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Table of Contents

 

 

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 June 30, 2015

 

¨ 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 June 30, 2015: Common Stock, $5.00 Par Value, shares outstanding: 1,728,730 shares

 

 

 


Table of Contents

FORM 10-Q INDEX

 

          Page No.  

PART I - Financial Information

  
Item 1.   

Financial Statements

     4-29   
  

Consolidated Balance Sheets at June 30, 2015 (unaudited) and December 31, 2014

     4   
  

Consolidated Statements of Income for the three and six months ended June 30, 2015 and June 30, 2014 (unaudited)

     5   
  

Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended June 30, 2015 and June 30, 2014 (unaudited)

     6   
  

Consolidated Statements of Changes in Stockholders’ Equity for the six months ended June 30, 2015 and 2014 (unaudited)

     7   
  

Consolidated Statements of Cash Flows for the six months ended June 30, 2015 and 2014 (unaudited)

     8   
  

Condensed Notes to the Consolidated Financial Statements (unaudited)

     9-29   
Item 2.   

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

     30-43   
Item 3.   

Quantitative and Qualitative Disclosures About Market Risk

     44   
Item 4.   

Controls and Procedures

     44   

PART II - Other Information

  
Item 1.   

Legal Proceedings

     45   
Item 1A.   

Risk Factors

     45   
Item 2.   

Unregistered Sales of Equity Securities and Use of Proceeds

     45   
Item 3.   

Defaults upon Senior Securities

     45   
Item 4.   

Mine Safety Disclosures

     45   
Item 5.   

Other Information

     45   
Item 6.   

Exhibits

     45   

SIGNATURES

     46   

 

2


Table of Contents

FIRST WEST VIRGINIA BANCORP, INC.

PART I

FINANCIAL INFORMATION

 

3


Table of Contents

Item 1 - Financial Statements

First West Virginia Bancorp, Inc. and Subsidiary

CONSOLIDATED BALANCE SHEETS

 

     June 30,
2015
    December 31,
2014
 
(in thousands, except shares)    (Unaudited)        
ASSETS   

Cash and due from banks

   $ 5,290      $ 5,348   

Due from banks - interest bearing

     12,407        15,048   
  

 

 

   

 

 

 

Total cash and cash equivalents

     17,697        20,396   

Investment securities:

    

Available-for-sale (at fair value)

     191,337        197,079   

Loans

     104,820        99,217   

Less allowance for loan losses

     (1,758     (1,813
  

 

 

   

 

 

 

Net loans

     103,062        97,404   

Premises and equipment, net

     8,197        8,413   

Accrued income receivable

     1,014        1,015   

Goodwill

     1,644        1,644   

Bank owned life insurance

     3,894        3,840   

Other assets

     2,844        2,599   
  

 

 

   

 

 

 

Total assets

   $ 329,689      $ 332,390   
  

 

 

   

 

 

 
LIABILITIES     

Noninterest bearing deposits:

    

Demand

   $ 37,826      $ 41,556   

Interest bearing deposits:

    

Demand

     53,873        55,459   

Savings

     116,145        112,756   

Time

     59,536        62,372   
  

 

 

   

 

 

 

Total deposits

     267,380        272,143   

Securities sold under agreements to repurchase

     23,321        21,051   

Federal Home Loan Bank borrowings

     3,371        3,420   

Accrued interest payable

     110        120   

Other liabilities

     642        784   
  

 

 

   

 

 

 

Total liabilities

     294,824        297,518   
  

 

 

   

 

 

 
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 June 30, 2015 and December 31, 2014

     8,644        8,644   

Treasury stock - 10,000 shares at cost

     (228     (228

Surplus

     6,966        6,966   

Retained earnings

     19,338        18,655   

Accumulated other comprehensive income

     145        835   
  

 

 

   

 

 

 

Total stockholders’ equity

     34,865        34,872   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 329,689      $ 332,390   
  

 

 

   

 

 

 

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

 

4


Table of Contents

First West Virginia Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF INCOME

 

     Three Months Ended,
June 30,
    Six Months Ended,
June 30,
 
     2015     2014     2015      2014  
(in thousands, except shares and per share amounts)    (Unaudited)     (Unaudited)  

INTEREST AND DIVIDEND INCOME

         

Loans, including fees:

         

Taxable

   $ 1,127      $ 1,030      $ 2,417       $ 2,075   

Tax-exempt

     127        132        255         257   

Debt securities:

         

Taxable

     733        710        1,468         1,384   

Tax-exempt

     294        481        626         1,023   

Other interest and dividend income

     24        28        70         52   
  

 

 

   

 

 

   

 

 

    

 

 

 

Total interest and dividend income

     2,305        2,381        4,836         4,791   
  

 

 

   

 

 

   

 

 

    

 

 

 

INTEREST EXPENSE

         

Deposits

     253        276        514         561   

Federal funds purchased and repurchase agreements

     55        39        104         78   

Federal Home Loan Bank borrowings

     40        41        81         83   
  

 

 

   

 

 

   

 

 

    

 

 

 

Total interest expense

     348        356        699         722   
  

 

 

   

 

 

   

 

 

    

 

 

 

Net interest income

     1,957        2,025        4,137         4,069   

PROVISION FOR LOAN LOSSES

     —          —          —           —     
  

 

 

   

 

 

   

 

 

    

 

 

 

Net interest income after provision for loan losses

     1,957        2,025        4,137         4,069   
  

 

 

   

 

 

   

 

 

    

 

 

 

NONINTEREST INCOME

         

Service charges and other fees

     74        93        149         179   

Net gains on available for sale securities

     200        261        1,156         261   

Other-than-temporary losses on securities

         

Total other-than-temporary losses

     —          —          —           (49

Portion of loss recognized in other comprehensive income (before taxes)

     —          —          —           —     
  

 

 

   

 

 

   

 

 

    

 

 

 

Net impairment losses recognized in earnings

     —          —          —           (49

Other operating income

     152        153        319         322   
  

 

 

   

 

 

   

 

 

    

 

 

 

Total noninterest income

     426        507        1,624         713   
  

 

 

   

 

 

   

 

 

    

 

 

 

NONINTEREST EXPENSE

         

Salary and employee benefits

     1,012        937        2,004         1,847   

Net occupancy expense of premises

     426        421        864         850   

Other operating expenses

     659        667        1,242         1,238   
  

 

 

   

 

 

   

 

 

    

 

 

 

Total noninterest expense

     2,097        2,025        4,110         3,935   
  

 

 

   

 

 

   

 

 

    

 

 

 

Income before income taxes

     286        507        1,651         847   

INCOME TAX EXPENSE (BENEFIT)

     (46     (31     281         (137
  

 

 

   

 

 

   

 

 

    

 

 

 

Net income

   $ 332      $ 538      $ 1,370       $ 984   
  

 

 

   

 

 

   

 

 

    

 

 

 

WEIGHTED AVERAGE SHARES OUTSTANDING

     1,718,730        1,718,730        1,718,730         1,718,730   
  

 

 

   

 

 

   

 

 

    

 

 

 

EARNINGS PER COMMON SHARE

   $ 0.20      $ 0.31      $ 0.80       $ 0.57   
  

 

 

   

 

 

   

 

 

    

 

 

 

DIVIDENDS PER COMMON SHARE

   $ 0.20      $ 0.20      $ 0.40       $ 0.40   
  

 

 

   

 

 

   

 

 

    

 

 

 

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

 

5


Table of Contents

First West Virginia Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

 

     Three Months Ended,
June 30,
    Six Months Ended,
June 30,
 
     2015     2014     2015     2014  
(in thousands)    (Unaudited)     (Unaudited)  

Net Income

   $ 332      $ 538      $ 1,370      $ 984   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss):

        

Investment securities available for sale

        

Unrealized holding gains (losses) arising during the period

     (1,971     2,489        50        5,022   

Income tax effect

     742        (937     (19     (1,890

Reclassification of gains recognized in earnings

     (200     (261     (1,156     (212

Income tax effect

     75        99        435        80   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss)

     (1,354     1,390        (690     3,000   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

   $ (1,022   $ 1,928      $ 680      $ 3,984   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

6


Table of Contents

First West Virginia Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited)

(in thousands, except shares and per share amounts)

 

                                      Accumulated        
                                      Other        
     Common Stock      Treasury            Retained     Comprehensive        
     Shares      Amount      Stock     Surplus      Earnings     Income (Loss)     Total  

BALANCE, DECEMBER 31, 2014

     1,728,730       $ 8,644       $ (228   $ 6,966       $ 18,655      $ 835      $ 34,872   

Net Income

     —           —           —          —           1,370        —          1,370   

Other comprehensive loss

     —           —           —          —           —          (690     (690

Cash dividend ($.40 per share)

     —           —           —          —           (687     —          (687
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

BALANCE, JUNE 30, 2015

     1,728,730       $ 8,644       $ (228   $ 6,966       $ 19,338      $ 145      $ 34,865   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 
                                      Accumulated        
                                      Other        
     Common Stock      Treasury            Retained     Comprehensive        
     Shares      Amount      Stock     Surplus      Earnings     Income (Loss)     Total  

BALANCE, DECEMBER 31, 2013

     1,728,730       $ 8,644       $ (228   $ 6,966       $ 18,126      $ (2,718   $ 30,790   

Net Income

     —           —           —          —           984        —          984   

Other comprehensive income

     —           —           —          —           —          3,000        3,000   

Cash dividend ($.40 per share)

     —           —           —          —           (687     —          (687
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

BALANCE, JUNE 30, 2014

     1,728,730       $ 8,644       $ (228   $ 6,966       $ 18,423      $ 282      $ 34,087   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

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

 

7


Table of Contents

First West Virginia Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

     For the Six Months Ended
June 30,
 
(in thousands)    2015     2014  

OPERATING ACTIVITIES

    

Net income

   $ 1,370      $ 984   

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

    

