Green Bancorp, Inc. - FORM 10-Q

Attached files

file	filename
EX-32.2 - EXHIBIT 32.2 - Green Bancorp, Inc.	ex322gnbc06302018.htm
EX-32.1 - EXHIBIT 32.1 - Green Bancorp, Inc.	ex321gnbc06302018.htm
EX-31.2 - EXHIBIT 31.2 - Green Bancorp, Inc.	ex312gnbc06302018.htm
EX-31.1 - EXHIBIT 31.1 - Green Bancorp, Inc.	ex311gnbc06302018.htm

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2018

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 001-36580

Green Bancorp, Inc.

(Exact name of registrant as specified in its charter)




TEXAS (State or other jurisdiction of incorporation or organization)	42-1631980 (I.R.S. Employer Identification No.)

4000 Greenbriar

Houston, Texas 77098

(Address of principal executive offices, including zip code)

(713) 275 - 8220

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

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



Large accelerated filer ¨		Accelerated filer x
Non-accelerated filer ¨	(Do not check if a smaller reporting company)	Smaller reporting company ¨
Emerging growth company x

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. x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

As of August 6, 2018, there were 37,308,313 outstanding shares of the registrant’s Common Stock, par value $0.01 per share.

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GREEN BANCORP, INC. AND SUBSIDIARIES

INDEX TO FORM 10-Q



Special Cautionary Notice Regarding Forward-Looking Statements		3
PART I—FINANCIAL INFORMATION
Item 1.	Interim Condensed Consolidated Financial Statements	6
	Condensed Consolidated Balance Sheets as of June 30, 2018 and December 31, 2017 (Unaudited)	6
	Condensed Consolidated Statements of Income for the Three and Six Months Ended June 30, 2018 and 2017 (Unaudited)	7
	Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2018 and 2017 (Unaudited)	8
	Condensed Consolidated Statements of Changes in Shareholders’ Equity for the Three and Six Months Ended June 30, 2018 and 2017 (Unaudited)	9
	Condensed Consolidated Statements of Cash Flows for the Three and Six Months Ended June 30, 2018 and 2017 (Unaudited)	10
	Notes to Interim Condensed Consolidated Financial Statements (Unaudited)	11
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	55
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	78
Item 4.	Controls and Procedures	79
PART II—OTHER INFORMATION
Item 1.	Legal Proceedings	79
Item 1A.	Risk Factors	79
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	81
Item 3.	Defaults upon Senior Securities	81
Item 4.	Mine Safety Disclosures	81
Item 5.	Other Information	81
Item 6.	Exhibits	82
Signatures		83

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Special Cautionary Notice Regarding Forward-Looking Statements

Statements and financial discussion and analysis contained in this Quarterly Report on Form 10-Q that are not historical facts are forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on various facts and derived utilizing numerous important assumptions and are subject to known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. You should understand that the following important factors could affect our future results and cause actual results to differ materially from those expressed in the forward-looking statements:


•	risks related to the concentration of our business within our geographic areas of operation in Texas, including the continued impact of downturns in the energy sector, as well as risks associated with the technology and real estate sectors within our geographic areas of operation in Texas;


•	risks related to our energy reserve exposure and energy-related service industry exposure of our total funded loans and the decline in oil prices and our ability to successfully execute our strategy to mitigate these risks;


•	our ability to execute on our growth strategy, including through the identification of acquisition candidates that will be accretive to our financial condition and results of operation;

•

risks related to the integration of any acquired businesses, including exposure to potential asset quality and credit quality risks and unknown or contingent liabilities, the time and costs associated with integrating systems, technology platforms, procedures and personnel, the need for additional capital to finance such transactions, and possible failures in realizing the anticipated benefits from acquisitions;


•	our ability to comply with various governmental and regulatory requirements applicable to financial institutions;


•	our ability to meet the supervisory expectations of our regulators and the impact of any regulatory restrictions or supervisory actions imposed on us, including on our ability to grow, conduct acquisitions or pay dividends;


•	market conditions and economic trends nationally, regionally and in our target markets, particularly in Texas and the geographic areas in which we operate;


•	our ability to attract and retain successful bankers that meet our expectations in terms of customer relationships and profitability;


•	risks related to our strategic focus on lending to small to medium-sized businesses;


•	risks associated with our commercial and industrial loan portfolio, including the risk for deterioration in value of the general business assets that generally secure such loans;


•	potential changes in the prices, values and sales volumes of commercial and residential real estate securing our real estate loans;


•	the sufficiency of the assumptions and estimates we make in establishing reserves for probable loan losses and other estimates;


•	risks related to our concentration of loans to a limited number of borrowers and in a limited geographic area;


•	our ability to maintain adequate liquidity and to raise necessary capital to fund our acquisition strategy, operations or to meet increased minimum regulatory capital levels;


•	changes in market interest rates that affect the pricing of our loans and deposits and our net interest income;


•	accounting estimates and risk management processes that rely on analytical and forecasting models;


•	our ability to maintain an effective system of disclosure controls and procedures and internal controls over financial reporting;


•	the effects of competition from a wide variety of local, regional, national and other providers of financial, investment and insurance services;


•	potential fluctuations in the market value and liquidity of the securities we hold for sale;

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•	loss of our executive officers or other key employees could impair our relationship with our customers and adversely affect our business;


•	potential impairment on the goodwill we may record in connection with business acquisitions;


•	risks associated with system failures or failures to prevent breaches of our network security;


•	a failure in or breach of operational or security systems of the Company’s infrastructure, or those of its third-party vendors and other service providers, including as a result of cyber attacks;


•	our ability to keep pace with technological changes or difficulties when implementing new technologies;


•	risks associated with data processing system failures and errors;


•	risks associated with fraudulent and negligent acts by our customers, employees or vendors;


•	the institution and outcome of litigation and other legal proceeding against us or to which we become subject;


•	our new lines of business or new products and services may subject us to additional risks;


•	legal and regulatory proceedings or the results of regulatory examinations could adversely affect our business, financial condition, and results of operation;


•	we are subject to claims and litigation pertaining to intellectual property from time to time;


•	we could experience claims and litigation pertaining to fiduciary responsibility;


•	the impact of recent and future legislative and regulatory changes, including changes in banking, securities and tax laws and regulations and their application by our regulators, such as the Dodd-Frank Act;


•	governmental monetary and fiscal policies, including the policies of the Board of Governors of the Federal Reserve System (the "Federal Reserve");


•	the failure of the Company’s enterprise risk management framework to identify or address risks adequately;


•	the ability of the Company or Veritex Holdings, Inc. (“Veritex”) to obtain regulatory approvals and meet other closing conditions to the Merger Transactions, including approval of the Merger by the Company’s shareholders and approval of the Share Issuance by Vertiex’s shareholders;


•	the impact of, and our ability to comply with, formal or informal regulatory actions by federal banking agencies, including any requirements or limitations imposed on us as a result of our confidential supervisory ratings or the results of any regulatory examination;


•	many of our new activities and expansion plans require regulatory approvals, and failure to obtain them may restrict our growth;


•	financial institutions, such as the Bank, face a risk of noncompliance and enforcement action with the Bank Secrecy Act and other anti‑money laundering statutes and regulations;


•	substantial regulatory limitations on changes of control of bank holding companies;


•	changes in the scope and cost of Federal Deposit Insurance Corporation (the "FDIC") insurance and other coverages;


•	future financial and operating results of Vertiex, the Company or the combined company following the Merger Transactions;


•	systemic risks associated with the soundness of other financial institutions;


•	acts of terrorism, an outbreak of hostilities or other international or domestic calamities, weather or other acts of God and other matters beyond the Company’s control; and


•	other risks and uncertainties listed from time to time in the Company’s reports and documents filed with the Securities and Exchange Commission (the "SEC").

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Other factors not identified above, including those described in our Annual Report on Form 10-K for year ended December 31, 2017 under the headings “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” may also cause actual results to differ materially from those described in our forward-looking statements. Most of these factors are difficult to anticipate and are generally beyond our control. You should consider these factors in connection with considering any forward-looking statements that may be made by us. We undertake no obligation to release publicly any revisions to any forward-looking statements, to report events or to report the occurrence of unanticipated events unless we are required to do so by law.

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PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

GREEN BANCORP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except share data)

(Unaudited)



	June 30, 2018			December 31, 2017

ASSETS
Cash and due from banks	$	25,486		$	26,562
Interest bearing deposits in financial institutions and fed funds sold	205,765			114,119
Total cash and cash equivalents	231,251			140,681
Available-for-sale securities, at fair value	635,333			705,539
Held-to-maturity securities, at amortized cost (fair value of $63,993 and $13,146, respectively)	64,530			13,275
Investment in Patriot Bancshares Capital Trusts I and II	666			666
Federal Reserve Bank stock	11,809			11,702
Federal Home Loan Bank of Dallas stock	19,711			14,915
Other investments	10,776			—
Total securities and other investments	742,825			746,097
Loans held for sale	4,992			7,156
Loans held for investment	3,222,108			3,190,485
Allowance for loan losses	(35,086		)	(31,220		)
Loans, net	3,192,014			3,166,421
Premises and equipment, net	29,178			24,002
Goodwill	85,291			85,291
Core deposit intangibles, net of accumulated amortization	7,881			8,503
Accrued interest receivable	11,855			11,109
Deferred tax asset, net	12,528			8,758
Real estate acquired by foreclosure	802			802
Bank owned life insurance	56,066			55,302
Other assets	21,986			14,950
TOTAL ASSETS	$	4,391,677		$	4,261,916

LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES:
Deposits:
Noninterest-bearing	$	824,753		$	803,210
Interest-bearing transaction and savings	1,281,255			1,331,601
Certificates and other time deposits	1,320,042			1,262,332
Total deposits	3,426,050			3,397,143
Securities sold under agreements to repurchase	4,141			5,173
Other borrowed funds	412,000			325,000
Subordinated debentures and subordinated notes	48,019			47,737
Accrued interest payable	3,785			2,841
Other liabilities	18,189			20,227
Total liabilities	3,912,184			3,798,121
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS’ EQUITY:
Preferred stock, $0.01 par value, 10,000,000 shares authorized, no shares issued or outstanding	—			—
Common stock, $0.01 par value, 90,000,000 shares authorized; 37,467,477 and 37,280,822 shares issued at June 30, 2018 and December 31, 2017, respectively; 37,289,477 and 37,102,822 shares outstanding at June 30, 2018 and December 31, 2017, respectively	375			373
Capital surplus	392,010			387,891
Retained earnings	106,416			83,263
Accumulated other comprehensive income, net	(18,055		)	(6,479		)
Less treasury stock, at cost, 178,000 shares at both June 30, 2018 and December 31, 2017	(1,253		)	(1,253		)
Total shareholders’ equity	479,493			463,795
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	4,391,677		$	4,261,916

See notes to interim condensed consolidated financial statements.

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GREEN BANCORP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Dollars in thousands, except per share data)

(Unaudited)



	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2018		2017		2018		2017
INTEREST INCOME:
Loans, including fees	$	44,479	$	38,476	$	86,278	$	74,847
Securities	4,734		3,928		9,292		6,511
Other investments	341		197		641		385
Deposits in financial institutions and fed funds sold	659		331		1,152		740
Total interest income	50,213		42,932		97,363		82,483
INTEREST EXPENSE:
Transaction and savings deposits	3,023		2,230		5,487		4,208
Certificates and other time deposits	4,712		3,786		8,783		7,393
Subordinated debentures and subordinated notes	1,109		1,051		2,188		2,092
Other borrowed funds	1,608		560		2,902		842
Total interest expense	10,452		7,627		19,360		14,535
NET INTEREST INCOME	39,761		35,305		78,003		67,948
PROVISION FOR LOAN LOSSES	1,897		1,510		11,560		7,655
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES	37,864		33,795		66,443		60,293
NONINTEREST INCOME:
Customer service fees	2,578		2,199		4,973		4,465
Loan fees	996		1,106		1,829		1,940
Gain on sale of available-for-sale securities, net	66		294		66		294
Gain on held-for-sale loans, net	—		222		—		84
Gain on sale of guaranteed portion of loans, net	1,112		878		2,053		2,805
Other	733		1,000		1,722		1,606
Total noninterest income	5,485		5,699		10,643		11,194
NONINTEREST EXPENSE:
Salaries and employee benefits	13,640		12,653		27,241		25,059
Occupancy	2,263		2,048		4,340		4,045
Professional and regulatory fees	2,172		1,899		4,433		4,296
Data processing	1,029		995		2,001		1,903
Software license and maintenance	703		438		1,419		927
Marketing	257		163		433		362
Loan related	467		301		514		901
Real estate acquired by foreclosure, net	4		223		16		515
Other	2,110		891		4,301		2,442
Total noninterest expense	22,645		19,611		44,698		40,450
INCOME BEFORE INCOME TAXES	20,704		19,883		32,388		31,037
PROVISION FOR INCOME TAXES	4,283		6,985		6,605		10,927
NET INCOME	$	16,421	$	12,898	$	25,783	$	20,110

EARNINGS PER SHARE:
Basic	$	0.44	$	0.35	$	0.69	$	0.54
Diluted	$	0.44	$	0.35	$	0.69	$	0.54

See notes to interim condensed consolidated financial statements.

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GREEN BANCORP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Dollars in thousands)

(Unaudited)



	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2018			2017		2018			2017

NET INCOME	$	16,421		$	12,898	$	25,783		$	20,110
OTHER COMPREHENSIVE LOSS, BEFORE TAX:
Securities available-for-sale:
Change in net unrealized gains (losses) on securities available-for-sale	(4,967		)	1,562		(12,793		)	(14		)
Reclassification of net gains (losses) included in net income	66			—		66			—
Reclassification of unrealized losses on securities transferred to held-to-maturity	—			—		2,188			—
Tax effect	(1,029		)	547		(2,213		)	(5		)
Other comprehensive loss, net of tax, for securities available-for-sale	(3,872		)	1,015		(8,326		)	(9		)
Securities held-to-maturity:
Reclassification of unrealized losses on securities transferred from available-for-sale	—			—		(2,188		)	—
Amortization of unrealized losses on securities transferred from available-for-sale	79			—		98			—
Other comprehensive loss, net of tax, for securities held-to-maturity	79			—		(2,090		)	—
OTHER COMPREHENSIVE LOSS, NET OF TAX	(3,793		)	1,015		(10,416		)	(9		)
COMPREHENSIVE INCOME	$	12,628		$	13,913	$	15,367		$	20,101

See notes to interim condensed consolidated financial statements.

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GREEN BANCORP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(In thousands)

(Unaudited)



	Common Stock			Capital		Retained			Accumulated Other Comprehensive			Treasury
	Shares	Amount		Surplus		Earnings			Income (Loss)			Stock			Total

BALANCE — January 1, 2017	36,988	$	372	$	382,961	$	49,127		$	(725	)	$	(1,253	)	$	430,482
Net income	—	—		—		20,110			—			—			20,110
Other comprehensive income (loss)	—	—		—		—			(9		)	—			(9		)
Purchase of treasury stock	—	—		—		—			—			—			—
Issuance of common stock in connection with exercise of stock options	225	—		456		—			—			—			456
Stock-based compensation expense	—	—		702		—			—			—			702
BALANCE — June 30, 2017	37,213	$	372	$	384,119	$	69,237		$	(734	)	$	(1,253	)	$	451,741

BALANCE — January 1, 2018	37,103	$	373	$	387,891	$	83,263		$	(6,479	)	$	(1,253	)	$	463,795
Reclassification upon adoption of ASU 2018-02⁽¹⁾	—	—		—		1,396			(1,396		)	—			—
Reclassification upon adoption of ASU 2016-01⁽¹⁾	—	—		—		(299		)	236			—			(63		)
Net income	—	—		—		25,783			—			—			25,783
Other comprehensive income (loss)	—	—		—					(10,416		)	—			(10,416		)
Issuance of common stock in connection with exercise of stock options	186	2		1,759		—			—			—			1,761
Stock-based compensation expense	—	—		2,360		—			—			—			2,360
Cash dividend declared, $0.10 per share	—	—		—		(3,727		)	—			—			(3,727		)
BALANCE — June 30, 2018	37,289	$	375	$	392,010	$	106,416		$	(18,055	)	$	(1,253	)	$	479,493


⁽¹⁾	Adoption of Accounting Standards Updates 2018-02 and 2016-01. See Notes 3 and 14 to interim condensed consolidated financial statements for additional information.

See notes to interim condensed consolidated financial statements.

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GREEN BANCORP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)



	Six Months Ended
	June 30,
	2018			2017
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	25,783		$	20,110
Adjustments to reconcile net income to net cash provided (used) by operating activities:
Amortization and accretion of premiums and discounts on securities, net	1,253			542
Accretion of loan discounts, net	(2,917		)	(2,470		)
Amortization of deposit premiums	(415		)	(567		)
Amortization of core deposit intangibles	622			760
Amortization and accretion of borrowing and debt valuation allowance, net	210			210
Amortization of issuance costs of subordinated notes	72			72
Provision for loan losses	11,560			7,655
Depreciation	955			1,048
Net gain on sale of available-for-sale securities	(66		)	(294		)
Net loss on sale of real estate acquired by foreclosure	—			147
Net gain on loans held-for-sale	—			(84		)
Net gain on sale of guaranteed portion of loans	(2,053		)	(2,805		)
Net market value loss on equity investments	262			—
Originations of goverment guaranteed loans held-for-sale	(22,595		)	—
Proceeds from sales of and principal collected on loans held-for-sale	26,812			13,903
Writedown of real estate acquired by foreclosure	—			185
Stock-based compensation expense	2,471			1,059
Deferred tax benefit	(3,770		)	(1,201		)
Net change in accrued interest receivable and other assets, net	(6,165		)	15,222
Net change in accrued interest payable and other liabilities, net	(1,205		)	(3,473		)
Net cash provided by operating activities	30,814			50,019
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the maturities or calls and paydowns of available-for-sale securities	36,322			37,329
Proceeds from the sale of available-for-sale securities	24,424			279,168
Purchases of available-for-sale securities	(65,686		)	(729,200		)
Proceeds from the maturities or calls and paydowns of held-to-maturity securities	2,433			3,815
Purchases of held-to-maturity securities	(3,627		)	—
Proceeds from sales of guaranteed portion of loans	—			33,606
Proceeds from sales of real estate acquired by foreclosure	—			3,967
Purchases of Federal Home Loan Bank of Dallas stock, net of redemptions	(4,796		)	(7,329		)
Purchases of Federal Reserve Bank stock	(107		)	(24		)
Net increase in loans held for investment	(42,363		)	(68,624		)
Investment in construction of premises and purchases of other fixed assets	(168		)	(212		)
Net cash used in investing activities	(53,568		)	(447,504		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposit accounts	29,322			(13,711		)
Net (decrease) increase in securities sold under agreements to repurchase	(1,032		)	1,728
Net proceeds from other short-term borrowed funds	87,000			155,000
Proceeds from issuance of common stock due to exercise of stock options	1,761			456
Payments of cash dividends	(3,727		)	—
Net cash provided by financing activities	113,324			143,473
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS	$	90,570		$	(254,012	)
CASH AND CASH EQUIVALENTS:
Beginning of period	140,681			389,007
End of period	$	231,251		$	134,995

NONCASH ACTIVITIES:
Noncash investing and financing activities - acquisition of real estate through foreclosure of collateral	$	5,963		$	5,270
Transfer of loans to held-for-sale	$	—		$	7,860
SUPPLEMENTAL INFORMATION:
Interest paid	$	18,548		$	15,108
Income taxes paid	$	8,000		$	7,300

See notes to interim condensed consolidated financial statements.

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GREEN BANCORP, INC. AND SUBSIDIARIES

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2018

(Unaudited)

1. BASIS OF PRESENTATION

The interim condensed consolidated financial statements include the accounts of Green Bancorp, Inc. (“Green Bancorp”), together with Green Bank, N.A., its subsidiary bank, (the “Company”). All intercompany transactions and balances have been eliminated.

The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial information. In the opinion of management, the interim statements reflect all adjustments necessary for a fair presentation of the financial position, results of operations and cash flows of the Company on a consolidated basis and all such adjustments are of a normal recurring nature. These financial statements and the accompanying notes should be read in conjunction with the financial statements and the notes thereto in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017. Operating results for the three and six months ended June 30, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018 or any other period.

Organization—Green Bancorp is a Texas corporation that was incorporated on October 20, 2004. In 2006 Green Bancorp entered into an agreement and plan of merger with Redstone Bank, National Association (“Redstone Bank”), a national banking association located in Houston, Texas, for the purpose of acquiring all of the issued and outstanding stock of Redstone Bank. The acquisition was completed on December 31, 2006, and Green Bancorp became a bank holding company registered under the Bank Holding Company Act of 1956, as amended.

Green Bank, N.A. (the “Bank”) is a national banking association, which was chartered under the laws of the United States of America as a national bank on February 17, 1999, as Redstone Bank. On September 14, 2007, the name was changed to Green Bank, N.A. The Bank provides commercial and consumer banking services in the greater Houston and Dallas metropolitan areas, and Austin, Louisville and Honey Grove.

Merger Agreement—On July 23, 2018, the Company, Veritex, the parent holding company of Veritex Community Bank (“Veritex Bank”), and MustMS, Inc. (“Merger Sub”), a wholly owned subsidiary of Veritex, entered into an Agreement and Plan of Reorganization (the “Merger Agreement”), pursuant to which, subject to the terms and conditions of the Merger Agreement, among other things, (i) Merger Sub will merge with and into the Company (the “Merger”), with the Company continuing as the surviving corporation in the Merger and a wholly owned subsidiary of Veritex, (ii) immediately thereafter, the Company (as the surviving corporation in the Merger) will merge with and into Veritex (together with the Merger, the “Holdco Mergers”), with Veritex being the surviving corporation and (iii) immediately thereafter, Green Bank will merge with and into Veritex Bank, with Veritex Bank continuing as the surviving bank (together with the Holdco Mergers, the “Merger Transactions”).

Upon the consummation of the Merger, each share of Company common stock will be converted into the right to receive 0.79 shares of common stock (the “Exchange Ratio”), par value $0.01 per share, of Veritex (“Veritex Common Stock”).

The Merger Agreement contains customary representations and warranties and covenants by the Company and Veritex, including, among others, covenants relating to (1) the conduct of each party’s business during the period prior to the consummation of the Merger, (2) each party’s obligations to facilitate its shareholders’ consideration of, and voting upon, the Merger Agreement and the Merger, in the case of the Company, and the issuance of shares of Veritex Common Stock in connection with the Merger (the “Share Issuance”), in the case of Veritex, (3) the recommendation by the parties’ respective boards of directors in favor of approval of the Merger Agreement and the Merger Transactions, in the case of the Company, and the Share Issuance, in the case of Veritex, and (4) the Company’s non-solicitation obligations relating to alternative business combination transactions. Furthermore, the Merger Agreement provides that, following the consummation of the Merger, the Veritex board will consist of nine members, six of whom are current members of the Veritex board and three of whom are current members of the Company board.

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The transaction is subject to customary closing conditions, including, among others, (1) approval of the Merger by the shareholders of the Company and the approval of the Share Issuance by the shareholders of Veritex, (2) receipt of required regulatory approvals, (3) the absence of any law or order prohibiting the consummation of the transactions contemplated by the Merger Agreement (including the Merger Transactions), (4) the effectiveness of the registration statement for the Veritex Common Stock to be issued in the Merger, (5) the approval of the listing on the Nasdaq Global Market of the Veritex Common Stock to be issued in the Merger and (6) the receipt of regulatory approvals without the imposition of a condition that would reasonably be expected to be materially financially burdensome to the business, operations, financial condition or results of operations of the surviving corporation.

Each party’s obligation to consummate the Merger Transactions is also subject to certain additional customary conditions, including (1) subject to certain exceptions, the accuracy of the representations and warranties of the other party, (2) performance in all material respects by the other party of its obligations under the Merger Agreement and (3) receipt by such party of an opinion from its counsel to the effect that the Holdco Mergers, taken together, will qualify as a “reorganization” within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended.

The Merger Agreement provides certain termination rights for both the Company and Veritex and further provides that a termination fee of $40,000,000 will be payable by either the Company or Veritex, as applicable, upon termination of the Merger Agreement under certain circumstances.

Use of Estimates—The preparation of financial statements in conformity with generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. The calculation of the allowance for loan losses, the valuation of goodwill and available for sale securities, acquired assets and liabilities and the calculation of stock based compensation are estimates particularly susceptible to significant change in the near term. Actual results could differ from those estimates.

2. EARNINGS PER COMMON SHARE

Basic earnings per common share is computed as net income available to common shareholders divided by the weighted average number of common shares outstanding during the period.

Diluted earnings per common share is computed using the weighted-average number of shares determined for the basic earnings per common share computation plus the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock using the treasury stock method. Outstanding stock options issued by the Company represent the only dilutive effect reflected in diluted weighted average shares. In the event of a net loss, the outstanding stock options are excluded from the diluted earnings per common share calculation due to their anti-dilutive effect and the diluted net loss per common share would equal the basic net loss per common share.

