UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

FORM 10-K

 

 

Commission file number: 000-49699

 

Centra Financial Holdings, Inc.

(Exact name of registrant as specified in its charter)

 

 

(Registrant’s telephone number, including area code) (304) 598-2000

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

Securities registered pursuant to Section 12(g) of the Act: Common Stock

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o  No þ

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) Act.  Yes o  No þ

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ  No o

 

Indicate by checkmark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.)  Yes o  No o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o

 

Indicate by check mark if the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.  Yes o No  þ

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

(Do not check if a smaller reporting company)

 

The aggregate market value of Centra Financial Holdings, Inc. common stock, representing all of its voting and non-voting shares held by non-affiliates as of June 30, 2009, was approximately $77,343,280. For this purpose, certain executive officers and directors are considered affiliates. However, Centra does not sell its common stock on a public exchange. Therefore, Centra does not consider the market value of its non-affiliated shares to be public float.

 

As of February 28, 2010, the number of shares outstanding of Centra’s only class of common stock was 8,066,183.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Part III incorporates certain information by reference from the registrant’s definitive proxy statement for the 2010 annual meeting of shareholders, which proxy statements will be filed on or about April 9, 2010.

 

 

TABLE OF CONTENTS

 

 

 

Centra Financial Holdings, Inc., or Centra, was formed on October 25, 1999, as a bank holding company. Centra Bank, Inc., or the bank or Centra Bank, was formed on September 27, 1999, and chartered under the laws of the State of West Virginia. The bank commenced operations on February 14, 2000. During the first quarter of 2001, Centra formed two second-tier holding companies (Centra Financial Corporation — Morgantown, Inc. and Centra Financial Corporation — Martinsburg, Inc.) On August 25, 2006, Centra completed its acquisition of Smithfield State Bank of Smithfield, Pennsylvania (“Smithfield”), a state-chartered bank operating four retail branch offices in Fayette County, Pennsylvania. The acquisition was completed in accordance with the Agreement and Plan of Merger that Centra and Smithfield entered into on April 7, 2006. During the first quarter of 2007, Centra formed two additional second-tier holding companies (Centra Financial Corporation — Uniontown, Inc. and Centra Financial Corporation — Hagerstown, Inc.) These four entities were formed to manage the banking operations of Centra Bank, the sole bank subsidiary, in those markets.

 

Centra operates offices in the Suncrest, Waterfront, Cheat Lake, Sabraton, and Westover areas of Morgantown, West Virginia; Foxcroft Avenue, North Martinsburg, South Berkeley, and Spring Mills areas of Martinsburg, West Virginia; the Uniontown, Smithfield, Walnut Hill, and Point Marion areas of Fayette County, Pennsylvania; and the Pennsylvania Avenue, Kenley Square and North Pointe areas of Hagerstown, Maryland. At December 31, 2009, Centra had total assets of $1.3 billion, total loans of $1.0 billion, total deposits of $1.1 billion, and total stockholders’ equity of $105.1 million.

 

Centra’s business activities are currently confined to a single segment, community banking. As a community banking entity, Centra offers its customers a full range of products through various delivery channels. Such products and services include checking accounts, NOW accounts, money market and savings accounts, time certificates of deposit, commercial, installment, commercial real estate and residential real estate mortgage loans, debit cards, and safe deposit rental facilities. Centra also offers official checks. Services are provided through our walk-in offices, automated teller machines (“ATMs”), automobile drive-in facilities, banking by phone, and Internet-based banking. Additionally, Centra offers a full line of investment products through an unaffiliated registered broker-dealer.

 

At December 31, 2009 and 2008, Centra had 241 and 232 full-time equivalent employees, respectively. Centra’s principal office is located at 990 Elmer Prince Drive, Morgantown, West Virginia 26505, and its telephone number is (304) 598-2000. Centra’s web site is www.centrabank.com.

 

Customers and Markets

 

Centra’s market areas have a diverse economic structure. Centra has expanded from its roots in Monongalia County, West Virginia, to a market area that encompasses eastern West Virginia, southwestern Pennsylvania and western Maryland. Principal industries or employers in Monongalia County include pharmaceuticals, health care, West Virginia University, metals, plastics and petrochemical manufacturing; oil, gas, and coal production; and related support industries. Principal industries in Berkeley County include manufacturing, warehousing, federal government, and printing and binding. Principal businesses and industries in Washington County include manufacturing, data processing, health care, higher education, construction, tourism, transportation and warehousing, scientific and technical services and retail businesses. Fayette County’s industries include health care, education, customer service centers, steel fabrication, water meter production, glass production, coal strip mining, retail businesses, sales, and professional services. In addition, tourism, education, and other service-related industries are important and growing components of the economy of our markets. Consequently, Centra does not depend upon any one industry segment for its business opportunities.

 

Centra originates various types of loans, including commercial and commercial real estate loans, residential real estate loans, home equity lines of credit, real estate construction loans, and consumer loans (loans to individuals). In general, Centra retains most of its originated loans (exclusive of certain long-term,

fixed and adjustable rate residential mortgages that are sold servicing released). However, loans originated in excess of Centra’s legal lending limit are participated to other banking institutions and the servicing of those loans is retained by Centra. Centra’s loan originations include a broad range of industrial classifications. Management has identified eight areas of loan concentrations to borrowers engaged in the same or similar industries. However, loans within these areas are not concentrated to a single borrower or in a single geographic area. Management does not believe these concentrations are detrimental to the bank, although new loan requests in those areas are more closely scrutinized before approving additional loans in those categories. Centra has no loans to foreign entities. Centra’s lending market areas are primarily concentrated in Monongalia and Berkeley Counties, West Virginia, and neighboring areas of Pennsylvania, West Virginia, Virginia, Maryland, and Ohio.

 

Commercial Loans

 

At December 31, 2009, Centra had outstanding approximately $757.9 million in commercial loans, including commercial, commercial real estate, financial, and agricultural loans. These loans represented approximately 74.1% of the total aggregate loan portfolio as of that date.

 

Lending Practices.  Commercial lending entails significant additional risks as compared with consumer lending (i.e., single-family residential mortgage lending and installment lending). In addition, the payment experience on commercial loans typically depends on adequate cash flow of a business and thus may be subject, to a greater extent, to adverse conditions in the general economy or in a specific industry. Loan terms include amortization schedules commensurate with the purpose of each loan, the source of repayment, and the risk involved. Extensions of credit to borrowers whose aggregate total debt, including the principal amount of the proposed loan, exceeds $5.0 million require board approval. The primary analysis technique used in determining whether to grant a commercial loan is the review of a schedule of estimated cash flows to evaluate whether anticipated future cash flows will be adequate to service both interest and principal due. In addition, Centra reviews collateral to determine its value in relation to the loan in the event of a foreclosure.

 

Centra presents all new loans with an aggregate outstanding balance greater than $100,000 to the board of directors on a bi-monthly basis for ratification. If deterioration in creditworthiness has occurred, Centra takes effective and prompt action designed to assure repayment of the loan. Upon detection of the reduced ability of a borrower to meet original cash flow obligations, the loan is considered an impaired loan and reviewed for possible downgrading or placement on nonaccrual status.

 

Consumer Loans

 

At December 31, 2009, Centra had outstanding consumer loans in an aggregate amount of approximately $75.1 million or approximately 7.3% of the total loan portfolio.

 

Lending Practices.  Consumer loans generally involve more risk as to collectability than mortgage loans because of the type and nature of the collateral and, in certain instances, the absence of collateral. As a result, consumer lending collections are dependent upon the borrower’s continued financial stability, and thus are more likely to be adversely affected by employment loss, personal bankruptcy, or adverse economic conditions. Credit approval for consumer loans requires demonstration of sufficiency of income to repay principal and interest due, stability of employment, a positive credit record and sufficient collateral for secured loans. It is the practice of Centra to review its delinquent and nonperforming consumer loans monthly and to charge off loans that do not meet its standards and to adhere strictly to all laws and regulations governing consumer lending. The loan committees are responsible for monitoring performance in this area, and for advising and updating loan personnel.

 

Centra offers credit life insurance and accident and health insurance to all qualified buyers, thus reducing risk of loss when a borrower’s income is terminated or interrupted.

Real Estate Loans

 

At December 31, 2009, Centra had approximately $189.9 million of residential real estate loans, home equity lines of credit, and construction mortgages outstanding, representing 18.6% of the total loan portfolio.

 

Lending Practices.  Centra generally requires that the residential real estate loan amount be no more than 80% of the purchase price or the appraised value of the real estate securing the loan, unless the borrower obtains private mortgage insurance for the percentage exceeding 80%. The risk conditions of these loans are considered during underwriting. Loans made in this lending category are generally one to three-year adjustable rate, fully amortizing mortgages. Centra also originates fixed or adjustable rate real estate loans and generally sells these loans in the secondary market, servicing released. All real estate loans are secured by first mortgages with evidence of title in favor of Centra in the form of an attorney’s opinion of the title or a title insurance policy. Centra also requires proof of hazard insurance with Centra named as the mortgagee and as the loss payee. Generally, full appraisals are obtained for all mortgage loans. Appraisals are obtained from pre-approved licensed appraisers.

 

Home Equity Loans.  Home equity lines of credit are generally made as second mortgages by Centra. The maximum amount of a home equity line of credit is generally limited to 80% of the appraised value of the property less the balance of the first mortgage. The home equity lines of credit are written with 20-year terms, but are subject to review upon request for renewal.

 

Construction Loans.  Construction financing is generally considered to involve a higher degree of risk of loss than long-term financing on improved, occupied real estate. Risk of loss on a construction loan is dependent largely upon the accuracy of the initial estimate of the property’s value at completion of construction and the estimated cost (including interest) of construction. If the estimate of construction cost proves to be inaccurate, Centra may advance funds beyond the amount originally committed to permit completion of the project.