Depreciation and amortization

     318        304   

Amortization of investment securities, net

     403        215   

Investment security gains

     (1,156     (261

Other-than-temporary losses on securities

     —          49   

Net gains on sales of mortgage loans

     —          (2

Loss on disposal of premises and equipment

     9        2   

Increase in cash surrender value of bank-owned life insurance

     (54     (53

Originations of mortgage loans held for sale

     —          (85

Proceeds from sales of mortgage loans

     —          87   

Decrease in interest receivable

     1        33   

Decrease in interest payable

     (10     (12

Decrease (increase) in deferred taxes

     62        (5

Other, net

     (32     (1,345
  

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     911        (89
  

 

 

   

 

 

 

INVESTING ACTIVITIES

    

Net increase in loans, net of charge-offs

     (5,667     (1,047

Recoveries on loans previously charged-off

     8        3   

Proceeds from sales of securities available-for-sale

     52,074        12,210   

Proceeds from maturities, prepayments, and calls of securities available-for-sale

     14,139        10,043   

Purchases of securities available-for-sale

     (60,824     (18,346

Purchases of premises and equipment

     (111     (1,081
  

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     (381     1,782   
  

 

 

   

 

 

 

FINANCING ACTIVITIES

    

Net decrease in deposits

     (4,763     (10,147

Dividends paid

     (687     (687

Increase (decrease) in short-term borrowings

     2,270        (438

Repayment of Federal Home Loan Bank borrowings

     (49     (47
  

 

 

   

 

 

 

Net cash used in financing activities

     (3,229     (11,319
  

 

 

   

 

 

 

DECREASE IN CASH AND CASH EQUIVALENTS

     (2,699     (9,626

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR

     20,396        31,875   
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS, END OF PERIOD

   $ 17,697      $ 22,249   
  

 

 

   

 

 

 

Supplemental Disclosures:

    

Cash Paid for Interest

   $ 709      $ 733   

Cash Paid for Income Taxes

   $ 26      $ 8   

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

 

8


Table of Contents

First West Virginia Bancorp, Inc. and Subsidiary

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2015 AND 2014

(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, 2014. 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 six month period ended June 30, 2015, 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, 2014 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 June 30, 2015, the Company’s cash accounts exceeded federally insured limits by approximately $537,000. Additionally, the Company had approximately $11,721,000 on deposit with the Federal Reserve Bank and the Federal Home Loan Bank of Pittsburgh as of June 30, 2015.

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 Company 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 June 30, 2015 and December 31, 2014. 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.

 

9


Table of Contents

First West Virginia Bancorp, Inc. and Subsidiary

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2015 AND 2014

(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 June 30, 2015 and December 31, 2014.

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, 2015. 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 $7,944,000 and $8,501,000 as of June 30, 2015 and December 31, 2014, respectively. These loans were also subject to recourse obligation or credit risk in the amount of $316,000 and $323,000 at June 30, 2015 and December 31, 2014, 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 $6,000 and $5,000 for the three months ended June 30, 2015 and 2014, respectively, and $12,000 and $13,000 for the six months ended June 30, 2015 and 2014, 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.

 

10


Table of Contents

First West Virginia Bancorp, Inc. and Subsidiary

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2015 AND 2014

(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 in the case of collateral dependent 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 $1,758,000 at June 30, 2015, 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 $1,644,000 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 June 30, 2015 and 2014. 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 $3,894,000 and $3,840,000 at June 30, 2015 and December 31, 2014, respectively. The death benefit value of the bank-owned life insurance at June 30, 2015 and December 31, 2014 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 $70,000 and $50,000 for the three months ended June 30, 2015 and June 30, 2014, respectively. For the six month periods ended June 30, 2015 and 2014 advertising expenses amounted to $100,000 and $89,000, 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.

 

11


Table of Contents

First West Virginia Bancorp, Inc. and Subsidiary

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2015 AND 2014

(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: Assets acquired through, or in lieu of, loan foreclosures are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. The assets are subsequently accounted for at the lower of cost or fair value, less estimated costs to sell. Any subsequent declines in fair value and gains or losses on the disposition of these assets are credited to or charged against income. Other real estate owned is included in other assets. The recorded investment in consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are in process totaled approximately $71,000 at June 30, 2015.

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. Deferred tax assets are reduced by a valuation allowance if, based on the weight of evidence available, it is more likely than not that some portion or all of a deferred tax asset will not be realized.

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.

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.

Recent Accounting Pronouncements: In February 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis, which is intended to improve targeted areas of consolidation guidance for legal entities such as limited partnerships, limited liability corporations, and securitization structures (collateralized debt obligations, collateralized loan obligations, and mortgage-backed security transactions). The ASU focuses on the consolidation evaluation for reporting organizations (public and private companies and not-for-profit organizations) that are required to evaluate whether they should consolidate certain legal entities. In addition to reducing the number of consolidation models from four to two, the new standard simplifies the FASB Accounting Standards Codification and improves current GAAP by:

 

   

Placing more emphasis on risk of loss when determining a controlling financial interest. A reporting organization may no longer have to consolidate a legal entity in certain circumstances based solely on its fee arrangement, when certain criteria are met.

 

   

Reducing the frequency of the application of related-party guidance when determining a controlling financial interest in a variable interest entity (VIE).

 

   

Changing consolidation conclusions for public and private companies in several industries that typically make use of limited partnerships or VIEs.

The ASU will be effective for periods beginning after December 15, 2015, for public companies. Early adoption is permitted, including adoption in an interim period. Adoption of the ASU is not expected to have a significant effect on the Company’s consolidated financial statements.

In April 2015, the FASB issued ASU 2015-05, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement. Existing GAAP does not include explicit guidance about a customer’s accounting for fees paid in a cloud computing arrangement. Examples of cloud computing arrangements include: (a) software as a service; (b) platform as a service; (c) infrastructure as a service; and (d) other similar hosting arrangements. The amendments add guidance to Subtopic 350-40, Intangibles - Goodwill and Other - Internal-Use Software, which will help entities evaluate the accounting for fees paid by a customer in a cloud computing arrangement. The guidance already exists in the FASB Accounting Standards Codification in paragraphs 985-605-55-121 through 55-123, but it is included in a Subtopic applied by cloud service providers to determine whether an arrangement includes the sale or license of software. For public business entities, the amendments will be effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2015. Adoption of the ASU is not expected to have a significant effect on the Company’s consolidated financial statements.

In May 2015, the FASB issued ASU 2015-07, Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent). This Update addresses the diversity in practice related to how certain investments measured at net asset value with future redemption dates are categorized; the amendments in this Update remove the requirement to categorize investments for which fair values are measured using the net asset value per share practical expedient. It also limits disclosures to investments for which the entity has elected to measure the fair value using the practical expedient. The amendments in this Update are effective for annual reporting periods beginning after December 15, 2015. Early adoption is permitted. Adoption of the ASU is not expected to have a significant effect on the Company’s consolidated financial statements.

 

12


Table of Contents

First West Virginia Bancorp, Inc. and Subsidiary

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2015 AND 2014

(Unaudited)

 

NOTE 2 - INVESTMENT SECURITIES

The amortized cost and estimated fair values of investment securities are as follows at June 30, 2015 and December 31, 2014:

 

     (Expressed in thousands)  
     June 30, 2015  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair Value  

Securities available-for-sale:

           

Obligations of U.S. Government corporations and agencies

   $ 44,751       $ —         $ (459    $ 44,292   

Obligations of states and political subdivisions

     32,301         1,617         (127      33,791   

Mortgage-backed securities

     113,878         362         (1,194      113,046   

Equity securities

     175         35         (2      208   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available-for-sale

   $ 191,105       $ 2,014       $ (1,782    $ 191,337   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     (Expressed in thousands)  
     December 31, 2014  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair Value  

Securities available-for-sale:

           

Obligations of U.S. Government corporations and agencies

   $ 44,595       $ 13       $ (602    $ 44,006   

Obligations of states and political subdivisions

     40,349         2,144         (71      42,422   

Mortgage-backed securities

     110,626         818         (1,001      110,443   

Equity securities

     171         38         (1      208   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available-for-sale

   $ 195,741       $ 3,013       $ (1,675    $ 197,079   
  

 

 

    

 

 

    

 

 

    

 

 

 

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 June 30, 2015 and December 31, 2014, was approximately $138,183,000 and $92,305,000, which is approximately 72.2% and 46.8%, 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 June 30, 2015.

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 June 30, 2015.

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 June 30, 2015.

 

13


Table of Contents

First West Virginia Bancorp, Inc. and Subsidiary

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2015 AND 2014

(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 until 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 June 30, 2015.

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 category and length of time that the individual securities have been in a continuous unrealized loss position, at June 30, 2015 and December 31, 2014:

 

     (Expressed in thousands)  
     June 30, 2015  
     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

   $ 28,513       $ (236   $ 15,777       $ (223   $ 44,290       $ (459

Obligations of states and political subdivisions

     6,099         (127     —           —          6,099         (127

Mortgage-backed securities

     55,913         (439     31,827         (755     87,740         (1,194
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total debt securities

     90,525         (802     47,604         (978     138,129         (1,780

Equity securities

     32         (1     22         (1     54         (2
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 90,557       $ (803   $ 47,626       $ (979   $ 138,183       $ (1,782
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

     (Expressed in thousands)
December 31, 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

   $ 5,486       $ (9   $ 36,006       $ (593   $ 41,492       $ (602

Obligations of states and political subdivisions

     766         (7     5,000         (64     5,766         (71

Mortgage-backed securities

     7,193         (12     37,835         (989     45,028         (1,001
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total debt securities

     13,445         (28     78,841         (1,646     92,286         (1,674

Equity securities

     19         (1     —           —          19         (1
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 13,464       $ (29   $ 78,841       $ (1,646   $ 92,305       $ (1,675
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

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 six months ended  
     June 30,
2015
     June 30,
2014
     June 30,
2015
     June 30,
2014
 

Balance at beginning of period

   $ —         $ 49       $ —         $ —     

Additions for credit-related OTTI not previously recognized

     —           —           —           49   

Reductions for securities sold during the period (realized)

     —           (49      —           (49
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance at end of period

   $ —         $ —         $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

No other-than-temporary impairment losses were recognized in accumulated other comprehensive income as of June 30, 2015 and 2014.