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The following table illustrates the computation of basic and diluted earnings per share:



	Three Months Ended June 30,						Six Months Ended June 30,
	2018			2017			2018			2017
	Amount	Per Share Amount		Amount	Per Share Amount		Amount	Per Share Amount		Amount	Per Share Amount

	(Amounts in thousands, except per share amounts)
Net income	16,421			12,898			25,783			20,110
Basic:
Weighted average shares outstanding	37,274	$	0.44	37,023	$	0.35	37,219	$	0.69	37,007	$	0.54
Diluted:
Add incremental shares for:
Effect of dilutive securities - options	372			241			394			227
Total	37,646	$	0.44	37,264	$	0.35	37,613	$	0.69	37,234	$	0.54

On April 30, 2015, the Company announced the Board of Directors approved a stock repurchase program under which it authorized the Company to repurchase, in the aggregate, up to $15.0 million of the Company’s outstanding common stock. The repurchase program remains in place, but may be limited or terminated at any time without prior notice. Under the authorized stock repurchase agreement, the Company could repurchase shares in open-market purchases or through privately negotiated transactions as permitted under Rule 10b-18 promulgated under the Exchange Act. As of June 30, 2018, the Company had repurchased an aggregate of $1.3 million of the Company’s outstanding common stock under this program at an average price of $7.04 per share.

3. RECENT ACCOUNTING STANDARDS

Accounting Standards Updates (“ASU”)

FASB ASU 2018-03 - "Technical Corrections and Improvements to Financial Instruments - Overall (Subtopic 825-10)" The amendments in this ASU provide clarification on certain aspects related to the guidance issued in ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The areas for correction or improvement include (1) equity securities without a readily determinable fair value - discontinuation; (2) equity securities without a readily determinable fair value - adjustments; (3) forward contracts and purchased options; (4) presentation requirements for certain fair value option liabilities; (5) fair value option liabilities denominated in a foreign currency; and (6) transition guidance for equity securities without a readily determinable fair value.This ASU is effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years beginning after June 15, 2018. Early adoption is permitted. The adoption of this guidance is not expected to be material to the consolidated financial statements.

FASB ASU No. 2018-02 - “Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.” The amendments of ASU 2018-02 allow reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act, which was signed into law on December 22, 2017. The amendments also require certain disclosures about stranded tax effects. This update will be effective for all annual and interim periods beginning January 1, 2019, with early adoption permitted, and the guidance should be applied either in the period of adoption or retrospectively to each period impacted by the change in the U.S. federal corporate income tax rate in the Tax Cuts and Job Acts is recognized. The Company early adopted the new guidance in the first quarter of 2018, which resulted in a cumulative effect adjustment to the consolidated balance sheet as of January 1, 2018 to reclass approximately $1.4 million of tax expense from accumulated other comprehensive loss to

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retained earnings. This reclassification is presented in the condensed consolidated statement of changes in shareholders equity for the period ended June 30, 2018.

FASB ASU No. 2017-12 — “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities.” Issued in August 2017, the ASU 2017-12 amends the hedge accounting recognition and presentation requirements in ASC 815. The amendments objectives are to (1) improve the transparency and understandability of information conveyed to financial statement users about an entity’s risk management activities by better aligning the entity’s financial reporting for hedging relationships with those risk management activities and (2) reduce the complexity of and to simplify the application of hedge accounting by preparers. For public entities, ASU 2017-12 is effective for interim and annual periods beginning after December 15, 2018; however, early adoption is permitted. The Company adopted the ASU in the third quarter of 2017 and reclassified $15.9 million of securities from held-to-maturity to available-for-sale classification pursuant to the transition election. The amount of net unrealized loss at the date of transfer was recorded in accumulated other comprehensive income. The early adoption did not have a material impact on the Company’s consolidated financial condition, results of operations or cash flows.

FASB ASU No. 2017-09 — “Compensation-Stock Compensation (Topic 718) - Scope of Modification Accounting.” Issued in May 2017, ASU 2017-09 clarifies when changes to terms or conditions of a share-based payment award must be accounted for as a modification. Under the new guidance, an entity will not apply modification accounting to a share-based payment award if all of the following are the same immediately before and after the change: (i) the fair value of the award, (ii) the vesting conditions of the award, and (iii) the classification of the award as either an equity or liability instrument. ASU 2017-09 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted. The guidance requires companies to apply the requirements prospectively to awards modified on or after the adoption date. ASU 2017-09 did not have a material impact on the Company’s consolidated financial statements.

FASB ASU No. 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 shortens the amortization period for certain callable debt securities held at a premium. Specifically, the amendment requires the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. For public business entities, the amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted, including adoption in an interim period. The Company is currently evaluating the potential impact of ASU 2017-08 on the Company’s consolidated financial statements.

FASB ASU No. 2017-04 — “Intangibles—Goodwill and Other (Topic 350).” ASU 2017-04 simplifies the subsequent measurement of goodwill by eliminating the second step of the goodwill impairment test, which required computing the implied fair value of goodwill. Under the amendments in this update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. ASU 2017-04 will be effective for the Company on January 1, 2020 and is not expected to have a significant impact on the Company’s consolidated financial statements.

FASB ASU No. 2017-01 — “Business Combinations (Topic 805).” ASU 2017-01 is intended to clarify or correct unintended applications of ASU 2014-09 “Revenue from Contract with Customers (Topic 606).” ASU 2017-01 clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. Additionally, the amendments in this update provide a more robust framework to assist entities in evaluating whether a set of assets and activities constitutes a business. Lastly, the amendments in this update narrow the definition of the term output so that the term is consistent with how outputs are described in Topic 606. ASU 2017-01 became effective for the Company on January 1, 2018 and did not have a material impact on the Company’s consolidated financial statements.

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FASB ASU No. 2016-18 — “Statement of Cash Flows (Topic 230) – Restricted Cash.” ASU 2016-18 requires the Statement of Cash Flows to explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents. Therefore, restricted cash or cash equivalents should be included with cash and cash equivalents when recording the beginning-of-period and end-of-period total amounts on the Statement of Cash Flows. ASU 2016-18 became effective for the Company on January 1, 2018 and did not have a material impact on the Company’s consolidated financial statements.

FASB ASU No. 2016-15 — "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments." ASU 2016-15 is intended to reduce the diversity in practice around how certain transactions are classified within the statement of cash flows. ASU 2016-15 provides classification guidance on certain cash receipts and cash payments, including, but not limited to, debt prepayment costs, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of bank-owned life insurance policies and distributions received from equity method investees. ASU 2016-15 became effective for the Company on January 1, 2018, and did not have a material impact on the Company’s consolidated financial statements.

FASB ASU No. 2016-13 —"Financial Instruments - Credit Losses (Topic 326)" ASU 2016-13 requires an entity to utilize a new impairment model known as the current expected credit loss ("CECL") model to estimate its lifetime "expected credit loss" and record an allowance that, when deducted from the amortized cost basis of the financial asset, presents the net amount expected to be collected on the financial asset. The CECL model is expected to result in more timely recognition of credit losses. ASU 2016-13 also requires new disclosures for financial assets measured at amortized cost, loans and available-for-sale debt securities. ASU 2016-13 will be effective for the Company on January 1, 2020. Entities will apply the standard's provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. The Company is currently evaluating the potential impact of ASU 2016-13 on the Company’s consolidated financial statements.

FASB ASU No. 2016-09 — “Compensation - Stock Compensation (Topic 718) – Improvements to Employee Share-Based Payment Accounting.” ASU 2016-09 was issued as part of the FASB’s simplification initiative and affects all entities that issue share-based payment awards to their employees. This ASU covers accounting for income taxes, forfeitures and statutory tax withholding requirements, as well as classification in the statement of cash flows. ASU 2016-09 was effective for the Company beginning January 1, 2017 and did not have a material impact on the Company’s consolidated financial statements.

FASB ASU No. 2016-02 — “Leases (Topic 842).” In February 2016, the Financial Accounting Standards Board issued ASU 2016-02 to supersede nearly all existing lease guidance under GAAP. The guidance would require a lessee to record a right-to-use asset and liability representing the obligation to make lease payments for long-term leases. ASU 2016-02 is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018 and must be adopted using a modified retrospective approach. The Company is currently evaluating the impact of its pending adoption of ASU 2016-02 on its consolidated financial statements.

FASB ASU No. 2016-01 — “Financial Instruments─Overall (Subtopic 825-10)– Recognition and Measurement of Financial Assets and Financial Liabilities.” ASU 2016-01 addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. ASU 2016-01 (i) requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; (ii) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; (iii) eliminates the requirement to disclose the fair value of financial instruments measured at amortized cost for entities that are not public business entities; (iv) eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; (v) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (vi) requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; (vii) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements; and (viii) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. The amendments in this update affect all entities that hold financial

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assets or owe financial liabilities. ASU 2016-01 became effective for the Company beginning January 1, 2018, and did not have a material impact on the Company’s consolidated financial statements.

FASB ASU No. 2015-17 — “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes.” In November 2015, the FASB issued ASU 2015-17, as part of its simplification initiative. The ASU requires entities to present deferred tax assets (“DTAs”) and deferred tax liabilities (“DTLs”) as noncurrent in a classified balance sheet. It thus simplifies the current guidance, which requires entities to separately present DTAs and DTLs as current or noncurrent in a classified balance sheet. Netting of DTAs and DTLs by tax jurisdiction is still required under the new guidance. ASU 2015-17 was effective for the Company beginning January 1, 2017 and did not have a material impact on the Company’s consolidated financial statements.

FASB ASU No. 2014-09 — “Revenue from Contracts with Customers (Topic 606)”. ASU 2014-09 is a comprehensive new revenue recognition standard that superseded nearly all existing revenue recognition guidance under GAAP and is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects consideration to which the entity expects to be entitled in exchange for those goods and services. The ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09 establishes a five-step model which entities must follow to recognize revenue and removes inconsistencies and weaknesses in existing guidance. The Company’s primary sources of revenue are comprised of net interest income on financial assets and liabilities, which are not within the scope of ASU 2014-09. The Company adopted ASU 2014-09, effective January 1, 2018, and had no material effect on how we recognize revenue or to our consolidated financial statements and disclosures. See below for additional information related to revenue generated from contracts with customers.

Revenue Recognition

Accounting Standards Codification ("ASC") 606, Revenue from Contracts with Customers ("ASC 606"), establishes principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity's contracts to provide goods or services to customers. The core principle requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration that it expects to be entitled to receive in exchange for those goods or services recognized as performance obligations are satisfied.

The majority of our revenue-generating transactions are not subject to ASC 606, including revenue generated from financial instruments, such as our loans, letters of credit, derivatives and investment securities, as well as revenue related to our mortgage servicing activities, as these activities are subject to other GAAP discussed elsewhere within our disclosures. Descriptions of our revenue-generating activities that are within the scope of ASC 606, which are presented in our income statements as components of non-interest income are as follows:

•

Service charges on deposit accounts - these represent general service fees for monthly account maintenance and activity- or-transaction-based fees and consist of transaction-based revenue, time-based revenue (service period), item-based revenue or some other individual attribute-based revenue. Revenue is recognized when the performance obligation is completed, which is generally monthly for account maintenance services or when a transaction has been completed (such as a wire transfer). Payment for such performance obligations are generally received at the time the performance obligations are satisfied.


•	Gains/losses on the sale of other real estate owned - generally recognized when the performance obligation is complete which is typically at delivery of control over the property to the buyer at the time of each real estate closing.

4. ACQUISITIONS

Acquisitions have been in the past and may be in the future an important part of the Company’s growth strategy. All acquisitions were accounted for using the acquisition method of accounting. Accordingly, the assets and liabilities of the acquired entities were recorded at their fair values at the acquisition date. The excess of the purchase price over the estimated fair value of the net assets for tax-free acquisitions is recorded as goodwill, none of which is deductible for tax purposes. The excess of the purchase price over the estimated fair value of the net assets for taxable acquisitions was recorded as goodwill, and is deductible for tax purposes. The identified core deposit intangibles for each acquisition are being amortized using an accelerated basis over an estimated life of six to nineteen years. The results of operations for each acquisition have been included in the Company’s consolidated financial results beginning on the respective acquisition date.

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The measurement period for the Company to determine the fair values of acquired identifiable assets and assumed liabilities will end at the earlier of (1) twelve months from the date of the acquisition or (2) as soon as the Company receives the information it was seeking about facts and circumstances that existed as of the acquisition date or learns that more information is not obtainable.

Pursuant to the terms of the Merger Agreement, the Company is restricted from certain acquisition activities without the consent of Veritex. Veritex has agreed not to unreasonably withhold any such consent.

5. CASH AND CASH EQUIVALENTS

The Bank, as a correspondent of the Federal Reserve Bank, is required to maintain average reserve balances. Interest-bearing deposits in financial institutions include restricted amount of $86.2 million and $76.0 million at June 30, 2018 and December 31, 2017, respectively, as a result of this requirement.

6. SECURITIES

The amortized cost and fair value of securities as of the dates set forth were as follows:



	June 30, 2018
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(Dollars in thousands)
Available-for-sale:
SBA guaranteed securities	$	99,125	$	74	$	(1,982	)	$	97,217
Mortgage-backed securities issued by U.S. government agencies or sponsored enterprises: residential	227,164		—		(7,095		)	220,069
Mortgage-backed securities issued by U.S. government agencies or sponsored enterprises: commercial	65,823		—		(2,823		)	63,000
Collateralized mortgage obligations issued by U.S. government agencies or sponsored enterprises: residential	211,291		—		(7,035		)	204,256
Collateralized mortgage obligations issued by U.S. government agencies or sponsored enterprises: commercial	35,990		—		(1,341		)	34,649
Corporate debt securities	15,913		53		(61		)	15,905
Obligations of municipal subdivisions	236		1		—			237
Total	$	655,542	$	128	$	(20,337	)	$	635,333

Held-to-maturity:
Mortgage-backed securities issued by U.S. government agencies or sponsored enterprises: residential	$	11,352	$	25	$	(389	)	$	10,988
Mortgage-backed securities issued by U.S. government agencies or sponsored enterprises: commercial	2,488		—		(90		)	2,398
Collateralized mortgage obligations issued by U.S. government agencies or sponsored enterprises: residential	44,499		60		(138		)	44,421
Obligations of municipal subdivisions	6,191		—		(5		)	6,186
Total	$	64,530	$	85	$	(622	)	$	63,993

Securities with fair value of $50.0 million were transferred from available-for-sale to held-to-maturity classification during the quarter ended March 31, 2018. The related unrealized loss at the date of transfer of $2.2 million remained in accumulated other comprehensive income and will be amortized over the remaining term of the securities. The net unamortized, unrealized loss on the transferred securities included in accumulated other comprehensive income as of June 30, 2018 totaled $2.1 million.

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	December 31, 2017
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(Dollars in thousands)
Available-for-sale:
SBA guaranteed securities	$	104,111	$	129	$	(948	)	$	103,292
Mortgage-backed securities issued by U.S. government agencies or sponsored enterprises: residential	250,580		297		(1,701		)	249,176
Mortgage-backed securities issued by U.S. government agencies or sponsored enterprises: commercial	65,986		—		(500		)	65,486
Collateralized mortgage obligations issued by U.S. government agencies or sponsored enterprises: residential	234,881		—		(6,434		)	228,447
Collateralized mortgage obligations issued by U.S. government agencies or sponsored enterprises: commercial	36,151		—		(472		)	35,679
Corporate debt securities	5,789		5		—			5,794
Obligations of municipal subdivisions	6,672		—		(45		)	6,627
CRA qualified investment fund	11,337		—		(299		)	11,038
Total	$	715,507	$	431	$	(10,399	)	$	705,539

Held-to-maturity:
Mortgage-backed securities issued by U.S. government agencies or sponsored enterprises: residential	$	10,841	$	61	$	(170	)	$	10,732
Collateralized mortgage obligations issued by U.S. government agencies or sponsored enterprises: residential	2,434		—		(20		)	2,414
Total	$	13,275	$	61	$	(190	)	$	13,146

Expected maturities of securities will differ from contractual maturities because the underlying borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date are shown separately. The following table sets forth, as of the date indicated, contractual maturities of securities:



	June 30, 2018
	Available-for-sale				Held-to-maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(Dollars in thousands)
Due in one year or less	$	—	$	—	$	—	$	—
Due after one year through five years	4,913		4,871		—		—
Due after five years through ten years	11,236		11,271		—		—
Due after ten years	—		—		6,191		6,186
	16,149		16,142		6,191		6,186

Mortgage-backed securities and collateralized mortgage obligations	540,268		521,974		58,339		57,807
SBA guaranteed securities	99,125		97,217		—		—
Total	$	655,542	$	635,333	$	64,530	$	63,993

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There were twenty-nine and thirty-one sales of securities classified as available-for-sale during the six months ended June 30, 2018 and 2017, respectively. During the six months ended June 30, 2018, proceeds of $24.4 million were received from sales of securities classified as available-for-sale. The sales resulted in a net gain of $66 thousand, which is comprised of $172 thousand in gross realized gains, offset by $106 thousand in gross realized losses. During the six months ended June 30, 2017, proceeds of $279.2 million were received from sales of securities classified as available-for-sale. The sales resulted in a net gain of $294 thousand, which is comprised of $777 thousand in gross realized gains, offset by $483 thousand in gross realized losses.

Management evaluates securities for other-than-temporary impairment (“OTTI”) at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. The investment securities portfolio is evaluated for OTTI by segregating the portfolio into two general segments and applying the appropriate OTTI model. Investment securities classified as available-for-sale or held-to-maturity are evaluated for OTTI under FASB ASC 320, Investments—Debt and Equity Securities.

In determining OTTI, management considers many factors, including: (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions, and (4) whether the entity has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. The assessment of whether an other-than-temporary decline exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time.

When OTTI occurs, the amount of the other-than-temporary impairment recognized in earnings depends on whether an entity intends to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis less any current-period credit loss.

As of June 30, 2018, the Company does not intend to sell any debt securities classified as held-to-maturity and management believes that the Company more likely than not will not be required to sell any debt securities that are in a loss position before their anticipated recovery, at which time the Company will receive full value for the securities. Furthermore, as of June 30, 2018, management does not have the intent to sell any of its securities classified as available-for-sale that are in a loss position and believes that it is more likely than not that the Company will not have to sell any such securities before a recovery of cost. The unrealized losses are largely due to increases in market interest rates over the yields available at the time the underlying securities were purchased. The fair value is expected to recover as the securities approach their maturity date or repricing date or if market yields for such investments decline. Management does not believe any of the securities are impaired due to reasons of credit quality. Accordingly, as of June 30, 2018, management believes any impairment in the Company’s securities is temporary and no impairment loss has been realized in the Company’s consolidated statements of income.

Declines in the fair value of individual securities below their cost that are other-than-temporary would result in writedowns, as a realized loss, to their fair value. In evaluating other-than-temporary impairment losses, management considers several factors including the severity and the duration that the fair value has been less than cost, the credit quality of the issuer, and whether it is more likely than not that the Company will be required to sell the security before a recovery in value. The Company has not realized any losses due to other-than-temporary impairment of securities as of June 30, 2018.

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NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2018

(Unaudited)

Securities with unrealized losses segregated by length of continuous unrealized loss position as of the dates set forth were as follows:



	June 30, 2018
	Less than 12 Months							12 Months or More
	Amortized Cost		Gross Unrealized Losses			Fair Value		Amortized Cost		Gross Unrealized Losses			Fair Value

	(Dollars in thousands)
Available-for-sale:
SBA guaranteed securities	$	89,688	$	(1,892	)	$	87,796	$	4,979	$	(90	)	$	4,889
Mortgage-backed securities issued by U.S. government agencies or sponsored enterprises: residential	227,164		(7,095		)	220,069		—		—			—
Mortgage-backed securities issued by U.S. government agencies or sponsored enterprises: commercial	52,887		(2,340		)	50,547		12,936		(483		)	12,453
Collateralized mortgage obligations issued by U.S. government agencies or sponsored enterprises: residential	72,794		(1,481		)	71,313		138,497		(5,554		)	132,943
Collateralized mortgage obligations issued by U.S. government agencies or sponsored enterprises: commercial	35,990		(1,341		)	34,649		—		—			—
Corporate debt securities	8,913		(61		)	8,852		—		—			—
Total	$	487,436	$	(14,210	)	$	473,226	$	156,412	$	(6,127	)	$	150,285

Held-to-maturity:
Mortgage-backed securities issued by U.S. government agencies or sponsored enterprises: residential	$	3,893	$	(78	)	$	3,815	$	6,017	$	(311	)	$	5,706
Mortgage-backed securities issued by U.S. government agencies or sponsored enterprises: commercial	2,488		(90		)	2,398		—		—			—
Collateralized mortgage obligations issued by U.S. government agencies or sponsored enterprises: residential	42,531		(138		)	42,393		—		—			—
Municipal bonds	6,191		(5		)	6,186		—		—			—
Total	$	55,103	$	(311	)	$	54,792	$	6,017	$	(311	)	$	5,706

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JUNE 30, 2018

(Unaudited)



	December 31, 2017
	Less than 12 Months							12 Months or More
	Amortized Cost		Gross Unrealized Losses			Fair Value		Amortized Cost		Gross Unrealized Losses			Fair Value

	(Dollars in thousands)
Available-for-sale:
SBA guaranteed securities	$	76,603	$	(948	)	$	75,655	$	—	$	—		$	—
Mortgage-backed securities issued by U.S. government agencies or sponsored enterprises: residential	192,105		(1,608		)	190,497		9,152		(93		)	9,059
Mortgage-backed securities issued by U.S. government agencies or sponsored enterprises: commercial	65,986		(500		)	65,486		—		—			—
Collateralized mortgage obligations issued by U.S. government agencies or sponsored enterprises: residential	210,034		(6,183		)	203,851		9,037		(251		)	8,786
Collateralized mortgage obligations issued by U.S. government agencies or sponsored enterprises: commercial	36,151		(472		)	35,679		—		—			—
Obligations of municipal subdivisions	6,436		(45		)	6,391		—		—			—
CRA qualified investment fund	—		—			—		11,337		(299		)	11,038
Total	$	587,315	$	(9,756	)	$	577,559	$	29,526	$	(643	)	$	28,883

Held-to-maturity:
Mortgage-backed securities issued by U.S. government agencies or sponsored enterprises: residential	$	1,086	$	(9	)	$	1,077	$	6,265	$	(161	)	$	6,104
Collateralized mortgage obligations issued by U.S. government agencies or sponsored enterprises: residential	2,434		(20		)	2,414		—		—			—
Total	$	3,520	$	(29	)	$	3,491	$	6,265	$	(161	)	$	6,104

The average loss on securities in an unrealized loss position was 2.97% and 1.69% of the amortized cost basis at June 30, 2018 and December 31, 2017, respectively. There were nineteen and eighteen securities in an unrealized loss position of greater than 12 months at June 30, 2018 and December 31, 2017, respectively.

The Company did not own securities of any one issuer (other than the U.S. government and its agencies or sponsored enterprises) for which the aggregate adjusted cost exceeds 10% of the consolidated shareholders’ equity at June 30, 2018 or December 31, 2017.

Securities with an amortized cost of $5.4 million and $6.3 million and fair value of $5.2 million and $6.3 million were pledged and available to be sold under repurchase agreements at June 30, 2018 and December 31, 2017, respectively. Securities with an amortized cost of $74.4 million and $55.7 million and fair value of $73.4 million and $55.5 million were pledged to various Federal Reserve Districts related to deposits of bankruptcy trustees at June 30, 2018 and December 31, 2017, respectively. In addition, securities with an amortized cost of $3.3 million and $3.4 million and fair value of $3.2 million and $3.3 million were pledged as collateral for the Company’s derivative instruments at June 30, 2018 and December 31, 2017, respectively.

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NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2018

(Unaudited)

7. LOANS

The loan portfolio classified by type and class as of the dates set forth were as follows:



	June 30, 2018
	Originated		Acquired		Total

	(Dollars in thousands)
Commercial & industrial	$	1,034,821	$	35,599	$	1,070,420
Mortgage warehouse	244,041		—		244,041
Real estate:
Owner occupied commercial real estate	373,692		62,461		436,153
Commercial real estate	949,099		142,937		1,092,036
Construction, land & land development	105,926		24,607		130,533
Residential mortgage	158,531		76,661		235,192
Consumer and other	12,854		879		13,733
Total loans held for investment	$	2,878,964	$	343,144	$	3,222,108

Total loans held for sale	$	4,992	$	—	$	4,992



	December 31, 2017
	Originated		Acquired		Total

	(Dollars in thousands)
Commercial & industrial	$	1,002,797	$	63,469	$	1,066,266
Mortgage warehouse	220,230		—		220,230
Real estate:
Owner occupied commercial real estate	327,906		87,324		415,230
Commercial real estate	823,361		244,418		1,067,779
Construction, land & land development	136,998		27,954		164,952
Residential mortgage	149,021		89,559		238,580
Consumer and other	16,178		1,270		17,448
Total loans held for investment	$	2,676,491	$	513,994	$	3,190,485

Total loans held for sale	$	7,156	$	—	$	7,156

The loan portfolio is comprised of four types, commercial and industrial loans, mortgage warehouse, real estate loans and consumer and other loans. The real estate loans are further segregated into owner occupied commercial real estate, commercial real estate, which includes multi-family loans, construction, land and land development, which includes both commercial construction and loans for the construction of residential properties and residential mortgage, which includes first and second liens and home equity lines. Consumer and other loans includes various types of loans to consumers and overdrafts. Loans are further separated between loans originated by the Company and loans acquired.

