Note 9: Premises and Equipment

3 Months Ended

Mar. 31, 2020

Notes

Note 9: Premises and Equipment

NOTE 9: PREMISES AND EQUIPMENT

Major classifications of premises and equipment, stated at cost, were as follows:

		March 31,			December 31,
		2020			2019
		(In Thousands)
Land	$	40,720	$	40,632
Buildings and improvements		98,076		96,959
Furniture, fixtures and equipment		57,890		56,986
Operating leases right of use asset		8,446		8,668
		205,132		203,245
Less accumulated depreciation		63,433		61,337
	$	141,699	$	141,908

Leases.  The Company adopted ASU 2016-02, Leases (Topic 842), on January 1, 2019, using the modified retrospective transition approach whereby comparative periods were not restated.  The Company also elected certain

relief options under the ASU, including the option not to recognize right of use asset and lease liabilities that arise from short-term leases (leases with terms of twelve months or less).   Adoption of this ASU resulted in the Company initially recognizing a right of use asset and corresponding lease liability of $9.5 million during the three months ended March 31, 2019.  The amount of the right of use asset and corresponding lease liability will fluctuate based on the Company’s lease terminations, new leases and lease modifications and renewals. As of March 31, 2020, the lease right to use asset value was $8.4 million and the corresponding lease liability was $8.5 million.

All of our leases are classified as operating leases (as they were prior to January 1, 2019), and therefore were previously not recognized on the Company’s consolidated statements of financial condition.  With the adoption of ASU 2016-02, these operating leases are now included as a right of use asset in the premises and equipment line item on the Company’s consolidated statements of financial condition.  The corresponding lease liability is included in the accrued expenses and other liabilities line item on the Company’s consolidated statements of financial condition.  Because these leases are classified as operating leases, the adoption of the new standard did not have a material effect on lease expense on the Company’s consolidated statements of income.

ASU 2016-02 provides a number of optional practical expedients in transition. The Company has elected the “package of practical expedients,” which permits the Company not to reassess under the new standard the prior conclusions about lease identification, lease classification and initial direct costs. The Company also elected the use of the hindsight, a practical expedient which permits the use of information available after lease inception to determine the lease term via the knowledge of renewal options exercised not available as of the lease’s inception.  The practical expedient pertaining to land easements is not applicable to the Company.  

ASU 2016-02 also requires certain other accounting elections.  The Company elected the short-term lease recognition exemption for all leases that qualify, meaning those with terms under twelve months.  Right of use assets or lease liabilities are not to be recognized for short-term leases. The Company also elected the practical expedient to not separate lease and non-lease components for all leases.   The Company’s short-term leases related to offsite ATMs have both fixed and variable lease payment components, based on the number of transactions at the various ATMs.  The variable portion of these lease payments is not material and the total lease expense related to ATMs for the three months ended March 31, 2020 was $62,000.

The calculated amounts of the right of use assets and lease liabilities in the table below are impacted by the length of the lease term and the discount rate used to present value the minimum lease payments. The Company’s lease agreements often include one or more options to renew the extended term in the calculation of the right of use asset and lease liability. Regarding the discount rate, the ASU requires the use of the rate implicit in the lease at the Company’s discretion. If at lease inception, the Company considers the exercising of a renewal option to be reasonably certain, the Company will include the extended term in the calculation of the right of use asset and lease liability.  Regarding the discount rate, the ASU requires the use of the rate implicit in the lease whenever this rate is readily determinable. As this rate is rarely determinable, the Company utilizes its incremental borrowing rate at lease inception over a similar term. The discount rate utilized was the FHLBank borrowing rate for the term corresponding to the expected term of the lease.  The expected lease terms range from 2.3 years to 18.9 years with a weighted-average lease term of 10.6 years.  The weighted-average discount rate was 3.40%.

		At or For the		At or For the
		Three Months Ended		Three Months Ended
		March 31, 2020		March 31, 2019
		(In Thousands)
Statement of Financial Condition
Operating leases right of use asset	$	8,446	$	9,323
Operating leases liability	$	8,539	$	9,349
Statement of Income
Operating lease costs classified as occupancy and equipment expense	$	385	$	376
(includes short-term lease costs and amortization of right of use asset)
Supplemental Cash Flow Information
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	371	$	350
Right of use assets obtained in exchange for lease obligations:
Operating leases			$	9,538

For the three months ended March 31, 2020 and 2019, lease expense was $385,000 and $376,000, respectively.  At March 31, 2020, future expected lease payments for leases with terms exceeding one year were as follows (In Thousands):

2020	$	851
2021		1,148
2022		1,131
2023		1,099
2024		999
2025		973
Thereafter		4,213
Future lease payments expected		10,414
Less interest portion of lease payments		(1,875)
Lease liability	$	8,539

The Company does not sublease any of its leased facilities; however, it does lease to other third parties portions of facilities that it owns.  In terms of being the lessor in these circumstances, all of these lease agreements are classified as operating leases.  In the three months ended March 31, 2020 and 2019, income recognized from these lessor agreements was $299,000 and $276,000, respectively, and was included in occupancy and equipment expense.