OPERATING LEASE COMMITMENTS AND CONTINGENCIES

12 Months Ended

Dec. 31, 2022

CONTINGENCIES

OPERATING LEASE COMMITMENTS AND CONTINGENCIES

17. OPERATING LEASE COMMITMENTS AND CONTINGENCIES

Operating Lease Commitments

Operating leases in which the Corporation is the lessee are recorded as operating lease Right of Use ("ROU") assets and operating lease liabilities, included in other assets and other liabilities, respectively, on the consolidated balance sheets. The Corporation does not currently have any finance leases. Operating lease ROU assets represent the right to use an underlying asset during the lease term and operating lease liabilities represent the obligation to make lease payments arising from the lease. ROU assets and operating lease liabilities were recognized as of the date of adoption of ASU 2017-02 based on the present value of the remaining lease payments using a discount rate that represented the then Corporation’s incremental borrowing rate at the date of initial application.

Operating lease expense, which is comprised of amortization of the ROU assets and the implicit interest accreted on the operating lease liability, is recognized on a straight line basis over the remaining lease term of the operating lease, and is recorded in office occupancy expense in the consolidated statements of income. The leases relate to Bank branches with remaining lease terms of generally 1 to 10 years.

The Corporation leases certain branch locations, office space and equipment. All leases are classified as operating leases. Leases with an initial term of 12 months or less are not recorded on the balance sheet and the related lease expense is recognized on a straight-line basis over the lease term.

Certain leases include options to renew, with renewal terms that can extend the lease term from one to eight years that are reasonably certain of being exercised. The discount rate used in determining the lease liability for each individual lease was the FHLB fixed advance rate which corresponded with the remaining lease term as of January 1, 2019 for leases that existed at adoption and as of the lease commencement date for leases subsequently entered into after January 1, 2019. At December 31, 2022, discount rates ranged from 0.84% to 3.50% with a weighted-average discount rate of 1.98%. At December 31, 2022, the weighted-average remaining lease term was 5.1 years. At December 31, 2021, the weighted-average discount rate was 1.90% and the weighted-average remaining lease term was 4.8 years.

As shown in the table below, at December 31, 2022, right-of-use assets of $4,133,000 were included in other assets, and the related lease liabilities totaling the same amount were included in accrued interest and other liabilities, in the consolidated balance sheets. At December 31, 2021, right of use assets and the related liabilities totaled $3,751,000.

	December 31,		December 31,
(In Thousands)	2022		2021
Other assets	$	4,133	$	3,751
Other liabilities	$	4,133	$	3,751

In 2022, 2021 and 2020, operating lease expenses are included in the following line item of the consolidated statements of income:

(In Thousands)	2022		2021		2020
Net occupancy and equipment expense	$	599	$	492	$	371
Total	$	599	$	492	$	371

A maturity analysis of the Corporation’s lease liabilities at December 31, 2022 is as follows:

(In Thousands)

Lease Payments Due

2023	$	643
2024		622
2025		593
2026		532
2027		509
Thereafter		1,565
Total lease payments		4,464
Discount on cash flows		(331)
Total lease liabilities	$	4,133

Litigation Matters

In the normal course of business, the Corporation is subject to pending and threatened litigation in which claims for monetary damages are asserted. In management’s opinion, the Corporation’s financial position and results of operations would not be materially affected by the outcome of these legal proceedings.

Trust Department Tax Reporting Contingency

The Corporation has incurred operational losses from compliance oversight related to trust department tax preparation and administration activities that occurred prior to 2020. In 2020, the Corporation made changes in internal controls and personnel responsible for trust department tax administration activities. Management implemented the changes in internal controls and personnel in an effort to mitigate and prevent the likelihood of new instances of non-compliance from trust department tax administration activities. In 2022, the Corporation recorded a net reduction in expense of $459,000 related to trust department tax compliance matters, resulting mainly from favorable rulings on two matters. Losses related to trust department tax compliance matters totaled $164,000 in 2021 and $571,000 in 2020. The net reduction in expense in 2022 and the losses in 2021 and 2020 are included in other noninterest expense in the consolidated statements of income. The balance of accrued interest and other liabilities in the consolidated balance sheets includes $122,000 at December 31, 2022 and $465,000 at December 31, 2021 related to trust department tax compliance matters.