In June 2016, the FASB issued ASU
No. 2016-13,
“Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”. ASU No.
2016-13 requires
an entity to utilize a new impairment model known as the current expected credit loss (“CECL”) model to estimate its lifetime “expected credit loss” and record an allowance that, when deducted from the amortized cost basis of the financial asset, presents the net amount expected to be collected on the financial asset. The CECL model is expected to result in earlier recognition of credit losses. ASU
No. 2016-13
also requires new disclosures for financial assets measured at amortized cost, loans, and
debt securities. In November 2018, the FASB issued ASU No.
2018-19—Codification
Improvements to Topic 326, Financial Instruments—Credit Losses. The amendments clarify that receivables arising from operating leases are not within the scope of Subtopic
326-20.
Instead, impairment of receivables arising from operating leases should be accounted for in accordance with Topic 842, Leases. In May 2019, the FASB issued ASU
No. 2019-05
“Financial Instruments-Credit Losses (Topic 326)-Targeted Transition Relief” which amends ASU
No. 2016-13
to allow companies to irrevocably elect, upon adoption of ASU No,
2016-13,
the fair value option on financial instruments that were previously recorded at amortized cost and are within the scope of ASC
326-20
if the instruments are eligible for the fair value option under ASC
825-10.
The fair value option election does not apply to
debt securities. Entities are required to make this election on an
basis. In November 2019, the FASB issued ASU
No. 2019-11,
“Codification Improvements to Topic 326, Financial Instruments—Credit Losses”, which provides specific improvements and clarifications to the guidance in Topic 326. Addresses expected recoveries for purchased financial assets with credit deterioration, transition relief for troubled debt restructurings, disclosures related to accrued interest receivables, financial assets secured by collateral maintenance provisions, and conforming cross-references to Subtopic
805-20.
In December 2018, the federal bank regulatory agencies approved a final rule that modifies their regulatory capital rules and provides institutions the option to phase in over a three-year period any
day-one
regulatory capital effects of the new accounting standard. The Company has formed an internal management committee and engaged a third-party vendor to assist with the transition to the guidance set forth in this update. The committee is currently evaluating the impact of this update on the Company’s Consolidated Financial Statements, but the allowance for credit losses (“ACL”) is expected to increase upon adoption since the allowance will be required to cover the full expected life of the portfolio. The extent of this increase is still being evaluated and will depend on economic conditions and the composition of the loan and lease portfolio at the time of adoption. Management is currently evaluating the preliminary modeling results, including a qualitative framework to account for the drivers of credit losses that are not captured by the quantitative model. In October 2019, the FASB affirmed its previously proposed amendment to delay the effective date for small reporting public companies to interim and annual reporting periods beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption is permitted. The Company currently expects as of January 1, 2023 to recognize a
one-time
cumulative effect adjustment to increase the ACL with an offsetting reduction to the retained earnings component of equity.