Spirit of Texas Bancshares Inc (NASDAQ: STXB) (Spirit the Company we our or us) reported net income of $77 million in the second quarter of 2020 representing diluted earnings per share of $044 compared to net income of $58 million in the second quarter of 2019 representing diluted earnings per share of $041 Record net income for the second quarter of 2020 was assisted by $10 million net accretion of origination fees on Paycheck Protection Program (PPP) loans offset by increased provision expense for loan losses related to the COVID-19 pandemic

Second Quarter 2020 Financial and Operational Highlights

• Deployed our talented and experienced lending team to assist more than 3200 businesses in obtaining PPP loans totaling $428 million as of June 30 2020 generating $153 million of origination fees that will be accreted into income over the life of the loans
• Capital continues to remain strong with a Tier 1 capital leverage ratio of 960% at Spirit of Texas Bank SSB (the Bank) and 949% at the Company on a consolidated basis
• Net interest margin for the second quarter as reported and on a tax equivalent basis⁽¹⁾ were 395% and 400% respectively Net interest margin was negatively impacted by the origination of PPP loans which yield 100% and reduced the net interest margin by 19 basis points
• At June 30 2020 return on average assets was 107% annualized
• Book value per share increased to $2001 at June 30 2020 and tangible book value per share⁽¹⁾ increased to $1497 at the same date
• At June 30 2020 total stockholders' equity to total assets was 1173% and tangible stockholders' equity to tangible assets⁽¹⁾ was 904%

Dean Bass Spirit's Chairman and Chief Executive Officer stated We are extremely pleased to report such strong quarterly results despite an extremely tough operating environment We are truly blessed to have some of the strongest and most committed bankers in the business who worked tirelessly to assist current and new customers obtain capital through the Paycheck Protection Program We were only able to accomplish the impressive volume of PPP loan originations during the quarter because of the robust staff that we maintain Additionally the origination fees which will be earned over the relatively short life of these loans represent an attractive return on investment for our shareholders We remain absolutely committed to the safety of our employees and customers as the global pandemic continues to evolve and will continue to seek unique opportunities to deploy resources and create shareholder value during these challenging times

Loan Portfolio and Composition

During the second quarter of 2020 gross loans grew to $243 billion an increase of 206% from $201 billion as of March 31 2020 and an increase of 712% from $142 billion as of June 30 2019  Loan growth quarter over quarter was primarily driven by participation in the Payroll Protection Program which added $4280 million in loans  Excluding PPP loans organic loans increased $431 million or 144% annualized which includes approximately $133 million of participations purchased   Organic loan growth for the quarter (excluding PPP loans) was the result of customers delaying projects and plans as opposed to the Bank decreasing the supply of funds available to lend  We will continue to support our customers and are committed to making funds available while actively managing balance sheet risk

We remain focused on credit quality and meeting the needs of our customers while ensuring adequate capital is conserved to cover potential losses due to the COVID-19 pandemic The industries and related exposures currently being monitored by our credit administration personnel include retail strip centers hospitality restaurants and direct and indirect oil exposure Retail strip centers consisted of $1204 million or 50% of the loan portfolio at June 30 2020 Hospitality exposure consisted of $914 million or 38% of the loan portfolio at June 30 2020  Restaurant exposure consisted of $305 million or 13% of the loan portfolio at June 30 2020  Finally total oil exposure was $747 million or 31% of the loan portfolio at June 30 2020

Asset Quality

Asset quality remained strong in the second quarter of 2020 The provision for loan losses recorded for the second quarter of 2020 was $28 million which served to increase the allowance to $99 million or 041% of the $243 billion in gross loans outstanding as of June 30 2020 The majority of the provision expense for the second quarter of 2020 related to increasing qualitative reserves in response to the current economic environment as opposed to a deterioration in credit quality or an increase in impaired loan balances The coverage ratio on the organic portfolio was 077% of the $128 billion in organic loans outstanding excluding PPP loans which are fully guaranteed and not reserved for as of June 30 2020 As an emerging growth company we have opted to delay the adoption of CECL until 2023  Under our current incurred loss model our reserves are based upon an estimate of loss events which have occurred as opposed to forecasting future loss events

Nonperforming loans to loans held for investment ratio as of June 30 2020 was 031% compared to 038% as of March 31 2020 and 040% as of June 30 2019 Annualized net charge-offs were 10 basis points for the second quarter of 2020 compared to 18 basis points for the second quarter of 2019

