ASU 2016-02 Leases (Topic 842) became effective for the Company on January 1, 2019. For all operating lease contracts where the Company is lessee, a right-of-use (ROU) asset and lease liability was recorded as of the effective date. The Company assumed all renewal terms will be exercised when calculating the ROU assets and lease liabilities. For leases existing at the transition date, any prepaid or deferred rent was added to the ROU asset to calculate the lease liability. The discount rate used to calculate the present value of future payments at the transition date was the Company’s incremental borrowing rate. The Company used the FHLB fixed rate borrowing rates on December 29, 2018 as the discount rate at transition. For all classes of underlying assets, the Company has elected not to record short-term leases (leases with a term of 12 months or less) on the balance sheet when the Company is lessee. Instead, the Company will recognize the lease payment on a straight-line basis over the lease term and variable lease payments in the period in which the obligation for those payments is incurred. For all asset classes, the Company has elected, as a lessee, not to separate nonlease components from lease components and instead to account for each separate lease component and nonlease components associated with that lease component as a single lease component.

Management determines if an arrangement is or contains a lease at contract inception. If an arrangement is determined to be or contains a lease, the Company recognizes a ROU asset and a lease liability when the asset is placed in service.

The Company’s operating leases, where the Company is lessee, include property, land and equipment. As of June 30, 2020, ten of the Company’s branch properties were leased under operating leases. In four of the branch leases, the Company leases the land from an unrelated third party, and the buildings are the Company’s own capital improvement. The Company also leases three standalone ATMs under operating leases. Additionally, the Company has three equipment leases classified as finance leases.



		Asset Balance at
(dollars in thousands)	June 30, 2020		December 31, 2019

Equipment	$	413	$	397
Less accumulated depreciation and amortization		(156)		(117)
Leased property under finance leases, net	$	257	$	280

The following is a schedule of future minimum lease payments under finance leases together with the present value of the net minimum lease payments as of June 30, 2020:

(a)The future minimum lease payments have not been reduced by estimated executory costs (such as taxes and maintenance) since this amount was deemed immaterial by management.

(b)Amount necessary to reduce net minimum lease payments to present value calculated at the Company’s incremental borrowing rate upon lease inception.

As of June 30, 2020, the Company leased its Green Ridge, Pittston, Peckville, Back Mountain, Mountain Top, Abington, Nazareth, Easton, Bethlehem and Martins Creek branches under the terms of operating leases. Common area maintenance is included in variable lease payments in the table below. The Abington branch has variable lease payments which are calculated as a percentage of the national prime rate of interest which are expensed as incurred.


(dollars in thousands)	June 30, 2020		June 30, 2019
Lease cost
Finance lease cost:
Amortization of right-of-use assets	$	39	$	37
Interest on lease liabilities		4		5
Operating lease cost		243		216
Short-term lease cost		9		9
Variable lease cost		(3)		-
Total lease cost	$	292	$	267

Other information
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from finance leases	$	4	$	5
Operating cash flows from operating leases (Fixed payments)	$	221	$	159
Operating cash flows from operating leases (Liability reduction)	$	101	$	62
Financing cash flows from finance leases	$	38	$	36
Right-of-use assets obtained in exchange for new finance lease liabilities	$	16	$	17
Right-of-use assets obtained in exchange for new operating lease liabilities	$	1,338	$	4,133
Weighted-average remaining lease term - finance leases		3.23 yrs		4.17 yrs
Weighted average remaining lease term - operating leases		21.65 yrs		23.24 yrs
Weighted-average discount rate - finance leases		2.96%		3.07%
Weighted-average discount rate - operating leases		3.55%		3.94%

During the first half of 2020, $275 thousand of the total lease cost is included in premises and equipment expense and $17 thousand is included in other expenses on the consolidated statements of income. Operating lease expense is recognized on a straight-line basis over the lease term. We recognized both the interest expense and amortization expense for finance leases in premises and equipment expense since the interest expense portion was immaterial.

The future minimum lease payments for the Company’s branch network and equipment under operating leases that have lease terms in excess of one year as of June 30, 2020 are as follows:


(dollars in thousands)	Amount

2020	$	275
2021		526
2022		504
2023		507
2024		510
2025 and thereafter		8,893
Total future minimum lease payments		11,215
Plus variable payment adjustment		251
Less amount representing interest		(3,674)
Present value of net future minimum lease payments	$	7,792

‎

The Company leases eight properties, where the Company is lessor, under operating leases to unrelated parties. Four are residential properties surrounding the Main Branch that the Company leases on a month-to-month basis and are considered short-term leases. One property is under a lease that ends on November 30, 2020 and is considered a short-term lease. The undiscounted cash flows to be received on an annual basis for the remaining three properties under long-term operating leases are as follows:

The Company also indirectly originates automobile leases classified as direct finance leases. See Footnote 5, “Loans and leases”, for more information about the Company’s direct finance leases.

Lease income recognized from direct finance leases was included in interest income from loans and leases on the consolidated statements of income. Lease income related to operating leases is included in fees and other revenue on the consolidated statements of income. The Company only receives a variable payment for taxes from one of its lessees, but the amount is immaterial and excluded from rental income. The amount of lease income recognized on the consolidated statements of income was as follows for the periods indicated:


		For the three months ended June 30,			For the six months ended June 30,
(dollars in thousands)	2020		2019		2020		2019
Lease income - direct finance leases
Interest income on lease receivables	$	169	$	176	$	345	$	351

Lease income - operating leases		53		63		111		119
Total lease income	$	222	$	239	$	456	$	470