views February 2016 The New Lease Standard: What Does It Mean for Your Institution? Eric Crowder, Manager | DHG Financial Services Walter McNairy, Managing Partner | DHG Financial Services After much anticipation, in November 2015, the FASB announced the tentative effective date of the accounting standard titled Leases, ASC Topic 842. The new standard is expected to be effective for public business entities for fiscal years beginning after Dec. 15, 2018, including interim periods within those years. The standard is expected to be effective for non-public business entities for fiscal years beginning after Dec.

15, 2019. Early adoption of the standard will be permitted. Financial institutions will be significantly impacted by the leases standard, as not only do they enter into leases as part of their business (branches, operations and headquarters facilities), but many loan agreements with customers have covenants based on certain balance sheet ratios, which may be significantly affected by the proposed standard. Since early adoption is permitted, it is likely that banks will be immediately affected by the new leasing standard, either through their own leasing activities or through their customers. Accordingly, bank management should begin to consider the following areas in planning for implementation of the standard: • Monitor internal control systems – particularly for banks required to maintain internal control environments under FDICIA and Sarbanes-Oxley (SOX). • Create an inventory of leases and their key terms. • Determine initial classification Assurance | Tax | Advisory | dhgllp.com • Evaluate whether the balance sheet impact of leases would put the bank over a key asset size threshold (e.g., $500 million, $1 billion or $10 billion), which would trigger additional regulatory requirements. • Analyze impact on financial covenants with customers – particularly balance sheet covenants such as debt-toequity ratios and debt service coverage (DSC) ratios. • Train loan officers on the likely impact to their customers, including effect on existing debt covenants. • Determine the impact on regulatory capital ratios due to grossing up of the balance sheet/change in risk weighted assets. Financial institutions that consider these steps should be well prepared for the start date of the new leases standard. . views About DHG Financial Services About the Authors DHG Financial Services, a national practice of Dixon Hughes Goodman, focuses on publicly traded and privately-held financial services companies across the U.S. Our 30 financial services partners and more than 300 dedicated professionals provide you with in-depth, specialized industry knowledge and a wide range of assurance, tax and advisory services to address issues facing your industry in today’s challenging environment. For more information, visit dhgllp.com/financial-services. Eric Crowder is a manager in the DHG Financial Services and employee benefit plans practices. He has managed external audit engagements for a variety of financial institutions, including HUD mortgage lenders for more than seven years. Walter McNairy, Managing Partner, DHG Financial Services, oversees financial services client engagements throughout DHG’s footprint.

Over the past 25 years Walter has worked with community, regional and top 10 banks helping them achieve their strategic goals and navigate the complexities inherent in today’s environment. Eric Crowder Manager DHG Financial Services eric.crowder@dhgllp.com Assurance | Tax | Advisory | dhgllp.com 2 Walter McNairy Managing Partner DHG Financial Services walter.mcnairy@dhgllp.com .