New Accounting Pronouncements

9 Months Ended

Sep. 30, 2019

New Accounting Pronouncements [Abstract]

New Accounting Pronouncements

(11) New Accounting Pronouncements

In February 2016, the FASB issued ASU. 2016 02, Leases (Topic 842) (“ASU 2016 02”).  ASU 2016 02 is intended to improve financial reporting of leasing transactions by requiring organizations that lease assets to recognize assets and liabilities for the rights and obligations created by leases that extend more than twelve months on the balance sheet.  This accounting update also requires additional disclosures surrounding the amount, timing, and uncertainty of cash flows arising from leases.  ASU 2016 02 is effective for financial statements issued for annual and interim periods beginning after December 15, 2018 for public business entities.  Early adoption is permitted.  The Company elected to adopt ASU 2016 02 as of January 1, 2019.  The Company has elected the package of practical expedients permitted in ASC Topic 842.  Accordingly, the Company accounted for its existing operating leases as operating leases under the new guidance, without reassessing (a) whether the contracts contain a lease under ASC Topic 842, (b) whether classification of the operating leases would be different in accordance with ASC Topic 842, or (c) whether the unamortized initial direct costs before transition adjustments (as of December 31, 2018) would have met the definition of initial direct costs in ASC Topic 842 at lease commencement.  The company has also elected the practical expedient to use hindsight in determining the lease term.  As a result of the adoption of the new lease accounting guidance, the Company recognized on January 1, 2019 (a) a lease liability of approximately $58.2 million, which represents the present value of the remaining lease payments of approximately $69.4 million, discounted using the Company’s incremental borrowing rate, and (b) a ROU asset of approximately $53.0 million which represents the lease liability of $58.2 million adjusted for accrued rent of approximately $5.2 million.  This standard did not have a material impact on the Company’s key performance metrics and had no impact on the Company’s operating results.  The most significant impact was the recognition of ROU assets and lease liabilities for operating leases.

In June 2016, the FASB released ASU 2016-13, “Financial Instruments – Credit Losses” which amended existing guidance to replace current generally accepted accounting principles used to measure a reporting entity’s credit losses.  The main objective of this update is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date.  To achieve this objective, the amendments in this update replace the incurred loss impairment methodology in current GAAP with a methodology that reflects the current expected credit losses (“CECL”) and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates.  These amendments are effective for public business entities for annual periods and interim periods within those annual periods beginning after December 15, 2019.

The ASU represents a significant change from current GAAP and the Company continues to evaluate the impact of the ASU on its consolidated financial statements. The Company’s committee continues to meet regularly to evaluate the provisions of the ASU, reviewing the results of trial runs, enhancements to and development of policies as well as internal controls and processes being put in place related to the adoption of ASU 2016-13.   We have made our decision on loan segmentation and currently are in the process of testing and validating methodologies for calculating the quantitative component of our CECL allowance.  The Company has performed and will continue to perform multiple trial runs of CECL models, as well as model sensitivity analysis and determination of qualitative adjustments.

The Company plans to finalize its Topic 326 compliant methodology, accounting policies and internal controls in the fourth quarter of 2019. Upon adoption, any change to the Allowance for Credit losses will be recorded with a corresponding one-time cumulative-effect adjustment to retained earnings. The magnitude of any such one-time adjustment or the overall impact of the new guidance on the consolidated financial statements cannot yet be reasonably estimated. We continue to evaluate the impact the adoption of the guidance will have on our Consolidated Financial Statements. The impact will be contingent upon the underlying characteristics of the affected portfolio and macroeconomic and internal forecasts at adoption date. In December 2018, the OCC, the Board of Governors of the Federal Reserve System, and the FDIC approved a final rule to address changes to credit loss accounting under GAAP, including banking organizations’ implementation of CECL.  The final rule provides banking organizations the option to phase in over a three-year period the day-one adverse effects on regulatory capital that may result from the adoption of the new accounting standard.  The Company is evaluating adopting the capital transition relief over the permissible three-year period.

In April 2019, Accounting Standards Update No. 2019-04, “Codification Improvements to Topic 326 Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments” (“ASU 2019-04”) was issued to provide additional clarification on the scope and disclosure requirements of Topic 326. ASU 2019-04 includes provisions related to accounting policy elections that can be made by the entity related to accrued interest receivable and expected prepayments on financial assets, the inclusion of recoveries in estimating the allowance for credit losses (“ACL”) and consideration of contract extension and renewals when determining the contractual term. This ASU also provides clarification on the tabular vintage disclosures related to line-of-credit arrangements that convert term loans. In May 2019, Accounting Standards Update No. 2019-05, “Financial Instruments - Credit Losses (Topic 326); Targeted Transition Relief” (“ASU 2019-05”) was issued to allow an entity to make an irrevocable fair value option election on instruments within the scope of Topic 326 that are measured at amortized cost, except for held-to-maturity debt securities. This election can be applied on an instrument-by-instrument basis upon the adoption of Topic 326.  The Company currently writes off the uncollectible accrued interest receivable balance upon nonaccrual status by reversing interest income. The Company currently includes recoveries in estimating the allowance for credit losses and is evaluating all other components of ASU 2019-04 and their impacts to the Company.

For available for sale investments with unrealized losses, credit losses will be recognized as an allowance on an individual security basis rather than a reduction in the amortized cost of the securities. As a result, improvements to estimated credit losses will be recognized immediately in earnings rather than as interest income over time.  The Company has also evaluated the impacts of ASU 2019-05 to our held to maturity investments that are measured at amortized cost.  Based on the credit quality of our existing available for sale and held to maturity debt investment portfolio, the Company does not expect the Allowance for Credit Losses for the adoption of the standard, as it relates to the investment portfolio  to be significant.  The effective dates of ASU 2019-04 and ASU 2019-05 are the same as the effective date of ASU 2016-13.