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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 September 30, 2018
or
¨ 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 November 6, 2018, there were 37,370,188 outstanding shares of the registrant’s Common Stock, par value $0.01 per share.


Table of Contents

GREEN BANCORP, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
 
 
 
 
 
 
 
 
 


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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 and 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, employees or vendors 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 and difficulties when implementing new technologies;
risks associated with data processing system failures, breaches 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 allegations, claims and litigation pertaining to intellectual property from time to time;
we could experience allegations, 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 proposed Merger Transactions, including approval of the Merger by the Company’s shareholders and approval of the Share Issuance by Veritex’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 and banks;
changes in the scope and cost of Federal Deposit Insurance Corporation (the "FDIC") insurance and other coverages;
future financial and operating results of Veritex, the Company or the combined company following the proposed 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,” and our Quarterly Reports on Form 10-Q for each quarter ended in 2018 under the heading “Risk Factors,” 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)
 
September 30,
2018
 
December 31,
2017
 
 
ASSETS
 
 
 
Cash and due from banks
$
27,124

 
$
26,562

Interest bearing deposits in financial institutions and fed funds sold
113,966

 
114,119

Total cash and cash equivalents
141,090

 
140,681

Available-for-sale securities, at fair value
610,494

 
705,539

Held-to-maturity securities, at amortized cost (fair value of $61,667 and $13,146, respectively)
62,595

 
13,275

Investment in Patriot Bancshares Capital Trusts I and II
666

 
666

Federal Reserve Bank stock
11,845

 
11,702

Federal Home Loan Bank of Dallas stock
21,571

 
14,915

Other investments
10,693

 

Total securities and other investments
717,864

 
746,097

Loans held for sale
7,627

 
7,156

Loans held for investment
3,363,354

 
3,190,485

Allowance for loan losses
(35,186
)
 
(31,220
)
Loans, net
3,335,795

 
3,166,421

Premises and equipment, net
28,873

 
24,002

Goodwill
85,291

 
85,291

Core deposit intangibles, net of accumulated amortization
7,584

 
8,503

Accrued interest receivable
13,438

 
11,109

Deferred tax asset, net
12,700

 
8,758

Real estate acquired by foreclosure
2,532

 
802

Bank owned life insurance
56,457

 
55,302

Other assets
18,250

 
14,950

TOTAL ASSETS
$
4,419,874

 
$
4,261,916

 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
LIABILITIES:
 
 
 
Deposits:
 
 
 
Noninterest-bearing
$
833,827

 
$
803,210

Interest-bearing transaction and savings
1,221,640

 
1,331,601

Certificates and other time deposits
1,359,005

 
1,262,332

Total deposits
3,414,472

 
3,397,143

Securities sold under agreements to repurchase
3,502

 
5,173

Other borrowed funds
437,000

 
325,000

Subordinated debentures and subordinated notes
48,161

 
47,737

Accrued interest payable
5,295

 
2,841

Other liabilities
21,240

 
20,227

Total liabilities
3,929,670

 
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; 37,545,688 and 37,280,822 shares issued at September 30, 2018 and December 31, 2017, respectively; 37,367,688 and 37,102,822 shares outstanding at September 30, 2018 and December 31, 2017, respectively
375

 
373

Capital surplus
393,476

 
387,891

Retained earnings
118,276

 
83,263

Accumulated other comprehensive income, net
(20,670
)
 
(6,479
)
Less treasury stock, at cost, 178,000 shares at both September 30, 2018 and December 31, 2017
(1,253
)
 
(1,253
)
Total shareholders’ equity
490,204

 
463,795

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
$
4,419,874

 
$
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
 
Nine Months Ended
 
September 30,
 
September 30,
 
2018
 
2017
 
2018
 
2017
INTEREST INCOME:
 
 
 
 
 
 
 
