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RECENT ACCOUNTING PRONOUNCEMENTS | 3 Months Ended
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Mar. 31, 2021
RECENT ACCOUNTING PRONOUNCEMENTS |
RECENT ACCOUNTING PRONOUNCEMENTS | NOTE 7 – RECENT ACCOUNTING PRONOUNCEMENTS New accounting pronouncements are issued by the Financial Accounting Standards Board ("FASB") with required effective dates. The following accounting pronouncements should be read in conjunction with "Critical Accounting Policies" of Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the Company’s 2020 Form 10-K. ASU 2016-13 "Financial Instruments - Credit Losses (Topic 326)" ("ASU 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 more timely recognition of credit losses. ASU 2016-13 also requires new disclosures for financial assets measured at amortized cost, loans, and available-for-sale debt securities. Entities will apply the standard's provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. ASU 2016-13, as updated, was adopted on January 1, 2021. Through the date of adoption, we held working group meetings that included individuals from various functional areas relevant to the implementation of CECL. Additionally, an assessment of our primary modeling tool was completed, which enabled us to complete parallel runs utilizing second and third quarter 2020 data, during which preliminary operational procedures and internal controls were designed. Management's working group also validated the appropriateness of, among other things, management’s decisions regarding portfolio segmentation, life of loan considerations, and reasonable and supportable forecasting methodology. The Company early adopted ASC 326 during the first quarter 2021 and based on the application of the modified retrospective method, it became effective on January 1, 2021 for all financial assets measured at amortized cost (primarily loans receivable) and off-balance-sheet credit exposures. Results for reporting periods beginning after January 1, 2021 are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP. The Company recorded a decrease to retained earnings of $1,472,000 as of January 1, 2021 for the cumulative effect of adopting ASC 326 as further detailed below.
|  |  |  | CECL |  |
|  | December 31, 2020 |  | Adoption Impact |  | January 1, 2021
(dollars in thousands) |  |  |  |  |  |  |  |  |
Allowance for credit losses: |  |  |  |  |  |  |  |  |
Loans Secured by Real Estate |  |  |  |  |  |  |  |  |
Construction and land |  | $ | 10 |  | $ | 16 |  | $ | 26
Farmland |  |  | 2 |  |  | 9 |  |  | 11
Single-family residential |  |  | 512 |  |  | 854 |  |  | 1,366
Multi-family |  |  | 39 |  |  | 63 |  |  | 102
Commercial |  |  | 218 |  |  | 199 |  |  | 417
Total loans secured by real estate |  |  | 781 |  |  | 1,141 |  |  | 1,922
Commercial and Industrial |  |  |  |  |  |  |  |  |
Commercial and industrial |  |  | 67 |  |  | 120 |  |  | 187
SBA guaranty |  |  | 48 |  |  | (6) |  |  | 42
Total commercial and industrial loans |  |  | 115 |  |  | 114 |  |  | 229
Consumer Loans |  |  |  |  |  |  |  |  |
Consumer |  |  | 11 |  |  | 46 |  |  | 57
Automobile |  |  | 569 |  |  | 273 |  |  | 842
Total consumer loans |  |  | 580 |  |  | 319 |  |  | 899
Total allowance for loan losses |  |  | 1,476 |  |  | 1,574 |  |  | 3,050
Reserve for unfunded commitments |  |  | 33 |  |  | 457 |  |  | 490
Total allowance for credit losses |  | $ | 1,509 |  | $ | 2,031 |  | $ | 3,540
Retained earnings |  |  |  |  |  |  |  |  |
Total pre-tax impact |  |  |  |  | $ | 2,031 |  |  |
Tax effect |  |  |  |  |  | (559) |  |  |
Decrease to retained earnings |  |  |  |  | $ | 1,472 |  |  |
ASU 2019-12, “Simplifying the Accounting for Income Taxes (Topic 740).” The ASU was issued in December 2019. The amendments in this Update are meant to simplify the accounting for income taxes by removing certain exceptions to GAAP. The amendments also improve consistent application of and simplify GAAP by modifying and/or revising the accounting for certain income tax transactions and by clarifying certain existing codification. The amendments in the update are effective for public business entities for fiscal years and interim periods within those fiscal years beginning after December 15, 2020. The adoption of this guidance did not have a material impact upon the Company’s financial position and results of operations. ASU 2020-01, “Investments – Equity Securities (Topic 321), Investments – Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) – Clarifying the Interactions Between Topic 321, Topic 323, and Topic 815 (a Consensus of the Emerging Issues Task Force).” The ASU clarifies the interaction between ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities and the ASU on equity method investments. ASU 2016-01 provides companies with an alternative to measure certain equity securities without a readily determinable fair value at cost, minus impairment, if any, unless an observable transaction for an identical or similar security occurs. ASU 2020-01 clarifies that for purposes of applying the Topic 321 measurement alternative, an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting under Topic 323, immediately before applying or upon discontinuing the equity method. In addition, the new ASU provides direction that a company should not consider whether the underlying securities would be accounted for under the equity method or the fair value option when it is determining the accounting for certain forward contracts and purchased options, upon either settlement or exercise. The amendments in this update become effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Early adoption is permitted, and the amendments are to be applied prospectively. There was no material impact from adopting the new guidance on the Company’s consolidated financial statements. ASU No. 2020-04, “Reference Rate Reform (Topic 848).” The ASU provides optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. It provides optional expedients and exceptions for applying generally accepted accounting principles to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in this update are effective for all entities as of March 12, 2020 through December 31, 2022. The Company is currently evaluating the impact of adopting the new guidance on the consolidated financial statements. ASU No. 2020-08, “Codification Improvements to Subtopic 310-20, Receivables-Nonrefundable Fees and Other Costs.” The amendments in this update clarify that an entity should reevaluate whether a callable debt security is within the scope of ASC paragraph 310-20-35-33 for each reporting period. The amendments in this update are effective beginning after December 15, 2020. The adoption of the guidance did not have a material impact on the Company's consolidated financial statements. ASU No. 2020-10, “Codification Improvements.” The ASU improves reporting consistency by amending the Codification to include all disclosure guidance in the appropriate disclosure sections. It clarifies the application of various provisions in the Codification by amending and adding new headings, cross referencing to other guidance, and refining or correcting terminology. The amendments are effective for annual periods beginning after December 15, 2020, and early application is permitted. The adoption of the guidance did not have a material impact on the Company's consolidated financial statements. ASU No. 2021-01, “Reference Rate Reform (Topic 848): Scope.” The ASU clarifies that all derivative instruments affected by changes to the interest rates used for discounting, margining, or contract price alignment due to reference rate reform are in the scope of ASC 848. Entities may apply certain optional expedients in ASC 848 to derivative instruments that do not reference LIBOR or another rate expected to be discontinued as a result of reference rate reform if there is a change to the interest rate used for discounting, margining or contract price alignment. The ASU also clarifies other aspects of ASC 848 and provides new guidance on how to address the effects of the cash compensation adjustment that is provided as part of the above change on certain aspects of hedge accounting. The ASU is intended to reduce diversity in practice related to accounting for (1) modifications to the terms of affected derivatives; and (2) existing hedging relationships in which the affected derivatives are designated as hedging instruments. ASU 2021-01 is effective upon issuance and generally can be applied through December 31, 2022. Entities may elect to apply the guidance on contract modifications either (1) retrospectively as of any date from the beginning of any interim period that includes March 12, 2020; or (2) prospectively to new modifications from any date in an interim period that includes or is after January 7, 2021, up to the date that financial statements are available to be issued. The Company is currently evaluating the impact of adopting the new guidance on the consolidated financial statements.

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