In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (ASC 326): Measurement of Credit Losses on Financial Instruments. The guidance, along with subsequent related updates issued during 2019, introduces an impairment model that is based on expected credit losses (ECL) rather than incurred losses, to estimate credit losses on certain types of financial instruments, such as loans and held-to-maturity (HTM) securities, including certain off-balance sheet financial instruments, such as loan commitments. The measurement of ECL should consider historical information, current information, and reasonable and supportable forecasts, including estimates of prepayments, over the contractual term. Financial instruments with similar risk characteristics must be grouped together when estimating ECL. In addition, ASC 326 expands credit quality disclosures.

ASC 326 also provides for a simplified accounting model for purchased financial assets with a more-than-insignificant amount of credit deterioration since their origination (purchased credit deteriorated). The initial estimate of expected credit losses for purchase credit deteriorated financial assets is recognized as an AECL with an offset (i.e., increase) to the cost basis of the related financial asset at acquisition.

Additionally, ASC 326 amends the current AFS security impairment model for debt securities. The new model will require an estimate of ECL when the fair value is below the amortized cost of the asset. The credit-related impairment (and subsequent recoveries) are recognized as an allowance on the balance sheet with a corresponding adjustment to the income statement. Non-credit related losses will continue to be recognized through OCI.

The Company has developed multiple current expected credit loss models (ECL Models) which segment the Company’s loan and lease portfolio by borrower type (i.e. commercial and consumer) and loan type to estimate lifetime expected credit losses for loans and leases. The ECL Models primarily use a probability-of-default methodology to estimate expected credit losses. Within each ECL Model, loans and leases are further segregated based on additional risk characteristics specific to that loan or leases type, such as risk rating, industry sector, company and/or loan size, collateral type, geographic location and FICO score. The Company uses both internal and external historical loss data in the ECL Models, as appropriate.

Economic Forecasts: Management selected economic variables it believes to be the most relevant for estimating losses based on the composition of the loan and leases portfolio and customer base, including property values, employment and unemployment levels, oil prices and other key economic measures. The Company considers a variety of economic forecasts and selects multiple economic forecasts it believes represent future changes in macroeconomic conditions. The Company uses a blend of the selected economic forecasts to estimate credit losses.

Forecast Period: Management believes that it can reasonably forecast credit losses over an eighteen month period, taking into consideration historical information, current information, and reasonable and supportable economic forecasts. Management will re-evaluate the forecast period on a quarterly basis and may adjust the forecast period in response to changes in the economic environment and other factors.

Reversion Methodology: For contractual periods beyond the eighteen month forecast period, the Company reverts over a twelve-month period to longer term historical loss experience on a straight-line basis to arrive at lifetime expected credit losses. Management will re-evaluate the reversion methodology on a quarterly basis.

Credit losses for loans and leases which no longer share risk characteristics with other loans or leases, primarily non-accrual and TDR loans are individually assessed for impairment. A specific allowance is determined for these loans and leases determined using either the present value of expected cash flows or the fair value of the underlying collateral.

The Company elected not to measure an allowance for expected credit losses for accrued interest as its reverses uncollectible accrued interest through interest income in a timely manner. Accrued interest will continue to be reported within other assets in the consolidated balance sheet. The Company did not elect the one-time fair value option transition expedient for financial instruments recorded at amortized cost. Additionally, the Company elected to discontinue the use of pools to account for purchased credit deteriorated financial assets.

ASC 326 also requires an estimate of expected credit losses on the HTM and AFS debt securities portfolios. Most of these portfolios consist of agency-backed securities that inherently have an immaterial risk of loss. For non-agency-backed HTM securities, the Company estimates expected credit losses by segmenting the portfolio by credit rating and duration and applying external historical loss data, taking into consideration management's forecast of future economic conditions, as discussed above. For non-agency-backed AFS securities where amortized cost exceeds fair value, the Company reviews each security to determine if any portion of the unrealized loss is credit-related.



(in thousands)	December 31, 2019		CECL Adoption			January 1, 2020
Allowance for Expected Credit Losses
Real estate - construction	$	9,993	$	3,332		$	13,325
Real estate - owner-occupied	16,115		(7,536		)	8,579
Real estate - non-owner occupied	38,170		28,859			67,029
Commercial & industrial	62,112		(14,656		)	47,456
Residential mortgage	10,209		71,264			81,473
Home equity	14,231		2,808			17,039
Other consumer loans	12,395		(1,752		)	10,643
Total	$	163,225	$	82,319		$	245,544

Retained Earnings
Increase in allowance for expected credit losses	$	82,319
Balance sheet reclassification	5,987
Total pre-tax effect	88,306
Tax effect	20,701
Decrease to retained earnings	$	67,605

The increase in the AECL primarily relates to required increases for loans previously classified as acquired non-impaired. The AECL for residential mortgage loans increased due to the requirement to estimate lifetime expected credit losses and the remaining length of time to maturity for these loans versus a loss emergence period. The AECL for non-owner-occupied commercial real estate loans also increased reflecting higher LGDs under the CECL model. The balance sheet reclassification represents the adjustment to the amortized cost basis of purchased credit deteriorated loans to reflect the addition of the allowance for expected credit losses at the date of adoption. At the time of adoption, the Company recognized the economy was vulnerable to major shocks, fiscal policy missteps, other geopolitical events and the outcome of the pending U.S. elections. The transition adjustment reflected the Company's view of a relatively stable macroeconomic environment over the next eighteen months. While ASC 326 results in a higher AECL, it does not change the overall credit risk in the Company’s loan and lease portfolios or the ultimate losses therein. The Company expects future changes in the AECL to be more volatile under ASC 326 as the AECL in future periods will be based on a variety of factors, including changes in loan and lease volumes, the credit quality of the loan and lease portfolio, and forecasts of future economic conditions, which are outside of the Company’s control.