Loans, including fees
$
46,612

 
$
39,549

 
$
132,890

 
$
114,396

Securities
4,277

 
4,337

 
13,569

 
10,848

Other investments
360

 
221

 
1,001

 
606

Deposits in financial institutions and fed funds sold
651

 
432

 
1,803

 
1,172

Total interest income
51,900

 
44,539

 
149,263

 
127,022

INTEREST EXPENSE:
 
 
 
 
 
 
 
Transaction and savings deposits
3,393

 
2,502

 
8,880

 
6,710

Certificates and other time deposits
5,671

 
4,042

 
14,454

 
11,435

Subordinated debentures and subordinated notes
1,120

 
1,059

 
3,308

 
3,151

Other borrowed funds
2,197

 
657

 
5,099

 
1,499

Total interest expense
12,381

 
8,260

 
31,741

 
22,795

NET INTEREST INCOME
39,519

 
36,279

 
117,522

 
104,227

PROVISION FOR LOAN LOSSES
320

 
2,300

 
11,880

 
9,955

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
39,199

 
33,979

 
105,642

 
94,272

NONINTEREST INCOME:
 
 
 
 
 
 
 
Customer service fees
2,874

 
2,365

 
7,847

 
6,830

Loan fees
942

 
871

 
2,771

 
2,811

Gain on sale of available-for-sale securities, net

 
(332
)
 
66

 
(38
)
Gain on held-for-sale loans, net

 
(1,294
)
 

 
(1,210
)
Gain on sale of guaranteed portion of loans, net
705

 
1,302

 
2,758

 
4,107

Other
952

 
478

 
2,674

 
2,084

Total noninterest income
5,473

 
3,390

 
16,116

 
14,584

NONINTEREST EXPENSE:
 
 
 
 
 
 
 
Salaries and employee benefits
13,729

 
12,487

 
40,970

 
37,546

Occupancy
2,068

 
2,080

 
6,408

 
6,125

Professional and regulatory fees
1,359

 
2,331

 
5,792

 
6,627

Data processing
923

 
924

 
2,924

 
2,827

Software license and maintenance
732

 
464

 
2,151

 
1,391

Marketing
354

 
154

 
787

 
516

Loan related
587

 
271

 
1,101

 
1,172

Merger costs
2,955

 

 
2,955

 

Other
1,425

 
1,356

 
5,742

 
4,313

Total noninterest expense
24,132

 
20,067

 
68,830

 
60,517

INCOME BEFORE INCOME TAXES
20,540

 
17,302

 
52,928

 
48,339

PROVISION FOR INCOME TAXES
4,943

 
5,895

 
11,548

 
16,822

NET INCOME
$
15,597

 
$
11,407

 
$
41,380

 
$
31,517

 
 
 
 
 
 
 
 
EARNINGS PER SHARE:
 
 
 
 
 
 
 
Basic
$
0.42

 
$
0.31

 
$
1.11

 
$
0.85

Diluted
$
0.41

 
$
0.31

 
$
1.10

 
$
0.85

 
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
 
Nine Months Ended
 
September 30,
 
September 30,
 
2018
 
2017
 
2018
 
2017
 
 
 
 
 
 
 
 
NET INCOME
$
15,597

 
$
11,407

 
$
41,380

 
$
31,517

OTHER COMPREHENSIVE LOSS, BEFORE TAX:
 
 
 
 
 
 
 
Securities available-for-sale:
 
 
 
 
 
 
 
Change in net unrealized gains (losses) on securities available-for-sale
(3,412
)
 
(1,857
)
 
(16,205
)
 
(1,871
)
Reclassification of net gains (losses) included in net income

 

 
66

 

Reclassification of unrealized losses on securities transferred to held-to-maturity

 

 
2,188

 

Tax effect
(717
)
 
(650
)
 
(2,930
)
 
(655
)
Other comprehensive loss, net of tax, for securities available-for-sale
(2,695
)
 
(1,207
)
 
(11,021
)
 
(1,216
)
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
80

 

 
178

 