 

Competition

 

Centra experiences significant competition in attracting depositors and borrowers. Competition in lending activities comes principally from other commercial banks, savings associations, insurance companies, governmental agencies, credit unions, brokerage firms, and pension funds. The primary factors in competing for loans are interest rate and overall lending services. Competition for deposits comes from other commercial banks, savings associations, money market funds, and credit unions as well as from insurance companies and brokerage firms. The primary factors in competing for deposits are interest rates paid on deposits, account liquidity, convenience of office location, and overall financial condition. Centra believes that its size and community approach provide flexibility, which enables the bank to offer an array of banking products and services.

 

Centra primarily focuses on its local markets for its products and services. Management believes Centra has developed a niche and a level of expertise in serving these communities.

 

Centra operates under a “needs-based” selling approach that management believes has proven successful in serving the financial needs of most customers. It is not Centra’s strategy to compete solely on the basis of interest rate. Management believes that a focus on customer relationships and service will promote our customers’ continued use of Centra’s financial products and services and will lead to enhanced revenue opportunities.

 

Supervision and Regulation

 

The following is a summary of certain statutes and regulations affecting Centra and its subsidiaries, and is qualified in its entirety by reference to such statutes and regulations:

 

Bank Holding Company Regulation.  Centra is a bank holding company under the Bank Holding Company Act of 1956, which restricts the activities of Centra and any acquisition by Centra of voting stock or assets of any bank, savings association, or other company. Centra is also subject to the reporting requirements

of, and examination and regulation by, the Federal Reserve Board. Centra’s subsidiary bank, Centra Bank, is subject to restrictions imposed by the Federal Reserve Act on transactions with affiliates, including any loans or extensions of credit to Centra or its subsidiaries, investments in the stock or other securities thereof, and the taking of such stock or securities as collateral for loans to any borrower; the issuance of guarantees, acceptances, or letters of credit on behalf of Centra and its subsidiaries; purchases or sales of securities or other assets; and the payment of money or furnishing of services to Centra and other subsidiaries. Centra is prohibited from acquiring direct or indirect control of more than 5% of any class of voting stock or substantially all of the assets of any bank holding company without the prior approval of the Federal Reserve Board. Centra and its subsidiaries are prohibited from engaging in certain tying arrangements in connection with extensions of credit and/or the provision of other property or services to a customer by Centra or its subsidiaries.

 

The Sarbanes-Oxley Act of 2002 addresses, among other issues, corporate governance, auditing and accounting, executive compensation, and enhanced and timely disclosure of corporate information.

 

As directed by Section 302(a) of Sarbanes-Oxley, Centra’s chief executive officer and chief financial officer are each required to certify that Centra’s Quarterly and Annual Reports do not contain any untrue statement of a material fact. The rules have several requirements, including having these officers certify that: they are responsible for establishing, maintaining, and regularly evaluating the effectiveness of Centra’s internal controls; they have made certain disclosures to Centra’s auditors and the audit committee of the Board of Directors about Centra’s internal controls; and they have included information in Centra’s Quarterly and Annual Reports about their evaluation and whether there have been significant changes in Centra’s internal controls or in other factors that could significantly affect internal controls subsequent to the evaluation.

 

Banking Subsidiary Regulation.  Centra Bank is chartered as a state bank and regulated by the West Virginia Division of Banking and the Federal Deposit Insurance Corporation. Centra Bank provides FDIC insurance on its deposits and is a member of the Federal Home Loan Bank of Pittsburgh.

 

International Money Laundering Abatement and Anti-Terrorist Financing Act of 2001 (USA Patriot Act)  The International Money Laundering Abatement and Anti-Terrorist Financing Act of 2001 (the “Patriot Act”) was adopted in response to the September 11, 2001, terrorist attacks. The Patriot Act provides law enforcement with greater powers to investigate terrorism and prevent future terrorist acts. Among the broad-reaching provisions contained in the Patriot Act are several provisions designed to deter terrorists’ ability to launder money in the United States and provide law enforcement with additional powers to investigate how terrorists and terrorist organizations are financed. The Patriot Act creates additional requirements for banks, which were already subject to similar regulations. The Patriot Act authorizes the Secretary of the Treasury to require financial institutions to take certain “special measures” when the Secretary suspects that certain transactions or accounts are related to money laundering. These special measures may be ordered when the Secretary suspects that a jurisdiction outside of the United States, a financial institution operating outside of the United States, a class of transactions involving a jurisdiction outside of the United States, or certain types of accounts are of “primary money laundering concern.” The special measures include the following: (a) require financial institutions to keep records and report on the transactions or accounts at issue; (b) require financial institutions to obtain and retain information related to the beneficial ownership of any account opened or maintained by foreign persons; (c) require financial institutions to identify each customer who is permitted to use a payable-through or correspondent account and obtain certain information from each customer permitted to use the account; and (d) prohibit or impose conditions on the opening or maintaining of correspondent or payable-through accounts.

 

Federal Deposit Insurance Corporation  The FDIC insures the deposits of Centra Bank and Centra Bank is subject to the applicable provisions of the Federal Deposit Insurance Act. The FDIC may terminate a bank’s deposit insurance upon finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order, or condition enacted or imposed by the bank’s regulatory agency.

 

Federal Home Loan Bank  The FHLB provides credit to its members in the form of advances. As a member of the FHLB of Pittsburgh, Centra Bank must maintain an investment in the capital stock of that

FHLB in an amount equal to the greater of 1.0% of the aggregate outstanding principal amount of its respective residential mortgage loans, home purchase contracts, and similar obligations at the beginning of each year, or 5% of its advances from the FHLB.

 

Capital Requirements

 

Federal Reserve Board.  The Federal Reserve Board has adopted risk-based capital guidelines for bank holding companies. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning assets and off-balance sheet items to broad risk categories. For further discussion regarding Centra’s risk-based capital requirements, see Note 12 of the Notes to the Consolidated Financial Statements included in Item 8 of this Form 10-K.

 

West Virginia Division of Banking.  State banks, such as Centra Bank, are subject to similar capital requirements adopted by the West Virginia Division of Banking and the FDIC.

 

FDIC Assessment.

 

Beginning in late 2008, the economic environment caused higher levels of bank failures, which dramatically increased FDIC resolution costs and led to a significant reduction in the Deposit Insurance Fund. As a result, the FDIC has significantly increased the initial base assessment rates paid by financial institutions for deposit insurance. The base assessment rate was increased by seven basis points (7 cents for every $100 of deposits) for the first quarter of 2009. Effective April 1, 2009, initial base assessment rates were changed to range from 12 basis points to 45 basis points across all risk categories with possible adjustments to these rates based on certain debt-related components. These increases in the base assessment rate have increased our deposit insurance costs and negatively impacted our earnings. In addition, in May 2009, the FDIC imposed a special assessment on all insured institutions due to recent bank and savings association failures. The emergency assessment amounted to 5 basis points on each institution’s assets minus tier one (core) capital as of June 30, 2009, subject to a maximum equal to 10 basis points times the institution’s assessment base. Our special assessment, which was reflected in earnings for the quarter ended June 30, 2009, was approximately $567,000. The FDIC may impose additional emergency special assessments if necessary to maintain public confidence in federal deposit insurance or as a result of deterioration in the deposit insurance fund reserve ratio due to institution failures. Any additional emergency special assessment imposed by the FDIC will negatively impact our earnings.

 

On November 12, 2009, the FDIC adopted a final rule requiring that all institutions prepay their assessments for the fourth quarter of 2009 and all of 2010, 2011 and 2012. This pre-payment was due on December 30, 2009. However, the FDIC may exempt certain institutions from the prepayment requirement if the FDIC determines that the prepayment would adversely affect the safety and soundness of the institution. On December 30, 2009, Centra paid $5.8 million to the FDIC which included the third quarter 2009 assessment and the pre-payment of estimated assessments through 2012.

 

Troubled Asset Relief Program — Capital Purchase Program

 

On October 3, 2008, the Federal government enacted the Emergency Economic Stabilization Act of 2008 (“EESA”). EESA was enacted to provide liquidity to the U.S. financial system and lessen the impact of looming economic problems. The EESA included broad authority. The centerpiece of the EESA is the Troubled Asset Relief Program (“TARP”). EESA’s broad authority was interpreted to allow the U.S. Treasury to purchase equity interests in both healthy and troubled financial institutions. The equity purchase program is commonly referred to as the Capital Purchase Program (“CPP”). On January 16, 2009, Centra Financial Holdings, Inc. (the “Company”) entered into a Letter Agreement (the “Purchase Agreement”) with the United States Department of the Treasury (the “Treasury”) under the CPP, pursuant to which the Company issued and sold (i) 15,000 shares of the Company’s Preferred Stock as Fixed Rate Cumulative Perpetual Preferred Stock, Series A (the “Series A Preferred Stock”) and (ii) a warrant (the “Warrant”) to purchase 750.75075 shares of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock — Series B, par value $1.00 per share and liquidation value $1,000 per share (the “Series B Preferred Stock”), for an aggregate purchase price of

$15,000,000 in cash (the transaction being referred to as the “Investment”). The Treasury immediately exercised the Warrant for 750 shares of Series B Preferred Stock. On March 31, 2009, Centra redeemed the Series A Preferred Stock. On April 15, 2009, Centra completed the redemption of the Series B Preferred Stock with the Treasury. As instructed by the Treasury, Centra returned a total of $761,250, which included accrued, but unpaid, dividends of $11,250 and the liquidation value of the Series B Preferred Stock of $750,000. Centra received in return the cancelled Series B Preferred Stock. This completed the redemption of both the Series A and Series B Preferred Stock, and accordingly, the limitations imposed under the TARP CPP on Centra’s dividends, operations and compensation were terminated.

