8-K/A

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-K/A

CURRENT REPORT

Pursuant to Section 13 or 15(d) of the

Securities Exchange Act of 1934

Date of Report (Date of earliest event reported): May 28, 2019 (April 2, 2019)

Spirit of Texas Bancshares, Inc.

(Exact name of registrant as specified in its charter)

Texas	001-38484	90-0499552
(State or other jurisdiction of incorporation)	(Commission File Number)	(IRS Employer Identification No.)

1836 Spirit of Texas Way

Conroe, Texas 77301

(Address of principal executive offices) (Zip Code)

(936) 521-1836

(Registrant’s telephone number, including area code)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

☐ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

☐ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

☐ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

☐ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading symbol(s)	Name of each exchange on which registered
Common Stock, no par value	STXB	The NASDAQ Stock Market LLC

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).

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 13(a) of the Exchange Act.  ☐

EXPLANATORY NOTE

This Current Report on Form 8-K/A amends the Current Report on Form 8-K (the “Original 8-K”) filed by Spirit of Texas Bancshares, Inc. (“Spirit”) on April 2, 2019, reporting under Item 2.01 the completion of the merger of First Beeville Financial Corporation, a Texas corporation (“Beeville”), with and into Spirit, with Spirit continuing as the surviving corporation (the “Merger”), pursuant to the previously announced Agreement and Plan of Reorganization, dated as of November 27, 2018, by and between Spirit and Beeville. Under Item 9.01 of the Original 8-K, the Company stated that (a) the financial statements required by Item 9.01 would be filed by amendment to the Original 8-K no later than 71 days after the date on which the Original 8-K was required to be filed, and (b) the pro forma financial information required by Item 9.01 would be filed by amendment to the Original 8-K no later than 71 days after the date on which the Original 8-K was required to be filed. Accordingly, this Current Report on Form 8-K/A amends and restates Item 9.01 of the Original 8-K to present certain financial statements of Beeville and certain pro forma financial information, which are filed as exhibits hereto and are incorporated herein by reference. Except for this Explanatory Note, the filing of the financial statements and the pro forma financial information required by Item 9.01, and the consent of BKD, LLP filed herewith as Exhibit 23.1, there are no changes to the Original 8-K.

Item 9.01. Financial Statements and Exhibits.

(a) Financial Statements of Businesses Acquired.

The audited consolidated financial statements of Beeville as of and for the years ended December 31, 2018 and 2017, as well as the accompanying notes thereto, are filed as Exhibit 99.1 to this Current Report on Form 8-K/A and are incorporated herein by reference. The unaudited consolidated financial statements of Beeville as of March 31, 2019 and for the three months ended March 31, 2019 and 2018 are filed as Exhibit 99.2 to this Current Report on Form 8-K/A and are incorporated herein by reference.

(b) Pro Forma Financial Information.

The pro forma financial information required by Item 9.01 is filed as Exhibit 99.3 to this Current Report on Form 8-K/A and is incorporated herein by reference. The unaudited pro forma combined condensed consolidated balance sheet as of March 31, 2019 and the unaudited pro forma combined condensed consolidated statements of income for the three months ended March 31, 2019 and the year ended December 31, 2018 give effect to Spirit’s completed acquisition of Beeville, as if such transaction had been completed as of January 1, 2018. The unaudited pro forma combined condensed consolidated financial information is presented for illustrative purposes only and does not reflect the benefits of expected cost savings or opportunities to earn additional revenue and, accordingly, does not attempt to predict or suggest future results. It also does not necessarily reflect what the historical results of the combined company would have been had Spirit and Beeville been combined during these periods.

(d) Exhibits.

Exhibit No.	Description
23.1	Consent of BKD, LLP
99.1	Audited consolidated financial statements of First Beeville Financial Corporation as of and for the years ended December 31, 2018 and 2017
99.2	Unaudited consolidated financial statements of First Beeville Financial Corporation as of March 31, 2019 and for the three months ended March 31, 2019 and 2018.
99.3	Unaudited pro forma combined condensed consolidated balance sheet as of March  31, 2019 and unaudited pro forma combined condensed consolidated statements of income for the three months ended March 31, 2019 and the year ended December 31, 2018

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

Date: May 28, 2019	SPIRIT OF TEXAS BANCSHARES, INC.
	By:	/s/ Jeffrey A. Powell
	Name:	Jeffrey A. Powell
	Title:	Chief Financial Officer and Executive Vice President

EX-23.1

Exhibit 23.1

Consent of Independent Auditor

We consent to the incorporation by reference in this current report on Form 8-K/A and the registration statement of Spirit of Texas Bancshares, Inc. on Form S-8 (Registration No. 333-228169) of our report dated March 20, 2019, on our audits of the consolidated financial statements of First Beeville Financial Corporation as of December 31, 2018 and 2017 and the years then ended, which is included in this current report on Form 8-K/A.

/s/ BKD, LLP

San Antonio, Texas

May 28, 2019

EX-99.1

Exhibit 99.1

First Beeville Financial Corporation

Independent Auditor’s Report and

Consolidated Financial Statements

December 31, 2018 and 2017

First Beeville Financial Corporation

December 31, 2018 and 2017

Contents

Independent Auditor’s Report	1
Consolidated Financial Statements
Balance Sheets	2
Statements of Income	3
Statements of Comprehensive Income	4
Statements of Stockholders’ Equity	5
Statements of Cash Flows	6
Notes to Financial Statements	8

	10001 Reunion Place, Suite 400 | San Antonio, TX 78216-4137
	210.341.9400 | Fax 210.341.9434 | bkd.com

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 and its subsidiaries, which comprise the consolidated balance sheets as of December 31, 2018 and 2017, and the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for the years 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 audits 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 and its subsidiaries, as of December 31, 2018 and 2017, 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.

San Antonio, Texas

March 20, 2019

First Beeville Financial Corporation

Consolidated Balance Sheets

December 31, 2018 and 2017

Assets	2018			2017
Cash and due from banks (including interest-bearing deposits of $662 in 2018 and $260,350 in 2017)	$	47,188,391		$	40,311,219
Interest-bearing deposits at the Federal Reserve Bank		8,987,093			6,052,985
Total cash and cash equivalents		56,175,484			46,364,204
Certificates of deposit in other banks		1,225,000			1,225,000
Investment securities available-for-sale		62,952,029			57,987,522
Loans receivable (net of allowance for loan losses of $3,492,212 in 2018 and $3,127,603 in 2017)		294,331,521			260,523,241
Federal Home Loan Bank stock, at cost		1,061,200			1,043,000
Accrued interest receivable		1,369,826			1,279,127
Foreclosed assets		1,358,728			1,410,296
Banking premises and equipment, net		7,177,132			7,585,393
Deferred federal income tax		994,960			619,881
Bank owned life insurance		7,859,002			7,676,163
Other assets		497,195			1,080,982
Total assets	$	435,002,077		$	386,794,809
Liabilities and Stockholders’ Equity
Liabilities
Deposits	$	394,837,389		$	351,378,134
Accrued interest payable		333,472			211,199
State income tax payable		23,340			15,900
Federal income tax payable		138,630			981,506
Dividends payable		—			443,535
Other liabilities		1,744,531			1,555,840
Total liabilities		397,077,362			354,586,114
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		40,222,182			33,969,570
Treasury stock, at cost (34,808 shares in 2018 and 2017)		(2,750,636	)		(2,750,636	)
Accumulated other comprehensive loss Unrealized loss on securities available-for-sale (net of deferred income taxes of $212,939 in 2018 and $70,300 in 2017)		(801,056	)		(264,464	)
Total stockholders’ equity		37,924,715			32,208,695
Total liabilities and stockholders’ equity	$	435,002,077		$	386,794,809

See Notes to Consolidated Financial Statements

2

First Beeville Financial Corporation

Consolidated Statements of Income

Years Ended December 31, 2018 and 2017

	2018			2017
Interest and Dividend Income
Interest and fees on loans	$	15,957,343		$	13,355,480
Interest on investment securities
Mortgage-backed and related securities		610,880			410,786
U.S. treasury securities		71,695			63,117
Federal agency securities		84,063			102,835
Tax-exempt municipals		403,343			295,179
Interest on deposits with banks		945,682			312,380
Dividend income		30,070			21,803
Total interest and dividend income		18,103,076			14,561,580
Interest Expense
Interest on deposits		1,828,001			1,133,987
Interest on borrowed funds		2,081			49,600
Total interest expense		1,830,082			1,183,587
Net Interest Income		16,272,994			13,377,993
Provision for Loan Losses		565,000			1,001,000
Net Interest Income After Provision for Loan Losses		15,707,994			12,376,993
Noninterest Income
Service charges on deposit accounts		856,560			902,491
Other service charges and noninterest income		114,680			71,045
Bank owned life insurance income		182,840			139,216
Income from death benefit of bank-owned life insurance		—			624,493
Gain (loss) on sale of assets		(474	)		2,581
Loss on foreclosure		—			(20,670	)
Total noninterest income		1,153,606			1,719,156
Noninterest Expense
Salaries and employee benefits		5,352,118			4,707,131
Occupancy and equipment expense		1,041,227			995,978
Other expense		2,732,252			2,450,582
Total noninterest expense		9,125,597			8,153,691
Income Before Income Taxes		7,736,003			5,942,458
Income Tax Expense		1,483,391			2,279,612
Net Income	$	6,252,612		$	3,662,846
Net Income Per Share (based on weighted average number of shares outstanding—59,138 shares in 2018 and 59,335 in 2017)	$	105.73		$	61.71