Included in the loans held for investment balance was $13.6 million of net deferred loan origination fees and unamortized premium and discount at both June 30, 2018 and December 31, 2017. Also included in loans at June 30, 2018 and December 31, 2017 was $234 thousand and $1.4 million, respectively, in nonaccretable discount on acquired credit impaired loans. Accrued interest receivable on loans was $9.3 million and $8.8 million at June 30, 2018 and December 31, 2017, respectively. Consumer and other loans include overdrafts of $55 thousand and $48 thousand as of June 30, 2018 and December 31, 2017, respectively.

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JUNE 30, 2018

(Unaudited)

The loan portfolio consists of various types of loans made to borrowers principally located in the Houston and Dallas metropolitan areas. Although the portfolio is diversified and generally secured by various types of collateral, a substantial portion of its debtors’ ability to honor their obligations is dependent on local economic conditions, including conditions affecting the energy industry. The risks created by this geographic concentration have been considered by management in the determination of the adequacy of the allowance for loan losses. The Company does not have any significant concentration to any one industry or customer. As of June 30, 2018 and December 31, 2017, there were no concentrations of loans related to any single industry in excess of 10% of total loans.

Reserved-based energy loans outstanding represented approximately 0.4% and 0.6% of total funded loans as of June 30, 2018 and December 31, 2017, respectively. Energy-related service industry loans represented approximately 0.8% and 1.1% of total funded loans as of June 30, 2018 and December 31, 2017, respectively. As of June 30, 2018, and December 31, 2017, $14.3 million and $19.2 million of reserved-based energy loans and $10.1 million and $17.5 million of energy-related service industry loans were impaired, respectively.

Loan maturities and rate sensitivity of the loans held for investment, as of the date indicated, were as follows:



	June 30, 2018
	Due in One Year or Less		Due After One Year Through Five Years		Due After Five Years		Total

	(Dollars in thousands)
Commercial & industrial	$	390,500	$	620,518	$	59,402	$	1,070,420
Mortgage warehouse	126,702		117,339		—		244,041
Real estate:
Owner occupied commercial real estate	20,561		169,800		245,792		436,153
Commercial real estate	164,160		669,033		258,843		1,092,036
Construction, land & land development	41,620		56,203		32,710		130,533
Residential mortgage	18,921		47,200		169,071		235,192
Consumer and Other	3,854		2,262		7,617		13,733
Total loans held for investment	$	766,318	$	1,682,355	$	773,435	$	3,222,108

Fixed rate	$	141,480	$	429,239	$	103,806	$	674,525
Adjustable rate⁽¹⁾	624,838		1,253,116		669,629		2,547,583
Total loans held for investment	$	766,318	$	1,682,355	$	773,435	$	3,222,108


⁽¹⁾	Includes all adjustable rate loans irrespective of the time period to next interest rate reset.

In the ordinary course of business, the Company has granted loans to certain directors, officers and their affiliates. In the opinion of management, all transactions entered into between the Bank and such related parties have been and are in the ordinary course of business, made on the same terms and conditions as similar transactions with unaffiliated persons.

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NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2018

(Unaudited)

An analysis of activity with respect to these related-party loans for the six months ended June 30, 2018 and the year ended December 31, 2017 was as follows:



	June 30, 2018		December 31, 2017

	(Dollars in thousands)
Beginning balance	$	—	$	5,813
Advances	—		—
Repayments	—		(5,813		)
Ending Balance	$	—	$	—

Acquired Loans — The outstanding principal balance and recorded investment in the total acquired loans from all completed acquisitions, as of the dates set forth, was as follows:



	June 30, 2018			December 31, 2017

	(Dollars in thousands)
Credit impaired acquired loans:
Outstanding principal balance	$	11,378		$	18,498
Recorded investment	10,717			15,965
Discount, net	$	661		$	2,533

Other acquired loans:
Outstanding principal balance	333,433			499,939
Deferred fees, net	(40		)	(72		)
Recorded investment	332,427			498,029
Discount, net	$	966		$	1,838

Total acquired loans:
Outstanding principal balance	344,811			518,437
Deferred fees, net	(40		)	(72		)
Recorded investment	343,144			513,994
Discount, net	$	1,627		$	4,371

Changes in the accretable yield for credit impaired acquired loans for the periods indicated, were as follows:



	Six Months Ended June 30,
	2018			2017

	(Dollars in thousands)
Balance at beginning of period	$	1,125		$	2,544
Reclassifications from non-accretable discount	989			327
Accretion	(1,687		)	(695		)
Balance at period end	$	427		$	2,176

Purchased credit impaired loans are evaluated on an ongoing basis after acquisition. Reclassifications between nonaccretable discount and accretable yield are recorded based on the current estimates of the timing and amount of expected future cash flows.

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JUNE 30, 2018

(Unaudited)

Nonaccrual and Past Due Loans — When management doubts a borrower’s ability to meet payment obligations, which typically occurs when principal or interest payments are more than 90 days past due, the loans are placed on nonaccrual status.

The age analysis of loans, segregated by class, as of the dates set forth was as follows:



	June 30, 2018
	Loans Past Due and Still Accruing
	30 - 89 Days Past Due		90 Days or More Past Due		Total		Nonaccrual		Purchased Credit Impaired		Current		Total Loans

	(Dollars in thousands)
Originated Loans
Commercial & industrial	$	4,396	$	—	$	4,396	$	41,033	$	—	$	989,392	$	1,034,821
Mortgage warehouse	—		—		—		—		—		244,041		244,041
Real estate:
Owner occupied commercial real estate	—		—		—		5,225		—		368,467		373,692
Commercial real estate	14,800		—		14,800		175		—		934,124		949,099
Construction, land & land development	—		—		—		107		—		105,819		105,926
Residential mortgage	968		59		1,027		3,859		—		153,645		158,531
Consumer and other	157		26		183		45		—		12,626		12,854
Total originated loans	$	20,321	$	85	$	20,406	$	50,444	$	—	$	2,808,114	$	2,878,964

Acquired Loans
Commercial & industrial	$	4,310	$	438	$	4,748	$	1,746	$	1,730	$	27,375	$	35,599
Real estate:
Owner occupied commercial real estate	1,837		—		1,837		1,727		3,394		55,503		62,461
Commercial real estate	8,290		268		8,558		105		3,591		130,683		142,937
Construction, land & land development	—		—		—		700		—		23,907		24,607
Residential mortgage	1,144		97		1,241		104		2,002		73,314		76,661
Consumer and other	—		19		19		3		—		857		879
Total acquired loans	$	15,581	$	822	$	16,403	$	4,385	$	10,717	$	311,639	$	343,144
Total loans held for investment	$	35,902	$	907	$	36,809	$	54,829	$	10,717	$	3,119,753	$	3,222,108

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JUNE 30, 2018

(Unaudited)



	December 31, 2017
	Loans Past Due and Still Accruing
	30 - 89 Days Past Due		90 Days or More Past Due		Total		Nonaccrual		Purchased Credit Impaired		Current		Total Loans

	(Dollars in thousands)
Originated Loans
Commercial & industrial	$	15,917	$	242	$	16,159	$	45,413	$	—	$	941,225	$	1,002,797
Mortgage warehouse	—		—		—		—		—		220,230		220,230
Real estate:
Owner occupied commercial real estate	1,109		—		1,109		—		—		326,797		327,906
Commercial real estate	16,250		—		16,250		—		—		807,111		823,361
Construction, land & land development	2,255		133		2,388		3,287		—		131,323		136,998
Residential mortgage	1,311		—		1,311		3,111		—		144,599		149,021
Consumer and other	127		—		127		49		—		16,002		16,178
Total originated loans	$	36,969	$	375	$	37,344	$	51,860	$	—	$	2,587,287	$	2,676,491

Acquired Loans
Commercial & industrial	$	—	$	—	$	—	$	1,901	$	3,237	$	58,331	$	63,469
Real estate:
Owner occupied commercial real estate	233		—		233		1,886		4,062		81,143		87,324
Commercial real estate	1,885		—		1,885		312		6,437		235,784		244,418
Construction, land & land development	204		—		204		714		—		27,036		27,954
Residential mortgage	804		—		804		454		2,229		86,072		89,559
Consumer and other	—		—		—		211		—		1,059		1,270
Total acquired loans	3,126		—		3,126		5,478		15,965		489,425		513,994
Total loans held for investment	$	40,095	$	375	$	40,470	$	57,338	$	15,965	$	3,076,712	$	3,190,485

Impaired Loans — The following is a summary of information related to impaired, nonaccrual and restructured loans and accruing loans past due 90 days or more as of the dates set forth:



	June 30, 2018
	Originated		Acquired		Total

	(Dollars in thousands)
Nonaccrual loans	$	49,543	$	3,342	$	52,885
Accruing loans past due 90 days or more	85		822		907
Restructured loans - nonaccrual	901		1,043		1,944
Restructured loans - accruing	8		3,047		3,055
Total nonperforming loans	$	50,537	$	8,254	$	58,791



	December 31, 2017
	Originated		Acquired		Total

	(Dollars in thousands)
Nonaccrual loans	$	43,797	$	4,095	$	47,892
Accruing loans past due 90 days or more	375		—		375
Restructured loans - nonaccrual	8,063		1,383		9,446
Restructured loans - accruing	4,255		8,838		13,093
Total nonperforming loans	$	56,490	$	14,316	$	70,806

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NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2018

(Unaudited)

Impaired loans of $54.8 million and $57.3 million at June 30, 2018 and December 31, 2017 respectively, have been categorized by management as nonaccrual loans. Interest foregone on nonaccrual loans for the three months ended June 30, 2018 and 2017 was approximately $1.3 million and $1.1 million, respectively, and for the six months ended June 30, 2018 and 2017 was approximately $2.4 million and $2.8 million, respectively.

Based on an analysis of impaired loans at June 30, 2018 and December 31, 2017, an allowance of $10.4 million and $5.7 million, respectively, was allocated to impaired loans. The following tables present, for the periods indicated, the average recorded investment in impaired loans and the approximate amount of interest recognized on impaired loans. Interest recognized includes interest accrued on restructured loans that have performed based on their restructured terms and interest collected on nonaccrual loans that were paid in full during the period.



	Three Months Ended
	June 30, 2018				June 30, 2017
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized

	(Dollars in thousands)
Originated Loans
Commercial & industrial	$	49,277	$	55	$	40,013	$	3
Owner occupied commercial real estate	2,318		—		—		—
Commercial real estate	2,186		—		1,993		—
Construction, land & land development	2,432		—		—		—
Residential mortgage	3,619		—		2,251		20
Consumer and other	47		—		124		1
Total originated loans	$	59,879	$	55	$	44,381	$	24

Acquired Loans
Commercial & industrial	$	8,956	$	119	$	19,949	$	133
Owner occupied commercial real estate	1,733		—		8,141		—
Commercial real estate	107		—		1,266		—
Construction, land & land development	703		—		1,440		15
Residential mortgage	45		—		1,052		9
Consumer and other	207		—		216		—
Total acquired loans	$	11,751	$	119	$	32,064	$	157
Total	$	71,630	$	174	$	76,445	$	181

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JUNE 30, 2018

(Unaudited)



	Six Months Ended
	June 30, 2018				June 30, 2017
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized

	(Dollars in thousands)
Originated Loans
Commercial & industrial	$	50,893	$	115	$	38,924	$	11
Owner occupied commercial real estate	1,159		—		—		—
Commercial real estate	1,186		—		3,752		—
Construction, land & land development	2,918		—		—		—
Residential mortgage	3,358		—		2,455		26
Consumer and other	51		—		167		2
Total originated loans	$	59,565	$	115	$	45,298	$	39

Acquired Loans
Commercial & industrial	$	9,940	$	242	$	24,636	$	272
Owner occupied commercial real estate	1,762		—		8,507		—
Commercial real estate	111		3		1,619		—
Construction, land & land development	707		—		1,268		15
Residential mortgage	176		—		1,244		9
Consumer and other	210		—		145		—
Total acquired loans	$	12,906	$	245	$	37,419	$	296
Total	$	72,471	$	360	$	82,717	$	335

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JUNE 30, 2018

(Unaudited)

The following tables present additional information regarding impaired loans that were individually evaluated for impairment as of the dates indicated:



	June 30, 2018
	Recorded Investment		Unpaid Principal Balance		Related Allowance

	(Dollars in thousands)
Originated Loans
With no related allowance recorded:
Commercial & industrial	$	16,215	$	16,423	$	—
Owner occupied commercial real estate	1,731		1,738
Commercial real estate	175		175		—
Construction, land & land development	107		108		—
Residential mortgage	3,859		3,859		—
Total with no related allowance recorded:	$	22,087	$	22,303	$	—

With an allowance recorded:
Commercial & industrial	$	24,826	$	24,889	$	9,652
Owner occupied commercial real estate	3,494		3,494		531
Consumer and other	45		45		30
Total with an allowance recorded:	$	28,365	$	28,428	$	10,213
Total originated loans	$	50,452	$	50,731	$	10,213

Acquired Loans
With no related allowance recorded:
Commercial & industrial	$	4,594	$	4,594	$	—
Owner occupied commercial real estate	1,043		1,053		—
Commercial real estate	105		105		—
Construction, land & land development	700		702		—
Residential mortgage	104		105		—
Consumer and other	200		194		—
Total with no related allowance recorded:	$	6,746	$	6,753	$	—

With an allowance recorded:
Owner occupied commercial real estate	$	684	$	699	$	153
Consumer and other	2		3		2
Total with an allowance recorded:	$	686	$	702	$	155
Total acquired loans	$	7,432	$	7,455	$	155

Total:
Commercial & industrial	$	45,635	$	45,906	$	9,652
Real estate	12,002		12,038		684
Consumer and other	247		242		32
Total	$	57,884	$	58,186	$	10,368

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JUNE 30, 2018

(Unaudited)



	December 31, 2017
	Recorded Investment		Unpaid Principal Balance		Related Allowance

	(Dollars in thousands)
Originated Loans
With no related allowance recorded:
Commercial & industrial	$	32,794	$	32,974	$	—
Construction, land & land development	111		111		—
Residential mortgage	3,111		3,111		—
Consumer and other	12		12		—
Total with no related allowance recorded:	$	36,028	$	36,208	$	—

With an allowance recorded:
Commercial & industrial	$	16,862	$	16,943	$	5,409
Construction, land & land development	3,176		3,176		224
Consumer and other	49		49		30
Total with an allowance recorded:	$	20,087	$	20,168	$	5,663
Total originated loans	$	56,115	$	56,376	$	5,663

Acquired Loans
With no related allowance recorded:
Commercial & industrial	$	10,738	$	10,738	$	—
Owner occupied commercial real estate	1,886		1,910		—
Commercial real estate	312		312		—
Construction, land & land development	714		716		—
Residential mortgage	454		455		—
Consumer and other	208		202		—
Total with no related allowance recorded:	$	14,312	$	14,333	$	—

With an allowance recorded:
Consumer and other	$	4	$	4	$	4
Total with an allowance recorded:	$	4	$	4	$	4
Total acquired loans	$	14,316	$	14,337	$	4

Total:
Commercial & Industrial	$	60,394	$	60,655	$	5,409
Real Estate	9,764		9,791		224
Consumer and other	273		267		34
Total	$	70,431	$	70,713	$	5,667

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GREEN BANCORP, INC. AND SUBSIDIARIES

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2018

(Unaudited)

Credit Quality — Internally assigned risk grades for loans are defined as follows:

Grade 1 (Highest Quality — No Apparent Risk) — This category includes loans to borrowers of unquestioned credit standing which are secured by readily marketable collateral of undisputed value, with appropriate margin. It also includes loans to borrowing entities with: excellent capitalization, liquidity and earnings levels; quality management; positive financial trends; and favorable industry conditions.

Grade 2 (Good Quality — Minimal Risk) — This category includes loans to investment grade entities with: good liquidity and financial condition, nominal term debt, strong debt service capability, solid management, and quality financial information. These loans are usually secured with current assets, but may be unsecured. Alternative financing from other lenders is generally available to these borrowers.

Grade 3 (Satisfactory Quality — Acceptable Risk — Tier One) — This category includes loans to entities maintaining fair liquidity and acceptable financial conditions. The level of term debt is moderate, with adequate debt service capability. Earnings may be volatile, but borrowers in this category generally do not show a loss within the last three years. Primary debt service must be supported by identified secondary repayment sources or by guarantors with adequate and proven responsibility and capacity.

Grade 4 (Satisfactory Quality — Acceptable Risk — Tier Two) — This category includes loans to borrowers maintaining acceptable financial conditions; however, borrowers may exhibit certain characteristics of leverage or asset dependency that reflect a greater level of risk than Tier One credits. This category may also include borrowers exhibiting explainable interim losses within the previous three years and/or industry characteristics that warrant frequent monitoring.

Grade 5 (Monitored Loans) — This category includes loans with trends or characteristics which, if continued, could result in impaired repayment ability. The borrower may exhibit a low degree of liquidity and relatively high leverage, erratic earnings history (including the possibility of a reported loss in the past four years), significant term debt and a nominal cushion for debt service capacity. Loans in this category may also include financing to start-up borrowers backed by experienced management and significant capital investment or established companies in distressed industry conditions.

Grade 6 (Other Assets Especially Mentioned) — This category includes loans which have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or a weakening of the Company’s credit position at some future date. Grade 6 loans are not adversely classified and do not expose the Company to sufficient risk to warrant adverse classification.

Grade 7 (Substandard — Accruing) — This category includes loans which are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any, or loans with identified weaknesses but where there is sufficient collateral value and/or cash flow coverage. This category includes loans that: (1)may require a secondary source of repayment (liquidation of collateral or repayment by a guarantor); (2) lack current financial information or appraisals; and/or (3) have collateral deficiencies such that the Company would be in an unsecured position with an obligor not deserving unsecured credit. This category may also include borrowers with operating losses in recent periods.

Grade 8 (Substandard — Nonaccrual) — This category includes loans with the same basic characteristics as Grade 7 loans that also meet the Company’s criteria for nonaccrual status, but do not warrant a Grade 9 or Grade 10 classification.

Grade 9 (Doubtful/Exposure) — This category includes loans with all the Grade 7 or 8 characteristics but with weaknesses that make collection (or liquidation) highly questionable and improbable.

Grade 10 (Loss) — This category includes loans which are considered uncollectible, or of such little value that they should no longer be carried as an asset of the Company.

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GREEN BANCORP, INC. AND SUBSIDIARIES

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2018

(Unaudited)

The credit risk profile of loans aggregated by class and internally assigned risk grades as of the dates set forth were as follows:



	June 30, 2018
	Grade 1 - 4 (Pass)		Grade 5 (Watch)		Grade 6 (Special Mention)		Grade 7 (Substandard-Accrual)		Grade 8 (Substandard-Nonaccrual)		Grade 9 (Doubtful)		PCI		Total

	(Dollars in thousands)
Originated Loans
Commercial & Industrial	$	895,299	$	65,009	$	22,153	$	11,327	$	41,033	$	—	$	—	$	1,034,821
Mortgage Warehouse	244,041		—		—		—		—		—		—		244,041
Owner Occupied Commercial Real Estate	342,441		18,036		4,649		3,341		5,225		—		—		373,692
Commercial Real Estate	799,637		77,763		23,652		47,872		175		—		—		949,099
Construction & Land Development	94,902		3,686		1,457		5,774		107		—		—		105,926
Residential Mortgage	153,588		14		59		1,011		3,859		—		—		158,531
Other Consumer	12,783		—		—		26		45		—		—		12,854
Total originated loans	$	2,542,691	$	164,508	$	51,970	$	69,351	$	50,444	$	—	$	—	$	2,878,964
Acquired Loans
Commercial & Industrial	$	17,645	$	6,596	$	7,750	$	132	$	1,746	$	—	$	1,730	$	35,599
Owner Occupied Commercial Real Estate	47,744		7,314		2,003		279		1,727		—		3,394		62,461
Commercial Real Estate	107,919		4,232		26,822		268		105		—		3,591		142,937
Construction & Land Development	11,401		11,951		—		555		700		—		—		24,607
Residential Mortgage	73,597		202		197		559		104		—		2,002		76,661
Other Consumer	657		—		200		19		3		—		—		879
Total acquired loans	$	258,963	$	30,295	$	36,972	$	1,812	$	4,385	$	—	$	10,717	$	343,144
Total loans	$	2,801,654	$	194,803	$	88,942	$	71,163	$	54,829	$	—	$	10,717	$	3,222,108



	December 31, 2017
	Grade 1 - 4 (Pass)		Grade 5 (Watch)		Grade 6 (Special Mention)		Grade 7 (Substandard-Accrual)		Grade 8 (Substandard-Nonaccrual)		Grade 9 (Doubtful)		PCI		Total

	(Dollars in thousands)
Originated Loans
Commercial & Industrial	$	889,709	$	22,648	$	5,605	$	39,422	$	45,413	$	—	$	—	$	1,002,797
Mortgage Warehouse	220,230		—		—		—		—		—		—		220,230
Owner Occupied Commercial Real Estate	314,497		3,096		7,658		2,655		—		—		—		327,906
Commercial Real Estate	681,691		45,149		85,431		11,090		—		—		—		823,361
Construction & Land Development	121,893		970		—		10,848		3,287		—		—		136,998
Residential Mortgage	138,239		6,529		—		1,142		3,111		—		—		149,021
Other Consumer	16,113		2		—		14		49		—		—		16,178
Total originated loans	$	2,382,372	$	78,394	$	98,694	$	65,171	$	51,860	$	—	$	—	$	2,676,491
Acquired Loans
Commercial & Industrial	$	38,000	$	3,172	$	11,101	$	6,058	$	1,901	$	—	$	3,237	$	63,469
Owner Occupied Commercial Real Estate	72,592		8,499		—		285		1,886		—		4,062		87,324
Commercial Real Estate	173,765		43,775		20,129		—		312		—		6,437		244,418
Construction & Land Development	14,549		12,136		—		555		714		—		—		27,954
Residential Mortgage	85,461		1,023		202		190		454		—		2,229		89,559
Other Consumer	1,059		—		—		—		211		—		—		1,270
Total acquired loans	$	385,426	$	68,605	$	31,432	$	7,088	$	5,478	$	—	$	15,965	$	513,994
Total loans	$	2,767,798	$	146,999	$	130,126	$	72,259	$	57,338	$	—	$	15,965	$	3,190,485

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GREEN BANCORP, INC. AND SUBSIDIARIES

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2018

(Unaudited)

Troubled Debt Restructurings — The restructuring of a loan is considered a troubled debt restructuring if both the borrower is experiencing financial difficulties and the creditor has granted a concession. Concessions may include interest rate reductions or below market interest rates, principal forgiveness, restructuring amortization schedules and other actions intended to minimize potential losses.

Troubled debt restructurings identified during the periods indicated were as follows:



	Six Months Ended
	June 30, 2018					June 30, 2017
	Number of Contracts	Pre-Modification Outstanding Recorded Investment		Recorded Investment		Number of Contracts	Pre-Modification Outstanding Recorded Investment		Recorded Investment

	(Dollars in thousands)
Commercial & industrial	—	$	—	$	—	3	$	2,526	$	2,509
Owner occupied commercial real estate	—	—		—		3	5,501		5,492
Construction, land & land development	—	—		—		2	831		820
Consumer and other	—	—		—		1	208		214
Total	—	$	—	$	—	9	$	9,066	$	9,035

The modifications primarily relate to extending the maturity date of the loans, which includes loans modified post-bankruptcy. The Company did not forgive any principal or interest on the restructured loans. For the six months ended June 30, 2018, the Company did not add any new troubled debt restructuring. For the six months ended June 30, 2017, the Company added $9.1 million in new troubled debt restructuring and $9.0 million was outstanding on June 30, 2017.

Troubled debt restructurings are individually evaluated for impairment. The allowance for loan losses included specific reserves of $244 thousand related to $901 thousand of these loans at June 30, 2018.

