Leases

6 Months Ended

Jun. 30, 2019

Leases

16. Leases

The Company, as lessee, is obligated under a number of noncancelable operating leases primarily for branch premises and related real estate. Terms of such leases extend for periods up to 45 years, many of which provide for periodic adjustment of rent payments based on changes in various economic indicators. Renewal options are included in the Company’s lease liabilities and related right-of-use assets to the extent that the Company is reasonably certain to exercise such options. For all of the Company’s short-term leases (i.e., leases with an initial term of 12 months or less), the Company recognizes lease expense 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.

The Company’s branch premises leases typically require that the Company is responsible to pay for non-lease variable components, primarily maintenance expense, as well as costs that are not a component of a lease agreement such as real property taxes, property insurance and sales taxes. Maintenance expense is paid to maintain common areas and covers costs including landscaping, cleaning and general maintenance. Such variable costs are typically re-evaluated by the landlord on an annual basis and are charged to the Company based on the portion of the total building premises that is occupied by the Company.

The Company subleases certain premises and real estate to third parties. The sublease portfolio consists of operating leases for space connected with three of the Company’s branch properties.

The components of the Company’s net lease expense for the three and six months ended June 30, 2019 were as follows:

(dollars in thousands)	Three Months Ended June 30, 2019		Six Months Ended June 30, 2019
Operating lease expense	$	2,340	$	4,655
Short-term lease expense		77		275
Variable lease expense		329		1,046
Finance lease expense:
Amortization of right-of-use assets		1		1
Interest on lease liabilities		—		1
Total finance lease expense		1		2
Less: Sublease income		(249)		(498)
Net lease expense	$	2,498	$	5,480

Other information related to the Company’s lease liabilities as of and for the six months ended June 30, 2019 was as follows:

(dollars in thousands)	Six Months Ended June 30, 2019
Supplemental Cash Flows Information
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows paid for operating leases	$	3,426
Operating cash flows paid for finance leases		61
Financing cash flows paid for finance leases		—
Right-of-use assets obtained in exchange for new lease obligations:
Operating leases	$	680
Weighted Average Remaining Lease Term
Operating leases		15.2 years
Finance leases		3.0 years
Weighted Average Discount Rate
Operating leases		3.42	%
Finance leases		6.78	%

Operating lease right-of-use assets were $47.4 million and finance lease right-of-use assets were not material as of June 30, 2019. Operating lease right-of-use assets and finance lease right-of use assets were recorded as a component of other assets and premises and equipment, respectively, as of June 30, 2019. Operating lease liabilities were $48.3 million and finance lease liabilities were not material as of June 30, 2019. Operating lease liabilities and finance lease liabilities were recorded as a component of other liabilities and long-term borrowings, respectively, as of June 30, 2019.

The most significant assumption related to the Company’s application of ASC Topic 842 was the discount rate assumption. As most of the Company’s lease agreements do not provide for an implicit interest rate, the Company used the collateralized interest rate that the Company would have to pay to borrow over a similar term to estimate the Company’s lease liability as of January 1, 2019.

The following table sets forth future minimum rental payments under noncancelable leases with terms in excess of one year as of June 30, 2019:

	Net Operating
	Lease
(dollars in thousands)	Payments
Year ending December 31:
2019 (excluding the six months ended June 30, 2019)	$	5,360
2020		8,667
2021		7,977
2022		5,346
2023		2,854
Thereafter		34,853
Total future minimum lease payments		65,057
Less: Imputed interest		(16,737)
Total	$	48,320

The following table presents future minimum rental payments under leases with terms in excess of one year as of December 31, 2018 presented in accordance with ASC Topic 840, “Leases”:

	Operating		Less		Net Operating
	Lease		Sublease		Lease
(dollars in thousands)	Payments		Income		Payments
Year ending December 31:
2019	$	8,780	$	903	$	7,877
2020		8,668		903		7,765
2021		7,961		892		7,069
2022		5,101		—		5,101
2023		2,632		—		2,632
Thereafter		34,638		—		34,638
Total future minimum lease payments	$	67,780	$	2,698	$	65,082

The Company has several operating leases with related parties associated with its branch premises. The lease payments to related parties were $0.1 million and $0.2 million for the three and six months ended June 30, 2019, respectively. The future minimum rental payments due to related parties are $0.2 million (remainder of 2019), $0.3 million (2020), $0.3 million (2021), $0.2 million (2022), $0.2 million (2023), and $7.5 million thereafter.

The Company, as lessor, rents office space in its headquarters office building as well as office space located primarily in Hawaii to third party lessees. The cost and accumulated depreciation related to leased properties were $288.7 million and $137.4 million, respectively, as of June 30, 2019, and $289.2 million and $133.7 million, respectively, as of December 31, 2018. Terms of such leases, including renewal options, may be extended for up to nine years, many of which provide for periodic adjustment of rent payments based on changes in consumer or other price indices. The Company recognizes lease income on a straight-line basis over the lease term. Non-lease components, primarily consisting of costs incurred by the Company for maintenance and utilities, are recognized as income in the period in which the payments are due.

The Company recognized operating lease income related to lease payments of $1.5 million and $3.0 million for the three and six months ended June 30, 2019, respectively. In addition, the Company recognized $1.3 million and $2.6 million of lease income related to variable lease payments for the three and six months ended June 30, 2019, respectively.

Certain of the Company’s leases are with related parties for the use of space at the Company’s headquarters office building. The rental income paid by the related parties for the three and six months ended June 30, 2019 and the future minimum rental income from related parties as of June 30, 2019 was $0.1 million and $0.2 million, respectively.

The following table sets forth future minimum rental income under noncancelable operating leases with terms in excess of one year as of June 30, 2019:

	Minimum
	Rental
(dollars in thousands)	Income
Year ending December 31:
2019 (excluding the six months ended June 30, 2019)	$	2,926
2020		5,747
2021		5,438
2022		3,719
2023		2,795
Thereafter		5,049
Total	$	25,674