See Notes to Consolidated Financial Statements

3

First Beeville Financial Corporation

Consolidated Statements of Comprehensive Income

Years Ended December 31, 2018 and 2017

	2018			2017
Net Income	$	6,252,612		$	3,662,846
Other Comprehensive Income
Net unrealized loss on securities available-for-sale		(679,230	)		(311,523	)
Tax benefit		(142,638	)		(105,918	)
Other comprehensive loss		(536,592	)		(205,605	)
Comprehensive Income	$	5,716,020		$	3,457,241

See Notes to Consolidated Financial Statements

4

First Beeville Financial Corporation

Consolidated Statements of Stockholders’ Equity

Years Ended December 31, 2018 and 2017

													Accumulated
													Other
	Common Stock						Retained			Treasury			Comprehensive
	Shares		Amount		Surplus		Earnings			Stock			Income (Loss)			Total
Balance, January 1, 2017		94,936	$	469,730	$	784,495	$	30,706,739		($	2,587,650	)	$	(15,339	)	$	29,357,975
Net income for the year		—		—		—		3,662,846			—			—			3,662,846
Other comprehensive loss		—		—		—		—			—			(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
Net income		—		—		—		6,252,612			—			—			6,252,612
Other comprehensive loss		—		—		—		—			—			(536,592	)		(536,592	)
Balance, December 31, 2018		94,936	$	469,730	$	784,495	$	40,222,182		$	(2,750,636	)	$	(801,056	)	$	37,924,715

See Notes to Consolidated Financial Statements

5

First Beeville Financial Corporation

Consolidated Statements of Cash Flows

Years Ended December 31, 2018 and 2017

	2018			2017
Operating Activities
Net income	$	6,252,612		$	3,662,846
Items not requiring (providing) cash
Depreciation		583,918			563,665
Provision for loan losses		565,000			1,001,000
Net amortization of investment securities		417,948			325,023
Deferred income taxes		(232,440	)		156,733
Gain on sale of foreclosed assets		—			(56	)
Loss on sale of assets		474			—
Loss on foreclosure of foreclosed assets		—			20,670
Income from death benefit of bank-owned life insurance		—			(624,493	)
Increase in cash surrender value of bank-owned life insurance		(182,839	)		(139,216	)
Changes in
Interest receivable		(90,699	)		(314,957	)
Other assets		578,687			(466,549	)
Interest payable and other liabilities		310,964			468,834
Federal income tax payable		(842,876	)		1,535,462
State income tax payable		7,440			640
Net cash provided by operating activities		7,368,189			6,189,602
Investing Activities
Purchases of available-for-sale securities		(96,372,680	)		(109,107,853	)
Proceeds from maturities of available-for-sale securities		90,310,994			94,063,630
Proceeds from maturities of held-to-maturity securities		—			2,360,344
Net change in loans		(34,373,280	)		(25,168,925	)
Purchase of premises and equipment		(175,657	)		(499,204	)
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		(18,200	)		(9,900	)
Proceeds from the sale of foreclosed assets		4,626			—
Proceeds from the sale of assets		51,568			9,490
Net cash used in investing activities		(40,572,629	)		(39,833,232	)

See Notes to Consolidated Financial Statements

6

First Beeville Financial Corporation

Consolidated Statements of Cash Flows (continued)

Years Ended December 31, 2018 and 2017

	2018			2017
Financing Activities
Net increase in non-certificate of deposits accounts	$	35,482,978		$	58,044,339
Net increase in certificate of deposits accounts		7,976,277			4,963,809
Repayments of short-term borrowings		—			(926,183	)
Purchase of treasury stock		—			(162,986	)
Dividends paid		(443,535	)		(445,830	)
Net cash provided by financing activities		43,015,720			61,473,149
Increase in Cash and Cash Equivalents		9,811,280			27,829,519
Cash and Cash Equivalents, Beginning of Year		46,364,204			18,534,685
Cash and Cash Equivalents, End of Year	$	56,175,484		$	46,364,204
Supplemental Cash Flows Information
Interest paid	$	1,707,809		$	1,093,395
Income taxes paid	$	2,550,860		$	1,080,956
Real estate acquired in settlement of loans	$	—		$	304,000
Dividends declared but not yet paid	$	—		$	443,535

See Notes to Consolidated Financial Statements

7

First Beeville Financial Corporation

Notes to Consolidated Financial Statements

December 31, 2018 and 2017

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, 2018 and 2017, cash equivalents consisted primarily of cash and due from banks and interest-bearing deposits at the Federal Reserve Bank.

At December 31, 2018, the Company’s interest-bearing cash accounts exceeded federally insured limits by approximately $48,815,000. Approximately $8,987,000 of this amount is held at the Federal Reserve Bank of Dallas.

8

First Beeville Financial Corporation

Notes to Consolidated Financial Statements

December 31, 2018 and 2017

Securities

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.

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, 2018 or 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.

9

First Beeville Financial Corporation

Notes to Consolidated Financial Statements

December 31, 2018 and 2017

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 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.

10

First Beeville Financial Corporation

Notes to Consolidated Financial Statements

December 31, 2018 and 2017

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.

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, 2018 and 2017.

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, carried at cost and evaluated for impairment.

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.

11

First Beeville Financial Corporation

Notes to Consolidated Financial Statements

December 31, 2018 and 2017

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.

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

12

First Beeville Financial Corporation

Notes to Consolidated Financial Statements

December 31, 2018 and 2017

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.

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, 2018 or 2017.

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 2018 or 2017.

13

First Beeville Financial Corporation

Notes to Consolidated Financial Statements

December 31, 2018 and 2017

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:

			Gross		Gross		Approximate
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
December 31, 2018
U.S. Government and government-sponsored enterprises (GSE) securities	$	15,016,246	$	15,317	$	8,944	$	15,022,619
Tax-exempt municipal securities		20,988,046		1,948		387,439		20,602,555
U.S. government and GSE mortgage-backed securities		27,961,731		9,441		644,317		27,326,855
Total	$	63,966,023	$	26,706	$	1,040,700	$	62,952,029
December 31, 2017
U.S. Government and 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

The amortized cost and fair value of available-for-sale securities at December 31, 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	$	15,372,642	$	15,363,921
Due in one to five years		13,764,762		13,675,789
Due in five to ten years		6,866,888		6,585,464
Total investment securities		36,004,292		35,625,174
U.S. Government and GSE mortgage-backed securities		27,961,731		27,326,855
Total	$	63,966,023	$	62,952,029

14

First Beeville Financial Corporation

Notes to Consolidated Financial Statements

December 31, 2018 and 2017

The carrying value of securities pledged as collateral, to secure public deposits and for other purposes, was $61,970,330 and $46,503,676 at December 31, 2018 and 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 December 31, 2018 and 2017, was $57,577,248 and $44,475,753, respectively, which is approximately 91 percent and 77 percent, respectively, of the Company’s available-for-sale 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, 2018 and 2017:

	December 31, 2018
	Less Than 12 Months				12 Months or More				Total
			Unrealized				Unrealized				Unrealized
	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
Available-for-sale securities
U.S. Government and GSE securities	$	12,991,400	$	5,794	$	1,010,140	$	3,150	$	14,001,540	$	8,944
Tax-exempt municipal securities		7,024,721		43,467		13,072,490		343,972		20,097,211		387,439
U.S. Government and GSE mortgage-backed securities		2,512,923		54,269		20,965,574		590,048		23,478,497		644,317
Total	$	22,529,044	$	103,530	$	35,048,204	$	937,170	$	57,577,248	$	1,040,700
	December 31, 2017
	Less Than 12 Months				12 Months or More				Total
			Unrealized				Unrealized				Unrealized
	Fair Value		Losses		Fair Value		Losses		Fair Value		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

15

First Beeville Financial Corporation

Notes to Consolidated Financial Statements

December 31, 2018 and 2017

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 December 31, 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 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, 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 fair 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 December 31, 2018.

16

First Beeville Financial Corporation

Notes to Consolidated Financial Statements

December 31, 2018 and 2017

Note 3: Loans and Allowance for Loan Losses

Categories of loans at December 31, 2018 and 2017, include:

	2018			2017
Commercial loans	$	27,530,614		$	24,790,860
Agricultural loans		7,531,424			8,093,208
Real estate loans		261,927,679			229,989,035
Installment and consumer term loans		1,708,764			1,537,900
Other loans (virtual and ready credit)		77,671			81,095
Overdrafts		40,653			54,962
Gross loans		298,816,805			264,547,060
Less
Net deferred loan fees and costs		(993,072	)		(896,216	)
Allowance for loan losses		(3,492,212	)		(3,127,603	)
Net loans	$	294,331,521		$	260,523,241

17

First Beeville Financial Corporation

Notes to Consolidated Financial Statements

December 31, 2018 and 2017

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, 2018 and 2017:

	2018
	Commercial			Agricultural			Real Estate			Consumer			Total
Allowance for Loan Losses
Balance, beginning of year	$	245,850		$	69,311		$	2,793,499		$	18,943		$	3,127,603
Provision for loan losses		(41,992	)		(2,229	)		596,146			13,075			565,000
Losses charged-off		—			—			(225,500	)		(19,590	)		(245,090	)
Recoveries		20,940			—			18,313			5,446			44,699
Balance, end of year	$	224,798		$	67,082		$	3,182,458		$	17,874		$	3,492,212
Allowance Balances
Ending balance individually evaluated for impairment	$	—		$	—		$	—		$	—		$	—
Ending balance collectively evaluated for impairment		224,798			67,082			3,182,458			17,874			3,492,212
Ending balance	$	224,798		$	67,082		$	3,182,458		$	17,874		$	3,492,212
Loans
Ending balance individually evaluated for impairment	$	—		$	—		$	1,234,840		$	—		$	1,234,840
Ending balance collectively evaluated for impairment		27,530,614			7,531,424			260,692,839			1,827,088			297,581,965
Ending balance	$	27,530,614		$	7,531,424		$	261,927,679		$	1,827,088		$	298,816,805

18

First Beeville Financial Corporation

Notes to Consolidated Financial Statements

December 31, 2018 and 2017

	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		7,913			1,001,000
Losses charged-off		(516,396	)		—		—		(21,154	)		(537,550	)
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

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 way 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.

