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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

x	QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT of 1934

For the Quarterly Period Ended September 30, 2014

 

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             .

Commission File No. 1-13652

 

 

First West Virginia Bancorp, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

West Virginia		55-6051901
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

1701 Warwood Avenue

Wheeling, West Virginia 26003

(Address of principal executive offices)

Registrant’s telephone number, including area code: (304) 277-1100

N/A

(Former name, former address and former fiscal year,

if changed since last report)

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
report(s), and (2) has been subject to such filing requirements for the past 90 days.    x  Yes    ¨  No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, 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).    x  Yes    ¨  No

Indicate by check mark whether the registrant is a large accelerated filer , an accelerated filer or 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.

 

Large Accelerated Filer		¨		Accelerated Filer		¨
Non-accelerated filer		¨		Smaller Reporting Company		x

Indicate by check mark whether the Registrant is a shell company as defined by Rule 12b-2 of the Exchange Act.    ¨  Yes    x  No

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY

PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.    ¨  Yes    ¨  No

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. The number of shares outstanding of the issuer’s common stock as of September 30, 2014: Common Stock, $5.00 Par Value, shares outstanding: 1,728,730 shares

 

 

 

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FORM 10-Q INDEX

 

				Page No.
PART I - Financial Information
Item 1.		Financial Statements			3-31
		Consolidated Balance Sheets at September 30, 2014 (unaudited) and December 31, 2013			4
		Consolidated Statements of Income for the three and nine months ended September 30, 2014 and September 30, 2013 (unaudited)			5
		Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2014 and September 30, 2013 (unaudited)			6
		Consolidated Statements of Changes in Stockholders’ Equity for the nine months ended September 30, 2014 and 2013 (unaudited)			7
		Consolidated Statements of Cash Flows for the nine months ended September 30, 2014 and 2013 (unaudited)			8
		Condensed Notes to the Consolidated Financial Statements (unaudited)			9-31
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			32-44
Item 3.		Quantitative and Qualitative Disclosures About Market Risk			45
Item 4.		Controls and Procedures			45
PART II - Other Information
Item 1.		Legal Proceedings			46
Item 1A.		Risk Factors			46
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			46
Item 3.		Defaults upon Senior Securities			46
Item 4.		Mine Safety Disclosures			46
Item 5.		Other Information			46
Item 6.		Exhibits			46
SIGNATURES					47

 

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FIRST WEST VIRGINIA BANCORP, INC.

PART I

FINANCIAL INFORMATION

 

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Item 1 - Financial Statements

First West Virginia Bancorp, Inc.

CONSOLIDATED BALANCE SHEET

 

		September 30, 2014				December 31, 2013
		(Unaudited)
ASSETS
Cash and due from banks		$	5,348,041			$	6,530,981
Due from banks - interest bearing			17,428,812				25,343,994
Total cash and cash equivalents			22,776,853				31,874,975
Investment securities:
Available-for-sale (at fair value)			196,821,761				199,955,367
Loans			96,383,756				93,401,845
Less allowance for loan losses			(1,811,788	)			(1,864,788	)
Net loans			94,571,968				91,537,057
Premises and equipment, net			8,181,774				7,000,590
Accrued income receivable			1,198,252				1,168,483
Goodwill			1,644,119				1,644,119
Bank owned life insurance			3,812,769				3,732,439
Other assets			4,160,426				5,232,197
Total assets		$	333,167,922			$	342,145,227
LIABILITIES
Noninterest bearing deposits:
Demand		$	41,006,111			$	55,906,673
Interest bearing deposits:
Demand			54,553,895				54,812,380
Savings			113,085,804				108,070,929
Time			64,204,442				67,086,776
Total deposits			272,850,252				285,876,758
Federal funds purchased and securities sold under agreements to repurchase			22,076,236				20,215,183
Federal Home Loan Bank borrowings			3,444,557				3,515,580
Accrued interest payable			118,521				134,389
Other liabilities			648,463				1,613,281
Total liabilities			299,138,029				311,355,191
COMMITMENTS AND CONTINGENT LIABILITIES
Commitments and contingent liabilities			—				—
STOCKHOLDERS’ EQUITY
Common stock - 2,000,000 shares authorized at $5 par value:
1,728,730 shares issued at September 30, 2014 and December 31, 2013			8,643,650				8,643,650
Treasury stock - 10,000 shares at cost			(228,100	)			(228,100	)
Surplus			6,966,020				6,966,020
Retained earnings			18,853,086				18,126,554
Accumulated other comprehensive loss			(204,763	)			(2,718,088	)
Total stockholders’ equity			34,029,893				30,790,036
Total liabilities and stockholders’ equity		$	333,167,922			$	342,145,227

The accompanying condensed notes are an integral part of the unaudited consolidated financial statements.

 

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First West Virginia Bancorp, Inc.

CONSOLIDATED STATEMENTS OF INCOME

 

		Three Months Ended, September 30,								Nine Months Ended, September 30,
		2014				2013				2014				2013
		(Unaudited)								(Unaudited)
INTEREST AND DIVIDEND INCOME
Loans, including fees:
Taxable		$	1,113,372			$	1,182,577			$	3,188,168			$	3,608,763
Tax-exempt			119,887				111,852				377,048				312,312
Debt securities:
Taxable			739,728				562,239				2,123,639				1,644,969
Tax-exempt			427,307				476,516				1,450,337				1,405,830
Other interest and dividend income			24,317				17,558				76,157				39,414
Total interest and dividend income			2,424,611				2,350,742				7,215,349				7,011,288
INTEREST EXPENSE
Deposits			277,333				298,965				838,243				914,211
Federal funds purchased and repurchase agreements			46,300				37,267				123,607				100,141
Federal Home Loan Bank borrowings			41,328				42,169				124,367				127,669
Total interest expense			364,961				378,401				1,086,217				1,142,021
Net interest income			2,059,650				1,972,341				6,129,132				5,869,267
PROVISION FOR LOAN LOSSES			—				—				—				—
Net interest income after provision for loan losses			2,059,650				1,972,341				6,129,132				5,869,267
NONINTEREST INCOME
Service charges and other fees			99,687				111,652				278,859				304,505
Net gains on available for sale securities			608,555				674				868,968				2,924
Other-than-temporary losses on securities
Total other-than-temporary losses			—				—				(49,318	)			—
Portion of loss recognized in other comprehensive income (before taxes)			—				—				—				—
Net impairment losses recognized in earnings			—				—				(49,318	)			—
Other operating income			156,886				157,343				479,521				488,662
Total noninterest income			865,128				269,669				1,578,030				796,091
NONINTEREST EXPENSE
Salary and employee benefits			1,035,949				964,957				2,883,048				2,794,712
Net occupancy expense of premises			395,904				409,740				1,246,190				1,213,988
Other operating expenses			581,636				572,916				1,819,618				1,720,079
Total noninterest expense			2,013,489				1,947,613				5,948,856				5,728,779
Income before income taxes			911,289				294,397				1,758,306				936,579
INCOME TAX EXPENSE (BENEFIT)			137,464				(96,574	)			536				(250,144	)
Net income		$	773,825			$	390,971			$	1,757,770			$	1,186,723
WEIGHTED AVERAGE SHARES OUTSTANDING			1,718,730				1,718,730				1,718,730				1,718,730
EARNINGS PER COMMON SHARE		$	0.45			$	0.23			$	1.02			$	0.69
DIVIDENDS PER COMMON SHARE		$	0.20			$	0.19			$	0.60			$	0.57

The accompanying condensed notes are an integral part of the unaudited consolidated financial statements.

 

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First West Virginia Bancorp, Inc.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

 

		Three Months Ended, September 30,								Nine Months Ended, September 30,
		2014				2013				2014				2013
		(Unaudited)								(Unaudited)
Net Income		$	773,825			$	390,971			$	1,757,770			$	1,186,723
Other comprehensive income (loss):
Investment securities available for sale
Unrealized holding gains (losses) arising during the period			(172,375	)			78,377				4,849,349				(6,726,657	)
Income tax effect			64,865				(29,493	)			(1,824,810	)			2,531,241
Reclassification of gains recognized in earnings			(608,555	)			(674	)			(819,650	)			(2,924	)
Income tax effect			229,000				254				308,436				1,100
Total other comprehensive income (loss)		$	(487,065	)		$	48,464			$	2,513,325			$	(4,197,240	)
Comprehensive income (loss)		$	286,760			$	439,435			$	4,271,095			$	(3,010,517	)

The accompanying condensed notes are an integral part of the unaudited consolidated financial statements.

 

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First West Virginia Bancorp, Inc.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited)

 

																						Accumulated
																						Other
		Common Stock								Treasury								Retained				Comprehensive
		Shares				Amount				Stock				Surplus				Earnings				Income (Loss)				Total
BALANCE, DECEMBER 31, 2013			1,728,730			$	8,643,650			$	(228,100	)		$	6,966,020			$	18,126,554			$	(2,718,088	)		$	30,790,036
Net Income			—				—				—				—				1,757,770				—				1,757,770
Other comprehensive income			—				—				—				—				—				2,513,325				2,513,325
Cash dividend ($.60 per share)			—				—				—				—				(1,031,238	)			—				(1,031,238	)
BALANCE, September 30, 2014			1,728,730			$	8,643,650			$	(228,100	)		$	6,966,020			$	18,853,086			$	(204,763	)		$	34,029,893
																						Accumulated
																						Other
		Common Stock								Treasury								Retained				Comprehensive
		Shares				Amount				Stock				Surplus				Earnings				Income (Loss)				Total
BALANCE, DECEMBER 31, 2012			1,728,730			$	8,643,650			$	(228,100	)		$	6,966,020			$	17,191,740			$	3,129,463			$	35,702,773
Net Income			—				—				—				—				1,186,723				—				1,186,723
Other comprehensive loss			—				—				—				—				—				(4,197,240	)			(4,197,240	)
Cash dividend ($.57 per share)			—				—				—				—				(979,676	)			—				(979,676	)
BALANCE, September 30, 2013			1,728,730			$	8,643,650			$	(228,100	)		$	6,966,020			$	17,398,787			$	(1,067,777	)		$	31,712,580

The accompanying condensed notes are an integral part of the unaudited consolidated financial statements.

 

 

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First West Virginia Bancorp, Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

		For the Nine Months Ended September 30,
		2014				2013
OPERATING ACTIVITIES
Net income		$	1,757,770			$	1,186,723
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation			450,878				416,233
Amortization of investment securities, net			342,536				338,158
Investment security gains			(868,968	)			(2,924	)
Other-than-temporary losses on securities			49,318				—
Net gains on sales of mortgage loans			(1,893	)			(14,175	)
Loss on disposal of premises and equipment			6,252				1,333
Increase in cash surrender value of bank-owned life insurance			(80,330	)			(79,971	)
Originations of mortgage loans held for sale			(85,168	)			(395,500	)
Proceeds from sales of mortgage loans			87,061				519,475
Increase in interest receivable			(29,769	)			(35,485	)
Decrease in interest payable			(15,868	)			(24,074	)
Decrease (increase) in deferred taxes			(53,548	)			259,001
Other, net			(1,355,874	)			(1,102,630	)
Net cash provided by operating activities			202,397				1,066,164
INVESTING ACTIVITIES
Net decrease (increase) in loans, net of charge-offs			(3,038,935	)			3,934,956
Recoveries on loans previously charged-off			4,024				94,190
Proceeds from sales of securities available-for-sale			22,596,249				34,726
Proceeds from maturities, prepayments, and calls of securities available-for-sale			17,525,011				30,450,505
Purchases of securities available-for-sale			(32,480,840	)			(40,391,974	)
Purchases of premises and equipment			(1,638,314	)			(855,797	)
Net cash provided by (used in) investing activities			2,967,195				(6,733,394	)
FINANCING ACTIVITIES
Net increase (decrease) in deposits			(13,026,506	)			47,768,649
Dividends paid			(1,031,238	)			(979,676	)
Increase in short-term borrowings			1,861,053				3,129,912
Repayment of Federal Home Loan Bank borrowings			(71,023	)			(67,716	)
Net cash provided by (used in) financing activities			(12,267,714	)			49,851,169
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS			(9,098,122	)			44,183,939
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR			31,874,975				15,876,511
CASH AND CASH EQUIVALENTS, END OF PERIOD		$	22,776,853			$	60,060,450
Supplemental Disclosures:
Cash Paid for Interest		$	1,102,085			$	1,166,095
Cash Paid for Income Taxes		$	8,496			$	25,000
Loans transferred to other real estate owned		$	207,534				—

The accompanying condensed notes are an integral part of the unaudited consolidated financial statements.

 

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First West Virginia Bancorp, Inc. and Subsidiary

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2014 AND 2013

(Unaudited)

 

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A summary of the significant accounting and reporting policies applied in the presentation of the accompanying consolidated financial statements follows.

Nature of Operations and Basis of Presentation: First West Virginia Bancorp, Inc. (the “Company”) is a West Virginia Company. The Company provides a variety of banking services to individuals and businesses through the branch network of its affiliate bank (the “Bank”). The Bank operates nine full service branches located in Wheeling (3), Wellsburg, Moundsville, New Martinsville, Buckhannon, and Weston, West Virginia and Bellaire, Ohio. Primary deposit products consist of checking accounts, savings accounts, and certificates of deposit. Primary lending products consist of commercial and residential real estate loans, consumer loans, and business loans.

The accompanying unaudited consolidated financial statements were prepared in accordance with instructions for Form 10-Q and, therefore, do not include information or footnotes necessary for a complete presentation of financial position, results of operations, and cash flows in conformity with generally accepted accounting principles. Accordingly, these financial statements should be read in conjunction with the consolidated financial statements and notes thereto of the Company included in the Annual Report on Form 10-K for the year ended December 31, 2013. However, in the opinion of management, all adjustments (consisting of only normal recurring adjustments) which are necessary for a fair presentation of the financial statements have been included. The results of operations for the nine month period ended September 30, 2014, are not necessarily indicative of the results which may be expected for the entire year or any other period. The consolidated balance sheet of the Company as of December 31, 2013 has been derived from the audited consolidated balance sheet of the Company as of that date.

Principles of Consolidation: The consolidated financial statements of the Company include the financial statements of the parent and its wholly-owned subsidiary, Progressive Bank, N.A. All significant intercompany transactions and accounts have been eliminated in consolidation.

Use of Estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to material change in the near term relate to the determination of the allowance for loan losses, valuation of deferred tax assets, other-than-temporary impairments (OTTI), and fair values of financial instruments.

Cash and Cash Equivalents: Cash and cash equivalents consist of cash on hand and amounts due from banks and federal funds sold with maturities of less than 90 days. At September 30, 2014, the Company’s cash accounts exceeded federally insured limits by approximately $884,000. Additionally, the Company had approximately $16,420,000 on deposit with the Federal Reserve Bank and the Federal Home Loan Bank of Pittsburgh as of September 30, 2014, which is not federally insured.

Investment Securities: Investment securities are classified at the time of purchase, based on management’s intention and ability, as securities available for sale or held to maturity. Debt securities classified as held to maturity are stated at cost adjusted for amortization of premium and accretion of discount which are computed using the interest method and recognized as adjustments of interest income. Certain other debt and equity securities have been classified as available for sale to serve principally as a source of liquidity. Unrealized holding gains and losses for available-for-sale securities are reported as a separate component of stockholders’ equity, net of tax, until realized. Realized securities gains and losses are computed using the specific identification method. Interest and dividends on investment securities are recognized as income when earned.

