Note 2 - Recent Accounting Pronouncements

9 Months Ended

Sep. 30, 2019

New Accounting Pronouncements And Changes In Accounting Principles [Abstract]

Recent Accounting Pronouncements

2. RECENT ACCOUNTING PRONOUNCEMENTS

QNB adopted Financial Accounting Standards Board (FASB) issued Accounting Statement Update (ASU) 2016-02, Leases (Topic 842) effective January 1, 2019. This new standard on accounting for leases introduced a lessee model that brings most leases on the balance sheet but recognizes expenses in the income statement similar to how items are recorded today. The new standard eliminates the requirement in current generally accepted accounting principles  in the United States (U.S. GAAP) for an entity to use bright-line tests in determining lease classification. The ASU also eliminates the current real estate-specific provisions and changes the guidance on sale-leaseback transactions, initial direct costs and lease executory costs for all entities.  All entities will classify leases to determine how to recognize the related revenue and expense and this classification will affect amounts that lessors record on the balance sheet.

QNB applied the new standard to all new contracts initiated on or after the effective date; and, for contracts which have remaining obligations as of the effective date.  There was no adjustment needed to the opening balance of QNB’s retained earnings account at January 1, 2019.  The discount rates used in determining the initial value of the right of use assets were based on the FHLB Amortizing Fixed Loan Rate for the remaining term of each lease at January 1, 2019.  These rates ranged from 2.82% to 3.46%.  QNB typically enters into lease agreements with an initial term of  5 to 10 years and subsequent additional optional terms in increments of 5 years.  The lease agreements also contain termination options. None of the leases contain purchase options and none transfer the ownership of the leased asset.  QNB has renewed one operating lease and entered into two new operating leases during 2019.  

The right-of-use assets under the operating leases are included within “Premises and equipment, net” and the operating lease liabilities are included with “Other liabilities” on the Consolidated Balance Sheets.  All operating lease costs are included in non-interest expense within  “Net occupancy” on the Consolidated Statements of Income.  The following table summarized the quantitative attributes of QNB’s operating leases.

For the nine months ended		September 30, 2019
Lease cost:
Operating lease cost		$	449
Total lease cost		$	449
Other information:
Cash paid for amounts included in the measurement of lease liabilities:
Operating cashflows from operating leases		$	(431	)
Total cash paid for amounts included in the measurement of lease liabilities		$	(431	)
At implementation of new accounting guidance:
Right-of-use assets recorded for operating lease liabilities		$	2,005
Right-of-use assets obtained in exchange for new operating lease liabilities		$	2,407
Weighted average remaining lease term:
Operating leases		14.0 years
Weighted average discount rate:
Operating leases	3.11				%

A maturity analysis of the operating lease liabilities and reconciliation of the undiscounted cash flows to the total operating lease liability is as follows:

	Operating Leases
October 2019 thru September 2020	$	555
October 2020 thru September 2021		487
October 2021 thru September 2022		464
October 2022 thru September 2023		432
October 2023 thru September 2024		349
October 2024 and thereafter		3,320
Total undiscounted cashflows		5,607
Total discount on cashflows		(1,315	)
Total lease liabilities	$	4,292

On June 16, 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326) (CECL). The new guidance requires organizations to measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts.

To that end, the new guidance:

• Eliminates the probable initial recognition threshold in current U.S. GAAP and, instead, reflects an organization’s current estimate of all expected credit losses over the contractual term of its financial assets

• Broadens the information an entity can consider when measuring credit losses to include forward-looking information

• Increases usefulness of the financial statements by requiring timely inclusion of forecasted information in forming expectations of credit losses

• Increases comparability of purchased financial assets with credit deterioration (PCD assets) with other purchased assets that do not have credit deterioration as well as originated assets because credit losses that are expected will be recorded through an allowance for credit losses for all assets

• Increases users’ understanding of underwriting standards and credit quality trends by requiring additional information about credit quality indicators by year of origination (vintage)

• For available-for-sale debt securities, aligns the income statement recognition of credit losses with the reporting period in which changes occur by recording credit losses (and subsequent changes in credit losses) through an allowance rather than a write down

The new guidance affects organizations that hold financial assets and net investments in leases that are not accounted for at fair value with changes in fair value reported in net income.  The new guidance affects loans, debt securities, trade receivables, net investments in leases, off-balance-sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash.

On October 16, 2019, FASB adopted its August 15, 2019 proposal to delay the effective dates for certain smaller reporting companies for the implementation CECL. For public business entities that are U.S. Securities and Exchange Commission (SEC) filers, the new guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, except for smaller reporting companies, whose effective date is effective for fiscal years , and interim periods with those fiscal years, beginning after December 15, 2022. Early application will be permitted for all organizations for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018.  QNB is evaluating the impact of this new standard on its consolidated financial statements.