NOTE 7 – COMMITMENTS & CONTINGENCES

Operating Leases

A lease is defined as a contract, or part of a contract, that conveys the right to control the use of identified property, plant or equipment for a period of time in exchange for consideration. On January 1, 2019, the Company adopted ASU No. 2016-02 “Leases” (Topic 842) and all subsequent ASUs that modified Topic 842. For the Company, Topic 842 primarily affected the accounting treatment for operating lease agreements in which the Company is the lessee. All of the leases in which the Company is the lessee are for branches and office space. All of these leases are classified as operating leases, and therefore, were previously not recognized on the Company’s consolidated balance sheet. With the adoption of Topic 842, operating lease agreements are required to be recognized on the consolidated balance sheet as a right-of-use-asset with a corresponding lease liability.

At March 31, 2019, the Company had lease liabilities totaling $10.1 million and right of use assets totaling $10.0 million related to these leases. Remaining lease terms range from six to 26 years. Management assumed all leases would be extended through all contractual extensions.

For the three months ended March 31, 2019, the weighted average remaining lease term for operating leases was 18.31 years and the weighted average discount rate used in the measurement of operating leases was 3.48%. Operating lease cost was $220,000 and cash paid for amounts included in the measurement of lease liabilities was $183,000. Rent expense for the three months ended March 31, 2018, prior to the adoption of ASU 2016-02, was $234,000 which included $58,000 for acquired operating leases for facilities from the County First acquisition. All County First operating leases expired on or before December 31, 2018.

The Company elected to apply certain practical expedients provided under ASU 2016-02 whereby management did not reassess (i) whether any expired or existing contracts are or contain leases, (ii) the lease classification for any expired or existing leases and (iii) initial direct costs for any existing leases. The Company accounted for lease and non-lease components separately because such amounts are readily determinable under our lease contracts. ASC 842 allows a lessee to make an accounting policy election for short term leases whereby short-term lease are not recognized on the balance sheet. However, the Company did not have any short-term leases upon adoption or during the quarter.

Topic 842 requires the use of the rate implicit in the lease whenever this rate is readily determinable. As this rate is rarely determinable, the Company utilizes its incremental borrowing rate at lease inception over a similar term. For operating leases existing prior to January 1, 2019, the FHLB fixed advance rate which corresponded with the remaining lease term as of January 1, 2019 was used.

A maturity analysis of operating lease liabilities and reconciliation of the undiscounted cash flows to the total operating lease liability is as follows:


(dollars in thousands)	As of March 31, 2019

Lease payments due:
Within one year	$	756
After one but within two years		764
After two but within three years		787
After three but within four years		807
After four but within five years		824
After five years		10,123
Total undiscounted cash flows	$	14,061
Discount on cash flows		3,981
Total lease liability	$	10,080