CASH 2018 Annual Report

18 Non-Accruing Loans and Leases At September 30, 2018, the Company had $2.9 million in non-accruing loans and leases, which constituted less than 0.1% of the Company's gross loan and lease portfolio and total assets. At September 30, 2017, the Company had $0.7 million in non-accruing loans which also constituted less than 0.1% of its gross loans portfolio and total assets. The fiscal 2018 increase in non-accruing loans and leases relates to an increase in non-accruing loans and leases in the commercial finance portfolio. Accruing Loans and Leases Delinquent 90 Days or More At September 30, 2018, the Company had $7.3 million in accruing loans and leases delinquent 90 days or more, compared to $36.9 million at September 30, 2017. This balance of accruing loans and leases 90 days or more past due was mainly comprised of National Lending loans and leases. Classified Assets Federal regulations provide for the classification of loans, leases, and other assets such as debt and equity securities considered by our primary regulator, the OCC, to be of lesser quality as “substandard,” “doubtful” or “loss,” with each such classification dependent on the facts and circumstances surrounding the assets in question. An asset is considered “substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. “Substandard” assets include those characterized by the “distinct possibility” that the Bank will sustain “some loss” if the deficiencies are not corrected. Assets classified as “doubtful” have all of the weaknesses inherent in those classified “substandard,” with the added characteristic that the weaknesses present make “collection or liquidation in full,” on the basis of currently existing facts, conditions and values, “highly questionable and improbable.” Assets classified as “loss” are those considered “uncollectible” and of such minimal value that their continuance as assets without the establishment of a specific loss reserve is not warranted. General allowances represent loss allowances which have been established to recognize the inherent risk associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem assets. When assets are classified as “loss,” the Bank is required either to establish a specific allowance for losses equal to 100% of that portion of the asset so classified or to charge off such amount. The Bank’s determinations as to the classification of its assets and the amount of its valuation allowances are subject to review by its regulatory authorities, which may order the establishment of additional general or specific loss allowances. On the basis of management’s review of its classified assets, at September 30, 2018, the Company had classified loans and leases of $24.6 million as substandard and none as doubtful or loss. Further, at September 30, 2018, the Company owned real estate or other assets as a result of foreclosure of loans with a value of $31.6 million. Allowance for Loan and Lease Losses The allowance for loan and lease losses is established through a provision for loan and lease losses based on management’s evaluation of the risk inherent in its loan and lease portfolio and changes in the nature and volume of its loan and lease activity, including those loans and leases that are being specifically monitored by management. Such evaluation, which includes a review of loans and leases for which full collectability may not be reasonably assured, includes consideration of, among other matters, the estimated fair value of the underlying collateral, economic conditions, historical loan and lease loss experience and other factors that warrant recognition in providing for an appropriate loan and lease loss allowance. Management closely monitors economic developments both regionally and nationwide, and considers these factors when assessing the appropriateness of its allowance for loan and lease losses. The current economic environment continues to show signs of stability and improvement in the Bank’s markets. The Bank’s average loss rates over the past three years were low relative to industry averages for such years, offset, in the case of fiscal 2016, with a higher agricultural loss rate driven by the charge off of one relationship. The Bank does not believe it is likely these low loss conditions will continue indefinitely. Each loan and lease segment is evaluated using both historical loss factors as well as other qualitative factors in order to determine the amount of risk the Company believes exists within that segment.