Page 20 - 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)

An entity is required to recognize the financial statement impact of a tax position when it is
more likely than not that the position will be sustained upon examination. The Company
believes that all significant tax positions utilized by the Company will more likely than not be
sustained upon examination. As of December 31, 2016, the tax years that remain subject to
examination by the major tax jurisdictions under the statute of limitations are from 2013
forward (with limited exceptions). Tax penalties and interest, if any, would be accrued as
incurred and would be classified as income tax expense in the consolidated statements of
income and comprehensive income.

The Company is subject to Texas Margin Tax. Texas Margin Tax amounted to $48,000 and
$63,239 for years ending December 31, 2016 and 2015, respectively.

Intangible Assets - Goodwill amounting to $892,700 at December 31, 2016 and 2015
represents the net fair value of consideration given in excess of the fair value of the net
assets of a bank acquired in 1996. Goodwill is tested for impairment annually, and will be
tested for impairment between annual tests if an event occurs or circumstances change that
would indicate the carrying value may be impaired. At December 31, 2016 and 2015,
management has determined that goodwill, net of amortization accumulated during prior
years, as reflected in the Company’s consolidated financial statements, was not impaired.

Trust Assets - Assets held by the Company’s trust department, other than cash resulting from
trust assets held on deposit at the Bank, are not assets of the Company and are therefore
not included in the consolidated balance sheets.

Treasury Stock - The Company has repurchased shares of its authorized and issued common
stock which is now held in treasury pending use for general corporate purposes or
retirement. At December 31, 2016 and 2015, the Company held 189,421 treasury shares
which are reflected as a component of shareholders’ equity on the accompanying
consolidated balance sheets.

Accounting for Stock-Based Compensation – Stock-based compensation is recognized as
compensation cost in the consolidated income statements based on the grant fair value on
the date of the grant.

Fair Value Measurements - U.S. GAAP establishes a framework for measuring fair value, and
requires certain disclosures about fair value measurements. In general, fair values of financial
instruments are based upon quoted market prices, where available. If such quoted market
prices are not available, fair value is based upon internally developed models that primarily
use, as inputs, observable market-based parameters. Valuation adjustments may be made to
ensure that financial instruments are recorded at fair value. These adjustments may include
amounts to reflect counterparty credit quality and the entity’s creditworthiness, among other
things, as well as unobservable parameters. Any such valuation adjustments are applied
consistently over time.

The Company has not elected to account for any financial assets or liabilities as trading
instruments for which changes in market value would be recorded in the Company’s
consolidated statements of income.

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