Holder in light of such holder’s personal circumstances or to a U.S. Holder that is subject to special treatment under U.S. federal income tax laws, including, without limitation:

• financial institutions or mutual funds;

• tax-exempt organizations;

• insurance companies;

• dealers or brokers in securities or foreign currency;

• traders in securities who elect to apply a mark-to-market method of accounting,

• partnerships, S corporations, and other pass-through entities and arrangements treated as partnerships for U.S. federal income tax purposes and investors in such entities;

• controlled foreign corporations or passive foreign investment companies;

• regulated investment companies and real estate investment trusts;

• broker-dealers;

• holders liable for the alternative minimum tax;

• holders that have a functional currency other than the U.S. dollar;

• holders who received, or have a right to receive, their Beeville common stock through the exercise of employee stock options, through a tax-qualified retirement plan, deferred stock award or otherwise as compensation;

• holders who hold Beeville common stock as part of a hedge, straddle, constructive sale, conversion transaction or other integrated investment; and

• U.S. expatriates or certain former citizens or long-term residents of the United States.

For purposes of this discussion, a “U.S. Holder” is a beneficial owner of Beeville common stock who is, for U.S. federal income tax purposes: (i) an individual who is a citizen or resident of the United States; (ii) a corporation (or any other entity taxable as a corporation for U.S. federal income tax purposes) created or organized under the laws of the United States or any state thereof or the District of Columbia; (iii) an estate that is subject to U.S. federal income tax on its income regardless of its source; or (iv) a trust (A) if a U.S. court is

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able to exercise primary supervision over its administration and one or more U.S. persons have the authority to control all substantial decisions of the trust or (B) that was in existence on August 20, 1996, and has made a valid election to be treated as a U.S. person for U.S. federal income tax purposes. Beeville shareholders who are not U.S. Holders may have different tax consequences than those described below and are urged to consult their own tax advisors regarding the tax treatment of the merger under U.S. and non-U.S. tax laws.

If a partnership (or an entity or arrangement treated as a partnership for U.S. federal income tax purposes) holds shares of Beeville common stock, the U.S. federal income tax treatment of a partner in such partnership generally will depend upon the status of the partner and the activities of the partnership. Such partners and partnerships are urged to consult their own tax advisors regarding the particular tax consequences of the merger to them.

Determining the actual U.S. federal income tax consequences of the merger to a U.S. Holder may be complex and will depend, in part, on the holder’s particular circumstances. Each U.S. Holder of Beeville common stock should consult such holder’s own tax advisor with respect to the particular tax consequences of the merger to such holder, including the applicability and effect of the alternative minimum tax and any state, local, foreign and other tax laws and of possible changes in those laws after the date of this document.

U.S. Federal Income Tax Consequences of the Merger

The obligations of Spirit and Beeville to complete the merger are conditioned on, among 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. These opinions will be based on representations and covenants, including those contained in certificates of officers of Spirit and Beeville and on customary factual assumptions, including assumptions regarding the absence of changes in existing facts and the completion of the merger strictly in accordance with the reorganization agreement and the registration statement of which this document forms a part. The opinions described herein represent Hunton’s and Fenimore Kay’s best legal judgment, but do not bind the courts and do not preclude the IRS from adopting a position contrary to the ones expressed in the opinions. Additionally, the IRS has not issued (and is not expected to issue) any ruling as to the qualification of the merger as a reorganization under Section 368(a) of the Code. Accordingly, there can be no assurance that the IRS will not assert, or that a court would not sustain, a position contrary to any of the tax consequences set forth below. If any of the assumptions, representations or covenants upon which these opinions are based is incorrect or inaccurate in any way, these opinions and the U.S. federal income tax consequences of the merger could be adversely affected and the tax consequences of the merger could differ from those described in this document. The following discussion regarding the U.S. federal income tax consequences of the merger assumes that the merger will be consummated as described in the reorganization agreement and this document.

Subject to the conditions and limitations of the preceding section, as well as the certificates of officers of Spirit and Beeville delivered in connection with the opinions set forth in Exhibits 8.1 and 8.2 to this registration statement, it is the opinion of Hunton and Fenimore Kay that the merger will qualify as a “reorganization” within the meaning of Section 368(a) of the Code. Accordingly, when a U.S. Holder receives a combination of Spirit common stock and cash (other than cash received instead of fractional shares of Spirit common stock and dissenters, each discussed below) in the merger, such holder (1) will not recognize any loss upon surrendering such holder’s Beeville stock, and (2) will recognize gain (but not loss) upon surrendering such holder’s Beeville stock equal to the lesser of (a) the excess, if any, of (i) the sum of the amount of cash consideration that such U.S. Holder receives plus the fair market value (determined as of the effective time) of the Spirit common stock that such holder receives over (ii) such holder’s aggregate adjusted tax basis in the shares of Beeville stock that such holder surrenders, and (b) the amount of cash consideration that such holder receives.

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The aggregate tax basis of the shares of Spirit common stock received (including any fractional share of Spirit common stock deemed received and redeemed for cash as described below) by a U.S. Holder will be equal to such holder’s aggregate tax basis in the shares of Beeville common stock surrendered in exchange for the shares of Spirit common stock, decreased by the amount of any cash consideration (other than cash received instead of fractional shares of Spirit common stock) received and increased by the amount of any gain recognized or any amount treated as a dividend, as described below (but excluding any gain resulting from the deemed receipt and redemption of fractional shares). The holding period for shares of Spirit common stock received in the merger (including any fractional share of Spirit common stock deemed received and redeemed for cash as described below) by a U.S. Holder will include such holder’s holding period for the Beeville common stock surrendered in exchange for the Spirit common stock. If Beeville common stock was purchased or acquired by a U.S. Holder on different dates or at different prices, such holder should consult his, her or its tax advisor for purposes of determining the basis and holding period of the Spirit common stock received in the merger.

Potential Treatment of Cash Consideration as a Dividend. Any gain described in the paragraph above will be capital gain unless a U.S. Holder’s receipt of cash consideration has the effect of a distribution of a dividend, in which case the gain will be treated as a dividend to the extent of such holder’s ratable share of Beeville’s accumulated earnings and profits, as calculated for U.S. federal income tax purposes. For purposes of determining whether a U.S. Holder’s receipt of cash consideration has the effect of a distribution of a dividend, such holder will be treated as if such holder first exchanged all of his, her or its Beeville stock solely in exchange for Spirit common stock (instead of the combination of stock consideration and cash consideration actually received in the merger) and then Spirit immediately redeemed a portion of that stock for the cash consideration that such U.S. Holder actually received in the merger, which is referred to herein as the deemed redemption.

Receipt of cash will generally be treated as capital gain and will not have the effect of a dividend to a U.S. Holder if such receipt is “not essentially equivalent to a dividend” or “substantially disproportionate,” each within the meaning of Section 302(b) of the Code. The deemed redemption will generally be “substantially disproportionate” with respect to a U.S. Holder if the percentage of the outstanding voting Spirit common stock that such holder actually and constructively owns immediately after the deemed redemption is less than 80% of the percentage of the outstanding voting Spirit common stock that such holder is deemed actually and constructively to have owned immediately before the deemed redemption. In order for the deemed redemption to be “not essentially equivalent to a dividend,” the deemed redemption must result in a “meaningful reduction” in the U.S. Holder’s deemed percentage stock ownership of Spirit following the merger. The determination generally requires a comparison of the percentage of the outstanding stock of Spirit that such U.S. Holder is considered to have owned immediately before the deemed redemption to the percentage of the outstanding stock of Spirit that such U.S. Holder owns immediately after the deemed redemption. The IRS has indicated in rulings that any reduction in the interest of a minority shareholder that owns a small number of shares in a publicly and widely held corporation and that exercises no control over corporate affairs would result in capital gain (as opposed to dividend) treatment.

For purposes of applying the foregoing tests, a U.S. Holder will be deemed to own the stock the shareholder actually owns and the stock the U.S. Holder constructively owns under the attribution rules of Section 318 of the Code. Under Section 318 of the Code, a U.S. Holder will be deemed to own the shares of stock owned by certain family members, by certain estates and trusts of which the shareholder is a beneficiary, and by certain affiliated entities, as well as shares of stock subject to an option actually or constructively owned by the shareholder or such other persons. If, after applying these tests, the deemed redemption results in a capital gain, the capital gain will be long-term if a U.S. Holder’s holding period for his, her or its Beeville stock is more than one year as of the date of the exchange. If, after applying these tests, the deemed redemption results in the gain recognized being classified as a dividend, such dividend will be treated as either ordinary income or qualified dividend income. Any gain treated as qualified dividend income will be taxable to a U.S. Holder at the long-term capital gains rate, provided such holder held the shares giving rise to such income for more than 60 days during the 121 day period beginning 60 days before the effective time. The determination as to whether a U.S. Holder will recognize a capital gain or dividend income as a result of his, her or its exchange of Beeville stock for a

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combination of Spirit common stock and cash in the merger is complex and is determined on a shareholder-by-shareholder basis. Accordingly, each U.S. Holder should consult his, her or its own tax advisor with respect to any such determination that is applicable to such holder’s individual situation.

Cash Received in Lieu of a Fractional Share. A U.S. Holder who receives cash in lieu of a fractional share of Spirit common stock will be treated as having received the fractional share in the merger and then as having exchanged the fractional share for cash in redemption by Spirit. As a result, the U.S. Holder generally will recognize gain or loss equal to the difference between the amount of cash received and such U.S. Holder’s tax basis allocable to the fractional share. Such gain or loss generally will be capital gain or loss and will be long-term capital gain or loss if the U.S. Holder has held the fractional share exchanged (including the holding period for the Beeville common stock exchanged therefor) for more than one year at the effective time of the merger. The deductibility of capital losses is subject to limitations.

Dissenters. Upon the proper exercise of dissenters’ rights, a U.S. Holder will exchange all of the shares of Beeville common stock actually owned by such holder solely for cash and generally will recognize gain or loss equal to the difference between the amount of cash received and such holder’s tax basis in the shares of Beeville common stock surrendered. The gain or loss will be long-term capital gain or loss if the U.S. Holder’s holding period with respect to the Beeville common stock surrendered is more than one year. The deductibility of capital losses is subject to limitations. In some cases, if the U.S. Holder actually or constructively owns shares of Spirit common stock after the merger, the cash received could be treated as a dividend, in which case such holder may recognize dividend income up to the entire amount of the cash received (and not only on the excess of cash received over such U.S. Holder’s tax basis in the shares of Beeville common stock exchanged).

Information Reporting and Backup Withholding

Beeville shareholders are required to retain permanent records and make such records available to any authorized IRS officers and employees. The records should include the number of shares of Beeville stock exchanged, the number of shares of Spirit common stock received, the fair market value of the Beeville stock exchanged, and the holder’s adjusted basis in the Spirit common stock received.

Payments of cash (such as cash received in lieu of fractional shares) to a U.S. Holder pursuant to the merger may be subject to information reporting and backup withholding under certain circumstances, unless the U.S. Holder receiving such payments:

• furnishes a correct taxpayer identification number to the exchange agent and certifies that such holder is not subject to backup withholding on the substitute Form W-9 or successor form included in the letter of transmittal received and otherwise complies with applicable requirements of the backup withholding rules; or

• otherwise establishes an exemption from backup withholding.

Any amounts withheld under the backup withholding rules are not an additional tax and will generally be allowed as a refund or credit against a holder’s U.S. federal income tax liability, provided such holder furnishes the required information to the IRS.

Reporting Requirements

A U.S. Holder who receives shares of Spirit common stock upon the completion of the merger and who is considered a “significant holder” will be required to retain permanent records of the facts pertaining to the merger and to file a statement with such holder’s U.S. federal income tax return for the year in which the merger takes place a statement in accordance with Treasury Regulation Section 1.368-3 providing certain facts relating to the merger (including such U.S. Holder’s tax basis in, and the fair market value of, the Beeville stock and securities surrendered by such U.S. Holder in the merger). For this purpose, a U.S. Holder is a “significant holder” if the person (i) owns at least 5.0% (by vote or value) of Beeville’s outstanding shares or (ii) owned Beeville securities with a tax basis of $1.0 million or more.

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This discussion of certain material U.S. federal income tax consequences is for general information only and is not tax advice. Spirit and Beeville urge Beeville shareholders to consult their tax advisors with respect to the application of U.S. federal income tax laws to their particular situations as well as any tax consequences arising under the U.S. federal estate or gift tax rules, the applicability or effect of the alternative minimum tax or Medicare tax on net investment income, any tax consequences arising under the laws of any state, local, foreign or other taxing jurisdiction and of changes in those laws.

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DESCRIPTION OF CAPITAL STOCK OF SPIRIT

The following discussion summarizes some of the important rights of Spirit shareholders as of the date of this document. This discussion does not purport to be a complete description of these rights and may not contain all of the information regarding Spirit’s capital stock that is important to you. These rights can be determined in full only by reference to federal and state banking laws and regulations, the TBOC and Spirit’s certificate of formation and bylaws as in effect as of the date of this document.

General

Spirit is incorporated in Texas. The rights of Spirit shareholders are generally covered by Texas law and Spirit’s certificate of formation and bylaws. The terms of Spirit’s capital stock are therefore subject to Texas law, including the TBOC, and the common and constitutional law of Texas. Spirit’s certificate of formation and bylaws have been filed with the SEC as Exhibit 3.1 and Exhibit 3.2 to the Registration Statement on Form S-4 of which this document forms a part, and you are encouraged to read those documents carefully and in their entirety.

Spirit’s certificate of formation authorizes it to issue up to 50,000,000 shares of common stock, no par value, and 5,000,000 shares of preferred stock, par value $1.00 per share. The authorized but unissued shares of Spirit’s capital stock are available for future issuance without shareholder approval, unless otherwise required by applicable law or the rules of any applicable securities exchange.

As of                 ,                  shares of Spirit common stock were outstanding and held by approximately                  holders of record. Based on                  shares of Spirit common stock outstanding as of                  and assuming the issuance of 1,579,268 shares of Spirit common stock in the merger, Spirit expects to have                  shares of Spirit common stock outstanding immediately following the completion of the merger. Also as of                 , options to purchase                  shares of Spirit common stock held by its employees, officers and directors under the ST Financial Group, Inc. 2008 Stock Plan and the 2017 Stock Incentive Plan and warrants to purchase                  shares of Spirit common stock were outstanding. As of the date of this document, Spirit has no shares of Spirit preferred stock outstanding.

Common Stock

Voting Rights. Subject to any special voting rights that may be given to any series of preferred stock that Spirit may issue in the future, holders of Spirit common stock are entitled to one vote per share in the election of directors and on all other matters submitted to a vote of Spirit shareholders. Spirit shareholders are not entitled to cumulate their votes with respect to the election of directors. Directors are elected by a plurality of the votes cast.

Dividend Rights. Holders of Spirit common stock are entitled to dividends when, as and if declared by the Spirit board of directors out of funds legally available therefor.

Preferred Stock

Spirit’s certificate of formation permits it to issue one or more series of preferred stock and authorizes the Spirit board of directors to designate the preferences, limitations and relative rights of any such series of preferred stock, in each case, without any further action by Spirit shareholders. Preferred stock may have voting rights, subject to applicable law and the determination at issuance by the Spirit board of directors. While the terms of preferred stock may vary from series to series, holders of Spirit common stock should assume that all shares of preferred stock will be senior to Spirit common stock in respect of distributions and on liquidation.

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Although the creation and authorization of preferred stock does not, in and of itself, have any effect on the rights of the holders of Spirit common stock, the issuance of one or more series of preferred stock may affect the holders of Spirit common stock in a number of respects, including the following:

• by subordinating Spirit common stock to the preferred stock with respect to dividend rights, liquidation preferences, and other rights, preferences, and privileges;

• by diluting the voting power of Spirit common stock;

• by diluting the earnings per share of Spirit common stock; and

• by issuing Spirit common stock, upon the conversion of the preferred stock, at a price below the fair market value or original issue price of the Spirit common stock that is outstanding prior to such issuance.

As of the date of this document, Spirit has no shares of preferred stock outstanding.

Warrants

As part of the transaction with Bank4Texas Holdings, Inc., on August 24, 2010, Spirit issued warrants to purchase 12,491 shares of Spirit common stock, at an exercise price of $10.50 per share, to the Bank4Texas Holdings, Inc. organizers and the subscribers to a previous Bank4Texas offering. Such warrants are exercisable at any time until August 24, 2020. Of these warrants, warrants to purchase 419 shares of Spirit common stock have been exercised as of the date of this document.

As part of the acquisition of Oasis Bank, SSB, on November 30, 2012, Spirit assumed the outstanding warrants to purchase Oasis Bank, SSB common stock and exchanged such warrants for warrants to purchase 19,140 shares of Spirit common stock, at an exercise price of $12.84 per share, exercisable at any time on or prior to November 30, 2022, all of which remain outstanding as of the date of this document.

Business Combinations under Texas Law

Spirit is subject to the provisions of Title 2, Chapter 21, Subchapter M of the TBOC, which we refer to as the Texas Business Combination Law, which provides that a Texas corporation that qualifies as an “issuing public corporation” (as defined in the Texas Business Combination Law) may not engage in specified types of “business combinations” with a person, or an affiliate or associate of that person, who is an “affiliated shareholder.” For purposes of this law, a “business combination” is defined generally to include: mergers or share exchanges; dispositions of assets having an aggregate value equal to 10% or more of the market value of the assets or of the outstanding common stock or representing 10% or more of the earning power or net income of the corporation; certain issuances or transactions by the corporation that would increase the affiliated shareholder’s number of shares of the corporation; certain liquidations or dissolutions; and the receipt of tax, guarantee, loan or other financial benefits by an affiliated shareholder of the corporation. For purposes of this law, an “affiliated shareholder” is, or was, during the prior three years, the beneficial owner of 20% or more of the corporation’s voting shares. The prohibition on certain transactions with such affiliated shareholders extends for a three-year period from the date such shareholder first becomes an affiliated shareholder. These prohibitions do not apply if:

• the business combination or the acquisition of shares by the affiliated shareholder was approved by the board of directors of the corporation before the affiliated shareholder became an affiliated shareholder; or

• the business combination was approved by the affirmative vote of the holders of at least two-thirds of the outstanding voting shares of the corporation not beneficially owned by the affiliated shareholder or an affiliate or associate of the affiliated shareholder, at a meeting of shareholders called for that purpose, not less than six months after the affiliated shareholder became an affiliated shareholder.

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As Spirit currently has more than 100 shareholders, it is considered an “issuing public corporation” for purposes of this law. The Texas Business Combination Law does not apply to the following:

• the business combination of an issuing public corporation: where the corporation’s original certificate of formation or bylaws contain a provision expressly electing not to be governed by the Texas Business Combination Law; or that adopts an amendment to its certificate of formation or bylaws, by the affirmative vote of the holders, other than affiliated shareholders or an affiliate or associate of the affiliated shareholder, of at least two-thirds of the outstanding voting shares of the corporation, expressly electing not to be governed by the Texas Business Combination Law and so long as the amendment does not take effect for 18 months following the date of the vote and does not apply to a business combination with an affiliated shareholder who became affiliated on or before the effective date of the amendment;

• a business combination of an issuing public corporation with an affiliated shareholder that became an affiliated shareholder inadvertently, if the affiliated shareholder divests itself, as soon as practicable, of enough shares to no longer be an affiliated shareholder and would not at any time within the three-year period preceding the announcement of the business combination have been an affiliated shareholder but for the inadvertent acquisition;

• a business combination with an affiliated shareholder who became an affiliated shareholder through a transfer of shares by will or intestacy and continuously was an affiliated shareholder until the announcement date of the business combination; and

• a business combination of a corporation with its wholly-owned subsidiary, if the subsidiary is a Texas entity and not an affiliate or associate of the affiliated shareholder other than by reason of the affiliated shareholder’s beneficial ownership of voting shares of the corporation.

Neither Spirit’s certificate of formation nor its bylaws contains any provision expressly providing that Spirit will not be subject to the Texas Business Combination Law. As a result, the Texas Business Combination Law may prevent a non-negotiated merger or other business combination involving us, even if such a merger or combination would be beneficial to Spirit shareholders.

Action by Written Consent

Under Texas law, no action required or permitted to be taken at an annual or special meeting of shareholders may be taken by written consent in lieu of a meeting of shareholders without the unanimous written consent of all shareholders entitled to vote on the action unless the certificate of formation specifically allows action to be taken by a written consent of the shareholders holding at least the minimum number of shares necessary to take the action that is subject to that consent at a meeting of shareholders, even though such consent is not signed by all of the corporation’s shareholders. Spirit’s certificate of formation does not provide for shareholder action by less than unanimous written consent.

Certain Certificate of Formation and Bylaw Provisions Potentially Having an Anti-Takeover Effect

Certain provisions of Spirit’s certificate of formation and bylaws as in effect on the date of this document may have an anti-takeover effect and thus discourage potential takeover attempts and make it more difficult for Spirit shareholders to change management or receive a premium for their shares. 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;

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• 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 shares of Spirit common stock that are issued, outstanding and entitled to vote.

In addition to these provisions of Spirit’s certificate of formation and bylaws, 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.

Exclusive Forum

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 owed by any of Spirit’s directors or officers, (iii) any action asserting a claim against Spirit or any of its directors or officers arising pursuant to the TBOC or 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 it. 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.

Limitation of Liability and Indemnification of Officers and Directors

Spirit’s certificate of formation provides that its directors and officers will be indemnified by it to the fullest extent permitted by the TBOC, against all expenses incurred in connection with their service for or on Spirit’s behalf. In addition, Spirit’s certificate of formation provides that its directors and officers will not be personally liable for monetary damages to it to the fullest extent permitted by the TBOC.

Spirit has entered into indemnification agreements with its officers and directors pursuant to which they are indemnified as described above and will be advanced costs and expenses subject to the condition that an indemnitee shall reimburse the indemnitor for all the amounts paid if a final judicial determination is made that the indemnitee is not entitled to be so indemnified under applicable law and regulation.

Transfer Agent and Registrar

The transfer agent and registrar for Spirit common stock is Computershare Trust Company, N.A.

Listing

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

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COMPARISON OF SHAREHOLDERS’ RIGHTS

If the merger is completed, Beeville shareholders will be entitled to receive shares of Spirit common stock in exchange for their shares of Beeville common stock. Both Spirit and Beeville are organized under the laws of the State of Texas. The following is a summary of the material differences between (i) the current rights of Beeville shareholders under the TBOC, the Beeville certificate of formation and the Beeville bylaws and (ii) the current rights of Spirit shareholders under the TBOC, the Spirit certificate of formation and the Spirit bylaws.

Spirit and Beeville believe that this summary describes the material differences between the rights of the Spirit shareholders as of the date of this document and the rights of the Beeville shareholders as of the date of this document; however, it does not purport to be a complete description of those differences. Copies of Spirit’s governing documents have been filed with the SEC. Copies of the Beeville certificate of formation and the Beeville bylaws are available upon written request from Beeville. To find out where copies of these documents can be obtained, see the section of this document entitled “Where You Can Find More Information,” beginning on page 281.

Spirit	Beeville
Authorized Capital Stock
Spirit’s certificate of formation authorizes the issuance of up to 55,000,000 shares divided into (i) 50,000,000 shares of common stock, no par value, and (ii) 5,000,000 shares of preferred stock, par value $1.00 per share, which may be divided into and issued in series as set forth in the certificate of formation. As                 , there were                  shares of Spirit common stock outstanding and no shares of Spirit preferred stock outstanding.	Beeville’s certificate of formation authorizes it to issue up to 1,000,000 shares of common stock, par value $5.00 per share. As of the Beeville record date for the Beeville special meeting, there were              shares of Beeville common stock outstanding.
Voting Limitations
The Spirit certificate of formation expressly denies the right of cumulative voting for the election of directors or for any other purpose. Otherwise, the Spirit certificate of formation and the Spirit bylaws do not impose voting restrictions on shares of Spirit common stock.	The Beeville certificate of formation and the Beeville bylaws do not impose voting restrictions on shares of Beeville common stock.
Preemptive Rights
Under Texas law, there are no preemptive rights unless expressly provided in the corporation’s certificate of formation. Spirit’s certificate of formation expressly denies preemptive rights to any shareholder of any class of stock, other than such rights as the Spirit board of directors may determine from time to time.	Under Texas law, there are no preemptive rights unless expressly provided in the corporation’s certificate of formation. Beeville’s certificate of formation expressly provides that Beeville shareholders are not entitled to preemptive rights with respect to any shares that may be issued.
Convertibility of Stock
Spirit common stock is not convertible into any other securities of Spirit.	Beeville common stock is not convertible into any other securities of Beeville.

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Spirit	Beeville
Size of Board of Directors
The Spirit certificate of formation provides that the number of Spirit directors shall be fixed from time to time by resolution of the Spirit board of directors, but in no case will a decrease in the number of directors shorten the term of an incumbent director. The Spirit certificate of formation also provides that the full board will be divided into three classes of directors who will staggered three-year terms. The Spirit board of directors currently has ten directors.	The Beeville bylaws provide that the number of directors shall be set at five (5). The number of directors may be increased or decreased from time to time by amendment of the bylaws, but (i) no decrease in the number of directors will have the effect of shortening the term of any incumbent director, and (ii) no increase may increase the number of directors by more than two the number of directors last elected by shareholders.
Election of Directors
Under Texas law, directors are elected by a plurality of the votes cast by the shareholders entitled to vote in the election of directors at a meeting of shareholders at which a quorum is present, unless otherwise provided in the certificate of formation or the bylaws of a corporation. Directors of Spirit are elected by a plurality of the votes cast by the holders entitled to vote at the meeting. The persons receiving a plurality of the votes cast, up to the number of directors to be elected in such election, shall be deemed elected. Each share of Spirit stock has one vote for each nominee for director. Spirit’s certificate of formation expressly prohibits cumulative voting for the election of directors. Directors need not be residents of the State of Texas or Spirit shareholders.	Under Texas law, directors are elected by a plurality of the votes cast by the shareholders entitled to vote in the election of directors at a meeting of shareholders at which a quorum is present, unless otherwise provided in the certificate of formation or the bylaws of a corporation. Directors of Beeville are elected by a plurality of the votes cast by the holders entitled to vote at the meeting. Each share of Beeville common stock has one vote for each nominee for director. Directors need not be residents of the State of Texas or Beeville shareholders.
Removal of Directors, Board Vacancies and Classes of Directors
Unless otherwise provided in the certificate of formation or the bylaws of a corporation, Texas law provides that at any meeting of shareholders called expressly for the purpose of removing a director, any director or the entire board of directors may be removed, with or without cause, by a vote of the holders of a majority of the shares then entitled to vote at any election of directors. Spirit’s bylaws provide that any director may be removed only for cause and only by the affirmative vote of a majority of the votes entitled to be cast by the shares of the then outstanding Spirit common stock present in person or represented by proxy and entitled to vote generally in the election of directors at a duly constituted meeting of shareholders. Any vacancies occurring on the Spirit board of directors may be filled at an annual or special meeting of the Spirit shareholders called for that purpose, or by the	Unless otherwise provided in the certificate of formation or the bylaws of a corporation, Texas law provides that at any meeting of shareholders called expressly for the purpose of removing a director, any director or the entire board of directors may be removed, with or without cause, by a vote of the holders of a majority of the shares then entitled to vote at any election of directors. Beeville’s bylaws provide that at any meeting of Beeville shareholders called expressly for such purpose, any director or the entire board of directors may be removed, with or without cause, by the holders of a majority of shares then entitled to vote at an election of directors. Any vacancy on the Beeville board of directors may be filled by the affirmative vote of the majority of the directors then in office, though less than a quorum, or by election at an annual or special meeting of

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Spirit	Beeville
affirmative vote of a majority of the directors then in office–even if the remaining directors constitute less than a quorum of the Spirit board of directors. Any director so chosen shall hold office for the remainder of the term to which the director has been selected and until such director’s successor shall have been elected and qualified. Any directorship to be filled by reason of an increase in the number of directors may be filled at an annual or special meeting of the shareholders called for that purpose or may be filled by the board of directors for a term of office continuing only until the next election of one or more directors by the shareholders. Furthermore, the board of directors may not fill more than two directorships during the period between any two successive annual meetings of the shareholders. The Spirit board of directors has three classes of directors. Each class shall consist, as nearly as may be possible, of one-third of the total number of directors constituting the full Spirit board of directors. Each class is elected to serve a three-year term and each class is staggered so that one class is elected at each annual meeting of Spirit shareholders.	Beeville shareholders called for that purpose. Any director elected to fill a vacancy shall be elected for the unexpired term of their predecessor in office. Any Beeville directorship to be filled by reason of an increase in the number of directors may be filled at an annual or special meeting of the shareholders called for that purpose or may be filled by the board of directors for a term of office continuing only until the next election of one or more directors by the shareholders. The Beeville board of directors is not divided into classes.
Quorum
A majority of the number of directors then in office shall constitute a quorum for the transaction of business of the Spirit board of directors. The holders of a majority of the Spirit common stock issued and outstanding and entitled to vote, present in person or represented by proxy, shall constitutes a quorum at all meetings of Spirit shareholders for the transaction of business, except as otherwise provided by law. If a quorum fails to attend any meeting, the shareholders entitled to vote who are present in person or represented by proxy may adjourn the meeting.	A majority of the number of directors shall constitute a quorum for the transaction of business of the Beeville board of directors. The holders of a majority of the Beeville common stock issued and outstanding and entitled to vote, represented in person or by proxy, shall constitute a quorum at a meeting of Beeville shareholders for the transaction of business except as otherwise provided by law.
Notice of Shareholder Meeting
Written or printed notice of any meeting of Spirit shareholders shall be given not less than ten nor more than 60 days before the day of the meeting. The notice shall include the place, date and time of the meeting, and in the case of special meetings, the purpose or purposes of the meeting. A written waiver of any notice signed by a Spirit shareholder, whether before or after the time of the event for which notice is to be given, will be deemed equivalent to the notice required to be given to such	Written or printed notice of the place, day and hour of each meeting of Beeville shareholders, and, in case of a special meeting, the purpose or purposes for which the meeting is called, shall be delivered not less than ten nor more than 50 days before the date of the meeting, either personally or by mail, by or at the direction of the president of Beeville, the Secretary of Beeville or the officer or persons calling the meeting, to each Beeville shareholder of record entitled to vote at such meeting.

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Spirit	Beeville
shareholder. Attendance of a shareholder at a meeting will constitute a waiver of notice of such meeting, except when the shareholder attends a meeting for the sole purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened.	Attendance at a meeting shall constitute a waiver of notice, except where the person attends for the express purpose of objecting to the transaction of any business on the ground that the meeting is not lawfully called.
Vote Required for Certain Shareholder Actions
Texas law provides that on matters other than the election of directors, the affirmative vote of the holders of a majority of the shares entitled to vote on, and who voted for, against, or expressly abstained with respect to the matter, will be the act of the shareholders, unless the vote of a greater number is required by law, the certificate of formation or the bylaws. Under Texas law, the affirmative vote of the holders of at least two-thirds of the outstanding shares of the corporation entitled to vote is required to approve a fundamental business transaction, unless a different vote but not less than a majority of the shares entitled to vote on the matter, is specified in the certificate of formation. Spirits certificate of formation provides for a majority of the shares entitled to vote on the matter. Under Texas law, a corporation’s certificate of formation may provide that the affirmative vote of the holders of a specified portion of the shares, not less than a majority, entitled to vote on the matter will be the act of the shareholders, rather than the specified portion of shares required under Texas law. Each share of Spirit common stock has one vote for each matter properly brought before the shareholders. Except as otherwise required by law, the vote of the holders of a majority of the Spirit common stock entitled to vote and represented in person or by proxy at such meeting will be sufficient to decide the question. Spirit’s certificate of formation provides that, except as otherwise required by law, any matter requiring the approval of Spirit shareholders will require the affirmative vote of a majority of the outstanding shares of Spirit common stock entitled to vote on such matter. However, Spirit’s bylaws provide that directors will be elected by plurality of the votes cast.	Texas law provides that on matters other than the election of directors, the affirmative vote of the holders of a majority of the shares entitled to vote on, and who voted for, against, or expressly abstained with respect to the matter, will be the act of the shareholders, unless the vote of a greater number is required by law, the certificate of formation or the bylaws. Under Texas law, the affirmative vote of the holders of at least two-thirds of the outstanding shares of the corporation entitled to vote is required to approve a fundamental business transaction, unless a different vote but not less than a majority of the shares entitled to vote on the matter, is specified in the certificate of formation. Beeville’s certificate of formation does not provide for a different or lesser vote. Under Texas law, a corporation’s certificate of formation may provide that the affirmative vote of the holders of a specified portion of the shares, not less than a majority, entitled to vote on the matter will be the act of the shareholders, rather than the specified portion of shares required under Texas law. Each share of Beeville common stock has one vote for each matter properly brought before the shareholders.
Amendment of Certificate of Formation
Under Texas law, a corporation’s certificate of formation may be amended by the affirmative vote of the holders of two-thirds of the outstanding shares	Under Texas law, a corporation’s certificate of formation may be amended by the affirmative vote of the holders of two-thirds of the outstanding shares

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Spirit	Beeville
entitled to vote on the amendment, and, if entitled to vote by class or series of shares, by the holders of two-thirds of the outstanding shares of each class or series entitled to vote on the amendment, unless a different number, not less than a majority of shares entitled to vote on the matter or class or series entitled to vote on the matter, is specified in the corporation’s certificate of formation. Spirit’s certificate of formation does not specifically address amendment of the certificate of formation.	entitled to vote on the amendment, and, if entitled to vote by class or series of shares, by the holders of two-thirds of the outstanding shares of each class or series entitled to vote on the amendment, unless a different number, not less than a majority of shares entitled to vote on the matter or class or series entitled to vote on the matter, is specified in the corporation’s certificate of formation. Beeville’s certificate of formation does not specifically address amendment of the certificate of formation.
Amendment of Bylaws
Under Texas law, unless a corporation’s certificate of formation or a bylaw adopted by the shareholders provides otherwise, a corporation’s shareholders may amend the bylaws regardless of whether they may also be amended by the board of directors. Spirit’s bylaws provide that the bylaws may be altered, amended or repealed from time to time by the Spirit board of directors unless reserved to the Spirit shareholders by law or Spirit’s certificate of formation. Spirit bylaws may also be altered, amended or repealed by the Spirit shareholders.	Under Texas law, unless a corporation’s certificate of formation or a bylaw adopted by the shareholders provides otherwise, a corporation’s shareholders may amend the bylaws regardless of whether they may also be amended by the board of directors. Beeville’s bylaws provide that the bylaws may be altered, amended or repealed from time to time by the Beeville board of directors, subject to repeal or change by action of the shareholders.
Shareholder Actions Without A Meeting
Under Texas law, shareholders may act without a meeting if a written consent is signed by all of the shareholders entitled to vote on the matter, unless the corporation’s certificate of formation allows less than unanimous consent (but not less that the number of votes necessary to take such action at a meeting at which the holders of all shares entitled to vote on such action were present and voted). Spirit’s certificate of formation and bylaws provide that any action required or permitted by law to be taken at a meeting of the shareholders of Spirit may be taken without a meeting, without prior notice and without a vote if a consent or consents in writing, setting forth the action so taken, shall be signed be the holder or holders of all shares issued Beeville shares having not less than the minimum number of votes that would be necessary to take such action at a meeting at which the holders of all shares issued, outstanding and entitled to vote on such matter.	Under Texas law, shareholders may act without a meeting if a written consent is signed by all of the shareholders entitled to vote on the matter, unless the corporation’s certificate of formation allow less than unanimous consent (but not less that the number of votes necessary to take such action at a meeting at which the holders of all shares entitled to vote on such action were present and voted). Beeville’s certificate of formation does not specifically address shareholder action by written consent.

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Spirit	Beeville
Special Meetings of Shareholders
Under Texas law, special meetings of the shareholders of a corporation may be called by the president, by the Spirit board of directors or by any other person authorized to call special meetings by the certificate of formation or bylaws of the corporation. A special meeting may also be called by the holder of the percentage of shares specified in the certificate of formation, not to exceed 50.0% of the shares entitled to vote, or if no percentage is specified, at least 10.0% of all of the shares of the corporation entitled to vote at the proposed special meeting. Spirit’s certificate of formation and bylaws provide that special meetings of the shareholders may be called at any time by the president, by the chief executive officer, by the Spirit board of directors or by the holders of at least 50.0% of all shares issued, outstanding and entitled to vote at such meeting. Business transacted at the special meeting shall be confined to the purpose or purposes stated in the notice of such meeting.	Under Texas law, special meetings of the shareholders of a corporation may be called by the president, by the board of directors or by any other person authorized to call special meetings by the certificate of formation or bylaws of the corporation. A special meeting may also be called by the holder of the percentage of shares specified in the certificate of formation, not to exceed 50.0% of the shares entitled to vote, or if no percentage is specified, at least 10.0% of all of the shares of the corporation entitled to vote at the proposed special meeting. Special meetings of the Beeville shareholders may be called by the president, and shall be called by the president or secretary of Beeville at the request in writing of a majority of the Beeville board of directors or at the request in writing of Beeville shareholders owning at least 10.0% of all shares of Beeville stock entitled to vote at such meeting.
Nomination of Directors
Any Spirit shareholder entitled of vote in the election of directors generally may nominate one or more persons as a nominee for election as directors at a meeting, if such shareholder (i) was a shareholder at the time such shareholder gave advance notice (as described below) and at the time of the meeting, (ii) is entitled to vote for the election of directors at such meeting and (iii) complies with specific advance notice procedures. A shareholder must provide timely notice in proper written form of his intent to make such nomination or nominations. To be timely, a shareholder’s notice given in the context of an annual meeting of shareholders shall be delivered to or mailed and received at the principal executive office of Spirit not less than 75 days nor more than 100 days prior to the first anniversary of the date of Spirit notice to shareholders in connection with the previous year’s annual meeting of shareholders. To be in proper written form, a shareholder’s notice to the Secretary shall set forth, as to the proposed nominee: (i) the name, age, business address and residence address of the person or persons to be nominated; (ii)  the principal occupation or employment of each nominee; (iii)  the number of shares of Spirit common stock beneficially owned by each nominee; (iv) any other information concerning the nominee that must be disclosed as to nominees in proxy	The certificate of formation and bylaws of Beeville do not provide for any specific requirements relating to nominations for election to the Beeville board of directors.

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solicitations pursuant to Regulation 14A under the Exchange Act of 1934, as amended (including such person’s written consent to be named as a nominee and to serve as a director of Spirit if election); and (v)   if applicable, a description of all compensation and other material monetary arrangements or understandings between the shareholder and each nominee and any other person or persons (naming such person or persons) pursuant to
Shareholder Proposal of Business
Except with respect to the nomination of directors, proposals for business to be brought before any shareholder meeting may be made by the Spirit board of directors or by any shareholder entitled to vote in such meeting if such shareholder (i) was a shareholder at the time such shareholder gave advance notice (as described below) and at the time of the meeting, (ii) is entitled to vote for the election of directors at such meeting and (iii) complies with specific advance notice procedures. A shareholder who desires to propose business must give timely notice in proper written form of his intent to propose such business. To be timely, a shareholder’s notice given in the context of an annual meeting of shareholder shall be delivered to or mailed and received at the principal executive office of Spirit not less than 75 days nor more than 100 days prior to the first anniversary of the date of Spirit’s notice to shareholders in connection with the previous year’s annual meeting of shareholders. To be in proper written form, a shareholder’s notice to the Secretary shall set forth: (i) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting; (ii)  the name and address, as they appear on Spirit’s corporate books, of the shareholder proposing such business; (iii)  as of the date of the notice and as of the record date for the meeting: (a)   the class or series and number of shares of Spirit that are beneficially owned by such shareholder; (b)   any option, warrant, convertible security, stock appreciation right, or similar right with an exercise or conversion privilege or a settlement payment or “derivative	The certificate of formation and bylaws of Beeville do not provide for any specific requirements relating to proposals for business to be brought before any shareholder meeting.

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instrument” directly or indirectly owned beneficially by such shareholder; (c)   any proxy, contract, arrangement, understanding, or relationship pursuant to which such shareholder has a right to vote any shares of any security of Spirit; (d)   any short interest in any security of Spirit; (e)   any rights to dividends on the shares of Spirit owned beneficially by such shareholder; (f)   any proportionate interest in shares of Spirit or derivative instruments held, directly or indirectly, by a general or limited partnership in which such shareholder is a general partner or, directly or indirectly, beneficially owned an interest in a general partner thereof; and (g)   any performance-related fees that such shareholder is entitled to based on any increase or decrease in the value of shares of Spirit or derivative instruments as of the date of such notice, including without limitation any such interests held by members of such shareholder’s immediate family sharing the same household. (iv) a representation that the shareholder is a holder of record of stock of Spirit entitled to vote at the meeting and intends to appear in person or by proxy at the meeting to propose such business. The chairman of any meeting of shareholders shall determine whether business has been properly brought before the meeting and, if the facts so warrant, may refuse to transact any business at such meeting which has not been properly brought before the meeting.
Indemnification
Under Texas law, a corporation must indemnify a director for his service at the corporation and for service at the corporation as a representative of another entity against reasonable expenses actually incurred by the director in connection with a proceeding because of such service if the director is wholly successful, on the merits or otherwise, in the defense of the proceeding. If	Under Texas law, a corporation must indemnify a director for his service at the corporation and for service at the corporation as a representative of another entity against reasonable expenses actually incurred by the director in connection with a proceeding because of such service if the director is wholly successful, on the merits or otherwise, in the

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Spirit	Beeville
a court determines that a director, former director or representative is entitled to indemnification, the court will order indemnification by the corporation and award the person expenses incurred in securing the indemnification. Texas law also permits corporations to indemnify present or former directors and representatives of other entities serving as such directors in certain situations where indemnification is not mandated by law; however, such permissive indemnification is subject to various limitations. Under Texas law, a court may also order indemnification under various circumstances, and officers must be indemnified to the same extent as directors. Spirit’s certificate of formation and bylaws provide for mandatory indemnification to the fullest extent allowed by Texas law for all persons who are or were serving at the request of Spirit as a director, officer, partner or trustee of another foreign or domestic corporation, partnership, joint venture, trust or employee benefit plan, to the same extent that Spirit is obligated to indemnify and pay or reimburse expenses to directors. Spirit’s bylaws provide that Spirit may at the discretion of the board of directors purchase and maintain insurance on behalf of Spirit and any person whom Spirit has the power to indemnify	defense of the proceeding. If a court determines that a director, former director or representative is entitled to indemnification, the court will order indemnification by the corporation and award the person expenses incurred in securing the indemnification. Texas law also permits corporations to indemnify present or former directors and representatives of other entities serving as such directors in certain situations where indemnification is not mandated by law; however, such permissive indemnification is subject to various limitations. Under Texas law, a court may also order indemnification circumstances, and officers must be indemnified to the same extent as directors. Beeville’s bylaws provide for indemnification at the discretion of Beeville for all individuals who are or were a director, officer, employee, agent, or serving at the request of Beeville as a director, officer, employee, or agent. Beeville’s bylaws provide that Beeville may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee, agent, or serving as the request of Beeville in such positions, against any liability asserted against and incurred by such person in such a capacity or arising out of his or her status as such person, whether or not Beeville would have the power to indemnify such person against that liability under the bylaws or Texas law.
Limitation of Director Liability
Texas law provides that the certificate of formation of a corporation may provide that a director of the corporation is not liable, or is liable only to the extent provided by the certificate of formation to the corporation or its shareholders for monetary damages for an act or omission by the person in the person’s capacity as a director. Spirit’s certificate of formation provides that, to the fullest extent permitted by Texas law, a director of Spirit will not be liable to Spirit or its shareholders for monetary damages for an act or omission in the director’s capacity as a director. Any repeal or modification of the foregoing sentence will not increase the personal liability of any director of Spirit for any act or occurrence taking place before such repeal or modification, or adversely affect any right or protection of a director of Spirit existing at the time of such repeal or modification.	Texas law provides that the certificate of formation of a corporation may provide that a director of the corporation is not liable, or is liable only to the extent provided by the certificate of formation to the corporation or its shareholders for monetary damages for an act or omission by the person in the person’s capacity as a director. Beeville’s certificate of formation provides that a director of Beeville shall not be personally liable to Beeville or its shareholders for monetary damages for any act or omission in his capacity as a director, except to the extent Texas law expressly precludes elimination or limitation on such personal liability.

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Spirit	Beeville
Right of First Refusal
Spirit common stock is not subject to a right of first refusal in favor of Spirit.	Beeville common stock is not subject to a right of first refusal in favor of Beeville.
Shareholder Rights Plan
Spirit does not currently have a shareholder rights plan.	Beeville does not currently have a shareholder rights plan.
Texas Anti-Takeover Statutes
Spirit is subject to the affiliated business combinations provisions of Chapter 21, Subchapter M of the TBOC (Sections 21.601 through 21.610), which provide that a Texas corporation may not engage in certain business combinations, including mergers, consolidations and asset sales, with a person, or an affiliate or associate of such person, who is an “Affiliated Shareholder” (generally defined as the holder of 20.0% or more of the corporation’s voting shares) for a period of three years from the date such person became an Affiliated Shareholder unless: (i) the business combination or purchase or acquisition of shares made by the Affiliated Shareholder was approved by the board of directors of the corporation before the Affiliated Shareholder became an Affiliated Shareholder or (ii) the business combination was approved by the affirmative vote of the holders of an at least two-thirds majority of the outstanding voting shares of the corporation not beneficially owned by the Affiliated Shareholder, at a meeting of shareholders called for that purpose (and not by written consent), not less than six months after the Affiliated Shareholder became an Affiliated Shareholder. The affiliated business combinations provisions of the TBOC are not applicable to: •   the business combination of a corporation: (a) where the corporation’s original certificate of formation or bylaws contain a provision expressly electing not to be governed by the affiliated business combinations provisions of the TBOC; (b) that adopted an amendment to its certificate of formation or bylaws before December 31, 1997, expressly electing not to be governed by the affiliated business combinations provisions of the TBOC; or (c) that adopts an amendment to its certificate of formation or bylaws after December 31, 1997, by the affirmative vote of the holders, other than Affiliated Shareholders, of an at least two-thirds majority of the outstanding voting	Beeville is subject to the affiliated business combinations provisions of Chapter 21, Subchapter M of the TBOC (Sections 21.601 through 21.610), which provide that a Texas corporation may not engage in certain business combinations, including mergers, consolidations and asset sales, with a person, or an affiliate or associate of such person, who is an “Affiliated Shareholder” (generally defined as the holder of 20.0% or more of the corporation’s voting shares) for a period of three years from the date such person became an Affiliated Shareholder unless: (i) the business combination or purchase or acquisition of shares made by the Affiliated Shareholder was approved by the board of directors of the corporation before the Affiliated Shareholder became an Affiliated Shareholder or (ii) the business combination was approved by the affirmative vote of the holders of an at least two-thirds majority of the outstanding voting shares of the corporation not beneficially owned by the Affiliated Shareholder, at a meeting of shareholders called for that purpose (and not by written consent), not less than six months after the Affiliated Shareholder became an Affiliated Shareholder. The affiliated business combinations provisions of the TBOC are not applicable to: •   the business combination of a corporation: (a) where the corporation’s original certificate of formation or bylaws contain a provision expressly electing not to be governed by the affiliated business combinations provisions of the TBOC; (b) that adopted an amendment to its certificate of formation or bylaws before December 31, 1997, expressly electing not to be governed by the affiliated business combinations provisions of the TBOC; or (c) that adopts an amendment to its certificate of formation or bylaws after December 31, 1997, by the affirmative vote of the holders, other than

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shares of the corporation, expressly electing not to be governed by the affiliated business combinations provisions of the TBOC; •   a business combination of a corporation with an Affiliated Shareholder that became an Affiliated Shareholder inadvertently, if the Affiliated Shareholder: (a) as soon as practicable divests itself of enough shares to no longer be an Affiliated Shareholder; and (b) would not at any time within the three-year period preceding the announcement of the business combination have been an Affiliated Shareholder but for the inadvertent acquisition; •   a business combination with an Affiliated Shareholder that was the beneficial owner of 20.0% or more of the outstanding voting shares of the corporation on December 31, 1996, and continuously until the announcement date of the business combination; •   a business combination with an Affiliated Shareholder who became an Affiliated Shareholder through a transfer of shares of the corporation by will or intestate succession and continuously was such an Affiliated Shareholder until the announcement date of the business combination; or •   a business combination of a corporation with a wholly owned subsidiary if the subsidiary is not an affiliate or associate of the Affiliated Shareholder other than by reason of the Affiliated Shareholder’s beneficial ownership of the voting shares of the corporation. Neither Spirit’s certificate of formation nor Spirit’s bylaws contains any provision expressly providing that Spirit will not be subject to the affiliated business combinations provisions of the TBOC. The affiliated business combinations provisions of the TBOC may have the effect of inhibiting a non-negotiated merger or other business combination involving Spirit, even if such event(s) would be beneficial to its shareholders.

Affiliated Shareholders, of an at least two-thirds majority of the outstanding voting shares of the corporation, expressly electing not to be governed by the affiliated business combinations provisions of the TBOC; •   a business combination of a corporation with an Affiliated Shareholder that became an Affiliated Shareholder inadvertently, if the Affiliated Shareholder: (a) as soon as practicable divests itself of enough shares to no longer be an Affiliated Shareholder; and (b) would not at any time within the three-year period preceding the announcement of the business combination have been an Affiliated Shareholder but for the inadvertent acquisition; •   a business combination with an Affiliated Shareholder that was the beneficial owner of 20.0% or more of the outstanding voting shares of the corporation on December 31, 1996, and continuously until the announcement date of the business combination; •   a business combination with an Affiliated Shareholder who became an Affiliated Shareholder through a transfer of shares of the corporation by will or intestate succession and continuously was such an Affiliated Shareholder until the announcement date of the business combination; or •   a business combination of a corporation with a wholly owned subsidiary if the subsidiary is not an affiliate or associate of the Affiliated Shareholder other than by reason of the Affiliated Shareholder’s beneficial ownership of the voting shares of the corporation. Neither Beeville’s certificate of formation nor Beeville’s bylaws contains any provision expressly providing that Beeville will not be subject to the affiliated business combinations provisions of the TBOC. The affiliated business combinations provisions of the TBOC may have the effect of inhibiting a non-negotiated merger or other business combination involving Beeville, even if such event(s) would be beneficial to its shareholders.

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COMPARATIVE MARKET PRICES AND DIVIDENDS

Spirit

Since May 4, 2018, Spirit common stock has been traded on NASDAQ. Quotations of the sales volume and the closing sales prices of Spirit common stock are listed daily under the symbol “STXB” in NASDAQ’s listings. As of November 30, 2018 there were approximately 507 holders of record of Spirit common stock.

The following table sets forth, for the periods indicated, the high and low intraday sales prices for Spirit common stock as reported by NASDAQ:

		High		Low
2018	Second Quarter	$	21.23	$	20.47
	Third Quarter		22.56		20.22
	Fourth Quarter		22.81		16.70
2019	First Quarter (through January 9, 2019)		23.53		21.70

Beeville shareholders are advised to obtain the current stock quotation for Spirit common stock. The market price of Spirit common stock will fluctuate from the date of this document through the completion of the merger.

Spirit Dividend Policy

Spirit has not historically declared or paid cash dividends on Spirit common stock and does not expect to pay dividends on Spirit common stock for the foreseeable future. Instead, Spirit anticipates that all of Spirit’s future earnings will be retained to support Spirit’s operations and to finance the growth and development of Spirit’s business. Any future determination to pay dividends on Spirit common stock will be made by the Spirit board of directors and will depend on a number of factors, including:

• Spirit’s historical and projected financial condition, liquidity and results of operations;

• Spirit’s capital levels and requirements;

• statutory and regulatory prohibitions and other limitations;

• any contractual restriction on Spirit’s ability to pay cash dividends, including pursuant to the terms of any of Spirit’s credit agreements or other borrowing arrangements;

• Spirit’s business strategy;

• tax considerations;

• any acquisitions or potential acquisitions that Spirit may examine;

• general economic conditions; and

• other factors deemed relevant by the Spirit board of directors.

As a Texas corporation, Spirit is subject to certain restrictions on dividends under the TBOC. Generally, a Texas corporation may pay dividends to its shareholders out of its surplus or, if there is no surplus, out of its net profits for the fiscal year in which the dividend is declared or the preceding fiscal year, or both. In addition, if the capital of a Texas corporation is diminished by depreciation in the value of its property, or by losses, or otherwise, to an amount less than the aggregate amount of the capital represented by the issued and outstanding stock of all classes having a preference upon the distribution of assets, the directors of such corporation cannot declare and pay out of such net profits any dividends upon any shares of any classes of its capital stock until the deficiency in the amount of capital represented by the issued and outstanding stock of all classes having a preference upon the distribution of assets is repaired. Spirit is also subject to certain restrictions on the payment of cash dividends as a result of banking laws, regulations and policies.

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Under current law and Federal Reserve policy, a bank holding company is expected to act as a source of financial and managerial strength to its depository institution subsidiaries and to maintain resources adequate to support such subsidiaries, which could require Spirit to commit resources to support Spirit Bank in situations where additional investments in a bank may not otherwise be warranted. These situations include guaranteeing the compliance of an “undercapitalized” bank with its obligations under a capital restoration plan. As a result of these obligations, a bank holding company may be required to contribute additional capital to its subsidiaries including in the form of capital notes or other instruments that qualify as capital under regulatory rules. Any such loan from a holding company to a subsidiary bank is likely to be unsecured and subordinated to the bank’s depositors and perhaps to other creditors of the bank.

The Federal Reserve’s policy regarding dividends is that a bank holding company should not declare or pay a cash dividend which would impose undue pressure on the capital of any bank subsidiary or would be funded only through borrowing or other arrangements that might adversely affect a bank holding company’s financial position. As a general matter, the Federal Reserve has indicated that the board of directors of a bank holding company should consult with the Federal Reserve and eliminate, defer or significantly reduce the bank holding company’s dividends if:

• its net income available to shareholders for the past four quarters, net of dividends previously paid during that period, is not sufficient to fully fund the dividends;

• its prospective rate of earnings retention is not consistent with its capital needs and overall current and prospective financial condition; or

• it will not meet, or is in danger of not meeting, its minimum regulatory capital adequacy ratios.

Should an insured depository institution controlled by a bank holding company be “significantly undercapitalized” under the applicable federal bank capital ratios, or if the bank subsidiary is “undercapitalized” and has failed to submit an acceptable capital restoration plan or has materially failed to implement such a plan, federal banking regulators (in the case of Spirit Bank, the FDIC) may choose to require prior Federal Reserve approval for any capital distribution by the bank holding company. Further, the capital conservation buffer may place additional restrictions on the ability of banking institutions to pay dividends.

Since Spirit is a bank holding company and does not engage directly in business activities of a material nature, Spirit’s ability to pay dividends to its shareholders depends, in large part, upon Spirit’s receipt of dividends from Spirit Bank, which is also subject to numerous limitations on the payment of dividends under federal and state banking laws, regulations and policies. The present and future dividend policy of Spirit Bank is subject to the discretion of its board of directors. Spirit Bank is not obligated to pay dividends.

Capital adequacy requirements serve to limit the amount of dividends that may be paid by Spirit Bank. Under the Federal Deposit Insurance Act, which we refer to as the FDIA, an insured depository institution such as Spirit Bank is prohibited from making capital distributions, including the payment of dividends, if, after making such distribution, the institution would become “undercapitalized.” A depository institution is “under-capitalized” if it has a total risk-based capital ratio of less than 8.0%, a common equity Tier 1 capital ratio less than 4.5%, a Tier 1 risk-based capital ratio of less than 6.0% or a leverage ratio of less than 4.0%. The FDIC may further restrict the payment of dividends by requiring Spirit Bank to maintain a higher level of capital than would otherwise be required in order to be adequately capitalized for regulatory purposes. Payment of dividends by Spirit Bank also may be restricted at any time at the discretion of the appropriate regulator if it deems the payment to constitute an unsafe and unsound banking practice. Under Texas law, Spirit Bank is permitted to declare and pay a dividend on capital stock only out of current or retained income.

Beeville

There is no established public trading market for the shares of Beeville common stock, and no market for Beeville common stock is expected to develop if the merger is not completed. No registered broker/dealer makes

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a market in Beeville common stock, and Beeville common stock is not listed for trading or quoted on any stock exchange or automated quotation system. Beeville acts as the transfer agent and registrar for its own shares. As of the Beeville record date, there were approximately 153 holders of record of Beeville common stock.

Beeville becomes aware of trades of shares of Beeville common stock in its capacity as transfer agent and sometimes learns of the prices at which these trades are made. The following table sets forth the high and low sales prices known to management of Beeville for trades of Beeville common stock for the periods shown:

		High			Low		Number of Trades		Number of Shares Traded
2017	First Quarter	$	0.00		$	0.00		0		0
	Second Quarter		433.35			433.35		1		100
	Third Quarter		509.16			650.00		3		306
	Fourth Quarter		0.00	(1)		0.00		1		704
2018	First Quarter		0.00			0.00		0		0
	Second Quarter		500.00			500.00		1		10
	Third Quarter		628.00			628.00		2		704
	Fourth Quarter		0.00			0.00		0		0
2019	First Quarter (through January 9, 2019)		0.00			0.00		0		0

(1) This transfer was a gift/donation for tax purposes of the individual’s 704 shares to a non-related organization

There have been other limited transfers of Beeville common stock that are not reflected in the table above which were excluded as they were transferred between related parties (as gifts or to trusts or estates). Because of limited trading, the prices described above may not be representative of the actual or fair value of Beeville common stock.

Beeville is not obligated to register shares of Beeville common stock or, upon any registration, to create a market for Beeville common stock.

Beeville Dividend Policy

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.

Beeville shareholders are entitled to receive dividends out of legally available funds when, as and if declared by the Beeville board of directors, in its sole discretion. As a Texas corporation, Beeville is subject to certain restrictions on dividends under the TBOC. Generally, a Texas corporation may pay dividends to its shareholders out of its surplus (the excess of its assets over its liabilities and stated capital) unless the corporation is insolvent or the payment of the dividend would render the corporation insolvent.

Consistent with its policy that bank holding companies should serve as a source of financial strength for their subsidiary banks, the Federal Reserve has stated that, as a matter of prudent banking, a bank holding company generally should not maintain a rate of dividends to shareholders unless its net income available has been sufficient to fully fund the dividends, and the prospective rate of earnings retention appears consistent with the bank holding company’s capital needs, asset quality and overall financial condition.

Beeville does not engage in separate business activities of a material nature. As a result, Beeville’s ability to pay dividends depends upon the dividends received from Beeville Bank. As a national banking association, Beeville Bank’s ability to pay distributions is restricted by certain laws and regulations. Under the National Bank

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Act, Beeville Bank generally may not declare a distribution without prior approval of the Office of the Comptroller of the Currency, which we refer to as the OCC, if the total amount of all distributions declared by Beeville Bank in any calendar year exceeds its total net profits for that year and its retained net profits for the preceding two calendar years, less any required transfers to surplus. Federal law also prohibits Beeville Bank from paying distributions that would be greater than its undivided profits after deducting statutory bad debt in excess of its allowance for loan and lease losses.

Under the FDIA, Beeville Bank may not pay any distribution if the payment of the distribution would cause Beeville Bank to become undercapitalized or if Beeville Bank is “undercapitalized.” The OCC may further restrict the payment of distributions by requiring that Beeville Bank maintain a higher level of capital than would otherwise be required to be “adequately capitalized” for regulatory purposes. If, in the opinion of the OCC, Beeville Bank is engaged in an unsound practice (which could include the payment of distributions), the OCC may require, generally after notice and hearing, that Beeville Bank cease such practice. The OCC has indicated that paying distributions that deplete a depository institution’s capital base to an inadequate level would be an unsafe banking practice. The OCC also has issued policy statements providing that insured depository institutions generally should pay distributions only out of current operating earnings.

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INFORMATION ABOUT SPIRIT

Spirit is a Texas corporation and a registered bank holding company located in the Houston metropolitan area with headquarters in Conroe, Texas. Through its wholly-owned bank subsidiary, Spirit of Texas Bank, SSB, Spirit offers a broad range of commercial and retail banking services. Spirit is a business-focused bank that delivers relationship-driven financial services to small- and medium-sized businesses and individuals in its market areas. Spirit’s philosophy is to target commercial customers whose businesses generate between $3.0–$30.0 million of annual revenue. Spirit’s product offerings consist of a wide range of commercial products, including term loans and operating lines of credit to commercial and industrial companies; commercial real estate loans; construction and development loans; SBA loans; commercial deposit accounts; and treasury management services. In addition, Spirit’s retail offerings include consumer loans, 1-4 single family residential real estate loans and retail deposit products.

Spirit prides itself on its strong credit culture and responsiveness to its customers’ banking needs. Spirit is guided by an experienced and proven executive management team, led by founder Dean O. Bass, Chairman and Chief Executive Officer of Spirit and Spirit Bank, and David M. McGuire, President of Spirit and President and Chief Lending Officer of Spirit Bank. 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 Spirit’s presence in existing markets or expanded its operations into new markets with attractive business prospects.

Recent Developments

On November 14, 2018, Spirit completed its acquisition of Comanche and Comanche Bank. Because Spirit has not yet filed with the SEC a periodic report that reflects the acquisition of Comanche, 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.

Information about Spirit’s Business

History and Growth

Dean O. Bass founded Spirit after successfully establishing, operating and selling, Royal Oaks Bank, a high growth de novo institution in the Central Houston area. Spirit began operations in November 2008 with the acquisition of First Bank of Snook, a community bank with two branches, one in the Bryan/College Station metropolitan area and one in Snook, Texas. Immediately following this initial acquisition, Spirit opened a business banking office with an established commercial lending team and SBA team with whom its management group worked at Royal Oaks Bank. Spirit quickly expanded into the Central Houston and North Houston markets through de novo branching and branch acquisitions. Early in its development, Spirit identified the Dallas/Fort Worth metropolitan area as a strategic opportunity for expansion and an area with strong growth potential based on attractive demographics and market characteristics. In 2012, Spirit expanded into Dallas with a team of bankers with whom its management team had previously worked, by establishing two loan production offices, which we refer to as LPOs. Spirit further expanded its presence in the Dallas/Fort Worth metropolitan area in

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2013 through a whole-bank acquisition and subsequently converted the LPOs into two full-service de novo branches. At the end of 2013, Spirit acquired a bank in The Woodlands, which is located in North Houston, in a FDIC-assisted transaction. In 2016, Spirit acquired an additional branch in a strategic location in The Woodlands. Most recently, on November 14, 2018, Spirit acquired Comanche and Comanche Bank expanding its presence in the North Central Texas region.

Today, Spirit has 23 full-service branches located in four Texas markets—the Houston, Dallas/Fort Worth, Bryan/College Station metropolitan areas and North Central Texas. Spirit believes its exposure to these dynamic and complementary markets provides it with economic diversification and the opportunity for expansion across Texas. Spirit has experienced significant growth since Spirit’s formation while maintaining strong credit metrics, as demonstrated by:

• its balance sheet growth, with a compound annual growth rate, which we refer to as a CAGR, of 10.5% in assets, 12.3% in loans held for investment and 12.4% in deposits from December 31, 2015 to December 31, 2017;

• its noninterest bearing deposit growth, with a CAGR of 24.1% from December 31, 2015 to December 31, 2017; and

• its earnings growth, with a CAGR of 9.8% in net income and 10.1% in diluted earnings per common share for the 12 months ended December 31, 2015 to the 12 months ended December 31, 2017. The decrease in net income and diluted earnings per common share for the 12 months ended December 31, 2016 compared to the 12 months ended December 31, 2015 was partially as a result of expenditures for additional personnel and infrastructure as part of and to support Spirit’s growth efforts.

Spirit has supplemented its strong organic growth through strategic bank acquisitions. Since its formation, Spirit has completed four whole-bank acquisitions, three branch acquisitions consisting of six branches and one FDIC-assisted acquisition. These transactions result in Spirit being the most active acquirer among private Texas-based banks and third most active acquirer among Texas-based banks (in each case, based on number of transactions) since 2008, according to data obtained through S&P Global. These acquisitions demonstrate Spirit’s ability to identify acquisition targets, negotiate and execute definitive agreements and integrate different systems and cultures into its own. In addition, Spirit has proven its ability to leverage the new capabilities obtained through these acquisitions as evidenced by strong organic growth in acquired markets and continuously enhanced product offerings for its customers. Spirit evaluates acquisitions based on a defined set of criteria, including earnings per share accretion, reasonable tangible book value per share earn back periods and enhanced shareholder value.

The following table summarizes the acquisitions that Spirit has completed since its inception and excludes cash received and paid and other acquired liabilities:

Target Company / Seller	Acquisition Type	Market Area	Completion Date		Acquired Assets		Acquired Deposits
					(Dollars in millions)
Snook Bancshares, Inc.	Whole-bank	College Station		11/17/2008	$	38.6	$	35.9
Third Coast Bank, SSB	Two branches	Houston		10/23/2009		9.2		18.6
Texas Community Bank, N.A.	Three branches	Houston		10/29/2011		42.9		58.9
Oasis Bank, SSB	Whole-bank	Houston		11/30/2012		79.3		69.0
Peoples Bank	Whole-bank	Dallas/Fort Worth		7/13/2013		70.8		60.8
Texas Community Bank, N.A.	FDIC-assisted	Houston		12/13/2013		134.1		118.7
PlainsCapital Bank	One branch	Houston		6/24/2016		4.4		36.7
Comanche National Corporation	Whole-bank	Dallas/Fort Worth		11/14/2018		280.1		297.5

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Banking Strategy

Spirit is a business-focused bank that delivers relationship-driven financial services to small- and medium-sized businesses as well as individuals in its market areas. The following further articulates Spirit’s banking strategy:

• Diverse Lending Platform. Spirit’s strategy is to provide a broad array of financial services, which results in a diverse loan portfolio that consists primarily of: commercial and industrial loans; 1-4 single family residential real estate loans; construction, land and development loans; and commercial real estate loans. Spirit focuses on delivering superior customer service, responsive decision-making and personal customer relationships. Spirit believes its target customer base is underserved by larger financial institutions, and its ability to execute its relationship banking model and respond quickly to customers gives Spirit an advantage over its competition. Spirit’s approach is to equip commercial lenders with the tools and support necessary to serve their clients, including advanced training, treasury management support, quick access to lending management and timely credit decisions. Spirit’s lenders are evaluated on their ability not only to originate loans but also to gather deposits and maintain a portfolio with sound credit quality.

• Small Business Administration (SBA) Lending. During the SBA’s fiscal year ended September 30, 2017, Spirit was the leading SBA lender among community banks in Texas, based on the number of loans closed. Spirit primarily lends through the SBA 7(a) program and has a dedicated team focused on origination, documentation and closing of SBA loans. SBA lending has been a core competency since Spirit’s inception, and its SBA leadership team has an average of 15 years of experience dedicated to the program. Spirit’s strategy is to sell the government-guaranteed portion of the loan (generally 75% to 85% of the principal balance), on which Spirit generates an up-front premium. In addition to selling the guaranteed portion of the loan, Spirit retains the servicing rights to the loans that it sells, and it collects the associated servicing fees, which are typically 1% of the principal balance of the loan. For the years ended December 31, 2015 through 2017, Spirit originated 243, 202 and 270 SBA loans totaling $53.9 million, $46.7 million and $71.2 million, respectively. During these periods, Spirit generated gains on sales of SBA loans of $4.4 million, $4.4 million and $5.7 million, respectively. During the nine months ended September 30, 2018, Spirit originated 229 SBA loans totaling $51.0 million, generating gains on sales of SBA loans of $3.9 million.

As of September 30, 2018, Spirit had SBA loans on its balance sheet of $75.9 million, and it serviced $299.6 million of SBA loans. Spirit maintains strict underwriting guidelines in its SBA program, which has contributed to its success. More than 75% of Spirit’s SBA customers are national franchisees, which Spirit believes leads to fewer losses because it is able to mitigate risk by analyzing loss histories of similar businesses and the national franchise provides greater support to its borrowers. Additionally, Spirit’s SBA loans are subject to the same credit review process as its conventional lending customers. Spirit believes these factors have contributed to its SBA portfolio performing better than the national SBA three-year average loss rate.

Spirit is a Preferred Lenders Program participant with the SBA, which allows it to accelerate the SBA documentation process. To date, Spirit has not been notified of any denial or repair of the SBA guaranty on any loan submitted for liquidation. An annual review by an independent third party validates the performance of the portfolio and the integrity of the documentation. This lending channel provides Spirit with a competitive advantage and opportunity to earn a borrower’s banking relationship early in the business’s life cycle. Once it has originated an SBA loan, Spirit believes it is optimally positioned to continue to service the customer as the customer’s business matures.

• Deposit Gathering Focus. Spirit is focused on generating core deposits from its business customers. Spirit improved its treasury management services by hiring additional personnel and offering more products to enable it to more effectively attract and service the operating accounts of larger, more sophisticated businesses. These efforts have produced desirable results, as evidenced by Spirit’s growth in non-interest bearing deposits from $114.8 million at December 31, 2015 to $207.7 million at

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September 30, 2018, a 80.9% increase. Spirit believes that over time it will continue to successfully grow its core deposit base through commercial customers as well as its strategically located retail branches. In addition to its organic deposit efforts, Spirit will continue to place an emphasis on the acquisition of banks with high quality funding profiles to enhance its core deposit base.

• Scalable Infrastructure. Throughout its history, Spirit has been strategic in the hiring of key personnel and implementation of systems and processes that it believes are advanced for a bank of its size, which Spirit expects will allow it to scale its business model without significant additional noninterest expense going forward. This includes a sophisticated loan review process, dedicated senior credit and compliance officers and robust internal and external loan review programs. As Spirit is able to leverage its current expense base as a larger company, Spirit expects to experience enhanced shareholder returns through operational efficiencies.

Growth Strategy

Spirit believes it has managed its growth successfully since inception, and plans to continue its strategy of organic and acquisitive growth, as outlined below:

• Organic Growth. Spirit’s organic growth strategy involves building upon the relationships of its 41 commercial lenders and SBA lenders as of December 31, 2017, who Spirit believes have additional capacity to grow the loan portfolio. Spirit has designed its incentive plans to emphasize strong credit quality, loan growth and deposit growth. From December 31, 2015 to September 30, 2018, Spirit has grown loans held for investment and deposits by $265.2 million and 211.2 million, or 38.5% and 31.9%, respectively. Spirit intends to further penetrate its current market areas by leveraging its lending relationships and continuing to hire additional junior and senior lenders. Spirit’s senior lenders typically have 15-30 years of experience and are supported by its junior lenders. Spirit hires junior lenders, initially in a credit analyst support capacity, so that it may conduct training in-house and in accordance with its lending methodologies. Spirit incentivizes its senior lenders to incorporate its junior lenders into their book of business by compensating its senior lenders, in part, based on region-wide performance, as opposed to compensation based entirely on the senior lender’s individual portfolio. This program is an integral part of Spirit’s lending and credit culture.

During 2018, to expand its lending capacities, Spirit hired six senior lenders in the Houston and Dallas/Fort Worth metropolitan areas. Collectively, they have 132 years of banking experience in their respective markets. Additionally, Spirit hired a deposit sourcing specialist in the Bryan/College Station market. Spirit expects these professionals will generate and maintain meaningful portfolios, while also continuing its focus on increasing core deposits to fund loan growth. Spirit intends to continue to seek out talented bankers that are a good cultural fit and have long standing business relationships in its markets. In addition to leveraging its current platform and hiring key personnel to drive organic growth, Spirit also looks for opportunities to open de novo branches in existing and new markets. Before entering a new market, Spirit has historically identified a lending team that is experienced and seasoned in that market and opened an LPO, with the ultimate goal of establishing a full-service branch.

• Growth Through Acquisitions. Throughout its history, Spirit has supplemented its organic growth through both whole-bank and branch acquisitions, as well as an FDIC-assisted acquisition, and it intends to continue its strategy of opportunistically acquiring Texas-based community banks and branches within and outside its current footprint. Spirit believes having a publicly traded stock and enhanced access to the capital markets will improve its ability to compete for quality acquisitions. Spirit seeks acquisitions that provide meaningful financial and strategic benefits, long-term organic growth opportunities and expense reductions, without compromising its risk profile. When evaluating acquisition targets, Spirit focuses its efforts on banks with successful operating histories, stable core deposits, sound asset quality, and strong banking talent. Spirit seeks banking markets with attractive demographics, favorable competitive dynamics and potential consolidation opportunities. Spirit is

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currently focused on acquisitions in and surrounding the four major Texas metropolitan areas of Houston, Dallas/Fort Worth, San Antonio and Austin. In an effort to source future potential acquisitions, Spirit’s management team maintains an active calling effort with banks that fit its acquisition criteria. With approximately 350 banks headquartered in Texas with total assets less than $1.0 billion, Spirit believes it will have opportunities for acquisitions both within and outside its current footprint.

Banking Services

Spirit offers quality products and personalized services while providing its customers with the financial sophistication and array of products typically offered by a larger bank. Spirit’s lending services include commercial loans to small- to medium-sized businesses and professional practices, real estate-related loans and consumer loans to individuals. Spirit’s current working capital and its ability to generate, maintain and increase its deposits continues to be its primary source of funding for such loans. Spirit offers a broad range of competitively-priced deposit services including demand deposits, regular savings accounts, money market deposits, certificates of deposit and individual retirement accounts. To complement its lending and deposit services, Spirit also offers direct deposit, wire transfers, night depository, treasury management services, safe-deposit boxes, debit cards and automatic drafts.

Lending Activities

Spirit offers a variety of loans, including commercial and industrial loans, SBA loans, 1-4 single family residential real estate loans, construction, land and development real estate loans, commercial real estate loans (including multifamily) and municipal loans. Spirit also offers various loans and leases to individuals and professionals including residential real estate loans, home equity loans, installment loans, personal lines of credit, and standby letters of credit.

Spirit supports the small- to medium-sized business community throughout its market areas and lend money to creditworthy borrowers within those markets. Spirit’s ability to attract deposits serves as its primary source of working capital to fund loans. To provide additional sources of working capital, Spirit maintains a federal funds borrowing line of credit with one or more correspondent banks and Spirit is a member of the FHLB which permits it to borrow against its loan portfolio at preferred rates.

Spirit’s SBA loan program is a key element of its ability to serve the small- to medium-sized business community in its market areas. Spirit also provides SBA loans nationwide to well-known national franchises. Generally, these loans have a more flexible structure than conventional loans and Spirit uses its Preferred Lender status with the SBA to expedite the loan approval process for its customers. During the SBA’s fiscal year ended September 30, 2017, Spirit was the leading SBA lender among community banks in Texas, based on the number of loans closed.

In addition to traditional 1-4 single family residential real estate loans, Spirit has a team dedicated to making 1-4 single family residential real estate loans to foreign nationals residing in Texas. Generally, these loans are made to borrowers who derive more than 50.0% of their personal income from foreign sources and do not qualify for traditional conforming mortgage products readily available to most home buyers in Texas.

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As of September 30, 2018, Spirit had loans held for investment of $954.1 million, representing 86.6% of its total assets. As of December 31, 2017, Spirit had loans held for investment of $869.1 million, representing 84.4% of its total assets. Spirit’s loan portfolio consisted of the following loan categories as of the dates indicated:

	As of September 30, 2018					As of December 31, 2017
	Amount		% of Total			Amount		% of Total
	(Dollars in thousands)
Commercial and industrial loans	$	159,776		16.8	%	$	135,040		15.5	%
Real estate:
1-4 single family residential loans		244,633		25.6			232,510		26.8
Construction, land and development loans		155,778		16.3			139,470		16.0
Commercial real estate loans (including multifamily)		324,212		34.0			285,731		32.9
Consumer loans and leases		18,174		1.9			22,736		2.6
Municipal and other loans		51,501		5.4			53,632		6.2
Total loans held for investment		954,074		100.0			869,119		100.0

The following is a description of the types of loans Spirit offers to its customers.

• Commercial and Industrial Loans. A primary component of Spirit’s loan portfolio is loans for commercial purposes. Spirit’s commercial loan portfolio consists of loans principally to retail trade, service and manufacturing firms located in its market areas. The terms of these loans vary by purpose and by type of underlying collateral, if any. Spirit typically makes equipment loans for a term of five years or less at fixed or variable rates, with the loan fully amortized over the term. Equipment loans are generally secured by the financed equipment, and the ratio of the loan principal to the value of the financed equipment or other collateral is generally 80.0% or less. Loans to support working capital typically have terms not exceeding one year and are usually secured by accounts receivable, inventory, or other collateral, as well as personal guarantees of the principals of the business. For loans secured by accounts receivable or inventory, principal will typically be repaid as the assets securing the loan are converted into cash, and for loans secured with other types of collateral, principal will typically be due at maturity. The primary risk for commercial loans is the failure of the business due to economic and financial factors. As a result, the quality of the commercial borrower’s management and its ability both to properly evaluate changes in the supply and demand characteristics affecting its markets for products and services and to effectively respond to such changes are significant factors in a commercial borrower’s creditworthiness and Spirit’s decision to make a commercial loan. Commercial and industrial loans totaled $159.8 million as of September 30, 2018, or 16.8% of Spirit’s loans held for investment.

SBA Loans. Spirit originates loans to customers in Texas and, in some instances, nationwide in support of some well-known national franchises under an SBA program that generally provides for SBA guarantees of between 75.0% and 85.0% of each loan. Spirit routinely sells the guaranteed portion of SBA loans to a third party and retains the servicing rights, holding the nonguaranteed portion in its portfolio. When the guaranteed portion of an SBA loan is sold, the premium received on the sale is recognized in noninterest income, and the revenue associated with the servicing rights is recognized as service is performed. SBA servicing assets are recognized separately when rights are acquired through the sale of the SBA guaranteed portion. These servicing rights are initially measured at fair value at the date of sale and included in the gain on sale. Updated fair values are obtained from an independent third party on a quarterly basis and adjustments are presented as SBA servicing fees on the consolidated statements of income. To determine the fair value of SBA servicing rights, Spirit uses market prices for comparable servicing contracts, when available, or alternatively, it uses a valuation model that calculates the present value of estimated future net servicing income.

During the SBA’s fiscal year ended September 30, 2017, Spirit was the leading SBA lender among community banks in Texas, based on the number of loans closed. Spirit is also the 27th largest provider

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of SBA loans nationally, among all banks, based upon number of loans originated in 2017. Spirit focuses its primary SBA lending efforts on financing well-known national franchises in Texas and nationwide. Spirit’s deep relationship with each of these franchises allows it the privilege of being the preferred lender for their respective franchises, providing Spirit a steady pipeline of new SBA loan opportunities both in Texas and nationwide. The unguaranteed portion of SBA loans on Spirit’s balance sheet totaled $75.9 million as of September 30, 2018, or 47.5% of total commercial and industrial loans.

• 1-4 Single Family Residential Real Estate Loans.

Traditional 1-4 Single Family Loans. Spirit provides mortgages for the financing of 1-4 single family residential homes for primary occupancy, vacation or rental purpose. Generally these loans are 30-year adjustable rate mortgages. All borrowers are underwritten with standard policy guidelines to provide a homogenous and predictable portfolio of performing loans. As of September 30, 2018, 1-4 single family residential real estate loans totaled $244.6 million, or 25.6% of Spirit’s loans held for investment.

Spirit is located near five major Texas public and private universities where on-campus housing is not sufficient to house their current and growing student populations. This is an ideal opportunity for Spirit to provide financing for homes near each of the universities to be used for borrower-related student housing and/or rental to other students. In addition, Spirit caters to borrowers who specialize in renting homes to students, with the financing of multiple 1-4 single family residential properties for their business. These loans are underwritten to standard policy guidelines with amortizations typically shorter than homes used for primary occupancy.

Foreign National Loans. In addition to traditional 1-4 single family residential loans, Spirit has a team dedicated to making 1-4 single family residential real estate loans to foreign nationals in Texas. Spirit provides mortgages to foreign nationals in Texas for the purpose of primary occupancy or as secondary homes while travelling to the United States. Generally, Spirit defines foreign nationals as those who derive more than 50% of their personal income from non-U.S. sources. All of Spirit’s market areas have experienced an influx of foreign nationals from outside the United States as they move their families to Texas for business, education, personal safety or employment reasons. Spirit has developed relationships with other traditional mortgage companies and local real estate agents who refer foreign national home buyers to Spirit for financing. Because more than 50% of their personal income sources are derived from outside of the United States, these foreign nationals do not qualify for traditional market financing; therefore they must seek financing from banks that specialize in this type of non-standard product.

Spirit believes it is one of the most active providers of loans to foreign nationals in Texas. Spirit has developed an enhanced due diligence process designed to meet or exceed any regulatory guidelines. Typical loan terms include larger down payments than would normally be required, minimum reserves equal to an amount of mortgage payments over a specified period held in Spirit Bank and monthly escrows for taxes and insurance. Foreign national loans totaled $125.1 million as of September 30, 2018, or 51.1% of Spirit’s total 1-4 single family residential real estate loans.

• Construction, Land and Development Loans. Spirit’s construction and development loans are made both on a pre-sold and speculative basis. If the borrower has entered into an agreement to sell the property prior to beginning construction, then the loan is considered to be on a pre-sold basis. If the borrower has not entered into an agreement to sell the property prior to beginning construction, then the loan is considered to be on a speculative basis. Construction and development loans are generally made with a term of 12 months and interest is paid periodically. The ratio of the loan principal to the value of the collateral, as established by independent appraisal, does not generally exceed 80.0%. Additionally, speculative loans are based on the borrower’s financial strength and cash flow position. Loan proceeds are disbursed based on the percentage of completion and only after the project has been inspected by an experienced construction lender or appraiser.

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Construction and development loans generally carry a higher degree of risk than long-term financing of existing properties. Spirit attempts to reduce risk by generally requiring personal guarantees and by keeping the loan-to-value ratio of the completed project below specified percentages. Spirit also requires additional borrower reserves if the project will have an extended marketing period. Spirit may also reduce risk by selling participations in larger loans to other institutions when possible. As of September 30, 2018, construction loans totaled $155.8 million, or 16.3% of Spirit’s loans held for investment.

• Commercial Real Estate Loans (Including Multifamily). Spirit’s commercial real estate loan terms are generally limited to seven years or less, although payments may be structured on a longer amortization basis. Interest rates may be fixed or adjustable, with an origination fee generally being charged on each loan funded. Spirit attempts to reduce credit risk on its commercial real estate loans by emphasizing loans on owner-occupied office and retail buildings where the ratio of the loan principal to the value of the collateral as established by independent appraisal does not exceed 80. Spirit also projects minimum levels of net projected cash flow available for debt service based on the type of loan. In addition, Spirit generally requires personal guarantees from the principal owners of the property supported by a review by Spirit’s management of the principal owners’ personal financial statements. As of September 30, 2018, commercial real estate loans (including multifamily) totaled $324.2 million, or 34.0% of Spirit’s loans held for investment.

Owner-occupied Commercial Real Estate Loans. Owner-occupied commercial real estate is a key component of Spirit’s lending strategy to owner-operated businesses, representing a large percentage of its total commercial real estate loans. Spirit’s philosophy is that owner-occupied property loans are desirable since they are its borrower’s business “home” representing a safer investment of its funds, as Spirit is usually able to monitor the borrower’s business financial results on a regular basis. These loans are competitively sought after by the other community banks in Spirit’s market areas. Owner-occupied commercial real estate loans totaled $106.0 million, or 32.7% of Spirit’s total commercial real estate loans as of September 30, 2018.

Other Commercial Real Estate Loans. Spirit possesses the experience, expertise and on-going monitoring capabilities to originate loans for income producing properties. Generally, these loans are for retail strip centers, hotels, office buildings, self-storage facilities and multi and single tenant office warehouses, all within Spirit’s market areas. Generally, Spirit’s income producing property loans require experienced and deep management, premium locations, proven debt service ability, strong equity positions, alternative repayment sources and the personal guarantee of the principals. Spirit monitors its exposures to these loan types to maintain adequate concentration levels in relation to its capital position, its market geographies and as a percentage of its entire loan portfolio. Nonowner-occupied commercial real estate loans totaled $196.1 million, or 60.5% of Spirit’s total commercial real estate loans as of September 30, 2018.

Multifamily Loans and Farmland. Multifamily loans are generally not a focus of Spirit’s lending strategy as evidenced by its current low level of multifamily loan exposures outstanding and Spirit does not expect this portion of its loan portfolio to represent a large portion of the growth going forward. Given the large dollar requirements for most multifamily projects exceed Spirit’s legal lending limit, either as construction or as completed, Spirit has elected not to pursue multifamily lending as a part of its core business strategy. Spirit’s current multifamily loans are to seasoned and successful multifamily operators who possess quality alternative repayment sources. Multifamily loans totaled $17.8 million, or 5.5% of Spirit’s total commercial real estate loans as of September 30, 2018. Farmland loans totaled $4.3 million as of September 30, 2018, or 1.3% of Spirit’s total commercial real estate loans as of September 30, 2018.

• Consumer Loans and Leases. Spirit makes a variety of loans to individuals for personal, family and household purposes, including secured and unsecured installment and term loans. Consumer loans are generally made at a fixed rate of interest. While Spirit believes its policies help minimize losses in the consumer loan category, because of the nature of the collateral, if any, it may be more difficult to recover any loan losses.

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The majority of Spirit’s consumer loans are related to the financing of vehicle leases to individuals, originated by a well-known, third-party leasing company and subsequently purchased by Spirit after its final credit review. Spirit limits its exposure to individuals living in Texas, within its defined local markets. Underwriting for each lease is performed by Spirit’s credit department, within its policies and is approved by a senior credit officer. Consumer loans and leases totaled $18.2 million, or 1.9% of Spirit’s loans held for investment as of September 30, 2018. Leases totaled $14.0 million, or 77.0% of Spirit’s total consumer loans as of September 30, 2018.

• Municipal and Other Loans. Spirit provides financing for municipalities, emergency service districts, hospital districts, school districts and some counties in Texas. Generally the financing opportunities are for equipment and facilities, such as fire engines, fire stations, hospitals, municipal water treatment facilities or other public needs. The loans are typically secured by a lien on the tax revenues of the borrower. These loans earn a tax-exempt rate to Spirit. Total loans to municipalities, emergency service, hospital and school districts totaled $51.5 million, or 5.4% of Spirit’s loans held for investment as of September 30, 2018.

Spirit provides loans for agricultural purposes resulting from relationships in its first several years of operation. As the focus of Spirit’s business has shifted to the major metropolitan areas of Texas, the focus on agricultural lending has declined; therefore, while Spirit dos not actively pursue this line of business, it continues to service its existing active agriculture customers.

Deposits

Spirit’s core deposits include checking accounts, money market accounts, savings accounts, a variety of certificates of deposit and IRA accounts. To attract deposits, Spirit employs an aggressive marketing plan in its primary service areas and features a broad product line and competitive offerings. The primary sources of deposits are residents and businesses located in the markets Spirit serves. Spirit obtains these deposits through personal solicitation by its lenders, officers and directors, direct mail solicitations and advertisements in the local media.

The following table sets forth the amount of Spirit’s total deposits and percentage of total deposits based on balances as of the dates indicated.

	As of September 30, 2018					As of December 31, 2017
	Amount		% of Total			Amount		% of Total
	(Dollars in thousands)
Noninterest-bearing demand deposits	$	207,727		23.8	%	$	176,726		21.2	%
Interest-bearing NOW accounts		7,865		0.9			7,318		0.9
Savings and money market accounts		214,380		24.6			243,173		29.1
Time deposits		442,638		50.7			408,151		48.8
Total deposits	$	872,610		100.0	%	$	835,368		100.0	%

Other Banking Services

Spirit offers banking products and services that it believes are attractively priced and easily understood by its customers. In addition to traditional bank accounts such as checking, savings, money markets and CDs, Spirit offers a full range of ancillary banking services, including a full suite of treasury management services, consumer and commercial online banking services, mobile applications, safe deposit boxes, wire transfer services, debit cards and ATM access. Merchant services (credit card processing) and co-branded credit card services are offered through a correspondent bank relationship. Spirit does not exercise trust powers.

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Investments

Spirit maintains a portfolio of investments, primarily in obligations of the United States or obligations guaranteed as to principal and interest by the United States and other taxable securities, to provide liquidity and an additional source of income, to manage interest rate risk, to meet pledging requirements and to meet regulatory capital requirements.

Spirit invests in Treasury bills and notes, as well as in securities of federally sponsored agencies, such as FHLB bonds. Spirit may invest in federal funds, negotiable certificates of deposit, banker’s acceptances, mortgage-backed securities, corporate bonds and municipal or other tax-free bonds. No investment in any of those instruments will exceed any applicable limitation imposed by law or regulation. Spirit’s asset/liability/investment committee reviews the investment portfolio on an ongoing basis in order to ensure that the investments conform to its internal policy set by the Spirit board of directors.

Markets

Spirit’s primary markets are the Houston, Dallas/Fort Worth and Bryan/College Station metropolitan areas and North Central Texas. Spirit expects to continue to grow within its current markets, as well as expand into new markets. Spirit believes the markets that it serves are a key factor in its growth and success, and offer stability and steady growth as well as economic diversification.

Spirit believes that its four markets are economically insulated from one another, and economic hardships in one market may have little or no impact on the other markets. For example, during the period from 2015 through the end of 2016, the Houston metropolitan area experienced a slowdown in economic activity, in part, due to a prolonged period of lower crude oil and natural gas prices. While Spirit did not experience heightened losses on its loan portfolio in the Houston metropolitan area, it observed a slowdown in lending opportunities in that market. Conversely, in the Dallas/Fort Worth metropolitan area and the Bryan/College Station metropolitan area, Spirit exceeded its loan growth expectations over the same time period, leading to overall robust loan growth. Spirit expects that the diversification of its markets will continue to benefit it in the future.

According to S&P Global, Texas is the second most populous state in the country with a population of 29.0 million as of January 2019. Over 50% of the Texas population lives in the four markets in which Spirit operates. Additionally, the five-year population growth from 2019 to 2024 is projected to be 7.0% compared to 3.6% for the nation as a whole over the same period.

							Market Demographics
							January 2019 Population(3)		2019 – 2024 Projected
	Spirit of Texas Bancshares, Inc.(1)								Population Growth(3)			Household Income Growth(3)
Market	Branches		Loans(2)		Deposits(2)
			(Dollars in thousands)
Houston-The Woodlands-Sugar Land, TX		10	$	414,548	$	553,565		7,092,836		8.0	%		2.4	%
Dallas-Fort Worth-Arlington, TX		4		176,231		117,218		7,575,979		7.7			7.6
Bryan-College Station, TX		1		132,021		106,626		266,165		7.5			9.3
North Central Texas		8		119,772		296,880		94,141		4.5			4.5
Total Markets		23		842,572		1,074,289		15,029,121
Texas								28,959,501		7.0			6.0
Nationwide								329,236,175		3.6			8.8

(1) Amounts as of September 30, 2018.

(2) Excludes SBA loans, loans to foreign nationals, and mortgage loans (as well as associated deposits).

(3) According to S&P Global.

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Competition

The banking business is highly competitive, and Spirit’s profitability will depend principally upon its ability to compete with other banks and non-bank financial institutions located in each of its banking center locations for lending opportunities, deposit funds, bankers and acquisition candidates. Spirit’s banking competitors in its target markets include various community banks and national and regional banks. There were over 300 FDIC-insured depository institutions that operate in Spirit’s combined markets as of December 31, 2017. Spirit competes with other commercial banks, savings associations, credit unions, finance companies and money market mutual funds operating in its markets.

Spirit is subject to vigorous competition in all aspects of its business from banks, savings banks, savings and loan associations, finance companies, credit unions and other providers of financial services, such as money market mutual funds, brokerage firms, consumer finance companies, asset-based non-bank lenders, insurance companies and certain other non-financial entities, including retail stores which may maintain their own credit programs and certain governmental organizations which may offer more favorable financing than Spirit can. Many of the banks and other financial institutions with which Spirit competes have significantly greater financial resources, marketing capability and name recognition than it and operate on a local, statewide, regional or nationwide basis.

Spirit’s strategy to compete effectively in its markets is to emphasize its identity as a community-oriented bank in contrast to large, national and regional banks. As a community bank, Spirit can respond to loan requests quickly and flexibly through decisions made locally. Spirit’s marketing strategy is relationship and referral-based. Spirit relies heavily on its bankers and the efforts of its officers and directors for building and strengthening those relationships. Additionally, Spirit’s bankers, directors and officers are actively involved in its primary markets and are a strong source of introductions and referrals.

Employees

As of September 30, 2018, Spirit had 209 employees of which 203 were full-time employees. None of Spirit’s employees are represented by a union. Management believes that Spirit’s relationship with employees is good.

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Information about Spirit’s Properties

Spirit’s principal offices and headquarters are located at 1836 Spirit of Texas Way, Conroe, Texas 77301. All of Spirit’s branches are located in Texas. Spirit owns 16 of its branch locations and leases the remaining seven locations and Spirit owns one building that is currently held for sale or lease. Spirit moved from one owned location in The Woodlands to a newly acquired office location in The Woodlands in February 2018, Spirit moved from one leased office location to a newly acquired office location in Fort Worth in April 2018 and Spirit moved from another leased office location to a newly acquired office location in Dallas in April 2018. The terms of Spirit’s leases range from five to ten years and generally give it the option to renew for subsequent terms of equal duration or otherwise extend the lease term subject to price adjustment based on market conditions at the time of renewal. The following table sets forth a list of Spirit’s locations as of the date of this document.

Houston-The Woodlands-Sugar Land MSA
Location	Own or Lease		Sq. Ft.(1)
Houston
Post Oak Banking Center		Lease		10,853
720 N. Post Oak Road, Suites 101, 620 and 650, Houston, Texas 77024
Stafford Banking Center		Lease		6,372
12840 Southwest Freeway, Stafford, Texas 77477
Richmond Banking Center		Lease		5,890
3100 Richmond Avenue, Suite 100, Houston, Texas 77098
Clear Lake Banking Center		Lease		2,592
1010 Bay Area Boulevard, Unit 1010, Houston, Texas 77058
The Woodlands
Woodlands North Banking Center		Own		24,000	(2)
16610 IH-45 North, The Woodlands, Texas 77384
Woodlands Central Center		Own		14,925	(2)
1525 Lake Front Circle, The Woodlands, Texas 77380
Woodlands West Banking Center		Own		6,700	(3)
30350 FM 2978, Magnolia, Texas 77354
Conroe
Conroe Banking Center		Own		24,000	(2)
1836 Spirit of Texas Way (815 W. Davis Street), Conroe, Texas 77301
Tomball
Tomball Banking Center		Own		12,798	(2)
1100 West Main, Tomball, Texas 77375
Magnolia
Magnolia Banking Center		Lease		3,600
6910 FM 1488, Suites 1, 2, 3 & 4, Magnolia, Texas 77354

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Dallas-Fort Worth-Arlington MSA
Location	Own or Lease		Sq. Ft.
Dallas
Dallas Branch		Own		23,602	(4)
5301 Spring Valley Road, Dallas, Texas 75254
Fort Worth
Fort Worth Branch		Own		7,483	(5)
1120 Summit Avenue, Fort Worth, Texas 76102
Colleyville
Colleyville Banking Center		Lease		4,100
5712 Colleyville Boulevard, Suite 100, Colleyville, Texas 76034
Grapevine
Grapevine Banking Center		Lease		3,327
601 W. Northwest Hwy, Suite 100, Grapevine, Texas 76051
Parker
Millsap Branch		Own		998
107 Fannin, Millsap, Texas 76066
Cool Branch		Own		3,479
9702 Mineral Wells Highway, Weatherford, Texas 76088

College Station-Bryan MSA
Location	Own or Lease		Sq. Ft.
College Station
College Station Banking and Operations Center		Own		12,358
625 University Drive East, College Station, Texas 77840

Mineral Wells MSA
Location	Own or Lease		Sq. Ft.
Mineral Wells
Mineral Wells Branch		Own		2,544
701 East Hubbard Street, Mineral Wells, Texas 76067
Mingus Branch		Own		1,572
117 highway 193, Mingus, Texas 76463
Palo Pinto Branch		Own		1,800
539 Oak Street, Palo Pinto, Texas 76484
Santo Branch		Own		1,760
14003 South FM 4, Santo, Texas 76472

Comanche County
Location	Own or Lease		Sq. Ft.
Comanche
The Comanche National Bank		Own		12,342
100 East Central Street, Comanche, Texas 76442

Jack County
Location	Own or Lease		Sq. Ft.
Jacksboro
Jacksboro Branch		Own		4,196
1220 North Main Street, Jacksboro, Texas 76458

(1) Square footage does not include drive thru.

(2) Spirit leases a portion of this owned space to third-party tenants.

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(3) In April 2017, Spirit completed the purchase of a building at 30350 FM 2978, The Woodlands, Texas consisting of approximately 6,700 square feet. Spirit moved from The Woodlands location at 6886 Woodlands Parkway to this new building in February 2018. Spirit intends to lease approximately 3,000 square feet of this new building to third-party tenants, but no leases have been signed for this space. Spirit intends to sell The Woodlands building at 6886 Woodlands Parkway, which consists of 6,322 square feet, and began actively marketing the building in March 2018. Spirit currently does not have a definitive agreement to sell the building. Spirit currently leases a portion of the old Woodlands location to third-party tenants.

(4) In November 2017, Spirit completed the purchase of this building. Spirit currently leases approximately 16,000 square feet of this owned space to a third-party tenant and intends to lease another 4,000 square feet to other third-party tenants, but no leases have been signed for this space. Spirit moved the Dallas branch from its prior leased location at 3100 Monticello Avenue, Suites 125 and 980, Dallas, Texas to the new owned location in April 2018.

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SPIRIT’S MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS AND OPERATIONS

The following discussion and analysis of Spirit’s financial condition and results of operations should be read in conjunction with the section of this document entitled “Selected Historical Consolidated Financial Data for Spirit” and Spirit’s consolidated financial statements and the accompanying notes included elsewhere in this document. This discussion and analysis contains forward-looking statements that are subject to certain risks and uncertainties and are based on certain assumptions that Spirit believes are reasonable but may prove to be inaccurate. Certain risks, uncertainties and other factors, including those set forth in the sections of this document entitled “Cautionary Statements Regarding Forward-Looking Statements” and “Risk Factors” and elsewhere in this document, may cause actual results to differ materially from those projected results discussed in the forward-looking statements appearing in this discussion and analysis. Spirit assumes no obligation to update any of these forward-looking statements.

Overview

Spirit is a Texas corporation and a registered bank holding company located in the Houston metropolitan area with headquarters in Conroe, Texas. Spirit offers a broad range of commercial and retail banking services through its wholly-owned bank subsidiary, Spirit of Texas Bank, SSB. Spirit operates through 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 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 a bank holding company, Spirit generates most of its revenues from interest income on loans, gains on sale of the guaranteed portion of SBA loans, customer service and loan fees, brokerage fees derived from secondary mortgage originations and interest income from investments in securities. Spirit incurs interest expense on deposits and other borrowed funds and noninterest expenses, such as salaries and employee benefits and occupancy expenses. Spirit’s goal is to maximize income generated from interest-earning assets, while also minimizing interest expense associated with its funding base to widen net interest spread and drive net interest margin expansion. Net interest margin is a ratio calculated as net interest income divided by average interest-earning assets. Net interest income is the difference between interest income on interest-earning assets, such as loans and securities, and interest expense on interest-bearing liabilities, such as deposits and borrowings that are used to fund those assets. Net interest spread is the difference between rates earned on interest-earning assets and rates paid on interest-bearing liabilities.

Changes in market interest rates and the interest rates Spirit earns on interest-earning assets or pays on interest-bearing liabilities, as well as the volume and types of interest-earning assets, interest-bearing and noninterest-bearing liabilities and stockholders’ equity, are usually the largest drivers of periodic changes in net interest spread, net interest margin and net interest income. Fluctuations in market interest rates are driven by many factors, including governmental monetary policies, inflation, deflation, macroeconomic developments, changes in unemployment, the money supply, political and international conditions and conditions in domestic and foreign financial markets. Periodic changes in the volume and types of loans in Spirit’s loan portfolio are affected by, among other factors, economic and competitive conditions in Texas, as well as developments affecting the real estate, technology, financial services, insurance, transportation, manufacturing and energy sectors within Spirit’s target markets and throughout Texas.

Recent Developments

During the three months ended March 31, 2018, to expand Spirit’s lending capacities, Spirit hired six senior lenders in the Houston and Dallas/Fort Worth metropolitan areas. Collectively, they have 132 years of banking experience in their respective markets. Additionally, Spirit hired a deposit sourcing specialist in the Bryan/College Station market. Spirit expects these professionals will generate and maintain meaningful portfolios,

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while also continuing its focus on increasing core deposits to fund loan growth. Spirit intends to continue to seek out talented bankers that are a good cultural fit and have long standing business relationships in its markets.

In February 2018, Spirit relocated one location in The Woodlands to a newly acquired office location in The Woodlands located at 30350 F.M. 2978, Magnolia, Texas 77354. In addition, in April of 2018, Spirit relocated its Dallas and Fort Worth branches. Spirit’s new Dallas branch is located at 5301 Spring Valley Road, Dallas, Texas 75254. Spirit’s new Fort Worth branch is located at 1120 Summit Avenue, Fort Worth, Texas 76102. Spirit believes these relocations will allow it to better serve its customers in the Houston metropolitan area and the Dallas/Fort Worth metropolitan area, while also enhancing the visibility of Spirit’s franchise.

Spirit consummated the underwritten initial public offering of its common stock in May 2018. Spirit common stock is traded on the NASDAQ Global Select Market under the ticker symbol “STXB.” In connection with its initial public offering, Spirit issued and sold 2,300,000 shares of its common stock, including 300,000 shares of common stock sold pursuant to the underwriters’ full exercise of their option to purchase additional shares, at an offering price of $21.00 per share, for aggregate gross proceeds of $48.3 million before deducting underwriting discounts and offering expenses, and aggregate net proceeds of $42.1 million after deducting underwriting discounts and offering expenses. As of the date hereof, Spirit used $7.8 million of net proceeds from this offering to repay in full the outstanding indebtedness under its line of credit with a third party lender, plus accrued and unpaid interest. For a description of the line of credit see “—Financial Condition—Borrowings.” Spirit intends to use the remaining net proceeds to support its continued growth, including organic growth and potential future acquisitions and for general corporate purposes.

On November 14, 2018, Spirit completed its acquisition of Comanche and Comanche Bank. In connection with the transaction, Spirit paid to Comanche shareholders approximately $12,255,000 million in cash (based on agreed to cash consideration of $15.0 million less certain estimated transaction costs of Comanche) and 2,142,857 shares of Spirit common stock. 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, this Management’s Discussion and Analysis of Financial Condition and Results of Operations does not include information about Comanche and its subsidiaries. Please see 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.

On November 27, 2018, Spirit and Beeville entered into the reorganization agreement providing for the acquisition by Spirit of Beeville pursuant to the merger of Beeville with and into Spirit, with Spirit surviving the merger. Pursuant to the terms and subject to the conditions of the reorganization agreement, which has been approved by the Spirit board of directors and the Beeville board of directors, the transaction provides for the payment to Beeville shareholders of an estimated $32,375,000 million in cash and 1,579,268 shares of Spirit common stock, subject to certain adjustments. The transaction is expected to close in the second quarter of 2019, subject to the satisfaction of customary closing conditions, including the receipt of regulatory approvals and the approval of Beeville shareholders.

Results of Operations

Spirit’s results of operations depend substantially on net interest income and noninterest income. Other factors contributing to Spirit’s results of operations include its level of its noninterest expenses, such as salaries and employee benefits, occupancy and equipment and other miscellaneous operating expenses.

Net Interest Income

Net interest income represents interest income less interest expense. Spirit generates interest income from interest, dividends and fees received on interest-earning assets, including loans and investment securities it owns.

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Spirit incurs interest expense from interest paid on interest-bearing liabilities, including interest-bearing deposits and borrowings. To evaluate net interest income, Spirit measures and monitors (1) yields on its loans and other interest-earning assets, (2) the costs of its deposits and other funding sources, (3) its net interest spread, (4) its net interest margin and (5) its provisions for loan losses. Net interest spread is the difference between rates earned on interest-earning assets and rates paid on interest-bearing liabilities. Net interest margin is calculated as the annualized net interest income divided by average interest-earning assets. Because noninterest-bearing sources of funds, such as noninterest-bearing deposits and stockholders’ equity, also fund interest-earning assets, net interest margin includes the benefit of these noninterest-bearing sources.

Changes in market interest rates and the interest rates Spirit earns on interest-earning assets or pays on interest-bearing liabilities, as well as the volume and types of interest-earning assets, interest-bearing and noninterest-bearing deposits and stockholders’ equity, are usually the largest drivers of periodic changes in net interest spread, net interest margin and net interest income. Spirit measures net interest income before and after provision for loan losses required to maintain its allowance for loan and lease losses at acceptable levels.

Noninterest Income

Spirit’s noninterest income includes the following: (1) service charges and fees; (2) SBA loan servicing fees; (3) mortgage referral fees; (4) gain on the sales of loans, net; (5) gain (loss) on sales of other assets; and (6) other.

Noninterest Expense

Spirit’s noninterest expense includes the following: (1) salaries and employee benefits; (2) occupancy and equipment expenses; (3) loan and other real estate related expenses; (4) professional services; (5) data processing and network; (6) regulatory assessments and insurance; (7) amortization of core deposit intangibles; (8) advertising; (9) marketing; (10) telephone expenses; and (11) other.

Financial Condition

The primary factors Spirit uses to evaluate and manage its financial condition include liquidity, asset quality and capital.

Liquidity

Spirit manages liquidity based upon factors that include the amount of core deposits as a percentage of total deposits, the level of diversification of its funding sources, the allocation and amount of its deposits among deposit types, the short-term funding sources used to fund assets, the amount of non-deposit funding used to fund assets, the availability of unused funding sources, off-balance sheet obligations, the availability of assets to be readily converted into cash without undue loss, the amount of cash and liquid securities it holds, and the repricing characteristics and maturities of its assets when compared to the repricing characteristics of its liabilities, the ability to securitize and sell certain pools of assets and other factors.

Asset Quality

Spirit manages the diversification and quality of its assets based upon factors that include the level, distribution, severity and trend of problem, classified, delinquent, nonaccrual, nonperforming and restructured assets, the adequacy of its allowance for loan and lease losses, discounts and reserves for unfunded loan commitments, the diversification and quality of loan and investment portfolios and credit risk concentrations.

Capital

Spirit manages capital based upon factors that include the level and quality of capital and its overall financial condition, the trend and volume of problem assets, the adequacy of discounts and reserves, the level and

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quality of earnings, the risk exposures in its balance sheet, the levels of Tier 1 (core), risk-based and tangible equity capital, the ratios of tier 1 (core), risk-based and tangible equity capital to total assets and risk-weighted assets and other factors.

Performance Highlights

Operating and financial highlights for the three months ended September 30, 2018 include the following:

• Net income increased to $2.8 million. Adjusted net income was $3.0 million for the third quarter of 2018, which excluded $215 thousand of after-tax merger related expenses.

• Diluted earnings per share were $0.27 in the third quarter of 2018. Adjusted diluted earnings per share were $0.29 for the third quarter of 2018 which excluded $215 thousand of after-tax merger related expenses.

• Net interest margin and tax equivalent net interest margin were 4.60% and 4.65%, respectively.

• Noninterest-bearing deposit growth of $24.1 million or 52.1% annualized.

• Organic loan growth of $36.6 million or 15.8% annualized.

• Return on average assets was 1.01%, annualized.

• Book value per share was $15.38 in the third quarter of 2018. Tangible book value per share was $14.62 in the third quarter of 2018.

Tax equivalent net interest margin, adjusted net income, adjusted diluted earnings per share and tangible book value per share are non-GAAP financial measures. See Spirit’s reconciliation of non-GAAP financial measures to their most directly comparable GAAP financial measures under “—Non-GAAP Financial Measures.”

Analysis of Results of Operations

Net income for the three months ended September 30, 2018 totaled $2.8 million, which generated diluted earnings per common share of $0.27 for the three months ended September 30, 2018. Adjusted net income for the three months ended September 30, 2018 totaled $3.0 million which excluded $215 thousand of after-tax merger related expenses, which generated diluted earnings per common share of $0.29. Net income for the three months ended September 30, 2017 totaled $2.0 million, which generated diluted earnings per common share of $0.26 for the three months ended September 30, 2017. The increase in net income was driven by an increase in interest income of $2.0 million that was primarily attributable to increasing loan yields, partially offset by an increase in noninterest expense of $1.7 million, which was mainly the result of an increase in salaries and benefits expense. Spirit’s results of operations for the three months ended September 30, 2018 produced an annualized return on average assets of 1.01% compared to an annualized return on average assets of 0.78% for the three months ended September 30, 2017. Spirit had an annualized return on average stockholders’ equity of 7.34% for the three months ended September 30, 2018, compared to an annualized return on average stockholders’ equity of 7.78% for the three months ended September 30, 2017.

Net income for the nine months ended September 30, 2018 totaled $7.5 million, which generated diluted earnings per common share of $0.86 for the nine months ended September 30, 2018. Adjusted net income for the nine months ended September 30, 2018 totaled $7.7 million which excluded $215 thousand of after-tax merger related expenses, which generated diluted earnings per common share of $0.84. Net income for the nine months ended September 30, 2017 totaled $4.2 million, which generated diluted earnings per common share of $0.56 for the nine months ended September 30, 2017. The increase in net income was driven by an increase in interest income of $5.8 million that was primarily attributable to increasing loan yields, partially offset by an increase in interest expense of 1.2 million and an increase in noninterest expense of $1.8 million. The increase in interest

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expense was primarily due to an increase in interest rates by the Federal Open Market Committee during 2017 and 2018. The increase in noninterest expense was mainly the result of an increase in salaries and benefits expense. Spirit’s results of operations for the nine months ended September 30, 2018 produced an annualized return on average assets of 0.94% compared to an annualized return on average assets of 0.56% for the nine months ended September 30, 2017. Spirit had an annualized return on average stockholders’ equity of 8.08% for the nine months ended September 30, 2018, compared to an annualized return on average stockholders’ equity of 5.64% for the nine months ended September 30, 2017.

Net Interest Income and Net Interest Margin

The following table presents, for the periods indicated, information about (1) average balances, the total dollar amount of interest income from interest-earning assets and the resultant average yields; (2) average balances, the total dollar amount of interest expense on interest-bearing liabilities and the resultant average rates; (3) the interest rate spread; (4) net interest income and margin; and (5) net interest income and margin (tax equivalent). Interest earned on loans that are classified as nonaccrual is not recognized in income, however the balances are reflected in average outstanding balances for that period. Any nonaccrual loans have been included in the table as loans carrying a zero yield.

	Three Months Ended September 30,
	2018							2017
	Average Balance(1)		Interest/ Expense		Annualized Yield/Rate			Average Balance(1)		Interest/ Expense		Annualized Yield/Rate
	(Dollars in thousands)
Interest-earning assets:
Interest-earning deposits in other banks	$	24,007	$	140		2.32	%	$	50,443	$	157		1.23	%
Loans, including loans held for sale(2)		944,429		13,901		5.84	%		867,634		11,842		5.41	%
Investment securities and other		39,056		235		2.38	%		43,845		245		2.22	%
Total interest-earning assets		1,007,492		14,276		5.62	%		961,922		12,244		5.05	%
Noninterest-earning assets		77,988							61,635
Total assets	$	1,085,480						$	1,023,557
Interest-bearing liabilities:
Interest-bearing NOW accounts	$	7,932	$	3		0.15	%	$	8,634	$	3		0.14	%
Savings and money market accounts		212,511		338		0.63	%		242,289		340		0.56	%
Time deposits		442,149		1,856		1.67	%		423,390		1,341		1.26	%
FHLB advances and other borrowings		77,471		389		1.99	%		73,056		405		2.20	%
Total interest-bearing liabilities		740,063		2,586		1.39	%		747,369		2,089		1.11	%
Noninterest-bearing liabilities and shareholders’ equity:
Noninterest-bearing demand deposits		192,408							170,083
Other liabilities		3,182							3,963
Stockholders’ equity		149,827							102,142
Total liabilities and stockholders’ equity	$	1,085,480						$	1,023,557
Net interest rate spread						4.23	%						3.94	%
Net interest income and margin			$	11,690		4.60	%			$	10,155		4.19	%
Net interest income and margin (tax equivalent)(3)			$	11,803		4.65	%			$	10,395		4.29	%

(1) Average balances presented are derived from daily average balances.

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(2) Includes loans on nonaccrual status.

(3) In order to make pretax income and resultant yields on tax-exempt loans comparable to those on taxable loans, a tax-equivalent adjustment has been computed using a federal tax rate of 21% for the three months ended September 30, 2018 and a federal tax rate of 34% for the three months ended September 30, 2017, which is a non-GAAP financial measure. See Spirit’s reconciliation of non-GAAP financial measures to their most directly comparable GAAP financial measures under “—Non-GAAP Financial Measures.”

	Nine Months Ended September 30,
	2018							2017
	Average Balance(1)		Interest/ Expense		Annualized Yield/Rate			Average Balance(1)		Interest/ Expense		Annualized Yield/Rate
	(Dollars in thousands)
Interest-earning assets:
Interest-earning deposits in other banks	$	31,102	$	448		1.92	%	$	89,681	$	680		1.01	%
Loans, including loans held for sale(2)		910,237		39,270		5.77	%		827,847		33,515		5.41	%
Investment securities and other		40,140		699		2.33	%		29,249		420		1.92	%
Total interest-earning assets		981,479		40,417		5.51	%		946,777		34,615		4.89	%
Noninterest-earning assets		76,332							60,081
Total assets	$	1,057,811						$	1,006,858
Interest-bearing liabilities:
Interest-bearing NOW accounts	$	7,928	$	9		0.15	%	$	8,291	$	9		0.15	%
Savings and money market accounts		223,159		1,016		0.61	%		233,471		991		0.57	%
Time deposits		430,369		4,844		1.50	%		431,278		3,913		1.21	%
FHLB advances and other borrowings		85,472		1,395		2.18	%		68,339		1,180		2.31	%
Total interest-bearing liabilities		746,928		7,264		1.30	%		741,379		6,093		1.10	%
Noninterest-bearing liabilities and shareholders’ equity:
Noninterest-bearing demand deposits		183,658							161,861
Other liabilities		3,645							3,385
Stockholders’ equity		123,580							100,233
Total liabilities and stockholders’ equity	$	1,057,811						$	1,006,858
Net interest rate spread						4.21	%						3.79	%
Net interest income and margin			$	33,153		4.52	%			$	28,522		4.03	%
Net interest income and margin (tax equivalent)(3)			$	33,497		4.56	%			$	29,224		4.13	%

(1) Average balances presented are derived from daily average balances.

(2) Includes loans on nonaccrual status.

(3) In order to make pretax income and resultant yields on tax-exempt loans comparable to those on taxable loans, a tax-equivalent adjustment has been computed using a federal tax rate of 21% for the nine months ended September 30, 2018 and a federal tax rate of 34% for the nine months ended September 30, 2017, which is a non-GAAP financial measure. See Spirit’s reconciliation of non-GAAP financial measures to their most directly comparable GAAP financial measures under “—Non-GAAP Financial Measures.”

Increases and decreases in interest income and interest expense result from changes in average balances (volume) of interest-earning assets and liabilities, as well as changes in average interest rates. The following table shows the effect that these factors had on the interest earned on Spirit’s interest-earning assets and the interest

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incurred on its interest-bearing liabilities for the periods indicated. The effect of changes in volume is determined by multiplying the change in volume by the prior period’s average rate. Similarly, the effect of rate changes is calculated by multiplying the change in average rate by the prior period’s volume.

A summary of increases and decreases in interest income and interest expense resulting from changes in average balances (volume) and average interest rates follows:

	Three Months Ended September 30, 2018 compared to 2017
	Increase (Decrease) Due to
	Volume(1)			Rate(1)			Total
	(Dollars in thousands)
Interest-earning assets:
Interest-earning deposits in other banks	$	(415	)	$	398		$	(17	)
Loans, including loans held for sale(2)		1,085			974			2,059
Investment securities and other		(90	)		80			(10	)
Total change in interest income	$	580		$	1,452		$	2,032
Interest-bearing liabilities:
Interest-bearing NOW accounts		(1	)		1			—
Savings and money market accounts		(169	)		167			(2	)
Time deposits		62			453			515
FHLB advances and other borrowings		113			(129	)		(16	)
Total change in interest expenses		5			492			497
Total change in net interest income	$	575		$	960		$	1,535

(1) Variances attributable to both volume and rate are allocated on a consistent basis between rate and volume based on the absolute value of the variances in each category.

(2) Includes loans on nonaccrual status.

	Nine Months Ended September 30, 2018 compared to 2017
	Increase (Decrease) Due to
	Volume(1)			Rate(1)			Total
	(Dollars in thousands)
Interest-earning assets:
Interest-earning deposits in other banks	$	(784	)	$	552		$	(232	)
Loans, including loans held for sale(2)		3,449			2,306			5,755
Investment securities and other		177			102			279
Total change in interest income	$	2,842		$	2,960		$	5,802
Interest-bearing liabilities:
Interest-bearing NOW accounts		—			—			—
Savings and money market accounts		(62	)		87			25
Time deposits		(14	)		945			931
FHLB advances and other borrowings		321			(106	)		215
Total change in interest expenses		245			926			1,171
Total change in net interest income	$	2,597		$	2,034		$	4,631

(1) Variances attributable to both volume and rate are allocated on a consistent basis between rate and volume based on the absolute value of the variances in each category.

(2) Includes loans on nonaccrual status.

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Three months ended September 30, 2018 compared to three months ended September 30, 2017

Net interest income was $11.7 million for the three months ended September 30, 2018 compared to $10.2 million for the three months ended September 30, 2017, representing an increase of $1.5 million, or 15.1%. The increase in net interest income was primarily due to an increase in interest income of $2.0 million partially offset by an increase in interest expense of $497 thousand. Interest income on loans increased by $2.1 million for the three months ended September 30, 2018. The growth in average loans of $76.8 million, including loans held for sale, for the three months ended September 30, 2018 was the primary driver of the increase in interest income on loans, as well as an increase in the average rate on loans of 43 basis points over the same period.

Interest expense was $2.6 million for the three months ended September 30, 2018 compared to $2.1 million for the three months ended September 30, 2017, representing an increase of $497 thousand. This increase was mainly due to an increase in interest expense on deposits. Interest expense on deposits totaled $2.2 million for the three months ended September 30, 2018 compared to $1.7 million for the three months ended September 30, 2017, representing an increase of $513 thousand, resulting primarily from an increase in the average rate paid on time deposits of 41 basis points for the three months ended September 30, 2018 over the three months ended September 30, 2017. The average cost of deposits for the three months ended September 30, 2018 was 1.02%. This represents an increase of 23 basis points compared to the average cost of deposits of 0.79% for the three months ended September 30, 2017. The increase in cost of deposits was primarily attributable to the increase in interest rates by the Federal Open Market Committee during 2017 and 2018. For the three months ended September 30, 2018, the average rate paid on time deposits was 1.67% compared to 1.26% for the three months ended September 30, 2017.

The net interest margin was 4.60% for the three months ended September 30, 2018 compared to 4.19% for the three months ended September 30, 2017, representing an increase of 41 basis points. The tax equivalent net interest margin was 4.65% for the three months ended September 30, 2018 compared to 4.29% for the three months ended September 30, 2017, representing an increase of 36 basis points. The average yield on interest-earning assets increased by 57 basis points for the three months ended September 30, 2018 compared to the three months ended September 30, 2017 while the average rate paid on interest-bearing liabilities increased by 28 basis points, resulting in a 29 basis point increase in the interest rate spread. The increase in both net interest margin and interest rate spread primarily resulted from the shift in assets from low yielding interest-earning deposits in other banks to higher yielding loans for the three months ended September 30, 2018.

Nine months ended September 30, 2018 compared to nine months ended September 30, 2017

Net interest income was $33.2 million for the nine months ended September 30, 2018 compared to $28.5 million for the nine months ended September 30, 2017, representing an increase of $4.6 million, or 16.2%. The increase in net interest income was primarily due to an increase in interest income of $5.8 million partially offset by an increase in interest expense of $1.2 million. Interest income on loans increased by $5.8 million for the nine months ended September 30, 2018. The growth in average loans of $82.4 million, including loans held for sale, for the nine months ended September 30, 2018 was the primary driver of the increase in interest income on loans, as well as an increase in the average rate on loans of 36 basis points over the same period.

Interest expense was $7.3 million for the nine months ended September 30, 2018 compared to $6.1 million for the nine months ended September 30, 2017, representing an increase of $1.2 million. This increase was mainly due to an increase in interest expense on deposits and FHLB advances and other borrowings. Interest expense on deposits totaled $5.9 million for the nine months ended September 30, 2018 compared to $4.9 million for the nine months ended September 30, 2017, representing an increase of $956 thousand, resulting primarily from an increase in the average rate paid on time deposits of 29 basis points for the nine months ended September 30, 2018 over the nine months ended September 30, 2017. The average cost of deposits for the nine months ended September 30, 2018 was 0.93%. This represents an increase of 14 basis points compared to the average cost of deposits of 0.79% for the nine months ended September 30, 2017. The increase in cost of

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deposits was primarily attributable to the increase in interest rates by the Federal Open Market Committee during 2017 and 2018. For the nine months ended September 30, 2018, the average rate paid on time deposits was 1.50% compared to 1.21% for the nine months ended September 30, 2017.

Interest expense on FHLB advances and other borrowings increased by $215 thousand for the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017. The increase was attributable to an increase in the average balance of FHLB advances and other borrowings of $17.1 million for the nine months ended September 30, 2018.

The net interest margin was 4.52% for the nine months ended September 30, 2018 compared to 4.03% for the nine months ended September 30, 2017, representing an increase of 49 basis points. The tax equivalent net interest margin was 4.56% for the nine months ended September 30, 2018 compared to 4.13% for the nine months ended September 30, 2017, representing an increase of 43 basis points. The average yield on interest-earning assets increased by 62 basis points for the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017 while the average rate paid on interest-bearing liabilities increased by 20 basis points, resulting in a 42 basis point increase in the interest rate spread. The increase in both net interest margin and interest rate spread primarily resulted from the shift in assets from low yielding interest-earning deposits in other banks to higher yielding loans for the nine months ended September 30, 2018.

Provision for Loan Losses

The provision for loan losses represents the amount determined by management to be necessary to maintain the allowance for loan and lease losses at a level capable of absorbing inherent losses in the loan portfolio. See the discussion under “—Critical Accounting Policies—Allowance for Loan and Lease Losses.” Spirit’s management and board of directors review the adequacy of the allowance for loan and lease losses on a quarterly basis. The allowance for loan and lease losses calculation is segregated by call report code and then further segregated into various segments that include classified loans, loans with specific allocations and pass rated loans. A pass rated loan is generally characterized by a very low to average risk of default and in which management perceives there is a minimal risk of loss. Loans are rated using a nine-point risk grade scale by loan officers that are subject to validation by a third party loan review or Spirit’s internal credit committee. Risk ratings are categorized as pass, watch, special mention, substandard, doubtful and loss, with some general allocation of reserves based on these grades. Impaired loans are reviewed specifically and separately under the FASB ASC 310, “Receivables”, to determine the appropriate reserve allocation. Management compares the investment in an impaired loan with the present value of expected future cash flow discounted at the loan’s effective interest rate, the loan’s observable market price or the fair value of the collateral, if the loan is collateral-dependent, to determine the specific reserve allowance. Reserve percentages assigned to non-impaired loans are based on historical charge-off experience adjusted for other risk factors. To evaluate the overall adequacy of the allowance to absorb losses inherent in Spirit’s loan portfolio, its management considers historical loss experience based on volume and types of loans, trends in classifications, volume and trends in delinquencies and nonaccruals, economic conditions and other pertinent information. Based on future evaluations, additional provisions for loan losses may be necessary to maintain the allowance for loan and lease losses at an appropriate level.

Three months ended September 30, 2018 compared to three months ended September 30, 2017

The provision for loan losses was $486 thousand for the three months ended September 30, 2018 and $604 thousand for the three months ended September 30, 2017. The ratio of net charged-off loans to average loans (annualized) was 0.14% for the three months ended September 30, 2018 and 0.01% for the three months ended September 30, 2017.

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Nine months ended September 30, 2018 compared to nine months ended September 30, 2017

The provision for loan losses was $1.5 million for the nine months ended September 30, 2018 and $1.8 million for the nine months ended September 30, 2017. The ratio of net charged-off loans to average loans (annualized) was 0.14% for the nine months ended September 30, 2018 and 0.11% for the nine months ended September 30, 2017.

Spirit’s management maintains a proactive approach in managing nonperforming loans, which were $3.7 million, or 0.39% of loans held for investment, at September 30, 2018, and $3.6 million, or 0.41% of loans held for investment, at December 31, 2017. The allowance for loan and lease losses totaled $6.2 million, or 0.65% of loans held for investment, at September 30, 2018 compared to $5.7 million, or 0.65% of loans held for investment, at December 31, 2017. The ratio of allowance for loan and lease losses to nonperforming loans was 164.42% at September 30, 2018, compared to 157.22% at December 31, 2017.

Noninterest Income

Spirit’s noninterest income includes the following: (1) service charges and fees; (2) SBA loan servicing fees; (3) mortgage referral fees; (4) gain on the sales of loans, net; (5) gain (loss) on sales of other assets; and (6) other.

The following table presents a summary of noninterest income by category, including the percentage change in each category, for the periods indicated:

	Three Months Ended September 30,								Nine Months Ended September 30,
	2018		2017			Change from the Prior Period			2018			2017			Change from the Prior Period
Noninterest income:
Service charges and fees		462		362			27.6	%		1,238			1,095			13.1	%
SBA loan servicing fees		529		207			155.6	%		1,701			1,378			23.4	%
Mortgage referral fees		160		158			1.3	%		524			531			-1.3	%
Gain on sales of loans, net		1,369		1,392			-1.7	%		3,884			4,710			-17.5	%
Gain (loss) on sales of other assets		—		(70	)		-100.0	%		(25	)		(47	)		-46.8	%
Other noninterest income		47		44			6.8	%		136			55			147.3	%
Total noninterest income	$	2,567	$	2,093			22.6	%	$	7,458		$	7,722			-3.4	%

Three months ended September 30, 2018 compared to three months ended September 30, 2017

For the three months ended September 30, 2018, noninterest income totaled $2.6 million, a $474 thousand, or 22.6%, increase from $2.1 million for the prior period. This increase was primarily due to an increase in SBA loan servicing fees of $322 thousand.

SBA loan servicing fees were $529 thousand for the three months ended September 30, 2018 compared to $207 thousand for the three months ended September 30, 2017, primarily due to an increase in the number of loans being serviced.

Nine months ended September 30, 2018 compared to nine months ended September 30, 2017

For the nine months ended September 30, 2018, noninterest income totaled $7.5 million, a $264 thousand, or 3.4%, decrease from $7.7 million for the prior period. This decrease was primarily due to a decrease in gain on sales of loans, net of $826 thousand, offset by an increase in SBA servicing fees of $323 thousand.

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Gain on sales of loans, net, was $3.9 million for the nine months ended September 30, 2018 compared to $4.7 million for the nine months ended September 30, 2017, primarily due to increased premiums being offered in the first half of 2017.

SBA loan servicing fees were $1.7 million for the nine months ended September 30, 2018 compared to $1.4 million for the nine months ended September 30, 2017, primarily due to an increase in the number of loans being serviced.

Noninterest Expense

Spirit’s noninterest expense includes the following: (1) salaries and employee benefits; (2) occupancy and equipment expenses; (3) loan and other real estate related expenses; (4) professional services; (5) data processing and network; (6) regulatory assessments and insurance; (7) amortization of core deposit intangibles; (8) advertising; (9) marketing; (10) telephone expense; and (11) other.

The following table presents a summary of noninterest expenses by category, including the percentage change in each category, for the periods indicated:

	Three Months Ended September 30,							Nine Months Ended September 30,
	2018		2017		Change from the Prior Period			2018		2017		Change from the Prior Period
Noninterest expense:
Salaries and employee benefits		6,623		5,271		25.6	%		19,524		17,774		9.8	%
Occupancy and equipment expenses		1,279		1,239		3.2	%		3,736		3,742		-0.2	%
Loan and other real estate related expenses		94		20		370.0	%		171		244		-29.9	%
Professional services		624		410		52.2	%		1,249		1,159		7.8	%
Data processing and network		302		317		-4.7	%		936		899		4.1	%
Regulatory assessments and insurance		266		221		20.4	%		787		689		14.2	%
Amortization of intangibles		176		176		0.0	%		527		527		0.0	%
Advertising		83		147		-43.5	%		300		431		-30.4	%
Marketing		115		118		-2.5	%		354		399		-11.3	%
Telephone expense		120		109		10.1	%		332		325		2.2	%
Other operating expenses		599		511		17.2	%		1,872		1,754		6.7	%
Total noninterest expense	$	10,281	$	8,539		20.4	%	$	29,788	$	27,943		6.6	%

Three months ended September 30, 2018 compared to three months ended September 30, 2017

For the three months ended September 30, 2018, noninterest expenses totaled $10.3 million, a $1.7 million, or 20.4%, increase from $8.5 million for the prior period. This increase was primarily due to an increase in salaries and employee benefits of $1.4 million and an increase in professional services expense of $214 thousand.

Salaries and employee benefits totaled $6.6 million for the three months ended September 30, 2018, which included $181 thousand of stock-based compensation expense. By comparison, salaries and employee benefits totaled $5.3 million for the three months ended September 30, 2017, which included $201 thousand of stock-based compensation expense. The increase in salaries and employee benefits is primarily due to the seasonality of annual bonuses.

Professional services totaled $624 thousand for the three months ended September 30, 2018 compared to $410 thousand for the three months ended September 30, 2017. This increase is primarily the result of the merger related expenses for the Comanche acquisition.

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Nine months ended September 30, 2018 compared to nine months ended September 30, 2017

For the nine months ended September 30, 2018, noninterest expenses totaled $29.8 million, a $1.8 million, or 6.6%, increase from $27.9 million for the prior period. This increase was primarily due to an increase in salaries and employee benefits of $1.8 million.

Salaries and employee benefits totaled $19.5 million for the nine months ended September 30, 2018, which included $506 thousand of stock-based compensation expense and a one-time executive bonus expense of $475 thousand. By comparison, salaries and employee benefits totaled $17.8 million for the nine months ended September 30, 2017, which included $1.4 million of stock-based compensation expense. During the nine months ended September 30, 2017, Spirit incurred a one-time expense of $757 thousand in connection with the accelerated vesting of all stock options held by its board of directors and the board of directors of the Bank approved by its board of directors in February 2017. The increase in salaries and employee benefits is primarily due to the seasonality of annual bonuses and the payment of the one-time executive bonus during the nine months ended September 30, 2018.

Income Tax Expense

The provision for income taxes includes both federal and state taxes. Fluctuations in effective tax rates reflect the differences in the inclusion or deductibility of certain income and expenses for income tax purposes. Spirit’s future effective income tax rate will fluctuate based on the mix of taxable and tax-free investments it makes, periodic increases in surrender value of bank-owned life insurance policies for certain former executive officers and its overall taxable income.

Three months ended September 30, 2018 compared to three months ended September 30, 2017

Income tax expense was $719 thousand for the three months ended September 30, 2018, a decrease of $384 thousand compared to income tax expense of $1.1 million for the three months ended September 30, 2017. Spirit’s effective tax rates for the three months ended September 30, 2018 and 2017 were 20.6% and 35.5%, respectively, primarily due to the impact of changes in the United States tax law during the year ended December 31, 2017. On December 22, 2017, the United States enacted the Tax Cuts and Jobs Act, which we refer to as the Tax Reform, resulting in significant modifications to existing law. Spirit’s financial statements for the three months ended September 30, 2018 reflect certain effects of the Tax Reform, which include a reduction in the corporate tax rate from 34.0% to 21.0%.

Nine months ended September 30, 2018 compared to nine months ended September 30, 2017

Income tax expense was $1.9 million for the nine months ended September 30, 2018 and $2.3 million for the nine months ended September 30, 2017. Spirit’s effective tax rates for the nine months ended September 30, 2018 and 2017 were 20.3% and 34.9%, respectively, primarily due to the impact of the Tax Reform, which included a reduction in the corporate tax rate from 34.0% to 21.0%.

Spirit recorded an uncertain tax position at December 31, 2017 arising from a deduction taken on the 2016 federal return related to a request for change in accounting method. The total amount of the recorded uncertain tax position at December 31, 2017 was $903 thousand and is included in other liabilities. During the second quarter of 2018, the Company filed an amended return and the uncertain tax position was settled against the balance left on account with the IRS. The Company’s policy is to classify interest and penalties associated with income taxes within other expenses. The Company did not record interest and penalties associated with income taxes for the three or nine months ended September 30, 2018 or 2017.

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Financial Condition

Spirit’s total assets increased $71.9 million, or 7.0%, from $1.03 billion as of December 31, 2017 to $1.10 billion as of September 30, 2018. Spirit’s asset growth was mainly due to the capital raised during its initial public offering during the second quarter of 2018.

Investment Securities

Spirit uses its investment securities portfolio to provide a source of liquidity, provide an appropriate return on funds invested, manage interest rate risk, and meet collateral requirements and meet regulatory capital requirements. The average balance of the securities portfolio including FHLB and The Independent Bankers Bank, or TIB, bank stock for the three months ended September 30, 2018 and 2017 was $39.1 million and $43.8 million, respectively, with a pre-tax yield of 2.38% and 2.22%, respectively. The average balance of the securities portfolio including FHLB and The Independent Bankers Bank, or TIB, stock for the nine months ended September 30, 2018 and 2017 was $40.1 million and $29.2 million, respectively, with a pre-tax yield of 2.33% and 1.92%, respectively. Spirit held 50 securities classified as available for sale with an amortized cost of $34.9 million as of September 30, 2018.

Management evaluates securities for other-than-temporary impairment, or OTTI, at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. No securities were determined to be OTTI as of September 30, 2018 or December 31, 2017.

The following tables show contractual maturities and the weighted average yields on Spirit’s investment securities as of the dates presented. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Weighted average yields are not presented on a taxable equivalent basis:

	Maturity as of September 30, 2018
	One Year or Less					One to Five Years					Five to Ten Years					After Ten Years
(Dollars in thousands)	Amortized Cost		Weighted Average Yield			Amortized Cost		Weighted Average Yield			Amortized Cost		Weighted Average Yield			Amortized Cost		Weighted Average Yield
Available for sale:
U.S. Government agencies	$	—		0.00	%	$	—		0.00	%	$	1,537		2.18	%	$	477		2.92	%
Residential mortgage- backed securities		—		0.00	%		2		2.75	%		2,019		2.36	%		25,176		2.65	%
Corporate bonds and other debt securities		—		0.00	%		4,117		2.49	%		1,561		2.79	%		—		0.00	%
Total available for sale	$	—		0.00	%	$	4,119		2.49	%	$	5,117		2.44	%	$	25,653		2.66	%

	Maturity as of December 31, 2017
	One Year or Less					One to Five Years					Five to Ten Years					After Ten Years
(Dollars in thousands)	Amortized Cost		Weighted Average Yield			Amortized Cost		Weighted Average Yield			Amortized Cost		Weighted Average Yield			Amortized Cost		Weighted Average Yield
Available for sale:
U.S. Government agencies	$	—		0.00	%	$	—		0.00	%	$	1,535		2.18	%	$	475		2.99	%
Residential mortgage- backed securities		—		0.00	%		2		2.75	%		—		0.00	%		30,154		2.01	%
Corporate bonds and other debt securities		—		0.00	%		4,142		2.45	%		1,569		2.72	%		—		0.00	%
Total available for sale	$	—		0.00	%	$	4,144		2.45	%	$	3,104		2.45	%	$	30,629		2.03	%

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As a member institution of the FHLB and TIB, the Bank is required to own capital stock in the FHLB and TIB. As of September 30, 2018 the Bank held approximately $4.9 million in FHLB and TIB bank stock and $4.8 million as of December 31, 2017. No market exists for this stock, and the Bank’s investment can be liquidated only through repurchase by the FHLB or TIB. Such repurchases have historically been at par value. Spirit monitors its investment in FHLB and TIB stock for impairment through review of recent financial results, dividend payment history and information from credit agencies. As of September 30, 2018 and December 31, 2017, management did not identify any indicators of impairment of FHLB and TIB stock.

Except for securities issued by U.S. government agencies, Spirit did not have any concentrations where the total outstanding balances issued by a single issuer exceed 10% of its stockholders’ equity as of September 30, 2018 and December 31, 2017.

Spirit’s securities portfolio had a weighted average life of 5.45 years and an effective duration of 4.98 years as of September 30, 2018 and a weighted average life of 5.00 years and an effective duration of 5.03 years as of December 31, 2017.

Loans Held for Sale

Loans held for sale consist of the guaranteed portion of SBA loans that Spirit intends to sell after origination. Spirit’s loans held for sale were $5.5 million as of September 30, 2018 and $3.8 million as of December 31, 2017.

Loan Concentrations

Spirit’s primary source of income is interest on loans to individuals, professionals, small and medium-sized businesses and commercial companies located in the Houston and Dallas/Fort Worth metropolitan areas. Spirit’s loan portfolio consists primarily of commercial and industrial loans, 1-4 single family residential real estate loans and loans secured by commercial real estate properties located in its primary market areas. Spirit’s loan portfolio represents the highest yielding component of its earning asset base.

Spirit’s total loans held for investment of $954.1 million as of September 30, 2018 represented an increase of $85.0 million, or 9.8%, compared to $869.1 million as of December 31, 2017. Spirit’s loans as a percentage of assets were 86.6% and 84.4% as of September 30, 2018 and December 31, 2017, respectively.

The current concentrations in Spirit’s loan portfolio may not be indicative of concentrations in its loan portfolio in the future. Spirit plans to maintain a relatively diversified loan portfolio to help reduce the risk inherent in concentration in certain types of collateral. The following table summarizes the allocation of loans by type as of the dates presented.

	September 30, 2018					December 31, 2017
(Dollars in thousands)	Amount		% of Total			Amount		% of Total
Commercial and industrial loans(1)	$	159,776		16.8	%	$	135,040		15.5	%
Real estate:
1-4 single family residential loans		244,633		25.6	%		232,510		26.8	%
Construction, land and development loans		155,778		16.3	%		139,470		16.0	%
Commercial real estate loans (including multifamily)		324,212		34.0	%		285,731		32.9	%
Consumer loans and leases		18,174		1.9	%		22,736		2.6	%
Municipal and other loans		51,501		5.4	%		53,632		6.2	%
Total loans held in portfolio	$	954,074		100.0	%	$	869,119		100.0	%

(1) Balance includes $75.9 million and $67.1 million of the unguaranteed portion of SBA loans as of September 30, 2018 and December 31, 2017, respectively.

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Commercial and Industrial Loans (including SBA loans)

Commercial and industrial loans, including SBA loans, are underwritten after evaluating and understanding the borrower’s ability to repay the loan through operating profitably and effectively growing its business. Spirit’s management examines current and projected cash flows to determine the ability of the borrower to repay their obligations as agreed. Commercial loans are primarily made based on the credit quality and cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and may incorporate a personal guarantee to add strength to the credit and reduce the risk on a transaction to an acceptable level; however, some short-term loans may be made on an unsecured basis to the most credit worthy borrowers.

In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers. Due to the nature of accounts receivable and inventory secured loans, Spirit closely monitors credit availability and collateral through the use of various tools, including but not limited to borrowing-base formulas, periodic accounts receivable agings, periodic inventory audits, and/or collateral inspections.

Commercial and industrial loans, including SBA loans, totaled $159.8 million as of September 30, 2018 and represented an increase of $24.7 million, or 18.3%, from $135.0 million as of December 31, 2017. Spirit believes it is well-positioned for continued loan growth in its commercial and industrial loan portfolio based on its strategic presence in the Houston and Dallas/Fort Worth metropolitan areas, which are expected to continue to benefit from favorable economic conditions.

The primary focus of Spirit’s SBA lending program is financing well-known national franchises for which the United States generally will guarantee between 75% and 85% of the loan. Spirit is a SBA preferred lender, and originate SBA loans to national franchises in Texas and nationwide. Spirit routinely sells the guaranteed portion of SBA loans to third parties for a premium and retain the servicing rights, for which it earns a 1% fee, and maintain the nonguaranteed portion in its loan portfolio.

SBA loans held in Spirit’s loan portfolio totaled $75.9 million and $67.1 million at September 30, 2018 and December 31, 2017, respectively. Spirit intends to continue to expand its SBA lending program in the future.

Real estate loans

1-4 single family residential real estate loans (including loans to foreign nationals)

1-4 single family residential real estate loans, including foreign national loans, are subject to underwriting standards and processes similar to commercial and industrial loans. Spirit provides mortgages for the financing of 1-4 single family residential homes for primary occupancy, vacation or rental purposes. The borrowers on these loans generally qualify for traditional market financing. Spirit also specialize in 1-4 single family residential real estate loans to foreign national customers, in which the borrower does not qualify for traditional market financing.

Spirit defines its foreign national loans as loans to borrowers who derive more than 50% of their personal income from outside the U.S. Spirit provides mortgages for these foreign nationals in Texas for primary occupancy or secondary homes while travelling to the U.S. Because more than 50% of the borrower’s income is derived from outside of the U.S., they do not qualify for traditional market financing. Spirit has developed an enhanced due diligence process for foreign national loans that includes larger down payments than a traditional mortgage, as well as minimum reserves equal to an amount of mortgage payments over a specified period held in the Bank and monthly escrows for taxes and insurance.

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1-4 single family residential real estate loans (including loans to foreign nationals) totaled $244.6 million as of September 30, 2018 and represented an increase of $12.1 million, or 5.2%, from $232.5 million as of December 31, 2017. Spirit believes it is well-positioned for continued loan growth in its 1-4 single family residential real estate loan portfolio based on its strategic presence in the Houston and Dallas/Fort Worth metropolitan areas, which are expected to continue to benefit from favorable economic conditions.

Construction, land and development loans

With respect to loans to developers and builders, Spirit generally requires the borrower to have a proven record of success and expertise in the building industry. Construction loans are underwritten utilizing feasibility studies, independent appraisal reviews, sensitivity analysis of absorption and lease rates and financial analysis of the developers and property owners. Construction loans are generally based upon estimates of costs and value associated with the complete project. These estimates may be inaccurate. Construction loans often involve the disbursement of substantial funds with repayment primarily dependent on the success of the ultimate project.

Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders, sales of developed property or an interim loan commitment from Spirit until permanent financing is obtained. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, governmental regulation of real property, general economic conditions and the availability of long-term financing. Due to the nature of the real estate industry, we evaluate the borrower’s ability to service the interest of the debt from other sources other than the sale of the constructed property.

Construction loans totaled $155.8 million as of September 30, 2018 and represented an increase of $16.3 million, or 11.7%, from $139.5 million as of December 31, 2017. Spirit believes it is well-positioned for continued loan growth in its construction, land and development loan portfolio based on its strategic presence in the Houston and Dallas/Fort Worth metropolitan areas, which are expected to continue to benefit from favorable economic conditions.

Commercial real estate loans

Commercial real estate loans are subject to underwriting standards and processes similar to commercial loans. Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally largely dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan.

Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. Management monitors and evaluates commercial real estate loans based on collateral and risk grade criteria. As a general rule, Spirit avoids financing special use projects unless strong secondary support is present to help mitigate risk.

Commercial real estate loans consist of owner and nonowner-occupied commercial real estate loans, multifamily loans and farmland. Total commercial real estate loans of $324.2 million as of September 30, 2018 represented an increase of $38.5 million, or 13.5%, from $285.7 million as of December 31, 2017. Spirit believes it is well-positioned for continued loan growth in its commercial real estate loan portfolio based on its strategic presence in the Houston and Dallas/Fort Worth metropolitan areas, which are expected to continue to benefit from favorable economic conditions.

Consumer loans and leases

Spirit’s non-real estate consumer loans are based on the borrower’s proven earning capacity over the term of the loan. Spirit monitors payment performance periodically for consumer loans to identify any deterioration in

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the borrower’s financial strength. To monitor and manage consumer loan risk, management develops and adjusts policies and procedures as needed. This activity, coupled with a relatively small volume of consumer loans, minimizes risk.

All of Spirit’s leases are related to the financing of vehicle leases to individuals. These loans are originated by a well-known third party leasing company and subsequently purchased by Spirit after its final credit review. Spirit limits its exposure to individuals living in Texas, within its defined local markets.

Consumer loans and leases totaled $18.2 million as of September 30, 2018 and represented a decrease of $4.6 million, or 20.1%, from $22.7 million as of December 31, 2017. Spirit has not actively grown its consumer portfolio because it believes current pricing on these loans does not adequately cover the inherent risk.

Municipal and other loans

Municipal and other loans consist primarily of loans made to municipalities and emergency service, hospital and school districts as well as agricultural loans.

Spirit make loans to municipalities and emergency service, hospital and school districts primarily throughout Texas. The majority of these loans have tax or revenue pledges and in some cases are additionally supported by collateral. Municipal loans made without a direct pledge of taxes or revenues are usually made based on some type of collateral that represents an essential service. Lending money directly to these municipalities allows Spirit to earn a higher yield for similar durations than it could if it purchased municipal securities. Total loans to municipalities and emergency service, hospital and school districts and others were $51.5 million as of September 30, 2018 and represented a decrease of $2.1 million, or 4.0%, from $53.6 million as of December 31, 2017. Spirit has not actively grown its municipal loan portfolio as the impact of the recent Tax Reform has resulted in unfavorable pricing on these loans.

Asset Quality

The following table sets forth the composition of Spirit’s nonperforming assets, including nonaccrual loans, accruing loans 90 days or more days past due, other real estate owned and repossessed assets and restructured loans as of the dates indicated:

	September 30, 2018		December 31, 2017
	(Dollars in thousands)
Nonperforming assets
Nonaccrual loans:
Commercial and industrial loans	$	2,421	$	1,927
Real estate:
1-4 single family residential loans		825		1,135
Construction, land and development loans		—		—
Commercial real estate loans (including multifamily)		—		447
Consumer loans and leases		72		53
Municipal and other loans		—		—
Total nonaccrual loans		3,318		3,562
Accruing loans 90 days or more past due		426		33
Total nonperforming loans		3,744		3,595
Other real estate owned and repossessed assets		289		21
Total nonperforming assets	$	4,033	$	3,616
Restructured loans(1)	$	218	$	270

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(1) Restructured loans represent the balance at the end of the respective period for those performing loans modified in a troubled debt restructuring that are not already presented as a nonperforming loan.

Nonperforming loans totaled $3.7 million at September 30, 2018, an increase of $149 thousand, or 4.1%, from $3.6 million at December 31, 2017. Nonperforming assets totaled $4.0 million at September 30, 2018, an increase of $417 thousand, or 11.5%, from $3.6 million at December 31, 2017.

Spirit classifies loans as past due when the payment of principal or interest is greater than 30 days delinquent based on the contractual next payment due date. Spirit’s policies related to when loans are placed on nonaccrual status conform to guidelines prescribed by bank regulatory authorities. Loans are placed on nonaccrual status when it is probable that principal or interest is not fully collectible, or when principal or interest becomes 90 days past due, whichever occurs first. Loans are removed from nonaccrual status when they become current as to both principal and interest and concern no longer exists as to the collectability of principal and interest.