Securities are periodically reviewed for other-than-temporary impairment based upon a number of factors, including, but not limited to, the length of time and extent to which the market value has been less than cost, the financial condition of the underlying issuer, the ability of the issuer to meet contractual obligations, the likelihood of the security’s ability to recover any decline in its market value, and management’s intent and ability to hold the security for a period of time sufficient to allow for a recovery in market value. Among the factors that are considered in determining management’s intent and ability is a review of the Company’s capital adequacy, interest rate risk position and liquidity. The assessment of a security’s ability to recover any decline in market value, the ability of the issuer to meet contractual obligations and management’s intent and ability requires considerable judgment. Once a decline in value is determined to be other-than-temporary, 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. There were no investment securities identified by management to be other-than-temporarily impaired at September 30, 2014 and December 31, 2013. If investments decline in fair value due to adverse changes in the financial markets, charges to income could occur in future periods.

Federal Reserve and Federal Home Loan Bank stock are required investments for institutions that are members of the Federal Reserve and Federal Home Loan Bank systems. The required investment in the common stock is based on a predetermined formula, carried at cost and evaluated for impairment.

 

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First West Virginia Bancorp, Inc. and Subsidiary

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2014 AND 2013

(Unaudited)

 

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Loans and Loans Held for Sale: Loans are generally reported at the principal balance outstanding, net of unearned income. Interest income on loans is accrued based on the principal outstanding. It is the Company’s policy to discontinue the accrual of interest when either the principal or interest is past due 90 days or more, unless the loan is both well secured and in the process of collection. It is the Company’s policy not to recognize interest income on specific impaired loans unless the likelihood of future loss is remote. Interest payments received on such loans are applied as a reduction of the loan principal balance. A nonaccrual loan may be returned to accrual status when none of its principal and interest payments are due and there has been a sustained period of repayment performance. Loans are considered past due when contractually required principal and interest payments have not been made on the due dates. Loan origination and commitment fees and certain direct loan origination costs are deferred and the net amount amortized over the contractual life of the related loans or commitments as an adjustment of the related loan’s yield. Loans held for sale are carried at the lower of cost or estimated market value in the aggregate. There were no loans held for sale as of September 30, 2014 and December 31, 2013.

Consumer loans are fully charged off or charged down to net realizable value when deemed uncollectible due to bankruptcy or other factors or no later than a defined number of days past due. Consumer loans not secured by real estate are charged off or charged down to net realizable value at 120 days past due for closed-end loans and 180 days past due for open-end loans. Residential real estate loans are charged down to net realizable value at 120 days past due for closed-end loans and 180 days past due for open-end loans. Commercial loans are fully charged off or charged down to net realizable value when management judges the loan to be uncollectible.

The Company has entered into an agreement with the Federal Home Loan Bank of Pittsburgh (“FHLB”) under which the bank may sell conforming one-to-four family residential mortgage loans to the FHLB. The current agreement dated December 28, 2013 provides for a maximum commitment of $5,000,000. This commitment expires on December 28, 2014. Loans sold to the FHLB are sold with limited recourse or credit risk based upon utilization of the original commitment. The bank also maintains the servicing of these loans, for which it is paid a servicing fee. The total amount of loans sold and outstanding to the FHLB were $8,728,398 and $9,489,935 as of September 30, 2014 and December 31, 2013, respectively. These loans were also subject to recourse obligation or credit risk in the amount of $325,382 and $342,602 at September 30, 2014 and December 31, 2013, respectively. No liability has been recorded for the recourse obligation as the likelihood of incurring the liability is considered remote. The amount of income recognized as a result of this agreement was $5,563 and $6,083 for the three months ended September 30, 2014 and 2013, respectively, and $18,506 and $28,017 for the nine months ended September 30, 2014 and 2013, respectively.

Allowance for Loan Losses: The allowance for loan losses represents the amount which management estimates is adequate to provide for probable losses inherent in its loan portfolio. The allowance method is used in providing for loan losses. Accordingly, all loan losses are charged to the allowance, and all recoveries are credited to it. The allowance for loan losses is established through a provision for loan losses that is charged to operations. The provision is based on management’s evaluation of the adequacy of the allowance for loan losses which encompasses the overall risk characteristics of the various portfolio segments, past experience with losses, the impact of economic conditions on borrowers, and other relevant factors. The estimates used in determining the adequacy of the allowance for loan losses, including the amounts and timing of future cash flows expected on impaired loans, are particularly susceptible to significant changes in the near term.

Management tracks and assigns a historical loss percentage for each loan rating category within each loan type. A rolling three-year historical loss ratio is used, calculated on a quarterly basis.

Management currently utilizes nine qualitative factors that are adjusted based on changes in the lending environment and economic conditions. The qualitative factors include the following: levels of and trends in delinquencies, non-accruals, and charge-offs; trends within the loan portfolio; changes in lending policies and procedures; experience of lending personnel and management oversight; national and local economic trends; concentrations of credit; external factors such as legal and regulatory requirements; changes in the quality of loan review and Board oversight; and changes in the value of underlying collateral. The number of qualitative factors can change. Factors can be added for new risks or taken away if the risk no longer applies. Each loan type will have its own risk profile and management will evaluate and adjust each qualitative factor for each loan type quarterly, if necessary. For example, if one area of the loan portfolio is experiencing sharp increases in growth, it is likely the qualitative factor for trends in the loan portfolio would be increased for that loan type. As levels of delinquencies and non-accrual loans decline for commercial real estate and commercial loans it is likely that factor would be reduced.

In terms of the Company’s loan portfolio, the commercial and industrial loans and commercial real estate loans are deemed to have more risk than the consumer real estate loans and other consumer loans in the portfolio. The commercial loans not secured by real estate are highly dependent on financial condition and are more dependent on economic conditions. The commercial loans secured by real estate are also dependent on economic conditions but generally have stronger forms of collateral. More recently, commercial real estate has been negatively impacted by devaluation so these commercial loans carry a higher qualitative factor for changes in the value of collateral. The commercial loans and commercial real estate loans have historically been responsible for the majority of the Company’s delinquencies, non-accrual loans, and charge-offs so both of these categories carry higher qualitative factors than consumer real estate loans and other consumer loans. The Company has historically experienced very low levels of consumer real estate and consumer loan charge-offs so these qualitative factors are set lower than the commercial real estate and commercial and industrial loans.

Mortgage loans secured by one-to-four family properties and all consumer loans are large groups of smaller-balance homogeneous loans and are measured for impairment collectively. Loans that experience insignificant payment delays, which are defined as 90 days or less, generally are not classified as impaired. Management determines the significance of payment delays on a case-by-case basis taking into consideration all circumstances concerning the loan, the credit worthiness and payment history of the borrower, the length of the payment delay, and the amount of shortfall in relation to the principal and interest owed.

 

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Table of Contents

First West Virginia Bancorp, Inc. and Subsidiary

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2014 AND 2013

(Unaudited)

 

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Allowance for Loan Losses: (Continued)

 

Impaired loans are loans for which it is probable the Company will not be able to collect all amounts due according to the contractual terms of the loan agreement. The Company individually evaluates such loans for impairment and does not aggregate loans by major risk classifications. The definition of “impaired loans” is not the same as the definition of “nonaccrual loans,” although the two categories overlap.

The Company may choose to place a loan on nonaccrual status due to payment delinquency or uncertain collectibility while not classifying the loan as impaired, provided the loan is not a commercial or commercial real estate classification. Payments received on nonaccrual loans are applied as a reduction of the loan principal balance. Factors considered by management in determining impairment include payment status and collateral value. The amount of impairment for these types of loans is determined by the difference between the present value of the expected cash flows related to the loan, using the original interest rate, and its recorded value, or as a practical expedient in the case of collateralized loans, the difference between the fair value of the collateral and the recorded amount of the loans. When foreclosure is probable, impairment is measured based on the fair value of the collateral less estimated liquidation expenses.

Individual loan reviews are based upon specific quantitative and qualitative criteria, including the size of the loan, 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 the 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 in the amount of $1,811,788 at September 30, 2014, was 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 collectibility 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, an adverse change in economic activity could reduce cash flows for both commercial and individual borrowers, which would likely cause the Company to experience increases in problem assets, delinquencies and losses on loans.

Goodwill: Goodwill resulted from the Company’s purchase of a less-than-whole financial institution (the “branch”). The goodwill value of $1,644,119 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.

Goodwill is periodically reviewed for impairment. No impairment losses were recognized as of September 30, 2014 and 2013. Additionally, future events could cause management to conclude that impairment indicators exist and that the goodwill is impaired, which would result in the Company recording an impairment loss. Any resulting impairment loss could have a material, adverse impact on the Company’s financial condition and results of operations.

Mortgage Servicing Rights (“MSRs”): The Company has agreements for the express purpose of selling loans in the secondary market. The Company maintains all servicing rights for these loans. Originated MSRs are recorded by allocating total costs incurred between the loan and servicing rights based on their relative fair values. MSRs are amortized in proportion to the estimated servicing income over the estimated life of the servicing portfolio. Impairment is evaluated based on the fair value of the right, based on portfolio interest rates and prepayment characteristics.

Bank-owned Life Insurance: Bank-owned life insurance consists of investments in life insurance policies on executive officers and other members of the bank’s management. The policies are carried at their net cash surrender value. Changes in the policy value are recorded as an adjustment to the carrying value with the corresponding amount recognized as non-interest income or expense. Earnings on these policies are based on the net earnings on the cash surrender value of the policies. The net cash surrender value of bank-owned life insurance was $3,812,769 and $3,732,439 at September 30, 2014 and December 31, 2013, respectively. The death benefit value of the bank-owned life insurance at September 30, 2014 and December 31, 2013 was $8.7 million and $8.8 million, respectively. An agreement has been executed with all officers whereby a $40,000 death benefit is payable upon the participant’s death while employed by the Company to their designated beneficiary.

Advertising Costs: Advertising costs are expensed as the costs are incurred. Advertising expenses amounted to $50,707 and $54,958 for the three months ended September 30, 2014 and September 30, 2013, respectively. For the nine month periods ended September 30, 2014 and 2013 advertising expenses amounted to $140,030 and $153,354, respectively.

Premises and Equipment: Land is carried at cost. Premises and equipment are stated at cost, less accumulated depreciation and amortization. Provisions for depreciation and amortization are computed generally using the straight-line method over the estimated useful lives of the assets. When units of property are disposed of, the premises and equipment accounts are relieved of the cost and the accumulated depreciation related to such units. Any resulting gains or losses are credited to or charged against income. Cost of repairs and maintenance is charged to expense as incurred. Additions and improvements are capitalized at cost.

 

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First West Virginia Bancorp, Inc. and Subsidiary

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2014 AND 2013

(Unaudited)

 

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Transfers of Financial Assets: Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

Other Real Estate Owned: Other real estate owned are carried at the lower of cost or their estimated current fair value, less estimated costs to sell and are included in other assets. Other real estate owned consist primarily of properties acquired through, or in lieu of foreclosures. Any subsequent declines in fair value, and gains or losses on the disposition of these assets are credited to or charged against income.

Income Taxes: The Company and its subsidiary file a consolidated federal income tax return. There is currently no liability for uncertain tax positions and no known unrecognized tax benefits. The Company recognizes, when applicable, interest and penalties related to unrecognized tax benefits in the provision for income taxes in the Statement of Income. Deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets and liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. Deferred income tax expenses or benefits are based on the changes in the deferred tax asset or liability from period to period.

Earnings Per Common Share: Earnings per common share are calculated by dividing net income by the weighted-average number of shares of common stock outstanding during the year. The Company has no securities which would be considered potential common stock.

Recent Accounting Pronouncements: In January 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) No. 2014-04, Receivables - Troubled Debt Restructurings by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure - The objective of this Update is to reduce diversity by clarifying when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan receivable should be derecognized and the real estate property recognized. The ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2014. The amendments in this Update may be adopted using either a modified retrospective transition method or a prospective transition method. Adoption of the ASU is not expected to have a significant effect on the Company’s consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606) - The topic of Revenue Recognition had become broad with several other regulatory agencies issuing standards, which lacked cohesion. The new guidance establishes a “comprehensive framework” and “reduces the number of requirements to which an entity must consider in recognizing revenue” and yet provides improved disclosures to assist stakeholders reviewing financial statements. The amendments in this Update are effective for annual reporting periods beginning after December 15, 2016. Early adoption is not permitted. The Company will adopt the methodologies prescribed by this ASU by the date required. Adoption of the ASU is not expected to have a significant effect on the Company’s consolidated financial statements.

In June 2014, the FASB issued ASU 2014-11, Transfers and Servicing (Topic 860): Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures - This Update addresses the concerns of stakeholders by changing the accounting practices surrounding repurchase agreements. The new guidance changes the “accounting for repurchase-to-maturity transactions and linked repurchase financings to secured borrowing accounting, which is consistent with the accounting for other repurchase agreements.” The amendments in this Update are effective for annual reporting periods beginning after December 15, 2014. Early adoption is prohibited. The Company will adopt the methodologies prescribed by this ASU by the date required. Adoption of the ASU is not expected to have a significant effect on the Company’s consolidated financial statements.

 

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First West Virginia Bancorp, Inc. and Subsidiary

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2014 AND 2013

(Unaudited)

 

NOTE 2 - INVESTMENT SECURITIES

The amortized cost and estimated fair values of investment securities are as follows at September 30, 2014 and December 31, 2013:

 

		(Expressed in thousands)
		September 30, 2014
		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
Securities available-for-sale:
Obligations of U.S. Government corporations and agencies		$	46,595			$	7			$	(1,095	)		$	45,507
Obligations of states and political subdivisions			40,059				2,158				(117	)			42,100
Mortgage-backed securities			110,329				337				(1,653	)			109,013
Equity securities			167				36				(1	)			202
Total available-for-sale		$	197,150			$	2,538			$	(2,866	)		$	196,822

 

		(Expressed in thousands)
		December 31, 2013
		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
Securities available-for-sale:
Obligations of U.S. Government corporations and agencies		$	50,598			$	18			$	(2,170	)		$	48,446
Obligations of states and political subdivisions			60,049				1,421				(1,056	)			60,414
Mortgage-backed securities			93,501				72				(2,673	)			90,900
Equity securities			165				32				(2	)			195
Total available-for-sale		$	204,313			$	1,543			$	(5,901	)		$	199,955

Certain investments in debt securities are reported in the financial statements at an amount less than their historical cost. Total fair value of these investments at September 30, 2014 and December 31, 2013, was approximately $121,225,000 and $145,017,000, which is approximately 61.6% and 72.5%, respectively, of the Company’s available-for-sale investment portfolio.

The Company’s investment securities portfolio contains unrealized losses of direct obligations of the U.S. Government agency securities, including mortgage-related instruments issued or backed by the full faith and credit of the United States government or are generally viewed as having the implied guarantee of the U.S. government, and debt obligations of a U.S. state or political subdivision.

The unrealized losses on the Company’s investments in direct obligations of U.S. government corporations and agencies were caused by interest rate increases. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost bases of the investments. Because the Company does not intend to sell the investments and it is not more likely than not the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at September 30, 2014.

The unrealized losses on the Company’s investments in residential mortgage-backed securities were caused by interest rate increases. The Company expects to recover the amortized cost basis over the term of the securities. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell the investments and it is not more likely than not the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at September 30, 2014.

The unrealized losses on the Company’s investments in securities of state and political subdivisions were caused by interest rate increases. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost bases of the investments. Because the Company does not intend to sell the investments and it is not more likely than not the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at September 30, 2014.

 

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First West Virginia Bancorp, Inc. and Subsidiary

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2014 AND 2013

(Unaudited)

 

NOTE 2 - INVESTMENT SECURITIES (CONTINUED)

 

On a quarterly basis, the Company evaluates the severity and duration of impairment for its investment securities portfolio and the Company’s ability to hold the securities till they recover. Generally, impairment is considered other-than-temporary when an investment security has sustained a decline in market value for a period of twelve months. The Company has concluded that any impairment of its investment securities portfolio is not other-than-temporary but is the result of interest rate changes that are not expected to result in the noncollection of principal and interest during the period. There are 70 positions that are temporarily impaired at September 30, 2014.

