LEASING ACTIVITIES

12 Months Ended

Dec. 31, 2017

Leases [Abstract]

LEASING ACTIVITIES

NOTE 17 LEASING ACTIVITIES

Sale and Leaseback Transactions

On May 31, 2017 the Bank, the wholly-owned subsidiary of the Company, sold four (4) of its properties, one each located in Abingdon, Bristol, Gate City and Castlewood, Virginia to a non affiliated third party for a total purchase price of $6.2 million. After selling expenses of $192 thousand, the net proceeds on the transactions were $6.0 million. The sales prices for the properties were based on outside appraisals obtained by the Bank. The Bank provided $4.9 million of financing to the purchaser for a term of 10 years for this transaction.

In connection with the sale of the four properties, the Bank on May 31, 2017 entered into commercial lease agreements with the purchaser for the properties (the “Leases”), which will allow the Bank to continue to service customers from these locations. The Leases, which commenced on June 1, 2017, provide the Bank with use of the properties for an initial term of fifteen (15) years.  Base rent payments for years 1 through 5 of the Leases are approximately $417 thousand a year.  The base rent payments will increase by 8% for years 6 through 10 of the Leases and then by another 8% for years 11 through 15 of the Leases.  The Bank has the option to renew the Leases five (5) times and each renewal would be for a term of five (5) years.  The base rent for the renewals would be negotiated at the time the renewal option is exercised by the Bank. While the cash lease payments are currently $417 thousand a year, the Company is required to straight-line the expense over the initial term of fifteen (15) years. As a result, the annual lease expense will be approximately $451 thousand. The weighted average remaining life of the leases is 14.42 years.

In anticipation of this transaction the Company early adopted ASU No. 2016-02 Leases (Topic 842). This ASU revised certain aspects of recognition, measurement, presentation, and disclosure of leasing transactions. As a result of this transaction the Company recognized right-to-use assets – operating leases of approximately $5.3 million, along with corresponding lease liabilities of approximately $5.3 million. The $5.3 million was determined by calculating the present value of the annual cash lease payments using a discount rate of 3.25%. The 3.25% discount rate was determined to be our fifteen (15) year incremental borrowing rate as of May 31, 2017.

As a result of the sale and the determination that the corresponding leases were operating leases, the Company recognized a gain of $2.6 million on the sale and leaseback transactions.

Kingsport Loan Production Office Lease

The Bank entered into a commercial lease for office space in Kingsport, TN for use as a loan production office, which is expected to open during the 1^st Quarter of 2018. The lease, which commenced on December 1, 2017, provides the Bank with use of the office space for an intital term of three (3) years. Base rent payments are $25 thousand for year 1, $25 thousand for year 2, and $26 thousand for year 3. The Bank has the option to renew the lease one (1) time and the renewal would be for a term of one (1) year. The base rent for the renewal would increase by 5.00%. While the cash lease payments are currently $25 thousand a year, the Company is required to straight-line the expense over the initial term of three (3) years. As a result, the annual lease expense will be approximately $25 thousand. The weighted average remaining life of the lease is 2.97 years.

As a result of this transaction the Company recognized a right-to-use asset – operating lease of approximately $73 thousand, along with corresponding lease liability of approximately $73 thousand. The $73 thousand was determined by calculating the present value of the annual cash lease payments using a discount rate of 2.17%. The 2.17% discount rate was determined to be our three (3) year incremental borrowing rate as of December 1, 2017.

The Company’s operating lease cost for the year ended December 31, 2017 as a result of the transactions discussed above was $265 thousand.

All other operating leases the Company has were evaluated and determined that they are immaterial to the financial statements. At December 31, 2017, future minimum rental commitments under the non-cancellable operating leases discussed above are as follows (dollars are in thousands):

2018	$	441
2019		442
2020		440
2021		492
2022		436
Thereafter		4,415
Total	$	6,666