NOTE

— COMMITMENTS AND CONTINGENCIES

The Company is obligated for rental payments under certain operating lease agreements, some of which contain renewal options and escalation clauses that provide for increased rentals. Total rental expense for the years ended

December

31,

2019

and

2018,

was

$1,096,000

and

$1,171,000,

respectively.

We have historically entered into a number of lease arrangements under which we are the lessee. We have elected the practical expedient to rely on our original lease classification at the commencement of each lease contract, and

not

reassess the lease classifications upon the adoption of ASU

No.

2016

02,

Leases (Topic

842

)

on the effective date of

January 1, 2019.

Therefore, all of the Company’s leases are determined to be operating leases. The other practical expedients the Company adopted are: (

) combining lease and non-lease components into a single liability amount and (

) leases with fair values of less than

$5,000

were

not

included as they are

not

considered to be material. The Company does

not

have any short-term leases in which the original term at commencement is

twelve

months or less and therefore there is

impact of short-term leases on the initial ROU or lease liability recorded on

January 1, 2019.

Most of our office leases include

one

or more optional renewal periods. The Company has

not

elected the hindsight practical expedient and therefore potential payments related to future lease renewal options are

not

reflected in the ROU asset and lease liability. Generally, all of the lease contracts have annual rent payment increases, some of which are based on the Consumer Price Index and others are fixed increases that are set forth within the contracts. The majority of our lease contracts are gross leases, in which a single monthly payment includes the lessor’s property and casualty insurance costs, property taxes, and common area maintenance associated with the property.

The Company determined the operating lease liability as of

January 1, 2019,

by calculating the present value of remaining base rent cash payments on each of its leases, excluding any renewal options regardless of the likelihood that the option would be exercised. As of

January 1, 2019,

the weighted average remaining term of the lease contracts was

7.9

years and the weighted average discount rate used to calculate the present value of the operating lease liability was

3.12%.

The discount rate was based on our incremental borrowing rate through our line of credit with the FHLB as of

January 1, 2019,

for the borrowing term that was equal to the remaining term of each lease. The resulting operating lease liability recorded as of

January 1, 2019

was

$5,246,000,

which is included in interest payable and other liabilities in the condensed consolidated balance sheet. The ROU asset was then determined by adjusting the operating lease liability by deferred rent and unamortized tenant improvement allowance. The ROU asset recorded on

January 1, 2019

was

$4,817,000,

which is included in interest receivable and other assets on the condensed consolidated balance sheet.

December

31,

2019,

the future minimum commitments under these operating leases are as follows (in thousands):

Year ending December 31,
2020	$	1,185
2021		944
2022		898
2023		605
2024		480
Thereafter		2,081
	$	6,193

The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit in the form of loans or through standby letters of credit. These instruments involve, to varying degrees, elements of credit and interest-rate risk in excess of the amount recognized in the balance sheet. The contract amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments.

The Company’s exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.

Financial instruments at

December 31, 2019

whose contract amounts represent credit risk:

	Contract
(in thousands)	Amount

Undisbursed loan commitments	$	144,401
Checking reserve		1,302
Equity lines		15,826
Standby letters of credit		3,143
	$	164,672

Commitments to extend credit, including undisbursed loan commitments and equity lines, are agreements to lend to a customer as long as there is

violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and

may

require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do

not

necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation. Collateral held varies but

may

include accounts receivable, inventory, property, plant, equipment and income-producing commercial properties.

Checking reserves are lines of credit associated consumer deposit accounts that meet qualification standards for extension of credit if the deposit account were to become overdraft.

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a

third

party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.