Leases Leases

9 Months Ended

Sep. 30, 2019

The Company adopted ASU 2016-02, "Leases", and its related amendments on January 1, 2019 using a modified retrospective approach. The Company's leasing activities include leasing certain real estate and equipment, providing lease financing to commercial customers, and leasing office space to third parties. The Company adopted the package of practical expedients permitted within the new standard, along with the lease component expedient for all lease classes and the disclosure expedient. The Company uses the FHLB fixed-advance rate at lease commencement or remeasurement event based on the remaining lease term to calculate the liability for each lease.

Lessee

The Company primarily has operating leases for branches, office space, ATM locations, and certain equipment. As of September 30, 2019, the right-of-use asset, reported within premises and equipment, net, and lease liability, reported within other liabilities, recognized on the Company's consolidated balance sheets totaled $26.4 million and $27.1 million, respectively. For leases with a term of 12 months or less, an election was made not to recognize lease assets and lease liabilities for all asset classes, and to recognize lease expense for these leases on a straight-line basis over the lease term. Total lease cost for the three and nine months ended September 30, 2019 was $1.8 million and $5.5 million, respectively. The Company's leases have remaining terms of 1 month to 35 years, most of which contain renewal options. However, the renewal options are generally not included in the leased asset or liability because the option exercises are uncertain.

The maturities of operating leases are included in the table below.



(in thousands)	Operating Leases^(a)
2019 (excluding the nine months ended September 30, 2019)	$	1,452
2020	5,400
2021	4,579
2022	4,093
2023	3,772
After 2023	15,123
Total lease payments	$	34,419
Less: Interest^(b)	7,337
Present value of lease liabilities	$	27,082

(a) Excludes $2.9 million of legally binding minimum lease payments for operating leases signed but not yet commenced.

(b) Calculated using the interest rate for each lease.

The following table presents the average lease term and discount rate of operating leases.



	September 30, 2019
Weighted-average remaining lease term	11.8 years
Weighted-average discount rate	3.72	%

Supplemental cash flow information related to operating leases is included in the table below.



	For the Three Months Ended September 30		For the Nine Months Ended September 30
(in thousands)	2019		2019
Operating cash paid toward lease liabilities	$	1,446	$	4,487
Leased assets obtained in exchange for new lease liabilities	$	659	$	2,751

The Company adopted the new lease standard using the effective date as the date of initial application as noted above, and as required, the table below provides the disclosure for periods prior to adoption. Future minimum lease payments as of December 31, 2018 are shown below, which include leases that have not yet commenced.



(in thousands)
Year Ended December 31	Total
2019	$	5,763
2020	4,817
2021	4,055
2022	3,598
2023	3,273
After	15,161
Total minimum lease payments	$	36,667

Lessor

The Company has net investments in direct financing and sales-type leases to commercial, industrial, and tax-exempt entities. These leases are included within business loans on the Company's consolidated balance sheets. The Company primarily leases various types of equipment, trucks and trailers, and office furniture and fixtures. Lease agreements may include options to renew or for the lessee to purchase the leased equipment at the end of the lease term. The Company has elected to adopt the lease component expedient in which the lease and nonlease components are combined into the total lease receivable. The Company also leases office space to third parties, and these leases are classified as operating leases. The leases may include options to renew or expand the leased space, and currently the leases have remaining terms of 1 month to 9 years.

The following table provides the components of lease income.



	For the Three Months Ended September 30		For the Nine Months Ended September 30
(in thousands)	2019		2019
Direct financing and sales-type leases	6,092		17,988
Operating leases^(a)	1,984		5,816
Total lease income	$	8,076	$	23,804

(a) Includes rent of $19 thousand and $56 thousand, respectively, from Tower Properties Company, a related party, for the three and nine months ended September 30, 2019.

The following table presents the components of the net investments in direct financing and sales-type leases.



(in thousands)	September 30, 2019
Lease payment receivable	$	710,676
Unguaranteed residual assets	54,938
Total net investments in direct financing and sales-type leases	$	765,614
Deferred origination cost	3,546
Total net investment included within business loans	$	769,160

The maturities of lease receivables are included in the table below.



(in thousands)	Direct Financing and Sale-Type Leases		Operating Leases		Total
2019 (excluding the nine months ended September 30, 2019)	$	51,888	$	1,918	$	53,806
2020	200,390		7,057		207,447
2021	156,798		7,036		163,834
2022	117,779		13,314		131,093
2023	86,746		5,084		91,830
After 2023	160,852		13,096		173,948
Total lease receipts	774,453		$	47,505	$	821,958
Less: Net present value adjustment	63,777
Present value of lease receipts	$	710,676