Note 13 — Leases

The Company enters into leases in the normal course of business primarily for bank branch offices, back-office operations locations, business development offices, information technology data centers and information technology equipment. The Company’s leases have remaining terms ranging from one to thirteen years, some of which include renewal or termination options to extend the lease for up to five years.

The Company includes lease extension and termination options in the lease term if, after considering relevant economic factors, it is reasonably certain the Company will exercise the option. In addition, the Company has elected to account for any non-lease components in its real estate leases as part of the associated lease component. The Company has also elected not to recognize leases with original lease terms of 12 months or less (short-term leases) on the Company’s balance sheet.

Leases are classified as operating or finance leases at the lease commencement date. Lease expense for operating leases and short-term leases is recognized on a straight-line basis over the term of the lease. Right-of-use assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Right-of-use assets and lease liabilities are recognized at the lease commencement date based on the estimated present value of the lease payments over the lease term.

As of September 30, 2023, the outstanding balances for our right-of-use asset and lease liability were $43.0 million and $47.0 million, respectively. The outstanding balances of the right-of-use asset and lease liability were $40.4 million and $44.2 million,

respectively, as of December 31, 2022. The right-of-use asset is reported in prepaid expenses and other assets line item and lease liability is reported in accrued expenses and other liabilities line item on the Consolidated Balance Sheets.

In determining the discount rates, since most of our leases do not provide an implicit rate, we used our incremental borrowing rate provided by the FHLB of San Francisco based on the information available at the commencement date to calculate the present value of lease payments.

Weighted average remaining lease terms for the Company's operating leases were 7.05 years and 7.12 years as of September 30, 2023 and December 31, 2022, respectively. Weighted average discount rates used for the Company's operating leases were 2.92% and 2.42% as of September 30, 2023 and December 31, 2022, respectively. Net lease expense recognized for the three months ended September 30, 2023 and 2022 was $2.4 million and $2.1 million, respectively. Net lease expense recognized for the nine months ended September 30, 2023 and 2022 was $6.6 million and $6.2 million, respectively. This included operating lease costs of $2.3 million and $2.0 million for the three months ended September 30, 2023 and 2022, respectively. Operating lease costs were $6.5 million and $5.9 million for the nine months ended September 30, 2023 and 2022, respectively. Sublease income for operating leases was immaterial for both the nine months ended September 30, 2023 and 2022.

Cash paid and included in cash flows from operating activities for amounts used in the measurement of the lease liability of the Company's operating leases was $2.3 million and $1.9 million for the three months ended September 30, 2023 and 2022, respectively, and $6.4 million and $5.9 million for the nine months ended September 30, 2023 and 2022, respectively.

During the third quarter of 2023, the Company consummated a sale-leaseback transaction pursuant to which it sold a branch building for an aggregate cash purchase price of $7.8 million and concurrently agreed to separately lease the property for an initial term of 10 years, with two five year renewal options that the Company may exercise to extend the term of the lease. The pre-tax, net gain recorded associated with the sale of the building was $4.0 million, after deducting transaction-related expenses and after removing the branch building from "Premises and equipment, net" on the Balance Sheet. The aggregate annual lease expense associated with this building will be $0.4 million for the first 12 months of the lease term.