Other comprehensive loss, net of tax, for securities held-to-maturity
80

 

 
(2,010
)
 

OTHER COMPREHENSIVE LOSS, NET OF TAX
(2,615
)
 
(1,207
)
 
(13,031
)
 
(1,216
)
COMPREHENSIVE INCOME
$
12,982

 
$
10,200

 
$
28,349

 
$
30,301

 
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
 

 

 

 
31,517

 

 

 
31,517

Other comprehensive income (loss)
 

 

 

 

 
(1,216
)
 

 
(1,216
)
Issuance of common stock in connection with exercise of stock options
 
286

 
1

 
469

 

 

 

 
470

Stock-based compensation expense
 

 

 
1,058

 

 

 

 
1,058

BALANCE — September 30, 2017
 
37,274

 
$
373

 
$
384,488

 
$
80,644

 
$
(1,941
)
 
$
(1,253
)
 
$
462,311

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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
 

 

 

 
41,380

 

 

 
41,380

Other comprehensive income (loss)
 

 

 

 


 
(13,031
)
 

 
(13,031
)
Issuance of common stock in connection with exercise of stock options
 
265

 
2

 
2,882

 

 

 

 
2,884

Stock-based compensation expense
 

 

 
2,703

 

 

 

 
2,703

Cash dividend declared, $0.10 per share
 

 

 

 
(7,464
)
 

 

 
(7,464
)
BALANCE — September 30, 2018
 
37,368

 
$
375

 
$
393,476

 
$
118,276

 
$
(20,670
)
 
$
(1,253
)
 
$
490,204

(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)

 
 
Nine Months Ended
 
 
September 30,
 
 
2018
 
2017
 
 
 
 
 
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
 
Net income
 
$
41,380

 
$
31,517

Adjustments to reconcile net income to net cash provided (used) by operating activities:
 
 

 
 

Amortization and accretion of premiums and discounts on securities, net
 
2,286

 
1,126

Accretion of loan discounts, net
 
(3,363
)
 
(3,752
)
Amortization of deposit premiums
 
(578
)
 
(781
)
Amortization of core deposit intangibles
 
919

 
1,140

Amortization and accretion of borrowing and debt valuation allowance, net
 
315

 
315

Amortization of issuance costs of subordinated notes
 
109

 
109

Provision for loan losses
 
11,880

 
9,955

Depreciation
 
1,378

 
1,558

Net gain on sale of available-for-sale securities
 
(66
)
 
38

Net loss on sale of real estate acquired by foreclosure
 

 
147

Net gain on loans held-for-sale
 

 
1,210

Net gain on sale of guaranteed portion of loans
 
(2,758
)
 
(4,107
)
Net market value loss on equity investments
 
345

 

Originations of government guaranteed loans held-for-sale
 
(31,083
)
 

Proceeds from sales of and principal collected on loans held-for-sale
 
33,370

 
15,136

Writedown of real estate acquired by foreclosure
 

 
304

Stock-based compensation expense
 
2,853

 
1,700

Deferred tax benefit
 
(3,942
)
 
(2,062
)
Net change in accrued interest receivable and other assets, net
 
(3,606
)
 
17,340

Net change in accrued interest payable and other liabilities, net
 
3,317

 
2,281

Net cash provided by operating activities
 
52,756

 
73,174

 
 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 

 
 

Proceeds from the maturities or calls and paydowns of available-for-sale securities
 
65,197

 
55,811

Proceeds from the sale of available-for-sale securities
 
24,424

 
349,374

Purchases of available-for-sale securities
 
(74,191
)
 
(811,919
)
Proceeds from the maturities or calls and paydowns of held-to-maturity securities
 
4,392

 
5,833

Purchases of held-to-maturity securities
 
(3,627
)
 

Proceeds from sales of guaranteed portion of loans
 

 
45,957

Proceeds from sales of real estate acquired by foreclosure
 

 
3,967

Purchases of Federal Home Loan Bank of Dallas stock, net of redemptions
 
(6,656
)
 
