LEASES

9 Months Ended

Sep. 30, 2019

A lease is defined as a contract, or part of a contract, that conveys the right to control the use of identified property, plant or equipment for a period of time in exchange for consideration. On January 1, 2019, Heartland adopted ASU 2016-02 "Leases" (Topic 842) and all subsequent ASUs that modified Topic 842. For Heartland, Topic 842 primarily affected the accounting treatment for operating lease agreements in which Heartland is the lessee.

Lessee Accounting

Substantially all of the leases in which Heartland is the lessee are comprised of real estate property for branches, ATM locations, and office space with terms extending through 2031. All of Heartland's leases are classified as operating leases, and therefore, were previously not recognized on the consolidated balance sheet. With the adoption of Topic 842, operating lease agreements are required to be recognized on the consolidated balance sheet as a right-of-use ("ROU") asset and a corresponding lease liability.

Heartland elected not to include short-term leases (i.e., leases with initial terms of twelve months or less), or equipment leases (deemed immaterial) on the consolidated balance sheet. The table below presents Heartland's ROU assets and lease liabilities as of September 30, 2019, in thousands:


Assets	Classification	September 30, 2019
Operating lease assets	Other assets	$	24,677
Total lease right-of-use assets		$	24,677

Liabilities
Operating lease liabilities	Accrued expenses and other liabilities	$	26,403
Total lease liabilities		$	26,403

The calculated amount of the ROU assets and lease liabilities in the table above are impacted by the length of the lease term and the discount rate used to present value the minimum lease payments. Heartland’s lease agreements often include one or more options to renew at Heartland’s discretion. If at lease inception, Heartland considers the exercising of a renewal option to be reasonably certain, Heartland will include the extended term in the calculation of the ROU asset and lease liability. Regarding the discount rate, Topic 842 requires the use of the rate implicit in the lease whenever this rate is readily determinable. As this rate is rarely determinable, Heartland utilizes its incremental borrowing rate at lease inception, on a collateralized basis, over a similar term. For operating leases existing prior to January 1, 2019, the rate for the remaining lease term as of January 1, 2019 was used. The variable lease cost primarily represents variable payments such as common area maintenance and utilities. The table below presents the lease costs and supplemental information as of September 30, 2019, in thousands:


	Income Statement Category	Three Months Ended September 30, 2019		Nine Months Ended September 30, 2019
Lease Cost
Operating lease cost	Occupancy expense	$	1,681	$	4,548
Variable lease cost	Occupancy expense	42		109

Total lease cost		$	1,723	$	4,657
Supplemental Information
Noncash reduction of ROU assets arising from lease modifications	Occupancy expense	$	495	$	2,959
Noncash reduction lease liabilities arising from lease modifications	Occupancy expense	284		2,771

Supplemental balance sheet information		As of September 30, 2019
Weighted-average remaining operating lease term (in years)		6.5

Weighted-average discount rate for operating leases		3.00				%

A maturity analysis of operating lease liabilities and reconciliation of the undiscounted cash flows to the total of operating lease liabilities as of September 30, 2019 is as follows, in thousands:


Three months ending December 31, 2019	$	1,503
Year ending December 31,
2020	5,931
2021	5,678
2022	4,346
2023	2,900
Thereafter	8,751
Total lease payments	$	29,109
Less interest	(2,706)
Present value of lease liabilities	$	26,403

As defined by Topic 840, Heartland's minimum future rental commitments at December 31, 2018, for all non-cancelable leases were as follows, in thousands:


2019	$	5,776
2020	5,493
2021	5,102
2022	3,241
2023	2,297
Thereafter	12,419
	$	34,328