New Accounting Pronouncements

6 Months Ended

Jun. 30, 2016

Accounting Policies [Abstract]

New Accounting Pronouncements

Note 2: New Accounting Pronouncements

On June 16, 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-13, Financial Instruments—Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments. This ASU codified the final current expected credit loss (“CECL”) modeling requirement for financial assets within its scope.  The CECL modeling requirement represents a transition in the way institutions will account for losses on many financial assets, including loans.  In comparison to current authoritative guidance, the largest proposed change is the shift to accounting for expected losses over the entire life of the financial asset.

The new CECL model will apply to: (1) financial assets subject to credit losses and measured at amortized cost, and (2) certain off-balance sheet credit exposures. This includes loans, held-to-maturity debt securities, loan commitments, financial guarantees, and net investments in leases, as well as reinsurance and trade receivables. Upon initial recognition of the exposure, the CECL model requires an entity to estimate the credit losses expected over the life of an exposure (or pool of exposures). The estimate of expected credit losses (“ECL”) should consider historical information, current information, and reasonable and supportable forecasts, including estimates of prepayments.  Generally, the initial estimate of the ECL and subsequent changes in the estimate will be reported in current earnings. The ECL will be recorded through an allowance for loan and lease losses (“ALLL”) in the statement of financial position.

Current GAAP requires an “incurred loss” methodology for recognizing credit losses that delays recognition until it is probable that a loss has been incurred.  The current model therefore generally restricts an organization’s ability to record credit losses that are expected, but do not yet meet the “probable” threshold.

The ASU also significantly amends the current available-for-sale (“AFS”) security other-than-temporary impairment (“OTTI”) model for debt securities. The new model will require an estimate of ECL only when the fair value is below the amortized cost of the asset. The length of time that the fair value of an AFS debt security has been below the amortized cost will no longer impact the determination of whether a credit loss exists.  In addition, credit losses on AFS debt securities will now be limited to the difference between the security’s amortized cost basis and its fair value. The AFS debt security model will also require the use of an allowance to record estimated credit losses (and subsequent recoveries).

The new guidance addresses purchased financial assets with credit deterioration (“PCD”). The new model applies to purchased financial assets (measured at amortized cost or held as AFS) that have experienced more than insignificant credit deterioration since origination. This represents a change from the scope of what are considered purchased credit-impaired assets under the current model. Different than the accounting for originated or purchased assets that do not qualify as PCD, the initial estimate of expected credit losses for a PCD would be recognized through an ALLL with an offset to the cost basis of the related financial asset at acquisition (i.e., there is no impact to net income at initial recognition). Subsequently, the accounting will follow the applicable CECL or AFS debt security impairment model with all adjustments of the ALLL recognized through earnings.

ASU 2016-13 also expands the disclosure requirements regarding an entity’s assumptions, models, and methods for estimating the ALLL. In addition, public business entities (“PBEs”) 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 disclosure will not be required for other reporting entities.

For PBEs that are U.S. Securities and Exchange Commission (SEC) filers, such as the Company, the amendments in this Update are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.  All entities may adopt the amendments in this Update earlier as of the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.  An entity will apply the amendments in this Update through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective.  The provisions of this new accounting standard are complex and will require substantial analysis prior to the ASU’s implementation.  The Company’s management is currently in the process of evaluating the impact that this standard will have on its consolidated financial statements.