 

14


Table of Contents

First West Virginia Bancorp, Inc. and Subsidiary

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2015 AND 2014

(Unaudited)

 

NOTE 2 - INVESTMENT SECURITIES (CONTINUED)

 

The amortized cost and fair value of investment securities at June 30, 2015, 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)
June 30, 2015
 
     Amortized
Cost
     Fair
Value
 

Due in one year or less

   $ 584       $ 605   

Due after one year through five years

     27,146         27,069   

Due after five years through ten years

     33,926         34,084   

Due after ten years

     15,396         16,325   
  

 

 

    

 

 

 
     77,052         78,083   

Mortgage-backed securities

     113,878         113,046   

Equity securities

     175         208   
  

 

 

    

 

 

 

Total

   $ 191,105       $ 191,337   
  

 

 

    

 

 

 

Proceeds from sales of securities available-for-sale during the six month periods ended June 30, 2015 and 2014, were $52,074,000 and $12,210,000, respectively. Gross gains of $1,156,000 were realized during the six months ended June 30, 2015. Gross losses realized during the six months ended June 30, 2015 were less than $500 and not considered material for financial reporting and disclosure purposes. Gross gains of $297,000 and gross losses of $36,000 were realized during the six months ended June 30, 2014. Proceeds from sales of securities available-for-sale during the three month periods ended June 30, 2015 and 2014, were $12,527,000 and $12,210,000, respectively. Gross gains of $200,000 were realized during the three months ended June 30, 2015. Gross losses realized during the three months ended June 30, 2015 were less than $500 and not considered material for financial reporting and disclosure purposes. Gross gains of $297,000 and gross losses of $36,000 were realized during the three months ended June 30, 2014. Assets carried at $71,661,000 and $63,856,000 at June 30, 2015 and December 31, 2014, respectively, were pledged to secure United States Government and other public funds and for other purposes as required or permitted by law.

NOTE 3 - LOANS AND LEASES

Loans outstanding at June 30, 2015 and December 31, 2014, are as follows:

 

     (Expressed in Thousands)  
     June 30,
2015
     December 31,
2014
 

Consumer Real Estate:

     

Construction

   $ 3,563       $ 3,519   

Farmland

     82         93   

Residential 1-4 family

     22,757         23,737   

Home equity loans

     980         1,207   

Home equity lines of credit

     4,305         3,966   
  

 

 

    

 

 

 

Total Consumer Real Estate

     31,687         32,522   

Commercial Real Estate:

     

Non-farm, non-residential

     39,742         37,411   

Multifamily (5 or more) residential properties

     9,210         9,538   
  

 

 

    

 

 

 

Total Commercial Real Estate

     48,952         46,949   

Commercial and Other Loans:

     

Commercial

     10,751         5,720   

Non-rated industrial development obligations

     10,792         11,384   

Other loans

     27         19   
  

 

 

    

 

 

 

Total Commercial and Other Loans

     21,570         17,123   

Consumer Loans:

     

Installment and other loans to individuals

     2,299         2,261   

Credit Cards

     462         503   
  

 

 

    

 

 

 

Total Consumer Loans

     2,761         2,764   
  

 

 

    

 

 

 

Total Loans

     104,970         99,358   

Less unearned interest and deferred fees

     150         141   
  

 

 

    

 

 

 

Gross Loans

     104,820         99,217   

Less allowance for loan losses

     1,758         1,813   
  

 

 

    

 

 

 

Net Loans

   $ 103,062       $ 97,404   
  

 

 

    

 

 

 

 

15


Table of Contents

First West Virginia Bancorp, Inc. and Subsidiary

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2015 AND 2014

(Unaudited)

 

NOTE 3 - LOANS AND LEASES (CONTINUED)

 

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 the 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.

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 $869,000 and $1,032,000 at June 30, 2015 and December 31, 2014, respectively. The amount of interest income that would have been recognized had the loans performed in accordance with their original terms was $12,000 and $19,000 for the three months ended June 30, 2015 and June 30, 2014, respectively. For the six months ended June 30, 2015 and 2014 and for the year ended December 31, 2014, the amount of interest income that would have been recognized had the loans performed in accordance with their original terms was $21,000, $37,000 and $63,000, respectively.

 

16


Table of Contents

First West Virginia Bancorp, Inc. and Subsidiary

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2015 AND 2014

(Unaudited)

 

NOTE 3 - LOANS AND LEASES (CONTINUED)

 

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

 

     June 30, 2015  
     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

   $ 21,519      $ 31       $ —         $ 20       $ 51       $ 21,570      $ —     

Commercial real estate

     48,272        354         —           326         680         48,952        —     

Consumer real estate

     31,493        116         —           78         194         31,687        —     

Consumer

     2,741        12         8         —           20         2,761        —     

Unearned interest and deferred fees

     (150     —           —           —           —           (150     —     
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total loans

   $ 103,875      $ 513       $ 8       $ 424       $ 945       $ 104,820      $ —     
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Non-accrual loans included above are as follows:

                  

Commercial and other loans

   $ —        $ —         $ —         $ 20       $ 20       $ 20      $ —     

Commercial real estate

     243        —           —           326         326         569        —     

Consumer real estate

     171        31         —           78         109         280        —     

Consumer

     —          —           —           —           —           —          —     
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total non-accrual loans

   $ 414      $ 31       $ —         $ 424       $ 455       $ 869      $ —     
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

     December 31, 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

   $ 17,078      $ 6       $ —         $ 39       $ 45       $ 17,123      $ —     

Commercial real estate

     46,246        —           13         690         703         46,949        —     

Consumer real estate

     32,384        71         —           67         138         32,522        —     

Consumer

     2,742        5         3         14         22         2,764        14   

Unearned interest and deferred fees

     (141     —           —           —           —           (141     —     
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total loans

   $ 98,309      $ 82       $ 16       $ 810       $ 908       $ 99,217      $ 14   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Non-accrual loans included above are as follows:

                  

Commercial and other loans

   $ —        $ —         $ —         $ 39       $ 39       $ 39      $ —     

Commercial real estate

     —          —           13         690         703         703        —     

Consumer real estate

     223        —           —           67         67         290        —     

Consumer

     —          —           —           —           —           —          —     
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total non-accrual loans

   $ 223      $ —         $ 13       $ 796       $ 809       $ 1,032      $ —     
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

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.

 

17


Table of Contents

First West Virginia Bancorp, Inc. and Subsidiary

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2015 AND 2014

(Unaudited)

 

NOTE 3 - LOANS AND LEASES (CONTINUED)

 

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.

The following tables present the risk category of loans by class of loans based on the most recent analysis performed as of June 30, 2015 and December 31, 2014 (in thousands):

 

June 30, 2015

   Pass      Special Mention      Substandard      Doubtful      Total  

Commercial and other

   $ 21,550       $ —         $ 20       $ —         $ 21,570   

Commercial real estate

     45,226         —           3,726         —           48,952   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 66,776       $ —         $ 3,746       $ —         $ 70,522   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2014

   Pass      Special Mention      Substandard      Doubtful      Total  

Commercial and other

   $ 17,084       $ —         $ 39       $ —         $ 17,123   

Commercial real estate

     41,679         1,170         4,100         —           46,949   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 58,763       $ 1,170       $ 4,139       $ —         $ 64,072   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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 June 30, 2015 and December 31, 2014 (in thousands):

 

June 30, 2015

   Performing      Non-performing      Total  

Consumer

   $ 2,761       $ —         $ 2,761   

Consumer real estate

     31,056         631         31,687   
  

 

 

    

 

 

    

 

 

 

Total

   $ 33,817       $ 631       $ 34,448   
  

 

 

    

 

 

    

 

 

 

December 31, 2014

   Performing      Non-performing      Total  

Consumer

   $ 2,750       $ 14       $ 2,764   

Consumer real estate

     32,232         290         32,522   
  

 

 

    

 

 

    

 

 

 

Total

   $ 34,982       $ 304       $ 35,286   
  

 

 

    

 

 

    

 

 

 

 

18


Table of Contents

First West Virginia Bancorp, Inc. and Subsidiary

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2015 AND 2014

(Unaudited)

 

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 June 30, 2015 and December 31, 2014 are set forth in the following tables (in thousands):

 

     June 30, 2015  
     Unpaid
Contractual
Principal
Balance
     Recorded
Investment
With No
Allowance
     Recorded
Investment
With
Allowance
     Total
Recorded
Investment
     Related
Allowance
 

Commercial and other loans

   $ 20       $ —         $ 20       $ 20       $ 20   

Commercial real estate

     569         341         228         569         77   

Consumer real estate

     425         75         350         425         9   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,014       $ 416       $ 598       $ 1,014       $ 106   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     December 31, 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

     744         474         270         744         78   

Consumer real estate

     493         143         350         493         9   

Consumer

     18         —           11         11         1   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,294       $ 617       $ 670       $ 1,287       $ 127   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     Average Recorded Investment      Interest Income Recognized      Interest Income Recognized
Cash Basis
 
     For the three months ended      For the three months ended      For the three months ended  
     June 30, 2015      June 30, 2014      June 30, 2015      June 30, 2014      June 30, 2015      June 30, 2014  

Commercial and other loans

   $ 20       $ 22       $ —         $ —         $ —         $ —     

Commercial real estate

     587         850         —           1         39         —     

Consumer real estate

     431         185         5         2         1         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,038       $ 1,057       $ 5       $ 3       $ 40       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Average Recorded Investment      Interest Income Recognized      Interest Income Recognized
Cash Basis
 
     For the six months ended      For the six months ended      For the six months ended  
     June 30, 2015      June 30, 2014      June 30, 2015      June 30, 2014      June 30, 2015      June 30, 2014  

Commercial and other loans

   $ 29       $ 24       $ —         $ —         $ —         $ —     

Commercial real estate

     646         881         —           1         253         —     

Consumer real estate

     459         179         10         2         2         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,134       $ 1,084       $ 10       $ 3       $ 255       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

19


Table of Contents

First West Virginia Bancorp, Inc. and Subsidiary

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2015 AND 2014

(Unaudited)

 

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 was one TDR in accrual status at June 30, 2015 and two TDRs in accrual status at December 31, 2014.

