Page 44 - Annual Report 2017

TEXAS GULF BANCSHARES, INC. AND SUBSIDIARY

Notes to Consolidated Statements
December 31, 2016 and 2015

NOTE P REGULATORY MATTERS (CONTINUED)

Dividend Restrictions

In the ordinary course of business, the Company is dependent upon dividends from the Bank
to provide funds for the payment of distributions to shareholders and to provide for other
cash requirements. Banking regulations may limit the amount of dividends that may be paid.
Approval by regulatory authorities is required if the effect of dividends declared would cause
the regulatory capital of the Bank to fall below specified minimum levels. Approval is also
required if dividends declared exceed the net profits for that year combined with the retained
net profits for the preceding two years.

NOTE Q FAIR VALUE DISCLOSURES

The fair value of an asset or liability is the price that would be received to sell that asset or
paid to transfer that liability in an orderly transaction occurring in the principal market (or
most advantageous market in the absence of a principal market) for such asset or liability. In
estimating fair value, the Company utilized valuation techniques that are consistent with the
market approach, the income approach, and/or the cost approach. Such valuation techniques
are consistently applied. Inputs to valuation techniques include the assumptions that market
participants would use in pricing an asset or liability.

Fair Value Hierarchy

U.S. GAAP specifies a hierarchy of valuation techniques based upon whether the inputs to
those valuation techniques are observable or unobservable. These inputs are summarized in
the three broad levels listed below.

Level 1 - Level 1 inputs are based upon unadjusted quoted prices in active markets for
identical assets and liabilities that the Company has the ability to access at the measurement
date.

Level 2 - Level 2 inputs are based upon other significant observable inputs (including quoted
prices in active or inactive markets for similar assets and liabilities), or other inputs that are
observable or can be corroborated by observable market data for substantially the full term
of a financial instrument.
Level 3 - Level 3 inputs are based upon unobservable inputs reflecting management’s
assumptions that are supported by little or no market activity and that are significant to the
fair value of the asset or liability. Level 3 measurements are determined using pricing
models, discounted cash flow methodologies, or similar techniques, as well as instruments for
which the determination of fair value requires significant management judgment or
estimation.

38