The following tables show the Company’s gross unrealized losses and fair value of the Company’s investments with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment class and length of time that the individual securities have been in a continuous unrealized loss position, at September 30, 2014 and December 31, 2013:

 

		(Expressed in thousands)
		September 30, 2014
		Less than Twelve Months								Twelve Months or Greater								Total
		Fair Value				Gross Unrealized Losses				Fair Value				Gross Unrealized Losses				Fair Value				Gross Unrealized Losses
U.S. Government corporations and agencies		$	—			$	—			$	40,499			$	(1,095	)		$	40,499			$	(1,095	)
Obligations of states and political subdivisions			804				(1	)			5,700				(116	)			6,504				(117	)
Mortgage-backed securities			39,201				(211	)			34,993				(1,442	)			74,194				(1,653	)
Total debt securities			40,005				(212	)			81,192				(2,653	)			121,197				(2,865	)
Equity securities			—				—				28				(1	)			28				(1	)
Total		$	40,005			$	(212	)		$	81,220			$	(2,654	)		$	121,225			$	(2,866	)

 

		(Expressed in thousands)
		December 31, 2013
		Less than Twelve Months								Twelve Months or Greater								Total
		Fair Value				Gross Unrealized Losses				Fair Value				Gross Unrealized Losses				Fair Value				Gross Unrealized Losses
U.S. Government corporations and agencies		$	46,416			$	(2,170	)		$	—			$	—			$	46,416			$	(2,170	)
Obligations of states and political subdivisions			19,009				(867	)			1,794				(189	)			20,803				(1,056	)
Mortgage-backed securities			65,915				(2,036	)			11,805				(637	)			77,720				(2,673	)
Total debt securities			131,340				(5,073	)			13,599				(826	)			144,939				(5,899	)
Equity securities			70				(1	)			8				(1	)			78				(2	)
Total		$	131,410			$	(5,074	)		$	13,607			$	(827	)		$	145,017			$	(5,901	)

The following is a tabular rollforward of the amount of credit related OTTI recognized in earnings (in thousands):

 

		For the three months ended								For the nine months ended
		September 30, 2014				September 30, 2013				September 30, 2014				September 30, 2013
Balance at beginning of period		$	—			$	—			$	—			$	—
Additions for credit-related OTTI not previously recognized			—				—				49				—
Reductions for securities sold during the period (realized)			—				—				(49	)			—
Balance at end of period		$	—			$	—			$	—			$	—

No other-than-temporary impairment losses were recognized in accumulated other comprehensive income as of September 30, 2014 and 2013.

 

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First West Virginia Bancorp, Inc. and Subsidiary

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2014 AND 2013

(Unaudited)

 

NOTE 2 - INVESTMENT SECURITIES (CONTINUED)

 

The amortized cost and fair value of investment securities at September 30, 2014, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

		(Expressed in thousands) September 30, 2014
		Amortized Cost				Fair Value
Due in one year or less		$	112			$	112
Due after one year through five years			18,343				18,164
Due after five years through ten years			46,137				45,910
Due after ten years			22,062				23,421
			86,654				87,607
Mortgage-backed securities			110,329				109,013
Equity securities			167				202
Total		$	197,150			$	196,822

Proceeds from sales of securities available-for-sale during the nine month periods ended September 30, 2014 and 2013, were $22,596,249 and $34,726, respectively. Gross gains of $905,514 and gross losses of $36,546 were realized during the nine months ended September 30, 2014 and gross gains of $2,942 and gross losses of $18 were realized during the nine months ended September 30, 2013. Proceeds from sales of securities available-for-sale during the three month periods ended September 30, 2014 and 2013, were $10,386,512 and $17,940, respectively. Gross gains of $608,555 and gross losses of $0 were realized during the three months ended September 30, 2014 and gross gains of $674 and gross losses of $0 were realized during the three months ended September 30, 2013. Assets carried at $63,469,000 and $65,339,000 at September 30, 2014 and December 31, 2013, respectively, were pledged to secure United States Government and other public funds and for other purposes as required or permitted by law.

The maturity distribution using book value including accretion of discounts and amortization of premiums and approximate yield of investment securities at September 30, 2014 and December 31, 2013 are presented in the following table. Tax equivalent yield basis was used on tax exempt obligations. Approximate yield was calculated using a weighted average of yield to maturities. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

(dollars in thousands)		September 30, 2014												December 31, 2013
		Amortized Cost				Fair Value				Yield				Amortized Cost				Fair Value				Yield
U.S. Government corporations and agencies
Within One Year		$	2			$	2				0.01	%		$	9			$	9				0.01	%
After One But Within Five Years			16,994				16,768				1.60				7,490				7,416				1.81
After Five But Within Ten Years			29,599				28,737				1.79				43,099				41,021				1.81
			46,595				45,507				1.72				50,598				48,446				1.81
States & Political Subdivisions
Within One Year			110				110				6.14				1,288				1,321				6.59
After One But Within Five Years			1,349				1,396				6.09				1,246				1,305				5.95
After Five But Within Ten Years			16,538				17,173				5.38				25,960				26,125				5.11
After Ten Years			22,062				23,421				5.83				31,555				31,663				5.65
			40,059				42,100				5.66				60,049				60,414				5.44
Mortgage-Backed Securities			110,329				109,013				2.17				93,501				90,900				2.06
Equity Securities			167				202				2.61				165				195				4.02
Total		$	197,150			$	196,822				2.81	%		$	204,313			$	199,955				3.02	%

 

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First West Virginia Bancorp, Inc. and Subsidiary

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2014 AND 2013

(Unaudited)

 

NOTE 3 - LOANS AND LEASES

Loans outstanding at September 30, 2014 and December 31, 2013, are as follows:

 

		(Expressed in Thousands)
		September 30, 2014				December 31, 2013
Consumer Real Estate:
Construction		$	3,585			$	487
Farmland			99				136
Residential 1-4 Family			23,428				23,275
Home Equity Loans			1,341				1,665
Home Equity Lines of Credit			3,610				3,684
Total Consumer Real Estate			32,063				29,247
Commercial Real Estate:
Non-farm, non-residential			36,424				35,345
Multifamily (5 or more) residential properties			8,841				8,762
Total Commercial Real Estate			45,265				44,107
Commercial and Other Loans:
Commercial			5,793				5,489
Non-rated industrial development obligations			10,323				11,200
Other loans			19				36
Total Commercial and Other Loans			16,135				16,725
Consumer Loans:
Installment and other loans to individuals			2,583				2,921
Credit Cards			481				535
Total Consumer Loans			3,064				3,456
Total loans		$	96,527			$	93,535
Less unearned interest and deferred fees			143				133
Gross loans		$	96,384			$	93,402

The Company has certain lending policies and procedures in place that are designed to maximize loan income within an acceptable level of risk. These policies and procedures are reviewed by management and approved by the Board of Directors on a regular basis. A reporting system supplements the review process by providing management with frequent reports related to loan production, loan quality, concentration of credit, loan delinquencies and non-performing and potential problem loans. Diversification in the loan portfolio is a means of managing risk associated with fluctuations in economic conditions.

The Company originates direct and indirect consumer loans including principally residential real estate, home equity lines and loans, credit cards, and indirect vehicle loans using a credit analysis as part of the underwriting process. Each loan type has a separate underwriting criteria, which consists of several factors including debt to income, type of collateral, credit history and customer relationship with the Company. Credit risk is driven by factors such as the creditworthiness of a borrower and general economic conditions in the Company’s market area that might impact the borrower’s personal income, employment, or collateral value. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.

Commercial and industrial loans are underwritten after evaluating and understanding the borrower’s ability to operate profitably. Underwriting standards are designed to promote relationship banking rather than transactional banking. The Company’s management examines current and projected cash flows to determine the ability of the borrower to repay their obligations as agreed. Commercial and industrial loans are primarily made based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of the borrower, however, may not be as expected and the collateral securing the loan may fluctuate in value. Credit risk in these loans is driven by the creditworthiness of a borrower and the economic conditions that impact the cash flow stability from business operations. Minimum standards and underwriting guidelines have been established for commercial loan types.

 

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First West Virginia Bancorp, Inc. and Subsidiary

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2014 AND 2013

(Unaudited)

 

NOTE 3 - LOANS AND LEASES (CONTINUED)

 

Commercial real estate loans are subject to underwriting standards and processes similar to commercial and industrial loans, in addition to those of real estate loans. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally largely dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be adversely affected by the general economy or conditions specific to the real estate market such as geography and/or property type.

Construction and land development real estate loans are usually based upon estimates of costs and estimated value of the completed project and include independent appraisal reviews and a financial analysis of the developers and property owners. Sources of repayment of these loans may include permanent loans, sales of developed property or an interim loan commitment from the Company until permanent financing is obtained. These loans are considered to be higher risk than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, general economic conditions and the availability of long-term financing. Credit risk in these loans may be impacted by the creditworthiness of a borrower, property values and the economic conditions in the Company’s market areas.

Non-accrual loans amounted to $1,148,928 and $1,270,447 at September 30, 2014 and December 31, 2013, respectively. The amount of interest income that would have been recognized had the loans performed in accordance with their original terms was $9,891 and $20,815 for the three months ended September 30, 2014 and September 30, 2013, respectively. For the nine months ended September 30, 2014 and 2013 and for the year ended December 31, 2013, the amount of interest income that would have been recognized had the loans performed in accordance with their original terms was $47,309, $64,494 and $84,793, respectively.

The following tables present the aging of the recorded investment in past due loans by class of loans (in thousands):

 

		September 30, 2014
		Current				30-59 Days Past Due				60-89 Days Past Due				90 Days or more Past Due				Total Past Due				Total Loans				90 Days or more Past  Due and Accruing
Commercial and other loans		$	16,096			$	20			$	—			$	19			$	39			$	16,135			$	—
Commercial real estate			44,458				15				289				503				807				45,265				—
Consumer real estate			31,858				136				—				69				205				32,063				—
Consumer			3,053				11				—				—				11				3,064				—
Unearned interest and deferred fees			(143	)			—				—				—				—				(143	)			—
Total loans		$	95,322			$	182			$	289			$	591			$	1,062			$	96,384			$	—
Non-accrual loans included above are as follows:
Commercial and other loans		$	—			$	20			$	—			$	19			$	39			$	39			$	—
Commercial real estate			—				15				289				503				807				807				—
Consumer real estate			234				—				—				69				69				303				—
Consumer			—				—				—				—				—				—				—
Total non-accrual loans		$	234			$	35			$	289			$	591			$	915			$	1,149			$	—

 

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SEPTEMBER 30, 2014 AND 2013

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NOTE 3 - LOANS AND LEASES (CONTINUED)

 

		December 31, 2013
		Current				30-59 Days Past Due				60-89 Days Past Due				90 Days or more Past Due				Total Past Due				Total Loans				90 Days or more Past  Due and Accruing
Commercial and other loans		$	16,693			$	10			$	—			$	22			$	32			$	16,725			$	—
Commercial real estate			43,244				159				—				704				863				44,107				—
Consumer real estate			28,994				168				9				76				253				29,247				—
Consumer			3,451				4				—				1				5				3,456				—
Unearned interest and deferred fees			(133	)			—				—				—				—				(133	)			—
Total loans		$	92,249			$	341			$	9			$	803			$	1,153			$	93,402			$	—
Non-accrual loans included above are as follows:
Commercial and other loans		$	4			$	—			$	—			$	22			$	22			$	26			$	—
Commercial real estate			22				159				—				704				863				885				—
Consumer real estate			146				124				9				76				209				355				—
Consumer			—				3				—				1				4				4				—
Total non-accrual loans		$	172			$	286			$	9			$	803			$	1,098			$	1,270			$	—

The Company utilizes an internal asset classification system as a means of reporting problem and potential problem loans. Risk ratings are assigned to individual credit exposures as an aspect of the credit approval and are adjusted thereafter to reflect changes in risk exposure as the borrower’s condition changes. The most significant factor used to determine the risk rating is the borrower’s primary source of repayment which includes a cash flow analysis. Other items considered in the loan review include secondary sources of repayment, financial trends, collateral value and characteristics, the size of the loan, and external factors impacting the borrower’s repayment ability.

Loans rated as “Pass” include those that have minimal, modest, acceptable, and higher risk. Minimal risk loans are fully secured by marketable securities or cash collateral, or loans supported by the United States Treasury. Modest risk loans have borrowers with stable cash flows over an extended period of time and extensive access to credit from several sources. Acceptable risk loans include individual borrowers with substantial liquid assets and commercial borrowers with strong cash flow. Higher risk loans have adequate sources of repayment and no current identifiable risk for repayment and loans that are slightly below average due to any number of factors such as income, collateral, or the lack of sufficient financial information.

Problem and potential problem loans are classified as “Special Mention,” “Substandard,” and “Doubtful.” Substandard loans are inadequately protected by the current worth and paying capacity of the borrower or the collateral pledged, if any. These loans have a well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt and are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Loans classified as Doubtful have all the weaknesses inherent in those classified Substandard with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. Loans that do not currently expose the Company to sufficient risk to warrant classification in one of the aforementioned categories, but possess weaknesses that deserve management’s close attention are deemed to be Special Mention.

 

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SEPTEMBER 30, 2014 AND 2013

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NOTE 3 - LOANS AND LEASES (CONTINUED)

 

The following tables present the risk category of loans by class of loans based on the most recent analysis performed and the contractual aging as of September 30, 2014 and December 31, 2013 (in thousands):

 

September 30, 2014		Pass				Special Mention				Substandard				Doubtful				Total
Commercial and Other		$	16,096			$	—			$	39			$	—			$	16,135
Commercial Real Estate			39,634				1,349				4,282				—				45,265
Construction and Land Development			3,333				—				351				—				3,684
Total		$	59,063			$	1,349			$	4,672			$	—			$	65,084
Current		$	59,063			$	1,349			$	3,826			$	—			$	64,238
Past Due 30-59 days			—				—				—				—				—
Past Due 60-89 days			—				—				—				—				—
Past Due 90 days or more			—				—				—				—				—
Non- accrual			—				—				846				—				846
Total		$	59,063			$	1,349			$	4,672			$	—			$	65,084

 

December 31, 2013		Pass				Special Mention				Substandard				Doubtful				Total
Commercial and Other		$	16,675			$	—			$	50			$	—			$	16,725
Commercial Real Estate			35,302				3,936				4,869				—				44,107
Construction and Land Development			272				—				351				—				623
Total		$	52,249			$	3,936			$	5,270			$	—			$	61,455
Current		$	52,249			$	3,936			$	4,349			$	—			$	60,534
Past Due 30-59 days			—				—				10				—				10
Past Due 60-89 days			—				—				—				—				—
Past Due 90 days or more			—				—				—				—				—
Non- accrual			—				—				911				—				911
Total		$	52,249			$	3,936			$	5,270			$	—			$	61,455

For consumer and consumer real estate loan classes, the Company also evaluates credit quality based on the aging status of the loan, which was previously presented, and by payment activity. The following table presents the recorded investment in those loan classes based on payment activity as of September 30, 2014 and December 31, 2013 (in thousands):

 

September 30, 2014		Performing				Non-performing				Total
Consumer		$	3,064			$	—			$	3,064
Consumer Real Estate			28,076				303				28,379
Total		$	31,140			$	303			$	31,443

 

December 31, 2013		Performing				Non-performing				Total
Consumer		$	3,452			$	4			$	3,456
Consumer Real Estate			28,269				355				28,624
Total		$	31,721			$	359			$	32,080

 

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SEPTEMBER 30, 2014 AND 2013

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NOTE 3 - LOANS AND LEASES (CONTINUED)

 

The Company also evaluates problem loans for impairment. A loan is considered to be impaired if it is probable that the Company will not be able to collect the payments for principal and interest when due according to the contractual terms of the loan agreement. Impaired loans generally include all non-accrual loans and Troubled Debt Restructurings (TDRs).