As of June 30 2020 we have received and approved COVID-19 related loan relief requests including periods of interest only payments full payment deferrals and escrow deferrals associated with loans with an unpaid principal balance of approximately $5206 million  While these approvals were initially given for a period of 90 days to ease the impact of business closures and reduced demand we continue to stay in contact with our borrowers and monitor their long-term financial stability and our collateral position Based on these conversations more than 90% of these borrowers have resumed or are expected to resume payments this month 

Deposits and Borrowings

Deposits totaled $241 billion as of June 30 2020 an increase of 163% from $208 billion as of March 31 2020 and an increase of 538% from $157 billion as of June 30 2019  Noninterest-bearing demand deposits increased $2586 million or 531% from March 31 2020 and increased $3778 million or 1027% from June 30 2019 The increase in noninterest-bearing deposits is partially due to deposit accounts related to PPP loan funding  PPP related deposit accounts totaled $1080 million at June 30 2020 Noninterest-bearing demand deposits represented 309% of total deposits as of June 30 2020 up from 234% of total deposits as of March 31 2020 and 234% of total deposits as of June 30 2019 The average cost of deposits was 067% for the second quarter of 2020 representing a 26 basis point decrease from the first quarter of 2020 and a 34 basis point decrease from the second quarter of 2019

Borrowings increased by $798 million during the second quarter of 2020 to $1931 million due primarily to participation in the Paycheck Protection Program Lending Facility with the Board of Governors of the Federal Reserve System  Borrowings totaled 65% of total assets at June 30 2020 compared to 44% at March 31 2020 and 47% at June 30 2019

Net Interest Margin and Net Interest Income

The net interest margin for the second quarter of 2020 was 395% a decrease of 43 basis points from the first quarter of 2020 and 66 basis points from the second quarter of 2019 The tax equivalent net interest margin⁽¹⁾ for the second quarter of 2020 was 400% a decrease of 40 basis points from the first quarter of 2020 and a decrease of 64 basis points from the second quarter of 2019  The decline from the first quarter of 2020 is primarily due to rate resets on interest-earning assets as a result of decreases in interest rates set by the Federal Open Market Committee during the first quarter of 2020 and PPP loans which yield 100%  Excluding the impact of PPP loans net interest margin and tax equivalent net interest margin were 414% and 421% respectively

Net interest income totaled $261 million for the second quarter of 2020 an increase of 95% from $238 million for the first quarter of 2020 and an increase of 319% from $198 million for the second quarter of 2019  Interest income totaled $306 million for the second quarter of 2020 an increase of 60% from $288 million for the first quarter of 2020 and an increase of 257% from $243 million for the second quarter of 2019  Interest and fees on loans increased by $25 million or 91% from the first quarter of 2020 and increased by $77 million or 347% from the second quarter of 2019 Interest expense was $45 million for the second quarter of 2020 a decrease of 102% from $50 million for the first quarter of 2020 and relatively flat compared to the second quarter of 2019 

Noninterest Income and Noninterest Expense

Noninterest income totaled $26 million for the second quarter of 2020 compared to $27 million for the first quarter of 2020 US Small Business Administration loan servicing fees increased $246 thousand quarter over quarter as a result of a favorable servicing asset valuation Additionally during the second quarter of 2020 mortgage referral fees increased $155 thousand as mortgage activity increased as a result of lower interest rates during the quarter  Gain on sale of loans and interest rate swap income declined $138 thousand and $369 thousand respectively in response to general declines in lending activity during the quarter

Noninterest expense totaled $161 million in the second quarter of 2020 a decrease of 232% from $210 million in the first quarter of 2020 The primary reason for the decline in noninterest expense was the deferral of $49 million of salary expense recorded in conjunction with PPP loan originations  These loan costs will amortize on a straight-line basis over the life of the loans

The efficiency ratio was 5628% in the second quarter of 2020 which was assisted by the deferral of $49 million of salary expense related to PPP loan originations compared to 7906% in the first quarter of 2020 and 6727% in the second quarter of 2019