Table of Contents

GREEN BANCORP, INC. AND SUBSIDIARIES

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2018

(Unaudited)

8. ALLOWANCE FOR LOAN LOSSES

An analysis of activity in the allowance for loan losses for the periods indicated, and the balance of loans receivable by the method of impairment evaluation for those periods were as follows:



	Balance March 31, 2018		Provision			Charge-offs			Recoveries		Balance June 30, 2018

	(Dollars in thousands)
Originated Loans
Commercial & industrial	$	23,113	$	2,713		$	(5,300	)	$	1	$	20,527
Owner occupied commercial real estate	2,871		480			—			—		3,351
Commercial real estate	7,766		385			—			—		8,151
Construction, land & land development	1,461		(613		)	—			—		848
Residential mortgage	1,159		(52		)	—			3		1,110
Consumer and other	165		39			(46		)	7		165
Total originated loans	$	36,535	$	2,952		$	(5,346	)	$	11	$	34,152

Acquired Loans
Commercial & industrial	$	42	$	(26	)	$	—		$	3	$	19
Owner occupied commercial real estate	513		(360		)	—			—		153
Commercial real estate	574		(289		)	—			5		290
Construction, land & land development	20		18			—			—		38
Residential mortgage	539		(396		)	—			287		430
Consumer and other	10		(2		)	(6		)	2		4
Total acquired loans	$	1,698	$	(1,055	)	$	(6	)	$	297	$	934
Total	$	38,233	$	1,897		$	(5,352	)	$	308	$	35,086



	Balance March 31, 2017		Provision			Charge-offs			Recoveries		Balance June 30, 2017

	(Dollars in thousands)
Originated Loans
Commercial & industrial	$	15,155	$	1,736		$	(308	)	$	23	$	16,606
Owner occupied commercial real estate	2,763		62			—			—		2,825
Commercial real estate	8,347		(162		)	—			—		8,185
Construction, land & land development	1,536		40			—			—		1,576
Residential mortgage	1,119		37			—			9		1,165
Consumer and other	191		103			(126		)	4		172
Total originated loans	$	29,111	$	1,816		$	(434	)	$	36	$	30,529

Acquired Loans
Commercial & industrial	$	586	$	(321	)	$	(158	)	$	50	$	157
Owner occupied commercial real estate	1,064		(103		)	(961		)	—		—
Commercial real estate	340		144			—			3		487
Construction, land & land development	9		(6		)	—			—		3
Residential mortgage	611		(20		)	—			7		598
Consumer and other	215		—			—			2		217
Total acquired loans	$	2,825	$	(306	)	$	(1,119	)	$	62	$	1,462
Total	$	31,936	$	1,510		$	(1,553	)	$	98	$	31,991

Table of Contents

GREEN BANCORP, INC. AND SUBSIDIARIES

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2018

(Unaudited)



	Balance December 31, 2017		Provision			Charge-offs			Recoveries		Balance June 30, 2018

	(Dollars in thousands)
Originated Loans
Commercial & industrial	$	16,654	$	11,869		$	(7,999	)	$	3	$	20,527
Owner occupied commercial real estate	2,748		603			—			—		3,351
Commercial real estate	7,738		413			—			—		8,151
Construction, land & land development	1,481		(633		)	—			—		848
Residential mortgage	1,136		(31		)	—			5		1,110
Consumer and other	221		(54		)	(56		)	54		165
Total originated loans	$	29,978	$	12,167		$	(8,055	)	$	62	$	34,152

Acquired Loans
Commercial & industrial	$	35	$	(25	)	$	—		$	9	$	19
Owner occupied commercial real estate	—		153			—			—		153
Commercial real estate	658		(375		)	—			7		290
Construction, land & land development	—		38			—			—		38
Residential mortgage	542		(412		)	—			300		430
Consumer and other	7		14			(20		)	3		4
Total acquired loans	$	1,242	$	(607	)	$	(20	)	$	319	$	934
Total	$	31,220	$	11,560		$	(8,075	)	$	381	$	35,086



	Balance December 31, 2016		Provision			Charge-offs			Recoveries		Balance June 30, 2017

	(Dollars in thousands)
Originated Loans
Commercial & industrial	$	9,491	$	7,970		$	(1,443	)	$	588	$	16,606
Owner occupied commercial real estate	2,609		216			—			—		2,825
Commercial real estate	8,576		(391		)	—			—		8,185
Construction, land & land development	1,852		(276		)	—			—		1,576
Residential mortgage	1,134		(3		)	—			34		1,165
Consumer and other	193		(9		)	(134		)	122		172
Total originated loans	$	23,855	$	7,507		$	(1,577	)	$	744	$	30,529

Acquired Loans
Commercial & industrial	$	1,260	$	(838	)	$	(335	)	$	70	$	157
Owner occupied commercial real estate	—		957			(961		)	4		—
Commercial real estate	437		47			—			3		487
Construction, land & land development	115		(91		)	(95		)	74		3
Residential mortgage	685		(126		)	—			39		598
Consumer and other	12		199			—			6		217
Total acquired loans	$	2,509	$	148		$	(1,391	)	$	196	$	1,462
Total	$	26,364	$	7,655		$	(2,968	)	$	940	$	31,991

Table of Contents

GREEN BANCORP, INC. AND SUBSIDIARIES

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2018

(Unaudited)

An analysis of activity in the allowance for loan losses for the periods indicated, and the balance of loans receivable by the method of impairment evaluation for those periods were as follows:



	June 30, 2018
	Loans evaluated for impairment								Allowance for loan losses evaluated
	Collectively evaluated for impairment		Individually evaluated for impairment		Purchased credit impaired		Total loans		Collectively evaluated for impairment		Individually evaluated for impairment		Purchased credit impaired		Total allowance for loan losses

	(Dollars in thousands)
Originated Loans
Commercial & industrial	$	1,237,821	$	41,041	$	—	$	1,278,862	$	10,875	$	9,652	$	—	$	20,527
Owner occupied commercial real estate	368,467		5,225		—		373,692		2,820		531		—		3,351
Commercial real estate	948,924		175		—		949,099		8,151		—		—		8,151
Construction, land & land development	105,819		107		—		105,926		848		—		—		848
Residential mortgage	154,672		3,859		—		158,531		1,110		—		—		1,110
Consumer and other	12,809		45		—		12,854		136		29		—		165
Total originated loans	$	2,828,512	$	50,452	$	—	$	2,878,964	$	23,940	$	10,212	$	—	$	34,152

Acquired Loans
Commercial & industrial	$	29,275	$	4,594	$	1,730	$	35,599	$	19	$	—	$	—	$	19
Owner occupied commercial real estate	57,340		1,727		3,394		62,461		—		153		—		153
Commercial real estate	139,241		105		3,591		142,937		290		—		—		290
Construction, land & land development	23,907		700		—		24,607		38		—		—		38
Residential mortgage	74,555		104		2,002		76,661		320		—		110		430
Consumer and other	677		202		—		879		1		3		—		4
Total acquired loans	$	324,995	$	7,432	$	10,717	$	343,144	$	668	$	156	$	110	$	934
Total	$	3,153,507	$	57,884	$	10,717	$	3,222,108	$	24,608	$	10,368	$	110	$	35,086

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GREEN BANCORP, INC. AND SUBSIDIARIES

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2018

(Unaudited)



	December 31, 2017
	Loans evaluated for impairment								Allowance for loan losses evaluated
	Collectively evaluated for impairment		Individually evaluated for impairment		Purchased credit impaired		Total loans		Collectively evaluated for impairment		Individually evaluated for impairment		Purchased credit impaired		Total allowance for loan losses

	(Dollars in thousands)
Originated Loans
Commercial & industrial	$	1,173,371	$	49,656	$	—	$	1,223,027	$	11,245	$	5,409	$	—	$	16,654
Owner occupied commercial real estate	327,906		—		—		327,906		2,748		—		—		2,748
Commercial real estate	823,361		—		—		823,361		7,738		—		—		7,738
Construction, land & land development	133,711		3,287		—		136,998		1,257		224		—		1,481
Residential mortgage	145,910		3,111		—		149,021		1,136		—		—		1,136
Consumer and other	16,116		62		—		16,178		191		30		—		221
Total originated loans	$	2,620,375	$	56,116	$	—	$	2,676,491	$	24,315	$	5,663	$	—	$	29,978

Acquired Loans
Commercial & industrial	$	49,494	$	10,738	$	3,237	$	63,469	$	35	$	—	$	—	$	35
Owner occupied commercial real estate	81,376		1,886		4,062		87,324		—		—		—		—
Commercial real estate	237,669		312		6,437		244,418		658		—		—		658
Construction, land & land development	27,240		714		—		27,954		—		—		—		—
Residential mortgage	86,876		454		2,229		89,559		467		—		75		542
Consumer and other	1,059		211		—		1,270		3		4		—		7
Total acquired loans	$	483,714	$	14,315	$	15,965	$	513,994	$	1,163	$	4	$	75	$	1,242
Total	$	3,104,089	$	70,431	$	15,965	$	3,190,485	$	25,478	$	5,667	$	75	$	31,220



	June 30, 2017
	Loans evaluated for impairment								Allowance for loan losses evaluated
	Collectively evaluated for impairment		Individually evaluated for impairment		Purchased credit impaired		Total loans		Collectively evaluated for impairment		Individually evaluated for impairment		Purchased credit impaired		Total allowance for loan losses

	(Dollars in thousands)
Originated Loans
Commercial & industrial	$	1,010,269	$	42,085	$	—	$	1,052,354	$	9,556	$	7,050	$	—	$	16,606
Owner occupied commercial real estate	306,514		—		—		306,514		2,825		—		—		2,825
Commercial real estate	805,362		1,979		—		807,341		8,185		—		—		8,185
Construction, land & land development	153,522		—		—		153,522		1,576		—		—		1,576
Residential mortgage	135,879		2,039		—		137,918		1,165		—		—		1,165
Consumer and other	19,024		81		—		19,105		143		29		—		172
Total originated loans	$	2,430,570	$	46,184	$	—	$	2,476,754	$	23,450	$	7,079	$	—	$	30,529

Acquired Loans
Commercial & industrial	$	74,661	$	15,029	$	2,288	$	91,978	$	—	$	157	$	—	$	157
Owner occupied commercial real estate	88,714		6,958		5,131		100,803		—		—		—		—
Commercial real estate	291,289		—		10,607		301,896		487		—		—		487
Construction, land & land development	46,984		1,468		18		48,470		3		—		—		3
Residential mortgage	99,052		402		2,462		101,916		561		20		17		598
Consumer and other	1,323		215		—		1,538		5		212		—		217
Total acquired loans	$	602,023	$	24,072	$	20,506	$	646,601	$	1,056	$	389	$	17	$	1,462
Total	$	3,032,593	$	70,256	$	20,506	$	3,123,355	$	24,506	$	7,468	$	17	$	31,991

Table of Contents

GREEN BANCORP, INC. AND SUBSIDIARIES

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2018

(Unaudited)

9. PREMISES AND EQUIPMENT

Premises and equipment as of the dates indicated are summarized as follows:



	June 30, 2018			December 31, 2017

	(Dollars in thousands)
Land	$	8,457		$	7,660
Buildings and improvements	28,563			23,598
Furniture, fixtures and equipment	10,479			10,484
	47,499			41,742
Less accumulated depreciation	(18,321		)	(17,740		)
Total	$	29,178		$	24,002

Depreciation of premises and equipment totaled $453 thousand and $515 thousand for the three months ended June 30, 2018 and 2017, respectively, and $1.0 million for both the six months ended June 30, 2018 and 2017.

10. GOODWILL AND CORE DEPOSIT INTANGIBLES

The Company has historically performed its annual goodwill impairment test as of December 31 each year. During 2017, the Company voluntarily changed its annual impairment assessment date from December 31 to October 31. The Company accelerated the impairment test to earlier during the quarter to better align the impairment testing work with year-end financial statements. The change in measurement date represents a change in the method of applying an accounting principle, however, the Company does not consider the change material, intends to utilize the same valuation approach and does not expect the change in valuation date to produce different impairment results.

The Company reviews its goodwill for impairment annually, or more frequently, if indicators of impairment exist. At June 30, 2018 and December 31, 2017, management determined that goodwill, as reflected in the Company’s financial statements, was not impaired. The most recent goodwill impairment test was as of October 31, 2017. Subsequent to the date of the test, management has determined that no triggering events have occurred that would result in impairment.

Changes in the carrying amount of goodwill and core deposit intangibles for the periods set forth were as follows:



	Goodwill		Core Deposit Intangibles

	(Dollars in thousands)
Balance - December 31, 2016	$	85,291	$	9,975
Less - amortization	—		(1,472		)
Balance - December 31, 2017	$	85,291	$	8,503
Less amortization	—		(622		)
Balance - June 30, 2018	$	85,291	$	7,881

Amortization of core deposit intangibles was $306 thousand and $380 thousand for the three months ended June 30, 2018 and 2017, respectively, and $622 thousand and $760 thousand for the six months ended June 30, 2018 and 2017, respectively.

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GREEN BANCORP, INC. AND SUBSIDIARIES

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2018

(Unaudited)

The Company initially records the total premium paid on acquisitions as goodwill. After finalizing the valuation, core deposit intangibles are identified and reclassified from goodwill to core deposit intangibles on the balance sheet. This reclassification has no effect on total assets, liabilities, shareholders’ equity, net income or cash flows. The measurement period for the Company to determine the fair value of acquired identifiable assets and assumed liabilities will be at the end of the earlier of (1)twelve months from the date of acquisition or (2) as soon as the Company receives the information it was seeking about facts and circumstances that existed as of the date of acquisition. The Company may record subsequent adjustments to goodwill for amounts undeterminable at acquisition date, such as deferred taxes and real estate valuations.

Core deposit intangibles are amortized on an accelerated basis over their estimated lives, which the Company believes is approximately six to nineteen years. The estimated future amortization expense for the core deposit intangibles remaining as of June 30, 2018 is as follows (dollars in thousands):



2018	$	573
2019	1,080
2020	993
2021	905
2022	818
Thereafter	3,512
Total	$	7,881

11. DEPOSITS

Scheduled maturities of certificates and other time deposits for the next five years were as follows:



	June 30, 2018		December 31, 2017

	(Dollars in thousands)
2018	$	493,872	$	889,231
2019	629,791		247,595
2020	138,430		83,005
2021	20,699		13,922
2022	26,780		28,579
Thereafter	10,470		—
Total	$	1,320,042	$	1,262,332

Certificates and other time deposits that meet or exceed the FDIC Insurance limit of $250,000 at June 30, 2018 and December 31, 2017, were $609.0 million and $482.0 million, respectively.

The Company had $179.5 million and $123.4 million in brokered time deposits at June 30, 2018 and December 31, 2017, respectively. At June 30, 2018, the Company also had $75.1 million in brokered interest-bearing transaction accounts and $39.1 million in noninterest-bearing escrow accounts classified as brokered. Brokered deposits represented 8.6% and 4.7% of total deposits at June 30, 2018 and December 31, 2017, respectively. The Company utilizes brokered deposits to enhance liquidity.

There are no major concentrations of deposits with any one depositor.

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NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2018

(Unaudited)

12. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND OTHER BORROWED FUNDS

Other borrowed funds as of the dates indicated were as follows:



	June 30, 2018		December 31, 2017

	(Dollars in thousands)
Federal Home Loan Bank advances	412,000		$	325,000
Repurchase agreements	4,141		5,173
Total	$	416,141	$	330,173

Federal Home Loan Bank Advances — The Company has an available borrowing arrangement with the Federal Home Loan Bank (the “FHLB”), which allows the Company to borrow on a collateralized basis. At June 30, 2018 and December 31, 2017, total unused borrowing capacity of $777.7 million and $948.2 million, respectively, was available under this arrangement. At June 30, 2018, $412.0 million was outstanding with an average interest rate of 2.16% and all of the Company’s FHLB advances will mature within two years. At December 31, 2017, $325.0 million was outstanding with an average interest rate of 1.41% and all of the Company’s FHLB advances will mature within one year. These borrowings are collateralized by a blanket lien on certain real estate loans and unpledged securities in safekeeping. The total borrowing capacity decreased due to increased utilization. The Company utilizes these borrowings to meet liquidity needs and to fund certain loans in its loan portfolio.

Federal Reserve Bank — The Company has an available borrower in custody arrangement with the Federal Reserve Bank of Dallas (the “Dallas Fed”), which allows the Company to borrow, on a collateralized basis. Certain commercial and consumer loans are pledged under this arrangement. The Company maintains this borrowing arrangement to meet liquidity needs pursuant to its liquidity risk management program. At June 30, 2018 and December 31, 2017, $487.9 million and $384.5 million, respectively, were available under this arrangement and no borrowings were outstanding.

Securities Sold Under Agreements to Repurchase — Securities sold by the Company under agreements to repurchase represent the purchase of interests in securities by its customers. Securities sold under agreements to repurchase are stated at the amount of cash received in connection with the transaction. Repurchase agreements are settled on the following business day. All securities sold under agreements to repurchase are collateralized by pledged securities. The securities underlying the repurchase agreements are held in safekeeping by the Bank’s safekeeping agent.

Federal Funds Purchased — The Company has available federal funds lines of credit with its correspondent banks. As of June 30, 2018 and December 31, 2017, there were no federal funds purchased outstanding.

13. SUBORDINATED DEBENTURES AND SUBORDINATED NOTES

Subordinated Notes — On December 8, 2016, the Company issued $35.0 million of 8.50% Fixed-to-Floating Rate Subordinated Notes (the “Notes”) that mature on December 15, 2026 through a private placement to certain institutional accredited investors. The Notes, which qualify as Tier 2 capital under the Federal Reserve’s capital guidelines in effect at June 30, 2018, have an interest rate of 8.50% per annum, during the fixed-rate period from date of issuance through December 15, 2021. Interest is payable semi-annually on each June 15 and December 15, from June 15, 2017 through December 15, 2021.

During the floating rate period from December 15, 2021, but excluding the maturity date or date of earlier redemption, the Notes will bear interest at a rate per annum equal to three-month LIBOR for the related interest period plus 6.685%, payable quarterly on each March 15, June 15, September 15 and December 15. The Notes are subordinated in right of payment to all of the Company's senior indebtedness and effectively subordinated to all existing and future debt and all other liabilities of the Company's subsidiary bank. The Company may elect to redeem the Notes (subject to regulatory approval), in whole or in part, on any early redemption date which is any interest payment date on or after December 15, 2021 at a redemption price equal to 100% of the principal amount plus any accrued and unpaid interest. Other than on an early redemption date, the Notes cannot be accelerated except in the event of bankruptcy or the occurrence of certain other events of bankruptcy, insolvency or reorganization. The sale of the Notes yielded net proceeds of approximately $33.9 million. The Company utilized $32.8 million of the proceeds to transfer several energy loans to the holding company to provide flexibility to resolve these loans.

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GREEN BANCORP, INC. AND SUBSIDIARIES

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2018

(Unaudited)

Unamortized debt issuance costs related to these Notes, which are included in Subordinated Debentures and Subordinated Notes, totaled $1.2 million at June 30, 2018. Net issuance costs associated with issuing these Notes are amortized to interest expense over the respective terms using the straight-line method.

In connection with the issuance of the Notes, we entered into a registration rights agreement (the “Registration Rights Agreement”) with the purchasers of the Notes. Under the Registration Rights Agreement, we were required to, among other things, use commercially reasonable efforts to (1) file with the SEC on or prior to March 31, 2017, a registration statement (the “Exchange Offer Registration Statement”) with respect to an offer to exchange the Notes for new notes with identical terms (except for the provisions relating to the transfer restrictions and payment of additional interest) (the “Exchange Offer”), (2) cause the Exchange Offer Registration Statement to be declared effective by the SEC no later than June 15, 2017 and (3) consummate the Exchange Offer no later than 45 days following the effective date of the Exchange Offer Registration Statement. The Exchange Offer Registration Statement was declared effective by the SEC on April 13, 2017, and we completed the Exchange Offer on May 19, 2017, such that $34,000,000 aggregate principal amount of the Notes was exchanged for $34,000,000 aggregate principal amount of 8.50% Fixed-to-Floating Rate Subordinated Notes due 2026 that were registered under the Securities Act of 1933, as amended, and $1,000,000 aggregate principal amount of the Notes remained unregistered.

A summary of pertinent information related to the Company’s issues of subordinated Notes outstanding as of the dates indicated were as follows:



	June 30, 2018			December 31, 2017

	(Dollars in thousands)
Subordinated notes fixed to floating rate, 8.50% per annum, maturity date December 15, 2026	$	35,000		$	35,000
Less: unamortized debt issuance costs	(1,218		)	(1,291		)
Total subordinated notes	$	33,782		$	33,709

Subordinated Debentures Trust Preferred Securities — At June 30, 2018, the Company had outstanding $22.2 million in subordinated debentures, which is offset by a $7.9 million purchase discount. On October 1, 2015, the Company acquired Patriot Bancshares, Inc., and assumed the obligations related to the subordinated debentures issued to Capital Trust I and Capital Trust II.

A summary of pertinent information related to the Company’s two issues of subordinated debentures outstanding at June 30, 2018 is set forth in the table below:

Description

Issuance Date

Trust Preferred Securities Outstanding

Interest Rate⁽¹⁾

Subordinated Debt Owed to Trusts

Maturity Date⁽²⁾

(Dollars in thousands)

Patriot Bancshares Capital Trust I

March 31, 2006

5,000

3 month LIBOR +1.85%, not to exceed 11.90%

5,155

April 7, 2036

Patriot Bancshares Capital Trust II

August 2, 2007

16,500

3 month LIBOR +1.80%, not to exceed 11.90%

17,011

September 15, 2037


⁽¹⁾	The 3-month LIBOR in effect as of June 30, 2018 was 2.336%.


⁽²⁾	All debentures are callable five years from issuance date.

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NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2018

(Unaudited)

Each of the trusts is a capital trust organized for the sole purpose of issuing trust securities and investing the proceeds in the Company’s junior subordinated debentures. The trust preferred securities of each trust represent preferred beneficial interests in the assets of the respective trusts and are subject to mandatory redemption upon payment of the junior subordinated debentures held by the trust. The common securities of each trust are 100% owned by the Company. Each trust’s ability to pay amounts due on the trust preferred securities is solely dependent upon the Company making payment on the related subordinated debentures. The debentures, which are the only assets of each trust, are subordinate and junior in right of payment to all of the Company’s present and future senior indebtedness. The Company has fully and unconditionally guaranteed each trust’s obligations under the trust securities issued by such trust to the extent not paid or made by each trust, provided such trust has funds available for such obligations.

Under the provisions of each issue of the debentures, the Company has the right to defer payment of interest on the debentures at any time, or from time to time, for periods not exceeding five years. If interest payments on either issue of the debentures are deferred, the distributions on the applicable trust preferred securities and common securities will also be deferred.

14. INCOME TAXES

Income tax expense for the three and six months ended June 30, 2018 and 2017 was as follows:



	Three Months Ended June 30,						Six Months Ended June 30,
	2018			2017			2018			2017

	(Dollars in thousands)
Income tax expense for the period	$	4,283		$	6,985		$	6,605		$	10,927
Effective Tax Rate	20.7		%	35.1		%	20.4		%	35.2		%

Effective January 1, 2018, the federal statutory corporate income tax rates was reduced from 35% to 21% pursuant to the Tax Cuts and Jobs Act described below.

The effective tax rates differ from the statutory federal tax rates of 21% and 35% for the three and six months ended June 30, 2018 and 2017, respectively, largely due to the nontaxable earnings on bank owned life insurance, tax exempt interest income earned on certain investment securities and loans and excess tax benefits on exercised stock options and vested restricted stock units, less state tax expense, net of federal effect, and other non-deductible expenses.

Net deferred tax assets totaled $12.5 million and $8.8 million at June 30, 2018 and December 31, 2017, respectively. No valuation allowance was recorded against deferred tax assets as of those dates, as management believes it is more likely than not that all of the deferred tax assets will be realized because they were supported by recoverable taxes paid in prior years.

Tax Cuts and Jobs Act - The Tax Cuts and Jobs Act was enacted on December 22, 2017. Among other things, the new law (i) establishes a new, flat, federal statutory corporate income tax rate of 21%, (ii) eliminates the corporate alternative minimum tax and allows the use of any such carryforwards to offset regular tax liability for any taxable year, (iii) limits the deduction for net interest expense incurred by U.S. corporations, (iv) allows businesses to immediately expense, for tax purposes, the cost of new investments in certain qualified depreciable assets, (v) eliminates or reduces certain deductions related to meals and entertainment expenses, (vi) modifies the limitation on excessive employee compensation to eliminate the exception for performance-based compensation and clarifies the definition of a covered employee and (vii) limits the deductibility of deposit insurance premiums for banks in excess of $5 billion in assets.

The Company completed its accounting under ASU 740, Income Taxes, for all material deferred tax assets and liabilities during the quarter ended December 31, 2017. Provisional amounts were recorded for certain immaterial items including Schedules K-1 from CRA related partnership investments. As a result of the revaluation, we recorded $5.8 million in income tax expense for 2017. Material adjustment to provisional amounts are not expected.

During the three months ended March 31, 2018, the Company elected early adoption of the provisions of ASU 2018-02, which allowed the Company to reclassify the effects of the statutory tax rate change on items within accumulated other comprehensive income to retained earnings. This reclassification, which reduced other comprehensive income and increased retained earnings by $1.4 million, related entirely to unrealized gains and losses on available-for-sale securities.

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NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2018

(Unaudited)

15. EMPLOYEE BENEFITS

Equity Incentive Plans — The 2014 Omnibus Equity Incentive Plan (the “2014 Plan”) was approved by the Company’s Board of Directors and shareholders on July 28, 2014 and became effective immediately prior to the initial public offering on August 7, 2014. A total of 1,273,838 shares of common stock were reserved for issuance under the 2014 Plan, which permits the grant of incentive stock options, within the meaning of Section 422 of the IRS Code, to the Company’s employees, and the grant of non-statutory stock options, stock appreciation rights, restricted stock, restricted stock units, performance units, performance shares and other forms of equity-based awards to the Company’s employees, directors, consultants and independent contractors. The 2014 Plan is administered by the Compensation Committee of the Board of Directors, who may select which eligible participants receive awards, the types of awards to be granted, the purchase price, if any, to be paid for shares covered by the awards and the vesting, forfeiture, cancellation and other terms and conditions of the awards.