 

Future Legislation

 

Various other legislative and regulatory initiatives are from time to time introduced in Congress and state legislatures, as well as regulatory agencies. Such legislation may change banking statutes and the operating environment of Centra and Centra Bank in substantial and unpredictable ways, and could increase or decrease the cost of doing business, limit or expand permissible activities or affect the competitive balance depending upon whether any of this potential legislation will be enacted, and if enacted, the effect that it or any implementing regulations, would have on the financial condition or results of operations of the Company or any of its subsidiaries. With the recent enactments of EESA and the American Recovery and Reinvestment Act “ARRA”, the nature and extent of future legislative and regulatory changes affecting financial institutions is very unpredictable at this time. The Company cannot determine the ultimate effect that such potential legislation, if enacted, would have upon its financial condition or operations.

 

Centra is subject to extensive regulation, supervision and examination by federal and state banking authorities. Any change in applicable regulations or laws could have a substantial impact on us and our operations. Additional legislation and regulations that could significantly affect our powers, authority and operations may be enacted or adopted in the future, which could have a material adverse effect on our financial condition and results of operations. New legislation proposed by Congress may give bankruptcy courts the power to reduce the increasing number of home foreclosures by giving bankruptcy judges the authority to restructure mortgages and reduce a borrower’s payments. Property owners would be allowed to keep their property while working out their debts. Other similar bills placing additional temporary moratoriums on foreclosure sales or otherwise modifying foreclosure procedures to the benefit of borrowers and the detriment of lenders may be enacted by either, Congress or the States of West Virginia, Pennsylvania and Maryland in the future. These laws may further restrict our collection efforts on one-to-four single-family mortgage loans. Additional legislation proposed or under consideration in Congress would give current debit and credit card holders the chance to opt out of an overdraft protection program and limit overdraft fees, which could result in additional operational costs and a reduction in our non-interest income.

 

Further, our regulators have significant discretion and authority to prevent or remedy unsafe or unsound practices or violations of laws by financial institutions and holding companies in the performance of their supervisory and enforcement duties. In this regard, banking regulators are considering additional regulations governing compensation, which may adversely affect our ability to attract and retain employees. On June 17, 2009, the Obama Administration published a comprehensive regulatory reform plan that is intended to modernize and protect the integrity of the United States financial system. The President’s plan contains several elements that would have a direct effect on us. The reform plan proposes the creation of a new federal agency, the Consumer Financial Protection Agency, which would be dedicated to protecting consumers in the financial products and services market. The creation of this agency could result in new regulatory requirements and raise the cost of regulatory compliance. In addition, legislation stemming from the reform plan could require changes in regulatory capital requirements, and compensation practices. If implemented, the foregoing regulatory reforms may have a material impact on our operations. However, because the legislation needed to implement the President’s reform plan has not been introduced, and because the final legislation may differ significantly from the legislation proposed by the Administration, we cannot determine the specific impact of regulatory reform at this time.

Limits on Dividends

 

Centra’s ability to obtain funds for the payment of dividends and for other cash requirements largely depends on the amount of dividends Centra Bank declares. However, the Federal Reserve Board expects Centra to serve as a source of strength to Centra Bank. The Federal Reserve Board may require Centra to retain capital for further investment in Centra Bank, rather than pay dividends to its shareholders. Centra Bank may not pay dividends to Centra if, after paying those dividends, Centra Bank would fail to meet the required minimum levels under the risk-based capital guidelines and the minimum leverage ratio requirements. Centra Bank must have the approval from the West Virginia Division of Banking if a dividend in any year would cause the total dividends for that year to exceed the sum of the current year’s net earnings as defined and the retained earnings for the preceding two years as defined, less required transfers to surplus. These provisions could limit Centra’s ability to pay dividends on its outstanding common shares. As disclosed in Note 12 of the Notes to the Consolidated Financial Statements included in Item 8 of this Form 10-K, Centra has $26.1 million available for dividends at January 1, 2010.

 

Federal and State Laws

 

Centra Bank is subject to regulatory oversight under various consumer protection and fair lending laws. These laws govern, among other things, truth-in-lending disclosure, equal credit opportunity, fair credit reporting, and community reinvestment. Failure to abide by federal laws and regulations governing community reinvestment could limit the ability of a bank to open a new branch or engage in a merger transaction. Community reinvestment regulations evaluate how well and to what extent a bank lends and invests in its designated service area, with particular emphasis on low-to-moderate income communities and borrowers in such areas.

 

Monetary Policy and Economic Conditions

 

The business of financial institutions is affected not only by general economic conditions, but also by the policies of various governmental regulatory agencies, including the Federal Reserve Board. The Federal Reserve Board regulates money and credit conditions and interest rates to influence general economic conditions primarily through open market operations in U.S. government securities, changes in the discount rate on bank borrowings, and changes in the reserve requirements against depository institutions’ deposits. These policies and regulations significantly affect the overall growth and distribution of loans, investments and deposits, and the interest rates charged on loans, as well as the interest rates paid on deposits and accounts.

 

The monetary policies of the Federal Reserve Board have had a significant effect on the operating results of financial institutions in the past and are expected to continue to have significant effects in the future. In view of the changing conditions in the economy and the money markets, and the activities of monetary and fiscal authorities, Centra cannot predict future changes in interest rates, credit availability, or deposit levels.

 

Effect of Environmental Regulation

 

Centra’s primary exposure to environmental risk is through its lending activities. In cases when management believes environmental risk potentially exists, Centra mitigates its environmental risk exposures by requiring environmental site assessments at the time of loan origination to confirm collateral quality as to commercial real estate parcels posing higher than normal potential for environmental impact, as determined by reference to present and past uses of the subject property and adjacent sites. Environmental assessments are typically required prior to any foreclosure activity involving nonresidential real estate collateral.

 

With regard to residential real estate lending, management reviews those loans with inherent environmental risk on an individual basis and makes decisions based on the dollar amount of the loan and the materiality of the specific credit.

 

Centra anticipates no material effect on anticipated capital expenditures, earnings, or competitive position as a result of compliance with federal, state, or local environmental protection laws or regulations.

Executive Officers

 

The following are the executive officers of Centra Financial Holdings as of December 31, 2009.

 

 

On December 17, 2009, the board of directors of Centra Financial Holdings, Inc., approved a reorganization and reassignment of duties among its executive officers to better position Centra’s for growth opportunities. This reorganization was the result of reviews by the management and board of directors of Centra, and it was not caused by any disagreement between any executive officer and Centra. The reorganization had no

effect on the levels or forms of compensation of any executive officer, although the employment agreements of each affected officer was amended to reflect the new title and duties effective in mid-January of 2010.

 

 

We may not be able to maintain our historical growth rate, which may adversely impact our results of operations and financial condition.

 

Since our inception, Centra’s asset level has increased rapidly, including a 6.5% increase in 2009. Various factors, such as economic conditions, regulatory considerations and competition, may impede our rate of growth and our branch expansion, or may make future growth or branches less profitable or more expensive. If we experience a significant decline in our rate of growth as compared to our historic rate of growth, our income, or our rate of income growth, may decrease, and we may not be able to maintain or reduce our expense levels and efficiency ratio, which will adversely affect our results of operations and financial condition.

 

Economic conditions began deteriorating during the latter half of 2007 and continued throughout 2008 and 2009. Business activity across a wide range of industries and regions has been greatly reduced and many businesses are in serious difficulties due to a lack of consumer spending and the lack of liquidity in credit markets. Unemployment has also increased significantly. As a result of this economic crises, many lending institutions have experienced declines in the performance of their loans, including construction, land development and land loans, commercial loans and consumer loans. Moreover, competition among depository institutions for deposits and quality loans has increased significantly. In addition, the values of real estate collateral supporting many commercial loans and home mortgages have declined and may continue to decline. There can be no assurance that the environment will improve in the near term.

 

Centra’s real estate portfolios are exposed to weakness in the U.S. housing markets and the overall state of the economy.

 

The decline in home prices in many markets across the U.S., along with the reduced availability of mortgage credit, could result in increases in delinquencies and losses in Centra’s portfolio of loans related to residential real estate mortgage, construction and development. Further declines in home prices coupled with an economic recession and associated rises in unemployment levels could drive losses beyond that which is provided for in the allowance for loan losses.

 

In addition, the values of real estate collateral supporting many commercial loans have declined and may continue to decline. Overall, the general business environment has had an adverse effect on Centra’s business, and there can be no assurance that the environment will improve in the near term. Accordingly, until conditions improve, Centra’s business, financial condition and results of operations could continue to be adversely affected.

 

The allowance for loan losses may prove inadequate or be negatively affected by credit risk exposures.

 

Centra’s business depends on the creditworthiness of its customers. Centra reviews the allowance for loan losses quarterly for adequacy considering economic conditions and trends, collateral values and credit quality indicators, including past charge-off experience and levels of past due loans and nonperforming assets. There is no certainty that the allowance for loan losses will be adequate over time to cover credit losses from the portfolio because of unanticipated adverse changes in the economy, market conditions or events adversely affecting specific customers, industries or markets. If the credit quality of the customer base materially decreases, if the risk profile of a market, industry or group of customers changes materially, or if the allowance for loan losses is not adequate, the business, financial condition, liquidity, capital, and results of operations could be materially adversely affected. See the sections captioned “Allowance and Provision for loans Losses” in Item 7 of this Form 10-K for further discussion related to Centra’s allowance for loan losses.

Centra’s Ability to Pay Dividends is Limited.