19

First Beeville Financial Corporation

Notes to Consolidated Financial Statements

December 31, 2018 and 2017

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.

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.

20

First Beeville Financial Corporation

Notes to Consolidated Financial Statements

December 31, 2018 and 2017

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.

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.

21

First Beeville Financial Corporation

Notes to Consolidated Financial Statements

December 31, 2018 and 2017

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, 2018 and 2017:

	2018
	Commercial		Agricultural		Real Estate		Consumer		Total
Rating
Pass	$	26,985,017	$	7,507,344	$	254,872,807	$	1,825,309	$	291,190,477
Watch		545,597		—		5,060,903		—		5,606,500
OAEM		—		—		740,190		—		740,190
Substandard		—		24,080		18,939		1,779		44,798
Impaired		—		—		1,234,840		—		1,234,840
Doubtful		—		—		—		—		—
Total	$	27,530,614	$	7,531,424	$	261,927,679	$	1,827,088	$	298,816,805
	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

The following tables present the Bank’s loan portfolio aging analysis of the recorded investment in loans as of December 31, 2018 and 2017:

	2018
							Total						Total Loans >
	30-89 Days		60-89 Days		Greater Than		Past				Total		90-Days &
	Past Due		Past Due		90 Days		Due		Current		Loans		Accruing
Commercial loans	$	6,101	$	—	$	—	$	6,101	$	27,524,513	$	27,530,614	$	—
Agricultural loans		—		—		—		—		7,531,424		7,531,424		—
Real estate loans		198,499		—		—		198,499		261,729,180		261,927,679		—
Consumer loans		6,185		—		—		6,185		1,820,903		1,827,088		—
Total	$	210,785	$	—	$	—	$	210,785	$	298,606,020	$	298,816,805	$	—
	2017
							Total						Total Loans >
	30-89 Days		60-89 Days		Greater Than		Past				Total		90-Days &
	Past Due		Past Due		90 Days		Due		Current		Loans		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

22

First Beeville Financial Corporation

Notes to Consolidated Financial Statements

December 31, 2018 and 2017

The following tables present impaired loans for the years ended December 31, 2018 and 2017:

	2018
							Average				Interest
			Unpaid				Investment in		Interest		Income
	Recorded		Principal		Specific		Impaired		Income		Recognized
	Investment		Balance		Allowance		Loans		Recognized		Cash Basis
Loans without a specific valuation allowance
Commercial loans	$	—	$	—	$	—	$	—	$	—	$	—
Agricultural loans		—		—		—		—		—		—
Real estate loans		1,234,840		1,234,840		—		826,156		56,934		—
Consumer loans		—		—		—		—		—		—
Loans with a specific valuation allowance
Commercial loans		—		—		—		—		—		—
Agricultural loans		—		—		—		—		—		—
Real estate loans		—		—		—		—		—		—
Consumer loans		—		—		—		—		—		—
Total	$	1,234,840	$	1,234,840	$	—	$	826,156	$	56,934	$	—
	2017
							Average				Interest
			Unpaid				Investment in		Interest		Income
	Recorded		Principal		Specific		Impaired		Income		Recognized
	Investment		Balance		Allowance		Loans		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	$	—

23

First Beeville Financial Corporation

Notes to Consolidated Financial Statements

December 31, 2018 and 2017

The following table presents the Company’s nonaccrual loans at December 31, 2017. There were no nonaccrual loans at December 31, 2018. This table excludes performing troubled debt restructurings.

	2017
Commercial loans	$	301,188
Agricultural loans		—
Real estate loans		1,725,829
Consumer loans		—
Total	$	2,027,017

There were no material troubled debt restructurings for the years ended December 31, 2018 and 2017.

Note 4: Foreclosed Assets

Expenses applicable to foreclosed assets at December 31 include the following:

	2018		2017
Gain on sales of real estate	$	—	$	(56	)
Loss on foreclosure		—		20,670
Operating expenses, net of rental income		20,673		13,862
	$	20,673	$	34,476

Note 5: Premises and Equipment

Major classifications of premises and equipment, stated at cost, are as follows:

	2018			2017
Land	$	893,482		$	893,482
Buildings and improvements		8,701,245			8,679,965
Furniture and equipment		1,775,987			1,727,570
Data processing equipment and software		898,624			792,664
		12,269,338			12,093,681
Less accumulated depreciation		(5,092,206	)		(4,508,288	)
Net premises and equipment	$	7,177,132		$	7,585,393

24

First Beeville Financial Corporation

Notes to Consolidated Financial Statements

December 31, 2018 and 2017

Note 6: Time Deposits

Deposits consisted of the following at December 31, 2018 and 2017:

	2018		2017
Interest-bearing checking accounts	$	205,238,674	$	189,849,611
Demand deposits and official checks		90,868,741		76,023,329
Savings		40,867,773		35,619,270
Time - $250,000 and over		23,168,109		19,180,731
Other time		34,694,092		30,705,193
Total deposits	$	394,837,389	$	351,378,134

At December 31, 2018, the scheduled maturities of time deposits are as follows:

2019	$	42,409,046
2020		11,750,551
2021		2,073,235
2022		908,912
2023		720,456
	$	57,862,200

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, 2018, the unused credit limit is $666,667. 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.

There was no outstanding balance at December 31, 2017 and 2018. Interest expense for the year ended December 31, 2017, amounted to $36,090. No interest expense was recognized for the year ended December 31, 2018.

25

First Beeville Financial Corporation

Notes to Consolidated Financial Statements

December 31, 2018 and 2017

Note 8: Lines of Credit

FHLB Line of Credit

At December 31, 2018 and 2017, the Bank had a revolving line of credit with no expiration and a maximum available limit of $132,252,316 and $123,178,971, respectively. At December 31, 2018 and 2017, 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, 2018 and 2017, the Bank had available a $6,000,000 revolving line of credit that expires in 2019. At December 31, 2018 and 2017, there were no funds borrowed against this line. The line is not collateralized at December 31, 2018. 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, 2018 and 2017, 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, 2018 and 2017, 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.

Note 9: Income Taxes

The provision (credit) for income taxes includes these components:

	2018			2017
Federal
Taxes currently payable	$	1,700,531		$	2,106,979
Deferred income taxes		(232,440	)		(227,004	)
Adjustments to deferred tax assets and liabilities for enacted changes in tax laws		—			383,737
State (all current)		15,300			15,900
Income tax expense	$	1,483,391		$	2,279,612

26

First Beeville Financial Corporation

Notes to Consolidated Financial Statements

December 31, 2018 and 2017

A reconciliation of income tax expense at the statutory rate to the Company’s actual income tax expense is shown below:

	2018			2017
Computed at the statutory rate (21% in 2018 and 34% in 2017)	$	1,624,561		$	2,025,842
Increase (decrease) resulting from
Tax exempt interest		(84,893	)		(102,812	)
Nontaxable BOLI income		(38,396	)		(47,333	)
Nondeductible interest expense		5,892			3,640
Nontaxable dividends		(60	)		(97	)
Nondeductible expenses		11,136			5,145
State income tax expense		12,087			10,494
Deferred tax adjustment related to reduction in federal statutory income tax rate		—			383,737
Other, net		(46,936	)		996
Actual tax expense	$	1,483,391		$	2,279,612

The tax effects of temporary differences related to deferred taxes shown on the balance sheets were:

	2018		2017
Deferred tax assets
Allowance for loan losses	$	612,947	$	537,059
Deferred loan fees		208,407		187,891
SAR plan expenses		163,075		116,673
Deferred cash incentive plan expenses		37,448		29,814
Salary continuation plan expenses		112,818		84,203
Accrued expenses		12,658		—
Net unrealized loss on securities available-for-sale		212,939		70,300
		1,360,292		1,025,940
Deferred tax liability
Valuation of foreclosed assets		108,864		114,564
Accretion of investment discounts		3,631		10,051
Fixed assets		201,296		277,808
FHLB stock dividends		7,458		3,636
Prepaid expense		44,083		—
		365,332		406,059
Net deferred tax asset	$	994,960	$	619,881

27

First Beeville Financial Corporation

Notes to Consolidated Financial Statements

December 31, 2018 and 2017

On December 22, 2017, the United States enacted tax reform legislation through the Tax Cuts and Jobs Act, which significantly changed 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: 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 December 31, 2018 and 2017, that the Bank meets all capital adequacy requirements to which it is subject.

As of December 31, 2018 and 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.

28

First Beeville Financial Corporation

Notes to Consolidated Financial Statements

December 31, 2018 and 2017

The Bank’s actual capital amounts and ratios are also presented in the following table.

											Minimum to Be
											Well Capitalized Under
						Minimum Capital					Prompt Corrective Action
	Actual					Requirement					Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of December 31, 2018
Total risk-based capital (to risk-weighted assets)	$	42,147,000		13.49	%	$	30,857,795		9.875	%	$	31,248,400		10.00	%
Tier I capital (to risk-weighted assets)	$	38,655,000		12.37	%	$	24,608,115		7.875	%	$	24,998,720		8.00	%
Common equity Tier 1 capital (to risk-weighted assets)	$	38,655,000		12.37	%	$	19,920,855		6.375	%	$	20,311,460		6.50	%
Tier I capital (to average assets)	$	38,655,000		9.17	%	$	16,863,600		4.000	%	$	21,079,500		5.00	%
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	%

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 December 31, 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.

