CASH 2018 Annual Report

92 The Company maintains an allowance for loan and lease losses because it is probable that some loans and leases may not be repaid in full. At September 30, 2018, the Company had an allowance for loan and lease losses of $13.0 million as compared to $7.5 million at September 30, 2017. The increase was driven by a $1.3 million increase in the community banking allowance and a $4.2million increase in the national lending allowance which was primarily comprised of $2.8 million related to the student loan portfolios and $0.8 million related to consumer credit products. The combined allowance for loan and lease losses and fair value marks was $24.4 million, or 0.8%, of the total loan and lease portfolio at September 30, 2018, compared to an allowance for loan loss of $7.5 million, or 0.6% of the total loan portfolio at September 30, 2017. Management’s periodic review of the allowance for loan and lease losses is based on various subjective and objective factors including the Company’s past loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral and current economic conditions. While management may allocate portions of the allowance for specifically identified problem loan and lease situations, the majority of the allowance is based on both subjective and objective factors related to the overall loan and lease portfolio and is available for any loan and lease charge-offs that may occur. As stated previously, there can be no assurance future losses will not exceed estimated amounts, or that additional provisions for loan and lease losses will not be required in future periods. In addition, the Bank is subject to review by the OCC, which has the authority to require management to make changes to the allowance for loan and lease losses, and the Company is subject to similar review by the Federal Reserve. In determining the allowance for loan and lease losses, the Company specifically identifies loans and leases it considers as having potential collectability problems. Based on criteria established by ASC 310, Receivables , some of these loans and leases are considered to be “impaired” while others are not considered to be impaired, but possess weaknesses that the Company believes merit additional analysis in establishing the allowance for loan and lease losses. All other loans and leases are evaluated by applying estimated loss ratios to various pools of loans and leases. The Company then analyzes other applicable qualitative factors (such as economic conditions) in determining the aggregate amount of the allowance needed. At September 30, 2018, $0.6 million of the allowance for loan and lease losses was allocated to impaired loans and leases. See Note 3 of the “Notes to Consolidated Financial Statements,” which is included in Part II, Item 8 “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K. $0.8 million of the total allowance was allocated to other identified problem loans and loan relationships, representing 0.7% of the related loan and lease balances, and $11.6 million of the total allowance, representing 0.4% of the related loan and lease balances, was allocated to the remaining overall loan and lease portfolio based on historical loss experience and qualitative factors. At September 30, 2017, none of the allowance for loan losses was allocated to impaired loans and leases. $2.0 million of the total allowance was allocated to other identified problem loan and lease situations or 3.5% of related loan and lease balances, and $5.5 million of the total allowance, representing 0.4%, was allocated against losses from the overall loan and leases portfolio based on historical loss experience and qualitative factors. The Company maintains an internal loan and lease review and classification process which involves multiple officers of the Company and is designed to assess the general quality of credit underwriting and to promote early identification of potential problem loans and leases. All loan officers are charged with the responsibility of risk rating all loans and leases in their portfolios and updating the ratings, positively or negatively, on an ongoing basis as conditions warrant. The level of potential problem loans and leases is another predominant factor in determining the relative level of risk in the loan and lease portfolio and in determining the appropriate level of the allowance for loan and lease losses. Potential problem loans and leases are generally defined by management to include loans and leases rated as substandard by management that are not considered impaired ( i.e. , non-accrual loans and leases and accruing troubled debt restructurings), but there are circumstances that create doubt as to the ability of the borrower to comply with repayment terms. The decision of management to include performing loans and leases in potential problem loans and leases does not necessarily mean that the Company expects losses to occur, but that management recognizes a higher degree or risk associated with these loans and leases. The loans and leases that have been reported as potential problem loans and leases are predominantly commercial loans and leases covering a diverse range of businesses and real estate property types. At September 30, 2018, potential problem loans and leases totaled $24.6 million compared to $39.5 million at September 30, 2017.