 

Holders of shares of Centra’s common stock are entitled to dividends if, and when, they are declared by Centra’s Board of Directors out of funds legally available for that purpose. The Federal Reserve Board expects Centra to serve as a source of strength to Centra Bank. The Federal Reserve Board may require Centra to retain capital for further investment in Centra Bank, rather than pay dividends to its shareholders. Centra Bank may not pay dividends to Centra if, after paying those dividends, Centra Bank would fail to meet the required minimum levels under the risk-based capital guidelines and the minimum leverage ratio requirements. Centra Bank must have the approval from the West Virginia Division of Banking if a dividend in any year would cause the total dividends for that year to exceed the sum of the current year’s net earnings as defined in the retained earnings for the preceding two years as defined, less required transfers to surplus. These provisions could limit Centra’s ability to pay dividends on its outstanding common shares. As disclosed in Note 12 of the Notes to the Consolidated Financial Statements included in Item 8 of this Form 10-K, Centra has $26.1 million available for dividends as of January 2010.

 

Financial Market and Economic Conditions May Adversely Affect Our Business.

 

The United States was considered to be in a recession for most of 2009, and many businesses are having difficulty due to reduced consumer spending and the lack of liquidity in the credit markets. Unemployment has increased significantly.

 

Because of declines in values of commercial real estate, home prices and the values of subprime mortgages across the country, financial institutions and the securities markets have been adversely affected by significant declines in the values of most asset classes and by a serious lack of liquidity. These conditions have led to the failure or merger of a number of prominent financial institutions. The U.S. government, the Federal Reserve and other regulators have taken numerous steps to increase liquidity and to restore investor confidence, but asset values have continued to decline and access to liquidity continues to be very limited.

 

Centra’s financial performance and the ability of borrowers to pay interest on and repay principal of outstanding loans and the value of collateral securing those loans depends on the business environment in the markets where Centra operates.

 

An Increase in FDIC Assessments Could Impact Our Financial Performance.

 

The FDIC imposes an assessment against all depository institutions for deposit insurance. See “Supervision and Regulation — FDIC Assessments.” In the current economic environment, it is likely that further increases in assessments will occur in general for financial institutions across the country, including Centra Bank, thereby increasing operating costs.

 

Changes in interest rates could reduce income and cash flows.

 

Aside from credit risk, the most significant risk resulting from Centra’s normal course of business, extending loans and accepting deposits, is interest rate risk. Centra’s income and cash flows depend to a great extent on the difference between the interest rates earned on interest-earning assets such as loans and investment securities, and the interest rates paid on interest-bearing liabilities such as deposits and other borrowings. These rates are highly sensitive to many factors outside of Centra’s control, including general economic conditions and the fiscal and monetary policies of various governmental agencies, in particular, the Federal Reserve. Changes in monetary policy and changes in interest rates will affect loan origination volume, the values of investments, the volume of deposits and other borrowings, the rates received on loans and investment securities, the rates paid on deposits and other borrowings and the resulting margin. Fluctuations in these areas may have an adverse effect on Centra’s financial condition.

 

Management uses various measures to monitor interest rate risk and believes it has implemented effective asset and liability management strategies to reduce the potential effects of changes in interest rates on Centra’s results of operations. Management also periodically adjusts the mix of assets and liabilities to manage interest rate risk. However, any substantial, unexpected, prolonged change in market interest rates could have a

material adverse effect on Centra’s financial condition and results of operations. See the sections captioned “Interest Income and Expense”, “Liquidity and Interest Rate Sensitivity” and “Interest Rate Risk” in Item 7 of this Form 10-K for further discussion related to Centra’s interest rate risk.

 

Centra’s success depends on Centra’s management team.

 

The departure of one or more of Centra’s officers or other key personnel could adversely affect Centra’s operations and financial position. Centra’s management makes most decisions that involve Centra’s operations. A significant portion of Centra’s key personnel have all been with Centra since Centra was formed in 1999.

 

Centra faces vigorous competition in its market areas.

 

Centra faces competition from the following:

 

 

In particular, Centra’s competitors include several major national financial and banking companies whose greater resources may afford them a marketplace advantage by enabling them to maintain numerous banking locations and mount extensive promotional and advertising campaigns. Additionally, banks and other financial institutions may have products and services not offered by Centra, which may cause current and potential customers to choose those institutions. Centra experiences areas of competition with interest rates on loans and deposits, the ability to obtain deposits and the range and quality of services provided. If Centra is unable to attract new and retain current customers, loan and deposit growth could decrease causing Centra’s results of operations and financial condition to be negatively impacted.

 

Centra is highly regulated.

 

The operations of Centra are subject to extensive regulation by federal, state, and local governmental authorities and are subject to various laws and judicial and administrative decisions imposing requirements and restrictions on them. Policies adopted or required by these governmental authorities can affect Centra’s business operations and the availability, growth, and distribution of Centra’s investments, borrowings, and deposits. Regulations affecting banks and financial services businesses are undergoing continuous change, and management cannot predict the effect of those changes.

 

The number of shares owned by our directors and executive officers could make it more difficult to obtain approval for some matters submitted to shareholder vote, including mergers and acquisitions.

 

Our directors and executive officers and their affiliates own approximately 30% of the outstanding common stock. By voting against a proposal submitted to shareholders, the directors and officers, as a group, may be able to make approval more difficult for proposals requiring the vote of shareholders, such as some mergers, share exchanges, asset sales, and amendments to the Articles of Incorporation. The results of the vote may be contrary to the desires or interests of the non-affiliated shareholders.

 

 

None.

 

Centra’s sole banking subsidiary, Centra Bank leases its main office on Elmer Prince Drive in Morgantown, West Virginia and its operation center on University Avenue in Morgantown, West Virginia. Centra Bank also leases its offices on Williamsport Pike in Martinsburg and on Pennsylvania Avenue, Frederick Street and North Pointe Drive in Hagerstown, Maryland. Rent expense on the leased properties totaled $1.1 million in 2009, $1.3 million in 2008, and $1.1 million in 2007. The main banking office is leased from a limited liability company, two-thirds of which is owned by two directors of Centra. Rent expense for the building approximated $671,000 in 2009 and 2008, and $658,000 in 2007 and has primarily increased due to additional space being leased.

 

Additional information concerning the property and equipment owned or leased by Centra and its subsidiaries is incorporated herein by reference from “Note 5. Bank Premises and Equipment” of the Notes to the Consolidated Financial Statements included in Item 8 of this Form 10-K.

 

 

Centra is engaged in various legal actions that it deems to be in the ordinary course of business. As these legal actions are resolved, Centra could realize positive and/or negative impact to its financial performance in the period in which these legal actions are ultimately decided. There can be no assurance that current actions will have immaterial results, either positive or negative, or that no material actions may be presented in the future.

 

 

 

Centra’s common shares are not traded on any national exchange.

 

The table presented below sets forth the estimated market value for the indicated periods utilizing the price established for the Dividend Reinvestment Plan (the DRP). These determinations were made based on an independent third party consulting firm engaged by Centra pursuant to the terms of the DRP. Centra’s uses an independent third party because its stock does not trade on an exchange or over-the-counter. In addition, dividends are subject to the restrictions described in Note 12 to the financial statements. This valuation was based primarily on the stock trading multiples of a group of comparable banks. As no other bank is exactly similar to Centra, choosing a comparable group is a very subjective process. Comparable banks were chosen based on having performance, financial characteristics and geography similar to Centra; however, because of Centra’s location and size there are a very limited number of comparable banks. The primary determination of value was based on the price times earnings and/or price as a percent of tangible book value, as appropriate, with other methods of valuation, such as but not limited to, price as a percent of assets, discounted cash flows, known trades, previous stock offerings and other information deemed by the consultant to be appropriate in the circumstance.

 

Quarterly Market and Dividend Information:

 

During 2009 and 2008, four quarterly dividends of $0.05 each were declared for a year-to-date dividend amount of $0.20. The fourth quarter dividend was paid on January 4, 2010. Since our inception, Centra has declared five 10% stock dividends and eight $0.05 cash dividends. The declaration and payment of dividends are subject to various regulatory restrictions and requirements. Refer to “Supervision and Regulation — Limits on Dividends” and “Risk Factors — Centra’s Ability to Pay Dividends is Limited.”

 

Centra had 1,554 stockholders of record at December 31, 2009.

 

In December of 2009, Centra announced its intent to offer up to 1,000,000 shares of common stock at $20.00 per share. Centra will use the proceeds of the offering to provide necessary capital to support the overall growth of the organization. In January of 2010, Centra applied for an override with the Securities and Exchange Commission to sell up to an additional 200,000 shares of common stock through the offering.

 

In 2008, the Board of Directors approved 1,100,000 shares of common stock to be used in our dividend reinvestment and stock purchase plans. Our shareholders of record have the opportunity to purchase shares of Centra Financial Holdings, Inc. common stock through these plans with full dividend reinvestment, partial dividend reinvestment and optional cash payment investment options. In addition, Centra’s Board of Directors approved the selection of Registrar and Transfer Company as Centra’s stock transfer agent. As of December 31, 2009, approximately 100,000 shares were issued under the dividend reinvestment program.

 

Centra has not initiated any plans to repurchase its stock nor has it repurchased any stock since its formation in 1999.

Performance Graph

 

The following Performance Graph and related information shall not be deemed “soliciting material” or to be “filed” with the Securities and Exchange Commission, nor shall such information be deemed to be incorporated by reference into any future filing under the Securities Act of 1933 or Securities Exchange Act of 1934, each as amended, except to the extent that Centra specifically incorporates it by reference into such filing.

