CASH 2018 Annual Report

74 MPS's revenue is concentrated. MPS works with a large number of business partners to derive its revenue. The Company believes four of its partners have reached a size that, should these partners’ business with the Company end or there is a significant decrease in revenues associated with any of these business relationships, the earnings attributable to them would have a material effect on the financial results of the Company. The composition of Crestmark’s customer base presents unique market risks and opportunities. The Crestmark division specializes in providing business-to-business working capital solutions, equipment leasing, and asset-based lending services to small- and medium-sized businesses that are outside the scope of what traditional banks typically offer. These services include customizable business lines of credit, machinery and equipment financing, term loans, working capital acquisition funding and expansion financing, discount factoring, and traditional factoring. Prior to the Crestmark Acquisition, Crestmark typically provided these services to customers who were not “bankable” under traditional lending standards, and the loans it made were based in large part on the value of and control over the borrower’s collateral. The Bank continues to refine the underwriting and credit assessments of the Crestmark’s divisions customers in connection with the loans and financing opportunities the division is creating for the Bank. Additionally, due to the smaller size of the Crestmark division’s commercial customers, such customers are more likely than larger commercial businesses to be strained by regional or national economic downturns. Stressed economic conditions may reduce the ability of the Crestmark division’s commercial borrowers to make loan and lease payments or cause the value of the Bank’s collateral to decline. The effect of a downturn in general economic conditions may be more significant for the Crestmark division’s business than for the Bank as a whole due to the specialized nature of its financial products and collateral. Moreover, given the relatively smaller nature of the Crestmark division’s customers, it is difficult to verify the accuracy and reliability of customer financial and other underwriting materials. If materials provided to the Crestmark division by commercial credit applicants are materially inaccurate or false, or if the third-party resources the Crestmark division uses to underwrite credit applicants do not identify risks presented by such potential customer relationships, the Bank could suffer significant material consequences in connection with the performance of its commercial loan portfolio, its earnings, and its reputation and may need to dedicate resources to ensure the division’s ability to identify such fraud in the future. Crestmark’s business presents a heightened degree of operational and credit risks to the Bank. Crestmark’s focus on asset-based loans and other forms of commercial financing subjects Crestmark, and therefore the Bank, to the potential for fraud by borrowers regarding the value of underlying collateral. As a result, the Bank may assume different or greater lending risks than other commercial lenders in connection with the commercial products and services offered through the Crestmark division. Even routine funding transactions expose the Bank to credit risk in the event of default of its counterparty or client. In addition, credit risk related to products and services offered by the Crestmark division may be exacerbated when the collateral held by the Bank cannot be realized upon or is liquidated at prices insufficient to recover the full amount due under the financial instrument. Future success of the Crestmark division is dependent on its ability to compete effectively in the highly competitive commercial finance industry. The Crestmark division faces substantial competition in all phases of its operations froma variety of different competitors, and its future growth and success depends on its ability to compete effectively in this highly competitive environment. The Crestmark division competes for loans, leases, and other financial services with numerous national and regional banks, thrifts, credit unions, and other financial institutions, as well as other entities that provide financial services, including specialty lenders, securities firms, and mutual funds. Certain larger commercial financing companies do not currently focus their marketing efforts on smaller commercial companies; however, any shift in focus by such larger financing companies may further fragment existing market share in this commercial finance industry. Moreover, some of the financial institutions and financial service organizations with which the Crestmark division competes are not subject to the same degree of regulation as the Crestmark division and the Bank. Many of the Crestmark division’s competitors have been in business for many years, have established customer bases, are larger, offer larger branch networks than the Bank does, and may offer other services that neither the Crestmark division nor the Bank do. This competition may limit the Crestmark division’s growth or earnings.