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Commitments and Contingent Liabilities | 3 Months Ended
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Mar. 31, 2023
Commitments and Contingencies Disclosure [Abstract] |
Commitments and Contingent Liabilities | Commitments and Contingent Liabilities 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 unfunded loan commitments and standby letters of credit not reflected in the consolidated statements of condition are as follows:
(in thousands) | March 31, 2023 | December 31, 2022
Commercial lines of credit | $ | 266,082 |  | $ | 292,204 |
Revolving home equity lines | 218,353 |  | 218,907 |
Undisbursed construction loans | 32,471 |  | 43,179 |
Personal and other lines of credit | 10,851 |  | 10,842 |
Standby letters of credit | 1,720 |  | 1,738 |
Total unfunded loan commitments and standby letters of credit | $ | 529,477 |  | $ | 566,870 |
We record an allowance for credit losses on unfunded loan commitments at the balance sheet date based on estimates of the probability that these commitments will be drawn upon according to historical utilization experience of the different types of commitments and expected loss rates determined for pooled funded loans. The allowance for credit losses on unfunded commitments totaled $1.3 million and $1.5 million as of March 31, 2023 and December 31, 2022, respectively, which is included in interest payable and other liabilities in the consolidated statements of condition. The $174 thousand reversal of the provision for credit losses on unfunded loan commitments in the first quarter of 2023 was due primarily to a $37.4 million decrease in total unfunded commitments, compared to a $318 thousand provision reversal in the first quarter of 2022, due mainly to an improvement in the underlying economic forecasts at the time. Leases We lease premises under long-term non-cancelable operating leases with remaining terms of 4 months to 19 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.
(in thousands) | March 31, 2023 | December 31, 2022
Operating leases: |  |
Operating lease right-of-use assets | $ | 22,854 |  | $ | 24,821 |
Operating lease liabilities | $ | 25,433 |  | $ | 26,639 |
Finance leases: |  |
Finance lease right-of-use assets | $ | 606 |  | $ | 616 |
Accumulated amortization | (214) |  | (187) |
Finance lease right-of-use assets, net 1 | $ | 392 |  | $ | 429 |
Finance lease liabilities 2 | $ | 402 |  | $ | 439 |
1 Included in premises and equipment in the consolidated statements of condition. |
2 Included 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 periods presented.
| Three months ended
(in thousands) | March 31, 2023 | March 31, 2022
Right-of-use assets obtained in exchange for operating lease liabilities | $ | — |  | $ | 1,120 |
The following table shows components of operating and finance lease cost.
| Three months ended |  |
(in thousands) | March 31, 2023 | March 31, 2022 |  |  |
Operating lease cost | $ | 1,610 |  | $ | 1,284 |  |  |  |
Variable lease cost | — |  | — |  |  |  |
Total operating lease cost 1 | $ | 1,610 |  | $ | 1,284 |  |  |  |
Finance lease cost: |  |  |  |  |
Amortization of right-of-use assets 2 | $ | 37 |  | $ | 31 |  |  |  |
Interest on finance lease liabilities 3 | 2 |  | 1 |  |  |  |
Total finance lease cost | $ | 39 |  | $ | 32 |  |  |  |
Total lease cost | $ | 1,649 |  | $ | 1,316 |  |  |  |
1 Included in occupancy and equipment expense in the consolidated statements of comprehensive income.
2 Included in depreciation and amortization in the consolidated statements of comprehensive income.
3 Included in interest on borrowings and other obligations in the consolidated statements of comprehensive income.
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 March 31, 2023. 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 lease commencement date.
(in thousands) | March 31, 2023
Year | Operating Leases | Finance Leases
2023 | $ | 3,997 |  | $ | 115 |
2024 | 4,585 |  | 153 |
2025 | 3,875 |  | 106 |
2026 | 3,129 |  | 36 |
2027 | 2,845 |  | 5 |
Thereafter | 9,693 |  | — |
Total minimum lease payments | 28,124 |  | 415 |
Amounts representing interest (present value discount) | (2,691) |  | (13) |
Present value of net minimum lease payments (lease liability) | $ | 25,433 |  | $ | 402 |
Weighted average remaining term (in years) | 7.6 | 2.9
Weighted average discount rate | 2.27 | % | 1.89 | %
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 reached a $4.0 billion interchange multidistrict litigation class settlement agreement with plaintiffs representing a class of U.S. retailers. During its six month fiscal reporting period ended March 31, 2023, Visa deposited an additional $350 million into the litigation escrow account to address claims of certain merchants who opted out of the Amended Settlement Agreement for a balance of $1.6 billion. Combined with funds previously deposited with the court, these funds 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 is subject to 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.

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