CASH 2018 Annual Report

55 Our loan portfolio includes loans with a higher risk of loss. The Company originates commercial loans and related financing products, commercial mortgage loans, consumer loans, agricultural real estate loans, agricultural loans, and residential mortgage loans. Commercial, commercial mortgage, consumer, agricultural real estate, and agricultural loans may expose the Bank to greater credit risk than loans secured by residential real estate because the collateral securing these loans may not be sold as easily as residential real estate. These loans also have greater credit risk than residential real estate, including for the following reasons: • Commercial Loans and Related Financing Products. Repayment is dependent upon the successful operation of the borrower’s business. Moreover, due to the composition of borrowers under these loans within our portfolio (small- to medium-sized businesses), this portfolio may be more susceptible to even mild or moderate economic declines than a portfolio of loans with larger commercial borrowers. • Commercial Mortgage Loans . Repayment is dependent upon income being generated in amounts sufficient to cover operating expenses and debt service. • Consumer Loans. Consumer loans (such as personal lines of credit) are collateralized, if at all, with assets that may not provide an adequate source of payment of the loan due to depreciation, damage, or loss. • Agricultural Loans. Repayment is dependent upon the successful operation of the business, which is greatly dependent on many things outside the control of either the Bank or the borrowers. These factors include weather, commodity prices, and interest rates, among others. • Commercial Insurance Premium Finance Loans. Repayment is dependent upon the successful operations of the business. The risk is mitigated, however, because the loan is secured by the unamortized portion of the underlying insurance policy. • Student Loans. Repayment is dependent upon the obligor’s fulfillment of its contractual payment obligations, which is greatly dependent on factors outside the control of the Bank. • Taxpayer Advance Loans. Repayment is dependent upon an income tax refund being approved and paid by the Internal Revenue Service or a state tax authority. If our actual loan and lease losses exceed our allowance for loan and lease losses, our net income will decrease. We make various assumptions and judgments about the collectability of our loan and lease portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of our loans and leases. Despite our underwriting and monitoring practices, our loan and lease customers may not repay their loans and leases according to their terms, and the collateral securing the payment of these loans and leases may be insufficient to pay any remaining loan and lease balance. We may experience significant loan and lease losses, which could have a material adverse effect on our operating results. Because we must use assumptions regarding individual loans and leases and the economy, the current allowance for loan and lease losses may not be sufficient to cover actual loan and lease losses, and increases in the allowance may be necessary. We may need to significantly increase our provision for losses on loans and leases if one or more of our larger loans and leases or credit relationships becomes impaired or if we continue to expand our commercial real estate and commercial lending businesses or enter new lines of lending. In addition, federal and state regulators periodically review our allowance for loan and lease losses and may require us to increase our provision for loan and lease losses or recognize loan charge-offs. Material additions to our allowance would materially decrease our net income. We cannot provide any assurance that our monitoring procedures and policies will reduce certain lending risks or that our allowance for loan and lease losses will be adequate to cover actual losses. Nonpayment of loans and leases related to the Bank’s and its divisions’ businesses may have a materially adverse effect on our overall financial condition and results of operation, as well as the value of our common stock. Further, a new method of determining loan and lease loss allowances, expected to be implemented in fiscal year 2020, is under analysis and could impact future profitability.