Loans are identified for restructuring based on their delinquency status, risk rating downgrade, or at the request of the borrower. Borrowers that are 90 days delinquent and/or have a history of being delinquent, or experience a risk rating downgrade, are contacted to discuss options to bring the loan current, cure credit risk deficiencies, or other potential restructuring options that will reduce the inherent risk and improve collectability of the loan. In some instances, a borrower will initiate a request for loan restructure. Spirit requires borrowers to provide current financial information to establish the need for financial assistance and satisfy applicable prerequisite conditions required by Spirit. Spirit may also require the borrower to enter into a forbearance agreement.

Modification of loan terms may include the following: reduction of the stated interest rate; extension of maturity date or other payment dates; reduction of the face amount or maturity amount of the loan; reduction in accrued interest; forgiveness of past-due interest; or a combination of the foregoing.

Spirit engages an external consulting firm to complete an independent loan review and validate its credit risk program on a periodic basis. Results of these reviews are presented to management. The loan review process complements and reinforces the risk ratings and credit quality assessment decisions made by lenders and credit personnel, as well as Spirit’s policies and procedures.

The following table sets forth Spirit’s asset and credit quality ratios for the periods presented:

	September 30, 2018			December 31, 2017
Asset and Credit Quality Ratios
Nonperforming loans to loans held for investment(1)		0.39	%		0.41	%
Nonperforming assets to loans plus OREO		0.42	%		0.42	%
Nonperforming assets to total assets(2)		0.37	%		0.35	%
Net charge-offs to average loans (annualized)(3)		0.14	%		0.14	%
Allowance for loan losses to nonperforming loans		164.42	%		157.22	%
Allowance for loan losses to loans held for investment		0.65	%		0.65	%

(1) Nonperforming loans include loans in nonaccrual status.

(2) Nonperforming assets include loans in nonaccrual status and other real estate owned.

(3) December 31, 2017 ratio uses year to date net charge-offs.

Analysis of the Allowance for Loan and Lease Losses

Allowance for loan and lease losses reflects management’s estimate of probable credit losses inherent in the loan portfolio. The computation of the allowance for loan and lease losses includes elements of judgment and high levels of subjectivity.

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The following tables summarize the allocation of allowance for loan and lease losses related to Spirit’s loans as of the dates and for the periods presented. This allocation is calculated on an approximate basis and is not necessarily indicative of future losses or allocations. The entire amount of the allowance is available to absorb losses occurring in any category of loans:

	Allowance Rollforward
Three Months Ended September 30, 2018	Beginning Balance		Charge-offs			Recoveries		Provision			Ending Balance
	(Dollars in thousands)
Commercial and industrial loans	$	4,886	$	(275	)	$	4	$	76		$	4,691
Real estate:
1-4 single family residential loans		318		—			—		(216	)		102
Construction, land and development loans		195		—			—		256			451
Commercial real estate loans (including multifamily)		233		—			—		495			728
Consumer loans and leases		346		(74	)		—		(90	)		182
Municipal and other loans		37		—			—		(35	)		2
Ending allowance balance	$	6,015	$	(349	)	$	4	$	486		$	6,156

	Allowance Rollforward
Three Months Ended September 30, 2017	Beginning Balance		Charge-offs			Recoveries		Provision			Ending Balance
	(Dollars in thousands)
Commercial and industrial loans	$	2,582	$	(15	)	$	—	$	20		$	2,587
Real estate:
1-4 single family residential loans		732		—			—		201			933
Construction, land and development loans		412		—			—		103			515
Commercial real estate loans (including multifamily)		800		—			—		255			1,055
Consumer loans and leases		204		(16	)		—		(15	)		173
Municipal and other loans		161		—			—		40			201
Ending allowance balance	$	4,891	$	(31	)	$	—	$	604		$	5,464

	Allowance Rollforward
Nine Months Ended September 30, 2018	Beginning Balance		Charge-offs			Recoveries		Provision			Ending Balance
	(Dollars in thousands)
Commercial and industrial loans	$	3,046	$	(920	)	$	73	$	2,492		$	4,691
Real estate:
1-4 single family residential loans		902		(5	)		—		(795	)		102
Construction, land and development loans		441		—			—		10			451
Commercial real estate loans (including multifamily)		898		—			—		(170	)		728
Consumer loans and leases		198		(104	)		—		88			182
Municipal and other loans		167		—			—		(165	)		2
Ending allowance balance	$	5,652	$	(1,029	)	$	73	$	1,460		$	6,156

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	Allowance Rollforward
Nine Months Ended September 30, 2017	Beginning Balance		Charge-offs			Recoveries		Provision		Ending Balance
	(Dollars in thousands)
Commercial and industrial loans	$	2,347	$	(555	)	$	2	$	793	$	2,587
Real estate:
1-4 single family residential loans		647		—			—		286		933
Construction, land and development loans		364		—			—		151		515
Commercial real estate loans (including multifamily)		667		(15	)		—		403		1,055
Consumer loans and leases		186		(129	)		—		116		173
Municipal and other loans		146		—			—		55		201
Ending allowance balance	$	4,357	$	(699	)	$	2	$	1,804	$	5,464

In determining the allowance for loan and lease losses, Spirit estimates losses on specific loans, or groups of loans, where the probable loss can be identified and reasonably determined. The balance of the allowance for loan and lease losses is based on internally assigned risk classifications of loans, historical loan loss rates, changes in the nature of the loan portfolio, overall portfolio quality, industry concentrations, delinquency trends, current economic factors and the estimated impact of current economic conditions on certain historical loan loss rates.

During 2017, Spirit refined its allowance for loan loss methodology based upon management’s judgment and applicable regulatory guidance. The calculation of reserves on loans collectively evaluated for impairment was altered to reflect five years of historical loss experience which more appropriately matches the weighted average life of loans in the portfolio. Additionally, the calculated historical loss experience is now allocated across the portfolio’s risk rates using a probability of default curve constructed from the Bank’s historical default data. Spirit also updated the qualitative component of the reserve on loans collectively evaluated for impairment to allow for a greater sensitivity to current trends.

Prior to the second quarter of 2018, Spirit was utilizing a peer bank allowance coverage ratio in the qualitative reserve calculation, as it did not have enough historical defaults to rely on its own loss factors. As of September 30, 2018, Spirit had a sufficient amount of defaults over the five year lookback period to transition over to relying more on its own historical loss data versus peer data. While this did not result in a significant change to the allowance for loan and lease losses as a whole, it continues to impact the provision for certain loan categories that Spirit had experienced more historical defaults.

The allowance for loan and lease losses increased to $6.2 million at September 30, 2018 as compared to $5.7 million at December 31, 2017. The allowance for loan and lease losses as a percentage of nonperforming loans and allowance for loan and lease losses as a percentage of loans held for investment was 164.42% and 0.65%, respectively, as of September 30, 2018, compared to 157.22% and 0.65%, respectively, as of December 31, 2017.

Net loan charge-offs for the three months ended September 30, 2018 totaled $345 thousand, an increase from $31 thousand of net loan charge-offs for the same period of 2017. Net loan charge-offs for the nine months ended September 30, 2018 totaled $956 thousand, a decrease from $697 thousand of net loan charge-offs for the same period of 2017.

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The following table provides the allocation of the allowance for loan and lease losses as of the dates presented:

	September 30, 2018					December 31, 2017
	Amount		% Loans in each category			Amount		% Loans in each category
	(Dollars in thousands)
Commercial and industrial loans	$	4,691		16.8	%	$	3,046		15.5	%
Real estate:
1-4 single family residential loans		102		25.6	%		902		26.8	%
Construction, land and development loans		451		16.3	%		441		16.0	%
Commercial real estate loans (including multifamily)		728		34.0	%		898		32.9	%
Consumer loans and leases		182		1.9	%		198		2.6	%
Municipal and other loans		2		5.4	%		167		6.2	%
Total	$	6,156		100.0	%	$	5,652		100.0	%

Deposits

Spirit expects deposits to be its primary funding source in the future as it optimizes its deposit mix by continuing to shift its deposit composition from higher cost time deposits to lower cost demand deposits. Non-time deposits include demand deposits, NOW accounts, and savings and money market accounts.

The following table shows the deposit mix as of the dates presented:

	September 30, 2018					December 31, 2017
	Amount		% of Total			Amount		% of Total
	(Dollars in thousands)
Noninterest-bearing demand deposits	$	207,727		23.8	%	$	176,726		21.2	%
Interest-bearing NOW accounts		7,865		0.9	%		7,318		0.9	%
Savings and money market accounts		214,380		24.6	%		243,173		29.1	%
Time deposits		442,638		50.7	%		408,151		48.8	%
Total deposits	$	872,610		100.0	%	$	835,368		100.0	%

Total deposits at September 30, 2018 were $872.6 million, an increase of $37.2 million, or 4.5%, from total deposits at December 31, 2017 of $835.4 million.

The average cost of deposits for the three months ended September 30, 2018 was 1.02%. This represents an increase of 23 basis points compared to the average cost of deposits of 0.79% for the three months ended September 30, 2017. The increase in cost of deposits was primarily attributable to the increase in interest rates by the Federal Open Market Committee during 2017 and 2018. For the three months ended September 30, 2018, the average rate paid on time deposits was 1.67% compared to 1.26% for the three months ended September 30, 2017.

The average cost of deposits for the nine months ended September 30, 2018 was 0.93%. This represents an increase of 14 basis points compared to the average cost of deposits of 0.79% for the nine months ended September 30, 2017. The increase in cost of deposits was primarily attributable to the increase in interest rates by the Federal Open Market Committee during 2017 and 2018. For the nine months ended September 30, 2018, the average rate paid on time deposits was 1.50% compared to 1.21% for the nine months ended September 30, 2017.

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The following table shows the remaining maturity of time deposits of $100,000 and greater as of the date indicated:

	September 30, 2018
	(Dollars in thousands)
Time deposits $100,000 or greater with remaining maturity of:
Three months or less	$	56,315
After three months through six months		64,840
After six months through twelve months		93,848
After twelve months		131,841
Total	$	346,844

Borrowings

In addition to deposits, Spirit utilizes advances from the FHLB and other borrowings as a supplementary funding source to finance its operations.

FHLB borrowings: The FHLB allows Spirit to borrow, both short and long-term, on a blanket floating lien status collateralized by certain securities and loans. As of September 30, 2018 and December 31, 2017, total remaining borrowing capacity of $293.3 million and $274.0 million, respectively, was available under this arrangement.

Line of credit: Spirit entered into a line of credit with a third party lender in May 2017 that allows it to borrow up to $20 million. The interest rate on this line of credit is based upon 90-day LIBOR plus 4.0%, and unpaid principal and interest is due at the stated maturity of May 12, 2022. This line of credit is secured by a pledge of all of the common stock of the Bank. This line of credit may be prepaid at any time without penalty, so long as such prepayment includes the payment of all interest accrued through the date of the repayments, and, in the case of prepayment of the entire loan, the amount of attorneys’ fees and disbursements of the lender. On May 8, 2018, Spirit used $7.8 million of net proceeds from its initial public offering to repay in full this line of credit, plus accrued and unpaid interest. At September 30, 2018, total borrowing capacity of $20.0 million was available under this line of credit.

Total borrowings consisted of the following as of the dates presented:

	September 30, 2018		December 31, 2017
	(Dollars in thousands)
Short-term FHLB borrowings	$	10,000	$	15,000
Long-term FHLB borrowings		64,961		68,623
Third party lender line of credit		—		7,788
Total borrowings	$	74,961	$	91,411

At September 30, 2018, total borrowings were $75.0 million, a decrease of $16.5 million, or 18.0%, from $91.4 million at December 31, 2017.

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Short-term borrowings consist of debt with maturities of one year or less. Spirit’s short-term borrowings consist of FHLB borrowings and a third party line of credit. The following table is a summary of short-term borrowings as of and for the periods presented:

	As of/For the Three Months Ended September 30,						As of/For the Nine Months Ended September 30,
	2018			2017			2018			2017
	(Dollars in thousands)
Short-term borrowings:
Maximum outstanding at any month-end during the period	$	15,000		$	12,788		$	20,000		$	40,000
Balance outstanding at end of period		10,000			12,788			10,000			12,788
Average outstanding during the period		11,957			12,723			15,128			18,810
Average interest rate during the period		1.72	%		3.74	%		1.73	%		2.28	%
Average interest rate at the end of the period		1.71	%		4.31	%		1.71	%		4.31	%

Stockholders’ Equity

The following table summarizes the changes in Spirit’s stockholders’ equity for the periods indicated:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
	(Dollars in thousands)						(Dollars in thousands)
Balance at beginning of period	$	147,986		$	96,602		$	99,139		$	92,896
Net income		2,771			2,002			7,465			4,230
Shares issued in offering, net		(161	)		—			42,058			—
Exercise of stock options and warrants		177			25			2,362			471
Stock-based compensation		181			201			506			1,361
Other comprehensive income (loss)		(61	)		(25	)		(637	)		(153	)
Balance at end of period	$	150,893		$	98,805		$	150,893		$	98,805

Net income totaled $2.8 million for the three months ended September 30, 2018, an increase of $769 thousand, compared to $2.0 million for the three months ended September 30, 2017. Spirit’s results of operations for the three months ended September 30, 2018 produced an annualized return on average assets of 1.01% compared to 0.78% for the three months ended September 30, 2017. Spirit’s results of operations for the three months ended September 30, 2018 produced an annualized return on average stockholders’ equity of 7.34% compared to 7.78% for the three months ended September 30, 2017.

Net income totaled $7.5 million for the nine months ended September 30, 2018, an increase of $3.2 million, compared to $4.2 million for the nine months ended September 30, 2017. Spirit’s results of operations for the nine months ended September 30, 2018 produced an annualized return on average assets of 0.94% compared to an annualized return on average assets of 0.56% for the nine months ended September 30, 2017. Spirit had an annualized return on average stockholders’ equity of 8.08% for the nine months ended September 30, 2018, compared to an annualized return on average stockholders’ equity of 5.64% for the nine months ended September 30, 2017.

Stockholders’ equity was $150.9 million as of September 30, 2018, an increase of $51.8 million from $99.1 million as of December 31, 2017. The increase was primarily driven by proceeds raised during Spirit’s initial public offering of $42.1 million, net income of $7.5 million and the exercise of stock options and warrants of $2.4 million during the period.

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Off-Balance Sheet Arrangements

In the normal course of business, Spirit enters into various transactions, which, in accordance with GAAP, are not included on Spirit’s consolidated balance sheets. Spirit enters into these transactions to meet the financing needs of its customers. These transactions include commitments to extend credit and commercial and standby letters of credit, which involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amounts recognized on Spirit’s consolidated balance sheets.

Spirit enters into contractual loan commitments to extend credit, normally with fixed expiration dates or termination clauses, at specified rates and for specific purposes. Since a portion of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent Spirit’s future cash requirements. Substantially all of Spirit’s commitments to extend credit are contingent upon customers maintaining specific credit standards until the time of loan funding. Spirit seeks to minimize its exposure to loss under these commitments by subjecting them to prior credit approval and ongoing monitoring procedures. Spirit assesses the credit risk associated with certain commitments to extend credit and establish a liability for probable credit losses. As of September 30, 2018 and December 31, 2017, Spirit’s reserve for unfunded commitments totaled $40 thousand.

Commercial and standby letters of credit are written conditional commitments issued by Spirit to guarantee the performance of a customer to a third party. In the event the customer does not perform in accordance with the terms of the agreement with the third party, Spirit would be required to fund the commitment. The maximum potential amount of future payments Spirit could be required to make is represented by the contractual amount of the commitment. If the commitment is funded, Spirit would be entitled to seek recovery from the customer. Spirit’s policies generally require that standby letter of credit arrangements contain security and debt covenants similar to those contained in loan agreements.

The following table summarizes Spirit’s commitments as of the dates presented:

	September 30, 2018		December 31, 2017
	(Dollars in thousands)
Unfunded loan commitments	$	142,657	$	134,536
Commercial and standby letters of credit		85		91
Total	$	142,742	$	134,627

Management believes that Spirit has adequate liquidity to meet all known contractual obligations and unfunded commitments, including loan commitments over the next twelve months. Additionally, management believes that Spirit’s off-balance sheet arrangements have not had or are not reasonably likely to have a current or future material effect on its financial condition, revenues, expenses, results of operations, liquidity, capital expenditures or capital resources.

Capital Resources

Spirit is required to comply with certain “risk-based” capital adequacy guidelines issued by the Federal Reserve and the FDIC. The risk-based capital guidelines assign varying risk weights to the individual assets held by a bank. The guidelines also assign weights to the “credit-equivalent” amounts of certain off-balance sheet items, such as letters of credit and interest rate and currency swap contracts.

Under the Basel III rules adopted by the federal bank regulatory agencies in July 2013 and effective beginning January 1, 2015, Spirit is required to maintain a leverage ratio of 4.0% (5.0% to be considered “well capitalized”), common equity tier 1 capital to risk-weighted assets ratio of 4.5% (6.5% to be considered “well capitalized”), a tier 1 capital to risk-weighted assets ratio of 6.0% (8.0% to be considered “well capitalized”), and

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a total capital to risk-weighted assets ratio of 8.0% (10.0% to be considered “well capitalized”). In addition, the risk-weighted capital ratios include a capital conservation buffer of 2.5%, which is in addition to the minimum risk-based capital standards. Institutions that do not maintain this required capital conservation buffer will become subject to progressively more stringent limitations on the percentage of earnings that can be paid out in dividends or used for stock repurchases and on the payment of discretionary bonuses to senior executive management. The capital conservation buffer is being phased in over four years beginning in 2016. Spirit has included the 1.25% and 1.875% increases for 2017 and 2018, respectively, in its minimum capital adequacy ratios in the table below. The capital conservation buffer effectively raises the minimum required common equity tier 1 capital ratio to 7.0%, the tier 1 capital ratio to 8.5%, and the total capital ratio to 10.5% on a fully phased-in basis on January 1, 2019.

The risk-based capital ratios measure the adequacy of a bank’s capital against the riskiness of its assets and off-balance sheet activities. Failure to maintain adequate capital is a basis for “prompt corrective action” or other regulatory enforcement action. In assessing a bank’s capital adequacy, regulators also consider other factors such as interest rate risk exposure; liquidity, funding and market risks; quality and level of earnings; concentrations of credit, quality of loans and investments; risks of any nontraditional activities; effectiveness of bank policies; and management’s overall ability to monitor and control risks.

The following table sets forth the regulatory capital ratios, excluding the impact of the capital conservation buffer, as of the dates indicated:

	Minimum Capital			Minimum Capital Requirement with Capital			Minimum To Be Well			September 30, 2018			December 31, 2017
	Requirement			Buffer			Capitalized			Actual			Actual
Capital ratios (Company):
Tier 1 leverage ratio		4.0	%		4.000	%		N/A			13.03	%		8.71	%
Common equity tier 1 capital ratio		4.5	%		6.375	%		N/A			14.66	%		10.07	%
Tier 1 risk-based capital ratio		6.0	%		7.875	%		N/A			14.66	%		10.07	%
Total risk-based capital ratio		8.0	%		9.875	%		N/A			15.31	%		10.72	%
Capital ratios (Bank):
Tier 1 leverage ratio		4.0	%		4.000	%		5.0	%		9.36	%		9.29	%
Common equity tier 1 capital ratio		4.5	%		6.375	%		6.5	%		10.53	%		10.74	%
Tier 1 risk-based capital ratio		6.0	%		7.875	%		8.0	%		10.53	%		10.74	%
Total risk-based capital ratio		8.0	%		9.875	%		10.0	%		11.18	%		11.39	%

At September 30, 2018, both Spirit and the Bank met all the capital adequacy requirements to which Spirit and the Bank were subject. At September 30, 2018, the Bank was “well capitalized” under the regulatory framework for prompt corrective action. Management believes that no conditions or events have occurred since September 30, 2018 that would materially adversely change such capital classifications. From time to time, Spirit may need to raise additional capital to support Spirit’s and the Bank’s further growth and to maintain the Bank’s “well capitalized” status.

As of September 30, 2018, Spirit had a tier 1 leverage ratio of 13.03%. As of September 30, 2018, the Bank had a tier 1 leverage ratio of 9.36%, which provided $46.8 million of excess capital relative to the minimum requirements to be considered “well capitalized.”

Liquidity

Liquidity involves Spirit’s ability to raise funds to support asset growth and acquisitions or reduce assets to meet deposit withdrawals and other payment obligations, to maintain reserve requirements and otherwise to operate on an ongoing basis and manage unexpected events. At September 30, 2018 and December 31, 2017,

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Spirit’s liquidity needs were primarily met by core deposits, security and loan maturities and amortizing investment and loan portfolios. Although access to brokered deposits, purchased funds from correspondent banks and overnight advances from the FHLB are available and have been utilized on occasion to take advantage of investment opportunities, Spirit does not generally rely on these external funding sources. The Bank maintained four Federal Funds lines of credit with commercial banks which provide for extensions of credit with an availability to borrow up to an aggregate $35.0 million as of September 30, 2018 and December 31, 2017. There were no advances under these lines of credit outstanding as of September 30, 2018 or December 31, 2017.

Spirit’s primary source of funds is deposits, and its primary use of funds is loans. Spirit does not expect a change in the primary source or use of its funds in the foreseeable future. Spirit predominantly invests excess deposits in overnight deposits with the Federal Reserve, securities, interest-bearing deposits at other banks or other short-term liquid investments until needed to fund loan growth. Spirit’s securities portfolio had a weighted average life of 5.45 years and an effective duration of 4.98 years as of September 30, 2018.

As of September 30, 2018, Spirit had outstanding $142.6 million in commitments to extend credit and $85 thousand in commitments associated with outstanding commercial and standby letters of credit. Since commitments associated with letters of credit and commitments to extend credit may expire unused, the total outstanding may not necessarily reflect the actual future cash funding requirements.

As of September 30, 2018, Spirit believes it had no exposure to future cash requirements associated with known uncertainties. Capital expenditures, including buildings and construction in process, for the nine months ended September 30, 2018 and 2017 were $4.0 million and $5.6 million, respectively.

For the year ended December 31, 2017 compared to the year ended December 31, 2016

Analysis of Results of Operations

Net income for the year ended December 31, 2017 totaled $4.8 million, which generated diluted earnings per common share of $0.63 for the year ended December 31, 2017. Net income for the year ended December 31, 2016 totaled $3.7 million, which generated diluted earnings per common share of $0.50 for the year ended December 31, 2016. The increase in net income was driven by an increase in interest income of $6.7 million that was primarily attributable to loan growth, partially offset by an increase in interest expense of $1.6 million, which was mainly the result of increased interest expense on deposits and increased rates on FHLB advances and other borrowings. Spirit’s results of operations for the year ended December 31, 2017 produced a return on average assets of 0.47% and an adjusted return on average assets of 0.55% compared to a return on average assets of 0.41% for the year ended December 31, 2016. Spirit had a return on average stockholders’ equity of 4.88% and an adjusted return on average stockholders’ equity of 5.74% compared to a return on average stockholders’ equity of 4.09% for the year ended December 31, 2016.

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Net Interest Income and Net Interest Margin

The following table presents, for the periods indicated, information about (i) average balances, the total dollar amount of interest income from interest-earning assets and the resultant average yields; (ii) average balances, the total dollar amount of interest expense on interest-bearing liabilities and the resultant average rates; (iii) the interest rate spread; (iv) net interest income and margin; and (v) net interest income and margin (tax equivalent). Interest earned on loans that are classified as nonaccrual is not recognized in income, however the balances are reflected in average outstanding balances for that period. Any nonaccrual loans have been included in the table as loans carrying a zero yield.

	Years Ended December 31,
	2017							2016
	Average Balance(1)		Interest/ Expense		Yield/ Rate			Average Balance(1)		Interest/ Expense		Yield/ Rate
	(Dollars in thousands)
Interest-earning assets:
Interest-earning deposits in other banks	$	82,630	$	847		1.03	%	$	104,763	$	508		0.49	%
Loans, including loans held for sale(2)		830,664		45,411		5.47			718,291		39,455		5.49
Investment securities and other		29,731		649		2.18			16,055		247		1.54
Total interest-earning assets		943,025		46,907		4.97			839,109		40,210		4.79
Noninterest-earning assets		65,539							64,833
Total assets	$	1,008,564						$	903,942
Interest-bearing liabilities:
Interest-bearing NOW accounts	$	8,419	$	13		0.15	%	$	9,668	$	14		0.15	%
Savings and money market accounts		233,574		1,348		0.58			189,516		972		0.51
Time deposits		426,787		5,241		1.23			388,386		4,496		1.16
FHLB advances and other borrowings		77,153		1,726		2.24			83,527		1,248		1.49
Total interest-bearing liabilities		745,933		8,328		1.12			671,097		6,730		1.00
Noninterest-bearing liabilities and shareholders’ equity:
Noninterest-bearing demand deposits		162,722							132,801
Other liabilities		2,503							9,273
Stockholders’ equity		97,406							90,771
Total liabilities and stockholders’ equity	$	1,008,564						$	903,942
Net interest rate spread						3.85	%						3.79	%
Net interest income and margin			$	38,579		4.09	%			$	33,480		3.99	%
Net interest income and margin (tax equivalent)(3)			$	39,514		4.19	%			$	34,291		4.09	%

(1) Average balances presented are derived from daily average balances.

(2) Includes loans on nonaccrual status.

(3) In order to make pretax income and resultant yields on tax-exempt loans comparable to those on taxable loans, a tax-equivalent adjustment has been computed using a federal tax rate of 34% for the years ended December 31, 2017 and 2016, which is a non-GAAP financial measure. See Spirit’s reconciliation of non-GAAP financial measures to their most directly comparable GAAP financial measures in the section of this document entitled “—Non-GAAP Financial Measures.”

Increases and decreases in interest income and interest expense result from changes in average balances (volume) of interest-earning assets and liabilities, as well as changes in average interest rates. The following table

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shows the effect that these factors had on the interest earned on Spirit’s interest-earning assets and the interest incurred on its interest-bearing liabilities for the periods indicated. The effect of changes in volume is determined by multiplying the change in volume by the prior period’s average rate. Similarly, the effect of rate changes is calculated by multiplying the change in average rate by the previous period’s volume.

A summary of increases and decreases in interest income and interest expense resulting from changes in average balances (volume) and average interest rates follows:

	Years Ended December 31, 2017       compared to 2016
	Increase (Decrease) Due to
	Volume(1)			Rate(1)			Total
	(Dollars in thousands)
Interest-earning assets:
Interest-earning deposits in other banks	$	(127	)	$	466		$	339
Loans, including loans held for sale(2)		6,102			(146	)		5,956
Investment securities and other		270			132			402
Total change in interest income	$	6,245		$	452		$	6,697
Interest-bearing liabilities:
Interest-bearing NOW accounts		(1	)		—			(1	)
Savings and money market accounts		236			140			376
Time deposits		462			283			745
FHLB advances and other borrowings		(102	)		580			478
Total change in interest expenses		595			1,003			1,598
Total change in net interest income	$	5,650		$	(551	)	$	5,099

(1) Variances attributable to both volume and rate are allocated on a consistent basis between rate and volume based on the absolute value of the variances in each category.

(2) Includes loans on nonaccrual status.

Net interest income was $38.6 million for the year ended December 31, 2017 compared to $33.5 million for the year ended December 31, 2016, representing an increase of $5.1 million, or 15.2%. The increase in net interest income was primarily due to an increase in interest income of $6.7 million partially offset by an increase in interest expense of $1.6 million. Interest income on loans increased by $6.0 million for the year ended December 31, 2017. The growth in average loans of $112.4 million, including loans held for sale, for the year ended December 31, 2017, was the primary driver of the increase in interest income on loans, partially offset by a decrease in average rate on loans of 2 basis points over the same period.

Interest expense was $8.3 million for the year ended December 31, 2017 compared to $6.7 million for the year ended December 31, 2016, representing an increase of $1.6 million, or 23.7%. This increase was mainly due to an increase in interest expense on deposits and FHLB borrowings. Interest expense on deposits totaled $6.6 million for the year ended December 31, 2017 compared to $5.5 million for the year ended December 31, 2016, representing an increase of $1.1 million, resulting primarily from an increase in the average volume of deposits of $81.2 million. Cost of funds, which Spirit defines as the average interest rate paid on deposits, increased 4 basis points for the year ended December 31, 2017 compared to the year ended December 31, 2016.

The average cost of deposits for the year ended December 31, 2017 was 0.80%. This represents an increase of 4 basis points compared to the average cost of deposits of 0.76% for the year ended December 31, 2016. The increase in cost of deposits was primarily attributable to the increase in interest rates by the Federal Open Market Committee during 2017. For the year ended December 31, 2017, the average rate paid on time deposits was 1.23% compared to 1.16% for the year ended December 31, 2016.

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Interest expense on FHLB advances and other borrowings increased by $478 thousand for the year ended December 31, 2017 compared to the year ended December 31, 2016. The increase was primarily attributable to an increase in the average rate paid on FHLB advances and other borrowings of 75 basis points for the year ended December 31, 2017. The increase in the average rate on borrowings was primarily attributable to rising interest rates during 2017 as well as an increase in the average maturity of Spirit’s FHLB advances and other borrowings.

The net interest margin was 4.09% for the year ended December 31, 2017 compared to 3.99% for the year ended December 31, 2016, representing an increase of 10 basis points. The tax equivalent net interest margin was 4.19% for the year ended December 31, 2017 compared to 4.09% for the year ended December 31, 2016, representing an increase of 10 basis points. The average yield on interest-earning assets increased by 18 basis points for the year ended December 31, 2017 compared to the year ended December 31, 2016 while the average rate paid on interest-bearing liabilities increased by 12 basis points, resulting in a 6 basis point increase in the interest rate spread. The increase in both net interest margin and interest rate spread primarily resulted from the increased average loan balance of $112.4 million for the year ended December 31, 2017, combined with flat loan yields for the years ended December 31, 2017 and 2016.

Provision for Loan Losses

The provision for loan losses represents the amount determined by management to be necessary to maintain the allowance for loan and lease losses at a level capable of absorbing inherent losses in the loan portfolio. See the discussion under “—Critical Accounting Policies—Allowance for Loan and Lease Losses.” Spirit’s management and the Spirit board of directors review the adequacy of the allowance for loan and lease losses on a quarterly basis. The allowance for loan and lease losses calculation is segregated by call report code and then further segregated into various segments that include classified loans, loans with specific allocations and pass rated loans. A pass rated loan is generally characterized by a very low to average risk of default and in which management perceives there is a minimal risk of loss. Loans are rated using a nine-point risk grade scale by loan officers that are subject to validation by a third party loan review or Spirit’s internal credit committee. Risk ratings are categorized as pass, watch, special mention, substandard, doubtful and loss, with some general allocation of reserves based on these grades. Impaired loans are reviewed specifically and separately under the FASB ASC 310, “Receivables”, to determine the appropriate reserve allocation. Spirit’s management compares the investment in an impaired loan with the present value of expected future cash flow discounted at the loan’s effective interest rate, the loan’s observable market price or the fair value of the collateral, if the loan is collateral-dependent, to determine the specific reserve allowance. Reserve percentages assigned to non-impaired loans are based on historical charge-off experience adjusted for other risk factors. To evaluate the overall adequacy of the allowance to absorb losses inherent in its loan portfolio, Spirit’s management considers historical loss experience based on volume and types of loans, trends in classifications, volume and trends in delinquencies and nonaccruals, economic conditions and other pertinent information. Based on future evaluations, additional provisions for loan losses may be necessary to maintain the allowance for loan and lease losses at an appropriate level.

The provision for loan losses was $2.5 million for the year ended December 31, 2017 and $1.6 million for the year ended December 31, 2016. The increase of the provision for the year ended December 31, 2017 was primarily due to organic loan growth and total net charge-offs of $1.2 million during 2017 primarily in Spirit’s SBA loan portfolio. These losses were anticipated and provided for as the SBA loan portfolio matures. Additionally, Spirit’s management performed a loan level assessment of the effects of Hurricane Harvey and determined that no increases in its reserves were necessary. Spirit will continue to actively monitor these credits.

Spirit’s management maintains a proactive approach in managing nonperforming loans, which were $3.6 million, or 0.41% of loans held for investment, at December 31, 2017, and $3.8 million, or 0.49% of loans held for investment, at December 31, 2016. During 2017, Spirit had net charged-off loans totaling $1.2 million, compared to net charged-off loans of $336 thousand for the year ended December 31, 2016. The ratio of net

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charged-off loans to average loans was 0.14% for 2017 compared to 0.05% for 2016. The allowance for loan and lease losses totaled $5.7 million, or 0.65% of loans held for investment, at December 31, 2017, compared to $4.4 million, or 0.56% of loans held for investment, at December 31, 2016. The ratio of allowance for loan and lease losses to nonperforming loans was 157.22% at December 31, 2017, compared to 114.45% at December 31, 2016.

Noninterest Income

Spirit’s noninterest income includes the following: (i) service charges and fees; (ii) SBA loan servicing fees; (iii) mortgage referral fees; (iv) gain on the sales of loans, net; (v) gain (loss) on sales of premises and equipment; (vi) gain (loss) on sales of investment securities; and (vii) other.

The following table presents a summary of noninterest income by category, including the percentage change in each category, for the periods indicated:

	Years Ended December 31,
	2017			2016 Restated		Change from the Prior Year
	(Dollars in thousands)
Noninterest income:
Service charges and fees	$	1,501		$	1,216		23.4	%
SBA loan servicing fees		1,794			1,831		(2.0	)
Mortgage referral fees		634			751		(15.6	)
Gain on sales of loans, net		5,684			4,437		28.1
Gain (loss) on sales of premises and equipment		(45	)		21		(314.3	)
Gain (loss) on sales of investment securities		—			69		(100.0	)
Other noninterest income		70			17		311.8
Total noninterest income	$	9,638		$	8,342		15.5	%

For the year ended December 31, 2017, noninterest income totaled $9.6 million, a $1.3 million, or 15.5%, increase from $8.3 million for the prior year. This increase was primarily due to an increase in gain on sales of loans, net of $1.2 million and an increase of $285 thousand in service charges and fees.

Gain on sales of loans, net, was $5.7 million for the year ended December 31, 2017 compared to $4.4 million for the year ended December 31, 2016, primarily due to increased volume of SBA loan originations.

Service charges and fees were $1.5 million for the year ended December 31, 2017 compared to $1.2 million for the year ended December 31, 2016. The $285 thousand increase was due to improved treasury management services through more product offerings.

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Noninterest Expense

Noninterest expenses have increased at a nominal rate of 7.2% from 2016, as Spirit has managed the growth of its infrastructure in anticipation of further growth . The following table presents a summary of noninterest expenses by category, including the percentage change in each category, for the periods indicated:

	Years Ended December 31,
	2017		2016 Restated		Change from the Prior Year
	(Dollars in thousands)
Noninterest expense:
Salaries and employee benefits	$	23,338	$	21,094		10.6	%
Occupancy and equipment expenses		5,123		4,736		8.2
Loan and other real estate related expenses		254		30		746.7
Professional services		1,845		1,745		5.7
Data processing and network		1,266		1,518		(16.6	)
Regulatory assessments and insurance		924		742		24.5
Amortization of intangibles		703		671		4.8
Advertising		551		303		81.8
Marketing		579		634		(8.7	)
Telephone expense		409		606		(32.5	)
Other operating expenses		2,410		2,802		(14.0	)
Total noninterest expense	$	37,402	$	34,881		7.2	%

For the year ended December 31, 2017, noninterest expenses totaled $37.4 million, a $2.5 million, or 7.2%, increase from $34.9 million for the prior year. This increase was primarily due to increases in salaries and employee benefits of $2.2 million, occupancy and equipment expenses of $387 thousand, advertising expenses of $248 thousand and increases in loan and other real estate related expenses of $224 thousand. These expenses were partially offset by decreases in other operating expenses of $392 thousand and data processing and network expenses of $252 thousand.

Salaries and employee benefits totaled $23.3 million for the year ended December 31, 2017, which included $1.5 million of stock-based compensation expense. By comparison, salaries and employee benefits totaled $21.1 million for the year ended December 31, 2016, which included $1.1 million of stock-based compensation expense. During 2017, Spirit incurred a one-time expense of $757 thousand in connection with the accelerated vesting of all stock options held by the Spirit board of directors and the board of directors of Spirit Bank approved by the Spirit board of directors in February 2017. Additionally, Spirit hired several key employees during 2017.

Occupancy and equipment expenses increased $387 thousand for the year ended December 31, 2017 compared to the year ended December 31, 2016, primarily due to the increased depreciation taken on two additional buildings purchased in September and November of 2017 in the Dallas/Fort Worth area.

Advertising expense increased $248 thousand for the year ended December 31, 2017 compared to the year ended December 31, 2016 primarily due to additional marketing efforts to drive loan growth within the SBA portfolio. Loan and other real estate related expenses increased $224 thousand for the year ended December 31, 2017 compared to the year ended December 31, 2016 due to increased loan growth.

Other operating expense decreased $392 thousand for the year ended December 31, 2017 compared to the year ended December 31, 2016, primarily due to Spirit’s efforts to reduce operating expenses.

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Data processing and network expense decreased $252 thousand for the year ended December 31, 2017 compared to the year ended December 31, 2016, primarily due to improved contract terms with Spirit’s outsourced IT provider.

Income Tax Expense

The provision for income taxes includes both federal and state taxes. Fluctuations in effective tax rates reflect the differences in the inclusion or deductibility of certain income and expenses for income tax purposes. Spirit’s future effective income tax rate will fluctuate based on the mix of taxable and tax-free investments Spirit makes, periodic increases in surrender value of BOLI policies for certain former executive officers and its overall taxable income.

Income tax expense was $3.6 million, an increase of $2.0 million for the year ended December 31, 2017 compared income tax expense of $1.6 million for to the year ended December 31, 2016. Spirit’s effective tax rates for the years ended December 31, 2017 and 2016 were 43.0% and 30.2%, respectively, primarily due to the impact of changes in the United States tax law during the year ended December 31, 2017. On December 22, 2017, the Tax Reform was enacted, resulting in significant modifications to existing U.S. tax law. Spirit completed the accounting for the effects of the Tax Reform during the quarter ended December 31, 2017. Spirit’s financial statements for the year ended December 31, 2017 reflect certain effects of the Tax Reform, which include a reduction in the corporate tax rate from 34.0% to 21.0%. As a result of the changes to tax laws and tax rates under the Tax Reform, Spirit incurred incremental income tax expense of $834 thousand during the year ended December 31, 2017, which consisted primarily of the remeasurement of deferred tax assets and liabilities based on the change in the tax rate from 34.0% to 21.0%. The remaining portion of the increase in income tax expense is primarily related to increased net income during the year ended December 31, 2017.

Financial Condition

Spirit’s total assets increased $49.8 million, or 5.1%, from $980.5 million as of December 31, 2016 to $1.03 billion as of December 31, 2017. Spirit’s asset growth was mainly due to the execution of its growth strategy resulting in new customer accounts and growth in balances from existing loan and deposit customers.

Investment Securities

Spirit uses its securities portfolio to provide a source of liquidity, provide an appropriate return on funds invested, manage interest rate risk, meet collateral requirements and meet regulatory capital requirements. The balance in Spirit’s securities portfolio as of December 31, 2016 was $5 thousand following the liquidation of its securities portfolio to generate funds to finance its increased loan demand. Spirit uses cash on hand and funds from operations to increase its securities portfolio in 2017. The balance in Spirit’s securities portfolio as of December 31, 2017 was $37.2 million. In accordance with regulatory and accounting requirements, Spirit is prohibited from classifying security purchases as held-to-maturity for a period of two years. The average balance of the securities portfolio including FHLB and TIB stock for the years ended December 31, 2017 and 2016 was $29.7 million and $16.1 million, respectively, with a pre-tax yield of 2.18% and 1.54%, respectively. Spirit held 50 securities classified as available for sale with an amortized cost of $37.9 million as of December 31, 2017.

Management evaluates securities for OTTI at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. No securities were determined to be OTTI as of December 31, 2017 and 2016.

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The following table summarizes Spirit’s available for sale securities portfolio as of the dates presented.

	As of December 31,
	2017				2016
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(Dollars in thousands)
Available for sale:
U.S. Government agencies	$	2,010	$	1,949	$	—	$	—
Residential mortgage-backed securities		30,156		29,629		5		5
Corporate bonds and other debt securities		5,711		5,665		—		—
Total available for sale	$	37,877	$	37,243	$	5	$	5

The following tables show contractual maturities and the weighted average yields on Spirit’s investment securities as of the dates presented. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Weighted average yields are not presented on a taxable equivalent basis:

	Maturity as of December 31, 2017
	One Year or Less					One to Five Years					Five to Ten Years					After Ten Years
	Amortized Cost		Weighted Average Yield			Amortized Cost		Weighted Average Yield			Amortized Cost		Weighted Average Yield			Amortized Cost		Weighted Average Yield
	(Dollars in thousands)
Available for sale:
U.S. Government agencies	$	—		—	%	$	—		—	%	$	1,535		2.18	%	$	475		2.99	%
Residential mortgage-backed securities		—		—			2		2.75			—		—			30,154		2.01
Corporate bonds and other debt securities		—		—			4,142		2.45			1,569		2.72			—		—
Total available for sale	$	—		—	%	$	4,144		2.45	%	$	3,104		2.45	%	$	30,629		2.03	%

	Maturity as of December 31, 2016
	One Year or Less					One to Five Years					Five to Ten Years					After Ten Years
	Amortized Cost		Weighted Average Yield			Amortized Cost		Weighted Average Yield			Amortized Cost		Weighted Average Yield			Amortized Cost		Weighted Average Yield
	(Dollars in thousands)
Available for sale:
U.S. Government agencies	$	—		—	%	$	—		—	%	$	—		—	%	$	—		—	%
Residential mortgage-backed securities		—		—			—		—			3		2.22			2		4.52
Corporate bonds and other debt securities		—		—			—		—			—		—			—		—
Total available for sale	$	—		—	%	$	—		—	%	$	3		2.22	%	$	2		4.52	%

As a member institution of the FHLB and TIB, Spirit Bank is required to own capital stock in the FHLB and TIB. As of December 31, 2017 and 2016, Spirit Bank held approximately $4.8 million and $4.7 million,

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respectively, in FHLB and TIB bank stock. No market exists for this stock, and Spirit Bank’s investment can be liquidated only through repurchase by the FHLB or TIB. Such repurchases have historically been at par value. Spirit monitors its investment in FHLB and TIB stock for impairment through review of recent financial results, dividend payment history and information from credit agencies. As of December 31, 2017 and 2016, Spirit’s management did not identify any indicators of impairment of FHLB and TIB stock.

Except for securities issued by U.S. government agencies, Spirit did not have any concentrations where the total outstanding balances issued by a single issuer exceed 10.0% of Spirit’s stockholders’ equity as of December 31, 2017 or 2016.

Spirit’s securities portfolio had a weighted average life of 5.00 years and an effective duration of 5.03 years as of December 31, 2017 and a weighted average life of 2.34 years and an effective duration of 1.51 years as of December 31, 2016.

Loans Held for Sale

Loans held for sale consist of the guaranteed portion of SBA loans that Spirit intends to sell after origination. Spirit’s loans held for sale were $3.8 million as of December 31, 2017 and $4.0 million as of December 31, 2016.

Loan Concentrations

Spirit’s primary source of income is interest on loans to individuals, professionals, small- and medium-sized businesses and commercial companies located in the Houston and Dallas/Fort Worth metropolitan areas. Spirit’s loan portfolio consists primarily of commercial and industrial loans, 1-4 single family residential real estate loans and loans secured by commercial real estate properties located in its primary market areas. Spirit’s loan portfolio represents the highest yielding component of its earning asset base.

Spirit’s loans of $869.1 million as of December 31, 2017 represented an increase of $96.3 million, or 12.5%, compared to $772.9 million as of December 31, 2016. This increase was primarily due to the execution of Spirit’s growth strategy and its continued penetration in its primary market areas.

Spirit’s loans as a percentage of assets were 84.4% and 78.8% as of December 31, 2017 and 2016, respectively.

The current concentrations in Spirit’s loan portfolio may not be indicative of concentrations in its loan portfolio in the future. Spirit plans to maintain a relatively diversified loan portfolio to help reduce the risk inherent in concentration in certain types of collateral. The following table summarizes the allocation of loans by type as of the dates presented.

	As of December 31,
	2017					2016 Restated
	Amount		% of Total			Amount		% of Total
	(Dollars in thousands)
Commercial and industrial loans(1)	$	135,040		15.5	%	$	117,762		15.2	%
Real estate:
1-4 single family residential loans		232,510		26.8			206,641		26.7
Construction, land and development loans		139,470		16.0			113,316		14.7
Commercial real estate loans (including multifamily)		285,731		32.9			251,870		32.6
Consumer loans and leases		22,736		2.6			26,676		3.5
Municipal and other loans		53,632		6.2			56,596		7.3
Total loans held in portfolio	$	869,119		100.0	%	$	772,861		100.0	%

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(1) Balance includes $67.1 million and 58.7 million of the unguaranteed portion of SBA loans as of December 31, 2017 and 2016, respectively.

Commercial and Industrial Loans (including SBA loans)

Commercial and industrial loans, including SBA loans, are underwritten after evaluating and understanding the borrower’s ability to repay the loan through operating profitably and effectively growing its business. Spirit’s management examines current and projected cash flows to determine the ability of the borrower to repay their obligations as agreed. Commercial loans are primarily made based on the credit quality and cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and may incorporate a personal guarantee to add strength to the credit and reduce the risk on a transaction to an acceptable level; however, some short-term loans may be made on an unsecured basis to the most credit worthy borrowers.

In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers. Due to the nature of accounts receivable and inventory secured loans, Spirit closely monitors credit availability and collateral through the use of various tools, including but not limited to borrowing-base formulas, periodic accounts receivable agings, periodic inventory audits, and/or collateral inspections.

Commercial and industrial loans, including SBA loans, totaled $135.0 million as of December 31, 2017 and represented an increase of $17.3 million, or 14.7%, from $117.8 million as of December 31, 2016. This increase was primarily due to organic growth.

SBA Loans

The primary focus of Spirit’s SBA lending program is financing well-known national franchises for which the United States generally will guarantee between 75.0% and 85.0% of the loan. Spirit is a SBA preferred lender, and originates SBA loans to national franchises in Texas and nationwide. Spirit routinely sells the guaranteed portion of SBA loans to third parties for a premium and retain the servicing rights, for which it earns a 1.0% fee, and maintains the nonguaranteed portion in its loan portfolio.

SBA loans held in Spirit’s loan portfolio totaled $67.1 million and $58.7 million at December 31, 2017 and 2016, respectively. Spirit intends to continue to expand its SBA lending program in the future.

Real estate loans

1-4 single family residential real estate loans (including loans to foreign nationals)

1-4 single family residential real estate loans, including foreign national loans, are subject to underwriting standards and processes similar to commercial and industrial loans. Spirit provides mortgages for the financing of 1-4 single family residential homes for primary occupancy, vacation or rental purposes. The borrowers on these loans generally qualify for traditional market financing. Spirit also specializes in 1-4 single family residential real estate loans to foreign national customers, in which the borrower does not qualify for traditional market financing.

Spirit defines its foreign national loans as loans to borrowers who derive more than 50.0% of their personal income from outside the United States. Spirit provides mortgages for these foreign nationals in Texas for primary occupancy or secondary homes while travelling to the United States. Because more than 50.0% of the borrower’s income is derived from outside of the United States, they do not qualify for traditional market financing. Spirit

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has developed an enhanced due diligence process for foreign national loans that includes larger down payments than a traditional mortgage, as well as minimum reserves equal to an amount of mortgage payments over a specified period held in Spirit Bank and monthly escrows for taxes and insurance.

1-4 single family residential real estate loans totaled $232.5 million as of December 31, 2017 and represented an increase of $25.9 million, or 12.5%, from $206.6 million as of December 31, 2016. Foreign national loans comprised $107.6 million, or 46.3%, of 1-4 single family residential real estate loans as of December 31, 2017, compared to $85.3 million, or 41.3%, of 1-4 single family residential real estate loans as of December 31, 2016. The increase was primarily due to increased productivity and portfolio size of existing lenders in response to an increase in market demand.

Construction, land and development loans

With respect to loans to developers and builders, Spirit generally requires the borrower to have a proven record of success and expertise in the building industry. Construction loans are underwritten utilizing feasibility studies, independent appraisal reviews, sensitivity analysis of absorption and lease rates and financial analysis of the developers and property owners. Construction loans are generally based upon estimates of costs and value associated with the complete project. These estimates may be inaccurate. Construction loans often involve the disbursement of substantial funds with repayment primarily dependent on the success of the ultimate project.

Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders, sales of developed property or an interim loan commitment from Spirit until permanent financing is obtained. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, governmental regulation of real property, general economic conditions and the availability of long-term financing. Due to the nature of the real estate industry, Spirit evaluates the borrower’s ability to service the interest of the debt from other sources other than the sale of the constructed property.

Construction loans totaled $139.5 million as of December 31, 2017 and represented an increase of $26.2 million, or 23.1%, from $113.3 million as of December 31, 2016. The increase was primarily due to an increase in market demand in Spirit’s Dallas/Fort Worth metropolitan area market as well as increased demand in its Houston metropolitan area market as a result of the stabilization of that market area.

Commercial real estate loans

Commercial real estate loans are subject to underwriting standards and processes similar to commercial loans. Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally largely dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan.

Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. Spirit’s management monitors and evaluates commercial real estate loans based on collateral and risk grade criteria. As a general rule, Spirit avoids financing special use projects unless strong secondary support is present to help mitigate risk.

Commercial real estate loans consist of owner and nonowner-occupied commercial real estate loans, multifamily loans and farmland. Total commercial real estate loans of $285.7 million as of December 31, 2017 represented an increase of $33.9 million, or 13.4%, from $251.9 million as of December 31, 2016. The increase was primarily due to increased productivity and portfolio size of existing lenders in response to an increase in market demand.

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Owner and nonowner-occupied commercial real estate loans

Owner-occupied commercial real estate loans totaled $100.6 million as of December 31, 2017, compared to $102.3 million as of December 31, 2016. Owner-occupied real estate loans comprised 35.2% and 40.6% of total commercial real estate loans as of December 31, 2017 and December 31, 2016, respectively.

Nonowner-occupied commercial real estate loans totaled $164.3 million as of December 31, 2017 compared to $136.6 million as of December 31, 2016. Nonowner-occupied commercial real estate loans comprised 57.5% and 54.2% of total commercial real estate loans as of December 31, 2017 and December 31, 2016, respectively.

Multifamily loans and Farmland

Multifamily loans totaled $18.3 million at December 31, 2017 compared to $10.3 million at December 31, 2016. Multifamily loans comprised 6.4% and 4.1% of total commercial real estate loans as of December 31, 2017 and 2016, respectively.

Multifamily loans are not a focus of Spirit Bank, and Spirit does not expect this portion of the portfolio to represent a large portion of Spirit’s growth going forward. Farmland loans totaled $2.7 million at both December 31, 2017 and 2016.

Consumer loans and leases

Spirit’s non-real estate consumer loans are based on the borrower’s proven earning capacity over the term of the loan. Spirit monitors payment performance periodically for consumer loans to identify any deterioration in the borrower’s financial strength. To monitor and manage consumer loan risk, management develops and adjusts policies and procedures as needed. This activity, coupled with a relatively small volume of consumer loans, minimizes risk.

All of Spirit’s leases are related to the financing of vehicle leases to individuals. These loans are originated by a well-known third party leasing company and subsequently purchased by Spirit after its final credit review. Spirit limits its exposure to individuals living in Texas, within its defined local markets.

Consumer loans and leases totaled $22.7 million as of December 31, 2017 and represented a decrease of $3.9 million, or 14.8%, from $26.7 million as of December 31, 2016. Leases comprised $18.0 million and $21.5 million of total consumer loans and leases at December 31, 2017 and 2016, respectively. Spirit has not actively grown its consumer portfolio because it believes current pricing on these loans do not adequately cover the inherent risk.

Municipal and other loans

Municipal and other loans consist primarily of loans made to municipalities and emergency service, hospital and school districts as well as agricultural loans.

Spirit makes loans to municipalities and emergency service, hospital and school districts primarily throughout Texas. The majority of these loans have tax or revenue pledges and in some cases are additionally supported by collateral. Municipal loans made without a direct pledge of taxes or revenues are usually made based on some type of collateral that represents an essential service. Lending money directly to these municipalities allows Spirit to earn a higher yield for similar durations than it could if it purchased municipal securities. Total loans to municipalities and emergency service, hospital and school districts and others were $53.6 million and $56.6 million as of December 31, 2017 and 2016, respectively. Spirit has not actively grown its municipal loan portfolio as it was awaiting the outcome of the Tax Reform and the impact that it would have on pricing.

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For a more detailed discussion of the type of loans in Spirit’s loan portfolio, see the section of this document entitled “—Business—Banking Services—Lending Activities,” beginning on page 140.

Direct and indirect oil and gas exploration and production and oil field service company loans

Spirit is not an active lender to oil and gas exploration and production companies. As of December 31, 2017, Spirit had no loan commitments directly to exploration and production companies. However, Spirit has a small amount of direct and indirect lending exposure to the oil and gas industry, which it monitors closely. Spirit monitors certain loans in the following two categories it established:

Direct oil and gas related exposure:

Spirit defines direct exposure as companies that derive more than 50.0% of their respective gross revenue from providing services or products to the oil and gas industry. Based on that criteria, Spirit had 25 direct oil and gas loans as of December 31, 2017 totaling $15.4 million, or 1.8% of outstanding loans. As of December 31, 2017, all but one such loan were performing as agreed. Additionally, based on that criteria, Spirit had 21 direct oil and gas loans as of December 31, 2016 totaling $10.7 million, or 1.4% of outstanding loans. As of December 31, 2016, all such loans were performing as agreed.

Indirect oil and gas related exposure:

Spirit considers indirect oil and gas exposure to be exposure to individuals that derive less than 50.0% of their income from the oil and gas industry, or companies which derive less than 50.0% of their revenues from providing services or products to the oil and gas industry. Based on that criteria, Spirit had 68 indirect oil and gas loans as of December 31, 2017 totaling $22.2 million, or 2.6% of outstanding loans. As of December 31, 2017, all such loans were performing as agreed. Additionally, based on that criteria, Spirit had 75 indirect oil and gas loans as of December 31, 2016 totaling $25.0 million, or 3.2% of outstanding loans. As of December 31, 2016, all such loans were performing as agreed.

The following table summarizes the loan contractual maturity distribution by type and by related interest rate characteristics as of the date indicated:

	As of December 31, 2017
	One Year or Less		After One but Within Five Years		After Five Years		Total
	(Dollars in thousands)
Commercial and industrial loans	$	28,062	$	36,218	$	70,760	$	135,040
Real estate:
1-4 single family residential loans		20,446		87,342		124,722		232,510
Construction, land and development loans		67,427		58,086		13,957		139,470
Commercial real estate loans (including multifamily)		32,285		188,063		65,383		285,731
Consumer loans and leases		2,585		20,087		64		22,736
Municipal and other loans		531		6,791		46,310		53,632
Total loans held in portfolio	$	151,336	$	396,587	$	321,196	$	869,119
Predetermined (fixed) interest rates			$	288,926	$	100,126
Floating interest rates				107,661		221,070
Total			$	396,587	$	321,196

The information in the table above is limited to contractual maturities of the underlying loans. The expected life of Spirit’s loan portfolio will differ from contractual maturities because borrowers may have the right to curtail or prepay their loans with or without prepayment penalties.

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Asset Quality

The following table sets forth the composition of Spirit’s nonperforming assets, including nonaccrual loans, accruing loans 90 days or more days past due, other real estate owned and repossessed assets and restructured loans as of the dates indicated:

	As of December 31,
	2017		2016
	(Dollars in thousands)
Nonperforming assets
Nonaccrual loans:
Commercial and industrial loans	$	1,927	$	1,638
Real estate:
1-4 single family residential loans		1,135		1,296
Construction, land and development loans		—		—
Commercial real estate loans (including multifamily)		447		778
Consumer loans and leases		53		95
Municipal and other loans		—		—
Total nonaccrual loans		3,562		3,807
Accruing loans 90 days or more past due		33		—
Total nonperforming loans		3,595		3,807
Other real estate owned and repossessed assets		21		23
Total nonperforming assets	$	3,616	$	3,830
Restructured loans(1)	$	270	$	261

(1) Performing troubled debt restructurings represent the balance at the end of the respective period for those performing loans modified in a troubled debt restructuring that are not already presented as a nonperforming loan.

Nonperforming loans totaled $3.6 million at December 31, 2017, a decrease of $212 thousand, or 5.6%, from $3.8 million at December 31, 2016. Nonperforming assets totaled $3.6 million at December 31, 2017, a decrease of $214 thousand, or 5.6%, from $3.8 million at December 31, 2016.

Spirit classifies loans as past due when the payment of principal or interest is greater than 30 days delinquent based on the contractual next payment due date. Spirit’s policies related to when loans are placed on nonaccrual status conform to guidelines prescribed by bank regulatory authorities. Loans are placed on nonaccrual status when it is probable that principal or interest is not fully collectible, or when principal or interest becomes 90 days past due, whichever occurs first. Loans are removed from nonaccrual status when they become current as to both principal and interest and concern no longer exists as to the collectability of principal and interest.

Loans are identified for restructuring based on their delinquency status, risk rating downgrade, or at the request of the borrower. Borrowers that are 90 days delinquent and/or have a history of being delinquent, or experience a risk rating downgrade, are contacted to discuss options to bring the loan current, cure credit risk deficiencies, or other potential restructuring options that will reduce the inherent risk and improve collectability of the loan. In some instances, a borrower will initiate a request for loan restructure. Spirit requires borrowers to provide current financial information to establish the need for financial assistance and satisfy applicable prerequisite conditions required by Spirit. Spirit may also require the borrower to enter into a forbearance agreement.

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Modification of loan terms may include the following: reduction of the stated interest rate; extension of maturity date or other payment dates; reduction of the face amount or maturity amount of the loan; reduction in accrued interest; forgiveness of past-due interest; or a combination of the foregoing.

Spirit engages an external consulting firm to complete an independent loan review and validate its credit risk program on a periodic basis. Results of these reviews are presented to Spirit’s management. The loan review process complements and reinforces the risk ratings and credit quality assessment decisions made by lenders and credit personnel, as well as Spirit’s policies and procedures.

The following table sets forth Spirit’s asset and credit quality ratios for the periods presented:

	Years Ended December 31,
	2017			2016
Asset and Credit Quality Ratios
Nonperforming loans to loans held for investment(1)		0.41	%		0.49	%
Nonperforming assets to loans plus OREO		0.42			0.50
Nonperforming assets to total assets(2)		0.35			0.39
Net charge-offs to average loans		0.14			0.05
Allowance for loan losses to nonperforming loans		157.22			114.45
Allowance for loan losses to loans held for investment		0.65			0.56

(1) Nonperforming loans include loans on nonaccrual status and accruing loans 90 or more days past due.

(2) Nonperforming assets include loans on nonaccrual status, accruing loans 90 days or more past due and other real estate owned and repossessed assets.

Analysis of the Allowance for Loan and Lease Losses

Allowance for loan and lease losses reflects management’s estimate of probable credit losses inherent in the loan portfolio. The computation of the allowance for loan and lease losses includes elements of judgment and high levels of subjectivity.

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The following tables summarize the allocation of allowance for loan and lease losses related to Spirit’s loans as of the dates and for the periods presented. This allocation is calculated on an approximate basis and is not necessarily indicative of future losses or allocations. The entire amount of the allowance is available to absorb losses occurring in any category of loans:

	Allowance Rollforward
Year Ended December 31, 2017	Beginning Balance		Charge- offs			Recoveries		Provision			Ending Balance
	(Dollars in thousands)
Commercial and industrial loans	$	2,347	$	(974	)	$	7	$	1,666		$	3,046
Real estate:
1-4 single family residential loans		647		(23	)		—		278			902
Construction, land and development loans		364		—			—		77			441
Commercial real estate loans (including multifamily)		667		(34	)		—		265			898
Consumer loans and leases		186		(156	)		—		168			198
Municipal and other loans		146		—			—		21			167
Ending Allowance Balance	$	4,357	$	(1,187	)	$	7	$	2,475		$	5,652
	Allowance Rollforward
Year Ended December 31, 2016	Beginning Balance		Charge- offs			Recoveries		Provision			Ending Balance
	(Dollars in thousands)
Commercial and industrial loans	$	1,119	$	(282	)	$	58	$	1,452		$	2,347
Real estate:
1-4 single family residential loans		623		(3	)		—		27			647
Construction, land and development loans		398		(32	)		30		(32	)		364
Commercial real estate loans (including multifamily)		670		—			—		(3	)		667
Consumer loans and leases		89		(113	)		6		204			186
Municipal and other loans		177		—			—		(31	)		146
Ending Allowance Balance	$	3,076	$	(430	)	$	94	$	1,617		$	4,357

In determining the allowance for loan and lease losses, Spirit estimates losses on specific loans, or groups of loans, where the probable loss can be identified and reasonably determined. The balance of the allowance for loan and lease losses is based on internally assigned risk classifications of loans, historical loan loss rates, changes in the nature of the loan portfolio, overall portfolio quality, industry concentrations, delinquency trends, current economic factors and the estimated impact of current economic conditions on certain historical loan loss rates.

During 2017, Spirit refined its allowance for loan loss methodology based upon management judgement and applicable regulatory guidance. The calculation of reserves on loans collectively evaluated for impairment was altered to reflect five years of historical loss experience which more appropriately matches the weighted average life of loans in the portfolio. Additionally, the calculated historical loss experience is now allocated across the portfolio’s risk rates using a probability of default curve constructed from Spirit Bank’s historical default data. Spirit also updated the qualitative component of the reserve on loans collectively evaluated for impairment to allow for a greater sensitivity to current trends.

The allowance for loan and lease losses increased $1.3 million to $5.7 million at December 31, 2017 from $4.4 million at December 31, 2016, primarily due to the increase in loans held for investment of $96.3 million. The allowance for loan and lease losses as a percentage of nonperforming loans and allowance for loan and lease

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losses as a percentage of loans held for investment was 157.22% and 0.65%, respectively, as of December 31, 2017, compared to 114.45% and 0.56%, respectively, as of December 31, 2016.

Net loan charge-offs for the year ended December 31, 2017 totaled $1.2 million, an increase from $336 thousand of net loan charge-offs for the same period of 2016. The increase in net charge-offs for the year ended December 31, 2017 primarily related to charge-offs in Spirit’s SBA loan portfolio. These losses were anticipated and provided for as the SBA loan portfolio matures. The ratio of net loan charge-offs to average loans outstanding during the years ended December 31, 2017 and 2016 was 0.14% and 0.05%, respectively.

The following table provides the allocation of the allowance for loan and lease losses as of the dates presented:

	As of December 31,
	2017					2016
	Amount		% Loans in each category			Amount		% Loans in each category
	(Dollars in thousands)
Commercial and industrial loans	$	3,046		15.5	%	$	2,347		15.2	%
Real estate:
1-4 single family residential loans		902		26.8			647		26.7
Construction, land and development loans		441		16.0			364		14.7
Commercial real estate loans (including multifamily)		898		32.9			667		32.6
Consumer loans and leases		198		2.6			186		3.5
Municipal and other loans		167		6.2			146		7.3
Total	$	5,652		100.0	%	$	4,357		100.0	%

Deposits

Spirit expects deposits to be its primary funding source in the future as it optimizes its deposit mix by continuing to shift its deposit composition from higher cost time deposits to lower cost demand deposits. Non-time deposits include demand deposits, NOW accounts, and savings and money market accounts.

The following table shows the deposit mix as of the dates presented:

	As of December 31,
	2017					2016
	Amount		% of Total			Amount		% of Total
	(Dollars in thousands)
Noninterest-bearing demand deposits	$	176,726		21.2	%	$	171,475		21.1	%
Interest-bearing NOW accounts		7,318		0.9			8,302		1.0
Savings and money market accounts		243,173		29.1			215,432		26.4
Time deposits		408,151		48.8			419,229		51.5
Total deposits	$	835,368		100.0	%	$	814,438		100.0	%

Total deposits at December 31, 2017 were $835.4 million, an increase of $20.9 million, or 2.57%, from total deposits at December 31, 2016 of $814.4 million.

The average cost of deposits for the year ended December 31, 2017 was 0.80%. This represents an increase of 4 basis points compared to the average cost of deposits of 0.76% for the year ended December 31, 2016. The increase in cost of deposits was primarily attributable to the increase in interest rates by the Federal Open Market

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Committee during 2017. For the year ended December 31, 2017, the average rate paid on time deposits was 1.23% compared to 1.16% for the year ended December 31, 2016.

The following table shows the remaining maturity of time deposits of $100,000 and greater as of the date indicated:

	As of December 31, 2017
	(Dollars in thousands)
Time deposits $100,000 or greater with remaining maturity of:
Three months or less	$	56,650
After three months through six months		52,629
After six months through 12 months		106,296
After 12 months		98,527
Total	$	314,102

Borrowings

In addition to deposits, Spirit utilizes advances from the FHLB and other borrowings as a supplementary funding source to finance its operations.

FHLB borrowings: The FHLB allows Spirit to borrow, both short- and long-term, on a blanket floating lien status collateralized by certain securities and loans. As of December 31, 2017 and 2016, total remaining borrowing capacity of $274.0 million and $263.2 million, respectively, was available under this arrangement. As of December 31, 2017, Spirit had $15.0 million of short-term FHLB borrowings, with an average interest rate of 1.69%. Spirit had no short-term FHLB borrowings as of December 31, 2016. Spirit had long-term FHLB borrowings of $68.6 million and $66.0 million as of December 31, 2017 and 2016, respectively, with an average interest rate of 2.31% and 2.04%, respectively. Spirit’s current FHLB borrowings mature within 14 years.

Line of credit: Spirit entered into a line of credit with a third party lender in May 2017 that allows Spirit to borrow up to $20.0 million. The interest rate on this line of credit is based upon 90-day LIBOR plus 4.0%, and unpaid principal and interest is due at the stated maturity of May 12, 2022. This line of credit is secured by a pledge of all of the common stock of Spirit Bank. This line of credit may be prepaid at any time without penalty, so long as such prepayment includes the payment of all interest accrued through the date of the repayments, and, in the case of prepayment of the entire loan, the amount of attorneys’ fees and disbursements of the lender. At December 31, 2017, total borrowing capacity of $12.2 million was available under this line of credit and $7.8 million was drawn.

Total borrowings consisted of the following as of the dates presented:

	As of December 31,
	2017		2016
	(Dollars in thousands)
Short-term FHLB borrowings	$	15,000	$	—
Long-term FHLB borrowings		68,623		66,016
Third party lender line of credit		7,788		5,000
Total borrowings	$	91,411	$	71,016

At December 31, 2017, total borrowings were $91.4 million, an increase of $20.4 million, or 28.7%, from $71.0 million at December 31, 2016. The increase in total borrowings was primarily driven by the $15.0 million increase in short-term FHLB borrowings used to fund new loan originations.

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Short-term borrowings consist of debt with maturities of one year or less. Spirit’s short-term borrowings consist of FHLB borrowings and a third party line of credit. The following table is a summary of short-term borrowings as of and for the periods presented:

	As of and for the Years Ended December 31,
	2017			2016
	(Dollars in thousands)
Short-term borrowings:
Maximum outstanding at any month-end during the period	$	15,000		$	40,000
Balance outstanding at end of period		15,000			5,000
Average outstanding during the period		6,247			27,240
Average interest rate during the period		2.17	%		1.56	%
Average interest rate at the end of the period		1.69	%		4.00	%

Spirit maintained four, unsecured Federal Funds lines of credit with commercial banks which provide for extensions of credit with an availability to borrow up to an aggregate $35.0 million as of December 31, 2017 and as of December 31, 2016. There were no advances under these lines of credit outstanding as of December 31, 2017 or 2016.

Stockholders’ Equity

The following table summarizes the changes in Spirit’s stockholders’ equity for the periods indicated:

	Years Ended December 31,
	2017			2016 Restated
	(Dollars in thousands)
Balance at beginning of period	$	92,896		$	87,927
Net income		4,753			3,715
Exercise of stock options		471			59
Stock-based compensation		1,520			1,069
Other comprehensive income		(501	)		126
Balance at end of period	$	99,139		$	92,896

Net income totaled $4.8 million for the year ended December 31, 2017, an increase of $1.0 million, compared to $3.7 million for the year ended December 31, 2016. Spirit’s results of operations for the year ended December 31, 2017 produced a return on average assets of 0.47% compared to 0.41% for the prior year. Spirit’s results of operations for the year ended December 31, 2017 produced a return on average stockholders’ equity of 4.88% compared to 4.09% for the prior year.

Stockholders’ equity was $99.1 million as of December 31, 2017, an increase of $6.2 million from $92.9 million as of December 31, 2016. The increase was primarily driven by net income of $4.8 million.

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Contractual Obligations

The following table presents information regarding Spirit’s outstanding contractual obligations and other commitments to make future payments as of December 31, 2017, which consist of its future cash payments associated with its time deposits, operating lease obligations and contractual obligations pursuant to its FHLB advances and other borrowings. Payments related to Spirit’s leases are based on actual payments specified in the underlying contracts.

As of December 31, 2017	Total Amounts Committed		One Year or Less		Over One Year Through Three Years		Over Three Years Through Five Years		Over Five Years
	(Dollars in thousands)
Contractual obligations:
Time deposits	$	408,151	$	276,401	$	112,677	$	19,073	$	—
Operating lease obligations		4,985		1,497		2,038		1,276		174
FHLB advances and other borrowings		91,411		16,713		22,439		26,194		26,065
Construction in process		1,858		1,858		—		—		—
Total	$	506,405	$	296,469	$	137,154	$	46,543	$	26,239

Off-Balance Sheet Arrangements

In the normal course of business, Spirit enters into various transactions, which, in accordance GAAP, are not included on its consolidated balance sheets. Spirit enters into these transactions to meet the financing needs of its customers. These transactions include commitments to extend credit and commercial and standby letters of credit, which involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amounts recognized on Spirit’s consolidated balance sheets.

Spirit enters into contractual loan commitments to extend credit, normally with fixed expiration dates or termination clauses, at specified rates and for specific purposes. Since a portion of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent Spirit’s future cash requirements. Substantially all of Spirit’s commitments to extend credit are contingent upon customers maintaining specific credit standards until the time of loan funding. Spirit seeks to minimize its exposure to loss under these commitments by subjecting them to prior credit approval and ongoing monitoring procedures. Spirit assesses the credit risk associated with certain commitments to extend credit and establishes a liability for probable credit losses. As of December 31, 2017 and 2016, Spirit’s reserve for unfunded commitments totaled $40 thousand and $33 thousand, respectively.

Commercial and standby letters of credit are written conditional commitments issued by Spirit to guarantee the performance of a customer to a third party. In the event the customer does not perform in accordance with the terms of the agreement with the third party, Spirit would be required to fund the commitment. The maximum potential amount of future payments Spirit could be required to make is represented by the contractual amount of the commitment. If the commitment is funded, Spirit would be entitled to seek recovery from the customer. Spirit’s policies generally require that standby letter of credit arrangements contain security and debt covenants similar to those contained in loan agreements.

The following table summarizes Spirit’s commitments as of the dates presented:

	As of December 31,
	2017		2016
	(Dollars in thousands)
Unfunded loan commitments	$	134,536	$	107,443
Commercial and standby letters of credit		91		1,156
Total	$	134,627	$	108,599

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Spirit’s management believes that it has adequate liquidity to meet all known contractual obligations and unfunded commitments, including loan commitments over the next 12 months. Additionally, Spirit’s management believes that its off-balance sheet arrangements have not had or are not reasonably likely to have a current or future material effect on its financial condition, revenues, expenses, results of operations, liquidity, capital expenditures or capital resources.

Capital Resources

Spirit is required to comply with certain “risk-based” capital adequacy guidelines issued by the Federal Reserve and the FDIC. The risk-based capital guidelines assign varying risk weights to the individual assets held by a bank. The guidelines also assign weights to the “credit-equivalent” amounts of certain off-balance sheet items, such as letters of credit and interest rate and currency swap contracts.

In July 2013, the federal bank regulatory agencies adopted revisions to the agencies’ capital adequacy guidelines and prompt corrective action rules, which were designed to enhance such requirements and implement the revised standards of the Basel Committee on Banking Supervision, commonly referred to as Basel III. The final rules generally implemented higher minimum capital requirements, added a new common equity tier 1 capital requirement, and established criteria that instruments must meet to be considered common equity tier 1 capital, additional tier 1 capital or tier 2 capital. The new minimum capital to risk-adjusted assets requirements were a common equity tier 1 capital ratio of 4.5% (6.5% to be considered “well capitalized”) and a tier 1 capital ratio of 6.0%, increased from 4.0% (and increased from 6.0% to 8.0% to be considered “well capitalized”) and the total capital ratio remained at 8.0% under the new rules (10.0% to be considered “well capitalized”). Under the final capital rules that became effective on January 1, 2015, there was a requirement for a common phased-in equity tier 1 capital conservation buffer of 2.5% of risk-weighted assets which is in addition to the other minimum risk-based capital standards in the rule. Institutions that do not maintain this required capital buffer will become subject to progressively more stringent limitations on the percentage of earnings that can be paid out in dividends or used for stock repurchases and on the payment of discretionary bonuses to senior executive management. The capital buffer requirement is being phased in over three years beginning in 2016. Spirit has included the 0.625% increase for 2016 and 2017 in Spirit’s minimum capital adequacy ratios in the table below. The capital buffer requirement effectively raises the minimum required common equity tier 1 capital ratio to 7.0%, the tier 1 capital ratio to 8.5% and the total capital ratio to 10.5% on a fully phased-in basis on January 1, 2019.

The risk-based capital ratios measure the adequacy of a bank’s capital against the riskiness of its assets and off-balance sheet activities. Failure to maintain adequate capital is a basis for “prompt corrective action” or other regulatory enforcement action. In assessing a bank’s capital adequacy, regulators also consider other factors such as interest rate risk exposure; liquidity, funding and market risks; quality and level of earnings; concentrations of credit, quality of loans and investments; risks of any nontraditional activities; effectiveness of bank policies; and management’s overall ability to monitor and control risks.

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The following table sets forth the regulatory capital ratios, excluding the impact of the capital conservation buffer, as of the dates indicated:

	Minimum Capital Requirement			Minimum Capital Requirement with Capital Buffer			Minimum To Be Well Capitalized			December 31,
										2017			2016 Restated
Capital ratios (Company):
Tier 1 leverage ratio		4.0	%		4.00	%		N/A			8.71	%		8.75	%
Common equity tier 1 capital ratio		4.5			5.75			N/A			10.07			10.83
Tier 1 risk-based capital ratio		6.0			7.25			N/A			10.07			10.83
Total risk-based capital ratio		8.0			9.25			N/A			10.72			11.41
Capital ratios (Bank):
Tier 1 leverage ratio		4.0	%		4.00	%		5.0	%		9.29	%		9.16	%
Common equity tier 1 capital ratio		4.5			5.75			6.5			10.74			11.34
Tier 1 risk-based capital ratio		6.0			7.25			8.0			10.74			11.34
Total risk-based capital ratio		8.0			9.25			10.0			11.39			11.92

At December 31, 2017, Spirit and Spirit Bank were “well capitalized” under the regulatory framework for prompt corrective action. Spirit’s management believes that no conditions or events have occurred since December 31, 2017 that would materially adversely change such capital classifications. From time to time, Spirit may need to raise additional capital to support its and Spirit Bank’s further growth and to maintain its “well capitalized” status.

As of December 31, 2017, Spirit had a tier 1 leverage ratio of 8.71%. As of December 31, 2017, Spirit Bank had a tier 1 leverage ratio of 9.29%, which provided $43.4 million of excess capital relative to the minimum requirements to be considered well capitalized.

For a discussion of the changes in Spirit’s total stockholders’ equity at December 31, 2017 as compared with December 31, 2016, see the section of this document entitled “—Stockholders’ Equity,” beginning on page 193.

Liquidity

Liquidity involves Spirit’s ability to raise funds to support asset growth and acquisitions or reduce assets to meet deposit withdrawals and other payment obligations, to maintain reserve requirements and otherwise to operate on an ongoing basis and manage unexpected events. For the years ended December 31, 2017 and 2016, Spirit’s liquidity needs were primarily met by core deposits, security and loan maturities and amortizing investment and loan portfolios. Although access to brokered deposits, purchased funds from correspondent banks and overnight advances from the FHLB are available and have been utilized on occasion to take advantage of investment opportunities, Spirit does not generally rely on these external funding sources. Spirit Bank maintained four Federal Funds lines of credit with commercial banks which provide for extensions of credit with an availability to borrow up to an aggregate $35.0 million as of December 31, 2017 and 2016. There were no advances under these lines of credit outstanding as of December 31, 2017 or 2016.

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The following table illustrates, during the periods presented, the mix of Spirit’s funding sources and the average assets in which those funds are invested as a percentage of its average total assets for the periods indicated. Average assets were $1.01 billion for the year ended December 31, 2017 and $903.9 million for the year ended December 31, 2016.

	As of and for the Year Ended December 31,
	2017			2016
Sources of funds:
Deposits:
Noninterest-bearing		16.1	%		14.7	%
Interest-bearing		66.3			65.0
Advances from FHLB and other borrowings		7.6			9.3
Other liabilities		0.2			1.0
Stockholders’ equity		9.8			10.0
Total		100.0	%		100.0	%
Uses of funds:
Loans		82.4	%		79.4	%
Investment securities and other		2.9			1.8
Interest-bearing deposits in other banks		8.2			11.6
Other noninterest-earning assets		6.5			7.2
Total		100.0	%		100.0	%
Average noninterest-bearing deposits to average deposits		19.6	%		18.4	%
Average loans to average deposits		99.9	%		99.7	%

Spirit’s primary source of funds is deposits, and its primary use of funds is loans. Spirit does not expect a change in the primary source or use of its funds in the foreseeable future. Spirit’s average loans, including loans held for sale, increased 15.6% for the year ended December 31, 2017 compared to the year ended December 31, 2016. Spirit predominantly invests excess deposits in overnight deposits with the Federal Reserve, securities, interest-bearing deposits at other banks or other short-term liquid investments until needed to fund loan growth. Spirit’s securities portfolio had a weighted average life of 5.00 years and an effective duration of 5.03 years as of December 31, 2017.

As of December 31, 2017, Spirit had outstanding $134.5 million in commitments to extend credit and $91 thousand in commitments associated with outstanding commercial and standby letters of credit. Since commitments associated with letters of credit and commitments to extend credit may expire unused, the total outstanding may not necessarily reflect the actual future cash funding requirements.

As of December 31, 2017, Spirit believes it had no exposure to future cash requirements associated with known uncertainties. Capital expenditures, including buildings and construction in process, for the years ended December 31, 2017 and 2016 were $11.4 million and $3.7 million, respectively. In 2017, Spirit completed the purchase of a building at 5301 Spring Valley, Dallas, Texas consisting of 23,602 square feet for approximately $4.9 million and the purchase of a building at 1120 Summit Avenue, Fort Worth, Texas consisting of 7,483 square feet for approximately $3.0 million. Total capital expenditures related to the renovation of both locations as well as the construction of a new building at Spirit’s principal executive offices at 1836 Spirit of Texas Way was $336 thousand for the year ended December 31, 2017, and Spirit estimates the remaining capital expenditures to complete these projects will be approximately $1.9 million. Spirit moved both the Fort Worth branch location and the Dallas branch location from its prior leased locations to the newly acquired locations during April 2018. Spirit plans to fund capital expenditures for these properties with cash flow from operations.

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As of December 31, 2017, Spirit had cash and cash equivalents of $57.9 million compared to $152.2 million as of December 31, 2016. The decrease was primarily due to an increase in Spirit’s investment portfolio and funding new loan originations.

Interest Rate Sensitivity and Market Risk

As a financial institution, Spirit’s primary component of market risk is interest rate volatility. Spirit’s asset liability and funds management policy provides management with the guidelines for effective funds management, and Spirit has established a measurement system for monitoring its net interest rate sensitivity position. Spirit manages its sensitivity position within its established guidelines.

Fluctuations in interest rates will ultimately impact both the level of income and expense recorded on most of Spirit’s assets and liabilities, and the market value of all interest-earning assets and interest-bearing liabilities, other than those which have a short term to maturity. Interest rate risk is the potential for economic losses due to future interest rate changes. These economic losses can be reflected as a loss of future net interest income and/or a loss of current fair market values. The objective is to measure the effect on net interest income and to adjust the balance sheet to minimize the inherent risk while at the same time maximizing income.

Spirit manages its exposure to interest rates by structuring its balance sheet in the ordinary course of business. Spirit does not enter into instruments such as leveraged derivatives, interest rate swaps, financial options, financial future contracts or forward delivery contracts for the purpose of reducing interest rate risk. Based upon the nature of its operations, Spirit is not subject to foreign exchange or commodity price risk. Spirit does not own any trading assets.

Spirit’s exposure to interest rate risk is managed by the Asset-Liability Management Committee of Spirit Bank in accordance with policies approved by its board of directors. The committee formulates strategies based on appropriate levels of interest rate risk. In determining the appropriate level of interest rate risk, the committee considers the impact on earnings and capital of the current outlook on interest rates, potential changes in interest rates, regional economies, liquidity, business strategies and other factors. The committee meets regularly to review, among other things, the sensitivity of assets and liabilities to interest rate changes, the book and market values of assets and liabilities, unrealized gains and losses, purchase and sale activities, commitments to originate loans and the maturities of investments and borrowings. Additionally, the committee reviews liquidity, cash flow flexibility, maturities of deposits and consumer and commercial deposit activity. Spirit’s management employs methodologies to manage interest rate risk which include an analysis of relationships between interest-earning assets and interest-bearing liabilities and an interest rate shock simulation model.

Spirit uses interest rate risk simulation models and shock analysis to test the interest rate sensitivity of net interest income and fair value of equity, and the impact of changes in interest rates on other financial metrics. Contractual maturities, prepayment assumptions and repricing opportunities of loans are incorporated in the model as are prepayment assumptions, maturity data and call options within the investment portfolio. Average life of Spirit’s non-maturity deposit accounts are based on standard regulatory decay assumptions and are incorporated into the model. The assumptions used are inherently uncertain and, as a result, the model cannot precisely measure future net interest income or precisely predict the impact of fluctuations in market interest rates on net interest income. Actual results will differ from the model’s simulated results due to timing, magnitude and frequency of interest rate changes as well as changes in market conditions and the application and timing of various management strategies.

On a quarterly basis, Spirit runs two simulation models including a static balance sheet and dynamic growth balance sheet. These models test the impact on net interest income and fair value of equity from changes in market interest rates under various scenarios. Under the static and dynamic growth models, rates are shocked instantaneously and ramped rate changes over a 12-month horizon based upon parallel and non-parallel yield curve shifts. Parallel shock scenarios assume instantaneous parallel movements in the yield curve compared to a

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flat yield curve scenario. Non-parallel simulation involves analysis of interest income and expense under various changes in the shape of the yield curve. Internal policy regarding internal rate risk simulations currently specifies that for instantaneous parallel shifts of the yield curve, estimated net income at risk for the subsequent one-year period should not decline by more than 5.0% for a 100 basis point shift, 10.0% for a 200 basis point shift, and 15.0% for a 300 basis point shift.

The following table summarizes the simulated change in net interest income over a 12-month horizon:

	December 31, 2017
Change in interest rates (basis points)	% Change in Net Interest Income
+300		1.81	%
+200		1.10
+100		2.56
Base		0.00
-100		(4.03	)

The following table summarizes an immediate shock in the fair value of equity as of the date indicated:

	December 31, 2017
Change in interest rates (basis points)	% Change in Fair Value of Equity
+300		(5.08	%)
+200		(3.26	)
+100		(0.74	)
Base		0.00
-100		1.68

The results are primarily due to behavior of demand, money market and savings deposits during such rate fluctuations. Spirit has found that, historically, interest rates on these deposits change more slowly than changes in the discount and federal funds rates. This assumption is incorporated into the simulation model and is generally not fully reflected in a gap analysis. The assumptions incorporated into the model are inherently uncertain and, as a result, the model cannot precisely measure future net interest income or precisely predict the impact of fluctuations in market interest rates on net interest income. Actual results will differ from the model’s simulated results due to timing, magnitude and frequency of interest rate changes as well as changes in market conditions and the application and timing of various strategies.

Non-GAAP Financial Measures

Spirit’s accounting and reporting policies conform to GAAP, and the prevailing practices in the banking industry. However, Spirit also evaluates its performance based on certain additional financial measures discussed in this Management’s Discussion and Analysis of Financial Condition and Results of Operations as being a non-GAAP financial measures. Spirit classifies a financial measure as being a non-GAAP financial measure if that financial measure excludes or includes amounts, or is subject to adjustments that have the effect of excluding or including amounts, that are included or excluded, as the case may be, in the most directly comparable measure calculated and presented in accordance with GAAP as in effect from time to time in the United States in its statements of income, balance sheets or statements of cash flows. Non-GAAP financial measures do not include operating and other statistical measures or ratios or statistical measures calculated using exclusively financial measures calculated in accordance with GAAP.

The non-GAAP financial measures that Spirit discusses in this Management’s Discussion and Analysis of Financial Condition and Results of Operations should not be considered in isolation or as a substitute for the most directly comparable or other financial measures calculated in accordance with GAAP. Moreover, the manner in which Spirit calculates the non-GAAP financial measures that it discusses in this Management’s

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Discussion and Analysis of Financial Condition and Results of Operations may differ from that of other banking organizations reporting measures with similar names. You should understand how such other banking organizations calculate their financial measures similar or with names similar to the non-GAAP financial measures Spirit has discussed in this prospectus when comparing such non-GAAP financial measures.

Net Interest Margin

Spirit shows net interest margin on a fully taxable equivalent basis, which is a non-GAAP financial measure.

Spirit believes the fully tax equivalent basis is the preferred industry measurement basis for net interest margin and that it enhances comparability of net interest income arising from taxable and tax-exempt sources.

The following table reconciles, as of the dates set forth below, net interest margin on a fully taxable equivalent basis:

	As of or for the Nine Months Ended September 30,						As of or for the Years Ended December 31,
	2018			2017			2017			2016			2015
	(Dollars in thousands, except per share data)
Net interest margin – GAAP basis:
Net interest income	$	33,153		$	28,522		$	38,579		$	33,840		$	33,241
Average interest-earning assets		981,479			946,777			943,025			839,109			748,499
Net interest margin		4.52	%		4.03	%		4.09	%		3.99	%		4.44	%
Net interest margin – Non-GAAP basis:
Net interest income	$	33,153		$	28,522		$	38,579		$	33,840		$	33,241
Plus:
Impact of fully taxable equivalent adjustment		344			702			935			811			728
Net interest income on a fully taxable equivalent basis	$	33,497		$	29,224		$	39,514		$	34,291		$	33,969
Average interest-earning assets		981,479			946,777			943,025			839,109			478,499
Net interest margin on a fully taxable equivalent basis – Non-GAAP basis		4.56	%		4.13	%		4.19	%		4.09	%		4.54	%

Adjusted Earnings per Common Share – Basic and Diluted

Adjusted earnings per common share – basic and diluted is a non-GAAP financial measure that excludes merger related expenses. In Spirit’s judgment, the adjustments made to net income allow investors and analysts to better assess its basic and diluted earnings per common share by removing the volatility that is associated with merger related expenses that are unrelated to its core business.

Merger related expenses for the three and nine months ended September 30, 2018 consisted of $215 thousand, after-tax. There were no merger related expenses for the nine months ended September 30, 2017, or the years ended December 31, 2017, 2016 or 2015.

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The following table reconciles, as of the date set forth below, basic and diluted earnings per common share and presents Spirit’s basic and diluted earnings per common share exclusive of the impact of its merger related adjustments:

	As of or for the Nine Months Ended September 30,					As of or for the Years Ended December 31,
	2018			2017		2017		2016		2015
	(Dollars in thousands, except per share data)
Basic and diluted earnings per share - GAAP basis:
Net income	$	7,465		$	4,230	$	4,753	$	3,715	$	3,942
Less:
Participated securities share of undistributed earnings		—			27		23		87		93
Net income available to common stockholders	$	7,465		$	4,203	$	4,730	$	3,628	$	3,849
Weighted average number of common shares - basic		8,673,106			7,218,147		7,233,783		7,065,243		7,059,787
Weighted average number of common shares - diluted		9,094,691			7,504,208		7,519,944		7,205,709		7,408,519
Basic earnings per common share	$	0.86		$	0.58	$	0.65	$	0.51	$	0.55
Diluted earnings per common share	$	0.82		$	0.56	$	0.63	$	0.50	$	0.52
Basic and diluted earnings per share - Non-GAAP basis:
Net income	$	7,465		$	4,203	$	4,730	$	3,628	$	3,849
Pre-tax adjustments:
Noninterest expense
Merger related expenses		270			—		—		—		—
Taxes:
Tax effect of adjustments		(55	)		—		—		—		—
Adjusted net income	$	7,790		$	4,203	$	4,730	$	3,628	$	3,849
Weighted average number of common shares - basic		8,673,106			7,218,147		7,233,783		7,065,243		7,059,787
Weighted average number of common shares - diluted		9,094,691			7,504,208		7,519,944		7,205,709		7,408,519
Basic earnings per common share - Non-GAAP basis	$	0.90		$	0.58	$	0.65	$	0.51	$	0.55
Diluted earnings per common share - Non-GAAP basis	$	0.86		$	0.56	$	0.63	$	0.50	$	0.52

Tangible Book Value Per Share

Tangible book value per share is a non-GAAP financial measure generally used by investors, financial analysts and investment bankers to evaluate financial institutions. Spirit calculates (1) tangible book value per share as tangible equity divided by shares of common stock outstanding at the end of the respective period, and (2) tangible equity as common stockholders’ equity less goodwill and other intangible assets, net of accumulated amortization. The most directly comparable GAAP financial measure for tangible book value per share is book value per share.

Spirit believes that this measure is important to many investors in the marketplace who are interested in changes from period to period in book value per share exclusive of changes in intangible assets. Goodwill and other intangible assets have the effect of increasing total book value while not increasing its tangible book value.

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The following table reconciles, as of the dates set forth below, total stockholders’ equity to tangible equity and presents Spirit’s tangible book value per share compared to its book value per share:

	As of September 30,				As of December 31,
	2018		2017		2017		2016		2015
	(Dollars in thousands, except per share data)
Total stockholders’ equity	$	150,893	$	98,805	$	99,139	$	92,896	$	87,927
Less:
Goodwill and other intangible assets		7,444		8,147		7,971		8,674		8,703
Tangible stockholders’ equity	$	143,449	$	90,658	$	91,168	$	84,222	$	79,224
Shares outstanding		9,812,481		7,280,183		7,280,183		7,239,763		7,234,738
Book value per share	$	15.38	$	13.57	$	13.62	$	12.83	$	12.15
Less:
Goodwill and other intangible assets per share		0.76		1.12		1.10		1.20		1.20
Tangible book value per share	$	14.62	$	12.45	$	12.52	$	11.63	$	10.95

Tangible Equity to Tangible Assets

Tangible equity to tangible assets is a non-GAAP financial measure generally used by investors, financial analysts and investment bankers to evaluate financial institutions. Spirit calculates tangible equity, as described above in “—Tangible Book Value Per Share,” and tangible assets as total assets less goodwill and core deposit intangibles and other intangible assets, net of accumulated amortization. The most directly comparable GAAP financial measure for tangible equity to tangible assets is total common stockholders’ equity to total assets.

Spirit believes that this measure is important to many investors in the marketplace who are interested in the relative changes from period to period in common equity and total assets, each exclusive of changes in intangible assets. Goodwill and other intangible assets have the effect of increasing both total stockholders’ equity and assets while not increasing Spirit’s tangible equity or tangible assets.

The following table reconciles, as of the dates set forth below, total stockholders’ equity to tangible equity and total assets to tangible assets:

	As of September 30,						As of December 31,
	2018			2017			2017			2016			2015
	(Dollars in thousands)
Total stockholders’ equity to total assets – GAAP basis
Total stockholders’ equity (numerator)	$	150,893		$	98,805		$	99,139		$	92,896		$	87,927
Total assets (denominator)		1,102,211			1,026,032			1,030,298			980,489			843,768
Total stockholders’ equity to total assets		13.69	%		9.63	%		9.62	%		9.47	%		10.42	%
Tangible equity to tangible assets – Non-GAAP basis:
Tangible equity:
Total stockholders’ equity	$	150,893		$	98,805		$	99,139		$	92,896		$	87,927
Less:
Goodwill and other intangible assets		7,444			8,147			7,971			8,674			8,703
Total tangible common equity (numerator)	$	143,449		$	90,658		$	91,168		$	84,222		$	79,224
Tangible assets:
Total assets		1,102,211			1,026,032			1,030,298			980,489			843,768
Less:
Goodwill and other intangible assets		7,444			8,147			7,971			8,674			8,703
Total tangible assets (denominator)	$	1,094,767		$	1,017,885		$	1,022,327		$	971,815		$	835,065
Tangible equity to tangible assets		13.10	%		8.91	%		8.92	%		8.67	%		9.49	%

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Critical Accounting Policies

Spirit’s financial reporting and accounting policies conform to GAAP. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Spirit’s accounting policies and estimates are described in greater detail in Note 1 Summary of Significant Accounting Policies in the notes to its consolidated financial statements included elsewhere in this document.

Spirit has identified the following accounting policies and estimates that, due to the difficult, subjective or complex judgments and assumptions inherent in those policies and estimates and the potential sensitivity of its financial statements to those judgments and assumptions, are critical to an understanding of Spirit’s financial condition and results of operations. Spirit believes that the judgments, estimates and assumptions used in the preparation of its financial statements are appropriate. Spirit’s accounting policies are integral to understanding its results of operations.

Allowance for Loan and Lease Losses

Management’s ongoing evaluation of the adequacy of the allowance for loan and lease losses is based on Spirit’s past loan loss experience, the volume and composition of its lending, adverse situations that may affect a borrower’s ability to repay, the estimated value of any underlying collateral, current economic conditions and other factors affecting the known and inherent risk in the portfolio. The allowance for loan and lease losses is increased by charges to income through the provision for loan and lease losses and decreased by charge-offs (net of recoveries). The allowance is maintained at a level that management, based upon its evaluation, considers adequate to absorb losses inherent in the loan portfolio. This evaluation is inherently subjective as it requires material estimates including, among others, the amount and timing of expected future cash flows on impacted loans, exposure at default, value of collateral, and estimated losses on Spirit’s loan portfolio. All of these estimates may be susceptible to significant change.

The allowance consists of specific allowances for impaired loans and a general allowance on the remainder of the portfolio. Although management determines the amount of each element of the allowance separately, the allowance for loan and lease losses is available for the entire loan portfolio.

Management establishes an allowance on certain impaired loans for the amount by which the discounted cash flows, observable market price, or fair value of collateral if the loan is collateral dependent, is lower than the carrying value of the loan. A loan is considered to be impaired when, based upon current information and events, it is probable that Spirit will be unable to collect all amounts due according to the contractual terms of the loan. A delay or shortfall in amount of payments does not necessarily result in the loan being identified as impaired.

Management also establishes a general allowance on non-impaired loans to recognize the inherent losses associated with lending activities, but which, unlike specific allowances, have not been allocated to particular loans. This general valuation allowance is determined by segregating the loans by loan category and assigning allowance percentages based on Spirit’s historical loss experience, delinquency trends, and management’s evaluation of the collectability of the loan portfolio.

Management also evaluates classified loans, which are not impaired. Spirit segregates these loans by category and assign qualitative factors to each loan based on inherent losses associated with each type of lending and consideration that these loans, in the aggregate, represent an above-average credit risk and that more of these loans will prove to be uncollectible compared to loans in the general portfolio. Classification of a loan within this category is based on identified weaknesses that increase the credit risk of the loan.

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The allowance is adjusted for significant factors that, in management’s judgment, affect the collectability of the portfolio as of the evaluation date. These significant factors may include changes in lending policies and procedures, changes in existing general economic and business conditions affecting its primary lending areas, credit quality trends, collateral value, loan volumes and concentrations, seasoning of the loan portfolio, loss experience in particular segments of the portfolio, duration of the current business cycle, and bank regulatory examination results. The applied loss factors are re-evaluated each reporting period to ensure their relevance in the current economic environment.

Prior to the second quarter of 2018, Spirit was utilizing a peer bank allowance coverage ratio in the qualitative reserve calculation, as it did not have enough historical defaults to rely on its own loss factors. As of September 30, 2018, Spirit had a sufficient amount of defaults over the five year lookback period to transition over to relying more on its own historical loss data versus peer data. While this did not result in a significant change to the allowance for loan and lease losses as a whole, it continues to impact the provision for certain loan categories that the Company had experienced more historical defaults.

While management uses the best information known to it in order to make loan loss allowance valuations, adjustments to the allowance may be necessary based on changes in economic and other conditions, changes in the composition of the loan portfolio, or changes in accounting guidance. In times of economic slowdown, either regional or national, the risk inherent in the loan portfolio could increase resulting in the need for additional provisions to the allowance for loan and lease losses in future periods. An increase could also be necessitated by an increase in the size of the loan portfolio or in any of its components even though the credit quality of the overall portfolio may be improving. Historically, the estimates of the allowance for loan and lease losses have provided adequate coverage against actual losses incurred.

Goodwill and Other Intangible Assets

Goodwill represents the excess of consideration transferred in business combinations over the fair value of tangible and identifiable intangible assets acquired. Goodwill is assessed annually for impairment or more frequently if events or circumstances indicate that impairment may have occurred.

Goodwill acquired in a purchase business combination that is determined to have an indefinite useful life, is not amortized, but tested for impairment as described above. Spirit performs its annual impairment test in the fourth quarter. Goodwill is the only intangible asset with an indefinite life on its balance sheet.

Core deposit intangible, which we refer to as CDI, is a measure of the value of checking and savings deposit relationships acquired in a business combination. The fair value of the CDI stemming from any given business combination is based on the present value of the expected cost savings attributable to the core deposit funding relative to an alternative source of funding. CDI is amortized over the estimated useful lives of the existing deposit relationships acquired, but does not exceed 12 years. Spirit evaluates such identifiable intangibles for impairment when events and circumstances indicate that its carrying amount may not be recoverable.

Income Taxes

Management makes estimates and judgments to calculate various tax liabilities and determine the recoverability of various deferred tax assets, which arise from temporary differences between the tax and financial statement recognition of revenues and expenses. Management also estimates a reserve for deferred tax assets if, based on the available evidence, it is more likely than not that some portion or all of the recorded deferred tax assets will not be realized in future periods. These estimates and judgments are inherently subjective. Historically, management’s estimates and judgments to calculate the deferred tax accounts have not required significant revision.

In evaluating Spirit’s ability to recover deferred tax assets, management considers all available positive and negative evidence, including the past operating results and forecasts of future taxable income. In determining future

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taxable income, management makes assumptions for the amount of taxable income, the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies. These assumptions require management to make judgments about the future taxable income and are consistent with the plans and estimates used to manage the business. Any reduction in estimated future taxable income may require management to record a valuation allowance against the deferred tax assets. An increase in the valuation allowance would result in additional income tax expense in the period and could have a significant impact on future earnings.

Stock-based Compensation

Spirit sponsors incentive stock option plans under which options may be granted periodically to all of its full-time employees and directors or affiliates at a specific exercise price to acquire shares of its common stock. Shares are issued out of authorized unissued common shares. Compensation cost is measured based on the estimated fair value of the award at the grant date and is recognized in earnings on a straight-line basis over the requisite service period. The fair value of stock options is estimated at the date of grant using the Black-Scholes option pricing model. This model requires assumptions as to the expected stock volatility, dividends, terms and risk-free rates. Spirit uses the fair value method to account for its options. The expected volatility is based on the volatility of comparable peer banks. The expected term represents the period of time that options are expected to be outstanding from the grant date. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for the appropriate life of each option.

SBA Servicing Asset

A servicing asset related to SBA loans is initially recorded when these loans are sold and the servicing rights are retained. The servicing asset is recorded on the balance sheet. An updated fair value of the servicing asset is obtained from an independent third party on a quarterly basis and any necessary adjustments are included in SBA loan servicing fees on the consolidated statements of income. The valuation begins with the projection of future cash flows for each asset based on their unique characteristics, market-based assumptions for prepayment speeds and estimated losses and recoveries. The present value of the future cash flows are then calculated utilizing market-based discount ratio assumptions. In all cases, Spirit models expected payments for every loan for each quarterly period in order to create the most detailed cash flow stream possible. Spirit uses various assumptions and estimates in determining the impairment of the SBA servicing asset. These assumptions include prepayment speeds and discount rates commensurate with the risks involved and comparable to assumptions used by participants to value and bid serving rights available for sale in the market.

Recently Issued Accounting Pronouncements

See Note 1, Summary of Significant Accounting Policies, in the notes to Spirit’s audited consolidated financial statements included elsewhere in this document regarding the impact of new accounting pronouncements which Spirit has adopted.

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COMANCHE’S MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATION

The following discussion and analysis is intended to provide an overview of the significant factors affecting the financial condition and results of operations of Comanche for the nine months ended September 30, 2018 and 2017 and the years ended December 31, 2017 and 2016. The following discussion and analysis should be read in conjunction with the sections of this document entitled “Cautionary Statements Regarding Forward-Looking Statements,” “Risk Factors,” “Selected Historical Consolidated Financial Data for Comanche” and Comanche’s consolidated financial statements and the accompanying notes included elsewhere in this document. As used in this section, unless the context otherwise requires, references to “Comanche” refer to Comanche National Corporation, Comanche National Corporation of Delaware and The Comanche National Bank on a consolidated basis. This discussion and analysis contains forward-looking statements that are subject to certain risks and uncertainties and are based on certain assumptions that Comanche believes are reasonable but may prove to be inaccurate. Comanche assumes no obligation to update any of these forward-looking statements.

Overview

Comanche National Corporation is a Texas corporation that owns all of the outstanding shares of common stock of Comanche National Corporation of Delaware, which owns all of the outstanding shares of common stock of The Comanche National Bank, a national banking association, with operational headquarters in Comanche, Texas. Comanche Bank offers full consumer and commercial banking services to customers throughout its market areas in and around Comanche, Palo Pinto, Parker and Jack Counties, Texas. Comanche Bank has eight banking locations. As of September 30, 2018, Comanche had total assets of $338.9 million, total loans of $119.8 million, total deposits of $296.9 million and total shareholders’ equity of $37.0 million.

Comanche generates most of its income from interest income on loans, service charges on customer accounts and interest income from deposits in other financial institutions. Comanche incurs interest expense on deposits and other borrowed funds and noninterest expenses such as salaries and employee benefits and occupancy expenses. Net interest income is the largest source of Comanche’s revenue. Net interest spread is the difference between rates earned on interest-earning assets and rates paid on interest-bearing liabilities. Net interest margin is calculated as net interest income divided by average interest-earning assets. Because noninterest-bearing sources of funds, such as noninterest-bearing deposits and shareholders’ equity, also fund interest-earning assets, net interest margin includes the benefit of these noninterest-bearing sources.

Changes in the market interest rates and interest rates Comanche earns on interest-earning assets or pays on interest-bearing liabilities, as well as the volume and types of interest-earning assets, interest-bearing and noninterest-bearing liabilities and shareholders’ equity, are usually the largest drivers of periodic changes in net interest spread, net interest margin and net interest income. Fluctuations in market interest rates are driven by many factors, including governmental monetary policies, inflation, deflation, macroeconomic developments, changes in unemployment, the money supply, political and international conditions and conditions in domestic and foreign financial markets. Periodic changes in the volume and types of loans in Comanche’s loan portfolio are affected by, among other factors, economic and competitive conditions in Texas and specifically in Comanche, Palo Pinto, Parker and Jack Counties, Texas, as well as developments affecting the real estate, technology, financial services, insurance, transportation, manufacturing and energy sectors within Comanche’s target market.

Results of Operations for the Nine Months Ended September 30, 2018 and 2017

Net income was $2.6 million for the nine months ended September 30, 2018 compared with $2.4 million for the nine months ended September 30, 2017, an increase of $133 thousand, or 5.4%. The increase in net income was primarily the result of a $197 thousand increase in net interest income and $181 thousand decrease in income tax expense as a result of the decrease in the corporate federal tax rate. Annualized returns on average equity

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were 9.04% and 8.54% and annualized returns on average assets were 0.98% and 0.97%, for the nine months ended September 30, 2018 and 2017, respectively.

Net Interest Income

Net interest income is the difference between interest income on earning assets, such as loans and securities, and interest expense on liabilities, such as deposits and borrowings, which are used to fund those assets. Tax equivalent net interest margin is the ratio of taxable-equivalent net interest income to average earning assets for the period. The level of interest rates and the volume and mix of earning assets and interest-bearing liabilities impact net interest income and net interest margin.

Nine months ended September 30, 2018 compared to September 30, 2017. Net interest income before the provision for possible credit losses for the nine months ended September 30, 2018 was $8.0 million compared with $7.8 million for the nine months ended September 30, 2017, an increase of $197 thousand, or 2.5%. The increase in net interest income was primarily due to the increase in average interest-earning assets of $13.3 million, or 4.2%, for the nine months ended September 30, 2018 compared to the same period in 2017.

Interest income was $9.4 million for the nine months ended September 30, 2018, an increase of $500 thousand, or 5.6%, compared with the nine months ended September 30, 2017 primarily due to an increase of $327 thousand of interest income on investments during the nine months ended September 30, 2018 compared to the same period in 2017 as a result of the increase in average investment securities of $8.3 million for the same period.

Interest expense was $1.4 million for the nine months ended September 30, 2018, an increase of $303 thousand, or 27.4%, compared with the nine months ended September 30, 2017. This increase was primarily due to an increase in average interest-bearing liabilities. Average interest-bearing liabilities increased $7.1 million, or 2.9%, for the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017.

Tax equivalent net interest margin, defined as net interest income adjusted for tax-free income divided by average interest-earning assets, for the nine months ended September 30, 2018 was 3.35%, a decrease of 14 basis points compared to 3.49% for the nine months ended September 30, 2017. The average yield on interest earning assets and the average rate paid on interest-bearing liabilities increased over the prior year. The average yield on interest-earning assets of 3.84% and the average rate paid on interest-bearing liabilities, 0.76%, as of September 30, 2018, were primarily impacted by changes in market interest rates as well as changes in the volume and relative mix of the underlying assets and liabilities. Tax equivalent adjustments to net interest margin are the result of increasing income from tax-free securities by an amount equal to the taxes that would have been paid if the income were fully taxable based on a 21.0% and 34.0% federal tax rate for the nine months ended September 30, 2018 and 2017, respectively, thus making tax-exempt yields comparable to taxable asset yields.

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The following table presents, for the periods indicated, the total dollar amount of average balances, interest income from average interest-earning assets and the annualized resultant yields, as well as the interest expense on average interest-bearing liabilities, expressed in both dollars and rates. Any nonaccruing loans have been included in the table as loans carrying a zero yield.

	Nine Months Ended
	September 30, 2018								September 30, 2017
	Average Balance			Interest Earned/     Interest Paid		Average Yield/ Rate			Average Balance			Interest Earned/     Interest Paid		Average Yield/ Rate
	(Dollars in thousands)
Assets
Interest-Earning Assets:
Loans	$	123,602		$	5,613		6.07	%	$	126,578		$	5,588		5.90	%
Securities		189,982			3,627		2.55	%		181,690			3,300		2.43	%
Deposits in other financial institutions		15,282			204		1.78	%		7,314			56		1.02	%
Total interest-earning assets		328,866			9,444		3.84	%		315,582			8,944		3.79	%
Allowance for loan losses		(3,107	)							(3,005	)
Noninterest-earning assets		25,596								24,414
Total assets	$	351,355							$	336,991
Liabilities and Shareholders’ Equity
Interest-Bearing Liabilities:
Interest-bearing demand deposits	$	69,354			242		0.47	%	$	61,926			168		0.36	%
Money market and savings deposits		59,197			184		0.42	%		57,836			144		0.33	%
Certificates and other time deposits		117,011			899		1.03	%		118,124			715		0.81	%
Borrowed funds		3,063			82		3.58	%		3,685			77		2.79	%
Total interest-bearing liabilities		248,625			1,407		0.76	%		241,571			1,104		0.61	%
Noninterest-Bearing Liabilities:
Noninterest-bearing demand deposits		63,798								55,797
Other liabilities		784								1,324
Total liabilities		313,207								298,692
Shareholders’ equity		38,148								38,299
Total liabilities and shareholders’ equity	$	351,355							$	336,991
Net interest rate spread							3.08	%							3.18	%
Net interest income and margin(1)				$	8,037		3.27	%				$	7,840		3.32	%
Net interest income and margin (tax equivalent)(2)				$	8,233		3.35	%				$	8,238		3.49	%

(1) The net interest margin is equal to annualized net interest income divided by average interest-earning assets.

(2) In order to make pretax income and resultant yields on tax-exempt investments and loans comparable to those on taxable investments and loans, a tax-equivalent adjustment has been computed using a federal

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income tax rate of 21.0% and 34.0% for the nine months ended September 30, 2018 and 2017, respectively, and other applicable effective tax rates.

The following table presents information regarding the dollar amount of changes in interest income and interest expense for the periods indicated for each major component of interest-earning assets and interest-bearing liabilities and distinguishes between the changes attributable to changes in volume and changes in interest rates. For purposes of this table, changes attributable to both rate and volume that cannot be segregated have been allocated to rate.

	For the Nine Months Ended
	2018 vs. 2017
	Increase (Decrease) Due to Change in
	Volume			Rate		Total
	(Dollars in thousands)
Interest-Earning assets:
Loans	$	(131	)	$	156	$	25
Securities		151			176		327
Deposits in other financial institutions		61			87		148
Total increase in interest income		80			420		500
Interest-Bearing liabilities:
Interest-bearing demand deposits		20			54		74
Money market and savings deposits		3			37		40
Certificates and other time deposits		(7	)		191		184
Borrowed funds		(13	)		18		5
Total increase in interest expense		4			299		303
Increase (decrease) in net interest income	$	76		$	121	$	197

Provision for Possible Credit Losses

Comanche’s provision for possible credit losses is a charge to income in order to bring its allowance for possible credit losses to a level deemed appropriate by management. No provision was required for the nine months ended September 30, 2018 and 2017.

Noninterest Income

Comanche’s primary sources of noninterest income are service charges on deposit accounts, debit card and ATM card income and earnings on bank-owned life insurance. Noninterest income does not include loan origination fees.

Nine months ended September 30, 2018 compared with the nine months ended September 30, 2017. Noninterest income totaled $1.2 million for the nine months ended September 30, 2018 compared to $1.3 million for the same period in 2017, a decrease of $86 thousand, or (6.7%).

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The following table presents, for the periods indicated, the major categories of noninterest income:

	For the Nine Months Ended September 30,				Increase (Decrease)
	2018		2017
	(Dollars in thousands)
Service charges on deposit accounts	$	656	$	702	$	(46	)
Earnings on bank-owned life insurance		126		137		(11	)
Net gain on sales of investment securities		18		31		(13	)
Other noninterest income		393		409		(16	)
Total noninterest income	$	1,193	$	1,279	$	(86	)

Noninterest Expense

Nine months ended September 30, 2018 compared with nine months ended September 30, 2017. Noninterest expense was $6.2 million and $6.1 million for the nine months ended September 30, 2018 and 2017, respectively.

The following table presents, for the periods indicated, the major categories of noninterest expense:

	For the Nine Months Ended September 30,				Increase (Decrease)
	2018		2017
	(Dollars in thousands)
Salaries and employee benefits	$	4,050	$	4,078	$	(28	)
Occupancy and equipment expense		735		788		(53	)
Loan and other real estate related expenses		15		25		(10	)
Regulatory assessments and bank insurance		174		132		42
Professional fees		113		122		(9	)
Postage and delivery expenses		93		92		1
Telephone and data lines expenses		170		172		(2	)
Debit card and ATM card expense		183		191		(8	)
Advertising		29		28		1
Marketing		50		51		(1	)
Other operating expenses		634		408		226
Total noninterest expense	$	6,246	$	6,087	$	159

Efficiency Ratio

The efficiency ratio is a supplemental financial measure utilized in management’s internal evaluation of Comanche’s performance and is not calculated based on generally accepted accounting principles. A GAAP-based efficiency ratio is calculated by dividing total noninterest expense, excluding credit loss provisions, by net interest income plus total noninterest income, as shown in the Consolidated Statements of Income. The efficiency ratio is calculated by excluding from noninterest income the net gains and losses on the sale of investment securities, which can vary widely from period to period. Additionally, taxes and provision for loan losses are not included in this calculation. An increase in the efficiency ratio indicates that more resources are being utilized to generate the same volume of income and/or being invested to generate future income, while a decrease would indicate a more efficient allocation of resources. Comanche’s efficiency ratio was 67.80% for the nine months ended September 30, 2018 compared to 66.98% for the nine months ended September 30, 2017.

Income Taxes

The amount of federal income tax expense is influenced by the amount of pre-tax income, the amount of tax-exempt income and the amount of other nondeductible expenses. Income tax expense decreased

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$181 thousand, or 30.8%, to $406 thousand for the nine months ended September 30, 2018 compared with $587 thousand for the same period in 2017. Comanche’s effective tax rates were 13.6% and 19.4% for the nine months ended September 30, 2018 and 2017, respectively. Comanche’s effective tax rate decreased for the nine months ended September 30, 2018 compared to the same period in 2017 primarily due to the reduction in the U.S. federal statutory income tax rate to 21.0% for 2018 from 34.0% for periods prior to 2018 under the Tax Reform.

Results of Operations for the Years Ended December 31, 2017 and 2016

Net income was $3.0 million for the year ended December 31, 2017 compared with $2.9 million for the year ended December 31, 2016, an increase of $122 thousand, or 4.3%. The increase in net income was primarily the result of a $648 thousand increase in net interest income partially offset by a $431 increase in income tax expense due to adjustments recorded to the net deferred tax asset as a result of the lowering of the corporate federal income tax rate from 34.0% to 21.0%. Returns on average equity were 7.68% and 7.37% for the years ended December 31, 2017 and 2016, respectively. The returns on average assets was 0.88% for both years ended December 31, 2017 and 2016.

Year ended December 31, 2017 compared with the year ended December 31, 2016. Net interest income for the year ended December 31, 2017 was $10.5 million compared with $9.8 million for the year ended December 31, 2016, an increase of $648 thousand, or 6.6%. The increase in net interest income was primarily due to the increase in average interest-earning assets of $12.0 million, or 3.9%, for the year ended December 31, 2017 compared with the year ended December 31, 2016.

Interest income was $12.0 million for the year ended December 31, 2017, an increase of $770 thousand, or 6.9%, compared with the year ended December 31, 2016 primarily due to an increase of $435 thousand of interest income and fees on loans and $289 thousand of interest income on investment securities during the year ended December 31, 2017 compared to the same period in 2016 as a result of the increase in average loans outstanding of $8.2 million and average investment securities of $2.4 million for the same period.

Interest expense was $1.5 million for the year ended December 31, 2017, an increase of $122 thousand, or 8.9%, compared with the year ended December 31, 2016. This increase was primarily due to an increase in average interest-bearing liabilities. Average interest-bearing liabilities increased $10.2 million, or 4.4%, for the year ended December 31, 2017 compared with the year ended December 31, 2016. The increase in average interest-bearing liabilities was primarily due to the increase in average interest-bearing deposits of $10.7 million, or 4.7%, during the year ended December 31, 2017.

Tax equivalent net interest margin was 3.47% and 3.40% for the years ended December 31, 2017 and 2016, respectively.

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The following table presents, for the periods indicated, the total dollar amount of average balances, interest income from average interest-earning assets and the annualized resultant yields, as well as the interest expense on average interest-bearing liabilities, expressed in both dollars and rates. Any nonaccruing loans have been included in the table as loans carrying a zero yield.

	Years Ended
	December 31, 2017								December 31, 2016
	Average Balance			Interest Earned/ Interest Paid		Average Yield/ Rate			Average Balance			Interest Earned/ Interest Paid		Average Yield/ Rate
	(Dollars in thousands)
Assets
Interest-Earning Assets:
Loans	$	126,631		$	7,452		5.88	%	$	118,440		$	7,017		5.92	%
Securities		182,686			4,426		2.42	%		180,315			4,137		2.29	%
Deposits in other financial institutions		7,253			77		1.06	%		5,859			31		0.53	%
Total interest-earning assets		316,570		$	11,955		3.78	%		304,614		$	11,185		3.67	%
Allowance for loan losses		(3,007	)							(3,004	)
Noninterest-earning assets		24,622								23,103
Total assets	$	338,185							$	324,713
Liabilities and Shareholders’ Equity
Interest-Bearing Liabilities:
Interest-bearing demand deposits	$	62,606		$	232		0.37	%	$	54,931		$	192		0.35	%
Money market and savings deposits		57,408			194		0.34	%		52,988			169		0.32	%
Certificates and other time deposits		116,954			960		0.82	%		118,343			903		0.76	%
Borrowed funds		3,654			103		2.82	%		4,203			103		2.45	%
Total interest-bearing liabilities		240,622		$	1,489		0.62	%		230,465		$	1,367		0.59	%
Noninterest-bearing Liabilities:
Noninterest-bearing demand deposits		55,885								52,906
Other liabilities		2,959								2,611
Total liabilities		299,466								285,982
Shareholders’ equity		38,719								38,731
Total liabilities and shareholders’ equity	$	338,185							$	324,713
Net interest rate spread							3.16	%							3.08	%
Net interest income and margin(1)				$	10,466		3.31	%				$	9,818		3.22	%
Net interest income and margin (tax equivalent)(2)				$	10,996		3.47	%				$	10,355		3.40	%

(1) The net interest margin is equal to net interest income divided by average interest-earning assets.

(2) In order to make pretax income and resultant yields on tax-exempt investments and loans comparable to those on taxable investments and loans, a tax-equivalent adjustment has been computed using a federal income tax rate of 34.0% for the years ended December 31, 2017 and 2016 and other applicable effective tax rates.

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The following table presents information regarding the dollar amount of changes in interest income and interest expense for the periods indicated for each major component of interest-earning assets and interest-bearing liabilities and distinguishes between the changes attributable to changes in volume and changes in interest rates. For purposes of this table, changes attributable to both rate and volume that cannot be segregated have been allocated to rate.

	For the Years Ended December 31,
	2017 vs. 2016
	Increase (Decrease) Due to Change in
	Volume			Rate			Total
	(Dollars in thousands)
Interest-earning assets:
Loans	$	485		$	(50	)	$	435
Securities		54			235			289
Deposits in other financial institutions		8			38			46
Total increase in interest income		547			223			770
Interest-bearing liabilities:
Interest-bearing demand deposits		27			13			40
Money market and savings deposits		14			11			25
Certificates and other time deposits		(10	)		67			57
Borrowed funds		(13	)		13			—
Total increase in interest expense		18			104			122
Increase (decrease) in net interest income	$	529		$	119		$	648

Provision for Possible Credit Losses

Comanche’s provision for possible credit losses is a charge to income in order to bring its allowance for possible credit losses to a level deemed appropriate by management. No provision was required for the years ended December 31, 2017 and 2016.

Noninterest Income

Comanche’s primary sources of noninterest income are service charges on deposit accounts, debit card and ATM card income and earnings on bank-owned life insurance. Noninterest income does not include loan origination fees.

Year ended December 31, 2017 compared with the year ended December 31, 2016. Noninterest income totaled $1.6 million for the year ended December 31, 2017 compared to $1.7 million for the year ended December 31, 2016, a decrease of $82 thousand, or (4.9%). This decrease was primarily due to net losses recorded on the sale of investment securities during 2017 in the amount of $73 thousand as compared to net gains recorded on the sale of investment securities during 2016 in the amount of $212 thousand which was then offset by an increase in service charges on deposit accounts in the amount of $164 thousand recorded in 2017 over the amount that was recorded in 2016.

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The following table presents, for the periods indicated, the major categories of noninterest income:

	Years Ended December 31,					Increase (Decrease)
	2017			2016
	(Dollars in thousands)
Service charges on deposit accounts	$	936		$	772	$	164
Earnings on bank-owned life insurance		182			187		(5	)
Net gain (loss) on sales of securities		(73	)		212		(285	)
Net gain on sales of other real estate		—			7		(7	)
Other		536			485		51
Total noninterest income	$	1,581		$	1,664	$	(83	)

Noninterest Expense

Year ended December 31, 2017 compared with the year ended December 31, 2016. Noninterest expense was $8.1 million for the years ended December 31, 2017 and 2016.

The following table presents, for the periods indicated, the major categories of noninterest expense:

	For the Years Ended December 31,				Increase (Decrease)
	2017		2016
	(Dollars in thousands)
Salaries and employee benefits	$	5,396	$	5,338	$	58
Occupancy expense		560		582		(22	)
Furniture and equipment expense		471		481		(10	)
Other		1,645		1,658		(13	)
Total noninterest expense	$	8,072	$	8,059	$	13

Efficiency Ratio

Comanche calculates the efficiency ratio by dividing total noninterest expense by the sum of net interest income and noninterest income, excluding net gains and losses on the sale of securities. Additionally, taxes and provision for loan losses are not part of this calculation. The efficiency ratio was 67.00% for the year ended December 31, 2017 compared with 70.19% for the year ended December 31, 2016.

Income Taxes

The amount of federal income tax expense is influenced by the amount of pre-tax income, the amount of tax-exempt income and the amount of other nondeductible expenses. Income tax expense increased $431 thousand, or 75.7%, to $1.0 million for the year ended December 31, 2017 compared with $569 thousand for the same period in 2016 primarily due the adjustment recorded during 2017 to adjust the net deferred tax assets as a result of the lowering of corporate federal income tax rate to 21.0% beginning in 2018.

The effective tax rates were 25.2% and 16.6% for the years ended December 31, 2017 and 2016, respectively. The effective tax rate for 2017 was impacted by the adjustment of Comanche’s deferred tax assets related to the reduction in the U.S. federal statutory income tax rate to 21.0% under the Tax Reform.

Financial Condition

Loan Portfolio

At September 30, 2018, total loans decreased $5.7 million from December 31, 2017. Total loans at December 31, 2017 were $125 million, a decrease of $198 thousand, or (0.2%), compared to $126 million as of December 31, 2016.

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Total loans as a percentage of deposits were 40.34%, 40.03% and 43.34% as of September 30, 2018, December 31, 2017 and December 31, 2016, respectively. Total loans as a percentage of assets were 35.3%, 35.0% and 37.8% as of September 30, 2018, December 31, 2017 and December 31, 2016, respectively.

The following table summarizes Comanche’s loan portfolio by type of loan as of the dates indicated:

	September 30, 2018						December 31, 2017						December 31, 2016
	Amount			Percent			Amount			Percent			Amount			Percent
	(Dollars in thousands)
Real estate	$	92,224			77.0	%	$	94,010			74.9	%	$	94,682			75.4	%
Commercial and industrial		9,794			8.2	%		10,934			8.7	%		9,363			7.4	%
Agriculture		9,546			8.0	%		11,228			9.0	%		10,988			8.7	%
Consumer		8,160			6.8	%		9,215			7.3	%		10,500			8.4	%
Other		48			0.0	%		74			0.1	%		126			0.1	%
Total loans		119,772			100.0	%		125,461			100.0	%		125,659			100.0	%
Allowance for possible credit losses		(3,092	)					(3,117	)					(3,003	)
Loans, net	$	116,680					$	122,344					$	122,656

Comanche has certain lending policies and procedures in place that are designed to maximize loan income within an acceptable level of risk. Management reviews and approves these policies and procedures on a regular basis. Diversification of the loan portfolio is a means of managing the risks associated with fluctuations in economic conditions.

In order to manage the diversification of the portfolio, Comanche segments loans into classes. The real estate loan segment is sub-segmented into classes that primarily include commercial real estate mortgage loans, construction and land development loans, farmland loans, 1-4 family residential loans and multi-family residential loans. Comanche segments consumer loans into classes that primarily include automobiles and other consumer loans, which include revolving credit plans. Comanche analyzes the overall ability of the borrower and guarantors to repay a loan. Information and risk management practices specific to Comanche’s loan segments and classes follows.

Real estate. Comanche makes commercial real estate mortgage loans which are primarily viewed as cash flow loans and secondarily as loans secured by real estate. The properties securing Comanche’s commercial real estate loans can be owner occupied or nonowner occupied. Concentrations within the various types of commercial properties are monitored by management in order to assess the risks in the portfolio. The real estate loan portfolio increased $1.8 million, or 1.9%, to $92.2 million as of September 30, 2018 compared to $94.0 million as of December 31, 2017. Total real estate loans as of December 31, 2017 decreased $672 thousand, or (0.7%), compared to $94.7 million as of December 31, 2016.

The repayment of these loans is largely dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Accordingly, repayment of these loans may be subject to adverse conditions in the real estate market or the economy to a greater extent than other types of loans. Comanche seeks to minimize these risks in a variety of ways in connection with underwriting these loans, including giving careful consideration to the property’s operating history, future operating projections, current and projected occupancy, location and physical condition.

Construction and land development loans are generally nonowner occupied and are subject to certain risks attributable to the fact that loan funds are advanced over the construction phase and the project is of uncertain value prior to its completion. Construction loans are generally based upon estimates of costs and value associated with the completed project with repayment dependent, in part, on the success of the ultimate project rather than the ability of the borrower or guarantor to repay the loan. Comanche has underwriting and funding procedures

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designed to address what it believes to be the risks associated with such loans; however, no assurance can be given the procedures will prevent losses resulting from the risks described above.

Comanche’s real estate lending activities also include the origination of 1-4 family residential and multi-family residential loans. The terms of these loans typically range from three to 20 years and are secured by the properties financed. Comanche requires the borrowers to maintain mortgage title insurance and hazard insurance. Comanche retains all 1-4 family residential loans for its own portfolio rather than selling such loans into the secondary market.

Commercial and Industrial. Comanche’s commercial and industrial loans represent credit extended to small to medium sized businesses primarily for the purpose of providing working capital and equipment purchase financing. Commercial and industrial loans often are dependent on the profitable operations of the borrower. These credits are primarily made based on the expected cash flow of the borrower and secondarily on the underlying collateral provided by the borrower. Most commercial and industrial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and may also incorporate a personal guarantee. Some shorter term loans may be extended on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers. The cash flows of borrowers may not be as expected and the collateral securing these loans may fluctuate, increasing the risk associated with this loan segment. As a result of the additional complexities, variables, and risks, commercial loans typically require more thorough underwriting and servicing than other types of loans. The commercial and industrial loan portfolio decreased $1.1 million, or (10.4%), to $9.8 million as of September 30, 2018 compared to $10.9 million as of December 31, 2017. Total commercial and industrial loans as of December 31, 2017 increased $1.6 million, or 16.8%, compared to $9.4 million as of December 31, 2016.

Agriculture. Comanche provides crop production and farm equipment loans to local area farmers. Comanche evaluates these borrowers primarily based on their historical profitability, level of experience in their particular agricultural industry, overall financial capacity and the secondary collateral, including crop insurance, to withstand economic and national fluctuations common to the industry. The agriculture loan portfolio decreased $1.7 million, or (15.0%), to $9.5 million as of September 30, 2018 compared to $11.2 million as of December 31, 2017. Total agriculture loans as of December 31, 2017 increased $240 thousand, or 2.2%, compared to $11.0 million as of December 31, 2016.

Consumer. Comanche’s consumer loans include automobile loans, home improvement loans, home equity loans, personal loans (collateralized and uncollateralized) and deposit account collateralized loans. The terms of these loans typically range from one to seven years and vary based on the nature of collateral and size of the loan. Consumer loan collections are dependent on the borrower’s continuing financial stability, and thus more likely to be adversely affected by job loss, illness or personal bankruptcy. Furthermore, the application of various federal and state laws may limit the amount which can be recovered on such loans. To monitor and manage consumer loan risk, policies and procedures are developed and modified, as deemed appropriate by Comanche’s management. The consumer loan portfolio decreased $1.1 million, or (11.6%), to $8.2 million as of September 30, 2018 compared to $9.2 million as of December 31, 2017. Total consumer loans as of December 31, 2017 decreased $1.3 million, or (12.2%), compared to $10.5 million as of December 31, 2016.

Other loans. Other loans consist primarily of smaller loans to business entities and individuals for various personal and business purposes and overdraft lines of credit principally extended to individuals.

Concentrations of Credit

The vast majority of Comanche’s lending activity occurs in Comanche, Palo Pinto, Parker and Jack Counties, Texas. Comanche’s loans are primarily secured by real estate, including commercial and residential construction, owner occupied and nonowner occupied and multi-family commercial real estate, raw land and

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other real estate based loans located in these areas. As of September 30, 2018, December 31, 2017 and 2016, real estate loans represented 77.0%, 74.9% and 75.3%, respectively, of Comanche’s total loans.

The following table summarizes the loan contractual maturity distribution by type and by related interest rate characteristics as of the date indicated:

	As of December 31, 2017
	One Year or Less			After One but Within Five Years		After Five Years		Total
	(Dollars in thousands)
Commercial and industrial loans	$	12,656		$	9,246	$	260	$	22,162
Real estate loans:
Construction, land and development		4,225			702		29,842		34,769
Residential 1-4 family		39			1,333		27,420		28,792
Commercial real estate		2,158			840		24,486		27,484
Consumer loans		1,987			6,727		501		9,215
Overdrafts		74			—		—		74
Less: Deferred loan fees		(35	)		—		—		(35	)
Total loans held in portfolio		21,104			18,848		82,509		122,461
Predetermined (fixed) interest rates		6,956			11,898		3,534		22,388
Floating interest rates		14,148			6,950		81,975		103,073
Total	$	21,104		$	18,848	$	85,509	$	125,461

The information in the table above is limited to contractual maturities of the underlying loans. The expected life of Comanche’s loan portfolio will differ from contractual maturities because borrowers may have the right to curtail or prepay their loans with or without prepayment penalties.

Asset Quality

Nonperforming Assets and Potential Problem Loans. Comanche has procedures in place to assist in maintaining the overall quality of its loan portfolio. Comanche has established underwriting guidelines to be followed by its officers to monitor Comanche’s delinquency levels for any negative or adverse trends.

Comanche had $31 thousand, $495 thousand and $1.2 million in nonaccrual loans as of September 30, 2018, December 31, 2017 and 2016, respectively.

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The following table presents information regarding nonperforming assets as of the dates indicated:

	As of September 30, 2018			As of December 31, 2017			As of December 31, 2016
	(Dollars in thousands)
Nonaccrual loans:
Real estate	$	31		$	366		$	1,032
Commercial and industrial		—			129			137
Agriculture		—			—			—
Consumer		—			—			—
Other		—			—			22
Total nonaccrual loans		31			495			1,191
Accruing loans 90 or more days past due		9			—			—
Total nonperforming loans		40			495			1,191
Other real estate		33			113			33
Other repossessed assets		—			—			6
Total nonperforming assets	$	73		$	608		$	1,230
Restructured loans	$	—		$	—		$	—
Nonperforming assets to total assets		0.01	%		0.17	%		0.37	%
Nonperforming loans to total loans		0.02	%		0.39	%		0.95	%

Allowance for Possible Credit Losses

The allowance for possible credit losses is a valuation allowance that is established through charges to earnings in the form of a provision for possible credit losses. The amount of the allowance for possible credit losses is affected by the following: (1) charge-offs of loans that decrease the allowance, (2) subsequent recoveries on loans previously charged off that increase the allowance and (3) provisions for loan losses charged to income that increase the allowance. For purposes of determining the allowance for possible credit losses, Comanche considers the loans in its portfolio by segment, class and risk grade. Management uses judgment to determine the estimation method that fits the credit risk characteristics of each portfolio segment or loan class. To assist in the assessment of risk, management reviews reports related to loan production, loan quality, concentrations of credit, loan delinquencies and nonperforming and potential problem loans. Comanche utilizes an independent third party loan review service to review the credit risk assigned to loans on a periodic basis and the results are presented to management for review.

At September 30, 2018 and December 31, 2017, the allowance for possible credit losses amounted to $3.1 million, or 2.58% and 2.48%, respectively, of total loans, as compared with $3.0 million, or 2.39%, as of December 31, 2016. Comanche believes that the allowance for possible credit losses at September 30, 2018, December 31, 2017 and December 31, 2016 was adequate to cover probable incurred losses in the loan portfolio as of such date.

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The following table presents, as of and for the periods indicated, an analysis of the allowance for possible credit losses and other related data:

	For the Nine Months Ended September 30,						For the Year Ended December 31, 2018
	2018			2017			2017			2016
	(Dollars in thousands)
Average loans outstanding	$	123,602		$	126,578		$	126,631		$	118,440
Gross loans outstanding at end of period		119,772			127,387			125,461			125,659
Allowance for possible credit losses at beginning of period		3,117			3,003			3,003			2,970
Provision for possible credit losses		—			—			—			—
Charge-offs:
Real estate		—			(10	)		(23	)		(21	)
Commercial and industrial		—			—			—			—
Agriculture		(15	)		—			(10	)		—
Consumer		(45	)		(63	)		(77	)		(47	)
Other		—			—			—			—
Total charge-offs for all loan types		(60	)		(73	)		(110	)		(68	)
Recoveries:
Real estate		1			10			10			1
Commercial and industrial		—			—			—			2
Agriculture		5			—			82			—
Consumer		29			69			132			98
Other		—			—			—			—
Total recoveries for all loan types		35			79			224			101
Net (charge-offs) recoveries		(25	)		6			114			33
Allowance for possible credit losses at end of period	$	3,092		$	3,009		$	3,117		$	3,003
Allowance for possible credit losses to total loans		2.58	%		2.36	%		2.48	%		2.39	%
Net (charge-offs) recoveries to average loans(1)		0.02	%		0.00	%		0.09	%		0.03	%
Allowance for possible credit losses to nonperforming loans		0.10	%		9.54	%		629.70	%		252.14	%

(1) Interim period annualized.

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The following table shows the allocation of the allowance for possible credit losses among Comanche’s loan categories and the percentage of the respective loan category to total loans held for investment as of the dates indicated. The allocation is made for analytical purposes and is not necessarily indicative of the categories in which future losses may occur. The total allowance is available to absorb losses from any loan category.

	As of September 30, 2018					As of December 31, 2017					As of December 31, 2016
	Amount		Percent of Loans to Total Loans			Amount		Percent of Loans to Total Loans			Amount		Percent of Loans to Total Loans
	(Dollars in thousands)
Balance of allowance for possible credit losses applicable to:
Real estate	$	1,764		57.1	%	$	1,965		63.0	%	$	2,035		67.8	%
Commercial and industrial		182		5.9	%		273		8.8	%		315		10.5	%
Agriculture		177		5.7	%		186		6.0	%		187		6.2	%
Consumer		207		6.7	%		247		7.9	%		243		8.1	%
Other		762		24.6	%		446		14.3	%		223		7.4	%
Total allowance for possible credit losses	$	3,092		100.0	%	$	3,117		100.0	%	$	3,003		100.0	%

Available for Sale Securities

As of September 30, 2018, the carrying amount of investment securities totaled $150.3 million, a decrease of $43.2 million, or (22.3%) compared with $193.5 million as of December 31, 2017. The carrying amount of investment securities at December 31, 2017 increased $22.9 million, or 13.4%, compared with $170.6 million as of December 31, 2016. Securities represented 55.5%, 54.0% and 51.3% of total assets as of September 30, 2018, December 31, 2017 and 2016, respectively.

The majority of the securities in the portfolio are classified as available for sale. Securities classified as available for sale are measured at fair value in the financial statements with unrealized gains and losses reported, net of tax, as accumulated comprehensive income or loss until realized. Interest earned on securities is included in interest income.

The following table summarizes the amortized cost and fair value of the securities in the securities portfolio as of the dates shown:

	September 30, 2018
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(Dollars in thousands)
Available for Sale
U.S. Government and agency securities:
Agency mortgage-backed securities	$	110,969	$	—	$	(4,605	)	$	106,364
Agency collateralized mortgage obligations		27,141		3		(972	)		26,169
Municipal securities		18,349		—		(904	)		17,448
Total	$	156,459	$	3	$	(6,481	)	$	149,981
Held to Maturity
U.S. Government and agency securities:
Agency mortgage-backed securities	$	—	$	—	$	—		$	—
Municipal securities		353		3		(5	)		351
Total	$	353	$	3	$	(5	)	$	351

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	December 31, 2017
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(Dollars in thousands)
Available for Sale
U.S. Government and agency securities:
Agency mortgage-backed securities	$	116,105	$	42	$	(1,388	)	$	114,759
Agency collateralized mortgage obligations		25,020		11		(283	)		24,748
Municipal securities		52,941		995		(314	)		53,622
Total	$	194,066	$	1,048	$	(1,985	)	$	193,129
Held to Maturity
U.S. Government and agency securities:
Agency mortgage-backed securities	$	—	$	—	$	—		$	—
Municipal securities		390		9		(2	)		397
Total	$	390	$	9	$	(2	)	$	397

	December 31, 2016
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(Dollars in thousands)
Available for Sale
U.S. Government and agency securities:
Agency mortgage-backed securities	$	109,181	$	149	$	(1,661	)	$	107,669
Agency collateralized mortgage obligations		9,568		24		(97	)		9,495
Municipal securities		53,285		930		(1,289	)		52,926
Total	$	172,034	$	1,103	$	(3,047	)	$	170,090
Held to Maturity
U.S. Government and agency securities:
Agency mortgage-backed securities	$	—	$	—	$	—		$	—
Municipal securities		501		3		(35	)		469
Total	$	501	$	3	$	(35	)	$	469

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The following tables show contractual maturities and the weighted average yields on Comanche’s investment securities as of the dates presented. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Weighted average yields are not presented on a taxable equivalent basis.

	Maturity as of September 30, 2018
	One Year or Less					One to Five Years					Five to Ten Years					After Ten Years
	Amortized Cost		Weighted Average Yield			Amortized Cost		Weighted Average Yield			Amortized Cost		Weighted Average Yield			Amortized Cost		Weighted Average Yield
											(Dollars in thousands)
Held-to-maturity
Obligations of states and political subdivisions	$	37		4.28	%	$	104		3.98	%	$	78		3.70	%	$	134		5.09	%
U. S. Government agency mortgage-backed securities		—		—			—		9.30	%		—		—			—		—
Total	$	37	$	4.28	%	$	104		3.99	%	$	78		3.70	%	$	134		5.09	%
Available-for-sale
Obligations of states and political subdivisions	$	90		5.00	%	$	410		5.00	%	$	1,812		2.25	%	$	16,037		2.91	%
U. S. Government agency mortgage-backed securities		—		—			72,695		2.26	%		38,274		2.64	%		—		—
Collateralized mortgage obligations		—		—			18,665		2.35	%		8,476		2.60	%		—		—
Total	$	90	$	5.00	%	$	91,769		2.29	%	$	48,563		2.62	%	$	16,037		2.91	%

	Maturity as of December 31, 2017
	One Year or Less					One to Five Years					Five to Ten Years					After Ten Years
	Amortized Cost		Weighted Average Yield			Amortized Cost		Weighted Average Yield			Amortized Cost		Weighted Average Yield			Amortized Cost		Weighted Average Yield
											(Dollars in thousands)
Held-to-maturity
Obligations of states and political subdivisions	$	37		3.58	%	$	127		4.23	%	$	76		3.46	%	$	150		5.00	%
U. S. Government agency mortgage-backed securities		—		—			—		9.31	%		—		—			—		—
Total	$	37	$	3.58	%	$	127		3.91	%	$	76		3.46	%	$	150		5.00	%
Available-for-sale
Obligations of states and political subdivisions	$	2,907		4.61	%	$	9,168		4.72	%	$	9,794		3.36	%	$	31,753		3.33	%
U. S. Government agency mortgage-backed securities		—		—			71,976		2.19	%		42,783		2.55	%		—		—
Collateralized mortgage obligations		—		—			16,918		2.33	%		7,830		2.59	%		—		—
Total	$	2,907	$	4.61	%	$	98,062		2.45	%	$	60,407		2.69	%	$	31,573		3.33	%

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	Maturity as of December 31, 2016
	One Year or Less					One to Five Years					Five to Ten Years					After Ten Years
	Amortized Cost		Weighted Average Yield			Amortized Cost		Weighted Average Yield			Amortized Cost		Weighted Average Yield			Amortized Cost		Weighted Average Yield
											(Dollars in thousands)
Held-to-maturity
Obligations of states and political subdivisions	$	111		5.07	%	$	150		5.24	%	$	74		3.77	%	$	166		5.85	%
U. S. Government agency mortgage-backed securities		—		—			—		9.31	%		—		—			—		—
Total	$	111	$	5.07	%	$	150		5.25	%	$	74		3.77	%	$	166		5.85	%
Available-for-sale
Obligations of states and political subdivisions	$	1,349		5.39	%	$	7,644		5.47	%	$	11,015		4.89	%	$	32,918		4.03	%
U. S. Government agency mortgage-backed securities		—		—			83,146		2.11	%		24,523		2.30	%		—		—
Collateralized mortgage obligations		13		4.03	%		7,003		2.23	%		2,479		1.95	%		—		—
Total	$	1,362	$	5.37	%	$	97,793		2.38	%	$	38,017		3.03	%	$	32,918		4.03	%

Comanche does not have the intent to sell any of the securities classified as available-for-sale while in a loss position and believes that it is not likely that it will have to sell any of these securities before a recovery of cost. The unrealized losses are attributable primarily to changes in market interest rates relative to those available when the securities were acquired. The fair value of these securities is expected to recover as the securities reach their maturity or re-pricing date, or if market rates for such investments decline.

Comanche does not believe that any of the securities are impaired due to reasons of credit quality. Accordingly, as of September 30, 2018, December 31, 2017 and 2016, Comanche believes the impairments were temporary, and no impairment loss has been realized in its consolidated statements of income for the periods then ended.

The average yield of Comanche’s securities portfolio was 2.55% during the nine months ended 2018 compared to 2.43% for the same period in 2017. The average yield for the year ended December 31, 2017 was 2.42% compared with 2.29% for the year ended December 31, 2016.

Goodwill

The balance of goodwill as of September 30, 2018, December 31, 2017 and 2016 was $3.8 million. Goodwill resulting from business combinations represents the excess of the consideration paid over the fair value of the net assets acquired. Goodwill is assessed annually for impairment or when events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable.

Deposits

Comanche’s lending and investing activities are primarily funded by deposits. Comanche offers a variety of deposit accounts having a range of interest rates and terms including demand, savings, money market and certificates and other time accounts.

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Total deposits at September 30, 2018, were $296,9 million, a decrease of $16.6 million, or (5.3%), compared with $313.4 million at December 31, 2017 primarily due to a decrease of $7.4 million in interest-bearing demand deposits transaction accounts. Deposits at December 31, 2017 increased $23.5 million, or 8.1%, compared with $289.9 million at December 31, 2016. The deposit growth experienced in 2017 was organic deposit growth.

	September 30, 2018		December 31, 2017		December 31, 2016
	(Dollars in thousands)
Demand	$	61,804	$	65,558	$	53,611
Interest-bearing transaction accounts		105,830		108,934		102,892
Savings		24,725		23,542		21,201
Time deposits		104,521		115,412		112,206
Total deposits	$	296,880	$	313,446	$	289,910

Comanche’s ratio of average noninterest-bearing deposits to average total deposits was 20.6% for the nine months ended September 30, 2018 and 20.9% and 18.5% for the years ended December 31, 2017 and 2016, respectively.

The following table shows the remaining maturity of time deposits of $100,000 and greater as of the dates indicated:

	September 30, 2018		December 31, 2017		December 31, 2016
Time deposits $100,000 or greater with remaining maturity of:
Three months or less	$	31,992	$	35,823	$	28,735
After three months through six months		10,593		11,862		33,016
After six months through 12 months		24,480		27,412		16,336
After 12 months		6,646		7,441		—
Total	$	73,711	$	82,538	$	78,087

Borrowings

Comanche has established approximately $21.8 million in unsecured lines of credits for overnight purchase of federal funds. In addition, Comanche has an available line of credit with the Federal Home Loan Bank of Dallas (which we refer to as “FHLB”), which allows Comanche to borrow on a collateralized basis. FHLB advances are used to manage liquidity as needed. At September 30, 2018, December 31, 2017 and 2016, Comanche had an available line of credit with the FHLB, which allows it to borrow up to $53.0 million, $52.6 million and $51.5 million, respectively, on a collateralized basis. Any borrowings would be collateralized by a blanket lien on eligible commercial loans and loans secured by real estate. As of September 30, 2018, December 31, 2017 and 2016, there were no outstanding balances with the FHLB.

Comanche has Floating Rate Junior Subordinated Deferrable Interest Debentures outstanding of $2.8 million, $3.3 million and $3.8 million at September 30, 2018, December 31, 2017 and 2016, respectively. The interest rate on these debentures was 3.98413%, 3.23849% and 2.61344% at September 30, 2018, December 31, 2017 and 2016, respectively.

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Contractual Obligations

The following table presents information regarding Comanche’s outstanding contractual obligations and other commitments to make future payments as of December 31, 2017, which consists of its future cash payments associated with other time deposits and contractual obligations pursuant to FHLB advances and other borrowings:

	Total Amounts Committed		One Year or Less		Over One Year Through Three Years		Over Three Years Through Five Years		Over Five Years
	(Dollars in thousands)
December 31, 2017
Contractual obligations:
Time deposits	$	115,412	$	103,240	$	12,172	$	—	$	—
FHLB advances and other borrowings		2,811		—		—		—		2,811
Total deposits	$	118,223	$	103,240	$	12,172	$	—	$	2,811

Off-Balance Sheet Items

Comanche is party to various financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit under commercial lines of credit, revolving credit lines, overdraft protection agreements and standby letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the consolidated balance sheets. The contract amounts of the instruments reflect the extent of the Comanche’s involvement in particular classes of financial instruments. Comanche’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of these instruments. Comanche uses the same credit policies in making these commitments and conditional obligations as it does for on-balance-sheet instruments.

Comanche evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if considered necessary by Comanche upon extension of credit, is based on management’s credit evaluation of the customer.

The following is a summary of the various financial instruments entered into by Comanche as of the dates indicated:

	September 30, 2018		December 31,
			2017		2016
	(Dollars in thousands)
Commitments to extend credit	$	13,507	$	11,973	$	12,429
Standby letters of credit		467		467		308

Commitments to Extend Credit. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being fully drawn upon, the total commitment amounts disclosed above do not necessarily represent future cash requirements

Standby Letters of Credit. Standby letters of credit are conditional commitments issued by Comanche to guarantee the performance of a customer to a third party. Comanche’s credit risk involved in issuing letters of credit is essentially the same as that involved in funding loans facilities.

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Liquidity and Capital Resources

Liquidity

Liquidity is the measure of Comanche’s ability to meet the cash flow requirements of depositors and borrowers, while at the same time meeting Comanche’s operating, capital and strategic cash flow needs and to maintain reserve requirements to operate on an ongoing basis and manage unexpected events, all at a reasonable cost. For the nine months ended September 30, 2018 and the years ended December 31, 2017 and 2016, Comanche’s liquidity needs have been met by core deposits, borrowed funds, security and loan maturities and amortizing investment and loan portfolios. Comanche has access to purchased funds from correspondent banks, and advances from the FHLB are available under a security and pledge agreement to take advantage of investment opportunities.

