Montgomery Co. Appears To Invest Taxpayer Dollars, CARES Act Funds To Bailout Local Bank

Montgomery County Gazette

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Spirit of Texas Bank

CONROE - Since the Spirit of Texas Bank announced its merger with Simmons Bank, there have been five law firms reaching out to the shareholders of the Spirit of Texas Bank while investigating possible breaches of fiduciary duty and other violations of law. Each law firm is investigating various components of the proposed merger transaction with a value of approximately $581 million.

Here’s what the Montgomery County Gazette found.

Background Between Simmons and Spirit of Texas

On Friday, February 28, 2020, Spirit of Texas Bank completed the purchase and assumption of five Texas branches of Simmons Bank. During this purchase, Spirit of Texas Bank acquired $123 million more in loans than they assumed deposits on hand at the Simmons branches.

Since Spirit of Texas Bank had historically loaned out only 91% of its deposits, the purchase of the five Simmons branches reduced the liquidity of the Spirit of Texas Bank, leaving the percentage of deposits loaned out at 98%.

Coincidentally, on that same day, February 28, 2020, Montgomery County invested $7 million in a certificate of deposit at Spirit of Texas Bank. The Investment Committee is responsible for making investment decisions for the County and consists of three people: County Treasurer Melanie Bush, County Judge Mark Keough, and D. Keaton McDaniel, who is an investment advisor with Edward Jones.

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Montgomery County Gazette

Montgomery County’s investments are selected by the investment committee according to the county’s investment policy. New investments are automatically approved by the Commissioners Court on the consent agenda after the investment is purchased.

Unfortunately, the COVID-19 pandemic began unfolding the following month in March 2020, and on May 11, 2020, the Spirit of Texas Bank’s Form 8-K stated several potential adverse effects related to the global pandemic, including stating “the pandemic could affect the stability of our deposit base as well as our capital and liquidity position, impair the ability of borrowers to repay outstanding loans, impair the value of collateral securing loans, result in lost revenue and cause us to incur additional expenses.” While these are typical effects felt by every banking institution, it is important to remember that the February 28, 2020 acquisition of five Simmons branches had already reduced the bank’s liquidity just two and a half months prior and before COVID.

Coincidentally, and once again, on May 14, 2020, just three days later, Montgomery County purchased two additional certificates of deposit with Spirit of Texas Bank in the amount of $15 million and $10 million, bringing the county’s total investments at Spirit of Texas Bank to $32 million. The County continued to select Spirit of Texas Bank for its investments even after the bank publicly stated the expected effects of the pandemic.

Beginning in June 2020, Montgomery County started compounding the interest in all three certificates of deposit with Spirit of Texas Bank so the County could earn interest on interest in their investments. This practice also allowed Spirit of Texas Bank to increase their customer deposits on their balance sheet and helped to increase the bank’s liquidity.

Finally, on July 20, 2020, Spirit of Texas Bank announced the sale of their Clear Lake branch to Moody National Bank in Galveston which Spirit Chairman Dean Bass characterized as “our continued effort to diligently focus on reducing expenses.”

Then, on July 24, 2020, Spirit of Texas announced the sale of subordinate notes in the amount of $37 million to increase their regulatory capital. The notes were sold in a private placement unrelated to Montgomery County.

As of November 18, 2021 when Spirit of Texas Bank and Simmons Bank agreed to their merger, Montgomery County’s investments held at Spirit of Texas Bank is $45 million in certificates of deposit, representing 1.6% of Spirit’s pre-merger deposits.

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Sherrie Shorten/Montgomery County Gazette

Spirit of Texas Bank has improved their liquidity since February 2020 and the fair market value of their stock has increased from $19.07 on February 27, 2020 (the day before finalizing the purchase of five Simmons branches) to $25.35 on November 18, 2021 (the day before agreeing to merge with Simmons Bank). The Spirit of Texas Bank has increased the value of their stock by 33% in 21 months and today, the stock closed even higher at $28.93.

So, Montgomery County government helped the Spirit of Texas Bank by injecting taxpayer dollars into the bank’s investments at critical times during the bank’s various predicaments. While the county did receive interest income on the CDs, Spirit of Texas Bank shareholders received double and triple their investments.

Bankruptcy Courts List Spirit of Texas as a Creditor

While the COVID-19 pandemic caused many small businesses to go out of business, the bankruptcy courts are still sorting out the financial responsibility. The Spirit of Texas Bank has its fair share of loans caught in bankruptcy, but one particular case highlighted potential lapses in protocols.