The Bank is subject to certain restrictions on the amount of dividends that it may declare without prior regulatory approval. At December 31, 2018, approximately $10,891,000 of retained earnings were available for dividend declaration without prior regulatory approval.

29

First Beeville Financial Corporation

Notes to Consolidated Financial Statements

December 31, 2018 and 2017

Basel III Capital Rules

In July 2013, the three federal bank regulatory agencies jointly published final rules (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 11: Related Party Transactions

At December 31, 2018 and 2017, the Company had loans outstanding to executive officers, directors, significant shareholders and their affiliates (related parties), in the amount of $5,350,483 and $5,400,739, respectively.

Annual activity consisted of the following:

	2018								2017
	Current			Unfunded		Total			Current			Unfunded		Total
Beginning balance	$	5,400,739		$	1,060,337	$	6,461,076		$	5,642,755		$	940,133	$	6,582,888
New loans		491,177			54,771		545,948			2,097,867			120,204		2,218,071
Repayments		(541,433	)		—		(541,433	)		(2,339,883	)		—		(2,339,883	)
Ending balance	$	5,350,483		$	1,115,108	$	6,465,591		$	5,400,739		$	1,060,337	$	6,461,076

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.

30

First Beeville Financial Corporation

Notes to Consolidated Financial Statements

December 31, 2018 and 2017

Deposits from related parties held by the Company at December 31, 2018 and 2017, totaled $2,450,460 and $4,741,385 respectively.

Note 12: 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 2018 and 2017, 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 2018 and 2017, were $118,193 and $111,735, respectively.

Note 13: 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 December 31, 2018 and 2017. The Company accrued $776,550 and $550,863 related to the agreements at December 31, 2018 and 2017, respectively. Total expenses of the Plan amounted to $225,687 and $109,258 for the years ended December 31, 2018 and 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 20, 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 $2,436,619.

Note 14: 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.

31

First Beeville Financial Corporation

Notes to Consolidated Financial Statements

December 31, 2018 and 2017

Note 15: 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 $48,666 and $21,266 for the years ended December 31, 2018 and 2017, respectively.

Future minimum lease payments under operating leases are $5,188 for 2019, and there are no other contractual agreements.

Note 16: 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 December 31, 2018 and 2017, the Company had outstanding commitments to originate loans and unused lines of credit aggregating $27,626,432 and $31,558,857, 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.

32

First Beeville Financial Corporation

Notes to Consolidated Financial Statements

December 31, 2018 and 2017

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 $405,000 and $479,964, at December 31, 2018 and 2017, respectively, with terms ranging from 30 days to 15 months.

Note 17: 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

33

First Beeville Financial Corporation

Notes to Consolidated Financial Statements

December 31, 2018 and 2017

Recurring Measurements

The following tables present 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, 2018 and 2017:

			Fair Value Measurements Using
			Quoted
			Prices
			in Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
	Fair		Assets		Inputs		Inputs
	Value		(Level 1)		(Level 2)		(Level 3)
December 31, 2018
Available-for-sale securities
U.S. government and GSE securities	$	15,022,619	$	—	$	15,022,619	$	—
Tax-exempt municipal securities		20,602,555		—		20,602,555		—
U.S. government and GSE mortgage-backed securities		27,326,855		—		27,326,855		—
	$	62,952,029	$	—	$	62,952,029	$	—
			Fair Value Measurements Using
			Quoted
			Prices
			in Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
	Fair		Assets		Inputs		Inputs
	Value		(Level 1)		(Level 2)		(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	$	—

34

First Beeville Financial Corporation

Notes to Consolidated Financial Statements

December 31, 2018 and 2017

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, 2018 and 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 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.

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, mortgage-backed securities and tax-exempt municipal 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, 2018 and 2017:

			Fair Value Measurements Using
			Quoted
			Prices
			in Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
	Fair		Assets		Inputs		Inputs
	Value		(Level 1)		(Level 2)		(Level 3)
December 31, 2018
Collateral dependent impaired loans	$	1,234,840	$	—	$	—	$	1,234,840
	$	1,234,840	$	—	$	—	$	1,234,840
December 31, 2017
Collateral dependent impaired loans	$	1,802,308	$	—	$	—	$	1,802,308
Foreclosed assets held-for-sale		283,330		—		—		283,330
	$	2,085,638	$	—	$	—	$	2,085,638

35

First Beeville Financial Corporation

Notes to Consolidated Financial Statements

December 31, 2018 and 2017

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 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.

36

First Beeville Financial Corporation

Notes to Consolidated Financial Statements

December 31, 2018 and 2017

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, 2018 and 2017.

	Fair Value at
	December 31,		Valuation
	2018		Technique	Unobservable Inputs	Range
Collateral dependent impaired loans	$	1,234,840	Market comparable properties	Marketability discount		10% -15	%
	Fair Value at
	December 31,		Valuation
	2017		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	%

Note 18: 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 share-based compensation plans are discussed in the footnote on share-based compensation.

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.

37

First Beeville Financial Corporation

Notes to Consolidated Financial Statements

December 31, 2018 and 2017

Note 19: Current and Future Changes in Accounting Principles

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 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.

38

First Beeville Financial Corporation

Notes to Consolidated Financial Statements

December 31, 2018 and 2017

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 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. In March 2019, FASB issued ASU 2019-01, Leases (Topic 842), which clarifies the determination of the fair value of an underlying asset by lessors that are not manufacturers or dealers, presentation on the statement of cash flows for sale-type and direct financial leases, and transition disclosures related to accounting changes and error corrections.

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

39

First Beeville Financial Corporation

Notes to Consolidated Financial Statements

December 31, 2018 and 2017

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.

Note 20: 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.

40

First Beeville Financial Corporation

Notes to Consolidated Financial Statements

December 31, 2018 and 2017

Note 21: Subsequent Events

Subsequent events have been evaluated through March 20, 2019, which is the date the consolidated financial statements were issued.

Note 22: 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:

Condensed Balance Sheets
	December 31,
	2018		2017
Assets
Cash and due from banks	$	27,606	$	469,745
Investment in subsidiary		37,852,548		32,161,991
Other assets		52,074		20,494
Total assets	$	37,932,228	$	32,652,230
Liabilities
Dividends payable	$	—	$	443,535
Deferred tax liability		7,513		—
Total liabilities		7,513		443,535
Stockholders’ Equity		37,924,715		32,208,695
Total liabilities and stockholders’ equity	$	37,932,228	$	32,652,230

41

First Beeville Financial Corporation

Notes to Consolidated Financial Statements

December 31, 2018 and 2017

Condensed Statements of Income and Comprehensive Income
	Year Ended December 31,
	2018			2017
Income
Dividends from subsidiaries	$	165,000		$	1,410,832
Total income		165,000			1,410,832
Expenses
Interest expense		—			36,090
Other expenses		172,515			69,512
Total expenses		172,515			105,602
Income Before Income Tax and Equity in Undistributed
Net Income of Subsidiary		(7,515	)		1,305,230
Income Tax Benefit		(32,977	)		(34,142	)
Equity in Undistributed Net Income of Subsidiary		6,227,150			2,323,474
Net Income	$	6,252,612		$	3,662,846
Comprehensive Income	$	6,252,612		$	3,662,846
Condensed Statements of Cash Flows
	Year Ended December 31,
	2018			2017
Operating Activities
Net income	$	6,252,612		$	3,662,846
Items not requiring (providing cash)
Equity in undistributed income of subsidiary		(6,227,150	)		(2,323,474	)
Increase in other assets		(31,579	)		(16,994	)
Increase in other liabilities		—			(10,578	)
Increase in deferred tax liability		7,513			—
Net cash provided by operating activities		1,396			1,311,800
Financing Activities
Principal payments on borrowed funds		—			(926,183	)
Purchase of treasury stock		—			(162,986	)
Dividends paid		(443,535	)		(445,830	)
Net cash used in financing activities		(443,535	)		(1,534,999	)
Net Decrease in Cash		(442,139	)		(223,199	)
Cash at Beginning of Year		469,745			692,944
Cash at End of Year	$	27,606		$	469,745

42

EX-99.2

Exhibit 99.2

First Beeville Financial Corporation

Consolidated Financial Statements

March 31, 2019

First Beeville Financial Corporation

March 31, 2019

Contents

Consolidated Financial Statements
Balance Sheets	2
Statements of Income	3
Statements of Comprehensive Income	4
Statements of Stockholders’ Equity	5
Statements of Cash Flows	6
Notes to Financial Statements	8

First Beeville Financial Corporation

Consolidated Balance Sheets

(Dollars in thousands, except share data)