During the period from December 29, 2017 through January 23, 2018, the Compensation Committee restructured performance options under the 2010 Option Plan in order to more appropriately align the incentives of the grantees with the success of the Company. As a part of this restructuring, 256,242 outstanding performance options under the 2010 Option Plan were vested and 586,119 outstanding performance options under the 2010 Option Plan were cancelled and new grants of time-based and performance based restricted stock units or "RSUs" were granted under the 2014 Plan. As of March 30, 2018, 3,393 shares were available for future grant under the 2014 Plan. On April 3, 2018, our Board approved an amendment to the 2014 Plan and at the annual meeting of shareholders held May 23, 2018 our shareholders approved the amendment to the 2014 Plan, to increase the number of shares reserved for issuance under the 2014 Plan by 650,000 shares.

Stock Options. At June 30, 2018 and December 31, 2017 there were 403,503 and 428,168 time based options outstanding under the 2014 Plan, respectively.

Restricted Stock Units. In connection with the initial public offering, 275,000 restricted stock units were granted under the 2014 Plan. At June 30, 2018, there were 502,181 time based restricted stock units and 207,859 performance based restricted stock units outstanding under the 2014 Plan. At December 31, 2017, there were 322,875 time based restricted stock units outstanding under the 2014 Plan.

The Company has two additional stock options plans, both of which are frozen to further issuance.

The Green Bancorp, Inc. 2010 Stock Option Plan (the “2010 Option Plan”), which was approved by the Company’s Board of Directors on June 30, 2010, permitted the grant of up to 2,239,906 options. The non-qualified stock options granted were in the form of time-based options and performance options and may have been granted to a director, officer or employee of the Company. Time-based options under the 2010 Option Plan vest over a period of four years and expire on the tenth anniversary of the date of the grant. Performance options under the 2010 Option Plan vest upon the occurrence of a liquidity event, with the vested amounts determined based on the achievement of specified performance and market metrics. The 2010 Option Plan was frozen to further issuance upon approval of the 2014 Omnibus Plan. At June 30, 2018 there were 433,094 time based options, 237,999 performance options and 305,694 super-performance options outstanding under the 2010 Option Plan. At December 31, 2017 there were 367,213 time based options, 992,864 performance options and 308,054 super-performance options outstanding under the 2010 Option Plan.

The Green Bancorp, Inc. 2006 Stock Option Plan (the “2006 Option Plan”), which was approved by the shareholders of the Company on June 21, 2006, permitted the grant of up to 450,000 options. The options granted may have been in the form of nonqualified stock options, which may have been granted to a director, officer or employee of the Company, or incentive stock options, which may have been granted only to officers of the Company. Awards under the 2006 Option Plan vest over a four-year period, which began on the first anniversary of the grant date, and must be exercised within 10 years from the grant date. The 2006 Option Plan was frozen to further issuance upon approval of the 2010 Option Plan. At June 30, 2018 and December 31, 2017, there were 27,500 and 87,500 options outstanding under the 2006 Option Plan, respectively.

For the three months ended June 30, 2018 and 2017, $451 thousand and $159 thousand of stock based compensation expense was recorded for the stock options, respectively, and $893 thousand and $296 thousand for the six months ended June 30, 2018 and 2017, respectively. Total restricted stock units compensation expense was $753 thousand and $196 thousand for the three months ended June 30, 2018 and 2017, respectively, and $1.5 million and $406 thousand for the six months ended June 30, 2018 and 2017, respectively.

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NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2018

(Unaudited)

Stock Appreciation Rights Plan — On May 18, 2007, the Company’s Board of Directors adopted the Green Bancorp Stock Appreciation Rights Plan (the “SAR Plan”). The SAR Plan provided for the issuance of up to 200,000 units to plan participants at an exercise price of no less than the fair market value of the common stock of the Company at the time of grant. Units are redeemable by SAR Plan participants under certain circumstances whereby the participant will be paid the excess, if any, of the market value of the Company’s common stock at the time of exercise over the exercise price. The SAR Plan provides for a 10-year maximum term for units issued, vesting and exercisability limitations and accelerated vesting and deemed exercise in the event of a change of control. The SAR Plan was frozen to further issuance upon approval of the 2014 Omnibus Plan. As of June 30, 2018 and December 31, 2017, there were 41,500 and 63,000 units outstanding under the SAR Plan, respectively.

For the three and six months ended June 30, 2018, a $16 thousand reversal and $111 thousand of stock based compensation expense to reflect the fair value of the SARs was recorded, respectively. For the three and six months ended June 30, 2017, $169 thousand and $357 thousand of stock based compensation expense to reflect the fair value of the SARs was recorded.

Benefit Plan — The Company sponsors a 401(k) plan (the “401k Plan”), which is a defined contribution plan available to substantially all employees. Participants in the 401k Plan may make salary deferral contributions up to the amount allowed by law.

The Company makes safe harbor matching contributions to the 401k Plan equal to 100% of the participant’s elective contribution for the plan year up to a maximum of 6% of the participant’s salary. The Company contributions are fully vested at the date of contribution. The total of Company contributions for the three months ended June 30, 2018 and 2017, were $386 thousand and $348 thousand, respectively, and for the six months ended June 30, 2018 and 2017, were $759 thousand and $704 thousand, respectively.

16. OFF-BALANCE SHEET ARRANGEMENTS, COMMITMENTS AND CONTINGENCIES

The following table summarizes the Company’s contractual obligations and other commitments to make future payments as of the date indicated (other than securities sold under agreements to repurchase). The Company’s future cash payments associated with its contractual obligations pursuant to its certificates and other time deposits, FHLB advances, subordinated debentures and subordinated notes and operating leases, as of the date indicated are as follows:



	June 30, 2018
	1 year or less		More than 1 year but less than 3 years		3 years or more but less than 5 years		5 years or more		Total

	(Dollars in thousands)
Certificates and other time deposits	$	1,001,668	$	274,123	$	44,251	$	—	$	1,320,042
Federal Home Loan Bank advances	365,502		50,874		—		—		416,376
Subordinated debentures and subordinated notes	4,019		3,884		10,077		82,560		100,540
Operating leases	1,690		2,587		1,781		2,493		8,551
Total	$	1,372,879	$	331,468	$	56,109	$	85,053	$	1,845,509

Payments for the FHLB advances include interest of $4.4 million that will be paid in future years. Payments for subordinated debentures and subordinated notes include interest of $43.4 million that will be paid in future years. The future interest payments were calculated using the current rate in effect at June 30, 2018. Payments related to leases are based on actual payments specified in underlying contracts.

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NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2018

(Unaudited)

Leases — A summary as of June 30, 2018, of the Company’s noncancelable future operating lease commitments (in thousands):



2018	$	877
2019	1,610
2020	1,237
2021	1,099
2022	817
Thereafter	2,911
Total	$	8,551

The Company leases certain office facilities and equipment under operating leases. Rent expense under all noncancelable operating lease obligations, net of income from noncancelable subleases aggregated, was approximately $594 thousand and $578 thousand for the three months ended June 30, 2018 and 2017, respectively, and $1.2 million for both the six months ended June 30, 2018 and 2017, respectively.

Litigation — The Company from time to time is involved in routine litigation arising from the normal course of business. Management does not believe that there are any pending or threatened proceedings against the Company which, upon resolution, would have a material effect on the consolidated financial statements.

Financial Instruments with Off-Balance Sheet Risk — In the normal course of business, the Company is a party to various financial instruments with off-balance sheet risk to meet the financial needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the consolidated balance sheets. The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual or notional amount of these instruments. The Company uses the same credit policies in making these commitments and conditional obligations as it does for on-balance sheet instruments.

The following is a summary of the various financial instruments outstanding as of the date set forth:



	June 30, 2018
	1 year or less		More than 1 year but less than 3 years		3 years or more but less than 5 years		5 years or more		Total

	(Dollars in thousands)
Commitments to extend credit	$	325,665	$	190,944	$	85,515	$	87,085	$	689,209
Standby and commercial letters of credit	9,612		314		100		640		10,666
Total	$	335,277	$	191,258	$	85,615	$	87,725	$	699,875

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being fully drawn upon, the total commitment amounts disclosed above do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if considered necessary by the Company, upon extension of credit, is based on management’s credit evaluation of the customer.

Standby and commercial letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. In the event of nonperformance by the customer, the Company has rights to the underlying collateral, which can include commercial real estate, physical plant and property, inventory, receivables, cash and marketable securities. The credit risk to the Company in issuing letters of credit is essentially the same as that involved in extending loan facilities to its customers.

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JUNE 30, 2018

(Unaudited)

17. DERIVATIVE FINANCIAL INSTRUMENTS

In order to accommodate the borrowing needs of certain commercial customers, the Company has entered into interest rate swap or cap agreements with those customers. These interest rate derivative contracts effectively allow our customers to convert a variable rate loan to a fixed rate. In order to offset the exposure and manage interest rate risk, at the time an agreement was entered into with a customer, the Company entered into an interest rate swap or cap with a correspondent bank counterparty with offsetting terms. These derivative instruments are not designated as accounting hedges and changes in the net fair value are recognized in noninterest income or expense. Because we act as an intermediary for our customers, changes in the fair value of the underlying derivative contracts substantially offset each other and do not have a material impact on our results of operations. The fair value amounts are included in other assets and other liabilities.

The following is a summary of the interest rate swaps outstanding as of the dates set forth:



	June 30, 2018
	Notional Amount		Fixed Rate	Floating Rate	Maturity	Fair Value

	(Dollars in thousands)
Non-hedging derivative instruments:
Customer interest rate derivative:
Interest rate swaps - receive fixed/pay floating	$	159,205	4.38 - 6.94%	LIBOR 1 month + 3.00% - 4.25%	Wtd. Avg. 3.9 years	$	2,515
Interest rate caps and collars	$	37,030	4.55 - 6.00%	LIBOR 1 month + 3.00% - 3.75%	Wtd. Avg. 1.2 years	$	185

Correspondent interest rate swap:
Interest rate swaps - receive fixed/pay floating	$	159,205	4.38 - 6.94%	LIBOR 1 month + 3.00% - 4.25%	Wtd. Avg. 3.9 years	$	(2,564	)
Interest rate caps and collars	$	37,030	4.55 - 6.00%	LIBOR 1 month + 3.00% - 3.75%	Wtd. Avg. 1.2 years	$	(185	)



	December 31, 2017
	Notional Amount		Fixed Rate	Floating Rate	Maturity	Fair Value

	(Dollars in thousands)
Non-hedging derivative instruments:
Customer interest rate derivative:
Interest rate swaps - receive fixed/pay floating	$	173,304	2.19 - 5.72%	LIBOR 1 month + 0% - 4.25%	Wtd. Avg. 2.8 years	$	880
Interest rate caps and collars	$	37,466	4.55 - 6.00%	LIBOR 1 month + 3% - 3.75%	Wtd. Avg. 1.7 years	$	75

Correspondent interest rate swap:
Interest rate swaps - receive fixed/pay floating	$	173,304	2.19 - 5.72%	LIBOR 1 month + 0% - 4.25%	Wtd. Avg. 2.8 years	$	(901	)
Interest rate caps and collars	$	37,466	4.55 - 6.00%	LIBOR 1 month + 3% - 3.75%	Wtd. Avg. 1.7 years	$	(75	)

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(Unaudited)

The estimated fair values of non-hedging derivative instruments are reflected within Company’s consolidated balance sheet (included in other assets and other liabilities) on a net basis when a right of offset exits, based on transactions with a single counterparty that are subject to a legally enforceable master netting agreement. The notional amounts and estimated fair values of the non-hedging derivative instruments by classification as the dates set forth were as follows:



	June 30, 2018								December 31, 2017
			Estimated Fair Value								Estimated Fair Value
	Notional Amount		Asset Derivative			Liability Derivative			Notional Amount		Fair Value			Liability Derivative

	(Dollars in thousands)
Non-hedging interest rate derivatives:
Correspondent counterparty:
Interest rate swaps	$	159,205	$	2,757		$	242		$	173,304	$	1,326		$	448
Interest rate caps and collars	37,030		185			—			37,466		75			—
Customer counterparty:
Interest rate swaps	159,205		188			2,752			173,304		423			1,325
Interest rate caps and collars	37,030		—			185			37,466		—			75
Gross derivatives			3,130			3,179					1,824			1,848
Offsetting derivatives assets/liabilities			(122		)	(122		)			(369		)	(369		)
Net derivatives included in the consolidated balance sheets			$	3,008		$	3,057				$	1,455		$	1,479

18. REGULATORY MATTERS

Capital Requirements — The Company is subject to various regulatory capital requirements administered by federal banking agencies. Any institution that fails to meet its minimum capital requirements is subject to actions by regulators that could have a direct material effect on its financial statements. Under the capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines based on the Bank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Company’s capital amount and classification under the regulatory framework for prompt corrective action are also subject to qualitative judgments by the regulators.

In July 2013, the Federal Reserve published final rules for the adoption of the Basel III regulatory capital framework (the "Basel III Capital Rules"). The Basel III Capital Rules, among other things, (i) introduced a new capital measure called "Common Equity Tier 1" ("CET 1"), (ii) specify that Tier 1 capital consist of CET 1 and "Additional Tier 1 Capital" instruments meeting specified requirements, (iii) define CET 1 narrowly by requiring that most deductions/adjustments to regulatory capital measures be made to CET 1 and not to the other components of capital and (iv) expand the scope of the deductions/adjustments as compared to existing regulations. The Basel III Capital Rules became effective for us on January 1, 2015 with certain transition provisions to be fully phased in by January 1, 2019.

Beginning on January 1, 2016, the capital conservation buffer was effective for the Company starting at the 0.625% level and increasing by that amount on each subsequent January 1, until it reaches 2.5% on January 1, 2019. The required phase-in capital conservation buffer during 2018 is 1.875%. The capital conservation buffer, composed entirely of CET 1, is designed to absorb losses during periods of economic stress and effectively increases the minimum required risk-weighted capital ratios.

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GREEN BANCORP, INC. AND SUBSIDIARIES

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2018

(Unaudited)

Financial institutions are categorized as well capitalized or adequately capitalized, based on minimum total risk-based, Tier 1 risk-based, CET1 and Tier 1 leverage ratios. As shown in the table below, the Company’s capital ratios exceeded the regulatory definition of adequately capitalized as of June 30, 2018 and December 31, 2017. Based upon the information in its most recently filed call report, the Bank met the capital ratios necessary to be well capitalized. The regulatory authorities can apply changes in classification of assets and such changes may retroactively subject the Company to changes in capital ratios. Any such changes could result in reducing one or more capital ratios below well-capitalized status. In addition, a change may result in imposition of additional assessments by the FDIC or could result in regulatory actions that could have a material effect on condition and results of operations.

To meet the capital adequacy requirements, the Company and the Bank must maintain minimum capital amounts and ratios as defined in the regulations. Management believes, as of June 30, 2018 and December 31, 2017, that the Company and the Bank met all capital adequacy requirements to which they are subject.

The most recent notification from the regulatory banking agencies categorized Green Bank as “well capitalized” under the regulatory capital framework for prompt corrective action and there have been no events since that notification that management believes have changed the Bank’s category.

The Company’s consolidated capital ratios and the Bank’s capital ratios as of the dates set forth are presented in the following table:



	June 30, 2018
	Actual				For Capital Adequacy Purposes				To be Categorized as "Well Capitalized" under Prompt Corrective Action Provisions
	Amount		Ratio		Amount		Ratio		Amount		Ratio

	(Dollars in thousands)
The Company⁽¹⁾:
Total capital (to risk weighted assets)	$	487,002	13.2	%	$	295,174	8.0	%	N/A		N/A
Tier 1 capital (to risk weighted assets)	417,047		11.3		221,380		6.0		N/A		N/A
Common equity tier 1 capital	403,475		10.9		166,035		4.5		N/A		N/A
Tier I capital (to average assets)	417,047		10.0		167,184		4.0		N/A		N/A

The Bank⁽²⁾:
Total capital (to risk weighted assets)	$	477,452	13.0	%	$	294,851	8.0	%	$	368,564	10.0	%
Tier 1 capital (to risk weighted assets)	441,279		12.0		221,138		6.0		294,851		8.0
Common equity tier 1 capital	441,279		12.0		165,854		4.5		239,566		6.5
Tier I capital (to average assets)	441,279		10.6		167,123		4.0		208,904		5.0

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GREEN BANCORP, INC. AND SUBSIDIARIES

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2018

(Unaudited)



	December 31, 2017
	Actual				For Capital Adequacy Purposes				To be Categorized as "Well Capitalized" under Prompt Corrective Action Provisions
	Amount		Ratio		Amount		Ratio		Amount		Ratio

	(Dollars in thousands)
The Company⁽¹⁾:
Total capital (to risk weighted assets)	$	455,754	12.7	%	$	287,840	8.0	%	N/A		N/A
Tier 1 capital (to risk weighted assets)	390,690		10.9		215,880		6.0		N/A		N/A
Common equity tier 1 capital	377,328		10.5		161,910		4.5		N/A		N/A
Tier I capital (to average assets)	390,690		9.5		164,632		4.0		N/A		N/A

The Bank⁽²⁾:
Total capital (to risk weighted assets)	$	444,198	12.4	%	$	286,648	8.0	%	$	358,310	10.0	%
Tier 1 capital (to risk weighted assets)	415,542		11.6		214,986		6.0		286,648		8.0
Common equity tier 1 capital	415,542		11.6		161,239		4.5		232,901		6.5
Tier I capital (to average assets)	415,542		10.1		164,390		4.0		205,487		5.0


⁽¹⁾	The Federal Reserve may require the Company to maintain capital ratios above the required minimums.


⁽²⁾	The FDIC or the Office of the Comptroller of the Currency (the “OCC”) may require the Bank to maintain capital ratios above the required minimums.

Dividend Restrictions — Dividends paid by the Bank are subject to certain restrictions imposed by regulatory agencies. The Basel III Capital Rules further limit the amount of dividends that may be paid by our bank. A dividend of $6.2 million was paid by the Bank to Green Bancorp during the quarter ended June 30, 2018. A dividend of $1.0 million was paid by the Bank to Green Bancorp during the year ended December 31, 2017.

The Company is regarded as a legal entity separate and distinct from the Bank. The principal source of the Company’s revenues is dividends received from the Bank. Federal law currently imposes limitations upon certain capital distributions by national banks, such as certain cash dividends, payments to repurchase or otherwise acquire its shares, payments to shareholders of another institution in a cash‑out merger and other distributions charged against capital. The Federal Reserve and the OCC regulate all capital distributions by the Bank directly or indirectly to the Company, including dividend payments. For example, under applicable regulations, the Bank must file an application for OCC approval of a capital distribution if the total capital distributions for the applicable calendar year exceed the sum of the Bank’s net income for that year to date plus the Bank’s retained net income for the preceding two years. Additionally, the Bank may not pay dividends to the Company if, after paying those dividends, it would fail to meet the required minimum levels under risk‑based capital guidelines and the minimum leverage and tangible capital ratio requirements, or in the event the OCC notified the Bank that it was in need of more than normal supervision. Under the Federal Deposit Insurance Act, an insured depository institution such as the Bank is prohibited from making capital distributions, including the payment of dividends, if, after making such distribution, the institution would become “undercapitalized.” Payment of dividends by the Bank also may be restricted at any time at the discretion of the appropriate regulator if it deems the payment to constitute an unsafe and unsound banking practice. In addition, the Bank may become subject to supervisory limits on its ability to declare or pay a dividend or reduce its capital unless certain conditions are satisfied.

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GREEN BANCORP, INC. AND SUBSIDIARIES

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2018

(Unaudited)

19. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

ASC 820 applies to reported balances that are required or permitted to be measured at fair value under an existing accounting pronouncement. ASC 820 emphasizes that fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability and establishes a fair value hierarchy. The fair value hierarchy consists of three levels of inputs that may be used to measure fair value as follows:

Level 1 — Inputs that utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. Level 1 assets and liabilities include debt and equity securities that are traded in an active exchange market, as well as certain U.S. Treasury securities that are highly liquid and are actively traded in over-the-counter markets.

Level 2 — Inputs other than those quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates and yield curves that are observable at commonly quoted intervals. Level 2 assets and liabilities include available-for-sale securities with quoted prices that are traded less frequently than exchange-traded instruments and derivative contracts whose value is determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data. Available-for-sale securities are valued using observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, prepayment speeds, credit information, and the bond’s terms and conditions, among other things. Government guaranteed loans held-for-sale, which are guaranteed by the Small Business Administration ("SBA"), are valued based on observable market data and pricing. Derivative valuations utilize certain Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by the Company and its counterparties. The significance of the impact of these credit valuation adjustments on the overall valuation of derivative positions are not significant to the overall valuation and result in all derivative valuations being classified in Level 2 of the fair value hierarchy.

Level 3 — Inputs that are unobservable inputs for the asset or liability, which are typically based on an entity’s own assumptions, as there is little, if any, related market activity. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability. This category includes loans where independent pricing information was not able to be obtained.

The tables below present the Company’s assets and liabilities measured at fair value on a recurring basis as of the dates set forth aggregated by the level in the fair value hierarchy within which those measurements fall.



	June 30, 2018
	Level 1		Level 2		Level 3		Total

	(Dollars in thousands)
Financial Assets:
Available-for-sale securities	$	—	$	635,333	$	—	$	635,333
Loans held for sale	—		4,992		—		4,992
Correspondent interest rate swaps	—		2,757		—		2,757
Customer interest rate swaps	—		188		—		188
Correspondent interest rate caps and collars	—		185		—		185

Financial Liabilities:
Correspondent interest rate swaps	$	—	$	242	$	—	$	242
Customer interest rate swaps	—		2,752		—		2,752
Customer interest rate caps and collars	—		185		—		185

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GREEN BANCORP, INC. AND SUBSIDIARIES

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2018

(Unaudited)



	December 31, 2017
	Level 1		Level 2		Level 3		Total

	(Dollars in thousands)
Financial Assets:
Available-for-sale securities	$	—	$	705,539	$	—	$	705,539
Correspondent interest rate swaps	—		1,326		—		1,326
Customer interest rate swaps	—		423		—		423
Correspondent interest rate caps	—		75		—		75

Financial Liabilities:
Correspondent interest rate swaps	$	—	$	448	$	—	$	448
Customer interest rate swaps	—		1,325		—		1,325
Customer interest rate caps	—		75		—		75

Certain financial assets and financial liabilities are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). Assets measured on a nonrecurring basis include impaired loans, real estate acquired by foreclosure and other repossessed assets.

A loan is defined as impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due, according to the contractual terms of the loan agreement. The allowance for loan losses related to impaired loans is determined based on the difference between the carrying value of the impaired loan and its fair value. The fair value of impaired loans is determined based on the fair value of the collateral if repayment is expected solely from the collateral. Fair value of the loan’s collateral is determined by appraisals and third party estimates for real estate collateral and by appraisals or independent valuations for non-real estate collateral such as inventory, accounts receivable, equipment or other business assets. The fair value of real estate acquired by foreclosure is measured using appraisals and third party estimates. These values may be adjusted based on current information available to management, therefore the values are considered Level 3 inputs within the fair value hierarchy.

The following tables present the assets that were subject to fair value adjustments during the periods indicated, which were still on the balance sheet at the end of the reporting periods:



	June 30, 2018
	Level 3		Total		Losses for the Six Months Ended June 30, 2018

	(Dollars in thousands)
Assets Measured on a Nonrecurring Basis:
Impaired loans	$	28,535	$	28,535	$	8,598
Other real estate owned	—		—		—



	June 30, 2017
	Level 3		Total		Losses for the Six Months Ended June 30, 2017

	(Dollars in thousands)
Assets Measured on a Nonrecurring Basis:
Impaired loans	$	26,265	$	26,265	$	7,152
Other real estate owned	—		—		—

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GREEN BANCORP, INC. AND SUBSIDIARIES

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2018

(Unaudited)

The following methods and assumptions were used to estimate the fair value of cash and other financial instruments, other than those described above:

Cash and Short-Term Investments — The carrying amount of these short term investments is a reasonable estimate of fair value.

Securities — The fair value of securities are obtained from an independent pricing service. Securities are valued based on quoted prices in an active market when available. These securities are classified in Level 1 of the valuation hierarchy. If quoted market prices are not available for the specific security, then fair values are estimated and classified as Level 2 of the valuation hierarchy. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury and other yield curves, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the security’s terms and conditions, among other things.

Loans Held for Sale — The fair value of government guaranteed loans held-for-sale is based on commitments from investors or prevailing market prices.

Loans Held for Investment — The calculation of fair value of loans reported for the 2018 reporting periods has been revised to be in accordance with ASU 2016-01. The discounted cash flow methodology considers internal and market-based information, including interest rates, prepayment speeds and discount rates. The fair value of loans as of December 31, 2017 was estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.

Real Estate Acquired by Foreclosure — Real estate acquired by foreclosure is adjusted to fair value less estimated costs to sell at the time of foreclosure. Subsequently, these assets are carried at the lower of carrying value or fair value less estimated costs to sell. Fair value is generally based upon market prices or appraised values of the property, which may be discounted based on internal criteria and accordingly, the Company classifies real estate acquired by foreclosure as Level 3.

Deposit Liabilities — The fair value of demand deposits, savings accounts and certain money market deposits is the amount payable on demand at the reporting date. The fair value of certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities in the peer market.