A trampoline company in Ft. Bend County obtained a loan from Spirit of Texas Bank in 2018 to setup a franchise. Under Chapter 11 bankruptcy protection, the trampoline company has assets of $1.2 million which consist mostly of the equipment and fixtures inside the trampoline business. However, the company has debts of $1.4 million with Spirit of Texas Bank holding the loan on $1.2 million of the $1.4 million in debts. This company was allowed to finance 100% of their fixed assets.

Let’s break this down, the Spirit of Texas Bank has 41 locations and not all of these locations are in Montgomery County. When the bank takes deposits, they have a history of loaning 90% of these deposits to customers and not all of those customers are in Montgomery County.

So, Montgomery County taxpayers are allowing their property taxes, fines, fees, and Federal grant money to be invested to help political allies instead of based on sound investment practices. And while the taxpayers allow the money to sit in certificates of deposit to save a bank’s balance sheet, the county slows down on processing applications for rental assistance.

Potential Conflicts of Interest

With approximately 9.7 million shares of stock outstanding, many shareholders’ names are withheld from the public because of the small number of shares they own. However, the Montgomery County Gazette has learned there is a means and a way to discover the full list of shareholder names to see if anyone involved with the county has taken advantage of insider information to make their own investments.

Due to the many discoveries of corruption in Montgomery County over the last 4 years, if we find out anyone else is involved, we will share more information as it becomes available.

Law Firm Investigations Ongoing

The following five law firms are currently investigating the Spirit of Texas’ merger with Simmons Bank and would like to speak with shareholders of the Spirit of Texas Bank.

Bragar Eagel & Squire, PC (https://www.bespc.com/cases/STXB)

WeissLaw (https://www.weisslaw.co/news-and-cases/stxb)

Halper Sadeh, LLP (https://halpersadeh.com/actions/spirit-of-texas-bancshares-inc/)

Monteverde& Associates, PC (https://www.monteverdelaw.com/case/spirit-texas-bancshares-inc)

Rigrodsky Law, PA (https://www.rl-legal.com/cases-spirit-of-texas-bancshares-inc)

The Spirit of Texas Bank has sought to limit their exposure to legal issues by claiming in their restated certificate of formation that Montgomery County Courts have jurisdiction over everything related to their company:

“the state and federal courts located in Montgomery County, Texas will, to the fullest extent permitted by law, be the sole and exclusive forum for (a) any actual or purported derivative action or proceeding brought on our behalf, (b) any action asserting a claim of breach of a fiduciary duty, (c) any action asserting a claim against us or any of our directors or officers arising pursuant to the Texas Business Organizations Code, our second amended and restated certificate of formation, or our amended and restated bylaws, (d) any action to interpret, apply, enforce or determine the validity of our second amended and restated certificate of formation or amended and restated bylaws, or (e) any action asserting a claim against us or any of our directors or officers that is governed by the internal affairs doctrine.” AND

“The choice of forum provision in our second amended and restated certificate of formation may limit our shareholders’ ability to obtain a favorable judicial forum for disputes with us. Alternatively, if a court were to find the choice of forum provision contained in our second amended and restated certificate of formation to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could harm our business, operating results, and financial condition.”

These statements in the Spirit of Texas Bank’s SEC filings are an indication of just how corrupt the politics in Montgomery County have been and continue to be. One of the bank’s original founders is Leo “Tommy” Metcalf, III. The Metcalf family has lived in Montgomery County for years and his son, Will Metcalf, was elected to the Texas House of Representatives in 2015. The Metcalf’s know they can get a favorable ruling in Montgomery County.

However, the Spirit of Texas Bank’s statement on judicial proceedings is erroneous because there is not a federal court in Montgomery County, Texas. Since matters regarding SEC filings are under federal jurisdiction, any federal case should end up in the Southern District of Texas.

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The Montgomery County Gazette is an online newspaper serving the needs of the citizens of Montgomery County, Texas. While we cover news on the national and state level, we primarily focus on providing accurate and up-to-date local news and events. The Montgomery County Gazette aims to restore journalistic integrity to the media by not interpreting the news, but reporting the news. This is an added benefit to the residents of Montgomery County in delivering them news that is accurate, informative, and unbiased. Founded in 2015, the Montgomery County Gazette has grown exponentially from a simple Facebook page to this website. We are dedicated to the community because not only do we cover Montgomery County, we live here too.

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