CASH 2018 Special Proxy Statement

CRESTMARK BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) depth of lending management and other relevant staff; national and local economic trends and conditions; industry conditions; and effects of changes in credit concentrations. The following portfolio segments have been identified: Commercial Loans : The Corporation’s commercial loans are primarily asset based lending agreements secured by debtor’s short-term assets such as inventory, accounts receivable and work-in-process. Commercial loans may also be secured by real estate and equipment. Credit risk is managed through standardized loan policies, established and authorized credit limits, attentive portfolio management and the use of lock box agreements and similar arrangements which result in the Corporation receiving and controlling the debtor’s cash receipts. Consumer Loans : The Corporation’s consumer loan portfolio is primarily comprised of loans to individuals obligated to hospitals for medical services received. These loans are originated through CM HELP, LLC, one of the Corporation’s joint ventures. The majority of these loans are guaranteed by the hospital providing the service to the debtor and this guarantee serves to reduce credit risk as the guarantors agree to repurchase severely delinquent loans. The performance of the loans is affected by general economic conditions and the Corporation’s risk is affected by the financial strength of the guaranteeing entities as well as the individual debtors. Factoring Receivables : The Corporation’s factoring clients are diversified as to industry and geography. Credit risk is managed by standardized advance policies, established and authorized credit limits, verification of receivables, attentive portfolio management and the use of lock box agreements and similar arrangements which result in the Corporation receiving and controlling the client’s cash receipts. In addition, clients generally guarantee the payment of purchased accounts receivable. Leases : The Corporation’s lease portfolio is primarily comprised of leases on high-tech equipment, information systems hardware, capital equipment and durable goods, and vehicles such as automobiles and tractors. Starting in 2016, the Corporation through its leasing subsidiary CEF, shifted its emphasis on leases for high-tech equipment to Fortune 1,000 and higher investment grade companies to an emphasis on leases for capital equipment and durable goods to qualified middle market companies. Credit risk is managed through monitoring of the lessee’s business operations as repayment is typically dependent on the cash flow of the lessee. Lease residuals (or the value of the leased asset after the completion of the lease term) also represent an area of risk although changes in the value of lease residuals are not specifically reserved for in the allowance for credit losses. Lease Equipment Inventory: Inventory consists of equipment purchased by the Corporation for future transfer to direct financing and sales-type or operating leases which is recorded at cost. In addition, lease equipment inventory includes lease equipment returned to the Corporation after termination of a lease. Equipment returned after lease termination is recorded at the lower of its carrying amount or its estimated fair value at the lease termination date. Repossessed Assets: Assets acquired through or instead of foreclosure are initially recorded at fair value, less cost to sell, when acquired, establishing a new cost basis. If fair value declines, a valuation allowance is recorded in the consolidated statements of income. Costs after acquisition are expensed in the consolidated statements of income. As of December 31, 2017 the Corporation had approximately $2,087,000 of repossessed assets which is included in other assets on the consolidated balance sheet. There were approximately $3,855,000 of repossessed assets in 2016. F-12