 

The following line graph was completed by Research Data Group, Inc. and compares the five-year cumulative total shareholder return of Centra’s common shares, based on an initial investment of $100 on December 31, 2004, and assuming reinvestment of dividends, against that of an index comprised of all domestic common shares traded on the NASDAQ Stock Market (“NASDAQ Stocks U.S. Companies”), and an index comprised of all depository institutions (SIC Code #602) and depository institutions holding companies (SIC Code #6712) that are traded on the NASDAQ Stock Market (“NASDAQ Bank Stocks”).

 

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
AMONG CENTRA FINANCIAL HOLDINGS, INC.,
THE NASDAQ COMPOSITE INDEX AND SIC CODE INDEX

 

 

ASSUMES $100 INVESTED ON DECEMBER 31, 2004
ASSUMES DIVIDENDS REINVESTED
FISCAL YEAR ENDING DECEMBER 31, 2009

 

 

The information below has been derived from Centra’s Consolidated Financial Statements.

 

 

 

 

 

Forward-Looking Statements:

 

The following discussion contains statements that refer to future expectations, contains projections of the results of operations or of financial condition, or states other information that is “forward-looking.” “Forward-looking” statements are easily identified by the use of words such as “could,” “anticipate,” “estimate,” “believe,” and similar words that refer to a future outlook. There is always a degree of uncertainty associated with “forward-looking” statements. Centra’s management believes that the expectations reflected in such statements are based upon reasonable assumptions and on the facts and circumstances existing at the time of these disclosures. Actual results could differ significantly from those anticipated.

 

Many factors could cause Centra’s actual results to differ materially from the results contemplated by the forward-looking statements. Some factors, which could negatively affect the results, include those set forth in the “Risk Factors” section and the following:

 

 

In Management’s Discussion and Analysis, we review and explain the general financial condition and the results of operations for Centra Financial Holdings, Inc. and its subsidiaries. We have designed this discussion to assist you in understanding the significant changes in Centra’s financial condition and results of operations. We have used United States generally accepted accounting principles to prepare the accompanying consolidated financial statements. We engaged Ernst & Young LLP to audit the consolidated financial statements and their independent audit report is included in Item 8 herein.

 

Introduction

 

The following discussion and analysis of the Consolidated Financial Statements of Centra is presented to provide insight into management’s assessment of the financial results and operations of Centra. Centra Bank is the sole operating subsidiary of Centra and all comments, unless otherwise noted, are related to the bank. You should read this discussion and analysis in conjunction with the audited Consolidated Financial Statements and footnotes, and the ratios and statistics contained elsewhere in this Form 10-K.

 

Application of Critical Accounting Policies

 

Centra’s consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles and follow general practices within the banking industry. Application of these principles requires management to make estimates, assumptions, and judgments that affect the amounts reported in the financial statements; accordingly, as this information changes, the financial statements could reflect different estimates, assumptions, and judgments. Certain policies inherently have a greater reliance on the use of estimates, assumptions, and judgments and as such have a greater possibility of producing results that could be materially

different than originally reported. Estimates, assumptions, and judgments are necessary when assets and liabilities are required to be recorded at fair value, when a decline in the value of an asset not carried on the financial statements at fair value warrants an impairment write-down or valuation reserve to be established, or when an asset or liability needs to be recorded contingent upon a future event. Carrying assets and liabilities at fair value inherently results in more financial statement volatility. The fair values and the information used to record valuation adjustments for certain assets and liabilities are based either on quoted market prices or are provided by other third-party sources, when available. When third-party information is not available, valuation adjustments are estimated in good faith by management primarily through the use of internal forecasting techniques.

 

The most significant accounting policies followed by the bank are presented in Note 1 to the consolidated financial statements. These policies, along with the disclosures presented in the other financial statement notes and in management’s discussion and analysis of operations, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions, and estimates underlying those amounts, management has identified income recognition, the determination of the allowance for loan losses, investment securities, goodwill and intangible assets and the provision for income taxes to be the accounting areas that require the most subjective or complex judgments, and as such could be most subject to revision as new information becomes available.

 

Income Recognition

 

Interest income on loans and investment securities is recognized by methods that result in level rates of return on principal amounts outstanding, including yield adjustments resulting from the amortization of loan costs and premiums on investment securities and accretion of loan fees and discounts on investment securities.

 

In the event management believes collection of all or a portion of contractual interest on a loan has become doubtful, which generally occurs after the loan is 90 days past due, Centra discontinues the accrual of interest. In addition, previously accrued interest deemed uncollectible that was recognized in income in the current year is reversed, while amounts recognized in income in the prior year are charged against the allowance for loan losses. Interest received on nonaccrual loans is included in income only if principal recovery is reasonably assured. A nonaccrual loan is restored to accrual status after appropriate review by lending and/or loan review personnel indicates the collectability of the total contractual principal and interest is no longer considered doubtful.

 

Allowance for Loan Losses

 

In general, determining the amount of the allowance for loan losses requires significant judgment and the use of estimates by management. Centra maintains an allowance for loan losses to absorb probable losses based on a quarterly analysis of the loan portfolio and estimation of the losses that have been incurred within the loan portfolio. This formal analysis determines an appropriate level and allocation of the allowance for loan losses among loan types and resulting provision for loan losses by considering factors affecting losses, including specific losses on impaired loans, levels and trends in impaired and nonperforming loans, historical loan loss experience, current national and local economic conditions, volume, growth and composition of the portfolio, regulatory guidance, and other relevant factors. Management continually monitors the loan portfolio through its Loan Review Department to evaluate the adequacy of the allowance. The provision could increase or decrease each quarter based upon the results of management’s formal analysis.

 

The amount of the allowance for loan losses for the various loan types represents management’s estimate of probable losses from existing loans based upon specific allocations for individual lending relationships and historical loss experience for each category of homogeneous loans. The allowance for loan losses related to impaired loans is based on discounted cash flows using the loan’s initial effective interest rate or the fair value of the collateral for certain collateral dependent loans. This evaluation requires management to make estimates of the amounts and timing of future cash flows on impaired loans, which consists primarily of nonaccrual and restructured loans. While allocations are made to specific loans and pools of loans, the allowance is available for all loan losses.

Individual loan reviews are based upon specific quantitative and qualitative criteria, including the size of the loan, the loan cash flow characteristics, loan quality ratings, value of collateral, repayment ability of borrowers, and historical experience factors. The historical experience factors utilized for individual loan reviews are based upon past loss experience, known trends in losses and delinquencies, the growth of loans in particular markets and industries, and known changes in economic conditions in particular lending markets. Allowances for homogeneous loans (such as residential mortgage loans, personal loans, etc.) are evaluated based upon historical loss experience, trends in losses and delinquencies, growth of loans in particular markets, and known changes in economic conditions in each lending market.

 

There can be no assurance the allowance for loan losses will be adequate to cover all losses, but management believes the allowance for loan losses of $18.0 million at December 31, 2009, is adequate to provide for probable losses from existing loans based on information currently available. While management uses available information to provide for loan losses, the ultimate collectability of a substantial portion of the loan portfolio, and the need for future additions to the allowance, will be based on changes in economic conditions and other relevant factors. As such, adverse changes in economic activity could reduce cash flows for both commercial and individual borrowers, which would likely cause Centra to experience increases in problem assets, delinquencies, and losses on loans.

 

Available-for-sale Securities

 

Available-for-sale securities represent the second largest component of Centra’s assets, accounting for approximately 10.2% of total assets at December 31, 2009. Presently, Centra classifies its entire investment portfolio as available-for-sale and records changes in the estimated fair value of the portfolio in stockholders’ equity as a component of comprehensive income. As a result, both the investment and equity sections of Centra’s balance sheet are more sensitive to changes in the overall market value of the investment portfolio, due to changes in market interest rates, investor confidence, and other factors affecting market values, than if the investment portfolio was classified as held-to-maturity.

 

While temporary changes in the fair value of available-for-sale securities are not recognized in earnings, a decline in fair value of equity securities below amortized cost deemed to be “other-than-temporary” results in an adjustment to the cost basis of the investment, with a corresponding loss charged against earnings. A debt security is considered other-than-temporarily impaired if the present value of cash flows expected to be collected are less than the security’s amortized cost basis (the difference defined as the credit loss) or if the fair value of the security is less than the security’s amortized cost basis and the investor intends, or more-likely-than-not will be required, to sell the security before recovery of the security’s amortized cost basis. When OTTI exists, if the investor does not intend to sell the security, and it is more-likely-than-not that it will not be required to sell the security, before recovery of the security’s amortized cost basis, the charge to earnings is limited to the amount of credit loss. Any remaining difference between fair value and amortized cost (the difference defined as the non-credit portion) is recognized in other comprehensive income, net of applicable taxes. Otherwise, the entire difference between fair value and amortized cost is charged to earnings.

 

Management systematically evaluates Centra’s investment securities on a quarterly basis to identify potential other-than-temporary losses. This analysis requires management to consider various factors that can involve judgment and estimation, including duration and magnitude of the decline in value, the financial condition of the issuer, and Centra’s ability and intent to continue holding the investment for a period of time sufficient to allow for any anticipated recovery in market value.

 

During the year ended 2009, Centra identified one equity security that was in an unrealized loss position for more than twelve months and was deemed as other-than-temporarily impaired. Centra recognized the other-than-temporary loss and adjusted the investment’s cost basis by $526,000. No other investment securities in an unrealized loss position were deemed as other-than-temporarily impaired. If investments decline in fair value due to further adverse changes in the financial markets and the deterioration of credit of the underlying issuer, additional other-than-temporary impairment charges to income could occur in future periods.

Income Taxes

 

Income taxes are provided based on the liability method of accounting. The calculation of tax liabilities is complex and requires the use of estimates and judgment because it involves the application of complex tax laws that are subject to different interpretations by Centra and the various tax authorities. These interpretations are subject to challenge by the tax authorities upon audit or to reinterpretation based on management’s ongoing assessment of facts and evolving case law.

