Page 37 - Annual Report 2017

TEXAS GULF BANCSHARES, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements
December 31, 2016 and 2015

NOTE K COMMITMENTS AND CONTINGENT LIABILITIES

Unfunded Loan Commitments

In the normal course of business, the Company enters into various transactions, which in
accordance with U.S. GAAP, are not included in its consolidated balance sheets. The
Company through its Bank subsidiary enters into these transactions to meet the financing
needs of its customers.

These financial instruments include commitments to extend credit for loans in process,
commercial lines of credit, revolving credit lines, overdraft protection lines, and standby
letters of credit at both fixed and variable rates of interest. These instruments involve, to
varying degrees, elements of credit and interest rate risk in excess of the amounts
recognized in the consolidated balance sheets. The contract or notional amounts of those
instruments reflect the extent of the involvement the Company has in particular classes of
financial instruments. The Company’s exposure to credit loss in the event of nonperformance
by the other party to the financial instrument for commitments to extend credit and standby
letters of credit is represented by the contractual notional amount of those instruments. The
Company uses the same credit policies in making these commitments and conditional
obligations as it does for on-balance-sheet instruments.

The following is a summary of the various financial instruments whose contract amounts
represent credit risk at December 31, 2016 and 2015:

2016 2015

Commitments to extend credit $ 71,219,193 $ 64,120,385

Standby letters of credit $ 1,489,326 $ 1,502,411

Commitments to extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Commitments generally have fixed
expiration dates or other termination clauses and may require payment of a fee.
Commitments are extended at both fixed and variable rates of interest. Since many of the
commitments are expected to expire without being fully drawn upon, the total commitment
amounts disclosed above do not necessarily represent future cash requirements.

The Company evaluates each customer's credit worthiness on a case-by-case basis. The
amount of collateral obtained, if considered necessary by the Company upon extension of
credit, is based on management's credit evaluation of the customer.

Standby letters of credit are conditional commitments issued by the Company to guarantee
the performance of a customer to a third party. The credit risk involved in issuing letters of
credit is essentially the same as that involved in extending loan facilities to its customers.

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