Quarterly report pursuant to Section 13 or 15(d)

Note 3 - Change in Accounting Principles

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Note 3 - Change in Accounting Principles
 3 Months Ended
Mar. 31, 2023
Notes to Financial Statements  
Accounting Standards Update and Change in Accounting Principle [Text Block]

Note 3 – Change in Accounting Principles

In June 2016, FASB issued ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments (“CECL”. The ASU includes increased disclosures and various changes to the accounting and measurement of financial assets including the Bancorp’s loans and available-for-sale debt securities. Each financial asset presented on the balance sheet would have a unique allowance for credit losses (“ACL”) valuation account that is deducted from the amortized cost basis to present the net carrying value at the amount expected to be collected on the financial asset. The amendments in this ASU also eliminate the probable initial recognition threshold in current GAAP and instead, reflect an entity’s current estimate of all expected credit losses using reasonable and supportable forecasts. In October 2019, the FASB voted and approved proposed changes to the effective date of this ASU for smaller reporting companies, such as the Bancorp, and other non-SEC reporting entities. The approval changed the effective date of the ASU to fiscal years beginning after December 15, 2022, including interim periods within those fiscal periods. The new credit loss guidance became effective for the Bancorp as of January 1, 2023. Upon adoption, the ASU will be applied using a modified retrospective transition method to the beginning of the first reporting period in which the guidance is effective. A prospective transition approach is required for debt securities for which an other-than-temporary impairment had been recognized before the effective date. On January 1, 2023, the Bancorp adopted ASU No. 2016-13 resulting in an implementation entry of $8.3 million, increasing the ACL by $5.2 million and unfunded commitment liability of $3.1 million, retained earnings decreased $6.1 million and a deferred tax asset of $2.2 million was generated. The majority of the implementation entry is related to including acquired loan portfolios in the model and the addition of using economic forecasts in estimating future losses. In addition, $1.0 million of non-accretable credit loan discounts on purchase credit impaired loans now classified as purchase credit deteriorated were reallocated to the ACL.

 

Upon adopting ASU 2016-13, the Bancorp did not record an allowance as of January 1, 2023, with respect to its available-for-sale debt securities as the majority of these securities were backed by federal governmental agencies with zero-expected losses or highly rated for which the risk of loss is minimal.

 

The main drivers of the day one adjustment related to implementation is summarized in the following table:

 

                   

As Reported Under

  

(Dollars in thousands)

  

Pre-ASC 326 Adoption

    

Impact of ASC 326

    

ASC 326

  

Allowance for credit losses

  

December 31, 2022

    

Adoption

    

January 1, 2023

  

Residential real estate

   $ 3,021     $ 1,719     $ 4,740  

Home equity

     410       632       1,042  

Commercial real estate

     5,784       1,446       7,230  

Construction and land development

     1,253       1,735       2,988  

Multifamily

     1,007       141       1,148  

Commercial business

     1,365       325       1,690  

Consumer

     57       22       79  

Manufactured homes

     -       112       112  

Government

     -       55       55  

Total allowance for credit losses on loans

   $ 12,897     $ 6,187     $ 19,084  

Accrued expenses and other liabilities

     -       3,108       3,108  

Total allowance for credit losses

   $ 12,897     $ 9,295     $ 22,192  

 

In March 2022, the FASB issued ASU 2022-02, Financial Instruments—Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures, which addresses and amends areas identified by the FASB as part of its post-implementation review of the accounting standard that introduced the CECL model. The amendments eliminate the accounting guidance for troubled debt restructurings by companies that have adopted the CECL model and enhance the disclosure requirements for loan refinancings and restructurings made with borrowers experiencing financial difficulty. In addition, the amendments require disclosure of current-period gross writeoffs for financing receivables and net investment in leases by year of origination in the vintage disclosures. ASU 2022-02 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years for entities that have adopted the CECL accounting standard. The Bancorp adopted ASU 2022-02 on January 1, 2023.