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Contingent Liabilities, Commitments, and Financial Instruments with Off-Balance-Sheet Risk | 12 Months Ended
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Dec. 31, 2020
Commitments and Contingencies Disclosure [Abstract] |
Contingent Liabilities, Commitments, and Financial Instruments with Off-Balance-Sheet Risk | Contingent Liabilities, Commitments, and Financial Instruments with Off-Balance-Sheet Risk Contingent Liabilities —1st Source and its subsidiaries are defendants in various legal proceedings arising in the normal course of business. In the opinion of management, based upon present information including the advice of legal counsel, the ultimate resolution of these proceedings will not have a material effect on the Company’s consolidated financial position or results of operations. 1st Source Bank sells residential mortgage loans to Fannie Mae as well as FHA-insured, USDA-insured and VA-guaranteed loans in Ginnie Mae mortgage-backed securities. Additionally, the Bank has sold loans on a service released basis to various other financial institutions in the past. The agreements under which the Bank sells these mortgage loans contain various representations and warranties regarding the acceptability of loans for purchase. On occasion, the Bank may be required to indemnify the loan purchaser for credit losses on loans that were later deemed ineligible for purchase or may be required to repurchase a loan. Both circumstances are collectively referred to as “repurchases.” The Company’s liability for repurchases, included in Accrued Expenses and Other Liabilities on the Consolidated Statements of Financial Condition, was $0.33 million and $0.29 million as of December 31, 2020 and 2019, respectively. The mortgage repurchase liability represents the Company’s best estimate of the loss that it may incur. The estimate is based on specific loan repurchase requests and a historical loss ratio with respect to origination dollar volume. Because the level of mortgage loan repurchase losses are dependent on economic factors, investor demand strategies and other external conditions that may change over the life of the underlying loans, the level of liability for mortgage loan repurchase losses is difficult to estimate and requires considerable management judgment. Lease Commitments — The Company and its subsidiaries are obligated under operating leases for certain office premises and equipment. The following table shows operating lease right of use assets and operating lease liabilities as of December 31.
(Dollars in thousands) | Statement of Financial Condition classification | 2020 |  | 2019
Operating lease right of use assets | Accrued income and other assets | $ | 23,825 |  |  | $ | 24,147 |
Operating lease liabilities | Accrued expenses and other liabilities | $ | 23,688 |  |  | $ | 24,319 |
During 2019, the Company amended the lease agreement for its corporate office building by extending the lease term which resulted in an increase to its operating lease right of use assets of $14.65 million and an increase to its operating lease liabilities of $14.64 million. The following table shows the components of operating leases expense for the year ended December 31.
(Dollars in thousands) | Statement of Income classification | 2020 |  | 2019
Operating lease cost | Net occupancy expense | $ | 3,472 |  |  | $ | 3,487 |
Short-term lease cost | Net occupancy expense | 8 |  |  | 41 |
Variable lease (recovery of) cost | Net occupancy expense | (30) |  |  | — |
Total operating lease cost |  | $ | 3,450 |  |  | $ | 3,528 |
Gross rental expense for the year ended December 31, 2018 was $3.73 million. The following table shows future minimum rental commitments for all noncancellable operating leases with an initial term longer than 12 months for the next five years and thereafter.
(Dollars in thousands) |  |
2021 |  | $ | 3,639 |
2022 |  | 3,944 |
2023 |  | 3,590 |
2024 |  | 2,681 |
2025 |  | 2,497 |
Thereafter |  | 9,194 |
Total lease payments |  | 25,545 |
Less: imputed interest |  | (1,857) |
Present value of operating lease liabilities |  | $ | 23,688 |
The following table shows the weighted average remaining operating lease term, the weighted average discount rate and supplemental Consolidated Statement of Cash Flows information for operating leases at December 31.
(Dollars in thousands) | 2020 |  | 2019
Weighted average remaining lease term | 10.17 years |  | 10.88 years
Weighted average discount rate | 1.80 | % |  | 2.83 | %
Cash paid for amounts included in the measurement of lease liabilities: |  |  |
Operating cash flows from operating leases | $ | 3,794 |  |  | $ | 3,768 |
During the year ended December 31, 2019, the Company recognized a net gain on the sale of an office building in the amount of $1.31 million. The Company commenced an operating lease with the buyer of the building to lease a portion of it for office space resulting in a new right of use asset and operating lease liability. There were no new significant leases that had not yet commenced as of December 31, 2020. Financial Instruments with Off-Balance-Sheet Risk — To meet the financing needs of our clients, 1st Source and its subsidiaries are parties to financial instruments with off-balance-sheet risk in the normal course of business. These off-balance-sheet financial instruments include commitments to originate and sell loans and standby letters of credit. The instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated statements of financial condition. Financial instruments, whose contract amounts represent credit risk as of December 31, were as follows:
(Dollars in thousands) |  | 2020 |  | 2019
Amounts of commitments: |  |  |  |
Loan commitments to extend credit |  | $ | 1,140,892 |  |  | $ | 1,095,054 |
Standby letters of credit |  | $ | 24,884 |  |  | $ | 27,549 |
Commercial and similar letters of credit |  | $ | 7,095 |  |  | $ | 2,332 |
The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instruments for loan commitments and standby letters of credit is represented by the dollar amount of those instruments. The Company uses the same credit policies and collateral requirements in making commitments and conditional obligations as it does for on-balance-sheet instruments. Loan commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company grants mortgage loan commitments to borrowers subject to normal loan underwriting standards. The interest rate risk associated with these loan commitments is managed by entering into contracts for future deliveries of loans. Standby letters of credit are conditional commitments issued to guarantee the performance of a client to a third party. The credit risk involved in and collateral obtained when issuing standby letters of credit are essentially the same as those involved in extending loan commitments to clients. Standby letters of credit generally have terms ranging from two months to one year. Commercial letters of credit are issued specifically to facilitate commerce and typically result in the commitment being drawn on when the underlying transaction is consummated between the customer and the third party. Commercial letters of credit generally have terms ranging from two months to six months.

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