In August 2018, the FASB released ASU No. 2018-13, Fair Value Measurement (ASC 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement, which eliminates, adds and modifies certain disclosure requirements for fair value measurements. The ASU is effective for fiscal years beginning after December 15, 2019, including interim periods, with early adoption permitted.

In October 2018, the FASB released ASU No. 2018-17, Consolidation (ASC 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities, which improves the consistency of the application of the variable interest entity (VIE) related party guidance for common control arrangements. This ASU requires reporting entities to consider indirect interests held through related parties under common control on a proportional basis rather than as the equivalent of a direct interest in its entirety (as currently required in GAAP) when determining whether a decision-making fee is a variable interest. ASU No. 2018-17 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, and early adoption is permitted. The guidance will be applied retrospectively with a cumulative-effect adjustment to retained earnings at the beginning of the earliest period presented.

In April 2019, the FASB released ASU No. 2019-04, Codification Improvements to Financial Instruments-Credit Losses (ASC 326), Derivatives and Hedging (ASC 815), and Financial Instruments (ASC 825). The amendments in the ASU improve the Codification by eliminating inconsistencies and providing clarifications. The amendments related to the credit losses standard are discussed above under ASU 2016-13.

With respect to hedge accounting, the ASU addresses partial-term fair value hedges, fair value hedge basis adjustments, and certain transition requirements, among other things. For recognizing and measuring financial instruments, the ASU addresses the scope of the guidance, the requirement for re-measurement under ASC 820 when using the measurement alternative, certain disclosure requirements and which equity securities have to be re- measured at historical exchange rates.

Since the Company early adopted the guidance in ASU No. 2017-12, Derivatives and Hedging (ASC 815): Targeted Improvements to Accounting for Hedging Activities in 2018, the amended hedge accounting guidance in ASU No. 2019-04 is effective as of the beginning of the first annual reporting period beginning after April 25, 2019 with early adoption permitted on any date after the issuance of this ASU.

In December 2019, the FASB released ASU No. 2019-12, Income Taxes (ASC 740): Simplifying the Accounting for Income Taxes, as part of their initiative to reduce complexity in accounting standards. The ASU simplifies the accounting for income taxes by eliminating certain exceptions to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The ASU also simplifies aspects of the accounting for enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill.

ASU No. 2019-12 will be effective for fiscal years beginning after December 15, 2020, including interim periods, with early adoption permitted. The transition method for ASU No. 2019-12 varies between the simplification items. The Company is currently evaluating the impact of the ASU on the Company’s consolidated financial statements.

In January 2020, the FASB released ASU No. 2020-01, Investments-Equity Securities (ASC 321), Investments- Equity Method and Joint Ventures (ASC 323), and Derivatives and Hedging (ASC 815): Clarifying the Interactions between ASC 321, ASC 323, and ASC 815, a consensus of the FASB’s Emerging Issues Task Force (EITF). The ASU clarifies that a company should consider observable transactions that require a company to either apply or discontinue the equity method of accounting under ASC 323 for the purposes of applying the measurement alternative in accordance with ASC 321 immediately before applying or upon discontinuing the equity method. The ASU also clarifies that, when determining the accounting for certain forward contracts and purchased options, a company should not consider, whether upon settlement or exercise, if the underlying securities would be accounted for under the equity method or fair value option.

In March 2020, the FASB released ASU No. 2020-04, “Reference Rate Reform (Topic 848),” which provides relief for entities preparing for discontinuation of interest rates such as LIBOR. The ASU provides optional expedients and exceptions to ease the accounting impacts associated with contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. For contracts, this ASU allows entities to account for certain contract modifications as a continuation of the existing contract without additional analysis. For hedging relationships, this ASU allows hedge accounting to continue when certain critical terms of a hedging relationship charge and assess effectiveness in ways that disregard certain potential sources of ineffectiveness. Additionally, the ASU allows entities to make a one-time sale and/or transfer of certain debt securities from held-to-maturity to available-for-sale or trading.

ASU No. 2020-04 is effective from the beginning of the interim period that includes March 12, 2020. An entity may elect to apply the ASU prospectively through December 31, 2022. The expedients and exceptions provided by the ASU do not apply to contract modifications made or hedging relationships entered into or evaluated after December 31, 2022, with certain exceptions for hedging relationships existing as of December 31, 2022. The Company is currently evaluating the impact of the ASU on its consolidated financial statements.