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 new TDRs, 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 (in thousands).

 

     June 30, 2015      December 31, 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

     2         422         422         1         350         350   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     2       $ 422       $ 422         1       $ 350       $ 350   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
Troubled Debt Restructurings That Subsequently Defaulted Within 12 Months After Restructuring                  

Commercial and other loans

     —         $ —         $ —           —         $ —         $ —     

Commercial real estate

     —           —           —           —           —           —     

Consumer real estate

     —           —           —           1         350         350   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     —         $ —         $ —           1       $ 350       $ 350   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following tables include new TDRs by type of modification (in thousands):

 

     June 30, 2015  
Troubled Debt Restructurings    Interest Only      Term      Combination      Total Modification  

Commercial and other loans

   $ —         $ —         $ —         $ —     

Commercial real estate

     —           —           —           —     

Consumer real estate

     —           422         —           422   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —         $ 422       $ —         $ 422   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

20


Table of Contents

First West Virginia Bancorp, Inc. and Subsidiary

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2015 AND 2014

(Unaudited)

 

NOTE 3 - LOANS AND LEASES (CONTINUED)

 

     December 31, 2014  
Troubled Debt Restructurings    Interest Only      Term      Combination      Total Modification  

Commercial and other loans

   $ —         $ —         $ —         $ —     

Commercial real estate

     —           —           —           —     

Consumer real estate

     —           350         —           350   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —         $ 350       $ —         $ 350   
  

 

 

    

 

 

    

 

 

    

 

 

 

At June 30, 2015 and December 31, 2014, there were funds of $24,000 and $33,000 committed to be advanced to customers whose loans were classified as TDRs.

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 six months ended as of June 30, 2015 and June 30, 2014 (in thousands):

 

June 30, 2015

   Commercial
and Other
    Commercial
Real Estate
    Consumer
Real
Estate
    Consumer     Total  

Allowance for Loan Losses:

          

Beginning Balance, January 1, 2015

   $ 281      $ 1,254      $ 263      $ 15      $ 1,813   

Charge-offs

     (57     —          —          (6     (63

Recoveries

     —          2        —          6        8   

Provision

     120        (113     (7     —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance, June 30, 2015

   $ 344      $ 1,143      $ 256      $ 15      $ 1,758   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans individually evaluated for impairment

   $ 20      $ 77      $ 9      $ —        $ 106   

Loans collectively evaluated for impairment

     324        1,066        247        15        1,652   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

   $ 344      $ 1,143      $ 256      $ 15      $ 1,758   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

June 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

     —          —          —          (4     (4

Recoveries

     —          —          —          3        3   

Provision

     (20     (45     67        (2     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance, June 30, 2014

   $ 240      $ 1,270      $ 330      $ 24      $ 1,864   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans individually evaluated for impairment

   $ 19      $ 45      $ —        $ —        $ 64   

Loans collectively evaluated for impairment

     221        1,225        330        24        1,800   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

   $ 240      $ 1,270      $ 330      $ 24      $ 1,864   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

21


Table of Contents

First West Virginia Bancorp, Inc. and Subsidiary

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2015 AND 2014

(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 June 30, 2015 and June 30, 2014 (in thousands):

 

June 30, 2015

   Commercial
and Other
    Commercial
Real Estate
    Consumer
Real
Estate
    Consumer     Total  

Allowance for Loan Losses:

          

Beginning Balance, April 1, 2015

   $ 304      $ 1,232      $ 261      $ 14      $ 1,811   

Charge-offs

     (57     —          —          —          (57

Recoveries

     —          —          —          4        4   

Provision

     97        (89     (5     (3     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance, June 30, 2015

   $ 344      $ 1,143      $ 256      $ 15      $ 1,758   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

June 30, 2014

   Commercial
and Other
    Commercial
Real Estate
    Consumer
Real
Estate
    Consumer     Total  

Allowance for Loan Losses:

          

Beginning Balance, April 1, 2014

   $ 255      $ 1,315      $ 269      $ 27      $ 1,866   

Charge-offs

     —          —          —          (4     (4

Recoveries

     —          —          —          2        2   

Provision

     (15     (45     61        (1     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance, June 30, 2014

   $ 240      $ 1,270      $ 330      $ 24      $ 1,864   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The following table presents loans individually and collectively evaluated for impairment by class of loans as of June 30, 2015 and December 31, 2014 (in thousands):

 

June 30, 2015

   Commercial
and Other
     Commercial
Real Estate
     Consumer
Real
Estate
     Consumer      Unearned
Discounts
    Total  

Loans individually evaluated

   $ 20       $ 569       $ 425       $ —         $ —        $ 1,014   

Loans collectively evaluated

     21,550         48,383         31,262         2,761         (150     103,806   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Ending Balance

   $ 21,570       $ 48,952       $ 31,687       $ 2,761       $ (150   $ 104,820   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

December 31, 2014

                                        

Loans individually evaluated

   $ 39       $ 744       $ 493       $ 11       $ —        $ 1,287   

Loans collectively evaluated

     17,084         46,205         32,029         2,753         (141     97,930   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Ending Balance

   $ 17,123       $ 46,949       $ 32,522       $ 2,764       $ (141   $ 99,217   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

22


Table of Contents

First West Virginia Bancorp, Inc. and Subsidiary

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2015 AND 2014

(Unaudited)

 

NOTE 5 - PREMISES AND EQUIPMENT

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

 

     June 30, 2015      December 31, 2014      Estimated
Useful Life
Years
 

Land

   $ 1,984       $ 1,984      

Land improvements

     418         419         5 - 20   

Leasehold improvements

     1,089         1,087         5 - 20   

Buildings

     6,998         6,998         5 - 50   

Furniture, fixtures & equipment

     4,264         4,228         3 - 30   
  

 

 

    

 

 

    

Total

     14,753         14,716      

Less accumulated depreciation

     6,556         6,303      
  

 

 

    

 

 

    

Premises and equipment, net

   $ 8,197       $ 8,413      
  

 

 

    

 

 

    

Charges to operations for depreciation approximated $158,000 and $152,000 for the three months ended June 30, 2015 and 2014, respectively. Depreciation expenses were $318,000 and $304,000 for the six months ended June 30, 2015 and 2014, respectively.

NOTE 6 - DEPOSITS

The composition of the Bank’s deposits at June 30, 2015 and December 31, 2014 follows (in thousands):

 

     June 30, 2015  
     Demand                
     Noninterest
Bearing
     Interest
Bearing
     Savings      Time  

Individuals, partnerships and corporations (includes certified and official checks)

   $ 37,337       $ 47,974       $ 111,281       $ 56,774   

States and political subdivisions

     487         5,899         4,864         2,280   

Commercial banks and other depository institutions

     2         —           —           482   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 37,826       $ 53,873       $ 116,145       $ 59,536   
  

 

 

    

 

 

    

 

 

    

 

 

 
     December 31, 2014  
     Demand                
     Noninterest
Bearing
     Interest
Bearing
     Savings      Time  

Individuals, partnerships and corporations (includes certified and official checks)

   $ 41,102       $ 48,583       $ 108,108       $ 59,400   

States and political subdivisions

     384         6,876         4,617         2,490   

Commercial banks and other depository institutions

     70         —           31         482   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 41,556       $ 55,459       $ 112,756       $ 62,372   
  

 

 

    

 

 

    

 

 

    

 

 

 

A maturity distribution of time certificates of deposit at June 30, 2015 and December 31, 2014, follows:

 

(dollars in thousands)

   Maturities of Time Deposits  
     June 30, 2015      December 31, 2014  

Due in 2015

   $ 17,943       $ 35,151   

Due in 2016

     22,948         13,213   

Due in 2017

     7,269         6,215   

Due in 2018

     4,123         4,252   

Due in 2019

     3,487         3,522   

Due in 2020 and thereafter

     3,766         19   
  

 

 

    

 

 

 

Total

   $ 59,536       $ 62,372   
  

 

 

    

 

 

 

 

23


Table of Contents

First West Virginia Bancorp, Inc. and Subsidiary

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2015 AND 2014

(Unaudited)

 

NOTE 6 - DEPOSITS (CONTINUED)

 

Time deposits include certificates of deposit issued in denominations of $100,000 or more which amounted to $19,579,000 and $21,348,000 at June 30, 2015 and December 31, 2014, respectively. Interest expense on certificates of deposit of $100,000 or more was $53,000 and $62,000 for the three months ended June 30, 2015 and 2014, respectively. Interest expense on certificates of deposit of $100,000 or more was $117,000 and $133,000 for the six months ended June 30, 2015 and 2014, respectively. The following table sets forth the remaining maturity of time certificates of deposit of $100,000 or more:

 

     Maturities of Time Deposits in Excess of $100,000  

(dollars in thousands)

   June 30, 2015      December 31, 2014  

Three Months or Less

   $ 2,705       $ 4,870   

Over Three and Less than Six Months

     2,502         3,123   

Over Six and Less than Twelve Months

     6,422         4,515   

Over Twelve Months

     7,950         8,840   
  

 

 

    

 

 

 

Total

   $ 19,579       $ 21,348   
  

 

 

    

 

 

 

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 June 30, 2015 was approximately $39.9 million subject to the purchase of additional FHLB stock. The subsidiary bank had FHLB borrowings of $3,371,000 and $3,420,000 at June 30, 2015 and December 31, 2014, respectively. At June 30, 2015 the subsidiary bank had three fixed rate amortizing advances which totaled $3,371,000 with interest rates ranging from 4.65% to 4.89% of which $1,891,000 will mature through 2018 and $1,480,000 will mature through 2023. The collateral securing these borrowings totaled $3,523,000 at June 30, 2015.