Capital Resources

Comanche Bank is subject to various regulatory capital requirements administered by bank regulators. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures and risk weighting of assets, liabilities, and certain off-balance sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weighting and other factors.

Failure to meet the minimum regulatory capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on Comanche Bank’s financial statements. Comanche Bank believes, as of September 30, 2018, December 31, 2017 and December 31, 2016, that it met all of the capital adequacy requirements to which it is subject.

As of September 30, 2018, the most recent notification from the Office of the Comptroller of the Currency, Comanche Bank was categorized as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that Comanche Bank believes has changed Comanche Bank’s prompt corrective action category.

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The following table provides a comparison of Comanche Bank’s leverage and risk-weighted capital ratios as of September 30, 2018 and December 31, 2017 to the minimum and well-capitalized regulatory standards:

	Actual					For Capital Adequacy Purposes					To Be Categorized As Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
	(Dollars in thousands)
THE COMANCHE NATIONAL BANK
As of September 30, 2018
Total Capital
(to risk weighted assets)	$	42,406		27.42	%	$	12,372		8.00	%	$	15,465		10.00	%
Common Equity Tier 1 Capital
(to risk weighted assets)		40,459		26.16	%		9,279		4.50	%		12,372		6.50	%
Tier 1 Capital
(to risk weighted assets)		40,459		26.16	%		6,959		6.00	%		10,052		8.00	%
Tier 1 Capital
(to average tangible assets)		40,459		12.01	%		13,473		4.00	%		16,841		5.00	%
As of December 31, 2017
Total Capital
(to risk weighted assets)	$	39,731		23.79	%	$	13,362		8.00	%	$	16,702		10.00	%
Common Equity Tier 1 Capital
(to risk weighted assets)		37,631		22.53	%		7,562		4.50	%		10,922		6.50	%
Tier 1 Capital
(to risk weighted assets)		37,631		22.53	%		10,021		6.00	%		13,362		8.00	%
Tier 1 Capital
(to average tangible assets)		37,631		11.15	%		13,498		4.00	%		16,872		5.00	%

Quantitative and Qualitative Disclosures about Market Risk

Comanche manages market risk, which for Comanche is primarily interest rate risk related to the operations of its subsidiary bank, through the Asset-Liability Committee of Comanche Bank. This committee is composed of certain members of the board of directors of Comanche Bank in accordance with asset liability and funds management policies approved by the full board of directors of Comanche Bank. Comanche Bank uses an interest rate risk simulation model and shock analysis to test the interest rate sensitivity of net interest income and fair value of equity, and the impact of changes in interest rates on other financial metrics.

The following table summarizes the simulated change in net interest income and the economic value of equity over a 12-month horizon as of the dates indicated:

Change in Interest Rates (Basis Points)	Percent Change in Net Interest Income		Percent Change in Economic Value of Equity
	As of September 30, 2018	As of December 31, 2017	As of September 30, 2018	As of December 31, 2017
+300	9.5%	3.2%	(10.9%)	0.9%
+200	5.8%	0.9%	2.0%	7.6%
+100	3.4%	2.0%	(2.4%)	(7.3%)
Base	0.4%	0.0%	0.0%	0.0%
-100	(3.8%)	(4.8%)	(0.07%)	6.0%

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

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Non-GAAP Financial Measures

Comanche’s accounting and reporting policies conform to GAAP, and the prevailing practices in the banking industry. However, Comanche also evaluates its performance based on certain additional financial measures discussed in this document as being a non-GAAP financial measures. Comanche classifies a financial measure as being a non-GAAP financial measure if that financial measure excludes or includes amounts, or is subject to adjustments that have the effect of excluding or including amounts, that are included or excluded, as the case may be, in the most directly comparable measure calculated and presented in accordance with GAAP as in effect from time to time in the United States in its statements of income, balance sheets or statements of cash flows. Non-GAAP financial measures do not include operating and other statistical measures or ratios or statistical measures calculated using exclusively financial measures calculated in accordance with GAAP.

The non-GAAP financial measures that Comanche discusses in this document should not be considered in isolation or as a substitute for the most directly comparable or other financial measures calculated in accordance with GAAP. Moreover, the manner in which Comanche calculates the non-GAAP financial measures that it discusses in this document may differ from that of other banking organizations reporting measures with similar names. You should understand how such other banking organizations calculate their financial measures similar or with names similar to the non-GAAP financial measures Comanche has discussed in this document when comparing such non-GAAP financial measures.

Net Interest Margin

Comanche shows net interest margin on a fully taxable equivalent basis, which is a non-GAAP financial measure.

Comanche believes the fully tax equivalent basis is the preferred industry measurement basis for net interest margin and that it enhances comparability of net interest income arising from taxable and tax-exempt sources.

The following table reconciles, as of the dates set forth below, net interest margin on a fully taxable equivalent basis:

	As of or for the Nine Months Ended September 30,						As of or for the Years Ended December 31,
	2018			2017			2017			2016
	(Dollars in thousands)
Net interest margin - GAAP basis:
Net interest income	$	8,037		$	7,840		$	10,466		$	9,818
Average interest-earning assets		328,866			315,582			316,570			304,614
Net interest margin		3.27	%		3.32	%		3.31	%		3.22	%
Net interest margin - Non-GAAP basis:
Net interest income	$	8,037		$	7,840		$	10,466		$	9,818
Plus:
Impact of fully taxable equivalent adjustment		196			398			530			537
Net interest income on a fully taxable equivalent basis	$	8,233		$	8,238		$	10,996		$	10,355
Average interest-earning assets		328,866			315,582			316,570			304,614
Net interest margin on a fully taxable equivalent basis - Non-GAAP basis		3.35	%		3.49	%		3.47	%		3.40	%

Tangible Book Value Per Share

Tangible book value per share is a non-GAAP financial measure generally used by investors, financial analysts and investment bankers to evaluate financial institutions. Comanche calculates (i) tangible book value

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per share as tangible equity divided by shares of common stock outstanding at the end of the respective period, and (ii) tangible equity as common stockholders’ equity less goodwill and other intangible assets, net of accumulated amortization. The most directly comparable GAAP financial measure for tangible book value per share is book value per share.

Comanche believes that this measure is important to many investors in the marketplace who are interested in changes from period to period in book value per share exclusive of changes in intangible assets. Goodwill and other intangible assets have the effect of increasing total book value while not increasing Comanche’s tangible book value.

The following table reconciles, as of the dates set forth below, total stockholders’ equity to tangible equity and presents Comanche’s tangible book value per share compared to its book value per share:

	As of September 30,				As of December 31,
	2018		2017		2017		2016
	(Dollars in thousands, except per share data)
Total stockholders’ equity	$	37,043	$	40,142	$	39,252	$	36,455
Less:
Goodwill and other intangible assets		3,815		3,815		3,815		3,815
Tangible stockholders’ equity	$	33,228	$	36,327	$	35,437	$	32,640
Shares outstanding		399,261		401,912		401,912		402,152
Book value per share	$	92.78	$	99.88	$	97.66	$	90.65
Less:
Goodwill and other intangible assets per share		9.56		9.49		9.49		9.49
Tangible book value per share	$	83.22	$	90.39	$	88.17	$	81.16

Tangible Equity to Tangible Assets

Tangible equity to tangible assets is a non-GAAP financial measure generally used by investors, financial analysts and investment bankers to evaluate financial institutions. Comanche calculates tangible equity, as described above in “—Tangible Book Value Per Share”, and tangible assets as total assets less goodwill and core deposit intangibles and other intangible assets, net of accumulated amortization. The most directly comparable GAAP financial measure for tangible equity to tangible assets is total common stockholders’ equity to total assets.

Comanche believes that this measure is important to many investors in the marketplace who are interested in the relative changes from period to period in common equity and total assets, each exclusive of changes in intangible assets. Goodwill and other intangible assets have the effect of increasing both total stockholders’ equity and assets while not increasing our tangible equity or tangible assets.

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The following table reconciles, as of the dates set forth below, total stockholders’ equity to tangible equity and total assets to tangible assets:

	As of September 30,						As of December 31,
	2018			2017			2017			2016
	(Dollars in thousands)
Total stockholders’ equity to total assets – GAAP basis
Total stockholders’ equity (numerator)	$	37,043		$	40,142		$	39,252		$	36,455
Total assets (denominator)		338,886			333,595			358,383			332,367
Total stockholders’ equity to total assets		10.93	%		12.03	%		10.95	%		10.97	%
Tangible equity to tangible assets – Non-GAAP basis:
Tangible equity:
Total stockholders’ equity	$	37,043		$	40,142		$	39,252		$	36,455
Less:
Goodwill and other intangible assets		3,815			3,815			3,815			3,815
Total tangible common equity (numerator)	$	33,228		$	36,327		$	35,4378		$	32,640
Tangible assets:
Total assets		338,886			333,595			358,383			332,367
Less:
Goodwill and other intangible assets		3,815			3,815			3,815			3,815
Total tangible assets (denominator)	$	335,071		$	329,780		$	354,568		$	328,552
Tangible equity to tangible assets		9.92	%		11.02	%		9.99	%		9.93	%

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INFORMATION ABOUT BEEVILLE

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. Beeville Bank offers full commercial and consumer banking services to customers throughout north central region of Texas. Beeville Bank also has branches in Seguin and Yorktown, as well as loan production offices in Corpus Christi, Karnes City and New Braunfels, Texas.

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 subsidiary is included in documents incorporated by reference in this document. See the section of this document entitled “Where You Can Find More Information,” beginning on page 281.

Information about Beeville’s Business

General

Beeville was incorporated as a Texas corporation in 1984 to serve as a bank holding company for Beeville Bank. Beeville does not conduct any material operations at the holding company level other than activities it performs for Beeville Bank. Its primary activities are to provide assistance in the management and coordination of Beeville Bank’s financial resources. Beeville’s principal asset is the outstanding common stock of Beeville Bank. Beeville derives its revenues primarily from the operations of Beeville Bank in the form of dividends received from Beeville Bank.

Beeville Bank is a national banking association chartered in 1890, and has served since that time as a community-based financial institution with operations centered in Beeville, Texas and the surrounding areas.

As a bank holding company, Beeville is subject to supervision and regulation by the Federal Reserve, in accordance with the requirements set forth in the BHC Act and by the rules and regulations issued by the Federal Reserve.

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.

Products and Services

Beeville Bank is a traditional commercial bank offering a variety of banking services to consumer and commercial customers throughout the north central 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. Real estate loans offered by Beeville Bank are secured by first or second mortgages on the subject collateral, and often relate to owner-occupied office and retail buildings. Agricultural loans offered include loans to farming operations, ranching operations and dairy operation for purposes of operating, equipment and livestock purchases and land purchases. Commercial loans offered include loans to small- and medium-sized businesses for the purpose of purchasing equipment, inventory, facilities or for working capital. Consumer loans offered include loans for the purpose of purchasing automobiles, recreational vehicles, personal residences, household goods, home improvements and other personal expenses.

Beeville Bank offers depository services and various checking account services. Beeville Bank also offers commercial treasury management services, safe deposit boxes, debit card services, merchant bank card services, wire transfer services, cashier’s checks, telephone banking, Internet banking, direct deposit and automatic transfers between accounts. Beeville Bank has ATMs at most of its locations. Beeville Bank’s business is not seasonal in any material respect.

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Beeville Bank funds its lending activities primarily from its core deposit base. Beeville Bank obtains deposits from its local markets and is not heavily dependent on any single depositor.

Competition

Each activity in which Beeville Bank is engaged involves competition with other banks, as well as with nonbanking financial institutions and nonfinancial enterprises. In addition to competing with other commercial banks within and outside its primary market area, Beeville Bank competes with other financial institutions engaged in the business of making loans or accepting deposits, such as savings and loan associations, credit unions, industrial loan associations, insurance companies, small loan companies, financial companies, mortgage companies, real estate investment trusts, certain governmental agencies, credit card organizations and other enterprises. Banks and other financial institutions with which Beeville Bank competes may have capital resources and legal loan limits substantially higher than those maintained by Beeville Bank.

Employees

As of September 30, 2018, Beeville had 52 full-time employees and five (5) part-time employee, none of whom are covered by a collective bargaining agreement.

Information about Beeville’s Properties

Beeville Bank owns its main office, which is located at 1400 East Houston Street, Beeville, Texas 78102. Beeville Bank also owns its branches located at 125 South State Highway 46, Seguin, Texas 78155 and 142 North Riedel, Yorktown, Texas 78164. Beeville Bank leases its three loan production office locations at 7114 Saratoga, Corpus Christi, Texas 78414; 102 South Browne Street, Karnes City, Texas 78118; and 387 West Mill Street, Suite 107, New Braunfels, Texas 78130.

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BEEVILLE’S MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis is intended to provide an overview of the significant factors affecting the financial condition and results of operations of Beeville for the nine months ended September 30, 2018 and 2017 and the years ended December 31, 2017 and 2016. The following discussion and analysis should be read in conjunction with the sections of this proxy statement/prospectus entitled “Cautionary Statements Regarding Forward-Looking Statements,” “Risk Factors,” “Selected Consolidated Historical Financial Data for Beeville” and Beeville’s consolidated financial statements and the accompanying notes included elsewhere in this document. As used in this section, unless the context otherwise requires, references to “Beeville” refer to First Beeville Financial Corporation and The First National Bank of Beeville on a consolidated basis. This discussion and analysis contains forward-looking statements that are subject to certain risks and uncertainties and are based on certain assumptions that Beeville believes are reasonable but may prove to be inaccurate. Beeville assumes no obligation to update any of these forward-looking statements, except as required by law.

Overview

Beeville is a Texas corporation that owns all of the outstanding shares of common stock of Beeville Bank, with operational headquarters in Beeville, Texas. Beeville Bank offers full consumer and commercial banking services to customers throughout its market areas in and around Bee, DeWitt and Guadalupe Counties, Texas. Beeville Bank has three banking locations and three loan production offices. As of September 30, 2018, Beeville had total assets of $411.7 million, total loans of $279.0 million, total deposits of $373.4 million and total shareholders’ equity of $36.0 million.

Beeville generates most of its income from interest income on loans, service charges on customer accounts and interest income from deposits in other financial institutions. Beeville incurs interest expense on deposits and other borrowed funds and noninterest expenses such as salaries and employee benefits and occupancy expenses. Net interest income is the largest source of Beeville’s revenue. Net interest spread is the difference between rates earned on interest-earning assets and rates paid on interest-bearing liabilities. Net interest margin is calculated as net interest income divided by average interest-earning assets. Because noninterest-bearing sources of funds, such as noninterest-bearing deposits and shareholders’ equity, also fund interest-earning assets, net interest margin includes the benefit of these noninterest-bearing sources.

Changes in the market interest rates and interest rates Beeville earns on interest-earning assets or pays on interest-bearing liabilities, as well as the volume and types of interest-earning assets, interest-bearing and noninterest-bearing liabilities and shareholders’ equity, are usually the largest drivers of periodic changes in net interest spread, net interest margin and net interest income. Fluctuations in market interest rates are driven by many factors, including governmental monetary policies, inflation, deflation, macroeconomic developments, changes in unemployment, the money supply, political and international conditions and conditions in domestic and foreign financial markets. Periodic changes in the volume and types of loans in Beeville’s loan portfolio are affected by, among other factors, economic and competitive conditions in Texas and specifically in Bee, DeWitt and Guadalupe Counties, Texas, as well as developments affecting the real estate, technology, financial services, insurance, transportation, manufacturing and energy sectors within Beeville’s target market.

Recent Developments

On November 27, 2018, Beeville and Spirit entered into the reorganization agreement providing for the acquisition by Spirit of Beeville pursuant to the merger of Beeville with and into Spirit, with Spirit surviving the merger. Pursuant to the terms and subject to the conditions of the reorganization agreement, which has been approved by the Beeville board of directors and the Spirit board of directors, the transaction provides for the payment to Beeville shareholders of an estimated $32.375 million in cash and 1,579,268 shares of Spirit common

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stock, subject to certain adjustments. The transaction is expected to close in the second quarter of 2019, subject to satisfaction of customary closing conditions, including the receipt of regulatory approvals and the approval of Beeville shareholders.

Results of Operations for the Nine Months Ended September 30, 2018 and 2017

Net income was $4.5 million for the nine months ended September 30, 2018 compared with $3.2 million for the nine months ended September 30, 2017, an increase of $1.3 million, or 42.5%. The increase in net income was primarily the result of a $2.0 million increase in net interest income and a $311 thousand decrease in the provision for loan losses offset by a $592 thousand decrease in noninterest income and a $545 thousand increase in noninterest expense. There was also a $144 thousand decrease in income tax expense as a result of the decrease in the corporate federal tax rate. Annualized returns on average equity were 17.78% and 13.23% and annualized returns on average assets were 1.52% and 1.25%, for the nine months ended September 30, 2018 and 2017, respectively.

Net Interest Income

Net interest income is the difference between interest income on earning assets, such as loans and securities, and interest expense on liabilities, such as deposits and borrowings, which are used to fund those assets. Tax equivalent net interest margin is the ratio of taxable-equivalent net interest income to average earning assets for the period. The level of interest rates and the volume and mix of earning assets and interest-bearing liabilities impact net interest income and net interest margin.

Net interest income before the provision for loan losses for the nine months ended September 30, 2018 was $11.8 million compared with $9.8 million for the nine months ended September 30, 2017, an increase of $2.0 million, or 20.7%. The increase in net interest income was primarily due to the increase in average interest-earning assets of $56.0 million, or 17.6%, for the nine months ended September 30, 2018 compared to the same period in 2017.

Interest income was $13.1 million for the nine months ended September 30, 2018, an increase of $2.5 million, or 23.6%, compared with the nine months ended September 30, 2017 primarily due to an increase of $1.8 million of interest income on loans and an increase of $456 thousand in interest on deposits in other financial institutions during the nine months ended September 30, 2018 compared to the same period in 2017 as a result of the increases in average loans of $23.5 million and average deposits with other financial institutions of $21.3 million for the same period.

Interest expense was $1.3 million for the nine months ended September 30, 2018, an increase of $477 thousand, or 58.7%, compared with the nine months ended September 30, 2017. This increase was primarily due to an increase in average interest-bearing liabilities and an increase in the average rate paid on interest-bearing liabilities during the period. Average interest-bearing liabilities increased $43.8 million, or 18.8%, for the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017.

Tax equivalent net interest margin, which is a non-GAAP financial measure, defined as net interest income adjusted for tax-free income divided by average interest-earning assets, for the nine months ended September 30, 2018 was 4.25%, an increase of 11 basis points compared to 4.14% for the nine months ended September 30, 2017. The average yield on interest earning assets and the average rate paid on interest-bearing liabilities increased over the prior year. The average yield on interest-earning assets of 4.68% and the average rate paid on interest-bearing liabilities of 0.62%, as of September 30, 2018, were primarily impacted by changes in market interest rates, as well as changes in the volume and relative mix of the underlying assets and liabilities. Tax equivalent adjustments to net interest margin are the result of increasing income from tax-free securities by an amount equal to the taxes that would have been paid if the income were fully taxable based on a 21% and 34% federal tax rate for the nine months ended September 30, 2018 and 2017, respectively, thus making tax-exempt yields comparable to taxable asset yields.

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The following table presents, for the periods indicated, the total dollar amount of average balances, interest income from average interest-earning assets and the annualized resultant yields, as well as the interest expense on average interest-bearing liabilities, expressed in both dollars and rates. Any nonaccruing loans have been included in the table as loans carrying a zero yield.

	Nine Months Ended
	September 30, 2018								September 30, 2017
	Average Balance			Interest Earned/ Interest Paid		Average Yield/Rate			Average Balance			Interest Earned/ Interest Paid		Average Yield/ Rate
	(Dollars in thousands)
Assets
Interest-Earning Assets:
Loans	$	271,451		$	11,646		5.72	%	$	247,929		$	9,845		5.29	%
Securities		56,422			874		2.07			45,210			620		1.83
Deposits in other financial institutions		46,181			619		1.79			24,873			164		0.88
Total interest-earning assets		374,054			13,140		4.68			318,012			10,629		4.46
Allowance for loan losses		(3,240	)							(2,865	)
Noninterest-earning assets		25,143								21,632
Total assets	$	395,957							$	336,779
Liabilities and Shareholders’ Equity
Interest-Bearing Liabilities:
Interest-bearing demand deposits	$	156,307			219		0.19		$	119,548			177		0.20
Money market and savings deposits		66,992			680		1.35			62,715			313		0.67
Certificates and other time deposits		52,959			389		0.98			47,557			280		0.79
Borrowed funds		134			2		2.08			2,747			43		2.08
Total interest-bearing liabilities		276,392			1,290		0.62			232,567			813		0.47
Noninterest-Bearing Liabilities:
Noninterest-bearing demand deposits		83,598								70,608
Other liabilities		2,194								1,849
Total liabilities		362,184								305,024
Shareholders’ equity		33,773								31,755
Total liabilities and shareholders’ equity	$	395,957							$	336,779
Net interest rate spread							4.06								3.99
Net interest income and margin(1)				$	11,850		4.22					$	9,816		4.12
Net interest income and margin (tax equivalent)(2)				$	11,913		4.25					$	9,886		4.14

(1) The net interest margin is equal to annualized net interest income divided by average interest-earning assets.

(2) In order to make pretax income and resultant yields on tax-exempt loans comparable to those on taxable loans, a tax-equivalent adjustment has been computed using a federal tax rate of 21.0% for the nine months ended September 30, 2018 and a federal tax rate of 34.0% for the nine months ended September 30, 2017, which is a non-GAAP financial measure. See Beeville’s reconciliation of non-GAAP financial measures to their most directly comparable GAAP financial measures under the caption “Beeville’s Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Financial Measures.”

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The following table presents information regarding the dollar amount of changes in interest income and interest expense for the periods indicated for each major component of interest-earning assets and interest-bearing liabilities and distinguishes between the changes attributable to changes in volume and changes in interest rates. For purposes of this table, changes attributable to both rate and volume that cannot be segregated have been allocated to rate.

	For the Nine Months Ended September 30,
	2018 vs. 2017
	Increase (Decrease) Due to Change in						Total
	Volume			Rate
	(Dollars in thousands)
Interest-Earning assets:
Loans	$	934		$	867		$	1,801
Securities		154			100			254
Deposits in other financial institutions		140			316			456
Total increase in interest income		1,228			1,283			2,511
Interest-Bearing liabilities:
Interest-bearing demand deposits		55			(13	)		42
Money market and savings deposits		21			346			367
Certificates and other time deposits		32			77			109
Borrowed funds		(42	)		1			(41	)
Total increase in interest expense		66			411			477
Increase in net interest income	$	1,162		$	872		$	2,034

Provision for Loan Losses

Beeville’s provision for loan losses is a charge to income in order to bring its allowance for loan losses to a level deemed appropriate by management. A provision of $445 thousand and $756 thousand was required for the nine months ended September 30, 2018 and 2017.

Noninterest Income

Beeville’s primary sources of noninterest income are service charges on deposit accounts, debit card and ATM card income and earnings on bank-owned life insurance. Noninterest income does not include loan origination fees.

Noninterest income totaled $867 thousand for the nine months ended September 30, 2018 compared to $1.5 million for the same period in 2017, a decrease of $591 thousand, or 40.6%.

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The following table presents, for the periods indicated, the major categories of noninterest income:

	For the Nine Months Ended September 30,				Increase (Decrease)
	2018		2017
	(Dollars in thousands)
Service charges on deposit accounts	$	638	$	687	$	(49	)
Earnings on bank-owned life insurance		137		99		38
Death benefit of bank-owned life insurance		—		624		(624	)
Net gain on sales of investment securities		—		—		—
Other service charges and noninterest income		92		48		44
Total noninterest income	$	867	$	1,458	$	(591	)

Noninterest Expense

Noninterest expense was $6.7 million and $6.2 million for the nine months ended September 30, 2018 and 2017, respectively.

The following table presents, for the periods indicated, the major categories of noninterest expense:

	For the Nine Months Ended September 30,				Increase (Decrease)
	2018		2017
	(Dollars in thousands)
Salaries and employee benefits	$	4,005	$	3,539	$	466
Occupancy and equipment expense		790		761		29
Data processing expense		414		336		78
Regulatory assessments and bank insurance		266		208		58
Debit card and ATM card expenses		192		174		18
Professional services		149		225		(76	)
Telecommunications expense		156		143		13
Marketing and advertising		100		125		(25	)
Other operating expenses		658		673		(15	)
Total noninterest expense	$	6,730	$	6,184	$	546

Efficiency Ratio

The efficiency ratio is a supplemental financial measure utilized in management’s internal evaluation of Beeville’s performance and is not calculated based on generally accepted accounting principles. A GAAP-based efficiency ratio is calculated by dividing total noninterest expense, excluding credit loss provisions, by net interest income plus total noninterest income, as shown in the Consolidated Statements of Income. The efficiency ratio is calculated by excluding from noninterest income the net gains and losses on the sale of investment securities, which can vary widely from period to period. Additionally, taxes and provision for loan losses are not included in this calculation. An increase in the efficiency ratio indicates that more resources are being utilized to generate the same volume of income and/or being invested to generate future income, while a decrease would indicate a more efficient allocation of resources. Beeville’s efficiency ratio was 52.92% for the nine months ended September 30, 2018 compared to 54.85% for the nine months ended September 30, 2017.

Income Taxes

The amount of federal income tax expense is influenced by the amount of pre-tax income, the amount of tax-exempt income and the amount of other nondeductible expenses. Income tax expense decreased

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$144 thousand, or 12.17%, to $1.0 million for the nine months ended September 30, 2018 compared with $1.2 million for the same period in 2017. Beeville’s effective tax rates were 18.75% and 27.30% for the nine months ended September 30, 2018 and 2017, respectively. Beeville’s effective tax rate decreased for the nine months ended September 30, 2018 compared to the same period in 2017 primarily due to the reduction in the U.S. federal statutory income tax rate to 21.0% for 2018 from 34.0% for periods prior to 2018 under the Tax Reform.

Results of Operations for the Years Ended December 31, 2017 and 2016

Net income was $3.7 million for the year ended December 31, 2017 compared with $3.3 million for the year ended December 31, 2016, an increase of $400 thousand, or 12.2%. The increase in net income was primarily the result of a $1.3 million increase in net interest income and a $547 thousand decrease in the provision for loan losses partially offset by an increase of $609 thousand in noninterest expense and an $807 thousand increase in income tax expense due to adjustments recorded to the net deferred tax asset as a result of the lowering of the corporate federal income tax rate from 34.0% to 21.0%. Returns on average equity were 11.42% and 10.93% for the years ended December 31, 2017 and 2016, respectively. The returns on average assets were 1.05% and 1.04% for the years ended December 31, 2017 and 2016, respectively.

Net interest income for the year ended December 31, 2017 was $13.4 million compared with $12.1 million for the year ended December 31, 2016, an increase of $1.3 million, or 10.7%. The increase in net interest income was primarily due to the increase in average interest-earning assets of $32.1 million, or 10.8%, for the year ended December 31, 2017 compared with the year ended December 31, 2016.

Interest income was $14.6 million for the year ended December 31, 2017, an increase of $1.7 million, or 13.3%, compared with the year ended December 31, 2016 primarily due to an increase of $1.6 million of interest income and fees on loans during the year ended December 31, 2017 compared to the same period in 2016 as a result of the increase in average loans outstanding of $27.7 million for the same period.

Interest expense was $1.2 million for the year ended December 31, 2017, an increase of $420 thousand, or 55.0%, compared with the year ended December 31, 2016. This increase was primarily due to an increase in average interest-bearing liabilities combined with an increase in the rates paid on those interest-bearing liabilities. Average interest-bearing liabilities increased $26.4 million, or 12.2%, for the year ended December 31, 2017 compared with the year ended December 31, 2016. The increase in average interest-bearing liabilities was primarily due to the increase in average interest-bearing deposits of $31.3 million, or 15.0%, during the year ended December 31, 2017.

Tax equivalent net interest margin, which is a non-GAAP financial measure, was 4.09% and 4.11% for the years ended December 31, 2017 and 2016, respectively.

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The following table presents, for the periods indicated, the total dollar amount of average balances, interest income from average interest-earning assets and the annualized resultant yields, as well as the interest expense on average interest-bearing liabilities, expressed in both dollars and rates. Any nonaccruing loans have been included in the table as loans carrying a zero yield.

	Years Ended
	December 31, 2017								December 31, 2016
	Average Balance			Interest Earned/ Interest Paid		Average Yield/ Rate			Average Balance			Interest Earned/ Interest Paid		Average Yield/ Rate
	(Dollars in thousands)
Assets
Interest-Earning Assets:
Loans	$	250,383		$	13,355		5.33	%	$	222,707		$	11,776		5.29	%
Securities		48,379			894		1.85			62,037			998		1.61
Deposits in other financial institutions		29,711			313		1.05			11,621			77		0.66
Total interest-earning assets		328,473			14,562		4.43			296,365			12,851		4.34
Allowance for loan losses		(2,916	)							(2,764	)
Noninterest-earning assets		21,837								20,099
Total assets	$	347,394							$	313,700
Liabilities and Shareholders’ Equity
Interest-Bearing Liabilities:
Interest-bearing demand deposits	$	129,877		$	236		0.18		$	105,430		$	167		0.16
Money market and savings deposits		62,699			513		0.82			62,732			258		0.41
Certificates and other time deposits		48,113			385		0.80			41,205			247		0.60
Borrowed funds		2,060			50		2.41			6,918			92		1.34
Total interest-bearing liabilities		242,749			1,184		0.49			216,285			764		0.35
Noninterest-Bearing Liabilities:
Noninterest-bearing demand deposits		70,495								66,019
Other liabilities		2,065								1,535
Total liabilities		315,310								283,839
Shareholders’ equity		32,084								29,861
Total liabilities and shareholders’ equity	$	347,394							$	313,700
Net interest rate spread							3.95	%							3.98	%
Net interest income and margin(1)				$	13,378		4.07	%				$	12,087		4.08	%
Net interest income and margin (tax equivalent)(2)				$	13,440		4.09	%				$	12,180		4.11	%

(1) The net interest margin is equal to net interest income divided by average interest-earning assets.

(2) In order to make pretax income and resultant yields on tax-exempt loans comparable to those on taxable loans, a tax-equivalent adjustment has been computed using a federal tax rate of 34.0% for the years ended December 31, 2017 and 2016, which is a non-GAAP financial measure. See Beeville’s reconciliation of non-GAAP financial measures to their most directly comparable GAAP financial measures under the caption “Beeville’s Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Financial Measures.”

The following table presents information regarding the dollar amount of changes in interest income and interest expense for the periods indicated for each major component of interest-earning assets and interest-

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bearing liabilities and distinguishes between the changes attributable to changes in volume and changes in interest rates. For purposes of this table, changes attributable to both rate and volume that cannot be segregated have been allocated to rate.

	For the Years Ended December 31,
	2017 vs. 2016
	Increase (Decrease) Due to Change in						Total
	Volume			Rate
	(Dollars in thousands)
Interest-earning assets:
Loans	$	1,463		$	116		$	1,579
Securities		(220	)		116			(104	)
Deposits in other financial institutions		120			116			236
Total increase in interest income		1,363			348			1,711
Interest-bearing liabilities:
Interest-bearing demand deposits		39			30			69
Money market and savings deposits		—			255			255
Certificates and other time deposits		41			97			138
Borrowed funds		(65	)		23			(42	)
Total increase in interest expense		15			405			420
Increase (decrease) in net interest income	$	1,348		$	(57	)	$	1,291

Provision for Loan Losses

Beeville’s provision for loan losses is a charge to income in order to bring its allowance for loan losses to a level deemed appropriate by management. A provision of $1.0 million and $1.5 million was required for the years ended December 31, 2017 and 2016, respectively.

Noninterest Income

Beeville’s primary sources of noninterest income are service charges on deposit accounts, debit card and ATM card income and earnings on bank-owned life insurance. Noninterest income does not include loan origination fees.

Noninterest income totaled $1.7 million for the years ended December 31, 2017 and 2016.

The following table presents, for the periods indicated, the major categories of noninterest income:

	Years Ended December 31,					Increase (Decrease)
	2017			2016
	(Dollars in thousands)
Service charges on deposit accounts	$	902		$	941	$	(39	)
Earnings on bank-owned life insurance		139			142		(3	)
Death benefit of bank-owned life insurance		624			—		624
Net gain on sales of securities		—			252		(252	)
Net gains (losses) on other real estate		(18	)		332		(350	)
Other		72			76		(4	)
Total noninterest income	$	1,719		$	1,743	$	(24	)

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Noninterest Expense

Noninterest expense was $8.2 million and $7.5 million for the years ended December 31, 2017 and 2016, respectively.

The following table presents, for the periods indicated, the major categories of noninterest expense:

	For the Years Ended December 31,				Increase (Decrease)
	2017		2016
	(Dollars in thousands)
Salaries and employee benefits	$	4,707	$	4,625	$	82
Occupancy and equipment expense		996		929		67
Data processing expense		461		378		83
Regulatory assessments and bank insurance		240		258		(18	)
Debit card and ATM card expenses		232		121		111
Professional services		299		240		59
Telecommunications expense		189		144		45
Marketing and advertising		155		114		41
Other operating expenses		875		736		139
Total noninterest expense	$	8,154	$	7,545	$	609

Efficiency Ratio

Beeville calculates the efficiency ratio by dividing total noninterest expense by the sum of net interest income and noninterest income, excluding net gains and losses on the sale of securities. Additionally, taxes and provision for loan losses are not part of this calculation. The efficiency ratio was 54.01% for the year ended December 31, 2017 compared with 55.57% for the year ended December 31, 2016.

Income Taxes

The amount of federal income tax expense is influenced by the amount of pre-tax income, the amount of tax-exempt income and the amount of other nondeductible expenses. Income tax expense increased $807 thousand, or 54.8%, to $2.3 million for the year ended December 31, 2017 compared with $1.5 million for the same period in 2016 primarily due to a one-time adjustment of $384 thousand recorded during 2017 to adjust the net deferred tax assets as a result of the lowering of corporate federal income tax rate to 21.0% beginning in 2018.

The effective tax rates were 38.37% and 31.10% for the years ended December 31, 2017 and 2016, respectively. The effective tax rate for 2017 was impacted by the adjustment of Beeville’s deferred tax assets related to the reduction in the U.S. federal statutory income tax rate to 21.0% under the Tax Reform.

Financial Condition

Loan Portfolio

At September 30, 2018, total loans increased $15.3 million from December 31, 2017. Total loans at December 31, 2017 were $263.7 million, an increase of $24.3 million, or 10.2%, compared to $239.3 million as of December 31, 2016.

Total loans as a percentage of deposits were 74.7%, 75.0% and 83.0% as of September 30, 2018, December 31, 2017 and December 31, 2016, respectively. Total loans as a percentage of assets were 67.8%, 68.2% and 74.7% as of September 30, 2018, December 31, 2017 and December 31, 2016, respectively.

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The following table summarizes Beeville’s loan portfolio by type of loan as of the dates indicated:

	September 30, 2018						December 31, 2017						December 31, 2016
	Amount			Percent			Amount			Percent			Amount			Percent
	(Dollars in thousands)
Real estate	$	245,798			88.1	%	$	229,117			86.9	%	$	207,483			86.7	%
Commercial		22,657			8.1			24,767			9.4			27,231			11.4
Agriculture		8,621			3.1			8,093			3.0			2,880			1.2
Consumer		1,791			0.6			1,538			0.6			1,559			0.6
Other		122			0.1			136			0.1			163			0.1
Total loans		278,989			100.0	%		263,651			100.0	%		239,316			100.0	%
Allowance for loan losses		(3,375	)					(3,128	)					(2,657	)
Loans, net	$	275,614					$	260,523					$	236,659

Beeville has certain lending policies and procedures in place that are designed to maximize loan income within an acceptable level of risk. Management reviews and approves these policies and procedures on a regular basis. Diversification of the loan portfolio is a means of managing the risks associated with fluctuations in economic conditions.

Information and risk management practices specific to Beeville’s loan segments follows.

Commercial Loans—The commercial loan portfolio consists of loans to commercial customers for use in normal business operations to finance working capital needs, equipment purchase or other expansion projects. Commercial loans are underwritten to assure an ability to repay the indebtedness without relying primarily on the collateral. The underwriting process includes gaining an understanding of the borrower’s ability to operate their business profitably, then analyzing and forming a conclusion on the adequacy of their cash flow and financial stability in relation to their ability to service the indebtedness. The commercial loan portfolio decreased $2.1 million, or 8.5%, to $22.7 million as of September 30, 2018 compared to $24.8 million as of December 31, 2017. Total commercial loans as of December 31, 2017 decreased $2.5 million, or 9.0%, compared to $27.2 million as of December 31, 2016.

Real Estate Loans—The real estate loan portfolio consists of residential loans for single-family and multi-family properties, construction and land development loans, loans secured by farmland and other commercial real estate loans. Real estate loans, for commercial purposes as well as agricultural and residential purposes, are underwritten in much the same was as a commercial loan. Analyzing the borrower’s ability to service the indebtedness from estimated cash flows and structuring the payment streams to match such cash flow is integral to the success of loan repayment. Beeville has set boundaries within its policies that prohibit and/or limit speculative real estate investment loans and development loans due to the inherent risks in these types of loans. Trade territories have been established for Beeville as a whole and the majority of real estate loans are within these established trade territories. Lending beyond these areas is allowed on a limited basis when dealing with a seasoned customer who has established history with Beeville. The real estate loan portfolio increased $16.7 million, or 7.3%, to $245.8 million as of September 30, 2018 compared to $229.1 million as of December 31, 2017. Total real estate loans as of December 31, 2017 increased $22.6 million, or 10.4%, compared to $207.5 million as of December 31, 2016.

Agriculture Loans—Agriculture loans are another segment of the loan portfolio, and financial analysis similar to that performed on commercial loans is performed on all agriculture loans. This portfolio includes loans to farming operations by providing annual lines of credit for expenditures incurred up until and through harvest. Livestock production loans also make up a portion of the portfolio, whereby loans are structured to match the income stream generated from the livestock with maturities that fully amortize within the production life expectancy of the livestock. Equipment loans are also provided, with borrower equity injection being a critical

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requirement along with cash flow for debt service. The agriculture loan portfolio increased $528 thousand, or 6.5%, to $8.6 million as of September 30, 2018 compared to $8.1 million as of December 31, 2017. Total agriculture loans as of December 31, 2017 increased $5.2 million, or 181.0%, compared to $2.9 million as of December 31, 2016.

Consumer Loans—Consumer loans are also generated by Beeville, with analysis being based on the consumer’s income as compared to all debt and taking into consideration the consumer’s credit report score which is based upon prior performance with other creditors. The consumer’s income and credit report supplement the judgmental process used in consumer lending. The consumer loan portfolio increased $253 thousand, or 16.4%, to $1.8 million as of September 30, 2018 compared to $1.5 million as of December 31, 2017. Total consumer loans as of December 31, 2017 decreased $21 thousand, or 1.3%, compared to $1.6 million as of December 31, 2016.

Other Loans—Other loans consist primarily of smaller loans to business entities and individuals for various personal and business purposes and overdraft lines of credit principally extended to individuals.

Concentrations of Credit

The vast majority of Beeville’s lending activity occurs in Bee, DeWitt and Guadalupe Counties, Texas. Beeville’s loans are primarily secured by real estate, including commercial and residential construction, owner occupied and nonowner occupied and multi-family commercial real estate, raw land and other real estate based loans located in these areas. As of September 30, 2018, December 31, 2017 and 2016, real estate loans represented 88.1%, 86.9% and 86.7%, respectively, of Beeville’s total loans.

The following table summarizes the loan contractual maturity distribution by type and by related interest rate characteristics as of the date indicated:

	As of December 31, 2017
	One Year or Less			After One but Within Five Years		After Five Years		Total
	(Dollars in thousands)
Real estate	$	22,622		$	64,041	$	143,326	$	229,989
Commercial		10,503			12,513		1,775		24,791
Agriculture		5,568			2,525		—		8,093
Consumer loans		434			1,100		4		1,538
Other		135			—		1		136
Less: Deferred loan fees		(896	)		—		—		(896	)
Total loans held in portfolio	$	38,366		$	80,179	$	145,106	$	263,651
Predetermined (fixed) interest rates		26,529			52,784		20,563		99,876
Floating interest rates		12,733			27,395		124,543		164,671
Less: Deferred loan fees		(896	)		—		—		(896	)
Total		38,366			80,179		145,106	$	263,651

The information in the table above is limited to contractual maturities of the underlying loans. The expected life of Beeville’s loan portfolio will differ from contractual maturities because borrowers may have the right to curtail or prepay their loans with or without prepayment penalties.

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Asset Quality

Nonperforming Assets and Potential Problem Loans

Beeville has procedures in place to assist in maintaining the overall quality of its loan portfolio. Beeville has established underwriting guidelines to be followed by its officers to monitor Beeville’s delinquency levels for any negative or adverse trends.

Beeville had no nonaccrual loans at September 30, 2018. Beeville had $2.0 million and $3.1 million in nonaccrual loans as of December 31, 2017 and 2016, respectively.

The following table presents information regarding nonperforming assets as of the dates indicated:

	As of September 30, 2018			As of December 31, 2017			As of December 31, 2016
	(Dollars in thousands)
Nonaccrual loans:
Real estate	$	—		$	1,726		$	1,806
Commercial		—			301			1,334
Agriculture		—			—			—
Consumer		—			—			—
Other		—			—			—
Total nonaccrual loans		—			2,027			3,140
Accruing loans 90 or more days past due		—			2,603			—
Total nonperforming loans		—			4,630			3,140
Other real estate		1,410			1,410			1,036
Other repossessed assets		—			—			—
Total nonperforming assets	$	1,410		$	6,040		$	4,176
Restructured loans	$	—		$	2		$	3,146
Nonperforming assets to total assets		0.3	%		1.6	%		1.3	%
Nonperforming loans to total loans		0.0	%		1.8	%		1.3	%

Allowance for Loan Losses

The allowance for loan losses is a valuation allowance that is established through charges to earnings in the form of a provision for loan losses. The amount of the allowance for loan losses is affected by the following: (i) charge-offs of loans that decrease the allowance, (ii) subsequent recoveries on loans previously charged off that increase the allowance and (iii) provisions for loan losses charged to income that increase the allowance. For purposes of determining the allowance for loan losses, Beeville considers the loans in its portfolio by segment, class and risk grade. Management uses judgment to determine the estimation method that fits the credit risk characteristics of each portfolio segment or loan class. To assist in the assessment of risk, management reviews reports related to loan production, loan quality, concentrations of credit, loan delinquencies and nonperforming and potential problem loans. Beeville utilizes an independent third party loan review service to review the credit risk assigned to loans on a periodic basis and the results are presented to management for review.

At September 30, 2018 and December 31, 2017, the allowance for loan losses amounted to $3.4 million and $3.1 million, or 1.2% and 1.2%, respectively, of total loans, as compared with $2.7 million, or 1.1% of total loans, as of December 31, 2016. Beeville believes that the allowance for loan losses at September 30, 2018, December 31, 2017 and December 31, 2016 was adequate to cover probable incurred losses in the loan portfolio as of such date.

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The following table presents, as of and for the periods indicated, an analysis of the allowance for loan losses and other related data:

	For the Nine Months Ended September 30,						For the Year Ended December 31,
	2018			2017			2017			2016
	(Dollars in thousands)
Average loans outstanding	$	271,451		$	247,929		$	250,383		$	227,707
Gross loans outstanding at end of period		278,989			247,364			263,651			239,316
Allowance for loan losses at beginning of period		3,128			2,657			2,657			2,555
Provision for loan losses		445			756			1,001			1,548
Charge-offs:
Real estate		225			—			—			(371	)
Commercial		—			416			(516	)		(1,067	)
Agriculture		—			—			—			—
Consumer		16			17			(21	)		(15	)
Other		—			—			—			—
Total charge-offs for all loan types		241			433			(537	)		(1,453	)
Recoveries:
Real estate		(18	)		—			—			—
Commercial		(21	)		—			—			3
Agriculture		—			—			—			—
Consumer		(4	)		(6	)		8			5
Other		—			—			—			—
Total recoveries for all loan types		(43	)		(6	)		8			8
Net (charge-offs) recoveries		198			427			(529	)		(1,445	)
Allowance for loan losses at end of period	$	3,375		$	2,986		$	3,128		$	2,657
Allowance for loan losses to total loans		1.21	%		1.21	%		1.19	%		1.11	%
Net (charge-offs) recoveries to average loans(1)		0.10	%		0.23	%		0.21	%		0.65	%
Allowance for loan losses to nonperforming loans		—			113.97	%		67.56	%		84.62	%

(1) Interim period annualized.

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The following table shows the allocation of the allowance for loan losses among Beeville’s loan categories and the percentage of the respective loan category to total loans held for investment as of the dates indicated. The allocation is made for analytical purposes and is not necessarily indicative of the categories in which future losses may occur. The total allowance is available to absorb losses from any loan category.

	As of September 30, 2018					As of December 31, 2017					As of December 31, 2016
	Amount		Percent of Loans to   Total Loans			Amount		Percent of Loans to   Total Loans			Amount		Percent of Loans to   Total Loans
			(Dollars in thousands)
Balance of allowance for loan losses applicable to:
Real estate	$	3,059		90.6	%	$	2,794		89.3	%	$	2,226		83.8	%
Commercial		225		6.7			246		7.9			384		14.5
Agriculture		73		2.2			69		2.2			22		0.8
Consumer		18		0.5			19		0.6			25		0.9
Total allowance for loan losses	$	3,375		100.0	%	$	3,128		100.0	%	$	2,657		100.0	%

Available For Sale Securities

As of September 30, 2018, the carrying amount of investment securities totaled $56.1 million, a decrease of $2.2 million, or 4.0%, compared with $58.3 million as of December 31, 2017. The carrying amount of investment securities at December 31, 2017 increased $12.4 million, or 26.9%, compared with $46.0 million as of December 31, 2016. Securities represented 13.6%, 15.1% and 14.4% of total assets as of September 30, 2018, December 31, 2017 and 2016, respectively.

The majority of the securities in the portfolio are classified as available for sale. Securities classified as available for sale are measured at fair value in the financial statements with unrealized gains and losses reported, net of tax, as accumulated comprehensive income or loss until realized. Interest earned on securities is included in interest income.

The following table summarizes the amortized cost and fair value of the securities in the securities portfolio as of the dates shown:

	September 30, 2018
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(Dollars in thousands)
Available for Sale
U.S. Government and government-sponsored enterprise (GSE) securities	$	5,558	$	4	$	(12	)	$	5,550
U.S. Government and GSE mortgage-backed securities		29,483		9		(876	)		28,616
Municipal securities		21,033		—		(406	)		20,627
Total	$	56,074	$	13	$	(1,294	)	$	54,793

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	December 31, 2017
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(Dollars in thousands)
Available for Sale
U.S. Government and GSE securities	$	7,591	$	53	$	(5	)	$	7,639
U.S. Government and GSE mortgage-backed securities		29,961		67		(310	)		29,718
Municipal securities		20,771		44		(184	)		20,631
Total	$	58,323	$	164	$	(499	)	$	57,988
	December 31, 2016
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(Dollars in thousands)
Available for Sale
U.S. Government and GSE securities	$	3,007	$	3	$	—		$	3,010
U.S. Government and GSE mortgage-backed securities		6,315		2		(55	)		6,262
Municipal securities		8,296		35		(8	)		8,323
Total	$	17,618	$	40	$	(63	)	$	17,595
Held to Maturity
U.S. Government and GSE securities	$	9,632	$	110	$	—		$	9,742
U.S. Government and GSE mortgage-backed securities		11,743		71		(69	)		11,745
Municipal securities		6,970		21		(22	)		6,969
Total	$	28,345	$	202	$	(91	)	$	28,456

The following tables show contractual maturities and the weighted average yields on Beeville’s investment securities as of the dates presented. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Weighted average yields are not presented on a taxable equivalent basis:

	Maturity as of September 30, 2018
	One Year or Less					One to Five Years					Five to Ten Years					After Ten Years
(Dollars in thousands)	Amortized Cost		Weighted Average Yield			Amortized Cost		Weighted Average Yield			Amortized Cost		Weighted Average Yield			Amortized Cost		Weighted Average Yield
Available-for-sale:
U.S. Government and GSE securities	$	3,523		1.62	%	$	2,035		2.92	%	$	—		0.00	%	$	—		0.00	%
U.S. Government and GSE mortgage-backed securities		—		0.00	%		—		0.00	%		12,439		2.55	%		17,044		2.49	%
Municipal securities		2,395		1.43	%		10,016		2.05	%		8,622		2.13	%		—		0.00	%
Total available-for-sale	$	5,918		1.54	%	$	12,051		2.20	%	$	21,061		2.38	%	$	17,044		2.49	%

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	Maturity as of December 31, 2017
	One Year or Less					One to Five Years					Five to Ten Years					After Ten Years
(Dollars in thousands)	Amortized Cost		Weighted Average Yield			Amortized Cost		Weighted Average Yield			Amortized Cost		Weighted Average Yield			Amortized Cost		Weighted Average Yield
Available-for-sale:
U.S. Government and GSE securities	$	4,498		1.46	%	$	2,086		2.19	%	$	1,007		3.23	%	$	—		0.00	%
U.S. Government and GSE mortgage-backed securities		—		0.00	%		—		0.00	%		6,497		2.48	%		23,464		2.33	%
Municipal securities		220		1.44	%		7,758		1.72	%		12,793		2.19	%		—		0.00	%
Total available-for-sale	$	4,718		1.46	%	$	9,844		1.82	%	$	20,297		2.33	%	$	23,464		2.33	%

	Maturity as of December 31, 2016
	One Year or Less					One to Five Years					Five to Ten Years					After Ten Years
(Dollars in thousands)	Amortized Cost		Weighted Average Yield			Amortized Cost		Weighted Average Yield			Amortized Cost		Weighted Average Yield			Amortized Cost		Weighted Average Yield
Held-to-maturity:
U.S. Government and GSE securities	$	2,000		1.06	%	$	6,624		1.70	%	$	1,008		3.23	%	$	—		0.00	%
U.S. Government and GSE mortgage-backed securities		—		0.00	%		—		0.00	%		1,818		2.90	%		9,925		2.27	%
Municipal securities		—		0.00	%		3,145		1.78	%		3,825		2.34	%		—		0.00	%
Total held-to-maturity	$	2,000		1.06	%	$	9,769		1.73	%	$	6,651		2.63	%	$	9,925		2.27	%
Available-for-sale:
U.S. Government and GSE securities	$	3,007		0.87	%	$	—		0.00	%	$	—		0.00	%	$	—		0.00	%
U.S. Government and GSE mortgage-backed securities		—		0.00	%		—		0.00	%		3,350		2.26	%		2,965		2.15	%
Municipal securities		1,586		0.88	%		3,006		1.82	%		3,704		2.50	%		—		0.00	%
Total available-for-sale	$	4,593		0.87	%	$	3,006		1.82	%	$	7,054		2.39	%	$	2,965		2.15	%

Beeville does not have the intent to sell any of the securities classified as available for sale while in a loss position and believes that it is not likely that it will have to sell any of these securities before a recovery of cost. The unrealized losses are attributable primarily to changes in market interest rates relative to those available when the securities were acquired. The fair value of these securities is expected to recover as the securities reach their maturity or re-pricing date, or if market rates for such investments decline.

Beeville does not believe that any of the securities are impaired due to reasons of credit quality. Accordingly, as of September 30, 2018, December 31, 2017 and 2016, Beeville believes the impairments were temporary, and no impairment loss has been realized in its consolidated statements of income for the periods then ended.

The average yield of Beeville’s securities portfolio was 2.07% during the nine months ended September 30, 2018 compared to 1.83% for the same period in 2017. The average yield for the year ended December 31, 2017 was 1.85% compared with 1.61% for the year ended December 31, 2016.

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Deposits

Beeville’s lending and investing activities are primarily funded by deposits. Beeville offers a variety of deposit accounts having a range of interest rates and terms including demand, savings, money market and certificates and other time accounts.

Total deposits at September 30, 2018 were $373.4 million, an increase of $22.0 million, or 6.3%, compared with $351.4 million at December 31, 2017 primarily due to an increase of $20.0 million in interest-bearing transaction accounts. Deposits at December 31, 2017 increased $63.0 million, or 21.9%, compared with $288.4 million at December 31, 2016. The deposit growth experienced in 2017 was organic deposit growth.

	September 30, 2018					December 31, 2017					December 31, 2016
	Amount		% of Total			Amount		% of Total			Amount		% of Total
						(Dollars in thousands)
Demand	$	96,443		25.8	%	$	76,023		21.7	%	$	69,237		24.0	%
Interest-bearing transaction accounts		179,990		48.2	%		189,850		54.0	%		139,774		48.5	%
Savings		39,062		10.5	%		35,619		10.1	%		34,437		11.9	%
Time deposits		57,865		15.5	%		49,886		14.2	%		44,922		15.6	%
Total deposits	$	373,360		100.0	%	$	351,378		100.0	%	$	288,370		100.0	%

Beeville’s ratio of average noninterest-bearing deposits to average total deposits was 23.2% for the nine months ended September 30, 2018 and 22.6% and 24.0% for the years ended December 31, 2017 and 2016, respectively.

The following table shows the remaining maturity of time deposits of $100,000 and greater as of the dates indicated:

	September 30, 2018		December 31, 2017		December 31, 2016
	(Dollars in thousands)
Time deposits $100,000 or greater with remaining maturity of:
Three months or less	$	9,765	$	13,270	$	13,963
After three months through nine months		12,244		8,796		7,667
After nine months through 12 months		9,627		4,010		3,017
After 12 months		12,723		10,878		7,832
Total	$	44,359	$	36,954	$	32,749

Borrowings

Beeville has established approximately $12.0 million in lines of credit for overnight purchase of federal funds. $6.0 million of those lines are secured by Beeville Bank securities and the remainder is unsecured. In addition, Beeville has an available line of credit with the FHLB, which allows Beeville to borrow on a collateralized basis. FHLB advances are used to manage liquidity as needed. At September 30, 2018, December 31, 2017 and 2016, Beeville had an available line of credit with the FHLB, which allows it to borrow up to $132.6 million, $123.3 million and $107.3 million, respectively, on a collateralized basis. Any borrowings would be collateralized by a blanket lien on eligible commercial loans and loans secured by real estate. As of September 30, 2018, December 31, 2017 and 2016, there were no outstanding balances with the FHLB.

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Contractual Obligations

The following table presents information regarding Beeville’s outstanding contractual obligations and other commitments to make future payments as of December 31, 2017, which consist of its future cash payments associated with our time deposits and contractual obligations pursuant to our FHLB advances and other borrowings:

December 31, 2017	Total Amounts Committed		One Year or Less		Over One Year Through Three Years		Over Three Years Through Five Years		Over Five Years
	(Dollars in thousands)
Contractual obligations:
Time deposits	$	49,886	$	36,321	$	11,209	$	2,356	$	—
FHLB advances and other borrowings		—		—		—		—		—
Total	$	49,886	$	36,321	$	11,209	$	2,356	$	—

Off-Balance Sheet Items

Beeville is party to various financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit under commercial lines of credit, revolving credit lines, overdraft protection agreements and standby letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the consolidated balance sheets. The contract amounts of the instruments reflect the extent of the Beeville’s involvement in particular classes of financial instruments. Beeville’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of these instruments. Beeville uses the same credit policies in making these commitments and conditional obligations as it does for on-balance-sheet instruments.

Beeville evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if considered necessary by Beeville upon extension of credit, is based on management’s credit evaluation of the customer.

The following is a summary of the various financial instruments entered into by Beeville as of the dates indicated:

	September 30, 2018		December 31, 2017		December 31, 2016
	(Dollars in thousands)
Commitments to extend credit	$	25,450	$	31,559	$	21,956
Standby letters of credit		415		480		825

Commitments to Extend Credit

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being fully drawn upon, the total commitment amounts disclosed above do not necessarily represent future cash requirements.

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Standby Letters of Credit

Standby letters of credit are conditional commitments issued by Beeville to guarantee the performance of a customer to a third party. Beeville’s credit risk involved in issuing letters of credit is essentially the same as that involved in funding loans facilities.

Liquidity and Capital Resources

Liquidity

Liquidity is the measure of Beeville’s ability to meet the cash flow requirements of depositors and borrowers, while at the same time meeting Beeville’s operating, capital and strategic cash flow needs and to maintain reserve requirements to operate on an ongoing basis and manage unexpected events, all at a reasonable cost. For the nine months ended September 30, 2018 and the years ended December 31, 2017 and 2016, Beeville’s liquidity needs have been met by core deposits, borrowed funds, security and loan maturities and amortizing investment and loan portfolios. Beeville has access to purchased funds from correspondent banks, and advances from the FHLB are available under a security and pledge agreement to take advantage of investment opportunities.

Capital Resources

Beeville is subject to various regulatory capital requirements administered by bank regulators. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures and risk weighting of assets, liabilities, and certain off-balance sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weighting and other factors.

Failure to meet the minimum regulatory capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on Beeville’s consolidated financial statements. Beeville believes, as of September 30, 2018, December 31, 2017 and December 31, 2016, that it met all of the capital adequacy requirements to which it is subject.

As of September 30, 2018, the most recent notification from the OCC, Beeville Bank was categorized as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that Beeville believes has changed Beeville Bank’s prompt corrective action category.

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The following table provides a comparison of Beeville Bank’s leverage and risk-weighted capital ratios as of September 30, 2018 and December 31, 2017 to the minimum and well-capitalized regulatory standards:

	Actual					For Capital Adequacy Purposes					To Be Categorized As Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
	(Dollars in thousands)
The First National Bank of Beeville
As of September 30, 2018
Total Capital
(to risk weighted assets)	$	40,246		13.51	%	$	29,419		9.88	%	$	29,791		10.00	%
Common Equity Tier 1 Capital
(to risk weighted assets)	$	36,871		12.38	%	$	18,992		6.38	%	$	19,364		6.50	%
Tier 1 Capital
(to risk weighted assets)	$	36,871		12.38	%	$	23,461		7.88	%		23,833		8.00	%
Tier 1 Capital
(to average tangible assets)	$	36,871		9.16	%	$	16,107		4.00	%	$	20,133		5.00	%
As of December 31, 2017
Total Capital
(to risk weighted assets)	$	35,822		12.72	%	$	26,047		9.25	%	$	28,159		10.00	%
Common Equity Tier 1 Capital
(to risk weighted assets)	$	32,694		11.61	%	$	16,191		5.75	%	$	18,303		6.50	%
Tier 1 Capital
(to risk weighted assets)	$	32,694		11.61	%	$	20,415		7.25	%	$	22,527		8.00	%
Tier 1 Capital
(to average tangible assets)	$	32,694		8.69	%	$	15,051		4.00	%	$	18,813		5.00	%

The above minimum capital requirements include the capital conservation buffer required to avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers. The capital conservation buffer is being phased in from 0.0% for 2015 to 2.50% by January 1, 2019. The capital conservation buffer was 1.875% at September 30, 2018 and 1.250% at December 31, 2018. The net unrealized gain or loss on available-for-sale securities is not included in computing regulatory capital.

Quantitative and Qualitative Disclosures about Market Risk

Beeville manages market risk, which for Beeville is primarily interest rate risk related to the operations of its subsidiary bank, through the Asset-Liability Committee of Beeville Bank. This committee is composed of certain members of the Beeville Bank board of directors in accordance with asset liability and funds management policies approved by the full board of directors of Beeville Bank. Beeville Bank uses an interest rate risk simulation model and shock analysis to test the interest rate sensitivity of net interest income and fair value of equity, and the impact of changes in interest rates on other financial metrics.

The following table summarizes the simulated change in net interest income and the economic value of equity over a 12-month horizon as of the dates indicated:

Change in Interest Rates (Basis Points)	Percent Change in Net Interest Income						Percent Change in Economic Value of Equity
	As of September 30, 2018			As of December 31, 2017			As of September 30, 2018			As of December 31, 2017
+300		9.1	%		7.9	%		(19.7	)%		(21.1	)%
+200		6.1			5.3			(13.6	)		(14.3	)
+100		3.0			2.7			(7.1	)		(7.3	)
Base		0.0			0.0			0.0			0.0
-100		(3.7	)		(3.9	)		8.7			10.8

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Non-GAAP Financial Measures

Beeville’s accounting and reporting policies conform to GAAP, and the prevailing practices in the banking industry. However, Beeville also evaluates its performance based on certain additional financial measures discussed in this document as being non-GAAP financial measures. Beeville classifies a financial measure as being a non-GAAP financial measure if that financial measure excludes or includes amounts, or is subject to adjustments that have the effect of excluding or including amounts, that are included or excluded, as the case may be, in the most directly comparable measure calculated and presented in accordance with GAAP as in effect from time to time in the United States in its statements of income, balance sheets or statements of cash flows. Non-GAAP financial measures do not include operating and other statistical measures or ratios or statistical measures calculated using exclusively financial measures calculated in accordance with GAAP.

The non-GAAP financial measures that Beeville discusses in this document should not be considered in isolation or as a substitute for the most directly comparable or other financial measures calculated in accordance with GAAP. Moreover, the manner in which Beeville calculates the non-GAAP financial measures that it discusses in this document may differ from that of other banking organizations reporting measures with similar names. You should understand how such other banking organizations calculate their financial measures similar or with names similar to the non-GAAP financial measures Beeville has discussed in this document when comparing such non-GAAP financial measures.

Net Interest Margin

Beeville shows net interest margin on a fully taxable equivalent basis, which is a non-GAAP financial measure.

Beeville believes the fully tax equivalent basis is the preferred industry measurement basis for net interest margin and that it enhances comparability of net interest income arising from taxable and tax-exempt sources.

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The following table reconciles, as of the dates set forth below, net interest margin on a fully taxable equivalent basis:

Reconciliation of Non-GAAP Financial Measures—Net Interest Margin on a Fully Taxable Equivalent Basis (Unaudited)

	As of or for the Nine Months or Years Ended
	September 30, 2018			September 30, 2017			December 31, 2017			December 31, 2016
	(Dollars in thousands, except per share data)
Net interest margin—GAAP basis:
Net interest income	$	11,850		$	9,815		$	13,378		$	12,087
Average interest-earning assets		374,054			318,012			328,473			296,365
Net interest margin		4.22	%		4.12	%		4.07	%		4.08	%
Net interest margin—Non-GAAP basis:
Net interest income	$	11,850		$	9,816		$	13,378		$	12,087
Plus:
Impact of fully taxable equivalent adjustment		63			70			62			93
Net interest income on a fully taxable equivalent basis	$	11,913		$	9,886		$	13,440		$	12,180
Average interest-earning assets		374,054			318,012			328,473			296,365
Net interest margin on a fully taxable equivalent basis—Non-GAAP basis		4.25	%		4.14	%		4.09	%		4.11	%

Critical Accounting Policies

The consolidated financial statements of Beeville include its accounts and those of its wholly-owned subsidiary, Beeville Bank. All significant intercompany balances and transactions have been eliminated in consolidation. The accounting and reporting policies of all these entities are in accordance with accounting principles generally accepted in the United States of America.

Beeville has identified the following accounting policies and estimates that, due to the difficult, subjective or complex judgments and assumptions inherent in those policies and estimates and the potential sensitivity of its financial statements to those judgments and assumptions, are critical to an understanding of its financial condition and results of operations. Beeville believes that the judgments, estimates and assumptions used in the preparation of its financial statements are appropriate. Beeville’s accounting policies are integral to understanding its results of operations.

Investment Securities

Certain debt securities that management has the positive intent and ability to hold to maturity are classified as “held-to-maturity” and recorded at amortized cost. Securities not classified as held-to-maturity are classified as “available-for-sale.” Available-for-sale securities, which include any security for which Beeville has no immediate plan to sell but which may be sold in the future, are recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income. Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.

For debt securities with fair value below amortized cost when Beeville does not intend to sell a debt security and, it is more likely than not, Beeville will not have to sell the security before recovery of its cost basis, it

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recognizes the credit component of an other-than-temporary impairment of a debt security in earnings and the remaining portion in other comprehensive income.

Allowance for Loan Losses

The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to income. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

The allowance consists of allocated and general components. The allocated component relates to loans that are classified as impaired. For those loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers nonclassified loans and is based on historical charge-off experience and expected loss given default derived from Beeville’s internal risk rating process. Other adjustments may be made to the allowance for pools of loans after an assessment of internal or external influences on credit quality that are not fully reflected in the historical loss or risk rating data.

A loan is considered impaired when, based on current information and events, it is probable that Beeville will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price or the fair value of the collateral if the loan is collateral dependent.

Groups of loans with similar risk characteristics are collectively evaluated for impairment based on the group’s historical loss experience adjusted for changes in trends, conditions and other relevant factors that affect repayment of the loans. Accordingly, Beeville does not separately identify individual consumer and residential loans for impairment measurements, unless such loans are the subject of a restructuring agreement due to financial difficulties of the borrower.

Income Taxes

Beeville accounts for income taxes in accordance with income tax accounting guidance (ASC 740, Income Taxes). The income tax accounting guidance results in two components of income tax expense: current and deferred. Current income tax expense reflects taxes to be paid or refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues. Beeville determines deferred income taxes using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases of assets and liabilities and enacted changes in tax rates and laws are recognized in the period in which they occur. Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred

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tax assets are reduced by a valuation allowance if, based on the weight of evidence available, it is more likely than not that some portion or all of a deferred tax asset will not be realized.

Tax positions are recognized if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination. The term more likely than not means a likelihood of more than 50%; the terms examined and upon examination also include resolution of the related appeals or litigation processes, if any. A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The determination of whether or not a tax position has met the more-likely-than-not recognition threshold considers the facts, circumstances and information available at the reporting date and is subject to management’s judgment.

With a few exceptions, Beeville is no longer subject to U.S. federal, state and local or non-U.S. income tax examinations by tax authorities for years before 2014.

Beeville recognizes interest and penalties on income taxes as a component of income tax expense.

Beeville files consolidated income tax returns with its subsidiaries.

Recently Issued Accounting Pronouncements

See Note 1—Summary of Significant Accounting Policies in the notes to Beeville’s consolidated financial statements included elsewhere with this document regarding the impact of new accounting pronouncements which Beeville has adopted.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

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MANAGEMENT OF SPIRIT

Executive Officers and Directors

The following table sets forth information regarding the directors and executive officers of Spirit upon completion of the merger.

Name	Age	Position	Director Term Expires	Class
Dean O. Bass	67	Chairman of the Board and Chief Executive Officer of Spirit and Spirit Bank	2020	I
David M. McGuire	54	President and Director of Spirit and President and Chief Lending Officer and Director of Spirit Bank	2019	III
Jerry D. Golemon	62	Executive Vice President and Chief Operating Officer of Spirit and Spirit Bank and Advisory Director of Spirit Bank	N/A	N/A
Jeffrey A. Powell	60	Executive Vice President and Chief Financial Officer of Spirit and Spirit Bank	N/A	N/A
Robert S. Beall	59	Director of Spirit and Spirit Bank	2020	I
Allen C. Jones, IV	69	Director of Spirit	2021	II
Thomas Jones, Jr.	62	Director of Spirit and Spirit Bank	2019	III
Leo T. Metcalf, III	70	Director of Spirit and Spirit Bank	2019	III
Steven M. Morris	66	Director of Spirit and Spirit Bank	2020	I
William K. Nix	57	Director of Spirit and Vice Chairman of Spirit Bank	2020	I
Akash J. Patel	35	Director of Spirit and Spirit Bank	2021	II
H. D. Patel	74	Director of Spirit and Spirit Bank	2021	II
Thomas C. Sooy	71	Director of Spirit and Spirit Bank	2021	II

The following is a brief discussion of the business and banking background and experience of Spirit’s directors and executive officers. No director or executive officer has any family relationship, as defined in Item 401 of Regulation S-K, with any other director or with any of Spirit’s executive officers.

Dean O. Bass is the Chairman and Chief Executive Officer of Spirit and Spirit Bank and has served in those positions since Spirit’s inception in 2008. Prior to joining Spirit, Mr. Bass founded and served as President and Chief Executive Officer of Royal Oaks Bank, SSB, from 2001 to 2007. Previously, from 1996 to 2000, Mr. Bass was employed by Horizon Capital Bank where he served as Senior Vice President. Mr. Bass has been involved in the formation of several de novo banking offices and branches and has served in bank officer positions ranging from Executive Vice President to President and Chief Executive Officer/Chairman of the Board. Additionally, Mr. Bass was a National Bank Examiner for the Office of the Comptroller of the Currency from 1975 through 1979. Mr. Bass has served as a director and member of the executive committee of the Texas Bankers Association. He was the 2016 Chairman of the Community Bankers Council. Mr. Bass is an appointed member of The Woodlands Area Economic Development Partnership Board and the Greater Conroe Economic Development Council Board. Mr. Bass received his Bachelor of Business Administration degree from Abilene Christian University in 1973. With over 44 years of banking experience, Mr. Bass’s extensive business and banking experience and his community involvement and leadership skills qualify him to serve as Spirit’s Chairman and Chief Executive Officer.

David M. McGuire is the President of Spirit and President and Chief Lending Officer of Spirit Bank and has served in those positions since 2009. From 2001 to 2008, he was the founder of and employed by Royal Oaks Bank, SSB, and its successor First Bank, serving as its President and Chief Lending Officer. From 1995 to 2000 Mr. McGuire was employed by Sterling Bank where he served as Office Chief Executive Officer—Fort Bend. Mr. McGuire has been involved in the formation of several de novo banking offices and branches and has served in executive bank officer positions ranging from Bank Vice President to President. Mr. McGuire received his Bachelor of Business Administration—Finance degree from Texas A&M University in 1987. With over 37 years

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of banking experience, Mr. McGuire’s extensive business and banking experience and his perspective, knowledge and extensive community relationships qualify him to serve on the Spirit board of directors and as Spirit’s President and as the President and Chief Lending Officer of Spirit Bank.

Jerry D. Golemon is the Executive Vice President and Chief Operating Officer of Spirit and Spirit Bank. Mr. Golemon has served in that capacity since January 2017 and served as Chief Financial Officer of Spirit from January 2017 to July 2017. He has served as Executive Vice President and Chief Operating Officer of Spirit Bank since 2010 and served as Chief Financial Officer of Spirit Bank from April 2017 to July 2017. Mr. Golemon joined the Advisory Board of Spirit Bank in 2010. Mr. Golemon is a Certified Public Accountant, and has been associated with the banking business in the Houston area for more than 37 years. Mr. Golemon also served as Chief Financial Officer for Bank4Texas Holdings from 2008 to 2010. Starting in 1997, he was a founder and served as Chief Financial Officer and on the board of directors of Texas National Bank until it was sold in 2006. He has served in a chief financial officer or similar capacity for various banks since 1982. Prior to that time, he worked in a Houston-based CPA firm for four years, specializing in financial institution audits. He received his Bachelor of Business Administration degree in Accounting from the University of Texas in 1977. Mr. Golemon has served as President of the Tomball Rotary Club and worked in various capacities with the Tomball Chamber of Commerce, the Regional Arts Council, the Cypress Creek YMCA, and the Tomball Independent School District. He is also a graduate of the Southwest Graduate School of Banking.

Jeffrey A. Powell is the Executive Vice President and Chief Financial Officer of Spirit and Spirit Bank and has served in those positions since July 2017. Mr. Powell served as the Chief Financial Officer at Hamilton State Bancshares, Inc. in Hoschton, Georgia from 2011 to 2017. Additionally, Mr. Powell served as Executive Vice President and Chief Accounting Officer for IBERIABANK Corporation and its subsidiary, IBERIABANK, from 2008 to 2011 in Lafayette, Louisiana. Mr. Powell also served as Senior Vice President, Controller and Chief Accounting Officer of Citizens Republic Bancorp, Inc. and its subsidiary, Citizens Bank, from 2005 to 2008 in Flint, Michigan. Mr. Powell has worked in various capacities in the banking and financial services industry for 38 years. He received his Bachelor of Science in Accounting degree from Ball State University, Muncie, Indiana in 1980.

Robert S. Beall is president and chief executive officer of R.S. Beall Investments, Inc., a company engaged in various private investments related to real estate and financial services. He has served on the Spirit board of directors and the board of directors of Spirit Bank since 2013. Mr. Beall founded R.S. Beall Investments, Inc. in 1995. Prior to starting R.S. Beall Investments, Inc., from 2001 to 2003, Mr. Beall served as regional president of US Concrete, Inc., a publicly traded company. In 1981, he founded Beall Concrete, Inc., a manufacturer of concrete in Dallas and Fort Worth, Texas, which evolved into Beall Industries, Inc. with several different construction product lines and services. In 2000, Mr. Beall sold his company to US Concrete of Houston. He previously served as the Chairman of the Board of Directors for Peoples Bank of Colleyville, Texas. Mr. Beall’s community service includes being the former chairman of the Child Study Center in Fort Worth and the Chairman of the Board of Advisors for the College of Business at the University of Oklahoma. Mr. Beall earned his Bachelor of Business Administration degree in Accounting from the University of Oklahoma in 1979 and his Master of Business Administration degree from Southern Methodist University in 1981. Mr. Beall’s extensive business experience and leadership skills qualify him to serve on the Spirit board of directors.

Allen C. “Dick” Jones, IV is and has been the owner and manager of cattle and hunting operations through Jones Ranch LLC, a ranch that began in south Texas in 1895, since 1996. In addition to ranching, Mr. Jones’ other business activities include directorships with The First National Bank of Hebbronville and The First National Bank of Beeville and Mesteña Operations, Ltd. of Corpus Christi, Texas. He currently serves as a director for the Texas Wildlife Association, the Texas and Southwestern Cattle Raisers Association, an honorary director of the Texas and Southwestern Cattle Raisers Foundation and a Trustee of Texas A&M-Kingsville Foundation. He is a member of the Gulf Coast Conservation Association and First Methodist Church of Corpus Christi. Mr. Jones graduated from Texas Military Institute and attended Texas A&I Business School in Kingsville, Texas. Mr. Jones’ business experience and agricultural expertise qualifies him to serve on the Spirit board of directors.

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Thomas Jones, Jr. is a partner with the accounting and consulting firm of McConnell & Jones LLP, which he helped form in 1996. Mr. Jones leads the firm’s small business and tax group and is the practice leader for the firm’s overall business development and marketing efforts. Mr. Jones has served on the Spirit board of directors from November 2008 to February 2017 and since July 2017 and on the board of directors of Spirit Bank from November 2008 to May 2017 and since July 2017. Mr. Jones also served as an independent board member of Princeton Capital Corporation, a publicly-traded business development company, from 2015 to 2016. From 1985 to 1995, Mr. Jones served as a Vice President at Texas Commerce Bank (now Chase Bank) in the bank’s investment management services department. Prior to joining Texas Commerce Bank, Mr. Jones served as Treasurer and Tax Manager of Uncle Ben’s Rice from 1982 to 1985, where he was responsible for managing the company’s cash flows, banking relationships and compliance requirements for all federal, state and local tax filings.

Mr. Jones began his professional career with the Houston office of the international accounting firm of Ernst & Ernst (now Ernst & Young) as a staff auditor and later as a manager in the firm’s tax department. Mr. Jones is also a partner in HUNTJON, LLC, a real estate development company focusing on the construction and management of multi-family housing units for low and moderate income senior citizens. Mr. Jones also currently serves as Chairman of the Florida A&M University Foundation Board and as Chair of the Advisory Board of the Greater Houston Black Chamber of Commerce. Mr. Jones received his Bachelor of Science degree in Accounting from Florida A&M University in Tallahassee, Florida. Mr. Jones’ business experience and accounting experience qualifies him to serve on the Spirit board of directors.

Leo T. Metcalf, III is a private investor in real estate, stocks and master limited partnerships, has served as an outside business consultant to Service Corporation International since 2000, and a former mayor of Conroe, Texas serving a four-year term starting in 2004. He is also the former president of Metcalf Funeral Home, Inc., a Conroe area business. He has served on the Spirit board of directors and the board of directors of Spirit Bank since 2010. He has supported Montgomery County with his involvement in various community activities. He is a past president of the Conroe Rotary Club, the Montgomery County United Way, the Montgomery County Hospital District, the Embassy Club of the Greater Conroe Area Chamber of Commerce, and former district chairman for the Sam Houston Area Council of the Boy Scouts of America. He is a lifetime vice-president of the Montgomery Fair Association, former board member of the Conroe Chapter of the American Red Cross, Montgomery County Community Foundation, Greater Conroe Area Chamber of Commerce, Montgomery County Emergency Assistance, Greater Conroe Economic Development Council, and Lake Conroe Rotary Club. He is also a past president of the Texas Funeral Directors Association. Mr. Metcalf has additionally established four endowments through the Montgomery County Community Foundation, and has reflected his significant support for Sam Houston State University with the establishment of the Tommy Metcalf Scholarship Endowment Fund. Mr. Metcalf serves on the Sam Houston University Foundation as a Trustee and Vice President. Mr. Metcalf received his Bachelors of Business Administration degree from Sam Houston State University in 1971. Mr. Metcalf’s diverse business experience and extensive involvement in the community of one of Spirit’s primary market areas qualify him to serve on the Spirit board of directors.

Steven M. Morris is a business and financial consultant and certified public accountant, beginning his career with Arthur Young & Company, an international accounting firm. Mr. Morris is the Founder and President of TransTexas Enterprises, Inc., a private investment firm located in Cypress, Texas. Mr. Morris is also the managing director of Barkers Point Properties, LLC, a real estate investment company. He has served on the Spirit board of directors and the board of directors of Spirit Bank since 2008. He is the former chairman of the Twelfth Man Foundation, a private 501(c)(3) corporation located in College Station, Texas. Additionally, Mr. Morris serves on the board of Crossroads Christian Counseling, Inc. and as a director of 127 Pure, a 501(c)(3) corporation located in Cumming, Georgia. In the past, he has served on various public and private boards, including Audit Committee chairman of Quicksilver Resources, Inc. and Bank of Tanglewood of Houston, Texas. Mr. Morris has been an elder in his church for the past 18 years and a Habitat for Humanity volunteer and participates in annual mission trips supporting an orphanage in India. He received his BBA in Accounting from Texas Tech University in 1974. Mr. Morris’ business experience, public accounting experience, and public company experience qualifies him to serve on the Spirit board of directors.

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William K. “Kendall” Nix was appointed to the Spirit board of directors and as Vice Chairman of Spirit Bank in 2018, in connection with the completion of the Comanche acquisition. Mr. Nix was named an advisory director of Comanche Bank in May 1990 and was named director in March 1992. He was appointed Vice Chairman of Comanche Bank in March 2002 and became Chairman in March 2004. Mr. Nix became a director of Comanche at its inception in March 2001 and became Vice President in June 2001. He became President and Chief Executive Officer of Comanche in December 2005 and Chairman and Chief Executive Officer in March 2009. He is currently a member of the Board of Trustees of The Terrell Foundation, a charitable foundation serving the communities in and around Erath County, Texas and is co-managing trustee of the W. L. & Barbara Terrell Nix Foundation, a charitable foundation providing support to community service organizations in North Texas. Mr. Nix previously served on the Board of Trustees of Fort Worth Academy for the Education of Children and Youth, an independent school offering educational opportunities for Kindergarten through eighth grade students in Fort Worth, Texas, including terms as Treasurer and Board President. He continues to serve on the school’s Entrepreneurship and Leadership Initiative Advisory Council. Mr. Nix also worked for two decades in information technology in the oil and gas exploration and production, telecommunications and defense industries at several different companies in a variety of roles including various management positions. He received a Bachelor of Science degree in 1983 from Texas A&M University majoring in Computer Science minoring in Accounting. In 2003, Mr. Nix graduated from the Southwestern Graduate School of Banking at Southern Methodist University with Distinction and Recognition for Leadership and Thesis Nominated for Distinction.

Akash J. Patel is an engineer at Energy Flow Systems, Inc. and has served in that position since August 2005. He has served on the Spirit board of directors and the board of directors of Spirit Bank since 2009. He is currently a committee member of the IHG Emerging Leaders Council, an active member of the Houston Minority Supplier Development Council and a 2015 committee member of Asian American Hotel Owners Association—Houston Region. Mr. Patel has created and initiated programs involving Hotel Rooms for Charity and the donation of bedding supplies to battered women shelters. Mr. Patel received his Bachelor of Science degree in computer engineering and math from the University of Houston in 2004. Mr. Patel’s business experience and extensive involvement in the community qualify him to serve on the Spirit board of directors.

H. D. Patel is board certified in Internal Medicine, Gastroenterology and started a private group practice in 1980. He has served on the Spirit board of directors and on the board of directors of Spirit Bank from 2008 to July 2015 and was re-appointed to the Spirit board of directors again starting in October 2016. Dr. Patel gained notoriety as the corporate Medical Director and the original founder of Triumph Hospital. From 2007 to 2009, Dr. Patel served as an organizer and director of Third Coast Bank, SSB in Humble, Texas. Furthermore, Dr. Patel was an original founder and director of Royal Oaks Bank. Dr. Patel has been involved as an investor and advisory director at Sterling Bank and United Central Bank, as well as serving on various committees of each. Dr. Patel currently serves as Chairman of Gujarati Samaj of Houston and has been closely involved with political activities in Houston and Gujarat (India). After receiving his Bachelor of Medicine and Surgery from M.S. University Vadodara, India in 1969, Dr. Patel earned his Medical Degree in internal medicine from Queen’s Medical Center in 1975, and completed a fellowship in Gastroenterology in 1978. Mr. Patel’s experience serving on boards of directors of banks qualifies him to serve on the Spirit board of directors.

Thomas C. Sooy is the former owner of Tom Sooy & Co., a commercial real estate and commercial mortgage brokerage company Mr. Sooy ran from 1996 to 2000 and again from 2003 to 2006. From 2000 to 2003, Mr. Sooy was Executive Vice President and Chief Lending Officer of Union Planters Bank—Houston. Since 2006, Mr. Sooy has engaged in private investment and has otherwise retired from the real estate business. He has served on the Spirit board of directors and the board of directors of Spirit Bank since 2010. Prior to starting his real estate companies, Mr. Sooy spent more than 26 years in commercial banking in the greater Houston area, primarily as Executive Vice President of Charter Bancshares, Inc. and its subsidiary banks, serving in the capacity of Chief Credit Officer, and serving on the board of directors from 1978 to 1996. Mr. Sooy served as Chief Executive Officer of Charter National Bank—Colonial from 1978 to 1996. Additionally, Mr. Sooy served with the Office of the Comptroller of the Currency as a national bank examiner from 1970 to 1978. Mr. Sooy holds a Bachelor of Business Administration degree in Finance from Texas A&M University earned in 1970. Mr. Sooy’s business experience and banking experience qualify him to serve on the Spirit board of directors.

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Composition of the Board of Directors; Classes of Directors

The Spirit board of directors currently consists of nine members and will consist of 11 directors after the merger is completed. As discussed in greater detail below, the Spirit board of directors has affirmatively determined that seven of its nine current directors qualify as independent directors based upon the corporate governance standards of NASDAQ.

The Spirit board of directors is divided into three classes, denominated as class I, class II and class III. Members of each class hold office for staggered three-year terms. At each annual meeting of Spirit shareholders, the successors to the directors whose term expires at that meeting will be elected to serve until the third annual meeting after their election or until their successors have been elected and qualified. Messrs. Akash J. Patel, H.D. Patel and Sooy serve as class II directors whose terms expire at the 2021 annual meeting of shareholders. Messrs. Jones, McGuire and Metcalf serve as class III directors whose terms expire at the 2019 annual meeting of shareholders. Messrs. Bass, Beall and Morris serve as class I directors whose terms expire at the 2020 annual meeting of shareholders. Mr. Nix was appointed as a class I director on November 14, 2018. Because he was appointed to fill a newly-created directorship by the Spirit board of directors in connection with Spirit’s acquisition of Comanche, even though he was appointed as a class I director whose term expires in 2020, under the terms of Spirit’s bylaws, he must be submitted to Spirit shareholders for election as a director at Spirit’s next annual meeting of shareholders, to be held in 2019. Mr. Jones will be appointed as a class II director upon completion of the merger. Because he will be appointed to fill a newly-created directorship by the Spirit board of directors, even though he will be appointed as a class II director whose term expires in 2021, under the terms of Spirit’s bylaws, he must be submitted to Spirit shareholders for election as a director at Spirit’s next annual meeting of shareholders, to be held in 2019.

Any vacancy occurring in the Spirit board of directors may be filled by vote of a majority of directors then in office. Any director so appointed will hold office for the remainder of the term to which the director was appointed. Individuals appointed to fill additional directorships resulting from an increase in the number of directors will serve until the next meeting of shareholders at which directors are elected, provided that the Spirit board of directors may not fill more than two such directorships during the period between any two successive meetings of the shareholders at which directors are elected.

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EXECUTIVE COMPENSATION AND OTHER MATTERS

Spirit is providing compensation disclosure that satisfies the requirements applicable to emerging growth companies, as defined in the JOBS Act. Spirit’s named executive officers for 2018, which consist of its principal executive officer, principal financial officer and the two other most highly compensated executive officers, are:

• Dean O. Bass, Chairman of the Board and Chief Executive Officer of Spirit and Spirit Bank;

• David M. McGuire, Spirit’s President and the President and Chief Lending Officer of Spirit Bank;

• Jerry D. Golemon, Executive Vice President and Chief Operating Officer of Spirit and Spirit Bank; and

• Jeffrey A. Powell, Executive Vice President and Chief Financial Officer of Spirit and Spirit Bank.

Summary Compensation Table

The following table provides information regarding the compensation of Spirit’s named executive officers for the years ended December 31, 2018 and 2017. Except as set forth in the notes to the table, all cash compensation for each of Spirit’s named executive officers was paid by Spirit Bank, where each serves in the same capacity.

Name and Principal Position	Year		Salary ($)		Bonus ($)(1)			Stock Awards(3) ($)		Option Awards(3) ($)		Non-Equity Incentive Plan Compensation ($)		Nonqualified Deferred Compensation Earnings ($)		All Other Compensation ($)(4)		Total ($)
Dean O. Bass		2018		491,740		—			—		103,690		—		—		45,654		641,084
Chairman of the Board and Chief Executive officer		2017		472,941		353,425	(2)		—		61,478		—		—		42,681		930,525
David M. McGuire		2018		476,771		—			—		103,690		—		—		54,461		634,922
President		2017		457,856		328,364	(2)		—		61,478		—		—		60,870		908,568
Jerry D. Golemon		2018		268,394		—			—		34,563		—		—		32,037		334,994
Executive Vice President and Chief Operating Officer		2017		257,744		53,456			—		40,985		—		—		33,649		385,834
Jeffrey A. Powell		2018		271,519		—			—		34,563		—		—		58,784		364,866
Executive Vice President and Chief Financial Officer		2017		115,415		63,693			—		—		—		—		13,554		192,662

(1) Bonuses for 2018 performance will be determined by Spirit’s compensation committee in February 2019.

(2) Bonuses for 2017 paid to Dean Bass and David McGuire were $103,425 and $103,364, respectively. In August, 2017, Spirit’s compensation committee, acting with the advice of compensation consultants, also approved a one-time grant of payments, subject to acceptance, to Mr. Bass and Mr. McGuire of $250,000 and $225,000, respectively, for services rendered to Spirit and Spirit Bank since inception. The bonus grants were not accepted or paid in 2017 and expired on their own accord on December 31, 2017. New bonus grants in the same amounts were approved by Spirit’s compensation committee in February 2018 and accepted and paid to Mr. Bass and Mr. McGuire in the same month. See the section of this document entitled “—Separate Performance Bonuses,” beginning on page 263.

(3) Assumptions used in the calculation of the amounts in these columns are included in Note 14 to Spirit’s audited consolidated financial statements included in this document. The amounts represent the aggregate grant date fair values of equity awards granted during the applicable year, computed in accordance with FASB ASC Topic 718.

(4) All other compensation for 2018 includes the following:

	401(k) Company Match		Medical Insurance		Club dues and expenses		Automobile expense		Bank Scholarship		Total
Dean O. Bass	$	19,425	$	7,660	$	13,611	$	4,958	$	—	$	45,654
David M. McGuire		18,542		9,710		18,359		5,850		2,000		54,461
Jerry D. Golemon		14,076		7,065		5,131		5,765		—		32,037
Jeffrey Powell		—		6,859		8,639		43,286		—		58,784

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(4) All other compensation for 2017 includes the following:

	401(k) Company Match		Medical Insurance		Club dues and expenses		Automobile expense		Bank Scholarship		Total
Dean O. Bass	$	21,250	$	4,807	$	11,087	$	5,537	$	—	$	42,681
David M. McGuire		23,750		7,932		22,019		6,669		500		60,870
Jerry D. Golemon		15,465		7,932		5,366		4,886		—		33,649
Jeffrey Powell		—		3,215		5,539		4,800		—		13,554

Annual Cash Incentive Plan

Spirit’s executive compensation program is designed to attract, retain and motivate key executives to maximize performance and long-term shareholder value. Spirit’s bonus program and its overall compensation strategy for executive officers is designed by Spirit’s compensation committee with a goal of providing competitive compensation and tying a meaningful portion of compensation to financial and operating performance that align executives’ and shareholders’ interests and reward long-term growth and performance.

Historically, the compensation committee has provided discretionary cash bonuses after the end of each fiscal year. Discretionary cash bonuses for 2018 performance will be determined by Spirit’s compensation committee in February 2019. The amount of these discretionary awards, if any, has been based on an overall assessment of Spirit’s performance, while taking into consideration other factors such as market conditions, regulatory changes, accounting changes, tax law changes and other items that may impact Spirit’s strategic direction.

Spirit intends to continue to provide annual cash bonuses to reward achievement of financial or operational goals so that total compensation is reflective of actual company and individual performance. Spirit’s compensation committee is currently working to provide incentive targets that tie compensation to its performance in 2019. These performance criteria may include a discretionary provision for factors such as successful capital raises, acquisitions, and stock price performance.

Separate Performance Bonuses

In August 2017, Spirit’s compensation committee awarded one-time bonuses to Mr. Bass and Mr. McGuire of $250 thousand and $225 thousand, respectively, for the historical performance and growth of the company and Spirit Bank while leading Spirit toward its IPO. The amounts were determined at the discretion of the compensation committee. The bonus awards were subject to acceptance by Mr. Bass and Mr. McGuire before December 31, 2017. Mr. Bass and Mr. McGuire did not accept the bonus awards by December 31, 2017. In February 2018, Spirit’s compensation committee again approved the bonus awards, and Mr. Bass and Mr. McGuire accepted the awards then. Because the bonus awards were initially granted in 2017, the bonus amounts were included in the 2017 bonus total in the Summary Compensation Table.

IPO Option Grants

In connection with the IPO, Spirit’s compensation committee made the following stock option award grants to its named executive officers on May 3, 2018, the exercise price for which is $21.00 per share (the initial public offering price) and which vest in equal annual installments on each of the first five anniversaries of the grant date:

	No. of Shares Underlying Options
Dean O. Bass		15,000
David M. McGuire		15,000
Jerry D. Golemon		5,000
Jeffrey A. Powell		5,000

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Outstanding Equity Awards at 2018 Fiscal Year-End

The following table sets forth information relating to the unexercised options and outstanding stock awards held by the named executive officers as of December 31, 2018.

	Option Awards										Stock Awards
Name	Number of Securities Underlying Unexercised Options Exercisable (#)		Number of Securities Underlying Unexercised Options Unexercisable (#)		Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#)		Option Exercise Price ($)		Option Expiration Date		Number of shares or units of stock that have not vested (#)		Market value of shares or units of stock that have not vested ($)		Equity incentive plan awards: Number of unearned shares, units or other rights that  have not vested (#)		Equity incentive plan awards: Market or payout value of unearned shares, units or other rights that  have not vested ($)		Vesting Date
Dean O. Bass		29,048		—		—	$	10.50		8/18/21		—		—		—		—		Vested
		10,000		—		—	$	12.00		6/1/22		—		—		—		—		Vested
		15,000		—		—	$	13.00		3/21/23		—		—		—		—		Vested
		20,000		5,000		—	$	13.00		2/20/24		—		—		—		—		(1	)
		9,000		6,000		—	$	16.00		2/19/25		—		—		—		—		(2	)
		10,000		15,000		—	$	13.00		5/26/26		—		—		—		—		(3	)
		3,000		12,000		—	$	15.00		2/23/27		—		—		—		—		(4	)
		—		15,000		—	$	21.00		5/3/28		—		—		—		—		(5	)
David M. McGuire		50,000		—		—	$	10.00		8/16/19		—		—		—		—		Vested
		19,524		—		—	$	10.50		8/18/21		—		—		—		—		Vested
		15,000		—		—	$	12.00		6/1/22		—		—		—		—		Vested
		20,000		—		—	$	13.00		3/21/23		—		—		—		—		Vested
		20,000		5,000		—	$	13.00		2/20/24		—		—		—		—		(1	)
		9,000		6,000		—	$	16.00		2/19/25		—		—		—		—		(2	)
		10,000		15,000		—	$	13.00		5/26/26		—		—		—		—		(3	)
		3,000		12,000		—	$	15.00		2/23/27		—		—		—		—		(4	)
		—		15,000		—	$	21.00		5/3/28		—		—		—		—		(5	)
Jerry D. Golemon		5,000		—		—	$	10.50		8/20/20		—		—		—		—		Vested
		2,500		—		—	$	10.50		9/1/21		—		—		—		—		Vested
		5,000		—		—	$	12.00		11/1/22		—		—		—		—		Vested
		7,500		—		—	$	13.00		9/15/23		—		—		—		—		Vested
		6,000		1,500		—	$	13.00		10/1/24		—		—		—		—		(6	)
		3,000		2,000		—	$	16.00		8/15/25		—		—		—		—		(7	)
		2,000		3,000		—	$	13.00		8/26/26		—		—		—		—		(8	)
		2,000		8,000		—	$	15.00		2/23/27		—		—		—		—		(9	)
		—		5,000		—	$	21.00		5/3/28		—		—		—		—		(10	)
Jeffrey A. Powell		—		—		—		—		—		—		—		—		—		—
		—		5000		—	$	21.00		5/3/28		—		—		—		—		(10	)

(1) Stock options to acquire 20,000 shares are fully vested and exercisable; stock options to acquire 5,000 shares will vest on February 20, 2019.

(2) Stock options to acquire 9,000 shares are fully vested and exercisable; stock options to acquire 3,000 shares will vest on each of February 19, 2019 and 2020.

(3) Stock options to acquire 10,000 shares are fully vested and exercisable; stock options to acquire 5,000 shares will vest on each of May 26, 2019, 2020 and 2021.

(4) Stock options to acquire 3,000 shares are fully vested and exercisable; stock options to acquire 3,000 shares will vest on each of February 23, 2019, 2020, 2021 & 2022.

(5) Stock options to acquire 3,000 shares will vest on each of May 3, 2019, 2020, 2021, 2022 and 2023.

(6) Stock options to acquire 6,000 shares are fully vested and exercisable; stock options to acquire 1,500 shares will vest on October 1, 2019.

(7) Stock options to acquire 3,000 shares are fully vested and exercisable; stock options to acquire 1,000 shares will vest on each of August 15, 2019 and 2020.

(8) Stock options to acquire 2,000 shares are fully vested and exercisable; stock options to acquire 1,000 shares will vest on each of August 26, 2019, 2020 and 2021.

(9) Stock options to acquire 2,000 shares are fully vested and exercisable; stock options to acquire 2,000 shares will vest on each of February 23, 2019, 2020, 2021 and 2022.

(10) Stock options to acquire 1,000 shares will vest on each of May 3, 2019, 2020, 2021, 2022 and 2023.

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Nonqualified Deferred Compensation Plan

Spirit’s named executive officers are eligible to participate in the Spirit of Texas Bank Nonqualified Deferred Compensation Plan, which we refer to as the deferred compensation plan, which Spirit adopted in 2016. Spirit maintains the deferred compensation plan for the purposes of providing a competitive benefit and allowing executives and certain other senior employees an opportunity to defer income tax payments on their cash compensation within the restrictions imposed by the Code, and to assist executives in their retirement planning. the deferred compensation plan allows executives to voluntarily defer up to 75.0% of base salary and/or up to 100.0% of paid bonus or commissions. Spirit does not provide any matching contributions but, in its discretion, Spirit may make an annual contribution to an executive’s account based on individual and/or company performance. Any such annual contribution would vest in five equal annual installments beginning on the third anniversary of the contribution date. Earnings on deferrals are credited as a rate of return based on the percentage change in the S&P 500 Index over a one-year period, and such return is credited to the executive’s account at the end of such period. The return is subject to a cap rate of 12.0% and a floor rate of 0.0%. All amounts deferred by participants are fully vested, and amounts contributed by Spirit will automatically vest upon normal retirement beginning at age 65, death, disability or a change in control. Participants would forfeit any company contributions upon a termination for cause or engaging in competition with a competitor, as such terms are defined in Spirit’s employee handbook. Distributions under the deferred compensation plan will be paid out upon a fixed date (to the extent the participant chose the date on which his or her account balances are to be distributed) or following an event of certain financial hardship, termination of employment, death, disability or change in control. Deferred compensation account balances are unsecured and all amounts remain part of Spirit’s operating assets. In 2018, Spirit’s named executive officers contributed the following amounts to their deferred compensation plan accounts:

	Contributions		December 31, 2018 Balance
Dean O. Bass	$	18,397	$	68,298
David M. McGuire		17,835		58,989
Jerry D. Golemon		30,085		72,024
Jeffrey A. Powell		6,588		6,588

Spirit did not make any contributions to such accounts in 2018.

Employment Agreements

Dean O. Bass and David M. McGuire

In connection with its IPO, Spirit entered into new employment agreements with each of Mr. Bass and Mr. McGuire, effective as of March 1, 2017. These agreements replace Spirit’s prior employment agreements with Mr. Bass and Mr. McGuire. The material terms of the new employment agreements are summarized below.

Each agreement provides for the payment of base salary, annual incentive bonus, equity (long-term incentive plan) grants, reimbursement of expenses for club dues at a club approved by the Spirit board of directors, the use of an automobile and reimbursement for all costs and expenses related to operating the automobile or a vehicle allowance in an amount approved by the Spirit board or directors, and other customary benefits. Each executive’s agreement has an initial two-year term that expires on March 1, 2019, but it is subject to automatic renewals at the end of such term and each renewal term for successive one-year terms, unless either Spirit or the executive gives written notice not to extend at least 90 days before the end of the renewal term.

Each executive is entitled to receive severance payments if his employment terminates for certain reasons:

• if the executive’s employment terminates due to death or disability, he or his estate is entitled to his base salary, accrued vacation, and other benefits accrued or payable but not yet paid, through the date of termination, plus a pro rata portion of his target annual incentive bonus for the period in which the termination occurred;

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• if the executive terminates his employment without good reason or if his employment is terminated for cause, he is entitled to his base salary, accrued vacation, and other benefits earned or payable but not yet paid, through the date of termination;

• if Spirit terminates the executive’s employment without cause or if the executive terminates his employment for good reason not in connection with a change in control or within two years after a change in control, he is entitled to (i) his base salary, accrued vacation, and other benefits earned or payable but not yet paid, through the date of termination, to be paid within six days of the date of termination, (ii) a payment equal to two times the sum of the amount of his base salary for the year in which the termination occurs plus all bonus, profit sharing and other annual incentive payments made by Spirit to him with respect to the most recent full year preceding the year in which the termination occurs, to be paid within 30 days of the date of termination, and (iii) benefits equal in value to each life, health, accident or disability benefit to which he was entitled immediately before termination for 18 months after the date of termination, plus the option to have assigned to him any assignable insurance policy owned by Spirit or relating specifically to him;

• if, prior to and in connection with, or within two years after, a change in control, Spirit terminates the executive’s employment for any reason other than death, disability or cause, he is entitled to (i) his base salary, accrued vacation, and other benefits earned or payable but not yet paid, through the date of termination, to be paid within six days of the date of termination, (ii) an amount equal to three times the aggregate of his base salary for the year in which the termination occurs plus all bonus, profit sharing and other annual incentive payments made by Spirit to him with respect to the most recent full year preceding the year in which the termination occurs, to be paid within 30 days of the date of termination, and (iii) benefits equal in value to each life, health, accident or disability benefit to which he was entitled immediately before termination for 18 months after the date of termination, plus the option to have assigned to him any assignable insurance policy owned by Spirit or relating specifically to him.

Under the terms of the agreements, the amount of these severance benefits would be reduced to the extent necessary so that the aggregate amount of benefits would not be subject to excise tax under Sections 280G and 4999 of the Code if and only if (x) such reduction produces a better net after-tax position than the total payment provided for herein and (y) there are no other amounts receivable by the executive from Spirit that may not be reduced such that the aggregate amount of benefits would not be subject to such excise tax.

Each executive’s agreement provides that he is subject to a non-competition and non-solicitation obligation for 12 months following his termination of employment. Spirit may, in its sole discretion, pay each executive his base salary for up to 12 months after the termination date as additional compensation for his compliance with the non-competition and non-solicitation provision of the employment agreement. Each executive is required to execute a release of claims.

Each executive’s agreement also provides that he will be entitled to indemnification to the extent permitted by law.

Under the employment agreements, “cause” means the (i) willful and continued failure by the executive substantially to perform his duties (other than from incapacity due to physical or mental illness) after a demand for substantial performance has been delivered to the executive by the Spirit board of directors (which demand must specifically identify the manner in which it is believed the executive has not substantially performed his duties) with a reasonable period of opportunity for such substantial performance to be provided or (ii) willful engaging by the executive in illegal misconduct materially and demonstrably injurious to Spirit.

Under the employment agreements, “good reason” means any of the following occurs:

• any material diminution of the executive’s authority, duties or responsibilities;

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• a change in the executive’s business location of more than 30 miles;

• a diminution by Spirit in the executive’s (i) base salary; or (ii) prior to and in connection with, or within two years after, a change in control, the target annual bonus amount under any annual incentive plan in a manner inconsistent with other senior management employees; or

• any action or inaction that constitutes a material breach of the employment agreement by Spirit.

Jerry D. Golemon and Jeffrey A. Powell

In connection with its IPO, Spirit entered into a new employment agreement with Mr. Golemon, effective as of March 1, 2017. This agreement replaced Spirit’s prior employment agreement with Mr. Golemon. Spirit entered into an employment agreement with Mr. Powell in connection with his joining the company in July 2017. The material terms of the new employment agreements are summarized below.

The agreement provides for the payment of base salary, annual incentive bonus, equity (long-term incentive plan) grants, reimbursement of expenses for club dues at a club approved by the Spirit board of directors, the use of an automobile and reimbursement for all costs and expenses related to operating the automobile or a vehicle allowance in an amount approved by the Spirit board or directors (up to $1 thousand per month for Mr. Powell), and other customary benefits. Pursuant to his agreement, Mr. Powell received a $10 thousand signing bonus and an additional $10 thousand bonus after the first six months of satisfactory employment. The executive’s agreement has an initial one-year term that expires on March 1, 2018 in the case of Mr. Golemon and July 10, 2018 in the case of Mr. Powell, but it is subject to automatic renewals at the end of such term and each renewal term for successive one-year terms, unless either Spirit or the executive gives written notice not to extend at least 90 days before the end of the renewal term.

The executive is entitled to receive severance payments if his employment terminates for certain reasons:

• if the executive’s employment terminates due to death or disability, he or his estate is entitled to his base salary, accrued vacation, and other benefits accrued or payable but not yet paid, through the date of termination, and Spirit has the option (but not the obligation) to pay a pro rata portion of his target annual incentive bonus for the period in which the termination occurred;

• if the executive terminates his employment without good reason or if his employment is terminated for cause, he is entitled to his base salary, accrued vacation, and other benefits earned or payable but not yet paid, through the date of termination;

• if Spirit terminates the executive’s employment without cause or if the executive terminates his employment for good reason not in connection with a change in control or within two years after a change in control, he is entitled to (i) his base salary, accrued vacation, and other benefits earned or payable but not yet paid, through the date of termination, to be paid within six days of the date of termination, (ii) a payment equal to the amount of his base salary for the year in which the termination occurs, which amount can be paid in lump sum within 30 days of the date of termination or, at Spirit’s election, in 12 equal monthly installments, and (iii) benefits equal in value to each life, health, accident or disability benefit to which he was entitled immediately before termination for 12 months after the date of termination; or

• if, prior to and in connection with, or within two years after, a change in control, Spirit terminates the executive’s employment for any reason other than death, disability or cause or the executive terminates his employment for good reason, he is entitled to (i) his base salary, accrued vacation, and other benefits earned or payable but not yet paid, through the date of termination, to be paid within six days of the date of termination, (ii) an amount equal to his base salary for the year in which the termination occurs plus all bonus, profit sharing and other annual incentive payments made by Spirit to him with respect to the most recent full year preceding the year in which the termination occurs, to be paid within 30 days of the date of termination, and (iii) benefits equal in value to each life, health, accident

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or disability benefit to which he was entitled immediately before termination for 12 months after the date of termination, plus the option to have assigned to him any assignable insurance policy owned by Spirit or relating specifically to him.

Under the terms of the agreement, the amount of these severance benefits would be reduced to the extent necessary so that the aggregate amount of benefits would not be subject to excise tax under Sections 280G and 4999 of the Code if and only if (x) such reduction produces a better net after-tax position than the total payment provided for herein and (y) there are no other amounts receivable by the executive from Spirit that may not be reduced such that the aggregate amount of benefits would not be subject to such excise tax.

The executive’s agreement provides that he is subject to a non-competition and non-solicitation obligation for 12 months following his termination of employment. The executive is required to execute a release of claims.

The executive’s agreement also provides that he will be entitled to indemnification to the extent permitted by law. Under the employment agreement, “cause” means:

• executive’s breach of the employment agreement;

• failure to satisfactorily perform executive’s duties under the employment agreement, to follow the direction (consistent with duties) of the Spirit board of directors or any other individual to whom executive reports, or to follow Spirit’s procedures, policies and rules;

• any willful act or omission which is, or is likely to be, injurious to Spirit or its business reputation;

• dishonesty, fraud, malfeasance, negligence or misconduct, including the delay of information delivered to the Spirit board of directors or any other individual to whom executive reports, the incompleteness of reporting to the Spirit board of directors or any other individual to whom executive reports, or any effort to mislead or improperly influence the Spirit board of directors or any other individual to whom executive reports;

• arrest, indictment for, or conviction of, or entry of a plea of guilty or no contest to, a felony or a crime involving moral turpitude; or

• resignation or failure to perform services under the employment agreement;

provided, that Spirit must provide notice to the executive of the “cause” event in the first four bullet points above and the executive will have the right to cure such event within 30 days.

Under the employment agreement, “good reason” means any of the following occurs:

• any material diminution of the executive’s authority, duties or responsibilities;

• a change in the executive’s business location of more than 30 miles;

• a diminution by Spirit in the executive’s (i) base salary; or (ii) prior to and in connection with, or within two years after, a change of control, the target annual bonus amount under any annual incentive plan in a manner inconsistent with other senior management employees; or

• any action or inaction that constitutes a material breach of the employment agreement by Spirit.

Stock Incentive Plans

2008 Stock Plan

In 2008, Spirit adopted the ST Financial Group, Inc. 2008 Stock Plan, which we refer to as the 2008 stock plan, to provide incentive compensation opportunities that are competitive with those of similar companies in order to attract, retain and motivate eligible participants by providing for both the direct award or sale of shares

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and for the grant of options to purchase shares of Spirit common stock. The 2008 stock plan was subsequently amended on May 17, 2012, May 23, 2013 and May 21, 2015 to increase the number of shares of common stock reserved for issuance to 1,750,000 (such amounts after giving effect to Spirit’s 1-for-2 reverse stock split on March 16, 2017), and on January 19, 2017 to maintain compliance with applicable laws.

The maximum number of shares of Spirit common stock that may be issued pursuant to grants or options under the 2008 stock plan is 1,750,000 shares. Shares covered by an award will be counted as used only to the extent that they are actually issued. In addition, shares attributable to the non-vested, unpaid, unexercised, unconverted or otherwise unsettled portion of any award that is forfeited or cancelled or expires or terminates for any reason without becoming vested, paid, exercised, converted or otherwise settled in full will again be available for grant of additional awards under the 2008 Stock Plan within the limits provided by the 2008 stock plan. As of March 31, 2018 options to purchase 1,212,047 shares of Spirit common stock under the 2008 stock plan were outstanding. Spirit does not intend to make any further grants of awards under the 2008 Stock Plan. Rather, further award grants will be made under the 2017 stock plan. A summary of the material terms of the 2008 Stock Plan are described below.

Plan Administration. The 2008 stock plan may be administered by the Spirit board of directors or one or more committees of the Spirit board of directors. The 2008 stock plan has historically been administered by the Spirit board of directors, but as of February 23, 2017, is now administered by Spirit’s compensation committee. Spirit’s compensation committee has the authority to designate participants, determine the type and number of awards to be granted under the 2008 Stock Plan and determine the terms and conditions of any such award.

Eligibility. The 2008 stock plan permits the grant of stock options not described in Sections 422(b) or 423(b) of the Code and the direct award or sale of shares of Spirit common stock to Spirit’s employees, officers, outside directors and consultants. The 2008 stock plan also permits the grant of incentive stock options, or ISOs, to employees and officers.

Incentive Awards. The 2008 stock plan authorizes stock options and stock awards.

Stock Options. A stock option gives the awardee the right to purchase a certain number of shares of Spirit common stock at a future date at a specified price per share generally equal to, but not less than, the fair market value of a share on the date of grant. The exercise price of each stock option granted under the 2008 Stock Plan will be determined by the compensation committee. The compensation committee may authorize the grant of either an incentive stock option, which we refer to as ISO, or a nonqualified stock option, which we refer to as NQSO, that does not constitute an incentive stock option. ISO benefits are taxed differently from NQSOs, as described under “—Federal Income Tax Treatment of Awards under the 2008 Stock Plan” below. Stock options are subject to vesting requirements generally over a five-year period of continued service. Full payment for shares purchased on the exercise of any option must be made at the time of such exercise in a manner approved by Spirit’s compensation committee.

Stock Awards. A stock award represents the right to purchase or receive shares of Spirit common stock, typically a fixed number of shares. Spirit’s compensation committee specifies the price, if any, the participant must pay for such shares and the restrictions (which may include, for example, continued service and/or performance standards) imposed on such shares. Any right to purchase shares will automatically expire if not exercised within 30 days after the grant of the right was communicated to the participant.

Payment for Shares. The exercise price for stock options and the purchase price (if any) for stock awards may be paid in any of the following forms as determined by the Spirit board of directors or compensation committee and set forth in the award agreement: (i) cash, (ii) existing shares of Spirit common stock (unless this would cause Spirit to recognize additional compensation expense with respect to the option for financial reporting purposes), (iii) issuance of a full-recourse promissory note secured by a pledge of the shares purchased, (iv) a broker-assisted cashless exercise or (v) proceeds from a loan from a broker approved by Spirit secured by a

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pledge of the shares purchased. Notwithstanding the foregoing, no such loans, notes or other exercise arrangements will be permitted to the extent that such arrangement is prohibited by applicable law, including but not limited to Section 13(k) of the Exchange Act.

Agreements. The terms of each grant or award of shares or stock options, including terms relating to vesting, are set forth in a stock option agreement or stock purchase agreement; provided that no stock option award will have a term that exceeds ten years from the date of grant or an exercise price of less than 100% of the fair market value of a share of Spirit common stock on the date of grant.

Regulatory Requirements. If Spirit’s capital falls below minimum regulatory requirements, if directed by federal or state regulators, Spirit may require the option or award holder to exercise (to the extent then exercisable) or forfeit the option or award within such time period as required by the regulators.

Transfer Restrictions. Any shares granted or issued upon exercise of an option are subject to special forfeiture conditions, rights of repurchase, rights of first refusal and other transfer restrictions as the board of directors may determine at the time of grant. Stock options are generally only transferable by beneficiary designation, gift to an immediate family member, a will or other laws of descent and distribution. Stock awards are not transferable.

Termination of Employment. Unless the Spirit board of directors provides otherwise in an agreement, upon a termination of a participant’s employment, such participant’s stock options or unvested grant of shares will generally cease to be exercisable and will terminate on the date of such termination.

Change in Control. Unless the Spirit board of directors provides otherwise in a stock option agreement, upon a “change in control” (as defined in the 2008 Stock Plan) in which there is an acquiring or surviving entity, all options to the extent not previously terminated or vested will be accelerated and fully exercisable if the stock options do not remain outstanding, the options are not assumed by the surviving corporation or its parent, and the surviving corporation or its parent does not substitute options with substantially the same terms.

Right of Repurchase and Right of First Refusal. Spirit generally has a right to repurchase the shares of stock issued upon the exercise of any stock option granted under the 2008 Stock Plan from the holder upon the termination of the holder’s employment. Spirit does not intend to exercise this right. In addition, Spirit generally has a right of first refusal in the event a holder proposes to sell, pledge or otherwise transfer any shares of stock issued upon the exercise of any stock option granted under the 2008 Stock Plan. The right of first refusal terminated upon the completion of the IPO.

Amendment and Termination. The Spirit board of directors may, in its discretion, amend or alter the terms of the 2008 Stock Plan at any time, provided that Spirit’s shareholders must approve any amendment if the amendment increases the number of shares available for issuance under the 2008 Stock Plan, materially changes the class of persons who are eligible for the grant of ISOs or shareholder approval is required under applicable law or regulation. Shareholder approval will not be required for any other amendment to the 2008 Stock Plan. The Spirit board of directors may modify the terms and conditions of any outstanding options; provided, that no amendment may impair the option holder’s rights or increase the option holder’s obligations under such options without the consent of the option holder. Additionally, except in connection with a corporate transaction involving Spirit (including stock dividend, stock split, reverse stock split, recapitalization, reclassification, merger, consolidation or similar corporate transaction), the terms of outstanding options may not be amended to reduce the exercise price or cancel outstanding options in exchange for cash, other awards of shares of options, or options with an exercise price that is less than the exercise price of the original options without stockholder approval. The 2008 stock plan will automatically terminate on May 21, 2025, which is ten years after the most recent increase in the number of shares reserved under the 2008 Stock Plan that was approved by Spirit’s shareholders in May 2015.

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Federal Income Tax Treatment of Awards under the 2008 Stock Plan. Federal income tax consequences (subject to change) relating to awards under the 2008 Stock Plan are summarized in the following discussion. This summary is not intended to be exhaustive and, among other considerations, does not describe the deferred compensation provisions of Section 409A of the Code to the extent an award is subject to and does not satisfy those rules, nor does it describe state, local, or international tax consequences.

For NQSOs, Spirit generally is entitled to deduct (and the optionee recognizes taxable income in) an amount equal to the difference between the option exercise price and the fair market value of the shares at the time of exercise. For ISOs, Spirit is generally not entitled to a deduction, nor does the participant recognize income at the time of exercise. The current federal income tax consequences of other awards authorized under the 2008 Stock Plan generally follow certain basic patterns: nontransferable stock awards subject to a substantial risk of forfeiture results in income recognition equal to the excess of the fair market value over the price paid (if any) only at the time the restrictions lapse (unless the recipient elects to accelerate recognition as of the date of grant); bonuses and performance share awards are generally subject to tax at the time of payment. Spirit will generally have a corresponding deduction at the time the participant recognizes income. However, as for those awards subject to ISO treatment, Spirit would generally have no corresponding compensation deduction.

If an award is accelerated under the 2008 Stock Plan in connection with a change in control (as this term is used under the Code), Spirit may not be permitted to deduct the portion of the compensation attributable to the acceleration, which we refer to as parachute payments, if it exceeds certain threshold limits under the Code (and certain related excise taxes may be triggered).

2017 Stock Incentive Plan

On January 19, 2017, the Spirit board of directors approved the adoption of the 2017 Stock Incentive Plan, which we refer to as the 2017 stock plan, and recommended to the shareholders that the 2017 stock plan be approved. Spirit’s shareholders approved the 2017 stock plan on February 23, 2017.

The purpose of the 2017 stock plan is to attract and retain officers, employees, directors and other service providers by providing them with additional incentives, and to promote the long-term growth and profitability of Spirit. The maximum number of shares of Spirit common stock that may be issued pursuant to awards under the 2017 stock plan equals 1,000,000 (after giving effect to Spirit’s 1-for-2 reverse stock split on March 16, 2017), all of which may be subject to incentive stock option treatment. The total number of shares that may be issued for awards to any single participant during a calendar year is 250,000 (after giving effect to Spirit’s 1-for-2 reverse stock split on March 16, 2017). Shares covered by an award will be counted as used only to the extent that they are actually issued. In addition, shares attributable to the non-vested, unpaid, unexercised, unconverted or otherwise unsettled portion of any award that is forfeited or cancelled or expires or terminates for any reason without becoming vested, paid, exercised, converted or otherwise settled in full will again be available for grant of additional awards under the 2017 stock plan within the limits provided by the 2017 stock plan. As of March 31, 2018, options to purchase 132,777 shares of Spirit common stock under the 2017 stock plan were outstanding, all at an exercise price of $15.00 per share, and options to purchase 65,933 shares of common stock at an exercise price of $21.00 per share under the 2017 stock plan. A summary of the material terms of the 2017 stock plan is described below.

Administration. The Spirit board of directors or one or more committees appointed by the Spirit board of directors will administer the 2017 stock plan. The Spirit board of directors may delegate some or all of its authority with respect to the 2017 stock plan to a committee of directors and may delegate certain limited award grant authority to one or more officers of Spirit. (The appropriate acting body, be it the Spirit board of directors of, a committee within its delegated authority, or an officer within his or her delegated authority, is referred to in this summary as the Administrator.) The Administrator determines which employees, directors and other individuals shall receive grants of awards, the number of shares that are subject to awards and the terms and conditions of such awards, including the price (if any) to be paid for the shares or the award. Along with other

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authority granted to the Administrator under the 2017 stock plan, the Administrator may (i) determine fair market value, (ii) select recipients of awards, (iii) determine the number of shares subject to awards, (iv) determine the terms and conditions of awards, and (v) amend outstanding awards.

Eligibility. Persons eligible to receive awards under the 2017 stock plan include Spirit’s officers, employees, directors and other service providers. The Administrator determines from time to time the participants to whom awards will be granted.

Adjustments or Changes in Capitalization. In the event of any change in the outstanding shares of Spirit common stock by reason of a stock dividend, stock split, reverse stock split, recapitalization, reclassification, merger, consolidation, or similar corporate transaction, the Administrator will provide for a substitution for or an adjustment in the (i) number and class of securities subject to outstanding awards, (ii) the consideration to be received upon exercise or vesting of an award, (iii) the exercise price of options, (iv) the aggregate number and class of securities for which awards may be granted under the 2017 stock plan, and/or (v) the maximum number of securities with respect to which an employee may be granted awards during any calendar year.

Performance Goals. The performance goals for awards intended to qualify as “performance-based compensation” will be based on measurable and attainable financial targets selected by the Administrator from the following list with respect to Spirit: growth in interest income and expense; net income; net interest margin; efficiency ratio; reduction in nonaccrual loans and non-interest expense; growth in non-interest income and ratios to earnings assets; net revenue growth and ratio to earning assets; capital ratios; asset or liability interest rate sensitivity and gap; effective tax rate; deposit growth and composition; liquidity management; securities portfolio (value, yield, spread, maturity, or duration); earning asset growth and composition (loans, securities); non-interest income (e.g., fees, premiums and commissions, loans, wealth management, treasury management, insurance, funds management); overhead ratios, productivity ratios; credit quality measures; return on assets; return on equity; economic value of equity; compliance and regulatory ratings; internal controls; enterprise risk measures (e.g., interest rate, loan concentrations, portfolio composition, credit quality, operational measures, compliance ratings, balance sheet, liquidity, insurance); volume in production or loans; cash flow; cost; revenues; sales; ratio of debt to debt plus equity; net borrowing, credit quality or debt ratings; profit before tax; economic profit; earnings before interest and taxes; earnings before interest, taxes, depreciation and amortization; gross margin; profit margin; earnings per share; operating earnings; capital expenditures; expenses or expense levels; economic value added; ratio of operating earnings to capital spending or any other operating ratios; free cash flow; net profit; net sales; net asset value per share; the accomplishment of mergers, acquisitions, dispositions, securities offerings or similar extraordinary business transactions; sales growth; price of Spirit common stock; return on investment; return on assets, equity or shareholders’ equity; market share; inventory levels, inventory turn or shrinkage; customer satisfaction; or total return to shareholders. The Administrator may provide in any award intended to qualify as performance-based compensation under Section 162(m) of the Code that any evaluation of performance may include or exclude the impact, if any, on reported financial results of any of the following events that occurs during a performance period: (i) asset write-downs, (ii) litigation or claim judgments or settlements, (iii) changes in tax laws, accounting principles or other laws or provisions, (iv) reorganization or restructuring programs, (v) acquisitions and divestitures, (vi) foreign exchange gains or losses, or (vii) gains and losses that are treated as unusual in nature or that occur infrequently under ASC Topic 225. Performance goals may be absolute in their terms or measured against or in relationship to other companies. Performance goals may be particular to an award recipient or the department, branch, affiliate, or division in which the award recipient works, or may be based on the performance of Spirit, one or more of its affiliates, or Spirit and one or more of its affiliates, and may cover such period(s) as the Administrator may specify.

The performance goals will be established by the Administrator.

Incentive Awards. The 2017 stock plan authorizes stock options, stock appreciation rights, restricted stock, restricted stock units, dividend equivalent rights, and performance-based awards. The 2017 stock plan retains the flexibility to offer competitive incentives and to tailor benefits to specific needs and circumstances. Certain

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awards may be paid or settled in cash. An option or stock appreciation right will expire, or other award will vest, in accordance with the schedule set forth in the applicable award agreement.

Stock Options. A stock option is the right to purchase shares of Spirit common stock at a future date at a specified price per share generally equal to, but no less than, the fair market value of a share on the date of grant. An option may either be an ISO or a NQSO. ISO benefits are taxed differently from NQSOs, as described under “—Federal Income Tax Treatment of Awards under the 2017 stock plan” below. ISOs also are subject to more restrictive terms and are limited in amount by the Code and the 2017 stock plan. The exercise price for each option granted is determined in accordance with the method as defined in the 2017 stock plan, except that the option exercise price may not be less than 100% of the fair market value of a share of Spirit common stock on the date of grant (110% in the case of ISOs granted to an employee who owns stock representing more than 10% of the voting power of Spirit’s capital stock). All options granted under the 2017 stock plan will expire no later than 10 years from the date of grant (five years in the case of ISOs granted to an employee who owns stock representing more than 10% of the voting power of Spirit’s capital stock). The method of exercising an option granted under the 2017 stock plan will be set forth in the 2017 stock plan and the stock option agreement for that particular option. Full payment for shares purchased on the exercise of any option must be made at the time of such exercise in a manner approved by the Administrator.

Stock Appreciation Rights. Stock appreciation rights permit the holder to receive the appreciation in the value of Spirit common stock directly from Spirit in cash or shares of Spirit common stock. The Administrator determines the number of covered shares, the exercise price, the vesting schedule for stock appreciation rights, and whether the stock appreciation rights will be settled in cash or stock. Upon exercise of vested stock appreciation rights, the holder will receive, as determined by the Administrator, either (i) cash in an amount equal to the difference between the fair market value of Spirit common stock at the date of exercise and the exercise price of the stock appreciation right, multiplied by the number of shares with respect to which the stock appreciation rights are exercised or (ii) a number of shares of Spirit common stock equal to such amount of cash divided by fair market value of Spirit common stock on the date of exercise. The exercise price for each stock appreciation right granted will not be less than the fair market value of a share of Spirit common stock on the date of grant.

Restricted Stock. A grant of shares of restricted stock represents shares of Spirit common stock that are subject to restrictions on disposition and the obligation of the awardee to forfeit and surrender the shares under certain circumstances (forfeiture restrictions). A restricted stock award is typically for a fixed number of shares of common stock subject to restrictions. The Administrator specifies the price, if any, the participant must pay for such shares and the restrictions (which may include, for example, continued service and/or performance standards) imposed on such shares. Except for these restrictions and any others imposed by the Administrator, upon the grant of restricted stock the recipient will have rights of a shareholder with respect to the restricted stock, including the right to vote the restricted stock and to receive all dividends and other distributions paid or made with respect to the restricted stock.

Dividend Equivalent Rights. Dividend equivalent rights entitle the holder to receive payments from Spirit in an amount determined by reference to any cash dividends paid on a specified number of shares of Spirit common stock during the period the rights are effective. Payment may be made in cash or shares of Spirit common stock. To the extent a dividend equivalent right is granted in connection with another award that is subject to vesting conditions, such dividend equivalent right generally will vest and be eligible for payment on the same terms and conditions that apply to the vesting of the underlying award.

Performance Awards. The payment of the value of a performance award is conditioned upon the achievement of performance goals set by the compensation committee at the time of granting the performance award and may be paid in cash, shares of Spirit common stock, or a combination thereof.

Restricted Stock Units. Restricted stock units are not shares of Spirit common stock and do not entitle the recipients to the rights of a shareholder, but rather entitle the holder upon their settlement to the value of one

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share of Spirit common stock. Restricted stock units granted under the 2017 stock plan may or may not be subject to performance conditions. Restricted stock units will be settled in shares of Spirit common stock or cash in an amount based on the fair market value of Spirit common stock on the settlement date.

Transfer Restrictions. Subject to certain exceptions, awards under the 2017 stock plan are not transferable by the recipient and are generally exercisable, during the recipient’s lifetime, only by him or her.

Termination of or Changes to the 2017 Plan. The Spirit board of directors may amend or terminate the 2017 stock plan at any time, except that no amendment will be effective without shareholder approval if such approval is required by applicable law or regulation, and no amendment or termination may impair the rights of any holder of outstanding awards without his or her consent. Additionally, no award may be amended or otherwise subject to any action that would be treated, for accounting purposes, as a “repricing” of such award without shareholder approval.

Change in Control. Vesting of awards may be accelerated in the event of certain change in control situations.

Federal Income Tax Treatment of Awards under the 2017 stock plan. Federal income tax consequences relating to awards under the 2017 stock plan are summarized in the following discussion. This summary is not intended to be exhaustive and, among other considerations, does not describe the deferred compensation provisions of Section 409A of the Code to the extent an award is subject to and does not satisfy those rules, nor does it describe state, local, or international tax consequences.

For NQSOs, Spirit is generally entitled to deduct (and the optionee recognizes taxable income in) an amount equal to the difference between the option exercise price and the fair market value of the shares at the time of exercise. For ISOs, Spirit is generally not entitled to a deduction nor does the optionee recognize income at the time of exercise. The current federal income tax consequences of other awards authorized under the 2017 stock plan generally follow certain basic patterns: stock appreciation rights are taxed and deductible in substantially the same manner as NQSOs; nontransferable restricted stock subject to a substantial risk of forfeiture results in income recognition equal to the excess of the fair market value over the price paid (if any) only at the time the restrictions lapse (unless the recipient elects to accelerate recognition as of the date of grant); bonuses and performance share awards are generally subject to tax at the time of payment; cash-based awards are generally subject to tax at the time of payment; and compensation otherwise effectively deferred is taxed when paid. Spirit will generally have a corresponding deduction at the time the participant recognizes income. However, as for those awards subject to ISO treatment, Spirit will generally have no corresponding compensation deduction.

Tax Reform

The Tax Reform was enacted on December 22, 2017. Prior to the Tax Reform, Section 162(m) of the Code generally limited to $1.0 million the U.S. federal income tax deductibility of compensation paid in one year to a company’s Chief Executive Officer or any of its three next-highest-paid employees (other than its Chief Financial Officer). Performance-based compensation is not subject to this limit on deductibility so long as such compensation meets certain requirements, including stockholder approval of material terms. The Tax Reform includes a major overhaul to Section 162(m), which takes effect for tax years beginning after December 31, 2017. Under the Tax Reform, all new grants of executive compensation will be subject to the $1.0 million limit on deductibility, including performance based and non-performance based compensation. The Tax Reform contains a grandfathering provision that provides that any compensation pursuant to a written binding contract that was in effect on November 2, 2017 and was not materially modified after that date is not subject to this change to the exception to the $1.0 million limit on deductibility.

Director Compensation

Spirit currently pays its directors, other than those directors who are employed by Spirit or Spirit Bank, based on the directors’ participation in board and committee meetings, and Spirit Bank currently pays its

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directors in the same manner. Directors who are also employed by Spirit or Spirit Bank do not receive director remuneration for serving as a director of Spirit or Spirit Bank, but are compensated in their capacity as employees. The following table sets forth the compensation earned, awarded or paid during 2018 to each director who served on the Spirit board of directors in 2018, other than Messrs. Bass and McGuire, whose compensation is described in the “—Summary Compensation Table” above. The table also includes compensation earned by each director that is attributable to his service as a director of Spirit Bank.

Name	Fees Earned or Paid in Cash ($)		Stock Awards ($)(1)		Option Awards ($)(1)		All Other Compensation ($)		Total ($)
Robert S. Beall		42,400		—		20,738		—		63,138
Thomas Jones, Jr.		40,600		—		20,738		—		61,338
Leo T. Metcalf, III		65,100		—		20,738		—		85,838
Steven M. Morris		69,100		—		20,738		—		89,838
Akash J. Patel		43,400		—		20,738		—		64,138
H. D. Patel		39,800		—		20,738		—		60,538
Thomas C. Sooy		69,400		—		20,738		—		90,138

(1) Assumptions used in the calculation of the amounts in these columns are included in Note 14 to Spirit’s audited consolidated financial statements included in this document. The amounts represent the aggregate grant date fair values of equity awards granted pursuant to the 2017 stock plan and 2008 Stock Plan during the applicable year, computed in accordance with ASC 718.

(2) During 2018, each non-employee director who served on the Spirit board of directors in 2018 was awarded options to purchase 3,000 shares of Spirit common stock under the 2017 stock plan. The aggregate number of option awards held by Spirit’s existing non-employee directors as of December 31, 2018 is as follows:

Name	No. of Options
Robert S. Beall		21,750
Thomas Jones, Jr.		25,750
Leo T. Metcalf, III		24,250
Steven M. Morris		20,750
Akash J. Patel		25,750
H.D. Patel		3,000
Thomas C. Sooy		24,250

Spirit’s director compensation program is designed in recognition of the time commitment and preparations required for directors to fulfill their responsibilities and to assist in recruiting high-caliber directors. Spirit’s director fees are as follows:

Annual retainer fee	$16 thousand (paid $4 thousand per quarter)
Annual committee chair retainer	$4 thousand (paid $1 thousand per quarter)
Meeting fees	$800 for each Board meeting and $500 for each Board committee meeting

Spirit’s compensation committee may, in its discretion, award the directors an annual equity award.

Spirit’s compensation committee granted each non-employee director a stock option award to purchase 3,000 shares of Spirit common stock, the exercise price for which is $21.00 and which vests in five equal-annual installments on each of the first five anniversaries of the May 3, 2018 grant date.

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All non-employee directors have been and will continue to be reimbursed for their reasonable out-of-pocket travel expenses incurred in attending meetings of the Spirit board of directors or any committees thereof. Directors are also entitled to the protection provided by the indemnification provisions in Spirit’s second amended and restated certificate of formation and amended and restated bylaws, as well as the articles of association and bylaws of Spirit Bank.

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BENEFICIAL OWNERSHIP OF SPIRIT COMMON STOCK BY

MANAGEMENT AND PRINCIPAL SHAREHOLDERS OF SPIRIT

The following table sets forth information with respect to the beneficial ownership of Spirit common stock as of November 30, 2018, subject to certain assumptions set forth in the footnotes, and as adjusted to reflect the issuance of Spirit common stock in connection with the merger, for:

• each shareholder, or group of affiliated shareholders, who Spirit knows beneficially owns more than 5.0% of the outstanding shares of Spirit common stock;

• each of Spirit’s directors;

• each of Spirit’s named executive officers; and

• all of Spirit’s executive officers and directors as a group.

Spirit is not aware of any shareholder, or group of affiliated shareholders, who beneficially owns more than 5.0% of the outstanding shares of Spirit common stock. Beneficial ownership is determined in accordance with rules of the SEC and generally includes any shares over which a person exercises sole or shared voting and/or investment power. Shares of Spirit common stock subject to options and warrants currently exercisable or exercisable within 60 days are deemed outstanding for purposes of computing the percentage ownership of the person holding the options or warrants but are not deemed outstanding for purposes of computing the percentage ownership of any other person. Except as otherwise indicated, Spirit believes the beneficial owners of Spirit common stock listed below, based on information furnished by them, have sole voting and investment power with respect to the number of shares listed opposite their names.

Unless otherwise indicated, the address of each of the individuals named in the table below under “Named Executive Officers and Directors” is c/o Spirit of Texas Bancshares, Inc., 1836 Spirit of Texas Way, Conroe, Texas 77301.

Name	Shares Beneficially Owned Currently					Percentage Beneficially Owned After Giving Effect to the Merger(2)
	Number		Percentage(1)			Percentage
Named Executive Officers and Directors
Dean O. Bass(3)		298,040		2.45	%		2.17	%
David M. McGuire(4)		269,699		2.21	%		1.96	%
Jerry D. Golemon(5)		37,842		*			*
Jeffrey A. Powell(6)		238		*			*
Robert S. Beall(7)		132,747		1.10	%		*
Thomas Jones, Jr.(8)		57,750		*			*
Leo T. Metcalf, III(9)		195,536		1.62	%		1.43	%
Steven M. Morris(10)		139,750		1.16	%		1.02	%
William K. Nix		650,084		5.39	%		4.77	%
Akash J. Patel(11)		203,605		1.69	%		1.49	%
H.D. Patel(12)		67,750		*			*
Thomas C. Sooy(13)		40,956		*			*
All Executive Officers and Directors as a group (12 persons)		2,093,997		17.31	%		14.90	%

* Amount represents less than 1.0% of outstanding common stock.

(1) Based on 12,053,753 shares of Spirit common stock outstanding as of November 30, 2018.

(2) Based on 1,579,268 shares of Spirit common stock issued to Beeville shareholders pursuant to the reorganization agreement.

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(3) This number includes 199,292 shares owned directly by Mr. Bass and his spouse jointly, and options to purchase 96,048 shares of common stock that are currently exercisable or will become exercisable within 60 days. 149,292 shares have been pledged to secure loans from third party lending institutions.

(4) This number includes 118,176 shares owned directly by Mr. McGuire, 4,999 shares held by Mr. McGuire for the benefit of his children, and options to purchase 146,524 shares of common stock that are currently exercisable or will become exercisable within 60 days. 120,475 shares have been pledged to secure loans from a third party lending institution.

(5) This number includes 4,423 shares owned directly by Mr. Golemon, 419 shares of common stock subject to a warrant exercisable prior to August 24, 2020 and options to purchase 33,000 shares of common stock that are currently exercisable or will become exercisable within 60 days.

(6) This number includes 238 shares owned directly by Mr. Powell.

(7) This number includes 12,568 shares owned directly by Mr. Beall, 101,429 shares held by an irrevocable trust of which Mr. Beall is the trustee, and options to purchase 18,750 shares of common stock that are currently exercisable. The number of shares does not include 3,660 shares held by two irrevocable trusts established for the benefit of Mr. Beall’s children, with respect to which Mr. Beall is not the trustee and does not control the voting or investment decisions of the trustee. Mr. Beall disclaims beneficial ownership of the 3,660 shares held by these trusts.

(8) This number includes 35,000 shares owned directly by Mr. Jones and options to purchase 22,750 shares of common stock that are currently exercisable.

(9) This number includes 30,000 shares owned directly by Mr. Metcalf, 50,001 shares held by Mr. Metcalf’s IRA, 28,809 shares held by Mr. Metcalf’s spouse, and options to purchase 21,250 shares of common stock that are currently exercisable. This number also includes 65,476 shares held by a family limited partnership that is owned by Mr. Metcalf’s spouse and three adult children. Any decisions to vote or dispose of the shares must be made by at least two of the four partners in the family limited partnership. Mr. Metcalf disclaims beneficial ownership over the shares held by his spouse and the family limited partnership.

(10) This number includes 122,000 shares owned directly by Mr. Morris and his spouse jointly, and options to purchase 17,750 shares of common stock that are currently exercisable.

(11) This number includes 180,855 shares owned directly by Mr. Akash J. Patel and options to purchase 22,750 shares of common stock that are currently exercisable.

(12) This number includes 50,000 shares owned by a family limited partnership that Dr. H. D. Patel controls and options to purchase 17,750 shares of common stock that are currently exercisable.

(13) This number includes 4,376 shares owned directly by Mr. Sooy, 15,330 shares held by Mr. Sooy’s IRA, and options to purchase 21,250 shares of common stock that are currently exercisable.

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BENEFICIAL OWNERSHIP OF BEEVILLE COMMON STOCK BY

MANAGEMENT AND PRINCIPAL SHAREHOLDERS OF BEEVILLE

The following table sets forth information with respect to the beneficial ownership of Beeville common stock as of November 30, 2018, subject to certain assumptions set forth in the footnotes, for:

• each shareholder, or group of affiliated shareholders, who Beeville knows beneficially owns more than 5.0% of the outstanding shares of Beeville common stock;

• each of Beeville’s directors;

• each of Beeville’s named executive officers; and

• all of Beeville’s executive officers and directors as a group.

Spirit is not aware of any shareholder, or group of affiliated shareholders, who beneficially owns more than 5.0% of the outstanding shares of Beeville common stock. Beneficial ownership is determined in accordance with rules of the SEC and generally includes any shares over which a person exercises sole or shared voting and/or investment power. Except as otherwise indicated, Spirit believes the beneficial owners of Beeville common stock listed below, based on information furnished by them, have sole voting and investment power with respect to the number of shares listed opposite their names.

Unless otherwise indicated, the address of each of the individuals named in the table below under “Named Executive Officers and Directors” is c/o First Beeville Financial Corporation, 1400 East Houston Street, Beeville, Texas 78102.

Name	Number Shares Beneficially Owned		Percentage Beneficially Owned(1)
Named Executive Officers and Directors
Luis Alaniz, Jr.		45		*
Brannon Brooke		675		1.14	%
Gwenyth M. Burris		10		*
Kent Fry		4		*
John W. Galloway		200		*
J.D. Henshall		2		*
James A. Hatfield		1,200		2.03	%
Francis Arnold Hause, II(1)		1,469		2.48	%
Allen C. Jones, IV		6,213		10.51	%
George G. Latcham		406		*
George P. Morrill, III		449		*
Brian K. Schneider		142		*
Brenda Trevino		40		*
5% Shareholders
Hause Circle, Ltd.		4,601		7.78	%
All Executive Officers and Directors as a group (13 persons)		10,855		18.36	%

* Amount represents less than 1.0% of outstanding common stock.

(1) 150 shares are owned by the Hause II Protection Trust, F. A., which Mr. Hause serves as trustee.

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LEGAL MATTERS

The validity of the Spirit common stock to be issued in the merger will be passed upon for Spirit by Hunton. Certain U.S. federal income tax consequences relating to the merger will also be passed upon for Spirit by Hunton and for Beeville by Fenimore Kay.

EXPERTS

The consolidated financial statements of Spirit and its subsidiaries as of and for the years ended December 31, 2017 and 2016, have been included herein in reliance upon the report of BDO USA, LLP, an independent registered public accounting firm, appearing elsewhere herein, and upon the authority of said firm as an expert in accounting and auditing.

The consolidated financial statements of Comanche and its subsidiaries as of and for the years ended December 31, 2017 and 2016, have been included herein in reliance upon the report of Stovall, Grandey & Allen, LLP, an independent registered public accounting firm, appearing elsewhere herein, and upon the authority of said firm as an expert in accounting and auditing.

The consolidated financial statements of Beeville and its subsidiaries as of and for the year ended December 31, 2017, have been included herein in reliance upon the report of BKD, LLP, independent auditors, appearing elsewhere herein, and upon the authority of said firm as an expert in accounting and auditing. The consolidated financial statements of Beeville and its subsidiaries as of and for the year ended December 31, 2016, have been included herein in reliance upon the report of Bumgardner, Morrison & Company, LLP, independent auditors, appearing elsewhere herein, and upon the authority of said firm as an expert in accounting and auditing.

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WHERE YOU CAN FIND MORE INFORMATION

Spirit has filed with the SEC a registration statement on Form S-4 under the Securities Act to register the shares of Spirit common stock that Beeville shareholders will be entitled to receive in connection with the merger. This document is a part of that registration statement. The registration statement, including the attached annexes, exhibits and schedules, contains additional relevant information about Spirit and Spirit common stock. The rules and regulations of the SEC allow Spirit to omit certain information included in the registration statement from this document.

Spirit also files reports, proxy statements and other information with the SEC under the Exchange Act. You may read and copy any of the materials Spirit files with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site that contains reports, proxy and information statements and other information about issuers who file electronically with the SEC. The address of that site is http://www.sec.gov. General information about Spirit, including Spirit’s annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, as well as any amendments and exhibits to those reports, are available free of charge through Spirit’s website at https://www.sotb.com as soon as reasonably practicable after Spirit files them with, or furnishes them to, the SEC. Information on Spirit’s website is not incorporated into this document or Spirit’s other securities filings and is not a part of this document.

Any statement contained in this document or in a document incorporated or deemed to be incorporated into this document by reference will be deemed to be modified or superseded for purposes of this document to the extent that a statement contained in this document or in any subsequently filed document that is also incorporated into this document by reference modifies or supersedes such statement. Any such statement so modified or superseded will not be deemed, except as so modified or superseded, to constitute a part of this document.

Information about Spirit can also be found in additional documents that Spirit may file with the SEC pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act between the date of this document and the date of Beeville’s special meeting and Spirit’s special meeting (other than the portions of those documents not deemed to be filed). These documents include periodic reports, such as Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, as well as proxy statements. You can obtain any of the documents referred to above through Spirit or from the SEC through the SEC’s Internet site at the address described above.

Beeville is a private company and accordingly does not file reports or other information with the SEC. If you would like to request documents from Beeville, please send a request in writing or by telephone to Beeville at the following address or phone number:

First Beeville Financial Corporation

1400 East Houston Street

Beeville, Texas 78102

Attention: Brian K. Schneider

(361) 358-1530

To receive timely delivery of these documents in advance of the special meetings, you must make your request no later than five business days before the date of your company’s special meeting. This means that Beeville shareholders requesting documents must do so by                     , 2019 in order to receive them before the Beeville special meeting.

Spirit has supplied all information contained in this document relating to Spirit, and Beeville has supplied all information contained in this document relating to Beeville.

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Neither Spirit nor Beeville has authorized anyone to give any information or make any representation about the merger, the Spirit stock issuance or their companies that is different from, or in addition to, that contained in this document. Therefore, if anyone does give you information of this sort, you should not rely on it. If you are in a jurisdiction where offers to exchange or sell, or solicitations of offers to exchange or purchase, the securities offered by this document or the solicitation of proxies is unlawful, or if you are a person to whom it is unlawful to direct these types of activities, then the offer presented in this document does not extend to you. The information contained herein speaks only as of the date of this document unless the information specifically indicates that another date applies.

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INDEX TO FINANCIAL STATEMENTS

Unaudited Consolidated Financial Statements of Spirit of Texas Bancshares, Inc.:
Consolidated Balance Sheets as of September  30, 2018 and December 31, 2017	F-3
Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2018 and 2017	F-4
Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2018 and 2017	F-5
Consolidated Statements of Changes in Stockholders’ Equity for the Nine Months Ended September 30, 2018	F-6
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2018 and 2017	F-7
Notes to Consolidated Financial Statements	F-8
Audited Consolidated Financial Statements of Spirit of Texas Bancshares, Inc.:
Report of Independent Registered Public Accounting Firm	F-34
Consolidated Balance Sheets as of December 31, 2017 and 2016	F-35
Consolidated Statements of Income for the Years Ended December  31, 2017 and 2016	F-36
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2017 and 2016	F-37
Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended December 31, 2017 and 2016	F-38
Consolidated Statements of Cash Flows for the Years Ended December  31, 2017 and 2016	F-39
Notes to Consolidated Financial Statements	F-40
Unaudited Consolidated Financial Statements of Comanche National Corporation:
Consolidated Balance Sheets as of September  30, 2018 and December 31, 2017	F-88
Consolidated Statements of Income for the Nine Months Ended September 30, 2018 and 2017	F-89
Consolidated Statements of Comprehensive Income for the Nine Months Ended September 30, 2018 and 2017	F-90
Consolidated Statements of Changes in Stockholders’ Equity for the Nine Months Ended September 30, 2018	F-91
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2018 and 2017	F-92
Notes to Consolidated Financial Statements	F-93
Audited Consolidated Financial Statements of Comanche National Corporation:
Independent Auditor’s Report	F-113
Consolidated Balance Sheets as of December 31, 2017 and 2016	F-115
Consolidated Statements of Income for the Years Ended December  31, 2017 and 2016	F-116
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2017 and 2016	F-117
Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended December 31, 2017 and 2016	F-118
Consolidated Statements of Cash Flows for the Years Ended December  31, 2017 and 2016	F-119
Notes to Consolidated Financial Statements	F-125

F-1

Unaudited Consolidated Financial Statements of First Beeville Financial Corporation:
Consolidated Balance Sheets as of September  30, 2018 and December 31, 2017	F-154
Consolidated Statements of Income for the Nine Months Ended September 30, 2018 and 2017	F-155
Consolidated Statements of Comprehensive Income for the Nine Months Ended September 30, 2018 and 2017	F-156
Consolidated Statements of Changes in Stockholders’ Equity for the Nine Months Ended September 30, 2018	F-157
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2018 and 2017	F-158
Notes to Consolidated Financial Statements	F-159
Audited Consolidated Financial Statements of First Beeville Financial Corporation:
Independent Auditor’s Report for 2017	F-182
Independent Auditor’s Report for 2016	F-183
Consolidated Balance Sheets as of December 31, 2017 and 2016	F-184
Consolidated Statements of Income for the Years Ended December  31, 2017 and 2016	F-185
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2017 and 2016	F-186
Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended December 31, 2017 and 2016	F-187
Consolidated Statements of Cash Flows for the Years Ended December  31, 2017 and 2016	F-188
Notes to Consolidated Financial Statements	F-189

F-2

SPIRIT OF TEXAS BANCSHARES, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(Dollars in thousands, except per share data)

	September 30, 2018			December 31, 2017
Assets:
Cash and due from banks	$	18,212		$	19,054
Interest-bearing deposits in other banks		25,926			38,895
Total cash and cash equivalents		44,138			57,949
Time deposits in other banks		245			245
Investment securities:
Available for sale securities, at fair value		33,449			37,243
Total investment securities		33,449			37,243
Loans held for sale		5,500			3,814
Loans:
Loans held for investment		954,074			869,119
Less: allowance for loan and lease losses		(6,156	)		(5,652	)
Loans, net		947,918			863,467
Premises and equipment, net		46,135			42,189
Accrued interest receivable		3,715			3,466
Other real estate owned and repossessed assets		289			21
Goodwill		4,485			4,485
Core deposit intangible		2,959			3,486
SBA servicing asset		3,561			3,411
Deferred tax asset, net		1,667			1,480
Bank-owned life insurance		483			479
Federal Home Loan Bank and other bank stock, at cost		4,861			4,812
Other assets		2,806			3,751
Total assets	$	1,102,211		$	1,030,298
Liabilities and Stockholders’ Equity
Liabilities:
Deposits:
Transaction accounts:
Noninterest-bearing	$	207,727		$	176,726
Interest-bearing		222,245			250,491
Total transaction accounts		429,972			427,217
Time deposits		442,638			408,151
Total deposits		872,610			835,368
Accrued interest payable		475			407
Short-term borrowings		10,000			15,000
Long-term borrowings		64,961			76,411
Other liabilities		3,272			3,973
Total liabilities		951,318			931,159
Commitments and contingencies (Note 11)
Stockholders’ Equity:
Preferred stock, $1 par value; 5 million shares authorized; 0 shares issued and outstanding		—			—
Common stock, no par value; 50 million shares authorized; 9,812,481 and 7,280,183 shares issued and outstanding		127,541			82,615
Retained earnings		24,490			17,025
Accumulated other comprehensive income (loss)		(1,138	)		(501	)
Total stockholders’ equity		150,893			99,139
Total liabilities and stockholders’ equity	$	1,102,211		$	1,030,298

The accompanying notes are an integral part of these unaudited, consolidated financial statements.

