CASH 2017 Annual Report

89 The level of potential problem loans is another predominant factor in determining the relative level of risk in the loan portfolio and in determining the appropriate level of the allowance for loan losses. Potential problem loans are generally defined by management to include loans rated as substandard by management that are not considered impaired ( i.e. , non-accrual loans and accruing troubled debt restructurings), but there are circumstances present to create doubt as to the ability of the borrower to comply with present repayment terms. The decision of management to include performing loans in potential problem loans does not necessarily mean that the Company expects losses to occur, but that management recognizes a higher degree or risk associated with these loans. The loans that have been reported as potential problem loans are predominantly commercial loans covering a diverse range of businesses and real estate property types. At September 30, 2017, potential problem loans totaled $39.5 million compared to $8.9 million at September 30, 2016. The $30.6 million increase in potential problem loans since September 30, 2016, was primarily due to the previously mentioned large, well-collateralized agriculture relationship that was downgraded during fiscal 2017. This relationship also had accrued interest of $1.8 million as of September 30, 2017, which is expected to be collected. It is possible the collateral will go though a deed in lieu of foreclosure in the near future. Liquidity and Capital Resources The Company’s primary sources of funds are deposits, derived principally through its Payments divisions, and to a lesser extent through its retail bank division, borrowings, principal and interest payments on loans and mortgage-backed securities, and maturing investment securities. In addition, the Company utilizes wholesale deposit sources to provide temporary funding when necessary or when favorable terms are available. While scheduled loan repayments and maturing investments are relatively predictable, deposit flows and early loan repayments are influenced by the level of interest rates, general economic conditions and competition. The Company relies on advertising, quality customer service, convenient locations and competitive pricing to attract and retain its retail bank deposits and primarily solicits these deposits from its core market areas. Based on its experience, the Company believes that its consumer checking, savings and money market accounts are relatively stable sources of deposits. The Company’s ability to attract and retain time deposits has been, and will continue to be, affected by market conditions. However, the Company does not foresee any significant retail bank funding issues resulting from the sensitivity of time deposits to such market factors. The low-cost checking deposits generated through the Company's Payments divisions may carry a greater degree of concentration risk than traditional consumer checking deposits but, based on experience, the Company believes that Payments generated deposits are a stable source of funding. To date, the Company has not experienced any material net outflows related to Payments-generated deposits, though no assurance can be given that this will continue to be the case. The Bank is required by regulation to maintain sufficient liquidity to assure its safe and sound operation. In the opinion of management, the Bank is in compliance with this requirement. Liquidity management is both a daily and long-term function of the Company’s management strategy. The Company adjusts its investments in liquid assets based upon management’s assessment of (i) expected loan demand, (ii) the projected availability of purchased loan products, (iii) expected deposit flows, (iv) yields available on interest-bearing deposits and (v) the objectives of its asset/liability management program. Excess liquidity is generally invested in interest-earning overnight deposits and other short-term government agency or instrumentality obligations. If the Company requires funds beyond its ability to generate them internally, it has additional borrowing capacity with the FHLB and other wholesale funding sources. The Company is not aware of any facts that would be reasonably likely to have a material adverse impact on the Company’s liquidity or its ability to borrow additional funds. The primary investing activities of the Company are the origination of loans, the acquisitions of companies and the purchase of securities. During the years ended September 30, 2017, 2016 and 2015, the Company originated loans totaling $2.6 billion, $968.4 million and $672.8 million, respectively. Purchases of loans totaled $141.4 million, and $74.1 million during the years ended September 30, 2017 and 2015, respectively, and the Company did not purchase any loans during the year ended September 30, 2016. During the years ended September 30, 2017, 2016 and 2015, the Company purchased mortgage-backed securities and other securities in the amount of $849.5 million, $902.9 million and $894.3 million, respectively. Of these purchases in 2017, 2016 and 2015, $0.9 million, $298.9 million and $75.8 million, respectively, were securities designated as held to maturity.