Other Borrowed Funds — The carrying amount of securities sold under agreements to repurchase is a reasonable estimate of fair value because these borrowings reprice at market rates generally daily. The fair value of long term FHLB advances is estimated using the rates currently offered for advances of similar remaining maturities.

Subordinated debentures and subordinated notes—The fair value of the subordinated debentures and subordinated notes was calculated using the quoted market prices, if available. If quoted market prices are not available, fair value is estimated using quoted market prices for similar subordinated debentures. Subordinated debentures and subordinated notes fair value measurements utilize Level 2 inputs.

Off-Balance Sheet Financial Instruments — The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of guarantees and letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties at the reporting date. These amounts were not significant at the reporting dates. The fair value of interest rate swaps is derived from pricing models based on past, present and projected future market conditions, quoted market prices of instruments with similar characteristics or discounted cash flows, classified in Level 2 of the fair value hierarchy.

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GREEN BANCORP, INC. AND SUBSIDIARIES

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2018

(Unaudited)

The estimated fair values of the Company’s financial instruments as of the dates indicated are as follows:



	June 30, 2018
	Carrying Value		Level 1		Level 2		Level 3		Fair Value

	(Dollars in thousands)
Financial Assets:
Cash and short term investments	$	231,251	$	231,251	$	—	$	—	$	231,251
Available-for-sale securities	635,333		—		635,333		—		635,333
Held-to-maturity securities	64,530		—		63,993		—		63,993
Other securities	42,962		42,962		—		—		42,962
Loans held for sale	4,992		—		4,992		—		4,992
Loans held for investment, net of allowance	3,187,022		—		—		3,201,649		3,201,649
Real estate acquired by foreclosure	802		—		—		802		802
Total	$	4,166,892	$	274,213	$	704,318	$	3,202,451	$	4,180,982

Financial Liabilities:
Deposits	$	3,426,050	$	—	$	3,429,588	$	—	$	3,429,588
Securities sold under agreements to repurchase	4,141		—		4,141		—		4,141
Other borrowed funds	412,000		—		412,026		—		412,026
Subordinated debentures and subordinated notes	48,019		—		46,170		—		46,170
Total	$	3,890,210	$	—	$	3,891,925	$	—	$	3,891,925



	December 31, 2017
	Carrying Value		Level 1		Level 2		Level 3		Fair Value

	(Dollars in thousands)
Financial Assets:
Cash and short term investments	$	140,681	$	140,681	$	—	$	—	$	140,681
Available-for-sale securities	705,539		—		705,539		—		705,539
Held-to-maturity securities	13,275		—		13,146		—		13,146
Other securities	26,617		26,617		—		—		26,617
Loans held for sale	7,156		—		7,156		—		7,156
Loans held for investment	3,190,485		—		—		3,206,145		3,206,145
Real estate acquired by foreclosure	802		—		—		802		802
Total	$	4,084,555	$	167,298	$	725,841	$	3,206,947	$	4,100,086

Financial Liabilities:
Deposits	$	3,397,143	$	—	$	3,392,144	$	—	$	3,392,144
Securities sold under agreements to repurchase	5,173		—		5,173		—		5,173
Other borrowed funds	325,000		—		324,873		—		324,873
Subordinated debentures and subordinated notes	47,737		—		45,356		—		45,356
Total	$	3,775,053	$	—	$	3,767,546	$	—	$	3,767,546

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GREEN BANCORP, INC. AND SUBSIDIARIES

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2018

(Unaudited)

20. SUBSEQUENT EVENTS

Declaration of Dividends — On July 23, 2018, the Company's Board of Directors declared a quarterly cash dividend of $0.10 per share of its outstanding common stock, payable August 23, 2018, to shareholders of record as of August 9, 2018.

Pending Merger with Veritex Holdings, Inc. — On July 23, 2018, the Company, Veritex, the parent holding company of Veritex Bank, and Merger Sub entered into an Agreement and Plan of Reorganization (the “Merger Agreement”), pursuant to which, subject to the terms and conditions of the Merger Agreement, among other things, (i) Merger Sub will merge with and into the Company (the “Merger”), with the Company continuing as the surviving corporation in the Merger and a wholly owned subsidiary of Veritex, (ii) immediately thereafter, the Company (as the surviving corporation in the Merger) will merge with and into Veritex (together with the Merger, the “Holdco Mergers”), with Veritex being the surviving corporation and (iii) immediately thereafter, Green Bank will merge with and into Veritex Bank, with Veritex Bank continuing as the surviving bank (together with the Holdco Mergers, the “Merger Transactions”).

Upon the consummation of the Merger, each share of Company common stock will be converted into the right to receive 0.79 shares of Veritex Common Stock.

*****

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the Company’s interim consolidated financial statements and the accompanying notes included elsewhere in this report and with the consolidated financial statements and accompanying notes and other detailed information appearing in the Company’s Annual Report on Form 10-K for year ended December 31, 2017.

Except where the context otherwise requires or where otherwise indicated, in this Quarterly Report on Form 10-Q the terms “Company,” “we,” “us,” “our,” “our company” and “our business” refer to Green Bancorp, Inc. and our subsidiaries, including our banking subsidiary; Green Bank, N.A., a national banking association, and the term “Bank” refers to Green Bank, N.A. In this Quarterly Report on Form 10-Q, we refer to the Houston—Sugar Land—Baytown and Dallas—Fort Worth—Arlington metropolitan statistical areas as the Houston and Dallas MSAs.

Overview

We are a Texas focused bank holding company headquartered in Houston, Texas. Our wholly owned subsidiary, Green Bank, N.A., a nationally chartered commercial bank, provides commercial and private banking services primarily to Texas based customers through twenty-one full service branches in the Houston and Dallas MSAs and other markets. The Houston and Dallas MSAs are our target markets, and we believe their growing economies and attractive demographics, together with our scalable platform, provide us with opportunities for long‑term and sustainable growth. Our emphasis is on continuing to expand our existing business by executing on our proven business model as well as pursuing select strategic acquisitions and attracting additional talented portfolio bankers.

We generate the majority of our revenues from interest income on loans, customer service and loan fees and income from investment in securities. The revenues are partially offset by interest expense paid on deposits and other borrowings and noninterest expenses such as administrative and occupancy expenses. Net interest income is the difference between interest income on earning assets such as loans and securities and interest expense on liabilities such as deposits and borrowings which are used to fund those assets. Net interest income is our largest source of revenue. To evaluate net interest income, we measure and monitor (1) yields on our loans and other interest-earning assets, (2) the costs of our deposits and other funding sources, (3) our net interest spread, (4) our net interest margin and (5) our provision for loan losses. Net interest spread is the difference between rates earned on interest-earning assets and rates paid on interest-bearing liabilities. Net interest margin is calculated as net interest income divided by average interest-earning assets. Because noninterest-bearing sources of funds, such as noninterest-bearing deposits and shareholders’ equity, also fund interest-earning assets, net interest margin includes the benefit of these noninterest-bearing sources.

Total assets were $4.4 billion as of June 30, 2018 compared with $4.3 billion as of December 31, 2017, an increase of $129.8 million or 3.0%. Total deposits were $3.4 billion as of June 30, 2018 compared with $3.4 billion as of December 31, 2017, an increase of $28.9 million or 0.9%. Total loans held for investment were $3.2 billion at June 30, 2018, an increase of $31.6 million, or 1.0%, compared with $3.2 billion as of December 31, 2017. Loans held for sale were $5.0 million at June 30, 2018 compared with $7.2 million as of December 31, 2017, a decrease of $2.2 million or 30.2%. At June 30, 2018 and December 31, 2017, we had $54.8 million and $57.3 million, respectively, in non-accrual loans and our allowance for loan losses was $35.1 million and $31.2 million, respectively. Shareholders’ equity was $479.5 million and $463.8 million at June 30, 2018 and December 31, 2017, respectively.

Merger Agreement

On July 23, 2018, the Company, Veritex and Merger Sub entered into the Merger Agreement, pursuant to which, subject to the terms and conditions of the Merger Agreement, among other things, (i) Merger Sub will merge with and into the Company, with the Company continuing as the surviving corporation in the Merger and a wholly owned subsidiary of Veritex, (ii) immediately thereafter, the Company, with Veritex being the surviving corporation and (iii) immediately thereafter, Green Bank will merge with and into Veritex Bank, with Veritex Bank continuing as the surviving bank.

Upon the consummation of the Merger, each share of Company common stock will be converted into the right to receive 0.79 shares of Veritex Common Stock.

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Critical Accounting Policies

Our significant accounting policies are integral to understanding the results reported. Our accounting policies are described in detail in Note 1 to the consolidated financial statements included in the Company’s Annual Report on the Form 10-K for the year ended December 31, 2017. We believe that of our significant accounting policies, the following may involve a higher degree of judgment and complexity:

Allowance for loan losses—The allowance for loan losses is maintained at a level that management estimates to be appropriate to absorb probable credit losses in the portfolio as of the balance sheet date. This estimate involves numerous assumptions and judgments. Management utilizes a calculation methodology that includes both quantitative and qualitative factors and applies judgment when establishing the factors utilized in the methodology and in assessing the overall adequacy of the calculated results.

The allowance for loan losses is a valuation allowance for losses incurred on loans. All losses are charged to the allowance when the loss actually occurs or when a determination is made that a loss is probable. Recoveries are credited to the allowance at the time of recovery. Our allowance for loan losses consists of two components: a general component based upon probable but unidentified losses inherent in the portfolio and a specific component on individual loans that are considered impaired.

The general component of the allowance for loan losses related to probable but unidentified losses inherent in the portfolio is based on our actual historical loss experience and various qualitative factors. The qualitative factors include lending policies and procedures, loan volume and terms, experience, depth and ability of lending management, volume and severity of past due loans and monitored loans, quality of loan review system, concentrations, value of collateral underlying collateral dependent loans, economic conditions and other factors. Additional factors considered include the actual historical loss experience at the total portfolio level, a comparison of the allowance ratios to peer data, an analysis of the allowance by risk rating and other factors.

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To arrive at the general component of the allowance, loans are first separated into originated and acquired groups and then further separated by loan type for each group. On a quarterly basis, the trends in various metrics related to each of the factors described above are reviewed to determine the appropriate level of change to be applied to each factor for the period. The factors described above are calculated for the applicable loan groups and for each loan type within the applicable group and then applied to the loan balance by type to calculate the general reserve. The actual loss factor is based on our loss migration analysis, which calculates the weighted average of actual losses by loan type and within each risk rating over the prior three years.

The specific component of the allowance for loan losses is calculated based on a review of individual loans considered impaired. The analysis of impaired losses may be based on the present value of expected future cash flows discounted at the effective loan rate, an observable market price or the fair value of the underlying collateral on collateral dependent loans. In determining the collectability of certain loans, management also considers the fair value of any underlying collateral. The amount ultimately realized may differ from the carrying value of these assets because of economic, operating, or other conditions beyond our control.

Throughout the year, management estimates the probable level of losses to determine whether the allowance for loan losses is adequate to absorb inherent losses in the existing portfolio. Based on these estimates, an amount is recorded to the provision for loan losses and credited to the allowance for loan losses in order to adjust the allowance to a level determined to be adequate to absorb inherent losses. If economic conditions or borrower behavior deviate substantially from the assumptions utilized in the allowance calculation, increases in the allowance may be required.

Estimates of loan losses involve an exercise of judgment. While it is reasonably possible that in the near term we may sustain losses which are substantial relative to the allowance for loan losses, it is the judgment of management that the allowance for loan losses reflected in the consolidated balance sheets is adequate to absorb probable losses that exist in the current loan portfolio.

Determining the amount of the allowance is considered a critical accounting estimate, as it requires significant judgment and the use of subjective measurements, including management’s assessment of overall portfolio quality. We maintain the allowance at an amount that management believes is sufficient to provide for estimated losses inherent in our loan portfolio at each balance sheet date, and fluctuations in the provision for loan losses may result from management’s assessment of the adequacy of the allowance. Changes in these estimates and assumptions are possible and may have a material impact on our allowance, and therefore our financial position, liquidity or results of operations.

Accounting for Acquired Loans and the Allowance for Acquired Loan Losses—Acquisitions are accounted for using the acquisition method of accounting. Accordingly, the assets, including loans, and liabilities of the acquired entity were recorded at their fair values at the acquisition date. No allowance for credit losses related to the acquired loans is recorded on the acquisition date, as the fair value of the acquired loans incorporates assumptions regarding credit risk. These fair value estimates associated with acquired loans, and based on a discounted cash flow model, include estimates related to market interest rates and undiscounted projections of future cash flows that incorporate expectations of prepayments and the amount and timing of principal, interest and other cash flows, as well as any shortfalls thereof. The excess of cash flows expected at acquisition over the estimated fair value is considered the accretable discount and is recognized in interest income over the remaining life of the loan using the interest method.

Acquired loans with evidence of credit deterioration and the probability that all contractually required payments will not be collected as of the date of acquisition are accounted for in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 310-30. The difference between contractually required payments at acquisition and the cash flows expected to be collected is considered the non-accretable discount. The non-accretable discount represents the future credit losses expected to be incurred over the life of the loan. Subsequent increases in the expected cash flows will result in a recovery of any previously recorded allowance for loan losses and a reclassification from non-accretable discount to accretable discount.

At period-end after acquisition, the fair-valued acquired loans from each acquisition are reassessed to determine whether an addition to the allowance for credit losses is appropriate due to further credit quality deterioration. Methods utilized to estimate any subsequently required allowance for credit losses for acquired loans not deemed credit-impaired at acquisition are similar to originated loans; however, the estimate of loss is based on the unpaid principal balance and then compared to any remaining unaccreted purchase discount. To the extent that the calculated loss is greater than the remaining unaccreted purchase discount, an allowance is recorded for such difference. For further discussion of the methodology used in the determination of the allowance for credit losses for acquired loans, see “Financial Condition – Allowance for loan losses” section below.

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Business combinations—The Company applies the acquisition method of accounting for business combinations in accordance with ASC 805, Business Combinations. Under the acquisition method, the acquiring entity in a business combination recognizes all of the assets acquired and liabilities assumed at their acquisition date fair values. Management utilizes valuation techniques appropriate for the asset or liability being measured in determining these fair values. The excess of the purchase price over the estimated fair value of the net assets, including identifiable intangible assets, for tax-free acquisitions is recorded as goodwill, none of which is deductible for tax purposes. The excess of the purchase price over the estimated fair value of the net assets, including identifiable intangible assets, for taxable acquisitions was also recorded as goodwill, and is deductible for tax purposes. Where amounts allocated to assets acquired and liabilities assumed is greater than the purchase price, a bargain purchase gain is recognized. Acquisition-related costs are expensed as incurred. The results of operations for each acquisition have been included in the Company’s consolidated financial results beginning on the respective acquisition date.

Determining the fair value of assets acquired and liabilities assumed is considered a critical accounting estimate because the allocation of the fair value to the assets acquired and liabilities assumed requires significant management judgment and the use of subjective measurements. Variability in the market and changes in assumptions or subjective measurements used to allocate fair value are reasonably possible and may have a material impact on our financial position, liquidity or results of operations.

Goodwill—Goodwill has an indefinite useful life and is subject to an annual impairment test and more frequently if a triggering event occurs indicating that it is more likely than not that the fair value of the Company, which is our only reporting unit, is below the carrying value of its equity. We completed our annual impairment analysis of goodwill as of October 31, 2017, and based on this analysis, we do not believe any of our goodwill is impaired as of such date because the fair value of our equity substantially exceeded our carrying value. The goodwill impairment test involves a two-step process. Under the first step, the estimation of fair value of the reporting unit is compared with its carrying value including goodwill. If step one indicates a potential impairment, the second step is performed to measure the amount of impairment, if any. Goodwill impairment exists when the implied fair value of goodwill is less than its carrying value. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation. As part of our impairment analysis, we use a variety of methodologies in determining the fair value of the reporting unit, including cash flow analysis that are consistent with the assumptions management believes hypothetical marketplace participants would use.

Fair Value of Financial Instruments—The Company determines the fair market values of financial instruments based on the fair value hierarchy established which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. There are three levels of inputs that may be used to measure fair value. Level 1 inputs include quoted market prices, where available. If such quoted market prices are not available, Level 2 inputs are used. These inputs are based upon internally developed models that primarily use observable market-based parameters. Level 3 inputs are unobservable inputs which are typically based on an entity’s own assumptions, as there is little, if any, related market activity. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.

Emerging Growth Company—Pursuant to the Jumpstart Our Business Startups Act, an emerging growth company can elect to opt in to any new or revised accounting standards that may be issued by the FASB or the SEC otherwise applicable to non-emerging growth companies. We have elected to opt in to such standards, which election is irrevocable.

We will likely take advantage of some of the reduced regulatory and reporting requirements that are available to us so long as we qualify as an emerging growth company, including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation, and exemptions from the requirements of holding non-binding advisory votes on executive compensation and golden parachute payments.

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Hurricane Harvey

In late August 2017, Hurricane Harvey, a Category 4 hurricane, caused catastrophic flooding and unprecedented damage to residences and businesses across Southeast Texas, including Houston. The Company currently operates 11 branches in the greater Houston area. As of June 30, 2018, the Company has not experienced any material financial impact related to Hurricane Harvey.

Results of Operations

Three months ended June 30, 2018 compared with three months ended June 30, 2017. Net income was $16.4 million for the three months ended June 30, 2018 compared with net income of $12.9 million for the three months ended June 30, 2017, an increase of $3.5 million, or 27.3%. Net earnings per diluted common share was $0.44 for the three months ended June 30, 2018 compared with net earnings per diluted common share of $0.35 for the same period in 2017, an increase of $0.09. The Company recorded a provision for loan losses of $1.9 million for the three months ended June 30, 2018. The second quarter 2018 provision was primarily due to the addition of general reserves due primarily to loan growth and $956 thousand related to energy loans. We experienced returns on average common equity of 13.96% and 11.62%, returns on average assets of 1.54% and 1.26% and efficiency ratios of 50.0% and 47.8% for the three months ended June 30, 2018 and 2017, respectively. The efficiency ratio is calculated as noninterest expense divided by the sum of net interest income and noninterest income.

Six months ended June 30, 2018 compared with six months ended June 30, 2017. For the six months ended months ended June 30, 2018, net income was $25.8 million compared with a net income of $20.1 million for the same period in 2017, an increase of $5.7 million, or 28.2%. Earnings per common share on a diluted basis was $0.69 for the six months ended June 30, 2018 compared with net income per diluted common share of $0.54 for the same period in 2017, an increase of $0.15. The Company recorded a provision for loan losses of $11.6 million for the six months ended June 30, 2018, which included $4.7 million in reserves on the energy portfolio and $5.9 million for a syndicated healthcare credit. The provision increased $3.9 million from the same period in 2017, primarily due to the syndicated healthcare credit reserve recorded in 2018, offset by a $1.9 million decrease in provision for the energy portfolio. We experienced returns on average common equity of 11.09% and 9.21%, returns on average assets of 1.23% and 1.00% and efficiency ratios of 50.4% and 51.1% for the six months ended June 30, 2018 and 2017, respectively.

Net Interest Income

Our operating results depend primarily on our net interest income, which is the difference between interest income on interest-earning assets, including loans and securities, and interest expense incurred on interest-bearing liabilities, including deposits and other borrowed funds. Interest rate fluctuations, as well as changes in the amount and type of earning assets and liabilities, combine to affect net interest income. Our net interest income is affected by changes in the amount and mix of interest-earning assets and interest-bearing liabilities, referred to as a “volume change.” It is also affected by changes in yields earned on interest-earning assets and rates paid on interest-bearing deposits and other borrowed funds, referred to as a “rate change.”

Three months ended June 30, 2018 compared with three months ended June 30, 2017. Net interest income before the provision for loan losses for the three months ended June 30, 2018 was $39.8 million compared with $35.3 million for the three months ended June 30, 2017, an increase of $4.5 million, or 12.6%. The increase was primarily due to increases of $6.0 million, or 15.6%, in the interest earned on loans and $806 thousand, or 20.5%, in interest income on securities, offset by increases of $1.0 million, or 187.1%, in expense for other borrowed funds, a $926 thousand, or 24.5%, in interest expense on certificates and other time deposits and a $793 thousand, or 35.6%, in interest expense on transaction and saving deposits. Interest income was $50.2 million for the three months ended June 30, 2018, an increase of $7.3 million, or 17.0%, compared with the three months ended June 30, 2017. Interest income on loans was $44.5 million for the three months ended June 30, 2018, an increase of $6.0 million, or 15.6%, compared with the three months ended June 30, 2017, due to a 63 basis point increase in the average yield and a $84.6 million increase in average balance. Interest income on securities was $4.7 million for the three months ended June 30, 2018, an increase of $806 thousand compared with the three months ended June 30, 2017, due to a 34 basis point increase in the average yield and a $34.8 million, or 5.1%, increase in the average balance. Interest income earned on deposits in financial institutions and federal funds sold increased $328 thousand to $659 thousand for the three months ended June 30, 2018 compared to the three months ended June 30, 2017 due to a 84 basis point increase in average yield and a $14.3 million increase in the average balance. Interest expense was $10.5 million for the three months ended June 30, 2018, an increase of $2.8 million, or 37.0%, compared with the three months ended June 30, 2017. Interest expense on deposits was $7.7 million for the three months ended June 30, 2018, an increase of $1.7 million, or 28.6%, compared with the three months ended June 30, 2017, due to a 30 basis point increase in the average cost of interest-bearing deposits, offset by

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a decrease of $88.3 million in the average balance. Interest expense on other borrowed funds was $1.6 million for the three months ended June 30, 2018, an increase of $1.0 million, compared with the three months ended June 30, 2017, due to the $92.1 million increase in average outstanding balance and a 105 basis point increase in average rate. For the three months ended June 30, 2018, average noninterest-bearing deposits increased $121.1 million from $692.4 million during the three months ended June 30, 2017 to $813.5 million for the three months ended June 30, 2018. Total cost of funds, including noninterest-bearing deposits, increased 28 basis points to 1.12% for the three months ended June 30, 2018 compared to 0.84% for the same period in 2017.

Net interest margin, defined as net interest income divided by average interest-earning assets, for the three months ended June 30, 2018 was 3.94%, an increase of 31 basis points compared with 3.63% for the same period in 2017.

Six months ended June 30, 2018 compared with six months ended June 30, 2017. Net interest income before the provision for loan losses for the six months ended June 30, 2018 was $78.0 million compared with $67.9 million for the six months ended June 30, 2017, an increase of $10.1 million, or 14.8%. The increase was primarily due to a $11.4 million, or 15.3%, increase in the interest earned on loans, a $2.8 million, or 42.7%, increase in interest income on securities, offset by a $2.7 million increase in interest expense on deposits and a $2.1 million increase in expense for other borrowed funds. Interest income was $97.4 million for the six months ended June 30, 2018, an increase of $14.9 million, or 18.0%, compared with the six months ended June 30, 2017. Interest income on loans was $86.3 million for the six months ended June 30, 2018, an increase of $11.4 million, or 15.3%, compared with the six months ended June 30, 2017, due to a 60 basis point increase in the in average yield and a $89.1 million increase in average balance. Interest income on securities was $9.3 million for the six months ended June 30, 2018, an increase of $2.8 million, or 42.7%, compared with the six months ended June 30, 2017, due to a 51 basis point increase in the average yield and a $91.1 million increase in the average balance. Interest income earned on deposits in financial institutions and federal funds sold increased $412 thousand to $1.2 million for the six months ended June 30, 2018 compared to the six months ended June 30, 2017 due to a 80 basis point increase in average yield, offset by a $23.6 million decrease in the average balance. Interest expense was $19.4 million for the six months ended June 30, 2018, an increase of $4.8 million, or 33.2%, compared with the six months ended June 30, 2017. Interest expense on deposits was $14.3 million for the six months ended June 30, 2018, an increase of $2.7 million, or 23.0%, compared with the six months ended June 30, 2017, primarily due to a 25 basis point increase in the average cost of interest-bearing deposits offset by a decrease of $115.7 million in the average balance. Interest expense on other borrowed funds was $2.9 million for the three months ended June 30, 2018, an increase of $2.1 million, compared with the three months ended June 30, 2017, due to a 98 basis point increase in average rate and a $122.9 million increase in average balance. For the six months ended June 30, 2018, average noninterest-bearing deposits increased $131.3 million from $668.4 million during the six months ended June 30, 2017 to $799.7 million for the six months ended June 30, 2018. Total cost of funds, including noninterest-bearing deposits, increased 23 basis points to 1.04% for the six months ended June 30, 2018 compared to 0.81% for the same period in 2017.

Net interest margin, defined as net interest income divided by average interest-earning assets, for the six months ended June 30, 2018 was 3.91%, an increase of 36 basis points compared with 3.55% for the same period in 2017.

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The following tables present, for the periods indicated, the total dollar amount of average balances, interest income from average interest-earning assets and the resultant yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates. All average balances are daily average balances. Any nonaccruing loans have been included in the table as loans carrying a zero yield.