 

From time-to-time and in the ordinary course of business, Centra is involved in inquiries and reviews by tax authorities that normally require management to provide supplemental information to support certain tax positions taken by Centra in its tax returns. Uncertain tax positions are initially recognized in the financial statements when it is more likely than not the position will be sustained upon examination by the tax authorities. Such tax positions are initially and subsequently measured as the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement with the tax authority assuming full knowledge of the position and all relevant facts. Management believes that it has taken appropriate positions on its tax returns, although the ultimate outcome of any tax review cannot be predicted with certainty. On a quarterly basis, management reassesses Centra’s tax exposures based on the most recent information available and adjusts the related liability as deemed prudent and necessary. No assurance can be given that the final outcome of these matters will not be different than what is reflected in the current and historical financial statements.

 

Goodwill and Other Intangible Assets

 

Centra is required to allocate the cost of an acquired company to the assets acquired, including identified intangible assets, and liabilities assumed based on their estimated fair values at the date of acquisition.

 

The determination of fair value and subsequent allocation of the cost of an acquired company generally involves management making estimates based on other third-party valuations, such as appraisals, or internal valuations based on discounted cash flow analyses or other valuation techniques. In addition, the valuation and amortization of intangible assets representing the present value of future net income to be earned from customers (commonly referred to as “customer relationship intangibles” or “core deposit intangibles”) requires significant judgment and the use of estimates by management. While management feels the assumptions and variables used to value the recent acquisition were reasonable, the use of different, but still reasonable, assumptions could produce materially different results.

 

Customer relationship intangibles are amortized over their estimated useful lives, based upon the pattern in which the economic benefits of the intangible assets are consumed or otherwise used up. Management is required to evaluate the useful life of customer relationship intangibles to determine if events or circumstances warrant a change in the estimated life. Should management determine in future periods the estimated life of any intangible asset is shorter than originally estimated, Centra would adjust the amortization of that asset, which could increase future amortization expense.

 

Goodwill arising from business combinations represents the value attributable to unidentifiable intangible elements in the business acquired. Goodwill recorded by Centra in connection with its acquisition relates to the inherent value in the businesses acquired and this value is dependent upon Centra’s ability to provide quality, cost effective services in a competitive market place. As such, goodwill value is supported ultimately by revenue that is driven by the volume of business transacted. A decline in earnings as a result of a lack of growth or the inability to deliver cost effective services over sustained periods can lead to impairment of goodwill that could adversely impact earnings in future periods.

 

Centra has assessed its recorded goodwill as of December 31, 2009 and concluded that no indicators of impairment existed. However, future events could cause management to conclude that impairment indicators exist and re-evaluate goodwill. If such re-evaluation indicated impairment, Centra would recognize the loss, if any. Any resulting impairment loss could have a material, adverse impact on Centra’s financial condition and results of operations.

Recent Accounting Pronouncements and Developments

 

Note 1 to the consolidated financial statements discusses new accounting policies adopted by Centra during 2009 and the expected impact of accounting policies recently issued or proposed but not yet required to be adopted. The adoption of such accounting policies did not materially affect Centra’s financial condition, results of operations, or liquidity.

 

Summary Financial Results

 

Centra earned $8.0 million in 2009 compared to $6.6 million in 2008 and $5.3 million in 2007. The earnings equated to a 2009 return on average assets of 0.65% and a return on average equity of 7.71%, compared to results of 0.57% and 7.21% in 2008 and 0.54% and 8.16% in 2007, respectively. Basic earnings per share was $1.02 in 2009 compared to $1.00 in 2008 and $0.99 in 2007. Diluted earnings per share was $0.97 in 2009 compared to $0.92 in 2008 and $0.91 in 2007.

 

While operating in a challenging interest rate environment, the bank achieved a 5.70% yield on earning assets in 2009 compared to 6.51% in 2008 and 7.45% in 2007. The average balance of earning assets increased to $1.2 billion for the year ended December 31, 2009 compared to $1.1 billion for the year ended December 31, 2008. The bank maintained a high-quality, short-term investment portfolio during 2009 to provide liquidity in the balance sheet, to fund loan growth, and to pledge against customer’s accounts. U.S. government and agency securities comprised the majority of the bank’s investment portfolio at December 31, 2009 and 2008.

 

Average interest bearing deposits increased to $922.3 million as of December 31, 2009, from $865.6 million as of December 31, 2008, due to strong growth across all markets. Centra offers an uncomplicated product design accompanied by a simple fee structure that attracted customers at a steady rate during the year. Centra managed and reduced the cost of funds on interest-bearing liabilities to 2.20% in 2009 from 3.14% in 2008 and 4.22% in 2007.

 

Although the yield on earning assets declined from prior year, Centra achieved a net interest margin of 3.82% in 2009 compared to 3.81% in 2008 and 3.77% in 2007.

 

The following table reconciles the difference between net interest income and tax-equivalent net interest income for the year ended December 31, 2009.

 

 

Management continuously monitors the effects of net interest margin on the performance of the bank. Loan growth, fluctuations in prime lending rates and mix of the balance sheet will continue to impact net interest margin in future periods. As competition for deposits and quality loans continues, management anticipates continued pressure on the net interest margin given the current interest rate environment.

 

Interest Income and Expense

 

Net interest income is the amount by which interest income on interest-earning assets exceeds interest expense incurred on interest-bearing liabilities. Interest-earning assets include loans, investment securities, interest-bearing deposits and federal funds sold. Interest-bearing liabilities include interest-bearing deposits, borrowed funds such as fed funds purchased, sweep accounts, and term repurchase agreements. Net interest income remains the primary source of revenue for Centra. Net interest income is also impacted by changes in market interest rates, as well as the mix of interest-earning assets and interest-bearing liabilities. Net interest income is also impacted favorably by increases in non-interest-bearing demand deposits and equity.

Net interest margin is calculated by dividing tax-equivalent net interest income by average interest-earning assets and serves as a measurement of the net revenue stream generated by Centra’s balance sheet. As noted above, the net interest margin was 3.82% in 2009 compared to 3.81% in 2008 and 3.77% in 2007. The net interest margin continues to face considerable pressure due to competitive pricing of loans and deposits in Centra’s markets and the unprecedented interest rate environment. Management’s estimate of the impact of future changes in market interest rates is shown in the section captioned “Interest Rate Risk.”

 

During 2009, net interest income increased by $3.2 million or 8.2% to $43.2 million in 2009 from $40.0 million in 2008. This increase is due to growth in core average earning assets, while managing the cost of funds on interest-bearing liabilities. Average total loans grew to $1.0 billion in 2009 from $962.4 million in 2008. As a result of the decline in interest rates, total interest income decreased by $4.5 million or 6.4% to $64.9 million in 2009 from $69.4 million in 2008.

 

Average interest-bearing liabilities, mainly deposits, increased in 2009 by $53.4 million. Average interest-bearing deposits grew to $922.3 million as of December 31, 2009 from $865.6 million as of December 31, 2008. Primarily as a result of the decline in interest rates, total interest expense decreased by $7.7 million or 26.1% to $21.7 million in 2009 from $29.4 million in 2008.

 

As a result of the challenging rate environment, Centra has experienced a decline in the yield on earning assets and the cost of funds similar to many other banks in the industry. The yield on earning assets has declined to 5.70% in 2009 from 6.51% in 2008. This decrease occurred in each major earning asset category on the balance sheet including net loans which decreased from 6.80% in 2008 to 6.03% in 2009. Centra’s investment portfolio yield decreased to 3.75% during 2009 from 4.78% in 2008. During 2009, numerous bonds were called or matured and Centra reinvested the funds in lower yielding investments. In addition, Centra has continued to stress the quality of investments and the short-term nature of the portfolio. This short-term maturity structure was, and continues to be, necessary to provide funding for loan growth and to meet liquidity needs.

 

The cost of interest-bearing liabilities decreased to 2.20% in 2009 from 3.14% in 2008. This decrease is primarily a result of the declining rate environment.

 

As of December 31, 2009 and 2008, Centra had a balance of $20.0 million in trust preferred securities (see Note 8). This long-term debt had an effective weighted-average rate of 2.88% in 2009 and 5.47% in 2008. Interest expense on long-term debt was $575,000 in 2009 and $1.1 million in 2008.

Statistical Financial Information Regarding Centra

 

The following tables provide further information about Centra’s interest income and expense:

 

Average Balances and Analysis of Net Interest Income:

 

 

 

 

Average Balances and Analysis of Net Interest Income:

 

 

 

 

Rate/Volume Analysis of Changes in Interest Income and Expense:

 

 

 

 

 

Allowance and Provision for Credit Losses

 

Management continually monitors the loan portfolio through its committees to determine the adequacy of the allowance for loan losses. This formal analysis determines the appropriate level of the allowance for loan losses and allocation of the allowance among loan types and specific credits. The portion of the allowance allocated among the various loan types represents management’s estimate of probable losses based upon historical loss factors. In addition, Centra considers factors such as changes in lending policies, changes in the trend and volume of past due and adversely classified or graded loans, changes in local and national economic conditions, and effects of changes in loan concentrations. Specific loss estimates are derived for individual credits, where applicable, and are based upon specific qualitative criteria, including the size of the loan and loan grades below a predetermined level.

 

Centra maintains an allowance for loan losses and an allowance for lending-related commitments. The allowance for loan losses was $18.0 million, $16.4 million and $13.5 million at December 31, 2009, 2008 and 2007, respectively. The allowance for loan losses increased compared to the previous periods due to deterioration of general economic conditions and an increase in delinquent and non-performing assets from prior years. The allowance for loan losses as a percentage of total loans was 1.76%, 1.60%, and 1.54% at December 31, 2009, 2008, and 2007, respectively. The allowance for loan losses as a percentage of total loans compared to previous periods increased based upon management’s analysis of the adequacy of the reserve.

