Commitments and Contingencies

9 Months Ended

Sep. 30, 2019

Commitments and Contingencies Disclosure [Abstract]

Financial Instruments with Off-Balance Sheet Risk

We make commitments to extend credit in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to extend credit in the form of loans or through standby letters of credit. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Because various commitments will expire without being fully drawn, the total commitment amount does not necessarily represent future cash requirements.

Our credit loss exposure is equal to the contractual amount of the commitment in the event of nonperformance by the borrower. We use the same credit underwriting criteria for all credit exposure. The amount of collateral obtained, if deemed necessary by us, is based on Management's credit evaluation of the borrower. Collateral types pledged may include accounts receivable, inventory, other personal property and real property.

The contractual amount of undrawn loan commitments and standby letters of credit not reflected in the consolidated statements of condition are as follows:



(in thousands)	September 30, 2019		December 31, 2018
Commercial lines of credit	$	239,465	$	238,361
Revolving home equity lines	190,230		189,971
Undisbursed construction loans	40,101		46,229
Personal and other lines of credit	9,888		14,109
Standby letters of credit	2,014		2,636
Total commitments and standby letters of credit	$	481,698	$	491,306

We record an allowance for losses on these off-balance sheet commitments based on an estimate of probabilities of the utilization of these commitments according to our historical experience on different types of commitments and expected loss. The allowance for losses on off-balance sheet commitments totaled $1.1 million and $958 thousand as of September 30, 2019 and December 31, 2018, respectively, which is recorded in interest payable and other liabilities in the consolidated statements of condition.

Leases

We lease premises under long-term non-cancelable operating leases with remaining terms of 1 year to 13 years, most of which include escalation clauses and one or more options to extend the lease term, and some of which contain lease termination clauses. Lease terms may include certain renewal options that were considered reasonably certain to be exercised.

We lease certain equipment under finance leases with initial terms of 3 years to 5 years. The equipment finance leases do not contain renewal options, bargain purchase options or residual value guarantees.

The following table shows the balances of operating and finance lease right-of-use assets and lease liabilities as of September 30, 2019.



(in thousands)	September 30, 2019
Operating leases:
Operating lease right-of-use assets	$	11,934
Operating lease liabilities	$	13,665
Finance leases:
Finance lease right-of-use assets	$	379
Accumulated amortization	(127		)
Finance lease right-of-use assets, net¹	$	252
Finance lease liabilities²	$	255
¹Included in premises and equipment in the consolidated statements of condition.
²Included in borrowings and other obligations in the consolidated statements of condition.

The following table shows supplemental disclosures of noncash investing and financing activities for the period presented. There were no lease-related noncash investing and financing activities for the nine months ended September 30, 2018.



	Nine months ended
(in thousands)	September 30, 2019
Right-of-use assets obtained in exchange for operating lease liabilities	$	1,661
Right-of-use assets obtained in exchange for finance lease liabilities	$	31
Reclassification of deferred rent and unamortized lease incentives from other liabilities to operating lease right-of-use assets upon adoption of ASC 842	$	1,967

The following table shows components of operating and finance lease cost.



	Three months ended		Nine months ended
(in thousands)	September 30, 2019		September 30, 2019
Operating lease cost¹	$	1,051	$	3,123

Finance lease cost:
Amortization of right-of-use assets²	$	43	$	128
Interest on finance lease liabilities³	2		7
Total finance lease cost	$	45	$	135
Total lease cost	$	1,096	$	3,258
¹Included in occupancy and equipment expense in the consolidated statements of comprehensive income.
²Included in depreciation and amortization in the consolidated statements of comprehensive income.
³Included in interest on borrowings and other obligations in the consolidated statements of comprehensive income.

Operating lease rent expense totaled $1.1 million and $3.5 million, respectively, for the three and nine months ended September 30, 2018.

The following table shows the future minimum lease payments, weighted average remaining lease terms, and weighted average discount rates under operating and finance lease arrangements as of September 30, 2019. The discount rates used to calculate the present value of lease liabilities were based on the collateralized FHLB borrowing rates that were commensurate with lease terms and minimum payments on the later of the date we adopted the new lease accounting standards or lease commencement date.



(in thousands)	September 30, 2019
Year	Operating Leases			Finance Leases
2019	$	1,139		$	45
2020	4,469			170
2021	2,806			36
2022	1,952			8
2023	1,464			1
Thereafter	2,884			—
Total minimum lease payments	14,714			260
Amounts representing interest (present value discount)	(1,049		)	(5		)
Present value of net minimum lease payments (lease liability)	$	13,665		$	255

Weighted average remaining term (in years)	5.0			1.6
Weighted average discount rate	2.78		%	2.87		%

Litigation Matters

Bancorp may be party to legal actions that arise from time to time in the normal course of business. Bancorp's Management is not aware of any pending legal proceedings to which either it or the Bank may be a party or has recently been a party that will have a material adverse effect on the financial condition or results of operations of Bancorp or the Bank.

The Bank is responsible for a proportionate share of certain litigation indemnifications provided to Visa U.S.A. ("Visa") by its member banks in connection with Visa's lawsuits related to anti-trust charges and interchange fees ("Covered Litigation"). Our proportionate share of the litigation indemnification liability does not change or transfer upon the sale of our Class B Visa shares to member banks. Visa established an escrow account to pay for settlements or judgments in the Covered Litigation. Under the terms of the U.S. retrospective responsibility plan, when Visa funds the litigation escrow account, it triggers a conversion rate reduction of the Class B common stock to shares of Class A common stock, effectively reducing the aggregate value of the Class B common stock held by Visa's member banks like us.

In 2012, Visa had reached a $4.0 billion interchange multidistrict litigation class settlement agreement with plaintiffs representing a class of U.S. retailers. On September 17, 2018, Visa signed an amended settlement agreement with the putative class action plaintiffs of the U.S. interchange multidistrict litigation that superseded the 2012 settlement agreement. Visa's share of the settlement amount under the amended class settlement agreement increased to $4.1 billion. On January 24, 2019, the district court granted preliminary approval of the amended class settlement agreement, which was moved for final approval on June 7, 2019. Certain merchants chose to opt out of the class settlement agreement and a final settlement approval hearing is scheduled for November 7, 2019. On September 27, 2019, Visa deposited an additional $300 million into the litigation escrow account. The escrow balance combined with funds previously deposited with the court, are expected to cover the settlement payment obligations.

The outcome of the Covered Litigation affects the conversion rate of Visa Class B common stock held by us to Visa Class A common stock, as discussed above and in Note 4, Investment Securities. The final conversion rate might change depending on the final settlement payments, and the full effect on member banks is still uncertain. Litigation is ongoing and until the court approval process is complete, there is no assurance that Visa will resolve the claims as contemplated by the amended class settlement agreement, and additional lawsuits may arise from individual merchants who opted out of the class settlement. However, until the escrow account is fully depleted and the conversion rate of Class B to Class A common stock is reduced to zero, no future cash settlement payments are required by the member banks, such as us, on the Covered Litigation. Therefore, we are not required to record any contingent liabilities for the indemnification related to the Covered Litigation, as we consider the probability of losses to be remote.