	March 31,			December 31,
	2019			2018
	(unaudited)
Assets
Cash and due from banks (including interest-bearing deposits of $1 in 2019 and 2018)	$	48,959		$	47,188
Interest-bearing deposits at the Federal Reserve Bank		11,107			8,987
Total cash and cash equivalents		60,066			56,175
Certificates of deposit in other banks		1,225			1,225
Investment securities available-for-sale		59,800			62,952
Loans receivable (net of allowance for loan losses of $3,568 in 2019 and $3,492 in 2018)		295,777			294,332
Federal Home Loan Bank stock, at cost		1,067			1,061
Accrued interest receivable		1,545			1,370
Foreclosed assets		1,359			1,359
Banking premises and equipment, net		7,036			7,177
Deferred federal income tax		651			995
Bank owned life insurance		7,903			7,859
Other assets		564			497
Total assets	$	436,993		$	435,002
Liabilities and Stockholders’ Equity
Liabilities
Deposits	$	394,483		$	394,837
Accrued interest payable		328			333
State income tax payable		28			23
Federal income tax payable		370			139
Dividends payable		1			—
Other liabilities		1,828			1,746
Total liabilities		397,038			397,078
Stockholders’ Equity
Common stock ($5 par value; 1,000,000 shares authorized; 93,946 shares issued)		470			470
Surplus		784			784
Retained earnings		41,834			40,222
Treasury stock, at cost (34,808 shares in 2019 and 2018)		(2,751	)		(2,751	)
Accumulated other comprehensive loss
Unrealized loss on securities available-for-sale (net of income taxes of $102 in 2019 and $213 in 2018)		(382	)		(801	)
Total stockholders’ equity		39,955			37,924
Total liabilities and stockholders’ equity	$	436,993		$	435,002

The accompanying notes are an integral part of these unaudited, consolidated financial statements. 2

First Beeville Financial Corporation

Consolidated Statements of Income

(Unaudited)

(Dollars in thousands, except share data)

	Three Months Ended March 31,
	2019		2018
Interest and Dividend Income
Interest and fees on loans	$	4,540	$	3,722
Interest on mortgage-backed and related securities		153		148
Interest on investment account receivable
U.S. treasury securities		66		13
Federal agency securities		19		22
Tax-exempt municipals		97		99
Interest on deposits with banks		313		146
Dividend income		6		3
Total interest and dividend income		5,194		4,153
Interest Expense
Interest on deposits		554		386
Total interest expense		554		386
Net Interest Income		4,640		3,767
Provision for Loan Losses		80		205
Net Interest Income After Provision for Loan Losses		4,560		3,562
Noninterest Income
Service charges on deposit accounts		194		214
Other service charges and noninterest income		46		34
Bank owned life insurance income		44		45
Total noninterest income		284		293
Noninterest Expense
Salaries and employee benefits		1,493		1,303
Occupancy and equipment expense		279		268
Other expense		872		622
Total noninterest expense		2,644		2,193
Income Before Income Taxes		2,200		1,662
Income Tax Expense		469		354
Net Income	$	1,731	$	1,308
Earnings Per Share - Basic and Diluted (based on weighted average number of shares outstanding - 59,138 shares in 2019 and 2018)	$	29.27	$	22.12

The accompanying notes are an integral part of these unaudited, consolidated financial statements. 3

First Beeville Financial Corporation

Consolidated Statements of Comprehensive Income

(Unaudited)

(Dollars in thousands)

	Three Months Ended March 31,
	2019		2018
Net Income	$	1,731	$	1,308
Other Comprehensive Income (Loss), Net of Federal Income Tax
Net unrealized gain (loss) on securities available-for-sale		530		(668	)
Reclassification adjustment for realized gains included in net income		—		—
Other comprehensive income (loss) before tax effect		530		(668	)
Tax expense (benefit)		111		(140	)
Other comprehensive income (loss), net of federal income tax		419		(528	)
Comprehensive Income	$	2,150	$	780

The accompanying notes are an integral part of these unaudited, consolidated financial statements. 4

First Beeville Financial Corporation

Consolidated Statements of Stockholders’ Equity

(Unaudited)

(Dollars in thousands, except share data)

													Accumulated
							Retained			Treasury			Other
	Common Stock												Comprehensive
	Shares		Amount		Surplus		Earnings			Stock			Income (Loss)			Total
Balance, January 1, 2018		93,946	$	470	$	784	$	33,970		$	(2,751	)	$	(264	)	$	32,209
Net income		—		—		—		1,308			—			—			1,308
Other comprehensive loss		—		—		—		—			—			(528	)		(528	)
Balance, March 31, 2018		93,946	$	470	$	784	$	35,278		$	(2,751	)	$	(792	)	$	32,989
Balance, January 1, 2019		93,946	$	470	$	784	$	40,222		$	(2,751	)	$	(801	)	$	37,924
Net income		—		—		—		1,731			—			—			1,731
Other comprehensive income		—		—		—		—			—			419			419
Dividends on common stock, $2.02 per share		—		—		—		(119	)		—			—			(119	)
Balance, March 31, 2019		93,946	$	470	$	784	$	41,834		$	(2,751	)	$	(382	)	$	39,955

The accompanying notes are an integral part of these unaudited, consolidated financial statements. 5

First Beeville Financial Corporation

Consolidated Statements of Cash Flows

(Unaudited)

(Dollars in thousands)

	Three Months Ended March 31,
	2019			2018
Cash Flows From Operating Activities
Net income	$	1,731		$	1,308
Items not requiring (providing) cash
Depreciation		141			148
Provision for loan losses		80			205
Net amortization of investment securities		68			107
Deferred income taxes		233			—
Increase in cash surrender value of bank-owned life insurance		(44	)		(45	)
Changes in
Interest receivable		(175	)		—
Other assets		(67	)		439
Interest payable and other liabilities		77			(57	)
Dividends payable		1			(444	)
Federal income tax (receivable) payable		231			(855	)
State income tax payable		5			5
Net cash provided by operating activities		2,281			811
Investing Activities
Purchases of available-for-sale securities		(5,996	)		—
Proceeds from maturities of available-for-sale securities		9,610			2,514
Net change in loans		(1,525	)		(10,660	)
Purchase of premises and equipment		—			(118	)
Purchase of Federal Home Loan Bank stock		(6	)		(3	)
Net cash provided by (used in) investing activities		2,083			(8,267	)

The accompanying notes are an integral part of these unaudited, consolidated financial statements. 6

First Beeville Financial Corporation

Consolidated Statements of Cash Flows (continued)

(Unaudited)

(Dollars in thousands)

	Three Months Ended March 31,
	2019			2018
Financing Activities
Net increase in non-certificate of deposits accounts	$	2,991		$	6,523
Net (decrease) increase in certificate of deposits accounts		(3,345	)		985
Dividends paid		(119	)		—
Net cash provided by (used in) financing activities		(473	)		7,508
Increase in Cash and Cash Equivalents		3,891			52
Cash and Cash Equivalents, Beginning of Period		56,175			46,364
Cash and Cash Equivalents, End of Period	$	60,066		$	46,416
Supplemental Cash Flows Information
Interest paid	$	560		$	386
Income taxes paid	$	8		$	1,203

The accompanying notes are an integral part of these unaudited, consolidated financial statements. 7

First Beeville Financial Corporation

Notes to Consolidated Financial Statements

(Unaudited)

(Dollars in thousands, except 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, 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. 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 March 31, 2019, are not necessarily indicative of the results that may be expected for the year ending December 31, 2019, and should be read in conjunction with the audited financial statements and notes thereto for the year ended December 31, 2018.

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.

8

First Beeville Financial Corporation

Notes to Consolidated Financial Statements

(Unaudited)

(Dollars in thousands, except share data)

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.

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 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. The Company has adopted this standard and it did not have a material impact to the Company’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 annual and interim periods beginning after December 15, 2021. 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.

9

First Beeville Financial Corporation

Notes to Consolidated Financial Statements

(Unaudited)

(Dollars in thousands, except share data)

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 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

10

First Beeville Financial Corporation

Notes to Consolidated Financial Statements

(Unaudited)

(Dollars in thousands, except share data)

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 ASUs 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.

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 March 31, 2019 and December 31, 2018, the required reserves totaled $10,177 and $4,702, respectively.

11

First Beeville Financial Corporation

Notes to Consolidated Financial Statements

(Unaudited)

(Dollars in thousands, except share data)

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
March 31, 2019
U.S. Government and government-sponsored enterprises (GSE) securities	$	15,029	$	24	$	5	$	15,048
Tax-exempt municipal securities		18,562		32		158		18,436
U.S. Government and GSE mortgage-backed securities		26,693		26		403		26,316
Total	$	60,284	$	82	$	566	$	59,800
December 31, 2018
U.S. Government and GSE securities	$	15,016	$	15	$	9	$	15,022
Tax-exempt municipal securities		20,988		2		387		20,603
U.S. Government and GSE mortgage-backed securities		27,962		9		644		27,327
Total	$	63,966	$	26	$	1,040	$	62,952

The amortized cost and fair value of available-for-sale securities at March 31, 2019, 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	$	13,608	$	13,603
Due in one to five years		14,449		14,446
Due in five to ten years		5,534		5,435
Total investment securities		33,591		33,484
U.S. Government and GSE mortgage-backed securities		26,693		26,316
Total	$	60,284	$	59,800

The carrying value of securities pledged as collateral, to secure public deposits and for other purposes, was $56,800 and $61,970 at March 31, 2019 and December 31, 2018, respectively.

12

First Beeville Financial Corporation

Notes to Consolidated Financial Statements

(Unaudited)

(Dollars in thousands, except share data)

There were no sales of available-for-sale securities during 2019 or 2018.

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 March 31, 2019 and December 31, 2018, was $45,937 and $57,577, respectively, which is approximately 77 percent and 91 percent, respectively, of the Company’s available-for-sale 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 March 31, 2019 and December 31, 2018:

	March 31, 2019
	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	$	7,995	$	3	$	2,027	$	2	$	10,022	$	5
Tax-exempt municipal securities		—		—		12,835		158		12,835		158
U.S. Government and GSE mortgage-backed securities		—		—		23,080		403		23,080		403
Total	$	7,995	$	3	$	37,942	$	563	$	45,937	$	566
	December 31, 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	$	12,991	$	6	$	1,010	$	3	$	14,001	$	9
Tax-exempt municipal securities		7,025		43		13,072		344		20,097		387
U.S. Government and GSE mortgage-backed securities		2,513		54		20,966		590		23,479		644
Total	$	22,529	$	103	$	35,048	$	937	$	57,577	$	1,040

13

First Beeville Financial Corporation

Notes to Consolidated Financial Statements

(Unaudited)

(Dollars in thousands, except share data)

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 March 31, 2019.

