The Company’s lease arrangements consist of operating and finance leases; however, the majority of the leases have been classified as non-cancellable operating leases and are primarily for real estate and equipment leases with remaining lease terms of up to 15 years.

The Company adopted ASU 2016-02 – Leases (Topic 842) – on January 1, 2022 and began recognizing its operating leases on its consolidated balance sheet by recording a net lease liability, representing the Company’s legal obligation to make these lease payments, and a Right-Of-Use (“ROU”) asset, representing the Company’s legal right to use the leased assets. The Company, by policy, does not include renewal options for leases as part of its ROU asset and lease liabilities unless they are deemed reasonably certain to exercise. The Company does not have any sub-lease agreements.

The Company determines whether a contract contains a lease based on whether a contract, or a part of a contract, conveys the right to control the use of an identified asset for a period of time in exchange for consideration. The discount rate is either implicit in the lease or, when a rate cannot be readily determined, the Company’s incremental borrowing rate is used. The incremental borrowing rate is the rate of interest that the Company would have to pay to borrow on a collateralized basis over a similar term.

On June 11, 2024, the Bank entered into and closed on an agreement with a single purchaser for the purchase and sale of four properties formerly owned and operated by the Bank, which included four branches (with an adjacent drive thru) and a parking lot, each adjacent to a sold branch, for an aggregate cash purchase price of $7.5 million. Concurrently with the sale-leaseback transaction, the Bank entered into an absolute net lease agreement with the purchaser under which the Bank will lease the properties for an initial term of 15 years with one renewal option of 15 years. The lease agreement includes a 2.5% annual rent escalation during the initial term and during the renewal term, if exercised. The sale-leaseback transaction resulted in a pre-tax gain of $2.5 million which is included in non-interest income in the accompanying consolidated statements of income (loss). The Company’s operating lease ROU asset and corresponding operating lease liability of $5.2 million primarily resulted in an increase in ROU assets and lease liabilities at September 30, 2024 (included in other assets and other liabilities), compared to December 31, 2023. Additionally, the Company recorded a $1.5 million finance lease liability related to this agreement representing the portion of the gain not eligible for immediate recognition. The Company's obligation under this operating lease expires in June 2039 and has future lease payments of $9.3 million as of September 30, 2024. Total lease expense for this operating lease was $131,000 and $-0- for the three months ended September 30, 2024 and 2023, respectively, and $160,000 and $-0- for the nine months ended September 30, 2024, respectively.

During 2023, the Company completed a conversion of all of its branch ATMs from owned equipment to leased equipment and recognized a $2,000 loss on the disposition of all ATM-related equipment. The Company's obligation under the operating lease related to these ATMs expires in August 2030 and has future lease payments of $451,000 as of September 30, 2024. Total lease expense under the operating lease related to these ATMs was $19,000 and $6,000 for the three months ended September 30, 2024 and 2023, respectively, and $57,000 and $6,000 for the nine months ended September 30, 2024 and 2023, respectively.

The Company's obligation under an operating lease related to a branch not included in the sale-leaseback transaction expires in August 2027 and has future lease payments of $123,000 as of September 30, 2024. Total lease expense for this obligation was $10,000 for the three months ended September 30, 2024 and 2023, respectively, and $29,000 and $27,000 for the nine months ended September 30, 2024 and 2023, respectively. This lease agreement contains clauses calling for escalation of minimum lease payments contingent on increases in LIBOR, or a similar replacement index, and the consumer price index.

The following tables summarize information related to the Company’s lease portfolio and other supplemental lease information as of and for the periods ended:


	September 30, 2024						December 31, 2023
	Operating			Finance			Operating			Finance
	(Dollars in thousands)						(Dollars in thousands)
ROU assets	$	5,719		$	—		$	587		$	—
Lease liabilities		5,719			1,523			587			—
Lease Term and Discount Rate:
Weighted-average remaining lease term (years)		13.90			14.67			5.85			—
Weighted-average discount rate(1)		7.81	%		8.12	%		4.79	%		—

(1) A lease implicit rate or incremental borrowing rate is used based on information available at commencement date of lease.


	Three months ended September 30,
(Dollars in thousands)	2024		2023
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	70	$	16
Operating cash flows from finance lease		13		—
ROU assets obtained in exchange for lease obligations:
Net operating lease cost		70		16
Finance lease cost:
Amortization of right-of-use assets		13		—
Interest on lease liabilities		25		—
Total lease cost	$	108	$	16

	Nine months ended September 30,
(Dollars in thousands)	2024		2023
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	131	$	38
Operating cash flows from finance lease		16		—
Financing cash flows from finance lease		1,539		—
ROU assets obtained in exchange for lease obligations:
Operating leases		5,263		—
Net operating lease cost		131		38
Finance lease cost:
Amortization of right-of-use assets		16		—
Interest on lease liabilities		31		—
Total lease cost	$	178	$	38

The total minimum lease payments due in future periods for lease agreements in effect at September 30, 2024 were as follows:


As of September 30, 2024	Future Minimum Lease Payments
(Dollars in thousands)	Operating			Finance
Remainder of 2024	$	162		$	38
2025		654			156
2026		666			160
2027		666			164
2028		651			168
Thereafter		7,038			2,022
Total minimum lease payments		9,837			2,708
Less: interest		(4,118	)		(1,185	)
Total lease liability	$	5,719		$	1,523