F-3

SPIRIT OF TEXAS BANCSHARES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(Dollars in thousands, except per share data)

	Three Months Ended September 30,					Nine Months Ended September 30,
	2018		2017			2018			2017
Interest income:
Interest and fees on loans	$	13,901	$	11,842		$	39,270		$	33,515
Interest and dividends on investment securities		202		202			611			316
Other interest income		173		200			536			784
Total interest income		14,276		12,244			40,417			34,615
Interest expense:
Interest on deposits		2,197		1,684			5,869			4,913
Interest on FHLB advances and other borrowings		389		405			1,395			1,180
Total interest expense		2,586		2,089			7,264			6,093
Net interest income		11,690		10,155			33,153			28,522
Provision for loan losses		486		604			1,460			1,804
Net interest income after provision for loan losses		11,204		9,551			31,693			26,718
Noninterest income:
Service charges and fees		462		362			1,238			1,095
SBA loan servicing fees		529		207			1,701			1,378
Mortgage referral fees		160		158			524			531
Gain on sales of loans, net		1,369		1,392			3,884			4,710
Gain (loss) on sales of other assets		—		(70	)		(25	)		(47	)
Other noninterest income		47		44			136			55
Total noninterest income		2,567		2,093			7,458			7,722
Noninterest expense:
Salaries and employee benefits		6,623		5,271			19,524			17,774
Occupancy and equipment expenses		1,279		1,239			3,736			3,742
Loan and other real estate related expenses		94		20			171			244
Professional services		624		410			1,249			1,159
Data processing and network		302		317			936			899
Regulatory assessments and insurance		266		221			787			689
Amortization of intangibles		176		176			527			527
Advertising		83		147			300			431
Marketing		115		118			354			399
Telephone expense		120		109			332			325
Other operating expenses		599		511			1,872			1,754
Total noninterest expense		10,281		8,539			29,788			27,943
Income before income tax expense		3,490		3,105			9,363			6,497
Income tax expense		719		1,103			1,898			2,267
Net income	$	2,771	$	2,002		$	7,465		$	4,230
Earnings per common share:
Basic	$	0.28	$	0.28		$	0.86		$	0.58
Diluted	$	0.27	$	0.26		$	0.82		$	0.56
Weighted average common shares outstanding:
Basic		9,792,032		7,279,178			8,673,106			7,218,147
Diluted		10,360,301		7,565,239			9,094,691			7,504,208

The accompanying notes are an integral part of these unaudited, consolidated financial statements.

F-4

SPIRIT OF TEXAS BANCSHARES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(Dollars in thousands)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
Net income	$	2,771		$	2,002		$	7,465		$	4,230
Other comprehensive income (loss):
Unrealized net holding gains (losses) on investment securities available for sale, net of taxes of $16, $13, $169 and $79, respectively		(61	)		(25	)		(637	)		(153	)
Reclassification adjustment for realized (gains) losses on investment securities available for sale included in net income, net of taxes of $0, $0, $0 and $0, respectively		—			—			—			—
Total other comprehensive income (loss)		(61	)		(25	)		(637	)		(153	)
Total comprehensive income	$	2,710		$	1,977		$	6,828		$	4,077

The accompanying notes are an integral part of these unaudited, consolidated financial statements.

F-5

SPIRIT OF TEXAS BANCSHARES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited)

(Dollars in thousands)

	Shares of Common Stock		Shares of Preferred Stock			Common Stock		Preferred Stock			Retained Earnings		Accumulated Other Comprehensive Income (Loss)			Total Stockholders’ Equity
Balance as of January 1, 2017		7,069,527		170,236		$	78,871	$	1,753		$	12,272	$	—		$	92,896
Net income		—		—			—		—			4,230		—			4,230
Conversion of preferred stock		170,236		(170,236	)		1,753		(1,753	)		—		—			—
Exercise of stock options and warrants		40,419		—			471		—			—		—			471
Issuance of common stock		1		—			—		—			—		—			—
Stock-based compensation		—		—			1,361		—			—		—			1,361
Other comprehensive income (loss)		—		—			—		—			—		(153	)		(153	)
Balance as of September 30, 2017		7,280,183		—		$	82,456	$	—		$	16,502	$	(153	)	$	98,805
Balance as of January 1, 2018		7,280,183		—		$	82,615	$	—		$	17,025	$	(501	)	$	99,139
Net income		—		—			—		—			7,465		—			7,465
Shares issued in offering, net		2,300,000		—			42,058		—			—		—			42,058
Exercise of stock options and warrants		232,298		—			2,362		—			—		—			2,362
Stock-based compensation		—		—			506		—			—		—			506
Other comprehensive income (loss)		—		—			—		—			—		(637	)		(637	)
Balance as of September 30, 2018		9,812,481		—		$	127,541	$	—		$	24,490	$	(1,138	)	$	150,893

The accompanying notes are an integral part of these unaudited, consolidated financial statements.

F-6

SPIRIT OF TEXAS BANCSHARES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in thousands)

	Nine Months Ended September 30,
	2018			2017
Cash Flows From Operating Activities:
Net income	$	7,465		$	4,230
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Provision for loan losses		1,460			1,804
Depreciation and amortization		1,410			1,320
Net amortization (accretion) of premium (discount) on investment securities		234			140
Amortization of intangible assets		527			527
Accretion of discount on retained SBA loans		(672	)		(1,219	)
Deferred tax expense (benefit)		(18	)		(683	)
Originations of loans held for sale		(50,963	)		(55,206	)
Proceeds from loans held for sale		53,152			60,335
Net gains on sale of loans held for sale		(3,884	)		(4,710	)
Gain (loss) on sale of other real estate owned		11			(2	)
Fair value adjustment on SBA servicing asset		805			770
Stock-based compensation		506			1,361
Increase in cash surrender value of BOLI		(4	)		(2	)
Net change in operating assets and liabilities:
Net change in accrued interest receivable		(249	)		(452	)
Net change in accrued interest payable		68			93
Net change in other assets		945			835
Net change in other liabilities		(701	)		(971	)
Net cash provided by (used in) operating activities		10,092			8,170
Cash Flows From Investing Activities:
Purchase of investment securities available for sale		—			(40,419	)
Paydown and maturities of investment securities available for sale		2,754			1,219
Net purchase of FHLB and other bank stock		(49	)		(47	)
Proceeds from the sale of loans held for investment		1,451			—
Net change in loans		(87,937	)		(91,800	)
Proceeds from the sale of other real estate owned		22			499
Purchase of premises and equipment		(5,356	)		(7,709	)
Proceeds from the sale of premises and equipment		—			55
Net cash provided by (used in) investing activities		(89,115	)		(138,202	)
Cash Flows From Financing Activities:
Net change in deposits		37,242			28,705
Proceeds from long-term borrowings		—			16,762
Repayment of long-term borrowings		(11,450	)		(4,956	)
Proceeds from short-term borrowings		10,000			10,000
Repayment of short-term borrowings		(15,000	)		(10,000	)
Shares issued in offering, net		42,058			—
Exercise of stock options and warrants		2,362			471
Net cash provided by (used in) financing activities		65,212			40,982
Net Change in Cash and Cash Equivalents		(13,811	)		(89,050	)
Cash and Cash Equivalents at Beginning of Period		57,949			152,232
Cash and Cash Equivalents at End of Period	$	44,138		$	63,182
Supplemental Disclosures of Cash Flow Information:
Interest paid	$	5,802		$	4,820
Income taxes paid		2,850			1,695
Supplemental disclosure of noncash investing and financing activities:
Transfer of loans to other real estate owned and repossessed assets	$	301		$	450

The accompanying notes are an integral part of these unaudited, consolidated financial statements.

F-7

SPIRIT OF TEXAS BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

Spirit of Texas Bancshares, Inc. (the “Holding Company” or “Company”) is a bank holding company headquartered in Conroe, Texas that provides, through its bank subsidiary, a variety of financial services to individuals and corporate customers in Texas, which are primarily agricultural, light industrial and commercial areas.

On March 16, 2017, the Company filed a Second Amended and Restated Certificate of Formation with the Texas Secretary of State to affect a reverse stock split of its outstanding common stock which became effective on March 16, 2017. As a result of the reverse stock split, every two shares of the Company’s issued and outstanding common stock were consolidated into one issued and outstanding share of common stock. The computations of all share and per share amounts in this Quarterly Report on Form 10-Q (this “Form 10-Q”) have been adjusted retroactively to reflect the reverse stock split.

The Company consummated the underwritten initial public offering of its common stock in May 2018. In connection with the initial public offering, the Company issued and sold 2,300,000 shares of its common stock, including 300,000 shares of common stock sold pursuant to the underwriters’ full exercise of their option to purchase additional shares, at an offering price of $21.00 per share, for aggregate gross proceeds of $48.3 million before deducting underwriting discounts and offering expenses, and aggregate net proceeds of $42.1 million after deducting underwriting discounts and offering expenses.

Basis of Presentation

The consolidated financial statements include the accounts of the Holding Company and the accounts of its wholly-owned subsidiary, Spirit of Texas Bank SSB (the “Bank”). All significant intercompany balances and transactions have been eliminated in consolidation.

The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. Operating results for the period ended June 30, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018 and should be read in conjunction with the audited financial statements and notes thereto for the year ended December 31, 2017 included in our prospectus filed with the Securities and Exchange Commission (“SEC”) pursuant to Rule 424(b) of the Securities Act of 1933, as amended, on May 4, 2018, related to our initial public offering.

In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for the fair presentation of these consolidated financial statements have been included. The preparation of financial statements in conformity with these accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and income and expense during the reporting periods and the related disclosures. Although management’s estimates and assumptions are based on current expectations, estimates, forecasts and projections about future performance of the Company, such estimates and assumptions are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult for the Company to assess. Operating results for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for a full year or any future period.

F-8

Accounting Policies Recently Adopted and Pending Accounting Pronouncements

Accounting Standards Update (ASU) 2018-09, “Codification Improvements.” Issued in July 2018, ASU No. 2018-09 makes changes to a variety of topics to clarify, correct errors in, or make minor improvements to the Accounting Standards Codification. The majority of the amendments in ASU 2018-09 will be effective in annual periods beginning after December 15, 2018. Management is currently evaluating the effects the adoption of ASU 2018-09 will have on the consolidated financial statements, results of operations and cash flows.

ASU 2018-07, “Compensation-Stock Compensation.” Issued in June 2018, ASU 2018-07 expands the scope of ASC 718 to include share-based payment transactions for acquiring goods and services from nonemployees. The amendments also clarify that ASC 718 does not apply to share-based payments used to provide either financing to the issuer or awards granted in conjunction with selling goods or services to customers under a contract subject to ASC 606, Revenue from Contracts with Customers. The amendments of ASU 2018-07 are effective for public entities for interim and annual periods beginning after December 15, 2018 and for other entities for periods beginning after December 15, 2019. Management will adopt ASU 2018-07 using the public company effective date as early adoption is permitted and is currently evaluating the impact the ASU will have on the consolidated financial statements.

ASU 2017-08, “Receivables-Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities.” Issued in March 2017, ASU 2017-08 amends the amortization period for certain purchased callable debt securities held at a premium. In particular, the amendments in ASU 2017-08 require the premium to be amortized to the earliest call date. The amendments do not, however, require an accounting change for securities held at a discount; instead, the discount continues to be amortized to maturity. Notably, the amendments in this ASU more closely align the amortization period of premiums and discounts to expectations incorporated in market pricing on the underlying securities. Securities within the scope of ASU 2017-08 are purchased debt securities that have explicit, non-contingent call features that are callable at fixed prices and on preset dates. The amendments of ASU 2017-08 become effective for public entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2018 and for other entities for periods beginning after December 15, 2019. Management will adopt this ASU using the public company effective date as early adoption is permitted and is currently evaluating the impact this ASU will have on the consolidated financial statements; however, the adoption of ASU 2017-08 is not expected to have a material impact on the Company’s consolidated financial statements.

ASU 2017-04, “Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” Issued in January 2017, ASU 2017-04 simplifies the manner in which an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. In computing the implied fair value of goodwill under Step 2, an entity, prior to the amendments in ASU 2017-04, had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities, including unrecognized assets and liabilities, in accordance with the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. However, under the amendments in ASU 2017-04, an entity should (1) perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount, and (2) recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, with the understanding that the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, ASU 2017-04 removes the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails such qualitative test, to perform Step 2 of the goodwill impairment test. ASU 2017-04 is effective prospectively for public entities for annual, or any interim, goodwill impairment tests in fiscal years beginning after December 15, 2019 and for all other entities for impairment tests in fiscal years beginning after December 15, 2021. Management will adopt this ASU using the public company effective date as early adoption is permitted and will continue to evaluate the impact this ASU will have on the consolidated financial statements through its effective date; however, the adoption of ASU 2017-04 is not expected to have a material impact on the Company’s consolidated financial statements.

F-9

ASU 2017-01, “Business Combinations (Topic 805)—Clarifying the Definition of a Business.” Issued in January 2017, ASU 2017-01 clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses, which determines whether goodwill should be recorded or not. The amendments in ASU No. 2017-01 provide a screen to determine when a set of assets and activities (collectively, a “set”) is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. This screen reduces the number of transactions that need to be further evaluated. If, however, the screen is not met, then the amendments in ASU 2017-01 require that to be considered a business, a set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output and remove the evaluation of whether a market participant could replace missing elements. The revised definition will result in more transactions being recorded as asset acquisitions or dispositions as opposed to business acquisitions or dispositions. The amendments of ASU 2017-01 are effective for public business entities for fiscal years beginning after December 15, 2017, and for private companies for fiscal years beginning after December 15, 2018. Management has elected to adopt this ASU using the private company effective date and is currently evaluating the impact this ASU will have on the consolidated financial statements; however, the adoption of ASU 2017-01 is not expected to have a material impact on the Company’s consolidated financial statements.

In October 2016, the FASB issued ASU No. 2016-16, “Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory.” The objective of issuing this ASU is to improve the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. Current GAAP prohibits the recognition of current and deferred income taxes for an intra-entity asset transfer until the asset has been sold to an outside party. This prohibition on recognition is an exception to the principle of comprehensive recognition of current and deferred income taxes in GAAP. As such, the Board decided that an entity should recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. Consequently, the amendments in this guidance eliminate the exception for an intra-entity transfer of an asset other than inventory. The amendments of this ASU are effective for public business entities for fiscal years beginning after December 15, 2017, and for private companies for fiscal years beginning after December 15, 2018. Early adoption is permitted for all entities as of the beginning of an annual reporting period for which financial statements (interim or annual) have not been issued or made available for issuance. That is, earlier adoption should be in the first interim period if an entity issues interim financial statements. Management has elected to adopt this ASU using the private company effective date and is currently evaluating this guidance to determine the impact on its consolidated financial position, results of operations or cash flows.

ASU 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” Issued in June 2016, ASU 2016-13 will add FASB ASC Topic 326, “Financial Instruments-Credit Losses” and finalizes amendments to FASB ASC Subtopic 825-15, “Financial Instruments-Credit Losses.” The amendments of ASU 2016-13 are intended to provide financial statement users with more decision-useful information related to expected credit losses on financial instruments and other commitments to extend credit by replacing the current incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to determine credit loss estimates. The amendments of ASU 2016-13 eliminate the probable initial recognition threshold and, in turn, reflect an entity’s current estimate of all expected credit losses. ASU 2016-13 does not specify the method for measuring expected credit losses, and an entity is allowed to apply methods that reasonably reflect its expectations of the credit loss estimate. Additionally, the amendments of ASU 2016-13 require that credit losses on available for sale debt securities be presented as an allowance rather than as a write-down. The amendments of ASU 2016-13 are effective for public entities for interim and annual periods beginning after December 15, 2019 and for all other entities for periods beginning after December 15, 2020. Earlier application is permitted for interim and annual periods beginning after December 15, 2018. Management has elected to adopt this ASU using the private company effective date and is currently evaluating the impact this ASU will have on the consolidated financial statements and that evaluation will depend on economic conditions and the composition of the Company’s loan and lease portfolio at the time of adoption.

F-10

ASU 2016-02, “Leases (Topic 842).” Issued in February 2016, ASU 2016-02 was issued by the FASB to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and by disclosing key information about leasing arrangements. ASU 2016-02 will, among other things, require lessees to recognize a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. ASU 2016-02 does not significantly change lease accounting requirements applicable to lessors; however, the ASU contains some targeted improvements that are intended to align, where necessary, lessor accounting with the lessee accounting model and with the updated revenue recognition guidance issued in 2014. The amendments of ASU 2016-02 are effective for public entities for interim and annual periods beginning after December 15, 2018 and for other entities for periods beginning after December 15, 2019. The adoption of this ASU will result in an increase to the Consolidated Balance Sheets for right-of-use assets and associated lease liabilities for operating leases in which the Company is the lessee. Additionally, in July 2018, the FASB issued ASU No. 2018-10, Codification Improvements to Topic 842, Leases and ASU No. 2018-11, Leases, Targeted Improvements. The amendments in these updates provide additional clarification and implementation guidance on certain aspects of ASU 2016-02 and have the same effective and transition requirements as ASU 2016-02. Specifically, ASU 2018-11 creates an additional transition method option allowing entities to record a cumulative effect adjustment to opening retained earnings in the year of adoption. Management will adopt these ASU’s using the public company effective date as early adoption is permitted and is currently evaluating the impact to the consolidated financial statements, specifically, we are in the process of reviewing service contracts to determine if right-of-use assets exist.

ASU 2014-09, “Revenue from Contracts with Customers (Topic 606).” Issued in May 2014, ASU 2014-09 will add FASB ASC Topic 606, “Revenue from Contracts with Customers,” and will supersede revenue recognition requirements in FASB ASC Topic 605, “Revenue Recognition,” as well as certain cost guidance in FASB ASC Topic 605-35, “Revenue Recognition—Construction-Type and Production-Type Contracts.” ASU 2014-09 provides a framework for revenue recognition that replaces the existing industry and transaction specific requirements under the existing standards. ASU 2014-09 requires an entity to apply a five-step model to determine when to recognize revenue and at what amount. The model specifies that revenue should be recognized when (or as) an entity transfers control of goods or services to a customer at the amount in which the entity expects to be entitled. Depending on whether certain criteria are met, revenue should be recognized either over time, in a manner that depicts the entity’s performance, or at a point in time, when control of the goods or services are transferred to the customer. ASU 2014-09 provides that an entity should apply the following steps: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when, or as, the entity satisfies a performance obligation. In addition, the existing requirements for the recognition of a gain or loss on the transfer of non-financial assets that are not in a contract with a customer are amended to be consistent with the guidance on recognition and measurement in ASU 2014-09. The amendments of ASU 2014-09 may be applied either retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial application. If the transition method of application is elected, the entity should also provide the additional disclosures in reporting periods that include the date of initial application of (1) the amount by which each financial statement line item is affected in the current reporting period, as compared to the guidance that was in effect before the change, and (2) an explanation of the reasons for significant changes. ASU 2015-14, “Revenue from Contracts with Customers (Topic 606)-Deferral of the Effective Date,” issued in August 2015, defers the effective date of ASU 2014-09 by one year. ASU 2015-14 provides that the amendments of ASU 2014-09 become effective for public business entities for fiscal years beginning after December 15, 2017, and for private companies for fiscal years beginning after December 15, 2018. All subsequently issued ASU’s which provide additional guidance and clarifications to various aspects of FASB ASC Topic 606 will become effective when the amendments of ASU 2014-09 become effective. These subsequently issued ASU’s include ASU 2016-08 “Revenue from Contracts with Customers (Topic 606)-Principal versus Agent Considerations,” ASU 2016-10 “Revenue from Contracts with Customers (Topic 606)-Identifying Performance Obligations and Licensing,” and ASU 2016-12 “Revenue from Contracts with Customers (Topic 606)-Narrow Scope

F-11

Improvements and Practical Expedients.” These amendments clarify the main provisions of ASU-2014-09 with respect to specific revenue types based upon implementation questions submitted. Specifically, revenue in which a third party satisfies a portion of the performance obligations, revenue from licensing activities, and the assessment of collectability, treatment of sales taxes, non-cash consideration, and contract modifications at transition. Management has elected to adopt this ASU using the private company effective date and has completed an analysis to determine which revenue streams are within the scope of ASU 2014-09 and the related clarifying ASU’s and has determined that interest income and revenue generated from transfers and servicing of financial instruments, specifically, gain on sale of loans and servicing fees are out of scope. Management will adopt this ASU using the modified retrospective method of application and is continuing to evaluate the impact that ASU 2014-09 and the related clarifying ASU’s will have on in scope revenue streams, specifically, service charges and fees, mortgage referral fees, and gains or losses on other real estate owned.

NOTE 2. INVESTMENT SECURITIES

The amortized cost, gross unrealized gains and losses and approximate fair values of securities available for sale are as follows:

	Amortized Cost		Unrealized				Fair Value
September 30, 2018			Gains		Losses
	(Dollars in thousands)
Available for sale:
U.S. Government agencies	$	2,014	$	—	$	108	$	1,906
Residential mortgage-backed securities		27,197		—		1,149		26,048
Corporate bonds and other debt securities		5,678		—		183		5,495
Total available for sale	$	34,889	$	—	$	1,440	$	33,449

	Amortized Cost		Unrealized				Fair Value
December 31, 2017			Gains		Losses
	(Dollars in thousands)
Available for sale:								—
U.S. Government agencies	$	2,010	$	—	$	61	$	1,949
Residential mortgage-backed securities		30,156		—		527		29,629
Corporate bonds and other debt securities		5,711		—		46		5,665
Total available for sale	$	37,877	$	—	$	634	$	37,243

There were no securities pledged at September 30, 2018 or December 31, 2017, respectively.

The amortized cost and estimated fair value of securities available for sale, by contractual maturity, are as follows:

September 30, 2018	Amortized Cost		Fair Value
	(Dollars in thousands)
Available for sale:
Due in one year or less	$	—	$	—
Due after one year through five years		4,117		3,998
Due after five years through ten years		3,098		2,954
Due after ten years		477		449
Residential mortgage-backed securities		27,197		26,048
Total available for sale	$	34,889	$	33,449

F-12

For purposes of the maturity table, residential mortgage-backed securities, the principal of which are repaid periodically, are presented as a single amount. The expected lives of these securities will differ from contractual maturities because borrowers may have the right to prepay the underlying loans with or without prepayment penalties.

The following tables present the estimated fair values and gross unrealized losses on investment securities available for sale, aggregated by investment category and length of time individual securities have been in a continuous unrealized loss position as of the periods presented:

	Less than 12 Months				12 Months or More				Total
September 30, 2018	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
	(Dollars in thousands)
Available for sale:
U.S. Government agencies	$	—	$	—	$	1,906	$	108	$	1,906	$	108
Residential mortgage-backed securities		1,121		63		24,927		1,086		26,048		1,149
Corporate bonds and other debt securities		2,551		81		2,944		102		5,495		183
Total available for sale	$	3,672	$	144	$	29,777	$	1,296	$	33,449	$	1,440

	Less than 12 Months				12 Months or More				Total
December 31, 2017	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
	(Dollars in thousands)
Available for sale:
U.S. Government agencies	$	1,949	$	61	$	—	$	—	$	1,949	$	61
Residential mortgage-backed securities		29,627		527		—		—		29,627		527
Corporate bonds and other debt securities		5,665		46		—		—		5,665		46
Total available for sale	$	37,241	$	634	$	—	$	—	$	37,241	$	634

At September 30, 2018, the Company’s securities portfolio consisted of 50 securities, 49 of which were in an unrealized loss position. Six of the 49 securities in an unrealized loss position at September 30, 2018 were in an unrealized loss position for less than 12 months. The unrealized losses for these securities resulted primarily from changes in interest rates and spreads.

The Company monitors its investment securities for other-than-temporary-impairment (“OTTI”). Impairment is evaluated on an individual security basis considering numerous factors, and its relative significance. The Company has evaluated the nature of unrealized losses in the investment securities portfolio to determine if OTTI exists. The unrealized losses relate to changes in market interest rates and specific market conditions that do not represent credit-related impairments. Furthermore, the Company does not intend to sell nor is it more likely than not that it will be required to sell these investments before the recovery of their amortized cost basis. Management has completed an assessment of each security in an unrealized loss position for credit impairment and has determined that no individual security was other-than-temporarily impaired at September 30, 2018. The following describes the basis under which the Company has evaluated OTTI:

U.S. Government Agencies and Residential Mortgage-Backed Securities (“MBS”):

The unrealized losses associated with U.S. Government agencies and residential MBS are primarily driven by changes in interest rates. These securities have either an explicit or implicit U.S. government guarantee.

Corporate Bonds & Other Debt Securities:

Securities are generally underwritten in accordance with the Company’s investment standards prior to the decision to purchase, without relying on a bond issuer’s guarantee in making the investment decision. These

F-13

investments are investment grade and will continue to be monitored as part of the Company’s ongoing impairment analysis, but are expected to perform in accordance with their terms.

There were no securities sold for the three or nine months ended September 30, 2018 or 2017.

NOTE 3. LOANS, NET

Loans consisted of the following at September 30, 2018 and December 31, 2017:

	September 30, 2018			December 31, 2017
	(Dollars in thousands)
Commercial and industrial loans(1)	$	159,776		$	135,040
Real estate:
1-4 single family residential loans		244,633			232,510
Construction, land and development		155,778			139,470
Commercial real estate loans (including multifamily)		324,212			285,731
Consumer loans and leases		18,174			22,736
Municipal and other loans		51,501			53,632
Total loans held in portfolio(2)	$	954,074		$	869,119
Allowance for loan losses		(6,156	)		(5,652	)
Loans held in portfolio, net	$	947,918		$	863,467

(1) Balance includes $75.9 million and $67.1 million of the unguaranteed portion of SBA loans as of September 30, 2018 and December 31, 2017, respectively.

(2) Balance includes $(3.6 million) and $(3.4 million) of deferred fees, cost, premium and discount as of September 30, 2018 and December 31, 2017, respectively.

At September 30, 2018 and December 31, 2017, the Company had pledged loans as collateral for FHLB advances of $376.4 million and $358.2 million, respectively. There were no recorded investments of consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are in process as of September 30, 2018 and December 31, 2017.

The Company originates and sells loans secured by the SBA. The Company retains the unguaranteed portion of the loan and servicing on the loans sold and receives a fee based upon the principal balance outstanding. During the three months ended September 30, 2018 and 2017, the Company sold approximately $19.0 million and $16.9 million, respectively, in loans to third parties. The loan sales resulted in realized gains of $1.4 million and $1.4 million for the three months ended September 30, 2018 and 2017, respectively. During the nine months ended September 30, 2018 and 2017, the Company sold approximately $49.0 million and $52.3 million, respectively, in loans to third parties. The loan sales resulted in realized gains of $3.9 million and $4.7 million for the nine months ended September 30, 2018 and 2017, respectively.

During the second quarter of 2018, the Company sold a loan to one of its directors for $1.5 million. No gain or loss was recognized on this transaction.

F-14

In the ordinary course of business, the Company makes loans to executive officers and directors. Loans to these related parties, including companies in which they are principal owners, are as follows:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
	(Dollars in thousands)
Principal outstanding, beginning of year	$	421		$	516		$	463		$	9,036
Additions (reductions) of affiliations		—			—			—			(8,425	)
New loans made in current year		—			—			—			—
Repayments(1)		(19	)		(26	)		(61	)		(121	)
Principal outstanding, end of year	$	402		$	490		$	402		$	490

(1) During the three months ended June 30, 2017 there was a reclassification of repayments to reductions of affiliations.

There were no unfunded commitments to related parties at September 30, 2018 or December 31, 2017.

NOTE 4. ALLOWANCE FOR LOAN AND LEASE LOSSES

The allowance for loan and lease losses is a reserve established through a provision for loan losses charged to expense, which represents management’s best estimate of probable losses that have been incurred within the existing portfolio of loans. The allowance, in the judgment of management, is necessary to reserve for estimated loan losses and risks inherent in the loan portfolio. The methodology is based on historical loss experience by type of credit and internal risk grade, changes in the composition and volume of the portfolio, and specific loss allocations, with adjustments for current events and conditions. The Company’s process for determining the appropriate level of the allowance for loan and lease losses is designated to account for credit deterioration as it occurs.

During 2017, the Company refined its allowance for loan loss methodology based upon management’s judgment and applicable regulatory guidance. The calculation of reserves on loans collectively evaluated for impairment was altered to reflect five years of historical loss experience which more appropriately matches the weighted average life of loans in the portfolio. Additionally, the calculated historical loss experience is now allocated across the portfolio’s risk rates using a probability of default curve constructed from the Bank’s historical default data. Management also updated the qualitative component of the reserve on loans collectively evaluated for impairment to allow for a greater sensitivity to current trends.

Prior to the second quarter of 2018, the Company was utilizing a peer bank allowance coverage ratio in the qualitative reserve calculation, as the Company did not have enough historical defaults to rely on its own loss factors. As of September 30, 2018, the Company had a sufficient amount of defaults over the five year lookback period to transition over to relying more on its own historical loss data versus peer data. While this did not result in a significant change to the allowance for loan and lease losses as a whole, it continues to impact the provision for certain loan categories in which the Company had experienced more historical defaults.

F-15

The following tables present information related to allowance for loan and lease losses for the periods presented:

	Allowance Rollforward
Three Months Ended September 30, 2018	Beginning Balance		Charge-offs			Recoveries		Provision			Ending Balance
	(Dollars in thousands)
Commercial and industrial loans	$	4,886	$	(275	)	$	4	$	76		$	4,691
Real estate:
1-4 single family residential loans		318		—			—		(216	)		102
Construction, land and development loans		195		—			—		256			451
Commercial real estate loans (including multifamily)		233		—			—		495			728
Consumer loans and leases		346		(74	)		—		(90	)		182
Municipal and other loans		37		—			—		(35	)		2
Ending allowance balance	$	6,015	$	(349	)	$	4	$	486		$	6,156

	Allowance Rollforward
Three Months Ended September 30, 2017	Beginning Balance		Charge-offs			Recoveries		Provision			Ending Balance
	(Dollars in thousands)
Commercial and industrial loans	$	2,582	$	(15	)	$	—	$	20		$	2,587
Real estate:
1-4 single family residential loans		732		—			—		201			933
Construction, land and development loans		412		—			—		103			515
Commercial real estate loans (including multifamily)		800		—			—		255			1,055
Consumer loans and leases		204		(16	)		—		(15	)		173
Municipal and other loans		161		—			—		40			201
Ending allowance balance	$	4,891	$	(31	)	$	—	$	604		$	5,464

	Allowance Rollforward
Nine Months Ended September 30, 2018	Beginning Balance		Charge-offs			Recoveries		Provision			Ending Balance
	(Dollars in thousands)
Commercial and industrial loans	$	3,046	$	(920	)	$	73	$	2,492		$	4,691
Real estate:
1-4 single family residential loans		902		(5	)		—		(795	)		102
Construction, land and development loans		441		—			—		10			451
Commercial real estate loans (including multifamily)		898		—			—		(170	)		728
Consumer loans and leases		198		(104	)		—		88			182
Municipal and other loans		167		—			—		(165	)		2
Ending allowance balance	$	5,652	$	(1,029	)	$	73	$	1,460		$	6,156

F-16

	Allowance Rollforward
Nine Months Ended September 30, 2017	Beginning Balance		Charge-offs			Recoveries		Provision		Ending Balance
	(Dollars in thousands)
Commercial and industrial loans	$	2,347	$	(555	)	$	2	$	793	$	2,587
Real estate:
1-4 single family residential loans		647		—			—		286		933
Construction, land and development loans		364		—			—		151		515
Commercial real estate loans (including multifamily)		667		(15	)		—		403		1,055
Consumer loans and leases		186		(129	)		—		116		173
Municipal and other loans		146		—			—		55		201
Ending allowance balance	$	4,357	$	(699	)	$	2	$	1,804	$	5,464

Credit Quality Indicators

In evaluating credit risk, the Company looks at multiple factors; however, management considers delinquency status to be the most meaningful indicator of the credit quality of 1-4 single family residential, home equity loans and lines of credit and consumer loans. Delinquency statistics are updated at least monthly. Internal risk ratings are considered the most meaningful indicator of credit quality for commercial, construction, land and development and commercial real estate loans. Internal risk ratings are updated on a continuous basis.

The following tables present an aging analysis of the recorded investment for delinquent loans by portfolio and segment:

	Accruing								Non- Accrual		Total
September 30, 2018	Current		30 to 59 Days Past Due		60 to 89 Days Past Due		90 Days or More Past Due
	(Dollars in thousands)
Commercial and industrial loans	$	155,996	$	1,246	$	113	$	—	$	2,421	$	159,776
Real estate:
1-4 single family residential loans		242,606		776		—		426		825		244,633
Construction, land and development		155,767		11		—		—		—		155,778
Commercial real estate loans (including multifamily)		324,212		—		—		—		—		324,212
Consumer loans and leases		18,051		37		14		—		72		18,174
Municipal and other loans		51,501		—		—		—		—		51,501
Total loans	$	948,133	$	2,070	$	127	$	426	$	3,318	$	954,074

	Accruing								Non- Accrual		Total
December 31, 2017	Current		30 to 59 Days Past Due		60 to 89 Days Past Due		90 Days or More Past Due
	(Dollars in thousands)
Commercial and industrial loans	$	132,775	$	302	$	3	$	33	$	1,927	$	135,040
Real estate:
1-4 single family residential loans		230,738		637		—		—		1,135		232,510
Construction, land and development		139,470		—		—		—		—		139,470
Commercial real estate loans (including multifamily)		284,869		415		—		—		447		285,731
Consumer loans and leases		22,538		98		47		—		53		22,736
Municipal and other loans		53,632		—		—		—		—		53,632
Total loans	$	864,022	$	1,452	$	50	$	33	$	3,562	$	869,119

F-17

There was one loan 90 days or more past due and still accruing at September 30, 2018 with a recorded investment of $426 thousand. There was one loan 90 days or more past due and still accruing at December 31, 2017 with a recorded investment of $33 thousand.

At September 30, 2018, non-accrual loans that were 30 to 59 days past due were $355 thousand, non-accrual loans that were 60 to 89 days past due were $337 thousand, and non-accrual loans that were 90 days or more past due were $917 thousand. At December 31, 2017, non-accrual loans that were 30 to 59 days past due were $209 thousand, non-accrual loans that were 60 to 89 days past due were $57 thousand, and non-accrual loans that were 90 days or more past due were $427 thousand.

Loans exhibiting potential credit weaknesses that deserve management’s close attention and that if left uncorrected may result in deterioration of the repayment capacity of the borrower are categorized as special mention. Loans with well-defined credit weaknesses including payment defaults, declining collateral values, frequent overdrafts, operating losses, increasing balance sheet leverage, inadequate cash flow, project cost overruns, unreasonable construction delays, past due real estate taxes or exhausted interest reserves are assigned an internal risk rating of substandard. Loans classified as substandard can be on an accrual or non-accrual basis, as determined by its unique characteristics. A loan with a weakness so severe that collection in full is highly questionable or improbable will be assigned an internal risk rating of doubtful.

The following table summarizes the Company’s loans by key indicators of credit quality:

September 30, 2018	Pass		Special Mention		Substandard		Doubtful
	(Dollars in thousands)
Commercial and industrial loans	$	151,088	$	2,904	$	5,597	$	187
Real estate:
1-4 single family residential loans		240,081		—		4,552		—
Construction, land and development		154,305		315		1,158		—
Commercial real estate loans (including multifamily)		312,574		9,786		1,852		—
Consumer loans and leases		18,046		—		128		—
Municipal and other loans		51,501		—		—		—
Total loans	$	927,595	$	13,005	$	13,287	$	187

December 31, 2017	Pass		Special Mention		Substandard		Doubtful
	(Dollars in thousands)
Commercial and industrial loans	$	129,288	$	2,331	$	3,421	$	—
Real estate:
1-4 single family residential loans		228,450		1,090		2,970		—
Construction, land and development		137,760		1,403		307		—
Commercial real estate loans (including multifamily)		276,096		5,877		3,758		—
Consumer loans and leases		22,528		—		208		—
Municipal and other loans		53,632		—		—		—
Total loans	$	847,754	$	10,701	$	10,664	$	—

Internal risk ratings and other credit metrics are key factors in identifying loans to be individually evaluated for impairment and impact management’s estimates of loss factors used in determining the amount of the allowance for loan and lease losses.

F-18

The following table shows the Company’s investment in loans disaggregated based on the method of evaluating impairment:

	Loans—Recorded Investment				Allowance for Credit Loss
September 30, 2018	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Individually Evaluated for Impairment		Collectively Evaluated for Impairment
	(Dollars in thousands)
Commercial and industrial loans	$	2,494	$	157,282	$	1,085	$	3,606
Real estate:
1-4 single family residential loans		970		243,663		—		102
Construction, land and development		—		155,778		—		451
Commercial real estate loans (including multifamily)		—		324,212		—		728
Consumer loans and leases		72		18,102		24		158
Municipal and other loans		—		51,501		—		2
Total loans	$	3,536	$	950,538	$	1,109	$	5,047

	Loans—Recorded Investment				Allowance for Credit Loss
December 31, 2017	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Individually Evaluated for Impairment		Collectively Evaluated for Impairment
	(Dollars in thousands)
Commercial and industrial loans	$	2,194	$	132,846	$	1,226	$	1,820
Real estate:
1-4 single family residential loans		1,292		231,218		119		783
Construction, land and development		—		139,470		—		441
Commercial real estate loans (including multifamily)		447		285,284		—		898
Consumer loans and leases		53		22,683		16		182
Municipal and other loans		—		53,632		—		167
Total loans	$	3,986	$	865,133	$	1,361	$	4,291

The following tables set forth certain information regarding the Company’s impaired loans that were evaluated for specific reserves:

	Impaired Loans—With Allowance						Impaired Loans—With no Allowance
September 30, 2018	Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance
	(Dollars in thousands)
Commercial and industrial loans	$	1,784	$	6,159	$	1,085	$	710	$	1,514
Real estate:
1-4 single family residential loans		—		—		—		970		1,000
Construction, land and development		—		—		—		—		—
Commercial real estate loans (including multifamily)		—		—		—		—		—
Consumer loans and leases		54		55		24		18		18
Municipal and other loans		—		—		—		—		—
Total loans	$	1,838	$	6,214	$	1,109	$	1,698	$	2,532

F-19

	Impaired Loans—With Allowance						Impaired Loans—With no Allowance
December 31, 2017	Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance
	(Dollars in thousands)
Commercial and industrial loans	$	1,811	$	1,850	$	1,226	$	383	$	386
Real estate:
1-4 single family residential loans		119		119		119		1,173		1,174
Construction, land and development		—		—		—		—		—
Commercial real estate loans (including multifamily)		—		—		—		447		447
Consumer loans and leases		53		52		16		—		—
Municipal and other loans		—		—		—		—		—
Total loans	$	1,983	$	2,021	$	1,361	$	2,003	$	2,007

	Three Months Ended September 30,
	2018				2017
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(Dollars in thousands)
Commercial and industrial loans	$	2,571	$	—	$	2,220	$	—
Real estate:
1-4 single family residential loans		975		—		750		—
Construction, land and development		—		—		312		—
Commercial real estate loans (including multifamily)		—		—		1,997		—
Consumer loans and leases		72		—		55		—
Municipal and other loans		—		—		—		—
Total loans	$	3,618	$	—	$	5,334	$	—

	Nine Months Ended September 30,
	2018				2017
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(Dollars in thousands)
Commercial and industrial loans	$	2,774	$	—	$	2,363	$	—
Real estate:
1-4 single family residential loans		990		—		756		—
Construction, land and development		—		—		316		—
Commercial real estate loans (including multifamily)		—		—		1,983		—
Consumer loans and leases		76		—		56		—
Municipal and other loans		—		—		—		—
Total loans	$	3,840	$	—	$	5,474	$	—

F-20

Troubled Debt Restructurings:

The following table provides a summary of troubled debt restructurings (“TDRs”) based upon delinquency status, all of which are considered impaired:

	September 30, 2018				December 31, 2017
	Number of contracts		Recorded Investment		Number of contracts		Recorded Investment
	(Dollars in thousands)
Performing TDRs:
Commercial and industrial loans		4	$	73		5	$	270
Real estate:
1-4 single family residential loans		2		145		—		—
Construction, land and development		—		—		—		—
Commercial real estate loans (including multifamily)		—		—		—		—
Consumer loans and leases		—		—		—		—
Municipal and other loans		—		—		—		—
Total performing TDRs		6		218		5		270
Nonperforming TDRs		5		470		10		651
Total TDRs		11	$	688		15	$	921
Allowance attributable to TDRs			$	113			$	411

The following table summarizes TDRs and includes newly designated TDRs as well as modifications made to existing TDRs. Modifications may include, but are not limited to, granting a material extension of time, entering into a forbearance agreement, adjusting the interest rate, accepting interest only payments for an extended period of time, a change in the amortization period or a combination of any of these. Post-modification balances represent the recorded investment at the end of Day 2 in which the modification was made:

	Three Months Ended September 30,
	2018								2017
	Number of Contracts		Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		Related Allowance		Number of Contracts		Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		Related Allowance
	(Dollars in thousands)
Commercial and industrial loans		—	$	—	$	—	$	—		2	$	38	$	38	$	—
Real estate:
1-4 single family residential loans		—		—		—		—		—		—		—		—
Construction, land and development		—		—		—		—		—		—		—		—
Commercial real estate loans (including multifamily)		—		—		—		—		—		—		—		—
Consumer loans and leases		—		—		—		—		—		—		—		—
Municipal and other loans		—		—		—		—		—		—		—		—

F-21

	Nine Months Ended September 30,
	2018								2017
	Number of Contracts		Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		Related Allowance		Number of Contracts		Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		Related Allowance
	(Dollars in thousands)
Commercial and industrial loans		7	$	442	$	442	$	113		10	$	465	$	465	$	126
Real estate:
1-4 single family residential loans		1		34		34		—		—		—		—		—
Construction, land and development		—		—		—		—		—		—		—		—
Commercial real estate loans (including multifamily)		—		—		—		—		—		—		—		—
Consumer loans and leases		—		—		—		—		—		—		—		—
Municipal and other loans		—		—		—		—		—		—		—		—

NOTE 5. GOODWILL AND INTANGIBLES

Goodwill and other intangible assets, which consist of core deposit intangibles, are summarized as follows:

	September 30, 2018			December 31, 2017
	(Dollars in thousands)
Goodwill	$	4,485		$	4,485
Core deposit intangible		7,179			7,179
Total		11,664			11,664
Less: Accumulated amortization		(4,220	)		(3,693	)
Total, net	$	7,444		$	7,971

Amortization expense for core deposit intangibles for the nine months ended September 30, 2018 and 2017 totaled $527 thousand each.

The estimated amount of amortization expense for core deposit intangible assets to be recognized over the next five fiscal years is as follows:

Type of intangibles	Remainder of 2018		2019		2020		2021		2022		2023
	(Dollars in thousands)
Core deposit intangible	$	176	$	703	$	703	$	607	$	371	$	239

NOTE 6. SBA SERVICING ASSET

SBA servicing assets are recognized separately when rights are acquired through the sale of the guaranteed portion of SBA loans. These servicing rights are initially measured at fair value at the date of sale and included in the gain on sale. Updated fair values are obtained from an independent third party on a quarterly basis and adjustments are presented in SBA loan servicing fees on the consolidated statements of income. To determine the fair value of SBA servicing rights, the Company uses market prices for comparable servicing contracts, when available, or alternatively, uses a valuation model that calculates the present value of estimated future net servicing income.

F-22

Loans serviced for others are not included in the accompanying balance sheets. The unpaid principal balances of loans serviced for others were $299.6 million and $275.2 million at September 30, 2018 and December 31, 2017, respectively.

The risks inherent in the SBA servicing asset relate primarily to changes in prepayments that result from shifts in interest rates. The following summarizes the activity pertaining to SBA servicing rights, which are in the consolidated balance sheets, for the three and nine months ended September 30, 2018 and 2017:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
	(Dollars in thousands)
Beginning balance	$	3,521		$	3,515		$	3,411		$	3,132
Origination of servicing assets		376			367			955			1,132
Change in fair value:
Due to run-off		(254	)		(216	)		(707	)		(600	)
Due to market changes		(82	)		(172	)		(98	)		(170	)
Ending balance	$	3,561		$	3,494		$	3,561		$	3,494

NOTE 7. DEPOSITS

The following table sets forth the Company’s deposits by category:

	September 30, 2018		December 31, 2017
	(Dollars in thousands)
Noninterest-bearing demand deposits	$	207,727	$	176,726
Interest-bearing NOW accounts		7,865		7,318
Savings and money market accounts		214,380		243,173
Time deposits		442,638		408,151
Total deposits	$	872,610	$	835,368
Time deposits $100,000 and greater	$	346,844	$	314,102
Time deposits $250,000 and greater		90,056		82,816
Related party deposits (executive officers and directors)		12,983		13,914

The aggregate amount of overdraft demand deposits reclassified to loans was $15 thousand and $27 thousand at September 30, 2018 and December 31, 2017, respectively. The aggregate amount of maturities for time deposits for each of the five years following the latest balance sheet date totaled $267.8 million, $132.9 million, $22.7 million, $9.7 million and $9.5 million, respectively.

F-23

NOTE 8. STOCK-BASED COMPENSATION AND OTHER BENEFIT PLANS

Spirit of Texas Bancshares, Inc. 2008 Stock Plan (the “2008 Stock Plan”)

Option activity for the period indicated is summarized as follows:

	2008 Stock Plan
	Options			Weighted Average Exercise Price		Aggregate Intrinsic Value (in thousands)		Weighted Average Remaining Contractual Life (Years)
Outstanding at January 1, 2018		1,415,350		$	12.59
Granted		—
Exercised		(192,928	)	$	10.63	$	2,114
Forfeited(1)		(18,750	)	$	13.33	$	155
Expired		—
Outstanding at September 30, 2018		1,203,672		$	12.89	$	10,472		4.92
Exercisable at September 30, 2018		990,457		$	12.58	$	8,924		4.47
Vested at September 30, 2018		990,457		$	12.58	$	8,924		4.47

(1) Forfeitures are accounted for in the period they occur.

The total unrecognized compensation cost of $764 thousand related to the 2008 Stock Plan for the share awards outstanding at September 30, 2018 will be recognized over a weighted average remaining period of 2.00 years.

Spirit of Texas Bancshares, Inc. 2017 Stock Plan (the “2017 Stock Plan”)

Option activity for the period indicated is summarized as follows:

	2017 Stock Plan
	Options		Weighted Average Exercise Price		Aggregate Intrinsic Value (in thousands)		Weighted Average Remaining Contractual Life (Years)
Outstanding at January 1, 2018		127,927	$	15.00
Granted		83,340		20.69	$	75
Exercised		—
Forfeited(1)		—
Expired		—
Outstanding at September 30, 2018		211,267	$	17.25	$	917		8.89
Exercisable at September 30, 2018		77,335	$	15.00	$	510		8.41
Vested at September 30, 2018		77,335	$	15.00	$	510		8.41

(1) Forfeitures are accounted for in the period they occur.

F-24

The fair values of the stock options granted for the nine months ended September 30, 2018 were determined utilizing the Black-Scholes pricing model methodology. A summary of assumptions used to calculate the fair values of the 2017 Stock Plan awards is presented below:

	2017 Stock Plan
	Nine Months Ended September 30, 2018
Expected volatility		23	%
Expected dividend yield		0.0	%
Expected term (years)		7.5
Risk-free interest rate		2.36 - 2.87	%
Weighted average grant date fair value	$	6.77

The expected volatility is based on the volatility of comparable peer banks. The expected term represents the period of time that the 2017 Stock Plan awards are expected to be outstanding from the date of grant. The risk-free interest rate is based on the U.S. Treasury yields for the expected term of the instrument.

The total unrecognized compensation cost of $687 thousand related to the 2017 Stock Plan for the share awards outstanding at June 30, 2018 will be recognized over a weighted average remaining period of 4.31 years.

Warrants

Activity for the Spirit of Texas Bancshares, Inc. 2008 Warrants for the period indicated is summarized as follows:

	Spirit of Texas Bancshares, Inc. 2008 Warrants
	Warrants			Weighted Average Exercise Price		Aggregate Intrinsic Value (in thousands)		Weighted Average Remaining Contractual Life (Years)
Outstanding at January 1, 2018		105,000		$	10.00
Granted		—
Exercised		(45,000	)	$	10.00	$	522
Forfeited(1)		—
Expired		—
Outstanding at September 30, 2018		60,000		$	10.00	$	695		0.13
Exercisable at September 30, 2018		60,000		$	10.00	$	695		0.13
Vested at September 30, 2018		60,000		$	10.00	$	695		0.13

(1) Forfeitures are accounted for in the period they occur.

There is no remaining expense to be recognized on the Spirit of Texas Bancshares, Inc. 2008 Warrants.

F-25

Activity for the Bank4Texas Warrants for the period indicated is summarized as follows:

	Bank4Texas Warrants
	Warrants			Weighted Average Exercise Price		Aggregate Intrinsic Value (in thousands)		Weighted Average Remaining Contractual Life (Years)
Outstanding at January 1, 2018		12,072		$	10.50
Granted		—
Exercised		(1,362	)	$	10.50	$	15
Forfeited(1)		—
Expired		—
Outstanding at September 30, 2018		10,710		$	10.50	$	119		1.90
Exercisable at September 30, 2018		10,710		$	10.50	$	119		1.90
Vested at September 30, 2018		10,710		$	10.50	$	119		1.90

(1) Forfeitures are accounted for in the period they occur.

There was no activity during the nine months ended September 30, 2018 on the Oasis Warrants.

NOTE 9. BASIC AND DILUTED EARNINGS PER COMMON SHARE

The following table presents the computation of basic and diluted EPS:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
	(Dollars in thousands, except per share data)
Net income as reported	$	2,771	$	2,002	$	7,465	$	4,230
Less: Participated securities share of undistributed earnings		—		—		—		27
Net income available to common stockholders	$	2,771	$	2,002	$	7,465	$	4,203
Weighted average number of common shares—basic		9,792,032		7,279,178		8,673,106		7,218,147
Effect of dilutive securities:
Employee stock-based compensation awards and warrants		568,269		286,061		421,585		286,061
Weighted average number of common shares—diluted		10,360,301		7,565,239		9,094,691		7,504,208
Basic earnings per common share	$	0.28	$	0.28	$	0.86	$	0.58
Diluted earnings per common share	$	0.27	$	0.26	$	0.82	$	0.56
Anti-dilutive warrants and stock options		7,246		261,475		78,490		261,475

NOTE 10. INCOME TAXES

The Company uses an estimated annual effective tax rate method in computing its interim tax provision. This effective tax rate is based on forecasted annual pre-tax income, permanent tax differences and statutory tax rates.

F-26

The effective tax rates for the three months ended September 30, 2018 and 2017 were 20.6% and 35.5%, respectively. The decrease in the effective tax rate for the three months ended September 30, 2018 was primarily due to the enactment of the 2017 Tax Cuts and Jobs Act (the “Tax Reform”) which reduced the corporate tax rate from 34.0% to 21.0%.

The effective tax rates for the nine months ended September 30, 2018 and 2017 were 20.3% and 34.9%, respectively. The decrease in the effective tax rate for the nine months ended September 30, 2018 was primarily due to the enactment of the Tax Reform which reduced the corporate tax rate from 34.0% to 21.0%.

The Company recorded an uncertain tax position at December 31, 2017 arising from a deduction taken on the 2016 federal return related to a request for change in accounting method. The total amount of the recorded uncertain tax position at December 31, 2017 was $903 thousand and is included in other liabilities. During the second quarter of 2018, the Company filed an amended return and the uncertain tax position was settled against the balance left on account with the IRS. The Company’s policy is to classify interest and penalties associated with income taxes within other expenses. The Company did not record interest and penalties associated with income taxes for the three or nine months ended September 30, 2018 or 2017.

NOTE 11. COMMITMENTS AND CONTINGENCIES

The Company issues off-balance sheet financial instruments in connection with its lending activities and to meet the financing needs of its customers. These financial instruments include commitments to fund loans and lines of credit as well as commercial and standby letters of credit. These commitments expose the Company to varying degrees of credit and market risk which are essentially the same as those involved in extending loans to customers. The Company follows the same credit policies in making commitments as it does for instruments recorded on the Company’s consolidated balance sheet. Collateral is obtained based on management’s assessment of the customer’s credit risk.

The Company’s exposure to credit loss is represented by the contractual amount of these commitments. As of September 30, 2018 and December 31, 2017, the Company’s reserve for unfunded commitments totaled $40 thousand.

Fees collected on off-balance sheet financial instruments represent the fair value of those commitments and are deferred and amortized over their term.

Financial Instruments Commitments

Unfunded commitments are as follows:

	September 30, 2018		December 31, 2017
	(Dollars in thousands)
Unfunded loan commitments	$	142,657	$	134,536
Commercial and standby letters of credit		85		91
Total	$	142,742	$	134,627

Unfunded loan commitments:

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if it is

F-27

deemed necessary by the Company upon extension of credit, is based upon management’s credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, and income-producing commercial properties.

Commercial and standby letters of credit:

Letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Letters of credit are primarily issued to support trade transactions or guarantee arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Company generally holds collateral supporting those commitments if deemed necessary.

Other Commitments and Contingencies

Legal Proceedings

The Company, from time to time, is involved as plaintiff or defendant in various legal actions arising in the normal course of business. While the ultimate outcome of any such proceedings cannot be predicted with certainty, it is the opinion of management, based upon advice of legal counsel, that no proceedings exist, either individually or in the aggregate, which, if determined adversely to the Company, would have a material effect on the Company’s consolidated balance sheet, results of operations or cash flows.

NOTE 12. FAIR VALUE MEASUREMENTS

When determining the fair value measurements for assets and liabilities and the related fair value hierarchy, the Company considers the principal or most advantageous market in which it would transact and the assumptions that market participants would use when pricing the asset or liability. When possible, the Company looks to active and observable markets to price identical assets or liabilities. When identical assets and liabilities are not traded in active markets, the Company looks to market observable data for similar assets and liabilities. It is the Company’s policy to maximize the use of observable inputs, minimize the use of unobservable inputs and use unobservable inputs to measure fair value to the extent that observable inputs are not available. The need to use unobservable inputs generally results from the lack of market liquidity, resulting in diminished observability of both actual trades and assumptions that would otherwise be available to value these instruments, or the value of the underlying collateral is not market observable. Although third party price indications may be available for an asset or liability, limited trading activity would make it difficult to support the observability of these quotations.

Financial Instruments Carried at Fair Value on a Recurring Basis

The following is a description of the valuation methodologies used for financial instruments measured at fair value on a recurring basis, as well as the general classification of each instrument under the valuation hierarchy.

Investment Securities—Investment securities available for sale are carried at fair value on a recurring basis. When available, fair value is based on quoted prices for the identical security in an active market and as such, would be classified as Level 1. If quoted market prices are not available, fair values are estimated using quoted prices of securities with similar characteristics, discounted cash flows or matrix pricing models. Investment securities available for sale for which Level 1 valuations are not available are classified as Level 2, and include U.S. Government agencies and sponsored enterprises obligations and agency mortgage-backed securities; state and municipal obligations; asset-backed securities; and corporate debt and other securities. Pricing of these securities is generally spread driven.

Observable inputs that may impact the valuation of these securities include benchmark yield curves, credit spreads, reported trades, dealer quotes, bids, issuer spreads, current rating, historical constant prepayment rates, historical voluntary prepayment rates, structural and waterfall features of individual securities, published collateral data, and for certain securities, historical constant default rates and default severities.

F-28

SBA Servicing Asset—The SBA Servicing Asset is carried at fair value on a recurring basis. To determine the fair value of SBA servicing rights, the Company uses market prices for comparable servicing contracts, when available, or alternatively, uses a valuation model that calculates the present value of estimated future net servicing income. In using this valuation method, the Company incorporates assumptions that market participants would use in estimating future net servicing income, which includes estimates of the cost to service, the discount rate, custodial earnings rate, an inflation rate, ancillary income, prepayment speeds, default rates, late fees and losses. The SBA Servicing Asset is classified as Level 3.

The following table presents the assets and liabilities measured at fair value on a recurring basis:

	September 30, 2018
	Level 1		Level 2		Level 3		Total
	(Dollars in thousands)
Assets:
U.S. Government agencies	$	—	$	1,906	$	—	$	1,906
Residential mortgage-backed securities		—		26,048		—		26,048
Corporate bonds and other debt securities		—		5,495		—		5,495
SBA servicing rights		—		—		3,561		3,561
Total	$	—	$	33,449	$	3,561	$	37,010

	December 31, 2017
	Level 1		Level 2		Level 3		Total
	(Dollars in thousands)
Assets:
U.S. Government agencies	$	—	$	1,949	$	—	$	1,949
Residential mortgage-backed securities		—		29,629		—		29,629
Corporate bonds and other debt securities		—		5,665		—		5,665
SBA servicing rights		—		—		3,411		3,411
Total	$	—	$	37,243	$	3,411	$	40,654

There were no transfers of financial assets between levels of the fair value hierarchy during the three or nine months ended September 30, 2018.

Financial Instruments Measured at Fair Value on a Non-Recurring Basis

The following is a description of the methodologies used to estimate the fair values of assets and liabilities measured at fair value on a non-recurring basis, and the level within the fair value hierarchy in which those measurements are typically classified.

Impaired loans and other real estate owned (“OREO”)—The carrying amount of collateral dependent impaired loans is typically based on the fair value of the underlying collateral, which may be real estate or other business assets, less estimated costs to sell. The carrying value of OREO is initially measured based on the fair value, less estimated cost to sell, of the real estate acquired in foreclosure and subsequently adjusted to the lower of cost or estimated fair value, less estimated cost to sell. Fair values of real estate collateral are typically based on real estate appraisals which utilize market and income valuation techniques incorporating both observable and unobservable inputs. When current appraisals are not available, the Company may use brokers’ price opinions, home price indices, or other available information about changes in real estate market conditions to adjust the latest appraised value available. These adjustments to appraised values may be subjective and involve significant management judgment. The fair value of collateral consisting of other business assets is generally based on appraisals that use market approaches to valuation, incorporating primarily unobservable inputs. Fair value measurements related to collateral dependent impaired loans and OREO are classified within Level 3 of the fair value hierarchy.

F-29

The following table provides information about certain assets measured at fair value on a non-recurring basis:

	Estimated Fair Value
	September 30, 2018		December 31, 2017
	(Dollars in thousands)
Assets (classified in Level 3):
Impaired loans	$	1,913	$	2,553
Other real estate and repossessed assets		289		21

Impairment charges resulting from the non-recurring changes in fair value of underlying collateral of impaired loans are included in the provision for loan losses in the consolidated statement of income. Impairment charges resulting from the non-recurring changes in fair value of OREO are included in other real estate and acquired assets resolution expenses in the consolidated statement of income.

The following tables show significant unobservable inputs used in the recurring and non-recurring fair value measurements of Level 3 assets:

Level 3 Asset	Fair Value		Valuation Technique	Unobservable Inputs	Range/Weighted Average
September 30, 2018
Non-recurring:
Impaired loans	$	1,913	Third party appraisals	Collateral discounts	0.0% - 100.0% (84.7%)
Other real estate owned		289	Third party appraisals	Collateral discounts and estimated cost to sell	10.0%
SBA servicing assets		3,561	Discounted cash flows	Conditional prepayment rate	7.1%
				Discount rate	14.3%
December 31, 2017
Non-recurring:
Impaired loans	$	2,553	Third party appraisals	Collateral discounts	0.0% - 100.0% (11.6%)
Other real estate owned		21	Third party appraisals	Collateral discounts and estimated cost to sell	10.0%
SBA servicing assets		3,411	Discounted cash flows	Conditional prepayment rate	6.7%
				Discount rate	14.1%

The carrying amounts and estimated fair values, as well as the level within the fair value hierarchy, of the Company’s financial instruments are as follows:

September 30, 2018	Carrying Value		Fair Value		Level 1		Level 2		Level 3
	(Dollars in thousands)
Financial Assets:
Cash and cash equivalents	$	44,138	$	44,138	$	44,138	$	—	$	—
Time deposits in other banks		245		245		245		—		—
Available for sale securities		33,449		33,449		—		33,449		—
FHLB and other bank stock		4,861		4,861		—		4,861		—
Loans, net		947,918		942,987		—		—		942,987
Loans held for sale		5,500		5,880		—		5,880		—
Accrued interest receivable		3,715		3,715		—		3,715		—
Bank-owned life insurance		483		483		—		483		—
SBA servicing rights		3,561		3,561		—		—		3,561
Financial Liabilities:
Deposits	$	872,610	$	843,522	$	—	$	843,522	$	—
Accrued interest payable		475		475		—		475		—
Short-term borrowings		10,000		10,000		—		10,000		—
Long-term borrowings		64,961		63,233		—		63,233		—

F-30

December 31, 2017	Carrying Value		Fair Value		Level 1		Level 2		Level 3
	(Dollars in thousands)
Financial Assets:
Cash and cash equivalents	$	57,949	$	57,949	$	57,949	$	—	$	—
Time deposits in other banks		245		245		245		—		—
Available for sale securities		37,243		37,243		—		37,243		—
FHLB and other bank stock		4,812		4,812		—		4,812		—
Loans, net		863,467		870,749		—		—		870,749
Loans held for sale		3,814		4,188		—		4,188		—
Accrued interest receivable		3,466		3,466		—		3,466		—
Bank-owned life insurance		479		479		—		479		—
SBA servicing rights		3,411		3,411		—		—		3,411
Financial Liabilities:
Deposits	$	835,368	$	840,645	$	—	$	840,645	$	—
Accrued interest payable		407		407		—		407		—
Short-term borrowings		15,000		15,000		—		15,000		—
Long-term borrowings		76,411		67,310		—		67,310		—

Certain financial instruments are carried at amounts that approximate fair value due to their short-term nature and generally negligible credit risk. Financial instruments for which fair value approximates the carrying amount at September 30, 2018 and December 31, 2017, include cash and cash equivalents, time deposits in other banks and accrued interest receivable and payable.

The following methods and assumptions were used to estimate the fair value of each class of financial instruments.

FHLB and Other Bank Stock:

FHLB and other bank stock can be liquidated only by redemption by the issuer, as there is no market for these securities. These securities are carried at par, which has historically represented the redemption price and is therefore considered to approximate fair value.

Loans:

Fair values for loans are based on a discounted cash flow methodology that considers various factors, including the type of loan and related collateral, classification status, fixed or variable interest rate, term of loan, whether or not the loan was amortizing and current discount rates. A basis point adjustment for the liquidity premium curve was added to the discounted cash flow methodology to obtain the estimated exit price of the portfolio. Loans are grouped together according to similar characteristics and are treated in the aggregate when applying various valuation techniques. The discount rates used for loans are based on current market rates for new originations of comparable credit risk and include adjustments for liquidity concerns. The allowance for loan and lease losses is considered a reasonable estimate of the required adjustment to fair value to reflect the impact of credit risk. This estimate is intended to represent an exit value as defined in ASC 820.

Loans Held for Sale:

SBA loans held for sale are carried at the lower of cost or fair value. The fair values of SBA loans held for sale is determined, when possible, using quoted secondary-market prices and are classified within Level 2 of the fair value hierarchy. If no such quoted prices exist, the fair value of a loan is determined using quoted prices for a similar loan or loans, adjusted for the specific attributes of that loan.

F-31

Bank-owned Life Insurance:

The Company holds life insurance policies on certain officers. The carrying value of these policies approximates fair value as it is based on the cash surrender value adjusted for other charges or amounts due that are probable at settlement.

Deposits:

The fair value of demand deposits, savings accounts and money market deposits is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using discounted cash flow analysis and using the rates currently offered for deposits of similar remaining maturities.

Short-term and Long-term Borrowings:

The fair value of advances from the FHLB and other borrowings are estimated by discounting the future cash flows using the current rate at which similar borrowings with similar remaining maturities could be obtained.

F-32

Spirit of Texas Bancshares, Inc. and Subsidiary

Audited Consolidated Financial Statements:
Report of Independent Registered Public Accounting Firm	F-34
Consolidated Balance Sheets as of December 31, 2017 and 2016	F-35
Consolidated Statements of Income for the Years Ended December  31, 2017 and 2016	F-36
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2017 and 2016	F-37
Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended December 31, 2017 and 2016	F-38
Consolidated Statements of Cash Flows for the Years Ended December  31, 2017 and 2016	F-39
Notes to Consolidated Financial Statements	F-40

F-33

Report of Independent Registered Public Accounting Firm

Stockholders and Board of Directors

Spirit of Texas Bancshares, Inc.

Conroe, Texas

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of Spirit of Texas Bancshares, Inc. and Subsidiary (the “Company”) as of December 31, 2017 and 2016, the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for the years then ended, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2017 and 2016, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

Restatement of 2016 Financial Statements

As discussed in Note 20 to the consolidated financial statements, the 2016 financial statements have been restated to correct misstatements. Our opinion is not modified with respect to this matter.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ BDO USA, LLP

We have served as the Company’s auditor since 2015.

Spokane, Washington

February 28, 2018

F-34

SPIRIT OF TEXAS BANCSHARES, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share data)

	December 31,
	2017			2016 Restated
Assets:
Cash and due from banks	$	19,054		$	11,969
Interest-bearing deposits in other banks		38,895			140,263
Total cash and cash equivalents		57,949			152,232
Time deposits in other banks		245			245
Investment securities:
Available for sale securities, at fair value		37,243			5
Total investment securities		37,243			5
Loans held for sale		3,814			4,003
Loans:
Loans held for investment		869,119			772,861
Less: allowance for loan and lease losses		(5,652	)		(4,357	)
Loans, net		863,467			768,504
Premises and equipment, net		42,189			30,334
Accrued interest receivable		3,466			2,485
Other real estate owned and repossessed assets		21			23
Goodwill		4,485			4,485
Core deposit intangible		3,486			4,189
SBA servicing asset		3,411			3,132
Deferred tax asset, net		1,480			1,297
Bank-owned life insurance		479			477
Federal Home Loan Bank and other bank stock, at cost		4,812			4,743
Other assets		3,751			4,335
Total assets	$	1,030,298		$	980,489
Liabilities and Stockholders’ Equity
Liabilities:
Deposits:
Transaction accounts:
Noninterest-bearing	$	176,726		$	171,475
Interest-bearing		250,491			223,734
Total transaction accounts		427,217			395,209
Time deposits		408,151			419,229
Total deposits		835,368			814,438
Accrued interest payable		407			264
Short-term borrowings		15,000			5,000
Long-term borrowings		76,411			66,016
Other liabilities		3,973			1,875
Total liabilities		931,159			887,593
Commitments and contingencies (Note 17)
Stockholders’ Equity:
Preferred stock, $1 par value; 5 million shares authorized;
0 and 170,236 shares issued and outstanding		—			1,753
Common stock, no par value; 50 million shares authorized;
7,280,183 and 7,069,527 shares issued and outstanding		82,615			78,871
Retained earnings		17,025			12,272
Accumulated other comprehensive income (loss)		(501	)		—
Total stockholders’ equity		99,139			92,896
Total liabilities and stockholders’ equity	$	1,030,298		$	980,489

The accompanying notes are an integral part of these consolidated financial statements

F-35

SPIRIT OF TEXAS BANCSHARES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

(Dollars in thousands, except per share data)

	Years Ended December 31,
	2017			2016 Restated
Interest income:
Interest and fees on loans	$	45,411		$	39,455
Interest and dividends on investment securities		517			178
Other interest income		979			577
Total interest income		46,907			40,210
Interest expense:
Interest on deposits		6,602			5,482
Interest on FHLB advances and other borrowings		1,726			1,248
Total interest expense		8,328			6,730
Net interest income		38,579			33,480
Provision for loan losses		2,475			1,617
Net interest income after provision for loan losses		36,104			31,863
Noninterest income:
Service charges and fees		1,501			1,216
SBA loan servicing fees		1,794			1,831
Mortgage referral fees		634			751
Gain on sales of loans, net		5,684			4,437
Gain (loss) on sales of premises and equipment		(45	)		21
Gain (loss) on sales of investment securities		—			69
Other noninterest income		70			17
Total noninterest income		9,638			8,342
Noninterest expense:
Salaries and employee benefits		23,338			21,094
Occupancy and equipment expenses		5,123			4,736
Loan and other real estate related expenses		254			30
Professional services		1,845			1,745
Data processing and network		1,266			1,518
Regulatory assessments and insurance		924			742
Amortization of intangibles		703			671
Advertising		551			303
Marketing		579			634
Telephone expense		409			606
Other operating expenses		2,410			2,802
Total noninterest expense		37,402			34,881
Income before income tax expense		8,340			5,324
Income tax expense		3,587			1,609
Net income	$	4,753		$	3,715
Earnings per common share:
Basic	$	0.65		$	0.51
Diluted	$	0.63		$	0.50
Weighted average common shares outstanding:
Basic		7,233,783			7,065,243
Diluted		7,519,944			7,205,709

The accompanying notes are an integral part of these consolidated financial statements

F-36

SPIRIT OF TEXAS BANCSHARES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Dollars in thousands)

	Years Ended December 31,
	2017			2016     Restated
Net income	$	4,753		$	3,715
Other comprehensive income (loss):
Unrealized net holding gains (losses) on investment securities available for sale, net of taxes of $133 and $(89), respectively		(501	)		172
Reclassification adjustment for realized (gains) losses on investment securities available for sale included in net income, net of taxes of $0 and $23, respectively	$	—		$	(46	)
Total other comprehensive income (loss)		(501	)		126
Total comprehensive income	$	4,252		$	3,841

The accompanying notes are an integral part of these consolidated financial statements

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SPIRIT OF TEXAS BANCSHARES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Dollars in thousands)

	Shares of Common Stock		Shares of Preferred Stock			Common Stock		Preferred Stock			Retained Earnings		Accumulated Other Comprehensive Income (Loss)			Total Stockholders’ Equity
Balance as of January 1, 2016, before restatement		7,064,502		170,236		$	77,743	$	1,753		$	7,944	$	(126	)	$	87,314
Restatement		—		—			—		—			613		—			613
Balance as of January 1, 2016, after restatement		7,064,502		170,236		$	77,743	$	1,753		$	8,557	$	(126	)	$	87,927
Net income (restated)		—		—			—		—			3,715		—			3,715
Exercise of stock options		5,025		—			59		—			—		—			59
Stock-based compensation		—		—			1,069		—			—		—			1,069
Other comprehensive income (loss)		—		—			—		—			—		126			126
Balance as of December 31, 2016		7,069,527		170,236		$	78,871	$	1,753		$	12,272	$	—		$	92,896
Net income		—		—			—		—			4,753		—			4,753
Conversion of preferred stock		170,236		(170,236	)		1,753		(1,753	)		—		—			—
Exercise of stock options and warrants		40,419		—			471		—			—		—			471
Issuance of common stock		1		—			—		—			—		—			—
Stock-based compensation		—		—			1,520		—			—		—			1,520
Other comprehensive income (loss)		—		—			—		—			—		(501	)		(501	)
Balance as of December 31, 2017		7,280,183		—		$	82,615	$	—		$	17,025	$	(501	)	$	99,139

The accompanying notes are an integral part of these consolidated financial statements

F-38

SPIRIT OF TEXAS BANCSHARES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

	Years Ended December 31,
	2017			2016   Restated
Cash Flows From Operating Activities:
Net income	$	4,753		$	3,715
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Provision for loan losses		2,475			1,617
Depreciation and amortization		1,762			1,788
Net amortization (accretion) of premium (discount) on investment securities		237			85
Amortization of intangible assets		703			671
Accretion of discount on retained SBA loans		(946	)		(730	)
Deferred tax expense (benefit)		(50	)		752
Originations of loans held for sale		(71,185	)		(46,731	)
Proceeds from loans held for sale		77,169			50,752
Net gains on sale of loans held for sale		(5,684	)		(4,437	)
Fair value adjustment on SBA servicing asset		1,211			855
(Gain) loss on sales of investment securities		—			(69	)
Loss (gain) on sale of premises and equipment		45			(21	)
Stock-based compensation		1,520			1,069
Increase in cash surrender value of BOLI		(2	)		(5	)
Net change in operating assets and liabilities:
Net change in accrued interest receivable		(981	)		(87	)
Net change in accrued interest payable		143			53
Net change in other assets		584			(1,571	)
Net change in other liabilities		2,098			(559	)
Net cash provided by (used in) operating activities		13,852			7,147
Cash Flows From Investing Activities:
Purchases of securities available-for-sale		(40,414	)		—
Sales of investment securities available for sale		—			5,308
Sales of investment securities held to maturity		—			6,726
Paydown and maturities of investment securities available for sale		2,305			2,688
Paydown and maturities of investment securities held to maturity		—			833
Net purchase of FHLB and other bank stock		(69	)		(59	)
Net decrease in time deposits in other banks		—			748
Net change in loans		(98,565	)		(83,552	)
Proceeds from sale of other real estate owned		474			1,563
Purchase of premises and equipment		(14,164	)		(7,260	)
Proceeds from the sale of premises and equipment		502			30
Net cash received from branch acquisition		—			31,889
Net cash provided by (used in) investing activities		(149,931	)		(41,086	)
Cash Flows From Financing Activities:
Net change in deposits		20,930			116,351
Proceeds from long-term borrowings		19,177			76,294
Repayment of long-term borrowings		(8,782	)		(62,128	)
Proceeds from short-term borrowings		15,000			—
Repayment of short-term borrowings		(5,000	)		(35,000	)
Exercise of stock options		471			59
Net cash provided by (used in) financing activities		41,796			95,576
Net Change in Cash and Cash Equivalents		(94,283	)		61,637
Cash and Cash Equivalents at Beginning of Period		152,232			90,595
Cash and Cash Equivalents at End of Period	$	57,949		$	152,232
Supplemental Disclosures of Cash Flow Information:
Interest paid	$	8,185		$	6,677
Income taxes paid		2,495			3,090
Supplemental disclosure of noncash investing and financing activities:
Transfer of loans to other real estate owned and repossessed assets	$	472		$	1,255
Fair value of assets acquired in branch acquisition, excluding cash		—			4,852
Liabilities assumed in branch acquisition		—			36,741

The accompanying notes are an integral part of these consolidated financial statements

F-39

SPIRIT OF TEXAS BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

Spirit of Texas Bancshares, Inc. is a bank holding company headquartered in Conroe, Texas that provides, through its bank subsidiary, a variety of financial services to individuals and corporate customers in Texas, which are primarily agricultural, light industrial and commercial areas.

On March 16, 2017, the Company filed a Second Amended and Restated Certificate of Formation with the Texas Secretary of State to affect a reverse stock split of its outstanding common stock which became effective on March 16, 2017. As a result of the reverse split, every two shares of the Company’s issued and outstanding common stock were consolidated into one issued and outstanding share of common stock. The computations of all share and per share amounts have been adjusted retroactively to reflect the reverse stock split.

Basis of Presentation

The consolidated financial statements include the accounts of Spirit of Texas Bancshares, Inc. (the “Holding Company” or “Company”), and the accounts of its wholly-owned subsidiary, Spirit of Texas Bank (the “Bank”). All significant intercompany balances and transactions have been eliminated in consolidation. The accounting and financial reporting policies the Company follows conform, in all material respects, to U.S. generally accepted accounting principles (“GAAP”) and to general practices with the financial services industry.

As further discussed in Note 20, the Company identified prior period accounting errors which resulted in a restatement of certain prior period amounts within these consolidated financial statements as of and for the year ended December 31, 2016.

The Company has evaluated subsequent events for potential recognition and/or disclosure through the date these consolidated financial statements were issued.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Material estimates subject to significant change include the allowance for loan and lease losses, the carrying value of OREO, the fair value of financial instruments, including SBA servicing assets, and the valuation of goodwill and other intangible assets, stock-based compensation and deferred income tax assets.

Significant Group Concentrations of Credit Risk

Most of the Company’s activities are with customers located within Texas. Note 3—Investment Securities discusses the types of investment securities that the Company invests in. Note 4—Loans, net discusses the types of lending that the Company engages in as well as loan concentrations. The Company does not have a significant concentration of credit risk with any one customer.

Fair Value Measurement

The Company uses estimates of fair value in applying various accounting standards for its consolidated financial statements on either a recurring or non-recurring basis. Fair value is defined as the price to sell an asset or

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transfer a liability in an orderly transaction between willing and able market participants. The Company groups its assets and liabilities measured at fair value in three hierarchy levels, based on the observability and transparency of the inputs. These levels are as follows:

Level 1—Unadjusted quoted prices in active markets that are accessible at the measurement date for identical assets or liabilities;

Level 2—Observable inputs other than level 1 inputs, including quoted prices for similar assets and liabilities, quoted prices for identical assets and liabilities in less active markets and other inputs that can be corroborated by observable market data;

Level 3—Unobservable inputs supported by limited or no market activity or data and inputs requiring significant management judgment or estimation; valuation techniques utilizing level 3 inputs include option pricing models, discounted cash flow models and similar techniques.

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. It is the Company’s policy to maximize the use of observable inputs and minimize the use of unobservable inputs in estimating fair value. Unobservable inputs are utilized in determining fair value estimates only to the extent that observable inputs are not available. The need to use unobservable inputs generally results from a lack of market liquidity and trading volume. Transfers between levels of fair value hierarchy are recorded at the end of the reporting period.

Transfers of Financial Assets

The Company accounts for the transfers and servicing of financial assets in accordance with ASC 860, Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities. ASC 860, revises the standards for accounting for the securitizations and other transfers of financial assets and collateral.

Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

A servicing asset related to SBA loans is initially recorded when these loans are sold and the servicing rights are retained. The Company has elected the fair value method to subsequently measure retained servicing rights. An updated fair value of the servicing asset is obtained from an independent third party on a quarterly basis and any necessary adjustments are included in SBA loan servicing fees on the consolidated statement of income. The valuation begins with the projection of future cash flows for each asset based on their unique characteristics, our market-based assumptions for prepayment speeds and estimated losses and recoveries. The present value of the future cash flows are then calculated utilizing our market-based discount ratio assumptions. In all cases, the Company models expected payments for every loan for each quarterly period in order to create the most detailed cash flow stream possible.

The Company uses various assumptions and estimates in determining the impairment of the SBA servicing asset. These assumptions include prepayment speeds and discount rates commensurate with the risks involved and comparable to assumptions used by participants to value and bid servicing rights available for sale in the market.

Cash and Cash Equivalents

For the purpose of presentation in the financial statements of cash flows, cash and cash equivalents are defined as those amounts included in the balance sheet captions “cash and due from banks”, “interest-bearing deposits in

F-41

other banks”, and “federal funds sold.” Generally, federal funds are purchased and sold for one day periods. The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents.

The majority of cash and cash equivalents of the Company are maintained with major financial institutions in the United States. As such, interest-bearing, non-transaction account deposits with these financial institutions may exceed the amount of insurance provided on such deposits; however, these deposits typically may be redeemed upon demand and therefore, bear minimal risk. The FDIC insurance coverage is $250 thousand. The Company periodically evaluates the stability of the financial institutions with which it has deposits, and believes the risk of any potential credit loss is minimal.

The Company was required to have $14.3 million and $12.0 million of cash on hand or on deposit with the Federal Reserve Bank to meet regulatory reserve requirements as of December 31, 2017 and 2016, respectively.

Investment Securities

The Company determines the classification of investment securities at the time of purchase. If the Company has the intent and the ability at the time of purchase to hold debt securities until maturity, they are classified as held-to-maturity. Investment securities held-to-maturity are stated at amortized cost. Debt securities the Company does not intend to hold to maturity are classified as available for sale and carried at estimated fair value with unrealized gains or losses reported as a separate component of stockholders’ equity in accumulated other comprehensive income (loss), net of applicable income taxes. Available for sale securities are a part of the Company’s asset/liability management strategy and may be sold in response to changes in interest rates, prepayment risk or other market factors.

Interest income and dividends on securities are recognized in interest income on an accrual basis. Premiums and discounts on debt securities are amortized as an adjustment to interest income over the period to maturity of the related security using the effective interest method. Realized gains or losses on the sale of securities are determined using the specific identification method.

The Company reviews investment securities for impairment on a quarterly basis or more frequently if events and circumstances warrant. In order to determine if a decline in fair value below amortized cost represents other-than-temporary impairment (“OTTI”), management considers several factors, including but not limited to, the length of time and extent to which the fair value has been less than the amortized cost basis, the financial condition and near-term prospects of the issuer (considering factors such as adverse conditions specific to the issuer and the security and ratings agency actions) and the Company’s intent and ability to retain the investment in order to allow for an anticipated recovery in fair value.

The Company recognizes OTTI of a debt security for which there has been a decline in fair value below amortized cost if (i) management intends to sell the security, (ii) it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis, or (iii) the Company does not expect to recover the entire amortized cost basis of the security. The amount by which amortized cost exceeds the fair value of a debt security that is considered to have OTTI is separated into a component representing the credit loss, which is recognized in earnings, and a component related to all other factors, which is recognized in other comprehensive income (loss). The measurement of the credit loss component is equal to the difference between the debt security’s amortized cost basis and the present value of its expected future cash flows discounted at the security’s effective yield. If the Company intends to sell the security, or if it is more likely than not it will be required to sell the security before recovery, an OTTI write-down is recognized in earnings equal to the entire difference between the amortized cost basis and fair value of the security.

Federal Home Loan Bank (FHLB) and Independent Bankers’ Bank (TIB) Stock

The Bank is a member of the FHLB and the Independent Bankers’ Bank and is required to maintain an investment in the stock of the FHLB and TIB. No market exists for these stocks, and the Bank’s investment can

F-42

be liquidated only through redemption by the FHLB or TIB, at the discretion of and subject to conditions imposed by the FHLB and TIB. Historically, FHLB and TIB stock redemptions have been at cost (par value), which equals the Company’s carrying value. The Company monitors its investment in FHLB and TIB stock for impairment through review of recent financial results of the FHLB and TIB including capital adequacy and liquidity position, dividend payment history, redemption history and information from credit agencies. The Company has not identified any indicators of impairment of FHLB or TIB stock.

Loans Held for Sale

Loans held for sale consist of the guaranteed portion of SBA loans that the Company intends to sell after origination and are reflected at the lower of aggregate cost or fair value.

Loans Held for Investment

Loans that management has the intent and ability to hold for the foreseeable future are reported at their outstanding principal balances net of any allowance for loan and lease losses, unamortized deferred fees and costs and unamortized premiums or discounts. The net amount of nonrefundable loan origination fees and certain direct costs associated with the lending process are deferred and amortized to interest income over the contractual lives of the loans using methods which approximate the level yield method. Discounts and premiums are amortized or accreted to interest income over the estimated term of the loans using methods that approximate the level yield method. Interest income on loans is accrued based on the unpaid principal balance outstanding and the contractual terms of the loan agreements.

A substantial portion of the loan portfolio is comprised of commercial and real estate loans throughout Texas. The ability of the Company’s debtors to honor their contracts is dependent upon the general economic conditions of this area.

The loans held for investment portfolio is segmented into commercial and industrial loans, 1-4 single family residential loans (including home equity loans), construction, land and development loans, commercial real estate loans, consumer loans and leases, and municipal and other loans.

Commercial and industrial loans are underwritten after evaluating and understanding the borrower’s ability to repay the loan through operating profitably and effectively growing its business. The Company’s management examines current and projected cash flows to determine the ability of the borrower to repay their obligations as agreed. Commercial loans are primarily made based on the credit quality and cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and may incorporate a personal guarantee to add strength to the credit and reduce the risk on a transaction to an acceptable level; however, some short-term loans may be made on an unsecured basis to the most credit worthy borrowers.

Commercial real estate loans and 1-4 family single family residential loans are subject to underwriting standards and processes similar to commercial loans. Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally largely dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan.

With respect to loans to developers and builders, the Company generally requires the borrower to have a proven record of success and an expertise in the building industry. Construction, land and development loans are underwritten utilizing feasibility studies, independent appraisal reviews, sensitivity analysis of absorption and lease rates and financial analysis of the developers and property owners. Construction, land and development loans are generally based upon estimates of costs and value associated with the complete project. These estimates may be inaccurate. Construction, land and development loans often involve the disbursement of substantial funds with repayment substantially dependent on the success of the ultimate project.

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The Company’s non-real estate consumer loans and leases are based on the borrower’s proven earning capacity over the term of the loan. The Company monitors payment performance periodically for consumer loans to identify any deterioration in the borrower’s financial strength. To monitor and manage consumer loan risk, policies and procedures are developed and modified, as needed, jointly by management and staff. This activity, coupled with a relatively small volume of consumer loans, minimizes risk.

Municipal and other loans are comprised of loans to municipalities and emergency service, hospital and school districts primarily throughout Texas. The majority of these loans have tax or revenue pledges and in some cases are additionally supported by collateral. Municipal loans made without a direct pledge of taxes or revenues are usually made based on some type of collateral that represents an essential service.

U.S. Small Business Association (SBA) Lending Activities

The Bank originates loans to customers in the state of Texas and throughout the United States under an SBA program that generally provides for SBA guarantees of between 75 percent and 85 percent of each loan. The Bank routinely sells the guaranteed portion of its SBA loans to a third party and retains the servicing, holding the nonguaranteed portion in its portfolio. When the guaranteed portion of an SBA loan is sold, the premium received on the sale and the present value of future cash flows of the servicing assets are recognized in income. SBA servicing assets are recognized separately when rights are acquired through the sale of SBA guaranteed portion. These servicing rights are initially measured at fair value at the date of sale and included in the gain on sale. Updated fair values are obtained from an independent third party on a quarterly basis and adjustments are presented in SBA loan servicing fees on the consolidated statements of income. To determine the fair value of SBA Servicing Rights, the Bank uses market prices for comparable servicing contracts, when available, or alternatively, uses a valuation model that calculates the present value of estimated future net servicing income.

In using this valuation method, the Bank incorporates assumptions that market participants would use in estimating future net servicing income, which includes estimates of the cost to service, the discount rate, custodial earnings rate, an inflation rate, ancillary income, prepayment speeds, default rates, late fees and losses.

Serviced loans sold to others are not included in the accompanying balance sheet. Income (losses) and fees collected for loan servicing are included in SBA loan servicing fees in the consolidated statements of income.

Nonaccrual Loans

The Company classifies loans as past due when the payment of principal or interest is greater than 30 days delinquent based on the contractual next payment due date. The Company’s policies related to when loans are placed on nonaccrual status conform to guidelines prescribed by regulatory authorities. Loans are placed on nonaccrual status when it is probable that principal or interest is not fully collectible, or generally when principal or interest becomes 90 days past due, whichever occurs first. When loans are placed on nonaccrual status, interest receivable is reversed against interest income in the current period and amortization of any discount ceases. Interest payments received thereafter are applied as a reduction to the remaining principal balance unless management believes that the ultimate collection of the principal is likely, in which case payments are recognized in earnings on a cash basis. Loans are removed from nonaccrual status when they become current as to both principal and interest and the collectability of principal and interest is no longer doubtful.

Generally, a nonaccrual loan that is restructured remains on nonaccrual for a period of six months to demonstrate the borrower can meet the restructured terms. However, performance prior to the restructuring, or significant events that coincide with the restructuring, are considered in assessing whether the borrower can meet the new terms and may result in the loan being returned to accrual status after a shorter performance period. If the borrower’s ability to meet the revised payment schedule is not reasonably assured, the loan remains classified as a nonaccrual loan.

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Troubled Debt Restructurings

In certain situations due to economic or legal reasons related to a borrower’s financial difficulties, the Company may grant a concession to the borrower for other than an insignificant period of time that it would not otherwise consider. At that time, the related loan is classified as a troubled debt restructuring (“TDR”) and considered impaired. The concessions granted may include rate reductions, principal forgiveness, payment forbearance, extensions of maturity at rates of interest below those commensurate with the risk profile of the borrower, and other actions intended to minimize economic loss. A troubled debt restructured loan is generally placed on nonaccrual status at the time of the modification unless the borrower has no history of missed payments for six months prior to the restructuring. If the borrower performs pursuant to the modified loan terms for at least six months and the remaining loan balance is considered collectible, the loan is returned to accrual status.

Impaired Loans

Loans are considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due, according to the contractual terms of the loan agreements.

All impaired loans of $50,000 or greater on nonaccrual, as well as loans classified as TDRs, are reviewed individually for specific reserves on a quarterly basis.

Allowance for Loan and Lease Losses

The allowance for loan losses is a reserve established through a provision for loan losses charged to expense, which represents management’s best estimate of probable losses that have been incurred within the existing portfolio of loans. The allowance, in the judgment of management, is necessary to reserve for estimated loan losses and risks inherent in the loan portfolio. The Company’s allowance for loan loss methodology includes allowance allocations calculated in accordance with ASC Topic 310, “Receivables” and allowance allocations calculated in accordance with ASC Topic 450, “Contingencies.” Accordingly, the methodology is based on historical loss experience by type of credit and internal risk grade, changes in the composition and volume of the portfolio, and specific loss allocations, with adjustments for current events and conditions. The Company’s process for determining the appropriate level of the allowance for loan losses is designated to account for credit deterioration as it occurs.

The provision for loan losses reflects management’s periodic evaluation of individual loans and changes to the required allowance for specific loans, economic factors, past loan loss experience, loan quality trends, including the levels of and trends related to nonaccrual loans, past due loans, potential problem loans, criticized loans and net charge-offs or recoveries, among other factors.

The level of the allowance reflects management’s continuing evaluation of industry concentrations, specific credit risks, loan loss experience, current loan portfolio quality, present economic, political and regulatory conditions and unidentified losses inherent in the current loan portfolio. Portions of the allowance may be allocated for specific credits; however, the entire allowance is available for any credit that, in management’s judgment, should be charged-off. While management utilizes its best judgment and information available, the ultimate adequacy of the allowance is dependent upon a variety of factors beyond the Company’s control, including, among other things, the performance of the Company’s loan portfolio, the economy, changes in interest rates and the view of the regulatory authorities toward loan classifications.

The Company’s allowance for loan losses consists of three elements: (i) specific valuation allowances determined in accordance with ASC Topic 310 based on probable losses on specific loans; (ii) historical valuation allowances determined in accordance with ASC Topic 450 based on historical loan loss experience for similar loans with similar characteristics and trends, adjusted, as necessary, to reflect the impact of current conditions; and (iii) general valuation allowances determined in accordance with ASC Topic 450 based on general economic conditions and other qualitative risk factors both internal and external to the Company.

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The allowances established for probable losses on specific loans are based on a regular analysis and evaluation of impaired loans. Loans are classified based on an internal credit risk grading process that evaluates, among other things: (i) the borrower’s ability to repay; (ii) the underlying collateral, if any; and (iii) the economic environment and industry in which the borrower operates. The initial analysis is performed by the relationship manager and credit rating is reviewed and approved by the Chief Credit Officer, Deputy Chief Credit Officer or the Bank President.

Specific valuation allowances are established when the discounted cash flows (or collateral value or observable market price) of an impaired loan is lower than the carrying value of that loan. Historical valuation allowances are calculated based on the historical loss experience of specific types of loans and the internal risk grade of such loans at the time they were charged-off. The Company calculates historical loss ratios, based on a rolling five year average, for classification of similar loans based on the proportion of actual charge-offs experienced to the total population of loans in the category. The historical loss ratios are periodically updated based on actual charge-off experience.

The allowance calculation methodology includes further segregation of loan classes into risk rating categories. The borrower’s overall financial condition, repayment sources, guarantors and value of collateral, if appropriate, are evaluated annually for commercial loans or when credit deficiencies arise, such as delinquent loan payments, for commercial and consumer loans. Credit quality risk ratings include regulatory classifications of special mention, substandard, doubtful and loss. Loans classified special mention have potential weaknesses that deserve management’s close attention. If uncorrected, the potential weaknesses may result in deterioration of the repayment prospects. Loans classified substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They include loans that are inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified doubtful have all the weaknesses inherent in loans classified substandard with the added characteristic that collection or liquidation in full, on the basis of current conditions and facts, is highly improbable. Loans classified as a loss are considered uncollectible and are charged to the allowance for loan losses. Loans not classified are rated pass.

In general, such valuation allowances are determined by evaluating, among other things: (i) the experience, ability and effectiveness of the Company’s lending management and staff; (ii) the effectiveness of the Company’s loan policies, procedures and internal controls; (iii) changes in asset quality; (iv) changes in nature and loan portfolio volume; (v) the composition and concentrations of credit; (vi) the effectiveness of the loan review function; (vii) the impact of national and local economic business conditions; and (viii) the impact of external factors, such as competition or legal and regulatory requirements. The results are then input into a “general allocation matrix” to determine an appropriate general valuation allowance. Loan losses are charged-off in the period the loans, or portions thereof, are deemed uncollectible. Generally, the Company will record a loan charge-off (including a partial charge-off) to reduce a loan to the estimated fair value of the underlying collateral, less costs to sell, for collateral dependent loans. Subsequent recoveries, if any, are credited to the allowance for loan and lease losses. Management regularly reviews the loan portfolio and makes adjustments for loan losses, in order to maintain the allowance for loan and lease losses in accordance with U.S. GAAP.

Premises and Equipment

Premises and equipment are stated at cost less accumulated depreciation or amortization. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the related assets, except for land which is stated at cost. The useful lives of premises and equipment are: 40 years for bank premises; 3 to 5 years for computer equipment and software; and 5 to 10 years for furniture and equipment.

Leasehold improvements are amortized on a straight-line basis over the lesser of the lease terms, including certain renewals that were deemed probable at lease inception, or the estimated useful lives of the improvements. Purchased software and external direct costs of computer software developed for internal use are capitalized provided certain criteria are met and amortized over the useful lives of the software. Rent expense and rental income on operating leases are recorded using the straight-line method over the appropriate lease terms.

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The Bank reviews the carrying value of long-lived assets and certain identifiable intangibles for impairment whenever events and changes in circumstances indicate that the carrying amount of an asset may not be recoverable, as prescribed by ASC Topic 360, Accounting for the Impairment or Disposal of Long-Lived Assets.

Other Real Estate Owned (“OREO”) and Repossessed Assets

Real estate properties acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at their fair value less estimated disposition costs. When such assets are acquired, any shortfall between the loan carrying value and the estimated fair value of the underlying collateral less disposition costs is recorded as an adjustment to the allowance for loan and lease losses while any excess is recognized in income. The Company periodically performs a valuation of the property held; any excess of carrying value over fair value less disposition costs is charged to earnings as impairment. Routine maintenance and real estate taxes are expensed as incurred.

Bank Owned Life Insurance (“BOLI”)

The Bank owns life insurance policies on certain former directors. These policies are recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement, if applicable. Increases in the cash surrender value of these policies are included in noninterest income in the Consolidated Statements of Income. The Company’s BOLI policies are invested in general account and hybrid account products that have been underwritten by highly-rated third party insurance carriers.

Goodwill and Other Intangible Assets

Goodwill represents the excess of the purchase price over the underlying fair value of merged entities. We assess goodwill for impairment annually as of December 31 of each year. The Company has one reporting unit, the Bank. If certain events occur which indicate goodwill might be impaired between annual tests, goodwill must be tested when such events occur. In making this assessment, we consider a number of factors including operating results, business plans, economic projections, anticipated future cash flows, current market data, etc. There are inherent uncertainties related to these factors and our judgment in applying them to the analysis of goodwill impairment. Changes in economic and operating conditions could result in goodwill impairment in future periods. The Bank did not identify any impairment on its outstanding goodwill from its most recent testing which was performed as of December 31, 2017. Goodwill was evaluated in accordance with ASC 350-20 using a qualitative analysis. Core deposit intangible (“CDI”) is a measure of the value of checking and savings deposit relationships acquired in a business combination. The fair value of the CDI stemming from any given business combination is based on the present value of the expected cost savings attributable to the core deposit funding relative to an alternative source of funding. CDI is amortized over the estimated useful lives of the existing deposit relationships acquired, but does not exceed 12 years. The Company evaluates such identifiable intangibles for impairment when events and circumstances indicate that its carrying amount may not be recoverable. If an impairment loss is determined to exist, the loss is reflected as an impairment charge in the Consolidated Statements of Income for the period in which such impairment is identified. No impairment charges were required to be recorded for the years ended December 31, 2017 or 2016.

Preferred Stock

In 2011, as voted upon by its shareholders during the annual meeting, the Company established a $1 par Series A preferred stock whereby shareholders of record owning less than 5,000 common shares would be reclassified into one-for-one share of Series A preferred stock. At December 31, 2016, the Company had 170,236 Series A preferred shares outstanding. On February 23, 2017, we reclassified our 170,236 shares of Series A preferred stock into common stock on a one-for-one basis.

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Comprehensive Income

The Company presents as a component of comprehensive income the amounts from transactions and other events, which currently are excluded from the consolidated statements of income and are recorded directly to shareholders’ equity. These amounts consist of unrealized holding gains (losses) on available for sale securities.

Income Taxes (As Restated)

Income tax expense is determined using the asset and liability method and consists of income taxes that are currently payable and deferred income taxes. Deferred income tax expense (benefit) is determined by recognizing deferred tax assets and liabilities for future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates that are expected to apply to taxable income in years in which those temporary differences are expected to be recovered or settled. Changes in tax rates on deferred tax assets and liabilities are recognized in income in the period that includes the enactment date. A valuation allowance is established for deferred tax assets when management determines that it is more likely than not that some portion or all of a deferred tax asset will not be realized. In making such determinations, the Company considers all available positive and negative evidence that may impact the realization of deferred tax assets. These considerations include future reversals of existing taxable temporary differences, projected future taxable income, and available tax planning strategies.

The Company files a consolidated federal income tax return including the results of its wholly owned subsidiary, the Bank. The Company estimates income taxes payable based on the amount it expects to owe the various tax authorities (i.e., federal and state). Income taxes represent the net estimated amount due to, or to be received from, such tax authorities. In estimating income taxes, management assesses the relative merits and risks of the appropriate tax treatment of transactions, taking into account statutory, judicial, and regulatory guidance in the context of the Company’s tax position. Although the Company uses the best available information to record income taxes, underlying estimates and assumptions can change over time as a result of unanticipated events or circumstances such as changes in tax laws and judicial guidance influencing its overall tax position.

An uncertain tax position is recognized only if it is more-likely-than-not to be sustained upon examination, including resolution of any related appeals or litigation process, based on the technical merits of the position. The amount of tax benefit recognized in the financial statements is the largest amount of benefit that is more than fifty percent likely to be sustained upon ultimate settlement of the uncertain tax position. If the initial assessment fails to result in recognition of a tax benefit, the Company subsequently recognizes a tax benefit if there are changes in tax law or case law that raise the likelihood of prevailing on the technical merits of the position to more-likely-than-not, the statute of limitations expires, or there is a completion of an examination resulting in a settlement of that tax year or position with the appropriate agency.

Management has analyzed the tax positions taken by the Company, and has recorded an uncertain tax position at December 31, 2017 and 2016 arising from a deduction taken on the 2016 federal return related to a request for change in accounting method. The total amount of the recorded uncertain tax position at both December 31, 2017 and 2016 was $903 thousand and is included in other liabilities. The Company’s policy is to classify interest and penalties associated with income taxes within other expenses. The Company did not record interest and penalties associated with income taxes at December 31, 2017 or 2016.

The Company is subject to routine audits by taxing jurisdictions; however, there are currently no audits in progress for any tax periods. Management believes it is no longer subject to income tax examinations for years prior to 2014.

Off-Balance Sheet Arrangements

The Company enters into contractual loan commitments to extend credit, normally with fixed expiration dates or termination clauses, at specified rates and for specific purposes. Since a portion of the commitments are expected

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to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Substantially all of the commitments to extend credit are contingent upon customers maintaining specific credit standards until the time of loan funding. The Company decreases its exposure to loss under these commitments by subjecting them to credit approval and monitoring procedures.

Standby letters of credit are written conditional commitments issued by the Company to guarantee the performance of a customer to a third party. In the event the customer does not perform in accordance with the terms of the agreement with the third party, the Company would be required to fund the commitment. The maximum potential amount of future payments the Company could be required to make is represented by the contractual amount of the commitment. If the commitment is funded, the Company would be entitled to seek recovery from the customer. The Company’s policies generally require that standby letter of credit arrangements contain security and debt covenants similar to those contained in loan agreements.

Stock-based Compensation

The Company sponsors incentive stock option plans established in 2008 (the “2008 Stock Plan”) and in 2017 (the “2017 Stock Plan”) under which options may be granted periodically to all full-time employees and directors of the Company or its affiliates at a specific exercise price to acquire shares of the Company’s common stock. Shares are issued out of authorized unissued common shares. Compensation cost is measured based on the estimated fair value of the award at the grant date and is recognized in earnings on a straight-line basis over the requisite service period. The fair value of stock options is estimated at the date of grant using the Black-Scholes option pricing model. This model requires assumptions as to the expected stock volatility, dividends, terms and risk-free rates. The Company uses the calculated value method to account for its options. Management determined that the SNL Small Cap U.S. Bank Index is representative of the Company’s industry and has used the historical closing return values of that index to estimate volatility. The expected term represents the period of time that options are expected to be outstanding from the grant date. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for the appropriate life of each option.

Earnings per Common Share

The Company presents basic and diluted earnings per common share (“EPS”) data for its common stock. Basic EPS is calculated by dividing the net income attributable to shareholders of the Company by the weighted average number of shares of common stock outstanding during the period. Diluted EPS is determined by adjusting the profit or loss attributable to shareholders and the weighted average number of shares of common stock outstanding adjusted for the effects of all dilutive potential common shares comprised of options granted and warrants. Potential common stock equivalents that have been issued by the Company related to outstanding stock options and warrants are determined using the treasury stock method, while potential common shares related to Series A Preferred stock are determined using the “if converted” method.

The Company’s Series A Preferred stock are considered participating securities under ASC 260, “Earnings Per Share” which means the security may participate in undistributed earnings with common stock. The holders of the Series A Preferred Stock would be entitled to share in dividends, on an as-converted basis, if the holders of common stock were to receive dividends, other than dividends in the form of common stock. In accordance with ASC 260, a company is required to use the two-class method when computing EPS when a company has a security that qualifies as a “participating security.” The two-class method is an earnings allocation formula that determines EPS for each class of common stock and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings. In determining the amount of net earnings to allocate to common stock holders, earnings are allocated to both common and participating securities based on their respective weighted-average shares outstanding for the period. Diluted EPS for the Company’s common stock is computed using the more dilutive of the two-class method or the if-converted method.

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Segment Reporting

The Company operates in one reportable segment of business, Community Banking, which includes the Bank, the Company’s sole banking subsidiary. Through the Bank, the Company provides a broad range of retail and commercial banking services. Management makes operating decisions and assesses performance based on an ongoing review of these banking operations, which constitute the Company’s only operating segment.

Reclassifications

Certain reclassifications have been made to the 2016 information to conform to the 2017 presentation. The reclassifications had no effect on results of operations or shareholders’ equity.

Recently Issued Accounting Pronouncements

ASU 2018-02, “Income Statement-Reporting Comprehensive Income (Topic 220)” issued in February 2018, is effective for all entities for fiscal years beginning after December 15, 2018; however, the Company elected to early adopt ASU 2018-02 as of December 31, 2017. ASU 2018-02 allows an entity an election to reclassify the income tax effects of items within accumulated other comprehensive to retained earnings. The amount of the reclassification includes the effect of the change in U.S. federal corporate income tax rate on the gross deferred tax amounts and related valuation allowances, if any. If an entity does not make this election, the amendment requires the entity to disclose that an election was not made to make the reclassification. The impact of adopting ASU 2018-02 in the current year was not material to the Company’s consolidated financial statements.

ASU 2017-09, “Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting.” ASU 2017-09 seeks to provide clarity, reduce diversity in practice, and reduce cost and complexity when applying the guidance in Topic 718, Compensation-Stock Compensation, regarding a change to the terms or conditions of a share-based payment award. In fact, ASU 2017-09 provides guidance concerning which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. Specifically, an entity is to account for the effects of a modification, unless all of the following are satisfied: (1) the fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the modified award is the same as the fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the original award immediately before the original award is modified; (2) the vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified; and (3) the classification of the modified award as an equity instrument or as a liability instrument is the same as the classification of the original award immediately before the original award is modified. Note that the current disclosure requirements in Topic 718 apply regardless of whether an entity is required to apply modification accounting under the amendments in this ASU. The amendments of ASU 2017-09 are effective for all entities for interim and annual periods beginning after December 15, 2017 and must be applied prospectively to awards modified on or after the adoption date. Management has evaluated the amendments of ASU 2017-09 and determined that the adoption of this ASU will have no impact on the Company’s consolidated financial statements. However, should the Company modify the terms or conditions of any share-based payment award in the future, this modification would be evaluated and disclosed as appropriate based on the amendments of ASU 2017-09.

ASU 2017-08, “Receivables-Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities.” Issued in March 2017, ASU 2017-08 amends the amortization period for certain purchased callable debt securities held at a premium. In particular, the amendments in ASU 2017-08 require the premium to be amortized to the earliest call date. The amendments do not, however, require an accounting change for securities held at a discount; instead, the discount continues to be amortized to maturity. Notably, the amendments in this ASU more closely align the amortization period of premiums and discounts to expectations incorporated in market pricing on the underlying securities. Securities within the scope of ASU 2017-08 are purchased debt securities that have explicit, non-contingent call features that are callable at fixed

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prices and on preset dates. The amendments of ASU 2017-08 become effective for public entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2018 and for other entities for periods beginning after December 15, 2019. Management will adopt this ASU using the public company effective date as early adoption is permitted and is currently evaluating the impact this ASU will have on the consolidated financial statements; however, the adoption of ASU 2017-08 is not expected to have a material impact on the Company’s consolidated financial statements.

ASU 2017-04, “Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” Issued in January 2017, ASU 2017-04 simplifies the manner in which an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. In computing the implied fair value of goodwill under Step 2, an entity, prior to the amendments in ASU 2017-04, had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities, including unrecognized assets and liabilities, in accordance with the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. However, under the amendments in ASU 2017-04, an entity should (1) perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount, and (2) recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, with the understanding that the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, ASU 2017-04 removes the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails such qualitative test, to perform Step 2 of the goodwill impairment test. ASU 2017-04 is effective prospectively for public entities for annual, or any interim, goodwill impairment tests in fiscal years beginning after December 15, 2019 and for all other entities for impairment tests in fiscal years beginning after December 15, 2021. Management will adopt this ASU using the public company effective date as early adoption is permitted and will continue to evaluate the impact this ASU will have on the consolidated financial statements through its effective date; however, the adoption of ASU 2017-04 is not expected to have a material impact on the Company’s consolidated financial statements.

ASU 2017-01, “Business Combinations (Topic 805)—Clarifying the Definition of a Business.” Issued in January 2017, ASU 2017-01 clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses, which determines whether goodwill should be recorded or not. The amendments in ASU No. 2017-01 provide a screen to determine when a set of assets and activities (collectively, a “set”) is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. This screen reduces the number of transactions that need to be further evaluated. If, however, the screen is not met, then the amendments in ASU 2017-01 require that to be considered a business, a set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output and remove the evaluation of whether a market participant could replace missing elements. The revised definition will result in more transactions being recorded as asset acquisitions or dispositions as opposed to business acquisitions or dispositions. The amendments of ASU 2017-01 are effective for public business entities for fiscal years beginning after December 15, 2017, and for private companies for fiscal years beginning after December 15, 2018. Management has elected to adopt this ASU using the private company effective date and is currently evaluating the impact this ASU will have on the consolidated financial statements; however, the adoption of ASU 2017-01 is not expected to have a material impact on the Company’s consolidated financial statements.

In November 2016, the FASB issued ASU No. 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force).” The amendments in this ASU require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amendments in

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this ASU do not provide a definition of restricted cash or restricted cash equivalents. The amendments in this ASU are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years and for all other entities for fiscal years beginning after December 15, 2018. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The amendments in this ASU should be applied using a retrospective transition method to each period presented. The Company will adopt this ASU using the public company effective date as early adoption is permitted and has evaluated the provisions of ASU No. 2016-18 to determine the potential impact of the new standard and has determined that it will not have a material impact on the Company’s financial position, results of operations or cash flows.

In October 2016, the FASB issued ASU No. 2016-16, “Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory.” The objective of issuing this ASU is to improve the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. Current GAAP prohibits the recognition of current and deferred income taxes for an intra-entity asset transfer until the asset has been sold to an outside party. This prohibition on recognition is an exception to the principle of comprehensive recognition of current and deferred income taxes in GAAP. As such, the Board decided that an entity should recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. Consequently, the amendments in this guidance eliminate the exception for an intra-entity transfer of an asset other than inventory. The amendments of this ASU are effective for public business entities for fiscal years beginning after December 15, 2017, and for private companies for fiscal years beginning after December 15, 2018. Early adoption is permitted for all entities as of the beginning of an annual reporting period for which financial statements (interim or annual) have not been issued or made available for issuance. That is, earlier adoption should be in the first interim period if an entity issues interim financial statements. Management has elected to adopt this ASU using the private company effective date and is currently evaluating this guidance to determine the impact on its consolidated financial position, results of operations or cash flows.

ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.” Issued in August 2016, ASU 2016-15 provides guidance to reduce the diversity in practice of how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments of ASU 2016-15 provide guidance on eight specific cash flow items: (i) debt prepayment or debt extinguishment costs; (ii) settlement of zero-coupon bonds; (iii) contingent consideration payments made after a business combination; (iv) proceeds from the settlement of insurance claims; (v) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies; (vi) distributions received from equity method investees; (vii) beneficial interests in securitization transactions and (viii) separately identifiable cash flows and application of the predominance principle. The amendments of ASU 2016-15 are effective for public entities for interim and annual periods beginning after December 15, 2017 and for all other entities for periods beginning after December 15, 2018. Management plans to adopt the amendments of ASU 2016-15 during the first quarter of 2018 and has evaluated the amendments of ASU 2016-15 and does not believe that adoption of this ASU will impact the Company’s existing presentation of the applicable cash receipts and cash payments on its consolidated statements of cash flows.

ASU 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” Issued in June 2016, ASU 2016-13 will add FASB ASC Topic 326, “Financial Instruments-Credit Losses” and finalizes amendments to FASB ASC Subtopic 825-15, “Financial Instruments-Credit Losses.” The amendments of ASU 2016-13 are intended to provide financial statement users with more decision-useful information related to expected credit losses on financial instruments and other commitments to extend credit by replacing the current incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to determine credit loss estimates. The amendments of ASU 2016-13 eliminate the probable initial recognition threshold and, in turn, reflect an entity’s current estimate of all expected credit losses. ASU 2016-13 does not specify the method for measuring expected credit losses, and an entity is allowed to apply methods that reasonably reflect its

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expectations of the credit loss estimate. Additionally, the amendments of ASU 2016-13 require that credit losses on available for sale debt securities be presented as an allowance rather than as a write-down. The amendments of ASU 2016-13 are effective for public entities for interim and annual periods beginning after December 15, 2019 and for all other entities for periods beginning after December 15, 2020. Earlier application is permitted for interim and annual periods beginning after December 15, 2018. Management has elected to adopt this ASU using the private company effective date and is currently evaluating the impact this ASU will have on the consolidated financial statements and that evaluation will depend on economic conditions and the composition of the Company’s loan and lease portfolio at the time of adoption.

ASU 2016-09, “Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.” Issued in March 2016, ASU 2016-09 seeks to reduce complexity in accounting standards by simplifying several aspects of the accounting for share-based payment transactions. The amendments of ASU 2016-09 include: (i) requiring all excess tax benefits and tax deficiencies to be recognized as income tax expense or benefit in the income statement; (ii) requiring excess tax benefits to be classified along with other income tax cash flows as an operating activity on the statement of cash flow; (iii) allowing an entity to make an entity-wide accounting policy election to either estimate the number of awards that expect to vest or account for forfeitures when they occur; (iv) change the threshold to qualify for equity classification to permit withholding up to the maximum statutory tax rates in the applicable jurisdictions; and (v) requiring that cash paid by an employer when directly withholding shares for tax-withholding purposes to be classified as a financing activity on the statement of cash flows. The amendments of ASU 2016-09 became effective for the Company on January 1, 2017 and did not have a material impact on the consolidated financial statements.

ASU 2016-02, “Leases (Topic 842).” Issued in February 2016, ASU 2016-02 was issued by the FASB to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and by disclosing key information about leasing arrangements. ASU 2016-02 will, among other things, require lessees to recognize a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. ASU 2016-02 does not significantly change lease accounting requirements applicable to lessors; however, the ASU contains some targeted improvements that are intended to align, where necessary, lessor accounting with the lessee accounting model and with the updated revenue recognition guidance issued in 2014. The amendments of ASU 2016-02 are effective for public entities for interim and annual periods beginning after December 15, 2018 and for other entities for periods beginning after December 15, 2019. The adoption of this ASU will result in an increase to the Consolidated Balance Sheets for right-of-use assets and associated lease liabilities for operating leases in which the Company is the lessee. Management will adopt this ASU using the public company effective date as early adoption is permitted and is currently evaluating the impact this ASU will have on the consolidated financial statements and is in the process of preparing an inventory of existing leases and service contracts that could contain right-of-use assets.

ASU 2016-01, “Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (An Amendment of the FASB Accounting Standards Codification).” Issued in January 2016, ASU 2016-01 is intended to enhance the reporting model for financial instruments to provide users of financial statements with improved decision-making information. The amendments of ASU 2016-01 include: (i) requiring equity investments, except those accounted for under the equity method of accounting or those that result in the consolidation of an investee, to be measured at fair value with changes in fair value recognized in net income; (ii) requiring a qualitative assessment to identify impairment of equity investments without readily determinable fair values; (iii) eliminating the requirement to disclose the method and significant assumptions used to estimate the fair value for financial instruments measured at amortized cost on the balance sheet; (iv) requiring the use of the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (v) requiring an entity that has elected the fair value option to measure the fair value of a liability to present separately in other comprehensive income the portion of the change in the fair value resulting from a change in the instrument-specific credit risk; (vi) requiring separate presentation of financial assets and

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financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements and (vii) clarifying that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available for sale securities in combination with the entity’s other deferred tax assets. The amendments of ASU 2016-01 are effective for public entities for interim and annual periods beginning after December 15, 2017 and for all other entities for periods beginning December 15, 2018. Management plans to adopt the amendments of ASU 2016-01 during the first quarter of 2018. Management is currently evaluating the impact this ASU will have on the consolidated financial statements.

ASU 2014-09, “Revenue from Contracts with Customers (Topic 606).” Issued in May 2014, ASU 2014-09 will add FASB ASC Topic 606, “Revenue from Contracts with Customers,” and will supersede revenue recognition requirements in FASB ASC Topic 605, “Revenue Recognition,” as well as certain cost guidance in FASB ASC Topic 605-35, “Revenue Recognition–Construction-Type and Production-Type Contracts.” ASU 2014-09 provides a framework for revenue recognition that replaces the existing industry and transaction specific requirements under the existing standards. ASU 2014-09 requires an entity to apply a five-step model to determine when to recognize revenue and at what amount. The model specifies that revenue should be recognized when (or as) an entity transfers control of goods or services to a customer at the amount in which the entity expects to be entitled. Depending on whether certain criteria are met, revenue should be recognized either over time, in a manner that depicts the entity’s performance, or at a point in time, when control of the goods or services are transferred to the customer. ASU 2014-09 provides that an entity should apply the following steps: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when, or as, the entity satisfies a performance obligation. In addition, the existing requirements for the recognition of a gain or loss on the transfer of non-financial assets that are not in a contract with a customer are amended to be consistent with the guidance on recognition and measurement in ASU 2014-09. The amendments of ASU 2014-09 may be applied either retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial application. If the transition method of application is elected, the entity should also provide the additional disclosures in reporting periods that include the date of initial application of (1) the amount by which each financial statement line item is affected in the current reporting period, as compared to the guidance that was in effect before the change, and (2) an explanation of the reasons for significant changes. ASU 2015-14, “Revenue from Contracts with Customers (Topic 606)-Deferral of the Effective Date,” issued in August 2015, defers the effective date of ASU 2014-09 by one year. ASU 2015-14 provides that the amendments of ASU 2014-09 become effective for public business entities for fiscal years beginning after December 15, 2017, and for private companies for fiscal years beginning after December 15, 2018. All subsequently issued ASU’s which provide additional guidance and clarifications to various aspects of FASB ASC Topic 606 will become effective when the amendments of ASU 2014-09 become effective. These subsequently issued ASU’s include ASU 2016-08 “Revenue from Contracts with Customers (Topic 606)-Principal versus Agent Considerations,” ASU 2016-10 “Revenue from Contracts with Customers (Topic 606)-Identifying Performance Obligations and Licensing,” and ASU 2016-12 “Revenue from Contracts with Customers (Topic 606)-Narrow Scope Improvements and Practical Expedients.” These amendments clarify the main provisions of ASU-2014-09 with respect to specific revenue types based upon implementation questions submitted. Specifically, revenue in which a third party satisfies a portion of the performance obligations, revenue from licensing activities, and the assessment of collectability, treatment of sales taxes, non-cash consideration, and contract modifications at transition. Management has elected to adopt this ASU using the private company effective date and has completed an analysis to determine which revenue streams are within the scope of ASU 2014-09 and the related clarifying ASU’s and has determined that interest income and revenue generated from transfers and servicing of financial instruments, specifically, gain on sale of loans and servicing fees are out of scope. Management will adopt this ASU using the private company effective date and is continuing to evaluate the most appropriate transition method of application and the impact that ASU 2014-09 and the related clarifying ASU’s will have on in scope revenue streams, specifically, service charges and fees, mortgage referral fees, and gains or losses on other real estate owned.

F-54

NOTE 2. BUSINESS COMBINATIONS

On June 24, 2016, the Company completed the acquisition of one branch location from PlainsCapital Bank. This transaction provided the Company the opportunity to enhance and strengthen its footprint in The Woodlands. The Company assumed approximately $36.7 million of branch deposits, paying a 1.75% premium on the average balance of deposits assumed.

The following is a condensed balance sheet disclosing the estimated fair value amount of the branch acquired in the branch acquisition assigned to the major consolidated asset and liability captions at the acquisition date (dollars in thousands):

Assets:
Cash and cash equivalents	$	31,889
Premises and equipment, net		4,210
Core deposit intangible		642
Total assets	$	36,741
Liabilities:
Deposits	$	36,696
Other liabilities		45
Total liabilities	$	36,741

The core deposit intangible asset recognized as part of the branch acquisition is being amortized over its estimated useful life of approximately 10 years using the straight-line method.

Pro forma income statements are not being presented as the information is not practicable to produce, as the information is not maintained at the branch level.

All purchase accounting adjustments are final as of December 31, 2016.

NOTE 3. INVESTMENT SECURITIES

The amortized cost, gross unrealized gains and losses and approximate fair values of securities available for sale are as follows:

	Amortized Cost		Unrealized				Fair Value
December 31, 2017			Gains		Losses
	(Dollars in thousands)
Available for sale:								—
U.S. Government agencies	$	2,010	$	—	$	61	$	1,949
Residential mortgage-backed securities		30,156		—		527		29,629
Corporate bonds and other debt securities		5,711		—		46		5,665
Total available for sale	$	37,877	$	—	$	634	$	37,243

	Amortized Cost		Unrealized				Fair Value
December 31, 2016			Gains		Losses
	(Dollars in thousands)
Available for sale:
U.S. Government agencies	$	—	$	—	$	—	$	—
Residential mortgage-backed securities		5		—		—		5
Corporate bonds and other debt securities		—		—		—		—
Total available for sale	$	5	$	—	$	—	$	5

F-55

There were no securities pledged at December 31, 2017 or 2016, respectively.

The amortized cost and estimated fair value of securities available for sale, by contractual maturity, are as follows:

December 31, 2017	Amortized Cost		Fair Value
	(Dollars in thousands)
Available for sale:
Due in one year or less	$	—	$	—
Due after one year through five years		4,142		4,110
Due after five years through ten years		3,104		3,035
Due after ten years		475		469
Residential mortgage-backed securities		30,156		29,629
Total available for sale	$	37,877	$	37,243

For purposes of the maturity table, residential mortgage-backed securities, the principal of which are repaid periodically, are presented as a single amount. The expected lives of these securities will differ from contractual maturities because borrowers may have the right to prepay the underlying loans with or without prepayment penalties.

The following tables present the estimated fair values and gross unrealized losses on investment securities available for sale, aggregated by investment category and length of time individual securities have been in a continuous unrealized loss position as of the periods presented:

	Less than 12 Months				12 Months or More				Total
December 31, 2017	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
	(Dollars in thousands)
Available for sale:
U.S. Government agencies	$	1,949	$	61	$	—	$	—	$	1,949	$	61
Residential mortgage-backed securities		29,627		527		—		—	$	29,627	$	527
Corporate bonds and other debt securities		5,665		46		—		—		5,665		46
Total available for sale	$	37,241	$	634	$	—	$	—	$	37,241	$	634

Less than 12 Months

12 Months or More

Total

December 31, 2016

Fair Value

Unrealized Loss

Fair Value

Unrealized Loss

Fair Value

Unrealized Loss

(Dollars in thousands)

Available for sale:

U.S. Government agencies

$

—

$

—

$

—

$

—

$

—

$

—

Residential mortgage-backed securities

—

—

—

—

—

—

Corporate bonds and other debt securities

—

—

—

—

—

—

Total available for sale

$

—

$

—

$

—

$

—

$

—

$

—

At December 31, 2017, the Company’s security portfolio consisted of 50 securities, of which 49 were in an unrealized loss position. All of the 49 securities in an unrealized loss position at December 31, 2017 were in an unrealized loss position for less than 12 months. The unrealized losses for these securities resulted primarily from changes in interest rates and spreads.

In October 2016, the Company sold its $6.7 million held-to-maturity investment portfolio and realized a gross pre-tax gain of $96 thousand to provide liquidity for its strong outlook for loan growth. In accordance with

F-56

regulatory and accounting requirements, the Company is prohibited from classifying security purchases as held to maturity for a period of two years.

The Company monitors its investment securities for OTTI. Impairment is evaluated on an individual security basis considering numerous factors, and its relative significance. The Company has evaluated the nature of unrealized losses in the investment securities portfolio to determine if OTTI exists. The unrealized losses relate to changes in market interest rates and specific market conditions that do not represent credit-related impairments. Furthermore, the Company does not intend to sell nor is it more likely than not that it will be required to sell these investments before the recovery of their amortized cost basis. Management has completed an assessment of each security in an unrealized loss position for credit impairment and has determined that no individual security was other-than-temporarily impaired at December 31, 2017. The following describes the basis under which the Company has evaluated OTTI:

U.S. Government Agencies and Residential Mortgage-Backed Securities (“MBS”):

The unrealized losses associated with U.S. Government agencies and residential MBS are primarily driven by changes in interest rates. These securities have either an explicit or implicit U.S. government guarantee.

Corporate Bonds & Other Debt Securities:

Securities were generally underwritten in accordance with the Company’s investment standards prior to the decision to purchase, without relying on a bond issuer’s guarantee in making the investment decision. These investments are investment grade and will continue to be monitored as part of the Company’s ongoing impairment analysis, but are expected to perform in accordance with their terms.

There were no securities sold for the year ended December 31, 2017. Sale proceeds and gross realized gains and losses on the sale of securities available for sale are shown below. The cost of securities sold is based on the specific identification method.

	Years Ended December 31,
	2017		2016
	(Dollars in thousands)
Sale proceeds from sale of available for sale securities	$	—	$	5,308
Gross realized gains	$	—	$	—
Gross realized losses		—		(27	)
Net realized gains (losses)	$	—	$	(27	)

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NOTE 4. LOANS, NET, AS RESTATED

Loans consisted of the following at December 31, 2017 and 2016:

	December 31,
	2017			2016
	(Dollars in thousands)
Commercial and industrial loans(1)	$	135,040		$	117,762
Real estate:
1-4 single family residential loans		232,510			206,641
Construction, land and development		139,470			113,316
Commercial real estate loans (including multifamily)		285,731			251,870
Consumer loans and leases		22,736			26,676
Municipal and other loans		53,632			56,596
Total loans held in portfolio(2)	$	869,119		$	772,861
Allowance for loan losses		(5,652	)		(4,357	)
Loans held in portfolio, net	$	863,467		$	768,504

(1) Balance includes $67.1 million and $58.7 million of the unguaranteed portion of SBA loans as of December 31, 2017 and 2016, respectively.

(2) Balance includes $(3.4) million and $(2.6) million of deferred fees, cost, premium and discount as of December 31, 2017 and 2016.

At December 31, 2017 and 2016, the Company had pledged loans as collateral for FHLB advances of $358.2 million and $329.2 million, respectively. The recorded investments of consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are in process as of December 31, 2017 and 2016 totaled $0 and $269 thousand, respectively.

The Company originates and sells loans secured by the SBA. The Company retains the unguaranteed portion of the loan and servicing on the loans sold and receives a fee based upon the principal balance outstanding. During the years ended December 31, 2017 and 2016, the Company sold approximately $70.3 million and $46.3 million, respectively, in loans to third parties. The loan sales resulted in realized gains of $5.7 million and $4.4 million for the years ended December 31, 2017 and 2016, respectively.

In the ordinary course of business, the Company makes loans to executive officers and directors. Loans to these related parties, including companies in which they are principal owners, are as follows:

	December 31,
	2017			2016
	(Dollars in thousands)
Principal outstanding, beginning of year	$	9,036		$	1,209
Additions (reductions) of affiliations		(8,425	)		7,892
New loans made in current year		—			628
Repayments		(148	)		(693	)
Principal outstanding, end of year	$	463		$	9,036

Unfunded commitments to related parties were $0 thousand and $30 thousand at December 31, 2017 and 2016, respectively.

NOTE 5. ALLOWANCE FOR LOAN AND LEASE LOSSES

The allowance for loan and lease losses is a reserve established through a provision for loan losses charged to expense, which represents management’s best estimate of probable losses that have been incurred within the

F-58

existing portfolio of loans. The allowance, in the judgment of management, is necessary to reserve for estimated loan losses and risks inherent in the loan portfolio. The methodology is based on historical loss experience by type of credit and internal risk grade, changes in the composition and volume of the portfolio, and specific loss allocations, with adjustments for current events and conditions. The Company’s process for determining the appropriate level of the allowance for loan and lease losses is designated to account for credit deterioration as it occurs.

During 2017, the Company refined its allowance for loan loss methodology based upon management judgement and applicable regulatory guidance. The calculation of reserves on loans collectively evaluated for impairment was altered to reflect five years of historical loss experience which more appropriately matches the weighted average life of loans in the portfolio. Additionally, the calculated historical loss experience is now allocated across the portfolio’s risk rates using a probability of default curve constructed from the Bank’s historical default data. Management also updated the qualitative component of the reserve on loans collectively evaluated for impairment to allow for a greater sensitivity to current trends.

Changes in the allowance for loan and lease losses by loan portfolio and segment for the years ended December 31, 2017 and 2016 are as follows:

	Allowance Rollforward
Year Ended December 31, 2017	Beginning Balance		Charge- offs			Recoveries		Provision		Ending Balance
	(Dollars in thousands)
Commercial and industrial loans	$	2,347	$	(974	)	$	7	$	1,666	$	3,046
Real estate:
1-4 single family residential loans		647		(23	)		—		278		902
Construction, land and development loans		364		—			—		77		441
Commercial real estate loans (including multifamily)		667		(34	)		—		265		898
Consumer loans and leases		186		(156	)		—		168		198
Municipal and other loans		146		—			—		21		167
Ending Allowance Balance	$	4,357	$	(1,187	)	$	7	$	2,475	$	5,652

	Allowance Rollforward
Year Ended December 31, 2016	Beginning Balance		Charge- offs			Recoveries		Provision			Ending Balance
	(Dollars in thousands)
Commercial and industrial loans	$	1,119	$	(282	)	$	58	$	1,452		$	2,347
Real estate:
1-4 single family residential loans		623		(3	)		—		27			647
Construction, land and development loans		398		(32	)		30		(32	)		364
Commercial real estate loans (including multifamily)		670		—			—		(3	)		667
Consumer loans and leases		89		(113	)		6		204			186
Municipal and other loans		177		—			—		(31	)		146
Ending Allowance Balance	$	3,076	$	(430	)	$	94	$	1,617		$	4,357

Credit Quality Indicators

In evaluating credit risk, the Company looks at multiple factors; however, management considers delinquency status to be the most meaningful indicator of the credit quality of 1-4 single family residential, home equity loans and lines of credit and consumer loans. Delinquency statistics are updated at least monthly. Internal risk ratings are considered the most meaningful indicator of credit quality for commercial, construction, land and development and commercial real estate loans. Internal risk ratings are updated on a continuous basis.

F-59

The following tables present an aging analysis of the recorded investment for delinquent loans by portfolio and segment:

	Accruing
December 31, 2017	Current		30 to 59 Days Past Due		60 to 89 Days Past Due		90 Days or More Past Due		Non- Accrual		Total
			(Dollars in thousands)
Commercial and industrial loans	$	132,775	$	302	$	3	$	33	$	1,927	$	135,040
Real estate:
1-4 single family residential loans		230,738		637		—		—		1,135		232,510
Construction, land and development		139,470		—		—		—		—		139,470
Commercial real estate loans (including multifamily)		284,869		415		—		—		447		285,731
Consumer loans and leases		22,538		98		47		—		53		22,736
Municipal and other loans		53,632		—		—		—		—		53,632
Total loans	$	864,022	$	1,452	$	50	$	33	$	3,562	$	869,119

	Accruing
December 31, 2016	Current		30 to 59 Days Past Due		60 to 89 Days Past Due		90 Days or More Past Due		Non- Accrual		Total
			(Dollars in thousands)
Commercial and industrial loans	$	115,905	$	76	$	143	$	—	$	1,638	$	117,762
Real estate:
1-4 single family residential loans		204,542		803		—		—		1,296		206,641
Construction, land and development		113,312		4		—		—		—		113,316
Commercial real estate loans (including multifamily)		250,019		1,073		—		—		778		251,870
Consumer loans and leases		26,349		232		—		—		95		26,676
Municipal and other loans		56,596		—		—		—		—		56,596
Total loans	$	766,723	$	2,188	$	143	$	—	$	3,807	$	772,861

There was one loan past due greater than 90 days or more and still accruing at December 31, 2017 with a recorded investment of $33 thousand. There were no loans past due greater than 90 days or more and still accruing at December 31, 2016.

At December 31, 2017, non-accrual loans that were 30 to 59 days past due were $209 thousand, non-accrual loans that were 60 to 89 days past due were $57 thousand, and non-accrual loans that were 90 days or more past due were $427 thousand. At December 31, 2016, non-accrual loans that were 30 to 59 days past due were $77 thousand, non-accrual loans that were 60 to 89 days past due were $38 thousand, and non-accrual loans that were 90 days or more past due were $1.7 million.

Loans exhibiting potential credit weaknesses that deserve management’s close attention and that if left uncorrected may result in deterioration of the repayment capacity of the borrower are categorized as special mention. Loans with well-defined credit weaknesses including payment defaults, declining collateral values, frequent overdrafts, operating losses, increasing balance sheet leverage, inadequate cash flow, project cost overruns, unreasonable construction delays, past due real estate taxes or exhausted interest reserves are assigned an internal risk rating of substandard. Loans classified as substandard can be on an accrual or non-accrual basis, as determined by its unique characteristics. A loan with a weakness so severe that collection in full is highly questionable or improbable will be assigned an internal risk rating of doubtful.

F-60

The following table summarizes the Company’s loans by key indicators of credit quality:

December 31, 2017	Pass		Special Mention		Substandard		Doubtful
	(Dollars in thousands)
Commercial and industrial loans	$	129,288	$	2,331	$	3,421	$	—
Real estate:
1-4 single family residential loans		228,450		1,090		2,970		—
Construction, land and development		137,760		1,403		307		—
Commercial real estate loans (including multifamily)		276,096		5,877		3,758		—
Consumer loans and leases		22,528		—		208		—
Municipal and other loans		53,632		—		—		—
Total loans	$	847,754	$	10,701	$	10,664	$	—

December 31, 2016	Pass		Special Mention		Substandard		Doubtful
	(Dollars in thousands)
Commercial and industrial loans	$	111,718	$	2,142	$	3,750	$	152
Real estate:
1-4 single family residential loans		201,087		3,311		2,243		—
Construction, land and development		111,872		1,440		4		—
Commercial real estate loans (including multifamily)		245,270		2,889		3,711		—
Consumer loans and leases		26,391		103		182		—
Municipal and other loans		56,596		—		—		—
Total loans	$	752,934	$	9,885	$	9,890	$	152

Internal risk ratings and other credit metrics are key factors in identifying loans to be individually evaluated for impairment and impact management’s estimates of loss factors used in determining the amount of the allowance for loan and lease losses.

The following table shows the Company’s investment in loans disaggregated based on the method of evaluating impairment:

	Loans—Recorded Investment				Allowance for Credit Loss
December 31, 2017	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Individually Evaluated for Impairment		Collectively Evaluated for Impairment
	(Dollars in thousands)
Commercial and industrial loans	$	2,194	$	132,846	$	1,226	$	1,820
Real estate:
1-4 single family residential loans		1,292		231,218		119		783
Construction, land and development		—		139,470		—		441
Commercial real estate loans (including		447		285,284		—		898
Consumer loans and leases		53		22,683		16		182
Municipal and other loans		—		53,632		—		167
Total loans	$	3,986	$	865,133	$	1,361	$	4,291

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	Loans—Recorded Investment				Allowance for Credit Loss
December 31, 2016	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Individually Evaluated for Impairment		Collectively Evaluated for Impairment
	(Dollars in thousands)
Commercial and industrial loans	$	1,726	$	116,036	$	968	$	1,379
Real estate:
1-4 single family residential loans		1,468		205,173		—		647
Construction, land and development		—		113,316		—		364
Commercial real estate loans (including		778		251,092		15		652
Consumer loans and leases		95		26,581		51		135
Municipal and other loans		—		56,596		—		146
Total loans	$	4,067	$	768,794	$	1,034	$	3,323

The following tables set forth certain information regarding the Company’s impaired loans that were evaluated for specific reserves:

	Impaired Loans—With Allowance						Impaired Loans— With no Allowance
December 31, 2017	Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance
	(Dollars in thousands)
Commercial and industrial loans	$	1,811	$	1,850	$	1,226	$	383	$	386
Real estate:
1-4 single family residential loans		119		119		119	$	1,173		1,174
Construction, land and development		—		—		—		—		—
Commercial real estate loans (including		—		—		—	$	447		447
Consumer loans and leases		53		52		16		—		—
Municipal and other loans		—		—		—		—		—
Total loans	$	1,983	$	2,021	$	1,361	$	2,003	$	2,007

	Impaired Loans—With Allowance						Impaired Loans— With no Allowance
December 31, 2016	Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance
	(Dollars in thousands)
Commercial and industrial loans	$	1,583	$	1,603	$	968	$	143	$	144
Real estate:
1-4 single family residential loans		—		—		—		1,468		1,521
Construction, land and development		—		—		—		—		—
Commercial real estate loans (including		15		15		15		763		773
Consumer loans and leases		95		95		51		—		—
Municipal and other loans		—		—		—		—		—
Total loans	$	1,693	$	1,713	$	1,034	$	2,374	$	2,438

F-62

	Years Ended December 31,
	2017				2016
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(Dollars in thousands)
Commercial and industrial loans	$	34	$	—	$	2,287	$	—
Real estate:
1-4 single family residential loans		185		—		1,505		9
Construction, land and development		—		—		—		—
Commercial real estate loans (including multifamily)		224		—		799		8
Consumer loans and leases		53		—		97		—
Municipal and other loans		—		—		—		—
Total loans	$	496	$	—	$	4,688	$	17

Troubled Debt Restructurings:

The following table provides a summary of TDRs based upon delinquency status, all of which are considered impaired:

	December 31,
	2017				2016
	Number of contracts		Recorded Investment		Number of contracts		Recorded Investment
	(Dollars in thousands)
Performing TDRs:
Commercial and industrial loans		5	$	270		2	$	88
Real estate:
1-4 single family residential loans		—		—		2		172
Construction, land and development		—		—		—		—
Commercial real estate loans (including multifamily)		—		—		—		—
Consumer loans and leases		—		—		—		—
Municipal and other loans		—		—		—		—
Total performing TDRs		5		270		4		260
Nonperforming TDRs		10		651		4		147
Total TDRs		15	$	921		8	$	407
Allowance attributable to TDRs			$	411			$	3

F-63

The following table summarizes TDRs and includes newly designated TDRs as well as modifications made to existing TDRs. Modifications may include, but are not limited to, granting a material extension of time, entering into a forbearance agreement, adjusting the interest rate, accepting interest only payments for an extended period of time, a change in the amortization period or a combination of any of these. Post-modification balances represent the recorded investment at the end of Day 2 in which the modification was made:

	Years Ended December 31,
	2017								2016
	Number of Contracts		Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		Related Allowance		Number of Contracts		Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		Related Allowance
	(Dollars in thousands)
Commercial and industrial loans		10	$	712	$	712	$	370		6	$	239	$	239	$	3
Real estate:
1-4 single family residential						—		—		2		186		186		—
Construction, land and		—		—		—		—		—		—		—		—
Commercial real estate loans (including multifamily)		—		—		—		—		—		—		—		—
Consumer loans and leases		—		—		—		—		—		—		—		—
Municipal and other loans		—		—		—		—		—		—		—		—

There have been no defaults of troubled debt restructurings that took place within 12 months of restructure during the years ended December 31, 2017 and 2016.

NOTE 6. PREMISES AND EQUIPMENT

The major components of premises and equipment are as follows:

	December 31,
	2017			2016
	(Dollars in thousands)
Land	$	7,974		$	6,787
Building and improvements		21,228			19,030
Furniture, fixtures and equipment		8,376			7,244
Leasehold improvements		1,800			1,693
Construction in Process		9,038			—
Automobiles		898			1,555
Software		1,892			1,879
Total		51,206			38,188
Less: Accumulated depreciation		(9,017	)		(7,854	)
Total premises and equipment, net	$	42,189		$	30,334

Total depreciation expense was $1.8 million for the years ended December 31, 2017 and 2016.

The estimated costs to complete all open construction projects at December 31, 2017 was $1.9 million.

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NOTE 7. GOODWILL AND INTANGIBLES

Goodwill and other intangible assets, which consist of core deposit intangibles, are summarized as follows:

	December 31,
	2017			2016
	(Dollars in thousands)
Goodwill	$	4,485		$	4,485
Core deposit intangible		7,179			7,179
Total		11,664			11,664
Less: Accumulated amortization		(3,693	)		(2,990	)
Total, net	$	7,971		$	8,674

Amortization expense for core deposit intangibles for the year ended December 31, 2017 and 2016 totaled $703 thousand and $671 thousand, respectively.

The estimated amount of amortization expense for core deposit intangible assets to be recognized over the next five fiscal years is as follows:

Type of intangibles	2018		2019		2020		2021		2022
	(Dollars in thousands)
Core deposit intangible	$	703	$	703	$	703	$	607		371

NOTE 8. SBA SERVICING ASSET, AS RESTATED

SBA servicing assets are recognized separately when rights are acquired through the sale of SBA guaranteed portion. These servicing rights are initially measured at fair value at the date of sale and included in the gain on sale. Updated fair values are obtained from an independent third party on a quarterly basis and adjustments are presented in SBA loan servicing fees on the consolidated statements of income. To determine the fair value of SBA Servicing Rights, the Company uses market prices for comparable servicing contracts, when available, or alternatively, uses a valuation model that calculates the present value of estimated future net servicing income.

Loans serviced for others are not included in the accompanying balance sheets. The unpaid principal balances of loans serviced for others were $275.2 million and $234.4 million at December 31, 2017 and 2016, respectively.

The risks inherent in the SBA servicing asset relate primarily to changes in prepayments that result from shifts in interest rates. The following summarizes the activity pertaining to SBA servicing rights, which are in the consolidated balance sheets, for the years ended December 31, 2017 and 2016:

	December 31,
	2017			2016
	(Dollars in thousands)
Beginning balance	$	3,132		$	2,600
Origination of servicing assets		1,490			1,387
Change in fair value:
Due to run-off		(765	)		(645	)
Due to market changes		(446	)		(210	)
Ending balance	$	3,411		$	3,132

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NOTE 9. DEPOSITS

The following table sets forth the Company’s deposits by category:

	December 31,
	2017		2016
	(Dollars in thousands)
Noninterest-bearing demand deposits	$	176,726	$	171,475
Interest-bearing NOW accounts		7,318		8,302
Savings and money market accounts		243,173		215,432
Time deposits		408,151		419,229
Total deposits	$	835,368	$	814,438
Time deposits $100,000 and greater	$	314,102	$	324,735
Time deposits $250,000 and greater		82,816		77,474
Related party deposits (executive officers and directors)		13,914		21,660

The aggregate amount of overdraft demand deposits reclassified to loans was $27 thousand and $48 thousand at December 31, 2017 and 2016, respectively. The aggregate amount of maturities for time deposits for each of the five years following the latest balance sheet date totaled $276.4 million, $86.4 million, $26.3 million, $8.5 million and $10.5 million, respectively.

NOTE 10. FHLB AND OTHER BORROWINGS

The FHLB allows us to borrow, both short and long-term, on a blanket floating lien status collateralized by certain securities and loans. At December 31, 2017, the Company had additional capacity to borrow from the FHLB of $274.0 million.

Short-term borrowings

Short-term FHLB borrowings: As of December 31, 2017, the Company had $15.0 million of short-term FHLB borrowings, with an average interest rate of 1.69%. All short-term FHLB borrowings outstanding at December 31, 2017 had fixed interest rates. The Company had no short-term FHLB borrowings as of December 31, 2016.

Line of Credit: The Company entered into an unsecured line of credit with a third party lender in June 2016 which allowed it to borrow up to $10 million. The interest rate on the facility was prime rate plus 0.25% per annum, and unpaid principal and interest was due at the stated maturity on April 26, 2017. As of December 31, 2016, total borrowing capacity of $5.0 million was drawn, with an average interest rate of 4.00%.

Long-term borrowings

Line of Credit: The Company entered into an unsecured line of credit with a third party lender in May 2017 which allowed it to borrow up to $20 million. The interest rate on the facility is LIBOR plus 4.00% per annum, and unpaid principal and interest is due at the stated maturity on May 12, 2022. The line of credit may be prepaid at any time without penalty. The Company is subject to various financial covenants under this line of credit, and as of December 31, 2017 was in compliance with all covenants. As of December 31, 2017, total borrowing capacity of $12.2 million was available under this facility and $7.8 million was drawn, with an average interest rate of 5.24%.

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Long-term FHLB borrowings:

Long-term borrowings from the FHLB outstanding for the periods presented are as follows:

	December 31, 2017		Range of Contractual Interest Rates			Weighted Average Interest Rate			December 31, 2016		Range of Contractual Interest Rates			Weighted Average Interest Rate
	(Dollars in thousands)
Repayable during the years ending December 31,
2017	$	—		—			—			8,360		1.09% - 5.06	%		1.98	%
2018		1,713		1.25% - 5.02	%		1.69	%		6,013		1.25% - 5.02	%		2.03	%
2019		15,471		1.25% - 5.02	%		2.06	%		16,742		1.25% - 5.02	%		2.03	%
2020		6,968		1.48% - 5.02	%		2.16	%		7,248		1.48% - 5.02	%		2.15	%
2021		12,721		1.48% - 5.02	%		2.19	%		12,029		1.48% - 5.02	%		2.18	%
2022		13,473		1.79% - 5.02	%		2.34	%		6,328		1.79% - 5.02	%		2.19	%
2023-2031		18,277		2.10% - 5.02	%		2.49	%		9,296		2.17% - 5.02	%		2.51	%
Total long-term FHLB borrowings	$	68,623							$	66,016

For the years ended December 31, 2017 and 2016, the Company maintained long-term borrowings with the FHLB averaging $66.5 million and $56.3 million, respectively, with an average cost of approximately 2.05% and 1.94% respectively. Substantially all long-term FHLB borrowings outstanding at December 31, 2017 and 2016 had fixed interest rates.

The Company maintained four, unsecured Fed Funds lines of credit with commercial banks which provide for extensions of credit with an availability to borrow up to an aggregate $35.0 million as of December 31, 2017. There were no advances under these lines of credit outstanding as of December 31, 2016.

NOTE 11. OPERATING LEASES

Minimum future rental expense related to leased office space and equipment by the Company on non-cancelable operating lease agreements are as follows:

	December 31,
	(Dollars in thousands)
2018	$	1,497
2019		1,233
2020		805
2021		691
2022		585
Thereafter		174
Total rental expense	$	4,985

Many of the Company’s operating leases contain renewal options. Lease expenses of $2.1 million and $1.7 million for the years ended December 31, 2017 and 2016, respectively have been included in occupancy expense on the consolidated statement of income.

The Company currently leases one of its branch locations from a Company director. The amount incurred by the Company under this lease was $151 thousand for the years ended December 31, 2017 and 2016.

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NOTE 12. REGULATORY CAPITAL, AS RESTATED

The Company and the Bank are subject to risk-based capital standards by which bank holding companies and banks are evaluated in terms of capital adequacy. These regulatory capital requirements are administered by the federal banking agencies. Failure to meet minimum capital requirements can result in certain mandatory and possibly additional discretionary action by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company’s and the Bank’s assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Company’s and Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to each maintain minimum amounts and ratios. The requirements were revised and became effective on a phased-in basis beginning January 1, 2015 and include the establishment of a Common Equity Tier 1 level. The Company’s and the Bank’s Total, Tier 1 and Common Equity Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined in the regulations), and Tier 1 capital (as defined in the regulations) to average assets (as defined in the regulations) are set forth in the table below. The new risk-based capital rules require that banks and holding companies maintain a “capital conservation buffer” of 250 basis points in excess of the “minimum capital ratio”. The minimum capital ratio is equal to the prompt corrective action adequately capitalized threshold ratio. The capital conservation buffer will be phased in over four years beginning on January 1, 2016, with a maximum buffer of 0.625% of risk weighted assets for 2016, 1.25% for 2017, 1.875% for 2018 and 2.5% for 2019 and thereafter. Failure to maintain the required capital conservation buffer will result in limitations on capital distributions and on discretionary bonuses to executive officers. Management believes, as of December 31, 2017 and 2016, that the Company and the Bank met all capital adequacy requirements to which they were subject.

As of December 31, 2017, the most recent notification from the regulatory banking agencies categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as “well capitalized”, the Bank must maintain minimum Total risk-based, Tier 1 risk-based, Common Equity Tier 1 risk-based and Tier 1 leverage ratios as set forth in the table. To the knowledge of management, there are no conditions or events since these notifications that have changed the Bank’s category.