	For the Three Months Ended June 30,
	2018							2017
	Average Outstanding Balance			Interest Earned/ Interest Paid		Average Yield/ Rate		Average Outstanding Balance			Interest Earned/ Interest Paid		Average Yield/ Rate

	(Dollars in thousands)
Assets
Interest-Earning Assets:
Loans⁽¹⁾	$	3,157,297		$	44,479	5.65	%	$	3,072,674		$	38,476	5.02	%
Securities	713,707			4,734		2.66	%	678,886			3,928		2.32	%
Other investments	39,660			341		3.45	%	22,932			197		3.45	%
Interest earning deposits in financial institutions and federal funds sold	138,916			659		1.90	%	124,663			331		1.06	%
Total interest-earning assets	4,049,580			50,213		4.97	%	3,899,155			42,932		4.42	%

Allowance for loan losses	(36,863		)					(32,036		)
Noninterest-earning assets	240,640							229,267
Total assets	$	4,253,357						$	4,096,386

Liabilities and Shareholders’ Equity
Interest-bearing liabilities:
Interest-bearing transaction and savings deposits	$	1,290,065		$	3,023	0.94	%	$	1,361,929		$	2,230	0.66	%
Certificates and other time deposits	1,293,055			4,712		1.46	%	1,309,477			3,786		1.16	%
Securities sold under agreements to repurchase	4,941			2		0.16	%	4,457			2		0.18	%
Other borrowed funds	310,022			1,606		2.08	%	217,896			558		1.03	%
Subordinated debentures and subordinated notes	47,956			1,109		9.28	%	47,376			1,051		8.90	%
Total interest-bearing liabilities	2,946,039			10,452		1.42	%	2,941,135			7,627		1.04	%

Noninterest-bearing liabilities:
Noninterest-bearing deposits	813,512							692,379
Other liabilities	21,848							17,538
Total liabilities	3,781,399							3,651,052
Shareholders’ equity	471,958							445,334
Total liabilities and shareholders’ equity	$	4,253,357						$	4,096,386

Net interest rate spread						3.55	%						3.38	%
Net interest income and margin⁽²⁾				$	39,761	3.94	%				$	35,305	3.63	%

⁽¹⁾Loans held for sale and nonaccrual loans are included in the loan averages.

⁽²⁾The net interest margin is equal to net interest income divided by average interest‑earning assets.

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	For the Six Months Ended June 30,
	2018							2017
	Average Outstanding Balance			Interest Earned/ Interest Paid		Average Yield/ Rate		Average Outstanding Balance			Interest Earned/ Interest Paid		Average Yield/ Rate

	(Dollars in thousands)
Assets
Interest-Earning Assets:
Loans⁽¹⁾	$	3,143,129		$	86,278	5.54	%	$	3,054,013		$	74,847	4.94	%
Securities	716,757			9,292		2.61	%	625,676			6,511		2.10	%
Other investments	35,948			641		3.60	%	20,930			385		3.71	%
Interest earning deposits in financial institutions and federal funds sold	131,741			1,152		1.76	%	155,371			740		0.96	%
Total interest-earning assets	4,027,575			97,363		4.87	%	3,855,990			82,483		4.31	%

Allowance for loan losses	(34,561		)					(29,865		)
Noninterest-earning assets	235,898							230,659
Total assets	$	4,228,912						$	4,056,784

Liabilities and Shareholders’ Equity
Interest-bearing liabilities:
Interest-bearing transaction and savings deposits	$	1,295,948		$	5,487	0.85	%	$	1,372,247		$	4,208	0.62	%
Certificates and other time deposits	1,277,934			8,783		1.39	%	1,317,359			7,393		1.13	%
Securities sold under agreements to repurchase	5,070			4		0.16	%	3,978			3		0.15	%
Other borrowed funds	312,414			2,898		1.87	%	189,494			839		0.89	%
Subordinated debentures and subordinated notes	47,885			2,188		9.21	%	47,463			2,092		8.89	%
Total interest-bearing liabilities	2,939,251			19,360		1.33	%	2,930,541			14,535		1.00	%

Noninterest-bearing liabilities:
Noninterest-bearing deposits	799,725							668,429
Other liabilities	20,935							17,273
Total liabilities	3,759,911							3,616,243
Shareholders’ equity	469,001							440,541
Total liabilities and shareholders’ equity	$	4,228,912						$	4,056,784

Net interest rate spread						3.54	%						3.31	%
Net interest income and margin⁽²⁾				$	78,003	3.91	%				$	67,948	3.55	%

⁽¹⁾Loans held for sale and nonaccrual loans are included in the loan averages.

⁽²⁾The net interest margin is equal to net interest income divided by average interest‑earning assets.

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The following table presents information regarding the dollar amount of changes in interest income and interest expense for the periods indicated for each major component of interest-earning assets and interest-bearing liabilities and distinguishes between the changes attributable to changes in volume and changes in interest rates. For purposes of this table, changes attributable to both rate and volume which cannot be segregated have been allocated to rate.



	For the Three Months Ended June 30,							For the Six Months Ended June 30,
	2018 vs. 2017							2018 vs. 2017
	Increase (Decrease) Due to Change in							Increase (Decrease) Due to Change in
	Volume			Rate		Total		Volume			Rate			Total

	(Dollars in thousands)
Interest-earning assets:
Loans, including fees	1,060			$	4,943	6,003		2,184			$	9,247		11,431
Securities	201			605		806		948			1,833			2,781
Other investments	144			—		144		276			(20		)	256
Interest-earning deposits in financial institutions and federal funds sold	38			290		328		(113		)	525			412
Total increase in interest income	1,443			5,838		7,281		3,295			11,585			14,880

Interest-bearing liabilities:
Interest-bearing transaction and savings deposits	(118		)	$	911	793		(234		)	$	1,513		1,279
Certificates and other time deposits	(47		)	$	973	926		(221		)	$	1,611		1,390
Securities sold under agreements to repurchase	—			$	—	—		1			$	—		1
Other borrowings	236			$	812	1,048		544			$	1,515		2,059
Subordinated debentures and subordinated notes	13			$	45	58		19			$	77		96
Total increase in interest expense	84			2,741		2,825		109			4,716			4,825
Increase in net interest income	$	1,359		$	3,097	$	4,456	$	3,186		$	6,869		$	10,055

Provision for loan losses

Our provision for loan losses are charged to income in order to bring our total allowance for loan losses to a level deemed appropriate by management based on the factors discussed under “—Critical Accounting Policies—Allowance for loan losses.” The allowance for loan losses at June 30, 2018 was $35.1 million, representing 1.09% of total loans, excluding loans held for sale, as of such date.

Three months ended June 30, 2018 compared with three months ended June 30, 2017. We recorded $1.9 million in provision for loan losses for the three months ended June 30, 2018 compared with $1.5 million in provision for the same period in 2017. The second quarter of 2018 provision was primarily due to the addition of general reserves due primarily to loan growth and $956 thousand related to energy loans. Net charge-offs for the three months ended June 30, 2018 were $5.0 million compared with net charge offs of $1.5 million for the three months ended June 30, 2017. This increase reflected an increase in gross charge-offs from $1.6 million to $5.4 million for the three months ended June 30, 2017 and 2018, respectively, and an increase in recoveries from $98 thousand to $308 thousand for the three months ended June 30, 2017 and 2018, respectively. Net charge-offs included partial charge-offs of $3.8 million in energy loans for the three months ended June 30, 2018, in comparison to $154 thousand for the three months ended June 30, 2017.

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Six months ended June 30, 2018 compared with six months ended June 30, 2017. The provision for loan losses for the six months ended June 30, 2018 was $11.6 million compared with $7.7 million for the same period in 2017. The provision recorded for the six months ended June 30, 2017, included $4.7 million in reserves on the energy portfolio and $5.9 million for a syndicated healthcare credit. Net charge offs for the six months ended June 30, 2018 were $7.7 million compared with $2.0 million for the six months ended June 30, 2017. This increase reflected an increase in gross charge-offs from $3.0 million to $8.1 million, and a decrease in recoveries from $940 thousand to $381 thousand for the six months ended June 30, 2017 and 2018, respectively. Net charge-offs related to energy loans totaled $6.5 million for the six months ended June 30, 2018, in comparison to $1.2 million for the six months ended June 30, 2017.

Noninterest Income

Our primary sources of recurring noninterest income are customer service fees, loan fees, gains on sale of the guaranteed portion of loans and available for sale securities and other service fees. Noninterest income does not include loan origination fees which are recognized over the life of the related loan as an adjustment to yield.

For the three months ended June 30, 2018, noninterest income totaled $5.5 million, a decrease of $214 thousand, or 3.8%, compared with the three months ended June 30, 2017. The decrease was primarily due to decreases of $388 thousand in derivative income, $228 thousand in gain on sale of available for sale securities, $222 thousand in net gain on held for sale loans and $110 thousand in loan fees, offset by a $379 thousand increase in customer service fees and a $234 thousand increase in gain on sale of guaranteed portion of loans.

For the six months ended June 30, 2018, noninterest income totaled $10.6 million, a decrease of $551 thousand, or 4.9%, compared with the six months ended June 30, 2017. This decrease was primarily due to decreases of $752 thousand in gain on sale of the guaranteed portion of loans, $228 thousand in gain on sale of available for sale securities and $111 thousand in loan fees, offset by a $508 thousand increase in customer service fees.

The following table presents, for the periods indicated, the major categories of noninterest income:



	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2018		2017		2018		2017

	(Dollars in thousands)
Customer service fees	$	2,578	$	2,199	$	4,973	$	4,465
Loan fees	996		1,106		1,829		1,940
Gain on sale of available-for-sale securities, net	66		294		66		294
Gain on loans held-for-sale, net	—		222		—		84
Gain on sale of guaranteed portion of loans	1,112		878		2,053		2,805
Other	733		1,000		1,722		1,606
Total noninterest income	$	5,485	$	5,699	$	10,643	$	11,194

Noninterest Expense

For the three months ended June 30, 2018, noninterest expense totaled $22.6 million, an increase of $3.0 million, or 15.5%, compared with the three months ended June 30, 2017. The increase was primarily due to increases of $1.1 million in the reserve for unfunded commitments, $987 thousand in salaries and employee benefits, $273 thousand in professional and regulatory fees and $265 thousand in software license and maintenance, in addition to smaller change in other noninterest expense categories.

For the six months ended June 30, 2018, noninterest expense totaled $44.7 million, an increase of $4.2 million, or 10.5%, compared with the six months ended June 30, 2017. The increase is primarily due to increases of $2.2 million in salaries and employee benefits, $1.6 million in the reserve for unfunded commitments, a $492 thousand in software license and maintenance, and $295 thousand in occupancy, offset by decreases of $499 thousand in real estate acquired by foreclosure and $387 thousand in loan related expenses.

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The following table presents, for the periods indicated, the major categories of noninterest expense:



	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2018		2017		2018		2017

	(Dollars in thousands)
Salaries and employee benefits ⁽¹⁾	$	13,640	$	12,653	$	27,241	$	25,059
Non-staff expenses:
Occupancy	2,263		2,048		4,340		4,045
Professional and regulatory fees	2,172		1,899		4,433		4,296
Data processing	1,029		995		2,001		1,903
Software license and maintenance	703		438		1,419		927
Marketing	257		163		433		362
Loan related	467		301		514		901
Real estate acquired by foreclosure, net	4		223		16		515
Other	2,110		891		4,301		2,442
Total noninterest expense	$	22,645	$	19,611	$	44,698	$	40,450


⁽¹⁾	Total salaries and employee benefits include stock based compensation expense of $1.2 million and $524 thousand for the three months ended June 30, 2018 and 2017, respectively, and $2.5 million and $1.1 million for the six months ended June 30, 2018 and 2017, respectively.

Efficiency Ratio. The efficiency ratio is a supplemental financial measure utilized in our internal evaluation of our performance. Efficiency ratio represents noninterest expense divided by the sum of net interest income and noninterest income. An increase in the efficiency ratio indicates that more resources are being utilized to generate the same volume of income, while a decrease would indicate a more efficient allocation of resources. Our efficiency ratio was 50.0% for the three months ended June 30, 2018, compared with 47.8% for the three months ended June 30, 2017.

Our efficiency ratio was 50.4% and 51.1% for the six months ended June 30, 2018 and 2017, respectively. The improvement was due to a higher increase in net interest income compared to the increase in noninterest expense.

Income Taxes

For the three months ended June 30, 2018, income tax expense was $4.3 million, a decrease of $2.7 million or 38.7%, compared with income tax expense of $7.0 million for the same period in 2017. The decrease was primarily attributable to the enactment of the Tax Cuts and Jobs Act on December 22, 2017, which made the applicable federal statutory corporate income tax rate 21.0% effective January 1, 2018. The effective income tax rate for the three months ended June 30, 2018 and 2017 was 20.7% and 35.1%, respectively, as compared to the U.S. statutory rate of 21.0% and 35.0%, respectively.

For the six months ended June 30, 2018, income tax expense was $6.6 million, a decrease of $4.3 million, or 39.6%, compared with income tax expense of $10.9 million for the same period in 2017. The decrease was primarily attributable to the reduction in the U.S. statutory rate previously discussed. The effective income tax rate for the six months ended months ended June 30, 2018 and 2017 was 20.4% and 35.2%, respectively.

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Financial Condition

Loan Portfolio

At June 30, 2018, total loans held for investment were $3.2 billion, an increase of $31.6 million, or 1.0%, compared with December 31, 2017. The increase was primarily due to increases of $24.3 million in commercial real estate loans, $23.8 million in mortgage warehouse loans and $20.9 million in owner occupied commercial loans, offset by reductions of $34.4 million in construction and land loans, $3.7 million in consumer and other loans and $3.4 million in residential mortgage. At June 30, 2018, energy loans totaled $40.1 million, or 1.2% of total loans.

At June 30, 2018, total loans held for sale were $5.0 million, a decrease of $2.2 million, or 30.2%, compared with December 31, 2017. SBA loans comprise the balance of loans held for sale at June 30, 2018.

The following tables summarize our loan portfolio by type of loan as of the dates indicated:



	June 30, 2018
	Originated		Acquired		Total		Percent

	(Dollars in thousands)
Commercial & industrial	$	1,034,821	$	35,599	$	1,070,420	33.2	%
Mortgage warehouse	244,041		—		244,041		7.6
Real estate:
Owner occupied commercial real estate	373,692		62,461		436,153		13.5
Commercial real estate	949,099		142,937		1,092,036		33.9
Construction, land & land development	105,926		24,607		130,533		4.1
Residential mortgage	158,531		76,661		235,192		7.3
Consumer and other	12,854		879		13,733		0.4
Total loans held for investment	$	2,878,964	$	343,144	$	3,222,108	100.0	%

Total loans held for sale	$	4,992	$	—	$	4,992	100.0	%



	December 31, 2017
	Originated		Acquired		Total		Percent

	(Dollars in thousands)
Commercial & industrial	$	1,002,797	$	63,469	$	1,066,266	33.4	%
Mortgage warehouse	220,230		—		220,230		6.9
Real estate:
Owner occupied commercial real estate	327,906		87,324		415,230		13.0
Commercial real estate	823,361		244,418		1,067,779		33.5
Construction, land & land development	136,998		27,954		164,952		5.2
Residential mortgage	149,021		89,559		238,580		7.5
Consumer and other	16,178		1,270		17,448		0.5
Total loans held for investment	$	2,676,491	$	513,994	$	3,190,485	100.0	%

Total loans held for sale	$	7,156	$	—	$	7,156	100.0	%

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At June 30, 2018, total energy exposure was $40.1 million within loans held for investment. This represents energy exposure of 1.2% of loans held for investment. Reserved-based energy loans held for investment represented approximately 0.4% and 0.6% of total funded loans as of both June 30, 2018 and December 31, 2017, respectively. Energy-related service industry loans represented approximately 0.8% and 1.1% of total funded loans as of June 30, 2018 and December 31, 2017, respectively. As of June 30, 2018 and December 31, 2017, $14.3 million and $19.2 million of reserved-based energy loans and $10.1 million and $17.5 million of energy-related service industry loans were impaired, respectively.

Nonperforming Loans

Nonperforming loans held for investment include loans on nonaccrual status, accruing loans 90 or more days past due and restructured loans. Impaired loans do not include purchased loans that were identified upon acquisition as having experienced credit deterioration since origination (“purchased credit impaired loans” or “PCI loans”). We had $58.8 million in nonperforming loans held for investment at June 30, 2018, compared with $70.8 million at December 31, 2017. The ratio of nonperforming loans to total loans was 1.82% at June 30, 2018 compared with 2.22% at December 31, 2017.

We generally place a loan on nonaccrual status and cease accruing interest when a loan displays problems that may jeopardize full and timely collection of principal and/or interest, evidenced by one or more of the following: (i) full payment of principal and interest becomes questionable; (ii) the loan becomes 90 days past due as to principal or interest; (iii) the loan is graded as doubtful; (iv) the borrower files bankruptcy and does not reaffirm its indebtedness to us; or (v) foreclosure proceedings are initiated against collateral property. An exception to this is if the loan is in the process of collection and the underlying collateral fully supports the carrying value of the loan.

The following tables present information regarding nonperforming loans at the dates indicated:



	June 30, 2018
	Originated		Acquired		Total

	(Dollars in thousands)
Nonaccrual loans	$	49,543	$	3,342	$	52,885
Accruing loans past due 90 days or more	85		822		907
Restructured loans - nonaccrual	901		1,043		1,944
Restructured loans - accruing	8		3,047		3,055
Total nonperforming loans held for investment	$	50,537	$	8,254	$	58,791



	December 31, 2017
	Originated		Acquired		Total

	(Dollars in thousands)
Nonaccrual loans	$	43,797	$	4,095	$	47,892
Accruing loans past due 90 days or more	375		—		375
Restructured loans - nonaccrual	8,063		1,383		9,446
Restructured loans - accruing	4,255		8,838		13,093
Total nonperforming loans held for investment	$	56,490	$	14,316	$	70,806

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Allowance for loan losses

Our allowance for loan losses is established through charges to income in the form of the provision in order to bring our allowance for loan losses to a level deemed appropriate by management based on the factors discussed under “—Critical Accounting Policies—Allowance for loan losses.” The allowance for loan losses at June 30, 2018 was $35.1 million, representing 1.09% of total loans, excluding loans held for sale, compared with $31.2 million, or 0.98% of total loans, excluding loans held for sale, at December 31, 2017. Loans acquired were recorded at fair value based on a discounted cash flow valuation methodology.

The following tables present, as of and for the periods indicated, an analysis of the allowance for loan losses and other related data:



	As of and for the Six Months Ended June 30, 2018
	Originated			Acquired			Total

	(Dollars in thousands)
Average loans outstanding ⁽¹⁾	$	2,741,462		$	397,377		$	3,138,839
Total loans outstanding at end of period ⁽¹⁾	2,878,964			343,144			3,222,108
Allowance for loan losses at beginning of period	29,978			1,242			31,220
Provision for loan losses	12,167			(607		)	11,560
Charge-offs:
Commercial and industrial	(7,999		)	—			(7,999		)
Consumer and Other	(56		)	(20		)	(76		)
Total charge-offs	(8,055		)	(20		)	(8,075		)
Recoveries:
Commercial and industrial	3			9			12
Commercial real estate	—			7			7
Residential mortgage	5			300			305
Consumer and Other	54			3			57
Total recoveries	62			319			381
Net charge-offs	(7,993		)	299			(7,694		)
Allowance for loan losses at end of period	$	34,152		$	934		$	35,086

Ratio of allowance to end of period loans	1.19		%	0.27		%	1.09		%
Ratio of net charge-offs (recoveries) to average loans	0.29		%	(0.08		)%	0.25		%


⁽¹⁾	Excluding loans held for sale

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	As of and for the Six Months Ended June 30, 2017
	Originated			Acquired			Total

	(Dollars in thousands)
Average loans outstanding ⁽¹⁾	$	2,310,377		$	724,319		$	3,034,696
Total loans outstanding at end of period ⁽¹⁾	2,476,754			646,601			3,123,355
Allowance for loan losses at beginning of period	23,855			2,509			26,364
Provision for loan losses	7,507			148			7,655
Charge-offs:
Commercial and industrial	(1,443		)	(335		)	(1,778		)
Owner occupied commercial real estate	—			(961		)	(961		)
Residential mortgage	—			(95		)	(95		)
Consumer and Other	(134		)	—			(134		)
Total charge-offs	(1,577		)	(1,391		)	(2,968		)
Recoveries:
Commercial and industrial	588			70			658
Owner occupied commercial real estate	—			4			4
Commercial real estate	—			3			3
Construction, land & land development	—			74			74
Residential mortgage	34			39			73
Consumer and Other	122			6			128
Total recoveries	744			196			940
Net charge-offs	(833		)	(1,195		)	(2,028		)
Allowance for loan losses at end of period	$	30,529		$	1,462		$	31,991

Ratio of allowance to end of period loans	1.23		%	0.23		%	1.02		%
Ratio of net charge-offs to average loans	0.04		%	0.16		%	0.07		%


⁽¹⁾	Excluding loans held for sale

Please see “—Critical Accounting Policies—Allowance for loan losses” for additional discussion of our allowance policy.

In connection with our review of the loan portfolio, we consider risk elements attributable to particular loan types or categories in assessing the quality of individual loans. Some of the risk elements include:


•	for commercial and industrial loans, the operating results of the commercial, industrial or professional enterprise, the borrower’s business, professional and financial ability and expertise, the specific risks and volatility of income and operating results typical for businesses in that category and the value, nature and marketability of collateral;

•

for commercial mortgage loans and multifamily residential loans, the debt service coverage ratio (income from the property in excess of operating expenses compared to loan payment requirements), operating results of the owner in the case of owner occupied properties, the loan to value ratio, the age and condition of the collateral and the volatility of income, property value and future operating results typical of properties of that type;


•	for one-to-four family residential mortgage loans, the borrower’s ability to repay the loan, including a consideration of the debt to income ratio and employment and income stability, the loan-to-value ratio, and the age, condition and marketability of collateral; and


•	for construction, land development and other land loans, the perceived feasibility of the project including the ability to sell developed lots or improvements constructed for resale or the ability to lease property constructed for lease, the quality and nature of contracts for presale or prelease, if any, experience and ability of the developer and loan-to-value ratio.

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Acquired loans are recorded at fair value as of the date of acquisition. Determining the fair value of the acquired loans involves estimating the amount and timing of future expected cash flows and discounting those cash flows at a market rate of interest. Acquired loans with evidence of credit deterioration and the probability that all contractually required payments will not be collected as of the date of acquisition are accounted for in accordance with ASC 310-30, and the difference between contractually required payments at acquisition and the cash flows expected to be collected is considered the non-accretable discount. The non-accretable discount represents the future credit losses expected to be incurred over the life of the loan. No corresponding allowance for loan losses is recorded for these loans at acquisition.

We believe that the allowance for loan losses at June 30, 2018 was adequate to cover probable losses in the loan portfolio as of such date. There can be no assurance, however, that we will not sustain losses in future periods, which could be substantial in relation to the size of the allowance at June 30, 2018.

Securities

We use our securities portfolio to provide a source of liquidity, to provide an appropriate return on funds invested, to manage interest rate risk, to meet pledging requirements and to meet regulatory capital requirements. At June 30, 2018, the carrying amount of investment securities totaled $699.9 million, a decrease of $19.0 million, or 2.6%, compared with $718.8 million at December 31, 2017. At June 30, 2018, securities represented 15.9% of total assets compared with 16.9% at December 31, 2017.

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The following table summarizes the amortized cost and fair value by classification of securities as of the dates shown:



	June 30, 2018
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value

	(Dollars in thousands)
Available-for-sale:
SBA guaranteed securities	$	99,125	$	74	$	(1,982	)	$	97,217
Mortgage-backed securities issued by U.S. government agencies or sponsored enterprises: residential	227,164		—		(7,095		)	220,069
Mortgage-backed securities issued by U.S. government agencies or sponsored enterprises: commercial	65,823		—		(2,823		)	63,000
Collateralized mortgage obligations issued by U.S. government agencies or sponsored enterprises: residential	211,291		—		(7,035		)	204,256
Collateralized mortgage obligations issued by U.S. government agencies or sponsored enterprises: commercial	35,990		—		(1,341		)	34,649
Corporate debt securities	15,913		53		(61		)	15,905
Obligations of municipal subdivisions	236		1		—			237
Total	$	655,542	$	128	$	(20,337	)	$	635,333

Held-to-maturity:
Mortgage-backed securities issued by U.S. government agencies or sponsored enterprises: residential	$	11,352	$	25	$	(389	)	$	10,988
Mortgage-backed securities issued by U.S. government agencies or sponsored enterprises: commercial	2,488		—		(90		)	2,398
Collateralized mortgage obligations issued by U.S. government agencies or sponsored enterprises: residential	44,499		60		(138		)	44,421
Obligations of municipal subdivisions	6,191		—		(5		)	6,186
Total	$	64,530	$	85	$	(622	)	$	63,993

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	December 31, 2017
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value

	(Dollars in thousands)
Available-for-sale:
Obligations of the U.S. Treasury and other U.S. government agencies or sponsored enterprises	$	104,111	$	129	$	(948	)	$	103,292
Mortgage-backed securities issued by U.S. government agencies or sponsored enterprises: residential	250,580		297		(1,701		)	249,176
Mortgage-backed securities issued by U.S. government agencies or sponsored enterprises: commercial	65,986		—		(500		)	65,486
Collateralized mortgage obligations issued by U.S. government agencies or sponsored enterprises: residential	234,881		—		(6,434		)	228,447
Collateralized mortgage obligations issued by U.S. government agencies or sponsored enterprises: commercial	36,151		—		(472		)	35,679
Corporate debt securities	5,789		5		—			5,794
Obligations of municipal subdivisions	6,672		—		(45		)	6,627
CRA qualified investment fund	11,337		—		(299		)	11,038
Total	$	715,507	$	431	$	(10,399	)	$	705,539

Held-to-maturity:
Mortgage-backed securities issued by U.S. government agencies or sponsored enterprises: residential	$	10,841	$	61	$	(170	)	$	10,732
Mortgage-backed securities issued by U.S. government agencies or sponsored enterprises: commercial	—		—		—			—
Collateralized mortgage obligations issued by U.S. government agencies or sponsored enterprises: residential	2,434		—		(20		)	2,414
Obligations of municipal subdivisions	—		—		—			—
Total	$	13,275	$	61	$	(190	)	$	13,146

Certain investment securities are valued at less than their historical cost. Management evaluates securities for other than temporary impairment (“OTTI”) at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation.

