RECENT ACCOUNTING PRONOUNCEMENTS

12 Months Ended

Dec. 31, 2022

RECENT ACCOUNTING PRONOUNCEMENTS

RECENT ACCOUNTING PRONOUNCEMENTS

2. RECENT ACCOUNTING PRONOUNCEMENTS

The Financial Accounting Standards Board (FASB) issues ASUs to the FASB ASC. This section provides a summary description of recent ASUs that have significant implications (elected or required) within the consolidated financial statements, or that management expects may have a significant impact on financial statements issued in the foreseeable future.

Recent Accounting Pronouncements – Adopted

ASU 2020-04, Reference Rate Reform (Topic 848) provides temporary optional guidance to ease the potential burden in accounting for reference rate reform. The amendments in Update 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. The guidance includes a general principle that permits an entity to consider contract modifications due to reference rate reform to be an event that does not require contract remeasurement at the modification date or reassessment of a previous accounting determination. Some specific optional expedients are as follows:

● Simplifies accounting for contract modifications, including modifications to loans receivable and debt, by prospectively adjusting the effective interest rate.

● Simplifies the assessment of hedge effectiveness and allows hedging relationships affected by reference rate reform to continue.

The Corporation has elected to apply the optional expedients prospectively for applicable loan and other contracts, and implementation of this election did not have a material effect on the Corporation’s financial position or results of operations.

Recently Issued But Not Yet Effective Accounting Pronouncements

ASU 2016-13, Financial Instruments-Credit Losses (Topic 326), as modified by subsequent ASUs, changes accounting for credit losses on loans receivable and debt securities from an incurred loss methodology to an expected credit loss methodology commonly referred to as “CECL.” In addition, CECL amends the accounting for credit losses on debt securities and purchased financial assets with credit deterioration. The allowance for credit losses will be based on the Corporation’s historical loss experience, borrower characteristics, forecasts of future economic conditions and other relevant factors. The Corporation will also apply qualitative factors to account for information that may not be reflected in quantitatively derived results or other relevant factors to ensure the allowance reflects management’s best estimate of current expected credit losses.

The Corporation is adopting CECL on January 1, 2023 using the modified retrospective approach.  Based on implementation efforts to date, management estimates CECL adoption will result in a reduction in retained earnings estimated at $1,000,000 to $3,000,000, net of tax. Management estimates CECL adoption will result in an increase in the allowance for credit losses of $2,000,000 to $4,000,000 over the balance in the allowance for loan losses of $16,615,000 at December 31, 2022.

The Corporation is in the process of finalizing its expected credit loss estimates and the operational and control structure supporting the process.

Banking regulators permit transitional relief of incremental capital requirements from CECL adoption by utilizing a 3-year optional phase-in. Management does not expect to utilize the phased-in approach and expects to record the entire cumulative effect adjustment against regulatory capital at the time of adoption.

ASU 2022-02, Financial Instruments-Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. This update reduces the complexity of accounting for TDRs by eliminating certain accounting guidance, enhancing disclosures and improving the consistency of vintage disclosures. The Corporation will adopt ASU 2022-02 on January 1, 2023. The Corporation does not expect the adoption of ASU 2022-02 to have a material impact on its consolidated financial statements.