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 March 31, 2019.

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 March 31, 2019.

14

First Beeville Financial Corporation

Notes to Consolidated Financial Statements

(Unaudited)

(Dollars in thousands, except share data)

Note 4: Loans and Allowance for Loan Losses

Categories of loans at March 31, 2019 and December 31, 2018, include:

	March 31, 2019			December 31, 2018
Commercial loans	$	26,884		$	27,531
Agricultural loans		8,439			7,531
Real estate loans		263,135			261,928
Installment and consumer term loans		1,782			1,709
Other loans (virtual and ready credit)		75			77
Overdrafts		33			41
Gross loans		300,348			298,817
Less
Net deferred loan fees and costs		(1,003	)		(993	)
Allowance for loan losses		(3,568	)		(3,492	)
Net loans	$	295,777		$	294,332

15

First Beeville Financial Corporation

Notes to Consolidated Financial Statements

(Unaudited)

(Dollars in thousands, except share data)

The following tables present the balance in the allowance for loan losses for the periods ended March 31, 2019 and 2018.

	March 31, 2019
	Commercial		Agricultural		Real Estate			Consumer			Total
Allowance for Loan Losses
Balance, beginning of period	$	225	$	67	$	3,182		$	18		$	3,492
Provision for loan losses		30		6		43			1			80
Losses charged-off		—		—		—			(6	)		(6	)
Recoveries		—		—		—			2			2
Balance, end of period	$	255	$	73	$	3,225		$	15		$	3,568
	March 31, 2018
	Commercial		Agricultural		Real Estate			Consumer			Total
Allowance for Loan Losses
Balance, beginning of period	$	246	$	69	$	2,794		$	19		$	3,128
Provision for loan losses		—		—		202			3			205
Losses charged-off		—		—		(225	)		(4	)		(229	)
Recoveries		—		—		7			1			8
Balance, end of period	$	246	$	69	$	2,778		$	19		$	3,112
The following tables present the balance in the allowances for loan losses and the recorded investment in loans based on portfolio segment and impairment method as of March 31, 2019 and December 31, 2018:
	March 31, 2019
	Commercial		Agricultural		Real Estate			Consumer			Total
Allowance Balances
Ending balance individually evaluated for impairment	$	—	$	—	$	—		$	—		$	—
Ending balance collectively evaluated for impairment		255		73		3,225			15			3,568
Ending balance	$	255	$	73	$	3,225		$	15		$	3,568
Loans
Ending balance individually evaluated for impairment	$	—	$	—	$	—		$	—		$	—
Ending balance collectively evaluated for impairment		26,884		8,439		263,135			1,890			300,348
Ending balance	$	26,884	$	8,439	$	263,135		$	1,890		$	300,348

16

First Beeville Financial Corporation

Notes to Consolidated Financial Statements

(Unaudited)

(Dollars in thousands, except share data)

	December 31, 2018
	Commercial		Agricultural		Real Estate		Consumer		Total
Allowance Balances
Ending balance individually evaluated for impairment	$	—	$	—	$	—	$	—	$	—
Ending balance collectively evaluated for impairment		225		67		3,182		18		3,492
Ending balance	$	225	$	67	$	3,182	$	18	$	3,492
Loans
Ending balance individually evaluated for impairment	$	—	$	—	$	1,235	$	—	$	1,235
Ending balance collectively evaluated for impairment		27,531		7,531		260,693		1,827		297,582
Ending balance	$	27,531	$	7,531	$	261,928	$	1,827	$	298,817

17

First Beeville Financial Corporation

Notes to Consolidated Financial Statements

(Unaudited)

(Dollars in thousands, except share data)

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 way 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.

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.

18

First Beeville Financial Corporation

Notes to Consolidated Financial Statements

(Unaudited)

(Dollars in thousands, except share data)

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.

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, 2018, all assets classified as doubtful were impaired. There were no doubtful or impaired loans at March 31, 2019.

19

First Beeville Financial Corporation

Notes to Consolidated Financial Statements

(Unaudited)

(Dollars in thousands, except share data)

The following tables present the credit risk profile of the Bank’s loan portfolio based on internal rating category and payment activity as of March 31, 2019 and December 31, 2018:

	March 31, 2019
	Commercial		Agricultural		Real Estate		Consumer		Total
Rating
Pass	$	26,318	$	8,415	$	259,442	$	1,889	$	296,064
Watch		566		—		1,715		—		2,281
OAEM		—		—		734		—		734
Substandard		—		24		1,244		1		1,269
Total	$	26,884	$	8,439	$	263,135	$	1,890	$	300,348
	December 31, 2018
	Commercial		Agricultural		Real Estate		Consumer		Total
Rating
Pass	$	26,985	$	7,507	$	254,873	$	1,825	$	291,190
Watch		546		—		5,061		—		5,607
OAEM		—		—		740		—		740
Substandard		—		24		19		2		45
Impaired		—		—		1,235		—		1,235
Total	$	27,531	$	7,531	$	261,928	$	1,827	$	298,817

20

First Beeville Financial Corporation

Notes to Consolidated Financial Statements

(Unaudited)

(Dollars in thousands, except share data)

The following tables present the Bank’s loan portfolio aging analysis of the recorded investment in loans as of March 31, 2019 and December 31, 2018:

	March 31, 2019
	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	$	67	$	—	$	—	$	67	$	26,817	$	26,884	$	—
Agricultural loans		—		—		—		—		8,439		8,439		—
Real estate loans		1,200		—		—		1,200		261,935		263,135		—
Consumer loans		2		—		—		2		1,888		1,890		—
Total	$	1,269	$	—	$	—	$	1,269	$	299,079	$	300,348	$	—
	December 31, 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	$	6	$	—	$	—	$	6	$	27,525	$	27,531	$	—
Agricultural loans		—		—		—		—		7,531		7,531		—
Real estate loans		198		—		—		198		261,730		261,928		—
Consumer loans		6		—		—		6		1,821		1,827		—
Total	$	210	$	—	$	—	$	210	$	298,607	$	298,817	$	—

The following table presents impaired loans at December 31, 2018. There were no impaired loans at March 31, 2019.

	December 31, 2018
	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	$	—	$	—	$	—	$	—	$	—	$	—
Agricultural loans		—		—		—		—		—		—
Real estate loans		1,235		1,235		—		826		57		—
Consumer loans		—		—		—		—		—		—
Loans with a specific valuation allowance
Commercial loans		—		—		—		—		—		—
Agricultural loans		—		—		—		—		—		—
Real estate loans		—		—		—		—		—		—
Consumer loans		—		—		—		—		—		—
Total	$	1,235	$	1,235	$	—	$	826	$	57	$	—

21

First Beeville Financial Corporation

Notes to Consolidated Financial Statements

(Unaudited)

(Dollars in thousands, except share data)

There were no material troubled debt restructurings for the period ended March 31, 2019 or December 31, 2018.

Note 5: Lines of Credit

FHLB Line of Credit

At March 31, 2019 and December 31, 2018, the Bank had a revolving line of credit with no expiration and a maximum available limit of $139,820 and $132,252, respectively. There were no funds borrowed against this line at March 31, 2019 or December 31, 2018. 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 March 31, 2019 and December 31, 2018, the Bank had available a $6,000 revolving line of credit that expires in 2019. At March 31, 2019 and December 31, 2018, there were no funds borrowed against this line. The line is not collateralized at March 31, 2019. The line of credit bears interest at a daily variable rate which is set by Frost Bank.

At March 31, 2019 and December 31, 2018, the Company had available a revolving line of credit of $500 and $666, respectively. The available credit line decreases quarterly until maturity in 2019. At March 31, 2019 and December 31, 2018, there were no funds borrowed against this line. The line of credit is collateralized by 120,000 shares of Bank stock at March 31, 2019.

The Independent Bankers’ Bank (TIB) Line of Credit

At March 31, 2019 and December 31, 2018, 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 March 31, 2019 or December 31, 2018. The line is collateralized by securities as applicable. The line of credit bears interest at a daily variable rate which is set by TIB.

22

First Beeville Financial Corporation

Notes to Consolidated Financial Statements

(Unaudited)

(Dollars in thousands, except 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 March 31, 2019 and December 31, 2018, that the Bank meets all capital adequacy requirements to which it is subject.

As of March 31, 2019 and December 31, 2018, 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.

23

First Beeville Financial Corporation

Notes to Consolidated Financial Statements

(Unaudited)

(Dollars in thousands, except 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 March 31, 2019
Total risk-based capital (to risk-weighted assets)	$	43,825		14.07	%	$	32,710		10.500	%	$	31,152		10.00	%
Tier I capital (to risk-weighted assets)	$	40,257		12.92	%	$	26,479		8.500	%	$	24,922		8.00	%
Common equity Tier 1 capital (to risk-weighted assets)	$	40,257		12.92	%	$	21,807		7.000	%	$	20,249		6.50	%
Tier I capital (to average assets)	$	40,257		9.34	%	$	17,236		4.000	%	$	21,545		5.00	%
As of December 31, 2018
Total risk-based capital (to risk-weighted assets)	$	42,147		13.49	%	$	30,858		9.875	%	$	31,248		10.00	%
Tier I capital (to risk-weighted assets)	$	38,655		12.37	%	$	24,608		7.875	%	$	24,999		8.00	%
Common equity Tier 1 capital (to risk-weighted assets)	$	38,655		12.37	%	$	19,921		6.375	%	$	20,311		6.50	%
Tier I capital (to average assets)	$	38,655		9.17	%	$	16,864		4.000	%	$	21,080		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 zero percent for 2015 to 2.50 percent by 2019. The capital conservation buffer was 2.50 percent at March 31, 2019 and 1.875 percent at December 31, 2018. 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

24

First Beeville Financial Corporation

Notes to Consolidated Financial Statements

(Unaudited)

(Dollars in thousands, except share data)

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 7: Related-party Transactions

At March 31, 2019 and December 31, 2018, the Company had loans outstanding to executive officers, directors, significant shareholders and their affiliates (related parties), in the amount of $6,449 and $6,466, respectively.