Impaired loans at September 30, 2014 and December 31, 2013 are set forth in the following tables (in thousands):

 

		September 30, 2014
		Unpaid Contractual Principal Balance				Recorded Investment With No Allowance				Recorded Investment With Allowance				Total Recorded Investment				Related Allowance
Commercial and other loans		$	39			$	—			$	39			$	39			$	39
Commercial real estate			849				509				340				849				100
Consumer real estate			499				148				351				499				34
Total		$	1,387			$	657			$	730			$	1,387			$	173

 

		December 31, 2013
		Unpaid Contractual Principal Balance				Recorded Investment With No Allowance				Recorded Investment With Allowance				Total Recorded Investment				Related Allowance
Commercial and other loans		$	36			$	4			$	32			$	36			$	32
Commercial real estate			930				378				552				930				136
Consumer real estate			231				231				—				231				—
Total		$	1,197			$	613			$	584			$	1,197			$	168

Interest income of $586 and $1,763 was recognized on the impaired commercial real estate loan subsequent to its classification as impaired for the three months and nine months ended September 30, 2014. Interest income of $5,308 and $7,211 was recognized on the impaired consumer real estate loan subsequent to its classification as impaired for the three months and nine months ended September 30, 2014. Interest income of $628 and $649 was recognized on one impaired commercial real estate loan subsequent to its classification as impaired for the three and nine months ended September 30, 2013.

The average recorded investment in impaired loans are set forth below in the following table (in thousands):

 

		Average Recorded Investment
		For the three months ended								For the nine months ended
		September 30, 2014				September 30, 2013				September 30, 2014				September 30, 2013
Commercial and other loans		$	22			$	32			$	23			$	31
Commercial real estate			656				1,865				812				2,754
Consumer real estate			531				245				325				247
Total		$	1,209			$	2,142			$	1,160			$	3,032

 

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SEPTEMBER 30, 2014 AND 2013

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NOTE 3 - LOANS AND LEASES (CONTINUED)

 

Loan Modifications

The Company’s loan portfolio also includes certain loans that have been modified in a Troubled Debt Restructuring (TDR), where economic concessions have been granted to borrowers who have experienced or are expected to experience financial difficulties. These concessions typically result from the Company’s loss mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance or other actions. Certain TDRs are classified as nonaccrual at the time of restructure and may only be returned to accrual status after considering the borrower’s sustained repayment performance for a reasonable period, generally six months. TDRs on accrual status may remain in accrual status after they have been restructured as long as they continue to perform in accordance with their modified terms. There were two TDRs in accrual status at September 30, 2014 and one at December 31, 2013.

When the Company modifies a loan, management evaluates any possible impairment based on the present value of expected future cash flows, discounted at the contractual interest rate of the original loan agreement, except when the sole (remaining) source of repayment for the loan is the operation or liquidation of the collateral. In these cases management uses the current fair value of the collateral, less selling costs, instead of discounted cash flows. If management determines that the value of the modified loan is less than the recorded investment in the loan (net of previous charge-offs, deferred loan fees or costs and unamortized premium or discount), impairment is recognized by segment or class of loan, as applicable, through an allowance estimate or a charge-off to the allowance. Segment and class status is determined by the loan’s classification at origination.

The following tables include the recorded investment and number of modifications for newly modified loans, as of the respective dates. The Company reports the recorded investment in the loans prior to a modification and also the recorded investment in the loans after the loans were restructured.

 

		(Expressed in thousands)												(Expressed in thousands)
		For the three months ended												For the nine months ended
		September 30, 2014												September 30, 2014
Troubled Debt Restructurings		Number of Contracts				Pre- Modification Outstanding Recorded Investment				Post Modification Outstanding Recorded Investment				Number of Contracts				Pre- Modification Outstanding Recorded Investment				Post Modification Outstanding Recorded Investment
Commercial and other loans			—			$	—			$	—				—			$	—			$	—
Commercial real estate			—				—				—				—				—				—
Consumer real estate			—				—				—				1				351				351
Total			—			$	—			$	—				1			$	351			$	351
Troubled Debt Restructurings
That subsequently defaulted
Commercial and other loans			—			$	—			$	—				—			$	—			$	—
Commercial real estate			—				—				—				—				—				—
Consumer real estate			1				351				351				1				351				351
Total			1			$	351			$	351				1			$	351			$	351

The concession granted on the TDR that originated in 2014 was an extension of the maturity date. At September 30, 2014 and December 31, 2013, there were funds of $7,884 and $5,711 committed to be advanced to customers whose loans were classified as TDRs.

 

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SEPTEMBER 30, 2014 AND 2013

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NOTE 4 - ALLOWANCE FOR LOAN LOSSES

The following table summarizes the primary segments of the ALL, segregated into the amount for loans individually evaluated for impairment by class of loans for the nine months ended as of September 30, 2014 and September 30, 2013 (in thousands):

 

September 30, 2014		Commercial and other				Commercial Real Estate				Consumer Real Estate				Consumer				Total
Allowance for Loan Losses:
Beginning Balance, January 1, 2014		$	260			$	1,315			$	263			$	27			$	1,865
Charge-offs			(5	)			(36	)			—				(16	)			(57	)
Recoveries			—				—				—				4				4
Provision			(17	)			(15	)			31				1				—
Ending Balance, September 30, 2014		$	238			$	1,264			$	294			$	16			$	1,812
Loans individually evaluated for impairment		$	39			$	100			$	34			$	—			$	173
Loans collectively evaluated for impairment			199				1,164				260				16				1,639
Ending Balance		$	238			$	1,264			$	294			$	16			$	1,812
September 30, 2013		Commercial and other				Commercial Real Estate				Consumer Real Estate				Consumer				Total
Allowance for Loan Losses:
Beginning Balance, January 1, 2013		$	179			$	1,762			$	193			$	47			$	2,181
Charge-offs			—				—				—				(7	)			(7	)
Recoveries			—				84				—				11				95
Provision			120				(312	)			208				(16	)			—
Ending Balance, September 30, 2013		$	299			$	1,534			$	401			$	35			$	2,269
Loans individually evaluated for impairment		$	23			$	186			$	—			$	—			$	209
Loans collectively evaluated for impairment			276				1,348				401				35				2,060
Ending Balance		$	299			$	1,534			$	401			$	35			$	2,269

 

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SEPTEMBER 30, 2014 AND 2013

(Unaudited)

 

NOTE 4 - ALLOWANCE FOR LOAN LOSSES (CONTINUED)

 

The following table summarizes the primary segments of the ALL for the three months ended as of September 30, 2014 and September 30, 2013 (in thousands):

 

September 30, 2014		Commercial and other				Commercial Real Estate				Consumer Real Estate				Consumer				Total
Allowance for Loan Losses:
Beginning Balance, July 1, 2014		$	240			$	1,270			$	330			$	24			$	1,864
Charge-offs			(5	)			(36	)			—				(12	)			(53	)
Recoveries			—				—				—				1				1
Provision			3				30				(36	)			3				—
Ending Balance, September 30, 2014		$	238			$	1,264			$	294			$	16			$	1,812
September 30, 2013		Commercial and other				Commercial Real Estate				Consumer Real Estate				Consumer				Total
Allowance for Loan Losses:
Beginning Balance, July 1, 2013		$	179			$	1,762			$	193			$	51			$	2,185
Charge-offs			—				—				—				(2	)			(2	)
Recoveries			—				84				—				2				86
Provision			120				(312	)			208				(16	)			—
Ending Balance, September 30, 2013		$	299			$	1,534			$	401			$	35			$	2,269

The following table presents loans individually and collectively evaluated for impairment by class of loans as of September 30, 2014 and December 31, 2013 (in thousands):

 

September 30, 2014		Commercial and other				Commercial Real Estate				Consumer Real Estate				Consumer				Unearned Discounts				Total
Loans individually evaluated		$	39			$	849			$	499			$	—			$	—			$	1,387
Loans collectively evaluated			16,096				44,416				31,564				3,064				(143	)			94,997
Ending Balance		$	16,135			$	45,265			$	32,063			$	3,064			$	(143	)		$	96,384
December 31, 2013
Loans individually evaluated		$	36			$	930			$	231			$	—			$	—			$	1,197
Loans collectively evaluated			16,689				43,177				29,016				3,456				(133	)			92,205
Ending Balance		$	16,725			$	44,107			$	29,247			$	3,456			$	(133	)		$	93,402

 

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SEPTEMBER 30, 2014 AND 2013

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NOTE 5 - PREMISES AND EQUIPMENT

Premises and equipment are stated at cost, less accumulated depreciation, as follows (in thousands):

 

		September 30, 2014				December 31, 2013				Estimated Useful Life Years
Land		$	1,984			$	1,984
Land improvements			411				404				5 - 20
Leasehold improvements			1,087				1,083				5 - 20
Buildings			6,702				5,364				5 - 50
Furniture, fixtures & equipment			4,185				4,756				3 - 30
Total			14,369				13,591
Less accumulated depreciation			6,187				6,590
Premises and equipment, net		$	8,182			$	7,001

Charges to operations for depreciation approximated $146,794 and $137,366 for the three months ended September 30, 2014 and 2013, respectively. Depreciation expenses were $450,878 and $416,233 for the nine months ended September 30, 2014 and 2013, respectively.

The Buildings, Furniture, fixtures, and equipment, and Land improvements line items include construction-in-progress for the renovations to the Warwood branch of $1,518,000, $107,000, and $20,000, respectively, as of September 30, 2014 and $172,000, $52,000, and $11,000 as of December 31, 2013.

NOTE 6 - DEPOSITS

The composition of the Bank’s deposits at September 30, 2014 and December 31, 2013 follows (in thousands):

 

		September 30, 2014
		Demand
		Noninterest Bearing				Interest Bearing				Savings				Time
Individuals, partnerships and corporations (includes certified and official checks)		$	40,476			$	45,044			$	108,466			$	61,245
States and political subdivisions			349				9,510				4,589				2,478
Commercial banks and other depository institutions			181				—				31				481
Total		$	41,006			$	54,554			$	113,086			$	64,204
		December 31, 2013
		Demand
		Noninterest Bearing				Interest Bearing				Savings				Time
Individuals, partnerships and corporations (includes certified and official checks)		$	55,234			$	49,356			$	104,077			$	64,128
States and political subdivisions			601				5,456				3,963				2,478
Commercial banks and other depository institutions			72				—				31				481
Total		$	55,907			$	54,812			$	108,071			$	67,087

A maturity distribution of time certificates of deposit at September 30, 2014 and December 31, 2013, follows:

 

(dollars in thousands)		Maturities of Time Deposits
		September 30, 2014				December 31, 2013
Due in 2014		$	10,459			$	37,018
Due in 2015			28,882				12,928
Due in 2016			12,468				7,856
Due in 2017			6,086				5,590
Due in 2018			4,422				3,579
Due in 2019 and thereafter			1,887				116
Total		$	64,204			$	67,087

 

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SEPTEMBER 30, 2014 AND 2013

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NOTE 6 - DEPOSITS - (CONTINUED)

 

Time deposits include certificates of deposit issued in denominations of $100,000 or more which amounted to $21,612,000 and $22,249,000 at September 30, 2014 and December 31, 2013, respectively. Interest expense on certificates of deposit of $100,000 or more was $70,124 and $70,688 for the three months ended September 30, 2014 and 2013, respectively. Interest expense on certificates of deposit of $100,000 or more was $203,487 and $226,279 for the nine months ended September 30, 2014 and 2013, respectively.

The following table presents time deposits of $100,000 or more issued by domestic offices by time remaining until maturity of 3 months or less; over 3 through 6 months; over 6 through 12 months; and over 12 months.

 

		Maturities of Time Deposits in Excess of $100,000
(dollars in thousands)		September 30, 2014				December 31, 2013
Three Months or Less		$	3,380			$	5,700
Over Three and Less than Six Months			5,002				3,040
Over Six and Less than Twelve Months			4,400				4,011
Over Twelve Months			8,830				9,498
Total		$	21,612			$	22,249

NOTE 7 - FEDERAL HOME LOAN BANK BORROWINGS

The subsidiary Bank is a member of the Federal Home Loan Bank of Pittsburgh (“FHLB”). The FHLB borrowings are secured by a blanket lien by the FHLB on certain residential real estate loans or securities with a market value at least equal to the outstanding balances. The remaining maximum borrowing capacity with the FHLB at September 30, 2014 was approximately $33.4 million subject to the purchase of additional FHLB stock. The subsidiary bank had FHLB borrowings of $3,444,557 and $3,515,580 at September 30, 2014 and December 31, 2013, respectively. At September 30, 2014 the subsidiary bank had three fixed rate amortizing advances which totaled $3,444,557 with interest rates ranging from 4.65% to 4.89%. Two of these advances totaling $1,938,128 at September 30, 2014 will mature in 2018 and one advance totaling $1,506,429 at September 30, 2014 will mature in 2023. The collateral securing these borrowings totaled $3,585,574 at September 30, 2014.

The bank also has a line of credit agreement with the Federal Home Loan Bank which matures on May 1, 2015. The maximum credit available is $19.8 million under the agreement. There were no borrowings outstanding under this agreement at September 30, 2014 and December 31, 2013, respectively.

Contractual maturities of FHLB borrowings as of September 30, 2014 were as follows (in thousands):

 

Due in 2014		$	24
Due in 2015			100
Due in 2016			105
Due in 2017			110
Due in 2018			1,760
Due in 2019 and thereafter			1,346
Total		$	3,445

 

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SEPTEMBER 30, 2014 AND 2013

(Unaudited)

 

NOTE 8 - ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The activity in accumulated other comprehensive income (loss) for the three and nine months ended September 30, 2014 and 2013 is as follows:

 

(dollars in thousands)		Accumulated Other Comprehensive Income (Loss) (1) Unrealized Gains (Losses) on Securities Available for Sale
		Three months ended September 30,								Nine months ended September 30,
		2014				2013				2014				2013
Beginning Balance		$	282			$	(1,116	)		$	(2,718	)		$	3,129
Other comprehensive income (loss) before reclassifications			(107	)			49				3,024				(4,195	)
Amounts reclassified from accumulated other comprehensive income			(380	)			(1	)			(511	)			(2	)
Period Change			(487	)			48				2,513				(4,197	)
Ending Balance		$	(205	)		$	(1,068	)		$	(205	)		$	(1,068	)

 

(1)	All amounts are net of tax. Related income tax expense or benefit is calculated using a combined Federal and State income tax rate approximating 39.5%.

 

		Amount Reclassified from Accumulated Other Comprehensive Income (Loss)
Details about Accumulated Other Comprehensive Income (Loss) Components		For the Three months ended September 30,								Affected Line Item in the Statement of Income
(unaudited in thousands)		2014				2013
Securities available for sale (1):
Net securities gains reclassified into earnings		$	(609	)		$	(1	)		Net securities gains
Related income tax expense			229				—			Provision for income taxes
Net effect on accumulated other comprehensive income (loss) for the period		$	(380	)		$	(1	)		Net of tax
Total reclassifications for the period		$	(380	)		$	(1	)		Net of tax
		Amount Reclassified from Accumulated Other Comprehensive Income (Loss)
Details about Accumulated Other Comprehensive Income (Loss) Components		For the Nine months ended September 30,								Affected Line Item in the Statement of Income
(unaudited in thousands)		2014				2013
Securities available for sale (1):
Net securities gains reclassified into earnings		$	(868	)		$	(3	)		Net securities gains
Other-than-temporary losses classified into earnings			49				—			Other-than-temporary losses on investments
Related income tax expense			308				1			Provision for income taxes
Net effect on accumulated other comprehensive income (loss) for the period		$	(511	)		$	(2	)		Net of tax
Total reclassifications for the period		$	(511	)		$	(2	)		Net of tax

 

(1)	For additional detail related to unrealized gains on securities and related amounts reclassified from accumulated other comprehensive income (loss) see Note 2 “Investment Securities.”

 

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First West Virginia Bancorp, Inc. and Subsidiary

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2014 AND 2013

(Unaudited)

 

NOTE 9 - REGULATORY MATTERS

The Company and its subsidiary bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and Bank must meet specific capital guidelines that involve quantitative measures of the Company’s and bank’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company’s and bank’s capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk, weighting, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company and bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to adjusted total assets (as defined).

As of September 30, 2014, the most recent notifications from the Office of the Comptroller of the Currency categorized the bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes has changed the capital category. The capital ratios of the Company and its subsidiary bank, along with the regulatory framework for adequately capitalized and well capitalized institutions are depicted as set forth in the following table:

 

(Amounts Expressed in Thousands)		Actual								For Capital Adequacy Purposes								To be Well Capitalized  Under Prompt Corrective Action Provisions
		Amount				Ratio				Amount				Ratio				Amount				Ratio
First West Virginia Bancorp, Inc.
As of September 30, 2014
Total Capital (to Risk Weighted Assets)		$	34,425				21.91	%		$	12,567				8.0	%		$	15,709				10.0	%
Tier I Capital (to Risk Weighted Assets)			32,613				20.76	%			6,283				4.0	%			9,425				6.0	%
Tier I Capital (to Adjusted Total Assets)			32,613				9.77	%			13,347				4.0	%			16,684				5.0	%
As of December 31, 2013
Total Capital (to Risk Weighted Assets)		$	33,748				21.43	%		$	12,600				8.0	%		$	15,750				10.0	%
Tier I Capital (to Risk Weighted Assets)			31,883				20.24	%			6,300				4.0	%			9,450				6.0	%
Tier I Capital (to Adjusted Total Assets)			31,883				9.32	%			13,686				4.0	%			17,108				5.0	%
Progressive Bank, N.A.
As of September 30, 2014
Total Capital (to Risk Weighted Assets)		$	34,270				21.85	%		$	12,545				8.0	%		$	15,682				10.0	%
Tier I Capital (to Risk Weighted Assets)			32,458				20.70	%			6,273				4.0	%			9,409				6.0	%
Tier I Capital (to Adjusted Total Assets)			32,458				9.73	%			13,337				4.0	%			16,672				5.0	%
As of December 31, 2013
Total Capital (to Risk Weighted Assets)		$	33,577				21.35	%		$	12,580				8.0	%		$	15,725				10.0	%
Tier I Capital (to Risk Weighted Assets)			31,712				20.17	%			6,290				4.0	%			9,435				6.0	%
Tier I Capital (to Adjusted Total Assets)			31,712				9.28	%			13,676				4.0	%			17,095				5.0	%

NOTE 10 - FAIR VALUE MEASUREMENTS

The following disclosures show the hierarchal disclosure framework associated with the level of pricing observations utilized in measuring assets and liabilities at fair value. The three broad levels defined by U.S. generally accepted accounting principles are as follows:

 

Ÿ		Level I:		Quoted prices are available in active markets for identical assets or liabilities as of the reported date.
Ÿ		Level II:		Pricing inputs are other than the quoted prices in active markets, which are either directly or indirectly observable as of the reported date. The nature of these assets and liabilities includes items for which quoted prices are available but traded less frequently and items that are fair-valued using other financial instruments, the parameters of which can be directly observed.
Ÿ		Level III:		Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable. This hierarchy requires the use of observable market data when available.

 

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First West Virginia Bancorp, Inc. and Subsidiary

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2014 AND 2013

(Unaudited)

 

NOTE 10 - FAIR VALUE MEASUREMENTS - (CONTINUED)

 

Impaired loans that are collateral dependent are written down to fair value through the establishment of specific reserves. Techniques used to value the collateral that secure the impaired loans include observable inputs employed by certified appraisers or an internal evaluator for similar assets classified as Level III inputs adjusted for qualitative factors and estimated liquidation expenses.

The following table presents the assets reported on the balance sheet at their fair value as of September 30, 2014 and December 31, 2013, by level within the fair value hierarchy. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

 

(dollars in thousands)		September 30, 2014
		Level I				Level II				Level III				Total
Assets measured on a recurring basis:
Securities available for sale:
U.S. Government corporations and agencies		$	—			$	45,507			$	—			$	45,507
Obligations of states and political subdivisions			—				42,100				—				42,100
Mortgage-backed securities			—				109,013				—				109,013
Equity securities			202				—				—				202
Total securities available for sale:		$	202			$	196,620			$	—			$	196,822
Assets measured on a nonrecurring basis:
Impaired loans		$	—			$	—			$	517			$	517

 

(dollars in thousands)		December 31, 2013
		Level I				Level II				Level III				Total
Assets measured on a recurring basis:
Securities available for sale:
U.S. Government corporations and agencies		$	—			$	48,446			$	—			$	48,446
Obligations of states and political subdivisions			—				60,414				—				60,414
Mortgage-backed securities			—				90,900				—				90,900
Equity securities			195				—				—				195
Total securities available for sale:		$	195			$	199,760			$	—			$	199,955
Assets measured on a nonrecurring basis:
Impaired loans		$	—			$	—			$	372			$	372
Mortgage servicing rights		$	—			$	—			$	1			$	1

 

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First West Virginia Bancorp, Inc. and Subsidiary

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2014 AND 2013

(Unaudited)

 

NOTE 11 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

Securities Available-for-sale

Where quoted market prices are available in an active market, securities are classified within Level I of the valuation hierarchy. If quoted market prices are not available, then fair values are estimated by using quoted prices of securities with similar characteristics or independent asset pricing services and pricing models, the inputs of which are market-based or independently sourced market parameters. Such securities are classified in Level II of the valuation hierarchy.

The following table presents additional quantitative information about assets measured at fair value on a nonrecurring basis and for which the Level III inputs were used in determining fair value.

 

(dollars in thousands)		Quantitative Information about Level III Fair Value Measurements
September 30, 2014		Fair Value Estimate				Valuation Techniques		Unobservable Input		Range (Weighted Average)
Impaired Loans		$	517			Appraisal of collateral (1)		Appraisal adjustments (2)		-30.0% (-30.0%)
								Liquidation expenses (2)		9.0% (9.0%)
(dollars in thousands)		Quantitative Information about Level III Fair Value Measurements
December 31, 2013		Fair Value Estimate				Valuation Techniques		Unobservable Input		Range (Weighted Average)
Impaired Loans		$	372			Appraisal of collateral (1)		Appraisal adjustments (2)		0%
								Liquidation expenses (2)		15.8% to 23.1% (20.5%)
Mortgage Servicing Rights		$	1			Discounted Cash Flow		Prepayment rate (3)		7.8% to 17.2% (10.5%)
								Discount rate		9.5%

 

(1)	The fair value is determined through independent appraisals by certified appraisers or internal evaluators of the underlying collateral.

(2)

Appraisals and evaluations may be adjusted by management for qualitative factors and estimated liquidation expenses. The range and weighted average of liquidation expenses are expressed as a percent of discounted collateral value and other appraisal adjustments are presented as a percentage of the appraised amounts.

(3)	Conditional prepayment rates reflect future long-run prepayment estimates by bond dealers for the nation as a whole as well as the Company’s actual prepayment history. Prepayment rates are highly sensitive to market interest rates.

Collateral-dependent Impaired Loans

The estimated fair value of collateral-dependent impaired loans is based on the appraised fair value of the collateral, less estimated cost to sell. Collateral-dependent impaired loans are classified within Level III of the fair value hierarchy.

The Company considers the appraisal or evaluation as the starting point for determining fair value and then considers other factors and events in the environment that may affect the fair value. The appraised values are reduced by discounts to consider lack of marketability and estimated cost to sell if repayment or satisfaction of the loan is dependent on the sale of the collateral.

 

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First West Virginia Bancorp, Inc. and Subsidiary

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2014 AND 2013

(Unaudited)

 

NOTE 11 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS - (CONTINUED)

 

Mortgage Servicing Rights

Mortgage servicing rights do not trade in an active, open market with readily observable prices. Accordingly, fair value is estimated using discounted cash flow models having significant inputs of discount rate and prepayment speed. Due to the nature of the valuation inputs, mortgage servicing rights are classified within Level III of the hierarchy. Mortgage servicing rights are tested for impairment on an annual basis.

The reported fair values of financial instruments are based on a variety of factors. Where possible, fair values represent quoted market prices for identical or comparable instruments. In other cases, fair values have been estimated based on assumptions concerning the amount and timing of estimated future cash flows and assumed discount rates reflecting varying degrees of risk. Intangible values assigned to customer relationships are not reflected in the reported fair values. Accordingly, the fair values may not represent actual values of the financial instruments that could have been realized as of period end or that will be realized in the future.

The following methods and assumptions were used by the Company in estimating the fair value disclosures for financial instruments:

Cash and Cash Equivalents: The carrying amount for cash and cash equivalents is a reasonable estimate of fair value.

Investment Securities: Fair values for investment securities are based on quoted market prices, where available. If quoted market prices are not available, then fair values are estimated by using quoted prices of securities with similar characteristics or independent asset pricing services and pricing models, the inputs of which are market-based or independently sourced market parameters.

Loans: The fair value for net loans is estimated by discounting future cash flows using current market inputs at which loans with similar terms and qualities would be made to borrowers of similar credit quality.

Accrued Interest Receivable: The carrying amount of accrued interest receivable approximates its fair value.

Deposits: Noninterest bearing and interest bearing demand deposits and savings deposits are valued based on the discounted value of cash flows after estimating the weighted average remaining term and adding estimated wholesale borrowing costs to the rate. The fair values for time deposits are based on discounted value of cash flows.

Federal Funds Purchased and Repurchase Agreements: The carrying amount for federal funds purchased and repurchase agreements are considered to be a reasonable estimate of fair value.

Federal Home Loan Bank Borrowings: The discounted cash flow method is used to estimate the fair value of Federal Home Loan Bank borrowings.

Accrued Interest Payable: The carrying amount of accrued interest payable approximates its fair value.

Off-Balance-Sheet Instruments: The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. The amount of fees currently charged on commitments is determined to be insignificant and, therefore, the carrying value and fair value of off-balance-sheet instruments are not shown.

 

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First West Virginia Bancorp, Inc. and Subsidiary

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2014 AND 2013

(Unaudited)

 

NOTE 11 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS - (CONTINUED)

 

The estimates of fair values of financial instruments are summarized as follows at September 30, 2014 and December 31, 2013:

 

		September 30, 2014
		Carrying				Estimated Fair Value
(Amounts Expressed in Thousands)		Amount				Level I				Level II				Level III				Total
Financial assets:
Cash and cash equivalents		$	22,777			$	22,777			$	—			$	—			$	22,777
Investment securities			196,822				202				196,620				—				196,822
Loans			94,572				—				—				95,499				95,499
Accrued interest receivable			1,198				1,198				—				—				1,198
Financial liabilities:
Deposits			272,850				197,521				64,147				—				261,668
Federal funds purchased and repurchase agreements			22,076				22,076				—				—				22,076
Federal Home Loan Bank borrowings			3,445				—				3,738				—				3,738
Accrued interest payable			119				119				—				—				119

 

		December 31, 2013
		Carrying				Estimated Fair Value
(Amounts Expressed in Thousands)		Amount				Level I				Level II				Level III				Total
Financial assets:
Cash and cash equivalents		$	31,875			$	31,875			$	—			$	—			$	31,875
Investment securities			199,955				195				199,760				—				199,955
Loans			91,537				—				—				91,413				91,413
Accrued interest receivable			1,168				1,168				—				—				1,168
Financial liabilities:
Deposits			285,877				195,135				67,308				—				262,443
Federal funds purchased and repurchase agreements			20,215				20,215				—				—				20,215
Federal Home Loan Bank borrowings			3,516				—				3,917				—				3,917
Accrued interest payable			134				134				—				—				134

 

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Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations

Table One

SELECTED FINANCIAL DATA (Dollars in thousands, except per share data)

 

		Three Months  Ended September 30,								Nine Months Ended September 30,								Years ended December 31,
		2014				2013				2014				2013				2013				2012				2011
SUMMARY OF OPERATIONS
Total interest income		$	2,425			$	2,351			$	7,215			$	7,011			$	9,414			$	9,838			$	11,207
Total interest expense			365				379				1,086				1,142				1,524				1,789				2,229
Net interest income			2,060				1,972				6,129				5,869				7,890				8,049				8,978
Provision (credit) for loan losses			—				—				—				—				(400	)			(248	)			600
Total other income			865				270				1,578				796				1,440				2,352				2,034
Total other expenses			2,014				1,948				5,949				5,728				7,672				7,604				7,626
Income before income taxes			911				294				1,758				937				2,058				3,045				2,786
Net income			774				391				1,758				1,187				2,241				2,538				2,454
PER SHARE DATA (1)
Net income		$	0.45			$	0.23			$	1.02			$	0.69			$	1.30			$	1.48			$	1.43
Cash dividends declared			0.20				0.19				0.60				0.57				0.76				0.73				0.73
Book value per share			19.80				18.45				19.80				18.45				17.91				20.77				20.09
AVERAGE BALANCE SHEET SUMMARY
Total loans, net		$	95,342			$	97,410			$	92,720			$	98,514			$	97,374			$	104,566			$	115,415
Investment securities			199,438				176,964				200,910				173,807				177,809				154,755				136,409
Deposits - interest bearing			231,891				218,769				229,931				215,587				218,229				208,308				204,616
Stockholders’ equity			33,866				32,613				33,614				32,473				32,597				31,608				30,498
Total assets			335,321				318,699				335,534				306,861				316,172				293,601				283,734
SELECTED RATIOS
Return on average assets			0.92	%			0.49	%			0.70	%			0.52	%			0.71	%			0.86	%			0.86	%
Return on average equity			9.07	%			4.76	%			6.99	%			4.89	%			6.87	%			8.03	%			8.05	%
Average equity to average assets			10.10	%			10.23	%			10.02	%			10.58	%			10.31	%			10.77	%			10.75	%
Dividend payout ratio (1)			44.44	%			82.61	%			58.82	%			82.61	%			58.46	%			49.32	%			51.05	%
Loan to Deposit ratio			35.32	%			32.44	%			35.32	%			32.44	%			32.67	%			40.33	%			45.75	%
		September 30,								December 31,
		2014				2013				2013				2012				2011
BALANCE SHEET
Investments		$	196,822			$	181,348			$	199,955			$	178,208			$	150,961
Loans			96,384				95,446				93,402				99,387				109,428
Allowance for loan losses			(1,812	)			(2,269	)			(1,865	)			(2,181	)			(2,504	)
Other assets			41,774				77,867				50,653				31,133				35,373
Total Assets		$	333,168			$	352,392			$	342,145			$	306,547			$	293,258
Deposits		$	272,850			$	294,231			$	285,877			$	246,462			$	239,177
Federal funds purchased and repurchase agreements			22,076				21,896				20,215				18,767				14,013
FHLB borrowings			3,445				3,539				3,516				3,606				3,693
Other liabilities			767				1,013				1,747				2,009				1,848
Stockholders’ equity			34,030				31,713				30,790				35,703				34,527
Total Liabilities and Stockholders’ equity		$	333,168			$	352,392			$	342,145			$	306,547			$	293,258

 

(1)	Adjusted for the 4 percent common stock dividend to stockholders of record as of December 19, 2012.

 

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Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion and analysis provides further detail to the financial condition and results of operations of the Company. The section should be read in conjunction with the notes and financial statements presented elsewhere in this report.

The Company’s critical accounting policies involving the significant judgments and assumptions used in the preparation of the Consolidated Financial Statements as of September 30, 2014 have remained unchanged from the disclosures presented in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 under the section “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Forward-Looking Information: Certain information contained in this report, which are not historical facts, may be forward-looking statements that involve risks and uncertainties. These statements are subject to important factors that could cause actual results to differ materially from those contemplated by such statements, including without limitation, the effect of changing economic conditions, changes in interest rates, changes in lending activities, changes in state and federal regulations, and other external factors which may materially impact the Company’s operational and financial performance. Investors are cautioned that forward-looking statements, which are not historical fact, involve risks and uncertainties that could cause actual results to differ materially from those contemplated by such statements, including without limitation, the effect of changing regional and national economic conditions; changes in interest rates, spreads on earning assets and interest-bearing liabilities, and associated interest rate sensitivity; sources of liquidity available to the parent company and its related subsidiary operations; potential future credit losses and the credit risk of commercial, real estate, and consumer loan customers and their borrowing activities; actions of the Federal Reserve Board, Office of the Comptroller of the Currency, Federal Deposit Insurance Corporation, the Securities and Exchange Commission, and other regulatory bodies; potential legislative and federal and state regulatory actions and reform; competitive conditions in the financial services industry; rapidly changing technology affecting financial services, and/or other external developments materially impacting the Company’s operational and financial performance. The Company does not assume any duty to update forward-looking statements.

Critical Accounting Policies: The Company’s accounting policies are integral to understanding the results reported. The accounting policies are described in detail in Note 1 of the Consolidated Financial Statements. Our most complex accounting policies require management’s judgment to ascertain the valuation of assets, liabilities, commitments and contingencies. Detailed policies and control procedures have been established and are intended to ensure valuation methods are well controlled and applied consistently from period to period. In addition, the policies and procedures are intended to ensure that the process for changing methodologies occurs in an appropriate manner. The following is a brief description of our current accounting policies involving significant management valuation judgments.

Other-Than-Temporary Impairment of Investment Securities: Investment securities are evaluated periodically to determine whether a decline in their value is other-than-temporary. Management utilizes criteria such as the magnitude and duration of the decline, in addition to the reasons underlying the decline, to determine whether the loss in value is other-than-temporary. The term “other-than-temporary” is not intended to indicate that the decline is permanent. It indicates that the prospects for a near term recovery of value are not necessarily favorable, or that there is a lack of evidence to support fair values equal to, or greater than, the carrying value of the investment. Once a decline in value is determined to be other-than-temporary, the value of the security is reduced and a corresponding charge to earnings is recognized.

Allowance for Loan Losses: Arriving at an appropriate level of allowance for loan losses involves a high degree of judgment. The Company’s allowance for loan losses provides for probable losses based upon evaluations of known, and inherent risks in the loan portfolio. Management uses historical information to assess the adequacy of the allowance for loan losses as well as the prevailing business environment; as it is affected by changing economic conditions and various external factors, which may impact the portfolio in ways currently unforeseen. The allowance is increased by provisions for loan losses and by recoveries of loans previously charged-off and reduced by loans charged-off. For a full discussion of the Company’s methodology of assessing the adequacy of the reserve for loan losses, refer to Note 1 of the Consolidated Financial Statements.

Goodwill: As discussed in Note 1 of the notes to the Consolidated Financial Statements, the Company must assess goodwill each year for impairment. This assessment involves estimating cash flows for future periods. If the future cash flows were less than the recorded goodwill balance, we would be required to take a charge against earnings to write down the assets to the lower value.

Deferred Tax Assets: The Company uses an estimate of future earnings to support its position that the benefit of the deferred tax assets will be realized. If future income should prove non-existent or less than the amount of the deferred tax assets within the tax years to which they may be applied, the asset may not be realized and our net income will be reduced. The deferred tax assets are described further in Note 1 of the Consolidated Financial Statements.

OVERVIEW

The Company reported net income of $1,757,770 or $1.02 per share for the nine months ended September 30, 2014 compared to $1,186,723 or $.69 per share for the same period during 2013. The increase in net income for the nine months ended September 30, 2014 as compared to the same period in 2013 of $571,047 or 48.1% was primarily the result of the increase in net interest income and noninterest income, offset in part by the increase in noninterest expense and the decrease in the income tax benefit. Net interest income increased $259,865 or 4.4%, primarily due to the increase in the interest earned on investment securities and the decrease in the interest expense paid on interest bearing liabilities, offset in part by the decrease in the interest and fees earned on loans. Noninterest income increased $781,939 or 98.2% primarily due to the increase in the net gains on sales of investment securities offset in part by the other-than-temporary losses on investments combined with the decrease in service charges and fees earned on deposit accounts and the decrease in other operating income. Noninterest expenses increased $220,077 or 3.8% during the nine month period ended September 30, 2014 as compared to the same period in 2013 primarily due to increases in salary and employee benefits expenses, occupancy expenses, and other operating expenses. The ROA was .70% for the nine months ended September 30, 2014 as compared to .52% for the same period of the prior year. For the nine months ended September 30, 2014 compared to September 30, 2013, the ROE was 6.99% and 4.89%, respectively.

 

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Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

For the third quarter of 2014, net income was $773,825 or $.45 per share as compared to $390,971 or $.23 per share for the same period in 2013. The increase in net income for the three months ended September 30, 2014 as compared to the same period in 2013 of $382,854 or 97.9% was primarily the result of the increase in net interest income and noninterest income, offset in part by the increase in noninterest expense and the decrease in the income tax benefit. Net interest income increased $87,309 or 4.4% primarily due to the increase in the interest earned on investment securities and the decrease in the interest expense paid on interest bearing liabilities, offset in part by the decrease in the interest and fees earned on loans. Noninterest income increased $595,459 for the three months ended September 30, 2014 as compared to the same period of the prior year primarily due to the increase in the net gains on sales of investment securities, offset slightly by the decrease in service charges and fees earned on deposit accounts and other operating income. Noninterest expense increased $65,876 or 3.4% during the three month period ended September 30, 2014 as compared to the same period in 2013 primarily due to the increases in salary and employee benefits expenses and other operating expenses, offset in part by the decrease in occupancy expenses.

The sections that follow discuss in more detail the information contained in the summary of Selected Financial Data of the Company.

EARNINGS ANALYSIS - For the nine months ended September 30, 2014

Net Interest Income

Net interest income, which is the primary source of earnings for the Company, is the difference between interest earned on loans and investments and interest paid on deposits and other liabilities. Changes in the volume and mix of earning assets and interest bearing liabilities combined with changes in market rates of interest greatly effect net interest income. Table Two presents the average balance sheets and an interest rate analysis for the nine months ended September 30, 2014 and 2013.

For the nine months ended September 30, 2014, net interest income was $6,129,132, an increase of $259,865 or 4.4%, from the same period in 2013. Net interest income increased primarily due to the increase in the average volume of earning assets offset in part by the decrease in the taxable equivalent net yield on earning assets. The average earnings assets increased approximately $26.9 million or 9.3% from September 30, 2013 to 2014. The taxable equivalent net yield on earning assets decreased from 3.25% at September 30, 2013 to 3.12% at September 30, 2014.

Interest income on investment securities during the first nine months of 2014 increased $523,177 or 17.1% as compared to the same period of the prior year. The increase in interest income on investment securities during the first nine months of 2014 was primarily due to the rise in the average volume offset in part by the decrease in the taxable equivalent yield. The average volume of investment securities has increased approximately $23.1 million or 13.0% since December 31, 2013. The taxable equivalent yield on investment securities decreased 5 basis points in 2014, from 3.07% at December 31, 2013 to 3.02% at September 30, 2014 and also decreased 5 basis points from September 30, 2013.

Interest and fees on loans decreased $355,859 or 9.1%, from the same period in 2013 primarily due to the decrease in the average loan volume combined with the decline in the average yield on loans. The average loan volume decreased approximately $4.7 million or 4.8% since December 31, 2013. The taxable equivalent yield on loans fell 12 basis points in 2014 from 5.62% at December 31, 2013 to 5.50% at September 30, 2014 and fell 10 basis points from September 30, 2013.

During the nine months ended September 30, 2014, interest expense declined $55,804 or 4.9% as compared to the same period in 2013. The decrease in the average yield paid on interest bearing liabilities, partially offset by an increase in the average volume of interest bearing liabilities primarily contributed to the decrease in interest expense during the nine month period ended September 30, 2014. The average yield paid on interest bearing liabilities fell 6 basis points from .63% at December 31, 2013 to .57% at September 30, 2014 and decreased 7 basis points since September 30, 2013. The average volume of interest bearing liabilities increased approximately $12.9 million or 5.3% since December 31, 2013.

Noninterest Income

Noninterest income increased $781,939 or 98.2% for the nine months ended September 30, 2014 as compared to same period of the prior year. The increase in noninterest income was primarily due to the increase in the net gains on sales of investment securities offset in part by the other-than-temporary losses on investments combined with the decrease in service charges and fees earned on deposit accounts and the decrease in other operating income.

The net gains on investment securities increased $866,044 for the nine month period ended September 30, 2014 as compared to the same period in 2013. The Company’s subsidiary bank sold approximately $21.7 million of nontaxable state and political subdivision securities during the second and third quarters of 2014 in order to reinvest in mortgage backed investment securities and taxable securities of state and political subdivisions in accordance with the Company’s deferred tax asset plan. The Company accounted for securities gains of $905,514 and securities losses of $36,546 during the nine month period ended September 30, 2014 and securities gains of $2,942 and securities losses of $18 during the nine month period ended September 30, 2013.

Service charges and other fees represent charges that are earned from assessments made on checking and savings accounts. Service charges and other fee income fell $25,646 in the first nine months of 2014 as compared to the same period in 2013, down 8.4% from 2013.

Other operating income represents fees from safe deposit box rentals, sales of checkbooks, sales of cashiers’ checks and money orders, utility collections, ATM charges and card fees, credit life commissions, credit card fees and commissions and various other charges and fees related to normal customer banking relationships. For the nine month period ended September 30, 2014, other operating income decreased $9,141 or 1.9% compared to the same period in 2013. The decrease in other operating income was primarily due to decreases in FHLB fee income, checkbook income, and other miscellaneous income, offset in part by an increase in ATM fees.

 

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Table Two Average Balance Sheets and Interest Rate Analysis (dollars in thousands)

The following table presents an average balance sheet, interest earned on interest bearing assets, interest paid on interest bearing liabilities, average interest rates and interest differentials for the nine months ended September 30, 2014 and 2013. Average balance sheet information for the periods ended September 30, 2014 and 2013 was compiled using the daily averages. Loan fees and unearned discounts were included in income for average rate calculation purposes. Average yields on investment securities available for sale have been calculated based on amortized cost. Non-accrual loans were included in the average balance computations; however, no interest was included in income subsequent to the non-accrual status classification.

 

		For the nine months ended September 30, 2014												For the nine months ended September 30, 2013
		Average Volume				Interest				Average Rate				Average Volume				Interest				Average Rate
ASSETS:
Investment securities:
U.S. Treasury and U. S. Government agencies		$	49,313			$	665				1.80	%		$	44,825			$	585				1.74	%
Mortgage backed securities			98,574				1,428				1.94	%			78,182				1,056				1.81	%
States and political subdivisions			52,857				1,478				3.74	%			50,618				1,406				3.71	%
Other securities			166				3				2.42	%			182				4				2.94	%
Total Investment securities:			200,910				3,574				2.38	%			173,807				3,051				2.35	%
Interest bearing deposits			20,037				37				0.25	%			14,481				24				0.22	%
Loans, net of unearned income			92,720				3,565				5.14	%			98,514				3,921				5.32	%
Other earning assets			1,313				39				3.97	%			1,328				15				1.51	%
Total earning assets			314,980				7,215				3.06	%			288,130				7,011				3.25	%
Other assets			22,416												20,933
Allowance for loan losses			(1,862	)											(2,202	)
Total Assets		$	335,534											$	306,861
LIABILITIES
Time deposits		$	65,588			$	516				1.05	%		$	69,576			$	628				1.21	%
Savings deposits			111,073				274				0.33	%			97,958				243				0.33	%
Interest bearing demand deposits			53,270				48				0.12	%			48,053				43				0.12	%
Federal funds purchased and repurchase agreements			20,403				124				0.81	%			18,287				100				0.73	%
FHLB and other long-term borrowings			3,479				124				4.77	%			3,572				128				4.79	%
Total interest bearing liabilities			253,813				1,086				0.57	%			237,446				1,142				0.64	%
Demand deposits			47,603												36,259
Other liabilities			504												683
Total Liabilities			301,920												274,388
STOCKHOLDERS’ EQUITY			33,614												32,473
Total Liabilities and Stockholders’ Equity		$	335,534											$	306,861
Net yield on earning assets						$	6,129				2.60	%						$	5,869				2.72	%

The fully taxable equivalent basis of interest income from obligations of states and political subdivisions has been determined using a combined Federal and State corporate income tax rate of 40% for the nine months ended September 30, 2014 and 2013, respectively. The effect of this adjustment is presented below.

 

Investment securities		$	200,910			$	4,541				3.02	%		$	173,807			$	3,988				3.07	%
Loans			92,720				3,817				5.50	%			98,514				4,129				5.60	%
Total earning assets		$	314,980			$	8,434				3.58	%		$	288,130			$	8,156				3.78	%
Taxable equivalent net yield on earning assets						$	7,348				3.12	%						$	7,014				3.25	%

 

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EARNINGS ANALYSIS - For the nine months ended September 30, 2014 (continued)

 

Noninterest Expense

Noninterest expense increased $220,077 or 3.8% for the nine months ended September 30, 2014 as compared to the same period of the prior year. The increase in noninterest expense was primarily due to the increases in salary and employee benefits expenses, occupancy expenses, and other operating expenses.

Salary and employee benefits expenses increased $88,336 or 3.2% during the nine months ended September 30, 2014 over the same period in 2013. Salary and employee benefits expenses in 2014 compared to 2013 increased primarily as a result of a rise in salary expenses and payroll taxes, offset in part by a slight decrease in employee benefits expenses.

Net occupancy expenses of premises increased $32,202 or 2.7% during the nine months ended September 30, 2014 compared to the same period in 2013. Increases in furniture and fixtures expenses, depreciation expenses, banking house expenses, and insurance expenses, offset in part by the decline in real estate taxes, land lease expense, and utilities contributed to the increase in occupancy expenses in 2014 as compared to 2013.

Other operating expenses for the nine months ended September 30 included the following:

 

		2014				2013				Net Increase (Decrease)				Percent Increase (Decrease)
Directors’ fees		$	105,475			$	71,825			$	33,650				46.9	%
Stationery and supplies			108,048				106,013				2,035				1.9	%
Regulatory assessment and deposit insurance			222,908				205,614				17,294				8.4	%
Advertising			140,030				153,354				(13,324	)			(8.7	)%
Postage and transportation			115,851				132,185				(16,334	)			(12.4	)%
Other taxes			88,466				104,840				(16,374	)			(15.6	)%
Service expense			382,028				338,794				43,234				12.8	%
Other			656,812				607,454				49,358				8.1	%
Total		$	1,819,618			$	1,720,079			$	99,539				5.8	%

Income Taxes

Income tax expense for the nine month period ended September 30, 2014 was $536, increasing $250,680 compared to the income tax benefit for the nine month period ended September 30, 2013. The increase in income tax expense was primarily due to the increase in net gains on sales of securities during the first nine months of 2014 over the same period in 2013. Components of the income tax expense for September 30, 2014 were $50,193 for federal tax benefit and $50,729 for West Virginia corporate net income tax expense. Federal income tax rates remain consistent at 34% for the nine months ended September 30, 2014 and 2013 and for the year ended December 31, 2013. West Virginia corporate net income tax rates were 6.50% in 2014 and 7.00% in 2013.

 

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Table Three Average Balance Sheets and Interest Rate Analysis (dollars in thousands)

The following table presents an average balance sheet, interest earned on interest bearing assets, interest paid on interest bearing liabilities, average interest rates and interest differentials for the three months ended September 30, 2014 and 2013. Average balance sheet information for the periods ended September 30, 2014 and 2013 was compiled using the daily averages. Loan fees and unearned discounts were included in income for average rate calculation purposes. Average yields on investment securities available for sale have been calculated based on amortized cost. Non-accrual loans were included in the average balance computations; however, no interest was included in income subsequent to the non-accrual status classification. Average rates were annualized for the three month periods ended September 30, 2014 and 2013.

 

		For the three months ended												For the three months ended
		September 30, 2014												September 30, 2013
		Average Volume				Interest				Average Rate				Average Volume				Interest				Average Rate
ASSETS:
Investment securities:
U.S. Treasury and other U.S. Government agencies		$	48,160			$	213				1.75	%		$	45,125			$	198				1.74	%
Mortgage backed securities			104,382				507				1.93	%			79,743				363				1.81	%
Obligations of states and political subdivisions			46,730				446				3.79	%			51,921				477				3.64	%
Other securities			166				1				2.39	%			175				1				2.27	%
Total Investment securities:			199,438				1,167				2.32	%			176,964				1,039				2.33	%
Interest bearing deposits			17,428				10				0.23	%			24,267				11				0.18	%
Loans, net of unearned income			95,342				1,234				5.13	%			97,410				1,295				5.27	%
Other earning assets			1,310				14				4.24	%			1,330				6				1.79	%
Total earning assets			313,518				2,425				3.07	%			299,971				2,351				3.11	%
Other assets			23,661												20,967
Allowance for loan losses			(1,858	)											(2,239	)
Total Assets		$	335,321											$	318,699
LIABILITIES
Time deposits		$	64,831			$	166				1.02	%		$	68,982			$	200				1.15	%
Savings deposits			112,637				94				0.33	%			100,495				84				0.33	%
Interest bearing demand deposits			54,423				18				0.13	%			49,292				15				0.12	%
Federal funds purchased and repurchase agreements			21,649				46				0.84	%			19,809				38				0.76	%
FHLB and other long-term borrowings			3,456				41				4.71	%			3,549				42				4.70	%
Total interest bearing liabilities			256,996				365				0.56	%			242,127				379				0.62	%
Demand deposits			43,982												43,470
Other liabilities			477												489
Total Liabilities			301,455												286,086
STOCKHOLDERS’ EQUITY			33,866												32,613
Total Liabilities and Stockholders’ Equity		$	335,321											$	318,699
Net yield on earning assets						$	2,060				2.61	%						$	1,972				2.61	%

The fully taxable equivalent basis of interest income from obligations of states and political subdivisions has been determined using a combined Federal and State corporate income tax rate of 40% for the three months ended September 30, 2014 and 2013, respectively. The effect of this adjustment is presented below.

 

Investment securities		$	199,438			$	1,452				2.89	%		$	176,964			$	1,356				3.04	%
Loans			95,342				1,313				5.46	%			97,410				1,369				5.58	%
Total earning assets		$	313,518			$	2,789				3.53	%		$	299,971			$	2,742				3.63	%
Taxable equivalent net yield on earning assets						$	2,424				3.07	%						$	2,364				3.13	%

 

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EARNINGS ANALYSIS - For the three months ended September 30, 2014

Net Interest Income

For the three months ended September 30, 2014, net interest income was $2,059,650, increasing $87,309 or 4.4%, from the same period in 2013. The increase in net interest income was primarily due to the increase in the interest earned on investment securities combined with the decrease in the interest paid on interest bearing liabilities, offset in part by the decrease in the interest earned on loans. The taxable equivalent net yield on earning assets decreased from 3.13% at September 30, 2013 to 3.07% at September 30, 2014. Table Three presents the average balance sheets and an interest rate analysis for the three months ended September 30, 2014 and 2013.

Interest and fees on loans decreased $61,170 or 4.7% for the three month period ended September 30, 2014 as compared to the same period in 2013 due to the decline in the average volume of loans combined with the decrease in the average yield on loans. The average loan volume decreased approximately $2.0 million or 2.1% since December 31, 2013. The taxable equivalent yield on loans fell 16 basis points, to 5.46% at September 30, 2014 from 5.62% at December 31, 2013.

Interest income on investment securities increased $128,280 or 12.3% during the third quarter of 2014 compared to the same period of the prior year. The increase in interest income on investment securities was primarily due to the rise in the average volume, offset in part by a decline in the yield earned. The investment portfolio average volume increased approximately $21.6 million or 12.2% since December 31, 2013 and $22.5 million or 12.7% since September 30, 2013. The taxable equivalent yield earned on investment securities declined 15 basis points, to 2.89% for the three months ended September 30, 2014 as compared to 3.04% for the same period in 2013.

Interest expense paid on interest bearing liabilities fell $13,440 or 3.6% during the three months ended September 30, 2014 as compared to the same period in 2013. The decrease in interest expense was primarily due to the decline in the average yield paid on interest bearing liabilities, which was offset in part by an increase in the average balances of interest bearing liabilities. The average yield paid on interest bearing liabilities was down 6 basis points, from .62% at September 30, 2013 to .56% at September 30, 2014. The average volume of interest bearing liabilities rose approximately $14.9 million or 6.1%, from September 30, 2013 to September 30, 2014 primarily due to an increase in the balances maintained in savings deposits, interest bearing demand deposits, and repurchase agreements offset in part by the decline in time deposits and Federal Home Loan Bank borrowings.

Noninterest Income

Noninterest income increased $595,459 for the three months ended September 30, 2014 as compared to the same period of the prior year. The increase in noninterest income was primarily due to the increase in the net gains on sales of investment securities, offset in part by the slight decreases in service charges and other fee income and other operating income.

The net gains on investment securities increased $607,881 for the three month period ended September 30, 2014 as compared to the same period in 2013. The Company’s subsidiary bank sold approximately $9.8 million of nontaxable state and political subdivision securities during the third quarter of 2014 in order to reinvest in mortgage backed investment securities in accordance with the Company’s deferred tax asset plan. The Company accounted for securities gains of $608,555 and securities losses of $0 during the three month period ended September 30, 2014 and securities gains of $674 and securities losses of $0 during the three month period ended September 30, 2013.

Service charges and other fee income fell $11,965 during the third quarter of 2014 as compared to the same period in 2013, down 10.7% from 2013.

Noninterest Expense

Noninterest expense increased $65,876 or 3.4% for the three months ended September 30, 2014 as compared to the same period of the prior year. The increase in noninterest expense was primarily due to the increases in salary and employee benefits expenses and other operating expenses, offset in part by the decrease in occupancy expenses.

Salary and employee benefits expenses increased $70,992 or 7.4% during the three months ended September 30, 2014 over the same period in 2013. Salary and employee benefits expense in 2014 compared to 2013 increased primarily as a result of an increase in salary expenses and payroll taxes, offset in part by a slight decrease in employee benefits expenses.

Net occupancy expense of premises decreased $13,836 or 3.4% during the three months ended September 30, 2014 compared to the same period in 2013. The decrease in net occupancy expenses in 2014 as compared to 2013 was primarily due to a decrease in banking house expenses, real estate taxes, and utilities, offset in part by increases in furniture and fixtures expenses, depreciation expenses, and insurance expenses.

 

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EARNINGS ANALYSIS - For the three months ended September 30, 2014 (continued)

 

Noninterest Expense - (continued)

 

Other operating expenses for the three months ended September 30 included the following:

 

		2014				2013				Net Increase (Decrease)				Percent Increase (Decrease)
Directors’ fees		$	40,575			$	24,075			$	16,500				68.5	%
Stationery and supplies			37,530				34,031				3,499				10.3	%
Regulatory assessment and deposit insurance			70,646				70,027				619				0.9	%
Advertising			50,707				54,958				(4,251	)			(7.7	)%
Postage and transportation			39,363				43,383				(4,020	)			(9.3	)%
Other taxes			(1,137	)			14,699				(15,836	)			(107.7	)%
Service expense			125,644				119,515				6,129				5.1	%
Other			218,308				212,228				6,080				2.9	%
Total		$	581,636			$	572,916			$	8,720				1.5	%

Income Taxes

Income tax expense for the three month period ended September 30, 2014 was $137,464, increasing $234,038 compared to the income tax benefit for the three month period ended September 30, 2013. The increase in income tax expense was primarily due to the increase in net gains on sales of securities during the three month period ended September 30, 2014 over the same period in 2013.

Balance Sheet Analysis

Investments

Investment securities decreased approximately $3.1 million or 1.6% from December 31, 2013 to September 30, 2014. The investment portfolio is managed to attempt to achieve an optimum mix of asset quality, liquidity and maximum yield on investment. The investment portfolio consists of U.S. Government agency and corporation securities, obligations of states and political subdivisions, corporate debt securities, mortgage-backed securities and equity securities. Taxable securities comprised 79.6% of total securities at September 30, 2014, as compared to 69.8% at December 31, 2013. Other than the normal risks inherent in purchasing U.S. Government agency and corporation securities, corporate debt securities, mortgage-backed securities and obligations of states and political subdivisions, i.e., interest rate risk, management has no knowledge of other market risk involved in these investments. The Company does not have any high risk hybrid/derivative instruments.

Investment securities that are classified available for sale are available for sale at any time based upon management’s assessment of changes in economic or financial market conditions. These securities are carried at fair value and the unrealized holding gains and losses, net of taxes, are reflected as a separate component of stockholders’ equity until realized. Available for sale securities, at fair value, represented 100% of the investment portfolio at September 30, 2014 and December 31, 2013. The decrease in available for sale securities was primarily due to the sales of nontaxable state and political subdivision securities in accordance with the Company’s deferred tax asset plan as well as maturities, prepayments, and calls, offset in part by purchases of mortgage backed investment securities, securities of state and political subdivisions, and obligations of U.S. Government corporations and agencies combined with an increase in the market value of the securities. The Company did not have any investment securities classified as held to maturity securities at September 30, 2014 and December 31, 2013. As the investment portfolio consists primarily of fixed rate debt securities, changes in the market rates of interest will affect the carrying value of securities available for sale, adjusted upward or downward and represent temporary adjustments in value. The carrying value of securities available for sale was below amortized cost by $328,304 at September 30, 2014 and $4,358,005 at December 31, 2013, respectively.

Loans

Total loans, net of unearned income, increased $2,981,911 or 3.2% from December 31, 2013 to September 30, 2014. The increase in total loans in 2014 was primarily due to increases in consumer real estate loans and commercial real estate loans of $2,816,000 and $1,158,000, respectively, offset in part by decreases in commercial and other loans and consumer loans of $590,000 and $392,000, respectively. The increase in consumer real estate loans was primarily due to an increase in construction loans. The increase in commercial real estate loans during 2014 was primarily due to an increase in non-farm, non-residential loans combined with a slight increase in multifamily residential loans. Commercial and other loans declined during 2014 primarily in non-rated industrial development obligations. The decline in consumer loans was in installment loans and other loans to individuals and credit cards.

Commercial real estate loans which include real estate loans secured by non-farm, non-residential properties and multi-family residential property loans comprised forty-seven percent (47%) of the loan portfolio. Consumer real estate loans which include construction, farmland, real estate residential loans, and home equity loans comprised thirty-three percent (33%) of the loan portfolio. Commercial and other loans which include commercial and industrial loans and non-rated industrial development obligations comprised seventeen percent (17%) of the loan portfolio. Consumer loans which include installment and other loans to individuals and credit cards comprised three percent (3%) of the loan portfolio. The changes in the composition of the loan portfolio from December 31, 2013 to September 30, 2014 were a 2% increase in consumer real estate loans, a 1% decrease in consumer loans and a 1% decrease in commercial and other loans.

 

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Table Four - Maturities and Sensitivities of Loans to Changes in Interest Rates

The following table presents the contractual maturities of loans other than installment loans and residential mortgages as of September 30, 2014 and December 31, 2013:

 

		(Unaudited)												(Unaudited)
(dollars in thousands)		September 30, 2014												December 31, 2013
		In One Year or  Less				After One Year Through Five Years				After Five Years				In One Year or  Less				After One Year Through Five Years				After Five Years
Construction		$	351			$	2,910			$	324			$	351			$	37			$	99
Commercial real estate - nonfarm, nonresidential property			739				6,723				28,962				913				6,788				27,644
Commercial			675				1,744				3,374				594				2,684				2,211
Nonrated industrial development obligations			266				1,427				8,630				564				1,631				9,005
Total		$	2,031			$	12,804			$	41,290			$	2,422			$	11,140			$	38,959

The following table presents an analysis of fixed and variable rate loans as of September 30, 2014 and December 31, 2013 along with the contractual maturities of loans other than installment loans and residential mortgages:

 

		(Unaudited)												(Unaudited)
(dollars in thousands)		September 30, 2014												December 31, 2013
		In One Year or  Less				After One Year Through Five Years				After Five Years				In One Year or  Less				After One Year Through Five Years				After Five Years
Fixed Rates		$	1,291			$	7,865			$	5,873			$	1,526			$	9,213			$	6,815
Variable Rates			740				4,939				35,417				896				1,927				32,144
Total		$	2,031			$	12,804			$	41,290			$	2,422			$	11,140			$	38,959

Loans Held for Sale

The Company has entered into an agreement with the Federal Home Loan Bank of Pittsburgh (“FHLB”) under which the bank may sell conforming one-to-four family residential mortgage loans to the FHLB. The agreement provides for a maximum commitment of $5,000,000. Loans sold to the FHLB are sold with limited recourse or credit risk based upon utilization of the original commitment. The bank also maintains the servicing of these loans, for which it is paid a servicing fee. The total amount of loans sold and outstanding under this agreement was $8,728,398 and $9,489,935 as of September 30, 2014 and December 31, 2013, respectively. The loans which were sold were also subject to a recourse obligation or credit risk in the amount of $325,382 and $342,602 at September 30, 2014 and December 31, 2013, respectively.

Non-performing Loans

Non-performing assets include non-accrual loans on which the collectibility of the full amount of interest is uncertain; loans which have been renegotiated to provide for a reduction or deferral of interest on principal because of a deterioration in the financial position of the borrower; loans past due ninety days or more as to principal or interest; and other real estate owned. A summary of nonperforming assets is presented in the following table. Total non-performing loans were $1,750,000 at September 30, 2014 as compared to $1,314,000 at December 31, 2013. The increase in non-performing loans in 2014 was primarily due to an increase in renegotiated loans.

 

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Non-performing Loans (Continued)

 

Table Five - Risk Elements

Loans which are in the process of collection, but are contractually past due 90 days or more as to interest or principal, renegotiated, non-accrual loans and other real estate are as follows:

 

(dollars in thousands)		September 30,				December 31,
		2014				2013				2012				2011				2010
Past Due 90 Days or More, still accruing:
Commercial and other loans		$	—			$	—			$	—			$	—			$	—
Commercial real estate			—				—				—				—				—
Consumer real estate			—				—				—				—				28
Consumer			—				—				—				—				—
		$	—			$	—			$	—			$	—			$	28
Renegotiated:
Commercial and other loans		$	—			$	—			$	—			$	—			$	—
Commercial real estate			42				44				—				—				—
Consumer real estate			351				—				—				—				—
Consumer			—				—				—				—				—
		$	393			$	44			$	—			$	—			$	—
Non-accrual:
Commercial and other loans		$	39			$	26			$	31			$	39			$	54
Commercial real estate			807				885				3,115				3,533				4,147
Consumer real estate			303				355				388				447				688
Consumer			—				4				17				27				14
		$	1,149			$	1,270			$	3,551			$	4,046			$	4,903
Other Real Estate		$	208			$	—			$	—			$	138			$	8
Total non-performing assets		$	1,750			$	1,314			$	3,551			$	4,184			$	4,939
Total non-performing assets to total loans and other real estate			1.81	%			1.41	%			3.57	%			3.82	%			4.07	%

Loans are placed in non-accrual when the principal or interest is past due 90 days or more, unless the loan is both well secured and in the process of collection. Non-accrual loans were $1,149,000 or 1.2% of total loans outstanding as of September 30, 2014, as compared to $1,270,000 or 1.4% of total loans outstanding as of December 31, 2013. Non-accrual loans decreased in 2014 primarily due to one loan being transferred to other real estate. Management continues to monitor the nonperforming assets to ensure against deterioration in collateral values.

