Leases

9 Months Ended

Sep. 30, 2019

LEASES

As of January 1, 2019, the Corporation adopted certain accounting standard updates related to accounting for leases (Topic 842 - Leases), primarily ASU 2016-02 and subsequent updates. This guidance requires a lessee to recognize the following for all leases (with the exception of short-term leases) at the commencement date: (1) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. Certain targeted improvements were made to align, where necessary, lessor accounting with the lessee accounting model. The Corporation adopted the provisions of ASU 2016-02 on January 1, 2019, and elected several practical expedients made available by the FASB. Specifically, the Corporation elected the transition practical expedient to not recast comparative periods upon the adoption of the new guidance. In addition, the Corporation elected to apply certain practical adoption expedients provided under the updates whereby we did not reassess (1) whether any expired or existing contracts are or contain leases, (2) the lease classification for any expired or existing leases and (3) initial direct costs for any existing leases. As a result, the Corporation recognized approximately $12.5 million of right of use assets, approximately $800 thousand in prepaid rent, and $13.3 million of related lease liabilities as of January 1, 2019.

Operating lease 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. Operating lease assets and 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. Operating lease cost, which is comprised of amortization of the operating lease 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.

The Corporation leases certain full-serve branch offices, land and equipment. Leases with an initial term of twelve months or less are not recorded on the balance sheet. Most leases include one or more options to renew and the exercise of the lease renewal options are at the Corporation's sole discretion. Certain lease agreements of the Corporation include rental payments adjusted periodically for changes in the consumer price index.



Leases	Classification	September 30, 2019
Assets:
Operating lease assets	Operating lease assets	$	16,837
Finance lease assets	Premises and equipment, net ⁽¹⁾	519
Total leased assets		$	17,356

Liabilities:
Operating lease liabilities	Operating lease liabilities	$	17,696
Finance lease liabilities	Accrued interest payable and other liabilities	648
Total leased liabilities		$	18,344

(1) Finance lease assets are recorded net of accumulated amortization of $697 as of September 30, 2019.

The components of the Corporation's net lease expense for the three and nine months ended September 30, 2019 were as follows:



		Three months ended September 30,			Nine months ended September 30,
Lease Cost	Classification	2019			2019
Operating lease cost	Net occupancy expense	$	423		$	1,228
Variable lease cost	Net occupancy expense	33			82
Finance lease cost:
Amortization of leased assets	Net occupancy expense	18			54
Interest on lease liabilities	Interest expense - borrowed funds	7			23
Sublease income ⁽¹⁾	Net occupancy expense	(21		)	(62		)
Net lease cost		$	460		$	1,325

(1) Sublease income excludes rental income from owned properties.

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



Maturity of Lease Liabilities as of September 30, 2019	Operating Leases ⁽¹⁾		Finance Leases		Total
2019	$	339	$	26	$	365
2020	1,430		105		1,535
2021	1,483		105		1,588
2022	1,538		105		1,643
2023	1,458		105		1,563
After 2023	17,932		315		18,247
Total lease payments	24,180		761		24,941
Less: Interest	6,484		113		6,597
Present value of lease liabilities	$	17,696	$	648	$	18,344

(1) Operating lease payments include payments related to options to extend lease terms that are reasonably certain of being exercised and exclude $3,173 of legally binding minimum lease payments for leases signed, but not yet commenced.

Other information related to the Corporation's lease liabilities as of the nine months ended September 30, 2019 was as follows:



Lease Term and Discount Rate	September 30, 2019
Weighted-average remaining lease term (years)
Operating leases	16.9
Finance leases	7.3

Weighted-average discount rate
Operating leases	3.60	%
Finance leases	4.54	%



Other Information	September 30, 2019
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases	$	557
Leased assets obtained in exchange from new operating lease liabilities	17,674