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The table below provides a comparison of the Company’s and the Bank’s risk-based capital ratios and leverage ratios to the minimum regulatory requirements as of the dates indicated:

	Actual					Minimum Capital Requirement					Minimum Capital Requirement with Capital Buffer					Minimum To Be Well Capitalized
	Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio
	(Dollars in thousands)
December 31, 2017
Tier 1 leverage ratio
Company	$	88,599		8.71	%	$	40,675		4.0	%	$	40,675		4.000	%		N/A		N/A
Bank		93,991		9.29	%		40,488		4.0	%		40,488		4.000	%		50,610		5.0	%
Common equity tier 1 capital ratio
Company		88,599		10.07	%		39,578		4.5	%		50,572		5.750	%		N/A		N/A
Bank		93,991		10.74	%		39,368		4.5	%		50,304		5.750	%		56,865		6.5	%
Tier 1 risk-based capital ratio
Company		88,599		10.07	%		52,771		6.0	%		63,765		7.250	%		N/A		N/A
Bank		93,991		10.74	%		52,491		6.0	%		63,427		7.250	%		69,988		8.0	%
Total risk-based capital ratio
Company		94,285		10.72	%		70,361		8.0	%		81,355		9.250	%		N/A		N/A
Bank		99,677		11.39	%		69,988		8.0	%		80,924		9.250	%		87,485		10.0	%
December 31, 2016
Tier 1 leverage ratio
Company	$	82,195		8.75	%	$	37,586		4.0	%	$	37,586		4.000	%		N/A		N/A
Bank		85,963		9.16	%		37,551		4.0	%		37,551		4.000	%		46,939		5.0	%
Common equity tier 1 capital ratio
Company		82,195		10.83	%		34,138		4.5	%		38,879		5.125	%		N/A		N/A
Bank		85,963		11.34	%		34,098		4.5	%		38,834		5.125	%		49,253		6.5	%
Tier 1 risk-based capital ratio
Company		82,195		10.83	%		45,517		6.0	%		50,259		6.625	%		N/A		N/A
Bank		85,963		11.34	%		45,464		6.0	%		50,200		6.625	%		60,619		8.0	%
Total risk-based capital ratio
Company		86,585		11.41	%		60,690		8.0	%		65,431		8.625	%		N/A		N/A
Bank		90,353		11.92	%		60,619		8.0	%		65,355		8.625	%		75,774		10.0	%

NOTE 13. ACCUMULATED OTHER COMPREHENSIVE INCOME

Changes in AOCI for the periods indicated are summarized as follows:

	Year Ended December 31, 2017
	Before   Tax			Tax Effect		Net   of Tax
	(Dollars in thousands)
Balance at beginning of period	$	—		$	—	$	—
Unrealized gain (loss) on investment securities available for sale:
Net unrealized holdings gain (loss) arising during the period		(634	)		133		(501	)
Amounts reclassified to (gain) loss on investment securities(1)		—			—		—
Balance at end of period	$	(634	)	$	133	$	(501	)

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	Year Ended December 31, 2016
	Before   Tax			Tax Effect			Net   of Tax
	(Dollars in thousands)
Balance at beginning of period	$	(192	)	$	66		$	(126	)
Unrealized gain (loss) on investment securities available for sale:
Net unrealized holdings gain (loss) arising during the period		261			(89	)		172
Amounts reclassified to (gain) loss on investment securities(1)		(69	)		23			(46	)
Balance at end of period	$	—		$	—		$	—

(1) Gross amounts are included in gain on sales of investment securities and income tax amounts are included in income tax expense on the Consolidated Statements of Income.

NOTE 14. STOCK-BASED COMPENSATION AND OTHER BENEFIT PLANS

Spirit of Texas Bancshares, Inc. 2008 Stock Plan

During 2008, the Company established an incentive stock plan. Under the plan, stockholders authorized options to purchase up to 914,500 shares of Company stock. During 2015, stockholders authorized an increase in options to purchase up to 1,750,000 shares of Company stock. The option terms cannot exceed 10 years from the grant date. Options are fully vested after five years of employment. Options for a total of 1,415,350 shares of the Company stock are outstanding as of December 31, 2017. At December 31, 2017, the Company had 281,625 available shares for future option grants.

The following tables present the activity during the year ended December 31, 2017 related to the 2008 Stock Plan:

	2008 Stock Plan
	Options			Weighted Average Exercise Price		Aggregate Intrinsic Value		Weighted Average Remaining Contractual Life (Years)
Outstanding at January 1, 2017		1,549,725		$	12.62
Granted		2,000			13.00	$	—
Exercised		(40,000	)		11.71	$	132
Forfeited(1)		(96,375	)		13.37
Expired		—			—
Outstanding at December 31, 2017		1,415,350		$	12.59	$	3,411		5.28
Exercisable at December 31, 2017		1,070,475		$	12.09	$	3,115		4.58
Vested at December 31, 2017		1,070,475		$	12.09	$	3,115		4.58

(1) Forfeitures are accounted for in the period they occur

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The fair values of the stock options granted for the years ended December 31, 2017 and 2016 were determined utilizing the Black-Scholes pricing model methodology. A summary of assumptions used to calculate the fair values of the 2008 Stock Plan award is presented below:

	2008 Stock Plan
	Years Ended December 31,
	2017			2016
Expected volatility		20.0	%		21.6	%
Expected dividend yield		0.0	%		0.0	%
Expected term (years)		7.5			7.5
Risk-free interest rate		1.94	%		0.94-1.84	%
Weighted average grant date fair value	$	3.58		$	3.78

The Company uses the calculated value method to account for its options. Management determined that the SNL Small Cap U.S. Bank Index is representative of the Company’s industry and has used the historical closing return values of that index to estimate volatility. The expected term represents the period of time that the 2008 Stock Plan awards are expected to be outstanding from the date of grant. The risk-free interest rate is based on the U.S. Treasury yields for the expected term of the instrument.

A summary of selected data related to stock-based compensation expense follows:

	2008 Stock Plan
	Year Ended December 31,
	2017		2016
	(Dollars in thousands)
Stock-based compensation expense	$	1,290	$	1,069
Amount of cash received from exercise of awards		468		59

	2008 Stock Plan
	Year Ended December 31,
	2017		2016
	(Dollars in thousands)
Unrecognized compensation expense related to stock-based compensation	$	1,218	$	2,751
Weighted-average life over which expense is expected to be recognized (years)		2.5		3.3

Spirit of Texas Bancshares, Inc. 2017 Stock Plan

On February 23, 2017, the Company established an incentive stock plan to attract and retain officers, employees, directors and other service providers. Under the plan, stockholders authorized options to purchase up to 1,000,000 shares of Company stock. The option terms cannot exceed 10 years from the grant date. Directors’ options vested immediately and all employees’ options vest after 5 years of employment. Options for a total of 127,927 shares of the Company stock are outstanding as of December 31, 2017. At December 31, 2017, the Company had 872,073 available shares for future option grants.

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The following tables present the activity during the year ended December 31, 2017 related to the 2017 Stock Plan:

	2017 Stock Plan
	Options		Weighted Average Exercise Price		Aggregate Intrinsic Value		Weighted Average Remaining Contractual Life (Years)
Outstanding at January 1, 2017		—	$	—
Granted		127,927		15.00	$	—
Exercised		—		—
Forfeited(1)		—		—
Expired		—		—
Outstanding at December 31, 2017		127,927	$	15.00	$	—		9.17
Exercisable at December 31, 2017		65,000	$	15.00	$	—		9.15
Vested at December 31, 2017		65,000	$	15.00	$	—		9.15

(1) Forfeitures are accounted for in the period they occur

The fair values of the stock options granted for the year ended December 31, 2017 were determined utilizing the Black-Scholes pricing model methodology. A summary of assumptions used to calculate the fair values of the 2017 Stock Plan award is presented below:

	2017 Stock Plan
	Year Ended December 31,
	2017
Expected volatility		20.0	%
Expected volatility of directors’ options immediately vested		16.2	%
Expected dividend yield		0.0	%
Expected term (years) except for directors’ options immediately vested		7.5
Expected term (years) of directors’ options immediately vested		5.0
Risk-free interest rate		1.76-1.95	%
Weighted average grant date fair value	$	3.44

The Company uses the calculated value method to account for its options. Management determined that the SNL Small Cap U.S. Bank Index is representative of the Company’s industry and has used the historical closing return values of that index to estimate volatility. The expected term represents the period of time that the 2017 Stock Plan awards are expected to be outstanding from the date of grant. The risk-free interest rate is based on the U.S. Treasury yields for the expected term of the instrument.

The total stock-based compensation expense related to the 2017 Stock Plan was $230 thousand for the year ended December 31, 2017. The total unrecognized compensation cost of $216 thousand related to the 2017 Stock Plan for share awards outstanding at December 31, 2017 will be recognized over a weighted average remaining period of 4.2 years.

Spirit of Texas Bancshares, Inc. 2008 Warrants

In exchange for providing the seed money for the formation of the Company, its organizers received warrants to acquire common stock at an exercise price of $10 per share. The warrants are exercisable for a period of ten years and are not transferable. During 2008, warrants for 105,000 shares of stock were issued. None of these warrants have been exercised.

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Bank4Texas Warrants

In connection with the acquisition of Bank4Texas in 2010, the Company issued warrants for 12,491 shares of stock. The Bank4Texas warrants expire in August 2020. The warrants are exercisable at $10.50 per share and expire in August 2020.

The following table presents the activity for the period indicated related to the Bank4Texas Warrants:

	Bank4Texas Warrants
	Warrants			Weighted Average Exercise Price		Aggregate Intrinsic Value		Weighted Average Remaining Contractual Life (Years)
Outstanding at January 1, 2017		12,491		$	10.50
Granted		—			—
Exercised		(419	)		10.50	$	2
Forfeited(1)		—			—
Expired		—			—
Outstanding at December 31, 2017		12,072		$	10.50	$	54		2.65
Exercisable at December 31, 2017		12,072		$	10.50	$	54		2.65
Vested at December 31, 2017		12,072		$	10.50	$	54		2.65

(1) Forfeitures are accounted for in the period they occur

The amount of cash received from the exercise of the warrants was $4 thousand. There is no remaining expense to be recognized on the Bank4Texas Warrants.

Oasis Warrants

In connection with the acquisition of Oasis Bank in 2012, the Company issued warrants for 19,140 shares of stock. The Oasis warrants are exercisable at $12.84 per share and expire in November 2022. None of these warrants have been exercised.

Spirit of Texas Bank 401(k) Retirement Plan

The Company sponsors the Spirit of Texas Bank, S.S.B. 401(k) Plan, a tax-qualified, deferred compensation plan (the “401(k) Plan”). Under the terms of the 401(k) Plan eligible employees may contribute a portion of compensation not exceeding the limits set by law. Employees are eligible to participate at the completion of one month of service. The 401(k) Plan allows a matching employer contribution equal to 100% of elective deferrals that do not exceed 6% of compensation. Matching contributions are fully vested after six years of service. Total 401(k) matching employer contribution expense amounted to $738 thousand and $732 thousand for the years ended December 31, 2017 and 2016, respectively.

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NOTE 15. BASIC AND DILUTED EARNINGS PER COMMON SHARE, AS RESTATED

The following table presents the computation of basic and diluted EPS:

	Year Ended December 31,
	2017		2016 Restated
	(Dollars in thousands, except per share data)
Net income as reported	$	4,753	$	3,715
Less: Participated securities share of undistributed earnings		23		87
Net income available to common stockholders	$	4,730	$	3,628
Weighted average number of common shares—basic		7,233,783		7,065,243
Effect of dilutive securities:
Employee stock-based compensation awards and warrants		286,161		140,466
Weighted average number of common shares—diluted		7,519,944		7,205,709
Basic earnings per common share	$	0.65	$	0.51
Diluted earnings per common share	$	0.63	$	0.50
Anti-dilutive warrants and stock options		261,225		294,475

NOTE 16. INCOME TAXES, AS RESTATED

The components of the expense (benefit) for income taxes for the periods presented are as follows:

	Years Ended December 31,
	2017			2016
	(Dollars in thousands)
Current income tax expense:
Federal	$	3,529		$	973
State		108			(116	)
Total current income tax expense		3,637			857
Deferred income tax expense (benefit):
Federal		(50	)		752
State		—			—
Total deferred income tax expense (benefit)		(50	)		752
Total income tax expense (benefit)	$	3,587		$	1,609

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A reconciliation of the expected income tax expense at the statutory federal income tax rate of 34% to the Company’s actual income tax expense and effective tax rate for the periods presented is as follows:

	Years Ended December 31,
	2017						2016
	Amount			%			Amount			%
	(Dollars in thousands)
Tax expense at federal income tax rate	$	2,835			34.00	%	$	1,810			34.00	%
State taxes		71			0.85	%		(76	)		-1.43	%
Increase (decrease) resulting from:
Tax-exempt interest		(617	)		-7.40	%		(535	)		-10.05	%
Bank-owned life insurance		1			0.01	%		1			0.02	%
Stock compensation		260			3.12	%		295			5.54	%
Interest expense exclusion		29			0.35	%		25			0.47	%
Meals and entertainment		99			1.19	%		95			1.78	%
Club dues		56			0.67	%		32			0.60	%
Deferred Tax Valuation Adjustment		834			10.00	%		—			0.00	%
Other		19			0.22	%		(38	)		-0.71	%
Total	$	3,587			43.01	%	$	1,609			30.22	%

On December 22, 2017, the United States enacted the Tax Cuts and Jobs Act (the “Act”) resulting in significant modifications to existing law. We have completed the accounting for the effects of the Act during the quarter ended December 31, 2017. Our financial statements for the year ended December 31, 2017, reflect certain effects of the Act which includes a reduction in the corporate tax rate from 34.0% to 21.0% as well as other changes. As a result of the changes to tax laws and tax rates under the Act, we incurred incremental income tax expense of $834 thousand during the year ended December 31, 2017, which consisted primarily of the remeasurement of deferred tax assets and liabilities from 34.0% to 21.0%.

Deferred income tax assets and liabilities reflect the tax effect of estimated temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for the same items for income tax reporting purposes. The significant components of the net deferred tax assets and liabilities for the periods presented are as follows:

	December 31,
	2017			2016
	(Dollars in thousands)
Deferred tax assets:
Unrealized loss on securities available-for-sale	$	133		$	—
Allowance for loan losses		1,187			1,362
Texas margin tax		5			13
Organizational costs		47			91
Purchase accounting		194			313
Net operating loss		442			938
Stock Option Expense		273			185
Other		1			2
Total gross deferred tax assets		2,282			2,904
Deferred tax liabilities:
Depreciation		(517	)		(850	)
Purchase accounting		(246	)		(596	)
SBA Servicing		(25	)		(161	)
FHLB dividends		(14	)		—
Total gross deferred tax liabilities		(802	)		(1,607	)
Deferred tax assets, net	$	1,480		$	1,297

F-75

The realizability of deferred tax assets is dependent upon various factors, including the generation of future taxable income, the existence of taxes paid and recoverable, the reversal of deferred tax liabilities and tax planning strategies. Based upon these factors, management believes it is more likely than not that the Company will realize the benefits of these deferred tax assets.

The Company has federal net operating loss carryforwards of approximately $2.1 million which begin to expire in 2022. This amount is subject to a limitation by Section 382 of the Internal Revenue Code of 1986, as amended, to $650 thousand per year. The Company has determined that it is more likely than not that it will fully realize the benefit of such carryforwards prior to their expiration. Accordingly, a valuation allowance has not been recorded for federal net operating losses.

The Company recorded an uncertain tax position at December 31, 2017 and 2016 arising from a deduction taken on the 2016 federal return related to a request for change in accounting method. The total amount of the recorded uncertain tax position at both December 31, 2017 and 2016 was $903 thousand and is included in other liabilities. The Company’s policy is to classify interest and penalties associated with income taxes within other expenses. The Company did not record interest and penalties associated with income taxes at December 31, 2017 or 2016.

NOTE 17. COMMITMENTS AND CONTINGENCIES

The Company issues off-balance sheet financial instruments in connection with its lending activities and to meet the financing needs of its customers. These financial instruments include commitments to fund loans and lines of credit as well as commercial and standby letters of credit. These commitments expose the Company to varying degrees of credit and market risk which are essentially the same as those involved in extending loans to customers. The Company follows the same credit policies in making commitments as it does for instruments recorded on the Company’s consolidated balance sheet. Collateral is obtained based on management’s assessment of the customer’s credit risk.

The Company’s exposure to credit loss is represented by the contractual amount of these commitments. As of December 31, 2017 and December 31, 2016, the Company’s reserve for unfunded commitments totaled $40 thousand and $33 thousand, respectively.

Fees collected on off-balance sheet financial instruments represent the fair value of those commitments and are deferred and amortized over their term.

Financial Instruments Commitments

Unfunded commitments are as follows:

	December 31,
	2017		2016
	(Dollars in thousands)
Unfunded loan commitments	$	134,536	$	107,443
Commercial and standby letters of credit		91		1,156
Total	$	134,627	$	108,599

Unfunded loan commitments:

Commitments to extend credit are agreements to lend a customer to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.

F-76

The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if it is deemed necessary by the Company upon extension of credit, is based upon management’s credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, and income-producing commercial properties.

Commercial and standby letters of credit:

Letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Letters of credit are primarily issued to support trade transactions or guarantee arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Company generally holds collateral supporting those commitments if deemed necessary.

Other Commitments and Contingencies

Legal Proceedings

The Company, from time to time, is involved as plaintiff or defendant in various legal actions arising in the normal course of business. While the ultimate outcome of any such proceedings cannot be predicted with certainty, it is the opinion of management, based upon advice of legal counsel, that no proceedings exist, either individually or in the aggregate, which, if determined adversely to the Company, would have a material effect on the Company’s consolidated balance sheet, results of operations or cash flows.

NOTE 18. PARENT COMPANY FINANCIAL STATEMENTS, AS RESTATED

Condensed Balance Sheets of Spirit of Texas Bancshares, Inc. (Parent company only) for the periods presented are as follows:

PARENT COMPANY

CONDENSED BALANCE SHEETS

	December 31,
	2017		2016 Restated
	(Dollars in thousands)
Assets:
Cash and due from banks	$	1,837	$	175
Investment in bank subsidiary		103,863		96,005
Other assets		3,552		2,362
Total assets	$	109,252	$	98,542
Liabilities and stockholders’ equity:
Borrowings		7,788		5,000
Other liabilities		2,325		646
Stockholders’ equity		99,139		92,896
Total liabilities and stockholders’ equity	$	109,252	$	98,542

F-77

Condensed Statements of Income of Spirit of Texas Bancshares, Inc. (Parent company only) for the periods presented are as follows:

CONDENSED STATEMENTS OF INCOME

	Years Ended December 31,
	2017			2016     Restated
	(Dollars in thousands)
Income:
Interest income	$	—		$	2
Total income		—			2
Expense:
Interest on borrowings		345			113
Salaries and benefits		1,424			1,109
Stock-based compensation expense		1,520			1,069
Professional services		563			549
Directors fees		212			47
Other noninterest expense		132			125
Total expense		4,196			3,012
Income (loss) before income tax (benefit) and equity in undistributed income of subsidiary		(4,196	)		(3,010	)
Income tax (benefit)		(986	)		(706	)
Income (loss) before equity in undistributed income of subsidiaries		(3,210	)		(2,304	)
Equity in income of subsidiary		7,963			6,019
Net income	$	4,753		$	3,715
Comprehensive income	$	4,252		$	3,841

F-78

Condensed Statements of Cash Flows of Spirit of Texas Bancshares, Inc. (Parent company only) for periods presented are as follows:

PARENT COMPANY

CONDENSED STATEMENTS OF CASH FLOWS

	Years Ended December 31,
	2017			2016     Restated
	(Dollars in thousands)
Cash flows from operating activities:
Net income	$	4,753		$	3,715
Adjustments to reconcile net income to net cash used in operating activities:
Equity in earnings of subsidiaries		(7,963	)		(6,019	)
Stock-based compensation expense		1,520			1,069
Net change in operating assets and liabilities:
(Increase)/decrease in due from subsidiaries		—			—
Net change in other assets		(1,190	)		(1,264	)
Net change in other liabilities		4,071			522
Net cash provided by (used in) operating activities		1,191			(1,977	)
Cash flows from investing activities:
Net decrease in time deposits with other banks		—			250
Purchase of premises and equipment		—			(12	)
Capital contribution		(2,788	)		(5,000	)
Net cash provided by (used in) investing activities		(2,788	)		(4,762	)
Cash flows from financing activities:
Proceeds of borrowings		7,788			5,000
Repayment of borrowings		(5,000	)		—
Exercise of stock options and warrants		471			59
Net cash provided by (used in) financing activities		3,259			5,059
Net Change in Cash		1,662			(1,680	)
Cash at Beginning of Period		175			1,855
Cash at End of Period	$	1,837		$	175

NOTE 19. FAIR VALUE MEASUREMENTS

When determining the fair value measurements for assets and liabilities and the related fair value hierarchy, the Company considers the principal or most advantageous market in which it would transact and the assumptions that market participants would use when pricing the asset or liability. When possible, the Company looks to active and observable markets to price identical assets or liabilities. When identical assets and liabilities are not traded in active markets, the Company looks to market observable data for similar assets and liabilities. It is the Company’s policy to maximize the use of observable inputs, minimize the use of unobservable inputs and use unobservable inputs to measure fair value to the extent that observable inputs are not available. The need to use unobservable inputs generally results from the lack of market liquidity, resulting in diminished observability of both actual trades and assumptions that would otherwise be available to value these instruments, or the value of the underlying collateral is not market observable. Although third party price indications may be available for an asset or liability, limited trading activity would make it difficult to support the observability of these quotations.

F-79

Financial Instruments Carried at Fair Value on a Recurring Basis

The following is a description of the valuation methodologies used for financial instruments measured at fair value on a recurring basis, as well as the general classification of each instrument under the valuation hierarchy.

Investment Securities—Investment securities available for sale are carried at fair value on a recurring basis. When available, fair value is based on quoted prices for the identical security in an active market and as such, would be classified as Level 1. If quoted market prices are not available, fair values are estimated using quoted prices of securities with similar characteristics, discounted cash flows or matrix pricing models. Investment securities available for sale for which Level 1 valuations are not available are classified as Level 2, and include U.S. Government agencies and sponsored enterprises obligations and agency mortgage-backed securities; state and municipal obligations; asset-backed securities; and corporate debt and other securities. Pricing of these securities is generally spread driven.

Observable inputs that may impact the valuation of these securities include benchmark yield curves, credit spreads, reported trades, dealer quotes, bids, issuer spreads, current rating, historical constant prepayment rates, historical voluntary prepayment rates, structural and waterfall features of individual securities, published collateral data, and for certain securities, historical constant default rates and default severities.

SBA Servicing Asset—The SBA Servicing Asset is carried at fair value on a recurring basis. To determine the fair value of SBA Servicing Rights, The Company uses market prices for comparable servicing contracts, when available, or alternatively, uses a valuation model that calculates the present value of estimated future net servicing income. In using this valuation method, the Company incorporates assumptions that market participants would use in estimating future net servicing income, which includes estimates of the cost to service, the discount rate, custodial earnings rate, an inflation rate, ancillary income, prepayment speeds, default rates, late fees and losses. The SBA Servicing Asset is classified as Level 3.

The following table presents the assets and liabilities measured at fair value on a recurring basis:

	December 31, 2017
	Level 1		Level 2		Level 3		Total
	(Dollars in thousands)
Assets:
U.S. Government agencies	$	—	$	1,949	$	—	$	1,949
Residential mortgage-backed securities		—		29,629		—		29,629
Corporate bonds and other debt securities		—		5,665		—		5,665
SBA servicing rights		—		—		3,411		3,411
Total	$	—	$	37,243	$	3,411	$	40,654

	December 31, 2016
	Level 1		Level 2		Level 3		Total
	(Dollars in thousands)
Assets:
U.S. Government agencies	$	—	$	—	$	—	$	—
Residential mortgage-backed securities		—		5		—		5
Corporate bonds and other debt securities		—		—		—		—
SBA servicing rights		—		—		3,132		3,132
Total	$	—	$	5	$	3,132	$	3,137

There were no transfers of financial assets between levels of the fair value hierarchy during the year ended December 31, 2017 or 2016.

F-80

Financial Instruments Measured at Fair Value on a Non-Recurring Basis

The following is a description of the methodologies used to estimate the fair values of assets and liabilities measured at fair value on a non-recurring basis, and the level within the fair value hierarchy in which those measurements are typically classified.

Impaired loans and OREO–The carrying amount of collateral dependent impaired loans is typically based on the fair value of the underlying collateral, which may be real estate or other business assets, less estimated costs to sell. The carrying value of OREO is initially measured based on the fair value, less estimated cost to sell, of the real estate acquired in foreclosure and subsequently adjusted to the lower of cost or estimated fair value, less estimated cost to sell. Fair values of real estate collateral are typically based on real estate appraisals which utilize market and income valuation techniques incorporating both observable and unobservable inputs. When current appraisals are not available, the Company may use brokers’ price opinions, home price indices, or other available information about changes in real estate market conditions to adjust the latest appraised value available. These adjustments to appraised values may be subjective and involve significant management judgment. The fair value of collateral consisting of other business assets is generally based on appraisals that use market approaches to valuation, incorporating primarily unobservable inputs. Fair value measurements related to collateral dependent impaired loans and OREO are classified within level 3 of the fair value hierarchy.

The following tables provide information about certain assets measured at fair value on a non-recurring basis:

	Estimated Fair Value
	December 31,
	2017		2016
	(Dollars in thousands)
Assets (classified in Level 3):
Impaired loans	$	2,553	$	2,801
Other real estate and repossessed		21		23

Impairment charges resulting from the non-recurring changes in fair value of underlying collateral of impaired loans are included in the provision for loan losses in the consolidated statement of income. Impairment charges resulting from the non-recurring changes in fair value of OREO are included in other real estate and acquired assets resolution expenses in the consolidated statement of income.

F-81

The following tables show significant unobservable inputs used in the recurring and non-recurring fair value measurements of Level 3 assets:

Level 3 Asset	Fair value		Valuation Technique	Unobservable Inputs	Range/Weighted Average
December 31, 2017
Non-recurring:
Impaired loans	$	2,553	Third party appraisals	Collateral discounts		0.0% - 100.0% (11.6%	)
Other real estate owned		21	Third party appraisals	Collateral discounts and estimated cost to sell		10.0%
SBA servicing assets		3,411	Discounted cash flows	Conditional prepayment rate		6.7%
				Discount rate		14.1%
December 31, 2016
Non-recurring:
Impaired loans	$	2,801	Third party appraisals	Collateral discounts		0.0% - 10.0% (6.9%	)
Other real estate owned		23	Third party appraisals	Collateral discounts and estimated cost to sell		10.0%
SBA servicing assets		3,132	Discounted cash flows	Conditional prepayment rate		6.2%
				Discount rate		11.8%

The carrying amounts and estimated fair values, as well as the level within the fair value hierarchy, of the Company’s financial instruments are as follows:

December 31, 2017	Carrying Value		Fair Value		Level 1		Level 2		Level 3
	(Dollars in thousands)
Financial Assets:
Cash and cash equivalents	$	57,949	$	57,949	$	57,949	$	—	$	—
Time deposits in other banks		245		245		245		—		—
Available for sale securities		37,243		37,243		—		37,243		—
FHLB and other bank stock		4,812		4,812		—		4,812		—
Loans, net		863,467		870,749		—		—		870,749
Loans held for sale		3,814		4,188		—		4,188		—
Accrued interest receivable		3,466		3,466		—		3,466		—
Bank-owned life insurance		479		479		—		479		—
SBA servicing rights		3,411		3,411		—		—		3,411
Financial Liabilities:
Deposits	$	835,368	$	840,645	$	—	$	840,645	$	—
Accrued interest payable		407		407		—		407		—
Short-term borrowings		15,000		15,000		—		15,000		—
Long-term borrowings		76,411		67,310		—		67,310		—

F-82

December 31, 2016	Carrying Value		Fair Value		Level 1		Level 2		Level 3
	(Dollars in thousands)
Financial Assets:
Cash and cash equivalents	$	152,232	$	152,232	$	152,232	$	—	$	—
Time deposits in other banks		245		245		245		—		—
Available for sale securities		5		5		—		5		—
FHLB and other bank stock		4,743		4,743		—		4,743		—
Loans, net		768,504		753,082		—		—		753,082
Loans held for sale		4,003		4,383		—		4,383		—
Accrued interest receivable		2,485		2,485		—		2,485		—
Bank-owned life insurance		477		477		—		477		—
SBA servicing rights		3,132		3,132		—		—		3,132
Financial Liabilities:
Deposits	$	814,438	$	817,865	$	—	$	817,865	$	—
Accrued interest payable		264		264		—		264		—
Short-term borrowings		5,000		5,000		—		5,000		—
Long-term borrowings		66,016		65,051		—		65,051		—

Certain financial instruments are carried at amounts that approximate fair value due to their short-term nature and generally negligible credit risk. Financial instruments for which fair value approximates the carrying amount at December 31, 2017 and December 31, 2016, include cash and cash equivalents, time deposits in other banks and accrued interest receivable and payable.

The following methods and assumptions were used to estimate the fair value of each class of financial instruments.

FHLB and Other Bank Stock:

FHLB and other bank stock can be liquidated only by redemption by the issuer, as there is no market for these securities. These securities are carried at par, which has historically represented the redemption price and is therefore considered to approximate fair value.

Loans:

Fair values for loans are based on a discounted cash flow methodology that considers various factors, including the type of loan and related collateral, classification status, fixed or variable interest rate, term of loan, whether or not the loan was amortizing and current discount rates. Loans are grouped together according to similar characteristics and are treated in the aggregate when applying various valuation techniques. The discount rates used for loans are based on current market rates for new originations of comparable credit risk and include adjustments for liquidity concerns. The allowance for loan and lease losses is considered a reasonable estimate of the required adjustment to fair value to reflect the impact of credit risk. This estimate may not represent an exit value as defined in ASC 820.

Loans Held for Sale:

SBA loans held for sale are carried at the lower of cost or fair value. The fair values of SBA loans held for sale is determined, when possible, using quoted secondary-market prices and are classified within Level 2 of the fair value hierarchy. If no such quoted prices exist, the fair value of a loan is determined using quoted prices for a similar loan or loans, adjusted for the specific attributes of that loan.

F-83

Bank-owned Life Insurance:

The Company holds life insurance policies on certain officers. The carrying value of these policies approximates fair value as it is based on the cash surrender value adjusted for other charges or amounts due that are probable at settlement.

Deposits:

The fair value of demand deposits, savings accounts and money market deposits is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using discounted cash flow analysis and using the rates currently offered for deposits of similar remaining maturities.

Short-term and Long-term Borrowings:

The fair value of advances from the FHLB and other borrowings are estimated by discounting the future cash flows using the current rate at which similar borrowings with similar remaining maturities could be obtained.

NOTE 20. CORRECTION OF ERRORS AND RESTATEMENT

In accordance with the guidance in ASC Topic 250, Accounting Changes and Error Corrections, the Company has restated certain prior period amounts in the consolidated financial statements as of and for the year ended December 31, 2016. The Company identified prior period errors whereby the Company did not properly calculate and allocate the carrying value of loans sold using relative fair value in accordance with ASC Topic 860 Transfers and Servicing.

The Company recorded an uncertain tax position at December 31, 2016 arising from a deduction taken on the 2016 federal return related to a request for change in accounting method. Additionally, during the restatement process, amounts paid during 2017 were pushed back into the proper accounting period using the same accrual method used in 2017.

The following are previously stated adjustments and corrected balances (reflected as “As Previously Reported”, “Adjustments” and “As Restated,” respectively), which is also inclusive of certain reclassifications to conform to current year presentation, of the consolidated balance sheet, consolidated statement of income, consolidated statement of changes in stockholders’ equity, consolidated statement of cash flow, Parent Company balance sheet, Parent Company statement of income, and Parent Company statement of cash flows line items, impacted by these correction or errors ($ in thousands except per share data):

CONSOLIDATED BALANCE SHEET

December 31, 2016

Description	As Previously Reported		Adjustments			As Restated
Loans held for investment	$	772,281	$	580		$	772,861
SBA servicing asset		—		3,132			3,132
Deferred tax asset, net		1,342		(45	)		1,297
Other assets		7,229		(2,894	)		4,335
Total assets		979,716		773			980,489
Other liabilities		1,461		414			1,875
Total liabilities		887,179		414			887,593
Retained earnings		11,913		359			12,272
Total stockholders’ equity		92,537		359			92,896
Total liabilities and stockholders’ equity		979,716		773			980,489

F-84

CONSOLIDATED STATEMENT OF INCOME

Year Ended December 31, 2016

Description	As Previously Reported		Adjustments			As Restated
Interest and fees on loans	$	39,187	$	268		$	39,455
Total interest income		39,942		268			40,210
Net interest income		33,212		268			33,480
Net interest income after provision for loan losses		31,595		268			31,863
SBA loan servicing fees		1,950		(119	)		1,831
Mortgage referral fees		—		751			751
Gains on sales of loans, net		6,437		(2,000	)		4,437
Noninterest income		9,710		(1,368	)		8,342
Salaries and employee benefits		21,876		(782	)		21,094
Occupancy and equipment expenses		4,801		(65	)		4,736
Professional services		1,721		24			1,745
Data processing and network		1,399		119			1,518
Regulatory assessments and insurance		717		25			742
Advertising		—		303			303
Marketing		624		10			634
Telephone expense		583		23			606
Other operating expenses		3,058		(256	)		2,802
Total noninterest expense		35,480		(599	)		34,881
Income before income tax expense		5,825		(501	)		5,324
Income tax expense		1,856		(247	)		1,609
Net income		3,969		(254	)		3,715
Basic earnings per common share	$	0.55	$	(0.04	)	$	0.51
Diluted earnings per common share	$	0.54	$	(0.04	)	$	0.50

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

Year Ended December 31, 2016

Description	As Previously Reported		Adjustments			As Restated
Net income	$	3,969	$	(254	)	$	3,715
Comprehensive income		4,095		(254	)		3,841

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

Year Ended December 31, 2016

Description	As Previously Reported		Adjustments			As Restated
Retained earnings, balance as of January 1, 2016	$	7,944	$	613		$	8,557
Net income		3,969		(254	)		3,715
Retained earnings, balance as of January 1, 2017		11,913		359			12,272

F-85

CONSOLIDATED STATEMENT OF CASH FLOWS

Year Ended December 31, 2016

Description	As Previously Reported			Adjustments			As Restated
Net income		3,969			(254	)		3,715
Accretion of discount on retained SBA loans		(165	)		(565	)		(730	)
Deferred tax expense (benefit)		856			(104	)		752
Originations of loans held for sale		(46,632	)		(99	)		(46,731	)
Net gains on sale of loans held for sale		(6,437	)		2,000			(4,437	)
Fair value adjustment on SBA servicing asset		532			323			855
Net change in other assets		(2,488	)		917			(1,571	)
Net change in other liabilities		(793	)		234			(559	)
Net cash provided by (used in) operating activities		4,695			2,452			7,147
Net change in loans		(81,100	)		(2,452	)		(83,552	)
Net cash provided by (used in) investing activities		(38,634	)		(2,452	)		(41,086	)

PARENT COMPANY BALANCE SHEET

December 31, 2016

Description	As Previously Reported		Adjustments			As Restated
Investment in bank subsidiary	$	95,985	$	20		$	96,005
Other assets		2,416		(54	)		2,362
Total assets		98,576		(34	)		98,542
Borrowings		—		5,000			5,000
Other liabilities		6,039		(5,393	)		646
Stockholders’ equity		92,537		359			92,896
Total liabilities and stockholders’ equity		98,576		(34	)		98,542

PARENT COMPANY STATEMENT OF INCOME

Year Ended December 31, 2016

Description	As Previously Reported			Adjustments			As Restated
Income tax (benefit)	$	(626	)	$	(80	)	$	(706	)
Income (loss) before income tax (benefit) and equity in undistributed income of subsidiary		(2,384	)		80			(2,304	)
Income (loss) before equity in undistributed income of subsidiaries		6,353			(334	)		6,019
Net income		3,969			(254	)		3,715
Comprehensive income		4,095			(254	)		3,841

PARENT COMPANY STATEMENT OF CASH FLOWS

Year Ended December 31, 2016

Description	As Previously Reported			Adjustments			As Restated
Net income		3,969			(254	)		3,715
Equity in earnings of subsidiaries		(6,353	)		334			(6,019	)
Net change in other liabilities		602			(80	)		522

F-86

CONTENTS

Unaudited Consolidated Financial Statements of Comanche National Corporation:
Consolidated Balance Sheets as of September  30, 2018 and December 31, 2017	F-88
Consolidated Statements of Income for the Nine Months Ended September 30, 2018 and 2017	F-89
Consolidated Statements of Comprehensive Income for the Nine Months Ended September 30, 2018 and 2017	F-90
Consolidated Statements of Changes in Stockholders’ Equity for the Nine Months Ended September 30, 2018 and 2017	F-91
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2018 and 2017	F-92
Notes to Consolidated Financial Statements	F-93

F-87

COMANCHE NATIONAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(Dollars in thousands, except per share data)

	September 30, 2018			December 31, 2017
Assets:
Cash and due from banks	$	5,490		$	11,332
Interest-bearing deposits in other banks		46,380			11,664
Total cash and cash equivalents		51,870			22,996
Investment in unconsolidated subsidiary		78			94
Investment securities:
Available-for-sale securities, at fair value		149,981			193,129
Held-to-maturity securities, at amortized cost		353			390
Total investment securities		150,334			193,519
Loans:
Loans held for investment		119,772			125,461
Less: allowance for loan and lease losses		(3,092	)		(3,117	)
Loans, net		116,680			122,344
Premises and equipment, net		5,364			5,542
Accrued interest receivable		1,169			1,898
Other real estate owned		33			113
Goodwill		3,815			3,815
Deferred tax asset, net		1,912			577
Bank-owned life insurance		6,875			6,749
Federal Home Loan Bank and Federal Reserve Bank stock, at cost		331			329
Other assets		425			407
Total assets	$	338,886		$	358,383
Liabilities and Stockholders’ Equity
Liabilities:
Deposits:
Transaction accounts:
Noninterest-bearing	$	61,804		$	65,558
Interest-bearing		130,555			132,476
Total transaction accounts		192,359			198,034
Time deposits		104,521			115,412
Total deposits		296,880			313,446
Dividends payable		—			502
Accrued interest payable		134			133
Long-term borrowings		2,811			3,311
Other liabilities		2,018			1,739
Total liabilities		301,843			319,131
Commitments and contingencies (Note 10)
Stockholders’ Equity:
Common stock, no par value, stated value $2 per share; 2 million shares authorized; 450,000 shares issued		900			900
Capital surplus		17,447			17,447
Retained earnings		26,738			24,360
Accumulated other comprehensive loss		(5,117	)		(741	)
Treasury stock at cost – 50,739 and 48,088 shares at September 30, 2018 and December 31, 2017, respectively		(2,925	)		(2,714	)
Total stockholders’ equity		37,043			39,252
Total liabilities and stockholders’ equity	$	338,886		$	358,383

The accompanying notes are an integral part of these unaudited, consolidated financial statements.

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COMANCHE NATIONAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(Dollars in thousands, except per share data)

	Nine Months Ended September 30,
	2018		2017
Interest income:
Interest and fees on loans	$	5,613	$	5,588
Interest and dividends on investment securities		3,627		3,300
Other interest income		204		56
Total interest income		9,444		8,944
Interest expense:
Interest on deposits		1,325		1,027
Interest on borrowings		82		77
Total interest expense		1,407		1,104
Net interest income		8,037		7,840
Provision for loan losses		—		—
Net interest income after provision for loan losses		8,037		7,840
Noninterest income:
Service charges and fees		656		702
Net gain on sales of investment securities		18		31
Earnings on bank-owned life insurance		126		137
Other noninterest income		393		409
Total noninterest income		1,193		1,279
Noninterest expense:
Salaries and employee benefits		4,050		4,078
Occupancy and equipment expenses		735		788
Loan and other real estate related expenses		15		25
Professional services		113		122
Regulatory assessments and insurance		174		132
Debit card and ATM expenses		183		191
Advertising		29		28
Marketing		50		51
Telephone expense		170		172
Postage and delivery expense		93		92
Other operating expenses		634		408
Total noninterest expense		6,246		6,087
Income before income tax expense		2,984		3,032
Income tax expense		406		587
Net income	$	2,578	$	2,445
Earnings per common share:
Basic	$	6.45	$	6.08
Diluted	$	6.45	$	6.08
Weighted average common shares outstanding:
Basic		399,811		402,032
Diluted		399,811		402,032

The accompanying notes are an integral part of these unaudited, consolidated financial statements.

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COMANCHE NATIONAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

(Dollars in thousands)

	Nine Months Ended September 30,
	2018			2017
Net income	$	2,578		$	2,445
Other comprehensive income (loss):
Unrealized net holding gains (losses) on investment securities available-for-sale, net of tax (benefit) of ($1,146) and $757, respectively		(4,309	)		1,469
Reclassification adjustment for realized gains on investment securities available-for-sale included in net income, net of tax of $18 and $4, respectively		(67	)		(9	)
Total other comprehensive income (loss)		(4,376	)		1,460
Total comprehensive income (loss)	$	(1,798	)	$	3,905

The accompanying notes are an integral part of these unaudited, consolidated financial statements.

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COMANCHE NATIONAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited)

(Dollars in thousands)

	Shares of Common Stock Outstanding			Common Stock		Capital Surplus		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Treasury Stock			Total Stockholders’ Equity
Balance as of January 1, 2017		402,152		$	900	$	17,447	$	22,087		$	(1,283	)	$	(2,696	)	$	36,455
Net income		—			—		—		2,445			—			—			2,445
Dividends declared		—			—		—		(200	)		—			—			(200	)
Purchases of treasury stock		(240	)		—		—		—			—			(18	)		(18	)
Other comprehensive income		—			—		—		—			1,460			—			1,460
Balance as of September 30, 2017		401,912		$	900	$	17,447	$	24,332		$	177		$	(2,714	)	$	40,142
Balance as of January 1, 2018		401,912		$	900	$	17,447	$	24,360		$	(741	)	$	(2,714	)	$	39,252
Net income		—			—		—		2,578			—			—			2,578
Dividends declared		—			—		—		(200	)		—			—			(200	)
Purchases of treasury stock		(2,651	)		—		—		—			—			(211	)		(211	)
Other comprehensive loss		—			—		—		—			(4,376	)		—			(4,376	)
Balance as of September 30, 2018		399,261		$	900	$	17,447	$	26,738		$	(5,117	)	$	(2,925	)	$	37,043

The accompanying notes are an integral part of these unaudited, consolidated financial statements.

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COMANCHE NATIONAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in thousands)

	Nine Months Ended September 30,
	2018			2017
Cash Flows From Operating Activities:
Net income	$	2,578		$	2,445
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		—			—
Depreciation and amortization		229			244
Net amortization of premium on investment securities		1,582			1,615
Deferred tax benefit		(171	)		(63	)
Stock dividends		(2	)		—
Net gain on sales of investment securities		(18	)		(31	)
Earnings on bank-owned life insurance		(126	)		(137	)
Net change in operating assets and liabilities:
Net change in accrued interest receivable		729			402
Net change in accrued interest payable		1			9
Net change in other assets		(14	)		(79	)
Net change in other liabilities		280			112
Net cash provided by operating activities		5,068			4,517
Cash Flows From Investing Activities:
Purchase of investment securities available-for-sale		(21,691	)		(36,354	)
Paydown and maturities of investment securities available-for-sale		20,684			21,519
Paydown and maturities of investment securities held-to-maturity		37			111
Proceeds from the sales of investment securities available-for-sale		37,050			8,796
Net change in loans		5,740			(1,721	)
Proceeds from partial redemption of common stock held in trust subsidiary		16			16
Purchase of premises and equipment		(51	)		(50	)
Net cash used in investing activities		41,785			(7,683	)
Cash Flows From Financing Activities:
Net change in deposits		(16,566	)		(1,581	)
Purchases of treasury stock		(211	)		(18	)
Repayment of long-term borrowings		(500	)		(500	)
Dividends paid		(702	)		(703	)
Net cash provided by (used in) financial activities		(17,979	)		(2,802	)
Net Change in Cash and Cash Equivalents		28,874			(5,968	)
Cash and Cash Equivalents at Beginning of Period		22,996			19,214
Cash and Cash Equivalents at End of Period	$	51,870		$	13,246
Supplemental Disclosures of Cash Flow Information:
Interest paid	$	1,405		$	1,094
Income taxes paid		443			676
Supplemental Disclosure of Noncash Investing and Financing Activities:
Transfer of loans to other real estate owned	$	—		$	689
Bank financed sales of other real estate owned		80			689

The accompanying notes are an integral part of these unaudited, consolidated financial statements.

F-92

COMANCHE NATIONAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

Comanche National Corporation (Corporation) is a bank holding company headquartered in Comanche, Texas that provides, through its subsidiary, Comanche National Corporation of Delaware (Delaware), and Delaware’s bank subsidiary, Comanche National Bank (Bank), a variety of financial services to individuals and corporate customers located in Comanche, Palo Pinto, Parker and Jack Counties, Texas and the surrounding areas. The Bank operates under a national bank charter and provides full banking services. As a national bank, the Bank is subject to regulation by the Office of the Comptroller of the Currency.

Basis of Presentation

The consolidated financial statements of the Corporation includes its accounts and those of its wholly owned subsidiary, Comanche National Corporation of Delaware, and Delaware’s wholly owned subsidiary, Comanche National Bank. All significant intercompany balances and transactions have been eliminated in consolidation.

The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. Operating results for the period ended September 30, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018 and should be read in conjunction with the audited financial statements and notes thereto for the year ended December 31, 2017.

In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for the fair presentation of these consolidated financial statements have been included. The preparation of financial statements in conformity with these accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and income and expense during the reporting periods and the related disclosures. Although management’s estimates and assumptions are based on current expectations, estimates, forecasts and projections about future performance of the Corporation, such estimates and assumptions are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult for the Corporation to assess. Operating results for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for a full year or any future period.

Accounting Policies Recently Adopted and Pending Accounting Pronouncements

Accounting Standards Update (ASU) 2018-09, “Codification Improvements.” Issued in July 2018, ASU No. 2018-09 makes changes to a variety of topics to clarify, correct errors in, or make minor improvements to the Accounting Standards Codification. The majority of the amendments in ASU 2018-09 will be effective in annual periods beginning after December 15, 2018. Management is currently evaluating the effects the adoption of ASU 2018-09 will have on the consolidated financial statements, results of operations and cash flows.

ASU 2017-08, “Receivables-Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities.” Issued in March 2017, ASU 2017-08 amends the amortization period for certain purchased callable debt securities held at a premium. In particular, the amendments in ASU 2017-08 require the premium to be amortized to the earliest call date. The amendments do not, however, require an accounting change for securities held at a discount; instead, the discount continues to be amortized to maturity. Notably, the amendments in this ASU more closely align the amortization period of premiums and discounts to

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expectations incorporated in market pricing on the underlying securities. Securities within the scope of ASU 2017-08 are purchased debt securities that have explicit, non-contingent call features that are callable at fixed prices and on preset dates. The amendments of ASU 2017-08 become effective for public entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2018 and for other entities for periods beginning after December 15, 2019. Management is currently evaluating the effects the adoption of ASU 2017-08 will have on the consolidated financial statements, results of operations and cash flows.

ASU 2017-04, “Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” Issued in January 2017, ASU 2017-04 simplifies the manner in which an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. In computing the implied fair value of goodwill under Step 2, an entity, prior to the amendments in ASU 2017-04, had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities, including unrecognized assets and liabilities, in accordance with the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. However, under the amendments in ASU 2017-04, an entity should (1) perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount, and (2) recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, with the understanding that the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, ASU 2017-04 removes the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails such qualitative test, to perform Step 2 of the goodwill impairment test. ASU 2017-04 is effective prospectively for public entities for annual, or any interim, goodwill impairment tests in fiscal years beginning after December 15, 2019 and for all other entities for impairment tests in fiscal years beginning after December 15, 2021. Implementation of this standard is not expected to have a material impact on the Corporation’s consolidated financial statements.

ASU 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” Issued in June 2016, ASU 2016-13 will add FASB ASC Topic 326, “Financial Instruments-Credit Losses” and finalizes amendments to FASB ASC Subtopic 825-15, “Financial Instruments-Credit Losses.” The amendments of ASU 2016-13 are intended to provide financial statement users with more decision-useful information related to expected credit losses on financial instruments and other commitments to extend credit by replacing the current incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to determine credit loss estimates. The amendments of ASU 2016-13 eliminate the probable initial recognition threshold and, in turn, reflect an entity’s current estimate of all expected credit losses. ASU 2016-13 does not specify the method for measuring expected credit losses, and an entity is allowed to apply methods that reasonably reflect its expectations of the credit loss estimate. Additionally, the amendments of ASU 2016-13 require that credit losses on available for sale debt securities be presented as an allowance rather than as a write-down. The amendments of ASU 2016-13 are effective for public entities for interim and annual periods beginning after December 15, 2019 and for all other entities for periods beginning after December 15, 2020. Earlier application is permitted for interim and annual periods beginning after December 15, 2018. Management believes the amendments in this update will have an impact on the Corporation’s consolidated financial statements and is working to evaluate the significant of that impact.

ASU 2016-02, “Leases (Topic 842).” Issued in February 2016, ASU 2016-02 was issued by the FASB to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and by disclosing key information about leasing arrangements. ASU 2016-02 will, among other things, require lessees to recognize a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. ASU 2016-02 does not significantly change lease accounting requirements applicable to lessors; however, the ASU contains some targeted improvements that are intended to align, where necessary, lessor accounting with the lessee accounting

F-94

model and with the updated revenue recognition guidance issued in 2014. The amendments of ASU 2016-02 are effective for public entities for interim and annual periods beginning after December 15, 2018 and for other entities for periods beginning after December 15, 2019. The adoption of this ASU will result in an increase to the Consolidated Balance Sheets for right-of-use assets and associated lease liabilities for operating leases in which the Company is the lessee. Additionally, in July 2018, the FASB issued ASU No. 2018-10, Codification Improvements to Topic 842, Leases and ASU No. 2018-11, Leases, Targeted Improvements. The amendments in these updates provide additional clarification and implementation guidance on certain aspects of ASU 2016-02 and have the same effective and transition requirements as ASU 2016-02. Specifically, ASU 2018-11 creates an additional transition method option allowing entities to record a cumulative effect adjustment to opening retained earnings in the year of adoption. Implementation of this standard is not expected to have a material impact on the Corporation’s consolidated financial statements.

ASU 2014-09, “Revenue from Contracts with Customers (Topic 606).” Issued in May 2014, ASU 2014-09 will add FASB ASC Topic 606, “Revenue from Contracts with Customers,” and will supersede revenue recognition requirements in FASB ASC Topic 605, “Revenue Recognition,” as well as certain cost guidance in FASB ASC Topic 605-35, “Revenue Recognition—Construction-Type and Production-Type Contracts.” ASU 2014-09 provides a framework for revenue recognition that replaces the existing industry and transaction specific requirements under the existing standards. ASU 2014-09 requires an entity to apply a five-step model to determine when to recognize revenue and at what amount. The model specifies that revenue should be recognized when (or as) an entity transfers control of goods or services to a customer at the amount in which the entity expects to be entitled. Depending on whether certain criteria are met, revenue should be recognized either over time, in a manner that depicts the entity’s performance, or at a point in time, when control of the goods or services are transferred to the customer. ASU 2014-09 provides that an entity should apply the following steps: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when, or as, the entity satisfies a performance obligation. In addition, the existing requirements for the recognition of a gain or loss on the transfer of non-financial assets that are not in a contract with a customer are amended to be consistent with the guidance on recognition and measurement in ASU 2014-09. The amendments of ASU 2014-09 may be applied either retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial application. If the transition method of application is elected, the entity should also provide the additional disclosures in reporting periods that include the date of initial application of (1) the amount by which each financial statement line item is affected in the current reporting period, as compared to the guidance that was in effect before the change, and (2) an explanation of the reasons for significant changes. ASU 2015-14, “Revenue from Contracts with Customers (Topic 606)-Deferral of the Effective Date,” issued in August 2015, defers the effective date of ASU 2014-09 by one year. ASU 2015-14 provides that the amendments of ASU 2014-09 become effective for public business entities for fiscal years beginning after December 15, 2017, and for private companies for fiscal years beginning after December 15, 2018. All subsequently issued ASU’s which provide additional guidance and clarifications to various aspects of FASB ASC Topic 606 will become effective when the amendments of ASU 2014-09 become effective. These subsequently issued ASU’s include ASU 2016-08 “Revenue from Contracts with Customers (Topic 606)-Principal versus Agent Considerations,” ASU 2016-10 “Revenue from Contracts with Customers (Topic 606)-Identifying Performance Obligations and Licensing,” and ASU 2016-12 “Revenue from Contracts with Customers (Topic 606)-Narrow Scope Improvements and Practical Expedients.” These amendments clarify the main provisions of ASU-2014-09 with respect to specific revenue types based upon implementation questions submitted. Specifically, revenue in which a third party satisfies a portion of the performance obligations, revenue from licensing activities, and the assessment of collectability, treatment of sales taxes, non-cash consideration, and contract modifications at transition. Management has elected to adopt this ASU using the private company effective date and has completed an analysis to determine which revenue streams are within the scope of ASU 2014-09 and the related clarifying ASU’s and has determined that interest income and revenue generated from transfers and servicing of financial instruments, specifically, gain on sale of loans and servicing fees are out of scope. Implementation of this standard is not expected to have a material impact on the Corporation’s consolidated financial statements.

F-95

NOTE 2. RESTRICTIONS ON CASH AND DUE FROM BANKS

The Bank is required to maintain reserve funds in cash or on deposit with the Federal Reserve Bank. At September 30, 2018 and December 31, 2017, the required reserves totaled $816,000 and $49,000, respectively.

NOTE 3. INVESTMENT SECURITIES

The amortized cost and fair values of investment securities at September 30, 2018 are as follows (Dollars in thousands):

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Available-for-Sale
Obligations of states and political subdivisions	$	18,349	$	3	$	(904	)	$	17,448
U.S. government agency mortgage-backed securities		110,969		—		(4,605	)		106,364
Collateralized mortgage obligations		27,141		—		(972	)		26,169
Totals		156,459		3		(6,481	)		149,981
Held-to-Maturity
Obligations of states and political subdivisions		353		3		(5	)		351
U.S. government agency mortgage-backed securities		—		—		—			—
Totals		353		3		(5	)		351
Totals—All Securities	$	156,812	$	3	$	(6,486	)	$	150,332

The balance sheet as of September 30, 2018 reflects the amortized cost of held-to-maturity securities, $353,000, and the fair value of available-for-sale securities, $149,981,000, for a total of $150,334,000. A net unrealized loss of $6,478,000 is included in the available-for-sale investment securities balance. The unrealized loss, net of tax benefit, is included in stockholders’ equity.

The amortized cost and fair values of investment securities at December 31, 2017 are as follows (Dollars in thousands):

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Available-for-Sale
Obligations of states and political subdivisions	$	52,941	$	995	$	(314	)	$	53,622
U.S. government agency mortgage-backed securities		116,105		42		(1,388	)		114,759
Collateralized mortgage obligations		25,020		11		(283	)		24,748
Totals		194,066		1,048		(1,985	)		193,129
Held-to-Maturity
Obligations of states and political subdivisions		390		9		(2	)		397
U.S. government agency mortgage-backed securities		—		—		—			—
Totals		390		9		(2	)		397
Totals—All Securities	$	194,456	$	1,057	$	(1,987	)	$	193,526

The balance sheet as of December 31, 2017 reflects the amortized cost of held-to-maturity securities, $390,000, and the fair value of available-for-sale securities, $193,129,000, for a total of $193,519,000. A net unrealized loss of $937,000 is included in the available-for-sale investment securities balance. The unrealized loss, net of tax benefit, is included in stockholders’ equity.

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The amortized cost and fair values of held-to-maturity and available-for-sale securities at September 30, 2018, by contractual maturity, are shown below (Dollars in thousands). Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Mortgage-backed securities and collateralized mortgage obligations are shown separately, since they are not due at a single maturity date.

	Available-for-Sale				Held-to-Maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Amounts maturing in:
One year or less	$	90	$	91	$	37	$	37
After one year through five years		410		413		104		104
After five years through ten years		1,812		1,716		78		75
After ten years		16,037		15,228		134		135
		18,349		17,448		353		351
Mortgage-backed securities		110,969		106,364		—		—
Collateralized mortgage obligations		27,141		26,169		—		—
Totals	$	156,459	$	149,981	$	353	$	351

During the three and nine months ended September 30, 2018, there were sales proceeds from sales of available-for-sale investment securities in the amount of $33,830,000 and $37,050,000, respectively which resulted in gross realized gains of $30,000 and gross realized losses of $8,000. During 2017, there were proceeds from sales of available-for-sale investment securities in the amount of $13,646,000 which resulted in gross realized gains of $64,000 and gross realized losses of $137,000.

Securities with amortized costs of $114,769,000 and $99,879,000 and fair values of $110,032,000 and $98,926,000 at September 30, 2018 and December 31, 2017, respectively, were pledged to secure public deposits and for other purposes as required or permitted by law.

Information pertaining to securities with gross unrealized losses at September 30, 2018 and December 31, 2017, aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows (Dollars in thousands):

	Less Than 12 Months					12 Months or Greater					Total
	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
September 30, 2018:
Federal agencies	$	87,269	$	(2,750	)	$	50,841	$	(2,827	)	$	138,110	$	(5,577	)
State and municipal governments		10,596		(300	)		6,850		(609	)		17,446		(909	)
Totals	$	97,865	$	(3,050	)	$	57,691	$	(3,436	)	$	155,556	$	(6,486	)
December 31, 2017:
Federal agencies	$	70,064	$	(622	)	$	48,682	$	(1,049	)	$	118,746	$	(1,671	)
State and municipal governments		4,022		(44	)		9,800		(272	)		13,822		(316	)
Totals	$	74,086	$	(666	)	$	58,482	$	(1,321	)	$	132,568	$	(1,987	)

Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer and (3) the intent and ability of the Corporation to retain its investment in the issue for a period of time sufficient to allow for any anticipated recovery in fair value.

F-97

At September 30, 2018, the Corporation’s investment portfolio consisted of 274 securities, 250 of which were in an unrealized loss position. 130 of the 250 securities in an unrealized loss position at September 30, 2018 were in an unrealized loss position for less than 12 months. These securities are guaranteed by either the U.S. Government or other governments. These unrealized losses relate principally to current interest rates for similar types of securities. In analyzing an issuer’s financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred and the results of reviews of the issuer’s financial condition. As management has the ability to hold debt securities until maturity, or for the foreseeable future if classified as available-for-sale, no declines are deemed to be other-than-temporary.

NOTE 4. LOANS

An analysis of loan categories at September 30, 2018 and December 31, 2017 is as follows (Dollars in thousands):

	September 30, 2018			December 31, 2017
Commercial and agricultural loans	$	19,340		$	22,162
Real estate (RE) loans:
Construction, land and land development		36,332			34,769
Residential 1-4 family		28,001			28,792
Commercial RE		27,929			30,484
Consumer loans		8,160			9,215
Overdrafts		48			74
		119,810			125,496
Less: Deferred loan fees		(38	)		(35	)
Allowance for loan and lease losses		(3,092	)		(3,117	)
Loans, Net	$	116,680		$	122,344

There were no consumer mortgages secured by residential real properties for which formal foreclosure proceedings were in process as of September 30, 2018 and December 31, 2017.

Refer to Note 11 for information regarding loans that have been pledged as collateral.

Refer to Note 8 for information regarding loans to executive officers and directors.

NOTE 5. ALLOWANCE FOR LOAN AND LEASE LOSSES

The allowance for loan and lease losses is a reserve established through a provision for loan losses charged to expense, which represents management’s best estimate of probable losses that have been incurred within the existing portfolio of loans. The allowance, in the judgment of management, is necessary to reserve for estimated loan losses and risks inherent in the loan portfolio. The methodology is based on historical loss experience by type of credit and internal risk grade, changes in the composition and volume of the portfolio, and specific loss allocations, with adjustments for current events and conditions. The Corporation’s process for determining the appropriate level of allowance for loan and leases losses is designated to account for credit deterioration as it occurs.

F-98

Transactions in the allowance for loan and lease losses for the nine months ended September 30, 2018 are summarized as follows (Dollars in thousands):

	Commercial/ Agricultural			Construction, Land and Land Development			Residential Real Estate			Commercial Real Estate		Consumer and Other			Unallocated		September 30, 2018 Total
Allowance for Loan and Lease Losses:
Balance, beginning of year	$	459		$	663		$	720		$	582	$	247		$	446	$	3,117
Reallocation of loan loss provisions		(90	)		(1	)		(209	)		8		(24	)		316		—
		369			662			511			590		223			762		3,117
Loans charged-off		(15	)		—			—			—		(45	)		—		(60	)
Recoveries of loans previously charged-off		5			1			—			—		29			—		35
Net (charge-offs) recoveries		(10	)		1			—			—		(16	)		—		(25	)
Balance, end of year	$	359		$	663		$	511		$	590	$	207		$	762	$	3,092
Ending balance:
Individually evaluated for impairment	$	—		$	—		$	5		$	—	$	—		$	—	$	5
Ending balance:
Collectively evaluated for impairment		359			663			506			590		207			762		3,087
Balance, end of year	$	359		$	663		$	511		$	590	$	207		$	762	$	3,092
Loans:
Ending balance:
Individually evaluated for impairment	$	—		$	—		$	31		$	—	$	—				$	31
Ending balance:
Collectively evaluated for impairment		19,340			36,332			27,970			27,929		8,208					119,779
Ending balance total loans	$	19,340		$	36,332		$	28,001		$	27,929	$	8,208				$	119,810

F-99

Transactions in the allowance for loan and lease losses for the year ended December 31, 2017 are summarized as follows (Dollars in thousands):

	Commercial/ Agricultural			Construction, Land and Land Development		Residential Real Estate			Commercial Real Estate			Consumer and Other			Unallocated		December 31, 2017 Total
Allowance for Loan and Lease Losses:
Balance, beginning of year	$	502		$	593	$	790		$	653		$	242		$	223	$	3,003
Reallocation of loan loss provisions		(115	)		69		(57	)		(70	)		(50	)		223		—
		687			662		733			583			192			446		3,003
Loans charged-off		(10	)		—		(13	)		(10	)		(77	)		—		(110	)
Recoveries of loans previously charged-off		82			1		—			9			132			—		224
Net (charge-offs) recoveries		72			1		(13	)		(1	)		55			—		114
Balance, end of year	$	459		$	663	$	720		$	582		$	247		$	446	$	3,117
December 31, 2017:
Ending balance:
Individually evaluated for impairment	$	19		$	—	$	55		$	—		$	—		$	—	$	74
Ending balance:
Collectively evaluated for impairment		440			663		665			582			247			446		3,043
Balance, end of year	$	459		$	663	$	720		$	582		$	247		$	446	$	3,117
Loans:
Ending balance:
Individually evaluated for impairment	$	129		$	—	$	366		$	—		$	—				$	495
Ending balance:
Collectively evaluated for impairment		22,033			34,769		28,426			30,484			9,289					125,001
Ending balance total loans	$	22,162		$	34,769	$	28,792		$	30,484		$	9,289				$	125,496

Federal regulations require that the Corporation periodically evaluate the risks inherent in its loan portfolio. In addition, the Corporation’s regulatory agencies have authority to identify problem loans and, if appropriate, require them to be reclassified. There are three classifications for problem loans: Substandard, Doubtful and Loss. Substandard loans have one or more defined weaknesses and are characterized by the distinct possibility that the Corporation will sustain some loss if the deficiencies are not corrected. Doubtful loans have the weaknesses of loans classified as “Substandard,” with additional characteristics that suggest the weaknesses make collection or recovery in full after liquidation of collateral questionable on the basis of currently existing facts, conditions and values. There is a high possibility of loss in loans classified as “Doubtful.” Because of the high possibility of loss, these loans are charged-off by the Corporation through the allowance for loan and lease losses. A loan classified as “Loss” is considered uncollectible and of such little value that continued classification of the credit as a loan is not warranted. If a loan or a portion thereof is classified as “Loss,” it must be charged-off, meaning the amount of the loan is charged against the allowance for loan and lease losses, thereby reducing that reserve. The Corporation also classifies some loans as “Watch” or “Other Assets Especially Mentioned” (“OAEM”). Loans classified as Watch are performing assets and classified as pass credits but have elements of risk that require more monitoring than other performing loans. Loans classified as OAEM are assets that continue to perform but have shown deterioration in credit quality and require close monitoring.

F-100

Loans by credit quality risk rating at September 30, 2018 are as follows (Dollars in thousands):

	Pass		Other Assets Especially Mentioned		Sub-Standard		Doubtful		Total
Commercial and agricultural loans	$	18,989	$	79	$	272	$	—	$	19,340
Real estate (RE) loans:
Construction, land and land development		36,332		—		—		—		36,332
Residential 1-4 family		27,511		—		490		—		28,001
Commercial RE		26,722		—		1,207		—		27,929
Consumer and other loans		7,838		115		255		—		8,208
Subtotal	$	117,392	$	194	$	2,224	$	—		119,810
Less: Deferred loan fees										(38	)
Total loans									$	119,772

Loans by credit quality risk rating at December 31, 2017 are as follows (Dollars in thousands):

	Pass		Other Assets Especially Mentioned		Sub-Standard		Doubtful		Total
Commercial and agricultural loans	$	21,524	$	67	$	571	$	—	$	22,162
Real estate (RE) loans:
Construction, land and land development		34,343		—		426		—		34,769
Residential 1-4 family		26,911		303		1,578		—		28,792
Commercial RE		30,170		—		314		—		30,484
Consumer and other loans		8,755		158		376		—		9,289
Subtotal	$	121,703	$	528	$	3,265	$	—		125,496
Less: Deferred loan fees										(35	)
Total loans									$	125,461

An analysis of nonaccrual loans by category at September 30, 2018 and December 31, 2017 is as follows (Dollars in thousands):

	September 30, 2018		December 31, 2017
Commercial and agricultural loans	$	—	$	129
Real estate (RE) loans:
Residential 1-4 family		31		366
Total nonaccrual loans	$	31	$	495

At September 30, 2018, all nonaccrual loans were current. At December 31, 2017, nonaccrual loans past due 60-89 days consisted of $114,000 of residential 1-4 family loans. At December 31, 2017, nonaccrual loans past due 90 days or more consisted of $10,000 of commercial and agriculture loans and $214,000 of residential 1-4 family loans. At December 31, 2017, all remaining nonaccruals loans were current.

F-101

At September 30, 2018 and December 31, 2017, a summary of information pertaining to impaired loans is as follows (Dollars in thousands):

	Unpaid Contractual Principal Balance		Recorded Investment with No Allowance		Recorded Investment with Allowance		Total Recorded Investment		Related Allowance		Average Recorded Investment		Interest Income Recognized
September 30, 2018:
Commercial and agricultural loans	$	—	$	—	$	—	$	—	$	—	$	65	$	—
Real estate (RE) loans:
Residential 1-4 family		39		—		31		31		5		199		—
Commercial real estate		—		—		—		—		—		167		—
Totals	$	39	$	—	$	31	$	31	$	5	$	431	$	—
December 31, 2017:
Commercial and agricultural loans	$	157	$	—	$	129	$	129	$	19	$	133	$	—
Real estate (RE) loans:
Residential 1-4 family		399		—		366		366		55		365		—
Commercial real estate		—		—		—		—		—		334		—
Consumer and other loans		—		—		—		—		—		11		—
Totals	$	556	$	—	$	495	$	495	$	74	$	843	$	—

At September 30, 2018 and December 31, 2017, the Corporation has no commitments to loan additional funds to borrowers whose loans are impaired.

At September 30, 2018 and December 31, 2017, the Corporation had no troubled debt restructurings.

The following table illustrates an age analysis of past due loans as of September 30, 2018 (Dollars in thousands):

	30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current			Total Loans			Recorded Investment 90 Days or More and Still Accruing
Commercial and agricultural loans	$	162	$	—	$	—	$	162	$	19,178		$	19,340		$	—
Real estate (RE) loans:
Construction, land and land development		52		—		—		52		36,280			36,332			—
Residential 1-4 family		299		—		—		299		27,702			28,001			—
Commercial RE		178		387		—		565		27,364			27,929			—
Consumer and other loans		179		—		9		188		8,020			8,208			—
Less: Deferred loan fees		—		—		—		—		(38	)		(38	)		—
Totals	$	870	$	387	$	9	$	1,266	$	118,506		$	119,772		$	—

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The following table illustrates an age analysis of past due loans as of December 31, 2017 (Dollars in thousands):

	30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current			Total Loans			Recorded Investment 90 Days or More and Still Accruing
Commercial and agricultural loans	$	72	$	—	$	10	$	82	$	22,080		$	22,162		$	—
Real estate (RE) loans:
Construction, land and land development		296		233		—		529		34,240			34,769			—
Residential 1-4 family		538		152		214		904		27,888			28,792			—
Commercial RE		536		120		—		656		29,828			30,484			—
Consumer and other loans		123		19		—		142		9,147			9,289			—
Less: Deferred loan fees		—		—		—		—		(35	)		(35	)		—
Totals	$	1,565	$	524	$	224	$	2,313	$	123,148		$	125,461		$	—

NOTE 6. GOODWILL AND OTHER INTANGIBLE ASSETS

On August 10, 2006, the Corporation acquired First National Bank of Santo. A premium of $5,423,000 was paid by the Corporation, of which $1,608,000 was identified as core deposit intangibles. The remaining $3,815,000 was recorded as goodwill. In accordance with authoritative guidance issued by the FASB, the goodwill will not be amortized and is evaluated for impairment annually. No impairment loss was recorded during the three and nine months ended September 30, 2018 or during the year ended December 31, 2017. The core deposit intangibles were amortized using a straight line method over their estimated useful life of 8 years. The core deposit intangibles became fully amortized in 2014. As a result, there was no amortization expense recorded during the three and nine months ended September 30, 2018 or during the year ended December 31, 2017.

NOTE 7. INCOME TAXES

The Corporation uses an estimated annual effective tax rate method in computing its interim tax provision. This effective tax rate is based on pre-tax income, permanent tax differences and statutory tax rates. The effective tax rates for the nine months ended September 30, 2018 and 2017 were 13.6% and 19.4%, respectively. The decrease in the effective tax rate for the three months ended September 30, 2018 was primarily due to the enactment of the Tax Reform which reduced the corporate tax rate from 34.0% to 21.0%.

NOTE 8. RELATED PARTY TRANSACTIONS

During the nine months ended September 30, 2018 and the year ended December 31, 2017, the Corporation had transactions made in the ordinary course of business with certain of its officers, directors and principal shareholders. All loans included in such transactions were made on substantially the same terms, including interest rate and collateral, as those prevailing at the time for comparable transactions with other persons, and did not, in the opinion of management, involve more than normal credit risk or present other unfavorable features.

A summary of these transactions follows (Dollars in thousands):

	Balance Beginning of Year		Additions		Amounts Collected			Balance End of Year
For the nine months ended
September 30, 2018	$	3,253	$	982	$	(281	)	$	3,954
For the year ended
December 31, 2017	$	3,072	$	19,985	$	(19,804	)	$	3,253

F-103

At September 30, 2018 and December 31, 2017, there were no unfunded commitments to related parties.

At September 30, 2018 and December 31, 2017, the Corporation held deposits of $5,772,000 and 5,648,000 for related parties.

NOTE 9. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK

In the normal course of business, the Corporation has outstanding commitments and contingent liabilities, such as commitments to extend credit and standby letters of credit, which are not included in the accompanying consolidated financial statements. The Corporation’s exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual or notional amount of those instruments. The Corporation uses the same credit policies in making such commitments as it does for instruments that are included in the consolidated balance sheets.

Financial instruments whose contract amount represents credit risk were as follows (Dollars in thousands):

	September 30, 2018		December 31, 2017
Commitments to extend credit	$	13,507	$	11,973
Standby letters of credit		467		467

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Corporation evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Corporation upon extension of credit, is based on management’s credit evaluation. Collateral held varies but may include accounts receivable, inventory, property and equipment and income-producing commercial properties.

Standby letters of credit are conditional commitments issued by the Corporation to guarantee the performance of a customer to a third party. Standby letters of credit generally have fixed expiration dates or other termination clauses and may require payment of a fee. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Corporation’s policy for obtaining collateral, and the nature of such collateral, is essentially the same as that involved in making commitments to extend credit.

The Corporation has not been required to perform on any financial guarantees during the past two years. The Corporation has not incurred any losses on its commitments in either the nine months ended September 30, 2018 or the year ended December 31, 2017.

NOTE 10. COMMITMENTS AND CONTINGENT LIABILITIES

Comanche National Corporation and Subsidiaries are subject to claims and lawsuits which arise primarily in the ordinary course of business. It is the opinion of management that the disposition or ultimate resolution of such claims and lawsuits will not have a material adverse effect on the consolidated financial position of the Corporation.

NOTE 11. LINES OF CREDIT

The Corporation has established $21,408,000 in unsecured lines of credit for overnight purchase of federal funds. These lines may be cancelled without any prior notification. There were no outstanding balances on these lines of credit at September 30, 2018 and December 31, 2017.

F-104

The Corporation has also established a borrowing line with FHLB. At September 30, 2018 and December 31, 2017, there were available funds of $53,000,000 and $52,631,000, respectively, on this borrowing line. This line is secured by a blanket pledge of eligible loans with a carrying amount of $110,617,000 and $115,305,000 at September 30, 2018 and December 31, 2017, respectively. There were no outstanding balances on this line at September 30, 2018 and December 31, 2017.

NOTE 12. REGULATORY MATTERS

Banks are subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory (and possibly additional discretionary) actions by regulators that, if undertaken, could have a direct material effect on the Bank’s financial statements. Under the regulatory capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital adequacy guidelines that involve quantitative measures of the Bank’s assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification under the prompt corrective action guidelines are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios of: Total Risk-Based capital, Tier 1 capital and Common Equity Tier 1 capital to risk-weighted assets (as defined in the regulations), and Leverage capital, which is Tier 1 capital to adjusted total assets (as defined). Management believes, as of September 30, 2018 and December 31, 2017, that the Bank meets all capital adequacy requirements to which it is subject.

The Bank’s Tier 1 capital consists of shareholder’s equity excluding unrealized gains and losses on securities available-for-sale and goodwill.

The Comanche National Bank has been notified by its regulator that, as of its most recent regulatory examination, the Bank is regarded as well capitalized under the regulatory framework for prompt corrective action. Such determination has been made based on the Bank’s Common Equity Tier 1, Tier 1, total capital and leverage ratios. There have been no conditions or events since this notification that management believes would change the Bank’s categorization as well capitalized under the ratios listed on the next page.

Beginning January 1, 2015, community banking organizations became subject to a new regulatory rule adopted by federal banking agencies (commonly referred to as Basel III). The new rule establishes a new regulatory capital framework that incorporates revisions to the Basel capital framework, strengthens the definition of regulatory capital, increases risk-based capital requirements and amends the methodologies for determining risk-weighted assets. These changes are expected to increase the amount of capital required by community banking organizations. Basel III includes a multi-year transition period from January 1, 2015 through December 31, 2019.

Management believes that, as of September 30, 2018 and December 31, 2017, the Bank would meet all capital adequacy requirements under the Basel III Capital rules on a fully phased-in basis as if such requirements were currently in effect; however, final rules are subject to regulatory discretion and could result in the need for additional capital in the future.

F-105

The Bank’s actual and required capital amounts and ratios are as follows (Dollars in thousands):

	Actual					Minimum Required for Capital Adequacy Purposes					Required to be Well Capitalized under the Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of September 30, 2018:
Total Risk-based Capital (to Risk-weighted Assets)	$	42,406		27.42	%	$	12,372		8.00	%	$	15,465		10.00	%
Tier 1 Capital (to Risk-weighted Assets)	$	40,459		26.16	%	$	9,279		6.00	%	$	12,372		8.00	%
Common Equity Tier 1 Capital (to Risk-weighted Assets)	$	40,459		26.16	%	$	6,959		4.50	%	$	10,052		6.50	%
Leverage Capital (to Adjusted Total Assets)	$	40,459		12.01	%	$	13,473		4.00	%	$	16,841		5.00	%
As of December 31, 2017:
Total Risk-based Capital (to Risk-weighted Assets)	$	39,731		23.79	%	$	13,362		8.00	%	$	16,702		10.00	%
Tier 1 Capital (to Risk-weighted Assets)	$	37,631		22.53	%	$	10,021		6.00	%	$	13,362		8.00	%
Common Equity Tier 1 Capital (to Risk-weighted Assets)	$	37,631		22.53	%	$	7,562		4.50	%	$	10,922		6.50	%
Leverage Capital (to Adjusted Total Assets)	$	37,631		11.15	%	$	13,498		4.00	%	$	16,872		5.00	%

NOTE 13. FAIR VALUES OF FINANCIAL INSTRUMENTS

The estimated fair values of the Corporation’s financial instruments are as follows (Dollars in thousands):

	September 30, 2018				December 31, 2017
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Financial assets:
Cash and cash equivalents	$	51,870	$	51,870	$	22,996	$	22,996
Investment securities		150,334		150,332		193,519		193,526
FHLB and Fed stock		331		331		329		329
Loans, net		116,680		119,122		122,344		122,870
Bank-owned life insurance		6,875		6,875		6,749		6,749
Accrued interest receivable		1,169		1,169		1,898		1,898
Financial liabilities:
Deposits		296,880		273,944		313,446		300,041
Debentures		2,811		2,811		3,311		3,311
Accrued interest payable		134		134		133		133

The carrying amounts in the preceding table are included in the consolidated balance sheets under the applicable captions.

NOTE 14. FAIR VALUE MEASUREMENTS

The Corporation has adopted authoritative guidance issued by the FASB regarding fair value measurements for financial assets and financial liabilities. The authoritative guidance defines fair value, establishes a framework for

F-106

measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements.

The authoritative guidance issued by the FASB defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability shall not be adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact and (iv) willing to transact.

The authoritative guidance issued by the FASB requires the use of valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities. The income approach uses valuation techniques to convert future amounts, such as cash flows or earnings, to a single present amount on a discounted basis. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement cost). Valuation techniques should be consistently applied. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. In that regard, the authoritative guidance establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:

• Level 1 Inputs: Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

• Level 2 Inputs: Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatilities, prepayment speeds, credit risks, etc.) or inputs that are derived principally from or corroborated by market data by correlation or other means.

• Level 3 Inputs: Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.

A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.

In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon internally developed models that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality and the Corporation’s creditworthiness, among other things, as well as unobservable parameters. Any such valuation adjustments are applied consistently over time. The Corporation’s valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While management believes

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the Corporation’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.

Securities Available-for-Sale: U.S. Treasury securities are reported at fair value utilizing Level 1 inputs. Other securities classified as available-for-sale are reported at fair value utilizing Level 2 inputs. For these securities, the Corporation obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things.

Impaired Loans: Certain impaired loans are reported at the fair value of the underlying collateral if repayment is expected solely from the collateral. Collateral values are estimated using Level 2 inputs based on observable market data or Level 3 inputs based on customized discounting criteria.

Other Real Estate Owned: Other real estate owned represents foreclosed assets that are reported at the fair value less estimated selling costs of the underlying property. The fair values are estimated using Level 2 inputs based on observable market data or Level 3 inputs based on information obtained from customized discounting criteria.

There were no financial liabilities measured at fair value on a recurring basis as of September 30, 2018 and December 31, 2017. The following table summarizes financial assets measured at fair value on a recurring basis as of September 30, 2018 and December 31, 2017, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure the fair value (Dollars in thousands):

	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value
September 30, 2018:
Available-For-Sale
Obligations of states and political subdivisions	$	—	$	17,448	$	—	$	17,448
U.S. government agency mortgage-backed securities		—		106,364		—		106,364
Collateralized mortgage obligations		—		26,169		—		26,169
Totals	$	—	$	149,981	$	—	$	149,981
December 31, 2017:
Available-For-Sale
Obligations of states and political subdivisions	$	—	$	53,622	$	—	$	53,622
U.S. government agency mortgage-backed securities		—		114,759		—		114,759
Collateralized mortgage obligations		—		24,748		—		24,748
Totals	$	—	$	193,129	$	—	$	193,129

Certain financial assets are measured at fair value on a non-recurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). Financial assets measured at fair value on a non-recurring basis include certain impaired loans reported at the fair value of the underlying collateral if repayment is expected solely from the collateral. Collateral values are estimated using Level 2 inputs based on observable market data or Level 3 inputs based on customized discounting criteria.

F-108

The following table summarizes financial assets measured at fair value on a non-recurring basis as of September 30, 2018 and December 31, 2017, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure the fair value (Dollars in thousands):

	Level 1 Inputs		Level 2 Inputs			Level 3 Inputs		Total Fair Value
September 30, 2018:
Impaired loans	$	—	$	31		$	—	$	31
Less valuation allowance for possible loan losses		—		(5	)		—		(5	)
Impaired loans, net	$	—	$	26		$	—	$	26
December 31, 2017:
Impaired loans	$	—	$	495		$	—	$	495
Less valuation allowance for possible loan losses		—		(74	)		—		(74	)
Impaired loans, net	$	—	$	421		$	—	$	421

Certain nonfinancial assets are measured at fair value on a non-recurring basis. Nonfinancial assets measured at fair value on a non-recurring basis include other real estate owned which, upon initial recognition, were remeasured and reported at fair value through a charge-off to the allowance for loan and lease losses and certain other real estate owned, which subsequent to their initial recognition, were remeasured at fair value through a writedown included in other non-interest expense. The fair value of other real estate owned is estimated using Level 2 inputs based on observable market data or Level 3 inputs based on customized discounting criteria. At September 30, 2018 and December 31, 2017, the Corporation had other real estate owned totaling $33,000 and $113,000, respectively. Fair values were determined using Level 2 measurements.

During the nine months ended September 30, 2018, there were no charge-offs recognized in the allowance for loan and lease losses at the time of foreclosure. During the year ended December 31, 2017, there were charge-offs recognized in the allowance for loan and lease losses at the time of foreclosure in the amount of $13,000. During the nine months ended June 30, 2018 and the year ended December 31, 2017, there were no writedowns included in other non-interest expense relating to other real estate owned.

NOTE 15. BASIC AND DILUTED EARNINGS PER COMMON SHARE

For the nine months ended September 30, 2018 and 2017, the Corporation did not have any dilutive securities. This results in the dilutive EPS being equivalent to the basic EPS. The following table presents the computation of basic and diluted EPS (Dollars in thousands, except per share data):

	Nine Months Ended September 30,
	2018		2017
Net income available to common stockholders	$	2,578	$	2,445
Weighted average number of common shares—basic and diluted		399,811		402,032
Basic and diluted earnings per common share	$	6.45	$	6.08

F-109

NOTE 16. SUBSEQUENT EVENT

On July 19, 2018, the Corporation and Spirit of Texas Bancshares, Inc. (“Spirit”) entered into an Agreement and Plan of Reorganization (the “Reorganization Agreement”) providing for the acquisition by Spirit of the Corporation pursuant to the merger of the Corporation with and into Spirit, with Spirit surviving the merger. Pursuant to the terms and subject to the conditions of the Reorganization Agreement, which has been approved by the Board of Directors of both the Corporation and Spirit, the transaction provides for the payment to the Corporation’s shareholders an estimated $12.2 million in cash and 2,142,857 shares of Spirit’s common stock, subject to certain adjustments. The transaction is expected to close in the fourth quarter of 2018, subject to satisfaction of customary closing conditions, including the receipt of regulatory approvals and the approvals of Spirit’s and the Corporation’s respective shareholders.

F-110

COMANCHE NATIONAL CORPORATION

AND SUBSIDIARIES

COMANCHE, TEXAS

AUDITED CONSOLIDATED FINANCIAL STATEMENTS

AND

AUDITED BANK ONLY FINANCIAL STATEMENTS

FOR

The Comanche National Bank

December 31, 2017 and 2016

F-111

CONTENTS

	PAGE
AUDITED FINANCIAL STATEMENTS:
Independent Auditor’s Report		F-113
Comanche National Corporation and Subsidiaries (Consolidated):
Balance Sheets		F-115
Statements of Income		F-116
Statements of Comprehensive Income (Loss)		F-117
Statements of Changes in Shareholders’ Equity		F-118
Statements of Cash Flows		F-119
The Comanche National Bank (Bank Only):
Balance Sheets		F-120
Statements of Income		F-121
Statements of Comprehensive Income (Loss)		F-122
Statements of Changes in Shareholder’s Equity		F-123
Statements of Cash Flows		F-124
Notes to Financial Statements:
Consolidated and Bank Only		F-125
OTHER FINANCIAL INFORMATION:
Comanche National Corporation and Subsidiaries:
Consolidating Balance Sheet		F-150
Consolidating Statement of Income		F-151
Non-Interest Expense—The Comanche National Bank (Bank Only)		F-152

F-112

	INDEPENDENT AUDITOR’S REPORT
500 W. 7th Street Suite 900 Fort Worth, Texas 76102-4702 Phone 817-632-2500 Fax 817-632-2598 www.sga-cpas.com	To the Board of Directors and Shareholders of Comanche National Corporation Comanche, Texas We have audited the accompanying consolidated financial statements of Comanche National Corporation and Subsidiaries which comprise the balance sheets as of December 31, 2017 and 2016, and the related statements of income, comprehensive income (loss), changes in shareholders’ equity and cash flows for the years then ended, and the related notes to the consolidated financial statements. We have also audited the accompanying balance sheets of The Comanche National Bank (Bank Only) as of December 31, 2017 and 2016 and the related statements of income, comprehensive income (loss), changes in shareholder’s equity and cash flows for the years then ended. Management’s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with the accounting principles generally accepted in the United States of America; this includes the design, implementation and maintenance of internal controls relevant to the preparation and fair presentation of the consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditor’s Responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform our audits to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal controls relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal controls. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Comanche National Corporation and Subsidiaries and The Comanche National Bank (Bank Only) as of December 31, 2017 and 2016, and the results of their operations and their cash flows for the years then ended, in accordance with accounting principles generally accepted in the United States of America.
	CERTIFIED PUBLIC ACCOUNTANTS & BUSINESS ADVISORS

F-113

Other Matters

Our audits were conducted for the purpose of forming an opinion on the financial statements taken as a whole. The other financial information on pages 50-52 is presented for the purposes of additional analysis and is not a required part of the financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the financial statements. Such information has been subjected to the auditing procedures applied in the audit of the financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the financial statements or to the financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the other financial information is fairly stated in all material respects in relation to the financial statements taken as a whole.

STOVALL, GRANDEY & ALLEN, L.L.P.

Fort Worth, Texas

February 12, 2018

F-114

COMANCHE NATIONAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 2017 AND 2016

	2017			2016
ASSETS
Cash and cash equivalents:
Cash and due from banks—Note 3	$	11,331,641		$	6,498,618
Interest-bearing deposits maturing in less than three months		11,664,635			12,715,787
Total cash and cash equivalents		22,996,276			19,214,405
Investment securities—Note 4:
Available-for-sale		193,128,589			170,089,561
Held-to-maturity		390,058			500,904
Federal Home Loan Bank and Federal Reserve Bank stock, at cost—Note 2		329,650			328,450
Investment in unconsolidated subsidiary		94,000			110,000
Loans, net of deferred loan fees and allowance for loan losses—Note 5		122,343,946			122,655,747
Premises and equipment, net of accumulated depreciation—Note 6		5,541,753			5,720,836
Other foreclosed and repossessed assets		112,760			39,096
Net deferred tax assets—Note 11		577,170			1,208,967
Goodwill—Note 7		3,814,844			3,814,844
Bank-owned life insurance—Note 8		6,748,539			6,567,159
Accrued interest receivable		1,898,205			1,782,325
Other assets		407,676			334,084
Total Assets	$	358,383,466		$	332,366,378
LIABILITIES
Deposits—Note 9	$	313,446,320		$	289,910,338
Other liabilities:
Dividends payable		502,390			502,690
Accrued interest payable		132,866			123,893
Deferred compensation plans—Note 16		883,234			689,300
Other accrued expenses		855,310			873,870
Debentures payable—Note 10		3,311,000			3,811,000
Total other liabilities		5,684,800			6,000,753
Total Liabilities		319,131,120			295,911,091
Commitments and contingencies—Notes 13, 14, 15, 17 and 18
SHAREHOLDERS’ EQUITY
Common stock, no par value, stated value $2 per share:
Authorized—2,000,000 shares
Issued—450,000 shares		900,000			900,000
Capital surplus		17,446,851			17,446,851
Retained earnings		24,359,881			22,087,408
Accumulated other comprehensive loss, net of tax benefit of $196,820 in 2017 and $661,073 in 2016		(740,416	)		(1,283,259	)
Treasury stock at cost—48,088 and 47,848 shares at December 31, 2017 and 2016, respectively		(2,713,970	)		(2,695,713	)
Total Shareholders’ Equity		39,252,346			36,455,287
Total Liabilities and Shareholders’ Equity	$	358,383,466		$	332,366,378

The accompanying notes are an integral part of these financial statements.

F-115

COMANCHE NATIONAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016

	2017			2016
Interest income
Interest and fees on loans	$	7,452,332		$	7,016,617
Interest on investment securities:
Taxable		2,869,252			2,555,703
Exempt from federal income tax		1,556,507			1,581,111
		4,425,759			4,136,814
Interest on federal funds sold and deposits in correspondent banks		74,028			28,230
Other interest		2,910			2,976
Total interest income		11,955,029			11,184,637
Interest expense
On deposits		1,385,752			1,264,352
On borrowings		102,872			102,981
Total interest expense		1,488,624			1,367,333
Net interest income		10,466,405			9,817,304
Provision for loan losses—Note 5		—			—
Net interest income after provision for loan losses		10,466,405			9,817,304
Non-interest income
Service charges on deposit accounts		936,361			772,224
Net gain (loss) on sales of investment securities (includes $53,800 and ($126,701) for 2017 and 2016, respectively, of accumulated other comprehensive income (loss) reclassifications for unrealized gains (losses) on available-for-sale securities)		(72,920	)		212,265
Net gain on sales of other real estate		—			6,684
Earnings on bank-owned life insurance—Note 8		181,380			187,152
Other		536,125			485,607
Total non-interest income		1,580,946			1,663,932
Non-interest expense
Salaries and employee benefits		5,396,024			5,337,901
Occupancy expense		559,781			582,432
Furniture and equipment expense		471,753			481,205
Other		1,643,987			1,657,541
Total non-interest expense		8,071,545			8,059,079
Income before income taxes		3,975,806			3,422,157
Federal income tax—Note 11		999,935			569,054
Net Income	$	2,975,871		$	2,853,103

The accompanying notes are an integral part of these financial statements.

F-116

COMANCHE NATIONAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016

	2017		2016
Net Income	$	2,975,871	$	2,853,103
Other comprehensive income (loss), net of tax (benefit)
Securities available-for-sale:
Change in net unrealized gains/losses, net of tax (benefit), during the year		427,438		(2,885,215	)
Increase in net unrealized gains on securities available-for-sale due to reduction in federal income tax from 34% to 21%		61,605		—
Reclassification adjustment for net realized gains/losses on sales, net of tax (benefit), during the year		53,800		(126,701	)
Other comprehensive income (loss), net of tax (benefit)		542,843		(3,011,916	)
Comprehensive Income (Loss)	$	3,518,714	$	(158,813	)

The accompanying notes are an integral part of these financial statements.

F-117

COMANCHE NATIONAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016

	Common Stock		Capital Surplus		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Treasury Stock			Total
Balance at January 1, 2016	$	900,000	$	17,446,851	$	19,940,317		$	1,728,657		$	(2,378,360	)	$	37,637,465
Purchase treasury stock												(317,353	)		(317,353	)
Comprehensive income (loss) for the year ended December 31, 2016						2,853,103			(3,011,916	)					(158,813	)
Dividends declared—$1.75 per share						(706,012	)								(706,012	)
Balance at December 31, 2016		900,000		17,446,851		22,087,408			(1,283,259	)		(2,695,713	)		36,455,287
Purchase treasury stock												(18,257	)		(18,257	)
Comprehensive income for the year ended December 31, 2017						2,975,871			542,843						3,518,714
Dividends declared—$1.75 per share						(703,398	)								(703,398	)
Balance at December 31, 2017	$	900,000	$	17,446,851	$	24,359,881		$	(740,416	)	$	(2,713,970	)	$	39,252,346

The accompanying notes are an integral part of these financial statements.

F-118

COMANCHE NATIONAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016

	2017			2016
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	2,975,871		$	2,853,103
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		327,330			342,083
Deferred income tax (benefit)		167,544			(82,815	)
Stock dividends		(1,200	)		(400	)
Net premium amortization on investment securities		2,145,413			2,425,647
Net (gain) loss on sales of investment securities		72,920			(212,265	)
Net gain on sales of other real estate		—			(6,684	)
Earnings on bank-owned life insurance		(181,380	)		(187,152	)
(Increase) decrease in accrued income and other assets		(189,771	)		124,656
Increase in accrued expenses and other liabilities		184,347			336,656
Total adjustments		2,525,203			2,739,726
Net Cash Provided by Operating Activities		5,501,074			5,592,829
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investment securities:
Available-for-sale		(65,162,340	)		(43,577,415	)
Proceeds from maturities and calls of investment securities:
Available-for-sale		3,890,000			5,900,000
Held-to-maturity		110,822			107,822
Proceeds from sales of investment securities:
Available-for-sale		13,645,898			23,671,869
Principal payments on mortgage-backed securities:
Available-for-sale		23,376,178			26,059,633
Held-to-maturity		23			21
Net (increase) decrease in loans		238,436			(13,576,959	)
Proceeds from partial redemption of common stock held in trust subsidiary		16,000			16,000
Purchases of premises and equipment		(148,247	)		(579,366	)
Net Cash Used by Investing Activities	$	(24,033,230	)	$	(1,978,395	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand deposits, interest-bearing transaction accounts and savings	$	20,329,872		$	12,732,757
Net increase (decrease) in certificates of deposit		3,206,110			(3,633,135	)
Purchases of treasury stock		(18,257	)		(317,353	)
Payments on debentures		(500,000	)		(500,000	)
Dividends paid		(703,698	)		(711,627	)
Net Cash Provided by Financing Activities		22,314,027			7,570,642
Net increase in cash and cash equivalents		3,781,871			11,185,076
Cash and cash equivalents at beginning of year		19,214,405			8,029,329
Cash and cash equivalents at end of year	$	22,996,276		$	19,214,405
Supplemental Schedule of Operating and Investing Activities:
Interest paid	$	1,479,651		$	1,360,516
Income tax paid		879,164			683,675
Other real estate acquired through loan foreclosure		768,515			98,760
Bank financed sales of other real estate		688,515			211,172

F-119

THE COMANCHE NATIONAL BANK

BALANCE SHEETS

(BANK ONLY)

DECEMBER 31, 2017 AND 2016

	2017			2016
ASSETS
Cash and cash equivalents:
Cash and due from banks	$	11,321,380		$	6,487,880
Interest-bearing deposits maturing in less than three months		11,664,635			12,715,787
Total cash and cash equivalents		22,986,015			19,203,667
Investment securities:
Available-for-sale		193,128,589			170,089,561
Held-to-maturity		390,058			500,904
Federal Home Loan Bank and Federal Reserve Bank stock, at cost		329,650			328,450
Loans, net of deferred loan fees and allowance for loan losses		122,343,946			122,655,747
Premises and equipment, net of accumulated depreciation		5,511,029			5,689,897
Other foreclosed and repossessed assets		112,760			39,096
Net deferred tax assets		577,164			1,208,967
Goodwill		3,814,844			3,814,844
Bank-owned life insurance		6,748,539			6,567,159
Accrued interest receivable		1,898,061			1,782,189
Other assets		371,017			319,671
Total Assets	$	358,211,672		$	332,200,152
LIABILITIES
Deposits	$	315,639,362		$	291,879,908
Other liabilities:
Accrued interest payable		127,803			119,190
Deferred compensation plans		883,234			689,300
Other accrued expenses		855,310			873,870
Federal income taxes payable:
Current		—			21,817
Total other liabilities		1,866,347			1,704,177
Total Liabilities		317,505,709			293,584,085
Commitments and contingencies—Notes 13, 14, 15, 17 and 18
SHAREHOLDER’S EQUITY—Note 20
Common stock, $20 par value per share:
Authorized, issued and outstanding—45,000 shares		900,000			900,000
Capital surplus		5,238,270			5,238,270
Retained earnings		35,308,109			33,761,056
Accumulated other comprehensive loss, net of tax benefit of $196,820 in 2017 and $661,073 in 2016		(740,416	)		(1,283,259	)
Total Shareholder’s Equity		40,705,963			38,616,067
Total Liabilities and Shareholder’s Equity	$	358,211,672		$	332,200,152

The accompanying notes are an integral part of these financial statements.

F-120

THE COMANCHE NATIONAL BANK

STATEMENTS OF INCOME

(BANK ONLY)

FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016

	2017			2016
Interest income
Interest and fees on loans	$	7,452,332		$	7,016,617
Interest on investment securities:
Taxable		2,869,252			2,555,703
Exempt from federal income tax		1,556,507			1,581,111
		4,425,759			4,136,814
Interest on federal funds sold and deposits in correspondent banks		74,028			28,230
Total interest income		11,952,119			11,181,661
Interest expense
On deposits		1,385,752			1,264,352
On borrowings		1,167			1,086
Total interest expense		1,386,919			1,265,438
Net interest income		10,565,200			9,916,223
Provision for loan losses		—			—
Net interest income after provision for loan losses		10,565,200			9,916,223
Non-interest income
Service charges on deposit accounts		936,361			772,224
Net gain (loss) on sales of investment securities (includes $53,800 and ($126,701) for 2017 and 2016, respectively, of accumulated other comprehensive income (loss) reclassifications for unrealized gains (losses) on available-for-sale securities)		(72,920	)		212,265
Net gain on sales of other real estate		—			6,684
Earnings on bank-owned life insurance		181,380			187,152
Other		536,125			485,607
Total non-interest income		1,580,946			1,663,932
Non-interest expense
Salaries and employee benefits		5,396,024			5,337,901
Occupancy expense		559,566			581,732
Furniture and equipment expense		471,753			481,205
Other		1,635,149			1,650,599
Total non-interest expense		8,062,492			8,051,437
Income before income taxes		4,083,654			3,528,718
Federal income tax		1,036,601			605,283
Net Income	$	3,047,053		$	2,923,435

The accompanying notes are an integral part of these financial statements.

F-121

THE COMANCHE NATIONAL BANK

STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(BANK ONLY)

FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016

	2017		2016
Net Income	$	3,047,053	$	2,923,435
Other comprehensive income (loss), net of tax (benefit)
Securities available-for-sale:
Change in net unrealized gains/losses, net of tax (benefit), during the year		427,438		(2,885,215	)
Increase in net unrealized gains on securities available-for-sale due to reduction in federal income tax from 34% to 21%		61,605		—
Reclassification adjustment for net realized gains/losses on sales, net of tax (benefit), during the year		53,800		(126,701	)
Other comprehensive income (loss), net of tax (benefit)		542,843		(3,011,916	)
Comprehensive Income (Loss)	$	3,589,896	$	(88,481	)

The accompanying notes are an integral part of these financial statements.

F-122

THE COMANCHE NATIONAL BANK

STATEMENTS OF CHANGES IN SHAREHOLDER’S EQUITY

(BANK ONLY)

FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016

	Common Stock		Capital Surplus		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total
Balance at January 1, 2016	$	900,000	$	5,238,270	$	32,337,621		$	1,728,657		$	40,204,548
Comprehensive income (loss) for the year ended December 31, 2016						2,923,435			(3,011,916	)		(88,481	)
Cash dividends—$33.33 per share						(1,500,000	)					(1,500,000	)
Balance at December 31, 2016		900,000		5,238,270		33,761,056			(1,283,259	)		38,616,067
Comprehensive income for the year ended December 31, 2017						3,047,053			542,843			3,589,896
Cash dividends—$33.33 per share						(1,500,000	)					(1,500,000	)
Balance at December 31, 2017	$	900,000	$	5,238,270	$	35,308,109		$	(740,416	)	$	40,705,963

The accompanying notes are an integral part of these financial statements.

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THE COMANCHE NATIONAL BANK

STATEMENTS OF CASH FLOWS

(BANK ONLY)

FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016

	2017			2016
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	3,047,053		$	2,923,435
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		327,115			342,083
Deferred income tax (benefit)		167,550			(82,815	)
Stock dividends		(1,200	)		(400	)
Net premium amortization on investment securities		2,145,413			2,425,647
Net (gain) loss on sales of investment securities		72,920			(212,265	)
Net gain on sales of other real estate		—			(6,684	)
Earnings on bank-owned life insurance		(181,380	)		(187,152	)
(Increase) decrease in accrued income and other assets		(167,517	)		139,084
Increase in accrued expenses and other liabilities		162,170			327,695
Total adjustments		2,525,071			2,745,193
Net Cash Provided by Operating Activities		5,572,124			5,668,628
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investment securities:
Available-for-sale		(65,162,340	)		(43,577,415	)
Proceeds from maturities and calls of investment securities:
Available-for-sale		3,890,000			5,900,000
Held-to-maturity		110,822			107,822
Proceeds from sales of investment securities:
Available-for-sale		13,645,898			23,671,869
Principal payments on mortgage-backed securities:
Available-for-sale		23,376,178			26,059,633
Held-to-maturity		23			21
Net (increase) decrease in loans		238,436			(13,576,959	)
Purchases of premises and equipment		(148,247	)		(579,366	)
Net Cash Used by Investing Activities	$	(24,049,230	)	$	(1,994,395	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand deposits, interest-bearing transaction accounts and savings	$	20,553,344		$	12,644,457
Net increase (decrease) in certificates of deposit		3,206,110			(3,633,135	)
Dividends paid		(1,500,000	)		(1,500,000	)
Net Cash Provided by Financing Activities		22,259,454			7,511,322
Net increase in cash and cash equivalents		3,782,348			11,185,555
Cash and cash equivalents at beginning of year		19,203,667			8,018,112
Cash and cash equivalents at end of year	$	22,986,015		$	19,203,667
SUPPLEMENTAL SCHEDULE OF OPERATING AND INVESTING ACTIVITIES:
Interest paid	$	1,378,306		$	1,259,182
Income tax paid		915,395			720,784
Other real estate acquired through loan foreclosure		768,515			98,760
Bank financed sales of other real estate		688,515			211,172

The accompanying notes are an integral part of these financial statements.

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COMANCHE NATIONAL CORPORATION AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS

(CONSOLIDATED AND BANK ONLY)

DECEMBER 31, 2017 AND 2016

Note 1 History

Comanche National Corporation (“Corporation”), a Texas Corporation, and Comanche National Corporation of Delaware (“Delaware”), a Delaware Corporation, were chartered on October 11, 2000 and March 8, 2001, respectively, to serve as first and second tier bank holding companies.

The Corporations were inactive until March 31, 2001 when Comanche National Corporation and The Comanche National Bank (“Bank”) entered into a Share Exchange Agreement in order to effect the acquisition of 100 percent of the issued and outstanding common stock of the Bank. Each eligible Bank Shareholder received 10 shares of Corporation stock in exchange for each share of Bank stock owned.

After the Corporation had completed the acquisition, the Bank stock was transferred to Delaware in exchange for 450 shares (100%) of the issued and outstanding common stock of the Delaware Company. Consequently, the Corporation holds 100% of the common stock of Delaware and Delaware holds 100% of the common stock of the Bank.

On August 10, 2006, Comanche National Corporation acquired 100% of the issued and outstanding common stock of First National Bank of Santo (“Santo”). After the Corporation had completed this acquisition, the stock of Santo was contributed to the Corporation’s wholly-owned subsidiary, Comanche National Corporation of Delaware.

On February 29, 2008, The Comanche National Bank and First National Bank of Santo merged with The Comanche National Bank being the surviving entity.

Comanche National Corporation owns 100% of Comanche Statutory Trust I (“Trust”) which was formed August 9, 2006. Trust was formed to facilitate the acquisition of long-term funding.

Nature of Operations

The Corporation generates commercial, mortgage and consumer loans and receives deposits from customers located in Comanche, Palo Pinto, Parker and Jack Counties, Texas and the surrounding areas. The Bank operates under a national bank charter and provides full banking services. As a national bank, the Bank is subject to regulation by the Office of the Comptroller of the Currency.

Note 2 Summary of Significant Accounting Policies

The consolidated financial statements of the Corporation include its accounts and those of its one hundred percent (100%) owned subsidiary, Comanche National Corporation of Delaware and Delaware’s one hundred percent (100%) owned subsidiary, The Comanche National Bank. All significant intercompany balances and transactions have been eliminated in consolidation. The accounting and reporting policies of all these entities are in accordance with accounting principles generally accepted in the United States of America.

The Corporation determines whether it has a controlling financial interest in an entity by first evaluating whether the entity is a voting interest entity or a variable interest entity under accounting principles generally accepted in the United States of America. Voting interest entities are entities in which the total equity investment at risk is sufficient to enable the entity to finance itself independently and provides the equity holders with the obligation to absorb losses, the right to receive residual returns and the right to make decisions about the entity’s activities. The Corporation consolidates voting interest entities in which it has all the voting interest. As defined in applicable accounting standards, variable interest entities (VIEs) are

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entities that lack one or more of the characteristics of a voting interest entity. A controlling financial interest in a VIE is present when an enterprise has both the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and an obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE. The enterprise with a controlling financial interest, known as the primary beneficiary, consolidates the VIE. The Corporation’s wholly owned subsidiary, Comanche Statutory Trust I, is a VIE for which the Corporation is not the primary beneficiary. Accordingly, the accounts of this entity are not included in the Corporation’s consolidated financial statements.

Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

The determination of the adequacy of the allowance for loan losses is based on estimates that are particularly susceptible to significant changes in the economic environment and market conditions. In connection with the determination of the estimated losses on loans, management obtains independent appraisals for significant collateral.

The Corporation’s loans are generally secured by specific items of collateral including real property, consumer assets and business assets. Although the Corporation has a diversified loan portfolio, a substantial portion of its debtors’ ability to honor their contracts is dependent on local economic conditions.

While management uses available information to recognize losses on loans, further reductions in the carrying amounts of loans may be necessary based on changes in local economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review the estimated losses on loans. Such agencies may require the Corporation to recognize additional losses based on their judgments about information available to them at the time of their examination. Because of these factors, it is reasonably possible that the estimated losses on loans may change materially in the near term. However, the amount of the change that is reasonably possible cannot be estimated.

Cash and Cash Equivalents

For the purpose of presentation in the Statements of Cash Flows, cash and cash equivalents are defined as those amounts included in cash and amounts due from depository institutions, interest-bearing deposits in other banks maturing in three months or less and federal funds sold.

Investment Securities

The Corporation accounts for investment securities according to authoritative guidance issued by the Financial Accounting Standards Board (FASB). Debt securities that management has the ability and intent to hold to maturity are classified as held-to-maturity and carried at amortized cost. The amortization of premiums and accretion of discounts are recognized in interest income using methods approximating the interest method over the period to maturity.

Debt securities not classified as held-to-maturity are classified as available-for-sale. Securities available-for-sale are carried at fair value with unrealized gains and losses reported in other comprehensive income. Realized gains (losses) on securities available-for-sale are included in other income and, when applicable, are reported as a reclassification adjustment, net of tax (benefit), in other comprehensive income. Gains and losses on sales of securities are determined on the specific-identification method.

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Declines in the fair value of individual held-to-maturity and available-for-sale securities below their amortized cost that are other than temporary result in writedowns of the individual securities to their fair value. The related writedowns are included in earnings as realized losses. In estimating other-than temporary impairment losses, management considers (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer and (3) the intent and ability of the Corporation to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

Federal Home Loan Bank and Federal Reserve Bank Stock

At December 31, 2017 and 2016, the Corporation had $184,150 recorded as stock in the Federal Reserve Bank (Fed). A minimum investment in Fed stock is required based on the amount of the Bank’s capital. At December 31, 2017 and 2016, the Corporation had $145,500 and $144,300, respectively, recorded as stock in the Federal Home Loan Bank (FHLB). A minimum investment in FHLB stock is required to be a member of the FHLB. As a result of this, the Fed stock and FHLB stock are classified as restricted investment securities, carried at cost and evaluated annually for impairment. During 2017 and 2016, no impairment expense was recorded.

Loans

Loans are stated at the principal amount outstanding less deferred loan fees and the allowance for loan losses. Interest income on loans is recognized based upon the principal amounts outstanding. The accrual of interest on a loan is discontinued when, in the opinion of management, there is doubt about the ability of the borrower to pay interest or principal. All interest accrued but not collected for loans that are placed on nonaccrual or charged-off is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual status. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. Past due status is determined based on contractual terms.

Allowance for Loan Losses

The allowance for loan losses is comprised of amounts charged against income in the form of the provision for loan losses, less charged-off loans, net of recoveries. Loans are charged against the allowance for loan losses when management believes that collection of the principal is unlikely. Subsequent recoveries, if any, are credited to the allowance for loan losses.

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

The allowance consists of specific, general and unallocated components. For such loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors. An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.

A loan is considered impaired when, based on current information and events, it is probable that the Corporation will be unable to collect the scheduled payments of principal or interest when due according to

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the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis.

Loan Origination Fees and Costs

Loan origination fees are deferred and amortized as a yield adjustment over the lives of the related loans using the interest method. Amortization of deferred loan fees is discontinued when a loan is placed on nonaccrual status.

Premises and Equipment

Premises and equipment are stated at cost less accumulated depreciation. Depreciation expense is computed using the straight-line method based upon the estimated useful lives of the assets.

Maintenance and repairs are charged to operating expenses. Renewals and betterments are added to the asset accounts and depreciated over the periods benefited. Depreciable assets sold or retired are removed from the asset and related accumulated depreciation accounts and any gain or loss is reflected in the income and expense accounts.

Other Real Estate

Other real estate is foreclosed property held pending disposition and is initially recorded at fair value less estimated selling costs when acquired, establishing a new cost basis. At foreclosure, if the fair value of the real estate acquired less estimated selling costs is less than the Corporation’s recorded investment in the related loan, a writedown is recognized through a charge to the allowance for loan losses. Costs of significant property improvements are capitalized, whereas costs relating to holding property are expensed. Valuations are periodically performed by management, and any subsequent writedowns are recorded as a charge to income, if necessary, to reduce the carrying value of the property to its fair value less estimated selling costs. Sales of other real estate are accounted for according to authoritative guidance issued by the FASB.

Federal Income Taxes

Income taxes are provided for the tax effects of the transactions reported in the financial statements and consist of taxes currently due plus deferred taxes related primarily to differences between the tax and financial reporting of the allowance for loan losses, non-accrual loans, securities, deferred compensation and accumulated depreciation.

The deferred tax assets and liabilities represent the future tax return consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. Deferred tax assets and liabilities are reflected at income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes.

The Corporation, Delaware and the Bank join in filing consolidated federal income tax returns. Taxes are paid by each entity to the Corporation based on each entity’s separate taxable income.

The Companies maintain their records for both financial reporting and tax purposes on the accrual basis of accounting.

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In accordance with authoritative guidance issued by the FASB, the Corporation performed an evaluation to determine if there were any uncertain tax positions that would have an impact on the consolidated financial statements. No uncertain tax positions were identified. The December 31, 2014 through December 31, 2017 tax years remain subject to examination by the Internal Revenue Service. The Corporation does not believe that any reasonably possible changes will occur within the next 12 months which will have a material impact on the consolidated financial statements. The Corporation records incurred penalties and interest in other non-interest expense. There were no penalties or interest assessed by taxing authorities during 2017 or 2016.

Goodwill

Goodwill represents the excess of the purchase price over the fair value of net assets acquired in business combinations under the purchase method of accounting. The Corporation has adopted authoritative guidance issued by the FASB which eliminates amortization of goodwill associated with business combinations completed after September 30, 2001. Goodwill is periodically assessed for impairment when events or circumstances indicate that the carrying value of the asset may not be recoverable. The Corporation bases its evaluation on such impairment factors as the nature of the assets, the future economic benefit of the assets, any historical or future profitability measurements, as well as other external market conditions or factors that may be present. See Note 7–Goodwill and Other Intangible Assets.

Intangibles and Other Long-Lived Assets

Intangible assets are acquired assets that lack physical substance but can be distinguished from goodwill because of contractual or other legal rights or because the asset is capable of being sold or exchanged either on its own or in combination with a related contract, asset or liability. The Corporation’s intangible assets relate to core deposits. Intangible assets with definite useful lives are amortized on an accelerated basis over their estimated life. Intangible assets with indefinite useful lives are not amortized until their lives are determined to be definite. Intangible assets, premises and equipment and other long-lived assets are tested for impairment whenever events or changes in circumstances indicate the carrying amount of the assets may not be recoverable from future undiscounted cash flows. If impaired, the assets are recorded at fair value. See Note 7–Goodwill and Other Intangible Assets.

Advertising Costs

Advertising costs are expensed as incurred. Advertising costs in the amount of $105,328 and $98,489 were expensed during 2017 and 2016, respectively.

Fair Values of Financial Instruments

The FASB has issued authoritative guidance which requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instruments. The FASB authoritative guidance excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Corporation.

The following methods and assumptions were used by the Corporation in estimating its fair value disclosures for financial instruments:

Cash and Cash Equivalents: The carrying amounts reported in the balance sheet for cash and cash equivalents approximate those assets’ fair values.

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Investment Securities: Fair values for investment securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments.

Federal Home Loan Bank and Federal Reserve Bank Stock: The carrying amounts reported in the balance sheet for Federal Home Loan Bank and Federal Reserve Bank stock approximate those assets’ fair values.

Loans: For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying amounts. The fair values for other loans (for example, fixed rate commercial real estate and rental property mortgage loans and commercial and industrial loans) are estimated using discounted cash flow analysis, based on interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Loan fair value estimates include judgments regarding future expected loss experience and risk characteristics. The carrying amount of accrued interest receivable approximates its fair value.

Bank-Owned Life Insurance: The carrying amount reported in the balance sheet for bank-owned life insurance approximates those assets’ fair values.

Deposits: The fair values disclosed for demand deposits (for example, interest-bearing checking accounts and savings accounts) are, by definition, equal to the amount payable on demand at the reporting date (that is, their carrying amounts). The fair values for certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated contractual maturities on such time deposits. The carrying amount of accrued interest payable approximates its fair value.

Junior Subordinated Deferrable Interest Debentures: The fair value is estimated based on the quoted market prices of these instruments.

Comprehensive Income (Loss)

The Corporation has adopted authoritative guidance issued by the FASB which establishes standards for the reporting and display of comprehensive income (loss) and its components. The Corporation reports comprehensive income (loss) in the Statement of Comprehensive Income (Loss).

Subsequent Events

Subsequent events are events or transactions that occur after the balance sheet date but before the consolidated financial statements are available to be issued. The Corporation recognizes in the consolidated financial statements the effects of all subsequent events that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing the consolidated financial statements. The Corporation’s consolidated financial statements do not recognize subsequent events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after the balance sheet date and before the consolidated financial statements are available to be issued. The Corporation has evaluated subsequent events from December 31, 2017 through February 12, 2018, the date the financial statements were available to be issued. The Corporation did not note any subsequent events requiring disclosure or adjustment to these consolidated financial statements.

Reclassifications

Certain accounts have been reclassified in the consolidated financial statements of 2016 to conform to the 2017 presentation.

New Accounting Standards

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). This guidance is a comprehensive new revenue recognition standard that will supersede substantially all

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existing revenue recognition guidance. The new standard’s core principle is that a corporation will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the corporation expects to be entitled in exchange for those goods or services. In doing so, corporations will need to use more judgement and make more estimates than under existing guidance. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. On July 9, 2015, the FASB agreed to delay the effective date of the standard by one year. Therefore, the new standard will be effective for annual reporting periods beginning after December 31, 2018. Implementation of this standard is not expected to have a significant impact on the Corporation’s consolidated financial statements.

In April 2015, FASB issued ASU 2015-03, Interest–Imputation of Interest (Subtopic 835-30), which amended its authoritative guidance related to debt issuance costs. The amendment requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of the debt liability. However, the recognition and measurement guidance related to debt issuance costs is not affected by this amendment. The amendment is effective for annual and interim reporting periods beginning after December 15, 2015 and is to be applied on a retrospective basis. This amendment became effective in 2016 and did not have a significant impact on the Corporation’s consolidated financial statements.

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments—Overall: Recognition and Measurement of Financial Assets and Financial Liabilities. The amendment has a number of provisions including the requirements that public business entities use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, a separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (i.e. securities or loans receivables), and eliminating the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost. The amendment is effective for annual and interim reporting periods beginning after December 15, 2018. The Corporation is evaluating the potential impact of the amendment on the Corporation’s consolidated financial statements.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326) intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The standard requires an organization to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. The standard also requires enhanced disclosures to help investors and other financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio.

These disclosures include qualitative and quantitative requirements that provide additional information about the amounts recorded in the financial statements. Additionally, the standard amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The amendments in this update are effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. All entities may adopt the amendments in this update earlier as of the fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. An entity will apply the amendments in this update through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (that is, a modified-retrospective approach). The Corporation believes the amendments in this update will have an impact on the Corporation’s consolidated financial statements and is working to evaluate the significance of that impact.

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. This amendment provides guidance on eight specific cash

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flow issues, including debt prepayment or debt extinguishment costs, settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies, distributions received from equity method investees, beneficial interests in securitization transactions and separately identifiable cash flows and application of the predominance principle. The amendments in this update are effective for public business entities for fiscal years beginning after December 15, 2017. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2018. Early adoption is permitted. Implementation of this standard is not expected to have a significant impact on the Corporation’s consolidated financial statements.

In January 2017, the FASB issued ASU No. 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. This amendment simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. Under this amendment, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. The amendments in this update should be applied on a prospective basis. The amendments in this update are effective for a public entity that is a SEC filer for fiscal years beginning after December 15, 2019. The amendments in this update are effective for a public entity that is not a SEC filer for fiscal years beginning after December 15, 2020. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2021. Implementation of this standard is not expected to have a significant impact on the Corporation’s consolidated financial statements.

In March 2017, the FASB issued ASU No. 2017-08, Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities. The amendments in this update shorten the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. For public entities, the amendments in this update are effective for fiscal years beginning after December 15, 2018. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2019. Early adoption is permitted. The amendments of this update are applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The Corporation is evaluating the potential impact to the consolidated financial statements regarding implementation of this amendment.

In January 2018, the FASB issued a proposed ASU which is intended to help organizations reclassify certain stranded income tax effects in accumulated other comprehensive income resulting from the reduction in the federal income tax rate included in the Tax Cuts and Jobs Act of 2017. The proposed amendment would be effective for all organizations for fiscal years beginning after December 15, 2018. Early adoption is permitted.

Note 3 Restrictions on Cash and Due From Banks

The Comanche National Bank is required to maintain reserve funds in cash or on deposit with the Federal Reserve Bank. At December 31, 2017, the required additional reserves totaled $49,000. At December 31, 2016, there were no additional required reserves.

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Note 4 Investment Securities

The amortized cost and fair values of investment securities at December 31, 2017 are as follows:

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Available-for-Sale
Obligations of states and political subdivisions	$	52,940,655	$	994,977	$	(314,244	)	$	53,621,388
U.S. government agency mortgage-backed securities		116,105,435		42,134		(1,388,611	)		114,758,958
Collateralized mortgage obligations		25,019,735		10,844		(282,336	)		24,748,243
Totals		194,065,825		1,047,955		(1,985,191	)		193,128,589
Held-to-Maturity
Obligations of states and political subdivisions		389,956		8,533		(1,479	)		397,010
U.S. government agency mortgage-backed securities		102		1		—			103
Totals		390,058		8,534		(1,479	)		397,113
Totals—All Securities	$	194,455,883	$	1,056,489	$	(1,986,670	)	$	193,525,702

The balance sheet as of December 31, 2017 reflects the amortized cost of held-to-maturity securities, $390,058, and the fair value of available-for-sale securities, $193,128,589, for a total of $193,518,647. A net unrealized loss of $937,236 is included in the available-for-sale investment securities balance. The unrealized loss, net of tax benefit, is included in shareholders’ equity.

The amortized cost and fair values of investment securities at December 31, 2016 are as follows:

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Available-for-Sale
Obligations of states and political subdivisions	$	53,284,649	$	930,015	$	(1,288,826	)	$	52,925,838
U.S. government agency mortgage-backed securities		109,180,658		148,982		(1,660,709	)		107,668,931
Collateralized mortgage obligations		9,568,586		23,375		(97,169	)		9,494,792
Totals		172,033,893		1,102,372		(3,046,704	)		170,089,561
Held-to-Maturity
Obligations of states and political subdivisions		500,778		3,464		(34,725	)		469,517
U.S. government agency mortgage-backed securities		126		1		—			127
Totals		500,904		3,465		(34,725	)		469,644
Totals—All Securities	$	172,534,797	$	1,105,837	$	(3,081,429	)	$	170,559,205

The balance sheet as of December 31, 2016 reflects the amortized cost of held-to-maturity securities, $500,904, and the fair value of available-for-sale securities, $170,089,561, for a total of $170,590,465. A net unrealized loss of $1,944,332 is included in the available-for-sale investment securities balance. The unrealized loss, net of tax benefit, is included in shareholders’ equity.

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The amortized cost and fair values of held-to-maturity and available-for-sale securities at December 31, 2017, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Mortgage-backed securities and collateralized mortgage obligations are shown separately, since they are not due at a single maturity date.

	Available-for-Sale				Held-to-Maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Amounts maturing in:
One year or less	$	2,876,422	$	2,907,183	$	36,989	$	37,064
After one year through five years		8,933,197		9,167,855		126,967		130,097
After five years through ten years		9,580,068		9,793,387		76,000		75,118
After ten years		31,550,968		31,752,963		150,000		154,731
		52,940,655		53,621,388		389,956		397,010
Mortgage-backed securities		1 16,105,435		114,758,958		102		103
Collateralized mortgage obligations		25,019,735		24,748,243		—		—
Totals	$	194,065,825	$	193,128,589	$	390,058	$	397,113

During 2017 and 2016, there were proceeds from sales of available-for-sale investment securities in the amount of $13,645,898 and $23,671,869, respectively, which resulted in gross realized gains of $63,940 and $334,227 and gross realized losses of $136,860 and $121,962, respectively.

Securities with amortized costs of approximately $99,879,000 and $100,714,000 and fair values of approximately $98,926,000 and $99,422,000 at December 31, 2017 and 2016, respectively, were pledged to secure public deposits and for other purposes as required or permitted by law.

Information pertaining to securities with gross unrealized losses at December 31, 2017 and 2016, aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows:

	Less Than 12 Months					12 Months or Greater					Total
	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
December 31, 2017:
Federal agencies	$	70,063,334	$	(622,340	)	$	48,682,365	$	(1,048,607	)	$	118,745,699	$	(1,670,947	)
State and municipal governments		4,022,300		(43,695	)		9,799,465		(272,028	)		13,821,765		(315,723	)
Totals	$	74,085,634	$	(666,035	)	$	58,481,830	$	(1,320,635	)	$	132,567,464	$	(1,986,670	)
December 31, 2016:
Federal agencies	$	86,355,712	$	(1,627,307	)	$	6,166,771	$	(130,571	)	$	92,522,483	$	(1,757,878	)
State and municipal governments		27,136,179		(1,323,551	)		—		—			27,136,179		(1,323,551	)
Totals	$	113,491,891	$	(2,950,858	)	$	6,166,771	$	(130,571	)	$	119,658,662	$	(3,081,429	)

Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer and (3) the intent and ability of the Corporation to retain its investment in the issue for a period of time sufficient to allow for any anticipated recovery in fair value.

F-134

At December 31, 2017, the 141 debt securities with unrealized losses have depreciated 1.48% from the Corporation’s amortized cost basis. These securities are guaranteed by either the U.S. Government or other governments. These unrealized losses relate principally to current interest rates for similar types of securities. In analyzing an issuer’s financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred and the results of reviews of the issuer’s financial condition. As management has the ability to hold debt securities until maturity, or for the foreseeable future if classified as available-for-sale, no declines are deemed to be other-than-temporary.

Note 5 Loans and Allowance for Loan Losses

An analysis of loan categories at December 31, 2017 and 2016 is as follows:

	2017			2016
Commercial and agricultural loans	$	22,162,274		$	20,351,836
Real estate (RE) loans:
Construction, land and land development		34,769,056			32,486,363
Residential 1-4 family		28,792,386			32,288,036
Commercial RE		30,483,826			29,948,618
Consumer loans		9,214,710			10,499,600
Overdrafts		73,754			125,660
		125,496,006			125,700,113
Less: Deferred loan fees		(34,629	)		(41,264	)
Allowance for loan losses		(3,117,431	)		(3,003,102	)
Loans, Net	$	122,343,946		$	122,655,747

F-135

Transactions in the allowance for loan losses in 2017 are summarized as follows:

	Commercial/ Agricultural			Construction, Land and Land Development		Residential Real Estate			Commercial Real Estate			Consumer and Other			Unallocated		2017 Total
Allowance for Loan Losses:
Balance, beginning of year	$	501,990		$	592,592	$	790,387		$	652,605		$	242,830		$	222,698	$	3,003,102
Reallocation of loan loss provisions		(114,824	)		69,235		(57,191	)		(70,301	)		(49,712	)		222,793		—
		387,166			661,827		733,196			582,304			193,118			445,491		3,003,102
Loans charged-off		(9,677	)		—		(12,874	)		(9,789	)		(77,127	)		—		(109,467	)
Recoveries of loans previously charged-off		81,666			1,050		—			9,789			131,291			—		223,796
Net (charge-offs) recoveries		71,989			1,050		(12,874	)					54,164			—		114,329
Balance, end of year	$	459,155		$	662,877	$	720,322		$	582,304		$	247,282		$	445,491	$	3,117,431
Ending balance:
Individually evaluated for impairment	$	19,330		$	—		54,918		$	—		$	—		$	—	$	74,248
Ending balance:
Collectively evaluated for impairment		439,825			662,877		665,404			582,304			247,282			445,491		3,043,183
Balance, end of year	$	459,155		$	662,877	$	720,322		$	582,304		$	247,282		$	445,491	$	3,117,431
Loans:
Ending balance:
Individually evaluated for impairment	$	128,870		$	—		366,120		$	—		$	—				$	494,990
Ending balance:
Collectively evaluated for impairment		22,033,404			34,769,056		28,426,266			30,483,826			9,288,464					125,001,016
Ending balance total loans	$	22,162,274		$	34,769,056	$	28,792,386		$	30,483,826		$	9,288,464				$	125,496,006

F-136

Transactions in the allowance for loan losses in 2016 are summarized as follows:

	Commercial/ Agricultural		Construction, Land and Land Development			Residential Real Estate			Commercial Real Estate		Consumer and Other			Unallocated			2016 Total
Allowance for Loan Losses:
Balance, beginning of year	$	486,691	$	608,687		$	847,741		$	454,535	$	232,569		$	339,871		$	2,970,094
Reallocation of loan loss provisions		13,105		(16,095	)		(37,288	)		198,070		(40,619	)		(117,173	)		—
		499,796		592,592			810,453			652,605		191,950			222,698			2,970,094
Loans charged-off		—		—			(20,695	)		—		(46,839	)		—			(67,534	)
Recoveries of loans previously charged-off		2,194		—			629			—		97,719			—			100,542
Net (charge-offs) recoveries		2,194		—			(20,066	)		—		50,880			—			33,008
Balance, end of year	$	501,990	$	592,592		$	790,387		$	652,605	$	242,830		$	222,698		$	3,003,102
Ending balance:
Individually evaluated for impairment	$	20,604	$	—		$	54,600		$	100,162	$	3,221		$	—		$	178,587
Ending balance:
Collectively evaluated for impairment		481,386		592,592			735,787			552,443		239,609			222,698			2,824,515
Balance, end of year	$	501,990	$	592,592		$	790,387		$	652,605	$	242,830		$	222,698		$	3,003,102
Loans:
Ending balance:
Individually evaluated for impairment	$	137,359	$	—		$	363,999		$	667,749	$	21,471					$	1,190,578
Ending balance:
Collectively evaluated for impairment		20,214,477		32,486,363			31,924,037			29,280,869		10,603,789						124,509,535
Ending balance total loans	$	20,351,836	$	32,486,363		$	32,288,036		$	29,948,618	$	10,625,260					$	125,700,113

Federal regulations require that the Corporation periodically evaluate the risks inherent in its loan portfolio. In addition, the Corporation’s regulatory agencies have authority to identify problem loans and, if appropriate, require them to be reclassified. There are three classifications for problem loans: Substandard, Doubtful and Loss. Substandard loans have one or more defined weaknesses and are characterized by the distinct possibility that the Corporation will sustain some loss if the deficiencies are not corrected. Doubtful loans have the weaknesses of loans classified as “Substandard,” with additional characteristics that suggest the weaknesses make collection or recovery in full after liquidation of collateral questionable on the basis of currently existing facts, conditions and values. There is a high possibility of loss in loans classified as “Doubtful.” Because of the high possibility of loss, these loans are charged-off by the Corporation through the allowance for loan losses. A loan classified as “Loss” is considered uncollectible and of such little value that continued classification of the credit as a loan is not warranted. If a loan or a portion thereof is classified as “Loss,” it must be charged-off, meaning the amount of the loss is charged against the allowance for loan losses, thereby reducing that reserve. The Corporation also classifies some loans as “Watch” or “Other Assets Especially Mentioned” (“OAEM”). Loans classified as Watch are performing assets and classified as pass credits but have elements of risk that require more monitoring than other performing loans. Loans classified as OAEM are assets that continue to perform but have shown deterioration in credit quality and require close monitoring.

F-137

Loans by credit quality risk rating at December 31, 2017 are as follows:

	Pass		Other Assets Especially Mentioned		Sub- Standard		Total
Commercial and agricultural loans	$	21,523,595	$	67,205	$	571,474	$	22,162,274
Real estate (RE) loans:
Construction, land and land development		34,342,553		—		426,503		34,769,056
Residential 1-4 family		26,911,086		303,291		1,578,009		28,792,386
Commercial RE		30,170,462		—		313,364		30,483,826
Consumer and other loans		8,755,090		157,281		376,093		9,288,464
Subtotal	$	121,702,786	$	527,777	$	3,265,443		125,496,006
Less: Deferred loan fees								(34,629	)
Total loans							$	125,461,377

Loans by credit quality risk rating at December 31, 2016 are as follows:

	Pass		Other Assets Especially Mentioned		Sub- Standard		Total
Commercial and agricultural loans	$	19,489,501	$	128,999	$	733,336	$	20,351,836
Real estate (RE) loans:
Construction, land and land development		32,364,788		120,432		1,143		32,486,363
Residential 1-4 family		30,408,005		251,021		1,629,010		32,288,036
Commercial RE		29,101,810		—		846,808		29,948,618
Consumer and other loans		10,210,705		183,708		230,847		10,625,260
Subtotal	$	121,574,809	$	684,160	$	3,441,144		125,700,113
Less: Deferred loan fees								(41,264	)
Total loans							$	125,658,849

An analysis of nonaccrual loans by category at December 31, 2017 and 2016 is as follows:

	2017		2016
Commercial and agricultural loans	$	128,870	$	137,359
Real estate (RE) loans:
Residential 1-4 family		366,120		363,999
Commercial real estate		—		667,749
Consumer and other loans		—		21,471
Total nonaccrual loans	$	494,990	$	1,190,578

F-138

At December 31, 2017 and 2016, a summary of information pertaining to impaired loans is as follows:

	Unpaid Contractual Principal Balance		Recorded Investment with No Allowance		Recorded Investment with Allowance		Total Recorded Investment		Related Allowance		Average Recorded Investment		Interest Income Recognized
December 31, 2017:
Commercial and agricultural loans	$	157,249	$	—	$	128,870	$	128,870	$	19,330	$	133,114	$	—
Real estate (RE) loans:
Residential 1-4 family		398,833		—		366,120		366,120		54,918		365,060		—
Commercial real estate		—		—		—		—		—		333,874		—
Consumer and other loans		—		—		—		—		—		10,736		—
Totals	$	556,082	$	—	$	494,990	$	494,990	$	74,248	$	842,784	$	—
December 31, 2016:
Commercial and agricultural loans	$	151,425	$	—	$	137,359	$	137,359	$	20,604	$	148,173	$	—
Real estate (RE) loans:
Residential 1-4 family		388,862		—		363,999		363,999		54,600		363,186		—
Commercial real estate		674,207		—		667,749		667,749		100,162		333,874		—
Consumer and other loans		21,471		—		21,471		21,471		3,221		10,736		—
Totals	$	1,235,965	$	—	$	1,190,578	$	1,190,578	$	178,587	$	855,969	$	—

At December 31, 2017 and 2016, the Corporation has no commitments to loan additional funds to borrowers whose loans are impaired.

The following table illustrates an age analysis of past due loans as of December 31, 2017:

	30-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current			Total Loans			Recorded Investment 90 Days or More and Still Accruing
Commercial and agricultural loans	$	72,316	$	10,005	$	83,321	$	22,079,953		$	22,162,274		$	—
Real estate (RE) loans:
Construction, land and land development		528,638		—		528,638		34,240,418			34,769,056			—
Residential 1-4 family		689,870		213,950		903,820		27,888,566			28,792,386			—
Commercial RE		656,381		—		656,381		29,827,445			30,483,826			—
Consumer and other loans		141,417		—		141,417		9,147,047			9,288,464			—
Less: Deferred loan fees		—		—		—		(34,629	)		(34,629	)		—
Totals	$	2,088,622	$	223,955	$	2,312,577	$	123,148,800		$	125,461,377		$	—

F-139

The following table illustrates an age analysis of past due loans as of December 31, 2016:

	30-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current			Total Loans			Recorded Investment 90 Days or More and Still Accruing
Commercial and agricultural loans	$	109,783	$	—	$	109,783	$	20,242,053		$	20,351,836		$	—
Real estate (RE) loans:
Construction, land and land development		443,434		—		443,434		32,042,929			32,486,363			—
Residential 1-4 family		630,720		156,041		786,761		31,501,275			32,288,036			—
Commercial RE		132,935		667,749		800,684		29,147,934			29,948,618			—
Consumer and other loans		225,387		21,471		246,858		10,378,402			10,625,260			—
Less: Deferred loan fees		—		—		—		(41,264	)		(41,264	)		—
Totals	$	1,542,259	$	845,261	$	2,387,520	$	123,271,329		$	125,658,849		$	—

Note 6 Premises and Equipment

The investment in premises and equipment at December 31, 2017 and 2016, is as follows:

	2017			2016
Land	$	1,165,277		$	1,165,277
Buildings and improvements		6,230,560			6,220,960
Furniture and equipment		3,618,155			3,479,508
Auto		88,998			88,998
		11,102,990			10,954,743
Less accumulated depreciation		(5,561,237	)		(5,233,907	)
Bank Premises and Equipment, Net	$	5,541,753		$	5,720,836

Depreciation and amortization on premises and equipment charged to expense totaled $327,330 and $342,083 for the years ended December 31, 2017 and 2016, respectively.

Note 7 Goodwill and Other Intangible Assets

On August 10, 2006, the Corporation acquired First National Bank of Santo. A premium of $5,423,335 was paid by the Corporation, of which $1,608,491 was identified as core deposit intangibles. The remaining $3,814,844 was recorded as goodwill. In accordance with authoritative guidance issued by the FASB, the goodwill will not be amortized and is evaluated for impairment annually. No impairment loss was recorded in 2017 or 2016. The core deposit intangibles were amortized using a straight line method over their estimated useful life of 8 years. The core deposit intangibles became fully amortized in 2014. As a result, there was no amortization expense recorded in 2017 and 2016.

Note 8 Bank-Owned Life Insurance

During 2013, the Corporation purchased several life insurance policies for a total cost of $6,000,000. The Corporation is the beneficiary of these policies which insure the lives of selected key officers of the Corporation. During 2017 and 2016, earnings on these insurance policies in the amount of $181,380 and $187,152, respectively, were recorded through non-interest income. The carrying amount of the Bank-Owned Life Insurance at December 31, 2017 and 2016 was $6,748,539 and $6,567,159, respectively. Refer to Note 16 for additional information.

F-140

Note 9 Deposits

The carrying amount of deposits at December 31, 2017 and 2016 are as follows:

	2017		2016
Demand	$	65,558,569	$	53,611,522
Interest-bearing transaction accounts		108,933,986		102,892,380
Savings		23,541,945		21,200,726
Non-jumbo certificates of deposit		71,170,664		34,118,309
Jumbo certificates of deposit		44,241,156		78,087,401
Total Deposits	$	313,446,320	$	289,910,338

In the table above, the non-jumbo certificates of deposit represent amounts less than $250,000 and $100,000 at December 31, 2017 and 2016, respectively. In addition, the jumbo certificates of deposit represent amounts equal to or greater than $250,000 and $100,000 at December 31, 2017 and 2016, respectively.

Maturities of certificates of deposit for each of the next five years are:

2018	$	103,239,781
2019		11,400,939
2020		771,100
2021		—
2022		—
Total	$	115,411,820

Note 10 Debentures

On August 9, 2006, Comanche National Corporation issued $6,186,000 Floating Rate Junior Subordinated Deferrable Interest Debentures due September 15, 2036 to Comanche Statutory Trust I (“Trust”). The trust is considered a variable interest entity for which the Corporation is not the primary beneficiary. Accordingly, the accounts of the trust are not included in the Corporation’s consolidated financial statements. See Note 2–Summary of Significant Accounting Policies for additional information about the Corporation’s consolidation policy. Details of the Corporation’s transactions with this trust are presented on the next page.

On August 9, 2006, Trust issued 6,000 Floating Rate Capital Securities with each Security having a liquidation amount of $1,000 (total of $6,000,000). The securities represent preferred beneficial interests in the assets of the trust. The trust preferred securities will mature on September 15, 2036 and are redeemable with the approval of the Federal Reserve Board in whole or in part at the option of the Corporation at any time after September 15, 2011, and in whole at any time upon the occurrence of certain events affecting their tax or regulatory capital treatment. These Floating Rate Securities had an initial interest rate of 7.04%, which is payable quarterly, beginning September 15, 2006. The initial interest rate was fixed until September 15, 2011 (first five years). Effective September 15, 2011, the interest rate adjusts quarterly and is equal to the 3-month LIBOR rate plus 1.65%. As of December 31, 2017 and 2016, the interest rate was 3.23849% and 2.61344%, respectively. Trust also issued 186 Common Securities with each Security having a liquidation amount of $1,000 (total of $186,000). These Common Securities were issued to Comanche National Corporation.

The proceeds of the offering of trust preferred securities and common equity securities were used to purchase $6,186,000 of Floating Rate Junior Subordinated Deferrable Interest Debentures, which have terms substantially similar to the trust preferred securities. There are no principal payments due on these debentures during the next five years.

F-141

During 2017 and 2016, the Corporation made principal payments each year totaling $500,000 on the debentures which resulted in an outstanding balance of $3,311,000 and $3,811,000 at December 31, 2017 and 2016, respectively. The Trust used the proceeds from these payments to redeem 484 shares of its Capital Securities and 16 shares of its Common Securities which resulted in outstanding Capital Securities totaling $3,217,000 and $3,701,000 and Common Securities totaling $94,000 and $110,000 at December 31, 2017 and 2016, respectively.

Note 11 Income Taxes

The components of the federal income tax provision were as follows:

	2017		2016
Current tax	$	832,391	$	651,869
Deferred tax (benefit)		167,544		(82,815	)
Tax Provision—Consolidated	$	999,935	$	569,054

The principal factors causing a variation from the statutory tax rate are as follows:

	2017			2016
Statutory tax on income (at 34%)	$	1,351,776		$	1,163,535
Tax effect of tax exempt interest		(542,996	)		(547,040	)
Tax effect of reducing net deferred tax asset for reduction in tax rate		235,451			—
Tax effect of other items		(44,296	)		(47,441	)
Total	$	999,935		$	569,054

The Tax Cuts and Jobs Act bill was signed into law on December 22, 2017. This bill included a provision to lower the corporate income tax rate effective January 1, 2018 to a flat 21%. As a result of this, the Corporation revalued the net deferred tax assets to reflect the change in tax rate. As noted in the table on the previous page, the Corporation recorded additional income tax expense totaling $235,451 in 2017 as a result of this revaluation of the net deferred tax assets as of December 31, 2017.

At December 31, 2017 and 2016, the net deferred tax asset is comprised of the following temporary differences and their related tax effect as follows:

	2017			2016
Deferred Tax Asset
Loan loss provisions and allowances for financial reporting purposes in excess of amount allowed for tax	$	297,402		$	481,508
Deferred compensation		185,479			234,361
Interest accrued for tax purposes on loans not accruing for financial purposes		10,776			19,955
Unrealized loss on available-for-sale securities		196,820			661,073
Total Deferred Tax Asset		690,477			1,396,897
Deferred Tax Liability
Excess of depreciation taken for tax purposes over the amount for financial reporting purposes		(62,666	)		(116,521	)
Accretion on securities recognized for financial purposes		(49,822	)		(70,491	)
Stock dividends recognized for financial purposes		(819	)		(918	)
Total Deferred Tax Liability		(113,307	)		(187,930	)
Net Deferred Tax Asset	$	577,170		$	1,208,967

F-142

Note 12 Related Party Transactions

During 2017 and 2016, The Comanche National Bank had transactions made in the ordinary course of business with certain of its officers, directors and principal shareholders. All loans included in such transactions were made on substantially the same terms, including interest rate and collateral, as those prevailing at the time for comparable transactions with other persons, and did not, in the opinion of management, involve more than normal credit risk or present other unfavorable features.

A summary of these transactions follows:

	Balance Beginning of Year		Additions		Amounts Collected			Balance End of Year
For the year ended
December 31, 2017	$	3,072,204	$	19,984,608	$	(19,803,520	)	$	3,253,292
For the year ended
December 31, 2016	$	4,146,039	$	12,417,784	$	(13,491,619	)	$	3,072,204

The Corporation held deposits of approximately $5,648,000 and $6,145,000 for related parties at December 31, 2017 and 2016, respectively.

Note 13 Financial Instruments with Off-Balance-Sheet Risk

In the normal course of business, the Corporation has outstanding commitments and contingent liabilities, such as commitments to extend credit and standby letters of credit, which are not included in the accompanying consolidated financial statements. The Corporation’s exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual or notional amount of those instruments. The Corporation uses the same credit policies in making such commitments as it does for instruments that are included in the consolidated balance sheets.

Financial instruments whose contract amount represents credit risk were approximately as follows:

	2017		2016
Commitments to extend credit	$	11,973,200	$	12,428,900
Standby letters of credit		467,000		308,300

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Corporation evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Corporation upon extension of credit, is based on management’s credit evaluation. Collateral held varies but may include accounts receivable, inventory, property and equipment and income-producing commercial properties.

Standby letters of credit are conditional commitments issued by the Corporation to guarantee the performance of a customer to a third party. Standby letters of credit generally have fixed expiration dates or other termination clauses and may require payment of a fee. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Corporation’s policy for obtaining collateral, and the nature of such collateral, is essentially the same as that involved in making commitments to extend credit.

The Corporation has not been required to perform on any financial guarantees during the past two years. The Corporation has not incurred any losses on its commitments in either 2017 or 2016.

F-143

Note 14 Commitments and Contingent Liabilities

Comanche National Corporation and Subsidiaries are subject to claims and lawsuits which arise primarily in the ordinary course of business. It is the opinion of management that the disposition or ultimate resolution of such claims and lawsuits will not have a material adverse effect on the consolidated financial position of the Corporation.

Note 15 Compensated Absences

Employees of the Corporation are entitled to paid vacation and paid sick days, depending on job classification, length of service and other factors. It is impracticable to estimate the amount of compensation for future absences, and accordingly, no liability has been recorded in the accompanying financial statements. The Corporation’s policy is to recognize the costs of compensated absences when actually paid to employees.

Note 16 Employee Benefit Plans

Profit-Sharing 401(k) Plan

The Comanche National Bank amended its profit-sharing plan in 2003 to add a 401(k) provision whereby employees can contribute to the plan a percentage of their salary on a pre-tax basis. This plan merged into the Comanche National Corporation Profit Sharing 401(k) Plan effective July 1, 2007. The Corporation has chosen the safe harbor provision requiring a mandatory 3% contribution of eligible compensation to eligible employees. In addition, The Comanche National Bank may make a discretionary contribution to the plan determined annually by its Board of Directors. The total charge to operations under this plan was $253,688 and $254,845 for the years ended December 31, 2017 and 2016, respectively.

Deferred Compensation Plans

During 2014, the Corporation established a deferred compensation plan for selected officers and a salary continuation plan for the CEO. The deferred compensation plan includes provisions that the deferred compensation is eligible for payout on the fourth anniversary after the deferral if the officer is still employed by the Corporation. The salary continuation plan is designed to supplement retirement benefits for the CEO. The life insurance policies referred to in Note 8 are available to fund these plans. At December 31, 2017 and 2016, deferred compensation accruals totaled $721,130 and $574,061, respectively. At December 31, 2017 and 2016, salary continuation accruals totaled $162,104 and $115,239, respectively. Accruals for both of these plans are included in salaries and employee benefits in 2017 and 2016 totaling $193,934 and $256,580, respectively.

Note 17 Lines of Credit

The Comanche National Bank has established approximately $21,840,000 in unsecured lines of credit for overnight purchase of federal funds. These lines may be cancelled without any prior notification. There were no outstanding balances on these lines of credit at December 31, 2017 and 2016.

The Comanche National Bank has also established a borrowing line with FHLB. At December 31, 2017, there were available funds of approximately $52,631,300 on this borrowing line. This line is secured by a blanket pledge of eligible loans with a carrying amount of approximately $115,305,000 at December 31, 2017. There were no outstanding balances on this line at December 31, 2017 and 2016.

Note 18 Concentrations of Credit Risk

The Corporation maintains its cash accounts with several correspondent banks. Generally, accounts are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 per bank. At December 31, 2017, there were no uninsured deposits in correspondent banks. At December 31, 2016,

F-144

there were uninsured deposits in correspondent banks totaling $1,284,637. Furthermore, federal funds sold are essentially uncollateralized loans to other financial institutions. Management regularly evaluates the credit risk associated with the counterparties to these transactions and believes that the Corporation is not exposed to any significant credit risks on cash and cash equivalents.

The Corporation grants agribusiness, commercial, consumer and real estate loans to customers within Comanche, Palo Pinto, Parker and Jack Counties, Texas and the surrounding areas. A substantial portion of its debtors’ ability to honor their contracts is dependent upon the agribusiness and real estate economic sectors in that geographic area. Concentrations of credit by loan type are set forth in Note 5.

Note 19 Restrictions on Dividends

In the ordinary course of business, the Corporation is dependent upon dividends from The Comanche National Bank to provide funds for the payment of dividends to shareholders and to provide for other cash requirements. Banking regulations may limit the amount of dividends that may be paid. Approval by regulatory authorities is required if the effect of dividends declared would cause the regulatory capital of the Bank to fall below specified minimum levels. Approval is also required if dividends declared exceed the net profits for that year combined with the retained net profits for the preceding two years. At December 31, 2017, The Comanche National Bank had dividends of approximately $2,970,500 available to pay without prior regulatory approval.

