Note 4 - Premises and Equipment

Premises and equipment are summarized by major classification as follows at December 31:


	2019		2018
	(dollars in thousands)
Land	$	1,537	$	1,537
Building		29,834		29,755
Leasehold improvements		3,015		2,792
Furniture, fixtures, and equipment		3,718		3,178
Total, at cost		38,104		37,262
Less: Accumulated depreciation and amortization		(15,960)		(14,517)
Net premises and equipment	$	22,144	$	22,745

Depreciation expense was $1.4 million and $1.3 million for the years ended December 31, 2019 and 2018, respectively.

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, we adopted ASU No. 2016-02 “Leases” (“Topic 842”) and all subsequent ASUs that modified Topic 842. For us, Topic 842 primarily affected the accounting treatment for operating lease agreements in which we are the lessee.

Substantially all of the leases in which we are the lessee are comprised of real estate property for branches, ATM locations, office equipment, and office space with terms extending through 2035. All of our leases are classified as operating leases, and therefore, were previously not recognized on the our Consolidated Statements of Financial Condition. With the adoption of Topic 842, operating lease agreements are required to be recognized on the Consolidated Statements of Financial Condition as an ROU asset and a corresponding lease liability.

The following table represents the Consolidated Statements of Financial Condition classification of our ROU assets and lease liabilities, included in other assets and other liabilities, respectively, as of December 31, 2019. We elected not to include short-term leases (i.e., leases with initial terms of twelve months or less) on the Consolidated Statements of Financial Condition.


	(in thousands)
Lease ROU assets	$	2,538
Lease liabilities		2,597

The calculated amount of the ROU assets and lease liabilities in the table above are impacted by the length of the lease term and the discount rate used to present value the minimum lease payments. Our lease agreements often include one or more options to renew at our discretion. If at lease inception, we consider the exercising of a renewal option to be reasonably certain we will include the extended term in the calculation of the ROU asset and lease liability. Regarding the discount rate, Topic 842 requires the use of the rate implicit in the lease whenever this rate is readily determinable. As this rate is rarely determinable, we utilize our incremental borrowing rate at lease inception over a similar term. For operating leases existing prior to January 1, 2019, the rate for the remaining lease term as of January 1, 2019 was used. The weighted-average remaining lease term was 11.2 years and the weighted-average discount rate was 3.17% as of December 31, 2019.

The following table represents lease costs and other lease information for the year ended December 31, 2019. As we elected, for all classes of underlying assets, not to separate lease and non-lease components and instead to account for them as a single lease component, the variable lease cost primarily represents variable payments such as common area maintenance and utilities. Variable lease cost also includes payments for ATM location leases in which payments are based on a percentage of ATM transactions (i.e., ATM surcharge fees), rather than a fixed amount.


		(in thousands)
Operating lease costs	$	433
Variable lease cost		—
Total lease cost	$	433

Cash paid on operating lease liabilities amounted to $321,000 for the year ended December 31, 2019.

Total rent expense for all real property leases amounted to $321,000 for the year ended December 31, 2018.

Future minimum payments for finance leases and operating leases with initial or remaining terms of one year or more were as follows as of December 31, 2019:


Lease payments due in years ended December 31:	(in thousands)
2020	$	357
2021		348
2022		346
2023		288
2024		259
Thereafter		1,572
Total future minimum lease payments		3,170
Amounts representing interest		(573)
Present value of net future minimum lease payments	$	2,597

H.S. West, LLC, a subsidiary of the Bank, leases space to three unrelated companies and to a law firm of which the President of the Company and the Bank is a partner. Total gross rental income included in occupancy expense on the Consolidated Statements of Income was approximately $945,000 and $1.0 million for the years ended December 31, 2019 and 2018, respectively.

Our minimum future annual rental income on such leases is as follows as of December 31, 2019:


Years Ended December 31,	(in thousands)
2020	$	708
2021		712
2022		470
2023		442
2024		201
Thereafter		52
	$	2,585