(3,399
)
Purchases of Federal Reserve Bank stock
 
(143
)
 
(395
)
Net increase in loans held for investment
 
(185,113
)
 
(29,778
)
Investment in construction of premises and purchases of other fixed assets
 
(286
)
 
(347
)
Net cash used in investing activities
 
(176,003
)
 
(384,896
)


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GREEN BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)

 
 
Nine Months Ended
 
 
September 30,
 
 
2018
 
2017
 
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 

 
 

Net increase (decrease) in deposit accounts
 
17,907

 
34,334

Net (decrease) increase in securities sold under agreements to repurchase
 
(1,671
)
 
2,374

Net proceeds from other short-term borrowed funds
 
112,000

 
65,000

Proceeds from other long-term borrowed funds
 
50,000

 

Repayment of other long-term borrowed funds
 
(50,000
)
 

Proceeds from issuance of common stock due to exercise of stock options
 
2,884

 
470

Payments of cash dividends
 
(7,464
)
 

Net cash provided by financing activities
 
123,656

 
102,178

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
 
$
409

 
$
(209,544
)
CASH AND CASH EQUIVALENTS:
 
 

 
 

Beginning of period
 
140,681

 
389,007

End of period
 
$
141,090

 
$
179,463

 
 
 
 
 
NONCASH ACTIVITIES:
 
 

 
 

Noncash investing and financing activities - acquisition of real estate through foreclosure of collateral
 
$
7,693

 
$
5,270

Transfer of loans to held-for-sale
 
$

 
$
10,030

Transfer of securities to available-for-sale
 
$

 
$
15,883

 
 
 
 
 
SUPPLEMENTAL INFORMATION:
 
 

 
 

Interest paid
 
$
29,442

 
$
29,498

Income taxes paid
 
$
12,000

 
$
11,700



See notes to interim condensed consolidated financial statements.

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GREEN BANCORP, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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 nine months ended September 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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NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2018
(Unaudited)

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.

In connection with the proposed Merger Transactions, on August 31, 2018, Veritex filed a registration statement on Form S-4 with the SEC, which was amended on October 10, 2018 and became effective on October 12, 2018. Veritex and Green will hold meetings of their respective shareholders on November 15, 2018, at which meetings their respective shareholders may vote upon the Merger Agreement and the Merger, in the case of the Company, and the Share Issuance, in the case of Veritex. In connection therewith, Green and Veritex began mailing a joint proxy statement/prospectus to their respective shareholders on or around October 15, 2018.

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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NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2018
(Unaudited)

The following table illustrates the computation of basic and diluted earnings per share:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 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
 
15,597

 
 
 
11,407

 
 
 
41,380

 
 
 
31,517

 
 
Basic:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average shares outstanding
 
37,339

 
$
0.42

 
37,056

 
$
0.31

 
37,259

 
$
1.11

 
37,023

 
$
0.85

Diluted:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Add incremental shares for:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Effect of dilutive securities - options
 
387

 
 
 
276

 
 
 
393

 
 
 
250

 
 
Total
 
37,726

 
$
0.41

 
37,332

 
$
0.31

 
37,652

 
$
1.10

 
37,273

 
$
0.85

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 September 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 2018-13 "Fair Value Measurement (Topic 820) - Changes to the Disclosure Requirements for Fair Value Measurement." eliminates the requirements to disclose the amount and reasons for transfers between Level 1 and Level 2 fair value methodology, the policy for the timing of transfers between levels and the valuation processes for Level 3 fair value measurements. The ASU requires the entity to disclose relevant quantitative information used to develop Level 3 fair value measurements. ASU 2018-13 will become effective for the Company on January 1, 2020 and is not expected to have a significant impact on the Company’s financial statements.
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 was permitted. ASU 2018-03 did not have a material impact on the Company’s consolidated financial statements.