The bank also has a line of credit agreement with the Federal Home Loan Bank which matures on May 2, 2016. The maximum credit available is $21.4 million under the agreement. There were no borrowings outstanding under this agreement at June 30, 2015 and December 31, 2014, respectively.

Contractual maturities of FHLB borrowings as of June 30, 2015 were as follows (in thousands):

 

Due in 2015

   $ 50   

Due in 2016

     105   

Due in 2017

     110   

Due in 2018

     1,760   

Due in 2019

     43   

Due in 2020 and thereafter

     1,303   
  

 

 

 

Total

   $ 3,371   
  

 

 

 

NOTE 8 - REPURCHASE AGREEMENTS

The Bank transfers various securities to customers in exchange for cash at the end of each business day and agrees to reacquire the securities at the end of the next business day for the cash exchanged plus interest. The process is repeated at the end of each business day until the agreement is terminated. The securities underlying the agreements remained under the Bank’s control. The risk involved in this type of transaction is that the fair value of the securities transferred may decline below the amount of the Bank’s obligation which would require the Bank to pledge additional amounts. The Bank attempts to manage this risk by monitoring the fair value of securities pledged compared to the repurchase agreement amounts. The following table shows repurchase agreements accounted for as secured borrowings (in thousands):

 

     June 30, 2015  
     Remaining Contractual Maturity  

Repurchase Agreements Accounted for as Secured Borrowings

   Overnight and Continuous  

U.S. Government corporations and agencies

   $ 7,034   

Obligations of states and political subdivisions

     6,324   

Mortgage-backed securities

     21,160   
  

 

 

 

Total securities pledged for repurchase agreements

     34,518   
  

 

 

 

Gross amount of recognized liabilities for repurchase agreements

   $ 23,321   
  

 

 

 

 

24


Table of Contents

First West Virginia Bancorp, Inc. and Subsidiary

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2015 AND 2014

(Unaudited)

 

NOTE 9 - ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The activity in accumulated other comprehensive income (loss) for the three and six months ended June 30, 2015 and 2014 is as follows:

 

(dollars in thousands)

   Accumulated Other Comprehensive Income (Loss) (1)
Unrealized Gains (Losses) on Securities Available
for Sale
 
     Three months ended
June 30,
     Six months ended
June 30,
 
     2015      2014      2015      2014  

Beginning Balance

   $ 1,499       $ (1,108    $ 835       $ (2,718

Other comprehensive income (loss) before reclassifications

     (1,229      1,552         31         3,132   

Amounts reclassified from accumulated other comprehensive income

     (125      (162      (721      (132
  

 

 

    

 

 

    

 

 

    

 

 

 

Period Change

     (1,354      1,390         (690      3,000   
  

 

 

    

 

 

    

 

 

    

 

 

 

Ending Balance

   $ 145       $ 282       $ 145       $ 282   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(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
June 30,
   

Affected Line Item in the Statement of Income

(dollars in thousands)

   2015     2014      

Securities available for sale (1):

      

Net securities gains reclassified into earnings

   $ (200   $ (261   Net gains on available for sale securities

Related income tax expense

     75        99      Income tax expense (benefit)
  

 

 

   

 

 

   

Net effect on accumulated other comprehensive income (loss) for the period

   $ (125   $ (162   Net of tax
  

 

 

   

 

 

   

Total reclassifications for the period

   $ (125   $ (162   Net of tax
  

 

 

   

 

 

   
     Amount Reclassified from
Accumulated Other
Comprehensive Income (Loss)
     

Details about Accumulated Other Comprehensive Income
(Loss) Components

   For the six months ended
June 30,
   

Affected Line Item in the Statement of Income

(dollars in thousands)

   2015     2014      

Securities available for sale (1):

      

Net securities gains reclassified into earnings

   $ (1,156   $ (261   Net gains on available for sale securities

Other-than-temporary losses reclassified into earnings

            49      Other-than-temporary losses on investments

Related income tax expense

     435        80      Income tax expense (benefit)
  

 

 

   

 

 

   

Net effect on accumulated other comprehensive income (loss) for the period

   $ (721   $ (132   Net of tax
  

 

 

   

 

 

   

Total reclassifications for the period

   $ (721   $ (132   Net of tax
  

 

 

   

 

 

   

 

(1) 

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

 

25


Table of Contents

First West Virginia Bancorp, Inc. and Subsidiary

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2015 AND 2014

(Unaudited)

 

NOTE 10 - REGULATORY MATTERS

The Company’s subsidiary bank is 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 bank must meet specific capital guidelines that involve quantitative measures of the bank’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The 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 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). For June 30, 2015, Interim Final Basel III rules require the bank to maintain minimum amounts and ratios of common equity Tier I capital (as defined in the regulations) to risk-weighted assets (as defined). Additionally under Basel III rules, the decision was made to opt-out of including accumulated other comprehensive income in regulatory capital. For December 31, 2014, regulatory capital ratios were calculated under Basel I rules.

As of June 30, 2015, 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’s 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  

Progressive Bank, N.A.

               

As of June 30, 2015

               

Total Capital (to Risk Weighted Assets)

   $ 33,654         22.26   $ 12,097         8.0   $ 15,121         10.0

Tier I Capital (to Risk Weighted Assets)

     31,896         21.09     9,072         6.0     12,097         8.0

Common Equity Tier I Capital (to Risk Weighted Assets)

     31,896         21.09     6,804         4.5     9,829         6.5

Tier I Capital (to Adjusted Total Assets)

     31,896         9.61     13,278         4.0     16,598         5.0

As of December 31, 2014

               

Total Capital (to Risk Weighted Assets)

   $ 32,700         21.29   $ 12,290         8.0   $ 15,362         10.0

Tier I Capital (to Risk Weighted Assets)

     30,887         20.11     6,145         4.0     9,217         6.0

Tier I Capital (to Adjusted Total Assets)

     30,887         9.30     13,280         4.0     16,600         5.0

NOTE 11 - 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:

 

•          Level I:    Quoted prices are available in active markets for identical assets or liabilities as of the reported date.
   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.
   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.

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.

 

26


Table of Contents

First West Virginia Bancorp, Inc. and Subsidiary

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2015 AND 2014

(Unaudited)

 

NOTE 11 - FAIR VALUE MEASUREMENTS (CONTINUED)

 

The following table presents the assets reported on the balance sheet at their fair value as of June 30, 2015 and December 31, 2014, 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)

   June 30, 2015  
     Level I      Level II      Level III      Total  

Assets measured on a recurring basis:

           

Securities available for sale:

  

U.S. Government corporations and agencies

   $ —         $ 44,292       $ —         $ 44,292   

Obligations of states and political subdivisions

     —           33,791         —           33,791   

Mortgage-backed securities

     —           113,046         —           113,046   

Equity securities

     208         —           —           208   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total securities available for sale:

   $ 208       $ 191,129       $ —         $ 191,337   
  

 

 

    

 

 

    

 

 

    

 

 

 

Assets measured on a nonrecurring basis:

           

Impaired loans

   $ —         $ —         $ 493       $ 493   

 

(dollars in thousands)

   December 31, 2014  
     Level I      Level II      Level III      Total  

Assets measured on a recurring basis:

           

Securities available for sale:

  

U.S. Government corporations and agencies

   $ —         $ 44,006       $ —         $ 44,006   

Obligations of states and political subdivisions

     —           42,422         —           42,422   

Mortgage-backed securities

     —           110,443         —           110,443   

Equity securities

     208         —           —           208   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total securities available for sale:

   $ 208       $ 196,871       $ —         $ 197,079   
  

 

 

    

 

 

    

 

 

    

 

 

 

Assets measured on a nonrecurring basis:

           

Impaired loans

   $ —         $ —         $ 503       $ 503   

NOTE 12 -  DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

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

June 30, 2015

   Fair Value
Estimate
     Valuation
Techniques
  Unobservable Input   Range (Weighted Average)

Impaired Loans

   $  493       Appraisal of
collateral (1)
  Appraisal
adjustments (2)
  -100.0% to 0.0% (-14.4%)
        Liquidation
expenses (2)
  0.0% to 9.0% (9.0%)

(dollars in thousands)

   Quantitative Information about Level III Fair Value Measurements

December 31, 2014

   Fair Value
Estimate
     Valuation
Techniques
  Unobservable Input   Range (Weighted Average)

Impaired Loans

   $ 503       Appraisal of
collateral (1)
  Appraisal
adjustments (2)
  -30.0% to 0.0% (-11.5%)
        Liquidation
expenses (2)
  0.0% to 9.0% (8.8%)

 

(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.

 

27


Table of Contents

First West Virginia Bancorp, Inc. and Subsidiary

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2015 AND 2014

(Unaudited)

 

NOTE 12 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)

 

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.

Financial Instruments

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 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.

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 the discounted value of cash flows.

Repurchase Agreements: The carrying amount for repurchase agreements is 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.