Non-performing assets consist of non-accrual loans, other impaired loans that are not 90 days or more past due and still accruing interest, and other real estate owned. As of December 31, 2009, total non-performing assets reached $14.2 million compared to $6.9 million as of December 31, 2008. As a result of further deteriorating economic conditions in our markets, impaired loans and other real estate owned increased. As of December 31, 2009, other real estate owned was $2.3 million compared to $160,000 as of December 31, 2008.

 

Total non-performing loans were $11.9 million as of December 31, 2009 compared to $6.8 million as of December 31, 2008. Total non-accrual loans have increased by $436,000 since December 31, 2008 to $7.2 million as of December 31, 2009. Non-accrual loans continue to be concentrated in commercial loans. Non-accrual commercial loans have increased by $1.1 million to $4.9 million as of December 31, 2009. As a result of these increases, Centra’s allowance as a percent of non-performing loans has dropped to 151% at December 31, 2009 from 242% at December 31, 2008.

 

As of December 31, 2009, total impaired loans were $9.6 million, which include commercial non-accrual loans of $4.9 million and one loan for $4.7 million that was deemed impaired due to management’s expectation that the borrower would not be able to satisfy the contractual obligation due to a decline in the collateral value. Of the total impaired loans, $7.7 million required specific reserves due to shortfalls in collateral value. Centra reserved $2.5 million for impaired loans as of December 31, 2009. Of the $2.5 million reserve, Centra reserved $1.9 million for the $4.7 million loan mentioned above.

 

Accruing loans past due 30 days or more have increased to $6.5 million as of December 31, 2009 compared to $6.3 million as of December 31, 2008. As of December 31, 2009, only 0.64% of Centra’s total loan portfolio was past due 30 days or more. Commercial loans past due 30 days or more make up 33.11% or $2.2 million of the total loan delinquencies. Real estate loans past due 30 days or more comprise 53.39% or $3.5 million of the total loan delinquencies.

 

Management records the provision for credit losses as a result of its analysis of the adequacy of the allowance for loan losses and the overall management of inherent credit risks. During 2009, Centra recorded a provision for credit losses of $5.7 million related to on balance sheet loans and negative provision of $17,000 for unused off balance sheet commitments. The negative provision for off balance sheet commitments represents a decrease in the overall amount of unused commitments available and thus exposure to credit risk. This compares to a provision for credit losses in 2008 of $5.2 million for on balance sheet loans and a negative provision of $30,000 for unused off-balance sheet commitments in 2008 and $3.2 million for on balance sheet loans and $340,000 for unused off-balance sheet commitments in 2007. The increase in provision for credit losses were necessary to adequately reserve for the deteriorating economic conditions and weakening loan quality as well as an increase in charge-offs.

 

Centra incurred net charge-offs totaling $4.0 million in 2009 and $2.4 million in 2008. Net charge-offs represented 0.39% of average loans outstanding in 2009 and 0.24% of average loans outstanding in 2008. While charge-offs have increased from prior years, Centra’s loss percentage continues to be well below peer levels. According to the FDIC’s Third Quarter 2009 Quarterly Banking Profile, banks $1-10 billion in asset size experienced net charge-offs as a percentage of average loans of 1.82%. During the fourth quarter 2009, Centra’s net charge-offs were $1.7 million or 42.19% of total charge offs for the entire year. The net charge-offs in the fourth quarter, which related to certain commercial loans deemed uncollectible that had been previously identified as impaired and provided for, increased the historical loss rates utilized in management’s analysis. As a result of these losses and continued declines in credit quality as evidenced by a further increase in loans past due 30 days or more Centra recognized an increase in the allowance for loans losses as of December 31, 2009 and a larger provision for the fourth quarter, of $3.2 million. These higher amounts of charge-offs and provision expense for 2009, especially in the fourth quarter, reflect a weakened credit environment due to a deterioration of economic conditions.

Activity in the allowance for loan losses follows:

 

 

In determining the allowance for loan losses, Centra segregates the loan portfolio by loan type: commercial, consumer and real estate loans. Of the $18.0 million allowance for loan losses recorded on December 31, 2009, $11.6 million is allocated to commercial loans, $2.3 million is allocated to consumer loans, and $4.1 million is allocated to real estate loans. A specific reserve of $2.5 million is allocated to impaired loans, which is included in the commercial loan reserve allocation. Of the $16.4 million recorded on December 31, 2008, $9.3 million is allocated to commercial loans, $2.8 million is allocated to consumer loans, and $4.3 million is allocated to real estate loans. No specific reserve was allocated to impaired loans as of December 31, 2008.

 

The following table reflects the allocation of the allowance for loan losses as of December 31:

 

 

The allowance for loan losses related to unused off balance sheet commitments and its activity is as follows:

 

 

Non-performing assets consist of loans that are no longer accruing interest, other impaired loans that are not 90 days or more past due and still accruing interest and real estate acquired through foreclosure. When

interest accruals are suspended, accrued interest income is reversed with current year accruals charged to earnings and prior year amounts generally charged off as a credit loss. When, in management’s judgment, the borrower’s ability to make periodic interest and principal payments resumes, and collectability is no longer in doubt, the loan is returned to accrual status.

 

Total non-performing assets were $14.2 million at December 31, 2009, compared with $6.9 million at December 31, 2008, and represent 1.38% and 0.68%, respectively, of total loans.

 

Non-performing assets and past due loans:

 

 

The amount of interest income which would have been recorded under the original terms for total loans classified as non-accrual was $579,000 in 2009, $527,000 in 2008 and $435,000 in 2007. Amounts actually collected and recorded as interest income for these loans were $326,000 in 2009, $511,000 in 2008 and $316,000 in 2007.

 

Non-Interest Income

 

Fees related to real estate loans sold in the secondary market, deposit accounts, and electronic banking services generate the core of the bank’s non-interest income. Non-interest income totaled $7.9 million in 2009 compared to $7.8 million in 2008. Overall noninterest income remained consistent with the prior year despite other-than-temporary losses of $526,000 recognized during 2009 on an equity security held within the holding company investment portfolio. Excluding this charge, noninterest income would have reached $8.4 million, which is an increase of $620,000 or 7.97% from the prior year. This increase is attributable to a rise in secondary market income and service charges on deposit accounts.

 

Service charges on deposit accounts increased to $3.7 million in 2009 from $3.1 million in 2008. This growth was the direct result of the corresponding increase in deposit accounts and fee changes implemented in mid-2008.

 

Other service charges and fees increased to $2.5 million in 2009 from $2.4 million in 2008. This growth is primarily attributed to Visa and MasterCard related fees associated with an expanded card base.

 

Centra originates long-term, fixed rate, or adjustable mortgage loans and sells them on the secondary market, servicing released. Centra’s mortgage banking income includes the recognition of fees received from the borrower and the market gain from the sale of the loan. Centra recognized $1.4 million of income from selling those loans during 2009 compared to $1.2 million of such income in 2008. Approximately $93.8 million of loans were sold in 2009 compared to approximately $76.0 million in 2008.

Management will continue to explore new methods of enhancing non-interest income. Other traditional and non-traditional financial service products are analyzed regularly for potential inclusion in Centra’s product mix.

 

Non-Interest Expense

 

In 2009, total non-interest expense reached $33.4 million compared to $32.8 million in 2008. The level of non-interest costs is indicative of Centra’s continued growth in the number of customers served, the number of banking offices operated, and the number of personnel and technology to support the growth.

 

Salaries and benefits expense totaled $15.6 million in 2009 compared to $16.4 million in 2008. The decrease in salaries and benefits expense is representative of Centra’s efforts to focus on operational efficiency and optimal staffing levels while continuing to provide an exceptional level of customer service. Management will continue to strive to find new ways of increasing efficiencies and leveraging its resources, while effectively optimizing customer service.

 

Occupancy expense totaled $2.8 million in 2009 compared to $2.6 million in 2008. This increase is primarily due to the completion of renovations on the various branches including the headquarters in Morgantown, West Virginia during 2009. In addition, Centra opened its fifteenth full service branch during 2009. This branch was opened in the Washington County Maryland market. Included in these totals is depreciation expense of $617,000 in 2009 and $456,000 in 2008. Lease expense totaled $1.1 million in 2009 compared to $1.3 million in 2008. The decrease in lease expense is due to the termination of a lease in the Berkeley County region.

 

Equipment expense totaled $2.3 million in 2009 compared to $2.2 million in 2008. Depreciation expense on furniture, fixtures, and equipment constituted $1.5 million in 2009 compared to $1.4 million in 2008. Equipment depreciation reflects Centra’s commitment to technology including investments that improve service delivery channels to our customers and operational efficiency.

 

Advertising costs totaled $1.6 million in 2009 compared to $1.4 million in 2008. The bank believes our marketing approach resulted in market awareness of the Centra name and our long standing customer service philosophy.

 

Professional fees totaled $934,000 in 2009 compared to $1.3 million in 2008. Professional fees decreased from prior year due to consulting services utilized in 2008, but not incurred in 2009.

 

Data processing costs totaled $2.5 million in 2009 compared to $2.2 million in 2008. Data processing costs have increased in correlation to the number of deposit and loan accounts and the continued branch expansion.

 

Other outside services totaled $1.0 million in 2009 compared to $901,000 in 2008, which increased due to higher correspondent bank fees, ATM network fees, and courier services.

 

Regulatory assessment expense totaled $1.9 million in 2009 compared to $696,000 in 2008. The FDIC applied a special assessment to all member banks as of June 30, 2009 in order to recapitalize the regulatory insurance funds. This fee was in addition to the normal regulatory assessment required by the FDIC. Centra paid $567,000 under the special assessment.

