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.

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



	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.