 

28


Table of Contents

First West Virginia Bancorp, Inc. and Subsidiary

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2015 AND 2014

(Unaudited)

 

NOTE 12 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)

 

The estimates of fair values of financial instruments are summarized as follows at June 30, 2015 and December 31, 2014:

 

     June 30, 2015  
     Carrying      Estimated Fair Value  
(Amounts Expressed in Thousands)    Amount      Level I      Level II      Level III      Total  

Financial assets:

              

Cash and cash equivalents

   $ 17,697       $ 17,697       $ —         $ —         $ 17,697   

Investment securities

     191,337         208         191,129         —           191,337   

Loans, net

     103,062         —           —           103,840         103,840   

Accrued interest receivable

     1,014         1,014         —           —           1,014   

Financial liabilities:

              

Deposits

     267,380         197,386         59,359         —           256,745   

Repurchase agreements

     23,321         23,321         —           —           23,321   

Federal Home Loan Bank borrowings

     3,371         —           3,642         —           3,642   

Accrued interest payable

     110         110         —           —           110   

 

     December 31, 2014  
     Carrying      Estimated Fair Value  
(Amounts Expressed in Thousands)    Amount      Level I      Level II      Level III      Total  

Financial assets:

              

Cash and cash equivalents

   $ 20,396       $ 20,396       $ —         $ —         $ 20,396   

Investment securities

     197,079         208         196,871         —           197,079   

Loans, net

     97,404         —           —           98,445         98,445   

Accrued interest receivable

     1,015         1,015         —           —           1,015   

Financial liabilities:

              

Deposits

     272,143         199,444         62,289         —           261,733   

Repurchase agreements

     21,051         21,051         —           —           21,051   

Federal Home Loan Bank borrowings

     3,420         —           3,714         —           3,714   

Accrued interest payable

     120         120         —           —           120   

 

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Table of Contents

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
June 30,
    Six Months Ended
June 30,
    Years Ended December 31,  
     2015     2014     2015     2014     2014     2013     2012  

SUMMARY OF OPERATIONS

              

Total interest income

   $ 2,305      $ 2,381      $ 4,836      $ 4,791      $ 9,601      $ 9,414      $ 9,838   

Total interest expense

     348        356        699        722        1,449        1,524        1,789   

Net interest income

     1,957        2,025        4,137        4,069        8,152        7,890        8,049   

Provision (credit) for loan losses

     —          —          —          —          —          (400     (248

Total other income

     426        507        1,624        713        1,877        1,440        2,352   

Total other expenses

     2,097        2,025        4,110        3,935        8,060        7,672        7,604   

Income before income taxes

     286        507        1,651        847        1,969        2,058        3,045   

Net income

     332        538        1,370        984        1,904        2,241        2,538   

PER SHARE DATA (1)

              

Net income

   $ 0.20      $ 0.31      $ 0.80      $ 0.57      $ 1.11      $ 1.30      $ 1.48   

Cash dividends declared

     0.20        0.20        0.40        0.40        0.80        0.76        0.73   

Book value per share

     20.29        19.83        20.29        19.83        20.29        17.91        20.77   

AVERAGE BALANCE SHEET SUMMARY

              

Total loans, net

   $ 101,789      $ 91,022      $ 101,486      $ 91,387      $ 94,103      $ 97,374      $ 104,566   

Investment securities

     192,642        200,150        192,171        201,658        199,571        177,809        154,755   

Deposits - interest bearing

     231,882        229,439        232,482        228,935        230,440        218,229        208,308   

Stockholders’ equity

     34,594        33,563        34,420        33,485        33,767        32,597        31,608   

Total assets

     334,942        333,421        334,730        335,642        335,515        316,172        293,601   

SELECTED RATIOS

              

Return on average assets

     0.40     0.65     0.83     0.59     0.57     0.71     0.86

Return on average equity

     3.85     6.43     8.03     5.93     5.64     6.87     8.03

Average equity to average assets

     10.33     10.07     10.28     9.98     10.06     10.31     10.77

Dividend payout ratio (1)

     100.00     64.52     50.00     70.18     72.07     58.46     49.32

Loan to deposit ratio

     39.20     34.25     39.20     34.25     36.46     32.67     40.33
     June 30,     December 31,        
     2015     2014     2014     2013     2012    

BALANCE SHEET

            

Investments

   $ 191,337      $ 202,383      $ 197,079      $ 199,955      $ 178,208     

Loans

     104,820        94,445        99,217        93,402        99,387     

Allowance for loan losses

     (1,758     (1,864     (1,813     (1,865     (2,181  

Other assets

     35,290        40,385        37,907        50,653        31,133     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Total Assets

   $ 329,689      $ 335,349      $ 332,390      $ 342,145      $ 306,547     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Deposits

   $ 267,380      $ 275,730      $ 272,143      $ 285,877      $ 246,462     

Federal funds purchased and repurchase agreements

     23,321        19,777        21,051        20,215        18,767     

FHLB borrowings

     3,371        3,469        3,420        3,516        3,606     

Other liabilities

     752        2,286        904        1,747        2,009     

Stockholders’ equity

     34,865        34,087        34,872        30,790        35,703     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Total Liabilities and Stockholders’ Equity

   $ 329,689      $ 335,349      $ 332,390      $ 342,145      $ 306,547     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

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

 

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Table of Contents

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

 

The following discussion and analysis provides further detail on 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 June 30, 2015 have remained unchanged from the disclosures presented in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 under the section “Management’s Discussion and Analysis of the Financial Condition and Results of Holding Company 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 $1,370,000 or $.80 per share for the six months ended June 30, 2015 compared to $984,000 or $.57 per share for the same period during 2014. The increase in net income for the six months ended June 30, 2015 as compared to the same period in 2014 of $386,000 or 39.2% was primarily the result of the increase in noninterest income and net interest income, offset in part by the increase in income tax expense and noninterest expense. Noninterest income increased $911,000 or 127.8% primarily due to the increase in the net gains on sales of investment securities offset in part by a decline in service charges and fees earned on deposit accounts. Net interest income increased $68,000 or 1.7%, primarily due to the increase in the interest and fees earned on loans and the small decrease in the interest expense paid on interest bearing liabilities, offset in part by the decrease in the interest earned on investment securities. Income tax expense increased $418,000 primarily due to the increase in net gains on sales of securities during the first six months of 2015 over the same period in 2014. Noninterest expenses increased $175,000 or 4.4% during the six month period ended June 30, 2015 as compared to the same period in 2014 primarily due to increases in salary and employee benefits expenses as well as slight increases in occupancy expenses and other operating expenses. The return on average assets was .83% for the six months ended June 30, 2015 as compared to .59% for the same period of the prior year. For the six months ended June 30, 2015 compared to June 30, 2014, the return on average equity was 8.03% and 5.93%, respectively.

 

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Table of Contents

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

 

For the second quarter of 2015, net income was $332,000 or $.20 per share as compared to $538,000 or $.31 per share for the same period in 2014. The decrease in net income for the three months ended June 30, 2015 as compared to the same period of the prior year of $206,000 or 38.3% was primarily the result of the decrease in net interest income and noninterest income and the increase in noninterest expense, offset in part by the small increase in the income tax benefit. Net interest income decreased $68,000 or 3.4% primarily due to the decrease in the interest earned on investment securities, offset in part by the increase in the interest and fees earned on loans and the slight decrease in the interest expense paid on interest bearing liabilities. Noninterest income decreased $81,000 or 16.0% for the three months ended June 30, 2015 as compared to the same period of the prior year primarily due to the decrease in the net gains on sales of investment securities as well as the decline in service charges and fees earned on deposit accounts. Noninterest expense increased $72,000 or 3.6% during the three month period ended June 30, 2015 as compared to the same period in 2014 primarily due to the increases in salary and employee benefits expenses and occupancy expenses, offset in part by a slight decrease in other operating 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 six months ended June 30, 2015

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 borrowings. Changes in the volume and mix of interest 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 six months ended June 30, 2015 and 2014.

For the six months ended June 30, 2015, net interest income was $4,137,000, an increase of $68,000 or 1.7%, from the same period in 2014. This increase was primarily the result of the increase in the interest and fees earned on loans and the small decrease in the interest expense paid on interest bearing liabilities, offset in part by the decrease in the interest earned on investment securities. The changes in the volume and mix of earning assets and interest bearing liabilities combined with changes in market rates of interest resulted in a taxable equivalent net yield on average earning assets of 3.03% for the six months ended June 30, 2015 as compared to 3.14% for the same period in 2014. There was a slight decrease in the average volume of earning assets of $1,130,000 or .4%.

Interest and fees on loans increased $341,000 or 14.6%, from the same period in 2014 primarily due to the increase in the average loan volume combined with the increase in the average yield on loans. The average loan volume increased approximately $7.4 million or 7.8% since December 31, 2014. The taxable equivalent yield on loans increased 19 basis points in 2015 from 5.46% at December 31, 2014 to 5.65% at June 30, 2015 and increased 13 basis points as compared to the six months ended June 30, 2014.

Interest income on investment securities during the first six months of 2015 decreased $313,000 or 13.0% as compared to the same period of the prior year. The decrease in interest income on investment securities was primarily due to the decline in the average volume combined with a decrease in the yields earned. The average volume of investment securities decreased approximately $7.4 million or 3.7% since December 31, 2014. The taxable equivalent yield on investment securities decreased 32 basis points in 2015, from 2.96% at December 31, 2014 to 2.64% at June 30, 2015 and decreased 45 basis points as compared to the six months ended June 30, 2014.

During the six months ended June 30, 2015, interest expense declined $22,000 or 3.1% as compared to the same period in 2014. 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 six month period ended June 30, 2015. The average yield paid on interest bearing liabilities fell 3 basis points from .57% at December 31, 2014 to .54% at June 30, 2015 and decreased 4 basis points as compared to the six months ended June 30, 2014. The average volume of interest bearing liabilities increased approximately $5.0 million or 2.0% since December 31, 2014.

Noninterest Income

Noninterest income increased $911,000 or 127.8% for the six months ended June 30, 2015 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 decrease in service charges and fees earned on deposit accounts and the small decrease in other operating income.

