CASH 2018 Special Proxy Statement

The following table reflects the activity in the allowance for credit losses for each of the years presented (dollars in thousands): Years Ended December 31, 2017 2016 2015 2014 2013 Balance at beginning of year: . . . . . . . . . . . . . . . . . . . . $ 10,220 $ 9,651 $ 10,038 $ 12,972 $ 8,594 Provision for credit losses . . . . . . . . . . . . . . . . . . . . . . 7,250 4,355 47 2,250 8,050 Charge-offs: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial loans . . . . . . . . . . . . . . . . . . . . . . . . . 2,268 701 209 358 1,293 Consumer loans . . . . . . . . . . . . . . . . . . . . . . . . . . — — — — — Leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,117 1,015 797 16 — Factoring receivables . . . . . . . . . . . . . . . . . . . . . . 5,026 3,767 174 5,627 3,659 Total charge-offs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,411 5,483 1,180 6,001 4,952 Recoveries: Commercial loans . . . . . . . . . . . . . . . . . . . . . . . . . 406 26 95 318 480 Consumer loans . . . . . . . . . . . . . . . . . . . . . . . . . . — — — — — Leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 195 532 30 1 — Factoring receivables . . . . . . . . . . . . . . . . . . . . . . 1,717 1,139 621 498 800 Total recoveries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,318 1,697 746 817 1,280 Net charge-offs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,093 3,786 434 5,184 3,672 Allowance for credit losses . . . . . . . . . . . . . . . . . . . . . $ 10,377 $ 10,220 $ 9,651 $ 10,038 $ 12,972 Total loans at period end . . . . . . . . . . . . . . . . . . . . . . . $892,573 $686,954 $577,598 $523,328 $429,994 Ratio of allowance to total loans . . . . . . . . . . . . . . . . . 1.16% 1.49% 1.67% 1.92% 3.02% Ratio of net charge-offs to average loans . . . . . . . . . . . 0.92% 0.62% 0.08% 1.16% 0.96% Net charge-offs of $7.1 million were recorded during the year ended December 31, 2017 compared to net charge-offs of $3.8 million for the year ended December 31, 2016. During 2017, following several years of favorable charge-off performance, Crestmark Bank incurred higher than average historical charge-off activity as a result of three large accounts; one as a result of customer fraud and two from the inherent risk associated with these credits. These three charge-offs in 2017 equated to approximately 70% of the total charge-offs for the year. As Crestmark Bank asset size increases, the average loan and lease dollar amount continues to increase as well for certain segments of the portfolio. Crestmark Bank continues to diversify and expand its portfolio into larger commercial loans secured by inventory across the United States. These loans and leases are inherently more risky, due to the collateral securing these credits. As credits do experience charge-offs, and the corresponding average loan size increases, the charge-offs will tend to increase as well. However, the higher yields that are earned by Crestmark Bank on the leases are used to offset and compensate for the additional risk on these credits. Crestmark management believes the ratio of net charge-offs to average loans of 0.92% for fiscal year 2017 is well-within acceptable parameters. A provision for credit losses of $7.3 million was recorded during 2017 as compared to $4.4 million during 2016. This increase in provision for credit losses was primarily associated with the increase in the overall balance of the loan portfolio and to compensate for the aforementioned increased charge-offs in 2017. Net charge-offs of $3.8 million were recorded during the year ended December 31, 2016 compared to net charge-offs of $434,000 for the year ended December 31, 2015. During 2016, the bank had one large charge-off in the amount of $1.3 million, which was subsequently collected in full and included in recoveries as of December 31, 2017. A provision for credit losses of $4.4 million was recorded during 2016 as compared to $47,000 during 2015. This increase in provision for credit losses was primarily associated with the increase in the overall balance of the loan portfolio. 122