In determining OTTI, management considers many factors, including the severity and the duration of time that the fair value has been less than cost, the credit quality of the issuer and whether it is more likely than not that we will be required to sell the security before a recovery in value. The assessment of whether an other than temporary decline exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time. Securities within the available for sale portfolio may be used as part of our asset and liability management strategy and may be sold in response to changes in interest rate risk, prepayment risk or other factors.

Management does not intend to sell any debt securities classified as held to maturity and it is more likely than not that we will not be required to sell any such debt securities before their anticipated recovery of cost, if a loss currently exists, at which time we expect to receive full value for the securities. Furthermore, as of June 30, 2018, management does not have the intent to sell any of the securities classified as available-for-sale and believes that it is more likely than not that we will not be required to sell any such securities before a recovery of cost, if a loss currently exists. As of June 30, 2018, management believes any impairment in our securities is temporary and no impairment loss has been realized in our consolidated statement of income. We recorded no other than temporary impairment charges in the first six months of 2018 or the 2017 fiscal year.

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Deposits

Our lending and investing activities are primarily funded by deposits. We offer a variety of deposit accounts having a wide range of interest rates and terms including demand, savings, money market and time accounts. We rely primarily on competitive pricing policies, convenient locations and personalized service to attract and retain these deposits.

Total deposits at June 30, 2018 were $3.4 billion, an increase of $28.9 million, or 0.9%, compared to $3.4 billion at December 31, 2017, comprised of a $57.7 million increase in time deposits and a $21.5 million increase in noninterest-bearing deposits, offset by a $50.3 million decrease in money market and savings deposits. Noninterest bearing deposits at June 30, 2018 were $824.8 million compared with $803.2 million at December 31, 2017, an increase of $21.5 million, or 2.7%. The increase in noninterest-bearing deposits is due to continued efforts by our portfolio bankers with a focus on business accounts. Interest bearing deposits at June 30, 2018 were $2.6 billion, an increase of $7.4 million compared with December 31, 2017.

The following table presents the daily average balances and weighted average rates paid on deposits for the periods indicated:



	Six Months Ended June 30,
	2018				2017
	Average Balance		Average Rate		Average Balance		Average Rate

	(Dollars in thousands)
Interest-bearing transaction deposits	$	222,762	0.34	%	$	199,219	0.13	%
Money market and savings deposits	1,073,186		0.96		1,173,028		0.70
Certificates and other time deposits	1,277,934		1.39		1,317,359		1.13
Total interest-bearing deposits	$	2,573,882	1.12		$	2,689,606	0.87
Noninterest-bearing deposits	799,725		—		668,429		—
Total deposits	$	3,373,607	0.85	%	$	3,358,035	0.70	%

Other Borrowed Funds

The following table presents our borrowings at the dates indicated. There were no borrowings outstanding under our arrangement with the Dallas Fed and there were no federal funds purchased outstanding at the dates indicated.



	June 30, 2018		December 31, 2017

	(Dollars in thousands)
Federal Home Loan Bank advances	$	412,000	$	325,000
Repurchase agreements	4,141		5,173
Total	$	412,000	$	325,000

FHLB advances—We have an available borrowing arrangement with the FHLB, which allows the Company to borrow on a collateralized basis. At June 30, 2018 and December 31, 2017, total unused borrowing capacity of $777.7 million and $948.2 million, respectively, was available under this arrangement. At June 30, 2018, $412.0 million was outstanding with an average interest rate of 2.16% and all of the Company’s FHLB advances will mature within two year. At December 31, 2017, $325.0 million was outstanding with an average interest rate of 1.41% and all of the Company’s FHLB advances will mature within two years. These borrowings are collateralized by a blanket lien on certain real estate loans and unpledged securities in safekeeping. The total borrowing capacity decreased due to increased utilization. The Company utilizes these borrowings to meet liquidity needs and to fund certain loans in its loan portfolio.

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Dallas Fed—We have an available borrower in custody arrangement with the Dallas Fed, which allows us to borrow on a collateralized basis. Certain commercial and consumer loans are pledged under this arrangement. We maintain this borrowing arrangement to meet liquidity needs pursuant to our liquidity risk management program. At June 30, 2018 and December 31, 2017, $487.9 million and $384.5 million, respectively, were available under this arrangement and no borrowings were outstanding.

Securities Sold Under Agreements to Repurchase—Securities sold under agreements to repurchase represent the purchase of interests in securities by our customers. Securities sold under agreements to repurchase are stated at the amount of cash received in connection with the transaction. We do not account for any of our repurchase agreements as sales for accounting purposes in our financial statements. Repurchase agreements are settled on the following business day. All securities sold under agreements to repurchase are collateralized by pledged securities. The securities underlying the repurchase agreements are held in safekeeping by the Bank’s safekeeping agent.

Federal Funds Purchased—We have available federal funds lines of credit with our correspondent banks. As of June 30, 2018 and December 31, 2017, there were no federal funds purchased outstanding.

Subordinated Debentures and Subordinated Notes

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A summary of pertinent information related to the Company’s issues of subordinated Notes outstanding at the dates indicated is set forth in the table below:



	June 30, 2018			December 31, 2017

	(Dollars in thousands)
Subordinated notes fixed to floating rate, 8.50% per annum, maturity date December 15, 2026	$	35,000		$	35,000
Less: unamortized debt issuance costs	(1,218		)	(1,291		)
Total subordinated notes	$	33,782		$	33,709

A summary of pertinent information related to the Company’s issues of subordinated debentures outstanding at June 30, 2018 is set forth in the table below:

Description

Issuance Date

Trust Preferred Securities Outstanding

Interest Rate⁽¹⁾

Subordinated Debt Owed to Trusts

Maturity Date⁽²⁾

(Dollars in thousands)

Patriot Bancshares Capital Trust I

March 31, 2006

5,000

3 month LIBOR +1.85%, not to exceed 11.90%

5,155

April 7, 2036

Patriot Bancshares Capital Trust II

August 2, 2007

16,500

3 month LIBOR +1.80%, not to exceed 11.90%

17,011

September 15, 2037


⁽¹⁾	The 3-month LIBOR in effect as of June 30, 2018 was 2.336%.


⁽²⁾	All debentures are callable five years from issuance date.

Each of the trusts is a capital trust organized for the sole purpose of issuing trust securities and investing the proceeds in the Company’s junior subordinated debentures. The preferred trust securities of each trust represent preferred beneficial interests in the assets of the respective trusts and are subject to mandatory redemption upon payment of the junior subordinated debentures held by the trust. The common securities of each trust are wholly owned by the Company. Each trust’s ability to pay amounts due on the trust preferred securities is solely dependent upon the Company making payment on the related junior subordinated debentures. The debentures, which are the only assets of each trust, are subordinate and junior in right of payment to all of the Company’s present and future senior indebtedness. The Company has fully and unconditionally guaranteed each trust’s obligations under the trust securities issued by such trust to the extent not paid or made by each trust, provided such trust has funds available for such obligations.

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Liquidity and Capital Resources

Liquidity

Liquidity involves our ability to raise funds to support asset growth and acquisitions or reduce assets to meet deposit withdrawals and other payment obligations, to maintain reserve requirements and otherwise to operate on an ongoing basis and manage unexpected events. During the six months ended June 30, 2018 and 2017, our liquidity needs have primarily been met by core deposits, security and loan maturities and amortizing investment and loan portfolios. We expect capital resources and liquidity will be sufficient for at least the next twelve months.

As of June 30, 2018, we had outstanding $689.2 million in commitments to extend credit and $10.7 million in commitments associated with outstanding standby and commercial letters of credit. Since commitments associated with letters of credit and commitments to extend credit may expire unused, the total outstanding may not necessarily reflect the actual future cash funding requirements.

As of June 30, 2018, we had no exposure to future cash requirements associated with known uncertainties or capital expenditures of a material nature.

As of June 30, 2018, we had cash and cash equivalents of $231.3 million, an increase of $90.6 million compared with $140.7 million as of December 31, 2017.

Contractual Obligations

The following table summarizes our contractual obligations and other commitments to make future payments as of June 30, 2018 (other than securities sold under repurchase agreements), which consist of our future cash payments associated with our contractual obligations pursuant to our certificates and other time deposits, Federal Home Loan Bank advances, subordinated debentures and subordinated notes, and noncancelable future operating leases. Payments for the Federal Home Loan Bank advances includes interest of $4.4 million that will be paid in future years. Payments for subordinated debentures and subordinated notes includes interest of $43.4 million that will be paid in future years. The future interest payments were calculated using the current rate in effect at June 30, 2018. Payments related to leases are based on actual payments specified in underlying contracts.



	June 30, 2018
	1 year or less		More than 1 year but less than 3 years		3 years or more but less than 5 years		5 years or more		Total

	(Dollars in thousands)
Certificates and other time deposits	$	1,001,668	$	274,123	$	44,251	$	—	$	1,320,042
Federal Home Loan Bank advances	365,502		50,874		—		—		416,376
Subordinated debentures and subordinated notes	4,019		3,884		10,077		82,560		100,540
Operating leases	1,690		2,587		1,781		2,493		8,551
Total	$	1,372,879	$	331,468	$	56,109	$	85,053	$	1,845,509

Off Balance Sheet Items

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

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Our commitments associated with outstanding standby and commercial letters of credit and commitments to extend credit expiring by period as of June 30, 2018 are summarized below. Since commitments associated with letters of credit and commitments to extend credit may expire unused, the amounts shown do not necessarily reflect the actual future cash funding requirements:



	June 30, 2018
	1 year or less		More than 1 year but less than 3 years		3 years or more but less than 5 years		5 years or more		Total

	(Dollars in thousands)
Commitments to extend credit	$	325,665	$	190,944	$	85,515	$	87,085	$	689,209
Standby and commercial letters of credit	9,612		314		100		640		10,666
Total	$	335,277	$	191,258	$	85,615	$	87,725	$	699,875

Capital Resources

Total shareholders’ equity was $479.5 million at June 30, 2018, an increase of $15.7 million, or 3.4%, compared with $463.8 million at December 31, 2017. The increase was the result of net income of $25.8 million for the six month period, plus the $2.4 million increase due to stock compensation expense and the $1.8 million net change for proceeds from the exercise of stock options, offset by the $10.4 million change in the value of available for sale securities recognized in other accumulated comprehensive earnings and the $3.7 million dividend payment to shareholders.

In July 2013, the Federal Reserve published final rules for the adoption of the Basel III Capital Rules. The Basel III Capital Rules, among other things, (i) introduced CET 1, a new capital measure, (ii) specify that Tier 1 capital consist of CET 1 and "Additional Tier 1 Capital" instruments meeting specified requirements, (iii) define CET 1 narrowly by requiring that most deductions/adjustments to regulatory capital measures be made to CET 1 and not to the other components of capital and (iv) expand the scope of the deductions/adjustments as compared to existing regulations. The Basel III Capital Rules became effective for us on January 1, 2015 with certain transition provisions to be fully phased in by January 1, 2019.

The following table provides a comparison of the Company’s and the Bank’s leverage and risk weighted capital ratios as of June 30, 2018 and December 31, 2017 to the minimum and well capitalized regulatory standards:



	June 30, 2018
	Actual				For Capital Adequacy Purposes				To be Categorized as "Well Capitalized" under Prompt Corrective Action Provisions
	Amount		Ratio		Amount		Ratio		Amount		Ratio

	(Dollars in thousands)
The Company⁽¹⁾:
Total capital (to risk weighted assets)	$	487,002	13.2	%	$	295,174	8.0	%	N/A		N/A
Tier 1 capital (to risk weighted assets)	417,047		11.3		221,380		6.0		N/A		N/A
Common equity tier 1 capital	403,475		10.9		166,035		4.5		N/A		N/A
Tier I capital (to average assets)	417,047		10.0		167,184		4.0		N/A		N/A

The Bank⁽²⁾:
Total capital (to risk weighted assets)	$	477,452	13.0	%	$	294,851	8.0	%	$	368,564	10.0	%
Tier 1 capital (to risk weighted assets)	441,279		12.0		221,138		6.0		294,851		8.0
Common equity tier 1 capital	441,279		12.0		165,854		4.5		239,566		6.5
Tier I capital (to average assets)	441,279		10.6		167,123		4.0		208,904		5.0

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	December 31, 2017
	Actual				For Capital Adequacy Purposes				To be Categorized as "Well Capitalized" under Prompt Corrective Action Provisions
	Amount		Ratio		Amount		Ratio		Amount		Ratio

	(Dollars in thousands)
The Company⁽¹⁾:
Total capital (to risk weighted assets)	$	455,754	12.7	%	$	287,840	8.0	%	N/A		N/A
Tier 1 capital (to risk weighted assets)	390,690		10.9		215,880		6.0		N/A		N/A
Common equity tier 1 capital	377,328		10.5		161,910		4.5		N/A		N/A
Tier I capital (to average assets)	390,690		9.5		164,632		4.0		N/A		N/A

The Bank⁽²⁾:
Total capital (to risk weighted assets)	$	444,198	12.4	%	$	286,648	8.0	%	$	358,310	10.0	%
Tier 1 capital (to risk weighted assets)	415,542		11.6		214,986		6.0		286,648		8.0
Common equity tier 1 capital	415,542		11.6		161,239		4.5		232,901		6.5
Tier I capital (to average assets)	415,542		10.1		164,390		4.0		205,487		5.0


⁽¹⁾	The Federal Reserve may require the Company to maintain capital ratios above the required minimums.


⁽²⁾	The FDIC or the OCC may require the Bank to maintain capital ratios above the required minimums.

Dividend Restrictions - Dividends paid by the Bank are subject to certain restrictions imposed by regulatory agencies. The Basel III Capital Rules further limit the amount of dividends that may be paid by our bank. Dividends of $6.2 million were paid by the Bank to Green Bancorp during the six months ended June 30, 2018. A dividend of $1.0 million was paid by the Bank to Green Bancorp during the year ended December 31, 2017.

On April 25, 2018, the Company's Board of Directors declared an initial quarterly cash dividend of $0.10 per share of its outstanding common stock, which was paid on May 24, 2018 to shareholders of record as of May 10, 2018.

On July 23, 2018, the Company's Board of Directors declared a quarterly cash dividend of $0.10 per share of its outstanding common stock, payable August 23, 2018, to shareholders of record as of August 9, 2018.

Pursuant to the terms of the Merger Agreement, we may not pay quarterly cash dividends in excess of $0.10 per share

of common stock or repurchase shares of the Company’s common stock without the consent of Veritex. Veritex has agreed not

to unreasonably withhold any such consent.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

The Company manages market risk, which for the Company is primarily interest rate risk, through its Asset Liability Committee, which is composed of certain members of its board of directors in accordance with asset liability and funds management policies approved by the Company’s board of directors.

The Company uses an interest rate risk simulation model and shock analysis to test the interest rate sensitivity of net income and the balance sheet, respectively. See the Company’s Annual Report on Form 10-K for year ended December 31, 2017 “Management Discussion and Analysis of Financial Condition and Results of Operations — Financial Condition — Interest Rate Sensitivity and Market Risk”.

Pursuant to the terms of the Merger Agreement, the Company may not change in any material respect its interest rate

policies, without the consent of Veritex. Veritex has agreed not to unreasonably withhold any such consent.

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Item 4. Controls and Procedures.

Evaluation of disclosure controls and procedures — As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of its management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management was required to apply judgment in evaluating its controls and procedures. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) were effective as of the end of the period covered by this report.

Changes in internal control over financial reporting — There were no changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(e) and 15d-15(f) under the Exchange Act) during the quarter ended June 30, 2018 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II—OTHER INFORMATION

Item 1. Legal Proceedings.

The Company and the Bank are from time to time subject to claims and litigation arising in the ordinary course of business. At this time, in the opinion of management, the likelihood is remote that the impact of such proceedings, either individually or in the aggregate, would have a material adverse effect on our consolidated results of operations, financial condition or cash flows. However, one or more unfavorable outcomes in any claim or litigation against us could have a material adverse effect for the period in which they are resolved. In addition, regardless of their merits or their ultimate outcomes, such matters are costly, divert management’s attention and may materially adversely affect our reputation, even if resolved in our favor.

Item 1A. Risk Factors.

There have no material changes in the Company’s risk factors from those disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017, except as discussed below.

Because the market price of Veritex Common Stock will fluctuate, the Company’s shareholders cannot be certain of the market value of the merger consideration they will receive.

At the time the Merger is completed, each outstanding share of the Company’s common stock, except for certain shares of common stock owned by the Company or Veritex, will be converted into the right to receive 0.79 shares of Veritex Common Stock.

There will be a lapse of time between the date of the joint proxy statement/prospectus, the date of the Company’s special meeting, the date on which the Merger is completed and the date on which the Company’s shareholders entitled to receive the merger consideration actually receive the merger consideration. The market value of Veritex Common Stock may fluctuate during these periods as a result of a variety of factors, including general market and economic conditions, changes in Veritex’s businesses, operations and prospects and regulatory considerations, which are outside of the control of the Company.

Because the merger consideration is solely based on the value of Veritex Common Stock, any changes in the market price of Veritex Common Stock prior to the completion of the Merger will have a corresponding effect on the amount of merger consideration. There will be no adjustment to the computation of the merger consideration for changes in the market price of either shares of Veritex Common Stock or shares of the Company’s common stock.

In addition, because the date when the proposed Merger will be completed will be later than the date of the Company’s special meeting, the Company’s shareholders will not know the exact value of Veritex Common Stock on the date of the Merger, which amount will determine the merger consideration at the time the Company’s shareholders vote. Accordingly, if the market price of Veritex Common Stock on the date of the Merger is lower than the market price of Veritex Common Stock on the date of the Company’s special meeting, the merger consideration will be lower than what the merger consideration would have been at the time the Company’s shareholders vote on the Merger Agreement and the Merger.

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The Merger Agreement may be terminated in accordance with its terms, and the Merger Transactions may not be completed.

The Merger Agreement is subject to a number of conditions that must be fulfilled in order to complete the Merger Transactions. These conditions to the closing of the Merger Transactions may not be fulfilled in a timely manner or at all, and, accordingly, the Merger Transactions may be delayed or may not be completed. In addition, Veritex and the Company may elect to terminate the Merger Agreement in certain other circumstances and, in certain limited circumstances, the Company may be required to pay a termination fee.

Failure to complete the Merger Transactions could negatively impact the stock price, future business and financial results of the Company.

If the Merger Transactions are not completed, the ongoing business of the Company may be adversely affected, and the Company will be subject to several risks, including the following:


•	the Company may be required, under certain circumstances, to pay Veritex a termination fee of $40 million under the Merger Agreement;


•	the Company will be required to pay certain costs relating to the Merger Transactions, whether or not the Merger Transactions are completed, such as legal, accounting, financial advisor and printing fees;


•	pursuant to the Merger Agreement, the Company is subject to certain restrictions on the conduct of its business prior to the completion of the Merger Transactions, which restrictions may adversely affect the Company’s ability to execute certain of its business strategies; and


•	matters relating to the Merger Transactions may require substantial commitments of time and resources by Company management, which time and resources could otherwise have been devoted to other opportunities that may have been beneficial to the Company.

In addition, if the Merger Transactions are not completed, the Company may experience negative reactions from the financial markets and from its customers and employees. For example, the Company’s business may be impacted adversely by the failure to pursue other beneficial opportunities due to the focus of management on the Merger Transactions, without realizing any of the anticipated benefits of completing the Merger Transactions. The market price of the Company’s common stock could decline to the extent that the current market price reflects a market assumption that the Merger Transactions will be completed. The Company also could be subject to litigation related to (i) any failure to complete the Merger Transactions or (ii) proceedings commenced against the Company to compel the Company perform its obligations under the Merger Agreement. If the Merger Transactions are not completed, the Company cannot assure its shareholders that the risks described above will not materialize and will not materially affect the stock price, business and financial results of the Company.

Shareholder litigation could prevent or delay the closing of the proposed Merger or otherwise negatively impact our business and operations.

We may incur additional costs in connection with the defense or settlement of the currently pending or any future shareholder lawsuits filed in connection with the proposed Merger Transactions. Such litigation could have an adverse effect on our financial condition and results of operations and could prevent or delay the consummation of the Merger Transactions.

Regulatory approvals may not be received, may take longer than expected or may impose conditions that are not presently anticipated or that could have an adverse effect on the combined company following the Merger Transactions.

Before the Merger Transactions can be completed, Veritex and the Company must obtain all required regulatory approvals, including from the Federal Reserve and the Texas Department of Banking. Other approvals, as well as waivers or consents, from regulators may also be required. In determining whether to grant these approvals, waivers and consents the regulators consider a variety of factors, including the regulatory standing of each party. An adverse development in either party’s regulatory standing could result in an inability to obtain approval or delay their receipt. These regulators may impose conditions on the completion of the Merger Transactions or require changes to the terms of the Merger Transactions. Such conditions or changes could have the effect of delaying or preventing completion of the Merger Transactions or imposing additional costs on or limiting the revenues of the combined company following the completion of the Merger Transactions, any of which might have an adverse effect on the combined company following the completion of the Merger Transactions. However, under the terms of the Merger Agreement, in connection with obtaining such regulatory approvals or waivers, neither party is required to take any action, or commit to take any action, or to accept any restriction, commitment or condition,

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involving Veritex or the Company, which would reasonably be expected to be materially financially burdensome to the business, operations, financial condition or results of operations of the combined company and its subsidiaries, taken as a whole.

The Company will be subject to business uncertainties and contractual restrictions while the Merger Transactions are pending.

Uncertainty about the effect of the Merger Transactions on employees and customers may have an adverse effect on the Company. These uncertainties may impair the Company’s ability to attract, retain and motivate key personnel until the Merger Transactions are complete and could cause customers and others that deal with the Company to seek to change existing business relationships with the Company. Retention of certain employees may be challenging while the Merger Transactions are pending, as certain employees may experience uncertainty about their future roles with the combined company. If key employees depart because of issues relating to the uncertainty and difficulty of integration or a desire not to remain with the combined company, the Company’s business could be harmed.

In addition, the Merger Agreement restricts the Company from making certain acquisitions and taking other specified actions until the Merger Transactions occur without the consent of Veritex. These restrictions may prevent the Company from pursuing attractive business opportunities that may arise prior to the completion of the Merger Transactions.

If the Merger Transactions are not completed, the Company will have incurred substantial expenses without realizing the expected benefits of the Merger Transactions.

The Company has incurred and will incur substantial expenses in connection with the negotiation and completion of the transactions contemplated by the Merger Agreement. If the Merger Transactions are not completed, the Company would have to recognize these expenses without realizing the expected benefits of the Merger Transactions.

The Merger Agreement limits the Company’s ability to pursue an alternative acquisition proposal and could require the Company to pay a termination fee of $40 million under certain circumstances relating to alternative acquisition proposals.

The Merger Agreement prohibits the Company from soliciting, initiating or knowingly encouraging certain alternative acquisition proposals with any third party, subject to exceptions set forth in the Merger Agreement. The Merger Agreement also provides for the payment by the Company to Veritex of a termination fee in the amount of $40 million in the event that the Company or Veritex terminates the Merger Agreement for certain specified reasons. These provisions might discourage a potential competing acquirer that might have an interest in acquiring all or a significant part of the Company from considering or proposing such an acquisition.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

(a) None.

(b) None.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

None.

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Item 6. Exhibits.



Exhibit Number	Description of Exhibit
2.1*	Agreement and Plan of Reorganization by and among Veritex Holdings, Inc., MustMS, Inc. and Green Bancorp, Inc., dated July 23, 2018.
31.1**	Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended
31.2**	Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended
32.1***	Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2***	Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101**	Interactive Financial Data

* Incorporated by reference from Exhibit 2.1 to current report on Form 8-K filed July 24, 2018.

** Filed with this Quarterly Report on Form 10-Q

*** Furnished with this Quarterly Report on Form 10-Q

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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 thereunto duly authorized.



	Green Bancorp, Inc. (Registrant)


Date: August 8, 2018	/s/ Manuel J. Mehos
	Manuel J. Mehos
	Chairman and Chief Executive Officer

Date: August 8, 2018	/s/ Terry S. Earley
	Terry S. Earley
	Executive Vice President and Chief Financial Officer

Green Bancorp, Inc. - FORM 10-Q - August 8, 2018

Attached files

Green Bancorp, Inc. Reports