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NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2018
(Unaudited)

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 retained earnings. This reclassification is presented in the condensed consolidated statement of changes in shareholders equity for the period ended September 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.
 

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NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2018
(Unaudited)

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.
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. It is intended to improve the reporting of leasing transactions to provide users of financial statements with more decision-useful information. Topic 842 was subsequently amended by ASU 2018-11, “Targeted Improvements.” ASU 2016-02 will require organizations that lease assets to recognize a right-of-use (“ROU”) asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement.
ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. A modified retrospective transition approach is required, applying the new standard to all leases existing at the date of initial application. An entity may choose to use either (i) its effective date or (ii) the beginning of the earliest comparative period presented in the financial statements as its date of initial application. If an entity chooses the second option, the transition requirements for existing leases also apply to leases entered into between the date of initial application and the effective date. The entity must also recast its comparative period financial statements and provide the disclosures required by the new standard for the comparative periods. The Company expects to adopt the new standard on January 1, 2019 and use the effective date as its date of initial application. Consequently, financial information will not be updated and the disclosures required

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NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2018
(Unaudited)

under the new standard will not be provided for dates and periods before January 1, 2019.
ASU 2016-02 provides a number of optional practical expedients in transition. The Company expects to elect the ‘package of practical expedients’ as both the lessee and lessor, which permits us not to reassess under the new standard our prior conclusions about lease identification, lease classification and initial direct costs. The new standard also provides practical expedients for an entity’s ongoing accounting. The Company currently expects to elect the short-term lease recognition exemption for leases that qualify. This means, for those leases that qualify, the Company will not recognize ROU assets and leases liabilities for any lease that has a lease term at commencement date of 12 months or less and does not include a purchase option. The Company also currently expects to elect the practical expedient to not separate lease and non-lease components for all leases. The Company expects that this standard will increase its consolidated assets and liabilities but will not have a material impact on its consolidated statements of income. While the Company continued to assess all the effects of adoption, it currently believes the most significant effects relate to (i) the recognition of new ROU assets and lease liabilities on our balance sheet for our property and equipment operating leases and (ii) providing significant new disclosures about our lease activities. The Company does not expect a significant change in its leasing activities between now and adoption.
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 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.

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NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2018
(Unaudited)

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 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.
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 $87.0 million and $76.0 million at September 30, 2018 and December 31, 2017, respectively, as a result of this requirement.

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NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2018
(Unaudited)

6. SECURITIES
The amortized cost and fair value of securities as of the dates set forth were as follows:
 
 
September 30, 2018
 
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
 
 
(Dollars in thousands)
Available-for-sale:
 
 
 
 
 
 
 
 
SBA guaranteed securities
 
$
95,638

 
$
13

 
$
(2,296
)
 
$
93,355

Mortgage-backed securities issued by U.S. government agencies or sponsored enterprises: residential
 
219,222

 

 
(8,852
)
 
210,370

Mortgage-backed securities issued by U.S. government agencies or sponsored enterprises: commercial
 
54,792

 

 
(2,955
)
 
51,837

Collateralized mortgage obligations issued by U.S. government agencies or sponsored enterprises: residential
 
212,400

 

 
(8,005
)
 
204,395

Collateralized mortgage obligations issued by U.S. government agencies or sponsored enterprises: commercial
 
35,910

 

 
(1,466
)
 
34,444

Corporate debt securities
 
15,917

 
17

 
(77
)
 
15,857

Obligations of municipal subdivisions
 
236

 

 

 
236

Total
 
$
634,115

 
$
30

 
$
(23,651
)
 
$
610,494

 
 
 
 
 
 
 
 
 
Held-to-maturity:
 
 
 
 
 
 
 
 
Mortgage-backed securities issued by U.S. government agencies or sponsored enterprises: residential
 
$
10,794

 
$
15

 
$
(483
)
 
$
10,326

Mortgage-backed securities issued by U.S. government agencies or sponsored enterprises: commercial
 
2,488

 

 
(142
)
 
2,346

Collateralized mortgage obligations issued by U.S. government agencies or sponsored enterprises: residential
 
43,130

 
81

 
(289
)
 
42,922

Obligations of municipal subdivisions
 
6,183

 

 
(110
)
 
6,073

Total
 
$
62,595

 
$
96

 
$
(1,024
)
 
$
61,667

 
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 September 30, 2018 totaled $2.0 million.