Conference Call

Spirit of Texas Bancshares has scheduled a conference call to discuss its second quarter 2020 results which will be broadcast live over the Internet on Tuesday July 21 2020 at 10:00 am Eastern Time / 9:00 am Central Time To participate in the call dial 201-389-0867 and ask for the Spirit of Texas call at least 10 minutes prior to the start time or access it live over the Internet at https://irsotbcom/news-events/ir-calendar  For those who cannot listen to the live call a replay will be available through July 28 2020 and may be accessed by dialing 201-612-7415 and using pass code 13706886# Also an archive of the webcast will be available shortly after the call at https://irsotbcom/news-events/ir-calendar for 90 days

About Spirit of Texas Bancshares Inc

Spirit through its wholly-owned subsidiary Spirit of Texas Bank provides a wide range of relationship-driven commercial banking products and services tailored to meet the needs of businesses professionals and individuals  Spirit of Texas Bank has 41 locations in the Houston Dallas/Fort Worth Bryan/College Station Austin San Antonio-New Braunfels Corpus Christi and Tyler metropolitan areas along with offices in North Central and South Texas  Please visit https://wwwsotbcom for more information

Forward Looking Statements

This press release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that are subject to risks and uncertainties and are made pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933 as amended  Any statements about our expectations beliefs plans predictions protections forecasts objectives assumptions or future events or performance are not historical facts and may be forward-looking  Forward-looking statements are typically but not exclusively identified by the use of forward-looking terminology such as believes expects could may will should seeks likely intends plans pro forma projects estimates or anticipates or the negative of these words and phrases or similar words or phrases that are predictions of or indicate future events or trends and that do not relate solely to historical matters  Forward-looking statements involve numerous risks and uncertainties and you should not rely on them as predictions of future events  Factors that could cause our actual results to differ materially from those  described in the forward-looking statements include among others: (i) changes in general business industry or economic conditions or competition; (ii) the impact of the COVID-19 pandemic on the Bank's business including the impact of actions taken by governmental and regulatory authorities in response to such pandemic such as the Coronavirus Aid Relief and Economic Security Act and the programs established thereunder and the Bank's participation in such programs (iii) changes in any applicable law rule regulation policy guideline or practice governing or affecting bank holding companies and their subsidiaries or with respect to tax or accounting principles or otherwise; (iv) adverse changes or conditions in capital and financial markets; (v) changes in interest rates; (vi) the possibility that any of the anticipated benefits of the Bank's proposed transaction with Moody National Bank (Moody) pursuant to which Moody will purchase certain assets and assume certain liabilities (the Branch Sale) associated with the Bank's branch located at 1010 Bay Area Boulevard Houston Texas  77058 (the Branch) will not be realized or will not be realized within the expected time period; (vii) the risk that converting the operations of the Branch to Moody will be materially delayed or will be more difficult than expected; (viii) the effect of the announcement of the Branch Sale on customer relationships and operating results; (ix) the possibility that the Branch Sale may be more expensive to complete than anticipated including as a result of unexpected factors or events; (x) higher-than-expected costs or other difficulties related to integration of combined or merged businesses; (xi) the inability to realize expected cost savings or achieve other anticipated benefits in connection with business combinations and other acquisitions; (xii) changes in the quality or composition of our loan and investment portfolios; (xii) adequacy of loan loss reserves; (xiii) increased competition; (xiv) loss of certain key officers; (xv) continued relationships with major customers; (xvi) deposit attrition; (xvii) rapidly changing technology; (xviii) unanticipated regulatory or judicial proceedings and liabilities and other costs; (xix) changes in the cost of funds demand for loan products or demand for financial services; (xx) other economic competitive governmental or technological factors affecting our operations markets products services and prices; and (xxi) our success at managing the foregoing items   For a discussion of additional factors that could cause our actual results to differ materially from those described in the forward-looking statements please see the risk factors discussed in our most recent Annual Report on Form 10-K for the year ended December 31 2019 filed with the US Securities and Exchange Commission (the SEC) on March 16 2020 its Quarterly Report on Form 10-Q for the three months ended March 31 2020 filed with the SEC on May 15 2020 and its other filings with the SEC

While forward-looking statements reflect our good-faith beliefs they are not guarantees of future performance  All forward-looking statements are necessarily only estimates of future results  Accordingly actual results may differ materially from those expressed in or contemplated by the particular forward-looking statement and therefore you are cautioned not to place undue reliance on such statements  Further any forward-looking statement speaks only as of the date on which it is made and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events or circumstances except as required by applicable law