A summary of those transactions follows:

	Three Months Ended March 31,									Year Ended December 31,
	2019									2018
	Current			Unfunded			Total			Current			Unfunded		Total
Beginning balance	$	5,351		$	1,115		$	6,466		$	5,401		$	1,060	$	6,461
New loans		70			—			70			491			55		546
Repayments		(73	)		(14	)		(87	)		(541	)		—		(541	)
Ending balance	$	5,348		$	1,101		$	6,449		$	5,351		$	1,115	$	6,466

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 March 31, 2019 and December 31, 2018, totaled $2,354 and $2,450 respectively.

25

First Beeville Financial Corporation

Notes to Consolidated Financial Statements

(Unaudited)

(Dollars in thousands, except share data)

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 March 31, 2019 and December 31, 2018. The Company accrued $846 and $777 related to the agreements at March 31, 2019 and December 31, 2018, respectively. Total expenses of the Plan amounted to $70 and $226 for the three months and year ended March 31, 2019 and December 31, 2018, respectively. The SARs are required to be settled in cash.

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 is estimated to 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 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 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.

26

First Beeville Financial Corporation

Notes to Consolidated Financial Statements

(Unaudited)

(Dollars in thousands, except share data)

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 March 31, 2019 and December 31, 2018, the Company had outstanding commitments to originate loans and unused lines of credit aggregating $24,977 and $27,626, 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 $430 and $405, at March 31, 2019 and December 31, 2018, respectively, with terms ranging from 30 days to 15 months.

27

First Beeville Financial Corporation

Notes to Consolidated Financial Statements

(Unaudited)

(Dollars in thousands, except share data)

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

Recurring Measurements

The tables on the following page 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 March 31, 2019 and December 31, 2018:

28

First Beeville Financial Corporation

Notes to Consolidated Financial Statements

(Unaudited)

(Dollars in thousands, except share data)

			Fair Value Measurements Using
			Quoted
			Prices
			in Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
	Fair		Assets		Inputs		Inputs
	Value		(Level 1)		(Level 2)		(Level 3)
March 31, 2019
Available-for-sale securities
U.S. Government and GSE securities	$	15,048	$	—	$	15,048	$	—
Tax-exempt municipal securities		18,436		—		18,436		—
U.S. Government and GSE mortgage-backed securities		26,316		—		26,316		—
	$	59,800	$	—	$	59,800	$	—
			Fair Value Measurements Using
			Quoted
			Prices
			in Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
	Fair		Assets		Inputs		Inputs
	Value		(Level 1)		(Level 2)		(Level 3)
December 31, 2018
Available-for-sale securities
U.S. Government and GSE securities	$	15,022	$	—	$	15,022	$	—
Tax-exempt municipal securities		20,603		—		20,603		—
U.S. Government and GSE mortgage-backed securities		27,327		—		27,327		—
	$	62,952	$	—	$	62,952	$	—

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 period ended March 31, 2019 or December 31, 2018.

29

First Beeville Financial Corporation

Notes to Consolidated Financial Statements

(Unaudited)

(Dollars in thousands, except share data)

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.

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, 2018:

			Fair Value Measurements Using
			Quoted
			Prices
			in Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
	Fair		Assets		Inputs		Inputs
	Value		(Level 1)		(Level 2)		(Level 3)
December 31, 2018
Collateral dependent impaired loans	$	1,235	$	—	$	—	$	1,235
	$	1,235	$	—	$	—	$	1,235

30

First Beeville Financial Corporation

Notes to Consolidated Financial Statements

(Unaudited)

(Dollars in thousands, except share data)

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.

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 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, 2018.

	Fair Value at December 31, 2018		Valuation Technique	Unobservable Inputs	Range
Collateral dependent impaired loans	$	1,235	Market comparable properties	Marketability discount	10% - 15%

There were no assets or liabilities measured at fair value on a nonrecurring basis at March 31, 2019.

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 2019 or 2018.

31

First Beeville Financial Corporation

Notes to Consolidated Financial Statements

(Unaudited)

(Dollars in thousands, except share data)

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 SAR 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 three months ended March 31, 2019 and 2018, 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 outstanding for earnings per share calculations. The following table presents the computation of basic and diluted EPS:

	Three months ended March 31,
	2019		2018
Net income available to common stockholders	$	1,731	$	1,308
Weighted average number of common shares - basic and diluted		59,138		59,138
Basic and diluted earnings per common share	$	29.27	$	22.12

Note 14: 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. The merger was completed in the second quarter of 2019.

32

First Beeville Financial Corporation

Notes to Consolidated Financial Statements

(Unaudited)

(Dollars in thousands, except share data)

Note 15: Subsequent Events

Completion of Merger with Spirit of Texas Bancshares, Inc.

On April 2, 2019, Spirit completed its acquisition of the Company. With the transaction, the Company’s shareholders received approximately $32.4 million in cash and 1,579,268 shares of Spirit common stock. In connection with the completion of the acquisition, payments of $2,625 were made related to the change of control provision for the Company’s stock appreciation rights as discussed in Note 8 and payment of $1,359 was made related to the change of control agreement with the CEO as discussed in Note 9.

33

EX-99.3

Exhibit 99.3

UNAUDITED PRO FORMA COMBINED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The following unaudited pro forma combined condensed consolidated balance sheet as of March 31, 2019 and the unaudited pro forma combined condensed consolidated statements of income for the three months ended March 31, 2019 and the year ended December 31, 2018 have been prepared to show the impact on Spirit of Texas Bancshares, Inc.’s (“Spirit”) historical financial position and results of operations of (i) the completion of the acquisition of Comanche National Corporation (“Comanche”) on November 14, 2018, including the issuance of 2,142,811 shares of Spirit common stock to Comanche shareholders, and (ii) the completion of the acquisition of First Beeville Financial Corporation (“Beeville”) on April 2, 2019, including the 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 2,142,811 shares of Spirit common stock to Comanche shareholders; and

• net cash payment to Comanche shareholders of $12,200,000, for a total consideration of $52.9 million.

• a closing price of Spirit common stock of $21.20 per share, which was the closing price of Spirit common stock on April 2, 2019, as to the issuance of 1,579,268 shares of Spirit common stock to Beeville shareholders; and

• net cash payment to Beeville shareholders of $32,375,000, for a total consideration of $65.9 million.

The unaudited pro forma combined condensed consolidated balance sheet give effect to the Beeville acquisition as business combinations under generally accepted accounting principles (“GAAP”). Accordingly, all Beeville assets and liabilities were recorded at their respective fair values and the excess of the merger consideration over the fair value of Beeville’s net assets was allocated to goodwill. The unaudited pro forma combined condensed consolidated statements of income give effect to the Comanche acquisition and the Beeville acquisition as business combinations under GAAP. Pro forma adjustments are included only to the extent they are (i) directly attributable to either or both of the acquisitions, (ii) factually supportable and (iii) with respect to the unaudited pro forma combined condensed consolidated statements 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 unaudited pro forma financial statements and are described in the accompanying footnotes. Spirit’s management believes that the estimates used in these unaudited 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 for each acquisition 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 unaudited pro forma financial statements do not include the effects of any potential cost savings which management believes will result from combining certain operating procedures.

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 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 Beeville acquisition had become effective on March 31, 2019, with respect to the unaudited pro forma combined condensed consolidated balance sheet, and as if each of the Comanche acquisition and the Beeville acquisition had become effective on January 1, 2018, with respect to the unaudited pro forma combined condensed consolidated statements of income. The inclusion of the Comanche acquisition in the pro forma combined condensed consolidated statements of income is through November 14, 2018, after which the results of operations of Comanche are included in the historical results of operations of Spirit.

In preparing the unaudited pro forma combined condensed consolidated financial information in accordance with GAAP, the following historical information was used:

• Spirit’s Quarterly Report filed on Form 10-Q for the three months ended March 31, 2019;

• Beeville’s unaudited consolidated financial statements for the three months ended March 31, 2019;

• Spirit’s Annual Report filed on Form 10-K for the year ended December 31, 2018;

• Beeville’s audited consolidated financial statements for the year ended December 31, 2018; and

• Comanche’s unaudited financial information year to date through November 14, 2018.