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NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2018
(Unaudited)

 
 
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:
 
 
September 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
 
4,917

 
4,867

 

 

Due after five years through ten years
 
11,236

 
11,226

 

 

Due after ten years
 

 

 
6,183

 
6,073

 
 
16,153

 
16,093

 
6,183

 
6,073

 
 
 
 
 
 
 
 
 
Mortgage-backed securities and collateralized mortgage obligations
 
522,324

 
501,046

 
56,412

 
55,594

SBA guaranteed securities
 
95,638

 
93,355

 

 

Total
 
$
634,115

 
$
610,494

 
$
62,595

 
$
61,667


20

Table of Contents
GREEN BANCORP, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2018
(Unaudited)

There were twenty-nine and seventy-eight sales of securities classified as available-for-sale during the nine months ended September 30, 2018 and 2017, respectively. During the nine months ended September 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 nine months ended September 30, 2017, proceeds of $349.4 million were received from sales of securities classified as available-for-sale.  The sales resulted in a net loss of $38 thousand, which is comprised of $910 thousand in gross realized gains, offset by $948 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 September 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 September 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 September 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 September 30, 2018.

21

Table of Contents
GREEN BANCORP, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2018
(Unaudited)

Securities with unrealized losses segregated by length of continuous unrealized loss position as of the dates set forth were as follows:
 
 
September 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
 
$
32,936

 
$
(351
)
 
$
32,585

 
$
58,385

 
$
(1,945
)
 
$
56,440

Mortgage-backed securities issued by U.S. government agencies or sponsored enterprises: residential
 
131,434

 
(4,956
)
 
126,478

 
87,788

 
(3,896
)
 
83,892

Mortgage-backed securities issued by U.S. government agencies or sponsored enterprises: commercial
 
32,888

 
(1,848
)
 
31,040

 
21,904

 
(1,107
)
 
20,797

Collateralized mortgage obligations issued by U.S. government agencies or sponsored enterprises: residential
 
59,079

 
(1,366
)
 
57,713

 
144,981

 
(6,639
)
 
138,342

Collateralized mortgage obligations issued by U.S. government agencies or sponsored enterprises: commercial
 
4,971

 
(223
)
 
4,748

 
30,940

 
(1,243
)
 
29,697

Corporate debt securities
 
8,917

 
(77
)
 
8,840

 

 

 

Total
 
$
270,225

 
$
(8,821
)
 
$
261,404

 
$
343,998

 
$
(14,830
)
 
$
329,168

 
 
 
 
 
 
 
 
 
 
 
 
 
Held-to-maturity:
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities issued by U.S. government agencies or sponsored enterprises: residential
 
$
2,657

 
$
(74
)
 
$
2,583

 
$
6,869

 
$
(409
)
 
$
6,460

Mortgage-backed securities issued by U.S. government agencies or sponsored enterprises: commercial
 
2,488

 
(142
)
 
2,346

 

 

 

Collateralized mortgage obligations issued by U.S. government agencies or sponsored enterprises: residential
 
24,321

 
(233
)
 
24,088

 
1,977

 
(56
)
 
1,921

Municipal bonds
 
6,183

 
(110
)
 
6,073

 

 

 

Total
 
$
35,649

 
$
(559
)
 
$
35,090

 
$
8,846

 
$
(465
)
 
$
8,381



22

Table of Contents
GREEN BANCORP, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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 3.75% and 1.69% of the amortized cost basis at September 30, 2018 and December 31, 2017, respectively. There were forty-one and eighteen securities in an unrealized loss position of greater than 12 months at September 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 September 30, 2018 or December 31, 2017.

