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Note 11 - Leases

3 Months Ended

Mar. 31, 2023

11. Leases

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 were 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 as the discount rates. 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 March 31, 2023, ten of the Company’s branch properties, one administrative office and one former branch 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 two standalone ATMs under operating leases. Additionally, the Company has one property lease and four equipment leases classified as finance leases.

The following is an analysis of the leased property under finance leases:

(dollars in thousands)	*March 31, 2023*			December 31, 2022

Property and equipment	$	1,695		$	1,695
Less accumulated depreciation and amortization		(666	)		(606	)
Leased property under finance leases, net	$	1,029		$	1,089

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 March 31, 2023:

(dollars in thousands)	Amount

2023	$	163
2024		171
2025		161
2026		150
2027		150
2028 and thereafter		313
Total minimum lease payments^(a)		1,108
Less amount representing interest ^(b)		(57	)
Present value of net minimum lease payments	$	1,051

(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 March 31, 2023, the Company leased its Green Ridge, Pittston, Peckville, Back Mountain, Mountain Top, Abington, Nazareth, Easton, Bethlehem and Wyoming branches under the terms of operating leases. During 2022, the Company relocated the Bethlehem branch and the lease for the former branch expires in June 2023. During 2022, the Company also entered into a new lease of administrative office space in Scranton. 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 and are expensed as incurred. The Bethlehem and Easton branches have variable lease payments that increase annually and are expensed as incurred.

(dollars in thousands)	*March 31, 2023*			March 31, 2022
Lease cost
Finance lease cost:
Amortization of right-of-use assets	$	60		$	63
Interest on lease liabilities		5			6
Operating lease cost		192			184
Short-term lease cost		22			37
Variable lease cost		17			10
Total lease cost	$	296		$	300

Other information
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from finance leases	$	5		$	6
Operating cash flows from operating leases (Fixed payments)	$	176		$	148
Operating cash flows from operating leases (Liability reduction)	$	94		$	74
Financing cash flows from finance leases	$	59		$	59
Right-of-use assets obtained in exchange for new finance lease liabilities	$	-		$	-
Right-of-use assets obtained in exchange for new operating lease liabilities	$	-		$	-
Weighted-average remaining lease term - finance leases (in years)		6.39			6.98
Weighted average remaining lease term - operating leases (in years)		20.48			21.25
Weighted-average discount rate - finance leases		1.70	%		1.77	%
Weighted-average discount rate - operating leases		3.39	%		3.39	%

During the first three months of 2023, $290 thousand of the total lease cost was included in premises and equipment expense and $6 thousand was included in other expenses on the consolidated statements of income. During the first three months of 2022, $291 thousand of the total lease cost was included in premises and equipment expense and $9 thousand was 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 March 31, 2023 are as follows:

(dollars in thousands)	Amount

2023	$	522
2024		657
2025		637
2026		644
2027		653
2028 and thereafter		10,179
Total future minimum lease payments		13,292
Less variable payment adjustment		(174	)
Less amount representing interest		(3,855	)
Present value of net future minimum lease payments	$	9,263

The Company leases one property, where the Company is lessor, under an operating lease to an unrelated party. The undiscounted cash flows to be received on an annual basis for the property are as follows:

(dollars in thousands)	Amount

2023	$	36
2024		51
2025		54
2026		54
2027		27
2028 and thereafter		-
Total lease payments to be received	$	222

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 March 31,
(dollars in thousands)	2023		2022
Lease income - direct finance leases
Interest income on lease receivables	$	320	$	225

Lease income - operating leases		12		58
Total lease income	$	332	$	283