Page 18 - Annual Report 2017

TEXAS GULF BANCSHARES, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements
December 31, 2016 and 2015

NOTE A SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (CONTINUED)

Troubled Debt Restructurings - The Company will classify a loan as a troubled debt
restructuring if both (i) the borrower is experiencing financial difficulties and (ii) the borrower
has been 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. Interest is generally accrued on such loans in
accordance with the new terms.

Allowance for Possible Credit Losses - The allowance for possible credit losses is a reserve
established through a provision for possible credit losses charged to expense, which
represents management’s best estimate of probable losses on loans within the existing
portfolio of loans. All losses are charged to the allowance for possible credit losses when the
loss actually occurs or when a determination is made that a loss is likely to occur. Recoveries
are credited to the allowance at the time of recovery.

The allowance, in the judgment of management, is necessary to reserve for the estimated
loan losses and risks inherent in the loan portfolio. Therefore, the level of the allowance
reflects management’s continuing evaluation of industry concentrations, specific credit
risks, loan loss experience, current loan portfolio quality, present economic, political and
regulatory conditions, and unidentified losses inherent in the current loan portfolio, as well
as trends in the foregoing.

Portions of the allowance may be allocated for specific credits; however, generally the
entire allowance is available for any credit that, in management’s judgment, should be
charged-off. While management utilizes its best judgment and information available, the
ultimate adequacy of the allowance is dependent upon a variety of factors beyond the
Company’s control, including the performance of the Company’s loan portfolio, the
economy, changes in interest rates, and the view of the regulatory authorities toward loan
classifications.

Concentrations of Risk - The Company’s investments are subject to various levels of risk
associated with economic and political events beyond management’s control. Consequently,
management’s judgment as to the level of losses that currently exist or may develop in the
future involves the consideration of current and anticipated conditions and their potential
effects on the Company’s investments. In determining fair value of these investments,
management obtains information, which is considered reliable, from third parties in order to
value its investments. Due to the level of uncertainty related to changes in the value of
investment securities, it is possible that changes in risks could materially impact the amounts
reflected herein.

The Company originates loans, commitments, and letters of credit primarily to customers in
the Company’s market areas which include southern Brazoria County, Galveston County, and
Harris County. Generally, such customers are depositors of the Company. The Company’s
loans are generally secured by specific items of collateral including real property, consumer
assets, and business assets. Although the Company has a diversified loan portfolio, a
substantial portion of its debtors’ ability to honor their contracts is dependent on local
economic conditions. The concentrations of credit by loan segment are set forth in Note D. It
is the Company’s policy to not extend credit to any single borrower or group of related
borrowers in excess of the Company’s legal lending limit.

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