Note 20 Regulatory Matters

Banks are subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory (and possibly additional discretionary) actions by regulators that, if undertaken, could have a direct material effect on the Bank’s financial statements. Under the regulatory capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital adequacy guidelines that involve quantitative measures of the Bank’s assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification under the prompt corrective action guidelines are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios of: Total Risk-Based capital, Tier 1 capital and Common Equity Tier 1 capital to risk-weighted assets (as defined in the regulations), and Leverage capital, which is Tier 1 capital to adjusted total assets (as defined). Management believes, as of December 31, 2017 and 2016, that the Bank meets all capital adequacy requirements to which it is subject.

The Bank’s Tier 1 capital consists of shareholder’s equity excluding unrealized gains and losses on securities available-for-sale, goodwill and other intangible assets.

The Comanche National Bank has been notified by its regulator that, as of its most recent regulatory examination, the Bank is regarded as well capitalized under the regulatory framework for prompt corrective action. Such determination has been made based on the Bank’s Common Equity Tier 1, Tier 1, total capital and leverage ratios. There have been no conditions or events since this notification that management believes would change the Bank’s categorization as well capitalized under the ratios listed on the next page.

Beginning January 1, 2015, community banking organizations became subject to a new regulatory rule recently adopted by federal banking agencies (commonly referred to as Basel III). The new rule establishes a new regulatory capital framework that incorporates revisions to the Basel capital framework, strengthens the definition of regulatory capital, increases risk-based capital requirements and amends the methodologies for determining risk-weighted assets. These changes are expected to increase the amount of capital required by community banking organizations. Basel III includes a multi-year transition period from January 1, 2015 through December 31, 2019.

F-145

Management believes that, as of December 31, 2017 and 2016, the Bank would meet all capital adequacy requirements under the Basel III Capital rules on a fully phased-in basis as if such requirements were currently in effect; however, final rules are subject to regulatory discretion and could result in the need for additional capital in the future.

The Bank’s actual and required capital amounts and ratios are as follows (dollars in thousands):

	Actual					Minimum Required for Capital Adequacy Purposes					Required to be Well Capitalized under the Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of December 31, 2017:
Total Risk-based Capital (to Risk-weighted Assets)	$	39,731		23.79	%	$	13,362		8.00	%	$	16,702		10.00	%
Tier 1 Capital (to Risk-weighted Assets)	$	37,631		22.53	%	$	10,021		6.00	%	$	13,362		8.00	%
Common Equity Tier 1 Capital (to Risk-weighted Assets)	$	37,631		22.53	%	$	7,562		4.50	%	$	10,922		6.50	%
Leverage Capital (to Adjusted Total Assets)	$	37,631		11.15	%	$	13,498		4.00	%	$	16,872		5.00	%
As of December 31, 2016:
Total Risk-based Capital (to Risk-weighted Assets)	$	38,133		23.39	%	$	13,044		8.00	%	$	16,305		10.00	%
Tier 1 Capital (to Risk-weighted Assets)	$	36,083		22.13	%	$	9,783		6.00	%	$	13,044		8.00	%
Common Equity Tier 1 Capital (to Risk-weighted Assets)	$	36,083		22.13	%	$	7,380		4.50	%	$	10,660		6.50	%
Leverage Capital (to Adjusted Total Assets)	$	36,083		11.40	%	$	12,663		4.00	%	$	15,829		5.00	%

Note 21 Fair Values of Financial Instruments

The estimated fair values of the Corporation’s financial instruments are as follows:

	2017				2016
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Financial assets:
Cash and cash equivalents	$	22,996,2763	$	22,996,276	$	19,214,405	$	19,214,405
Investment securities		193,518,647		193,525,702		170,590,465		170,559,205
FHLB and Fed stock		329,650		329,650		328,450		328,450
Loans, net		122,343,946		122,870,000		122,655,747		123,369,000
Bank-owned life insurance		6,748,539		6,748,539		6,567,159		6,567,159
Accrued interest receivable		1,898,205		1,898,205		1,782,325		1,782,325
Financial liabilities:
Deposits		313,446,320		300,041,000		289,910,338		289,902,000
Debentures		3,311,000		3,311,000		3,811,000		3,811,000
Accrued interest payable		132,866		132,866		123,893		123,893

The carrying amounts in the preceding table are included in the consolidated balance sheets under the applicable captions.

Note 22 Fair Value Measurements

The Corporation has adopted authoritative guidance issued by the FASB regarding fair value measurements for financial assets and financial liabilities. The authoritative guidance defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements.

F-146

The authoritative guidance issued by the FASB defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability shall not be adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact and (iv) willing to transact.

The authoritative guidance issued by the FASB requires the use of valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities. The income approach uses valuation techniques to convert future amounts, such as cash flows or earnings, to a single present amount on a discounted basis. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement cost). Valuation techniques should be consistently applied. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. In that regard, the authoritative guidance establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:

• Level 1 Inputs: Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

• Level 2 Inputs: Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatilities, prepayment speeds, credit risks, etc.) or inputs that are derived principally from or corroborated by market data by correlation or other means.

• Level 3 Inputs: Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.

A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.

In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon internally developed models that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality and the Corporation’s creditworthiness, among other things, as well as unobservable parameters. Any such valuation adjustments are applied consistently over time. The Corporation’s valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While management believes the Corporation’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.

F-147

Securities Available-for-Sale: U.S. Treasury securities are reported at fair value utilizing Level 1 inputs. Other securities classified as available-for-sale are reported at fair value utilizing Level 2 inputs. For these securities, the Corporation obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things.

Impaired Loans: Certain impaired loans are reported at the fair value of the underlying collateral if repayment is expected solely from the collateral. Collateral values are estimated using Level 2 inputs based on observable market data or Level 3 inputs based on customized discounting criteria.

Other Real Estate: Other real estate represents foreclosed assets that are reported at the fair value less estimated selling costs of the underlying property. The fair values are estimated using Level 2 inputs based on observable market data or Level 3 inputs based on information obtained from customized discounting criteria.

The following table summarizes financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2017 and 2016, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure the fair value:

	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value
December 31, 2017:
Available-For-Sale
Obligations of states and political subdivisions	$	—	$	53,621,388	$	—	$	53,621,388
U.S. government agency mortgage-backed securities		—		114,758,958		—		114,758,958
Collateralized mortgage obligations		—		24,748,243		—		24,748,243
Totals	$	—	$	193,128,589	$	—	$	193,128,589
December 31, 2016:
Available-For-Sale
Obligations of states and political subdivisions	$	—	$	52,925,838	$	—	$	52,925,838
U.S. government agency mortgage-backed securities		—		107,668,931		—		107,668,931
Collateralized mortgage obligations		—		9,494,792		—		9,494,792
Totals	$	—	$	170,089,561	$	—	$	170,089,561

Certain financial assets are measured at fair value on a non-recurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). Financial assets measured at fair value on a non-recurring basis include certain impaired loans reported at the fair value of the underlying collateral if repayment is expected solely from the collateral. Collateral values are estimated using Level 2 inputs based on observable market data or Level 3 inputs based on customized discounting criteria.

F-148

The following table summarizes financial assets measured at fair value on a non-recurring basis as of December 31, 2017 and 2016, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure the fair value:

	Level 1 Inputs		Level 2 Inputs			Level 3 Inputs		Total Fair Value
December 31, 2017:
Impaired loans	$	—	$	494,990		$	—	$	494,990
Less valuation allowance for possible loan losses		—		(74,248	)		—		(74,248	)
Impaired loans, net	$	—	$	420,742		$	—	$	420,742
December 31, 2016:
Impaired loans	$	—	$	1,190,578		$	—	$	1,190,578
Less valuation allowance for possible loan losses		—		(178,587	)		—		(178,587	)
Impaired loans, net	$	—	$	1,011,991		$	—	$	1,011,991

Certain nonfinancial assets are measured at fair value on a non-recurring basis. Nonfinancial assets measured at fair value on a non-recurring basis include other real estate which, upon initial recognition, were remeasured and reported at fair value through a charge-off to the allowance for loan losses and certain other real estate, which subsequent to their initial recognition, were remeasured at fair value through a writedown included in other non-interest expense. The fair value of other real estate is estimated using Level 2 inputs based on observable market data or Level 3 inputs based on customized discounting criteria. At December 31, 2017 and 2016, the Corporation had other real estate totaling $112,760 and $32,760, respectively. Fair values were determined using Level 2 measurements.

The following table presents foreclosed assets that were remeasured and reported at fair value:

	2017			2016
Foreclosed assets remeasured at initial recognition:
Carrying value of foreclosed assets prior to remeasurement	$	781,389		$	118,827
Charge-offs recognized in the allowance for loan losses		(12,874	)		(20,067	)
Fair Value	$	768,515		$	98,760
Foreclosed assets remeasured subsequent to initial recognition:
Carrying value of foreclosed assets prior to remeasurement	$	—			—
Writedowns included in other non-interest expense		—			—
Fair Value	$	—		$	—

Charge-offs recognized upon loan foreclosures are generally offset by general or specific allocations of the allowance for loan losses and generally do not significantly impact the Corporation’s provision for loan losses. Regulatory guidelines require the Corporation to reevaluate the fair value of other real estate owned on at least an annual basis.

OTHER FINANCIAL INFORMATION

F-149

COMANCHE NATIONAL CORPORATION AND SUBSIDIARIES

CONSOLIDATING BALANCE SHEET

DECEMBER 31, 2017

	COMANCHE NATIONAL CORP.			COMANCHE NATIONAL CORP. OF DELAWARE			THE COMANCHE NATIONAL BANK			ELIMINATIONS			CONSOLIDATED BALANCES 2017
ASSETS
Cash and due from banks	$	2,193.042		$	10,261		$	11,321,380		$	(2,193,042	)	$	11,331,641
Interest-bearing deposits maturing in less than three months		—			—			11,664,635			—			11,664,635
Investment securities:
Available-for-sale		—						193,128,589			—			193,128,589
Held-to-maturity		—			—			390,058			—			390,058
Federal Home Loan Bank and Federal Reserve Bank stock, at cost		—			—			329,650			—			329,650
Investment in subsidiaries		40,810,472			40,705,963			—			(81,422,435	)		94.000
Loans, net of deferred loan fees and allowance for loan losses		—			—			122,343,946			—			122,343,946
Premises and equipment, net of accumulated depreciation		30,724			—			5,511,029			—			5,541,753
Other foreclosed assets		—			—			112,760			—			112,760
Net deferred tax asset		6			—			577,164			—			577,170
Goodwill		—			—			3,814,844			—			3,814,844
Bank-owned life insurance		—			—			6,748,539			—			6,748,539
Accrued interest receivable		144			—			1,898,061			—			1,898,205
Other assets		36,411			248			371,017			—			407,676
Total Assets	$	43,070,799		$	40,716,472		$	358,211,672		$	(83,615,477	)	$	358,383,466
LIABILITIES
Deposits	$	—		$	—		$	315,639,362		$	(2,193,042	)	$	313,446,320
Other liabilities:
Dividends payable		502,390			—			—			—			502,390
Accrued interest payable		5,063			—			127,803			—			132,866
Deferred compensation plans		—			—			883,234			—			883,234
Other accrued expenses		—			—			855,310			—			855,310
Debentures payable		3,311,000			—			—			—			3,311,000
Total other liabilities		3,818,453			—			1,866,347			—			5,684,800
Total Liabilities		3,818.453			—			317,505,709			(2,193,042	)		319,131,120
SHAREHOLDERS’ EQUITY
Common stock, no par value, stated value $2 per share:
Authorized—2,000,000 shares Issued—450,000 shares		900,000			5			900,000			(900,005	)		900,000
Capital surplus		17,446,851			28,981,906			5,238,270			(34,220,176	)		17,446,851
Retained earnings		24,359,881			12,474,977			35,308,109			(47,783,086	)		24,359,881
Accumulated other comprehensive loss, net of tax benefit of $196,820		(740,416	)		(740,416	)		(740,416	)		1,480,832			(740.416	)
Treasury stock at cost—48,088 shares		(2,713.970	)		—			—			—			(2,713,970	)
Total Shareholders’ Equity		39,252,346			40,716,472			40,705,963			(81,422,435	)		39,252,346
Total Liabilities and Shareholders’ Equity	$	43,070,799		$	40,716,472		$	358,211,672		$	(83,615,477	)	$	358,383,466

See independent Auditor’s Report.

F-150

COMANCHE NATIONAL CORPORATION AND SUBSIDIARIES

CONSOLIDATING STATEMENT OF INCOME

FOR THE YEAR ENDED DECEMBER 31, 2017

	COMANCHE NATIONAL CORP.			COMANCHE NATIONAL CORP. OF DELAWARE			THE COMANCHE NATIONAL BANK			ELIMINATIONS			CONSOLIDATED BALANCES 2017
Interest income
Interest and fees on loans	$	—		$	—		$	7,452,332		$	—		$	7,452,332
Interest on investment securities:
Taxable		—			—			2,869,252			—			2,869,252
Exempt from federal income tax		—			—			1,556,507			—			1,556,507
		—			—			4,425,759			—			4,425,759
Interest on federal funds sold and deposits in correspondent banks		—			—			74,028			—			74,028
Other interest		2,910			—			—			—			2,910
Total interest income		2,910			—			11,952,119			—			11,955,029
Interest expense
On deposits		—			—			1,385,752			—			1,385,752
On borrowings		101,705			—			1,167			—			102,872
Total interest expense		101,705			—			1,386,919			—			1,488,624
Net interest income (expense)		(98,795	)		—			10,565,200			—			10,466,405
Provision for loan losses		—			—			—			—			—
Net interest income (expense) after provision for loan losses		(98,795	)		—			10,565,200			—			10,466,405
Non-interest income
Service charges on deposit accounts		—			—			936,361			—			936,361
Equity in undistributed income of subsidiaries		1,546,572			1,547,053			—			(3,093,625	)		—
Dividend income from subsidiaries		1,500,000			1,500,000			—			(3,000,000	)		—
Net loss on sales of investment securities (includes $53,800 of accumulated other comprehensive loss reclassifications for unrealized net losses on available-for-sale securities)		—			—			(72,920	)		—			(72,920	)
Earnings on bank-owned life insurance		—			—			181,380			—			181,380
Other		—			—			536,125			—			536,125
Total non-interest income		3,046,572			3,047,053			1,580,946			(6,093,625	)		1,580,946
Non-interest expense
Salaries and employee benefits		—			—			5,396,024			—			5,396,024
Occupancy expense		215			—			559,566			—			559,781
Furniture and equipment expense		—			—			471,753			—			471,753
Other		8,109			729			1,635,149			—			1,643,987
Total non-interest expense		8,324			729			8,062,492			—			8,071,545
Income before income taxes		2,939,453			3,046,324			4,083,654			(6,093,625	)		3,975,806
Federal income tax (benefit)		(36,418	)		(248	)		1,036,601			—			999,935
Net Income	$	2,975,871		$	3,046,572		$	3,047,053		$	(6,093,625	)	$	2,975,871

See Independent Auditor’s Report.

F-151

THE COMANCHE NATIONAL BANK

NON-INTEREST EXPENSE

(BANK ONLY)

FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016

	2017		2016
Salaries and employee benefits:
Salaries, bonuses and deferred compensation	$	4,210,300	$	4,188,480
Payroll taxes		273,586		263,658
Employee insurance premiums		658,450		630,918
Contribution to profit-sharing plan		253,688		254,845
Total		5,396,024		5,337,901
Occupancy expense:
Depreciation—building		213,451		202,647
Maintenance and repairs		53,657		54,025
Utilities		83,916		86,008
Insurance—building		30,942		55,793
Taxes—ad valorem		115,727		98,522
Janitorial expense		61,873		84,737
Total		559,566		581,732
Furniture and equipment expense:
Depreciation—furniture and equipment		99,413		129,014
Machine maintenance and rental		369,358		344,910
Fixed assets direct expense		1,615		4,275
Data processing expense		1,367		3,006
Total		471,753		481,205
Other expense:
Directors fees		70,800		60,925
Advertising		105,328		98,489
Contributions		29,863		38,590
Dues and subscriptions		41,564		39,731
Examination fees		107,099		102,766
FDIC assessment		66,437		155,898
Insurance and bonds		29,282		33,106
Legal and professional		178,035		190,620
Loan expense		31,122		25,512
Postage and freight		122,632		113,754
Stationery, printing and supplies		70,460		73,212
Taxes—franchise and other		8,725		5,058
Telephone		232,713		206,104
Travel and automobile		19,482		20,952
Federal Reserve Bank charges		27,921		26,860
Depreciation—auto		14,251		10,422
Internet banking expense		53,804		46,404
Other expenses		425,631		402,196
Total		1,635,149		1,650,599
Total Non-Interest Expense	$	8,062,492	$	8,051,437

See Independent Auditor’s Report.

F-152

CONTENTS

Unaudited Consolidated Financial Statements of First Beeville Financial Corporation:
Consolidated Balance Sheets as of September  30, 2018 and December 31, 2017	F-154
Consolidated Statements of Income for the Nine Months Ended September 30, 2018 and 2017	F-155
Consolidated Statements of Comprehensive Income for the Nine Months Ended September 30, 2018 and 2017	F-156
Consolidated Statements of Changes in Stockholders’ Equity for the Nine Months Ended September 30, 2018 and 2017	F-157
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2018 and 2017	F-158
Notes to Consolidated Financial Statements	F-159

F-153

FIRST BEEVILLE FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(Dollars in thousands, except per share data)

	September 30, 2018			December 31, 2017
Assets
Cash and due from banks (including interest-bearing deposits of $-0- in 2018 and $260 in 2017)	$	51,483		$	40,311
Interest-bearing deposits at the Federal Reserve Bank		7,330			6,053
Total cash and cash equivalents		58,813			46,364
Certificates of deposit in other banks		1,225			1,225
Investment securities available-for-sale		54,793			57,988
Loans receivable (net of allowance for loan losses of $3,375 in 2018 and $3,128 in 2017)		275,614			260,523
Federal home loan bank stock, at cost		1,056			1,043
Accrued interest receivable		1,729			1,279
Foreclosed assets		1,410			1,410
Banking premises and equipment, net		7,314			7,585
Prepaid federal income tax		184			—
Deferred federal income tax		1,023			620
Bank owned life insurance		7,813			7,676
Other assets		694			1,082
Total assets	$	411,668		$	386,795
Liabilities and Stockholders’ Equity
Liabilities
Deposits	$	373,360		$	351,378
Accrued interest payable		250			211
State income tax payable		23			16
Federal income tax payable		—			982
Dividends payable		—			444
Other liabilities		2,070			1,555
Total liabilities		375,703			354,586
Stockholders’ Equity
Common stock ($5.00 par value; 1,000,000 shares authorized; 93,946 shares issued)		470			470
Surplus		784			784
Retained earnings		38,473			33,970
Treasury stock, at cost (34,808 shares in 2018 and 2017)		(2,751	)		(2,751	)
Accumulated other comprehensive income
Unrealized loss on securities available-for-sale (net of deferred income taxes of $269 in 2018 and $70 in 2017)		(1,011	)		(264	)
Total stockholders’ equity		35,965			32,209
Total liabilities and stockholders’ equity	$	411,668		$	386,795

The accompanying notes are an integral part of these unaudited, consolidated financial statements.

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FIRST BEEVILLE FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(Dollars in thousands, except per share data)

	Nine Months Ended September 30,
	2018		2017
Interest and Dividend Income
Interest and fees on loans	$	11,646	$	9,845
Interest on mortgage-backed and related securities		454		270
Interest on investment account receivable
U.S. treasury securities		34		51
Federal agency securities		65		80
Tax-exempt municipals		303		206
Interest on deposits with banks		619		164
Dividend income		19		13
Total interest and dividend income		13,140		10,629
Interest Expense
Interest on deposits		1,288		770
Interest on borrowed funds		2		43
Total interest expense		1,290		813
Net Interest Income		11,850		9,816
Provision for Loan Losses		445		756
Net Interest Income After Provision for Loan Losses		11,405		9,060
Noninterest Income
Service charges on deposit accounts		638		687
Other service charges and noninterest income		92		48
Bank owned life insurance income		137		99
Income from death benefit of bank-owned life insurance		—		624
Total noninterest income		867		1,458
Noninterest Expense
Salaries and employee benefits		4,005		3,539
Occupancy and equipment expense		790		761
Other expense		1,935		1,884
Total noninterest expense		6,730		6,184
Income Before Income Taxes		5,542		4,334
Income Tax Expense		1,039		1,183
Net Income	$	4,503	$	3,151
Earnings Per Share—Basic and Diluted (based on weighted average number of shares outstanding—59,138 shares in 2018 and 59,427 in 2017)	$	76.14	$	53.02

The accompanying notes are an integral part of these unaudited, consolidated financial statements.

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FIRST BEEVILLE FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

(Dollars in thousands)

	Nine Months Ended September 30,
	2018			2017
Net Income	$	4,503		$	3,151
Other Comprehensive Income (Loss), Net of Federal Income Tax
Net unrealized gain (loss) on securities available-for-sale		(946	)		610
Reclassification adjustment for realized gains included in net income		—			—
Other comprehensive income (loss) before tax effect		(946	)		610
Tax expense (benefit)		(199	)		207
Other comprehensive income (loss), net of federal income tax		(747	)		403
Comprehensive Income	$	3,756		$	3,554

The accompanying notes are an integral part of these unaudited, consolidated financial statements.

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FIRST BEEVILLE FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited)

(Dollars in thousands, except per share data)

	Common Stock				Surplus		Retained Earnings		Treasury Stock			Accumulated Other Comprehensive Income (Loss)			Total
	Shares		Amount
Balance, January 1, 2017		94,936	$	470	$	784	$	30,707	$	(2,588	)	$	(15	)	$	29,358
Net income		—		—		—		3,151		—			—			3,151
Changes in unrealized gain on securities available-for-sale, net of applicable deferred income taxes of ($207)		—		—		—		—		—			403			403
Purchase of 306 shares of stock at weighted average of $532.63 per share		—		—		—		—		—			—			(163	)
Balance, September 30, 2017	$	94,936	$	470	$	784	$	33,858	$	(163	)	$	388		$	32,749
Balance, January 1, 2018	$	94,936	$	470	$	784	$	33,970	$	(2,751	)	$	(264	)	$	32,209
Net income		—		—		—		4,503		—			—			4,503
Changes in unrealized gain on securities available-for-sale, net of applicable deferred income taxes of $199		—		—		—		—		—			(747	)		(747	)
Balance, September 30, 2018		94,936	$	470	$	784	$	38,473	$	(2.751	)	$	(1,011	)	$	35,965

The accompanying notes are an integral part of these unaudited, consolidated financial statements.

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FIRST BEEVILLE FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in thousands)

	Nine Months Ended September 30,
	2018			2017
Cash Flows From Operating Activities
Net Income	$	4,503		$	3,151
Items not requiring (providing) cash
Depreciation		441			419
Provision for loan losses		445			756
Net amortization of investment securities		326			215
Deferred income taxes		(204	)		(199	)
Income from death benefit of bank-owned life insurance		—			(624	)
Increase in cash surrender value of bank-owned life insurance		(137	)		(99	)
Changes in
Interests receivable		(450	)		(274	)
Other assets		389			(43	)
Interest payable and other liabilities		553			678
Federal income tax (receivable) payable		(1,166	)		843
State income tax payable		7			(4	)
Net cash provided by operating activities		4,707			4,819
Investing Activities
Purchases of available-for-sale securities		(84,094	)		(100,076	)
Proceeds from maturities of available-for-sale securities		86,017			91,617
Proceeds from maturities of held-to-maturity securities		—			2,360
Net change in loans		(15,536	)		(8,475	)
Purchase of premises and equipment		(170	)		(440	)
Proceeds from bank-owned life insurance		—			1,319
Purchase of Federal Home Loan Bank stock		(13	)		(7	)
Proceeds from the sale of foreclosed assets		—			9
Net cash used in investing activities	$	(13,796	)	$	(13,693	)
Financing Activities
Net increase in non-certificate of deposits accounts	$	14,003		$	36,890
Net increase in certificate of deposits accounts		7,979			4,075
Repayments of short-term borrowings		—			(329	)
Purchase of treasury stock		—			(163	)
Dividends paid		(444	)		(446	)
Net cash provided by financing activities		21,538			40,027
Increase in Cash and Cash Equivalents		12,449			31,153
Cash and Cash Equivalents, Beginning of Period		46,364			18,535
Cash and Cash Equivalents, End of Period	$	58,813		$	49,688
Supplemental Cash Flows Information
Interest paid	$	1,251		$	764
Income taxes paid	$	2,393		$	1,081
Transfer of investment securities held-to-maturity to available-for-sale	$	—		$	25,871

The accompanying notes are an integral part of these unaudited, consolidated financial statements.

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FIRST BEEVILLE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share data)

Note 1: Nature of Operations and Summary of Significant Accounting Policies

Nature of Operations

First Beeville Financial Corporation (Company), is a bank-holding company whose principal activity is the ownership and management of its wholly-owned subsidiary, The First National Bank of Beeville (Bank) and the Bank’s wholly-owned subsidiary, FNB Asset Management, LLC. The Bank is primarily engaged in providing a full range of banking and financial services to individual and corporate customers through its main office in Beeville, Texas, and its full-service branch banks in Yorktown and Seguin, Texas. The Bank’s subsidiary manages and holds foreclosed assets that were transferred to it by the Bank until their ultimate disposition. The Company and Bank are subject to competition from other financial institutions. The Company and Bank are subject to the regulation of certain federal and state agencies and undergo periodic examinations by those regulatory authorities.

Basis of Presentation

The consolidated financial statements include the accounts of the Company, Bank and real estate subsidiary. All significant intercompany accounts and transactions have been eliminated in consolidation.

The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. Operating results for the period ended September 30, 2018, are not necessarily indicative of the results that may be expected for the year ending December 31, 2018, and should be read in conjunction with the audited financial statements and notes thereto for the year ended December 31, 2017.

In the opinion of management, all adjustments (consisting of normal accruals) considered necessary for the fair presentation of these consolidated financial statements have been included. The preparation of financial statements in conformity with these accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and income and expense during the reporting periods and the related disclosures. Although management’s estimates and assumptions are based on current expectations, estimates, forecasts and projections about the future performance of the Company, such estimates and assumptions are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult for the Company to assess. Operating results for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for a full year or any future period.

Accounting Policies Recently Adopted and Pending Accounting Pronouncements

Accounting Standards Update (ASU) 2018-09, “Codification Improvements.” Issued in July 2018, ASU No. 2018-09 makes changes to a variety of topics to clarify, correct errors in, or make minor improvements to the Accounting Standards Codification. The majority of the amendments in ASU 2018-09 will be effective in annual periods beginning after December 15, 2018. Management is currently evaluating the effects the adoption of ASU 2018-09 will have on the consolidated financial statements, results of operations and cash flows.

ASU 2017-08, “Receivables-Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities.” Issued in March 2017, ASU 2017-08 amends the amortization period for certain purchased callable debt securities held at a premium. In particular, the

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FIRST BEEVILLE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share data)

amendments in ASU 2017-08 require the premium to be amortized to the earliest call date. The amendments do not, however, require an accounting change for securities held at a discount; instead, the discount continues to be amortized to maturity. Notably, the amendments in this ASU more closely align the amortization period of premiums and discounts to expectations incorporated in market pricing on the underlying securities. Securities within the scope of ASU 2017-08 are purchased debt securities that have explicit, non-contingent call features that are callable at fixed prices and on preset dates. The amendments of ASU 2017-08 become effective for public entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2018 and for other entities for periods beginning after December 15, 2019. Management is currently evaluating the effects the adoption of ASU 2017-08 will have on the consolidated financial statements, results of operations and cash flows.

ASU 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” Issued in June 2016, ASU 2016-13 will add FASB ASC Topic 326, “Financial Instruments-Credit Losses” and finalizes amendments to FASB ASC Subtopic 825-15, “Financial Instruments-Credit Losses.” The amendments of ASU 2016-13 are intended to provide financial statement users with more decision-useful information related to expected credit losses on financial instruments and other commitments to extend credit by replacing the current incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to determine credit loss estimates. The amendments of ASU 2016-13 eliminate the probable initial recognition threshold and, in turn, reflect an entity’s current estimate of all expected credit losses. ASU 2016-13 does not specify the method for measuring expected credit losses, and an entity is allowed to apply methods that reasonably reflect its expectations of the credit loss estimate. Additionally, the amendments of ASU 2016-13 require that credit losses on available-for-sale debt securities be presented as an allowance rather than as a write-down. The amendments of ASU 2016-13 are effective for public entities for interim and annual periods beginning after December 15, 2019, and for all other entities for annual periods beginning after December 15, 2020. Earlier application is permitted for interim and annual periods beginning after December 15, 2018. Management believes the amendments in this update will have an impact on the Company’s consolidated financial statements and is working to evaluate the significance of that impact.

ASU 2016-02, “Leases (Topic 842).” Issued in February 2016, ASU 2016-02 was issued by the FASB to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and by disclosing key information about leasing arrangements. ASU 2016-02 will, among other things, require lessees to recognize a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. ASU 2016-02 does not significantly change lease accounting requirements applicable to lessors; however, the ASU contains some targeted improvements that are intended to align, where necessary, lessor accounting with the lessee accounting model and with the updated revenue recognition guidance issued in 2014. The amendments of ASU 2016-02 are effective for public entities for interim and annual periods beginning after December 15, 2018 and for other entities for periods beginning after December 15, 2019. The adoption of this ASU will result in an increase to the Consolidated Balance Sheets for right-of-use assets and associated lease liabilities for operating leases in which the Company is the lessee. Additionally, in July 2018, the FASB issued ASU No. 2018-10, Codification Improvements to Topic 842, Leases and ASU No. 2018-11, Leases, Targeted Improvements. The amendments in these updates provide additional clarification and implementation guidance on certain aspects of ASU 2016-02 and have the same effective date and transition requirements as ASU 2016-02. Specifically, ASU 2018-11 creates an additional transition method option allowing entities to record a cumulative effect adjustment to opening retained earnings in the year of

F-160

FIRST BEEVILLE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share data)

adoption. FASB also issued ASU 2018-20, Leases (Topic 842): Narrow-Scope Improvements for Lessors in December 2018 that clarifies how to apply the new leases standard when accounting for sales taxes, certain lessor costs, and certain requirements related to variable payments in contracts. Implementation of this standard is not expected to have a material impact on the Company’s consolidated financial statements.

ASU 2014-09, “Revenue from Contracts with Customers (Topic 606).” Issued in May 2014, ASU 2014-09 will add FASB ASC Topic 606, “Revenue from Contracts with Customers,” and will supersede revenue recognition requirements in FASB ASC Topic 605, “Revenue Recognition,” as well as certain cost guidance in FASB ASC Topic 605-35, “Revenue Recognition—Construction-Type and Production-Type Contracts.” ASU 2014-09 provides a framework for revenue recognition that replaces the existing industry and transaction specific requirements under the existing standards. ASU 2014-09 requires an entity to apply a five-step model to determine when to recognize revenue and at what amount. The model specifies that revenue should be recognized when (or as) an entity transfers control of goods or services to a customer at the amount in which the entity expects to be entitled. Depending on whether certain criteria are met, revenue should be recognized either over time, in a manner that depicts the entity’s performance, or at a point in time, when control of the goods or services are transferred to the customer. ASU 2014-09 provides that an entity should apply the following steps: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when, or as, the entity satisfies a performance obligation. In addition, the existing requirements for the recognition of a gain or loss on the transfer of non-financial assets that are not in a contract with a customer are amended to be consistent with the guidance on recognition and measurement in ASU 2014-09. The amendments of ASU 2014-09 may be applied either retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial application. If the transition method of application is elected, the entity should also provide the additional disclosures in reporting periods that include the date of initial application of (1) the amount by which each financial statement line item is affected in the current reporting period, as compared to the guidance that was in effect before the change, and (2) an explanation of the reasons for significant changes. ASU 2015-14, “Revenue from Contracts with Customers (Topic 606)-Deferral of the Effective Date,” issued in August 2015, defers the effective date of ASU 2014-09 by one year. ASU 2015-14 provides that the amendments of ASU 2014-09 become effective for public business entities for fiscal years beginning after December 15, 2017, and for private companies for fiscal years beginning after December 15, 2018. All subsequently issued ASU’s which provide additional guidance and clarifications to various aspects of FASB ASC Topic 606 will become effective when the amendments of ASU 2014-09 become effective. These subsequently issued ASU’s include ASU 2016-08 “Revenue from Contracts with Customers (Topic 606)-Principal versus Agent Considerations,” ASU 2016-10 “Revenue from Contracts with Customers (Topic 606)-Identifying Performance Obligations and Licensing,” and ASU 2016-12 “Revenue from Contracts with Customers (Topic 606)-Narrow Scope Improvements and Practical Expedients.” These amendments clarify the main provisions of ASU-2014-09 with respect to specific revenue types based upon implementation questions submitted. Specifically, revenue in which a third party satisfies a portion of the performance obligations, revenue from licensing activities, and the assessment of collectability, treatment of sales taxes, non-cash consideration, and contract modifications at transition. Management has elected to adopt this ASU using the private company effective date and has completed an analysis to determine which revenue streams are within the scope of ASU 2014-09 and the related clarifying ASU’s and has determined that interest income and revenue generated from transfers and servicing of financial instruments, specifically, gain on sale of loans and servicing fees are out of scope. Implementation of this standard is not expected to have a material impact on the Company’s consolidated financial statements.

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FIRST BEEVILLE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share data)

Note 2: Restrictions on Cash and Due From Banks

The Bank is required to maintain reserve funds in cash or on deposit with the Federal Reserve Bank. At September 30, 2018 and December 31, 2017, the required reserves totaled $6,817 and $4,702, respectively.

Note 3: Securities

The amortized cost and approximate fair values, together with gross unrealized gains and losses of available-for-sale securities are as follows:

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Approximate Fair Value
September 30, 2018
U.S. Government and government-sponsored enterprises (GSE) securities	$	5,558	$	4	$	12	$	5,550
Tax-exempt municipal securities		21,033		—		406		20,627
U.S. Government and GSE mortgage-backed securities		29,483		9		876		28,616
Total	$	56,074	$	13	$	1,294	$	54,793
December 31, 2017
U.S. Government and GSE securities	$	7,591	$	53	$	5	$	7,639
Tax-exempt municipal securities		20,771		44		184		20,631
U.S. Government and GSE mortgage-backed securities		29,961		67		310		29,718
Total	$	58,323	$	164	$	499	$	57,988

The amortized cost and fair value of available-for-sale securities at September 30, 2018, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

	Available-for-Sale
	Amortized Cost		Fair Value
Due in one year or less	$	2,500	$	2,500
Due in one to five years		15,469		15,359
Due in five to ten years		8,622		8,318
Total investment securities		26,591		26,177
U.S. Government and GSE mortgage-backed securities		29,483		28,616
Total	$	56,074	$	54,793

The carrying value of securities pledged as collateral, to secure public deposits and for other purposes, was $43,093 and $46,504 at September 30, 2018 and December 31, 2017, respectively.

There were no sales of available-for-sale securities during 2018 or 2017.

Certain investments in debt securities are reported in the consolidated financial statements at an amount less than their historical cost. Total fair value of these investments at September 30, 2018 and December 31, 2017, was $49,135 and $44,475, respectively, which is approximately 90 percent and 77 percent, respectively, of the Company’s available-for-sale investment portfolio. The unrealized losses are largely due

F-162

FIRST BEEVILLE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share data)

to increases in market interest rates over the yield available at the time the underlying securities were purchased.

Except as discussed below, management believes the declines in fair value for these securities are temporary.

The following tables show the Company’s investments’ gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at September 30, 2018 and December 31, 2017:

	September 30, 2018
	Less Than 12 Months				12 Months or More				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Available-for-sale securities
U.S. Government and GSE securities	$	2,480	$	12	$	—	$	—	$	2,480	$	12
Tax-exempt municipal securities		15,551		221		4,565		185		20,116		406
U.S. Government and GSE mortgage-backed securities		16,221		462		10,318		414		26,539		876
Total	$	34,252	$	695	$	14,883	$	599	$	49,135	$	1,294

	December 31, 2017
	Less Than 12 Months				12 Months or More				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Available-for-sale securities
U.S. Government and GSE securities	$	4,294	$	5	$	—	$	—	$	4,294	$	5
Tax-exempt municipal securities		13,665		184		219		—		13,884		184
U.S. Government and GSE mortgage-backed securities		25,374		292		923		18		26,297		310
Total	$	43,333	$	481	$	1,142	$	18	$	44,475	$	499

U.S. Government and GSE Securities

The unrealized losses on the Company’s investments in direct obligations of the U.S. government and GSEs were caused by interest rate increases. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost bases of the investments. Because the Company does not intend to sell the investments and it is not more-likely-than-not the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at September 30, 2018.

Tax-exempt Municipal Securities

The unrealized losses on the Company’s investments in securities of state and political subdivisions were caused by changes in interest rates and illiquidity. The contractual terms of those investments do not permit

F-163

FIRST BEEVILLE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share data)

the issuer to settle the securities at a price less than the amortized cost bases of the investments. Because the Company does not intend to sell the investments and it is not more likely than not the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at September 30, 2018.

U.S. Government and GSE Mortgage-Backed Securities

The unrealized losses on the Company’s investment in mortgage-backed securities issued by the U.S. government and GSEs were caused by interest rate increases. The Company expects to recover the amortized cost basis over the term of the securities. Because the decline in market value is attributable to changes in interest rates and not credit quality and because the Company does not intend to sell the investments and it is not more-likely-than-not the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at September 30, 2018.

Note 4: Loans and Allowance for Loan Losses

Categories of loans at September 30, 2018 and December 31, 2017, include:

	September 30, 2018			December 31, 2017
Commercial loans	$	22,669		$	24,791
Agricultural loans		8,622			8,093
Real estate loans		246,770			229,989
Installment and consumer term loans		1,791			1,538
Other loans (virtual and ready credit)		76			81
Overdrafts		45			55
Gross loans		279,973			264,547
Less
Net deferred loan fees and costs		(984	)		(896	)
Allowance for loan losses		(3,375	)		(3,128	)
Net loans	$	275,614		$	260,523

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FIRST BEEVILLE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share data)

The following tables present the balance in the allowance for loan losses and the recorded investment in loans based on portfolio segment and impairment method as of September 30, 2018 and December 31, 2017:

	September 30, 2018
	Commercial			Agricultural		Real Estate			Consumer			Total
Allowance for Loan Losses
Balance, beginning of year	$	246		$	69	$	2,794		$	19		$	3,128
Provision for loan losses		(42	)		4		472			11			445
Losses charged-off		—			—		(225	)		(16	)		(241	)
Recoveries		21			—		18			4			43
Balance, end of year	$	225		$	73	$	3,059		$	18		$	3,375
Allowance Balances
Ending balance individually evaluated for impairment	$	—		$	—	$	—		$	—		$	—
Ending balance collectively evaluated for impairment		225			73		3,059			18			3,375
Ending balance	$	225		$	73	$	3,059		$	18		$	3,375
Loans
Ending balance individually evaluated for impairment	$	—		$	—	$	—		$	—		$	—
Ending balance collectively evaluated for impairment		22,669			8,622		246,770			1,912			279,973
Ending balance	$	22,669		$	8,622	$	246,770		$	1,912		$	279,973

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FIRST BEEVILLE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share data)

	December 31, 2017
	Commercial			Agricultural		Real Estate		Consumer			Total
Allowance for Loan Losses
Balance, beginning of year	$	383		$	22	$	2,226	$	25		$	2,656
Provision for loan losses		379			47		568		7			1,001
Losses charged-off		(516	)		—		—		(21	)		(537	)
Recoveries		—			—		—		8			8
Balance, end of year	$	246		$	69	$	2,794	$	19		$	3,128
Allowance Balances
Ending balance individually evaluated for impairment	$	—		$	—	$	226	$	—		$	226
Ending balance collectively evaluated for impairment		246			69		2,568		19			2,902
Ending balance	$	246		$	69	$	2,794	$	19		$	3,128
Loans
Ending balance individually evaluated for impairment	$	301		$	—	$	1,726	$	1		$	2,028
Ending balance collectively evaluated for impairment		24,490			8,093		228,263		1,673			262,519
Ending balance	$	24,791		$	8,093	$	229,989	$	1,674		$	264,547

The risk characteristics of the Bank’s material portfolio segments are as follows:

Commercial Loans—The commercial loan portfolio consists of loans to commercial customers for use in normal business operations to finance working capital needs, equipment purchase or other expansion projects. Commercial loans are underwritten to assure an ability to repay the indebtedness without relying primarily on the collateral. The underwriting process includes gaining an understanding of the borrower’s ability to operate their business profitably, then analyzing and forming a conclusion on the adequacy of their cash flow and financial stability in relation to their ability to service the indebtedness.

Real Estate Loans—The real estate loan portfolio consists of residential loans for single-family and multi-family properties, construction and land development loans, loans secured by farmland and other commercial real estate loans. Real estate loans, for commercial purposes as well as agricultural and residential purposes, are underwritten in much the same was as a commercial loan. Analyzing the borrower’s ability to service the indebtedness from estimated cash flows and structuring the payment streams to match such cash flow is integral to the success of loan repayment. The Bank has set boundaries within its policies that prohibit and/or limit speculative real estate investment loans and development loans due to the inherent risks in these types of loans. Trade territories have been established for the Bank as a whole and the majority of real estate loans are within these established trade territories. Lending beyond these areas is allowed on a limited basis when dealing with a seasoned customer who has established history with the Bank.

Agriculture Loans—Agriculture loans are another segment of the loan portfolio, and financial analysis similar to that performed on commercial loans is performed on all agriculture loans. This portfolio includes loans to farming operations by providing annual lines of credit for expenditures incurred up until and through harvest. Livestock production loans also make up a portion of the portfolio, whereby loans are

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share data)

structured to match the income stream generated from the livestock with maturities that fully amortize within the production life expectancy of the livestock. Equipment loans are also provided, with borrower equity injection being a critical requirement along with cash flow for debt service.

Consumer Loans—Consumer loans are also generated by the Bank, with analysis being based on the consumer’s income as compared to all debt and taking into consideration the consumer’s credit report score which is based upon prior performance with other creditors. The consumer’s income and credit report supplement the judgmental process used in consumer lending. The Bank presently has an established indirect lending program, which is monitored closely and for which special reserves are established.

Internal Risk Categories

The risk rating system for the Bank is based upon the judgmental and credit analysis process that loan officers perform in conjunction with the Officers Loan Committee’s and Directors Loan Committee’s review process. The substantial majority of all loans made by the Bank are considered pass credits at the inception of the loan based upon underwriting standards and analysis of the cash flow, collateral and creditworthiness of the customers in accordance with adopted policies and regulatory guidelines.

For loans that develop delinquencies or that evidence the development of serious deficiencies in cash flow, credit quality, collateral deficiencies, past delinquencies or other derogatory criteria, ongoing monitoring is performed. This is achieved through daily and weekly past due reports, weekly technical exceptions reports, daily account overdraft monitoring, as well as monthly classified loans list review and quarterly loan loss allowance evaluations and action plans.

Loans that reach a past-due status ranging from 60 to 90 days delinquency or that are in the final stages of demand and acceleration, are in bankruptcy or loans that display other negative trends or characteristics of deterioration in credit quality or collateral coverage are coded with a substandard loan rating. This loan rating carries a higher reserve allocation of 4 percent based upon the Bank’s historical loan migration loss factor; however, the loan is not categorized as impaired until it reaches a status of non-accrual or is deemed to be impaired as to full collectability. Loan officers are responsible for timely identification of the deterioration of credits and the need to classify them more severely than pass.

Impaired loans are carried as line items on the classified and impaired loans list for monitoring and for calculation of the reserve factor. Specific reserves are established when necessary and are based either upon the fair market value of the collateral if the loan is collateral dependent or on the best estimate of discounted cash flows when there is insufficient collateral coverage. All non-accrual loans are considered impaired.

The classifications for loans demonstrating some form of credit quality weakness or deficiency include Watch, Other Assets Especially Mentioned (OAEM), Substandard and Doubtful. The classification of a credit is determined according to the following definitions:

Non-Classified/Pass—Non-classified loans are not considered a greater-than-normal risk. (This rating may also be referred to as pass.) Performing loans for which the borrower demonstrates the ability to repay its obligations and the collateral value generally exceeds the loan amount.

Watch—Assets in this category are adequately protected by either collateral values or sound net worth and capacity of the obligor to meet the indebtedness; however, it has been determined that there may be some risks or weaknesses, (i.e., recent past dues, overdrafts or negative trends in earnings) but such potential weaknesses are not yet significant, but there is increased risk for deterioration in the credit. The classification is solely for the purpose of providing management a monthly monitoring tool.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share data)

Other Assets Especially Mentioned (OAEM)—A special mention asset has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the institution’s credit position at some future date. Special Mention assets are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification.

Substandard—A substandard asset is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful—An asset classified doubtful has all the weaknesses inherent in one classified as substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. At December 31, 2017, all assets classified as doubtful were impaired. There were no doubtful or impaired loans at September 30, 2018.

The following tables present the credit risk profile of the Bank’s loan portfolio based on internal rating category and payment activity as of September 30, 2018 and December 31, 2017:

	September 30, 2018
	Commercial		Agricultural		Real Estate		Consumer		Total
Rating
Pass	$	21,955	$	8,598	$	240,464	$	1,910	$	272,927
Watch		558		—		1,787		—		2,345
OAEM		—		—		3,269		—		3,269
Substandard		156		24		1,250		2		1,432
Total	$	22,669	$	8,622	$	246,770	$	1,912	$	279,973

	December 31, 2017
	Commercial		Agricultural		Real Estate		Consumer		Total
Rating
Pass	$	23,958	$	8,093	$	216,299	$	1,672	$	250,022
Watch		509		—		5,129		—		5,638
OAEM		—		—		4,190		—		4,190
Substandard		23		—		2,645		1		2,669
Impaired		301		—		1,726		1		2,028
Total	$	24,791	$	8,093	$	229,989	$	1,674	$	264,547

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share data)

The following tables present the Bank’s loan portfolio aging analysis of the recorded investment in loans as of September 30, 2018 and December 31, 2017:

	September 30, 2018
	30-89 Days Past Due		60-89 Days Past Due		Greater Than 90 Days		Total Past Due		Current		Total Loans		Total Loans > 90-Days & Accruing
Commercial loans	$	49	$	—	$	—	$	49	$	22,620	$	22,669	$	—
Agricultural loans		—		—		—		—		8,622		8,622		—
Real estate loans		74		—		—		74		246,696		246,770		—
Consumer loans		22		—		—		22		1,890		1,912		—
Total	$	145	$	—	$	—	$	145	$	279,828	$	279,973	$	—

	December 31, 2017
	30-89 Days Past Due		60-89 Days Past Due		Greater Than 90 Days		Total Past Due		Current		Total Loans		Total Loans > 90-Days & Accruing
Commercial loans	$	23	$	—	$	—	$	23	$	24,768	$	24,791	$	—
Agricultural loans		—		—		—		—		8,093		8,093		—
Real estate loans		321		—		2,603		2,924		227,065		229,989		2,603
Consumer loans		—		14		—		14		1,660		1,674		—
Total	$	344	$	14	$	2,603	$	2,961	$	261,586	$	264,547	$	2,603

The following table presents impaired loans for the year ended December 31, 2017. There were no impaired loans at September 30, 3018.

	December 31, 2017
	Recorded Investment		Unpaid Principal Balance		Specific Allowance		Average Investment in Impaired Loans		Interest Income Recognized		Interest Income Recognized Cash Basis
Loans without a specific valuation allowance
Commercial loans	$	301	$	402	$	—	$	681	$	—	$	—
Agricultural loans		—		—		—		—		—		—
Real estate loans		—		—		—		—		—		—
Consumer loans		1		1		—		2		—		—
Loans with a specific valuation allowance
Commercial loans		—		—		—		—		—		—
Agricultural loans		—		—		—		—		—		—
Real estate loans		1,726		2,097		226		1,762		—		—
Consumer loans		—		—		—		—		—		—
Total	$	2,028	$	2,500	$	226	$	2,445	$	—	$	—

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FIRST BEEVILLE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share data)

The following table presents the Company’s nonaccrual loans at December 31, 2017. There were no nonaccrual loans at September 30, 2018. This table excludes performing troubled debt restructurings.

	December 31, 2017
Commercial loans	$	301
Agricultural loans		—
Real estate loans		1,726
Consumer loans		—
Total	$	2,027

At December 31, 2017, the Company had certain loans that were modified in troubled debt restructurings and impaired. The modification of terms of such loans included one or a combination of the following: an extension of maturity, a reduction of the stated interest rate or a permanent reduction of the recorded investment in the loan. There were no material troubled debt restructurings for the periods ended September 30, 2018 or December 31, 2017.

There were no troubled debt restructurings modified in the past 12 months that subsequently defaulted.

Note 5: Lines of Credit

FHLB Line of Credit

At September 30, 2018 and December 31, 2017, the Bank had a revolving line of credit with no expiration and a maximum available limit of $132,616 and $123,179, respectively. There were no funds borrowed against this line at September 30, 2018 or December 31, 2017. The line is collateralized by all FHLB stock and a blanket lien on certain commercial and residential mortgage loans. The line of credit bears interest at a daily variable rate which is set by the FHLB.

Frost Bank Line of Credit

At September 30, 2018 and December 31, 2017, the Bank had available a $6,000 revolving line of credit that expires in 2019. At September 30, 2018 and December 31, 2017, there were no funds borrowed against this line. The line is not collateralized at September 30, 2018. The line of credit bears interest at a daily variable rate which is set by Frost Bank.

At September 30, 2018 and December 31, 2017, the Company had available a revolving line of credit of $833 and $1,333, respectively. The available credit line decreases quarterly until maturity in 2019. At September 30, 2018 and December 31, 2017, there were no funds borrowed against this line. The line of credit is collateralized by 120,000 shares of Bank stock at September 30, 2018.

The Independent Bankers’ Bank (TIB) Line of Credit

At September 30, 2018 and December 31, 2017, the Bank had available a $6,000 revolving line of credit with an open-ended term, which can be terminated by either party at any time. There were no funds borrowed against this line at September 30, 2018 or December 31, 2017. The line is collateralized by securities as applicable. The line of credit bears interest at a daily variable rate which is set by TIB.

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FIRST BEEVILLE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share data)

Note 6: Regulatory Matters

The Bank is subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s and Bank’s consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities and certain off-balance-sheet items as calculated under U.S. GAAP, regulatory reporting requirements and regulatory capital standards. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Furthermore, the Bank’s regulators could require adjustments to regulatory capital not reflected in these consolidated financial statements.

Quantitative measures established by regulatory reporting standards to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the following table) of total and Tier I capital (as defined) to risk-weighted assets (as defined), common equity Tier I capital (as defined) to total risk-weighted assets (as defined) and of Tier I capital (as defined) to average assets (as defined). Management believes, as of September 30, 2018 and December 31, 2017, that the Bank meets all capital adequacy requirements to which it is subject.

As of September 30, 2018 and December 31, 2017, the most recent notification from the Office of the Comptroller of the Currency (OCC) categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based capital, Tier I risk-based capital, common equity Tier I risk-based capital and Tier I leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the Bank’s category.

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FIRST BEEVILLE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share data)

The Bank’s actual capital amounts and ratios are also presented in the following table.

	Actual					Minimum Capital Requirement					Minimum to Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of September 30, 2018
Total risk-based capital
(to risk-weighted assets)	$	40,246		13.51	%	$	29,419		9.875	%	$	29,791		10.00	%
Tier I capital
(to risk-weighted assets)	$	36,871		12.38	%	$	23,461		7.875	%	$	23,833		8.00	%
Common equity Tier 1 capital
(to risk-weighted assets)	$	36,871		12.38	%	$	18,992		6.375	%	$	19,364		6.50	%
Tier I capital
(to average assets)	$	36,871		9.16	%	$	16,107		4.000	%	$	20,133		5.00	%
As of December 31, 2017
Total risk-based capital
(to risk-weighted assets)	$	35,822		12.72	%	$	26,047		9.250	%	$	28,159		10.00	%
Tier I capital
(to risk-weighted assets)	$	32,694		11.61	%	$	20,415		7.250	%	$	22,527		8.00	%
Common equity Tier 1 capital
(to risk-weighted assets)	$	32,694		11.61	%	$	16,191		5.750	%	$	18,303		6.50	%
Tier I capital
(to average assets)	$	32,694		8.69	%	$	15,051		4.000	%	$	18,813		5.00	%

The above minimum capital requirements include the capital conservation buffer required to avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers. The capital conservation buffer is being phased in from 0.0 percent for 2015 to 2.50 percent by 2019. The capital conservation buffer was 1.875 percent at September 30, 2018 and 1.250 percent at December 31, 2017. The net unrealized gain or loss on available-for-sale securities is not included in computing regulatory capital.

Basel III Capital Rules

In July 2013, the three federal bank regulatory agencies jointly published final rules (the Basel III Capital Rules) establishing a new comprehensive capital framework for U.S. banking organizations. The rules implement the Basel Committee’s December 2010 framework known as “Basel III” for strengthening international capital standards as well as certain provisions of the Dodd-Frank Act. These rules substantially revise the risk-based capital requirements applicable to bank holding companies and depository institutions, compared to the current U.S. risk-based capital rules. The Basel III Capital Rules define the components of capital and address other issues affecting the numerator in banking institutions’ regulatory capital ratios. These rules also address risk weights and other issues affecting the denominator in banking institutions’ regulatory capital ratios and replace the existing risk-weighting approach with a more risk-sensitive approach. The Basel III Capital Rules were effective for the Bank on January 1, 2015 (subject to a four-year phase-in period).

The Basel III Capital Rules, among other things, (i) introduce a new capital measure called “Common Equity Tier 1” (CET1), (ii) specify that Tier 1 capital consist of CET1 and “Additional Tier 1 Capital”

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FIRST BEEVILLE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share data)

instruments meeting specified requirements, (iii) define CET1 narrowly by requiring that most deductions/adjustments to regulatory capital measures be made to CET1 and not to the other components of capital and (iv) expand the scope of the deductions/adjustments as compared to existing regulations.

Note 7: Related-party Transactions

At September 30, 2018 and December 31, 2017, the Company had loans outstanding to executive officers, directors, significant shareholders and their affiliates (related parties), in the amount of $5,663 and $5,401, respectively.

A summary of those transactions follows:

	Nine Months Ended September 30, 2018									Year Ended December 31, 2017
	Current			Unfunded			Total			Current			Unfunded		Total
Beginning balance	$	5,401		$	1,060		$	6,461		$	5,643		$	940	$	6,583
New loans		498			122			620			2,098			120		2,218
Repayments		(236	)		(305	)		(541	)		(2,340	)		—		(2,340	)
Ending balance	$	5,663		$	877		$	6,540		$	5,401		$	1,060	$	6,461

In management’s opinion, such loans and other extensions of credit and deposits were made in the ordinary course of business and were made on substantially the same terms (including interest rates and collateral) as those prevailing at the time for comparable transactions with other persons. Further, in management’s opinion, these loans did not involve more than normal risk of collectability or present other unfavorable features.

Deposits from related parties held by the Company at September 30, 2018 and December 31, 2017, totaled $6,787 and $4,741 respectively.

Note 8: Stock Appreciation Rights Plan

The Company maintains a Stock Appreciation Rights Plan (SAR Plan) for select members of the Company’s management team. This Plan grants participants the right to the appreciation in the book value of a stated number of shares of the common stock of the Company. The Company had granted SARs on 3,500 shares at September 30, 2018 and December 31, 2017. The Company accrued $707 and $551 related to the agreements at September 30, 2018 and December 31, 2017, respectively. Total expenses of the Plan amounted to $156 and $109 for the nine months and year ended September 30, 2018 and December 31, 2017, respectively.

The stock appreciation rights agreements contain change of control provisions that provide for immediate vesting of the units outstanding and a defined redemption value for each unit. Should the Company complete its pending sale under the definitive agreement with Spirit of Texas Bancshares, Inc., described in Note 14, it would trigger the change of control provisions in the agreements. Based on the sales price in the definitive agreement, the payments to be made for the outstanding units would be $2,437.

Note 9: Change in Control Agreement

In 2013, the Company entered into an agreement with the CEO which entitles the CEO to receive payment upon a change in control. The payment amount per the agreement is equal to 2.99 times the CEO’s average

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share data)

annual compensation for the three calendar years preceding the calendar year in which the change in control occurs and is payable in lump sum within 30 days following the change in control.

Note 10: Commitments and Credit Risk

The Company grants commercial, consumer and residential loans to customers primarily located in the south central Texas region. The Company’s primary market area is comprised of Bee, Dewitt and Guadalupe and surrounding counties, along with Loan Production Offices located in Comal, Karnes and Nueces counties. Although the Company has a diversified loan portfolio, the Company has concentrations of credit risk in the real estate market and is dependent on general economic conditions in the Company’s geographic market area.

Commitments to Originate Loans and Lines of Credit

Commitments to originate loans are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since a portion of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Each customer’s creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained, if deemed necessary, is based on management’s credit evaluation of the counterparty. Collateral held varies, but may include accounts receivable, inventory, property, plant and equipment, commercial real estate and residential real estate.

Lines of credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Lines of credit generally have fixed expiration dates. Since a portion of the line of credit may expire without being drawn upon, the total unused lines of credit do not necessarily represent future cash requirements. Each customer’s creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained, if deemed necessary, is based on management’s credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, commercial real estate and residential real estate. Management uses the same credit policies in granting lines of credit as it does for on-balance-sheet instruments.

At September 30, 2018 and December 31, 2017, the Company had outstanding commitments to originate loans and unused lines of credit aggregating $25,450 and $31,559, respectively. The commitments extended over varying periods of time with the majority being disbursed within a one-year period. The majority of commitments are at a floating market rate of interest.

Standby Letters of Credit

Standby letters of credit are irrevocable conditional commitments issued by the Company to guarantee the performance of a customer to a third-party. Financial standby letters of credit are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing and similar transactions. Performance standby letters of credit are issued to guarantee performance of certain customers under non-financial contractual obligations. The credit risk involved in issuing standby letters of credit is essentially the same as that involved in extending loans to customers. Fees for letters of credit issued are initially recorded by the Company as revenue and are included in earnings at the origination of the respective agreements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share data)

Should the Company be obligated to perform under the standby letters of credit, the Company may seek recourse from the customer for reimbursement of amounts paid. The Company had total outstanding standby letters of credit amounting to $415 and $480, at September 30, 2018 and December 31, 2017, respectively, with terms ranging from 30 days to 15 months.

Note 11: Disclosures About Fair Value of Assets and Liabilities

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements must maximize the use of observable inputs and minimize the use of unobservable inputs. There is a hierarchy of three levels of inputs that may be used to measure fair value:

Level 1	Quoted prices in active markets for identical assets or liabilities that the entity can access at the measurement date
Level 2	Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities
Level 3	Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities

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FIRST BEEVILLE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share data)

Recurring Measurements

The following table presents the fair value measurements of assets recognized in the accompanying consolidated balance sheets measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fall at September 30, 2018 and December 31, 2017:

			Fair Value Measurements Using
	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
September 30, 2018
Available-for-sale securities
U.S. Government and GSE securities	$	5,550	$	—	$	5,550	$	—
Tax-exempt municipal securities		20,627		—		20,627		—
U.S. Government and GSE mortgage-backed securities		28,616		—		28,616		—
	$	54,793	$	—	$	54,793	$	—

			Fair Value Measurements Using
	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
December 31, 2017
Available-for-sale securities
U.S. Government and GSE securities	$	7,639	$	—	$	7,639	$	—
Tax-exempt municipal securities		20,631		—		20,631		—
U.S. Government and GSE mortgage-backed securities		29,718		—		29,718		—
	$	57,988	$	—	$	57,988	$	—

Following is a description of the inputs and valuation methodologies used for assets measured at fair value on a recurring basis and recognized in the accompanying consolidated balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy. There have been no significant changes in the valuation techniques during the periods ended September 30, 2018 or December 31, 2017.

Available-for-sale Securities

Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. Level 2 securities include U.S. Government and GSE debt and mortgage-backed securities. In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy. Currently, all of the Company’s securities are classified in Level 2 of the hierarchy.

F-176

FIRST BEEVILLE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share data)

Third-party vendors compile prices from various sources and may apply such techniques as matrix pricing to determine the value of identical or similar investment securities (Level 2). Matrix pricing is a mathematical technique widely used in the financial institution industry to value investment securities without relying exclusively on quoted prices for specific investment securities, but rather relying on the investment securities’ relationship to other benchmark quoted investment securities. Matrix pricing is utilized in the valuation of the U.S. Government and GSE debt and mortgage-backed securities.

Nonrecurring Measurements

The following table presents the fair value measurement of assets and liabilities measured at fair value on a nonrecurring basis and the level within the fair value hierarchy in which the fair value measurements fall at December 31, 2017:

			Fair Value Measurements Using
	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
December 31, 2017
Collateral dependent impaired loans	$	1,802	$	—	$	—	$	1,802
Foreclased assets held-for-sale		283		—		—		283
	$	2,085	$	—	$	—	$	2,085

There were no assets or liabilities measured at fair value on a nonrecurring basis at September 30, 2018.

Following is a description of the valuation methodologies and inputs used for assets measured at fair value on a nonrecurring basis and recognized in the accompanying consolidated balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy. For assets classified within Level 3 of the fair value hierarchy, the process used to develop the reported fair value is described below.

Other Real Estate Owned

Other real estate owned (OREO) is carried at the lower of fair value at acquisition date or current estimated fair value, less estimated cost to sell when the real estate is acquired. Estimated fair value of OREO is based on appraisals or evaluations. OREO is classified within Level 3 of the fair value hierarchy.

Appraisals of OREO are obtained when the real estate is acquired and subsequently as deemed necessary by the Controller’s office. Appraisals are reviewed for accuracy and consistency by the Controller’s office. Appraisers are selected from the list of approved appraisers maintained by management.

Collateral-dependent Impaired Loans, Net of ALLL

The estimated fair value of collateral-dependent impaired loans is based on the appraised fair value of the collateral, less estimated cost to sell. Collateral-dependent impaired loans are classified within Level 3 of the fair value hierarchy. The Company considers the appraisal or evaluation as the starting point for determining fair value and then considers other factors and events in the environment that may affect the

F-177

FIRST BEEVILLE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share data)

fair value. Appraisals of the collateral underlying collateral-dependent loans are obtained when the loan is determined to be collateral-dependent and subsequently as deemed necessary by the Controller’s office. Appraisals are reviewed for accuracy and consistency by the Controller’s office. Appraisers are selected from the list of approved appraisers maintained by management. The appraised values are reduced by discounts to consider lack of marketability and estimated cost to sell if repayment or satisfaction of the loan is dependent on the sale of the collateral. These discounts and estimates are developed by the Controller’s office by comparison to historical results.

Unobservable (Level 3) Inputs

The following table presents quantitative information about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements other than goodwill at December 31, 2017.

	Fair Value at December 31, 2017		Valuation Technique	Unobservable Inputs	Range
Collateral dependent impaired loans	$	1,802	Market comparable properties	Marketability discount		10%-15%
Foreclosed assets held-for-sale	$	283	Market comparable properties	Comparability adjustments (%)		5%-10%

There were no assets or liabilities measured at fair value on a nonrecurring basis at September 30, 2018.

Transfers in and out of Level 1 (quoted market prices), Level 2 (other significant observable inputs) and Level 3 (significant unobservable inputs) are recognized on the actual transfer date. There were no transfers between fair value hierarchy levels during 2018 or 2017.

Note 12: Significant Estimates and Concentrations

Accounting principles generally accepted in the United States of America require disclosure of certain significant estimates and current vulnerabilities due to certain concentrations. Estimates related to the allowance for loan losses are reflected in the footnote regarding loans. Current vulnerabilities due to certain concentrations of credit risk are discussed in the footnote on commitments and credit risk. Estimates related to the value of the Company’s stock used in the Company’s stock appreciation rights plan are discussed in Note 8.

Investments

The Company invests in various investment securities. Investment securities are exposed to various risks such as interest rate, market and credit risks. Due to the level of risk associated with certain investment securities, it is at least reasonably possible that changes in the values of investment securities will occur in the near term and that such change could materially affect the amounts reported in the accompanying consolidated balance sheets.

Note 13: Basic and Diluted Earnings per Common Share

For the nine months ended September 30, 2018 and 2017, the Company did not have any dilutive securities. This results in the dilutive EPS being equivalent to the basic EPS. Treasury stock shares are not deemed

F-178

FIRST BEEVILLE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share data)

outstanding for earnings per share calculations. The following table presents the computation of basic and diluted EPS:

	Nine months ended September 30,
	2018		2017
Net income available to common stockholders	$	4,503	$	3,151
Weighted average number of common shares—basic and diluted		59,138		59,427
Basic and diluted earnings per common share	$	76.14	$	53.02

Note 14: Subsequent Events

Subsequent events have been evaluated through January 7, 2019, which is the date the consolidated financial statements were issued.

Agreement with Spirit of Texas Bancshares, Inc.

On November 27, 2018, the Company and Spirit of Texas Bancshares, Inc. (Spirit) entered into an Agreement and Plan of Reorganization providing for the merger of the Company with and into Spirit, with Spirit the surviving corporation in the merger, and the merger of the Bank with and into Spirit, with Spirit of Texas Bank the surviving banking corporation. If the merger is completed, holders of the Company’s stock will receive a total of 1,579,268 shares of Spirit’s common stock and an estimated $32.4 million in cash, subject to certain adjustments. Consummation of the merger is contingent upon regulatory approval and is anticipated to be completed in the second quarter of 2019.

F-179

First Beeville Financial Corporation

Independent Auditor’s Report and

Consolidated Financial Statements

December 31, 2017 and 2016

F-180

First Beeville Financial Corporation

December 31, 2017 and 2016

Contents

Independent Auditor’s Report for 2017	F-182
Independent Auditor’s Report for 2016	F-183
Consolidated Financial Statements
Balance Sheets	F-184
Statements of Income	F-185
Statements of Comprehensive Income	F-186
Statements of Stockholders’ Equity	F-187
Statements of Cash Flows	F-188
Notes to Financial Statements	F-189

F-181

Independent Auditor’s Report

Board of Directors

First Beeville Financial Corporation

Beeville, Texas

We have audited the accompanying consolidated financial statements of First Beeville Financial Corporation, which comprise the consolidated balance sheet as of December 31, 2017, and the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for the year then ended, and the related notes to the consolidated financial statements.

Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

Auditor’s Responsibility

Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of First Beeville Financial Corporation, as of December 31, 2017, and the results of its operations and its cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America.

Prior Year Audited by Other Auditors

The 2016 financial statements were audited by other auditors and their report thereon, dated March 21, 2017, expressed an unmodified opinion.

San Antonio, Texas

March 14, 2018

F-182

Independent Auditors’ Report

To the Board of Directors of First Beeville Financial Corporation

We have audited the accompanying consolidated statements of financial condition of First Beeville Financial Corporation and Subsidiaries as of December 31, 2016 and 2015, and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for the years then ended, and the related notes to the consolidated financial statements.

Management’s Responsibility for the Consolidated Financial Statements

Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

Auditors’ Responsibility

Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of First Beeville Financial Corporation and Subsidiaries as of December 31, 2016 and 2015, and the results of their operations and their cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.

/s/ Bumgardner, Morrison & Company, LLP

Bumgardner, Morrison & Company, LLP

Victoria, Texas

March 21, 2017

Bumgardner, Morrison & Company, LLP		1501 E Mockingbird Lane, Suite 300 PO Box 3750 Victoria, Texas 77903-3750 Phone: 361.575.0271 Fax: 361.578.0880 Website: BMCcpa.com
Certified Public Accountants
Members:	American Institute of Certified Public Accountants
	Texas Society of Certified Public Accountants
	AICPA Private Companies Practice Section
	AICPA Employee Benefit Plan Audit Quality Center
	AICPA Government Audit Quality Center

F-183

First Beeville Financial Corporation

Consolidated Balance Sheets

December 31, 2017 and 2016

	2017			2016
Assets
Cash and due from banks (including interest-bearing deposits of $260,350 in 2017 and $1,871 in 2016)	$	40,311,219		$	9,034,031
Interest-bearing deposits at the Federal Reserve Bank		6,052,985			9,500,654
Total cash and cash equivalents		46,364,204			18,534,685
Certificates of deposit in other banks		1,225,000			1,225,000
Investment securities available-for-sale		57,987,522			17,594,537
Investment securities held-to-maturity		—			28,345,196
Loans receivable (net of allowance for loan losses of $3,127,603 in 2017 and $2,656,598 in 2016)		260,523,241			236,659,316
Federal home loan bank stock, at cost		1,043,000			1,033,100
Accrued interest receivable		1,279,127			964,169
Foreclosed assets		1,410,296			1,136,400
Banking premises and equipment, net		7,585,393			7,649,855
Prepaid federal income tax		—			553,956
Deferred federal income tax		619,881			714,215
Bank owned life insurance		7,676,163			5,431,640
Other assets		1,080,982			571,368
Total assets	$	386,794,809		$	320,413,437
Liabilities and Stockholders’ Equity
Liabilities
Deposits	$	351,378,134		$	288,369,986
Borrowed funds		—			926,183
Accrued interest payable		211,199			118,284
State income tax payable		15,900			15,260
Federal income tax payable		981,506			—
Dividends payable		443,535			445,830
Other liabilities		1,555,840			1,179,919
Total liabilities		354,586,114			291,055,462
Stockholders’ Equity
Common stock ($5 par value; 1,000,000 shares authorized; 93,946 shares issued)		469,730			469,730
Surplus		784,495			784,495
Retained earnings		33,969,570			30,706,739
34,502 shares in 2016)		(2,750,636	)		(2,587,650	)
Accumulated other comprehensive income
Unrealized gain (loss) on securities available-for-sale (net of deferred income taxes of $70,300 in 2017 and $7,902 in 2016)		(264,464	)		(15,339	)
Total stockholders’ equity		32,208,695			29,357,975
Total liabilities and stockholders’ equity	$	386,794,809		$	320,413,437

See Notes to Consolidated Financial Statements

F-184

First Beeville Financial Corporation

Consolidated Statements of Income

Years Ended December 31, 2017 and 2016

	2017			2016
Interest and Dividend Income
Interest and fees on loans	$	13,355,480		$	11,775,587
Interest on mortgage-backed and related securities		410,786			359,356
Interest on investment account receivable
U.S. treasury securities		63,117			202,607
Federal agency securities		102,835			141,954
Tax-exempt municipals		295,179			272,596
Corporate securities		—			3,546
Interest on deposits with banks		312,380			77,005
Dividend income		21,803			17,924
Total interest and dividend income		14,561,580			12,850,575
Interest Expense
Interest on deposits		1,133,987			672,017
Interest on borrowed funds		49,600			92,417
Total interest expense		1,183,587			764,434
Net Interest Income		13,377,993			12,086,141
Provision for Loan Losses		1,001,000			1,547,500
Net Interest Income After Provision for Loan Losses		12,376,993			10,538,641
Noninterest Income
Service charges on deposit accounts		902,491			941,089
Other service charges and noninterest income		71,045			75,921
Bank owned life insurance income		139,216			141,928
Income from death benefit of bank-owned life insurance		624,493			—
Gain (loss) on sale of assets		2,581			(234,152	)
Gain (loss) on foreclosure		(20,670	)		566,215
Gain on sale of securities		—			251,644
Total noninterest income		1,719,156			1,742,645
Noninterest Expense
Salaries and employee benefits		4,707,131			4,625,313
Occupancy and equipment expense		995,978			928,593
Other expense		2,450,582			1,990,885
Total noninterest expense		8,153,691			7,544,791
Income Before Income Taxes		5,942,458			4,736,495
Income Tax Expense		2,279,612			1,472,906
Net Income	$	3,662,846		$	3,263,589
Earnings Per Share—Basic and Diluted (based on weighted average number of shares outstanding—59,355 shares in 2017 and 59,444 in 2016)	$	61.71		$	54.90

See Notes to Consolidated Financial Statements

F-185

First Beeville Financial Corporation

Consolidated Statements of Comprehensive Income

Years Ended December 31, 2017 and 2016

	2017			2016
Net Income	$	3,662,846		$	3,263,589
Other Comprehensive Income, Net of Federal Income Tax
Net unrealized gain (loss) on securities available-for-sale		(311,523	)		61,100
Reclassification adjustment for realized gains included in net income		—			(251,644	)
Other comprehensive loss before tax effect		(311,523	)		(190,544	)
Tax benefit		(105,918	)		(64,785	)
Other comprehensive loss, net of federal income tax		(205,605	)		(125,759	)
Comprehensive Income	$	3,457,241		$	3,137,830

See Notes to Consolidated Financial Statements

F-186

First Beeville Financial Corporation

Consolidated Statements of Stockholders’ Equity

Years Ended December 31, 2017 and 2016

	Common Stock				Surplus		Retained Earnings			Treasury Stock			Accumulated Other Comprehensive Income (Loss)			Total
	Shares		Amount
Balance, January 1, 2016		94,936	$	469,730	$	784,495	$	27,888,980		($	2,587,650	)	$	110,420		$	26,665,975
Net income for the year		—		—		—		3,263,589			—			—			3,263,589
Changes in unrealized gain on securities available-for-sale, net of applicable deferred income taxes of $64,785		—		—		—		—			—			(125,759	)		(125,759	)
Dividends on common stock, $7.50 per share		—		—		—		(445,830	)		—			—			(445,830	)
Balance, December 31, 2016		94,936		469,730		784,495		30,706,739			(2,587,650	)		(15,339	)		29,357,975
Net Income		—		—		—		3,662,846			—			—			3,662,846
Changes in unrealized gain on securities available-for-sale, net of applicable deferred income taxes of $105,918		—		—		—		—			—			(205,605	)		(205,605	)
Reclassification of stranded tax effects due to Tax Cuts and Jobs Act (TCJA)		—		—		—		43,520			—			(43,520	)		—
Purchase of 306 shares of stock at weighted average of $532.63 per share		—		—		—		—			(162,986	)		—			(162,986	)
Dividends on common stock, $7.50 per share		—		—		—		(443,535	)		—			—			(443,535	)
Balance, December 31, 2017		94,936	$	469,730	$	784,495	$	33,969,570		$	(2,750,636	)	$	(264,464	)	$	32,208,695

See Notes to Consolidated Financial Statements

F-187

First Beeville Financial Corporation

Consolidated Statements of Cash Flows

Years Ended December 31, 2017 and 2016

	2017			2016
Cash Flows From Operating Activities
Net income	$	3,662,846		$	3,263,589
Items not requiring (providing) cash
Depreciation		563,665			420,703
Provision for loan losses		1,001,000			1,547,500
Net amortization of investment securities		325,023			422,978
Net realized gains on sales of available-for-sale securities		—			(251,644	)
Deferred income taxes		156,733			136,781
(Gain) loss on sale of foreclosed assets		(56	)		234,152
(Gain) loss on foreclosure		20,670			(566,215	)
Income from death benefit of bank-owned life insurance		(624,493	)		—
Increase in cash surrender value of bank-owned life insurance		(139,216	)		(141,927	)
Changes in
Interest receivable		(314,957	)		130,676
Other assets		(466,549	)		(44,215	)
Interest payable and other liabilities		468,834			(181,923	)
Federal income tax (receivable) payable		1,535,462			(534,872	)
State income tax payable		640			(42,840	)
Net cash provided by operating activities		6,189,602			4,392,743
Investing Activities
Proceeds from sales of available-for-sale securities		—			15,829,937
Purchases of available-for-sale securities		(109,107,853	)		—
Proceeds from maturities of available-for-sale securities		94,063,630			9,655,565
Proceeds from maturities of held-to-maturity securities		2,360,344			3,843,954
Net change in loans		(25,168,925	)		(34,153,178	)
Net change in interest-bearing time deposits		—			2,750,000
Purchase of premises and equipment		(499,204	)		(2,286,394	)
Proceeds from bank-owned life insurance		1,319,186			—
Purchase of bank-owned life insurance		(2,800,000	)		—
Purchase of Federal Home Loan Bank stock		(9,900	)		(905,200	)
Redemption of Federal Home Loan Bank stock		—			328,000
Proceeds from the sale of foreclosed assets		9,490			1,572,795
Net cash used in investing activities		(39,833,232	)		(3,364,521	)
Financing Activities
Net increase (decrease) in non-certificate of deposits accounts	$	58,044,339		$	(1,622,032	)
Net increase in certificate of deposits accounts		4,963,809			5,707,560
Repayments of short-term borrowings		(926,183	)		(538,254	)
Purchase of treasury stock		(162,986	)		—
Dividends paid		(445,830	)		(297,220	)
Net cash provided by financing activities		61,473,149			3,250,054
Increase in Cash and Cash Equivalents		27,829,519			4,278,276
Cash and Cash Equivalents, Beginning of Year		18,534,685			14,256,409
Cash and Cash Equivalents, End of Year	$	46,364,204		$	18,534,685
Supplemental Cash Flows Information
Interest paid	$	1,093,395		$	732,749
Income taxes paid	$	1,080,956		$	1,913,837
Real estate acquired in settlement of loans	$	304,000		$	1,036,400
Dividends declared but not yet paid	$	443,535		$	445,830

See Notes to Consolidated Financial Statements

F-188

First Beeville Financial Corporation

Notes to Consolidated Financial Statements

December 31, 2017 and 2016

Note 1: Nature of Operations and Summary of Significant Accounting Policies

Nature of Operations

First Beeville Financial Corporation (Company), is a bank-holding company whose principal activity is the ownership and management of its wholly-owned subsidiary, The First National Bank of Beeville (Bank) and the Bank’s wholly-owned subsidiary, FNB Asset Management, LLC. The Bank is primarily engaged in providing a full range of banking and financial services to individual and corporate customers through its main office in Beeville, Texas, and its full-service branch banks in Yorktown and Seguin, Texas, and its loan production offices in New Braunfels, Corpus Christi and Karnes City, Texas. The Bank’s subsidiary manages and holds foreclosed assets that were transferred to it by the Bank until their ultimate disposition. The Company and Bank are subject to competition from other financial institutions and insurance agencies. The Company and Bank are subject to the regulation of certain federal and state agencies and undergo periodic examinations by those regulatory authorities.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company, Bank, and real estate subsidiary. All significant intercompany accounts and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses and the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans. In connection with the determination of the allowance for loan losses and the valuation of foreclosed assets held-for-sale, management obtains independent appraisals for significant properties.

Cash Equivalents

The Company considers all liquid investments with original maturities of three months or less to be cash equivalents. At December 31, 2017 and 2016, cash equivalents consisted primarily of cash and due from banks and interest-bearing deposits at the Federal Reserve Bank.

At December 31, 2017, the Company’s interest-bearing cash accounts exceeded federally insured limits by approximately $37,842,000. Approximately, $6,053,000 of this amount is held at the Federal Reserve Bank of Dallas.

Securities

Certain debt securities that management has the positive intent and ability to hold to maturity are classified as “held-to-maturity” and recorded at amortized cost. Securities not classified as held-to-maturity are classified as “available-for-sale.” Available-for-sale securities, which include any security for which the Company has no immediate plan to sell but which may be sold in the future, are recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income. Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.

F-189

First Beeville Financial Corporation

Notes to Consolidated Financial Statements

December 31, 2017 and 2016

In July 2017, the Bank transferred all of its held-to-maturity investments to the available-for-sale category. Management determined that it no longer had the positive intent to hold its investment in securities classified as held-to-maturity for an indefinite period of time because of management’s desire to have more flexibility in managing the investment portfolio. The securities transferred had a total amortized cost of $25,870,835, fair value of $26,197,560 and net unrealized gross gains of $341,775 and unrealized gross losses of $15,050 at the time of the transfer. The net unrealized gain of $326,725 was recorded as other comprehensive income at the time of transfer. As a result, there are no securities classified as held-to-maturity at December 31, 2017.

For debt securities with fair value below amortized cost when the Company does not intend to sell a debt security and, it is more-likely-than-not, the Company will not have to sell the security before recovery of its cost basis, it recognizes the credit component of an other-than-temporary impairment of a debt security in earnings and the remaining portion in other comprehensive income.

Loans

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at their outstanding principal balances adjusted for unearned income, charge-offs, an allowance for loan loss, any unamortized deferred fees or costs on originated loans and unamortized premiums or discounts on purchased loans.

For loans amortized at cost, interest income is accrued based on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, as well as premiums and discounts, are deferred and amortized as a level yield adjustment over the respective term of the loan.

The accrual of interest on mortgage and commercial loans is discontinued at the time the loan is 90 days past due unless the credit is well-secured and in process of collection. Past due status is based on contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful.

All interest accrued but not collected for loans that are placed on nonaccrual or charged-off is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Allowance for Loan Losses

The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to income. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

The allowance consists of allocated and general components. The allocated component relates to loans that are classified as impaired. For those loans that are classified as impaired, an allowance is established when

F-190

First Beeville Financial Corporation

Notes to Consolidated Financial Statements

December 31, 2017 and 2016

the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers nonclassified loans and is based on historical charge-off experience and expected loss given default derived from the Company’s internal risk rating process. Other adjustments may be made to the allowance for pools of loans after an assessment of internal or external influences on credit quality that are not fully reflected in the historical loss or risk rating data.

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price or the fair value of the collateral if the loan is collateral dependent.

Groups of loans with similar risk characteristics are collectively evaluated for impairment based on the group’s historical loss experience adjusted for changes in trends, conditions and other relevant factors that affect repayment of the loans. Accordingly, the Company does not separately identify individual consumer and residential loans for impairment measurements, unless such loans are the subject of a restructuring agreement due to financial difficulties of the borrower.

Premises and Equipment

Depreciable assets are stated at cost less accumulated depreciation. Depreciation is charged to expense using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are capitalized and depreciated using the straight-line method over the terms of the respective leases or the estimated useful lives of the improvements, whichever is shorter. Expected terms include lease option periods to the extent that the exercise of such options is reasonably assured. Depreciation and amortization expense for the years ended December 31, 2017 and 2016, was $563,665 and $420,703, respectively.

The estimated useful lives for each major depreciable classification of premises and equipment are as follows:

Buildings and improvements	15-40 years
Furniture and equipment	5-25 years
Data processing equipment and software	3-5 years

Long-lived Asset Impairment

The Company evaluates the recoverability of the carrying value of long-lived assets whenever events or circumstances indicate the carrying amount may not be recoverable. If a long-lived asset is tested for recoverability and the undiscounted estimated future cash flows expected to result from the use and eventual disposition of the asset are less than the carrying amount of the asset, the asset cost is adjusted to fair value and an impairment loss is recognized as the amount by which the carrying amount of a long-lived asset exceeds its fair value.

No asset impairment was recognized during the years ended December 31, 2017 and 2016.

F-191

First Beeville Financial Corporation

Notes to Consolidated Financial Statements

December 31, 2017 and 2016

Federal Reserve and Federal Home Loan Bank Stock

Federal Reserve and Federal Home Loan Bank (FHLB) stock are required investments for institutions that are members of the Federal Reserve Bank and FHLB systems. The required investment in the common stock is based on a predetermined formula.

Bank-Owned Life Insurance

The Bank has purchased life insurance policies on certain key executives. Bank-owned life insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement.

Foreclosed Assets Held-For-Sale

Assets acquired through, or in lieu of, loan foreclosure are held-for-sale and are initially recorded at fair value at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less costs to sell. Revenue and expenses from operations and changes in the valuation allowance are included in net income or expense from foreclosed assets.

Treasury Stock

Common stock shares repurchased are recorded at cost. Cost of shares retired or reissued is determined using the first-in, first-out method.

Transfers of Financial Assets

Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company—put presumptively beyond the reach of the transferor and its creditors, even in bankruptcy or other receivership, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity or the ability to unilaterally cause the holder to return specific assets.

Income Taxes

The Company accounts for income taxes in accordance with income tax accounting guidance (ASC 740, Income Taxes). The income tax accounting guidance results in two components of income tax expense: current and deferred. Current income tax expense reflects taxes to be paid or refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues. The Company determines deferred income taxes using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases of assets and liabilities and enacted changes in tax rates and laws are recognized in the period in which they occur. Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are reduced by a valuation allowance if, based on the weight of evidence available, it is more likely than not that some portion or all of a deferred tax asset will not be realized.

F-192

First Beeville Financial Corporation

Notes to Consolidated Financial Statements

December 31, 2017 and 2016

Tax positions are recognized if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination. The term more likely than not means a likelihood of more than 50 percent; the terms examined and upon examination also include resolution of the related appeals or litigation processes, if any. A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50 percent likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The determination of whether or not a tax position has met the more-likely-than-not recognition threshold considers the facts, circumstances and information available at the reporting date and is subject to management’s judgment.

With a few exceptions, the Company is no longer subject to U.S. federal, state and local or non-U.S. income tax examinations by tax authorities for years before 2014.

The Company recognizes interest and penalties on income taxes as a component of income tax expense.

The Company files consolidated income tax returns with its subsidiaries.

Earnings Per Share

Basic earnings per share represents income available to common stockholders divided by the weighted-average number of common shares outstanding during each period. Diluted earnings per share reflects additional potential common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Potential common shares that may be issued by the Company relate solely to outstanding stock options and are determined using the treasury stock method. There were no dilutive shares outstanding at December 31, 2017 and 2016.

Treasury stock shares are not deemed outstanding for earnings per share calculations.

Comprehensive Income (Loss)

Comprehensive income (loss) consists of net income and other comprehensive income (loss), net of applicable income taxes. Other comprehensive income (loss) includes unrealized appreciation (depreciation) on available-for-sale securities. The Company uses the portfolio method for reclassifying material stranded tax effects in accumulated other comprehensive income (AOCI) to earnings.

Transfers Between Fair Value Hierarchy Levels

Transfers in and out of Level 1 (quoted market prices), Level 2 (other significant observable inputs) and Level 3 (significant unobservable inputs) are recognized on the actual transfer date. There were no transfers between fair value hierarchy levels during 2017 or 2016.

Reclassifications

Certain reclassifications have been made to the 2016 financial statements to conform to the 2017 financial statement presentation. These reclassifications had no effect on net income.

Revisions

Certain immaterial revisions have been made to the 2017 financial statements. Earnings per share for the year ended December 31, 2017 was revised for a computational error in weighted-average shares

F-193

First Beeville Financial Corporation

Notes to Consolidated Financial Statements

December 31, 2017 and 2016

outstanding which reduced previously reported earnings per share by $0.23. Also, the proceeds from the death benefit of bank-owned life insurance were reported at the net amount of the reduction in the cash surrender value of bank-owned life insurance in cash flows from investing activities rather than at the gross amount of the proceeds with a reconciling item in operating activities cash flows for income recorded as part of the transaction. The revision corrected the overstatement of cash provided by operating activities and overstatement of cash used in investing activities of $624,493. In addition, certain GNMA mortgage-backed securities with a fair value of $8,837,000 were originally reported in the U.S. government agencies category in Note 2 on Securities. These GNMA mortgage-backed securities have been reclassified to the mortgage-backed securities category.

Note 2: Securities

The amortized cost and approximate fair values, together with gross unrealized gains and losses of available-for-sale securities are as follows:

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Approximate Fair Value
December 31, 2017
U.S. Government and government- sponsored enterprises (GSE) securities	$	7,591,206	$	53,119	$	5,485	$	7,638,840
Tax-exempt municipal securities		20,770,570		44,182		183,802		20,630,950
U.S. Government and GSE mortgage-backed securities		29,960,510		66,888		309,666		29,717,732
Total	$	58,322,286	$	164,189	$	498,953	$	57,987,522
December 31, 2016
U.S. Government and GSE securities	$	3,007,306	$	2,844	$	—	$	3,010,150
Tax-exempt municipal securities		8,295,800		35,359		8,510		8,322,649
U.S. Government and GSE mortgage-backed securities		6,314,672		2,430		55,364		6,261,738
Total	$	17,617,778	$	40,633	$	63,874	$	17,594,537

The amortized cost and approximate fair values, together with gross unrealized gains and losses of held-to-maturity securities at December 31, 2016, are shown below. There are no securities classified as held-to-maturity at December 31, 2017.

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Approximate Fair Value
December 31, 2016
U.S. Government and GSE securities	$	9,632,216	$	109,631	$	67	$	9,741,780
Tax-exempt municipal securities		6,969,958		20,578		21,497		6,969,039
U.S. Government and GSE mortgage-backed securities		11,743,022		70,845		69,014		11,744,853
Total	$	28,345,196	$	201,054	$	90,578	$	28,455,672

F-194

First Beeville Financial Corporation

Notes to Consolidated Financial Statements

December 31, 2017 and 2016

The amortized cost and fair value of available-for-sale securities at December 31, 2017, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

	Available-for-Sale
	Amortized Cost		Fair Value
Due in one year or less	$	4,717,616	$	4,714,690
Due in one to five years		15,245,074		15,283,351
Due in five to ten years		7,286,070		7,166,411
Due after ten years		1,113,016		1,105,338
Total investment securities		28,361,776		28,269,790
U.S. Government and GSE mortgage-backed securities		29,960,510		29,717,732
Total	$	58,322,286	$	57,987,522

The carrying value of securities pledged as collateral, to secure public deposits and for other purposes, was $46,503,676 at December 31, 2017. There were no securities pledged as collateral at December 31, 2016.

Gross gains of $251,644 resulting from sales of available-for-sale securities were realized during the year ended December 31, 2016. There were no sales of available-for-sale securities during 2017.

Certain investments in debt securities are reported in the consolidated financial statements at an amount less than their historical cost. Total fair value of these investments at December 31, 2017 and 2016, was $44,475,753 and $20,922,860, respectively, which is approximately 77 percent and 55 percent, respectively, of the Company’s available-for-sale and held-to-maturity investment portfolio. The unrealized losses are largely due to increases in market interest rates over the yield available at the time the underlying securities were purchased. Except as discussed below, management believes the declines in fair value for these securities are temporary.

The following tables show the Company’s investments’ gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at December 31, 2017 and 2016:

	December 31, 2017
	Less Than 12 Months				12 Months or More				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Available-for-sale Securities
U.S. Government and GSE securities	$	4,293,752	$	5,485	$	—	$	—	$	4,293,752	$	5,485
Tax-exempt municipal securities		13,665,490		183,611		219,440		191		13,884,930		183,802
U.S. Government and GSE mortgage-backed securities		25,374,260		291,195		922,811		18,471		26,297,071		309,666
Total	$	43,333,502	$	480,291	$	1,142,251	$	18,662	$	44,475,753	$	498,953

F-195

First Beeville Financial Corporation

Notes to Consolidated Financial Statements

December 31, 2017 and 2016

	December 31, 2016
	Less Than 12 Months				12 Months or More				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Available-for-sale Securities
Tax-exempt municipal securities	$	2,048,068	$	6,436	$	2,058,800	$	2,074	$	4,106,868	$	8,510
U.S. Government and GSE mortgage-backed securities		5,634,698		55,364		—		—		5,634,698		55,364
Total	$	7,682,766	$	61,800	$	2,058,800	$	2,074	$	9,741,566	$	63,874

	December 31, 2016
	Less Than 12 Months				12 Months or More				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Held-to-maturity Securities
U.S. Government and GSE securities	$	1,000,000	$	67	$	—	$	—	$	1,000,000	$	67
Tax-exempt municipal securities		2,801,788		21,497		—		—		2,801,788		21,497
U.S. Government and GSE mortgage-backed securities		7,379,506		69,014		—		—		7,379,506		69,014
Total	$	11,181,294	$	90,578	$	—	$	—	$	11,181,294	$	90,578

U.S. Government and GSE Securities

The unrealized losses on the Company’s investments in direct obligations of U.S. government and GSEs were caused by interest rate increases. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost bases of the investments. Because the Company does not intend to sell the investments and it is not more-likely-than-not the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at December 31, 2017.

Tax-exempt Municipal Securities

The unrealized losses on the Company’s investments in securities of state and political subdivisions were caused by changes in interest rates and illiquidity. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost bases of the investments. Because the Company does not intend to sell the investments and it is not more likely than not the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at December 31, 2017.

U.S. Government and GSE Mortgage-Backed Securities

The unrealized losses on the Company’s investment in mortgage-backed securities issued by the U.S. government and GSEs were caused by interest rate increases. The Company expects to recover the amortized cost basis over the term of the securities. Because the decline in market value is attributable to changes in interest rates and not credit quality and because the Company does not intend to sell the investments and it is not more-likely-than-not the Company will be required to sell the investments before

F-196

First Beeville Financial Corporation

Notes to Consolidated Financial Statements

December 31, 2017 and 2016

recovery of their amortized cost bases, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at December 31, 2017.

Note 3: Loans and Allowance for Loan Losses

Categories of loans at December 31, 2017 and 2016, include:

	2017			2016
Commercial loans	$	24,790,860		$	27,230,839
Agricultural loans		8,093,208			2,880,008
Real estate loans		229,989,035			208,203,217
Installment and consumer term loans		1,537,900			1,558,954
Other loans (virtual and ready credit)		81,095			90,311
Overdrafts		54,962			72,638
Gross loans		264,547,060			240,035,967
Less
Net deferred loan fees and costs		(896,216	)		(720,053	)
Allowance for loan losses		(3,127,603	)		(2,656,598	)
Net loans	$	260,523,241		$	236,659,316

The following tables present the balance in the allowance for loan losses and the recorded investment in loans based on portfolio segment and impairment method as of December 31, 2017 and 2016:

	2017
	Commercial			Agricultural		Real Estate		Consumer			Total
Allowance for Loan Losses
Balance, beginning of year	$	383,440		$	22,487	$	2,226,042	$	24,629		$	2,656,598
Provision for loan losses		378,806			46,824		567,457		7,914			1,001,001
Losses charged-off		(516,396	)		—		—		(21,155	)		(537,551	)
Recoveries		—			—		—		7,555			7,555
Balance, end of year	$	245,850		$	69,311	$	2,793,499	$	18,943		$	3,127,603
Allowance Balances
Ending balance individually evaluated for impairment	$	—		$	—	$	225,829	$	—		$	225,829
Ending balance collectively evaluated for impairment		245,850			69,311		2,567,670		18,943			2,901,774
Ending balance	$	245,850		$	69,311	$	2,793,499	$	18,943		$	3,127,603
Loans
Ending balance individually evaluated for impairment	$	301,188		$	—	$	1,725,829	$	1,120		$	2,028,137
Ending balance collectively evaluated for impairment		24,489,672			8,093,208		228,263,206		1,672,837			262,518,923
Ending balance	$	24,790,860		$	8,093,208	$	229,989,035	$	1,673,957		$	264,547,060

F-197

First Beeville Financial Corporation

Notes to Consolidated Financial Statements

December 31, 2017 and 2016

	2016
	Commercial			Agricultural			Real Estate			Consumer			Total
Allowance for Loan Losses
Balance, beginning of year	$	672,860		$	105,003		$	1,749,422		$	27,338		$	2,554,623
Provision for loan losses		774,909			(82,516	)		847,620			7,487			1,547,500
Losses charged-off		(1,067,000	)		—			(371,000	)		(15,095	)		(1,453,095	)
Recoveries		2,671			—			—			4,899			7,570
Balance, end of year	$	383,440		$	22,487		$	2,226,042		$	24,629		$	2,656,598
Allowance Balances
Ending balance individually evaluated for impairment	$	5,705		$	—		$	—		$	2,623		$	8,328
Ending balance collectively evaluated for impairment		377,735			22,487			2,226,042			22,006			2,648,270
Ending balance	$	383,440		$	22,487		$	2,226,042		$	24,629		$	2,656,598
Loans
Ending balance individually evaluated for impairment	$	905,970		$	—		$	9,675,527		$	6,486		$	10,587,983
Ending balance collectively evaluated for impairment		26,324,869			2,880,008			198,527,690			1,715,417			229,447,984
Ending balance	$	27,230,839		$	2,880,008		$	208,203,217		$	1,721,903		$	240,035,967

The risk characteristics of the Bank’s material portfolio segments are as follows:

Commercial Loans—The commercial loan portfolio consists of loans to commercial customers for use in normal business operations to finance working capital needs, equipment purchase or other expansion projects. Commercial loans are underwritten to assure an ability to repay the indebtedness without relying primarily on the collateral. The underwriting process includes gaining an understanding of the borrower’s ability to operate their business profitably, then analyzing and forming a conclusion on the adequacy of their cash flow and financial stability in relation to their ability to service the indebtedness.

Real Estate Loans—The real estate loan portfolio consists of residential loans for single-family and multi-family properties, construction and land development loans, loans secured by farmland and other commercial real estate loans. Real estate loans, for commercial purposes as well as agricultural and residential purposes, are underwritten in much the same was as a commercial loan. Analyzing the borrower’s ability to service the indebtedness from estimated cash flows and structuring the payment streams to match such cash flow is integral to the success of loan repayment. The Bank has set boundaries within its policies that prohibit and/or limit speculative real estate investment loans and development loans due to the inherent risks in these types of loans. Trade territories have been established for the Bank as a whole and the majority of real estate loans are within these established trade territories. Lending beyond these areas is allowed on a limited basis when dealing with a seasoned customer who has established history with the Bank.

Agriculture Loans—Agriculture loans are another segment of the loan portfolio, and financial analysis similar to that performed on commercial loans is performed on all agriculture loans. This portfolio includes loans to farming operations by providing annual lines of credit for expenditures incurred up until and through harvest. Livestock production loans also make up a portion of the portfolio, whereby loans are structured to match the income stream generated from the livestock with maturities that fully amortize within the production life expectancy of the livestock. Equipment loans are also provided, with borrower equity injection being a critical requirement along with cash flow for debt service.

F-198

First Beeville Financial Corporation

Notes to Consolidated Financial Statements

December 31, 2017 and 2016

Consumer Loans—Consumer loans are also generated by the Bank, with analysis being based on the consumer’s income as compared to all debt and taking into consideration the consumer’s credit report score which is based upon prior performance with other creditors. The consumer’s income and credit report supplement the judgmental process used in consumer lending. The Bank presently has an established indirect lending program, which is monitored closely and for which special reserves are established.

Internal Risk Categories

The risk rating system for the Bank is based upon the judgmental and credit analysis process that loan officers perform in conjunction with the Officers Loan Committee’s and Directors Loan Committee’s review process. The substantial majority of all loans made by the Bank are considered pass credits at the inception of the loan based upon underwriting standards and analysis of the cash flow, collateral and creditworthiness of the customers in accordance with adopted policies and regulatory guidelines.

For loans that develop delinquencies or that evidence the development of serious deficiencies in cash flow, credit quality, collateral deficiencies, past delinquencies or other derogatory criteria, ongoing monitoring is performed. This is achieved through daily and weekly past due reports, weekly technical exceptions reports, daily account overdraft monitoring, as well as monthly classified loans list review and quarterly loan loss allowance evaluations and action plans.

Loans that reach a past-due status ranging from 60 to 90 days delinquency or that are in the final stages of demand and acceleration, are in bankruptcy or loans that display other negative trends or characteristics of deterioration in credit quality or collateral coverage are coded with a substandard loan rating. This loan rating carries a higher reserve allocation of 4 percent based upon the Bank’s historical loan migration loss factor; however, the loan is not categorized as impaired until it reaches a status of non-accrual or is deemed to be impaired as to full collectability. Loan officers are responsible for timely identification of the deterioration of credits and the need to classify them more severely than pass.

Impaired loans are carried as line items on the classified and impaired loans list for monitoring and for calculation of the reserve factor. Specific reserves are established when necessary and are based either upon the fair market value of the collateral if the loan is collateral dependent or on the best estimate of discounted cash flows when there is insufficient collateral coverage. All non-accrual loans are considered impaired.

The classifications for loans demonstrating some form of credit quality weakness or deficiency include Watch, Other Assets Especially Mentioned (OAEM), Substandard and Doubtful. The classification of a credit is determined according to the following definitions:

Non-Classified/Pass—Non-classified loans are not considered a greater-than-normal risk. (This rating may also be referred to as pass.) Performing loans for which the borrower demonstrates the ability to repay its obligations and the collateral value generally exceeds the loan amount.

Watch—Assets in this category are adequately protected by either collateral values or sound net worth and capacity of the obligor to meet the indebtedness; however, it has been determined that there may be some risks or weaknesses, (i.e., recent past dues, overdrafts or negative trends in earnings) but such potential weaknesses are not yet significant, but there is increased risk for deterioration in the credit. The classification is solely for the purpose of providing management a monthly monitoring tool.

Other Assets Especially Mentioned (OAEM)—A special mention asset has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the institution’s credit position at some future date. Special Mention assets are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification.

F-199

First Beeville Financial Corporation

Notes to Consolidated Financial Statements

December 31, 2017 and 2016

Substandard—A substandard asset is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful—An asset classified doubtful has all the weaknesses inherent in one classified as substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. At December 31, 2017 and 2016, all assets classified as doubtful were impaired.

The following tables present the credit risk profile of the Bank’s loan portfolio based on internal rating category and payment activity as of December 31, 2017 and 2016:

	2017
	Commercial		Agricultural		Real Estate		Consumer		Total
Rating
Pass	$	23,957,226	$	8,093,208	$	216,298,597	$	1,671,818	$	250,020,849
Watch		509,160		—		5,129,234		—		5,638,394
OAEM		—		—		4,190,136		—		4,190,136
Substandard		23,286		—		2,645,239		1,019		2,669,544
Impaired		301,188		—		1,725,829		1,120		2,028,137
Doubtful		—		—		—		—		—
Total	$	24,790,860	$	8,093,208	$	229,989,035	$	1,673,957	$	264,547,060

	2016
	Commercial		Agricultural		Real Estate		Consumer		Total
Rating
Pass	$	26,324,870	$	2,880,008	$	198,527,690	$	1,715,417	$	229,447,985
Watch		—		—		2,157,057		—		2,157,057
OAEM		—		—		—		—		—
Substandard		—		—		5,712,729		—		5,712,729
Impaired		905,969		—		1,805,741		6,486		2,718,196
Doubtful		—		—		—		—		—
Total	$	27,230,839	$	2,880,008	$	208,203,217	$	1,721,903	$	240,035,967

The following tables present the Bank’s loan portfolio aging analysis of the recorded investment in loans as of December 31, 2017 and 2016:

	2017
	30-89 Days Past Due		60-89 Days Past Due		Greater Than 90 Days		Total Past Due		Current		Total Loans		Total Loans > 90-Days & Accruing
Commercial loans	$	23,286	$	—	$	—	$	23,286	$	24,767,574	$	24,790,860	$	—
Agricultural loans		—		—		—		—		8,093,208		8,093,208		—
Real estate loans		321,291		—		2,602,984		2,924,275		227,064,760		229,989,035		2,602,984
Consumer loans		—		14,347		—		14,347		1,659,610		1,673,957		—
Total	$	344,577	$	14,347	$	2,602,984	$	2,961,908	$	261,585,152	$	264,547,060	$	2,602,984

F-200

First Beeville Financial Corporation

Notes to Consolidated Financial Statements

December 31, 2017 and 2016

	2016
	30-89 Days Past Due		60-89 Days Past Due		Greater Than 90 Days		Total Past Due		Current		Total Loans		Total Loans > 90-Days & Accruing
Commercial loans	$	149,072	$	—	$	—	$	149,072	$	27,081,767	$	27,230,839	$	—
Agricultural loans		29,388		—		—		29,388		2,850,620		2,880,008		—
Real estate loans		—		318,255		—		318,255		207,884,962		208,203,217		—
Consumer loans		6,928		22,650		—		29,578		1,692,325		1,721,903		—
Total	$	185,388	$	340,905	$	—	$	526,293	$	239,509,674	$	240,035,967	$	—

The following tables present impaired loans for the years ended December 31, 2017 and 2016:

	2017
	Recorded Investment		Unpaid Principal Balance		Specific Allowance		Average Investment in Impaired Loans		Interest Income Recognized		Interest Income Recognized Cash Basis
Loans without a specific valuation allowance
Commercial loans	$	301,188	$	401,584	$	—	$	681,234	$	—	$	—
Agricultural loans		—		—		—		—		—		—
Real estate loans		—		—		—		—		—		—
Consumer loans		1,120		1,120		—		1,996		252		—
Loans with a specific valuation allowance
Commercial loans		—		—		—		—		—		—
Agricultural loans		—		—		—		—		—		—
Real estate loans		1,725,829		2,096,829		225,829		1,761,691		—		—
Consumer loans		—		—		—		—		—		—
Total	$	2,028,137	$	2,499,533	$	225,829	$	2,444,921	$	252	$	—

	2016
	Recorded Investment		Unpaid Principal Balance		Specific Allowance		Average Investment in Impaired Loans		Interest Income Recognized		Interest Income Recognized Cash Basis
Loans without a specific valuation allowance
Commercial loans	$	763,339	$	1,830,339	$	—	$	868,143	$	38,317	$	—
Agricultural loans		—		—		—		—		—		—
Real estate loans		1,805,741		1,805,741		—		2,158,803		119,909		—
Consumer loans		—		—		—		—		—		—
Loans with a specific valuation allowance
Commercial loans		142,631		570,523		5,705		60,359		33,507		—
Agricultural loans		—		—		—		—		—		—
Real estate loans		—		—		—		—		—		—
Consumer loans		6,486		6,486		2,623		10,681		1,194		—
Total	$	2,718,197	$	4,213,089	$	8,328	$	3,097,986	$	192,927	$	—

F-201

First Beeville Financial Corporation

Notes to Consolidated Financial Statements

December 31, 2017 and 2016

The following table presents the Company’s nonaccrual loans at December 31, 2017 and 2016. This table excludes performing troubled debt restructurings.

	2017		2016
Commercial loans	$	301,188	$	1,333,862
Agricultural loans		—		—
Real estate loans		1,725,829		1,805,741
Consumer loans		—		—
Total	$	2,027,017	$	3,139,603

At December 31, 2017 and 2016, the Company had certain loans that were modified in troubled debt restructurings and impaired. The modification of terms of such loans included one or a combination of the following: an extension of maturity, a reduction of the stated interest rate or a permanent reduction of the recorded investment in the loan.

The following table presents information regarding troubled debt restructurings by class for the year ended December 31, 2017 and 2016.

Newly classified troubled debt restructurings:

	2017
	Number of Loans		Pre-modification Recorded Balance		Post-modification Recorded Balance
Consumer loans		1	$	1,673	$	1,673
		1	$	1,673	$	1,673

	2016
	Number of Loans		Pre-modification Recorded Balance		Post-modification Recorded Balance
Commercial loans		2	$	2,401,821	$	1,333,862
Real estate loans		1		2,176,741		1,805,741
Consumer loans		2		16,863		6,486
		5	$	4,595,425	$	3,146,089

The troubled debt restructurings described above resulted in charge-offs of $1,438,000 during the year ended December 31, 2016. There were no charge-offs resulting from troubled debt restructurings in 2017.

There were no troubled debt restructurings modified in the past 12 months that subsequently defaulted.

Note 4: Foreclosed Assets

Foreclosed assets consisted of the following properties at December 31, 2017 and 2016:

Description	Location	Date Acquired	2017		2016
2 lots	Beeville, Texas	9/1/2015	$	90,566	$	100,000
Commercial lot	Guadalupe/Comal County, Texas	9/6/2016		1,036,400		1,036,400
3 Farmland lots	Burleson, Texas	12/7/2017		283,330		—
Total foreclosed assets			$	1,410,296	$	1,136,400

F-202

First Beeville Financial Corporation

Notes to Consolidated Financial Statements

December 31, 2017 and 2016

Expenses applicable to foreclosed assets at December 31 include the following:

	2017			2016
Net loss (gain) on sales of real estate	$	(56	)	$	234,152
Loss (gain) on foreclosure		20,670			(566,215	)
Operating expenses, net of rental income		13,862			28,077
	$	34,476		$	(303,986	)

Note 5: Premises and Equipment

Major classifications of premises and equipment, stated at cost, are as follows:

	2017			2016
Land	$	893,482		$	893,482
Buildings and improvements		8,679,965			8,229,391
Furniture and equipment		1,727,570			1,589,732
Data processing equipment and software		792,664			626,828
Construction in progress		—			255,046
		12,093,681			11,594,479
Less accumulated depreciation		(4,508,288	)		(3,944,624	)
Net premises and equipment	$	7,585,393		$	7,649,855

Note 6: Time Deposits

Deposits consisted of the following at December 31, 2017 and 2016:

	2017		2016
Interest-bearing checking accounts	$	189,849,611	$	139,774,039
Demand deposits and official checks		76,023,329		69,236,479
Savings		35,619,270		34,437,353
Time—$250,000 and over		19,180,731		12,744,206
Other time		30,705,193		32,177,909
Total deposits	$	351,378,134	$	288,369,986

Time deposits in denominations of $250,000 or more were $19,180,731 and $12,744,206 at December 31, 2017 and 2016, respectively.

At December 31, 2017, the scheduled maturities of time deposits are as follows:

2019	$	36,321,134
2020		6,732,712
2021		4,475,702
2022		1,447,536
2023		908,840
	$	49,885,924

F-203

First Beeville Financial Corporation

Notes to Consolidated Financial Statements

December 31, 2017 and 2016

Note 7: Borrowed Funds

In November 2013, the Company renewed a revolving line of credit with Frost National Bank in order to raise additional capital. The loan has a term of six (6) years (maturing November 21, 2019), with quarterly, interest only payments starting February 21, 2014, and interest payments continue quarterly throughout the life of the note. The interest rate equals The Wall Street Journal’s prime rate plus 1.00 percent and can reset daily. This renewal loan is a revolving line of credit in the initial amount of $4,000,000. The credit limit is reduced by $166,667 each quarter beginning February 21, 2014. Reductions of the outstanding principal balance of the loan are required when any such outstanding principal amounts exceed the then current reduced credit limit amount. In 2017, the Company paid off the remaining outstanding principal balance of $926,183. At December 31, 2017, the unused credit limit is $1,333,333. As part of the business loan agreement, the Corporation (and subsidiary Bank as indicated) must comply with various financial covenants and ratios. The Corporation has pledged 120,000 shares of The First National Bank of Beeville stock, Certificate Number 1217, as collateral for these borrowed funds.

At December 31, 2016, the outstanding balance on the line of credit was $926,183. There was no outstanding balance at December 31, 2017. Interest expense for the years ended December 31, 2017 and 2016, amounted to $36,090 and $57,733, respectively.

Note 8: Lines of Credit

FHLB Line of Credit

At December 31, 2017 and 2016, the Bank had a revolving line of credit with no expiration and a maximum available limit of $123,178,971 and $107,252,950, respectively. At December 31, 2017 and 2016, there were no funds borrowed against this line. The line is collateralized by all FHLB stock and a blanket lien on certain commercial and residential mortgage loans. The line of credit bears interest at a daily variable rate which is set by the FHLB.

Frost Bank Line of Credit

At December 31, 2017 and 2016, the Bank had available a $6,000,000 and $4,000,000 revolving line of credit that expires in 2018. At December 31, 2017 and 2016, there were no funds borrowed against this line. The line is not collateralized at December 31, 2017. The line of credit bears interest at a daily variable rate which is set by Frost Bank.

The Independent Bankers’ Bank (TIB) Line of Credit

At December 31, 2017 and 2016, the Bank had available a $3,000,000 revolving line of credit with an open-ended term, which can be terminated by either party at any time. At December 31, 2017 and 2016, there were no funds borrowed against this line. The line is collateralized by securities as applicable. The line of credit bears interest at a daily variable rate which is set by TIB.

F-204

First Beeville Financial Corporation

Notes to Consolidated Financial Statements

December 31, 2017 and 2016

Note 9: Income Taxes

The provision (credit) for income taxes includes these components:

	2017			2016
Federal
Taxes currently payable	$	2,106,979		$	1,344,128
Deferred income taxes		(227,004	)		136,781
Adjustments to deferred tax assets and liabilities for enacted changes in tax laws		383,737			—
State (all current)		15,900			(8,003	)
Income tax expense	$	2,279,612		$	1,472,906

A reconciliation of income tax expense at the statutory rate to the Company’s actual income tax expense is shown below:

	2017			2016
Computed at the statutory rate (34%)	$	2,025,842		$	1,613,130
Increase (decrease) resulting from
Tax exempt interest		(102,812	)		(92,565	)
Nontaxable BOLI income		(47,333	)		(48,255	)
Nondeductible interest expense		3,640			2,414
Nontaxable dividends		(97	)		(97	)
Nondeductible expenses		5,145			6,282
State income tax expense		10,494			(8,003	)
Deferred tax adjustment related to reduction in federal statutory income tax rate		383,737			—
Other, net		996			—
Actual tax expense (credit)	$	2,279,612		$	1,472,906

F-205

First Beeville Financial Corporation

Notes to Consolidated Financial Statements

December 31, 2017 and 2016

The tax effects of temporary differences related to deferred taxes shown on the balance sheets were:

	2017		2016
Deferred tax assets
Allowance for loan losses	$	537,059	$	726,020
Deferred loan fees		187,891		244,341
SAR plan expenses		116,673		151,751
Deferred cash incentive plan expenses		29,814		43,173
Salary continuation plan expenses		84,203		98,339
Net unrealized loss on securities available-for-sale		70,300		7,902
		1,025,940		1,271,526
Deferred tax liability
Valuation of foreclosed assets		114,564		192,513
Accretion of investment discounts		10,051		14,234
Fixed assets		277,808		348,044
FHLB stock dividends		3,636		2,520
		406,059		557,311
Net deferred tax asset	$	619,881	$	714,215

On December 22, 2017, the United States enacted tax reform legislation through the Tax Cuts and Jobs Act, which significantly changes the existing U.S. tax laws, including a reduction in the corporate tax rate from 34 percent to 21 percent, as well as other changes. As a result of enactment of the legislation, the Company incurred additional one-time income tax expense of $383,737 during 2017, primarily related to the re-measurement of certain deferred tax assets and liabilities.

Note 10: Changes in Accumulated Other Comprehensive Income (AOCI) by Component

Amounts reclassified from AOCI and the affected line items in the consolidated statements of income during the year ended December 31, 2016, were as follows:

AOCI Component	Amounts Reclassified from AOCI 2016		Affected Line Item in the Consolidated Statements of Income
Unrealized gains (losses) on available-for-sale securities	$	251,644	Net realized gains on sales of available-for-sale securities
	$	251,644	Net reclassified amount

There were no amounts reclassified from AOCI during the year ended December 31, 2017.

Note 11: Regulatory Matters

The Bank is subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s and Bank’s consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities and certain off-balance-sheet items as calculated under U.S.

F-206

First Beeville Financial Corporation

Notes to Consolidated Financial Statements

December 31, 2017 and 2016

GAAP, regulatory reporting requirements and regulatory capital standards. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Furthermore, the Bank’s regulators could require adjustments to regulatory capital not reflected in these consolidated financial statements.

Quantitative measures established by regulatory reporting standards to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the following table) of total and Tier I capital (as defined) to risk-weighted assets (as defined), common equity Tier I capital (as defined) to total risk-weighted assets (as defined) and of Tier I capital (as defined) to average assets (as defined). Management believes, as of December 31, 2017 and 2016, that the Bank meets all capital adequacy requirements to which it is subject.

As of December 31, 2017 and 2016, the most recent notification from the Office of the Comptroller of the Currency (OCC) categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based capital, Tier I risk-based capital, common equity Tier I risk-based capital and Tier I leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the Bank’s category.

The Bank’s actual capital amounts and ratios are also presented in the following table.

	Actual					Minimum Capital Requirement					Minimum to Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of December 31, 2017
Total risk-based capital (to risk-weighted assets)	$	35,822,000		12.72	%	$	26,046,705		9.250	%	$	28,158,600		10.00	%
Tier I capital (to risk-weighted assets)	$	32,694,000		11.61	%	$	20,414,985		7.250	%	$	22,526,880		8.00	%
Common equity Tier 1 capital (to risk-weighted assets)	$	32,694,000		11.61	%	$	16,191,195		5.750	%	$	18,303,090		6.50	%
Tier I capital (to average assets)	$	32,694,000		8.69	%	$	15,050,680		4.000	%	$	18,813,350		5.00	%
As of December 31, 2016
Total risk-based capital (to risk-weighted assets)	$	32,716,000		12.99	%	$	21,728,963		8.625	%	$	25,193,000		10.00	%
Tier I capital (to risk-weighted assets)	$	30,059,000		11.93	%	$	16,690,363		6.625	%	$	20,154,400		8.00	%
Common equity Tier 1 capital (to risk-weighted assets)	$	30,059,000		11.93	%	$	12,911,413		5.125	%	$	16,375,450		6.50	%
Tier I capital (to average assets)	$	30,059,000		9.73	%	$	12,363,280		4.000	%	$	15,454,100		5.00	%

The above minimum capital requirements include the capital conservation buffer required to avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers. The capital conservation buffer is being phased in from 0.0 percent for 2015 to 2.50 percent by 2019. The capital conservation buffer was 1.250 percent at December 31, 2017. The net unrealized gain or loss on available-for-sale securities is not included in computing regulatory capital.

The Bank is subject to certain restrictions on the amount of dividends that it may declare without prior regulatory approval. At December 31, 2017, approximately $6,743,000 of retained earnings were available for dividend declaration without prior regulatory approval.

F-207

First Beeville Financial Corporation

Notes to Consolidated Financial Statements

December 31, 2017 and 2016

Basel III Capital Rules

In July 2013, the three federal bank regulatory agencies jointly published final rules (the Basel III Capital Rules) establishing a new comprehensive capital framework for U.S. banking organizations. The rules implement the Basel Committee’s December 2010 framework known as “Basel III” for strengthening international capital standards as well as certain provisions of the Dodd-Frank Act. These rules substantially revise the risk-based capital requirements applicable to bank holding companies and depository institutions, compared to the current U.S. risk-based capital rules. The Basel III Capital Rules define the components of capital and address other issues affecting the numerator in banking institutions’ regulatory capital ratios. These rules also address risk weights and other issues affecting the denominator in banking institutions’ regulatory capital ratios and replace the existing risk-weighting approach with a more risk-sensitive approach. The Basel III Capital Rules were effective for the Bank on January 1, 2015 (subject to a four-year phase-in period).

The Basel III Capital Rules, among other things, (i) introduce a new capital measure called “Common Equity Tier 1” (CET1), (ii) specify that Tier 1 capital consist of CET1 and “Additional Tier 1 Capital” instruments meeting specified requirements, (iii) define CET1 narrowly by requiring that most deductions/adjustments to regulatory capital measures be made to CET1 and not to the other components of capital and (iv) expand the scope of the deductions/adjustments as compared to existing regulations.

Note 12: Related-party Transactions

At December 31, 2017 and 2016, the Company had loans outstanding to executive officers, directors, significant shareholders and their affiliates (related parties), in the amount of $5,400,739 and $5,642,755, respectively.

Annual activity consisted of the following:

	2017								2016
	Current			Unfunded		Total			Current			Unfunded			Total
Beginning balance	$	5,642,755		$	940,133	$	6,582,888		$	3,818,432		$	2,257,882		$	6,076,314
New loans		2,097,867			120,204		2,218,071			2,450,656			374,072			2,824,728
Repayments		(2,339,883	)		—		(2,339,883	)		(626,333	)		(1,691,821	)		(2,318,154	)
Ending balance	$	5,400,739		$	1,060,337	$	6,461,076		$	5,642,755		$	940,133		$	6,582,888

In management’s opinion, such loans and other extensions of credit and deposits were made in the ordinary course of business and were made on substantially the same terms (including interest rates and collateral) as those prevailing at the time for comparable transactions with other persons. Further, in management’s opinion, these loans did not involve more than normal risk of collectability or present other unfavorable features.

Deposits from related parties held by the Company at December 31, 2017 and 2016, totaled $4,741,385 and $3,597,172 respectively.

Note 13: Employee Benefit Plan

The Bank has a retirement savings 401(k) plan covering substantially all employees. Employees may contribute a percentage of their compensation, subject to maximum annual limitations established by law. The plan allows the Bank to make discretionary contributions, including matching contributions, which have immediate vesting to participating employees. During 2017 and 2016, the Bank matched up to 5 percent of each employee’s base compensation. Total expenses of the plan, including employer contributions and administrative expenses, for 2017 and 2016, were $111,735 and $118,536, respectively.

F-208

First Beeville Financial Corporation

Notes to Consolidated Financial Statements

December 31, 2017 and 2016

Note 14: Stock Appreciation Rights Plan

Effective July 1, 2013, the Bank is providing an incentive-based Stock Appreciation Rights Plan (SAR Plan) for a select member of the Bank’s management team, the CEO (Participant). Effective January 1, 2017, the Bank added another select member of the Bank’s management team, the CLO, to the Plan. This Plan will provide the Participants with an initial award and the opportunity to earn additional shares if certain goals are met, which is then deferred and paid out at the Participants’ retirement age over a 10-year period. Total expenses of the Plan amounted to $109,258 and $169,450 for the years ended December 31, 2017 and 2016, respectively.

Initial grant:	CEO: 2,500 initial shares; CLO: 1,000 initial shares
Incentive criteria:	Additional shares are available if certain goals pertaining to the return on equity and return on assets of the Bank are met. The proposal only assumes that the initial shares of 2,500 were granted over the life of the Plan.
Plan lifetime cap:	$3,000,000
Normal retirement age:	67
Normal retirement payment:	10 years
Normal retirement payout:	5.00% discount rate
Disability benefit:	100% of the accrued balance paid in a single lump-sum
Death benefit:	The normal retirement benefit is paid monthly to the beneficiaries within sixty (60) days following the last day of the month after death.
Vesting:	Vesting Schedule—CLO vests at 12.5% per year over 7 years, CEO has an accelerated schedule, vesting between 10%-30% over 7 years
	Termination prior to age 67—vested account balance
	Termination for cause—entire Plan is forfeited
	Change of control—100% vested and incorporates the purchase price
	Termination of Plan—100% vested in accrued account balance as of the date paid in a lump-sum
Note:	Shares are granted at book value and continue to be measured based on book value.
	The SAR Plan is a 409A Plan.
	The SAR Plan does not grant the Participants a right to receive any stock; rather, it is a right to receive the value of the appreciation on the shares granted to the Participants.

F-209

First Beeville Financial Corporation

Notes to Consolidated Financial Statements

December 31, 2017 and 2016

Note 15: Deferred Cash Incentive Plan

Effective January 1, 2014, the Bank is providing an incentive-based Deferred Cash Incentive Plan (DCIP) to a select group of the Bank’s management team (Participants). This Plan will provide each Participant with an annual incentive award in which a percentage of base salary is deferred until the Participant attains age 67, at which time it is paid to the Participant in cash by the Bank. Total expenses of the Plan amounted to $14,990 and $35,439 for the years ended December 31, 2017 and 2016, respectively.

Components:	Yearly award granted if each Participant accomplishes certain goals set by executive management. The goals may be based on Bank and/or individual criteria.
Earnings credit:	The deferred account balance will be credited with the return on equity of the Bank which was illustrated at 9.09%
Death benefit:	Pay account balance in lump-sum to designated beneficiaries
Normal retirement age:	67
Disability:	Pay account balance in a lump-sum
Vesting:	Cliff-vesting (0%) until each grant is paid to the Participant
Plan distribution:	Each year a grant is made; it is then deferred for four (4) years and paid out early in the sixth year. The remaining account balance is paid in full following the Participant’s attainment of age 67.

Note 16: Salary Continuation Plan

Effective January 1, 2014, The First National Bank of Beeville is providing a Salary Continuation Plan for a select group of the Bank’s management team (Participants). This Plan will provide the Participants with a 10-year payout at retirement. One Plan Participant has a normal retirement age of 60. Total expenses of the Plan amounted to $111,735 and $101,278 for the years ended December 31, 2017 and 2016, respectively.

Normal retirement age:	67
Normal retirement benefit:	Specified annual amount as noted in individual Participant agreement
Normal retirement payout:	10 years
Normal retirement accrual:	5.00% discount rate
Disability benefit:	100% of the accrued balance paid in a single lump-sum
Death benefit:	The normal retirement benefit is paid monthly to the beneficiaries within sixty (60) days following the last day of the month after death
Other distributions:	1) Vesting schedule—10% per year for 10 years, as determined by the board
	2) Termination prior to age 67—vested account balance
	3) Termination for cause—entire Plan is forfeited
	4) Change of control—accrued account balance

F-210

First Beeville Financial Corporation

Notes to Consolidated Financial Statements

December 31, 2017 and 2016

Note 17: Change in Control Agreement

In 2013, the Company entered into an agreement with the CEO which entitles the CEO to receive payment upon a change of control. The payment amount per the agreement is equal to 2.99 times the CEO’s average annual compensation for the three calendar years preceding the calendar year in which the change in control occurs and is payable in a lump sum within 30 days following the change in control.

Note 18: Operating Leases

The Company has three noncancellable operating leases, primarily for loan production offices, that expire in 2018. These leases do not contain any renewal options for subsequent periods and require the Bank to pay all executory costs such as taxes, maintenance and insurance. Rental expense for all leases was $21,266 and $9,695 for the years ended December 31, 2017 and 2016, respectively.

Future minimum lease payments under operating leases are:

2018	$	43,146
2019		5,382
	$	48,528

Note 19: Commitments and Credit Risk

The Company grants commercial, consumer and residential loans to customers primarily located in the south central Texas region. The Company’s primary market area is comprised of Bee, Dewitt and Guadalupe and surrounding counties, along with Loan Production Offices located in Comal, Karnes and Nueces counties. Although the Company has a diversified loan portfolio, the Company has concentrations of credit risk in the real estate market and is dependent on general economic conditions in the Company’s geographic market area.

Commitments to Originate Loans and Lines of Credit

Commitments to originate loans are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since a portion of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Each customer’s creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained, if deemed necessary, is based on management’s credit evaluation of the counterparty. Collateral held varies, but may include accounts receivable, inventory, property, plant and equipment, commercial real estate and residential real estate.

Lines of credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Lines of credit generally have fixed expiration dates. Since a portion of the line of credit may expire without being drawn upon, the total unused lines of credit do not necessarily represent future cash requirements. Each customer’s creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained, if deemed necessary, is based on management’s credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, commercial real estate and residential real estate. Management uses the same credit policies in granting lines of credit as it does for on-balance-sheet instruments.

F-211

First Beeville Financial Corporation

Notes to Consolidated Financial Statements

December 31, 2017 and 2016

At December 31, 2017 and 2016, the Company had outstanding commitments to originate loans and unused lines of credit aggregating $31,558,857 and $21,955,957, respectively. The commitments extended over varying periods of time with the majority being disbursed within a one-year period. The majority of commitments are at a floating market rate of interest.

Standby Letters of Credit

Standby letters of credit are irrevocable conditional commitments issued by the Company to guarantee the performance of a customer to a third-party. Financial standby letters of credit are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing and similar transactions. Performance standby letters of credit are issued to guarantee performance of certain customers under non-financial contractual obligations. The credit risk involved in issuing standby letters of credit is essentially the same as that involved in extending loans to customers. Fees for letters of credit issued are initially recorded by the Company as revenue and are included in earnings at the origination of the respective agreements.

Should the Company be obligated to perform under the standby letters of credit, the Company may seek recourse from the customer for reimbursement of amounts paid. The Company had total outstanding standby letters of credit amounting to $479,964 and $824,964, at December 31, 2017 and 2016, respectively, with terms ranging from 30 days to 15 months.

Note 20: Disclosures About Fair Value of Assets and Liabilities

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements must maximize the use of observable inputs and minimize the use of unobservable inputs. There is a hierarchy of three levels of inputs that may be used to measure fair value:

Level 1	Quoted prices in active markets for identical assets or liabilities that the entity can access at the measurement date
Level 2	Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities
Level 3	Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities

F-212

First Beeville Financial Corporation

Notes to Consolidated Financial Statements

December 31, 2017 and 2016

Recurring Measurements

The following table presents the fair value measurements of assets recognized in the accompanying consolidated balance sheets measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fall at December 31, 2017 and 2016:

			Fair Value Measurements Using
	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
December 31, 2017
Available-for-sale securities
U.S. Government and GSE securities	$	7,638,840	$	—	$	7,638,840	$	—
Tax-exempt municipal securities		20,630,950		—		20,630,950		—
U.S. Government and GSE mortgage-backed securities		29,717,732		—		29,717,732		—
	$	57,987,522	$		$	57,987,522	$	—

			Fair Value Measurements Using
	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
December 31, 2016
Available-for-sale securities
U.S. Government and GSE securities	$	3,010,150	$	—	$	3,010,150	$	—
Tax-exempt municipal securities		8,322,649		—		8,322,649		—
U.S. Government and GSE mortgage-backed securities		6,261,738		—		6,261,738		—
	$	17,594,537	$	—	$	17,594,537	$	—

Following is a description of the inputs and valuation methodologies used for assets measured at fair value on a recurring basis and recognized in the accompanying consolidated balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy. There have been no significant changes in the valuation techniques during the years ended December 31, 2017 and 2016.

Available-for-sale Securities

Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. Level 2 securities include U.S. government agency debt and mortgage-backed securities. In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy. Currently, all of the Company’s securities are classified in Level 2 of the hierarchy.

F-213

First Beeville Financial Corporation

Notes to Consolidated Financial Statements

December 31, 2017 and 2016

Third-party vendors compile prices from various sources and may apply such techniques as matrix pricing to determine the value of identical or similar investment securities (Level 2). Matrix pricing is a mathematical technique widely used in the financial institution industry to value investment securities without relying exclusively on quoted prices for specific investment securities, but rather relying on the investment securities’ relationship to other benchmark quoted investment securities. Matrix pricing is utilized in the valuation of the U.S. government agency debt and mortgage-backed securities.

Nonrecurring Measurements

The following table presents the fair value measurement of assets and liabilities measured at fair value on a nonrecurring basis and the level within the fair value hierarchy in which the fair value measurements fall at December 31, 2017 and 2016:

			Fair Value Measurements Using
	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
December 31, 2017
Collateral dependent impaired loans	$	1,802,308	$	—	$	—	$	1,802,308
Foreclased assets held-for-sale		283,330						283,330
	$	2,085,638	$	—	$	—	$	2,085,638
December 31, 2016
Collateral dependent impaired loans	$	2,709,869	$	—	$	—	$	2,709,869
Foreclased assets held-for-sale		1,036,400						1,036,400
	$	3,746,269	$	—	$	—	$	3,746,269

Following is a description of the valuation methodologies and inputs used for assets measured at fair value on a nonrecurring basis and recognized in the accompanying consolidated balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy. For assets classified within Level 3 of the fair value hierarchy, the process used to develop the reported fair value is described on the following page.

Other Real Estate Owned

Other real estate owned (OREO) is carried at the lower of fair value at acquisition date or current estimated fair value, less estimated cost to sell when the real estate is acquired. Estimated fair value of OREO is based on appraisals or evaluations. OREO is classified within Level 3 of the fair value hierarchy.

Appraisals of OREO are obtained when the real estate is acquired and subsequently as deemed necessary by the Controller’s office. Appraisals are reviewed for accuracy and consistency by the Controller’s office. Appraisers are selected from the list of approved appraisers maintained by management.

Collateral-dependent Impaired Loans, Net of ALLL

The estimated fair value of collateral-dependent impaired loans is based on the appraised fair value of the collateral, less estimated cost to sell. Collateral-dependent impaired loans are classified within Level 3 of the fair value hierarchy.

F-214

First Beeville Financial Corporation

Notes to Consolidated Financial Statements

December 31, 2017 and 2016

The Company considers the appraisal or evaluation as the starting point for determining fair value and then considers other factors and events in the environment that may affect the fair value. Appraisals of the collateral underlying collateral-dependent loans are obtained when the loan is determined to be collateral-dependent and subsequently as deemed necessary by the Controller’s office. Appraisals are reviewed for accuracy and consistency by the Controller’s office. Appraisers are selected from the list of approved appraisers maintained by management. The appraised values are reduced by discounts to consider lack of marketability and estimated cost to sell if repayment or satisfaction of the loan is dependent on the sale of the collateral. These discounts and estimates are developed by the Controller’s office by comparison to historical results.

Unobservable (Level 3) Inputs

The following table presents quantitative information about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements other than goodwill at December 31, 2017 and 2016.

	Fair Value at December 31, 2017		Valuation Technique	Unobservable Inputs	Range
Collateral dependent impaired loans	$	1,802,308	Market comparable properties	Marketability discount	10%-15%
Foreclosed assets held-for-sale	$	283,330	Market comparable properties	Comparability adjustments (%)	5%-10%

	Fair Value at December 31, 2016		Valuation Technique	Unobservable Inputs	Range
Collateral dependent impaired loans	$	2,709,869	Market comparable properties	Marketability discount	10%-15%
Foreclosed assets held-for-sale	$	1,036,400	Market comparable properties	Comparability adjustments (%)	5%-10%

Note 21: Significant Estimates and Concentrations

Accounting principles generally accepted in the United States of America require disclosure of certain significant estimates and current vulnerabilities due to certain concentrations. Estimates related to the allowance for loan losses are reflected in the footnote regarding loans. Current vulnerabilities due to certain concentrations of credit risk are discussed in the footnote on commitments and credit risk. Estimates related to the value of the Company’s stock used in the Company’s stock appreciation rights plan are discussed in Note 14.

Investments

The Company invests in various investment securities. Investment securities are exposed to various risks such as interest rate, market and credit risks. Due to the level of risk associated with certain investment securities, it is at least reasonably possible that changes in the values of investment securities will occur in the near term and that such change could materially affect the amounts reported in the accompanying consolidated balance sheets.

F-215

First Beeville Financial Corporation

Notes to Consolidated Financial Statements

December 31, 2017 and 2016

Note 22: Current and Future Changes in Accounting Principles

Accounting Standard Adopted in the Current Year

The Company elected to apply the provisions of ASU 2018-02, Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. As a result, the Company reclassified $43,520 from retained earnings to AOCI.

Revenue Recognition

The Financial Accounting Standards Board amended its standards related to revenue recognition. This amendment replaces all existing revenue recognition guidance and provides a single, comprehensive revenue recognition model for all contracts with customers. The guidance provides a five-step analysis of transactions to determine when and how revenue is recognized. Other major provisions include capitalization of certain contract costs, consideration of the time value of money in the transaction price and allowing estimates of variable consideration to be recognized before contingencies are resolved in certain circumstances. The amendment also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in those judgments and assets recognized from costs incurred to fulfill a contract. The standard allows either full or modified retrospective adoption effective for nonpublic entities for annual periods beginning after December 15, 2018, and any interim periods within annual reporting periods that begin after December 15, 2019. The Company is in the process of evaluating the impact the amendment will have on the consolidated financial statements.

Accounting for Leases

The Financial Accounting Standards Board amended its standard related to the accounting for leases. Under the new standard, lessees will now be required to recognize substantially all leases on the balance sheet as both a right-of-use asset and a liability. The standard has two types of leases for income statement recognition purposes: operating leases and finance leases. Operating leases will result in the recognition of a single lease expense on a straight-line basis over the lease term similar to the treatment for operating leases under existing standards. Finance leases will result in an accelerated expense similar to the accounting for capital leases under existing standards. The determination of lease classification as operating or finance will be done in a manner similar to existing standards. The new standard also contains amended guidance regarding the identification of embedded leases in service contracts and the identification of lease and nonlease components in an arrangement. The new standard is effective for annual periods beginning after December 15, 2019, and any interim periods within annual reporting periods that begin after December 15, 2019. The Company is evaluating the impact the standard will have on the consolidated financial statements; however, the standard is expected to have an immaterial impact on the consolidated financial statements due to the recognition of additional assets and liabilities for operating leases.

Accounting for Financial Instruments—Credit Losses

The Financial Accounting Standards Board issued Accounting Standards Update (ASU) No. 2016-13, Financial Instruments—Credit Losses (Topic 326). The ASU introduces a new credit loss model, the current expected credit loss model (CECL), which requires earlier recognition of credit losses, while also providing additional transparency about credit risk.

The CECL model utilizes a lifetime “expected credit loss” measurement objective for the recognition of credit losses for loans, held-to-maturity securities and other receivables at the time the financial asset is

F-216

First Beeville Financial Corporation

Notes to Consolidated Financial Statements

December 31, 2017 and 2016

originated or acquired. The expected credit losses are adjusted each period for changes in expected lifetime credit losses. For available-for-sale securities where fair value is less than cost, credit-related impairment, if any, will be recognized in an allowance for credit losses and adjusted each period for changes in expected credit risk. This model replaces the multiple existing impairment models, which generally require that a loss be incurred before it is recognized.

The CECL model represents a significant change from existing practice and may result in material changes to the Company’s accounting for financial instruments. The Company is evaluating the effect ASU 2016-13 will have on its consolidated financial statements and related disclosures. The impact of the ASU will depend upon the state of the economy and the nature of our portfolios at the date of adoption. The new standard is effective for annual periods beginning after December 15, 2020, and any interim periods within annual reporting periods that begin after December 15, 2021.

Note 23: Subsequent Events

Subsequent events have been evaluated through March 14, 2018, which is the date the consolidated financial statements were issued.

Note 24: First Beeville Financial Corporation (Parent Company Only)

Presented below is condensed financial information as to financial position, results of operations and cash flows of the Company:

	December 31,
	2017		2016
Assets
Cash and due from banks	$	469,745	$	692,944
Investment in subsidiary		32,161,989		30,044,123
Other assets		20,494		3,498
Total assets	$	32,652,228	$	30,740,565
Liabilities
Borrowed funds	$	—	$	926,183
Dividends payable		443,535		445,830
Other liabilities		—		10,577
Total liabilities		443,535		1,382,590
Stockholders’ Equity		32,208,693		29,357,975
Total liabilities and stockholders’ equity	$	32,652,228	$	30,740,565

F-217

First Beeville Financial Corporation

Notes to Consolidated Financial Statements

December 31, 2017 and 2016

Condensed Statements of Income and Comprehensive Income

	Year Ended December 31,
	2017			2016
Income
Dividends from subsidiaries	$	1,410,832		$	1,273,050
Total income		1,410,832			1,273,050
Expenses
Interest expense		36,090			57,733
Other expenses		69,512			53,852
Total expenses		105,602			111,585
Income Before Income Tax and Equity in Undistributed Net Income of Subsidiary		1,305,230			1,161,465
Income Tax Benefit		(34,142	)		(37,939	)
Equity in Undistributed Net Income of Subsidiary		2,323,472			2,064,185
Net Income	$	3,662,844		$	3,263,589
Comprehensive Income	$	3,662,844		$	3,263,589

Condensed Statements of Cash Flows

	Year Ended December 31,
	2017			2016
Operating Activities
Net income	$	3,662,846		$	3,263,589
Items not requiring (providing cash)
Equity in undistributed income of subsidiary		(2,323,472	)		(2,064,185	)
Increase in other assets		(16,996	)		(3,497	)
Increase in other liabilities		(10,578	)		(294,621	)
Net cash provided by operating activities		1,311,800			901,286
Financing Activities
Principal payments on borrowed funds		(926,183	)		(538,254	)
Purchase of treasury stock		(162,986	)
Dividends paid		(445,830	)		—
Net cash used in financing activities		(1,534,999	)		(538,254	)
Net (decrease) increase in cash		(223,199	)		363,032
Cash at beginning of year		692,944			329,912
Cash at end of year	$	469,745		$	692,944

F-218

Annex A

AGREEMENT AND PLAN OF REORGANIZATION

by and between

SPIRIT OF TEXAS BANCSHARES, INC.

and

FIRST BEEVILLE FINANCIAL CORPORATION

Dated as of November 27, 2018

TABLE OF CONTENTS

ARTICLE I. THE MERGER		A-1
Section 1.1	The Merger	A-1
Section 1.2	Organizational Documents and Facilities of Continuing Corporation	A-2
Section 1.3	Board of Directors and Officers of Continuing Corporation	A-2
Section 1.4	Effect of Merger	A-2
Section 1.5	Liabilities of Continuing Corporation	A-2
Section 1.6	Bank Merger	A-2
Section 1.7	Approvals and Notices	A-2
Section 1.8	Tax Consequences	A-3
Section 1.9	Modification of Structure	A-3
ARTICLE II. CONSIDERATION AND EXCHANGE PROCEDURES		A-3
Section 2.1	Merger Consideration	A-3
Section 2.2	Adjustment to Merger Consideration	A-4
Section 2.3	Dissenting Shares	A-4
Section 2.4	Deposit of Merger Consideration	A-5
Section 2.5	Delivery of Merger Consideration	A-5
Section 2.6	Special Dividend	A-7
Section 2.7	Tax Adjustment	A-7
ARTICLE III. REPRESENTATIONS AND WARRANTIES OF BEEVILLE		A-7
Section 3.1	Organization	A-7
Section 3.2	Capitalization	A-8
Section 3.3	Authority; Approvals	A-8
Section 3.4	No Conflicts; Consents	A-9
Section 3.5	Proceedings	A-10
Section 3.6	Financial Statements	A-10
Section 3.7	Compliance with Laws and Regulatory Filings	A-10
Section 3.8	Absence of Certain Changes	A-11
Section 3.9	Investments	A-11
Section 3.10	Loan Portfolio and Reserve for Loan Losses	A-11
Section 3.11	Certain Loans and Related Matters	A-12
Section 3.12	Books and Records	A-12
Section 3.13	Fiduciary Responsibilities	A-13
Section 3.14	Real Property Owned or Leased	A-13
Section 3.15	Personal Property	A-13
Section 3.16	Environmental Laws	A-14
Section 3.17	Taxes	A-14
Section 3.18	Contracts and Commitments	A-16
Section 3.19	Fidelity Bonds and Insurance	A-17
Section 3.20	Regulatory Actions and Approvals	A-17
Section 3.21	Employee Matters	A-18
Section 3.22	Compensation and Benefit Plans	A-18
Section 3.23	Deferred Compensation and Salary Continuation Arrangements	A-20
Section 3.24	Internal Controls	A-21
Section 3.25	Derivative Contracts	A-21
Section 3.26	Deposits	A-21
Section 3.27	Intellectual Property Rights	A-21
Section 3.28	Shareholders’ List	A-21
Section 3.29	SEC Status; Securities Issuances	A-21
Section 3.30	Dissenting Shareholders	A-22
Section 3.31	Takeover Laws	A-22
Section 3.32	Brokers, Finders and Financial Advisors	A-22
Section 3.33	Fairness Opinion	A-22

ARTICLE IV. REPRESENTATIONS AND WARRANTIES OF SPIRIT		A-22
Section 4.1	Organization	A-22
Section 4.2	Capitalization	A-23
Section 4.3	Authority; Approvals	A-23
Section 4.4	No Conflicts; Consents	A-23
Section 4.5	Proceedings	A-24
Section 4.6	Financial Statements	A-24
Section 4.7	Compliance with Laws and Regulatory Filings	A-25
Section 4.8	SEC Reports	A-25
Section 4.9	Absence of Certain Changes	A-26
Section 4.10	Taxes	A-26
Section 4.11	Brokers, Finders and Financial Advisors	A-27
Section 4.12	Fairness Opinion	A-27
Section 4.13	No Financing	A-27
Section 4.14	Compensation and Benefit Plans	A-27
ARTICLE V. COVENANTS OF BEEVILLE		A-27
Section 5.1	Approval of Shareholders of Beeville; Efforts	A-27
Section 5.2	Activities of Beeville Pending Closing	A-28
Section 5.3	Access to Properties and Records	A-30
Section 5.4	Information for Regulatory Applications and SEC Filings	A-31
Section 5.5	No Solicitation	A-31
Section 5.6	Termination of Contracts	A-32
Section 5.7	Liability Insurance	A-32
Section 5.8	Allowance for Loan Losses	A-32
Section 5.9	Third-Party Consents	A-33
Section 5.10	Coordination; Integration	A-33
Section 5.11	Environmental Investigation; Rights to Terminate Agreement	A-33
Section 5.12	Bank Merger	A-35
Section 5.13	Financial Statements	A-35
Section 5.14	Employee Benefit Plans	A-35
Section 5.15	Change in Control Payments	A-35
Section 5.16	Indemnification of Beeville Advisory Fees	A-35
Section 5.17	Regulatory Matters	A-36
ARTICLE VI. COVENANTS OF SPIRIT		A-36
Section 6.1	Regulatory Filings; Efforts	A-36
Section 6.2	Registration Statement	A-36
Section 6.3	NASDAQ Listing	A-37
Section 6.4	Affirmative Covenants	A-37
Section 6.5	Negative Covenants	A-37
Section 6.6	Employee Matters	A-37
Section 6.7	Financial Statements	A-38
Section 6.8	Issuance of Spirit Common Stock; Stock Reserves	A-38
Section 6.9	Director and Officer Indemnification	A-38
Section 6.10	Director Nomination	A-39
ARTICLE VII. MUTUAL COVENANTS OF SPIRIT AND BEEVILLE		A-39
Section 7.1	Notification; Updated Disclosure Schedules	A-39
Section 7.2	Confidentiality	A-40
Section 7.3	Publicity	A-40
Section 7.4	Certain Tax Matters	A-40
Section 7.5	Closing Statements	A-41
Section 7.6	Efforts to Consummate	A-41

A-ii

ARTICLE VIII. CLOSING		A-41
Section 8.1	Closing	A-41
Section 8.2	Effective Time	A-41
ARTICLE IX. TERMINATION		A-42
Section 9.1	Termination	A-42
Section 9.2	Effect of Termination	A-44
Section 9.3	Termination Fee	A-44
ARTICLE X. CONDITIONS PRECEDENT		A-45
Section 10.1	Conditions Precedent to Obligations of Spirit	A-45
Section 10.2	Conditions Precedent to Obligations of Beeville	A-46
Section 10.3	Conditions Precedent to Obligations of Spirit and Beeville	A-47
ARTICLE XI. MISCELLANEOUS		A-48
Section 11.1	Certain Definitions	A-48
Section 11.2	Other Definitional Provisions	A-51
Section 11.3	Investigation; Survival of Agreements	A-52
Section 11.4	Amendments	A-52
Section 11.5	Expenses	A-52
Section 11.6	Notices	A-53
Section 11.7	Controlling Law; Jurisdiction	A-53
Section 11.8	Waiver	A-54
Section 11.9	Severability	A-54
Section 11.10	Entire Agreement	A-54
Section 11.11	Counterparts	A-54
Section 11.12	Assignment; Binding on Successors	A-54
Section 11.13	No Third-Party Beneficiaries	A-55

A-iii

EXHIBITS

Exhibit A — Form of Bank Merger Agreement

Exhibit B — Form of Voting Agreement

Exhibit C — Form of Director Support Agreement

Exhibit D — Form of Release by Director/Officer

A-iv

INDEX OF DEFINED TERMS

Acquisition Agreement	A-48
Acquisition Proposal	A-48
Acquisition Transaction	A-48
Adjusted Equity Capital	A-4
Affiliate	A-48
Affiliate Agreements	A-17
Affiliated Group	A-48
Aggregate Cash Consideration	A-3
Aggregate Stock Consideration	A-3
Agreement	A-1
Average Closing Price	A-44
Bank Merger	A-1
Bank Merger Agreement	A-1
Bank Stock	A-8
Banking Laws	A-10
Beeville	A-1
Beeville Advisory Fees	A-22
Beeville Annual and Quarterly Financial Statements	A-10
Beeville Bank	A-1
Beeville Board Recommendation	A-28
Beeville Contracts	A-16
Beeville Disclosure Schedules	A-7
Beeville Employee Plan	A-19
Beeville Employees	A-37
Beeville Financial Statements	A-10
Beeville Personal Property	A-13
Beeville Real Property	A-13
Beeville Regulatory Approvals	A-9
Beeville Shareholder Approval	A-28
Beeville Shareholder Meeting	A-27
Beeville Stock	A-1
Beeville Tax Representation Letter	A-40
BHC Act	A-1
BOLI	A-16
Borrower	A-48
Business Day	A-48
Calculation Date	A-4
Call Reports	A-10
Cancelled Shares	A-4
Certificate	A-5
Change in Recommendation	A-28
Closing	A-41
Closing Date	A-41
Code	A-1
Commercially Reasonable Efforts	A-48
Confidentiality Agreement	A-40
Continuing Corporation	A-1
Controlled Group Liability	A-48
Director Support Agreements	A-1

Dissenting Share	A-5
Effective Time	A-41
Employment Agreements	A-45
Environmental Inspections	A-34
Environmental Laws	A-49
ERISA	A-19
ERISA Affiliates	A-49
Exchange Act	A-21
Exchange Agent	A-5
Exchange Fund	A-5
Exchange Ratio	A-3
FDIC	A-3
Federal Reserve Board	A-3
Final Closing Statement	A-41
Final Index Price	A-44
Final Transaction Costs	A-4
Financial Advisor	A-31
FKHF	A-40
GAAP	A-4
Governmental Body	A-49
Hazardous Materials	A-49
Hunton	A-40
Indemnified Party	A-38
Index	A-44
Initial Closing Statement	A-41
Initial Index Price	A-44
Intellectual Property	A-21
IRS	A-16
knowledge	A-49
Letter of Transmittal	A-5
Liability	A-49
Loan	A-11
Loans	A-11
Material Adverse Effect	A-49
Merger	A-1
Merger Consideration	A-3
Minimum Allowance Amount	A-33
Minimum Equity Capital	A-4
Multiemployer Plans	A-19
NASDAQ	A-50
Notice Date	A-27
Notice Period	A-43
OCC	A-3
Order	A-50
Organizational Documents	A-50
Per Share Cash Consideration	A-3
Person	A-50
Proceeding	A-50
Proxy Statement	A-36
Registration Statement	A-23

A-v

Regulatory Approvals	A-23
Required Consents	A-9
SEC	A-3
Secondary Investigation	A-34
Securities Portfolio	A-11
Security Interest	A-50
Special Dividend	A-7
Spirit	A-1
Spirit Bank	A-1
Spirit Bank Stock	A-23
Spirit Common Stock	A-3
Spirit Disclosure Schedules	A-22
Spirit Employee Plan	A-27
Spirit Financial Statements	A-24
Spirit Regulatory Approvals	A-23
Spirit SEC Reports	A-22
Spirit Tax Representation Letter	A-40
Subsidiaries	A-50

Subsidiary	A-50
Superior Proposal	A-50
Tail Policy	A-32
Tax	A-51
Tax Return	A-51
Taxes	A-51
TBOC	A-1
TDSML	A-3
Termination Fee	A-44
Total Cash Consideration	A-7
Total Share Consideration	A-7
Transaction Costs	A-4
Treasury Regulations	A-51
Union	A-51
Unresolved Response Action	A-34
Voting Agreement	A-1
WARN Act	A-51
Watch List	A-12

A-vi

AGREEMENT AND PLAN OF REORGANIZATION

This Agreement and Plan of Reorganization (“Agreement”) dated as of November 27, 2018, is by and between Spirit of Texas Bancshares, Inc. (“Spirit”), a Texas corporation and bank holding company registered under the Bank Holding Company Act of 1956, as amended (the “BHC Act”), and First Beeville Financial Corporation (“Beeville”), a Texas corporation and bank holding company registered under the BHC Act.