Securities with an amortized cost of $5.1 million and $6.3 million and fair value of $4.9 million and $6.3 million were pledged and available to be sold under repurchase agreements at September 30, 2018 and December 31, 2017, respectively. Securities with an amortized cost of $82.4 million and $55.7 million and fair value of $80.9 million and $55.5 million were pledged to various Federal Reserve Districts related to deposits of bankruptcy trustees at September 30, 2018 and December 31, 2017, respectively. In addition, securities with an amortized cost of $3.1 million and $3.4 million and fair value of $3.0 million and $3.3 million were pledged as collateral for the Company’s derivative instruments at September 30, 2018 and December 31, 2017, respectively.

23

Table of Contents
GREEN BANCORP, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2018
(Unaudited)

7. LOANS
The loan portfolio classified by type and class as of the dates set forth were as follows:
 
 
September 30, 2018
 
 
Originated
 
Acquired
 
Total
 
 
 
 
 
 
 
 
 
(Dollars in thousands)
Commercial & industrial
 
$
1,114,467

 
$
28,266

 
$
1,142,733

Mortgage warehouse
 
236,307

 

 
236,307

Real estate:
 
 
 
 
 
 
Owner occupied commercial real estate
 
382,886

 
52,781

 
435,667

Commercial real estate
 
1,013,927

 
119,500

 
1,133,427

Construction, land & land development
 
137,634

 
15,623

 
153,257

Residential mortgage
 
177,168

 
71,878

 
249,046

Consumer and other
 
12,185

 
732

 
12,917

Total loans held for investment
 
$
3,074,574

 
$
288,780

 
$
3,363,354

 
 
 
 
 
 
 
Total loans held for sale
 
$
7,627

 
$

 
$
7,627

 
 
 
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 $13.5 million of net deferred loan origination fees and unamortized premium and discount at both September 30, 2018 and December 31, 2017. Also included in loans at September 30, 2018 and December 31, 2017 was $232 thousand and $1.4 million, respectively, in nonaccretable discount on acquired credit impaired loans. Accrued interest receivable on loans was $10.8 million and $8.8 million at September 30, 2018 and December 31, 2017, respectively. Consumer and other loans include overdrafts of $42 thousand and $48 thousand as of September 30, 2018 and December 31, 2017, respectively.

24

Table of Contents
GREEN BANCORP, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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 September 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 September 30, 2018 and December 31, 2017, respectively.  Energy-related service industry loans represented approximately 0.7% and 1.1% of total funded loans as of September 30, 2018 and December 31, 2017, respectively.  As of September 30, 2018, and December 31, 2017, $14.3 million and $19.2 million of reserved-based energy loans and $10.0 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:
 
 
September 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
 
$
406,028

 
$
663,102

 
$
73,603

 
$
1,142,733

Mortgage warehouse
 
126,581

 
109,726

 

 
236,307

Real estate:
 
 
 
 
 
 
 
 
Owner occupied commercial real estate
 
15,099

 
174,652

 
245,916

 
435,667

Commercial real estate
 
151,071

 
716,864

 
265,492

 
1,133,427

Construction, land & land development
 
35,854

 
83,126

 
34,277

 
153,257

Residential mortgage
 
19,517

 
46,408

 
183,121

 
249,046

Consumer and Other
 
3,856

 
2,217

 
6,844

 
12,917

Total loans held for investment
 
$
758,006

 
$
1,796,095

 
$
809,253

 
$
3,363,354

 
 
 
 
 
 
 
 
 
Fixed rate
 
$
116,653

 
$
528,920

 
$
108,931

 
$
754,504

Adjustable rate(1)
 
641,353

 
1,267,175

 
700,322

 
2,608,850

Total loans held for investment
 
$