7. Leases

Lessee – Operating Leases

Effective January 1, 2019, the Company adopted the provisions of Accounting Standards Update (ASU) No. 2016-02, “Leases (Topic 842),” (ASU 2016-02), for all open leases with a term greater than one year as of the adoption date, using the modified retrospective approach. Prior comparable periods are presented in accordance with previous guidance under Accounting Standards Codification (ASC) 840, “Leases.”

Operating leases in which we are the lessee are recorded as operating lease ROU assets and operating lease liabilities, included in other assets and other liabilities, respectively, on our consolidated balance sheets. We do not currently have any significant finance leases in which we are the lessee.

Operating lease ROU assets represent our right to use an underlying asset during the lease term and operating lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and operating lease liabilities are recognized at lease commencement based on the present value of the remaining lease payments using a discount rate that represents our incremental borrowing rate at the lease commencement date. ROU assets are further adjusted for lease incentives. Operating lease expense, which is comprised of amortization of the ROU asset and the implicit interest accreted on the operating lease liability, is recognized on a straight-line basis over the lease term, and is recorded in net occupancy expense in the consolidated statements of income.

Our leases relate primarily to office space and bank branches with remaining lease terms of generally 1 to 10 years. Certain lease arrangements contain extension options which typically range from 5 to 10 years at the then fair market rental rates. ASC 842 requires lessees to evaluate whether option periods, if available, will be exercised in order to determine the full life of the lease. The Company used data including the first option period, unless it is a relatively new lease that has a long initial lease term or other extenuating circumstances. As of June 30, 2019, operating lease ROU assets and liabilities were $5.31 million and $5.34 million, respectively. Operating lease expenses that were in scope of ASU 2016-02 were $215,000 and $422,000 for the three and six-month period ended June 30, 2019.

The table below summarizes the information related to our operating leases:

(in thousands except for percent and period data)	Three Months Ended June 30, 2019			Six Months Ended June 30, 2019
Cash Paid for Amounts Included in the Measurement of Lease Liabilities
Operating Cash Flow from Operating Leases	$	197		$	393
Right-of-Use Assets Obtained in Exchange for New Operating Lease Liabilities	$	916		$	5,645
Weighted-Average Remaining Lease Term - Operating Leases, in Years		8.30			8.30
Weighted-Average Discount Rate - Operating Leases		3.2	%		3.2	%

The table below summarizes the maturity of remaining lease liability:

(in thousands)	June 30, 2019
2019	$	390
2020		795
2021		719
2022		686
2023		697
2024 and thereafter		2,811
Total Lease Payments		6,098
Less: Interest		(760	)
Present Value of Lease Liabilities	$	5,338

As of June 30, 2019, we have no additional operating leases for office space that have not yet commenced or that are anticipated to commence during the third quarter of 2019.

Lessor - Direct Financing Leases

The Company is the lessor in direct finance lease arrangements. Leases are recorded at the principal balance outstanding, net of unearned income and charge-offs. Interest income is recognized using the interest method. Leases typically have a maturity of three to ten years, and fixed rates that are most often tied to treasury indices with an appropriate spread based on the amount of perceived risk. Credit risks are underwritten using the same credit criteria the Company would use when making an equipment term loan. Residual value risk is managed through the use of qualified, independent appraisers that establish the residual values the Company uses in structuring a lease. The impact of adopting Topic 842 for lessor accounting was not significant.

Lease payments due to the Company are typically fixed and paid in equal installments over the lease term. Variable lease payments that do not depend on an index or a rate (e.g., property taxes) that are paid directly by the Company are minimal. The majority of property taxes are paid directly by the client to a third party and are not considered part of variable payments and therefore are not recorded by the Company.

As a lessor, the Company leases certain types of agriculture equipment, solar equipment, construction equipment and other equipment to its customers. At June 30, 2019, the Company’s net investment in direct financing leases was $103.3 million.