 

Other expense decreased to $4.7 million in 2009 from $5.1 million in 2008. The decrease was primarily the result of a decline in other loan related expenses and other operating expenses from the prior year.

 

Centra’s key non-interest expense initiative is to maintain an acceptable level of non-interest expense and operating efficiency. The financial services industry uses the efficiency ratio (total non-interest expense as a percentage of the aggregate of net interest income and non-interest income, excluding security transactions and purchase accounting adjustments) as a key indicator of performance. Centra’s efficiency ratio was 63.2% in 2009 compared to 67.1% in 2008.

Income Taxes

 

Centra incurred income tax expense of $4.0 million in 2009 and $3.2 million in 2008. As a result, Centra’s effective income tax rate, including both federal and state income taxes was 33.4% in 2009 and 33.1% in 2008.

 

Return on Assets

 

Centra’s return on average assets (“ROA”) was 0.65% in 2009, 0.57% in 2008, and 0.54% in 2007. This measure has increased from prior years reflecting the increased profitability of Centra.

 

Return on Equity

 

Centra’s return on average stockholders’ equity (“ROE”) was 7.71% in 2009, 7.21% in 2008, and 8.16% in 2007.

 

The bank is considered well-capitalized under regulatory and industry standards of risk-based capital. See Note 12 of Notes to the Consolidated Financial Statements included in Item 8 herein.

 

2008 Compared to 2007

 

During 2008, net interest income increased by $5.4 million or 15.6% to $40.0 million in 2008 from $34.6 million in 2007. This increase is due to growth in core average earning assets. Average total loans grew to $962.4 million in 2008 from $778.7 million in 2007. Primarily as a result of this growth, total interest income increased by $0.8 million or 1.1% to $69.4 million in 2008 from $68.6 million in 2007.

 

Average interest-bearing liabilities, mainly deposits, likewise increased in 2008 by $130.5 million. Average interest-bearing deposits grew to $865.6 million in 2008 from $762.2 million in 2007. Primarily as a result of the decline in interest rates, total interest expense decreased by $4.6 million, or 13.5%, to $29.4 million in 2008 from $34.0 million in 2007.

 

The provision for credit losses was $5.2 million in 2008 compared to $3.5 million in 2007. This increase was a result of continued growth in the loan portfolio and deteriorating general economic conditions. Centra incurred net charge-offs of $2.4 million in 2008 and net recoveries of $41,000 in 2007. During the year, non-accrual loans increased by $2.6 million to $6.8 million at December 31, 2008 compared to $4.2 million at December 31, 2007. Centra had other real estate owned of $160,000 as of December 31, 2008 and $235,000 as of December 31, 2007. As of December 31, 2008, Centra had delinquent loans of $6.3 million and $4.9 million as of December 31, 2007. The overall increase in delinquencies is attributable to deteriorating general economic conditions and its impact on our customers.

 

Non-interest income is comprised of fees related to real estate loans sold on the secondary market, deposit accounts, and electronic banking services. Non-interest income totaled $7.8 million in 2008 compared to $6.1 million in 2007. This increase is primarily related to additional fee income related to core growth of deposits and growth related to other service charges and fees.

 

In 2008, total non-interest expense reached $32.8 million compared to $28.9 million in 2007. The level of non-interest costs incurred includes start up costs in the Hagerstown market, and is indicative of Centra’s continued growth in the number of customers served, the number of banking offices operated, and the number of personnel and technology to support the growth.

 

Centra incurred income tax expense of $3.2 million in 2008 and $2.9 million in 2007. As a result, Centra’s effective income tax rate, including both federal and state income taxes, decreased from 35.3% in 2007 to 33.1% in 2008. Centra’s effective tax rate declined from the prior year due to the expansion of Centra’s tax free investment portfolio.

Overview of the Statement of Condition

 

Centra’s balance sheet at December 31, 2009, reflects the dynamic growth of the organization. Total assets grew to $1.3 billion as of December 31, 2009 from $1.2 billion as of December 31, 2008, which is an increase of 6.51% or $79 million. The majority of the asset growth was a result of improved liquidity. Federal funds sold increased to $68.8 million in 2009 compared to $0 in 2008. Centra was in a borrowing position as of December 31, 2008.

 

Deposits grew to $1.1 billion at December 31, 2009, an increase of 10.07% or $102.0 million from $1.0 billion at December 31, 2008. As liquidity improved, short-term borrowings decreased by $34.5 million to $40.8 million as of December 31, 2009 from $75.3 million as of December 31, 2008.

 

Stockholders’ equity increased by approximately $9.9 million to $105.1 million as of December 31, 2009 due to the net income recognized for 2009 and as a result of equity received from the exercise of certain stock options and stock issued through the dividend reinvestment plan.

 

Cash and Cash Equivalents

 

Centra’s cash and cash equivalents totaled $74.6 million at December 31, 2009, compared to $20.3 million at December 31, 2008, an increase of $54.3 million resulting from strong deposit growth.

 

Management believes the current balance of cash and cash equivalents adequately serves Centra’s liquidity and performance needs. Total cash and cash equivalents fluctuate on a daily basis due to transactions in process and other liquidity demands. Management believes the liquidity needs of Centra are satisfied by the current balance of cash and cash equivalents, readily available access to traditional and nontraditional funding sources, and the portions of the investment and loan portfolios that mature within one year. These sources of funds should enable Centra to meet cash obligations as they come due.

 

Available-for-sale Securities

 

Available-for-sale securities totaled $131.5 million at December 31, 2009, compared to $119.6 million at December 31, 2008. This increase of $11.9 million reflects Centra’s ongoing efforts to invest conservatively to position the portfolio to help fund future loan demand. Additionally, the proceeds from maturities and calls of numerous securities were reinvested into the government-sponsored agency and state and municipal bond portfolios.

 

Government-sponsored agency securities comprise the majority of the portfolio. Centra does not hold any single issue or pooled trust preferred securities, perpetual preferred equity securities or any securities collateralized by sub-prime loans.

 

All of Centra’s investment securities are classified as available-for-sale. Management believes the available-for-sale classification provides flexibility for Centra in terms of selling securities as well as interest rate risk management opportunities. At December 31, 2009, the amortized cost of Centra’s investment securities was $2.6 million less than the fair value resulting in unrealized appreciation in the investment portfolio.

 

Throughout the year, Centra evaluated all investment securities with material unrealized losses for impairment. During the first quarter 2009, Centra recognized other-than-temporary impairment losses of $387,000 on an equity security, which had been in an unrealized loss position for more than twelve months. An additional impairment loss of $139,000 was recorded during the fourth quarter 2009 on the same security. A total charge of $526,000 was recorded during 2009 and resulted in a reduction of amortized cost by the same amount.

 

Other investments totaled $2.9 million as of December 31, 2009 compared to $2.0 million as of December 31, 2008. Other investments are carried at cost and include Federal Home Loan Bank stock.

 

Management monitors the earnings performance and liquidity of the investment portfolio on a regular basis through Asset/Liability Committee (“ALCO”) meetings. The group also monitors net interest income,

sets pricing guidelines, and manages interest rate risk for Centra. Through active balance sheet management and analysis of the investment securities portfolio, Centra maintains sufficient liquidity to satisfy depositor requirements and the various credit needs of its customers. Management believes the risk characteristics inherent in the investment portfolio are acceptable based on these parameters.

 

Loans

 

Centra’s lending is primarily focused in the north central and the eastern panhandle areas of West Virginia, south western Pennsylvania, and western Maryland and consists principally of commercial lending, retail lending, which includes single-family residential mortgages, and consumer lending. As the credit environment weakened in our regions, Centra did not try to aggressively grow the loan portfolio as it had in the past. Total loans remained relatively consistent with prior year and were $1.0 billion as of December 31, 2009 and 2008.

 

Centra experienced slight growth during 2009 in the commercial loan portfolio. At December 31, 2009, commercial loans totaled 74.1% of Centra’s total loan portfolio and comprised the largest portion of the loan portfolio. Commercial loans totaled $757.9 million as of December 31, 2009, compared to $743.1 million at December 31, 2008. Management will continue to focus on the enhancement and growth of the commercial loan portfolio while maintaining appropriate underwriting standards and risk/price balance. In addition to the anticipated increased in-market penetration, Centra will continue to selectively lend to customers outside its primary markets.

 

Real estate loans to Centra’s customers (including real estate construction loans) account for the second largest portion of the loan portfolio, comprising 18.6% of Centra’s total loan portfolio. Real estate mortgage loans totaled $189.8 million as of December 31, 2009, compared to $194.8 million at December 31, 2008. This decline resulted from a decrease in mortgage rates sparking an increase in real estate mortgage re-financing. To keep up with demand, Centra sold most of the new real estate mortgage loans and re-finances to the secondary market. As a result, Centra’s non-interest income from secondary market loans increased from the prior year.

 

Included in real estate loans are home equity credit lines with outstanding balances totaling $43.4 million as of December 31, 2009, compared to $40.8 million at December 31, 2008. Management believes the home equity loans are competitive products with an acceptable return on investment after risk considerations. Residential real estate lending continues to represent a major focus of Centra’s lending due to the lower risk factors associated with this type of loan, and the opportunity to provide additional products and services to these consumers at reasonable yields to Centra.

 

Consumer lending continues to be a part of Centra’s core lending. At December 31, 2009, consumer loan balances totaled $75.1 million compared to $87.4 million at December 31, 2008. Consumer loans declined from prior year due to payments on existing loans resulting in a decrease in the outstanding balances. Centra’s consumer loans are primarily in the direct lending area.

The following table provides additional information about Centra’s loans:

 

Loan Portfolio Analysis: