XML 24 R9.htm IDEA: XBRL DOCUMENT v3.20.1
Note 1 - Significant Accounting Policies
 3 Months Ended
Mar. 31, 2020
Notes to Financial Statements  
Significant Accounting Policies [Text Block]
1.
    
SIGNIFICANT ACCOUNTING POLICIES
 
Basis of Presentation
: The unaudited financial statements for the
three
months ended
March 31, 2020
include the consolidated results of operations of Mercantile Bank Corporation and its consolidated subsidiaries. These subsidiaries include Mercantile Bank of Michigan (“our bank”) and our bank’s
two
subsidiaries, Mercantile Bank Real Estate Co., LLC (“our real estate company”) and Mercantile Insurance Center, Inc. (“our insurance center”). These consolidated financial statements have been prepared in accordance with the instructions for Form
10
-Q and Item
303
(b) of Regulation S-K and do
not
include all disclosures required by accounting principles generally accepted in the United States of America (“GAAP”) for a complete presentation of our financial condition and results of operations. In the opinion of management, the information reflects all adjustments (consisting only of normal recurring adjustments) which are necessary in order to make the financial statements
not
misleading and for a fair presentation of the results of operations for such periods. The results for the period ended
March 31, 2020
should
not
be considered as indicative of results for a full year. For further information, refer to the consolidated financial statements and footnotes included in our annual report on Form
10
-K for the year ended
December 
31,
2019.
 
We have
five
separate business trusts that were formed to issue trust preferred securities. Subordinated debentures were issued to the trusts in return for the proceeds raised from the issuance of the trust preferred securities. The trusts are
not
consolidated, but instead we report the subordinated debentures issued to the trusts as a liability.
 
Earnings Per Share
: Basic earnings per share is based on the weighted average number of common shares and participating securities outstanding during the period. Diluted earnings per share include the dilutive effect of additional potential common shares issuable under our stock-based compensation plans and are determined using the treasury stock method. Our unvested restricted shares, which contain non-forfeitable rights to dividends whether paid or accrued (i.e., participating securities), are included in the number of shares outstanding for both basic and diluted earnings per share calculations. In the event of a net loss, our unvested restricted shares are excluded from the calculation of both basic and diluted earnings per share.
 
Approximately
256,000
unvested restricted shares were included in determining both basic and diluted earnings per share for the
three
months ended
March 31, 2020.
In addition, stock options for approximately
4,000
shares of common stock were included in determining diluted earnings per share for the
three
months ended
March 31, 2020.
Stock options for approximately
7,000
shares of common stock were antidilutive and
not
included in determining diluted earnings per share for the
three
months ended
March 31, 2020.
 
Approximately
263,000
unvested restricted shares were included in determining both basic and diluted earnings per share for the
three
months ended
March 31, 2019.
In addition, stock options for approximately
12,000
shares of common stock were included in determining diluted earnings per share for the
three
months ended
March 31, 2019.
Stock options for approximately
7,000
shares of common stock were antidilutive and
not
included in determining diluted earnings per share for the
three
months ended
March 31, 2019.
 
Securities
: Debt securities classified as held to maturity are carried at amortized cost when management has the positive intent and ability to hold them to maturity. Debt securities are classified as available for sale when they might be sold prior to maturity. Securities available for sale are carried at fair value, with unrealized holding gains and losses reported in other comprehensive income, net of tax. Federal Home Loan Bank stock is carried at cost.
 
Interest income includes amortization of purchase premiums and accretion of discounts. Premiums and discounts on securities are amortized or accreted on the level-yield method without anticipating prepayments, except for mortgage-backed securities where prepayments are anticipated. Gains and losses on sales are recorded on the trade date and determined using the specific identification method.
 
Declines in the fair value of debt securities below their amortized cost that are other-than-temporary impairment (“OTTI”) are reflected in earnings or other comprehensive income, as appropriate. For those debt securities whose fair value is less than their amortized cost, we consider our intent to sell the security, whether it is more likely than
not
that we will be required to sell the security before recovery and whether we expect to recover the entire amortized cost of the security based on our assessment of the issuer’s financial condition. In analyzing an issuer’s financial condition, we consider whether the securities are issued by the federal government or its agencies, and whether downgrades by bond rating agencies have occurred. If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings. For debt securities that do
not
meet the aforementioned criteria, the amount of impairment is split into
two
components as follows:
1
) OTTI related to credit loss, which must be recognized in the income statement, and
2
) OTTI related to other factors, such as liquidity conditions in the market or changes in market interest rates, which is recognized in other comprehensive income. The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost.
 
Loans
: Loans that we have the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net of deferred loan fees and costs and an allowance for loan losses. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using the level-yield method without anticipating prepayments.
 
Interest income on commercial loans and mortgage loans is discontinued at the time the loan is
90
days delinquent unless the loan is well-secured and in process of collection. Consumer and credit card loans are typically charged-off
no
later than when they are
120
days past due. Past due status is based on the contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged off at an earlier date if collection of principal and interest is considered doubtful.
 
All interest accrued but
not
received for loans placed on nonaccrual is reversed against interest income. Interest received on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
 
Loans Held for Sale
: Mortgage loans originated and intended for sale in the secondary market are carried at the lower of aggregate cost or fair value, as determined by outstanding commitments from investors. Net unrealized losses, if any, are recorded as a valuation allowance and charged to earnings. As of
March 31, 2020
and
December 31, 2019,
we determined that the fair value of our mortgage loans held for sale approximated the recorded cost of
$24.7
million and
$5.0
million, respectively. Loans held for sale are reported as part of our total loans on the balance sheet.
 
Mortgage loans held for sale are generally sold with servicing rights retained. Gains and losses on sales of mortgage loans are based on the difference between the selling price and the carrying value of the related loan sold, which is reduced by the cost allocated to the servicing right. We generally lock in the sale price to the purchaser of the mortgage loan at the same time we make an interest rate commitment to the borrower. These mortgage banking activities are
not
designated as hedges and are carried at fair value. The net gain or loss on mortgage banking derivatives is included in the gain on sale of loans. Mortgage loans serviced for others totaled approximately
$742
million and
$727
million as of
March 31, 2020
and
December 31, 2019,
respectively.
 
Mortgage Banking Activities
: Mortgage loan servicing rights are recognized as assets based on the allocated value of retained servicing rights on mortgage loans sold. Mortgage loan servicing rights are carried at the lower of amortized cost or fair value and are expensed in proportion to, and over the period of, estimated net servicing revenues. Impairment is evaluated based on the fair value of the rights using groupings of the underlying mortgage loans as to interest rates. Any impairment of a grouping is reported as a valuation allowance.
 
Servicing fee income is recorded for fees earned for servicing mortgage loans. The fees are based on a contractual percentage of the outstanding principal or a fixed amount per loan and are recorded as income when earned. Amortization of mortgage loan servicing rights is netted against mortgage loan servicing income and recorded in mortgage banking activities in the income statement.
 
Troubled Debt Restructurings
: A loan is accounted for as a troubled debt restructuring if we, for economic or legal reasons, grant a concession to a borrower considered to be experiencing financial difficulties that we would
not
otherwise consider. A troubled debt restructuring
may
involve the receipt of assets from the debtor in partial or full satisfaction of the loan, or a modification of terms such as a reduction of the stated interest rate or balance of the loan, a reduction of accrued interest, an extension of the maturity date or renewal of the loan at a stated interest rate lower than the current market rate for a new loan with similar risk, or some combination of these concessions. Troubled debt restructurings can be in either accrual or nonaccrual status. Nonaccrual troubled debt restructurings are included in nonperforming loans. Accruing troubled debt restructurings are generally excluded from nonperforming loans as it is considered probable that all contractual principal and interest due under the restructured terms will be collected.
 
In accordance with current accounting guidance, loans modified as troubled debt restructurings are, by definition, considered to be impaired loans. Impairment for these loans is measured on a loan-by-loan basis similar to other impaired loans as described below under “Allowance for Loan Losses.” Certain loans modified as troubled debt restructurings
may
have been previously measured for impairment under a general allowance methodology (i.e., pooling), thus at the time the loan is modified as a troubled debt restructuring the allowance will be impacted by the difference between the results of these
two
measurement methodologies. Loans modified as troubled debt restructurings that subsequently default are factored into the determination of the allowance in the same manner as other defaulted loans.
 
On
March 22, 2020,
the federal banking agencies issued an “
Interagency Statement on Loan Modifications and reporting for Financial Institutions Working with Customers Affected by the Coronavirus.” 
This guidance encourages financial institutions to work prudently with borrowers that
may
be unable to meet their contractual obligations because of the effects of the Coronavirus.  The guidance goes on to explain that in consultation with the FASB staff that the federal banking agencies conclude that short-term modifications (e.g.
six
months) made on a good faith basis to borrowers who were current as of the implementation date of a relief program are
not
troubled debt restructurings.  Section
4013
of the CARES Act also addressed Coronavirus-related modifications and specified that Coronavirus-related modifications on loans that were current as of
December 31, 2019
are
not
troubled debt restructurings.
 
In early
April 2020,
we developed internal programs of loan payment deferments for commercial and retail borrowers.  For commercial borrowers, we offer
90
-day (
three
payments) interest only amendments as well as
90
-day (
three
payments) principal and interest payment deferments.  Under the latter program, borrowers are extended a
12
-month single payment note at
0%
interest in an amount equal to
three
payments, with loan proceeds used to make the scheduled payments.  As of
April 30, 2020,
we had processed over
400
interest only amendments with loan balances aggregating
$342
million and
125
principal and interest payment deferments with loan balances totaling
$247
million and resulting single payment loans aggregating
$5.4
million.  For retail borrowers, we offer
90
-day (
three
payments) principal and interest payment deferments, with deferred amounts added to the end of the loan.  As of
April 30, 2020,
we had processed almost
300
principal and interest payment deferments with loan balances totaling
$34.0
million.
 
Allowance for Loan Losses
: The allowance for loan losses (“allowance”) is a valuation allowance for probable incurred credit losses. Loan losses are charged against the allowance when we believe the uncollectability of a loan is confirmed. Subsequent recoveries, if any, are credited to the allowance. We estimate the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions and other factors. Allocations of the allowance
may
be made for specific loans, but the entire allowance is available for any loan that, in our judgment, should be charged-off.
 
A loan is considered to be impaired when, based on current information and events, it is probable we will be unable to collect the scheduled payments of principal and interest when due according to the contractual terms of the loan agreement. Factors considered in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are
not
classified as impaired. We determine the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of delay, the reasons for delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price or the fair value of collateral if the loan is collateral dependent. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment.
 
Financial institutions are
not
required to comply with the Current Expected Credit Loss (“CECL”) methodology requirements from the enactment date of the CARES Act until the earlier of the end of the President’s declaration of a National Emergency or
December 31, 2020. 
An economic forecast is a key component of the CECL methodology.  As we enter into an unprecedented economic environment whereby a sizable portion of the economy has been significantly impacted by shelter in place declarations and similar reactions by businesses and individuals, substantial government stimulus has been provided to businesses, individuals and state and local governments, financial institutions have offered businesses and individuals payment relief options, economic forecasts are regularly updated and there is
no
economic forecast consensus.  Given the high degree of uncertainty surrounding economic forecasting, we have elected to postpone the adoption of CECL, and will continue to use our incurred loan loss reserve model as permitted.
 
Derivatives
: Derivative financial instruments are recognized as assets or liabilities at fair value. The accounting for changes in the fair value of derivatives depends on the use of the derivatives and whether the derivatives qualify for hedge accounting. Used as part of our asset and liability management to help manage interest rate risk, our derivatives have generally consisted of interest rate swap agreements that qualified for hedge accounting. We do
not
use derivatives for trading purposes.
 
Changes in the fair value of derivatives that are designated, for accounting purposes, as a hedge of the variability of cash flows to be received on various assets and liabilities and are effective are reported in other comprehensive income. They are later reclassified into earnings in the same periods during which the hedged transaction affects earnings and are included in the line item in which the hedged cash flows are recorded. If hedge accounting does
not
apply, changes in the fair value of derivatives are recognized immediately in current earnings as interest income or expense.
 
If designated as a hedge, we formally document the relationship between derivatives as hedged items, as well as the risk-management objective and the strategy for undertaking hedge transactions. This documentation includes linking cash flow hedges to specific assets and liabilities on the balance sheet. If designated as a hedge, we also formally assess, both at the hedge’s inception and on an ongoing basis, whether the derivative instruments that are used are highly effective in offsetting changes in cash flows of the hedged items. Ineffective hedge gains and losses are recognized immediately in current earnings as noninterest income or expense. We discontinue hedge accounting when we determine the derivative is
no
longer effective in offsetting changes in the cash flows of the hedged item, the derivative is settled or terminates, or treatment of the derivative as a hedge is
no
longer appropriate or intended.
 
Goodwill and Core Deposit Intangible
: Goodwill results from business acquisitions and represents the excess of the purchase price over the fair value of acquired tangible assets and liabilities and identifiable intangible assets. Goodwill is assessed at least annually for impairment and any such impairment is recognized in the period identified. A more frequent assessment is performed should events or changes in circumstances indicate the carrying value of the goodwill
may
not
be recoverable. We
may
elect to perform a qualitative assessment for the annual impairment test. If the qualitative assessment indicates it is more likely than
not
that the fair value of a reporting unit is less than its carrying amount, or if we elect
not
to perform a qualitative assessment, then we would be required to perform a quantitative test for goodwill impairment. If the estimated fair value of the reporting unit is less than the carrying value, goodwill is impaired and is written down to its estimated fair value. In
2019,
we elected to perform a qualitative assessment for our annual impairment test and concluded it is more likely than
not
our fair value was greater than its carrying amount; therefore,
no
further testing was required.
 
Due to the stressed economic and market conditions created by the Coronavirus Pandemic, we assessed goodwill for impairment as of
March 31, 2020.
We used a discounted income approach and a market valuation model, which compared the inherent value of our company to valuations of recent transactions in the market place to determine if our goodwill has been impaired. It was determined that our goodwill was
not
impaired as of
March 31, 2020.
 
The core deposit intangible that arose from the Firstbank Corporation acquisition was initially measured at fair value and is being amortized into noninterest expense over a
ten
-year period using the sum-of-the-years-digits methodology.
 
Revenue from Contracts with Customers
: We record revenue from contracts with customers in accordance with Accounting Standards Codification Topic
606,
“Revenue from Contracts with Customers”
(“Topic
606”
). Under Topic
606,
we must identify the contract with a customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to the performance obligations in the contract, and recognize revenue when (or as) we satisfy a performance obligation. Significant revenue has
not
been recognized in the current reporting period that results from performance obligations satisfied in previous periods.
 
Our primary sources of revenue are derived from interest and dividends earned on loans, securities and other financial instruments that are
not
within the scope of Topic
606.
We have evaluated the nature of our contracts with customers and determined that further disaggregation of revenue from contracts with customers into more granular categories beyond what is presented in the Consolidated Statements of Income was
not
necessary. We generally satisfy our performance obligations on contracts with customers as services are rendered, and the transaction prices are typically fixed and charged either on a periodic basis (generally monthly) or based on activity. Because performance obligations are satisfied as services are rendered and the transaction prices are fixed, there is little judgment involved in applying Topic
606
that significantly affects the determination of the amount and timing of revenue from contracts with customers.
 
Recent Events:
  The U.S. economy deteriorated rapidly during the latter part of the
first
quarter and into the
second
quarter of
2020
due to the ongoing pandemic of coronavirus disease
2019
(“COVID-
19”
) caused by severe acute respiratory syndrome coronavirus
2
(the “Coronavirus Pandemic”).  The outbreak was initially identified in Wuhan, China in
December 2019. 
The World Health Organization declared the outbreak to be a Public Health Emergency Concern on
January 30, 2020,
and then recognized it as a pandemic on
March 11, 2020. 
The
first
known case in the United States was identified in the State of Washington on
January 20, 2020. 
The White House Coronavirus Task Force was established on
January 29, 2020. 
President Trump declared a Public Health Emergency on
January 31, 2020,
which was elevated by the President’s declaration of a National Emergency on
March 13, 2020 (
the “National Emergency”). 
 
The
first
known case in the State of Michigan was identified on
March 10, 2020,
which triggered a State of Emergency response from Governor Whitmer.  Soon thereafter, Governor Whitmer ordered the closure of all K-
12
school buildings until early
April,
which was later amended to suspend all face-to-face instruction for the remainder of the
2019
-
2020
school year.  In mid-
March,
Governor Whitmer ordered all bars, restaurants, entertainment venues and other similar businesses to partially close for
two
weeks, and banned all gatherings of more than
50
people for the period of mid-
March
into early
April. 
On
March 24, 2020,
Governor Whitmer issued a state-wide stay-at-home order limiting all non-essential travel and discontinuing all non-essential business services and operations.  The order was originally set to expire on
April 13, 2020;
however, the order was extended, and expanded with additional restrictions, until
April 30, 2020. 
On
April 24, 2020,
Governor Whitmer issued an amended stay-at-home order that expires on
May 15, 2020
to replace the stay-at-home order that was scheduled to expire on
April 30, 2020. 
On
May 7, 2020,
Governor Whitmer issued an amended stay-at-home order that expires on
May 28, 2020
to replace the stay-at-home order that was scheduled to expire on
May 15, 2020. 
The amended orders reduced some of the restrictions from the previous orders, permitting certain activities in limited or restricted capacities.  Governor Whitmer requested a major disaster declaration on
March 26, 2020,
which was granted by President Trump on
March 28, 2020.
 