Allowance for Loan Losses

In all lending activities there is an inherent risk that borrowers will be unable to repay their obligations. The Company maintains an allowance for loan losses to absorb probable loan losses. The Company has historically maintained the allowance for loan losses at a level greater than actual charge-offs. Although a subjective evaluation is determined by management, the Company believes it has appropriately assessed the risk of loans in the loan portfolio and has provided for an allowance which is adequate based on that assessment. Because the allowance is an estimate, any change in the economic conditions of the Company’s market area could result in new estimates which could affect the Company’s earnings. Management monitors the quality of the loan portfolio through reviews of past due loans and all significant loans which are considered to be potential problem loans on a monthly basis. The internal loan review function provides for an independent review of commercial, real estate, and installment loans in order to measure the asset quality of the portfolio. Management’s review of the loan portfolio has not indicated any material loans, not disclosed in the accompanying tables and discussions which are known to have possible credit problems that cause management to have serious doubts as to the ability of each borrower to comply with their present loan repayment terms. The allowance for loan losses decreased $53,000 or 2.8%, since December 31, 2013. The allowance for loan losses represented 1.9% and 2.0% of outstanding loans as of September 30, 2014 and at December 31, 2013, respectively. Charge-offs amounted to $57,024 and recoveries were $4,024 for the nine month period ended September 30, 2014. There was no provision made to the allowance for loan losses during the nine months ended September 30, 2014 and 2013.

The additions and deletions to the allowance for loan losses are based on management’s evaluation of characteristics of the loan portfolio, current and anticipated economic conditions, past loan experiences, net loans charged-off, specific problem loans and delinquencies, and other factors. The Company has allocated the allowance for possible loan losses to specific portfolio segments based upon historical net charge-off experience, changes in the level of nonperforming assets, local economic conditions and management’s experience as presented in the following table.

 

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Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Allowance for Loan Losses (Continued)

 

Table Six - Analysis of Allowance for Possible Loan Losses

The following table presents a summary of loans charged off and recoveries of loans previously charged off by type of loan.

 

(dollars in thousands)		September 30,				December 31,
		2014				2013				2012				2011				2010
Allowance for loan losses:
Balance at beginning of period:		$	1,865			$	2,181			$	2,504			$	2,059			$	1,894
Loans Charged-off:
Commercial and other loans			5				—				—				8				14
Commercial real estate			36				—				87				156				—
Consumer real estate			—				—				—				28				—
Consumer			16				12				9				19				51
Total			57				12				96				211				65
Recoveries:
Commercial and other loans			—				—				—				2				1
Commercial real estate			—				84				15				45				—
Consumer real estate			—				—				—				—				—
Consumer			4				12				6				9				9
Total			4				96				21				56				10
Net Charge-offs (recoveries)			53				(84	)			75				155				55
Provision (credit) charged to operations			—				(400	)			(248	)			600				220
Balance at end of period:		$	1,812			$	1,865			$	2,181			$	2,504			$	2,059
Average loans outstanding		$	92,720			$	97,374			$	104,566			$	115,415			$	124,074
Ratio of net charge-offs to average loans outstanding for the period			0.06	%			-0.09	%			0.07	%			0.13	%			0.04	%
Ratio of the allowance for loan losses to loans outstanding for the period			1.88	%			2.00	%			2.19	%			2.29	%			1.70	%

The following table presents an allocation of the allowance for possible loan losses at September 30, 2014 and each of the four year periods ended December 31, 2013. The allocation presented below is based on the historical average of net charge offs per category combined with the change in loan growth and management’s review of the loan portfolio.

 

		September 30,								December 31,
		2014								2013								2012								2011								2010
(dollars in thousands)		Amount				Percent of loans in each category to total loans				Amount				Percent of loans in each category to total loans				Amount				Percent of loans in each category to total loans				Amount				Percent of loans in each category to total loans				Amount				Percent of loans in each category to total loans
Commercial and other loans		$	238				16.7	%		$	260				17.9	%		$	179				15.7	%		$	179				14.6	%		$	212				16.9	%
Commercial real estate			1,264				46.9	%			1,315				47.1	%			1,762				50.4	%			2,082				51.5	%			1,511				46.5	%
Consumer real estate			294				33.2	%			263				31.3	%			193				28.6	%			193				27.4	%			272				28.1	%
Consumer			16				3.2	%			27				3.7	%			47				5.3	%			50				6.5	%			64				8.5	%
Total		$	1,812				100.0	%		$	1,865				100.0	%		$	2,181				100.0	%		$	2,504				100.0	%		$	2,059				100.0	%

 

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Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Other Assets

Other assets decreased approximately $1.1 million during the nine month period ended September 30, 2014 primarily due to a decrease in the deferred tax asset related to available-for-sale securities.

Deposits

A stable core deposit base is the major source of funds for the Company’s subsidiary bank. The deposit mix depends upon many factors including competition from other financial institutions, depositor interest in certain types of deposits, changes in the interest rate and the Company’s need for certain types of deposit growth. Total deposits decreased approximately $13,026,506 during the first nine months of 2014. Since year end the decrease in total deposits was primarily due to decreases in noninterest bearing demand deposits, certificates of deposit, and interest bearing demand deposits which fell approximately $14.9 million, $2.9 million, and $0.2 million, respectively, offset in part by an increase in savings deposits of $5.0 million. At September 30, 2014, noninterest bearing deposits comprised 15% of total deposits and interest bearing deposits which include NOW, money market, savings and time deposits comprised 85% of total deposits. The changes in the composition of the deposit mix since December 31, 2013 were a 5% decrease in noninterest bearing deposits and a 5% increase in interest bearing deposits.

Federal Funds Purchased and Repurchase Agreements

Federal funds purchased and repurchase agreements represent borrowings of a short duration, usually less than 30 days. For repurchase agreements, the securities underlying the agreements remained under the Bank’s control. There were no Federal funds purchased at September 30, 2014 and December 31, 2013. Repurchase agreements increased $1,861,053 or 9.2%, from December 31, 2013 to September 30, 2014. The increase in repurchase agreements since year end was primarily due to the increase in the balances maintained by existing commercial customers.

Other Liabilities

Other liabilities decreased approximately $964,818 during the nine month period ended September 30, 2014 primarily due to investment purchases recorded based on trade dates.

Capital Resources

Stockholders’ equity increased 10.5% during the nine month period ended September 30, 2014 and was primarily due to the 8.2% increase in accumulated other comprehensive income and the 2.3% increase from current earnings after quarterly dividends. The increase in accumulated other comprehensive income is primarily attributable to the effect of the change in the net unrealized gains (losses) on securities available-for-sale. Stockholders’ equity amounted to 10.2% and 9.0% of total assets at September 30, 2014 and December 31, 2013, respectively. The Company paid dividends of $.60 and $.57 per share during the nine month periods ended September 30, 2014 and September 30, 2013, respectively. The Company paid dividends of $.20 and $.19 per share during the three month periods ended September 30, 2014 and September 30, 2013, respectively.

The Company’s primary source of funds for payment of dividends to shareholders is from the dividends from its subsidiary bank. The approval of the Comptroller of the Currency is required to pay dividends if the total of all dividends declared by a national bank in any calendar year exceeds the total of its net profits (as defined) for the year, combined with its retained net profits of the preceding two years. Under this formula, the Company’s subsidiary bank can declare dividends in 2014, without approval of the Comptroller of the Currency, of approximately $2,275,000, plus an additional amount equal to the bank’s net profit for 2014 up to the date of any such dividend declaration.

 

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Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Liquidity

Liquidity management ensures that funds are available to meet loan commitments, deposit withdrawals, and operating expenses. Funds are provided by loan repayments, investment securities maturities, or deposits, and can be raised by liquidating assets or through additional borrowings. The Company had investment securities with an estimated fair value of $196,821,761 classified as available-for-sale at September 30, 2014. These securities are available for sale at any time based upon management’s assessment in order to provide necessary liquidity should the need arise. The fair value of temporarily impaired investment securities that the Company has the intent and ability to hold until the anticipated recovery in market value is $121,225,000. In addition, the Company’s subsidiary bank, Progressive Bank, N.A., is a member of the Federal Home Loan Bank of Pittsburgh (“FHLB”). Membership in the FHLB provides an additional source of funding in the form of collateralized advances. The remaining maximum borrowing capacity with the FHLB at September 30, 2014 was approximately $33.4 million subject to the purchase of additional FHLB stock. The subsidiary bank had short term lines of credit in the aggregate amount of approximately $19.8 million and $19.4 million available with the FHLB at September 30, 2014 and December 31, 2013, respectively. There were no short term borrowings outstanding pursuant to these agreements as of September 30, 2014 and December 31, 2013. The subsidiary bank also has an agreement with a financial institution for an available line of credit in the amount of $4,000,000 to be used for federal funds borrowings. There were no borrowings outstanding related to this agreement as of September 30, 2014 and December 31, 2013. The subsidiary bank also has pledged investment securities in the amount of $17.0 million to secure the ability to borrow from the Federal Reserve discount window should the need arise. There were no borrowings outstanding from the Federal Reserve as of September 30, 2014. At September 30, 2014 and December 31, 2013, the Company had outstanding loan commitments and unused lines of credit totaling $27,460,000 and $27,315,000, respectively. As of September 30, 2014, management placed a high probability for required funding within one year of approximately $19.3 million. Approximately $7.3 million is principally unused overdraft, home equity and credit card lines on which management places a low probability for required funding.

 

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FIRST WEST VIRGINIA BANCORP, INC.

PART I

Item 3 Quantitative and Qualitative Disclosures About Market Risk

The Company’s subsidiary bank uses an asset/liability model to measure the impact of changes in interest rates on net interest income on a periodic basis. Assumptions are made to simulate the impact of future changes in interest rates and/or changes in balance sheet composition. The effect of changes in future interest rates on the mix of assets and liabilities may cause actual results to differ from simulated results. Guidelines established by the Company’s subsidiary bank provides that the estimated net interest income may not change by more than 10% in a one year period given a +/-200 basis point parallel shift in interest rates. Excluding the potential effect of interest rate changes on assets and liabilities of the Holding Company which are not deemed material, the anticipated impact on net interest income of the subsidiary bank at September 30, 2014 was as follows: given a 200 basis point increase scenario net interest income would be reduced by approximately 3.2%, and given a 200 basis point decrease scenario net interest income would be decreased by approximately 11.2%. The results using a +/-100 basis point interest rate scenario are also presented. Under the 100 basis point increase scenario net interest income would be reduced by approximately 1.4%, and given a 100 basis point decrease scenario net interest income would be decreased by 5.4%. The projections provided by the model are not intended as an actual forecast of the bank’s performance in a particular rate environment, and should not be relied upon. Actual changes in the interest rate environment normally do not take place instantaneously, but over a period of time, and do not occur in a parallel fashion. Additionally, the balance sheet composition, spread relationships for new dollars invested, non interest income and expenses, investment practices, and deposit practices all change as a result of changes in interest rates and would need to be considered by the Asset Liability Committee.

Item 4 Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Company’s Interim President and Chief Executive Officer, William G. Petroplus, and Executive Vice President, Chief Administrative Officer and Chief Financial Officer, Francie P. Reppy, after evaluating the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) as of a date within 90 days prior to the filing of this report (the “Evaluation Date”), have concluded that, as of the Evaluation Date, the Company’s disclosure controls and procedures were adequate and effective to ensure that material information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

Changes in Internal Controls

During the quarter, there were no significant changes in the Company’s internal controls or in other factors that could significantly affect the Company’s disclosure controls and procedures subsequent to the date of their evaluation, nor were there any significant deficiencies or material weaknesses in the Company’s internal controls. As a result, no corrective actions were required or undertaken.

 

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FIRST WEST VIRGINIA BANCORP, INC.

PART II

OTHER INFORMATION

 

Item 1

Legal Proceedings

The nature of the business of the Holding Company’s subsidiary generates a certain amount of litigation involving matters arising in the ordinary course of business. The Company is unaware of any litigation other than ordinary routine litigation incidental to the business of the Company, to which it or its subsidiary is a party or of which any of their property is subject.

 

Item 1A

Risk Factors

Not applicable to Smaller Reporting Companies

 

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

Inapplicable

 

Item 3

Defaults Upon Senior Securities

Inapplicable

 

Item 4

Mine Safety Disclosures

None

 

Item 5

Other Information

Inapplicable

 

Item 6

Exhibits and Reports on Form 8-K

 

(a)

Reports on Form 8-K

On July 31, 2014 a report on Form 8-K was filed which contained a press release dated July 29, 2014 that reported the announcement of First West Virginia Bancorp Inc.’s second quarter earnings.

 

(b)

Exhibits

The exhibits listed in the Exhibit Index on page 48 of this FORM 10-Q are incorporated by reference and/or filed herewith.

 

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

First West Virginia Bancorp, Inc.
(Registrant)
By:		/s/ William G. Petroplus
		William G. Petroplus
		Interim President and Chief Executive Officer
By:		/s/ Francie P. Reppy
		Francie P. Reppy
		Executive Vice President, Chief Administrative Officer and Chief Financial Officer

Dated: November 14, 2014

 

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EXHIBIT INDEX

The following exhibits are filed herewith and/or are incorporated herein by reference.

 

Incorporated by Reference

Exhibit Number

Description

Filed Herewith

Form

File No.

Exhibit

Filing Date

3.1

Certificate and Articles of Incorporation of First West Virginia Bancorp, Inc.

10-K

001-13652

3.1

3/31/10

3.2

Amended and Restated Bylaws of First West Virginia Bancorp, Inc.

8-K

001-13652

3.2

12/23/13

10.3

Lease dated July 20, 1993 between Progressive Bank, N.A., formerly known as “First West Virginia Bank, N.A.”, and Angela I. Stauver.

10-K

001-13652

10.3

3/31/10

10.4

Lease dated March 7, 2006 between Progressive Bank, N.A. and O.V. Smith & Sons of Big Chimney, Inc.

10-K

001-13652

10.4

3/31/10

10.5

Lease dated May 12, 2001 between Progressive Bank, N.A. and Sylvan J. Dlesk and Rosalie J. Dlesk doing business as Dlesk Realty & Investment Company.

10-K

001-13652

10.5

3/31/10

10.7

Lease dated December 1, 2009 between Progressive Bank, N.A. and Richard J. Dlesk, Sr. and Sharon G. Neis-Dlesk.

10-K

001-13652

10.7

3/31/10

10.8

Amendment to Lease and Notice of Exercise dated July 3, 2012 between Progressive Bank, N.A., formerly known as “First West Virginia Bank, N.A.”, and Angela I. Stauver.

10-K

001-13652

10.8

3/29/13

11.1

Statement regarding computation of per share earnings.

X

13.3

Summarized Quarterly Financial Information.

X

15

Letter re unaudited interim financial information. See Part 1, Notes to Consolidated Financial Statements.

X

31.1

Rule 13a-14(a) / 15d/14(a) Certifications - Certification of Chief Executive Officer.

X

31.2

Rule 13a-14(a) / 15d/14(a) Certifications - Certification of Chief Financial Officer.

X

32

Section 1350 Certifications of the Chief Executive Officer and Chief Financial Officer.

X

99.1

Independent Accountant’s Report.

X

101

Interactive Data File.

X