The net gains on investment securities increased $895,000 for the six month period ended June 30, 2015 as compared to the same period in 2014. These sales occurred as part of the Company’s deferred tax asset strategy and to take advantage of favorable market conditions. The Company accounted for securities gains of $1,156,000 during the six month period ended June 30, 2015 and securities gains of $297,000 and securities losses of $36,000 during the six month period ended June 30, 2014. Gross losses realized during the six months ended June 30, 2015 were less than $500 and not considered material for financial reporting and disclosure purposes.

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 $30,000 or 16.8%, in the first six months of 2015 as compared to the same period in 2014 primarily due to a decline in overdraft charges which fluctuate based on customer activity.

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 six month period ended June 30, 2015, other operating income decreased $3,000 or .9% compared to the same period in 2014. The decrease in other operating income was primarily due to decreases in checkbook income, ATM fees, and credit card fees, offset in part by an increase in various miscellaneous income sources.

 

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

 

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 six months ended June 30, 2015 and 2014. Average balance sheet information for the periods ended June 30, 2015 and 2014 was compiled using the daily average balance sheet. Total loans are gross of the allowance for loan losses, net of unearned income and include loans held for sale. Non-accrual loans were included in the average balance computations; however, no interest was included in income subsequent to the non-accrual status classification. 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.

 

     (Unaudited)
For the six months ended
June 30, 2015
    (Unaudited)
For the six months ended
June 30, 2014
 
     Average
Volume
    Interest      Average
Rate
    Average
Volume
    Interest      Average
Rate
 

ASSETS:

              

Investment securities:

              

U.S. Treasury and U. S. Government agencies

   $ 45,610      $ 405         1.79   $ 49,900      $ 452         1.83

Mortgage backed securities

     111,909        1,016         1.83     95,621        921         1.94

States and political subdivisions

              

Taxable

     2,212        44         4.01     335        8         4.82

Non-taxable

     32,268        626         3.91     55,636        1,023         3.71

Other securities

     172        3         3.52     166        3         3.64
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total Investment securities:

     192,171        2,094         2.20     201,658        2,407         2.41

Interest bearing deposits

     20,082        25         0.25     21,363        27         0.25

Loans, net of unearned income

     101,486        2,672         5.31     91,387        2,332         5.15

Other earning assets

     853        45         10.64     1,314        25         3.84
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total earning assets

     314,592        4,836         3.10     315,722        4,791         3.06

Other assets

     21,945             21,785        

Allowance for loan losses

     (1,807          (1,865     
  

 

 

        

 

 

      

Total Assets

   $ 334,730           $ 335,642        
  

 

 

        

 

 

      

LIABILITIES

              

Time deposits

   $ 61,187      $ 293         0.97   $ 65,973      $ 350         1.07

Savings deposits

     114,567        187         0.33     110,278        180         0.33

Interest bearing demand deposits

     56,728        34         0.12     52,684        31         0.12

Federal funds purchased and repurchase agreements

     23,812        104         0.88     19,769        77         0.79

FHLB and other long-term borrowings

     3,395        81         4.81     3,491        83         4.79
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total interest bearing liabilities

     259,689        699         0.54     252,195        721         0.58

Noninterest bearing demand deposits

     39,761             49,444        

Other liabilities

     860             518        
  

 

 

        

 

 

      

Total Liabilities

     300,310             302,157        

STOCKHOLDERS’ EQUITY

     34,420             33,485        
  

 

 

        

 

 

      

Total Liabilities and Stockholders’ Equity

   $ 334,730           $ 335,642        
  

 

 

        

 

 

      

Net yield on earning assets

     $ 4,137         2.65     $ 4,070         2.60
    

 

 

    

 

 

     

 

 

    

 

 

 

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 six months ended June 30, 2015 and 2014, respectively. The effect of this adjustment is presented below.

 

Investment securities

   $  192,171       $ 2,511         2.64   $ 201,658       $ 3,089         3.09

Loans

     101,486         2,842         5.65     91,387         2,503         5.52
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total earning assets

   $ 314,592       $ 5,423         3.48   $ 315,722       $ 5,644         3.60
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Taxable equivalent net yield on earning assets

      $ 4,724         3.03      $ 4,923         3.14
     

 

 

    

 

 

      

 

 

    

 

 

 

 

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Table of Contents

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

 

EARNINGS ANALYSIS - For the six months ended June 30, 2015 (continued)

 

Noninterest Expense

Noninterest expense increased $175,000 or 4.4% for the six months ended June 30, 2015 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 as well as small increases in occupancy expenses and other operating expenses.

Salary and employee benefits expenses increased $157,000 or 8.5% during the six months ended June 30, 2015 over the same period in 2014 primarily as a result of a rise in salary expenses due to additional employees.

Net occupancy expenses of premises increased $14,000 or 1.6% during the six months ended June 30, 2015 compared to the same period in 2014. Increases in depreciation expenses, banking house expenses, real estate taxes, and utilities offset in part by the decline in furniture and fixtures expense and insurance expense primarily contributed to the increase in occupancy expenses.

Other operating expenses increased $4,000 or .3% for the six months ended June 30, 2015 as compared to June 30, 2014 primarily as a result of the increase in directors’ fees, offset in part by a decline in other taxes. Directors’ fees increased due to the increase in the number of directors in May 2014. The decrease in other taxes was primarily due to the elimination of the West Virginia business franchise tax in 2015.

Other operating expenses for the six months ended June 30 included the following (in thousands):

 

     2015      2014      Net
Increase
(Decrease)
    Percent
Increase
(Decrease)
 

Directors’ fees

   $ 97       $ 65       $ 32        49.2

Stationery and supplies

     68         71         (3     (4.2 )% 

Regulatory assessment and deposit insurance

     147         152         (5     (3.3 )% 

Advertising

     100         89         11        12.4

Postage and transportation

     74         76         (2     (2.6 )% 

Other taxes

     60         90         (30     (33.3 )% 

Service expense

     251         256         (5     (2.0 )% 

Other

     445         439         6        1.4
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 1,242       $ 1,238       $ 4        0.3
  

 

 

    

 

 

    

 

 

   

 

 

 

Income Taxes

Income tax expense for the six month period ended June 30, 2015 was $281,000, increasing $418,000 from the prior year’s income tax benefit. The increase in income tax expense was primarily due to the increase in net gains on sales of securities during the first six months of 2015 over the same period in 2014. Components of the income tax expense for June 30, 2015 were $236,000 for federal taxes and $45,000 for West Virginia corporate net income tax. Federal income tax rates remain consistent at 34% for the six months ended June 30, 2015 and 2014 and for the year ended December 31, 2014. West Virginia corporate net income tax rates were 6.50% in 2015 and 2014.

Under U.S. GAAP, a valuation allowance is required to be recognized if it is “more likely than not” that a deferred tax asset will not be realized. A valuation allowance was recorded in 2014 due to the Company’s concern that a deferred tax asset may not be realized. The determination of the realizability of the deferred tax asset is highly subjective and dependent on judgment. At June 30, 2015, the valuation allowance of $225,000 was considered to be adequate based on the Company’s projections of future taxable income and tax planning strategies.

 

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

 

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 June 30, 2015 and 2014. Average balance sheet information for the periods ended June 30, 2015 and 2014 was compiled using the daily average balance sheet. Total loans are gross of the allowance for loan losses, net of unearned income and include loans held for sale. Non-accrual loans were included in the average balance computations; however, no interest was included in income subsequent to the non-accrual status classification. 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. Average rates were annualized for the three month periods ended June 30, 2015 and 2014.

 

     (Unaudited)
For the three months ended
June 30, 2015
    (Unaudited)
For the three months ended
June 30, 2014
 
     Average
Volume
    Interest      Average
Rate
    Average
Volume
    Interest      Average
Rate
 

ASSETS:

              

Investment securities:

              

U.S. Treasury and other U. S. Government agencies

   $ 45,840      $ 209         1.83   $ 49,737      $ 224         1.81

Mortgage backed securities

     114,206        501         1.76     98,222        477         1.95

States and political subdivisions

              

Taxable

     2,212        22         3.99     667        8         4.81

Non-taxable

     30,211        294         3.90     51,359        481         3.76

Other securities

     173        1         2.32     165        1         2.43
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total Investment securities:

     192,642        1,027         2.14     200,150        1,191         2.39

Interest bearing deposits

     19,601        13         0.27     21,757        14         0.26

Loans, net of unearned income

     101,789        1,254         4.94     91,022        1,162         5.12

Other earning assets

     858        11         5.14     1,324        14         4.24
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total earning assets

     314,890        2,305         2.94     314,253        2,381         3.04

Other assets

     21,855             21,032        

Allowance for loan losses

     (1,803          (1,864     
  

 

 

        

 

 

      

Total Assets

   $ 334,942           $ 333,421        
  

 

 

        

 

 

      

LIABILITIES

              

Time deposits

   $ 60,315      $ 143         0.95   $ 65,608      $ 170         1.04

Savings deposits

     114,894        94         0.33     110,827        91         0.33

Interest bearing demand deposits

     56,673        17         0.12     53,004        15         0.11

Federal funds purchased and repurchase agreements

     24,824        55         0.89     19,833        39         0.79

FHLB and other long-term borrowings

     3,383        39         4.62     3,480        41         4.73
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total interest bearing liabilities

     260,089        348         0.54     252,752        356         0.56

Demand deposits

     39,399             46,658        

Other liabilities

     860             448        
  

 

 

        

 

 

      

Total Liabilities

     300,348             299,858        

STOCKHOLDERS’ EQUITY

     34,594             33,563        
  

 

 

        

 

 

      

Total Liabilities and Stockholders’ Equity

   $ 334,942           $ 333,421        
  

 

 

        

 

 

      

Net yield on earning assets

     $ 1,957         2.49     $ 2,025         2.58
    

 

 

    

 

 

     

 

 

    

 

 

 

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 June 30, 2015 and 2014, respectively. The effect of this adjustment is presented below.