COVID-
19
is primarily spread between people during close contact, often via small droplets produced by coughing, sneezing or talking.  People
may
also become infected by touching a contaminated surface and then touching their eyes, nose or mouth.  There is currently
no
known vaccine or specific antiviral treatment, with the primary treatment being symptomatic and supportive therapies.  Recommended preventive measures include hand washing, covering one’s mouth when coughing and maintaining distance from other people, as well as self-isolation for people who suspect they are infected.
 
The Coronavirus Pandemic has caused severe global socioeconomic disruptions.  It has led to the postponement or cancellation of sporting, religious, political and cultural events, as well as widespread supply shortages exacerbated by panic buying.  Service industry businesses, such as restaurants, hotels, airlines, cruise lines and movie theaters, have been particularly negatively impacted by the restrictions and stay-at-home orders issued by authorities around a vast majority of the world.  The health care industry has also been significantly impacted, from a combination of treating infected patients to the cancellation of medical appointments and elective surgeries.  At the current time, it is highly uncertain as to when conditions will begin to return to normal.  Most agree that a return to normal conditions will be accomplished in phases, taking into account factors such as regional rates and trends of infections, types of businesses and required social distancing measures.  Human behavior will also likely play a significant role as people make individual choices to re-engage in permissible activities.
 
Responding to the Coronavirus Pandemic and Governor Whitmer’s stay-at-home orders, by
March 23, 2020,
over
75%
of our employees were working from home.  In addition, beginning on
March 18, 2020
our branch lobbies were allowing face-to-face contact with customers by appointment only.  On
March 25, 2020,
we enhanced our social distancing response by closing our branch lobbies to all customers.  Our customers are conducting banking transactions via drive-thru, virtual banking machines, online banking and our call center. 
 
In response to the substantial negative impact of the Coronavirus Pandemic and the associated social distancing orders and measures on the United States and global economies, Congress passed the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), which was signed by President Trump on
March 27, 2020. 
The CARES Act is in large part a
$1.8
trillion spending bill that builds upon
two
earlier and considerably smaller federal government support measures in the wake of the Coronavirus Pandemic and associated economic fallout.  The CARES Act is comprehensive and touches on many facets of federal government assistance and banking regulatory requirements.  In addition, the Federal Open Market Committee lowered the targeted federal funds rate by
50
basis points on
March 3, 2020
and by another
100
basis points on
March 15, 2020,
and announced the resumption of quantitative easing.
 
The Coronavirus Pandemic is a highly unusual, unprecedented and evolving public health and economic crisis and
may
have a negative material impact on our financial condition and results of operations.  We are in an asset-sensitive position, whereby interest rate environments characterized by numerous and/or high magnitude interest rate reductions have a negative impact on our net interest income and net income.  Additionally, the consequences of the unprecedented economic impact of the Coronavirus Pandemic is likely to result in declining asset quality, reflected by a higher level of loan delinquencies and loan charge-offs, as well as downgrades of commercial lending relationships, which will necessitate additional provisions for our allowance and reduced net income.
 
Subsequent Event
: The Paycheck Protection Program (“PPP”) reflects a substantial expansion of the Small Business Administration’s
100%
guaranteed
7
(a) loan program.  The CARES Act authorized up to
$350
billion in loans to businesses with fewer than
500
employees, including non-profit organizations, tribal business concerns, self-employed and individual contractors.  The PPP provides
100%
guaranteed loans to cover specific operating costs, with the maximum loan size capped at the lesser of
250%
of the average monthly payroll costs or
$10.0
million. PPP loans are eligible to be forgiven based upon certain criteria.  In general, the amount of the loan that is forgivable is the sum of the payroll costs, interest payments on mortgages, rent and utilities incurred or paid by the business during the
eight
-week period beginning on the loan origination date.  Any remaining balance after forgiveness is maintained at the
100%
guarantee for the duration of the loan.  The loan tenor is
24
months, with deferred payments for the
first
six
months, and fully amortizing monthly payments for the following
18
months.  The interest rate on the loan is fixed at
1.00%,
with the financial institution receiving a loan origination fee ranging from
1%
to
5%
of the loan amount paid by the Small Business Administration. Participation in the PPP will likely have a significant impact on our asset mix and net interest income for the remainder of
2020.
As of
April 30, 2020,
we had originated over
1,750
loans aggregating
$523
million in loans under the PPP.
 