RECITALS

WHEREAS, the respective boards of directors of Spirit and Beeville believe that the merger of Beeville with and into Spirit, with Spirit continuing as the surviving entity (the “Merger”), in the manner provided by, and subject to the terms and conditions set forth in, this Agreement and all exhibits, schedules and supplements hereto and the other transactions contemplated by this Agreement are advisable and in the best interests of their respective companies and shareholders;

WHEREAS, immediately following the Merger, and pursuant to a separate agreement and plan of merger in the form attached hereto as Exhibit A (the “Bank Merger Agreement”), Spirit of Texas Bank, SSB, a Texas state savings bank and wholly-owned subsidiary of Spirit (“Spirit Bank”), and The First National Bank of Beeville (the “Beeville Bank”), a national banking association and wholly-owned subsidiary of Beeville, shall be combined through merger, with Spirit Bank continuing as the surviving entity (the “Bank Merger”);

WHEREAS, for federal income tax purposes, the parties intend that each of (i) the Merger and (ii) the Bank Merger will qualify as a reorganization under Section 368(a) of the Internal Revenue Code of 1986, as amended (the “Code”) (and any comparable provision of state law), and the Treasury Regulations promulgated thereunder, and that this Agreement is intended to be and hereby is adopted as a “plan of reorganization” within the meaning of Treasury Regulations §§ 1.368-2(g) and 1.368-3(a) for purposes of Sections 354, 356 and 361 of the Code (and any comparable provision of state law) for federal and applicable state income tax purposes;

WHEREAS, the respective boards of directors of Spirit and Beeville have approved this Agreement and the transactions proposed herein on the terms and conditions set forth in this Agreement; and

WHEREAS, as a condition and inducement to Spirit’s willingness to enter into this Agreement, (i) each member of the board of directors of Beeville has entered into an agreement, in the form attached hereto as Exhibit B, dated as of the date of this Agreement, pursuant to which he or she agrees to vote the issued and outstanding shares of common stock, par value $5.00 per share, of Beeville (“Beeville Stock”) beneficially owned by such person in favor of this Agreement and the transactions contemplated hereby (the “Voting Agreement”), and (ii) each non-employee director of Beeville or Beeville Bank has entered into a support agreement in the form attached hereto as Exhibit C (the “Director Support Agreements”).

AGREEMENT

NOW, THEREFORE, in consideration of such premises and the mutual representations, warranties, covenants and agreements contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as set forth below.

ARTICLE I.

THE MERGER

Section 1.1    The Merger. Upon the terms and subject to the conditions set forth in this Agreement, at the Effective Time (as defined herein), Beeville shall be merged with and into Spirit, with Spirit continuing as the surviving corporation (which, as the surviving corporation, is hereinafter referred to as “Continuing Corporation” whenever reference is made to it at or after the Effective Time) pursuant to, and with the effect provided for in, the applicable provisions of the Texas Business Organizations Code (“TBOC”).

Section 1.2    Organizational Documents and Facilities of Continuing Corporation. At the Effective Time and until thereafter amended in accordance with applicable law, the Organizational Documents (as defined herein) of Continuing Corporation shall be the Organizational Documents of Spirit as in effect at the Effective Time. Unless and until changed by the board of directors of Continuing Corporation, the main office of Continuing Corporation shall be the main office of Spirit as of the Effective Time. The established offices and facilities of Beeville immediately prior to the Effective Time shall become established offices and facilities of Continuing Corporation. Until thereafter changed in accordance with law or the Organizational Documents of Continuing Corporation, all corporate acts, plans, policies, contracts, approvals and authorizations of Beeville and Spirit and their respective shareholders, boards of directors, committees elected or appointed thereby, officers and agents, which were valid, lawful, and effective immediately prior to the Effective Time, shall be taken for all purposes as the acts, plans, policies, contracts, approvals and authorizations of Continuing Corporation and shall be as effective and binding thereon as the same were with respect to Beeville and Spirit, respectively, as of the Effective Time.

Section 1.3    Board of Directors and Officers of Continuing Corporation. Subject to Section 6.10, at the Effective Time and until thereafter changed in accordance with applicable law and the Organizational Documents of Continuing Corporation, the members of the board of directors of Spirit at the Effective Time shall be the members of the board of directors of Continuing Corporation. At the Effective Time and until thereafter changed in accordance with applicable law and the Organizational Documents of Continuing Corporation, the senior officers of Spirit immediately prior to the Effective Time shall be the senior officers of Continuing Corporation.

Section 1.4    Effect of Merger. At the Effective Time, the corporate existence of Beeville and Spirit shall, as provided in the provisions of law heretofore mentioned, be consolidated and continued in Continuing Corporation, and Continuing Corporation shall be deemed to be a continuation in entity and identity of Beeville and Spirit. All rights, franchises and interests of Beeville and Spirit, respectively, in and to any type of property and choses in action shall be transferred to and vested in Continuing Corporation by virtue of the Merger without reversion or impairment, without further act or deed and without any assignment having occurred, but subject to any existing liens or other encumbrances thereon. The Merger shall have all other effects set forth in the applicable provisions of the TBOC.

Section 1.5    Liabilities of Continuing Corporation. At the Effective Time, Continuing Corporation shall be liable for all Liabilities (as defined herein) of Beeville and Spirit. All Liabilities and obligations of Beeville and of Spirit, respectively, matured or unmatured, whether accrued, absolute, contingent or otherwise, and whether or not reflected or reserved against on balance sheets, books of account, or records of Beeville or Spirit, as the case may be, shall be those of Continuing Corporation and shall not be released or impaired by the Merger. All rights of creditors and other obligees and all liens on property of either Beeville or Spirit shall be preserved unimpaired subsequent to the Merger.

Section 1.6    Bank Merger. In the Bank Merger, Beeville Bank shall be merged with and into Spirit Bank immediately following the Merger, with Spirit Bank continuing as the surviving entity and succeeding to and assuming all rights and obligations of Beeville Bank in accordance with the applicable laws of Texas. Following the Bank Merger, the separate corporate existence of Beeville Bank shall cease. Immediately after entering into this Agreement, Spirit Bank and Beeville Bank shall enter into the Bank Merger Agreement. At the request of Spirit, Beeville shall cause Beeville Bank to execute such articles or certificate of merger and such other documents and certificates as are necessary to make the Bank Merger effective immediately following the effective time of the Merger.

Section 1.7    Approvals and Notices. This Agreement shall be submitted to the shareholders of Beeville in accordance with the terms of this Agreement, the applicable provisions of law and the Organizational Documents of Beeville. Beeville and Spirit shall proceed with Commercially Reasonable Efforts (as defined herein) and cooperate fully in the procurement of any other consents and approvals and the taking of any other actions in satisfaction of all other requirements prescribed by law or otherwise necessary for consummation of the Merger

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on the terms herein provided, including the preparation and submission of all necessary filings, requests for waivers, notices and certificates with the Securities and Exchange Commission (the “SEC”), the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”), the Texas Department of Savings and Mortgage Lending (the “TDSML”), the Office of the Comptroller of the Currency (the “OCC”), and the Federal Deposit Insurance Corporation (the “FDIC”).

Section 1.8    Tax Consequences. It is intended by the parties hereto that each of the Merger and the Bank Merger shall qualify as a reorganization under Section 368(a) of the Code (and any comparable provision of state law), and the parties hereto hereby adopt this Agreement as a “plan of reorganization” within the meaning of Treasury Regulations §§ 1.368-2(g) and 1.368-3(a) for purposes of Sections 354, 356 and 361 of the Code (and any comparable provision of state law) for federal and applicable state income tax purposes.

Section 1.9    Modification of Structure. Notwithstanding any provision of this Agreement to the contrary, Spirit may elect, subject to the filing of all necessary applications and the receipt of all required regulatory approvals, to modify the structure of the transactions contemplated hereby so long as (a) there are no adverse federal income tax consequences to the shareholders of Beeville as a result of such modification, (b) the consideration to be paid to holders of Beeville Stock under this Agreement is not thereby changed in kind or reduced in amount solely because of such modification and (c) such modification will not be likely to materially delay or jeopardize receipt of any required regulatory approvals. In the event of such election, the parties agree to execute an appropriate amendment to this Agreement in order to reflect such election.

ARTICLE II.

CONSIDERATION AND EXCHANGE PROCEDURES

Section 2.1    Merger Consideration. At the Effective Time, by virtue of the Merger and without any action on the part of Beeville, Spirit or the holders of any of the following securities:

(a)    Each share of common stock, no par value, of Spirit (“Spirit Common Stock”) issued and outstanding immediately prior to the Effective Time shall remain issued and outstanding and shall not be affected by the Merger.

(b)    Each share of Beeville Stock issued and outstanding immediately prior to the Effective Time (other than any Cancelled Shares and Dissenting Shares (as such terms are defined herein)) shall be converted into the right to receive the following consideration (the “Merger Consideration”):

(i)    an amount of cash without interest equal to the quotient of (A) $32,375,000, subject to adjustment as provided in Section 2.2 (as adjusted, the “Aggregate Cash Consideration”), divided by (B) the aggregate of the number of shares of Beeville Stock issued and outstanding immediately prior to the Effective Time (such amount, the “Per Share Cash Consideration”); and

(ii)    a number (such number, the “Exchange Ratio”), as adjusted in accordance with the terms of this Agreement, of validly issued, fully paid and nonassessable shares of Spirit Common Stock equal to the quotient of (A) the Aggregate Stock Consideration divided by (B) the aggregate of the number of shares of Beeville Stock issued and outstanding immediately prior to the Effective Time, rounded to the nearest ten thousandth. “Aggregate Stock Consideration” means 1,579,268 shares of Spirit Common Stock, subject to appropriate adjustment (without duplication based on the same adjustment being provided elsewhere in this Agreement) for any stock split, reverse stock split, recapitalization, reclassification or similar transaction with respect to the then outstanding shares of Spirit Common Stock declared or effected after the date of this Agreement and prior to the Closing Date (as defined herein).

(c)    All shares of Beeville Stock issued and outstanding immediately prior to the Effective Time that are owned directly by Spirit, Beeville or Beeville Bank (other than (i) shares held in trust accounts, managed

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accounts and the like, or otherwise held in a fiduciary or agency capacity, that are beneficially owned by third parties and (ii) shares held, directly or indirectly, by such parties in respect of a debt previously contracted) shall be cancelled and shall cease to exist and no Merger Consideration or other consideration shall be delivered in exchange therefor (such cancelled shares, “Cancelled Shares”).

Section 2.2    Adjustment to Merger Consideration. If Beeville’s Adjusted Equity Capital (as defined below) is less than $34,750,000 (the “Minimum Equity Capital”) as of the close of business on the Business Day preceding the Closing Date (such date the “Calculation Date”), then the Aggregate Cash Consideration will be reduced, on a dollar for dollar basis, by an amount equal to the difference between the Minimum Equity Capital and the Adjusted Equity Capital as of the Calculation Date.

(a)    “Adjusted Equity Capital” means Beeville’s total consolidated equity capital, as determined in accordance with generally accepted accounting principles, consistently applied (“GAAP”), after giving effect to any unrealized gains or losses in the Securities Portfolio (as defined herein), less all intangible assets and the Final Transaction Costs (as defined below) to the extent not paid or accrued by Beeville as of the Calculation Date.

(b)    “Final Transaction Costs” means all Transaction Costs (as defined below), all of which shall be set forth in the Final Closing Statement (as defined herein) delivered pursuant to Section 7.5 of this Agreement. To the extent any Transaction Costs are unknown or cannot be calculated prior to the delivery of the Final Closing Statement, the Spirit and Beeville shall confer in good faith and agree upon reasonable estimates thereof for purposes of determining the Final Transaction Costs.

(c)    “Transaction Costs” means the amount of all of the costs and expenses of Beeville or Beeville Bank incurred (or to be incurred) in connection with the transactions contemplated by this Agreement through the Closing Date, including without limitation: (i) the amount of any costs, fees, expenses and commissions payable to any broker, finder, financial advisor or investment banking firm in connection with this Agreement or the transactions contemplated hereby, including, but not limited to, the Beeville Advisory Fees; (ii) the amount of all legal and accounting fees and other expenses incurred in connection with the negotiation, execution or performance of this Agreement or the consummation of the transactions contemplated hereby; (iii) the premium or additional cost or expense incurred to purchase the Tail Policy (as defined herein) pursuant to Section 5.7; (iv) the after-tax amount of any costs, fees, expenses, contract payments, penalties or liquidated damages paid or accrued in connection with the termination of Contracts to be Terminated (as defined herein) pursuant to Section 5.6; (v) the after-tax amount of any payments to be made pursuant to any existing employment, change in control, salary continuation, deferred compensation or other similar agreements or arrangements or severance, noncompetition, retention or bonus arrangements between Beeville or Beeville Bank and any other Person (as defined herein) (including any “excess parachute payments” within the meaning of Section 280G of the Code or similarly applicable state law) in excess of the applicable amount accrued for any such payment in accordance with GAAP on Beeville’s consolidated balance sheet in the ordinary course of business and consistent with past practices; (vi) the amount of any cost to terminate and liquidate any Beeville Employee Plan and to pay all related expenses and fees, including expenses and fees associated with any governmental filings in connection with such termination, to the extent such termination is required hereunder or requested by Spirit; (vii) any amount required to be added to Beeville Bank’s allowance for loan and lease losses pursuant to Section 5.8 so that such allowance equals the Minimum Allowance Amount (as defined herein) as of the date of delivery of the Final Closing Statement; (viii) the amount of any costs expected to be incurred by the Continuing Corporation on or after the Closing Date to fully complete all Unresolved Response Actions pursuant to Section 5.11(c); (ix) the amount of any costs and expenses, including legal fees and expenses and settlement costs, accrued by Beeville pursuant to Section 10.1(g); and (x) such other amounts as are agreed upon by Beeville and Spirit. For illustrative purposes, Section 2.2(c) of the Beeville Disclosure Schedules sets forth a projection of the Transaction Costs as of the date of this Agreement.

Section 2.3    Dissenting Shares. Each share of Beeville Stock issued and outstanding immediately prior to the Effective Time, the holder of which has not voted in favor of nor consented in writing to the approval of the

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Merger and who has properly perfected his or her dissenter’s rights of appraisal by following the exact procedure required by Chapter 10, Subchapter H of the TBOC is referred to herein as a “Dissenting Share.” Notwithstanding any provision of this Agreement to the contrary, each Dissenting Share shall not be converted into or represent the right to receive the Merger Consideration pursuant to this Article II and shall be entitled only to such rights as are available to such holder pursuant to the applicable provisions of the TBOC. Each holder of Dissenting Shares shall be entitled to receive the value of such Dissenting Shares held by him or her in accordance with the applicable provisions of the TBOC; provided, such holder complies with the procedures contemplated by and set forth in the applicable provisions of the TBOC. If any holder of any Dissenting Shares shall effectively withdraw or lose his or her dissenter’s rights under the applicable provisions of the TBOC, each such Dissenting Share shall be deemed to have been converted into and to have become exchangeable for, only the right to receive the Merger Consideration without any interest thereon in accordance with the provisions of this Article II.

Section 2.4    Deposit of Merger Consideration. Promptly after the Effective Time, Spirit shall deposit with or make available to the Exchange Agent (as defined herein) for exchange in accordance with Section 2.5: (a) the Aggregate Stock Consideration and (b) immediately available funds equal to the Aggregate Cash Consideration (together with, to the extent then determinable, any cash payable in lieu of fractional shares pursuant to Section 2.5(f) and cash payable to holders of Dissenting Shares pursuant to Section 2.3) (collectively, the “Exchange Fund”), and Spirit shall instruct the Exchange Agent to timely deliver the Merger Consideration.

Section 2.5    Delivery of Merger Consideration.

(a)    Within five (5) Business Days (as defined herein) after the Effective Time and subject to the receipt by Computershare Trust Company, N.A. (the “Exchange Agent”) of a list of Beeville shareholders in a format that is acceptable to the Exchange Agent, the Exchange Agent shall mail to each holder of record immediately prior to the Effective Time of certificates (other than with respect to Cancelled Shares and Dissenting Shares) representing shares of Beeville Stock (each, a “Certificate”), (i) a letter of transmittal (which shall specify that delivery shall be effected, and risk of loss and title to each Certificate shall pass, only upon delivery of such Certificate (or an affidavit of loss in lieu of such Certificate)) to the Exchange Agent and shall be substantially in such form and have such other provisions as shall be prescribed by the Exchange Agent Agreement (the “Letter of Transmittal”) and (ii) instructions for use in surrendering each Certificate in exchange for the Merger Consideration, any cash in lieu of a fractional share of Spirit Common Stock to be issued or paid in consideration therefor and any dividends or distributions to which such holder is entitled pursuant to Section 2.5(c).

(b)    Within ten (10) days after surrender to the Exchange Agent of its Certificate or Certificates, accompanied by a properly completed Letter of Transmittal, such holder of Beeville Stock will be entitled to receive the Merger Consideration and any cash in lieu of a fractional share of Spirit Common Stock to be issued or paid in consideration therefor in respect of the shares of Beeville Stock represented by such holder’s Certificate or Certificates. Until so surrendered, each Certificate (other than Certificates representing Cancelled Shares, which shall be treated as provided in Section 2.1(c), and Dissenting Shares, which shall be treated as provided in Section 2.3) shall represent after the Effective Time, for all purposes, only the right to receive, without interest, the Merger Consideration and any cash in lieu of a fractional share of Spirit Common Stock to be issued or paid in consideration therefor upon surrender of such Certificate in accordance with this Section 2.5, and any dividends or distributions to which such holder is entitled pursuant to this Section 2.5.

(c)    No dividends or other distributions with respect to Spirit Common Stock shall be paid to the holder of any unsurrendered Certificate with respect to the shares of Spirit Common Stock represented thereby, in each case unless and until the surrender of such Certificate in accordance with this Section 2.5. Subject to the effect of applicable abandoned property, escheat or similar laws, following surrender of any such Certificate in accordance with this Section 2.5, the record holder thereof shall be entitled to receive, without interest, the amount of dividends or other distributions payable with respect to shares of Spirit

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Common Stock represented by such Certificate with a record date after the Effective Time (but before such surrender date).

(d)    In the event of a transfer of ownership of a Certificate representing Beeville Stock prior to the Effective Time that is not registered in the stock transfer records of Beeville, the Merger Consideration and any cash in lieu of a fractional share of Spirit Common Stock to be issued or paid in consideration therefor shall be issued or paid in exchange therefor to a person other than the person in whose name the Certificate so surrendered is registered if the Certificate formerly representing such Beeville Stock shall be properly endorsed or otherwise be in proper form for transfer and the person requesting such payment or issuance shall pay any transfer or other similar Taxes (as defined herein) required by reason of the payment or issuance to a person other than the registered holder of the Certificate or establish to the satisfaction of Spirit and the Exchange Agent that the Tax has been paid or is not applicable. The Exchange Agent (or, subsequent to the earlier of (x) six (6) months after the Effective Time and (y) the expiration or termination of the Exchange Agent Agreement, Spirit) shall be entitled to deduct and withhold from the cash portion of the Merger Consideration and any cash in lieu of a fractional share of Spirit Common Stock otherwise payable pursuant to this Agreement to any holder of Beeville Stock such amounts as the Exchange Agent or Spirit, as the case may be, is required to deduct and withhold under the Code, or any provision of state, local or foreign Tax law, with respect to the making of such payment. To the extent the amounts are so withheld by the Exchange Agent or Spirit, as the case may be, and timely paid over to the appropriate Governmental Body (as defined herein), such withheld amounts shall be treated for all purposes of this Agreement as having been paid to the holder of shares of Beeville Stock in respect of whom such deduction and withholding was made by the Exchange Agent or Spirit, as the case may be.

(e)    After the Effective Time, there shall be no transfers on the stock transfer books of Beeville of the shares of Beeville Stock that were issued and outstanding immediately prior to the Effective Time other than to settle transfers of Beeville Stock that occurred prior to the Effective Time. If, after the Effective Time, Certificates representing such shares are presented to Spirit, they shall be promptly presented to the Exchange Agent for exchange as provided in this Section 2.5, they shall be cancelled and exchanged for the Merger Consideration and any cash in lieu of fractional shares of Spirit Common Stock to be issued or paid in consideration therefor in accordance with the procedures set forth in this Section 2.5.

(f)    Notwithstanding anything to the contrary contained in this Agreement, no fractional shares of Spirit Common Stock shall be issued upon the surrender of Certificates for exchange, no dividend or distribution with respect to Spirit Common Stock shall be payable on or with respect to any fractional share, and such fractional share interests shall not entitle the owner thereof to vote or to any other rights of a shareholder of Spirit. In lieu of the issuance of any such fractional share, Spirit shall pay to each former shareholder of Beeville who otherwise would be entitled to receive such fractional share an amount in cash (rounded to the nearest cent) determined by multiplying (i) $19.81 by (ii) the fraction of a share (after taking into account all shares of Beeville Stock held by such holder immediately prior to the Effective Time and rounded to the nearest one ten thousandth when expressed in decimal form) of Spirit Common Stock to which such holder would otherwise be entitled to receive pursuant to Section 2.1(b).

(g)    Any portion of the Exchange Fund that remains unclaimed by the shareholders of Beeville at the expiration of six (6) months after the Effective Time shall be paid to Spirit. In such event, any former shareholders of Beeville who have not theretofore complied with the exchange procedures in this Section 2.5 shall thereafter look only to Spirit with respect to the Merger Consideration, any cash in lieu of any fractional shares and any unpaid dividends and distributions on the Spirit Common Stock deliverable in respect of each share represented by a Certificate such shareholder holds as determined pursuant to this Agreement, in each case, without any interest thereon. Notwithstanding the foregoing, none of Spirit, Beeville, the Continuing Corporation, the Exchange Agent or any other person shall be liable to any former holder of shares of Beeville Stock for any amount delivered in good faith to a public official pursuant to applicable abandoned property, escheat or similar laws.

(h)    In the event any Certificate shall have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming such Certificate to be lost, stolen or destroyed and, if required

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by Spirit or the Exchange Agent, the posting by such person of a bond in such amount as Spirit or the Exchange Agent may determine is reasonably necessary as indemnity against any claim that may be made against it with respect to such Certificate, Spirit or the Exchange Agent, as the case may be, shall issue in exchange for such lost, stolen or destroyed Certificate the Merger Consideration deliverable in respect thereof pursuant to this Agreement.

Section 2.6    Special Dividend. If the Adjusted Equity Capital set forth in the Final Closing Statement exceeds the Minimum Equity Capital, then immediately prior to the Effective Time, Beeville may declare and pay to each holder of record of Beeville Stock as of the record date determined by the board of directors of Beeville a cash dividend for each outstanding share of Beeville Stock equal to the quotient of (a) fifty percent (50%) of the amount that the Adjusted Equity Capital exceeds the Minimum Equity Capital, divided by (b) the total number of shares of Beeville Stock outstanding as of the record date of such dividend (the “Special Dividend”).

Section 2.7    Tax Adjustment. Notwithstanding anything in this Agreement to the contrary, to preserve the status of the Merger as a tax-free reorganization within the meaning of Section 368(a)(1)(A) of the Code, if the aggregate value of the shares of Spirit Common Stock to be issued in connection with the Merger (excluding the value of fractional shares for which cash is to be paid pursuant to Section 2.5(f)) based upon the closing price of the Spirit Common Stock as reported on NASDAQ on the trading day immediately preceding the Closing Date (the “Total Share Consideration”) would be less than forty percent (40%) of the sum of the Total Cash Consideration (defined below) and the Total Share Consideration, then the Exchange Ratio will be increased with a corresponding decrease to the Per Share Cash Consideration so that the Aggregate Stock Consideration is equal to forty percent (40%) of the sum of the Total Share Consideration and the Total Cash Consideration without changing the value of the Merger Consideration under Section 2.5(b). For purposes of this Agreement, the term “Total Cash Consideration” shall mean the sum of (i) the aggregate cash consideration to be paid in exchange for Beeville Stock (including cash paid for Dissenting Shares) and (ii) the aggregate cash consideration to be paid in lieu of fractional shares of Spirit Common Stock pursuant to Section  2.5(f).

ARTICLE III.

REPRESENTATIONS AND WARRANTIES OF BEEVILLE

Beeville represents and warrants to Spirit as set forth below. On the date of this Agreement, Beeville delivered to Spirit schedules (the “Beeville Disclosure Schedules”) setting forth, among other things, items the disclosure of which are necessary or appropriate (a) in response to an express disclosure requirement contained in a provision hereof, (b) as an exception to one or more representations and warranties contained in this Article III or (c) as an exception to one or more covenants contained in this Agreement. Disclosure in any section of the Beeville Disclosure Schedules shall apply only to the indicated section of this Agreement, except to the extent that it is reasonably apparent on its face that such disclosure is relevant to another section of this Agreement.

Section 3.1    Organization.

(a)    Beeville is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Texas and a bank holding company duly registered under the BHC Act, subject to all laws, rules and regulations applicable to bank holding companies. Beeville Bank is a national banking association duly formed, validly existing and in good standing under the laws of the United States of America. Other than Beeville Bank and F N B Asset Management LLC, Beeville has no other Subsidiaries (as defined herein).

(b)    Beeville and each of its Subsidiaries has requisite power and authority (including all licenses, registrations, qualifications, franchises, permits and other governmental authorizations which are legally required) to own, lease and operate their respective properties, to engage in the business and activities now conducted by each of them. To Beeville’s knowledge (as defined herein), no suspension or cancellation of any such necessary license, registration, qualification, franchise, permit or authorization is threatened.

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(c)    The Bank is duly authorized to conduct general banking business, embracing all usual deposit functions of commercial banks as well as commercial, industrial and real estate loans, installment credits, collections and safe deposit facilities subject to the supervision of the OCC.

(d)    True and complete copies of the Organizational Documents of Beeville and each Subsidiary, each as amended to date, have been delivered to Spirit.

(e)    Section 3.1(e) of the Beeville Disclosure Schedules lists each of the Subsidiaries of Beeville and any other Person in which Beeville or any of its Subsidiaries own, or have the right to acquire, any ownership interest. Except as set forth in Section 3.1(e) of the Beeville Disclosure Schedules, neither Beeville nor any of its Subsidiaries (i) has any Subsidiaries or Affiliates (as defined herein), (ii) is a general partner or owner in any joint venture, general partnership, limited partnership, trust or other non-corporate entity or (iii) knows of any arrangement pursuant to which the capital stock of any corporation is or has been held in trust (whether express, constructive, resulting or otherwise) for the benefit of all shareholders of Beeville.

(f)    The deposit accounts of Beeville Bank are insured by the FDIC through the Deposit Insurance Fund to the fullest extent permitted by law, and all premiums and assessments due and owing as of the date of this Agreement required in connection therewith have been paid by Beeville Bank.

Section 3.2    Capitalization.

(a)    The authorized capital stock of Beeville consists of 1,000,000 shares of common stock, par value $5.00 per share, 59,138 of which are issued and outstanding and 34,808 of which are held in treasury as of the date of hereof. The authorized capital stock of Beeville Bank consists of 120,000 shares of common stock, par value $5.00 per share (“Bank Stock”), all of which are issued and outstanding. All of the issued and outstanding shares of Beeville Stock and Bank Stock are validly issued, fully paid and nonassessable and have not been issued in violation of the preemptive rights of any Person or in violation of any applicable federal or state securities laws.

(b)    Beeville owns, either directly or indirectly, all of the issued and outstanding capital stock and other securities of its Subsidiaries. The outstanding capital stock and other securities of Beeville’s Subsidiaries are, as applicable, (i) duly authorized, validly issued, fully paid and nonassessable (except as provided in 12 U.S.C. § 55) and (ii) except as set forth in Section 3.2(b) of the Beeville Disclosure Schedules, free and clear of any liens, claims, security interests and encumbrances of any kind. There are no irrevocable proxies with respect to shares of the Subsidiaries and there are no outstanding or authorized subscriptions, options, warrants, calls, rights or other agreements or commitments of any kind restricting the transfer of, requiring the issuance or sale of or otherwise relating to any such shares of capital stock of the Subsidiaries to any Person.

(c)    Except as set forth in Section 3.2(c) of the Beeville Disclosure Schedules, there are no existing options, stock appreciation rights, stock appreciation units, warrants, calls, convertible securities or commitments of any kind obligating Beeville to issue any authorized and unissued Beeville Stock.

(d)    Except as set forth in Section 3.2(d) of the Beeville Disclosure Schedules, Beeville does not have any outstanding commitment or obligation to repurchase, reacquire or redeem any of its outstanding capital stock or other securities. Other than the Voting Agreement, to the knowledge of Beeville, there are no voting trusts, voting agreements, buy-sell agreements or other similar arrangements affecting Beeville Stock.

(e)    Beeville has not paid any dividends on Beeville Stock since January 9, 2018.

Section 3.3    Authority; Approvals.

(a) Beeville has the requisite corporate power and authority to execute and deliver this Agreement and any related documents to which it is a party and perform its obligations hereunder and thereunder and to

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consummate the transactions contemplated hereby and thereby. This Agreement has been duly executed and delivered by Beeville and is a duly authorized, valid, legally binding agreement of Beeville enforceable against Beeville in accordance with its terms, subject to the effect of bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to creditors’ rights generally and general equitable principles.

(b)    The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly, validly and unanimously approved by the board of directors of Beeville. The board of directors of Beeville has (i) determined that this Agreement and the transactions contemplated hereby are advisable and in the best interests of Beeville and its shareholders, (ii) directed that this Agreement be submitted to Beeville’s shareholders for approval and adoption and (iii) resolved to recommend to Beeville’s shareholders that they approve this Agreement and the transactions contemplated by this Agreement. Except for the Beeville Shareholder Approval (as defined herein), no further corporate proceedings on the part of Beeville are necessary to execute and deliver this Agreement or the related documents and to consummate the transactions contemplated hereby or thereby.

(c)    Section 3.3(c) of the Beeville Disclosure Schedules lists all governmental and any other consents, approvals, authorizations, applications, filings, notices, registrations and qualifications that are required to be made or obtained by Beeville or any of its Subsidiaries in connection with or for the consummation of the transactions contemplated by this Agreement, including the Merger and the Bank Merger (collectively, the “Beeville Regulatory Approvals”). Other than federal and state securities laws and the Beeville Regulatory Approvals, no consents or approvals of or filings or registrations with any Governmental Body (as defined herein) or with any other Person are necessary in connection with the execution and delivery by (i) Beeville of this Agreement and the related documents to which it is a party or the consummation by Beeville of the transactions contemplated hereby or thereby, or (ii) Beeville Bank of the Bank Merger Agreement.

Section 3.4    No Conflicts; Consents.

(a)    Neither the execution and delivery by Beeville of this Agreement and the related documents nor the consummation of the transactions contemplated hereby or thereby, nor compliance by Beeville with any of the provisions hereof or thereof, will, assuming that the Beeville Regulatory Approvals and the Beeville Shareholder Approval are duly obtained, (i) violate, conflict with, or result in a breach of any provision of, or constitute a default (or an event which, with notice or lapse of time or both, would constitute a default) under, or result in the termination of, or result in the loss of any benefit or creation of any right on the part of any third party under, or accelerate the performance required by, or result in a right of termination or acceleration of, or result in the creation of any lien, charge or encumbrance upon any of the material properties or assets of Beeville or any of its Subsidiaries under any of the terms, conditions or provisions of (1) the Organizational Documents of Beeville or any of its Subsidiaries or (2) except as set forth in Section 3.4(a) of the Beeville Disclosure Schedules, any note, bond, mortgage, indenture, deed of trust, license, lease, agreement or other instrument or obligation to which Beeville or any of its Subsidiaries is a party or by which it may be bound, or to which Beeville or any of its Subsidiaries or any of the properties or assets of Beeville or any of its Subsidiaries may be subject, or (ii) violate any law, statute, code, ordinance, rule, regulation, permit, concession, grant, franchise or any judgment, ruling, order, writ, injunction or decree applicable to Beeville or any of its Subsidiaries or any of their respective properties or assets, except, with respect to clause (ii), for such violations, conflicts, breaches or defaults which either individually or in the aggregate would not have or be reasonably likely to have a Material Adverse Effect on Beeville or any of its Subsidiaries.

(b)    Except for the Beeville Regulatory Approvals, the Beeville Shareholder Approval and as set forth in Section 3.4(b) of the Beeville Disclosure Schedules (the items so set forth therein collectively, the “Required Consents”), no consent, approval, notice, license, permit, order or authorization of or registration, declaration or filing with any Person is required to be obtained or made by Beeville or any of its Subsidiaries in connection with the execution and delivery of this Agreement and the related documents to which they are a party and the consummation of the transactions contemplated hereby and thereby.

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Section 3.5    Proceedings. Except as set forth in Section 3.5 of the Beeville Disclosure Schedules, there are no Proceedings (as defined herein) pending or, to Beeville’s knowledge, threatened against Beeville or any of its Subsidiaries, and Beeville has no knowledge of any basis on which any such Proceedings could be brought, which could reasonably be expected to result in a Material Adverse Effect (as defined herein) on Beeville or which could question the validity of any action taken or to be taken in connection with this Agreement or the transactions contemplated hereby. Neither Beeville nor any of its Subsidiaries is in default with respect to any judgment, order, writ, injunction, decree, award, rule or regulation of any arbitrator or Governmental Body.

Section 3.6     Financial Statements.

(a)    Beeville has furnished and made available to Spirit true, correct and complete copies of Beeville’s audited consolidated balance sheets as of December 31, 2017 and 2016, and the related consolidated statements of income, changes in shareholders’ equity and cash flows for the years ended December 31, 2017, 2016 and 2015, accompanied by the report thereon of Beeville’s independent auditors, and true, correct and complete copies of Beeville’s unaudited consolidated balance sheet as of September 30, 2018, and the related consolidated statements of income, changes in shareholders’ equity and cash flows for the quarter ended September 30, 2018 (the “Beeville Annual and Quarterly Financial Statements”). Beeville has also furnished or made available to Spirit a true, correct and complete copy of the Consolidated Reports of Condition and Income (the “Call Reports”) filed by Beeville Bank as of and for each period during the three years ended December 31, 2017 and for the quarter ended September 30, 2018. The Beeville Annual and Quarterly Financial Statements and the Call Reports are collectively referred to in this Agreement as the “Beeville Financial Statements.”

(b)    The Beeville Annual and Quarterly Financial Statements have been prepared from the books and records of Beeville and its Subsidiaries and fairly present, in all material respects, the consolidated financial position, results of operations, shareholders’ equity and cash flows of Beeville at the dates and for the periods indicated in conformity with GAAP applied on a consistent basis throughout the periods indicated. The Call Reports fairly present the financial position of Beeville Bank and the results of its operations at the dates and for the periods indicated in compliance with the rules and regulations of applicable federal banking authorities.

(c)    As of the dates of Beeville Financial Statements and as of the date of this Agreement, neither Beeville nor any of its Subsidiaries had any material Liabilities (whether accrued, absolute, contingent or otherwise) except as fully set forth or provided for in such Beeville Financial Statements.

Section 3.7    Compliance with Laws and Regulatory Filings.

(a)    Beeville and each of its Subsidiaries have complied in all material respects with and are not in material default or violation under any applicable law, statute, order, rule, regulation, policy and/or guideline of any Governmental Body relating to Beeville or any of its Subsidiaries, including, as applicable, all laws related to data protection or privacy, the USA PATRIOT Act, the Bank Secrecy Act, the Equal Credit Opportunity Act and Regulation B, the Fair Housing Act, the Community Reinvestment Act, the Fair Credit Reporting Act, the Truth in Lending Act and Regulation Z, the Home Mortgage Disclosure Act, the Fair Debt Collection Practices Act, the Electronic Fund Transfer Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act, any regulations promulgated by the Consumer Financial Protection Bureau, the Interagency Policy Statement on Retail Sales of Non-deposit Investment Products, the SAFE Mortgage Licensing Act of 2008, the Real Estate Settlement Procedures Act, Regulation X, Flood Disaster Protection Act, Home Owners Equity Protection Act, Right to Financial Privacy Act, Unfair, Deceptive or Abusive Acts or Practices and any other law relating to bank secrecy, discriminatory lending, financing or leasing practices, money laundering prevention, Sections 23A and 23B of the Federal Reserve Act, the Sarbanes-Oxley Act, and all agency requirements relating to the origination, sale and servicing of mortgage and consumer loans (collectively, “Banking Laws”). Neither Beeville nor any of its Subsidiaries has had nor suspected any material incidents of fraud or defalcation involving Beeville, Beeville Bank or any of their respective officers, directors or Affiliates during the last two (2) years. Each of Beeville and Beeville Bank has timely and properly filed and maintained all requisite Currency Transaction Reports and Suspicious

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Activity Reports and has properly monitored transaction activity (including wire transfers). The Bank is designated as an intermediate small bank for purposes of the Community Reinvestment Act and has a Community Reinvestment Act rating of “satisfactory.”

(b)    Beeville and its Subsidiaries have filed all reports, registrations and statements, together with any amendments required to be made thereto, that are required to be filed with the Federal Reserve Board, the FDIC, the OCC or any other Governmental Body having supervisory jurisdiction over Beeville and its Subsidiaries, and such reports, registrations and statements as finally amended or corrected, are true and correct in all material respects. Except for normal examinations conducted by bank regulatory agencies in the ordinary course of business or as set forth in Section 3.7(b) of the Beeville Disclosure Schedules, no Governmental Body has initiated any Proceeding or, to Beeville’s knowledge, investigation into the business or operations of Beeville or its Subsidiaries. There is no material unresolved violation, criticism or exception by any bank regulatory agency with respect to any report relating to any examinations of Beeville Bank or Beeville. Beeville is “well capitalized” (as that term is defined in 12 C.F.R. § 225.2(r)) and “well managed” (as that term is defined is 12 C.F.R. § 225.2(s)). Beeville Bank is an “eligible depository institution” (as that term is defined in 12 C.F.R. § 5.3(h)).

(c)    None of Beeville, or its Subsidiaries, or to the knowledge of Beeville, any director, officer, employee, agent or other person acting on behalf of Beeville or any of its Subsidiaries has, directly or indirectly, (i) used any funds of Beeville or any of its Subsidiaries for unlawful contributions, unlawful gifts, unlawful entertainment or other expenses relating to political activity, (ii) made any unlawful payment to foreign or domestic governmental officials or employees or to foreign or domestic political parties or campaigns from funds of Beeville or any of its Subsidiaries, (iii) violated any provision of the Foreign Corrupt Practices Act of 1977, as amended, or any similar law, (iv) established or maintained any unlawful fund of monies or other assets of Beeville or any of its Subsidiaries, (v) made any fraudulent entry on the books or records of Beeville or any of its Subsidiaries, or (vi) made any unlawful bribe, unlawful rebate, unlawful payoff, unlawful influence payment, unlawful kickback or other unlawful payment to any person, private or public, regardless of form, whether in money, property or services, to obtain favorable treatment in securing business to obtain special concessions for Beeville or any of its Subsidiaries, to pay for favorable treatment for business secured or to pay for special concessions already obtained for Beeville or any of its Subsidiaries, or is currently subject to any U.S. sanctions administered by the Office of Foreign Assets Control of the U.S. Department of the Treasury.

Section 3.8    Absence of Certain Changes. Since June 30, 2018, (a) Beeville and its Subsidiaries have conducted their respective businesses in the ordinary and usual course consistent with safe and sound banking practices (except as otherwise required by this Agreement and excluding the incurrence of expenses related to this Agreement and the transactions contemplated hereby), (b) except as set forth in Section 3.8 of the Beeville Disclosure Schedules, neither Beeville nor any of its Subsidiaries has engaged in the activities proscribed by Section 5.2(b) and (c) no Material Adverse Effect on Beeville or Beeville Bank has occurred.

Section 3.9    Investments. Beeville has furnished to Spirit a true, correct and complete list, as of September 30, 2018, of all securities, including municipal bonds, owned by Beeville Bank (the “Securities Portfolio”). Except as set forth in Section 3.9 of the Beeville Disclosure Schedules, all such securities are owned by Beeville Bank (a) of record, except those held in bearer form, and (b) beneficially, free and clear of all mortgages, liens, pledges and encumbrances. Section 3.9 of the Beeville Disclosure Schedules also discloses any Person in which the ownership interest of Beeville, whether held directly or indirectly, equals five percent (5%) or more of the issued and outstanding voting securities of the issuer thereof. To Beeville’s knowledge, there are no voting trusts or other agreements or understandings with respect to the voting of any of the securities in the Securities Portfolio.

Section 3.10    Loan Portfolio and Reserve for Loan Losses.

(a)    All evidences of indebtedness to which Beeville or any of its Subsidiaries is a party as a lender, lessor or creditor (individually a “Loan” and collectively, the “Loans”), including any renewals and

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extensions of any Loan, were solicited, originated and currently exist in compliance in all material respects with all applicable requirements of federal and state law and regulations promulgated thereunder. The Loans are adequately documented, and each note evidencing a Loan or credit agreement or security instrument related to a Loan constitutes a valid and binding obligation of the obligor thereunder, enforceable in accordance with the terms thereof, except as the enforceability thereof may be limited by bankruptcy, insolvency or other laws affecting creditors’ rights, and all actions necessary to protect any related security interest have been duly taken. Neither Beeville nor any of its Subsidiaries has entered into any oral modifications or amendments or additional agreements related to the Loans that are not reflected in its records. There is no valid claim or defense to the enforcement of any Loan and none has been asserted, and Beeville has no knowledge of any acts or omissions that would give rise to any claim or right of rescission, set off, counterclaim or defense.

(b)    The credit files of Beeville and each of its Subsidiaries contain all material information (excluding general, local or national industry, economic or similar conditions) known to Beeville or any of its Subsidiaries that is reasonably required to evaluate in accordance with generally prevailing practices in the banking industry the collectability of the Loan portfolio of Beeville or any of its Subsidiaries (including Loans that will be outstanding if it advances funds it is obligated to advance).

(c)    The allowance for loan losses shown on Beeville Financial Statements as of September 30, 2018, was, and the allowance for loan losses to be shown on any financial statements of Beeville or Beeville Bank or Consolidated Reports of Condition and Income of Beeville Bank as of any date subsequent to the execution of this Agreement shall be, calculated in accordance with GAAP in all material respects as applied to banking institutions and all applicable rules and regulations, and in the reasonable opinion of management, adequate in all respects to provide for all probable losses, net of recoveries relating to loans previously charged off, on Loans outstanding (including accrued interest receivable) of Beeville or any of its Subsidiaries and other extensions of credit (including letters of credit or commitments to make loans or extend credit); provided, however, that no representation or warranty is made as to the sufficiency of collateral securing or the collectability of such Loans.

Section 3.11    Certain Loans and Related Matters.

(a)    Except as set forth in Section 3.11(a) of the Beeville Disclosure Schedules, as of September 30, 2018, neither Beeville nor any of its Subsidiaries is a party to any written or oral: (i) loan agreement, note or borrowing arrangement (other than credit card loans and other loans the unpaid balance of which does not exceed $10,000 per loan) under the terms of which the obligor is sixty (60) days delinquent in payment of principal or interest or in default of any other material provisions as of the date of this Agreement; (ii) loan agreement, note or borrowing arrangement which has been classified as “substandard,” “doubtful,” “loss,” “other loans especially mentioned,” “other assets especially mentioned” or any comparable classifications by such persons; (iii) loan agreement, note or borrowing arrangement, including any loan guaranty, with any director or executive officer of Beeville or any of its Subsidiaries, or any ten percent (10%) or more shareholder of Beeville, or any person, corporation or enterprise controlling, controlled by or under common control with any of the foregoing; or (iv) loan agreement, note or borrowing arrangement in violation of any law, regulation or rule applicable to Beeville or any of its Subsidiaries including those promulgated, interpreted or enforced by any regulatory agency with supervisory jurisdiction over Beeville or any of its Subsidiaries.

(b)    Section 3.11(b) of the Beeville Disclosure Schedules contains the “watch list of loans” of Beeville Bank (“Watch List”) as of September 30, 2018. To the knowledge of Beeville, there is no other Loan, loan agreement, note or borrowing arrangement which should be included on the Watch List based on Beeville’s or Beeville Bank’s ordinary course of business and safe and sound banking principles.

Section 3.12    Books and Records. The minute books, stock certificate books and stock transfer ledgers of Beeville and each of its Subsidiaries (a) are complete and correct in all material respects, (b) the transactions entered therein represent bona fide transactions, and (c) do not fail to reflect transactions involving the business

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of Beeville or any of its Subsidiaries that properly should have been set forth therein and that have not been accurately so set forth.

Section 3.13    Fiduciary Responsibilities. Since December 31, 2013, Beeville and each of its Subsidiaries have administered all accounts for which Beeville or any of its Subsidiaries acts as a fiduciary, including accounts for which Beeville or any of its Subsidiaries serves as a trustee, agent, custodian, personal representative, guardian, conservator or investment adviser, in compliance with the terms of the governing documents and applicable law in all material respects. None of Beeville or any of its Subsidiaries, or any director, officer or employee of Beeville or any of its Subsidiaries, has committed any material breach of trust with respect to any such fiduciary account.

Section 3.14    Real Property Owned or Leased.

(a)    Section 3.14(a) of the Beeville Disclosure Schedules contains a true, correct and complete list of all real property owned or leased by Beeville or its Subsidiaries, including non-residential other real estate, and the owner or lessee thereof (the “Beeville Real Property”). True and complete copies of all deeds and leases for, or other documentation evidencing ownership of or a leasehold interest in, Beeville Real Property, title insurance policies for Beeville Real Property that is owned by Beeville or its Subsidiaries, and all mortgages, deeds of trust and security agreements to which such property is subject have been furnished or made available to Spirit.

(b)    No lease or deed with respect to any Beeville Real Property contains any restrictive covenant that materially restricts the use, transferability or value of such Beeville Real Property pertaining to its current primary purpose.

(c)    None of the buildings and structures located on any Beeville Real Property, nor any appurtenances thereto or equipment therein, nor the operation or maintenance thereof, violates in any manner any restrictive covenants or encroaches on any property owned by others, nor does any building or structure of third parties encroach upon any Beeville Real Property, except those violations and encroachments that do not, individually or in the aggregate, materially adversely affect the value or use and enjoyment of the relevant Beeville Real Property. No condemnation proceeding is pending or, to Beeville’s knowledge, threatened, which could reasonably be expected to preclude or materially impair the use of any Beeville Real Property in the manner in which it is currently being used.

(d)    Beeville or one of its Subsidiaries has good and indefeasible title to, or a valid and enforceable leasehold interest in, all Beeville Real Property, and such interest is free and clear of all liens, including Tax liens, charges, imperfections of title or other encumbrances, except (i) statutory liens for amounts not yet delinquent or which are being contested in good faith through proper proceedings and for which adequate reserves have been provided in Beeville Financial Statements; and (ii) easements, covenants, restrictions and other matters of record which do not, individually or in the aggregate, materially adversely affect the use and enjoyment of the relevant real property.

(e)    All buildings and other facilities used in the business of Beeville and its Subsidiaries are in adequate condition (ordinary wear and tear excepted) and are free from defects which could reasonably be expected to materially interfere with the current or future use of such facilities consistent with past practices.

Section 3.15    Personal Property. Except as set forth in Section 3.15 of the Beeville Disclosure Schedules, each of Beeville and its Subsidiaries has good title to, or a valid leasehold interest in, all personal property, whether tangible or intangible, used in the conduct of its business (the “Beeville Personal Property”), free and clear of all liens, charges, imperfections of title or other encumbrances and except (a) statutory liens for amounts not yet delinquent or which are being contested in good faith through proper proceedings and for which adequate reserves have been provided in Beeville Financial Statements and (b) such other liens, charges imperfections of title and encumbrances as do not, individually or in the aggregate materially adversely affect the use and enjoyment of the relevant Beeville Personal Property. Subject to ordinary wear and tear, Beeville Personal

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Property, taken as a whole, is in good operating condition and repair and is adequate for the uses to which it is being put.

Section 3.16    Environmental Laws. Beeville and its Subsidiaries and any business owned or operated by any of them, whether or not held in a fiduciary or representative capacity, are and for the last seven (7) years have been in compliance in all material respects with all Environmental Laws (as defined herein) and permits thereunder. Neither Beeville nor any of its Subsidiaries has received written notice of any violation of any Environmental Laws or generated, stored, or disposed of any materials designated as Hazardous Materials (as defined herein), and they are not subject to any claim, lien, charge or other encumbrance under any Environmental Laws. No Beeville Real Property and no real estate currently owned, operated or leased (including any property acquired by foreclosure or deeded in lieu thereof) by Beeville or its Subsidiaries or owned, operated or leased by Beeville or its Subsidiaries within the ten (10) years preceding the date of this Agreement, has been designated by a Governmental Body as requiring any environmental investigation, cleanup or response action to comply with Environmental Laws, or, to the knowledge of Beeville, has been the site of any release of any Hazardous Materials. To Beeville’s knowledge, (a) no asbestos was used in the construction of any Beeville Real Property (or any improvements thereon), (b) no real property currently or previously owned by Beeville or any of its Subsidiaries is, or has been, a heavy industrial site or landfill, and (c) there are no underground storage tanks at any properties owned or operated by Beeville or any of its Subsidiaries and, except as set forth in Section 3.16 of the Beeville Disclosure Schedules, no underground storage tanks have been closed or removed from any properties owned or operated by Beeville or any of its Subsidiaries. Beeville has made available to Spirit all environmental audits, site assessments, documentation regarding off-site disposal of Hazardous Materials, reports and other material environmental documents related to Beeville Real Property, any real property formerly owned or operated by Beeville or any of its Subsidiaries or any of their respective predecessors, and any other real property acquired by foreclosure or deeded in lieu thereof, which are in the possession or reasonable control of Beeville or any of its Subsidiaries.

Section 3.17    Taxes.

(a)    Subject to applicable extension periods, Beeville and its Subsidiaries have filed all income Tax Returns (as defined herein) and all other material Tax Returns that each was required to file with the appropriate Governmental Bodies, including any Tax Returns of any affiliated, consolidated, combined or unitary group of which either Beeville or any of its Subsidiaries is or was a member. All such Tax Returns were correct and complete in all material respects. All Taxes due and owing by Beeville or any of its Subsidiaries and any affiliated, consolidated, combined or unitary group of which either Beeville or any of its Subsidiaries is or was a member (whether or not shown on any Tax Return) have been paid to the appropriate Governmental Bodies. Neither Beeville nor any of its Subsidiaries is currently the beneficiary of any extension of time within which to file any Tax Return. No claim has ever been raised in writing by an authority in a jurisdiction where Beeville or any of its Subsidiaries does not file Tax Returns that Beeville or any of its Subsidiaries is or may be subject to taxation by that jurisdiction. There are no Security Interests on any of the assets of Beeville or any of its Subsidiaries that arose in connection with any failure (or alleged failure) of Beeville or any of its Subsidiaries to pay any Tax.

(b)    Beeville and its Subsidiaries have collected or withheld and duly paid to the appropriate Governmental Body all Taxes required to have been collected or withheld in connection with amounts paid or owing to any employee, independent contractor, creditor, shareholder, or other third party.

(c)    There is no action, suit, proceeding, audit, assessment, dispute or claim concerning any Tax Liability of Beeville or any of its Subsidiaries either (i) claimed or raised by any authority in writing or (ii) as to which Beeville or any of its Subsidiaries has knowledge based upon contact with any agent of such authority. Section 3.17(c) of the Beeville Disclosure Schedules lists all federal, state, local, and foreign income Tax Returns filed with respect to Beeville or any of its Subsidiaries for any taxable period that is still open under the applicable statute of limitations, indicates those Tax Returns that have been audited, and indicates those Tax Returns that currently are the subject of audit. Beeville has made available to Spirit

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correct and complete copies of all federal income Tax Returns, examination reports, and statements of deficiencies assessed against or agreed to by Beeville and its Subsidiaries with respect to all taxable periods that are still open under the applicable statute of limitations.

(d)    Neither Beeville nor any of its Subsidiaries has waived any statute of limitations in respect of Taxes or agreed to any extension of time with respect to a Tax assessment or deficiency.

(e)    Neither Beeville nor any of its Subsidiaries has been a U.S. real property holding corporation within the meaning of Section 897(c) (2) of the Code during the applicable period specified in Section 897(c)(1)(A)(ii) of the Code. Neither Beeville nor any of its Subsidiaries has participated in a reportable or listed transaction as defined under Sections 6011 and 6111 of the Code and Treasury Regulations § 1.6011-4. Except as set forth in Section 3.17(e) of the Beeville Disclosure Schedules, neither Beeville nor any of its Subsidiaries (i) is a party to any Tax allocation or sharing agreement, (ii) has been a member of an Affiliated Group (as defined herein) filing a consolidated federal income Tax Return (other than the Affiliated Group of which Beeville is the common parent) or (iii) has any Liability for the Taxes of any Person (other than Beeville and its Subsidiaries) under Treasury Regulations § 1.1502-6 (or any similar provision of state, local, or foreign law), as a transferee or successor, by contract, or otherwise.

(f)    Neither Beeville nor any of its Subsidiaries has been required to disclose on its federal income Tax Returns any position that could give rise to a substantial understatement of federal income Tax within the meaning of Section 6662 of the Code.

(g)    None of Beeville, any of its Subsidiaries, Spirit or any Affiliate of Spirit will be required to include any item of income in, and none of Beeville, any of its Subsidiaries, Spirit or any Affiliate of Spirit will be required to exclude any item of deduction from, taxable income for any taxable period (or portion thereof) ending on or after the Closing Date as a result of any: (i) change in method of accounting for a taxable period ending on or prior to the Closing Date under Section 481 of the Code (or any corresponding or similar provision of state, local or foreign income Tax law); (ii) “closing agreement” as described in Section 7121 of the Code (or any corresponding or similar provision of state, local or foreign income Tax law) executed on or prior to the Closing Date; (iii) intercompany transaction or excess loss account described in the Treasury Regulations under Section 1502 of the Code (or any corresponding or similar provision of state, local or foreign Tax law); (iv) installment sale or open transaction disposition made on or prior to the Closing Date; or (v) prepaid amount received on or prior to the Closing Date.

(h)    Neither Beeville nor any of its Subsidiaries has constituted either a “distributing corporation” or a “controlled corporation” (within the meaning of Section 355(a)(1)(A) of the Code) in a distribution of stock under Sections 355 or 361 of the Code (i) in the two (2) years prior to the date of this Agreement or (ii) in a distribution which could otherwise constitute part of a “plan” or “series of related transactions” (within the meaning of Section 355(e) of the Code) in conjunction with the transactions contemplated by this Agreement.

(i)    The unpaid Taxes of Beeville and its Subsidiaries (i) did not, as of December 31, 2017, exceed the current liability accruals for Tax Liability (excluding any reserves for deferred Taxes established to reflect timing differences between book and Tax income) set forth in Beeville Financial Statements and (ii) do not exceed such current liability accruals for Taxes (excluding reserves any for deferred Taxes) as adjusted for the passage of time through the Closing Date in accordance with the past custom and practice of Beeville and its Subsidiaries in filing its Tax Returns.

(j)    Neither Beeville nor any of its Subsidiaries is aware of any fact or circumstance that reasonably could be expected to prevent (i) the Merger and (ii) the Bank Merger from qualifying as a reorganization within the meaning of Section 368(a) of the Code. Beeville has not taken or agreed to take any action that would prevent or reasonably could be expected to prevent the Merger or the Bank Merger from qualifying as a reorganization within the meaning of Section 368(a) of the Code.

(k)    Section 3.17(k) of the Beeville Disclosure Schedules (i) sets forth all net operating loss carryforwards, net capital loss carryforward, tax credit carryforwards, alternative minimum tax

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carryforwards or excess charitable contribution carryforwards allocable to Beeville or its Subsidiaries and describes any current limitations on Beeville or its Subsidiaries use of these Tax attributes prior to the Merger, and (ii) the net operating losses of Beeville and its Subsidiaries that arose in a taxable year beginning on or before December 31, 2017.

(l)    Neither Beeville nor any of its Subsidiaries has received any letter ruling from the Internal Revenue Service (“IRS”) (or any comparable ruling from any other taxing authority).

Section 3.18    Contracts and Commitments.

(a)    Except as set forth in Section 3.18(a) of the Beeville Disclosure Schedules (the “Beeville Contracts”), neither Beeville nor any of its Subsidiaries is a party to or bound by any of the following (whether written or oral, express or implied):

(i)    employment, services, independent contractor, consulting, change-in-control, retention, or severance contracts or similar arrangements;

(ii)    collective bargaining agreements, memorandums of understanding, or other contracts with any Union (as defined herein);

(iii)    bonus, stock option, restricted stock, stock appreciation, deferred compensation arrangement, profit-sharing plan, pension plan, retirement plan, welfare plan or other employee benefit agreement or arrangement;

(iv)    any material lease or license with respect to any property, real or personal, whether as landlord, tenant, licensor or licensee;

(v)    contract or commitment for capital expenditures in excess of $50,000 in the aggregate;

(vi)    material contract or commitment for the purchase of materials or supplies or for the performance of services over a period of more than sixty (60) days after the date of this Agreement and not terminable upon notice of sixty (60) days or less;

(vii)    contract or option to purchase or sell any real or personal property other than any contract for the purchase of personal property in the ordinary course of business;

(viii)    contract, agreement or letter with respect to the management or operations of Beeville or Beeville Bank imposed by any Governmental Body having supervisory jurisdiction over Beeville or Beeville Bank;

(ix)    note, debenture, agreement, contract or indenture related to the borrowing by Beeville or any of its Subsidiaries of money other than those entered into in the ordinary course of business;

(x)    guaranty of any obligation for the borrowing of money, excluding endorsements made for collection, repurchase or resell agreements, letters of credit and guaranties made in the ordinary course of business;

(xi)    agreement with or extension of credit to any executive officer or director of Beeville or any of its Subsidiaries or holder of ten percent (10%) or more of the issued and outstanding Beeville Stock, or any affiliate of such person;

(xii)    agreement with any executive officer or director of Beeville or any of its Subsidiaries or holder of ten percent (10%) or more of the issued and outstanding Beeville Stock or any affiliate of such person, relating to bank owned life insurance (“BOLI”);

(xiii)    lease of real property;

(xiv)    any agreement containing covenants that limit the ability of Beeville or any of its Subsidiaries to compete in any line of business or with any Person, or that involve any restriction on the geographic area in which, or method by which, Beeville (including any successor thereof) or any of its Subsidiaries (including any successor thereof) may carry on its business (other than as may be required by law or any Governmental Body);

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(xv)    any data processing or other electronic banking services agreement or contract which may not be terminated without payment or penalty upon notice of thirty (30) days or less;

(xvi)    any agreement pursuant to which Beeville or any of its Subsidiaries may become obligated to invest in or contribute capital to any Person;

(xvii)    any agreement between Beeville Bank, on the one hand, and a Person listed on Section 3.1(e) of the Beeville Disclosure Schedules, on the other hand (the “Affiliate Agreements”); or

(xviii)     contracts, other than the foregoing, with payments aggregating $50,000 or more not made in the ordinary course of business.

(b)    Each Beeville Contract is legal, valid and binding on Beeville or its Subsidiaries, as the case may be, and to the knowledge of Beeville, the other parties thereto, enforceable by Beeville or its Subsidiaries, as the case may be, in accordance with its terms (subject to the effect of bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to creditors’ rights generally and general equitable principles). Each of Beeville and its Subsidiaries has performed in all material respects all obligations required to be performed by it to date under each Beeville Contract and there are no existing material defaults by Beeville or its Subsidiary, as the case may be, or, to the knowledge of Beeville, the other party thereunder and, to the knowledge of Beeville, there are no allegations or assertions of such by any party under such Beeville Contract or any events that with notice, lapse of time or the happening or occurrence of any other event would be reasonably likely to constitute a default thereunder. A true and complete copy of each Beeville Contract has been delivered or made available to Spirit.

Section 3.19    Fidelity Bonds and Insurance.

(a)    A true, correct and complete list of all fidelity bonds and insurance policies (including any BOLI) owned or held by or on behalf of either Beeville or any of its Subsidiaries (other than credit-life policies), including the insurer, policy numbers, amount of coverage, deductions, type of insurance, effective and termination dates and any material pending claims thereunder is set forth in Section 3.19(a) of the Beeville Disclosure Schedules.

(b)    All policies of general liability, theft, life, fire, workers’ compensation, health, directors and officers, business interruption and other forms of insurance owned or held by Beeville or any of its Subsidiaries (i) are in full force and effect and all premiums that are due and payable with respect thereto are currently paid; (ii) are sufficient for compliance with all requirements of applicable laws and all agreements to which Beeville or such Subsidiary is a party; (iii) are usual and customary as to amount and scope for the business conducted by Beeville and its Subsidiaries in respect of amounts, types and risks insured; (iv) are valid, outstanding and enforceable policies (except as may be limited by bankruptcy, insolvency, moratorium, reorganization or similar laws affecting the rights of creditors generally and the availability of equitable remedies); and (v) will remain in full force and effect through the Effective Time, subject to normal renewal policies and procedures, including the payment of premiums. To the knowledge of Beeville, no insurer under any such policy or bond has canceled or indicated to Beeville or any of its Subsidiaries an intention to cancel or not to renew any such policy or bond effective at any time prior to the Effective Time or generally disclaimed liability thereunder. Neither Beeville nor any of its Subsidiaries is in default under any such policy or bond, and all material claims thereunder have been filed. Neither Beeville nor any of its Subsidiaries has been denied or had revoked or rescinded any policy of insurance during the last three (3) fiscal years.

Section 3.20    Regulatory Actions and Approvals. There are no Proceedings pending or, to the knowledge of Beeville, threatened, against Beeville or any of its Subsidiaries by or before any Governmental Body or arbitrator having jurisdiction over Beeville or any of its Subsidiaries. Neither Beeville nor any of its Subsidiaries is subject to a formal or informal agreement, memorandum of understanding, enforcement action with, or any type of financial assistance by, any Governmental Body or arbitrator having jurisdiction over it. Neither Beeville nor any of its Subsidiaries knows of any fact or circumstance relating to it that would materially impede or delay

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receipt of any Regulatory Approvals (as defined herein), the Merger, the Bank Merger or the other transactions contemplated by this Agreement, nor does Beeville or any of its Subsidiaries have any reason to believe that it will not be able to obtain all Beeville Regulatory Approvals.

Section 3.21    Employee Matters.

(a)    Section 3.21(a) of the Beeville Disclosure Schedules contains a list of all current employees of Beeville or any of its Subsidiaries-including, without limitation, those individuals for whom Beeville or any of its Subsidiaries is a joint employer-as of the date of this Agreement, including any such employee who is on a leave of absence of any nature, and sets forth for each such individual the following: (i) name; (ii) title or position (including whether full or part time); (iii) hire date; (iv) current base compensation rate; (v) bonus or other incentive-based compensation paid in the prior calendar year; (vi) exempt or non-exempt classification under the Fair Labor Standards Act; and (vii) pay-rolling entity. As of the date of this Agreement, all compensation payable to all employees of Beeville and its Subsidiaries for services performed on or prior to the date of this Agreement have been paid in full (or accrued in full on Beeville’s interim financial statements) and there are no outstanding agreements, understandings or commitments of Beeville or its Subsidiaries with respect to any compensation.

(b)    Section 3.21(b) of the Beeville Disclosure Schedules contains a list of all Persons who, as of the date of this Agreement, are parties to an independent contract or consulting agreement directly with Beeville or its Subsidiaries, and for each such individual the following information: (i) name; (ii) compensation rate; (iii) contract expiration date and terms; and (iv) a brief description of services provided. As of the date of this Agreement, all compensation payable to all independent contractors and consultants of Beeville and its Subsidiaries for services performed on or prior to the date of this Agreement have been paid in full (or accrued in full on Beeville’s interim financial statements) and there are no outstanding agreements, understandings or commitments of Beeville or its Subsidiaries with respect to any compensation.

(c)    Neither Beeville nor any of its Subsidiaries is, nor has been, a party to, bound by, or negotiating any collective bargaining agreement or other contract with a Union, and there is not, and has not been, any Union representing or purporting to represent any employee of Beeville or its Subsidiaries. Neither Beeville nor any of its Subsidiaries has a duty to bargain with any Union. As of the date of this Agreement, there is not any unfair labor practice charge or complaint or any other Proceedings pending before the National Labor Relations Board or any other Governmental Body having jurisdiction thereof and, to Beeville’s knowledge, no such complaint has been threatened. Neither Beeville nor any of its Subsidiaries has received any written notice concerning, and, to Beeville’s knowledge, there is not and has never been, any activities or proceedings of any Union (or representatives thereof) to organize any employees, or of any strikes, slowdowns, work stoppages, lockouts or threats thereof, by or with respect to any employees.

(d)    Beeville and its Subsidiaries have complied in all material respects with all labor and employment laws, including, without limitation, any provisions thereof relating to wages, hours, workplace discrimination, collective bargaining and the payment of workman’s compensation insurance and social security and similar Taxes, and, to the knowledge of Beeville, no person has asserted to Beeville or any of its Subsidiaries that Beeville or any of its Subsidiaries is liable for any arrearages of wages, workman’s compensation insurance premiums or any taxes or penalties for failure to comply with any of the foregoing. There are no Proceedings pending, or to Beeville’s knowledge, threatened against Beeville or any of its Subsidiaries with respect to allegations of a violation of any labor or employment law, and Beeville has no knowledge of any basis on which any such Proceedings could be brought.

(e)    Neither Beeville nor any of its Subsidiaries has implemented, and does not intend to implement, any plant closing or layoff of employees that could implicate the WARN Act (as defined herein).

Section 3.22    Compensation and Benefit Plans.

(a)    Section 3.22(a) of the Beeville Disclosure Schedules lists all employee benefit plans, policies, arrangements, programs, practices or agreements (i) providing benefits or compensation to any current or

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former employees, directors, consultants or other service providers of Beeville or any of its ERISA Affiliates (as defined herein), or (ii) that are sponsored or maintained by Beeville or any of its ERISA Affiliates, or (iii) to which Beeville or any of its ERISA Affiliates contributes or is obligated to contribute on behalf of current or former employees, directors, consultants or other service providers of Beeville or any of its ERISA Affiliates, or (iv) with respect to which Beeville or any of its ERISA Affiliates has any Liability, including, but not limited to, any employee welfare benefit plan within the meaning of Section 3(1) of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), any employee pension benefit plan within the meaning of Section 3(2) of ERISA or any employment or consulting agreement, or employee stock ownership, bonus, incentive, deferred compensation, retention, severance, change of control, hospitalization or other medical, dental, vision, accident, disability, life or other insurance, executive compensation, paid time off or fringe benefit plan, policy, arrangement, program, practice or agreement (each of the foregoing, a “Beeville Employee Plan”). Section 3.22(a) of the Beeville Disclosure Schedule sets forth the amounts that, as of the date of this Agreement, have been, and as of the Closing Date, will be, accrued pursuant to any Beeville Employee Plan in accordance with GAAP on Beeville’s consolidated balance sheet. Neither Beeville nor any of its Subsidiaries is party to or bound by any stock purchase, stock option, equity or phantom equity compensation plan, policy, arrangement, program, practice or agreement. Neither Beeville nor any of its Subsidiaries has any Liability under any employee benefit plans, policies, arrangements, programs, practices or agreements providing benefits or compensation to any service providers of Beeville or any of its ERISA Affiliates through a contractual arrangement with a third-party professional employer organization. There are no pending or, to the knowledge of Beeville, threatened Proceedings, audits or other claims (except routine claims for benefits) relating to any Beeville Employee Plan. All of Beeville Employee Plans comply and have been administered in all material respects with their terms and with all applicable requirements of ERISA, the Code and other applicable laws. There has occurred no “prohibited transaction” (as defined in Section 406 of ERISA or Section 4975 of the Code) with respect to Beeville Employee Plans which is likely to result in the imposition of any penalties or Taxes upon Beeville or any of its Subsidiaries under Section 502(i) of ERISA or Section 4975 of the Code. All contributions, premiums or other payments required by law or by any Beeville Employee Plan have been made by the due date thereof.

(b)    Neither Beeville nor any of its Subsidiaries has any Liabilities for post-retirement or post-employment welfare benefits under any Beeville Employee Plan, except for coverage required by Part 6 of Title I of ERISA or Section 4980B of the Code, or similar state laws, the cost of which is borne by the insured individuals. Each Beeville Employee Plan that is intended to be a “qualified plan” within the meaning of Section 401(a) of the Code is qualified in form and operation and no event or circumstance has occurred that would disqualify any such Beeville Employee Plan. Beeville has provided or made available copies of (i) each Beeville Employee Plan, including all amendments thereto, (ii) the most recent summary plan descriptions of each Beeville Employee Plan, (iii) each trust agreement, insurance policy or other instrument relating to the funding or administration of any Beeville Employee Plan, (iv) the three most recent annual reports (Form 5500 series) and accompanying schedules filed with the IRS or the U.S. Department of Labor with respect to each Beeville Employee Plan, (v) the most recent determination or opinion letter issued by the IRS with respect to each Beeville Employee Plan that is intended to qualify under Section 401 of the Code, (vi) the most recent available financial statements for each Beeville Employee Plan, and (vii) the most recent audited financial statements for each Beeville Employee Plan for which audited statements are required by ERISA.

(c)    Neither Beeville nor any of its ERISA Affiliates has any Liability with respect to a “multiemployer plan” within the meaning of Section 4001(a)(3) of ERISA (“Multiemployer Plans”). Neither Beeville nor any of its ERISA Affiliates has ever contributed to or been obligated to contribute to any Multiemployer Plan, and neither Beeville nor any of its ERISA Affiliates has incurred any withdrawal liability under Part I of Subtitle E of Title IV of ERISA that has not been satisfied in full. Neither Beeville nor any of its ERISA Affiliates sponsors, maintains or contributes to any employee benefit plan that is subject to Section 412 of the Code or Title IV of ERISA, and neither Beeville nor any of its ERISA

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Affiliates has ever sponsored, maintained, contributed to or been obligated to contribute to any plan subject to Section 412 of the Code or Title IV of ERISA.

(d)    There does not now exist, nor do any circumstances exist that could result in, any Controlled Group Liability (as defined herein) of Beeville or any of its Subsidiaries now or following the Closing.

(e)    Except as set forth in Section 3.22(e) of the Beeville Disclosure Schedules, the consummation of the transactions contemplated by this Agreement will not, either alone or in combination with another event (where such other event by itself would not result in such consequence), (i) entitle any current or former employee, director, officer, consultant or other service provider of Beeville or any of its Subsidiaries to severance pay, retention bonuses, parachute payments, noncompetition payments, unemployment compensation or any other payment or benefit, (ii) accelerate the time of payment or vesting, or increase the amount of compensation due to any current or former employee, director, officer, consultant or other service provider of Beeville or any of its Subsidiaries (whether by virtue of any termination, severance, change of control or similar benefits or otherwise), (iii) cause Beeville to transfer or set aside any assets to fund any benefits under any Beeville Employee Plan, or (iv) limit or restrict the right to amend, terminate, or transfer the assets of any Beeville Employee Plan on or following the Effective Time. Section 3.22(e) of the Beeville Disclosure Schedule sets forth the amounts that, as of the date of this Agreement, have been, and as of the Closing Date, will be, accrued pursuant to any such severance, noncompetition, retention or bonus arrangements under this Section 3.22(e) in accordance with GAAP on Beeville’s consolidated balance sheet. There is no contract, agreement, plan or other arrangement covering any service provider or former service provider of Beeville or any of its Subsidiaries that, individually or in the aggregate, could give rise to the payment by Beeville or any of its Subsidiaries of any amount that would not be deductible pursuant to the terms of Section 162(m) or Section 280G of the Code (or any corresponding provision of state, local or foreign Tax law).

(f)    Section 3.22(f) of the Beeville Disclosure Schedules lists each Person who (i) as of the Closing Date, could be reasonably expected to be a “disqualified individual” (within the meaning of Section 280G of the Code and the regulations promulgated thereunder) with respect to Beeville or any of its Subsidiaries and (ii) who could reasonably be expected to receive an “excess parachute payment” within the meaning of Section 280G of the Code (or any corresponding or similar provision of state, local or foreign Tax law).

(g)    Except as set forth in Section 3.22(g) of the Beeville Disclosure Schedules, neither Beeville nor any of its Subsidiaries is a party to or bound by any plan under which compensatory equity awards, including any arrangements awarding stock options, stock appreciation rights, stock appreciation units, restricted stock, deferred stock, phantom stock or any other equity compensation may be granted to any employee, director or other service provider of Beeville or any of its ERISA Affiliates.

Section 3.23    Deferred Compensation and Salary Continuation Arrangements.

(a)    Section 3.23(a) of the Beeville Disclosure Schedules contains a list of all nonqualified deferred compensation arrangements of Beeville or any of its Subsidiaries, including (i) the terms under which the cash value of any life insurance purchased in connection with any such arrangement can be realized and (ii) the amount of all accruals due each participant under any such arrangement, which amounts have been, as of the date of this Agreement, and will be, as of the Closing Date, accrued in accordance with GAAP on Beeville’s consolidated balance sheet. Each nonqualified deferred compensation arrangement satisfies the requirements of Section 409A of the Code, to the extent applicable, in form and operation.

(b)    Section 3.23(b) of the Beeville Disclosure Schedules contains a list of all salary continuation arrangements of Beeville or any of its Subsidiaries, including (i) the terms under which the cash value of any life insurance purchased in connection with any such arrangement can be realized and (ii) the amount of all accruals due each participant under any such arrangement, which amounts have been, as of the date of this Agreement, and will be, as of the Closing Date, accrued in accordance with GAAP on Beeville’s consolidated balance sheet.

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Section 3.24    Internal Controls. Beeville and each of its Subsidiaries maintains accurate books and records reflecting its material assets and material liabilities in all material respects and maintains proper and adequate internal accounting controls that provide reasonable assurance that (a) all material transactions are executed with management’s authorization; (b) all material transactions are recorded as necessary to permit preparation of the consolidated financial statements of Beeville and to maintain accountability for Beeville’s consolidated assets; (c) access to Beeville’s material assets is permitted only in accordance with management’s authorization; (d) the reporting of Beeville’s material assets is compared with existing assets at regular intervals; and (e) extensions of material credit and other receivables are recorded accurately, and reasonably proper and adequate procedures are implemented to effect the collection thereof on a current and timely basis. Neither Beeville’s nor any of its Subsidiary’s systems, controls, data or information are recorded, stored, maintained, operated or otherwise wholly or partly dependent on or held by any means (including any electronic, mechanical or photographic process, whether computerized or not) which (including all means of access thereto and therefrom) are not under the exclusive ownership and direct control of Beeville, its Subsidiaries or their accountants, vendors and consultants, except as would not reasonably be expected to have a Material Adverse Effect on the system of internal accounting controls described in the preceding sentence.

Section 3.25    Derivative Contracts. Neither Beeville nor any of its Subsidiaries is a party to nor has agreed to enter into an exchange traded or over-the-counter swap, forward, future, option, cap, floor or collar financial contract or agreement, or any other contract or agreement not included in Beeville Financial Statements which is a financial derivative contract (including various combinations thereof).

Section 3.26    Deposits. Except as listed in Section 3.26 of the Beeville Disclosure Schedules, no deposit of Beeville Bank is a “brokered” deposit (as such term is defined in 12 C.F.R. § 337.6(a)(2)) or is subject to any encumbrance, legal restraint or other legal process (other than garnishments, pledges, set off rights, escrow limitations and similar actions taken in the ordinary course of business).

Section 3.27    Intellectual Property Rights.

(a)    Section 3.27(a) of the Beeville Disclosure Schedules contains a correct and complete list of all registered trademarks, registered service marks, trademark and service mark applications, trade names and registered copyrights presently owned or held by Beeville or any of its Subsidiaries or used in a material manner by them in the conduct of their business under license pursuant to a material contract (the “Intellectual Property”). Beeville and its Subsidiaries own or have the right to use and continue to use the Intellectual Property in the operation of their business. Neither Beeville nor any of its Subsidiaries is, to Beeville’s knowledge, infringing or violating any patent, copyright, trademark, service mark, label filing or trade name owned or otherwise held by any other party, nor has Beeville or any of its Subsidiaries used any confidential information or any trade secrets owned or otherwise held by any other party, without holding a valid license for such use.

(b)    Neither Beeville nor any of its Subsidiaries is engaging, nor has any been charged with engaging, in any kind of unfair or unlawful competition. Neither the execution, delivery or performance of this Agreement or the related documents nor the consummation of the transactions contemplated hereby or thereby will in any way impair the right of Beeville or any of its Subsidiaries or the Continuing Corporation to use, sell, license or dispose of, or to bring any action for the infringement of, the Intellectual Property.

Section 3.28    Shareholders’ List. Section 3.28 of the Beeville Disclosure Schedules contains a true, correct and complete list of the record holders of shares of Beeville Stock as of a date within ten (10) Business Days prior to the date of this Agreement, containing their names, addresses and number of shares held of record, which shareholders’ list is in all respects accurate as of such date and shall be updated not more than five (5) Business Days prior to Closing.

Section 3.29    SEC Status; Securities Issuances. Beeville is not subject to the registration provisions of Section 12 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), nor the rules and

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regulations of the SEC promulgated under Section 12 of the Exchange Act, other than anti-fraud provisions of such act. All issuances of securities by Beeville and any of its Subsidiaries have been registered under the Securities Act, applicable state securities laws, and all other applicable laws or were exempt from any such registration requirements.

Section 3.30    Dissenting Shareholders. Beeville has no knowledge of any plan or intention on the part of any shareholder of Beeville to make written demand for payment of the fair value of such holder’s shares of Beeville Stock in the manner provided in Section 2.3.

Section 3.31    Takeover Laws. This Agreement and the Merger contemplated hereby are not subject to the requirements of any “moratorium,” “control stock,” “fair price,” “affiliate transactions,” “business combination” or other antitakeover laws and regulations of any state applicable to Beeville.

Section 3.32    Brokers, Finders and Financial Advisors. Section 3.32 of the Beeville Disclosure Schedules sets forth fees or commissions payable by Beeville to any broker, finder, financial advisor or investment banker in connection with this Agreement and the transactions contemplated hereby (collectively, the “Beeville Advisory Fees”). Other than the Beeville Advisory Fees, none of Beeville, any of its Subsidiaries or any of their respective officers, directors or employees have employed any broker, finder, financial advisor or investment banker or incurred any Liability for any brokerage, financial advisory, investment banking or other similar fees or commissions in connection with this Agreement and the transactions contemplated hereby.

Section 3.33    Fairness Opinion. Prior to the execution of this Agreement, Beeville has received a written opinion from Sheshunoff & Co. Investment Banking, dated as of the date of this Agreement, to the effect that, subject to the terms, conditions and qualifications set forth therein, as of the date of this Agreement, the Merger Consideration to be received by the shareholders of Beeville pursuant to this Agreement is fair, from a financial point of view, to such shareholders. Such opinion has not been amended or rescinded.

ARTICLE IV.

REPRESENTATIONS AND WARRANTIES OF SPIRIT

Spirit represents and warrants to Beeville as set forth below. On the date of this Agreement, Spirit delivered to Beeville schedules (the “Spirit Disclosure Schedules”) setting forth, among other things, items the disclosure of which are necessary or appropriate (a) in response to an express disclosure requirement contained in a provision hereof, (b) as an exception to one or more representations and warranties contained in this Article IV or (c) as an exception to one or more covenants contained in this Agreement. Disclosure in any section of the Spirit Disclosure Schedules shall apply only to the indicated section of this Agreement, except to the extent that it is reasonably apparent on its face that such disclosure is relevant to another section of this Agreement. The representations and warranties set forth below are further qualified by Spirit’s Final Prospectus filed on May 4, 2018 with the SEC pursuant to Rule 424(b)(4) of the Securities Act, Spirit’s Registration Statement on Form S-1 filed on April 6, 2018 with the SEC, as amended, Spirit’s Quarterly Reports on Form 10-Q for the fiscal quarters ended March 31, 2018, June 30, 2018 and September 30, 2018, Spirit’s Definitive Proxy Statement for the 2018 Annual Meeting of Shareholders of Spirit and any Current Reports on Form 8-K filed prior to the date of this Agreement with respect to events occurring since March 31, 2018 (collectively, “Spirit SEC Reports ” (it being understood that (i) nothing disclosed in the Spirit SEC Reports shall be deemed disclosed for purposes of any subsection of this Article IV unless it is reasonably apparent that the matters so disclosed in such Spirit SEC Report are applicable to such subsection and (ii) disclosure in the “Risk Factors” Section in a Spirit SEC Report shall be ignored for purposes of this Agreement.

Section 4.1    Organization.

(a)    Spirit is a corporation duly organized, validly existing and in good standing under the laws of the State of Texas and a bank holding company duly registered under the BHC Act, subject to all laws, rules

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and regulations applicable to bank holding companies. Spirit Bank is a Texas state savings bank duly organized, validly existing and in good standing under the laws of the State of Texas.

(b)    Spirit and Spirit Bank have full power and authority (including all licenses, registrations, qualifications, franchises, permits and other governmental authorizations which are legally required) to own, lease and operate their properties, to engage in the business and activities now conducted by them and to enter into this Agreement, except where the failure to be so licensed or qualified would not have a Material Adverse Effect on Spirit. Spirit engages only in activities (and holds properties only of the types) permitted to bank holding companies by the BHC Act, and the rules and regulations promulgated thereunder.

(c)    Spirit Bank (i) is duly authorized to conduct a general banking business, embracing all usual deposit functions of commercial banks as well as commercial, industrial and real estate loans, installment credits, collections and safe deposit facilities subject to the supervision of the Federal Reserve Board and the TDSML, and (ii)  is an insured bank as defined in the Federal Deposit Insurance Act.

Section 4.2     Capitalization.

(a)    The authorized capital stock of Spirit consists of 50,000,000 shares of Spirit Common Stock, no par value, 9,812,481 shares of which are outstanding as of September 30, 2018, and 5,000,000 shares of preferred stock, $1.00 par value, none of which are issued and outstanding as of the date of this Agreement. Spirit owns all of the issued and outstanding shares of common stock, par value $4.00 per share, of Spirit Bank (“Spirit Bank Stock”). All of the issued and outstanding shares of Spirit Common Stock and Spirit Bank Stock are validly issued, fully paid and nonassessable, and have not been issued in violation of the preemptive rights of any Person.

(b)    At the Effective Time, the shares of Spirit Common Stock issued pursuant to the Merger in accordance with this Agreement will be duly authorized, validly issued, fully paid and nonassessable, and will not be issued in violation of any preemptive rights or any applicable federal or state laws.

Section 4.3    Authority; Approvals.

(a)    Spirit has the requisite corporate power and authority to execute and deliver this Agreement and any related documents to which it is a party and perform its obligations hereunder and thereunder and to consummate the transactions contemplated hereby and thereby. This Agreement has been duly executed and delivered by Spirit and is a duly authorized, valid, legally binding agreement of Spirit enforceable against Spirit in accordance with its terms, subject to the effect of bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to creditors’ rights generally and general equitable principles.

(b)    The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly, validly and unanimously approved by the board of directors of Spirit. No further corporate proceedings on the part of Spirit are necessary to execute and deliver this Agreement or the related documents and to consummate the transactions contemplated hereby or thereby.

(c)    Section 4.3(c) of the Spirit Disclosure Schedules lists all governmental and any other consents, approvals, authorizations, applications, filings, notices, registrations and qualifications that are required to be made or obtained by Spirit or any of its Subsidiaries in connection with or for the consummation of the transactions contemplated by this Agreement, including the Merger and the Bank Merger (collectively, the “Spirit Regulatory Approvals” and together with the Beeville Regulatory Approvals, the “Regulatory Approvals”). Other than the federal and state securities filings, including the Registration Statement on Form S-4, to be filed with the SEC under the Securities Act (the “Registration Statement”), and the Spirit Regulatory Approvals, no consents or approvals of or filings or registrations with any Governmental Body or with any other Person are necessary in connection with the execution and delivery by (i) Spirit of this Agreement, or (ii) Spirit Bank of the Bank Merger Agreement.

Section 4.4    No Conflicts; Consents. Neither the execution and delivery by Spirit of this Agreement and the related documents nor the consummation of the transactions contemplated hereby or thereby, nor compliance by

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Spirit with any of the provisions hereof or thereof, will (a) violate, conflict with, or result in a breach of any provision of, or constitute a default (or an event which, with notice or lapse of time or both, would constitute a default) under, or result in the termination of, or result in the loss of any benefit or creation of any right on the part of any third party under, or accelerate the performance required by, or result in a right of termination or acceleration of, or result in the creation of any lien, charge or encumbrance upon any of the material properties or assets of Spirit or any of its Subsidiaries under any of the terms, conditions or provisions of (i) the Organizational Documents of Spirit or any of its Subsidiaries or (ii) any note, bond, mortgage, indenture, deed of trust, license, lease, agreement or other instrument or obligation to which Spirit or any of its Subsidiaries is a party or by which it may be bound, or to which Spirit or any of its Subsidiaries or any of the properties or assets of Spirit or any of its Subsidiaries may be subject, or (b) assuming that the Spirit Regulatory Approvals are duly obtained, violate any law, statute, code, ordinance, rule, regulation, permit, concession, grant, franchise or any judgment, ruling, order, writ, injunction or decree applicable to Spirit or any of its Subsidiaries or any of their respective properties or assets, except, with respect to clause (ii), for such violations, conflicts, breaches or defaults which either individually or in the aggregate would not have or be reasonably likely to have a Material Adverse Effect on Spirit.

Section 4.5    Proceedings. There are no Proceedings pending or, to Spirit’s knowledge, threatened against Spirit or any of its Subsidiaries, and Spirit has no knowledge of any basis on which any such Proceedings could be brought which could reasonably be expected to result in a Material Adverse Effect on Spirit or which could question the validity of any action taken or to be taken in connection with this Agreement and the transactions contemplated hereby. Neither Spirit nor Spirit Bank is in default with respect to any judgment, order, writ, injunction, decree, award, rule or regulation of any arbitrator or Governmental Body.

Section 4.6    Financial Statements.

(a)    Spirit has furnished or made available to Beeville true and complete copies of its Registration Statement on Form S-1 filed with the SEC on April 6, 2018, as amended, which contains Spirit’s audited consolidated balance sheet (which includes the allowance for loan losses) as of December 31, 2017, and the related statements of income, comprehensive income, shareholders’ equity and cash flows for the year ended December 31, 2017 and its Quarterly Reports on Form 10-Q for the fiscal quarters ended March 31, 2018, June 30, 2018 and September 30, 2018, and the related consolidated statements of income, changes in shareholders’ equity and cash flows for the quarter ended September 30, 2018 (the “Spirit Financial Statements”).

(b)    The Spirit Financial Statements have been prepared from the books and records of Spirit and its Subsidiaries and fairly present, in all material respects, the consolidated financial position, results of operations, shareholders’ equity and cash flows of Spirit at the dates and for the periods indicated in conformity with GAAP applied on a consistent basis throughout the periods indicated.

(c)    As of the dates of the Spirit Financial Statements, neither Spirit nor any of its Subsidiaries had any material Liabilities (whether accrued, absolute, contingent or otherwise) except as fully set forth or provided for in such Spirit Financial Statements.

(d)    Spirit and each of its Subsidiaries has established and maintains a system of “internal controls over financial reporting” (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that is sufficient to provide reasonable assurance (i) regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP, (ii) that receipts and expenditures of Spirit and its Subsidiaries are being made only in accordance with authorizations of management and the board of directors of Spirit, and (iii) regarding prevention or timely detection of the unauthorized acquisition, use or disposition of Spirit’s and its Subsidiaries’ assets that could have a material effect on Spirit’s financial statements.

(e)    Spirit’s “disclosure controls and procedures” (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) are reasonably designed to ensure that all information (both financial and non-financial)

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required to be disclosed by Spirit in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and that all such information is accumulated and communicated to Spirit’s management as appropriate to allow timely decisions regarding required disclosure and to make the certifications of the chief executive officer and chief financial officer of Spirit required under the Exchange Act with respect to such reports. Spirit has disclosed, based on its most recent evaluation of its disclosure controls and procedures prior to the date of this Agreement, to Spirit’s auditors and the audit committee of the board of directors of Spirit (i) any significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting that could adversely affect in any material respect Spirit’s ability to record, process, summarize and report financial information and (ii) any fraud, whether or not material, that involves management or other employees who have a significant role in Spirit’s internal controls over financial reporting. For purposes of this Agreement, the terms “significant deficiency” and “material weakness” shall have the meaning assigned to them in Public Company Accounting Oversight Board Auditing Standard 2, as in effect on the date of this Agreement.

Section 4.7    Compliance with Laws and Regulatory Filings.

(a)    Spirit and Spirit Bank have complied in all material respects with and are not in material default or violation under any applicable law, statute, order, rule, regulation, policy and/or guideline of any Governmental Body relating to Spirit or Spirit Bank, including all Banking Laws and Environmental Laws. Spirit and Spirit Bank have neither had nor suspected any material incidents of fraud or defalcation involving Spirit, Spirit Bank or any of their respective officers, directors or Affiliates during the last two (2) years. Each of Spirit and Spirit Bank has timely and properly filed and maintained in all material respects all requisite Currency Transaction Reports and Suspicious Activity Reports and has systems customarily used by financial institutions of a similar size to Spirit Bank that are designed to properly monitor transaction activity (including wire transfers). Spirit Bank is designated as an intermediate small institution for purposes of the Community Reinvestment Act and has a Community Reinvestment Act rating of “satisfactory.”

(b)    Spirit and its Subsidiaries have filed all reports, registrations and statements, together with any amendments required to be made thereto, that are required to be filed with the Federal Reserve Board, the TDSML, the FDIC, or any other Governmental Body having supervisory jurisdiction over Spirit and its Subsidiaries, and such reports, registrations and statements as finally amended or corrected, are true and correct in all material respects. Except for normal examinations conducted by bank regulatory agencies in the ordinary course of business, no Governmental Body has initiated any Proceeding or, to Spirit’s knowledge, investigation into the business or operations of Spirit or its Subsidiaries. There is no material unresolved violation, criticism or exception by any bank regulatory agency with respect to any report relating to any examinations of Spirit or Spirit Bank. Spirit Bank is “well capitalized” (as that term is define in 12 C.F.R. §325.103(b)(1)) and “well managed” (as that term is defined in 12 C.F.R. §225.2(s)).

(c)    There are no Proceedings pending or, to the knowledge of Spirit, threatened, against Spirit or any of its Subsidiaries by or before any Governmental Body or arbitrator having jurisdiction over Beeville or any of its Subsidiaries. Neither Spirit nor any of its Subsidiaries is subject to a formal or informal agreement, memorandum of understanding, enforcement action with, or any type of financial assistance by, any Governmental Body or arbitrator having jurisdiction over it. Spirit has no knowledge of any fact or circumstance relating to Spirit or any of its Subsidiaries that would materially impede or delay receipt of any required regulatory approval of the Merger or the other transactions contemplated by this Agreement, including the Bank Merger, nor does Spirit have any reason to believe that it will not be able to obtain all requisite regulatory and other approvals or consents which it is required to obtain in a timely manner in order to consummate the Merger and the Bank Merger.

Section 4.8    SEC Reports.

(a)    Spirit has timely filed all material reports and statements, together with any amendments required to be made with respect thereto, that it was required to file with the SEC pursuant to the Exchange Act since

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May 3, 2018. As of their respective dates (or if amended, as of the date so amended), each of such reports and statements (i) complied in all material respects as to form with the applicable requirements under the Exchange Act and (ii) were true and correct and complied in all material respects with the relevant statutes, rules and regulations enforced or promulgated by the SEC and such reports did not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading.

(b)    Spirit is in compliance with all applicable provisions of the Sarbanes-Oxley Act, except for any noncompliance that has not had and is not reasonably likely to have, individually or in the aggregate, a Material Adverse Effect on Spirit.

Section 4.9    Absence of Certain Changes. Except as set forth in Section 4.9 of the Spirit Disclosure Schedules, since June 30, 2018, (a) Spirit and Spirit Bank have conducted their respective businesses in the ordinary and usual course consistent with safe and sound banking practices (except as otherwise required by this Agreement and excluding the incurrence of expenses related to this Agreement and the transactions contemplated hereby), and (b) no Material Adverse Effect on Spirit or Spirit Bank has occurred.

Section 4.10    Taxes.

(a)    Subject to applicable extension periods, Spirit and its Subsidiaries have filed all material Tax Returns that each was required to file, including any Tax Returns of any affiliated, consolidated, combined or unitary group of which either Spirit or any of its Subsidiaries is or was a member. All such Tax Returns were correct and complete in all material respects. All Taxes due and owing by Spirit or any of its Subsidiaries and any affiliated, consolidated, combined or unitary group of which either Spirit or any of its Subsidiaries is or was a member (whether or not shown on any Tax Return) have been paid. Neither Spirit nor any of its Subsidiaries is currently the beneficiary of any extension of time within which to file any Tax Return. No claim has ever been raised in writing by an authority in a jurisdiction where Spirit or any of its Subsidiaries does not file Tax Returns that Spirit or any of its Subsidiaries is or may be subject to taxation by that jurisdiction. There are no Security Interests on any of the assets of Spirit or any of its Subsidiaries that arose in connection with any failure (or alleged failure) of Spirit or any of its Subsidiaries to pay any Tax.

(b)    Spirit and its Subsidiaries have collected or withheld and duly paid to the appropriate Governmental Body all Taxes required to have been collected or withheld in connection with amounts paid or owing to any employee, independent contractor, creditor, shareholder, or other third party.

(c)    There is no action, suit, proceeding, audit, assessment, dispute or claim concerning any Tax Liability of Spirit or any of its Subsidiaries either (i) claimed or raised by any authority in writing or (ii) as to which Spirit or any of its Subsidiaries has knowledge based upon contact with any agent of such authority.

(d)    Neither Spirit nor any of its Subsidiaries has participated in a reportable or listed transaction as defined under Section 6011 and 6111 of the Code and Treasury Regulations § 1.6011-4. Neither Spirit nor any of its Subsidiaries (i) is a party to any Tax allocation or sharing agreement, (ii) has been a member of an Affiliated Group filing a consolidated federal income Tax Return (other than the Affiliated Group of which Spirit is the common parent) or (iii) has any Liability for the Taxes of any Person (other than Spirit and its Subsidiaries) under Treasury Regulations § 1.1502-6 (or any similar provision of state, local, or foreign law), as a transferee or successor, by contract, or otherwise.

(e)    Neither Spirit nor any of its Subsidiaries has been required to disclose on its federal income Tax Returns any position that could give rise to a substantial understatement of federal income Tax within the meaning of Section 6662 of the Code.

(f)    Neither Spirit nor any of its Subsidiaries is aware of any fact or circumstance that reasonably could be expected to prevent the Merger or the Bank Merger from qualifying as a reorganization within the

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meaning of Section 368(a) of the Code. Spirit has not taken or agreed to take any action that would prevent or reasonably could be expected to prevent the Merger or the Bank Merger from qualifying as a reorganization within the meaning of Section 368(a) of the Code.

Section 4.11    Brokers, Finders and Financial Advisors. Other than fees payable by Spirit to Stephens Inc., neither Spirit, any of its Subsidiaries nor any of its or their respective officers, directors or employees have employed any broker, finder, financial advisor or investment banker or incurred any Liability for any brokerage, financial advisory, investment banking or other similar fees or commissions in connection with this Agreement and the transactions contemplated hereby.

Section 4.12    Fairness Opinion. Prior to the execution of this Agreement, Spirit has received a written opinion from Stephens Inc., dated as of the date of this Agreement, to the effect that, subject to the terms, conditions and qualifications set forth therein, as of the date of this Agreement, the Merger Consideration to be paid by Spirit to the shareholders of Beeville pursuant to this Agreement is fair, from a financial point of view, to Spirit. Such opinion has not been amended or rescinded.

Section 4.13    No Financing. Spirit has, and will have as of the Effective Time, sufficient cash on hand available to pay the Aggregate Cash Consideration. Spirit does not need to obtain any financing in order to fund the payment of the Aggregate Cash Consideration.

Section 4.14    Compensation and Benefit Plans. Section 4.14 the Spirit Disclosure Schedules lists all employee benefit plans, policies, arrangements, programs, practices or agreements (a) providing benefits or compensation to any current or former employees, directors, consultants or other service providers of Spirit or any of its ERISA Affiliates (as defined herein), or (b) that are sponsored or maintained by Spirit or any of its ERISA Affiliates, or (c) to which Spirit or any of its ERISA Affiliates contributes or is obligated to contribute on behalf of current or former employees, directors, consultants or other service providers of Spirit or any of its ERISA Affiliates, or (d) with respect to which Spirit or any of its ERISA Affiliates has any Liability, including, but not limited to, any employee welfare benefit plan within the meaning of Section 3(1) of ERISA, any employee pension benefit plan within the meaning of Section 3(2) of ERISA or employee stock ownership, severance, hospitalization or other medical, dental, vision, accident, disability, life or other insurance, paid time off or fringe benefit plan, policy, arrangement, program, practice or agreement (each of the foregoing, a “Spirit Employee Plan”). All of the Spirit Employee Plans comply and have been administered in all material respects with their terms and with all applicable requirements of ERISA, the Code and other applicable laws.

ARTICLE V.

COVENANTS OF BEEVILLE

Beeville covenants and agrees with Spirit as follows:

Section 5.1    Approval of Shareholders of Beeville; Efforts.

(a)    Beeville shall, and shall cause its board of directors to, (i) take all action in accordance with the federal securities laws, the laws of the State of Texas and the Organizational Documents of Beeville necessary to (1) call and give notice of a special meeting of its shareholders (the “Beeville Shareholder Meeting”) for the purpose of (A) considering and voting upon the approval of this Agreement and the transactions contemplated hereby and (B) for such other purposes consistent with the complete performance of this Agreement as may be necessary and desirable within fifteen (15) days following the date the Registration Statement is declared effective under the Securities Act (the “Notice Date”) and (2) schedule the Beeville Shareholder Meeting to take place on a date that is within forty-five (45) days after the Notice Date; (ii) use Commercially Reasonable Efforts to (x) cause the Beeville Shareholder Meeting to be convened and held on the scheduled date and (y) obtain the necessary approvals by Beeville’s shareholders

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of this Agreement and the transactions contemplated hereby (the “Beeville Shareholder Approval”); and (iii) subject to Section 5.1(b), include in the Proxy Statement (as defined herein) the recommendation that the Beeville shareholders approve and adopt this Agreement and the transactions contemplated hereby (the “Beeville Board Recommendation”).

(b)    The board of directors of Beeville shall not withdraw, amend or modify the Beeville Board Recommendation in a manner adverse to Spirit (a “Change in Recommendation”) and shall use Commercially Reasonable Efforts to obtain the Beeville Shareholder Approval. Notwithstanding the foregoing, if Beeville has complied with Section 5.5, the board of directors of Beeville may effect a Change in Recommendation if Beeville or any of its representatives receives an unsolicited bona fide Acquisition Proposal (as defined herein) before the Beeville Shareholder Approval that the board of directors of Beeville has (i) determined in its good faith judgment (after consultation with the Financial Advisor (as defined herein) and Beeville’s outside legal counsel) that such Acquisition Proposal constitutes or would reasonably be expected to result in a Superior Proposal (as defined herein), and (ii) determined in its good faith judgment (after consultation with Beeville’s outside legal counsel) that the failure to effect a Change in Recommendation would cause it to violate its fiduciary duties under applicable law.

(c)    If this Agreement is approved by Beeville’s shareholders, Beeville shall take all reasonable actions to aid and assist in the consummation of the Merger, and shall use Commercially Reasonable Efforts to take or cause to be taken all other actions necessary, proper or advisable to consummate the transactions contemplated by this Agreement, including such actions as it and Spirit reasonably consider necessary, proper or advisable in connection with filing applications and registration statements with, or obtaining approvals from, all Governmental Bodies having jurisdiction over the transactions contemplated by this Agreement.

Section 5.2    Activities of Beeville Pending Closing.

(a)    From the date of this Agreement to and including the Closing Date, as long as this Agreement remains in effect, and unless Spirit has consented in writing (which consent shall not be unreasonably withheld, conditioned or delayed) or as otherwise expressly contemplated or permitted by other provisions of this Agreement (including in Section 5.2(a) of the Beeville Disclosure Schedules) or except as may be required by applicable law or an order or policy of a Governmental Body, Beeville shall, and shall cause each of its Subsidiaries to:

(i)    conduct its affairs (including the making of or agreeing to make any loans or other extensions of credit) only in the ordinary course of business consistent with past practices and safe and sound banking principles;

(ii)    use Commercially Reasonable Efforts to preserve intact its present business organizations, keep available the services of its present officers, directors, employees and agents and preserve its relationships and goodwill with customers and advantageous business relationships;

(iii)    promptly give written notice to Spirit of (A) any material change in its business, operations or prospects, (B) any complaints, investigations or hearings (or communications indicating that the same may be contemplated) of any Governmental Body having jurisdiction over Beeville or any of its Subsidiaries, (C) the commencement or threat of any Proceeding against Beeville or any of its Subsidiaries or (D) the occurrence of any event or the failure of any event to occur or the existence of any circumstance that would reasonably be expected to cause (1) a breach of any covenant, condition or agreement contained herein, (2) any of the representations or warranties of Beeville contained in this Agreement to be untrue or inaccurate in any material respect (without regard to any materiality qualifiers contained therein) or (3) a Material Adverse Effect on Beeville or Beeville Bank; and

(iv)    except as required by law or regulation or expressly permitted by this Agreement, take no action which would adversely affect or delay the ability of Beeville or Spirit to obtain the Regulatory Approvals or any other approvals required for consummation of the transactions contemplated hereby or to perform its obligations and agreements under this Agreement.

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(b)    From the date of this Agreement to and including the Effective Time, except (1) as expressly permitted by this Agreement (including in Section 5.2(b) of the Beeville Disclosure Schedules) or (2) as may be required by applicable law or an order or policy of a Governmental Body, Beeville shall not, and shall not permit any of its Subsidiaries to, without the written consent of Spirit (which consent shall not be unreasonably withheld, conditioned or delayed):

(i)    adjust, split, combine or reclassify any of Beeville Stock;

(ii)    make, acquire, modify or renew, or agree to make, acquire, modify or renew, any loans, loan participations or other extensions of credit (whether directly or indirectly through the purchase of loan participations from other lenders, deal paper or otherwise) to any Borrower that (A) would be a material violation of its policies and procedures in effect as of the date of this Agreement, (B) would not be in the ordinary course of business consistent with past practices and safe and sound banking principles;

(iii)    issue or sell or obligate itself to issue or sell any shares of its capital stock or any warrants, rights or options to acquire, or any securities convertible into, any shares of its capital stock;

(iv)    grant any stock appreciation rights, stock appreciation units, restricted stock, stock options or other form of incentive compensation;

(v)    open, close or relocate any branch office, or acquire or sell or agree to acquire or sell, any branch office or any deposit liabilities;

(vi)    enter into, amend or terminate any agreement of the type that would be required to be disclosed in Section 3.18(a) of the Beeville Disclosure Schedules, or any other material agreement, or acquire or dispose of any material amount of assets or Liabilities or make any change in any of its leases, except in the ordinary course of business consistent with past practices and safe and sound banking practices;

(vii)    hire any employee or independent contractor with an annual salary in excess of $50,000;

(viii)    grant any severance or termination payment to, or enter into any collective bargaining, change-in-control, retention, noncompetition, retirement, parachute, severance or indemnification agreement with, any officer, director, employee or agent of Beeville or any of its Subsidiaries, either individually or as part of a class of similarly situated Persons;

(ix)    (A) increase in any manner the compensation or fringe benefits of any of its employees, directors, consultants or other service providers other than in the ordinary course of business consistent with past practice and pursuant to policies currently in effect, (B) pay any perquisite such as automobile allowance, club membership or dues or other similar benefits other than in accordance with past practice, or (C) institute any employee welfare, retirement or similar plan or arrangement;

(x)    amend any Beeville Employee Plan, other than as required to maintain the tax qualified status of such plan or as contemplated under this Agreement;

(xi)    (A) declare, pay or set aside for payment any dividend or other distribution (whether in cash, stock or property) in respect of Beeville Stock, other than (1) the payment of dividends from Beeville Bank to Beeville, (2) the payment by Beeville of a $120,000 cash dividend to be paid to its shareholders in the fourth quarter of 2018, and (3) the Special Dividend, or (B) directly or indirectly, purchase, redeem or otherwise acquire any shares of Beeville Stock;

(xii)     make any change in accounting methods, principles and practices, except as may be required by GAAP or any Governmental Body;

(xiii)    sell, transfer, convey, mortgage, encumber or otherwise dispose of any material properties or assets (including “other real estate owned”) or interest therein, except in the ordinary course of business consistent with past practices and safe and sound banking practices;

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(xiv)    foreclose upon or otherwise acquire any commercial real property prior to receipt and approval by Spirit of a recent Phase I environmental review thereof;

(xv)    increase or decrease the rate of interest paid on deposit accounts, except in the ordinary course of business consistent with past practices and safe and sound banking practices;

(xvi)    charge off any loan or other extension of credit greater than $50,000 without two (2) Business Days’ prior written notice to Spirit of the amount of such charge-off; provided, that if such charge-off is made at the request of a Governmental Body, then no prior notice or consent by Spirit will be required;

(xvii)    (A) establish any new Subsidiary or Affiliate or enter into any new line of business, or (B) except pursuant to contracts or agreements in force at the date of or permitted by this Agreement, make any equity investment in, or purchase outside the ordinary course of business any property or assets of, any other Person;

(xviii)     materially deviate from policies and procedures existing as of the date of this Agreement with respect to (A) classification of assets, (B) the allowance for loan losses and (C) accrual of interest on assets, except as otherwise required by the provisions of this Agreement, applicable law or regulation or any Governmental Body;

(xix)    amend or change any provision of the Organizational Documents of Beeville or any of its Subsidiaries;

(xx)    make any capital expenditure which would exceed an aggregate of $50,000;

(xxi)    excluding deposits and certificates of deposit, incur or modify any indebtedness for borrowed money, including Federal Home Loan Bank advances, except in the ordinary course of business consistent with past practices and safe and sound banking practices;

(xxii)    prepay any indebtedness or other similar arrangements so as to cause Beeville to incur any prepayment penalty thereunder;

(xxiii)     settle any Proceeding (A) involving payment by it of money damages in excess of $50,000 in the aggregate or (B) imposing any material restriction on the operations of Beeville or any of its Subsidiaries;

(xxiv)     make any changes to its Securities Portfolio or the manner in which the portfolio is classified or reported, except in the ordinary course of business consistent with past practices and safe and sound banking practices;

(xxv)    make, change or revoke any Tax election or Tax method of accounting, settle or compromise any Tax Liability, enter into any Tax closing agreement, surrender any right to claim a return of Taxes, file any amended Tax Return, or consent to any extension or waiver of any statute of limitations;

(xxvi)    take, or knowingly fail to take, any action that would reasonably be expected to prevent the Merger or the Bank Merger from qualifying as a “reorganization” under Section 368(a) of the Code; or

(xxvii)    agree to do any of the foregoing.

Section 5.3    Access to Properties and Records.

(a)    To the extent permitted by applicable law, Beeville shall and shall cause each of its Subsidiaries, upon reasonable notice from Spirit to Beeville to: (i) afford the employees and officers and authorized representatives (including legal counsel, accountants and consultants) of Spirit full access to the properties, books and records of Beeville and its Subsidiaries during normal business hours in order that Spirit may have the opportunity to make such reasonable investigation as it shall desire to make of the affairs of

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Beeville and its Subsidiaries and to conduct the environmental investigations provided in Section 5.11, and (ii) furnish Spirit with such additional financial and operating data and other information as to the business and properties of Beeville as Spirit shall, from time to time, reasonably request.

(b)    As soon as practicable after they become available, Beeville shall deliver or make available to Spirit all unaudited monthly and quarterly financial information prepared for the internal use of management of Beeville and all Consolidated Reports of Condition and Income filed by Beeville Bank with the appropriate Governmental Body after the date of this Agreement. In the event of the termination of this Agreement, Spirit shall return to Beeville all documents and other information obtained pursuant hereto and shall keep confidential any information obtained pursuant to Section 7.2.

Section 5.4    Information for Regulatory Applications and SEC Filings.

(a)    To the extent permitted by law and during the pendency of this Agreement, Beeville shall furnish Spirit with all information concerning Beeville or any of its Subsidiaries required for inclusion in any application, filing, statement or document to be made or filed by Spirit with any Governmental Body in connection with the transactions contemplated by this Agreement and any filings with the SEC and any applicable state securities authorities. Beeville shall fully cooperate with Spirit in the filing of any applications or other documents necessary to complete the transactions contemplated by this Agreement. Beeville shall, upon reasonable request by Spirit, furnish to Spirit all information concerning itself, its Subsidiaries, directors, officers and shareholders and such other matters as may be reasonably necessary or advisable in connection with the Proxy Statement, the Registration Statement or any other statement, filing, notice or application made by or on behalf of Spirit, Beeville or any of their respective Subsidiaries to any regulatory agency or other Governmental Body in connection with the Merger or the Bank Merger and the other transactions contemplated by this Agreement.

(b)    None of the information relating to Beeville and its Subsidiaries that is provided by Beeville for inclusion in (i) the Proxy Statement to be prepared in accordance with Beeville’s Organizational Documents and applicable law and mailed to Beeville’s shareholders in connection with the solicitation of proxies by the board of directors of Beeville for use at the Beeville Shareholder Meeting, any filings or approvals under applicable federal or state banking laws or regulations or state securities laws, or any filing pursuant to Rule 165 or Rule 425 under the Securities Act will, at the time of mailing the Proxy Statement to Beeville’s shareholders, at the time of the Beeville Shareholder Meeting and at the Effective Time, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they are made, not misleading, and (ii) the Registration Statement (as defined herein) will, at the time the Registration Statement and each amendment or supplement thereto, if any, becomes effective under the Securities Act, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading.

Section 5.5    No Solicitation.

(a)    Beeville agrees that neither it nor any of its Subsidiaries shall, and it shall instruct their respective directors, officers, agents or representatives not to, directly or indirectly take any action to solicit, initiate, encourage or facilitate the making of any inquiries or proposals with respect to, or, subject to Section 5.5(b), provide any information to, conduct any assessment of, engage in negotiations with, or have any discussions with any other party concerning any Acquisition Proposal (as defined herein) or which could reasonably be expected to lead to any Acquisition Proposal.

(b)    Notwithstanding anything to the contrary in Section 5.5(a), if Beeville has complied with Section 5.5(a) and Beeville or any of its representatives receives an unsolicited bona fide Acquisition Proposal before the Beeville Shareholder Approval that the board of directors of Beeville has (i) determined in its good faith judgment (after consultation with Beeville’s financial advisors set forth in Section 3.32 of the Beeville Disclosure Schedules or a nationally recognized investment firm (the “Financial Advisor”), and

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Beeville’s outside legal counsel) that such Acquisition Proposal constitutes or would reasonably be expected to result in a Superior Proposal, (ii) determined in its good faith judgment (after consultation with Beeville’s outside legal counsel) that the failure to take such action would cause, or would be reasonably expected to cause, it to violate its fiduciary duties under applicable law; and (iii) obtained from such Person an executed confidentiality agreement that is no less favorable to Beeville than the Confidentiality Agreement (as defined herein), then Beeville or its representatives may furnish information to and enter into discussions and negotiations with such other Person.

(c)    Beeville agrees to notify Spirit in writing within three (3) Business Days after receipt of any unsolicited Acquisition Proposal and provide reasonable detail as to the identity of the Person making such Acquisition Proposal and the material terms of such Acquisition Proposal. Beeville shall immediately cease and cause to be terminated any existing activities, discussions or negotiations with any Person conducted heretofore that relate to any Acquisition Proposal. Beeville shall, and shall cause Beeville Bank to, take the necessary steps to inform the appropriate Persons referred to in this Section 5.5 of the obligations undertaken in this Section 5.5.

Section 5.6    Termination of Contracts. Beeville shall use Commercially Reasonable Efforts, including notifying appropriate parties and negotiating in good faith a reasonable settlement, to ensure that, if requested by Spirit, each contract listed on Section 5.6 of the Beeville Disclosure Schedules will, if the Merger occurs, be terminated prior to the date on which the data processing conversion and the operational integration occurs between Beeville Bank and Spirit Bank; provided, however, that until the thirtieth (30th) calendar day prior to Closing, Spirit shall have the right to add to Section 5.6 of the Beeville Disclosure Schedules any data processing contracts and contracts related to the provision of electronic banking services of Beeville or Beeville Bank not then listed on Section 5.6 of the Beeville Disclosure Schedules to the extent any such contract had not been made available to Spirit prior to the date of this Agreement (the “Contracts to be Terminated”); provided further, that any and all costs, fees, expenses, contract payments, penalties or liquidated damages necessary to be paid by Beeville or Beeville Bank in connection with the termination of any Contract to be Terminated shall be accrued or paid by Beeville on or prior to the date of delivery of the Final Closing Statement in accordance with this Section 5.6 and shall be reflected in the calculation of Transaction Costs as contemplated by Section 2.2(c). For the avoidance of doubt, Spirit shall not pay or be responsible for the payment of any costs, fees, expenses, contract payments, penalties or liquidated damages in connection with the termination of any contract subject to this Section 5.6. Such notice and actions by Beeville shall be in accordance with the terms of such contracts. For the avoidance of doubt, the use of “Commercially Reasonable Efforts” by Beeville as used in this Section 5.6 shall include the payment or accrual of any termination fees or liquidated damages required by the terms of the contracts referenced in this Section 5.6 upon the termination of such contracts.

Section 5.7    Liability Insurance. Beeville shall purchase (a) for a period of not less than four (4) years after the Effective Time, past acts and extended reporting period insurance coverage for no less than the four-year period immediately preceding the Effective Time, under its current (i) directors and officers insurance (or comparable coverage), (ii) employment practices liability insurance, (iii) financial institutions bond (or comparable coverage), (iv) bankers professional liability insurance, (v) mortgage errors and omissions insurance and (vi) fiduciary liability insurance and (b) for a period of not less than three (3) years after the Effective Time, past acts and extended reporting period insurance coverage for no less than the three-year period immediately preceding the Effective Time under its current cyber liability insurance) ((a) and (b) collectively, the “Tail Policy”), for each person and entity, including, without limitation, Beeville, its Subsidiaries and their respective directors, officers and employees, currently covered under those policies held by Beeville or its Subsidiaries.

Section 5.8    Allowance for Loan Losses. Beeville shall cause Beeville Bank to maintain its allowance for loan losses at a level consistent with Beeville Bank’s historical methodology, past practices, existing policies and in compliance with GAAP and, at a minimum, on the date of delivery of the Final Closing Statement, the allowance for loan losses of Beeville Bank shall be at least 1.17% of total loans (subject to any adjustment for any reduction in the allowance for loan losses specifically allocated to those previously identified impaired loans

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set forth on Section 5.8 of the Beeville Disclosure Schedules) (the “Minimum Allowance Amount”); provided, however, that if the allowance for loan losses is less than the Minimum Allowance Amount on the date of delivery of the Initial Closing Statement (as defined herein), Beeville shall take or cause to be taken all action necessary to increase the allowance for loan losses to an amount equal to the Minimum Allowance Amount as of the date of delivery of the Final Closing Statement and any such increase shall be accounted for in the calculation of Transaction Costs for purposes of Section 2.2(c).

Section 5.9    Third-Party Consents. Beeville shall use Commercially Reasonable Efforts, and Spirit shall reasonably cooperate with Beeville at Beeville’s request, to provide all required notices and obtain all consents, approvals, authorizations, waivers or similar affirmations described in Section 3.4(b) of the Beeville Disclosure Schedules.

Section 5.10    Coordination; Integration.

(a)    The senior officers of Beeville and Beeville Bank agree to meet with senior officers of Spirit and Spirit Bank, on a semi-monthly basis or as reasonably requested by Spirit or Beeville, relating to the development, coordination and implementation of the post-Merger operating and integration plans of Spirit Bank, as the resulting institution in the Bank Merger and to otherwise review the financial and operational affairs of Beeville and Beeville Bank; provided, that Spirit and Spirit Bank shall have no right to review confidential supervisory information (as such term is defined in 12 C.F.R. § 261.2) of Beeville or Beeville Bank, and to the extent permitted by applicable law, each of Beeville and Beeville Bank agrees to give reasonable consideration to Spirit’s input on such matters, consistent with this Section 5.10, with the understanding that Spirit shall in no event be permitted to exercise control of Beeville or Beeville Bank prior to the Effective Time and, except as specifically provided under this Agreement, Beeville and Beeville Bank shall have no obligation to act in accordance with Spirit’s input.

(b)    Commencing after the date of this Agreement, Beeville shall provide Spirit with real time access to a data share file portal (the “Loan Portal”), which is updated weekly and used by the senior loan officers and members of Beeville Bank’s Loan Committee (collectively, the “Beeville Loan Representatives”). The Loan Portal contains all documents, reports and other materials prepared for and/or provided to Beeville Loan Representatives, including, but not limited to, summaries of all loans, loan participations, other extensions of credit and charge-offs approved or requested in a given week and certain documents related thereto.

(c)    Commencing after the date of this Agreement and to the extent permitted by applicable law, Spirit, Spirit Bank, Beeville and Beeville Bank shall use their Commercially Reasonable Efforts to plan the integration of Beeville and Beeville Bank with the businesses of Spirit and its Affiliates to be effective as much as practicable as of the Closing Date; provided, however, that in no event shall Spirit or its Affiliates be entitled to control Beeville or Beeville Bank prior to the Effective Time. Without limiting the generality of the foregoing, from the date of this Agreement through the Effective Time and consistent with the performance of their day-to-day operations and the continuous operation of Beeville and Beeville Bank in the ordinary course of business, Beeville’s and Beeville Bank’s employees and officers shall use their Commercially Reasonable Efforts to provide support, including support from Beeville’s and Beeville Bank’s outside contractors, and to assist Spirit in performing all tasks, including equipment installation, reasonably required to result in a successful integration at the Closing; provided, however, that no integration shall take place prior to the Closing. Spirit shall provide such assistance of its personnel as Beeville and Beeville Bank shall request to permit Beeville and Beeville Bank to comply with their obligations under this Section 5.10.

Section 5.11    Environmental Investigation; Rights to Terminate Agreement.

(a)    Spirit and its consultants, agents and representatives shall have the right to the same extent that Beeville or Beeville Bank has such right (at Spirit’s cost and expense), but not the obligation or responsibility, to inspect any Beeville or Beeville Bank property, including conducting asbestos surveys and

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sampling, environmental assessments and investigation, and other non-invasive or non-destructive environmental surveys and analyses (“Environmental Inspections”) at any time on or prior to forty-five (45) days after the date of this Agreement. If, as a result of any such Environmental Inspection, further investigation (“Secondary Investigation”) including test borings, soil, water, asbestos or other sampling, is deemed desirable by Spirit, Spirit shall (i) notify Beeville of any property for which it intends to conduct such a Secondary Investigation and the reasons for such Secondary Investigation, (ii) submit a work plan to Beeville for such Secondary Investigation, for which Spirit agrees to afford Beeville the ability to comment on and Spirit agrees to reasonably consider all such comments (and negotiate in good faith any such comments), and (iii) conclude such Secondary Investigation on or prior to sixty (60) days after the date of receipt of Beeville’s comments. Spirit shall give reasonable notice to Beeville of such Secondary Investigations, and Beeville may place reasonable restrictions on the time and place at which such Secondary Investigations may be carried out.

(b)    Beeville agrees to indemnify and hold harmless Spirit for any claims for damage to property, or injury or death to persons, made as a result of any Environmental Inspection or Secondary Investigation conducted by Spirit or its agents, representatives or contractors to the extent attributable to the gross negligence or willful misconduct of Beeville or its agents, representatives or contractors. Spirit agrees to indemnify and hold harmless Beeville for any claims for damage to property, or injury or death to persons made as a result of any Environmental Inspection or Secondary Investigation conducted by Spirit or its agents, representatives or contractors, to the extent attributable to the gross negligence or willful misconduct of Spirit or its agents, representatives or contractors in performing any Environmental Inspection or Secondary Investigation. If the Closing does not occur, the foregoing indemnities shall survive the termination of this Agreement. Spirit shall not have any Liability or responsibility of any nature whatsoever for the results, conclusions or other findings related to any Environmental Inspection, Secondary Investigation or other environmental survey. If this Agreement is terminated, then, except as otherwise required by law, reports to any Governmental Body of the results of any Environmental Inspection, Secondary Investigation or other environmental survey shall be made by Beeville in the exercise of its sole discretion and not by Spirit. Spirit shall make no such report prior to Closing unless required to do so by law, and in such case shall give Beeville reasonable prior written notice of Spirit’s intentions so as to enable Beeville to review and comment on such proposed report.

(c)    To the extent that Spirit identifies any past or present events, conditions or circumstances that would require further investigation, remediation or cleanup action under Environmental Laws, Beeville shall use all Commercially Reasonable Efforts to take and complete any such reporting, remediation or other response actions prior to Closing; provided, however, that, to the extent any such response actions have not been completed prior to Closing (“Unresolved Response Action”), Beeville shall include the after-tax amount of the costs reasonably expected to be incurred by the Continuing Corporation on or after the Closing Date, as determined by an independent third party with recognized expertise in environmental clean-up matters, to fully complete all Unresolved Response Actions in determining its Transaction Costs pursuant to
Section 2.2(c).

(d)    Spirit shall have the right to terminate this Agreement within ninety (90) days after the date of this Agreement if (i) the results of such Environmental Inspection, Secondary Investigation or other environmental survey are disapproved by Spirit because the Environmental Inspection, Secondary Investigation or other environmental survey identifies violations or potential violations of Environmental Laws that are reasonably likely to result in a Material Adverse Effect on Beeville; (ii) any past or present events, conditions or circumstances that would reasonably be expected to require further investigation, remedial or cleanup action under Environmental Laws, including, without limitation, an Environmental Inspection, Secondary Investigation or other environmental survey identifying the presence of any asbestos-containing material or mold in, on or under any Beeville Real Property, involving an expenditure reasonably expected by Spirit to exceed $1,000,000 or that is reasonably likely to have a Material Adverse Effect on Beeville or Beeville Bank; or (iii) the Environmental Inspection, Secondary Investigation or other environmental survey identifies the presence of any underground or above ground storage tank in, on or

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under any Beeville Real Property that is not shown to be in compliance with all Environmental Laws applicable to such tank, or that has had a release of petroleum or some other Hazardous Materials that has not been remediated in accordance with applicable Environmental Law. In the event Spirit terminates this Agreement or elects not to proceed to Closing pursuant to this Section 5.11(c), if Beeville reimburses Spirit for the costs of preparing any Environmental Inspections, Spirit promptly shall deliver to Beeville copies of any environmental report, engineering report, or property condition report prepared by Spirit or any third party with respect to any Beeville Real Property. Any results or findings of any Environmental Inspections shall not be disclosed by Spirit to any third party not affiliated with Spirit, unless Spirit is required by law to disclose such information.

(e)    Beeville agrees to make available upon request to Spirit and its consultants, agents and representatives all documents and other materials relating to environmental conditions of any Beeville Real Property including the results of other environmental inspections and surveys to the extent such documents are in the possession of Beeville. Beeville also agrees that all engineers and consultants who prepared or furnished such reports may discuss such reports and information with Spirit and, at Spirit’s cost and expense, shall be entitled to certify the same in favor of Spirit and its consultants, agents and representatives and make all other data available to Spirit and its consultants, agents and representatives.

Section 5.12    Bank Merger. Prior to the Effective Time, Beeville shall cause Beeville Bank to cooperate with Spirit and Spirit Bank as necessary in conjunction with all approvals, filings, and other steps necessary to cause the consummation of the Bank Merger after the Effective Time and after the Merger.

Section 5.13    Financial Statements. The consolidated balance sheets as of future dates and the related statements of income, changes in shareholders’ equity and cash flows of Beeville for the periods then ended, which may be provided by Beeville to Spirit subsequent to the date of this Agreement, shall be prepared from the books and records of Beeville and its Subsidiaries and shall fairly present, in all material respects, the consolidated financial position, results of operations, shareholders’ equity and cash flows of Beeville at the dates and for the periods indicated in conformity with GAAP applied on a consistent basis throughout the periods indicated, except that unaudited financial statements may (a) omit the footnote disclosure required by GAAP and (b) be subject to normal year-end audit adjustments required by GAAP. The Consolidated Reports of Condition and Income filed by Beeville Bank subsequent to the date of this Agreement shall fairly present the financial position of Beeville Bank and the results of its operations at the dates and for the periods indicated in compliance with the rules and regulations of applicable federal and state banking authorities.

Section 5.14    Employee Benefit Plans. To the extent requested by Spirit, Beeville or its appropriate Subsidiary shall execute and deliver such instruments and take such other actions as Spirit may reasonably require in order to cause the amendment or termination of any Beeville Employee Plan on terms satisfactory to Spirit and in accordance with applicable law and effective prior to the Closing Date, except that the winding up of any such plan may be completed following the Closing Date.

Section 5.15    Change in Control Payments. Beeville shall, and shall cause Beeville Bank to, take all necessary actions to ensure that no payment set forth on Section 3.22(f) of Beeville Disclosure Schedules would constitute an “excess parachute payment” within the meaning of Section 280G of the Code (or any corresponding or similar provision of state, local or foreign Tax law), and be subject to the excise tax imposed by Section 4999 of the Code.

Section 5.16    Indemnification of Beeville Advisory Fees. Beeville shall indemnify and hold harmless Spirit, its Subsidiaries and any of its or their respective officers, directors or employees against any costs or expenses (including reasonable attorneys’ fees), judgments, fines, losses, claims, damages or Liabilities incurred in connection with any claim, action, suit, proceeding or investigation, related to or arising out of the Beeville Advisory Fees or any other Liability for brokerage, financial advisory, investment banking or other similar fees or commissions incurred by Beeville, any of its Subsidiaries or any of its or their respective officers, directors or employees in connection with this Agreement and the transactions contemplated hereby.

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Section 5.17    Regulatory Matters. Beeville shall and shall cause Beeville Bank to take all necessary actions to address and remediate any findings of or requests, if any, made by a Governmental Body of Beeville or Beeville Bank prior to Closing, or if not possible to address and remediate such findings or requests prior to Closing, Beeville shall accrue an amount sufficient to cover expenses reasonably required by Spirit to timely remediate after the Merger.

ARTICLE VI.

COVENANTS OF SPIRIT

Spirit covenants and agrees with Beeville as follows:

Section 6.1    Regulatory Filings; Efforts. Within forty-five (45) calendar days following the date of this Agreement, Spirit shall prepare and file, or shall cause to be prepared and filed, all necessary applications or other documentation with the TDSML, the Federal Reserve Board, and any other appropriate Governmental Bodies having jurisdiction over the transactions contemplated by this Agreement, including the Bank Merger. Prior to filing such applications, Spirit will provide Beeville drafts of the non-confidential portions of such applications and incorporate Beeville’s reasonable comments to such applications. Spirit shall take all reasonable action to aid and assist in the consummation of the Merger, and shall use Commercially Reasonable Efforts to take or cause to be taken all other actions necessary, proper or advisable to consummate the transactions contemplated by this Agreement, including such actions which are necessary, proper or advisable in connection with filing applications and registration statements with, or obtaining approvals from, all Governmental Bodies having jurisdiction over the transactions contemplated by this Agreement and the Merger. Spirit shall provide Beeville with copies of all such regulatory filings and all correspondence with Governmental Bodies in connection with the Merger for which confidential treatment has not been requested. Spirit shall pay, or shall cause to be paid, any applicable fees and expenses incurred by it or any of its Subsidiaries in connection with the preparation and filing of such regulatory applications.

Section 6.2    Registration Statement.

(a)    Within seventy-five (75) calendar days following the date of this Agreement, Spirit shall prepare and file the Registration Statement and any other applicable documents, including the notice, proxy statement and prospectus and other proxy solicitation materials of Beeville constituting a part thereof (the “Proxy Statement”), relating to the shares of Spirit Common Stock to be delivered to the shareholders of Beeville pursuant to this Agreement. Each of Spirit and Beeville shall use its Commercially Reasonable Efforts to have the Registration Statement declared effective under the Securities Act as promptly as practicable after such filing and to maintain such effectiveness for as long as necessary to consummate the Merger and the other transactions contemplated by this Agreement. Beeville and its counsel shall be given the opportunity to participate in the preparation of the Registration Statement and shall have the right to approve the content of the Registration Statement with respect to information about Beeville and the meeting of Beeville’s shareholders. At the time the Registration Statement becomes effective, the Registration Statement shall comply in all material respects with the provisions of the Securities Act and the published rules and regulations thereunder.

(b)    Upon the Registration Statement being declared effective, Beeville shall thereafter mail or deliver the Proxy Statement to its shareholders. Spirit shall also use its commercially reasonable best efforts to obtain all necessary state securities law or “Blue Sky” permits and approvals required to carry out the transactions contemplated by this Agreement, and Beeville shall furnish all information concerning Beeville and the holders of Beeville Stock as may be reasonably requested in connection with any such action. If at any time prior to the Effective Time any event occurs or information relating to Beeville or Spirit, or any of their respective affiliates, directors or officers, should be discovered by Beeville or Spirit that should be set forth in an amendment or supplement to either the Registration Statement or the Proxy Statement, so that either such document would not include any misstatement of a material fact or omit to state any material

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fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, the party that discovers such information shall promptly notify the other party hereto and an appropriate amendment or supplement describing such information shall be promptly filed with the SEC and, to the extent required by applicable law, disseminated to Beeville’s shareholders.

(c)    None of the information relating to Spirit and its Subsidiaries that is provided by Spirit for inclusion in (i) the Proxy Statement, any filings or approvals under applicable federal or state banking laws or regulations or state securities laws, or any filing pursuant to Rule 165 or Rule 425 under the Securities Act will, at the time of mailing the Proxy Statement to Beeville’s shareholders or at the Effective Time, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they are made, not misleading, and (ii) the Registration Statement will, at the time the Registration Statement and each amendment or supplement thereto, if any, becomes effective under the Securities Act, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading.

Section 6.3    NASDAQ Listing. Spirit shall file all documents required to be filed to have the shares of Spirit Common Stock to be issued pursuant to this Agreement included for listing on NASDAQ and use its Commercially Reasonable Efforts to effect said listing.

Section 6.4    Affirmative Covenants. Except as otherwise permitted or required by this Agreement, from the date of this Agreement until the Effective Time, Spirit shall and shall cause each of its Subsidiaries to (a) maintain its corporate existence in good standing; (b) maintain the general character of its business and conduct its business in its ordinary and usual manner; (c) extend credit only in accordance with its existing lending policies and practices; and (d) use Commercially Reasonable Efforts to (i) preserve intact its present business organizations, (ii) keep available the services of its present executive officers and directors and (iii) preserve its relationships and goodwill with customers and advantageous business relationships.

Section 6.5    Negative Covenants. Spirit shall not, nor shall it permit any of its Subsidiaries to, (a) amend its Organizational Documents in a manner that would adversely affect Beeville, (b) take, or knowingly fail to take, any action that would reasonably be expected to prevent the Merger or the Bank Merger from qualifying as a “reorganization” under Section 368(a) of the Code, (c) take any action that, to the knowledge of Spirit, would adversely affect or delay (i) Spirit’s ability to obtain the necessary approvals of any Governmental Body required for the consummation of the transactions contemplated hereby or (ii) Spirit’s ability to perform its obligations under this Agreement or to consummate the transactions contemplated hereby, or (d) agree or commit to do any of the foregoing.

Section 6.6    Employee Matters.

(a)    Each employee of Beeville and its Subsidiaries who remains in the active employment of Spirit or its Subsidiaries after the Closing Date (the “Beeville Employees”) will be entitled to participate as an employee in the employee benefit plans and programs maintained for employees of Spirit and Spirit Bank with credit for prior service with Beeville or any of its Subsidiaries for all purposes under the employee welfare benefit plans and other employee benefit plans and programs (including any severance programs but excluding vesting requirements under stock incentive plans and benefits accrued under any retirement plans) sponsored by Spirit or Spirit Bank in which such Beeville Employee becomes eligible to participate from and after the Closing Date, to the extent such service was credited under a comparable Beeville Employee Plan immediately prior to the Closing, to the extent permitted by such Spirit plans and applicable law and to the extent that such service crediting will not result in any duplication of benefits for the same period of service. To the extent permitted by such Spirit plans and applicable law, any eligibility waiting period and pre-existing condition exclusion applicable to such plans and programs shall be waived with respect to each Beeville Employee and their eligible dependents. To the extent permitted by the applicable Spirit plans and applicable law, Spirit further agrees to credit each Beeville Employee and his or her eligible dependents for

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the year during which coverage under Spirit’s group health plan begins, with any deductibles, co-pays or out-of-pocket payments already incurred by such Beeville Employee during such year under Beeville’s group health plan. For purposes of determining Beeville Employee’s benefits for the calendar year in which the Merger occurs under Spirit’s vacation program, any vacation taken by a Beeville Employee immediately preceding the Closing Date for the calendar year in which the Merger occurs shall be deducted from the total Spirit vacation benefit available to such Beeville Employee for such calendar year.

(b)    The provisions of this Section 6.6 are for the sole benefit of the parties and nothing herein, expressed or implied, is intended or will be construed to confer upon or give to any person (including, for the avoidance of doubt, any Beeville Employee or other current or former employee of Beeville or any of its Subsidiaries), other than the parties and their respective permitted successors and assigns, any legal or equitable or other rights or remedies (including with respect to the matters provided for in this Section 6.6) under or by reason of any provision of this Agreement. Nothing in this Section 6.6 amends, or will be deemed to amend (or prevent the amendment or termination of), any Beeville Employee Plan or any employee benefit plan of Spirit or any of its Affiliates. Spirit and its Affiliates shall have no obligation to continue to employ or retain the services of any Beeville Employee for any period of time following the Effective Time and Spirit and its Affiliates shall be entitled to modify any compensation or benefits provided to, and any other terms or conditions of employment of, any such employees in its absolute discretion.

Section 6.7    Financial Statements. The consolidated balance sheets as of future dates and the related statements of income, comprehensive income, shareholders’ equity and cash flows of Spirit for the periods then ended, which may be filed by Spirit with the SEC subsequent to the date of this Agreement, shall be prepared from the books and records of Spirit and its Subsidiaries and shall fairly present, in all material respects, the consolidated financial position, results of operations, shareholders’ equity and cash flows of Spirit at the dates and for the periods indicated in conformity with GAAP applied on a consistent basis throughout the periods indicated, except that unaudited financial statements may (a) omit the footnote disclosure required by GAAP and (b) be subject to normal year-end audit adjustments required by GAAP.

Section 6.8    Issuance of Spirit Common Stock; Stock Reserves. The shares of Spirit Common Stock to be issued by Spirit to the shareholders of Beeville pursuant to this Agreement will, on the issuance and delivery to such shareholders pursuant to this Agreement, be duly authorized, validly issued, fully paid and nonassessable. The shares of Spirit Common Stock to be issued to the shareholders of Beeville pursuant to this Agreement are and shall be free of any preemptive rights of the shareholders of Spirit or any other Person. Spirit agrees at all times from the date of this Agreement until the Merger Consideration has been paid in full to reserve a sufficient number of shares of Spirit Common Stock to fulfill its obligations under this Agreement.

Section 6.9    Director and Officer Indemnification.

(a)    For a period of four (4) years after the date of this Agreement, and subject to the limitations contained in applicable Federal Reserve Board and FDIC regulations and to any limitations contained in the Organizational Documents of Beeville and each of its Subsidiaries, Spirit shall indemnify and hold harmless each present director and officer of Beeville or Beeville Bank, as applicable, determined as of the Effective Time (each, an “Indemnified Party”) against any costs or expenses (including reasonable attorneys’ fees), judgments, fines, losses, claims, damages or liabilities incurred in connection with any claim, action, suit, proceeding or investigation, whether civil, criminal, administrative or investigative, arising out of matters existing or occurring at or before the Effective Time, whether asserted or claimed before, at or after the Effective Time, arising in whole or in part out of or pertaining to the fact that he or she was acting in his or her capacity as a director or officer of Beeville or any of its Subsidiaries to the fullest extent that the Indemnified Party would be entitled under the Organizational Documents, as applicable, in each case as in effect on the date of this Agreement and to the extent permitted by applicable law.

(b)    Any Indemnified Party wishing to claim indemnification under this Section 6.9, upon learning of any such claim, action, suit, proceeding or investigation, is to promptly notify Spirit, but the failure to so

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notify will not relieve Spirit of any liability it may have to the Indemnified Party to the extent such failure does not prejudice Spirit. In any such claim, action, suit, proceeding or investigation (whether arising before or after the Effective Time), (i) Spirit will have the right to assume the defense thereof and bear the costs incurred in connection therewith and Spirit will not be liable to an Indemnified Party for any legal expenses of other counsel or any other expenses subsequently incurred by an Indemnified Party in connection with the defense thereof, except that if Spirit elects not to assume such defense or counsel for the Indemnified Party advises that there are issues which raise conflicts of interest between Spirit and the Indemnified Party, the Indemnified Party may retain counsel reasonably satisfactory to Spirit, and Spirit shall promptly pay the reasonable fees and expenses of such counsel for the Indemnified Party as any such fees and expenses are incurred by such Indemnified Party (which may not exceed one firm in any jurisdiction), provided that the Indemnified Party for whom fees and expenses are to be paid provides a signed written undertaking to repay such amounts if it is ultimately determined by a court of competent jurisdiction that such Indemnified Party is not entitled to indemnification under applicable laws or regulations, (ii) the Indemnified Party shall cooperate in the defense of any such matter, (iii) Spirit will not be liable for any settlement effected without its prior written consent and (iv) Spirit will have no obligation hereunder if indemnification of an Indemnified Party in the manner contemplated hereby is prohibited by applicable laws and regulations.

(c)    If Spirit fails promptly to pay the amounts due pursuant to this Section 6.9, and, in order to obtain such payment, an Indemnified Party commences a Proceeding which results in a judgment against Spirit for failure to provide indemnification, Spirit shall pay the costs and expenses of the Indemnified Party (including attorneys’ fees and expenses) in connection with such Proceeding. Furthermore, if Spirit, or any of its successors or assigns, shall consolidate with or merge into any other entity and shall not be the continuing or surviving entity of such consolidation or merger or shall transfer all or substantially all of its assets to any other entity, then and in each case, proper provision shall be made so that the successors and assigns of Spirit, or the surviving company shall assume the obligations set forth in this Section 6.9 prior to or simultaneously with the consummation of such transaction.

Section 6.10    Director Nomination.

(a)    Contemporaneously with Closing, and subject to the reasonable satisfaction of the fiduciary duties of the board of directors of Spirit and all other legal and regulatory requirements regarding service and election or appointment as a director of Spirit, Spirit shall appoint Allen C. Jones, IV as a director of Spirit, and at the 2019 annual meeting of shareholders, Spirit shall nominate him, or cause him to be nominated, and, subject to the reasonable satisfaction of the fiduciary duties of the board of directors of Spirit and all other legal and regulatory requirements regarding service and election or appointment as a director of Spirit, use Commercially Reasonable Efforts to ensure that Allen C. Jones, IV is elected at such annual meeting.

(b)    Contemporaneously with Closing, and subject to the satisfaction of the fiduciary duties of the board of directors of Spirit Bank and all other legal and regulatory requirements regarding service and election or appointment as a director of Spirit Bank, Spirit, as sole shareholder of Spirit Bank, shall cause Spirit Bank to appoint each of Brannon Brooke and George G. Latcham (a) as a director of Spirit Bank in connection with and to commence serving immediately following the Closing and (b) as a director of Spirit Bank at the next following general election of Spirit Bank directors that follows the Closing Date.

ARTICLE VII.

MUTUAL COVENANTS OF SPIRIT AND BEEVILLE

Section 7.1    Notification; Updated Disclosure Schedules.

(a)    Beeville shall give prompt written notice to Spirit, and Spirit shall give prompt written notice to Beeville, of (i) any representation or warranty made by it in this Agreement becoming untrue or inaccurate in any material respect (without regard to any materiality qualifier contained therein), including as a result

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of any change in the Beeville Disclosure Schedules or the Spirit Disclosure Schedules, respectively, or (ii) the failure by it to comply with or satisfy any covenant, condition or agreement to be complied with or satisfied by it under this Agreement; provided, however, that no such notification shall affect the representations, warranties, covenants or agreements of the parties or the conditions to the obligations of the parties under this Agreement; and provided further, however, that if such notification under clause (i) relates to any matter which arises for the first time after the date of this Agreement, then the other party may only terminate this Agreement if such matter would cause the condition set forth in Section 10.1(c), with respect to Beeville, and in Section 10.2(c), with respect to Spirit, incapable of being satisfied.

(b)    At least ten (10) Business Days prior to the Closing Date, Beeville shall provide Spirit with supplemental Beeville Disclosure Schedules and Spirit shall provide Beeville with an updated Spirit Disclosure Schedules reflecting any material changes to the Beeville Disclosure Schedules and the Spirit Disclosure Schedules, respectively, between the date of this Agreement and the date thereof. Delivery of such supplemental Beeville Disclosure Schedules and updated Spirit Disclosure Schedules shall not cure a breach or modify a representation or warranty of this Agreement.

Section 7.2    Confidentiality. Spirit and Beeville agree that terms of that Non-Disclosure and Confidentiality Agreement, dated as of May 7, 2018, by and between Spirit and Beeville (the “Confidentiality Agreement”) are incorporated into this Agreement by reference and shall continue in full force and effect and shall be binding on Spirit and Beeville and their respective affiliates, officers, directors, employees and representatives as if parties thereto, in accordance with the terms thereof.

Section 7.3    Publicity. Except as otherwise required by applicable law or securities exchange rules or in connection with the regulatory application process, as long as this Agreement is in effect, neither Spirit nor Beeville shall, nor shall they permit any of their officers, directors or representatives to, issue or cause the publication of any press release or public announcement with respect to, or otherwise make any public announcement concerning, the transactions contemplated by this Agreement without the consent of the other party, which consent shall not be unreasonably withheld or delayed.

Section 7.4    Certain Tax Matters.

(a)    Each of Beeville and Spirit shall take any actions required to cause each of (i) the Merger and (ii) the Bank Merger to qualify as a reorganization within the meaning of Section 368(a) of the Code, including by reporting consistently for all U.S. federal, state, and local income Tax or other purposes. Without limiting the generality of the foregoing, none of Beeville or Spirit shall take any action, or fail to take any action, that would reasonably be expected to cause the Merger or the Bank Merger to fail to qualify as a reorganization within the meaning of Section 368(a) of the Code.

(b)    Spirit shall deliver to Hunton Andrews Kurth LLP (“Hunton”) and Fenimore Kay Harrison & Ford, LLP (“FKHF”) an officer’s certificate, dated as of the Closing Date, and signed by an officer of Spirit, containing representations of Spirit as shall be reasonably necessary or appropriate to enable Hunton and FKHF to render the opinions described in Section 10.3(c), on the Closing Date (an “Spirit Tax Representation Letter”). Spirit shall not take or cause to be taken any action that would cause to be untrue (or fail to take or cause not to be taken any action that would cause to be untrue) any of the certifications and representations included in the Spirit Tax Representation Letter.

(c)    Beeville shall deliver to Hunton and FKHF an officer’s certificate, dated as of the Closing Date, and signed by an officer of Beeville, containing representations of Beeville as shall be reasonably necessary or appropriate to enable Hunton and FKHF to render the opinions described in Section 10.3(c) on the Closing Date, (a “Beeville Tax Representation Letter”). Beeville shall not take or cause to be taken any action that would cause to be untrue (or fail to take or cause not to be taken any action that would cause to be untrue) any of the certifications and representations included in Beeville Tax Representation Letter.

(d)    Without limiting the provisions of this Section 7.4, Beeville and Spirit shall comply with the recordkeeping and information reporting requirements set forth in Treasury Regulations § 1.368-3.