UNAUDITED PRO FORMA COMBINED CONDENSED CONSOLIDATED BALANCE SHEET

AS OF MARCH 31, 2019

	Spirit			Beeville			Beeville Acquisition Adjustments			Post Merger Pro forma Combined Company
	(Dollars in thousands)
Assets:
Cash and cash equivalents	$	122,662		$	61,291		$	(34,102	)(a)	$	149,851
Investment securities:
Available for sale securities, at fair value		131,068			59,800			—			190,868
Loans held for sale		6,300			—			—			6,300
Loans:
Loans held for investment		1,115,995			299,345			(3,392	)(b)		1,411,948
Less: allowance for loan and lease losses		(6,569	)		(3,568	)		3,568	(c)		(6,569	)
Loans, net		1,109,426			295,777			176			1,405,379
Premises and equipment, net		55,237			7,036			1,250	(d)		63,523
Other real estate owned and repossessed assets		518			1,359			—			1,877
Goodwill		18,253			—			24,202	(e)		42,455
Core deposit intangible		7,954			—			5,900	(f)		13,854
SBA servicing asset		3,747			—			—			3,747
Deferred tax asset, net		—			651			(1,757	)(g)		(1,106	)
Bank-owned life insurance		7,442			7,903			—			15,345
Federal Home Loan Bank and other bank stock, at cost		5,264			1,067			—			6,331
Other assets		9,313			2,109			313	(h)		11,735
Total assets	$	1,477,184		$	436,993		$	(4,018	)	$	1,910,159
Liabilities and Stockholders’ Equity
Liabilities:
Deposits:
Transaction accounts:
Noninterest-bearing	$	258,440		$	98,264		$	—		$	356,704
Interest-bearing		363,326			241,702			—			605,028
Total transaction accounts		621,766			339,966			—			961,732
Time deposits		581,486			54,517			200	(i)		636,203
Total deposits		1,203,252			394,483			200			1,597,935
FHLB Advances		65,676			—			—			65,676
Deferred tax liability, net		449									449
Other liabilities		3,831			2,555			3,984	(j)		10,370
Total liabilities		1,273,208			397,038			4,184			1,674,430
Stockholders’ Equity:
Common stock		171,159			1,254			32,226	(k)(l)		204,639
Retained earnings		30,813			41,834			(43,561	)(l)		29,086
Accumulated other comprehensive income (loss)		2,004			(382	)		382	(l)		2,004
Treasury stock, at cost		—			(2,751	)		2,751	(l)		—
Total stockholders’ equity		203,976			39,955			(8,202	)		235,729
Total liabilities and stockholders’ equity	$	1,477,184		$	436,993		$	(4,018	)	$	1,910,159

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

Assets of acquired bank:
Cash and cash equivalents	$	61,291
Securities available for sale		59,800
Loans		295,953
Premises and equipment		8,286
Core deposit intangible		5,900
Deferred tax asset, net		(793	)
Other real estate		1,359
Other assets		11,079
Total assets acquired		442,875
Liabilities of acquired bank:
Deposits		394,683
Trust Preferred Securities		—
Other Liabilities		6,539
Total liabilities assumed		401,222
Net assets acquired		41,653
Common stock issued		33,480
Cash paid		32,375
Total purchase price	$	65,855
Excess of consideration paid over fair value of net assets acquired - Goodwill	$	24,202

(a) Record cash paid at close of $32.4 million and transaction costs attributable to Spirit of $802 thousand and attributable to Beeville of $925 thousand.

(b) Estimated fair market value adjustment on the acquired loan portfolio, which includes a $3.6 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.

(c) Eliminate acquiree’s allowance for loan losses.

(d) 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, of $1.2 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.

(f) 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 $1.1 million, $965 thousand, $858 thousand, $751 thousand and $644 thousand, respectively.

(g) 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 $1.8 million. The significant components of the proforma adjustments to deferred tax asset related to acquired loans fair value adjustment of $709 thousand, a deferred tax liability related to premises and equipment of $263 thousand, a deferred tax liability related to core deposit intangible of $1.3 million, the elimination of the deferred tax asset related to Beeville’s historical allowance for loan losses of $613 thousand and the elimination of the deferred tax asset related to Beeville’s deferred compensation previously booked of $313 thousand. Acquired deferred tax assets materially consist of deferred taxes on deferred loan fees ($208 thousand). Acquired deferred tax liabilities materially consist of deferred taxes on premises and equipment ($201 thousand) and OREO ($109 thousand).

(h) Income tax receivable arising from deferred compensation payments.

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

(j) 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 April 2, 2019 closing price of Spirit common stock of $21.20.

(k) Issue 1,579,268 shares of Spirit common stock at April 2, 2019 closing price of $21.20 for a total of $33.5 million in equity consideration.

(l) Eliminate Beeville capital accounts. Adjustment to retained earnings includes $1.7 million in closing costs.

UNAUDITED PRO FORMA COMBINED CONDENSED CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR

ENDED DECEMBER 31, 2018

	Spirit		Comanche		Comanche Acquisition Pro Forma Adjustments			Beeville		Beeville Acquisition Pro Forma Adjustments			Pro Forma Combined Company
	(Dollars in thousands, except per share data)
Interest income:
Interest and fees on loans	$	55,087	$	6,498	$	249	(a)	$	15,957	$	337	(f)	$	78,128
Interest and dividends on investment securities		1,508		4,033		—			1,200		—			6,741
Other interest income		744		321		—			946		—			2,011
Total interest income		57,339		10,852		249			18,103		337			86,880
Interest expense:
Interest on deposits		8,482		1,566		(198	)(b)		1,828		(50	)(g)		11,628
Interest on FHLB advances and other borrowings		1,842		101		—			2		—			1,945
Total interest expense		10,324		1,667		(198	)		1,830		(50	)		13,573
Net interest income		47,015		9,185		447			16,273		387			73,307
Provision for loan losses		2,160		—		—			565		—			2,725
Net interest income after provision for loan losses		44,855		9,185		447			15,708		387			70,582
Noninterest income:
Service charges and fees		1,887		1,323		—			971		—			4,181
SBA loan servicing fees		2,727		—		—			—		—			2,727
Gain on sales of loans, net		5,120		—		—			—		—			5,120
Other noninterest income		755		41		—			183		—			979
Total noninterest income		10,489		1,364		—			1,154		—			13,007
Noninterest expense:
Salaries and employee benefits		27,512		4,736		—			5,352		—			37,600
Occupancy and equipment expenses		5,215		912		50	(c)		1,041		42	(c)		7,260
Professional services		3,055		421		—			—		—			3,476
Data processing and network		1,276		164		—			—		—			1,440
Regulatory assessments and insurance		1,094		239		—			—		—			1,333
Amortization of intangibles		917		—		1,497	(d)		—		1,062	(h)		3,476
Other operating expenses		4,295		1,464		—			2,733		—			8,492
Total noninterest expense		43,364		7,936		1,547			9,126		1,104			63,077
Income before income tax expense		11,980		2,613		(1,100	)		7,736		(717	)		20,512
Income tax expense		2,002		138		(231	)(e)		1,483		(151	)(e)		3,241
Net income	$	9,978	$	2,475	$	(869	)	$	6,253	$	(566	)	$	17,271
Share and per share data:
Earnings per common share:
Basic	$	1.08	$	6.19				$	105.73				$	1.36
Diluted	$	1.03	$	6.19				$	105.73				$	1.32
Weighted average common shares outstanding:
Basic		9,258,216		399,811					59,138					12,698,424
Diluted		9,642,408		399,811					59,138					13,082,616

(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) Additional depreciation related to fair market value adjustment on premises.

(d) Expected amortization of additional core deposit intangible of $6.0 million is based on a 6 year life using the sum of the years digits amortization method.

(e) Tax adjustment related to other pro forma adjustments calculated at a 21% rate.

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

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

(h) Expected amortization of additional core deposit intangible of $5.8 million is based on a 10 year life using the sum of the years digits amortization method.

UNAUDITED PRO FORMA COMBINED CONDENSED CONSOLIDATED STATEMENT OF INCOME FOR THE THREE MONTHS ENDED MARCH 31, 2019

	Spirit		Beeville		Beeville Acquisition Pro Forma Adjustments			Pro Forma Combined Company
	(Dollars in thousands, except per share data)
Interest income:
Interest and fees on loans	$	17,118	$	4,540	$	84	(a)	$	21,742
Interest and dividends on investment securities		1,182		341		—			1,523
Other interest income		584		313		—			897
Total interest income		18,884		5,194		84			24,162
Interest expense:
Interest on deposits		3,071		554		(13	)(b)		3,612
Interest on FHLB advances and other borrowings		378		—		—			378
Total interest expense		3,449		554		(13	)		3,990
Net interest income		15,435		4,640		97			20,172
Provision for loan losses		849		80		—			929
Net interest income after provision for loan losses		14,586		4,560		97			19,243
Noninterest income:
Service charges and fees		729		240		—			969
SBA loan servicing fees		264		—		—			264
Gain on sales of loans, net		804		—		—			804
Other noninterest income		1,260		44		—			1,304
Total noninterest income		3,057		284		—			3,341
Noninterest expense:
Salaries and employee benefits		7,124		1,493		—			8,617
Occupancy and equipment expenses		1,262		279		11	(c)		1,552
Professional services		1,041		—		—			1,041
Data processing and network		485		—		—			485
Regulatory assessments and insurance		98		—		—			98
Amortization of intangibles		603		—		241	(d)		844
Other operating expenses		2,391		872		—			3,263
Total noninterest expense		13,004		2,644		252			15,900
Income before income tax expense		4,639		2,200		(155	)		6,684
Income tax expense		829		469		(33	)(e)		1,265
Net income	$	3,810	$	1,731	$	(122	)	$	5,419
Share and per share data:
Earnings per common share:
Basic	$	0.31	$	29.27				$	0.39
Diluted	$	0.30	$	29.27				$	0.38
Weighted average common shares outstanding:
Basic		12,152,558		59,138					13,731,749
Diluted		12,607,445		59,138					14,186,636

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

(b) Adjustment to interest expense for amortization on Beeville time deposits based on expected fair market value.

(c) Additional depreciation related to fair market value adjustment on premises.

(d) Expected amortization of additional core deposit intangible of $5.8 million is based on a 10 year life using the sum of the years digits amortization method.

(e) Tax adjustment related to other pro forma adjustments calculated at a 21% rate.