Congress passed, and on
April 24, 2020
President Trump signed, legislation which added
$300
billion to the PPP.  Included in the legislation was a specific allocation of
$30
billion for financial institutions under
$10
billion.
 
Under the CARES Act, a PPP loan is assigned a risk weight of
0%
under the risk-based capital rules of the federal banking agencies.  On
April 9, 2020,
the federal banking agencies issued an interim final rule allowing financial institutions to exclude PPP loans from the average asset calculation to the degree the PPP loans are financed through the Paycheck Protection Program Lending Facility (“PPPLF”) for the Tier
1
Leverage Capital Ratio.
 
In
April, 2020,
the Federal Reserve initiated the PPPLF, which is designed to facilitate lending by financial institutions to small businesses under the PPP.  Only PPP loans are eligible to serve as collateral for the PPPLF, with each dollar of PPP loans providing
one
dollar of advance availability.  The maturity date of an extension of credit under the PPPLF will equal the maturity date of the pool of PPP loans pledged to secure the extension of credit.  Any principal payments received by the financial institution on the PPP loans, such as PPP loan forgiveness payments from the Small Business Administration or principal payments from the borrower after the initial
six
-month deferment period, must be used to pay down the PPPLF advance by the same dollar amount, maintaining the dollar-for-dollar advance amount and PPP aggregate loan balance relationship.  The interest rate on PPPLF advances is fixed at
0.35%.
 
No
PPPLF advances can be obtained after
September 30, 2020. 
As of
April 30, 2020,
our advances under the PPPLF totaled
$43.7
million.  In general, we plan to obtain additional PPPLF advances as our borrowers utilize PPP loan proceeds for permissible purposes.  It is expected that aggregate PPPLF advances will total
90%
to
100%
of the aggregate PPP loans at a point during the
second
quarter.
 
Adoption of New Accounting Standards
: In
February 2016,
the FASB issued ASU
2016
-
02,
Leases
. This ASU (as subsequently amended by ASU
2018
-
01,
ASU
2018
-
10,
ASU
2018
-
11
and ASU
2018
-
20
) establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than
12
months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The ASU was effective for annual and interim periods beginning after
December 15, 2018.
The adoption of this new standard as of
January 1, 2019
resulted in the recording of a ROU asset and associated lease liability of approximately
$1.3
million.
 
In
June 2016,
the FASB issued ASU
No.
2016
-
13,
Measurement of Credit Losses on Financial Instruments
. This ASU (as subsequently amended by ASU
2018
-
19
) significantly changes how entities will measure credit losses for most financial assets and certain other instruments that are
not
measured at fair value through net income. The standard will replace the current “incurred loss” approach with an “expected loss” model. The new model, referred to as the current expected credit loss (“CECL”) model, will apply to: (i) financial assets subject to credit losses and measured at amortized cost, and (ii) certain off-balance sheet credit exposures. This includes, but is
not
limited to, loans, leases, held-to-maturity securities, loan commitments and financial guarantees. The ASU also simplifies the accounting model for purchased credit-impaired debt securities and loans, and expands the disclosure requirements regarding an entity’s assumptions, models, and methods for estimating the allowance for loan and lease losses. In addition, entities will need to disclose the amortized cost balance for each class of financial asset by credit quality indicator, disaggregated by the year of origination. This ASU is effective for interim and annual reporting periods beginning after
December 15, 2019.
Financial institutions are
not
required to comply with the CECL methodology requirements from the enactment date of the CARES Act until the earlier of the end of the National Emergency or
December 31, 2020.
We elected to postpone CECL adoption as permitted. An economic forecast is a key component of the CECL methodology.  As we enter into an unprecedented economic environment whereby a sizable portion of the economy has been significantly impacted by shelter in place declarations and similar reactions by businesses and individuals, substantial government stimulus has been provided to businesses, individuals and state and local governments, financial institutions have offered businesses and individuals payment relief options, economic forecasts are regularly updated and there is
no
economic forecast consensus.  Given the high degree of uncertainty surrounding economic forecasting, we have elected to postpone the adoption of CECL, and will continue to use our incurred loan loss reserve model as permitted. Had we adopted CECL on
January 1, 2020,
the allowance would have decreased by
$1.0
million, resulting in an increase to retained earnings of
$0.8
million.