Community Bankers Trust Corp

Operating lease costs and sublease rental income for the three months ended June 30, 2019 were $445,000 and $39,000, respectively.  Rental expense and sublease rental income under operating lease agreements for the three months ended June 30, 2018 was $363,000 and $27,000, respectively. Operating lease costs and sublease rental income for the six months ended June 30, 2019 was $823,000 and $66,000, respectively. Rental expense and sublease rental income under operating lease agreements for the six months ended June 30, 2018 was $704,000 and $54,000, respectively.  Included in operating lease costs was $103,000 and $138,000 for the three and six month periods ended June 30, 2019, respectively, related to the early termination of an unprofitable branch on June 30, 2019.

Interest expense increased $1.0 million, or 36.4%, when comparing the second quarter of 2019 and the second quarter of 2018. Interest expense on deposits increased $1.2 million, or 52.4%, as the average balance of interest bearing deposits increased $63.8 million, or 6.7%.  The increase in deposit cost was driven by an increase in time deposit average balances, which increased $86.1 million, or 15.3%, year-over-year. Likewise, the cost of these balances increased $1.2 million, from 1.41% to 1.98%, over the same time frame. The average balance of  FHLB and other borrowings decreased $44.3 million year-over-year, and there was an increase in the rate paid, from 1.87% in the second quarter of 2018 to 2.08% in the second quarter of 2019. The decrease in balance more than offset the increase in rate and resulted in a decrease in the expense of this wholesale funding source of $172,000, to $310,000 in the second quarter of 2019.  The average balance of FHLB and other borrowings was $58.9 million in the second quarter of 2019. Overall, the Bank’s cost of interest bearing liabilities increased 37 basis points, from 1.08% in the second quarter of 2018 to 1.45% in the second quarter of 2019.

Noninterest expenses were $9.0 million in the second quarter of 2019 and increased $804,000, or 9.8%, compared with the same period in 2018. Salaries and employee benefits of $5.3 million increased $254,000, or 5.1% year-over-year. Related to this increase were $45,000 in severance costs associated with the closing of an underperforming branch and $44,000 in one-time pension costs due to the retirement of a long-term employee.  Other operating expenses of $1.6 million increased $246,000 year-over-year. Credit expense increased by $138,000, from $101,000 in the second quarter of 2018 to $239,000 in the second quarter of 2019. Of this increase in credit expense, $68,000 was related to an increase related to volume and timing of reimbursement of appraisal and inspection fees. Loan collection and repossession costs increased year-over-year by $57,000, of which $50,000 was related to one loan in the process of collection. Additionally, stationery, printing and supplies increased $66,000 related to increased customer volumes, new branches, and costs associated with notification activity from the closing of two branches.  Bank franchise tax increased $41,000 year-over-year. Occupancy expenses of $919,000 showed an increase of $150,000 over the same period in 2018, $103,000 of which related to the branch closing previously mentioned. Other real estate expenses of $105,000 in the second quarter of 2019 were $60,000 greater than the same period in 2018, $62,000 of which also related to the branch closing.  Data processing fees of $579,000 in the second quarter of 2019 were $80,000 greater than one year earlier as a result of an increase in the number of accounts processed and increased investment in electronic banking. FDIC assessment of $162,000 in the second quarter of 2019 decreased $36,000 from one year earlier.

Noninterest expenses were $17.8 million for the first six months of 2019, as compared with $17.6 million for the same period in 2018.  This is an increase of $278,000, or 1.6%. Occupancy expenses increased $268,000, or 17.0%, $103,000

of which related to the branch closing mentioned above. Data processing fees increased $162,000, or 16.4%, and were $1.1 million for the first six months of 2019, reflecting the increased number of accounts and investment in electronic banking mentioned above. Equipment expenses increased by $117,000 and were $775,000 for the first six months of 2019. Offsetting these increases, salaries and employee benefits decreased $214,000 for the first six months of 2019 compared with the same period in 2018. Although salaries and employee benefits increased $89,000 in 2019 due to the severance and pension costs noted above, health insurance expense decreased $224,000 from the six months ended June 30, 2018.  Also impacting noninterest expenses for the first six months of 2018 compared with the same period in 2017 was a decrease in FDIC assessment of $92,000 due to a decrease in the assessment factor calculated by the FDIC.

The Company designates derivatives as cash flow hedges when they are used to manage exposure to variability in cash flows related to forecasted transactions on variable rate borrowings, such as FHLB borrowings, repurchase agreements, and brokered CDs.  The Company had cash flow hedges with total notional amounts of $40 million and $30 million at June 30, 2019 and December 31, 2018, respectively. The Company recorded a fair value asset of $59,000 and a fair value liability of $45,000 in other assets and other liabilities, respectively, at June 30, 2019.  The Company recorded a fair value asset of $253,000 in other assets at December 31, 2018. The Company’s cash flow hedges are deemed to be effective. Therefore, the net gain was recorded as a component of other comprehensive income (loss) recorded in the Company’s consolidated statements of comprehensive income.