RECENT ACCOUNTING STANDARDS UPDATE ("ASU")

12 Months Ended

Dec. 31, 2022

RECENT ACCOUNTING STANDARDS UPDATE ("ASU")

RECENT ACCOUNTING STANDARDS UPDATE ("ASU")

3. RECENT ACCOUNTING STANDARDS UPDATE (“ASU”)

New Accounting Standards Adopted in 2022:

ASU 2020-04, Reference Rate Report (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting

Issued: March 2020

Summary: ASU 2020-04 was issued to ease the potential burden in accounting for reference rate reform. The amendments in ASU 2020-04 are elective and apply to all entities that have contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued due to reference rate reform.

The new guidance provides the following optional expedients that reduce costs and complexity of accounting for reference rate reform:

● Simplify accounting analyses for contract modifications.

● Allow hedging relationships to continue without de-designation if there are qualifying change in the critical terms of an existing hedging relationship due to reference rate reform.

● Allow a change in the systematic and rational method used to recognize in earnings the components excluded from the assessment of hedge effectiveness.

● Allow a change in the designated benchmark interest rate to a different eligible benchmark interest rate in a fair value hedging relationship.

● Allow the shortcut method for a fair value hedging relationship to continue for the remainder of the hedging relationship.

● Simplify the assessment of hedge effectiveness and provide temporary optional expedients for cash flow hedging relationships affected by reference rate reform.

● Allow a one-time election to sell or transfer debt securities classified as held to maturity that reference a rate affected by reference rate reform and are classified as held to maturity before January 1, 2020.

In January 2021, the FASB issued ASU 2021-01 which clarified that all derivative instruments affected by the changes to interest rates used for discounting, margining or contract price alignment, regardless of whether they reference LIBOR or

another rate expected to be discontinued as a result of reference rate reform, an entity may apply certain practical expedients in Topic 848.

Effective Date: ASU 2020-04 is effective for all entities from the beginning of an interim period that includes the issuance date of the ASU and the amendments may be applied prospectively through December 31, 2022. The adoption of this standard did not have a material effect on the Company’s operating results or financial condition.

Pending Accounting Standards:

ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments

Issued: June 2016

Summary: FASB issued Topic 326 to replace the incurred loss model for loans and other financial assets with an expected loss model, which is referred to as the current expected credit loss (“CECL”) model. The CECL model is applicable to the measurement of credit losses on financial assets measured at amortized cost, including loan receivables and held to maturity debt securities. It also applies to off-balance sheet credit exposures not accounted for as insurance loan commitments, standby letters of credit, financial guarantees and other similar instruments) and new investments in certain leases recognized by a lessor. In addition, the amendments in Topic 326 require credit losses on available for sale securities to be presented as a valuation allowance rather than a direct write-down.

Effective Date: The standard will be effective for all entities, including SEC filers identified as smaller reporting companies, and nonpublic business entities for fiscal years beginning after December 15, 2022.

● For debt securities with other-than-temporary impairment (“OTTI”), the guidance will be applied prospectively , if applicable.

● Existing purchased credit impaired (“PCI”) assets will be grandfathered and classified as purchased credit deteriorated (“PCD”) assets as the date of adoption. The asset will be grossed up for the allowance for expected credit losses for all PCD assets at the date of adoption and will continue to recognize the noncredit discount in interest income based on the yield of such assets as of the adoption date. Subsequent changes in expected credit losses will be recorded through the allowance.

● For all other assets within the scope of CECL, a cumulative-effect adjustment will be recognized in retained earnings as of the beginning of the first reporting period in which the guidance is effective.

The Company is adopting Topic 326, as of January 1, 2023. While the Company has not finalized the impact of implementing CECL, the Company expects to recognize a one-time cumulative effect increase to the allowance for credit losses on loans of between $1.0 million to $1.2 million upon adoption. The future impact of CECL on the Company’s allowance for credit losses and provision expense subsequent to the initial adoption will depend on changes in the loan portfolio, economic conditions and refinements to key assumptions including forecasting and qualitative factors. The Company measured its allowance under its current incurred loan loss model as of December 31, 2022. The impact of adoption on the allowance for credit losses on off-balance sheet commitments and for credit losses on securities held to maturity is not expected to be material.

ASU 2022-02, Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures

Issued: March 2022

Summary: ASU 2022-02 eliminates the recognition and measurement guidance for troubled debt restructurings (“TDRs”) by creditors in ASC 310-40. The Update also enhances disclosure requirements for certain loan restructurings by creditors when a borrower is experiencing financial difficulty. Specifically, rather than applying the recognition and measurement

guidance for TDRs, an entity will apply the loan refinancing and restructuring guidance to determine whether a modification or other form of restructuring results in a new loan or a continuation of an existing loan. Additionally, the amendments in this ASU require a public business entity to disclose current-period gross write-offs by year of origination for financing receivables and net investments in leases in the existing vintage disclosures.

Effective Date: The amendments in this Update are effective for entities that have adopted the amendments in Update 2016-13 for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. For entities that have not yet adopted the amendments in Update 2016-13, the effective date for the amendments in this update are the same as the effective dates in Update 2016-13. This update requires prospective transition for the disclosures related to loan restructurings for borrowers experiencing financial difficulty and the presentation of gross write-offs in the vintage disclosures. The guidance related to the recognition and measurement of TDRs may be adopted on a prospective or modified retrospective transition method. The adoption of this standard is not expected to have a material effect on the Company’s operating results or financial condition.