Note 7. Leases

The Corporation adopted ASU 2016-02 “Leases (Topic 842)” and all subsequent amendments on January 1, 2019 using the modified retrospective method. The Corporation has elected the option to apply the new standard as of January 1, 2019 without restatement of any prior period results. Adoption of the new standard resulted in the recognition of a lease liability and a right-of-use asset of $6.2 million without a cumulative effect adjustment to retained earnings.

The Corporation leases various assets in the course of its operations that are subject to recognition under the new standard. The Corporation considers all of its leases to be operating leases and it has no finance leases. The leased assets are comprised of equipment, and buildings and land (collectively real estate). The equipment leases are shorter-term than the real estate leases, and generally have a fixed payment over a defined term without renewal options. Certain equipment leases have purchase options and it was determined the option was not reasonably certain to be exercised. The real estate leases are longer-term and may contain renewal options after the initial term, but none of the real estate leases contain a purchase option. The renewal options on real estate leases were reviewed and if it was determined the option was reasonably certain to be renewed, the option term was considered in the determination of the lease liability. There is only one real estate lease with a variable payment based on an index included in the lease liability. None of the leases contain any restrictive covenants and there are no significant leases that have not yet commenced. The discount rate used to determine the lease liability is based on the Bank’s fully secured borrowing rate from the Federal Home Loan Bank for a term similar to the lease term. Adoption of the new standard did not affect the Corporation’s status as a “well-capitalized” institution. Operating lease expense is included in net occupancy expense in the consolidated statements of income. See Note 2 for additional information on the adoption of the new standard.

Lease costs for the three and nine months ended September 30, 2019 were as follows:


	Three Months Ended		Nine Months Ended
(Dollars in thousands)	September 30, 2019		September 30, 2019
Operating lease cost	$	183	$	555
Short-term lease cost		7		19
Variable lease cost		13		36
Total lease cost	$	203	$	610

Cash paid for amounts included in the measurement of lease liabilities and the weighted-average remaining lease term and discount rate were as follows:


	Nine Months Ended
(Dollars in thousands)	September 30, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	375

Weighted-average remaining lease term (years)		12.8
Weighted-average discount rate		3.52%

As of September 30, 2019, the future minimum payments for operating leases having initial or remaining lease terms in excess of one year were as follows:


(Dollars in thousands)

2019	$	177
2020		674
2021		651
2022		567
2023		527
2024 and beyond		4,380
Total undiscounted cash flows		6,976
Discounted cash flows		(1,433)
Total lease liability	$	5,543