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Section 7.5    Closing Statements. At least ten (10) Business Days prior to the Closing Date, Beeville shall deliver to Spirit a statement (the “Initial Closing Statement”) setting forth the Final Transaction Costs, with all necessary and appropriate supporting information and documentation that is reasonably satisfactory to Spirit. Beeville shall also update the Initial Closing Statement following its delivery, if necessary, to reflect any changes therein. In the event Spirit disputes any item in the Initial Closing Statement, the parties shall confer in good faith to resolve any such dispute. The term “Final Closing Statement” shall mean the Initial Closing Statement, as it may be adjusted pursuant to this Section 7.5 to reflect any changes or resolve any disputes, as reasonably agreed upon by the parties at least two (2) Business Days prior to the Closing Date.

Section 7.6    Efforts to Consummate. Subject to the terms and conditions set forth in this Agreement, Spirit and Beeville shall, and shall cause their respective Subsidiaries to, use Commercially Reasonable Efforts to take, or cause to be taken, all actions, and to do, or cause to be done, and to assist and cooperate with the other party in doing, all things reasonably necessary, proper or advisable to consummate the transactions contemplated by this Agreement, including, without limitation, (a) the satisfaction of the conditions precedent to the obligations of Beeville (in the case of Spirit) and Spirit (in the case of Beeville) to the Merger and the Bank Merger, (ii) the obtaining of all necessary consents or waivers from third parties, (iii) the obtaining of all necessary consents, approvals and authorizations of, or exemptions by, any Governmental Body, and (iv) the execution and delivery of any additional instruments necessary to consummate the Merger or the Bank Merger and to fully carry out the purposes of this Agreement.

ARTICLE VIII.

CLOSING

Section 8.1    Closing. The closing of the transactions contemplated by this Agreement (“Closing”) shall take place remotely via the exchange of documents and signatures or at such location mutually acceptable to the parties hereto. The Closing shall take place as soon as practicable once the conditions of Article X have been satisfied or waived but in any event within the thirty (30) day period commencing on the later of the following dates and in no event before April 1, 2019, unless the parties otherwise agree (“Closing Date”):

(a)    the receipt of the Beeville Shareholder Approval and the last Regulatory Approval and the expiration of any statutory or regulatory waiting period which is necessary to effect the Merger and the Bank Merger; and

(b)    if the transactions contemplated by this Agreement are being contested in any Proceeding and Spirit or Beeville, pursuant to Section 10.3(a), has elected to contest the same, then the date that such Proceeding has been brought to a conclusion favorable, in the reasonable judgment of each of Spirit and Beeville, to the consummation of the transactions contemplated herein, or such prior date as each of Spirit and Beeville shall elect whether or not such proceeding has been brought to a conclusion.

Section 8.2    Effective Time. Subject to the terms and upon satisfaction of all requirements of law and the conditions specified in this Agreement including, among other conditions, the receipt of the Beeville Shareholder Approval and the Regulatory Approvals, the Merger shall become effective, and the effective time of the Merger shall occur, at the date and time specified in the certificate of merger to be filed with the Secretary of State of the State of Texas (“Effective Time”).

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ARTICLE IX.

TERMINATION

Section 9.1    Termination.

(a) Notwithstanding any other provision of this Agreement, this Agreement may be terminated and the Merger contemplated hereby may be abandoned by action of the board of directors of Spirit or Beeville at any time prior to the Effective Time if:

(i)    any court of competent jurisdiction in the United States or other Governmental Body shall have issued an Order enjoining or otherwise prohibiting the Merger or the Bank Merger and such Order shall be final and non-appealable;

(ii)    any of the transactions contemplated by this Agreement are disapproved (or the applications or notices for which are suggested or recommended to be withdrawn) by any Governmental Body or other Person whose approval is required to consummate any of such transactions;

(iii)    the Effective Time has not occurred on or before the one hundred eightieth (180th) day following the date of this Agreement, unless one or more of the Regulatory Approvals has not been received on or before the 180th day after the date of this Agreement, in which case the Effective Time has not occurred on or before the two hundred fortieth (240th) day following the date of this Agreement, or such later date as has been approved in writing by the boards of directors of Spirit and Beeville; but the right to terminate under this Section 9.1(a)(iii) shall not be available to any party whose failure to fulfill any material obligation under this Agreement has been the cause of, or has resulted in, the failure of the Effective Time to occur on or before such applicable date; or

(iv)    the Beeville Shareholder Approval shall not have been obtained by reason of the failure to obtain the required vote at Beeville Shareholder Meeting.

(b)    This Agreement may be terminated at any time prior to the Effective Time by action of the board of directors of Beeville if Spirit shall fail to comply in any material respect with any of its covenants or agreements contained in this Agreement, or if any of the representations or warranties of Spirit contained herein shall be inaccurate in any material respect. If the board of directors of Beeville desires to terminate this Agreement because of an alleged breach or inaccuracy as provided in this Section 9.1(b), the board of directors must notify Spirit in writing of its intent to terminate stating the reason therefor. Spirit shall have fifteen (15) days from the receipt of such notice to cure the alleged breach or inaccuracy, if the breach or inaccuracy is capable of being cured.

(c)    This Agreement may be terminated at any time prior to the Effective Time by action of the board of directors of Spirit if (i) Beeville fails to comply in any material respect with any of its covenants or agreements contained in this Agreement, or if any of the representations or warranties of Beeville contained herein shall be inaccurate in any material respect, (ii) any approval required to be obtained from any regulatory authority or agency is obtained subject to restrictions or conditions on the operations of Beeville, Beeville Bank, Spirit or Spirit Bank that, in the reasonable judgment of Spirit, materially and adversely impairs the value of Beeville and its Subsidiaries, taken as a whole, to Spirit, that materially and adversely impairs the economic or business benefits of the transactions contemplated by this Agreement to Spirit or otherwise would, in the reasonable judgment of Spirit, be so burdensome as to render inadvisable the consummation of the transactions contemplated by this Agreement, or (iii) any of the conditions set forth in Section 5.11(d) shall have occurred. In the event the board of directors of Spirit desires to terminate this Agreement because of an alleged breach or inaccuracy as provided in clause (i) of this Section 9.1(c), the board of directors must notify Beeville in writing of its intent to terminate stating the reason therefor. Beeville shall have fifteen (15) days from the receipt of such notice to cure the alleged breach or inaccuracy, if the breach or inaccuracy is capable of being cured.

(d)    This Agreement may be terminated at any time prior to the Effective Time upon the mutual written consent of Spirit and Beeville and the approval of such action by their respective boards of directors.

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(e)    This Agreement may be terminated at any time before the Beeville Shareholder Approval by the board of directors of Beeville if before such time, Beeville receives an unsolicited bona fide Acquisition Proposal and the board of directors of Beeville determines in its good faith judgment (after consultation with the Financial Advisor and Beeville’s outside legal counsel), that (A) such Acquisition Proposal (if consummated pursuant to its terms and after giving effect to the payment of the Termination Fee (as defined herein)) is a Superior Proposal and (B) the failure to terminate this Agreement and accept such Superior Proposal would cause or would be reasonably likely to cause it to violate its fiduciary duties under applicable law; provided, however, that Beeville may not terminate this Agreement under this Section 9.1(e) unless:

(i)    Beeville has provided prior written notice to Spirit at least five (5) Business Days in advance (the “Notice Period”) of taking such action, which notice shall advise Spirit that the board of directors of Beeville has received a Superior Proposal and specify the material terms and conditions of such Superior Proposal (including the identity of the Person or “Group” (as such term is defined in Section 13(d) under the Exchange Act) making the Superior Proposal); and

(ii)    during the Notice Period, Beeville shall have, and shall have caused the Financial Advisor and Beeville’s outside legal counsel to, negotiate with Spirit in good faith (to the extent Spirit desires to so negotiate) to make such adjustments in the terms and conditions of this Agreement so that such Superior Proposal ceases to constitute a Superior Proposal, and the board of directors of Beeville shall have considered such adjustments in the terms and conditions of this Agreement resulting from such negotiations and concluded in good faith based upon consultations with the Financial Advisor and the advice of Beeville’s outside legal counsel that such Superior Proposal remains a Superior Proposal even after giving effect to the adjustments in the terms and conditions of this Agreement proposed by Spirit.

If during the Notice Period any revisions are made to the Superior Proposal and the board of directors of Beeville in its good faith judgment determines such revisions are material, Beeville shall deliver a new written notice to Spirit and shall comply with the requirements of this Section 9.1(e) with respect to such new written notice, except that the new Notice Period shall be three (3) Business Days. Termination under this Section 9.1(e) shall not be deemed effective until payment of the Termination Fee as required by Section 9.3.

(f)    This Agreement may be terminated at any time before the Closing by the board of directors of Spirit if (i) Beeville has breached the covenant contained in Section 5.5 in a manner adverse to Spirit; (ii) the board of directors of Beeville resolves to accept a Superior Proposal; or (iii) the board of directors of Beeville effects a Change in Recommendation.

(g)    This Agreement may be terminated at any time before the Closing by Beeville, if:

(i)    the Average Closing Price is less than $15.85; and

(ii)    the number obtained by dividing the Average Closing Price by $19.81 is less than the number obtained by dividing (A) the Final Index Price (as defined below) by (B) the Initial Index Price (as defined below) and subtracting 0.20 from such quotient; provided, however, that a termination by Beeville pursuant to this Section 9.1(g) will have no force and effect if Spirit agrees in writing (within two (2) Business Days after receipt of Beeville’s written notice of such termination) to increase (1) the Aggregate Cash Consideration and/or (2) the number of shares of Spirit Common Stock in the Aggregate Stock Consideration, such that the sum of any such additional cash consideration and the value of the Aggregate Stock Consideration is equal to $25,028,239 (valuing the Aggregate Stock Consideration based on the Average Closing Price). If within such two (2)-Business Day period, Spirit delivers written notice to Beeville that Spirit intends to proceed with the Merger by paying such additional consideration as contemplated by the preceding sentence, and notifies Beeville in writing of the revised Aggregate Stock Consideration, then no termination will occur pursuant to this Section 9.1(g), and this Agreement will remain in full force and effect in accordance with its terms

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(except that the Aggregate Stock Consideration will be modified in accordance with this Section 9.1(g)).

(iii)    For purposes of this Section 9.1(g), the following terms will have the meanings indicated below:

(1)    “Average Closing Price” means the average of the closing price per share of Spirit Common Stock on NASDAQ for the fifteen (15) consecutive trading days ending on and including the tenth (10th) trading day preceding the Closing Date.

(2)    “Final Index Price” means the average of the daily closing value of the Index for the fifteen (15) consecutive trading days ending on and including the fifth (5th) trading day preceding the Closing Date.

(3)    “Index” means the NASDAQ Bank Index.

(4)    “Initial Index Price” means the closing value of the Index on the date immediately prior to the date of this Agreement.

Section 9.2    Effect of Termination. Except as provided in Section 9.3, if this Agreement is terminated by either Spirit or Beeville as provided in Section 9.1, this Agreement shall become void and have no effect, without any liability on the part of any party or its directors, officers or shareholders, except that the provisions of Section 5.11, Section 7.2, this Section 9.2 and Section 11.5 shall survive termination of this Agreement. Nothing contained in this Section 9.2 shall relieve any party hereto of any liability for a breach of this Agreement.

Section 9.3    Termination Fee. To compensate Spirit for entering into this Agreement, taking actions to consummate the transactions contemplated hereunder and incurring the costs and expenses related thereto and other losses and expenses, including foregoing the pursuit of other opportunities by Spirit, Beeville and Spirit agree as follows:

(a)    Provided that Spirit is not in material breach of any covenant or obligation under this Agreement (which breach has not been cured within fifteen (15) days following receipt of written notice thereof by Beeville specifying in reasonable detail the basis of such alleged breach), if this Agreement is terminated by:

(i)    Beeville under the provisions of Section 9.1(e), then Beeville shall pay to Spirit in immediately available funds the sum of $2,500,000 (the “Termination Fee”);

(ii)    Spirit under the provisions of Section 9.1(f), then Beeville shall pay to Spirit the Termination Fee in immediately available funds;

(iii)    either Spirit or Beeville under the provisions of Section 9.1(a)(iii), if, at the time of termination, the Registration Statement has been declared effective for at least twenty-five (25) Business Days prior to such termination and Beeville shall have failed to call, give notice of, convene and hold Beeville Shareholder Meeting in accordance with Section 5.1, then Beeville shall pay to Spirit the Termination Fee in immediately available funds;

(iv)    either Spirit or Beeville under the provisions of Section 9.1(a)(iv), if, at the time of termination, there exists an Acquisition Proposal with respect to Beeville, then Beeville shall pay to Spirit the Termination Fee in immediately available funds; or

(v)    either Spirit or Beeville under the provisions of Section 9.1(a)(iii), if, at such time, the Beeville Shareholder Approval has not occurred and if, at the time of termination, there exists an Acquisition Proposal with respect to Beeville and within twelve (12) months of the termination of this Agreement, Beeville enters into an Acquisition Agreement with any Person with respect to such Acquisition Proposal, then Beeville shall pay to Spirit the Termination Fee in immediately available funds.

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(b)    The payment of the Termination Fee shall be Spirit’s sole and exclusive remedy with respect to termination of this Agreement as set forth in this Section 9.3. For the avoidance of doubt, in no event shall the Termination Fee under the circumstances described in this Section 9.3 be payable on more than one occasion.

(c)    Any payment required by this Section 9.3 shall become payable within two (2) Business Days after receipt by the non-terminating party of written notice of termination of this Agreement; provided, however, that if the payment of the Termination Fee is required pursuant to Section 9.3(a)(v) then such payment shall become payable on or before the second (2nd) Business Day following the execution by Beeville of an Acquisition Agreement.

ARTICLE X.

CONDITIONS PRECEDENT

Section 10.1    Conditions Precedent to Obligations of Spirit. The obligation of Spirit under this Agreement to consummate the Merger is subject to the satisfaction, at or prior to the Closing Date of the following conditions, which may be waived by Spirit in its sole discretion, to the extent permitted by applicable law:

(a)    Compliance with Representations and Warranties. (i) Each of the representations and warranties of Beeville set forth in Sections 3.1, 3.2, 3.3, 3.8, 3.32 and 3.33 shall be true and correct (other than inaccuracies that are de minimis in amount and effect) as of the date of this Agreement and as of the Closing Date as though made on and as of the Closing Date (except to the extent such representation or warranty is made specifically as of an earlier date, in which case as of such earlier date); (ii) each of the other representations and warranties made by Beeville in this Agreement shall be true and correct in all respects as of the date of this Agreement; provided, however, that Beeville may cure any such inaccurate representation or warranty covered by this clause (ii) by providing written notice to Spirit or taking lawful action to cure within thirty (30) days of Beeville having knowledge of such inaccuracy; and (iii) each of the representations and warranties made by Beeville in this Agreement, other than set forth in Sections 3.1, 3.2, 3.3, 3.8, 3.32 and 3.33, is true and correct in all material respects (except to the extent such representations and warranties are qualified by materiality or Material Adverse Effect, in which case such representations and warranties as so qualified are true and correct in all material respects) as of the Closing Date with the same force and effect as if such representations and warranties were made on and as of the Closing Date, (except to the extent such representation or warranty is made specifically as of an earlier date, in which case as of such earlier date). Spirit shall have received a certificate, executed by an appropriate representative of Beeville and dated as of the Closing Date, to the foregoing effect.

(b)    Performance of Obligations. Beeville shall have performed or complied in all material respects with all covenants and obligations required by this Agreement to be performed and complied with prior to or at the Closing. Spirit shall have received a certificate, executed by an appropriate representative of Beeville and dated as of the Closing Date, to the foregoing effect.

(c)    Absence of Material Adverse Change. No Material Adverse Effect on Beeville or Beeville Bank shall have occurred since the date of this Agreement.

(d)    Certain Agreements.

(i)    Each of the employment agreements entered into by those certain individuals listed on Section 10.1(d)(i) of the Beeville Disclosure Schedules (the “Employment Agreements”), shall remain in full force and effect as of the Effective Time.

(ii)    Each of the Director Support Agreements shall remain in full force and effect.

(iii)    Each agreement entered into by each director or officer of Beeville or Beeville Bank as a condition and inducement to Spirit’s willingness to enter into this Agreement, releasing Beeville and Beeville Bank from any and all claims by such directors and officers (except as described in such instrument), which shall each be in substantially the form attached hereto as Exhibit D, remain in full force and effect.

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(e)    Dissenters’ Rights. Holders of shares representing no more than five percent (5%) of the issued and outstanding Beeville Stock, in the aggregate, shall have demanded or shall be entitled to receive payment of the fair value of their shares as dissenting shareholders.

(f)    Consents and Approvals. The Required Consents shall have been obtained, and Spirit shall have received evidence thereof in form and substance reasonably satisfactory to Spirit and all applicable waiting periods shall have expired.

(g)    Outstanding Litigation. Beeville shall accrue for any reasonable costs and expenses, including legal fees and expenses and settlement costs, related to the outstanding Proceedings set forth in Section 3.5 of the Beeville Disclosure Schedules, as such schedule may be updated, as specified in such schedule, or if no such amount is specified, as jointly determined by Beeville and Spirit. No accrual will be required for any Proceeding that is settled or dismissed in any final, binding and non-appealable Proceeding after payment of all related fees, costs and expenses owed by Beeville or any of its Subsidiaries.

(h)    Termination of Beeville Employee Plans. Beeville shall have amended or terminated any Beeville Employee Plans as requested by Spirit in accordance with Section 5.14.

(i)    Other Documents. Beeville shall have delivered to Spirit all other instruments and documents which Spirit or its counsel may reasonably request to effectuate the transactions contemplated hereby.

Section 10.2    Conditions Precedent to Obligations of Beeville. The obligation of Beeville under this Agreement to consummate the Merger is subject to the satisfaction, at or prior to the Closing Date, of the following conditions, which may be waived by Beeville in its sole discretion, to the extent permitted by applicable law:

(a)    Compliance with Representations and Warranties. (i) Each of the representations and warranties of Spirit set forth in Sections 4.1, 4.2, 4.3, 4.9, 4.11 and 4.12 shall be true and correct (other than inaccuracies that are de minimis in amount and effect) as of the date of this Agreement and as of the Closing Date as though made on and as of the Closing Date (except to the extent such representation or warranty is made specifically as of an earlier date, in which case as of such earlier date); (ii) each of the other representations and warranties made by Spirit in this Agreement shall be true and correct in all respects as of the date of this Agreement; provided, however, that Spirit may cure any such inaccurate representation or warranty covered by this clause (ii) by providing written notice to Beeville or taking lawful action to cure within thirty (30) days of Spirit having knowledge of such inaccuracy; and (iii) each of the representations and warranties made by Spirit in this Agreement, other than set forth in Sections 4.1, 4.2, 4.3, 4.9, 4.11 and 4.12, is true and correct in all material respects (except to the extent such representations and warranties are qualified by materiality or Material Adverse Effect, in which case such representations and warranties as so qualified are true and correct in all material respects) as of the Closing Date with the same force and effect as if such representations and warranties were made on and as of the Closing Date, (except to the extent such representation or warranty is made specifically as of an earlier date, in which case as of such earlier date). Beeville shall have received a certificate, executed by an appropriate representative of Spirit and dated as of the Closing Date, to the foregoing effect.

(b)    Performance of Obligations. Spirit shall have performed or complied in all material respects with all covenants and obligations required by this Agreement to be performed and complied with prior to or at the Closing. Beeville shall have received a certificate, executed by an appropriate representative of Spirit and dated as of the Closing Date, to the foregoing effect.

(c)    Absence of Material Adverse Change. No Material Adverse Effect on Spirit or Spirit Bank shall have occurred since the date of this Agreement.

(d)    Consents and Approvals. The consents set forth in the Spirit Disclosure Schedules shall have been obtained, and Beeville shall have received evidence thereof in form and substance reasonably satisfactory to Beeville and all applicable waiting period shall have expired.

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Section 10.3    Conditions Precedent to Obligations of Spirit and Beeville. The respective obligations of Spirit and Beeville under this Agreement are subject to the satisfaction, at or prior to the Closing Date, of the following conditions which may be waived by Spirit and Beeville, respectively, in their sole discretion, to the extent permitted by applicable law:

(a)    Government Approvals. Spirit shall (i) have received the Regulatory Approvals, which approvals shall not impose any restrictions on the operations of Spirit or the Continuing Corporation that, in the reasonable judgment of Spirit, materially and adversely impairs the value of Beeville and its Subsidiaries, taken as a whole, to Spirit or that materially and adversely impairs the economic or business benefits of the transactions contemplated by this Agreement to Spirit or otherwise would, in the reasonable judgment of Spirit, be so burdensome as to render inadvisable the consummation of the transactions contemplated by this Agreement, and (ii) any statutory or regulatory waiting period necessary to effect the Merger and the transactions contemplated hereby, including the Bank Merger, shall have expired. Such approvals and the transactions contemplated hereby shall not have been contested by any Governmental Body or any third party (except shareholders asserting dissenters’ rights) by formal proceeding. It is understood that, if any such contest is brought by formal proceeding, Spirit or Beeville may, but shall not be obligated to, answer and defend such contest or otherwise pursue the Merger and the transactions contemplated hereby over such objection.

(b)    Shareholder Approval. The shareholders of Beeville shall have approved this Agreement and the transactions contemplated hereby by the requisite vote.

(c)    Tax Opinions. Beeville shall have received an opinion of FKHF, and Spirit shall have received an opinion of Hunton, in each case dated the Closing Date, to the effect that, based on the terms of this Agreement and on the basis of certain facts, representations and assumptions set forth in such opinion that the Merger will qualify as a reorganization under Section 368(a) of the Code. In rendering such opinion, such counsel may require and rely upon and may incorporate by reference representations and covenants, including (without limitation) those contained in the Spirit Tax Representation Letter and Beeville Tax Representation Letter.

(d)    No Adverse Action, Law or Order. No action having been taken, and no law, statute, rule, regulation or Order being promulgated, enacted, entered, enforced or deemed applicable to this Agreement or the transactions contemplated hereby by any federal, state or foreign government or Governmental Body or by any court, including the entry of a preliminary or permanent injunction, which, if successful, would (i) make this Agreement or any other agreement contemplated hereby, or the transactions contemplated hereby or thereby illegal, invalid or unenforceable, (ii) impose material limits on the ability of any party to this Agreement to complete this Agreement or any other agreement contemplated hereby, or the transactions contemplated hereby or thereby, or (iii) if this Agreement or any other agreement contemplated hereby, or the transactions contemplated hereby or thereby are completed, subject Beeville, Spirit or any of their Subsidiaries or any officer, director, shareholder or employee of Beeville, Spirit or their respective Subsidiaries to criminal or civil liability. Further, no action or Proceeding prior to any court or Governmental Body, by any government or Governmental Body or by any other Person is threatened, instituted or pending that would reasonably be expected to result in any of the consequences referred to in clauses (i) through (iii) above.

(e)    Registration of Spirit Common Stock. The Registration Statement covering the shares of Spirit Common Stock to be issued in the Merger shall have become effective under the Securities Act and no stop orders suspending such effectiveness shall be in effect, and no Proceeding by the SEC to suspend the effectiveness of the Registration Statement shall have been initiated or continuing, or have been threatened and be unresolved, and all necessary approvals under state’s securities laws relating to the issuance or trading of the Spirit Common Stock to be issued in the Merger shall have been received and such approval shall not have been withdrawn or revoked.

(f)    Listing of Spirit Common Stock. The shares of Spirit Common Stock to be delivered to the shareholders of Beeville pursuant to this Agreement shall have been authorized for listing on the NASDAQ.

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ARTICLE XI.

MISCELLANEOUS

Section 11.1    Certain Definitions. Except as otherwise provided herein, the capitalized terms set forth below shall have the following meanings:

(a)    “Acquisition Agreement” means any letter of intent, agreement in principle, memorandum of understanding, merger agreement, asset or share purchase agreement, share exchange agreement, option agreement or any similar agreement related to any Acquisition Proposal.

(b)    “Acquisition Proposal” means any bona fide proposal (whether communicated to Beeville or publicly announced to Beeville’s shareholders) by any Person (other than Spirit or any of its Affiliates) for an Acquisition Transaction (as defined herein) involving Beeville, any Subsidiary of Beeville or any future Subsidiary of Beeville, or any combination of such Subsidiaries, the assets of which constitute, or would constitute, twenty percent (20%) or more of the consolidated assets of Beeville as reflected on Beeville’s most recent consolidated statement of condition prepared in accordance with GAAP.

(c)    “Acquisition Transaction” means any transaction or series of related transactions (other than the transactions contemplated by this Agreement) involving: (i) any acquisition or purchase from Beeville by any Person or “Group” (as such term is defined in Section 13(d) under the Exchange Act), other than Spirit or any of its Affiliates, of twenty percent (20%) or more in interest of the total outstanding voting securities of Beeville or Beeville Bank, or any tender offer or exchange offer that if consummated would result in any Person or Group (other than Spirit or any of its Affiliates) beneficially owning twenty percent (20%) or more in interest of the total outstanding voting securities of Beeville or Beeville Bank, or any merger, consolidation, business combination or similar transaction involving Beeville or Beeville Bank pursuant to which the shareholders of Beeville immediately preceding such transaction hold less than eighty percent (80%) of the equity interests in the surviving or resulting entity (which includes the parent corporation of any constituent corporation to any such transaction) of such transaction; (ii) any sale or lease (other than in the ordinary course of business), or exchange, transfer, license, acquisition or disposition of twenty percent (20%) or more of the assets of Beeville or Beeville Bank; or (iii) any liquidation or dissolution of Beeville or Beeville Bank.

(d)    “Affiliate” means, with respect to any specified Person, a Person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, the Person specified, unless a different definition has been included in this Agreement for purposes of a particular provision hereof. For purposes of this definition, “control” (including the correlative terms “controlling,” “controlled by” and “under common control with”) means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting equity interest, by contract or otherwise.

(e)    “Affiliated Group” means any affiliated group within the meaning of Section 1504(a) of the Code.

(f)    “Borrower” means any Person (including any Affiliate, shareholder, member or partner of such Person) and any guarantor, surety, spouse, co-maker or co-obligor of any extension of credit to any Person;

(g)    “Business Day” means any day that is not a Saturday, a Sunday or other day on which banks are required or authorized by law to be closed in Conroe, Texas or Beeville, Texas.

(h)    “Commercially Reasonable Efforts” means the reasonable efforts that a reasonably prudent Person would use in similar circumstances to achieve such results as expeditiously as possible, provided that such Person is not required to expend funds or assume Liabilities beyond those that are reasonable in nature and amount in the context of the transactions contemplated by this Agreement.

(i)    “Controlled Group Liability” means any and all Liabilities (i) under Title IV of ERISA, (ii) under Section 302 of ERISA, (iii) under Sections 412 and 4971 of the Code, (iv) as a result of a failure to comply with the continuation coverage requirements of Section 601 et seq. of ERISA and Section 4980B of the Code or similar state law, and (v) under corresponding or similar provisions of foreign laws or regulations.

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(j)    “Environmental Laws,” as used in this Agreement, means all applicable federal, state or local statutes, laws, rules, regulations, ordinances or codes now in effect and in each case as amended to date and any controlling judicial or administrative interpretation thereof, including all common law theories (at law or in equity), any judicial or administrative order, consent decree, or judgment, relating to pollution, preservation, remediation or protection of the environment, natural resources, human health or safety, or Hazardous Materials, including the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, 42 U.S.C. § 9601, et seq.; the Hazardous Materials Transportation Authorization Act, as amended, 49 U.S.C. § 5101, et seq.; the Resource Conservation and Recovery Act of 1976, as amended, 42 U.S.C. § 6901, et seq.; the Federal Water Pollution Control Act, as amended, 33 U.S.C. § 1201, et seq.; the Toxic Substances Control Act, 15 U.S.C. § 2601, et seq.; the Clean Air Act, 42 U.S.C. § 7401, et seq.; and the Safe Drinking Water Act, 42 U.S.C. § 300f, et seq.

(k)    “ERISA Affiliates” means, with respect to any entity, trade or business, any other entity, trade or business that is a member of a group described in Sections 414(b), (c), (m) or (o) of the Code or Section 4001(b)(1) of ERISA that includes the first entity, trade or business, or that is a member of the same “controlled group” as the first entity, trade or business pursuant to Section 4001(a)(14) of ERISA.

(l)    “Governmental Body” means any supranational, national, federal, state, local, municipal, foreign or other government or quasi-governmental authority or any department, agency, commission, board, subdivision, bureau, agency, instrumentality, court or other tribunal of any of the foregoing.

(m)    “Hazardous Materials” includes, but is not limited to, (i) any petroleum or petroleum products, natural gas, or natural gas products, radioactive materials, asbestos, mold, urea formaldehyde foam insulation, transformers or other equipment that contains dielectric fluid containing levels of polychlorinated biphenyls (PCBs), and radon gas; (ii) any chemicals, materials, waste or substances defined as or included in the definition of “hazardous substances,” “hazardous wastes,” “hazardous materials,” “extremely hazardous wastes,” “restricted hazardous wastes,” toxic substances,” “toxic pollutants,” “contaminants,” or “pollutants,” or words of similar import, under any Environmental Laws; and (iii) any other chemical, material, waste or substance which is in any way regulated as hazardous or toxic by any federal, state or local Governmental Body, agency or instrumentality, including mixtures thereof with other materials, and including any regulated building materials such as asbestos and lead, provided, notwithstanding the foregoing or any other provision in this Agreement to the contrary, the words “Hazardous Material” shall not mean or include any such Hazardous Material used, generated, manufactured, stored, disposed of or otherwise handled in normal quantities in the ordinary course of the business of Beeville or any of its Subsidiaries in compliance with all Environmental Laws, or such that may be naturally occurring in any ambient air, surface water, ground water, land surface or subsurface strata.

(n)    “knowledge” and phrases of similar import means, as to Beeville, the actual knowledge of any executive officer of Beeville Bank designated by Beeville Bank as an “executive officer” pursuant to Regulation O, 12 C.F.R. § 215.1, et seq., after reasonable inquiry and, as to Spirit, the actual knowledge of any executive officer of Spirit after reasonable inquiry.

(o)    “Liability” means any liability, debt, obligation, loss, damage, claim, cost or expense (including court costs and reasonable attorneys’, accountants’ and other experts’ fees and expenses associated with investigating, preparing for and participating in any litigation or proceeding, including all appeals), interest, penalties, amounts paid in settlement, Taxes, fines, judgments or assessments, in each case, whether known or unknown, whether asserted or unasserted, whether absolute or contingent, whether accrued or unaccrued, whether liquidated or unliquidated, and whether due or to become due.

(p)    “Material Adverse Effect” with respect to any Person means any effect, change, development or occurrence that individually, or in the aggregate together with all other effects, changes, developments or occurrences, (i) is material and adverse to the financial condition, assets, properties, deposits, results of operations, earnings, business or cash flows of that Person, taken as a whole; provided, that a Material Adverse Effect shall not be deemed to include any effect on the referenced Person which is caused by (A) changes in laws and regulations or interpretations thereof that are generally applicable to the banking or

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savings industries; (B) changes in GAAP or regulatory accounting principles that are generally applicable to the banking or savings industries; (C) changes in global, national or regional political conditions or general economic or market conditions in the United States or the State of Texas, including changes in prevailing interest rates, credit availability and liquidity, currency exchange rates, and price levels or trading volumes in the United States or foreign securities markets affecting other companies in the financial services industry; (D) general changes in the credit markets or general downgrades in the credit markets; (E) actions or omissions of a party required by this Agreement or taken with the prior informed written consent of the other party or parties in contemplation of the transactions contemplated hereby; or (F) any outbreak or escalation of hostilities, declared or undeclared acts of war or terrorism; except to the extent that the effects of such changes in the foregoing (A) through (F) disproportionately affect such Person and its Subsidiaries, taken as a whole, as compared to other companies in the industry in which such Person and its Subsidiaries operate; or (ii) prevents or materially impairs any party from consummating the Merger, or any of the transactions contemplated by this Agreement, including the Bank Merger to which such Person is a party.

(q)    “NASDAQ” means the NASDAQ Global Select Market.

(r)    “Order” means any award, decision, decree, injunction, judgment, order, ruling, or verdict entered, issued, made or rendered by any court, administrative agency or any other Governmental Body.

(s)    “Organizational Documents” means (i) with respect to a corporation, the articles or certificate of incorporation and bylaws of such entity, (ii) with respect to a limited partnership, the certificate of limited partnership (or equivalent document) and partnership agreement or similar operational agreement, (iii) with respect to a limited liability company, the articles of organization (or equivalent document) and regulations, company agreement, or similar operational document and (iv) with respect to any foreign entity, equivalent constituent and governance documents.

(t)    “Person” means an individual, a partnership, a corporation, a limited liability company, an association, a joint stock company, a trust, a joint venture, an unincorporated organization and a Governmental Body or any department, agency or political subdivision thereof.

(u)    “Proceeding” means any action, suit, litigation, arbitration, lawsuit, claim, proceeding, hearing, audit, investigation or dispute (whether civil, criminal, administrative, investigative, at law or in equity) commenced, brought, conducted, pending or heard by or before, or otherwise involving, any Governmental Body or any arbitrator.

(v)    “Security Interest” means any mortgage, pledge, lien, encumbrance, charge, or other security interest, other than (i) mechanic’s, materialmen’s, and similar liens, (ii) liens for Taxes not yet due and payable or for Taxes that Beeville or any of its Subsidiaries is contesting in good faith through appropriate proceedings, if any, and for which adequate reserves have been established on the most recent applicable Balance Sheet in accordance with GAAP, (iii) purchase money liens and liens securing rental payments under capital lease arrangements, and (iv) other liens arising in the ordinary course of business and not incurred in connection with the borrowing of money.

(w)    “Subsidiary” or “Subsidiaries” means, with respect to any Person, any other Person (other than a natural person), whether incorporated or unincorporated, in which such Person, directly or indirectly through one or more Subsidiaries (i) has fifty percent (50%) or more equity interest or (ii) owns at least a majority of the securities or ownership interests having by their terms ordinary voting power to elect a majority of the board of directors or other persons performing similar functions; provided, however, that the term shall not include any such entity in which such voting securities or equity interest is owned or controlled in a fiduciary capacity, without sole voting power, or was acquired in securing or collecting a debt previously contracted in good faith.

(x)    “Superior Proposal” means any bona fide written Acquisition Proposal which the board of directors of Beeville reasonably determines, in its good faith judgment based on, among other things, the advice of Beeville’s outside legal counsel and the Financial Advisor, (i) to be more favorable from a financial point of view to Beeville’s shareholders than the Merger taking into account all terms and

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conditions of the proposal and (ii) reasonably capable of being consummated on the terms proposed, taking into account all legal, financial, regulatory (including the advice of Beeville’s outside legal counsel regarding the potential for regulatory approval of any such proposal) and other aspects of such proposal and any other relevant factors permitted under applicable law; provided, that for purposes of the definition of “Superior Proposal,” the references to “twenty percent (20%)” and “eighty percent (80%)” in the definitions of Acquisition Proposal and Acquisition Transaction shall be deemed to be references to “fifty percent (50%).”

(y)    “Tax” or “Taxes” means all (i) U.S. federal, state or local or non-U.S. taxes, assessments, charges, duties, levies or other similar governmental charges of any nature, including all income, franchise, margin, profits, capital gains, capital stock, transfer, sales, use, occupation, property, excise, severance, windfall profits, stamp, stamp duty reserve, license, payroll, employment, withholding, ad valorem, value added, alternative minimum, environmental, customs, social security (or similar), unemployment, sick pay, disability, registration and other taxes, assessments, charges, duties, fees, levies or other similar governmental charges of any kind whatsoever, whether disputed or not, together with all estimated taxes, deficiency assessments, additions to tax, penalties and interest; (ii) any Liability for the payment of any amount of a type described in clause (i) arising by operation of law, Treasury Regulations § 1.1502-6 (or any predecessor or successor thereof of any analogous or similar provision under law) or otherwise; and (iii) any Liability for the payment of any amount of a type described in clause (i) or clause (ii) as a result of any obligation to indemnify or otherwise assume or succeed to the Liability of any other Person.

(z)    “Tax Return” means any return, declaration, report, claim for refund, or information return or statement relating to Taxes, including any schedule or attachment thereto, and including any amendment thereof.

(aa)    “Treasury Regulations” means the regulations (including temporary regulations) promulgated by the U.S. Department of the Treasury pursuant to and in respect of the provisions of the Code.

(bb)    “Union” means a union, works council or other labor organization.

(cc)    “WARN Act” means the federal Worker Adjustment and Retraining Notification Act of 1988, and similar state, local and foreign laws related to plant closings, relocations, mass layoffs and employment losses.

Section 11.2    Other Definitional Provisions.

(a)    All references in this Agreement to Beeville Disclosure Schedules, Spirit Disclosure Schedules, Articles, Sections, subsections and other subdivisions refer to the corresponding Beeville Disclosure Schedules, Spirit Disclosure Schedules, Articles, Sections, subsections and other subdivisions of or to this Agreement unless expressly provided otherwise. Titles appearing at the beginning of any Articles, Sections, subsections or other subdivisions of this Agreement are for convenience only, do not constitute any part of this Agreement, and shall be disregarded in construing the language hereof.

(b)    The words “this Agreement,” “herein,” “hereby,” “hereunder” and “hereof,” and words of similar import, refer to this Agreement as a whole and not to any particular subdivision unless expressly so limited. The words “this Article,” “this Section” and “this subsection,” and words of similar import, refer only to the Article, Section or subsection hereof in which such words occur. The word “or” is exclusive, and the word “including” (in its various forms) means including without limitation.

(c)    All references to “$” and dollars shall be deemed to refer to U.S. currency unless otherwise specifically provided.

(d)    Pronouns in masculine, feminine or neuter genders shall be construed to state and include any other gender, and words, terms and titles (including terms defined herein) in the singular form shall be construed to include the plural and vice versa, unless the context otherwise requires.

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(e)    References herein to any law shall be deemed to refer to such law as amended, reenacted, supplemented or superseded in whole or in part and in effect from time to time and also to all rules and regulations promulgated thereunder.

(f)    References herein to any contract, agreement, commitment, arrangement or similar terms mean the foregoing as amended, supplemented or modified (including any waiver thereto) in accordance with the terms thereof, except that with respect to any contract, agreement, commitment, arrangement or similar matter listed on any schedule hereto, all such amendments, supplements, modifications must also be listed on such schedule.

(g)    If the last day for the giving of any notice or the performance of any act required or permitted under this Agreement is a day that is not a Business Day, then the time for the giving of such notice or the performance of such action shall be extended to the next succeeding Business Day.

(h)    Each representation, warranty, covenant and agreement contained in this Agreement will have independent significance, and the fact that any conduct or state of facts may be within the scope of two or more provisions in this Agreement, whether relating to the same or different subject matters and regardless of the relative levels of specificity, shall not be considered in construing or interpreting this Agreement.

(i)    References herein to documents being “made available” means that such documents, prior to the date of this Agreement, have been uploaded by the applicable party to the virtual data room maintained by Beeville’s financial advisor and to which representatives of each of the parties hereto have access, or are incorporated in, attached to or otherwise available in any of the publicly-available filings that Spirit or Beeville Bank has made with any Governmental Body.

Section 11.3    Investigation; Survival of Agreements. No investigation by the parties hereto made heretofore or hereafter shall affect the representations and warranties of the parties which are contained herein and each such representation and warranty shall survive such investigation. Except for those covenants and agreements expressly to be carried out after the Effective Time, the agreements, representations, warranties and covenants in this Agreement or in any instrument delivered pursuant to this Agreement shall not survive the Effective Time.

Section 11.4    Amendments. This Agreement may be amended by the parties hereto, by action taken by or on behalf of their respective boards of directors, at any time before or after the Beeville Shareholder Approval; provided, however, that after such approval no such amendment shall reduce the value of or change the form of the consideration to be delivered to each of Beeville’s shareholders as contemplated by this Agreement, unless such amendment is subject to the obtaining of the approval of the amendment by the shareholders of Beeville and such approval is obtained. This Agreement may not be amended except by an instrument in writing signed on behalf of each of the parties hereto which expressly states its intention to amend this Agreement.

Section 11.5    Expenses. Whether or not the transactions provided for herein are consummated, each party to this Agreement shall pay its respective expenses incurred in connection with the preparation and performance of its obligations under this Agreement. Similarly, each party agrees to indemnify the other party against any cost, expense or Liability (including reasonable attorneys’ fees) in respect of any claim made by any party for a broker’s or finder’s fee in connection with this transaction other than one based on communications between the party and the claimant seeking indemnification.

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Section 11.6    Notices. Except as explicitly provided herein, any notice given hereunder shall be in writing and shall be delivered in person, mailed by first class mail, postage prepaid or sent by email, courier or personal delivery to the parties at the following addresses unless by such notice a different address shall have been designated:

If to Spirit:

Spirit of Texas Bancshares, Inc.

1836 Spirit of Texas Way

Conroe, Texas 77301

Attention:     Mr. Dean O. Bass

Email:          DBass@sotb.com

With a copy to:

Hunton Andrews Kurth LLP

1445 Ross Avenue, Suite 3700

Dallas, Texas 75202

Attention:    Mr. Peter G. Weinstock

Email:          pweinstock@HuntonAK.com

If to Beeville:

First Beeville Financial Corporation

1400 East Houston Street

Beeville, Texas 78102

Attention:    Mr. Brian Schneider

Email:          brians@fnbsotx.com

With a copy to:

Fenimore Kay Harrison & Ford, LLP

5307 E. Mockingbird Lane, Suite 950

Dallas, Texas 75206

Attention:    Mr. Robert N. Flowers

Email:          rflowers@fkhpartners.com

All notices sent by mail as provided above shall be deemed delivered three (3) days after deposit in the mail. All notices sent by courier as provided above shall be deemed delivered one day after being sent and all notices sent by email shall be deemed delivered upon confirmation of receipt. All other notices shall be deemed delivered when actually received. Any party to this Agreement may change its address for the giving of notice specified above by giving notice as herein provided. Notices permitted to be sent via e-mail shall be deemed delivered only if sent to such persons at such e-mail addresses as may be set forth in writing (and confirmation of receipt is received by the sending party).

Section 11.7    Controlling Law; Jurisdiction.

(a)    This Agreement and any claim, controversy or dispute arising under or related in any way to this Agreement and/or the interpretation and enforcement of the rights and duties of the parties hereunder or related in any way to the foregoing, shall be governed by and construed in accordance with the internal, substantive laws of the State of Texas applicable to agreements entered into and to be performed solely within such state without giving effect to the principles of conflict of laws thereof.

(b)    Any Proceeding arising out of or relating to the matters contemplated by this Agreement must be brought in the courts of the State of Texas, County of Harris, or, if it has or can acquire jurisdiction, in the U.S. District Court for the Southern District of Texas (Houston Division), and each of the parties irrevocably submits to the exclusive jurisdiction of each such court in any such Proceeding, waives any

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objection it may now or hereafter have to venue or to convenience of forum, agrees that all claims in respect of such Proceeding shall be heard and determined only in any such court, and agrees not to bring any Proceeding arising out of or relating to the matters contemplated by this Agreement in any other court. Each party acknowledges and agrees that the provisions of this Section 11.7 constitute a voluntary and bargained for agreement between the parties. Process in any Proceeding may be served on any party anywhere in the world.

Section 11.8    Waiver. At any time prior to the Effective Time, the parties hereto, by action taken or authorized by their respective boards of directors, may, to the extent legally allowed: (a) extend the time for the performance of any of the obligations or other acts of the other parties hereto; (b) waive any inaccuracies in the representations and warranties contained herein or in any document delivered pursuant hereto; and (c) waive compliance with any of the agreements or conditions contained herein. Any agreement on the part of a party hereto to any such extension or waiver shall be valid only if set forth in a written instrument signed on behalf of such party, but such extension or waiver or failure to insist on strict compliance with an obligation, covenant, agreement or condition shall not operate as a waiver of, or estoppel with respect to, any subsequent or other failure. No failure or delay by any party in exercising any right, power or privilege hereunder shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein provided shall be cumulative and not exclusive of any rights or remedies provided by law.

Section 11.9    Severability. Any term or provision of this Agreement which is invalid or unenforceable in any jurisdiction shall, as to that jurisdiction, be ineffective to the extent of such invalidity or unenforceability without rendering invalid or unenforceable the remaining terms and provisions of this Agreement or affecting the validity or enforceability of any of the terms or provisions of this Agreement in any other jurisdiction. If any provision of this Agreement is so broad as to be unenforceable, the provision shall be interpreted to be only as broad as is enforceable. In all such cases, the parties shall use Commercially Reasonable Efforts to substitute a valid, legal and enforceable provision which, insofar as practicable, implements the original purposes and intents of this Agreement.

Section 11.10    Entire Agreement. Except for the Confidentiality Agreement, this Agreement and the exhibits and attachments hereto represent the entire agreement between the parties respecting the transactions contemplated hereby, and all understandings and agreements heretofore made between the parties hereto are merged in this Agreement, including the exhibits and schedules delivered pursuant hereto, which (together with any agreements executed by the parties hereto contemporaneously with or, if contemplated hereby, subsequent to the execution of this Agreement) shall be the sole expression of the agreement of the parties respecting the Merger. Each party to this Agreement acknowledges that, in executing and delivering this Agreement, it has relied only on the written representations, warranties and promises of the other parties hereto that are contained herein or in the other agreements executed by the parties contemporaneously with or, if contemplated hereby, subsequent to the execution of this Agreement, and has not relied on the oral statements of any other party or its representatives.

Section 11.11    Counterparts. This Agreement may be executed in multiple counterparts, any one of which need not contain the signatures of more than one party, but all such counterparts taken together shall constitute one and the same instrument. Counterparts may be delivered via facsimile, electronic mail (including .pdf or any electronic signature complying with the U.S. federal ESIGN Act of 2000, e.g., www.docusign.com) or other transmission method and any counterpart so delivered shall be deemed to have been duly and validly delivered and be valid and effective for all purposes.

Section 11.12    Assignment; Binding on Successors. Except as otherwise provided herein, this Agreement shall be binding upon, and shall inure to the benefit of, the parties hereto and their respective heirs, executors, trustees, administrators, guardians, successors and permitted assigns, but shall not be assigned by any party without the prior written consent of the other party.

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Section 11.13    No Third-Party Beneficiaries. Nothing contained in this Agreement, express or implied, is intended to confer upon any Persons, other than the parties hereto or their respective successors, any rights, remedies, obligations, or Liabilities under or by reason of this Agreement.

[Signature Page Immediately Follows]

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IN WITNESS WHEREOF, the parties have caused this Agreement to be executed as of the date first above written.

SPIRIT OF TEXAS BANCSHARES, INC.
By:	/s/ Dean O. Bass
	Dean O. Bass
	Chairman and Chief Executive Officer
FIRST BEEVILLE FINANCIAL CORPORATION
By:	/s/ Brian K. Schneider
	Brian K. Schneider
	Chairman and President

[Signature Page to Agreement and Plan of Reorganization]

Exhibit B

VOTING AGREEMENT

This VOTING AGREEMENT (this “Agreement”), dated as of November 27, 2018, is executed by and among Spirit of Texas Bancshares, Inc., a Texas corporation (“Spirit”), First Beeville Financial Corporation, a Texas corporation (the “Company”), and the shareholders of the Company who are signatories hereto (referred to herein individually as a “Shareholder” and collectively as the “Shareholders”). Terms with their initial letters capitalized and not otherwise defined herein have the meanings given to them in the Reorganization Agreement (as defined below).

RECITALS

WHEREAS, concurrently with the execution of this Agreement, Spirit and the Company are entering into that certain Agreement and Plan of Reorganization, dated as of the date hereof (as such agreement may be amended or supplemented from time to time, the “Reorganization Agreement”), pursuant to which the Company will merge with and into Spirit, with Spirit continuing as the surviving entity (the “Merger”);

WHEREAS, the Reorganization Agreement provides that all of the issued and outstanding shares of common stock of the Company (the “Company Stock”) (other than any Cancelled Shares or Dissenting Shares) will be exchanged for such consideration as set forth in the Reorganization Agreement;

WHEREAS, as a condition and inducement to Spirit’s willingness to enter into the Reorganization Agreement, each of the Shareholders has agreed to vote their shares of Company Stock in favor of approval of the Reorganization Agreement and the transactions contemplated thereby; and

WHEREAS, Spirit is relying on this Agreement in incurring expenses in reviewing the Company’s business, in preparing a joint proxy statement/prospectus, in proceeding with the filing of applications for regulatory approvals and in undertaking other actions necessary for the consummation of the Merger.

NOW, THEREFORE, in consideration of the substantial expenses that Spirit will incur in connection with the transactions contemplated by the Reorganization Agreement and to induce Spirit to execute the Reorganization Agreement and to proceed to incur such expenses, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereby, severally and not jointly, agree as follows:

AGREEMENT

1.    Each of the Shareholders hereby severally, but not jointly, represents and warrants to Spirit that:

(a)    such Shareholder is the registered owner or beneficial owner of, or has full voting power with respect to, the number of shares of Company Stock set forth below such Shareholder’s name on such Shareholder’s signature page to this Agreement (the “Shares”) free and clear of all liens or encumbrances;

(b)    except pursuant to this Agreement, there are no options, warrants or other rights, agreements, arrangements or commitments of any character to which Such Shareholder is a party relating to the pledge, disposition or voting of any of the Shares and there are no voting trusts or voting agreements with respect to the Shares;

(c)    such Shareholder does not beneficially own any Company Stock other than (i) the Shares and (ii) any options, warrants or other rights to acquire any additional shares of Company Stock or any security exercisable for or convertible into shares of Company Stock set forth on the signature page of this Agreement; and

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(d)    such Shareholder has had an opportunity to obtain the advice of legal counsel prior to executing this Agreement.

2.    Each Shareholder hereby agrees during the term of this Agreement to vote the Shares, and any additional shares of Company Stock or other voting securities of the Company acquired by such Shareholder after the date hereof, (a) in favor of the approval and adoption of the Reorganization Agreement and the transactions contemplated thereby at the special meeting of shareholders of the Company called for the purpose of considering and voting upon the approval of the Reorganization Agreement and the transactions contemplated thereby (the “Company Shareholder Meeting”) and (b) against approval of any Acquisition Proposal or any other proposal made in opposition to or in competition with this Agreement or the Reorganization Agreement (such Acquisition Proposal or other proposal, an “Opposing Proposal”) presented at the Company Shareholder Meeting or any other meeting of shareholders held prior or subsequent to the Company Shareholder Meeting or for which the Company otherwise seeks the approval of the Company’s shareholders.

3.    Each Shareholder shall not invite or seek any Opposing Proposal, support (or publicly suggest that anyone else should support) any Opposing Proposal that may be made, or ask the board of directors of the Company to consider, support or seek any Opposing Proposal or otherwise take any action designed to make any Opposing Proposal more likely. None of the Shareholders shall meet or otherwise communicate with any Person that makes or is considering making an Opposing Proposal or any representative of such Person after becoming aware that the Person has made or is considering making an Opposing Proposal. Each Shareholder shall promptly advise the Company of each contact the Shareholder or any of the Shareholder’s representatives may receive from any Person relating to any Opposing Proposal or otherwise indicating that any Person may wish to participate or engage in any transaction arising out of any Opposing Proposal and shall provide the Company with all information that is reasonably requested by Spirit and is reasonably available to the Shareholder regarding any such Opposing Proposal or possible Opposing Proposal, unless such Shareholder knows the Company has provided Spirit with such information, and the Company shall in turn provide any such information to Spirit. Each Shareholder shall not make any claim or join in any litigation alleging that the board of directors of the Company is required to consider, endorse or support any Opposing Proposal or to invite or seek any Opposing Proposal. Each Shareholder shall not take any other action that is reasonably likely to make consummation of the Merger less likely or to impair Spirit’s ability to exercise any of the rights granted by the Reorganization Agreement.

4.    While this Agreement is in effect, each Shareholder shall not, directly or indirectly, (a) sell, transfer, assign, pledge, encumber, hypothecate, cause to be redeemed or otherwise dispose (any such transaction, a “Transfer”) of any or all Shares or any shares of Company Stock subsequently acquired, (b) grant any proxy or interest in or with respect to any Shares or (c) deposit any Shares of Company Stock into a voting trust or enter into a voting agreement or arrangement with respect to any shares of Company Stock or grant any proxy with respect thereto, other than to other members of the board of directors of the Company for the purpose of voting to approve the Reorganization Agreement and the transactions contemplated thereby. This Section 4 shall not prohibit (w) Transfers to any member of the Shareholder’s family, subject to the transferee’s agreeing in writing to be bound by the terms of this Agreement, (x) Transfers for estate and tax planning purposes, including Transfers to relatives, trusts and charitable organizations, subject to the transferee agreeing in writing to be bound by the terms of this Agreement and the delivery of such agreement to Spirit, (y) Transfers to any other shareholder of the Company who has executed a copy of this Agreement on the date hereof, and (z) such Transfers as Spirit may otherwise permit in its sole discretion in writing. Any attempted Transfer of Shares or any shares of Company Stock subsequently acquired or any interest therein in violation of this Section 4 shall be null and void.

5.    Each Shareholder acknowledges that Spirit is relying on this Agreement in reviewing the business of the Company and its Subsidiaries, including without limitation, The First National Bank of Beeville (the “Bank”), in preparing a joint proxy statement/prospectus, in proceeding with the filing of applications for regulatory approvals and in undertaking other actions necessary for the consummation of the Merger. The

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Company and each Shareholder acknowledges that the performance of this Agreement is intended to benefit Spirit and the Company.

6.    This Agreement shall continue in effect until the earlier to occur of (a) the termination of the Reorganization Agreement in accordance with its terms or (b) the consummation of the Merger.

7.    Nothing in this Agreement shall be deemed to restrict any of the Shareholders from taking any action on behalf of the Company solely in the capacity of a director or officer of the Company (if applicable) that such Shareholder believes is necessary to fulfill the Shareholder’s duties and obligations as a director or officer (if applicable). Each Shareholder is executing this Agreement solely in his or her capacity as a shareholder of the Company.

8.    Each Shareholder has the legal capacity, power and authority to enter into and perform all of the Shareholder’s obligations under this Agreement. This Agreement has been duly and validly executed and delivered by the Shareholder and constitutes the legal, valid and binding obligation of the Shareholder, enforceable against the Shareholder in accordance with its terms except as the enforceability may be limited by bankruptcy, insolvency or other laws affecting creditors rights (whether enforce in law or in equity). If the Shareholder is married and his or her Shares constitute community property, this Agreement has been duly authorized, executed and delivered by, and constitutes a valid and binding agreement of, such Shareholder’s spouse, enforceable against such spouse in accordance with its terms.

9.    Each Shareholder hereby (a) confirms such Shareholder’s knowledge of the availability of the rights of dissenting shareholders under the Texas Business Organizations Code (the “TBOC”) with respect to the Merger and (b) confirms receipt of a copy of the provisions of the TBOC related to the rights of dissenting shareholders attached hereto as Annex A. Each Shareholder hereby waives and agrees not to assert, and shall use its best efforts to cause any of its Affiliates who hold of record any of the Shareholder’s Shares to waive and not to assert, any appraisal rights with respect to the Merger that the Shareholder or such Affiliate may now or hereafter have with respect to any Shares (or any other shares of capital stock of the Company that the Shareholder shall hold of record at the time that Shareholder may be entitled to assert appraisal rights with respect to the Merger) whether pursuant to the TBOC or otherwise.

10.    This Agreement may not be modified, amended, altered or supplemented with respect to a particular Shareholder except upon the execution and delivery of a written agreement executed by each of Spirit, the Company and the Shareholder. Any such amendment, modification, alteration or supplement shall only apply to the Shareholder(s) executing such written agreement and this Agreement shall remain in full force and effect with respect to Shareholders who do not execute such written agreement.

11.    For the convenience of the parties hereto, this Agreement may be executed simultaneously in two or more counterparts, each of which will be deemed an original but all of which shall constitute one and the same instrument. An email or electronic scan in “.pdf” format of a signed counterpart of this Agreement will be sufficient to bind the party or parties whose signature(s) appear thereon.

12.    This Agreement, together with the Reorganization Agreement and the agreements contemplated thereby, embody the entire agreement and understanding of the parties hereto in respect to the subject matter contained herein. This Agreement supersedes all prior agreements and understandings among the parties with respect to such subject matter contained herein. In the event of a conflict between the terms of this Agreement and the terms of the Reorganization Agreement, the terms of the Reorganization Agreement shall control.

13.    All notices, requests, demands and other communications required or permitted to be given under this Agreement shall be in writing and shall be deemed to have been duly given if delivered in person, mailed by first

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class mail (postage prepaid) or sent by email, courier or personal delivery to the parties at the following addresses unless by such notice a different address shall have been designated:

If to Spirit:

Spirit of Texas Bancshares, Inc.

1836 Spirit of Texas Way

Conroe, Texas 77301

Attention: Mr. Dean O. Bass

Email: DBass@sotb.com

With a copy (which shall not constitute notice) to:

Hunton Andrews Kurth LLP

1445 Ross Avenue, Suite 3700

Dallas, Texas 75202

Attention: Mr. Peter G. Weinstock

Email: pweinstock@HuntonAK.com

If to the Company:

First Beeville Financial Corporation

1400 East Houston Street

Beeville, Texas 78102

Attention: Mr. Brian K. Schneider

Email: brians@fnbsotx.com

With a copy (which shall not constitute notice to:

Fenimore, Kay, Harrison & Ford, LLP

5307 East Mockingbird Lane, Suite 950

Dallas, Texas 75206

Attention: Mr. Robert N. Flowers

Email: rflowers@fkhpartners.com

If to a Shareholder:

At the address set forth on such Shareholder’s signature page to this Agreement.

All notices sent by mail as provided above shall be deemed delivered three (3) days after deposit in the mail, all notices sent by courier as provided above shall be deemed delivered one (1) day after being sent and all notices sent by email shall be deemed delivered upon confirmation of receipt. All other notices shall be deemed delivered when actually received. Any party to this Agreement may change its address for the giving of notice specified above by giving notice as provided herein. Notices permitted to be sent via email shall be deemed delivered only if sent to such persons at such email addresses as may be set forth in writing (and confirmation of receipt is received by the sending party).

14.    From time to time, at Spirit’s request and without further consideration, each Shareholder shall execute and deliver such additional documents reasonably requested by Spirit as may be necessary or desirable to consummate and make effective, in the most expeditious manner practicable, the transactions contemplated by this Agreement.

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15.    Each Shareholder recognizes and acknowledges that a breach by the Shareholder of any covenants or agreements contained in this Agreement will cause Spirit to sustain damages for which it would not have an adequate remedy at law for money damages, and therefore the parties hereto agree that, in the event of any such breach, Spirit shall be entitled to seek the remedy of specific performance of such covenants and agreements and injunctive and other equitable relief, without the necessity of posting bond or proving actual damages, in addition to any other remedy to which it may be entitled, at law or in equity.

16.    THIS AGREEMENT IS TO BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF TEXAS WITHOUT REGARD FOR CONFLICT OF LAWS PRINCIPLES THEREOF. ANY SUIT, ACTION OR OTHER PROCEEDING DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY MUST BE BROUGHT IN THE COURTS OF THE STATE OF TEXAS, COUNTY OF HARRIS, OR, IF IT HAS OR CAN ACQUIRE JURISDICTION, IN THE U.S. DISTRICT COURT FOR THE SOUTHERN DISTRICT OF TEXAS (HOUSTON DIVISION), AND EACH PARTY HERETO IRREVOCABLY SUBMITS TO THE EXCLUSIVE JURISDICTION OF SUCH COURT IN ANY SUCH SUIT, ACTION OR OTHER PROCEEDING.

17.    EACH PARTY HERETO ACKNOWLEDGES AND AGREES THAT ANY CONTROVERSY WHICH MAY ARISE UNDER THIS AGREEMENT IS LIKELY TO INVOLVE COMPLICATED AND DIFFICULT ISSUES, AND THEREFORE EACH SUCH PARTY HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT SUCH PARTY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY SUIT, ACTION OR OTHER PROCEEDING DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT. EACH PARTY HERETO CERTIFIES AND ACKNOWLEDGES THAT: (A) NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF ANY ACTION, SUIT OR PROCEEDING, SEEK TO ENFORCE THE FOREGOING WAIVER, (B) EACH PARTY UNDERSTANDS AND HAS CONSIDERED THE IMPLICATIONS OF THIS WAIVER, (C) EACH PARTY MAKES THIS WAIVER VOLUNTARILY AND (D) EACH PARTY HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION 17.

18.    All of the terms, covenants, representations, warranties and conditions of this Agreement are binding upon, and inure to the benefit of and are enforceable by, the parties and their respective successors, representatives and permitted assigns. No party hereto may assign this Agreement, by operation of law or otherwise, in whole or in part, without the prior written consent of the other parties, and any purported assignment made or attempted in violation of this Section 18 shall be null and void. Nothing contained in this Agreement, express or implied, is intended to confer upon any Persons, other than the parties hereto or their respective successors, any rights, remedies, obligations or liabilities under or by reason of this Agreement.

19.    If any provision of this Agreement is held invalid or unenforceable by any court of competent jurisdiction, there will be added automatically as a part of this Agreement a provision mutually agreed to which is similar in terms to such invalid or unenforceable provision as may be possible and still be valid and enforceable, and the other provisions of this Agreement will remain in full force and effect. Any provision of this Agreement held invalid or unenforceable only in part or degree will remain in full force and effect to the extent not held invalid or unenforceable.

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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written.

SPIRIT OF TEXAS BANCSHARES, INC.

By:
	Dean O. Bass,
	Chairman and Chief Executive Officer

FIRST BEEVILLE FINANCIAL CORPORATION

By:
	Brian K. Schneider,
	Chairman and President

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SHAREHOLDER

Number of Shares:

Address for notice purposes:

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ANNEX A

DISSENTERS’ RIGHTS

SEC. 10.351. APPLICABILITY OF SUBCHAPTER.

(a)    This subchapter does not apply to a fundamental business transaction of a domestic entity if, immediately before the effective date of the fundamental business transaction, all of the ownership interests of the entity otherwise entitled to rights to dissent and appraisal under this code are held by one owner or only by the owners who approved the fundamental business transaction.

(b)    This subchapter applies only to a “domestic entity subject to dissenters’ rights,” as defined in Section 1.002. That term includes a domestic for-profit corporation, professional corporation, professional association, and real estate investment trust. Except as provided in Subsection (c), that term does not include a partnership or limited liability company.

(c)    The governing documents of a partnership or a limited liability company may provide that its owners are entitled to the rights of dissent and appraisal provided by this subchapter, subject to any modification to those rights as provided by the entity’s governing documents.

SEC. 10.352. DEFINITIONS.

In this subchapter:

(1)    “Dissenting owner” means an owner of an ownership interest in a domestic entity subject to dissenters’ rights who:

(A) provides notice under Section 10.356; and

(B) complies with the requirements for perfecting that owner’s right to dissent under this subchapter.

(2)    “Responsible organization” means:

(A) the organization responsible for:

(i) the provision of notices under this subchapter; and

(ii) the primary obligation of paying the fair value for an ownership interest held by a dissenting owner;

(B) with respect to a merger or conversion:

(i) for matters occurring before the merger or conversion, the organization that is merging or converting; and

(ii) for matters occurring after the merger or conversion, the surviving or new organization that is primarily obligated for the payment of the fair value of the dissenting owner’s ownership interest in the merger or conversion;

(C) with respect to an interest exchange, the organization the ownership interests of which are being acquired in the interest exchange;

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(D) with respect to the sale of all or substantially all of the assets of an organization, the organization the assets of which are to be transferred by sale or in another manner; and

(E) with respect to an amendment to a domestic for-profit corporation’s certificate of formation described by Section 10.354(a)(1)(G), the corporation.

SEC. 10.353. FORM AND VALIDITY OF NOTICE.

(a)    Notice required under this subchapter:

(1) must be in writing; and

(2) may be mailed, hand-delivered, or delivered by courier or electronic transmission.

(b)    Failure to provide notice as required by this subchapter does not invalidate any action taken.

SEC. 10.354. RIGHTS OF DISSENT AND APPRAISAL.

(a)    Subject to Subsection (b), an owner of an ownership interest in a domestic entity subject to dissenters’ rights is entitled to:

(1) dissent from:

(A) a plan of merger to which the domestic entity is a party if owner approval is required by this code and the owner owns in the domestic entity an ownership interest that was entitled to vote on the plan of merger;

(B) a sale of all or substantially all of the assets of the domestic entity if owner approval is required by this code and the owner owns in the domestic entity an ownership interest that was entitled to vote on the sale;

(C) a plan of exchange in which the ownership interest of the owner is to be acquired;

(D) a plan of conversion in which the domestic entity is the converting entity if owner approval is required by this code and the owner owns in the domestic entity an ownership interest that was entitled to vote on the plan of conversion;

(E) a merger effected under Section 10.006 in which:

(i) the owner is entitled to vote on the merger; or

(ii) the ownership interest of the owner is converted or exchanged;

(F) a merger effected under Section 21.459(c) in which the shares of the shareholders are converted or exchanged; or

(G) if the owner owns shares that were entitled to vote on the amendment, an amendment to a domestic for-profit corporation’s certificate of formation to:

(i) add the provisions required by Section 3.007(e) to elect to be a public benefit corporation; or

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(ii) delete the provisions required by Section 3.007(e), which in effect cancels the corporation’s election to be a public benefit corporation; and

(2) subject to compliance with the procedures set forth in this subchapter, obtain the fair value of that ownership interest through an appraisal.

(b)    Notwithstanding Subsection (a), subject to Subsection (c), an owner may not dissent from a plan of merger or conversion in which there is a single surviving or new domestic entity or non-code organization, or from a plan of exchange, if:

(1) the ownership interest, or a depository receipt in respect of the ownership interest, held by the owner is part of a class or series of ownership interests, or depository receipts in respect of ownership interests, that are, on the record date set for purposes of determining which owners are entitled to vote on the plan of merger, conversion, or exchange, as appropriate:

(A) listed on a national securities exchange; or

(B) held of record by at least 2,000 owners;

(2) the owner is not required by the terms of the plan of merger, conversion, or exchange, as appropriate, to accept for the owner’s ownership interest any consideration that is different from the consideration to be provided to any other holder of an ownership interest of the same class or series as the ownership interest held by the owner, other than cash instead of fractional shares or interests the owner would otherwise be entitled to receive; and

(3) the owner is not required by the terms of the plan of merger, conversion, or exchange, as appropriate, to accept for the owner’s ownership interest any consideration other than:

(A) ownership interests, or depository receipts in respect of ownership interests, of a domestic entity or non-code organization of the same general organizational type that, immediately after the effective date of the merger, conversion, or exchange, as appropriate, will be part of a class or series of ownership interests, or depository receipts in respect of ownership interests, that are:

(i) listed on a national securities exchange or authorized for listing on the exchange on official notice of issuance; or

(ii) held of record by at least 2,000 owners;

(B) cash instead of fractional ownership interests the owner would otherwise be entitled to receive; or

(C) any combination of the ownership interests and cash described by Paragraphs (A) and (B).

(c)    Subsection (b) shall not apply either to a domestic entity that is a subsidiary with respect to a merger under Section 10.006 or to a corporation with respect to a merger under Section 21.459(c).

(d)    Notwithstanding Subsection (a), an owner of an ownership interest in a domestic for-profit corporation subject to dissenters’ rights may not dissent from an amendment to the corporation’s certificate of formation described by Subsection (a)(1)(G) if the shares held by the owner are part of a class or series of shares, on the record date set for purposes of determining which owners are entitled to vote on the amendment:

(1) listed on a national securities exchange; or

(2) held of record by at least 2,000 owners.

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SEC. 10.355. NOTICE OF RIGHT OF DISSENT AND APPRAISAL.

(a)    A domestic entity subject to dissenters’ rights that takes or proposes to take an action regarding which an owner has a right to dissent and obtain an appraisal under Section 10.354 shall notify each affected owner of the owner’s rights under that section if:

(1) the action or proposed action is submitted to a vote of the owners at a meeting; or

(2) approval of the action or proposed action is obtained by written consent of the owners instead of being submitted to a vote of the owners.

(b)    If a parent organization effects a merger under Section 10.006 and a subsidiary organization that is a party to the merger is a domestic entity subject to dissenters’ rights, the responsible organization shall notify the owners of that subsidiary organization who have a right to dissent to the merger under Section 10.354 of their rights under this subchapter not later than the 10th day after the effective date of the merger. The notice must also include a copy of the certificate of merger and a statement that the merger has become effective.

(b-1)    If a corporation effects a merger under Section 21.459(c), the responsible organization shall notify the shareholders of that corporation who have a right to dissent to the plan of merger under Section 10.354 of their rights under this subchapter not later than the 10th day after the effective date of the merger. Notice required under this subsection that is given to shareholders before the effective date of the merger may, but is not required to, contain a statement of the merger’s effective date. If the notice is not given to the shareholders until on or after the effective date of the merger, the notice must contain a statement of the merger’s effective date.

(c)    A notice required to be provided under Subsection (a), (b), or (b-1) must:

(1) be accompanied by a copy of this subchapter; and

(2) advise the owner of the location of the responsible organization’s principal executive offices to which a notice required under Section 10.356(b)(1) or a demand under Section 10.356(b)(3), or both, may be provided.

(d)    In addition to the requirements prescribed by Subsection (c), a notice required to be provided:

(1) under Subsection (a)(1) must accompany the notice of the meeting to consider the action;

(2) under Subsection (a)(2) must be provided to:

(A) each owner who consents in writing to the action before the owner delivers the written consent; and

(B) each owner who is entitled to vote on the action and does not consent in writing to the action before the 11th day after the date the action takes effect; and

(3) under Subsection (b-1) must be provided:

(A) if given before the consummation of the tender or exchange offer described by Section 21.459(c)(2), to each shareholder to whom that offer is made; or

(B) if given after the consummation of the tender or exchange offer described by Section 21.459(c)(2), to each shareholder who did not tender the shareholder’s shares in that offer.

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(e)    Not later than the 10th day after the date an action described by Subsection (a)(1) takes effect, the responsible organization shall give notice that the action has been effected to each owner who voted against the action and sent notice under Section 10.356(b)(1).

(f)    If the notice given under Subsection (b-1) did not include a statement of the effective date of the merger, the responsible organization shall, not later than the 10th day after the effective date, give a second notice to the shareholders notifying them of the merger’s effective date. If the second notice is given after the later of the date on which the tender or exchange offer described by Section 21.459(c)(2) is consummated or the 20th day after the date notice under Subsection (b-1) is given, then the second notice is required to be given to only those shareholders who have made a demand under Section 10.356(b)(3).

SEC. 10.356. PROCEDURE FOR DISSENT BY OWNERS AS TO ACTIONS; PERFECTION OF RIGHT OF DISSENT AND APPRAISAL.

(a)    An owner of an ownership interest of a domestic entity subject to dissenters’ rights who has the right to dissent and appraisal from any of the actions referred to in Section 10.354 may exercise that right to dissent and appraisal only by complying with the procedures specified in this subchapter. An owner’s right of dissent and appraisal under Section 10.354 may be exercised by an owner only with respect to an ownership interest that is not voted in favor of the action.

(b)    To perfect the owner’s rights of dissent and appraisal under Section 10.354, an owner:

(1) if the proposed action is to be submitted to a vote of the owners at a meeting, must give to the domestic entity a written notice of objection to the action that:

(A) is addressed to the entity’s president and secretary;

(B) states that the owner’s right to dissent will be exercised if the action takes effect;

(C) provides an address to which notice of effectiveness of the action should be delivered or mailed; and

(D) is delivered to the entity’s principal executive offices before the meeting;

(2) with respect to the ownership interest for which the rights of dissent and appraisal are sought:

(A) must vote against the action if the owner is entitled to vote on the action and the action is approved at a meeting of the owners; and

(B) may not consent to the action if the action is approved by written consent; and

(3) must give to the responsible organization a demand in writing that:

(A) is addressed to the president and secretary of the responsible organization;

(B) demands payment of the fair value of the ownership interests for which the rights of dissent and appraisal are sought;

(C) provides to the responsible organization an address to which a notice relating to the dissent and appraisal procedures under this subchapter may be sent;

(D) states the number and class of the ownership interests of the domestic entity owned by the owner and the fair value of the ownership interests as estimated by the owner; and

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(E) is delivered to the responsible organization at its principal executive offices at the following time:

(i) not later than the 20th day after the date the responsible organization sends to the owner the notice required by Section 10.355(e) that the action has taken effect, if the action was approved by a vote of the owners at a meeting;

(ii) not later than the 20th day after the date the responsible organization sends to the owner the notice required by Section 10.355(d)(2) that the action has taken effect, if the action was approved by the written consent of the owners;

(iii) not later than the 20th day after the date the responsible organization sends to the owner a notice that the merger was effected, if the action is a merger effected under Section 10.006; or

(iv) not later than the 20th day after the date the responsible organization gives to the shareholder the notice required by Section 10.355(b-1) or the date of the consummation of the tender or exchange offer described by Section 21.459(c)(2), whichever is later, if the action is a merger effected under Section 21.459(c).

(c)    An owner who does not make a demand within the period required by Subsection (b)(3)(E) or, if Subsection (b)(1) is applicable, does not give the notice of objection before the meeting of the owners is bound by the action and is not entitled to exercise the rights of dissent and appraisal under Section 10.354.

(d)    Not later than the 20th day after the date an owner makes a demand under Subsection (b)(3), the owner must submit to the responsible organization any certificates representing the ownership interest to which the demand relates for purposes of making a notation on the certificates that a demand for the payment of the fair value of an ownership interest has been made under this section. An owner’s failure to submit the certificates within the required period has the effect of terminating, at the option of the responsible organization, the owner’s rights to dissent and appraisal under Section 10.354 unless a court, for good cause shown, directs otherwise.

(e)    If a domestic entity and responsible organization satisfy the requirements of this subchapter relating to the rights of owners of ownership interests in the entity to dissent to an action and seek appraisal of those ownership interests, an owner of an ownership interest who fails to perfect that owner’s right of dissent in accordance with this subchapter may not bring suit to recover the value of the ownership interest or money damages relating to the action.

SEC. 10.357. WITHDRAWAL OF DEMAND FOR FAIR VALUE OF OWNERSHIP INTEREST.

(a)    An owner may withdraw a demand for the payment of the fair value of an ownership interest made under Section 10.356 before:

(1) payment for the ownership interest has been made under Sections 10.358 and 10.361; or

(2) a petition has been filed under Section 10.361.

(b)    Unless the responsible organization consents to the withdrawal of the demand, an owner may not withdraw a demand for payment under Subsection (a) after either of the events specified in Subsections (a)(1) and (2).

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SEC. 10.358. RESPONSE BY ORGANIZATION TO NOTICE OF DISSENT AND DEMAND FOR FAIR VALUE BY DISSENTING OWNER.

(a)    Not later than the 20th day after the date a responsible organization receives a demand for payment made by a dissenting owner in accordance with Section 10.356(b)(3), the responsible organization shall respond to the dissenting owner in writing by:

(1) accepting the amount claimed in the demand as the fair value of the ownership interests specified in the notice; or

(2) rejecting the demand and including in the response the requirements prescribed by Subsection (c).

(b)    If the responsible organization accepts the amount claimed in the demand, the responsible organization shall pay the amount not later than the 90th day after the date the action that is the subject of the demand was effected if the owner delivers to the responsible organization:

(1) endorsed certificates representing the ownership interests if the ownership interests are certificated; or

(2) signed assignments of the ownership interests if the ownership interests are uncertificated.

(c)    If the responsible organization rejects the amount claimed in the demand, the responsible organization shall provide to the owner:

(1) an estimate by the responsible organization of the fair value of the ownership interests; and

(2) an offer to pay the amount of the estimate provided under Subdivision (1).

(d)    If the dissenting owner decides to accept the offer made by the responsible organization under Subsection (c)(2), the owner must provide to the responsible organization notice of the acceptance of the offer not later than the 90th day after the date the action that is the subject of the demand took effect.

(e)    If, not later than the 90th day after the date the action that is the subject of the demand took effect, a dissenting owner accepts an offer made by a responsible organization under Subsection (c)(2) or a dissenting owner and a responsible organization reach an agreement on the fair value of the ownership interests, the responsible organization shall pay the agreed amount not later than the 120th day after the date the action that is the subject of the demand took effect, if the dissenting owner delivers to the responsible organization:

(1) endorsed certificates representing the ownership interests if the ownership interests are certificated; or

(2) signed assignments of the ownership interests if the ownership interests are uncertificated.

SEC. 10.359. RECORD OF DEMAND FOR FAIR VALUE OF OWNERSHIP INTEREST.

(a)    A responsible organization shall note in the organization’s ownership interest records maintained under Section 3.151 the receipt of a demand for payment from any dissenting owner made under Section 10.356.

(b)    If an ownership interest that is the subject of a demand for payment made under Section 10.356 is transferred, a new certificate representing that ownership interest must contain:

(1) a reference to the demand; and

(2) the name of the original dissenting owner of the ownership interest.

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SEC. 10.360. RIGHTS OF TRANSFEREE OF CERTAIN OWNERSHIP INTEREST.

A transferee of an ownership interest that is the subject of a demand for payment made under Section 10.356 does not acquire additional rights with respect to the responsible organization following the transfer. The transferee has only the rights the original dissenting owner had with respect to the responsible organization after making the demand.

SEC. 10.361. PROCEEDING TO DETERMINE FAIR VALUE OF OWNERSHIP INTEREST AND OWNERS ENTITLED TO PAYMENT; APPOINTMENT OF APPRAISERS.

(a)    If a responsible organization rejects the amount demanded by a dissenting owner under Section 10.358 and the dissenting owner and responsible organization are unable to reach an agreement relating to the fair value of the ownership interests within the period prescribed by Section 10.358(d), the dissenting owner or responsible organization may file a petition requesting a finding and determination of the fair value of the owner’s ownership interests in a court in:

(1) the county in which the organization’s principal office is located in this state; or

(2) the county in which the organization’s registered office is located in this state, if the organization does not have a business office in this state.

(b)    A petition described by Subsection (a) must be filed not later than the 60th day after the expiration of the period required by Section 10.358(d).

(c)    On the filing of a petition by an owner under Subsection (a), service of a copy of the petition shall be made to the responsible organization. Not later than the 10th day after the date a responsible organization receives service under this subsection, the responsible organization shall file with the clerk of the court in which the petition was filed a list containing the names and addresses of each owner of the organization who has demanded payment for ownership interests under Section 10.356 and with whom agreement as to the value of the ownership interests has not been reached with the responsible organization. If the responsible organization files a petition under Subsection (a), the petition must be accompanied by this list.

(d)    The clerk of the court in which a petition is filed under this section shall provide by registered mail notice of the time and place set for the hearing to:

(1) the responsible organization; and

(2) each owner named on the list described by Subsection (c) at the address shown for the owner on the list.

(e)    The court shall:

(1) determine which owners have:

(A) perfected their rights by complying with this subchapter; and

(B) become subsequently entitled to receive payment for the fair value of their ownership interests; and

(2) appoint one or more qualified appraisers to determine the fair value of the ownership interests of the owners described by Subdivision (1).

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(f)    The court shall approve the form of a notice required to be provided under this section. The judgment of the court is final and binding on the responsible organization, any other organization obligated to make payment under this subchapter for an ownership interest, and each owner who is notified as required by this section.

(g)    The beneficial owner of an ownership interest subject to dissenters’ rights held in a voting trust or by a nominee on the beneficial owner’s behalf may file a petition described by Subsection (a) if no agreement between the dissenting owner of the ownership interest and the responsible organization has been reached within the period prescribed by Section 10.358(d). When the beneficial owner files a petition described by Subsection (a):

(1) the beneficial owner shall at that time be considered, for purposes of this subchapter, the owner, the dissenting owner, and the holder of the ownership interest subject to the petition; and

(2) the dissenting owner who demanded payment under Section 10.356 has no further rights regarding the ownership interest subject to the petition.

SEC. 10.362. COMPUTATION AND DETERMINATION OF FAIR VALUE OF OWNERSHIP INTEREST.

(a)    For purposes of this subchapter, the fair value of an ownership interest of a domestic entity subject to dissenters’ rights is the value of the ownership interest on the date preceding the date of the action that is the subject of the appraisal. Any appreciation or depreciation in the value of the ownership interest occurring in anticipation of the proposed action or as a result of the action must be specifically excluded from the computation of the fair value of the ownership interest.

(b)    In computing the fair value of an ownership interest under this subchapter, consideration must be given to the value of the domestic entity as a going concern without including in the computation of value any control premium, any minority ownership discount, or any discount for lack of marketability. If the domestic entity has different classes or series of ownership interests, the relative rights and preferences of and limitations placed on the class or series of ownership interests, other than relative voting rights, held by the dissenting owner must be taken into account in the computation of value.

(c)    The determination of the fair value of an ownership interest made for purposes of this subchapter may not be used for purposes of making a determination of the fair value of that ownership interest for another purpose or of the fair value of another ownership interest, including for purposes of determining any minority or liquidity discount that might apply to a sale of an ownership interest.

SEC. 10.363. POWERS AND DUTIES OF APPRAISER; APPRAISAL PROCEDURES.

(a)    An appraiser appointed under Section 10.361 has the power and authority that:

(1) is granted by the court in the order appointing the appraiser; and

(2) may be conferred by a court to a master in chancery as provided by Rule 171, Texas Rules of Civil Procedure.

(b)    The appraiser shall:

(1) determine the fair value of an ownership interest of an owner adjudged by the court to be entitled to payment for the ownership interest; and

(2) file with the court a report of that determination.

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(c)    The appraiser is entitled to examine the books and records of a responsible organization and may conduct investigations as the appraiser considers appropriate. A dissenting owner or responsible organization may submit to an appraiser evidence or other information relevant to the determination of the fair value of the ownership interest required by Subsection (b)(1).

(d)    The clerk of the court appointing the appraiser shall provide notice of the filing of the report under Subsection (b) to each dissenting owner named in the list filed under Section 10.361 and the responsible organization.

SEC. 10.364. OBJECTION TO APPRAISAL; HEARING.

(a)    A dissenting owner or responsible organization may object, based on the law or the facts, to all or part of an appraisal report containing the fair value of an ownership interest determined under Section 10.363(b).

(b)    If an objection to a report is raised under Subsection (a), the court shall hold a hearing to determine the fair value of the ownership interest that is the subject of the report. After the hearing, the court shall require the responsible organization to pay to the holders of the ownership interest the amount of the determined value with interest, accruing from the 91st day after the date the applicable action for which the owner elected to dissent was effected until the date of the judgment.

(c)    Interest under Subsection (b) accrues at the same rate as is provided for the accrual of prejudgment interest in civil cases.

(d)    The responsible organization shall:

(1) immediately pay the amount of the judgment to a holder of an uncertificated ownership interest; and

(2) pay the amount of the judgment to a holder of a certificated ownership interest immediately after the certificate holder surrenders to the responsible organization an endorsed certificate representing the ownership interest.

(e)    On payment of the judgment, the dissenting owner does not have an interest in the:

(1) ownership interest for which the payment is made; or

(2) responsible organization with respect to that ownership interest.

SEC. 10.365. COURT COSTS; COMPENSATION FOR APPRAISER.

(a)    An appraiser appointed under Section 10.361 is entitled to a reasonable fee payable from court costs.

(b)    All court costs shall be allocated between the responsible organization and the dissenting owners in the manner that the court determines to be fair and equitable.

SEC. 10.366. STATUS OF OWNERSHIP INTEREST HELD OR FORMERLY HELD BY DISSENTING OWNER.

(a)    An ownership interest of an organization acquired by a responsible organization under this subchapter:

(1) in the case of a merger, conversion, or interest exchange, shall be held or disposed of as provided in the plan of merger, conversion, or interest exchange; and

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(2) in any other case, may be held or disposed of by the responsible organization in the same manner as other ownership interests acquired by the organization or held in its treasury.

(b)    An owner who has demanded payment for the owner’s ownership interest under Section 10.356 is not entitled to vote or exercise any other rights of an owner with respect to the ownership interest except the right to:

(1) receive payment for the ownership interest under this subchapter; and

(2) bring an appropriate action to obtain relief on the ground that the action to which the demand relates would be or was fraudulent.

(c)    An ownership interest for which payment has been demanded under Section 10.356 may not be considered outstanding for purposes of any subsequent vote or action.

SEC. 10.367. RIGHTS OF OWNERS FOLLOWING TERMINATION OF RIGHT OF DISSENT.

(a)    The rights of a dissenting owner terminate if:

(1) the owner withdraws the demand under Section 10.356;

(2) the owner’s right of dissent is terminated under Section 10.356;

(3) a petition is not filed within the period required by Section 10.361; or

(4) after a hearing held under Section 10.361, the court adjudges that the owner is not entitled to elect to dissent from an action under this subchapter.

(b)    On termination of the right of dissent under this section:

(1) the dissenting owner and all persons claiming a right under the owner are conclusively presumed to have approved and ratified the action to which the owner dissented and are bound by that action;

(2) the owner’s right to be paid the fair value of the owner’s ownership interests ceases;

(3) the owner’s status as an owner of those ownership interests is restored, as if the owner’s demand for payment of the fair value of the ownership interests had not been made under Section 10.356, if the owner’s ownership interests were not canceled, converted, or exchanged as a result of the action or a subsequent action;

(4) the dissenting owner is entitled to receive the same cash, property, rights, and other consideration received by owners of the same class and series of ownership interests held by the owner, as if the owner’s demand for payment of the fair value of the ownership interests had not been made under Section 10.356, if the owner’s ownership interests were canceled, converted, or exchanged as a result of the action or a subsequent action;

(5) any action of the domestic entity taken after the date of the demand for payment by the owner under Section 10.356 will not be considered ineffective or invalid because of the restoration of the owner’s ownership interests or the other rights or entitlements of the owner under this subsection; and

(6) the dissenting owner is entitled to receive dividends or other distributions made after the date of the owner’s payment demand under Section 10.356, to owners of the same class and series of ownership interests held by the owner as if the demand had not been made, subject to any change in or adjustment to the ownership interests because of an action taken by the domestic entity after the date of the demand.

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SEC. 10.368. EXCLUSIVITY OF REMEDY OF DISSENT AND APPRAISAL.

In the absence of fraud in the transaction, any right of an owner of an ownership interest to dissent from an action and obtain the fair value of the ownership interest under this subchapter is the exclusive remedy for recovery of:

(1) the value of the ownership interest; or

(2) money damages to the owner with respect to the action.

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Exhibit C

DIRECTOR SUPPORT AGREEMENT

This DIRECTOR SUPPORT AGREEMENT (this “Agreement”) is made and entered into as of November 27, 2018 (the “Execution Date”), by and between Spirit of Texas Bancshares, Inc., a Texas corporation (“Spirit”), First Beeville Financial Corporation, a Texas corporation (the “Company”), and [                    ], an individual resident of the State of [                    ] (the “Undersigned”). Terms with their initial letters capitalized and not otherwise defined herein have the meanings given to them in the Reorganization Agreement (as defined below).

RECITALS

WHEREAS, the Undersigned is a director of the Company and/or The First National Bank of Beeville, a national banking association and subsidiary of the Company (the “Bank”);

WHEREAS, in connection with the execution of this Agreement, Spirit and the Company are entering into that certain Agreement and Plan of Reorganization, dated as of the date hereof (as such agreement may be amended or supplemented from time to time, the “Reorganization Agreement”), pursuant to which the Company will merge with and into Spirit, with Spirit continuing as the surviving entity (the “Merger”), and which further contemplates that the Bank and Spirit of Texas Bank, SSB, a Texas state savings bank and wholly-owned subsidiary of Spirit (“Spirit Bank”), will be combined through merger, with Spirit Bank continuing as the surviving entity, pursuant to a separate agreement and plan of merger;

WHEREAS, the term “Company” as used in this Agreement with respect to time periods after the Effective Time shall mean Spirit, as successor to the Company in the Merger;

WHEREAS, the Undersigned, as a director of the Company and/or the Bank, as the case may be, has had access to certain Confidential Information (as defined below), including, without limitation, information concerning the Company’s and the Bank’s business and the relationships between the Company and the Bank, their respective Subsidiaries, vendors and customers, and the Company’s and/or the Bank’s status and relationship with peer institutions that compete with Spirit, Spirit Bank, the Company and/or the Bank, and has had access to trade secrets, customer goodwill and proprietary information of the Company and/or the Bank and their respective businesses that constitute a substantial asset to be acquired by Spirit and Spirit Bank; and

WHEREAS, the Undersigned recognizes that Spirit’s willingness to enter into the Reorganization Agreement is dependent on the Undersigned entering into this Agreement (including the anti-piracy/non-solicitation/non-competition covenants below) and, therefore, this Agreement is incident thereto.

NOW, THEREFORE, for the new Confidential Information the Undersigned will be provided, training that is expected to be made available to the Undersigned and for other good and valuable consideration contained herein and in the Reorganization Agreement, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

AGREEMENT

1.    Director Support. The Undersigned agrees to use his or her best efforts to refrain from harming the goodwill and business relationships of Spirit, Spirit Bank, the Company, the Bank and their respective Subsidiaries, and their respective customer and client relationships during the term of this Agreement.

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2.    Non-Disclosure Obligations. The Undersigned agrees that he or she will not make any unauthorized disclosure, directly or indirectly, of any Confidential Information of Spirit, Spirit Bank, the Company or the Bank to third parties, or make any use thereof, directly or indirectly. The Undersigned also agrees that he or she shall deliver promptly to Spirit or the Company at any time at its reasonable request, without retaining any copies, all documents and other material in the Undersigned’s possession at that time relating, directly or indirectly, to any Confidential Information or other information of Spirit, Spirit Bank, the Company or the Bank, or Confidential Information or other information regarding third parties, learned in such person’s position as a director, officer, employee or shareholder of the Company or the Bank, as applicable.

For purposes of this Agreement, “Confidential Information” means and includes Spirit’s, Spirit Bank’s, the Company’s and the Bank’s confidential and/or proprietary information and/or trade secrets, including those of their respective Subsidiaries, that have been and/or will be developed or used and that cannot be obtained readily by third parties from outside sources. Confidential Information includes, but is not limited to, the: information regarding past, current and prospective customers and investors and business Affiliates, employees, contractors, and the industry not generally known to the public; strategies, methods, books, records, and documents; technical information concerning products, equipment, services, and processes; procurement procedures, pricing, and pricing techniques, including contact names, services provided, pricing, type and amount of services used; financial data; pricing strategies and price curves; positions; plans or strategies for expansion or acquisitions; budgets; research; financial and sales data; trading methodologies and terms; communications information; evaluations, opinions and interpretations of information and data; marketing and merchandising techniques; electronic databases; models and the output from same; specifications; computer programs; contracts; bids or proposals; technologies and methods; training methods and processes; organizational structure; personnel information, including compensation and bonuses; payments or rates paid to consultants or other service providers; other such confidential or proprietary information; and notes, analysis, compilations, studies, summaries, and other material prepared by or for Spirit, Spirit Bank, the Company, the Bank or any of their respective Subsidiaries containing or based, in whole or in part, on any information included in any of the foregoing. The term “Confidential Information” does not include any information that (a) at the time of disclosure or thereafter is generally available to and known to the public, other than by a breach of this Agreement by the disclosing party; (b) was available to the disclosing party, prior to disclosure by Spirit, Spirit Bank, the Company or the Bank, as applicable, on a non-confidential basis from a source other than the Undersigned and is not known by the Undersigned, after reasonable investigation, to be subject to any fiduciary, contractual or legal obligations of confidentiality; or (c) was independently acquired or developed by the Undersigned without violating any obligations of this Agreement. The Undersigned acknowledges that Spirit’s, Spirit Bank’s, the Company’s and the Bank’s respective businesses are highly competitive, that this Confidential Information constitutes valuable, special and unique assets to be acquired by Spirit in the Merger and constitutes existing valuable, special and unique assets held by the Company pre-Merger, and that protection of such Confidential Information against unauthorized disclosure and use is of critical importance to Spirit.

3.    Non-Competition Obligations. The Undersigned agrees that, for the period beginning on the Execution Date and continuing until the date that is two (2) years after the Effective Time of the Merger (the “Non-Competition Period”), the Undersigned will not, except as a director or officer of the Company or the Bank prior to the Effective Time of the Merger or as set forth on Schedule A hereto, in any capacity, directly or indirectly:

(a)    compete or engage, anywhere in the geographic area comprised of the fifty (50) mile radius surrounding the locations of the Bank before the Effective Time or, following the Effective Time, the locations of Spirit Bank banking centers that were formerly locations of the Bank (the “Market Area”), in a business as a federally insured depository institution;

(b)    take any action to invest in, own, manage, operate, control, participate in, be employed or engaged by, be a director of, or otherwise be connected in any manner with any individual, corporation (including any non-profit corporation), general or limited partnership, limited liability company, joint venture, estate, trust, association, organization or Governmental Body (each, a “Person”) engaging in a

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business similar to that of Spirit, Spirit Bank, the Company or the Bank anywhere within the Market Area. Notwithstanding the foregoing, the Undersigned is permitted hereunder to own, directly or indirectly, up to one percent (1.0%) of the issued and outstanding securities of any publicly traded financial institution conducting business in the Market Area;

(c)    (i) call on, service, solicit or respond to inquiries for competing business from customers of Spirit, Spirit Bank, the Company or the Bank or any of their respective Affiliates if, within the twelve (12) months before the Execution Date, the Undersigned had or made contact with the customer, or had access to information and files about the customer, or (ii) interfere with or damage (or attempt to interfere with or damage) any relationship between Spirit, Spirit Bank, the Company or the Bank or any of their respective Affiliates and any such customer; or

(d)    call on, solicit, induce or respond to inquiries to or from any employee of Spirit, Spirit Bank, the Company or the Bank or any of their respective Affiliates whom the Undersigned had contact with, knowledge of, or association with in the course of service with the Company or the Bank (whether as an employee or a contractor) to terminate his or her employment from or contract with Spirit, Spirit Bank, the Company or the Bank or any of their respective Affiliates, or assist any other Person in such activities;

provided, however, that the restrictions in the foregoing (c) and (d) will not prohibit the Undersigned from responding to inquiries made in response to a general solicitation for customers or employees or publicly advertised employment opportunities (including through employment agencies).

The Undersigned may not avoid the purpose and intent of this Section 3 by engaging in conduct within the Market Area from a remote location through means such as telecommunications, written correspondence, computer generated or assisted communications or other similar methods.

4.    Non-Competition Covenant Reasonable. The Undersigned acknowledges that the restrictions imposed by this Agreement are legitimate, reasonable and necessary to protect Spirit’s acquisition of the Company and the goodwill and business prospects thereof. The Undersigned acknowledges that the scope and duration of the restrictions contained herein are reasonable in light of the time that the Undersigned has been engaged in the business of the Company and/or the Bank and the Undersigned’s relationship with the customers of the Company and/or the Bank. The Undersigned further acknowledges that the restrictions contained herein are not burdensome to the Undersigned in light of the other opportunities that remain open to the Undersigned. Moreover, the Undersigned acknowledges that he or she has and will have other means available to him or her for the pursuit of his or her livelihood after the Effective Time of the Merger.

5.    Consideration. In consideration for the above obligations of the Undersigned, in addition to those matters set forth in the Recitals to this Agreement, the Company agrees to provide the Undersigned with access to new Confidential Information and training relating to the Company’s business, which will become Spirit’s business after the Effective Time of the Merger, in a greater quantity and/or expanded nature than that already provided to the Undersigned. The Undersigned also will have access to, or knowledge of, new Confidential Information of third parties, such as actual and potential customers, suppliers, partners, joint venturers, investors, financing sources, etc., of the Company and/or the Bank prior to the Merger.

6.    Injunctive Relief and Additional Remedies. The Undersigned acknowledges that the injury that would be suffered by Spirit or the Company as a result of a breach of the provisions of this Agreement (including any provision of Section 3) would be irreparable and that an award of monetary damages to Spirit or the Company, as the case may be, for such a breach would be an inadequate remedy. Consequently, each of Spirit and the Company shall have the right, in addition to any other rights it may have, to seek specific performance, to obtain injunctive relief to restrain any proposed or actual breach or threatened breach or otherwise to specifically enforce any provision of this Agreement without the obligation to post bond or other security in seeking such relief. Such equitable remedies are in addition to the right to obtain compensatory and punitive damages and attorney’s fees, and, notwithstanding Spirit’s or the Company’s, as the case may be, right to so seek damages, the

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Undersigned waives any defense that an adequate remedy for Spirit or the Company, as the case may be, exists under law. If the Undersigned, on the one hand, or Spirit or the Company, on the other hand, must bring suit to enforce this Agreement, the prevailing party shall be entitled to recover its attorneys’ fees and costs related thereto.

7.    Extension of Restrictive Covenant Period. In the event that Spirit or the Company shall file a lawsuit in any court of competent jurisdiction alleging a breach of Section 3 by the Undersigned and Spirit or the Company is successful on the merits of such lawsuit, then any time period set forth in this Agreement including the time periods set forth in Section 3, will be extended one month for each month the Undersigned was in breach of this Agreement, so that Spirit or the Company, as the case may be, is provided the benefit of the full Non-Competition Period.

8.    Effectiveness of this Agreement. This Agreement shall become effective on the Execution Date. This Agreement shall automatically terminate and be of no further force or effect if (a) the Reorganization Agreement is not executed on or prior to the Execution Date or (b) the Reorganization Agreement (once executed) is terminated in accordance with its terms and the Merger does not occur.

9.    Waiver; Amendment. The rights and remedies of the parties hereto are cumulative and not alternative. Any party may unilaterally waive a right which is solely applicable to it. Such action will be evidenced by a signed written notice. Neither the failure nor any delay in exercising any right, power or privilege under this Agreement by any party hereto will operate as a waiver thereof. No single or partial exercise of any right, power or privilege hereunder will preclude any other or further exercise thereof or the exercise of any other right, power or privilege. A waiver of any party of any right or remedy on any one occasion will not be construed as a bar to any right or remedy that such party would otherwise have on any future occasion or to any right or remedy that any other party may have hereunder. This Agreement may be amended, modified or supplemented only by an instrument in writing executed by each of the parties hereto.

10.    Notices. All notices, consents, waivers and other communications required or permitted to be given under this Agreement shall be in writing and shall be deemed to have been duly given if delivered in person, mailed by first class mail (postage prepaid) or sent by email, courier or personal delivery to the parties hereto at the following addresses unless by such notice a different address shall have been designated:

If to Spirit:

Spirit of Texas Bancshares, Inc.

1836 Spirit of Texas Way

Conroe, Texas 77301

Attention: Mr. Dean O. Bass

Email: DBass@sotb.com

With a copy (which shall not constitute notice) to:

Hunton Andrews Kurth LLP

1445 Ross Avenue, Suite 3700

Dallas, Texas 75202

Attention: Mr. Peter G. Weinstock

Email: pweinstock@HuntonAK.com

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If to the Company:

First Beeville Financial Corporation

1400 East Houston Street

Beeville, Texas 78102

Attention: Mr. Brian K. Schneider

Email: brians@fnbsotx.com

With a copy (which shall not constitute notice to:

Fenimore, Kay, Harrison & Ford, LLP

5307 East Mockingbird Lane, Suite 950

Dallas, Texas 75206

Attention: Mr. Robert N. Flowers

Email: rflowers@fkhpartners.com

If to the Undersigned:

At the address set forth on the Undersigned’s signature page hereto.

All notices sent by mail as provided above shall be deemed delivered three (3) days after deposit in the mail, all notices sent by courier as provided above shall be deemed delivered one (1) day after being sent and all notices sent by email shall be deemed delivered upon confirmation of receipt. All other notices shall be deemed delivered when actually received. Any party to this Agreement may change its address for the giving of notice specified above by giving notice as provided herein. Notices permitted to be sent via email shall be deemed delivered only if sent to such persons at such email addresses as may be set forth in writing (and confirmation of receipt is received by the sending party).

11.    Successors and Assigns. This Agreement shall be binding upon and shall inure to the benefit of Spirit, the Company and their respective successors and assigns, including, without limitation, any successor by merger, consolidation or stock purchase of Spirit, the Company and any Person that acquires all or substantially all of the assets of Spirit or the Company.

12.    Governing Law; Jurisdiction. This Agreement is to be construed in accordance with and governed by the laws of the State of Texas without regard for conflict of laws principles thereof. Any suit, action or other proceeding directly or indirectly arising out of or relating to this Agreement or the transactions contemplated hereby must be brought in the courts of the State of Texas, County of Harris, or, if it has or can acquire jurisdiction, in the U.S. District Court for the Southern District of Texas (Houston Division), and each party irrevocably submits to the exclusive jurisdiction of such court in any such suit, action or other proceeding. Process in any suit, action or other proceeding referred to in the preceding sentence may be served on any party anywhere in the world. Notwithstanding the foregoing a party may commence any action or proceeding in a court other than the above-named courts solely for the purpose of enforcing an order or judgment issued by one of the above-named courts.

13.    Entire Agreement. This Agreement, together with the Reorganization Agreement and the agreements contemplated thereby, embody the entire agreement and understanding of the parties hereto in respect to the subject matter contained herein. This Agreement supersedes all prior agreements and understandings among the parties hereto with respect to such subject matter contained herein. In the event of a conflict between the terms of this Agreement and the terms of the Reorganization Agreement, the terms of the Reorganization Agreement shall control.

14.    No Third-Party Beneficiaries. Nothing contained in this Agreement, express or implied, is intended to confer upon any persons, other than the parties hereto or their respective successors, any rights, remedies, obligations or liabilities under or by reason of this Agreement.

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15.    Severability. If any provision of this Agreement is held invalid or unenforceable by any court of competent jurisdiction, the other provisions of this Agreement will remain in full force and effect. Any provision of this Agreement held invalid or unenforceable only in part or degree will remain in full force and effect to the extent not held invalid or unenforceable. If any restriction in this Agreement is held invalid or unenforceable by any court of competent jurisdiction, it is the intention of the parties hereto that the restrictions be reformed by such court in such a manner that protects the business and Confidential Information of Spirit, Spirit Bank, the Company and the Bank to the maximum extent permissible.

16.    Representation by Counsel; Interpretation. Each party hereto acknowledges that it has had the opportunity to be represented by counsel in the negotiation, preparation and execution of this Agreement and the transactions contemplated hereby. Accordingly, any rule of law, including, but not limited to, the doctrine of contra proferentem, or any legal decision which would require interpretation of any claimed ambiguities in this Agreement against the drafting party has no application and is expressly waived. The provisions of this Agreement shall be interpreted in a reasonable manner to effect the intent of the parties hereto.

17.    Section Headings, Construction. The headings of Sections in this Agreement are provided for convenience only and will not affect its construction or interpretation. All references to “Section” or “Sections” refer to the corresponding Section or Sections of this Agreement unless otherwise specified. All words used in this Agreement will be construed to be of such gender or number, as the circumstances require. Unless otherwise expressly provided, the word “including” does not limit the preceding words or terms.

18.    Counterparts. For the convenience of the parties hereto, this Agreement may be executed simultaneously in two or more counterparts, each of which will be deemed an original but all of which shall constitute one and the same instrument. An email or electronic scan in “.pdf” format of a signed counterpart of this Agreement will be sufficient to bind the party or parties whose signature(s) appear thereon.

[Signature Page Follows]

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IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date first above written.

SPIRIT OF TEXAS BANCSHARES, INC.
By:
	Dean O. Bass,
	Chairman and Chief Executive Officer
FIRST BEEVILLE FINANCIAL CORPORATION
By:
	Brian K. Schneider,
	Chairman and President
DIRECTOR
[                    ]

[Signature Page to Director Support Agreement]

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SCHEDULE A

EXISTING CAPACITY

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Annex B

CHAPTER 10, SUBCHAPTER H OF THE TEXAS BUSINESS ORGANIZATIONS CODE

CHAPTER 10. MERGERS, INTEREST EXCHANGES, CONVERSIONS, AND SALES OF ASSETS

SUBCHAPTER H. RIGHTS OF DISSENTING OWNERS

§ 10.351. APPLICABILITY OF SUBCHAPTER.

(a) This subchapter does not apply to a fundamental business transaction of a domestic entity if, immediately before the effective date of the fundamental business transaction, all of the ownership interests of the entity otherwise entitled to rights to dissent and appraisal under this code are held by one owner or only by the owners who approved the fundamental business transaction.

(b) This subchapter applies only to a “domestic entity subject to dissenters’ rights,” as defined in Section 1.002. That term includes a domestic for-profit corporation, professional corporation, professional association, and real estate investment trust. Except as provided in Subsection (c), that term does not include a partnership or limited liability company.

(c) The governing documents of a partnership or a limited liability company may provide that its owners are entitled to the rights of dissent and appraisal provided by this subchapter, subject to any modification to those rights as provided by the entity’s governing documents.

§ 10.352. DEFINITIONS.

In this subchapter:

(1) “Dissenting owner” means an owner of an ownership interest in a domestic entity subject to dissenters’ rights who:

(A) provides notice under Section 10.356; and

(B) complies with the requirements for perfecting that owner’s right to dissent under this subchapter.

(2) “Responsible organization” means:

(A) the organization responsible for:

(i) the provision of notices under this subchapter; and

(ii) the primary obligation of paying the fair value for an ownership interest held by a dissenting owner;

(B) with respect to a merger or conversion:

(i) for matters occurring before the merger or conversion, the organization that is merging or converting; and

(ii) for matters occurring after the merger or conversion, the surviving or new organization that is primarily obligated for the payment of the fair value of the dissenting owner’s ownership interest in the merger or conversion;

(C) with respect to an interest exchange, the organization the ownership interests of which are being acquired in the interest exchange; and

(D) with respect to the sale of all or substantially all of the assets of an organization, the organization the assets of which are to be transferred by sale or in another manner.

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§ 10.353. FORM AND VALIDITY OF NOTICE.

(a) Notice required under this subchapter:

(1) must be in writing; and

(2) may be mailed, hand-delivered, or delivered by courier or electronic transmission.

(b) Failure to provide notice as required by this subchapter does not invalidate any action taken.

§ 10.354. RIGHTS OF DISSENT AND APPRAISAL.

(a) Subject to Subsection (b), an owner of an ownership interest in a domestic entity subject to dissenters’ rights is entitled to:

(1) dissent from:

(A) a plan of merger to which the domestic entity is a party if owner approval is required by this code and the owner owns in the domestic entity an ownership interest that was entitled to vote on the plan of merger;

(B) a sale of all or substantially all of the assets of the domestic entity if owner approval is required by this code and the owner owns in the domestic entity an ownership interest that was entitled to vote on the sale;

(C) a plan of exchange in which the ownership interest of the owner is to be acquired;

(D) a plan of conversion in which the domestic entity is the converting entity if owner approval is required by this code and the owner owns in the domestic entity an ownership interest that was entitled to vote on the plan of conversion;

(E) a merger effected under Section 10.006 in which:

(i) the owner is entitled to vote on the merger; or

(ii) the ownership interest of the owner is converted or exchanged; or

(F) a merger effected under Section 21.459(c) in which the shares of the shareholders are converted or exchanged; and

(2) Subject to compliance with the procedures set forth in this subchapter, obtain the fair value of that ownership interest through an appraisal.

(b) Notwithstanding Subsection (a), subject to Subsection (c), an owner may not dissent from a plan of merger or conversion in which there is a single surviving or new domestic entity or non-code organization, or from a plan of exchange, if:

(1) the ownership interest, or a depository receipt in respect of the ownership interest, held by the owner is part of a class or series of ownership interests, or depository receipts in respect of ownership interests, that are, on the record date set for purposes of determining which owners are entitled to vote on the plan of merger, conversion, or exchange, as appropriate:

(A) listed on a national securities exchange; or

(B) held of record by at least 2,000 owners;

(2) the owner is not required by the terms of the plan of merger, conversion, or exchange, as appropriate, to accept for the owner’s ownership interest any consideration that is different from the consideration to be provided to any other holder of an ownership interest of the same class or series as the

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ownership interest held by the owner, other than cash instead of fractional shares or interests the owner would otherwise be entitled to receive; and

(3) the owner is not required by the terms of the plan of merger, conversion, or exchange, as appropriate, to accept for the owner’s ownership interest any consideration other than:

(A) ownership interests, or depository receipts in respect of ownership interests, of a domestic entity or non-code organization of the same general organizational type that, immediately after the effective date of the merger, conversion, or exchange, as appropriate, will be part of a class or series of ownership interests, or depository receipts in respect of ownership interests, that are:

(i) listed on a national securities exchange or authorized for listing on the exchange on official notice of issuance; or

(ii) held of record by at least 2,000 owners;

(B) cash instead of fractional ownership interests the owner would otherwise be entitled to receive; or

(C) any combination of the ownership interests and cash described by Paragraphs (A) and (B).

(c) Subsection (b) will not apply either to a domestic entity that is a subsidiary with respect to a merger under Section 10.006 or to a corporation with respect to a merger under Section 21.459(c).

§ 10.355. NOTICE OF RIGHT OF DISSENT AND APPRAISAL.

(a) A domestic entity subject to dissenters’ rights that takes or proposes to take an action regarding which an owner has a right to dissent and obtain an appraisal under Section 10.354 will notify each affected owner of the owner’s rights under that section if:

(1) the action or proposed action is submitted to a vote of the owners at a meeting; or

(2) approval of the action or proposed action is obtained by written consent of the owners instead of being submitted to a vote of the owners.

(b) If a parent organization effects a merger under Section 10.006 and a subsidiary organization that is a party to the merger is a domestic entity subject to dissenters’ rights, the responsible organization will notify the owners of that subsidiary organization who have a right to dissent to the merger under Section 10.354 of their rights under this subchapter not later than the 10th day after the effective date of the merger. The notice must also include a copy of the certificate of merger and a statement that the merger has become effective.

(b-1) If a corporation effects a merger under Section 21.459(c), the responsible organization will notify the shareholders of that corporation who have a right to dissent to the plan of merger under Section 10.354 of their rights under this subchapter not later than the 10th day after the effective date of the merger. Notice required under this subsection that is given to shareholders before the effective date of the merger may, but is not required to, contain a statement of the merger’s effective date. If the notice is not given to the shareholders until on or after the effective date of the merger, the notice must contain a statement of the merger’s effective date.

(c) A notice required to be provided under Subsection (a), (b), or (b-1) must:

(1) be accompanied by a copy of this subchapter; and

(2) advise the owner of the location of the responsible organization’s principal executive offices to which a notice required under Section 10.356(b)(1) or a demand under Section 10.356(b)(3), or both, may be provided.

(d) In addition to the requirements prescribed by Subsection (c), a notice required to be provided:

(1) under Subsection (a)(1) must accompany the notice of the meeting to consider the action;

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(2) under Subsection (a)(2) must be provided to:

(A) each owner who consents in writing to the action before the owner delivers the written consent; and

(B) each owner who is entitled to vote on the action and does not consent in writing to the action before the 11th day after the date the action takes effect; and

(3) under Subsection (b-1) must be provided:

(A) if given before the consummation of the tender or exchange offer described by Section 21.459(c)(2), to each shareholder to whom that offer is made; or

(B) if given after the consummation of the tender or exchange offer described by Section 21.459(c)(2), to each shareholder who did not tender the shareholder’s shares in that offer.

(e) Not later than the 10th day after the date an action described by Subsection (a)(1) takes effect, the responsible organization will give notice that the action has been effected to each owner who voted against the action and sent notice under Section 10.356(b)(1).

(f) If the notice given under Subsection (b-1) did not include a statement of the effective date of the merger, the responsible organization will, not later than the 10th day after the effective date, give a second notice to the shareholders notifying them of the merger’s effective date. If the second notice is given after the later of the date on which the tender or exchange offer described by Section 21.459(c)(2) is consummated or the 20th day after the date notice under Subsection (b-1) is given, then the second notice is required to be given to only those shareholders who have made a demand under Section 10.356(b)(3).

§ 10.356. PROCEDURE FOR DISSENT BY OWNERS AS TO ACTIONS; PERFECTION OF RIGHT OF DISSENT AND APPRAISAL.

(a) An owner of an ownership interest of a domestic entity subject to dissenters’ rights who has the right to dissent and appraisal from any of the actions referred to in Section 10.354 may exercise that right to dissent and appraisal only by complying with the procedures specified in this subchapter. An owner’s right of dissent and appraisal under Section 10.354 may be exercised by an owner only with respect to an ownership interest that is not voted in favor of the action.

(b) To perfect the owner’s rights of dissent and appraisal under Section 10.354, an owner:

(1) if the proposed action is to be submitted to a vote of the owners at a meeting, must give to the domestic entity a written notice of objection to the action that:

(A) is addressed to the entity’s president and secretary;

(B) states that the owner’s right to dissent will be exercised if the action takes effect;

(C) provides an address to which notice of effectiveness of the action should be delivered or mailed; and

(D) is delivered to the entity’s principal executive offices before the meeting;

(2) with respect to the ownership interest for which the rights of dissent and appraisal are sought:

(A) must vote against the action if the owner is entitled to vote on the action and the action is approved at a meeting of the owners; and

(B) may not consent to the action if the action is approved by written consent; and

(3) must give to the responsible organization a demand in writing that:

(A) is addressed to the president and secretary of the responsible organization;

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(B) demands payment of the fair value of the ownership interests for which the rights of dissent and appraisal are sought;

(C) provides to the responsible organization an address to which a notice relating to the dissent and appraisal procedures under this subchapter may be sent;

(D) states the number and class of the ownership interests of the domestic entity owned by the owner and the fair value of the ownership interests as estimated by the owner; and

(E) is delivered to the responsible organization at its principal executive offices at the following time:

(i) not later than the 20th day after the date the responsible organization sends to the owner the notice required by Section 10.355(e) that the action has taken effect, if the action was approved by a vote of the owners at a meeting;

(ii) not later than the 20th day after the date the responsible organization sends to the owner the notice required by Section 10.355(d)(2) that the action has taken effect, if the action was approved by the written consent of the owners;

(iii) not later than the 20th day after the date the responsible organization sends to the owner a notice that the merger was effected, if the action is a merger effected under Section 10.006; or

(iv) not later than the 20th day after the date the responsible organization gives to the shareholder the notice required by Section 10.355(b-1) or the date of the consummation of the tender or exchange offer described by Section 21.459(c)(2), whichever is later, if the action is a merger effected under Section 21.459(c).

(c) An owner who does not make a demand within the period required by Subsection (b)(3)(E) or, if Subsection (b)(1) is applicable, does not give the notice of objection before the meeting of the owners is bound by the action and is not entitled to exercise the rights of dissent and appraisal under Section 10.354.

(d) Not later than the 20th day after the date an owner makes a demand under Subsection (b)(3), the owner must submit to the responsible organization any certificates representing the ownership interest to which the demand relates for purposes of making a notation on the certificates that a demand for the payment of the fair value of an ownership interest has been made under this section. An owner’s failure to submit the certificates within the required period has the effect of terminating, at the option of the responsible organization, the owner’s rights to dissent and appraisal under Section 10.354 unless a court, for good cause shown, directs otherwise.

(e) If a domestic entity and responsible organization satisfy the requirements of this subchapter relating to the rights of owners of ownership interests in the entity to dissent to an action and seek appraisal of those ownership interests, an owner of an ownership interest who fails to perfect that owner’s right of dissent in accordance with this subchapter may not bring suit to recover the value of the ownership interest or money damages relating to the action.

§ 10.357. WITHDRAWAL OF DEMAND FOR FAIR VALUE OF OWNERSHIP INTEREST.

(a) An owner may withdraw a demand for the payment of the fair value of an ownership interest made under Section 10.356 before:

(1) payment for the ownership interest has been made under Sections 10.358 and 10.361; or

(2) a petition has been filed under Section 10.361.

(b) Unless the responsible organization consents to the withdrawal of the demand, an owner may not withdraw a demand for payment under Subsection (a) after either of the events specified in Subsections (a)(1) and (2).

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§ 10.358. RESPONSE BY ORGANIZATION TO NOTICE OF DISSENT AND DEMAND FOR FAIR VALUE BY DISSENTING OWNER.

(a) Not later than the 20th day after the date a responsible organization receives a demand for payment made by a dissenting owner in accordance with Section 10.356(b)(3), the responsible organization will respond to the dissenting owner in writing by:

(1) accepting the amount claimed in the demand as the fair value of the ownership interests specified in the notice; or

(2) rejecting the demand and including in the response the requirements prescribed by Subsection (c).

(b) If the responsible organization accepts the amount claimed in the demand, the responsible organization will pay the amount not later than the 90th day after the date the action that is the subject of the demand was effected if the owner delivers to the responsible organization:

(1) endorsed certificates representing the ownership interests if the ownership interests are certificated; or

(2) signed assignments of the ownership interests if the ownership interests are uncertificated.

(c) If the responsible organization rejects the amount claimed in the demand, the responsible organization will provide to the owner:

(1) an estimate by the responsible organization of the fair value of the ownership interests; and

(2) an offer to pay the amount of the estimate provided under Subdivision (1).

(d) If the dissenting owner decides to accept the offer made by the responsible organization under Subsection (c)(2), the owner must provide to the responsible organization notice of the acceptance of the offer not later than the 90th day after the date the action that is the subject of the demand took effect

(e) If, not later than the 90th day after the date the action that is the subject of the demand took effect, a dissenting owner accepts an offer made by a responsible organization under Subsection (c)(2) or a dissenting owner and a responsible organization reach an agreement on the fair value of the ownership interests, the responsible organization will pay the agreed amount not later than the 120th day after the date the action that is the subject of the demand took effect, if the dissenting owner delivers to the responsible organization:

(1) endorsed certificates representing the ownership interests if the ownership interests are certificated; or

(2) signed assignments of the ownership interests if the ownership interests are uncertificated.

§ 10.359. RECORD OF DEMAND FOR FAIR VALUE OF OWNERSHIP INTEREST.

(a) A responsible organization will note in the organization’s ownership interest records maintained under Section 3.151 the receipt of a demand for payment from any dissenting owner made under Section 10.356.

(b) If an ownership interest that is the subject of a demand for payment made under Section 10.356 is transferred, a new certificate representing that ownership interest must contain:

(1) a reference to the demand; and

(2) the name of the original dissenting owner of the ownership interest.

§ 10.360. RIGHTS OF TRANSFEREE OF CERTAIN OWNERSHIP INTEREST.

A transferee of an ownership interest that is the subject of a demand for payment made under Section 10.356 does not acquire additional rights with respect to the responsible organization following the transfer. The transferee has only the rights the original dissenting owner had with respect to the responsible organization after making the demand.

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§ 10.361. PROCEEDING TO DETERMINE FAIR VALUE OF OWNERSHIP INTEREST AND OWNERS ENTITLED TO PAYMENT; APPOINTMENT OF APPRAISERS.

(a) If a responsible organization rejects the amount demanded by a dissenting owner under Section 10.358 and the dissenting owner and responsible organization are unable to reach an agreement relating to the fair value of the ownership interests within the period prescribed by Section 10.358(d), the dissenting owner or responsible organization may file a petition requesting a finding and determination of the fair value of the owner’s ownership interests in a court in:

(1) the county in which the organization’s principal office is located in this state; or

(2) the county in which the organization’s registered office is located in this state, if the organization does not have a business office in this state.

(b) A petition described by Subsection (a) must be filed not later than the 60th day after the expiration of the period required by Section 10.358(d).

(c) On the filing of a petition by an owner under Subsection (a), service of a copy of the petition will be made to the responsible organization. Not later than the 10th day after the date a responsible organization receives service under this subsection, the responsible organization will file with the clerk of the court in which the petition was filed a list containing the names and addresses of each owner of the organization who has demanded payment for ownership interests under Section 10.356 and with whom agreement as to the value of the ownership interests has not been reached with the responsible organization. If the responsible organization files a petition under Subsection (a), the petition must be accompanied by this list.

(d) The clerk of the court in which a petition is filed under this section will provide by registered mail notice of the time and place set for the hearing to:

(1) the responsible organization; and

(2) each owner named on the list described by Subsection (c) at the address shown for the owner on the list.

(e) The court will:

(1) determine which owners have:

(A) perfected their rights by complying with this subchapter; and

(B) become subsequently entitled to receive payment for the fair value of their ownership interests; and

(2) appoint one or more qualified appraisers to determine the fair value of the ownership interests of the owners described by Subdivision (1).

(f) The court will approve the form of a notice required to be provided under this section. The judgment of the court is final and binding on the responsible organization, any other organization obligated to make payment under this subchapter for an ownership interest, and each owner who is notified as required by this section.

(g) The beneficial owner of an ownership interest subject to dissenters’ rights held in a voting trust or by a nominee on the beneficial owner’s behalf may file a petition described by Subsection (a) if no agreement between the dissenting owner of the ownership interest and the responsible organization has been reached within the period prescribed by Section 10.358(d). When the beneficial owner files a petition described by Subsection (a):

(1) the beneficial owner will at that time be considered, for purposes of this subchapter, the owner, the dissenting owner, and the holder of the ownership interest subject to the petition; and

(2) the dissenting owner who demanded payment under Section 10.356 has no further rights regarding the ownership interest subject to the petition.

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§ 10.362. COMPUTATION AND DETERMINATION OF FAIR VALUE OF OWNERSHIP INTEREST.

(a) For purposes of this subchapter, the fair value of an ownership interest of a domestic entity subject to dissenters’ rights is the value of the ownership interest on the date preceding the date of the action that is the subject of the appraisal. Any appreciation or depreciation in the value of the ownership interest occurring in anticipation of the proposed action or as a result of the action must be specifically excluded from the computation of the fair value of the ownership interest.

(b) In computing the fair value of an ownership interest under this subchapter, consideration must be given to the value of the domestic entity as a going concern without including in the computation of value any control premium, any minority ownership discount, or any discount for lack of marketability. If the domestic entity has different classes or series of ownership interests, the relative rights and preferences of and limitations placed on the class or series of ownership interests, other than relative voting rights, held by the dissenting owner must be taken into account in the computation of value.

(c) The determination of the fair value of an ownership interest made for purposes of this subchapter may not be used for purposes of making a determination of the fair value of that ownership interest for another purpose or of the fair value of another ownership interest, including for purposes of determining any minority or liquidity discount that might apply to a sale of an ownership interest.

§ 10.363. POWERS AND DUTIES OF APPRAISER; APPRAISAL PROCEDURES.

(a) An appraiser appointed under Section 10.361 has the power and authority that:

(1) is granted by the court in the order appointing the appraiser; and

(2) may be conferred by a court to a master in chancery as provided by Rule 171, Texas Rules of Civil Procedure.

(b) The appraiser will:

(1) determine the fair value of an ownership interest of an owner adjudged by the court to be entitled to payment for the ownership interest; and

(2) file with the court a report of that determination.

(c) The appraiser is entitled to examine the books and records of a responsible organization and may conduct investigations as the appraiser considers appropriate. A dissenting owner or responsible organization may submit to an appraiser evidence or other information relevant to the determination of the fair value of the ownership interest required by Subsection (b)(1).

(d) The clerk of the court appointing the appraiser will provide notice of the filing of the report under Subsection (b) to each dissenting owner named in the list filed under Section 10.361 and the responsible organization.

§ 10.364. OBJECTION TO APPRAISAL; HEARING.

(a) A dissenting owner or responsible organization may object, based on the law or the facts, to all or part of an appraisal report containing the fair value of an ownership interest determined under Section 10.363(b).

(b) If an objection to a report is raised under Subsection (a), the court will hold a hearing to determine the fair value of the ownership interest that is the subject of the report. After the hearing, the court will require the responsible organization to pay to the holders of the ownership interest the amount of the determined value with interest, accruing from the 91st day after the date the applicable action for which the owner elected to dissent was effected until the date of the judgment.

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(c) Interest under Subsection (b) accrues at the same rate as is provided for the accrual of prejudgment interest in civil cases.

(d) The responsible organization will:

(1) immediately pay the amount of the judgment to a holder of an uncertificated ownership interest; and

(2) pay the amount of the judgment to a holder of a certificated ownership interest immediately after the certificate holder surrenders to the responsible organization an endorsed certificate representing the ownership interest.

(e) On payment of the judgment, the dissenting owner does not have an interest in the:

(1) ownership interest for which the payment is made; or

(2) responsible organization with respect to that ownership interest.

§ 10.365. COURT COSTS; COMPENSATION FOR APPRAISER.

(a) An appraiser appointed under Section 10.361 is entitled to a reasonable fee payable from court costs.

(b) All court costs will be allocated between the responsible organization and the dissenting owners in the manner that the court determines to be fair and equitable.

§ 10.366. STATUS OF OWNERSHIP INTEREST HELD OR FORMERLY HELD BY DISSENTING OWNER.

(a) An ownership interest of an organization acquired by a responsible organization under this subchapter:

(1) in the case of a merger, conversion, or interest exchange, will be held or disposed of as provided in the plan of merger, conversion, or interest exchange; and

(2) in any other case, may be held or disposed of by the responsible organization in the same manner as other ownership interests acquired by the organization or held in its treasury.

(b) An owner who has demanded payment for the owner’s ownership interest under Section 10.356 is not entitled to vote or exercise any other rights of an owner with respect to the ownership interest except the right to:

(1) receive payment for the ownership interest under this subchapter; and

(2) bring an appropriate action to obtain relief on the ground that the action to which the demand relates would be or was fraudulent.

(c) An ownership interest for which payment has been demanded under Section 10.356 may not be considered outstanding for purposes of any subsequent vote or action.

§ 10.367. RIGHTS OF OWNERS FOLLOWING TERMINATION OF RIGHT OF DISSENT.

(a) The rights of a dissenting owner terminate if:

(1) the owner withdraws the demand under Section 10.356;

(2) the owner’s right of dissent is terminated under Section 10.356;

(3) a petition is not filed within the period required by Section 10.361; or

(4) after a hearing held under Section 10.361, the court adjudges that the owner is not entitled to elect to dissent from an action under this subchapter.

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(b) On termination of the right of dissent under this section:

(1) the dissenting owner and all persons claiming a right under the owner are conclusively presumed to have approved and ratified the action to which the owner dissented and are bound by that action;

(2) the owner’s right to be paid the fair value of the owner’s ownership interests ceases;

(3) the owner’s status as an owner of those ownership interests is restored, as if the owner’s demand for payment of the fair value of the ownership interests had not been made under Section 10.356, if the owner’s ownership interests were not canceled, converted, or exchanged as a result of the action or a subsequent action;

(4) the dissenting owner is entitled to receive the same cash, property, rights, and other consideration received by owners of the same class and series of ownership interests held by the owner, as if the owner’s demand for payment of the fair value of the ownership interests had not been made under Section 10.356, if the owner’s ownership interests were canceled, converted, or exchanged as a result of the action or a subsequent action;

(5) any action of the domestic entity taken after the date of the demand for payment by the owner under Section 10.356 will not be considered ineffective or invalid because of the restoration of the owner’s ownership interests or the other rights or entitlements of the owner under this subsection; and

(6) the dissenting owner is entitled to receive dividends or other distributions made after the date of the owner’s payment demand under Section 10.356, to owners of the same class and series of ownership interests held by the owner as if the demand had not been made, subject to any change in or adjustment to the ownership interests because of an action taken by the domestic entity after the date of the demand.

§ 10.368. EXCLUSIVITY OF REMEDY OF DISSENT AND APPRAISAL.

In the absence of fraud in the transaction, any right of an owner of an ownership interest to dissent from an action and obtain the fair value of the ownership interest under this subchapter is the exclusive remedy for recovery of: (1) the value of the ownership interest; or (2) money damages to the owner with respect to the action.

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Annex C

November 27, 2018

Board of Directors

First Beeville Financial Corporation

1400 East Houston Street

Beeville, Texas 78102

Members of the Board:

You have requested Sheshunoff & Co. Investment Banking (“Sheshunoff”) provide an opinion as to the fairness, from a financial point of view, to First Beeville Financial Corporation, Beeville, Texas (“Beeville”), a Texas corporation and bank holding company, of the consideration to be paid to the common stockholders of Beeville in its proposed merger with Spirit of Texas Bancshares, Inc., (“Spirit”), Conroe, Texas, a Texas corporation and bank holding company. The merger will be accomplished by merging Beeville into Spirit (the “Merger”). Immediately thereafter, Beeville’s wholly-owned bank subsidiary, First National Bank of Beeville, will be merged into Spirit’s wholly-owned bank subsidiary, Spirit of Texas Bank, SSB, pursuant to the Bank Merger Agreement.

Pursuant to an Agreement and Plan of Merger dated, November 27, 2018 (the “Agreement”), Spirit has agreed to pay $32,375,000 of cash and $32,375,000 of stock, plus a return of Beeville’s excess capital as defined at closing approximately equal to $51,902, for all of the outstanding shares of common stock of Beeville. The total consideration after certain adjustments and transaction expenses of $64,801,902 (the “Merger Consideration”) is subject to adjustment pursuant to the terms of the Agreement. Total consideration before such adjustments and transaction expenses is approximately $68,937,622.

Sheshunoff is acting as financial advisor to Beeville in the Merger and is regularly engaged in the valuation of securities in connection with mergers and acquisitions and valuations for tax, financial reporting, corporate, and other purposes. Sheshunoff is experienced in these activities and has performed assignments similar in nature to that requested by Beeville.

In connection with its opinion, Sheshunoff, among other things:

1. Reviewed the latest draft of the Agreement delivered to Sheshunoff dated November 27, 2018;

2. Discussed the terms of the Agreement with the management of Beeville and Beeville’s legal counsel;

3. Conducted conversations with the management of Beeville regarding recent and projected financial performance of Beeville;

4. 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;

5. 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 state of Texas with similar characteristics to Beeville that Sheshunoff deemed appropriate;

901 South Mopac Expressway, Building V, Suite 140, Austin, TX 78746 | Phone 800.279.2241 | Fax 512.479.8200 | www.SheshunoffIB.com

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Board of Directors

First Beeville Financial Corporation

November 27, 2018

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6. 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;

7. 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;

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

9. Reviewed certain internal and publicly-available information regarding Spirit that Sheshunoff deemed relevant;

10. 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;

11. Compared the historical stock price data and trading volume of Spirit to certain relevant indices;

12. Reviewed available stock analysts’ research reports concerning Spirit; and

13. 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 us by Beeville for the purposes of this opinion. Sheshunoff assumed that any projections provided or approved by Beeville were reasonably prepared on a basis reflecting the best currently available estimates and judgments of Beeville’s management. Sheshunoff has assumed such forecasts and projections will be realized in the amounts and at the times contemplated thereby. Sheshunoff assumes no responsibility for and expresses no opinion on any such projections or the assumptions on which they are based. In addition, where appropriate, Sheshunoff relied upon publicly-available information that is believed to be reliable, accurate, and complete; however, we cannot guarantee the reliability, accuracy, or completeness of any such publicly-available information.

Sheshunoff did not make an independent evaluation of the assets or liabilities (including any contingent, derivative, or other off-balance-sheet assets or liabilities) of Beeville or Spirit nor was Sheshunoff furnished with any such appraisals. 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 operations 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 respective allowances for Beeville and Spirit are adequate to cover such losses. In addition, we have not reviewed any individual credit files or made an independent evaluation, appraisal or physical inspection of the assets or individual properties, including the other real estate owned, of Beeville or Spirit nor has Sheshunoff been furnished with any such evaluations or appraisals and assumed that the valuations of such assets and properties as presented are reasonably accurate. Sheshunoff did not perform an onsite review of Beeville or Spirit in the preparation of this opinion.

Sheshunoff assumed that the latest draft of the Agreement, as provided to Sheshunoff, will be without any 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 our analyses. For the purposes of this opinion, we have assumed that Spirit will be able to obtain all of the necessary financing, if needed, to complete the Merger in a timely manner and without terms and conditions that would adversely affect the Merger or its operations after the Merger. Sheshunoff assumed

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Board of Directors

First Beeville Financial Corporation

November 27, 2018

Page 3

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.

Sheshunoff’s opinion is necessarily based on economic, market, regulatory, and other conditions as in effect on, and the information made available to us as of, the date hereof. Events occurring after the date hereof could materially affect the assumptions used in preparing this opinion and the resulting conclusion, and we assume no responsibility for advising any person of any change in any matter affecting this opinion. Sheshunoff assumed that there are no material changes in the assets, financial condition, results of operations, regulatory standing, business or prospects of Beeville since the date of the last financial statement reviewed by us. Beeville’s management has advised us that it knows of no additional information that would have a material effect on this opinion. This opinion does not address any legal, regulatory, tax, or accounting matters, as to which Beeville has informed us that it has received such advice as it deems necessary from qualified professionals.

Sheshunoff expresses no opinion on the underlying decision by Beeville to engage in the Merger or the relative merits of the Merger as compared to the other transactions or business strategies that might be available to Beeville. This opinion is not an appraisal or opinion of value but is limited to the fairness of the Merger Consideration, from a financial point of view, to the stockholders of Beeville. We do not express any view, nor does this opinion, on any other term or aspect of the Merger, including, without limitation, (i) the fairness of the Merger to any class of securities, creditors, or constituencies of Beeville or (ii) the fairness of the amount or nature of any compensation to be paid or payable to any of the officers, directors, or employees of Beeville resulting directly or indirectly from the completion of the transactions as contemplated in the Merger.

This letter and the opinion expressed herein do not constitute a recommendation to any stockholder as to any approval of the Merger. Sheshunoff is an independent contractor for the purposes of this engagement and owes its duty solely to Beeville and not to any third party, including, without limitation, any individual board members or stockholders. Sheshunoff specifically disclaims any liability or fiduciary duties to Beeville’s stockholders or any third parties. It is understood that this letter, and the opinion expressed herein, is for the information of the Board of Directors of Beeville and may not be used for any other purpose without Sheshunoff’s prior written consent, except as may be required by law or by a court of competent jurisdiction and except that this opinion may be included in any filing with respect to the Merger with the Securities and Exchange Commission or proxy statement or similar communication to Beeville’s stockholders provided that this opinion is included in its entirety.

Sheshunoff’s fairness opinion is solely for the information of the Board of Directors of Beeville in the discharge of its fiduciary obligations and not for any other third party, including, without limitation, individual board members or Beeville stockholders. Beeville retained Sheshunoff based upon Sheshunoff’s reputation in bank valuations, mergers and acquisitions, and familiarity with the banking business. Beeville placed no limit on the scope of our analyses. In addition, Beeville agreed to reimburse Sheshunoff’s expenses and to indemnify Sheshunoff and its officers, employees, and affiliates for certain liabilities that may arise out of this engagement.

Sheshunoff will receive a fee for rendering its opinion that is not contingent upon the completion of the Merger and additional fees that are contingent upon consummation of the Merger. Sheshunoff or its affiliates have provided other services to Beeville for which they received compensation during the last two years. This opinion and the analyses supporting it were approved by a fairness committee of Sheshunoff.

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Board of Directors

First Beeville Financial Corporation

November 27, 2018

Page 4

Based on the foregoing and such other matters Sheshunoff deemed relevant, it is our opinion, as of the date hereof, that the Merger Consideration to be received pursuant to the Merger is fair to the stockholders of Beeville, from a financial point of view.

Very truly yours,

SHESHUNOFF & CO.

INVESTMENT BANKING, L.P.

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PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

Item 20. Indemnification of Directors and Officers of Spirit.

Spirit’s second amended and restated certificate of formation provides that its directors and officers will be indemnified by Spirit to the fullest extent permitted by the TBOC against all expenses incurred in connection with their service for or on behalf of Spirit.

In addition, Spirit’s second amended and restated certificate of formation provides that the personal liability of its directors and officers for monetary damages will be eliminated to the fullest extent permitted by the TBOC.

Spirit has entered into indemnification agreements with the members of its board of directors and officers, each an “indemnitee.” Each indemnification agreement requires Spirit to indemnify each indemnitee as described above. Spirit also, among other things, has agreed to advance costs and expenses subject to the condition that an indemnitee will reimburse the indemnitor for all amounts paid if a final judicial determination is made that the indemnitee is not entitled to be so indemnified under applicable law.

Spirit also maintains directors’ and officers’ liability insurance.

The indemnification provisions in Spirit’s second amended and restated certificate of incorporation and amended and restated bylaws and the indemnification agreements it entered into with each of its directors and officers may be sufficiently broad to permit indemnification of its directors and officers for liabilities (including reimbursement of expenses incurred) arising under the Securities Act.

Item 21. Exhibits and Financial Statement Schedules.

Exhibit No.	Description
2.1	Agreement and Plan of Reorganization, dated as of November 27, 2018, by and among Spirit of Texas Bancshares, Inc. and First Beeville Financial Corporation (included as Annex A  to the proxy statement/prospectus, which forms a part of this Registration Statement on Form S-4) (schedules to which have been omitted pursuant to Item 601(b)(2) of Regulation S-K and will be provided to the SEC upon request).
3.1	Second Amended and Restated Certificate of Formation of Spirit of Texas Bancshares, Inc. (incorporated herein by reference to Exhibit 3.1 to the Registration Statement on Form S-1 of Spirit of Texas Bancshares, Inc. (Registration No. 333-224172) filed April 6, 2018).
3.2	Amended and Restated Bylaws of Spirit of Texas Bancshares, Inc. (incorporated herein by reference to Exhibit 3.2 to the Registration Statement on Form S-1 of Spirit of Texas Bancshares, Inc. (Registration No. 333-224172) filed April 6, 2018).
4.1	Specimen Common Stock Certificate (incorporated herein by reference to Exhibit 4.1 to the Registration Statement on Form S-1 of Spirit of Texas Bancshares, Inc. (Registration No. 333-224172) filed April 26, 2018).
4.2	Form of Common Stock Purchase Warrant (incorporated herein by reference to Exhibit 4.2 to the Registration Statement on Form S-1 of Spirit of Texas Bancshares, Inc. (Registration No. 333-224172) filed April 6, 2018).
5.1	Opinion of Hunton Andrews Kurth LLP regarding the validity of the securities to be issued.
8.1	Form of Opinion of Hunton Andrews Kurth LLP regarding certain tax matters.

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Exhibit No.	Description
8.2	Form of Opinion of Fenimore, Kay, Harrison & Ford, LLP regarding certain tax matters.
10.1	Form of Voting Agreement, dated as of November 27, 2018, by and among Spirit of Texas Bancshares, Inc., First Beeville Financial Corporation and the shareholders party thereto (attached as Exhibit B  to the reorganization agreement, which is included as Annex A to the proxy statement/prospectus, which forms a part of this Registration Statement on Form S-4).
10.2	Form of Director Support Agreement, dated as of November  27, 2018, by and among Spirit of Texas Bancshares, Inc. and each non-employee director of Beeville Bank (attached as Exhibit C to the reorganization agreement, which is included as  Annex A to the proxy statement/prospectus, which forms a part of this Registration Statement on Form S-4).
10.3	Executive Employment Agreement, dated March  1, 2017, by and between Spirit of Texas Bancshares, Inc. and Dean O. Bass (incorporated herein by reference to Exhibit 10.1 to the Registration Statement on Form S-1 of Spirit of Texas Bancshares, Inc. (Registration No. 333-224172) filed April 6, 2018).
10.4	Executive Employment Agreement, dated March  1, 2017, by and between Spirit of Texas Bancshares, Inc. and David M. McGuire (incorporated herein by reference to Exhibit 10.2 to the Registration Statement on Form S-1 of Spirit of Texas Bancshares, Inc. (Registration No. 333-224172) filed April 6, 2018).
10.5	Executive Employment Agreement, dated March  1, 2017, by and between Spirit of Texas Bancshares, Inc. and Jerry Golemon (incorporated herein by reference to Exhibit 10.3 to the Registration Statement on Form S-1 of Spirit of Texas Bancshares, Inc. (Registration No. 333-224172) filed April 6, 2018).
10.6	Executive Employment Agreement, dated July  10, 2017, by and between Spirit of Texas Bancshares, Inc. and Jeffrey A. Powell (incorporated herein by reference to Exhibit 10.4 to the Registration Statement on Form S-1 of Spirit of Texas Bancshares, Inc. (Registration No. 333-224172) filed April 6, 2018).
10.7	Spirit of Texas Bancshares, Inc. 2008 Stock Plan (incorporated herein by reference to Exhibit 10.5 to the Registration Statement on Form S-1 of Spirit of Texas Bancshares, Inc. (Registration No. 333-224172) filed April 6, 2018).
10.8	Amendment to the Spirit of Texas Bancshares, Inc. 2008 Stock Plan (dated May  17, 2012) (incorporated herein by reference to Exhibit 10.6 to the Registration Statement on Form S-1 of Spirit of Texas Bancshares, Inc. (Registration No.  333-224172) filed April 6, 2018).
10.9	Amendment to the Spirit of Texas Bancshares, Inc. 2008 Stock Plan (dated May  23, 2013) (incorporated herein by reference to Exhibit 10.7 to the Registration Statement on Form S-1 of Spirit of Texas Bancshares, Inc. (Registration No.  333-224172) filed April 6, 2018).
10.10	Amendment to the Spirit of Texas Bancshares, Inc. 2008 Stock Plan (dated May  21, 2015) (incorporated herein by reference to Exhibit 10.8 to the Registration Statement on Form S-1 of Spirit of Texas Bancshares, Inc. (Registration No.  333-224172) filed April 6, 2018).
10.11	Second Amendment to the Spirit of Texas Bancshares, Inc. 2008 Stock Plan (dated January  19, 2017) (incorporated herein by reference to Exhibit 10.9 to the Registration Statement on Form S-1 of Spirit of Texas Bancshares, Inc. (Registration No.  333-224172) filed April 6, 2018).
10.12	Form of Stock Option Agreement under the Spirit of Texas Bancshares, Inc. 2008 Stock Plan (incorporated herein by reference to Exhibit 10.10 to the Registration Statement on Form S-1 of Spirit of Texas Bancshares, Inc. (Registration No. 333-224172) filed April 6, 2018).
10.13	Spirit of Texas Bancshares, Inc. 2017 Stock Incentive Plan (incorporated herein by reference to Exhibit 10.11 to the Registration Statement on Form S-1 of Spirit of Texas Bancshares, Inc. (Registration No. 333-224172) filed April 6, 2018).

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Exhibit No.	Description
10.14	Form of Non-Qualified Stock Option Agreement under the Spirit of Texas Bancshares, Inc. 2017 Stock Incentive Plan (incorporated herein by reference to Exhibit 10.12 to the Registration Statement on Form S-1 of Spirit of Texas Bancshares, Inc. (Registration No. 333-224172) filed April 6, 2018).
10.15	Form of Incentive Stock Option Agreement under the Spirit of Texas Bancshares, Inc. 2017 Stock Incentive Plan (incorporated herein by reference to Exhibit 10.13 to the Registration Statement on Form S-1 of Spirit of Texas Bancshares, Inc. (Registration No. 333-224172) filed April 6, 2018).
10.16	Form of Restricted Stock Agreement under the Spirit of Texas Bancshares, Inc. 2017 Stock Incentive Plan (incorporated herein by reference to Exhibit 10.14 to the Registration Statement on Form S-1 of Spirit of Texas Bancshares, Inc. (Registration No. 333-224172) filed April 6, 2018).
10.17	Form of Director and Officer Indemnification Agreement (incorporated herein by reference to Exhibit  10.15 to the Registration Statement on Form S-1 of Spirit of Texas Bancshares, Inc. (Registration No. 333-224172) filed April 6, 2018).
10.18	Spirit of Texas Bank Non-Qualified Supplemental Deferred Compensation Plan (incorporated herein by reference to Exhibit 10.16 to the Registration Statement on Form S-1 of Spirit of Texas Bancshares, Inc. (Registration No. 333-224172) filed April 6, 2018).
23.1	Consent of BDO USA, LLP (with respect to Spirit of Texas Bancshares, Inc.).
23.2	Consent of Stovall, Grandey & Allen LLP (with respect to Comanche National Corporation).
23.3	Consent of BKD, LLP (with respect to First Beeville Financial Corporation)
23.4	Consent of Bumgardner, Morrison & Company, LLP (with respect to First Beeville Financial Corporation).
23.5	Consent of Hunton Andrews Kurth LLP (included in Exhibit 5.1).
23.6	Consent of Hunton Andrews Kurth LLP (included in Exhibit 8.1).
23.7	Consent of Fenimore, Kay, Harrison & Ford, LLP (included in Exhibit 8.2).
24.1	Powers of Attorney (included on the signature page hereto).
99.1*	Form of proxy for holders of Beeville common stock.
99.2	Consent of Sheshunoff & Co. Investment Banking.
99.3	Consent of Mr. Allen C. Jones, IV (as director appointee).
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document

* To be filed with amendment.

Item 22. Undertakings.

(1)    The undersigned registrant hereby undertakes:

(2)    To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (i) to include any prospectus required by Section 10(a)(3) of the Securities Act of 1933;

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(ii) to reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement (notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the SEC pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement); and (iii) to include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement.

(3)    That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

(4)    To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering.

(5)    That, for purposes of determining any liability under the Securities Act of 1933, each filing of the registrant’s annual report pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plan’s annual report pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in this registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

(6)    That prior to any public reoffering of the securities registered hereunder through use of a prospectus which is a part of this registration statement, by any person or party who is deemed to be an underwriter within the meaning of Rule 145(c), the registrant undertakes that such reoffering prospectus will contain the information called for by the applicable registration form with respect to reofferings by persons who may be deemed underwriters, in addition to the information called for by the other items of the applicable form.

(7)    That every prospectus (i) that is filed pursuant to paragraph (5) above, or (ii) that purports to meet the requirements of Section 10(a)(3) of the Securities Act and is used in connection with an offering of securities subject to Rule 415, will be filed as a part of an amendment to the registration statement and will not be used until such amendment has become effective, and that for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

(8)    To respond to requests for information that is incorporated by reference into the prospectus pursuant to Items 4, 10(b), 11 or 13 of this Form, within one business day of receipt of such request, and to send the incorporated documents by first class mail or other equally prompt means. This includes information contained in documents filed subsequent to the effective date of the registration statement through the date of responding to the request.

(9)    To supply by means of a post-effective amendment all information concerning a transaction, and the company being acquired involved therein, that was not the subject of and included in this registration statement when it became effective.

(10)    Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification

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is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer, or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.

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SIGNATURES

Pursuant to the requirements of the Securities Act, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Conroe, State of Texas, on January 10, 2019.

SPIRIT OF TEXAS BANCSHARES, INC.
By:	/s/ Dean O. Bass
	Dean O. Bass
	Chairman and Chief Executive Officer

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Dean O. Bass and Jerry D. Golemon as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments and registration statements filed pursuant to Rule 462(b) under the Securities Act) to this Registration Statement and to file the same, with all relevant exhibits and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his substitutes or substitute, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Act, this Registration Statement has been signed below by the following persons in the capacities and on the dates indicated below.

Signature	Title	Date
/S/ Dean O. Bass Dean O. Bass	Chairman and Chief Executive Officer (Principal Executive Officer)	January 10, 2019
/s/ David M. McGuire David M. McGuire	President and Director	January 10, 2019
/s/ Jeffrey A. Powell Jeffrey A. Powell	Executive Vice President and Chief Financial Officer (Principal Financial and Principal Accounting Officer)	January 10, 2019
/s/ Robert S. Beall Robert S. Beall	Director	January 10, 2019
/s/ Thomas Jones, Jr. Thomas Jones, Jr.	Director	January 10, 2019
/s/ Steven M. Morris Steven M. Morris	Director	January 10, 2019
/s/ Leo T. Metcalf, III Leo T. Metcalf, III	Director	January 10, 2019

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Signature	Title	Date
/s/ William K. Nix William K. Nix	Director	January 10, 2019
/s/ Akash J. Patel Akash J. Patel	Director	January 10, 2019
/s/ H. D. Patel H. D. Patel	Director	January 10, 2019
/s/ Thomas C. Sooy Thomas C. Sooy	Director	January 10, 2019

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