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Leases

9 Months Ended

Sep. 30, 2019

(In Thousands)

The Company adopted ASC 842 in the first quarter of 2019. The Company enters into leases in both lessor and lessee capacities.

ASC 842 provided for a number of optional practical expedients, of which the Company has elected several including (i) the option not to separate the lease and non-lease components; (ii) the “package of practical expedients,” where the Company does not have to reassess (A) whether expired or existing contracts contain leases under the new definition of a lease, (B) lease classification for expired or existing leases and (C) whether previously capitalized initial direct costs would qualify for capitalization under ASC 842; and (iii) the use of hindsight in determining the lease term, which permits the use of information available after lease inception to determine the lease term via the knowledge of renewal options exercised but not available at the lease’s inception.

The practical expedient pertaining to land easements is not applicable to the Company.

Lessor Arrangements

The Company provides equipment financing to its customers through sales type or direct financing lease arrangements. These leases are carried at the aggregate of lease payments receivable plus the estimated residual value of the leased property less unearned income, which is accreted into interest income over the lease’s term using methods that approximate the interest method. These arrangements generally do not contain non-lease components. Lease agreements may include renewal and purchase options.

As of September 30, 2019, the net investment in these leases was $8,979, comprised of $7,167 in lease receivables, $2,415 in residual balances and $603 in deferred income. In order to mitigate potential exposure to residual asset risk, the Company utilizes first amendment or terminal rental adjustment clause leases.

For the three and nine months ended September 30, 2019, the Company generated $78 and $237, respectively, in income, which is included in interest income on loans on the Consolidated Statements of Income from these leases.

The maturities of the lessor arrangements outstanding at September 30, 2019 is presented in the table below.



Remainder of 2019	$	197
2020	1,263
2021	1,435
2022	2,168
2023	2,403
Thereafter	1,513
Total lease receivables	$	8,979

Lessee Arrangements

All of the Company’s lessee arrangements are operating leases, being real estate leases for Company facilities. Under these arrangements, the Company records right-of-use assets and corresponding lease liabilities, each of which is based on the present value of the remaining lease payments and are discounted at the Company’s incremental borrowing rate. Right-of-use assets are reported in premises and equipment on the Consolidated Balance Sheets and the related lease liabilities are reported in other liabilities. All leases are recorded on the Consolidated Balance Sheets except for leases with an initial term less than 12 months for which the Company elected the short-term lease recognition exemption. Lease expense is recognized on a straight-line basis over the lease term and is recorded in occupancy and equipment expense in the Consolidated Statements of Income. Variable lease payments consist primarily of common area maintenance and taxes. The Company does not have any material sublease agreements currently in place.

As of September 30, 2019, right-of-use assets totaled $86,654 and lease liabilities totaled $90,455. Lease terms may contain renewal and extension options and early termination features. Many leases include one or more options to renew, with renewal terms that can extend the lease term from one to 20 years or more. The exercise of lease renewal options is at the Company’s sole discretion.

Renewal options which are reasonably certain to be exercised in the future were included in the measurement of right-of-use assets and lease liabilities.

The table below provides the components of lease cost and supplemental information for the periods presented.



	Three months ended September 30, 2019			Nine months ended September 30, 2019
Operating lease cost (cost resulting from lease payments)	$	2,601		$	7,449
Short-term lease cost	9			29
Variable lease cost (cost excluded from lease payments)	434			1,231
Sublease income	(178		)	(474		)
Net lease cost	$	2,866		$	8,235
Operating lease - operating cash flows (fixed payments)	2,445			7,125
Operating lease - operating cash flows (liability reduction)	1,724			5,212
Weighted average lease term - operating leases (in years) (at period end)				17.46
Weighted average discount rate - operating leases (at period end)				3.41		%

Right-of-use assets obtained in exchange for new lease liabilities - operating leases	$	14,728		$	37,471

The maturities of the lessee arrangements outstanding at September 30, 2019 are presented in the table below.



Remainder of 2019	$	2,557
2020	9,632
2021	8,835
2022	8,460
2023	8,191
Thereafter	86,369
Total undiscounted cash flows	124,044
Discount on cash flows	33,589
Total operating lease liabilities	$	90,455

As of September 30, 2019, the Company had leases with related parties that were obtained in the Brand acquisition. The related party leases have right-of-use assets of $13,074 and lease liabilities of $15,317, with total lease cost of $492 and $1,476 for the three and nine months ended September 30, 2019, respectively.

As required, the following disclosure is provided for periods prior to the adoption of ASC 842. The following is a summary of future minimum lease payments for years following December 31, 2018:



2019	$	9,389
2020	8,199
2021	6,339
2022	4,929
2023	3,711
Thereafter	12,592
Total	$	45,159

For more information on lease accounting, see Note 1, “Summary of Significant Accounting Policies” and on lease financing receivables, see Note 4, “Non Purchased Loans.”

Leases