CASH 2018 Special Proxy Statement

information on how significant assets and liabilities are valued in the financial statements and how those values are determined. In determining the critical accounting estimates, Crestmark considered the valuation techniques and inputs used and the sensitivity of these to the financial statement amounts, estimates, assumptions, and judgments underlying those amounts. Based on this assessment, Crestmark management determined that the critical accounting policies are those related to the allowance for credit losses (including contingency reserves on factoring receivables), estimated residual values of leased equipment and income taxes. Allowance for Credit Losses The allowance for credit losses (“ALLL”) is established through a provision for credit losses charged to expense with credit exposures charged against the ALLL when Crestmark management believes that collectability of the principal is unlikely. The allowance is an amount that Crestmark management believes will be appropriate to absorb probable incurred losses on existing loans, leases and receivables based on an evaluation of the collectability of loans and prior loss and recovery experience as appropriate under U.S. GAAP. The determination of the ALLL is inherently subjective as it requires significant management judgment based on factors that are susceptible to significant change. These judgments include estimates associated with the amounts and timing of expected future cash flows on impaired loans, actual historical loss experience, specific borrower circumstances and estimated collateral values, and consideration of current economic trends and conditions, and other factors. For factoring receivables, Crestmark Bank withholds a contingency reserve which is the difference between the fair value of the invoice amount and the amount advanced. A contingency reserve is withheld for nonpayment of factored receivables, service fees and other adjustments. Any shortfalls of the collection of the amortized cost of the factoring receivables are charged to the allowance for credit losses. For additional discussion of the allowance for credit losses, see Notes 1 and 4 of the audited consolidated financial statements of Crestmark included in this joint proxy statement/prospectus. Residual Value of Direct Finance, Sales-Type, and Operating Leases Lease residual values are estimated at lease inception and represent the present value of the estimated fair value of the leased equipment at the termination date of the lease. Realization of these residual values depends on many factors, including Crestmark management’s use of estimates, assumptions, and judgment to determine such values. Several other factors outside of Crestmark management’s control may reduce the residual values realized, including general market conditions at the time of expiration of the lease, whether there has been technological or economic obsolescence or unusual wear and tear on, or use of, the equipment and the cost of comparable equipment. To the extent the actual residual at termination of the lease is different than its carrying amount, a gain or loss will be recorded on the subsequent settlement of the residual asset. If Crestmark Bank fails to realize the aggregate recorded residual values, the financial condition and profitability could be adversely affected. See Note 1, Note 4, and Note 5 of the “Notes to Consolidated Financial Statements” included in this joint proxy statement/prospectus. Income Taxes Income tax expense is based on Crestmark management’s judgments and estimates regarding permanent differences in the treatment of specific items of income and expense for financial statement and income tax purposes. These permanent differences result in an effective tax rate that differs from the federal statutory rate. In addition, deferred tax assets and liabilities are recognized in the Consolidated Balance Sheets of Crestmark based on Crestmark management’s judgment and estimates regarding timing differences in the recognition of income and expenses for financial statement and income tax purposes. Crestmark assesses the likelihood that any deferred tax assets will be realized through the reduction or refund of taxes in future periods and establishes a valuation allowance for those assets for which recovery is not more likely than not. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized. 108