 

Investment securities

   $ 192,642       $ 1,223         2.55   $ 200,150       $ 1,511         3.03

Loans

     101,789         1,339         5.28     91,022         1,251         5.51
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total earning assets

   $ 314,890       $ 2,586         3.29   $ 314,253       $ 2,790         3.56
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Taxable equivalent net yield on earning assets

      $ 2,238         2.85      $ 2,434         3.11
     

 

 

    

 

 

      

 

 

    

 

 

 

 

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Table of Contents

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

 

EARNINGS ANALYSIS - For the three months ended June 30, 2015

Net Interest Income

For the three months ended June 30, 2015, net interest income was $1,957,000, decreasing $68,000 or 3.4%, from the same period in 2014. The decrease in net interest income was primarily due to the decrease in the interest earned on investment securities, offset in part by the increase in the interest and fees earned on loans and the slight decrease in the interest expense paid on interest bearing liabilities. The taxable equivalent net yield on earning assets fell from 3.11% for the second quarter of 2014 to 2.85% for the second quarter of 2015. Table Three presents the average balance sheets and an interest rate analysis for three months ended June 30, 2015 and 2014.

Interest and fees on loans increased $92,000 or 7.9% for the three month period ended June 30, 2015 as compared to the same period in 2014 due to the increase in the average volume of loans, offset in part by the decline in the average yield on loans. The average loan volume increased approximately $10.8 million or 11.8% as compared to the three month period ended June 30, 2014. The taxable equivalent yield on loans fell 23 basis points, to 5.28% for the second quarter of 2015 from 5.51% for the same period of the prior year.

Interest income on investment securities decreased $164,000 or 13.8% during the second quarter of 2015 compared to the same period of the prior year. The decrease in interest income on investment securities was primarily due to the decline in the average volume combined with the decrease in the yield earned. The investment portfolio average volume decreased approximately $7.5 million or 3.8% compared to the three month period ended June 30, 2014. The taxable equivalent yield earned on investment securities declined 48 basis points, to 2.55% for the three months ended June 30, 2015 as compared to 3.03% for the same period in 2014.

Interest expense paid on interest bearing liabilities fell $8,000 or 2.2% during the three months ended June 30, 2015 as compared to the same period in 2014. 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 average balances of interest bearing liabilities. The average yield paid on interest bearing liabilities was down 2 basis points, from .56% for the second quarter of 2014 to .54% for the second quarter of 2015. The average volume of interest bearing liabilities rose approximately $7.3 million or 2.9% for the same time period primarily due to an increase in the balances maintained in repurchase agreements, savings deposits, and interest bearing demand deposits, offset in part by the decline in time deposits and Federal Home Loan Bank borrowings.

Noninterest Income

Noninterest income decreased $81,000 or 16.0% for the three months ended June 30, 2015 as compared to the same period of the prior year. The decrease in noninterest income was primarily due to the decrease in the net gains on sales of investment securities as well as the decline in service charges and fees earned on deposit accounts.

The net gains on investment securities decreased $61,000 or 23.4% for the second quarter of 2015 as compared to the same period in 2014. These sales occurred as part of the Company’s deferred tax asset strategy and to take advantage of favorable market conditions. The Company accounted for securities gains of $200,000 during the three month period ended June 30, 2015. Gross losses realized during the three months ended June 30, 2015 were less than $500 and not considered material for financial reporting and disclosure purposes. Gross gains of $297,000 and gross losses of $36,000 were realized during the three months ended June 30, 2014.

Service charges and other fee income fell $19,000 or 20.4%, in the second quarter of 2015 as compared to the same period in 2014 primarily due to a decline in overdraft charges which fluctuate based on customer activity.

For the three months ended June 30, 2015, other operating income decreased $1,000 or .7% compared to the same period in 2014. The decrease in other operating income was primarily due to decreases in ATM fees and checkbook income, offset in part by an increase in various miscellaneous income sources.

Noninterest Expense

Noninterest expense increased $72,000 or 3.6% for the three months ended June 30, 2015 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 occupancy expenses, offset in part by a slight decrease in other operating expenses.

Salary and employee benefits expenses increased $75,000 or 8.0% during the three months ended June 30, 2015 over the same period in 2014 primarily as a result of a rise in salary expenses due to additional employees.

Net occupancy expense of premises increased $5,000 or 1.2% during the three months ended June 30, 2015 compared to the same period in 2014. Increases in banking house expenses, real estate taxes, depreciation expenses, and utilities offset in part by the decline in furniture and fixtures expense and insurance expense primarily contributed to the increase in occupancy expenses.

Other operating expenses decreased $8,000 or 1.2% for the three months ended June 30, 2015 as compared to June 30, 2014 primarily as a result of the decrease in other taxes and regulatory assessments and deposit insurance, offset in part by an increase in advertising and directors’ fees. The decrease in other taxes was primarily due to the elimination of the West Virginia business franchise tax in 2015. Directors’ fees increased due to the increase in the number of directors in May 2014.

 

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Table of Contents

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

EARNINGS ANALYSIS - For the three months ended June 30, 2015 (continued)

Noninterest Expense - (continued)

 

Other operating expenses for the three months ended June 30 included the following (in thousands):

 

     2015      2014      Net
Increase
(Decrease)
    Percent
Increase
(Decrease)
 

Directors’ fees

   $ 50       $ 37       $ 13        35.1

Stationery and supplies

     41         41         0        0.0

Regulatory assessment and deposit insurance

     69         77         (8     (10.4 )% 

Advertising

     70         50         20        40.0

Postage and transportation

     42         35         7        20.0

Other taxes

     15         46         (31     (67.4 )% 

Service expense

     140         146         (6     (4.1 )% 

Other

     232         235         (3     (1.3 )% 
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 659       $ 667       $ (8     (1.2 )% 
  

 

 

    

 

 

    

 

 

   

 

 

 

Income Taxes

Income tax benefit for the three month period ended June 30, 2015 was $46,000, increasing $15,000 or 48.4% compared to the same period in 2014. The increase in income tax benefit was primarily due to the decrease in noninterest income and increase in noninterest expense, offset in part by the increase in taxable interest income.

Balance Sheet Analysis

Investments

Investment securities decreased approximately $5.7 million or 2.9% from December 31, 2014 to June 30, 2015. 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 83.5% of total securities at June 30, 2015, as compared to 79.6% at December 31, 2014. The Company’s subsidiary bank sold non-taxable state and political subdivision securities with an amortized cost of approximately $5.1 million, agency securities with an amortized cost of approximately $6.5 million, and mortgage-backed securities with an amortized cost of approximately $39.3 million in the first six months of 2015 and reinvested the proceeds primarily in mortgage-backed securities. These sales occurred as part of the Company’s deferred tax asset strategy and to take advantage of favorable market conditions. 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 June 30, 2015 and December 31, 2014. The Company did not have any investment securities classified as held to maturity securities at June 30, 2015 and December 31, 2014. 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 values of securities available for sale was above amortized cost by $232,000 at June 30, 2015 and $1,338,000 at December 31, 2014.

 

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

 

Table Four - Investment Portfolio

The maturity distribution using book value including accretion of discounts and amortization of premiums and approximate yield of investment securities at June 30, 2015 and December 31, 2014 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)

   June 30, 2015     December 31, 2014  
     Amortized
Cost
     Fair
Value
     Yield     Amortized
Cost
     Fair
Value
     Yield  

U.S. Government corporations and agencies

                

Within One Year

   $ 1       $ 1         0.01   $ 1       $ 1         0.01

After One But Within Five Years

     24,597         24,395         1.57        22,095         21,899         1.58   

After Five But Within Ten Years

     20,153         19,896         2.16        22,499         22,106         1.83   

After Ten Years

     —           —           —          —           —           —     
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 
     44,751         44,292         1.84        44,595         44,006         1.71   

States & Political Subdivisions

                

Within One Year

     583         604         6.48        604         607         6.81   

After One But Within Five Years

     2,549         2,674         5.90        2,998         3,125         6.12   

After Five But Within Ten Years

     13,773         14,188         5.19        16,782         17,343         5.18   

After Ten Years

     15,396         16,325         6.14        19,965         21,347         5.91   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 
     32,301         33,791         5.73        40,349         42,422         5.64   

Mortgage-Backed Securities

     113,878         113,046         2.14        110,626         110,443         2.16   

Equity Securities

     175         208         3.01        171         208         4.32   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total

   $ 191,105       $ 191,337         2.70   $ 195,741       $ 197,079         2.81
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Loans

Total loans, net of unearned income, increased $5.6 million or 5.6% from December 31, 2014 to June 30, 2015. The increase in total loans in 2015 was primarily due to the increase in commercial and commercial real estate loans of $4,447,000 and $2,003,000, respectively, offset in part by decreases in consumer real estate and consumer loans which decreased $835,000 and $3,000, respectively. Commercial and other loans increased primarily due to an increase in commercial loans, offset in part by a decrease in non-rated industrial development obligations. The increase in commercial real estate loans was a result of the increase in non-farm, non-residential loans, offset slightly by a decrease in multifamily residential loans. The decline in consumer real estate loans during 2015 was primarily due to a decrease in residential 1-4 family loans and home equity loans, offset in part by an increase in home equity lines of credit and construction loans. In the consumer loan category, the decrease in credit cards was mostly offset by the increase in installment and other loans to individuals.

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 percent (30%) of the loan portfolio. Commercial and other loans which include commercial and industrial loans and non-rated industrial development obligations comprised twenty percent (20%) 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, 2014 to June 30, 2015 were a 3% increase in commercial and other loans and a 3% decrease in consumer real estate loans.

 

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

 

Table Five - Loan Portfolio - 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 June 30, 2015 and December 31, 2014:

 

     (Unaudited)      (Unaudited)  

(dollars in thousands)

   June 30, 2015      December 31, 2014  
     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
 

Commercial real estate

   $ 646       $ 8,095       $ 40,211       $ 866       $ 8,932       $ 37,151   

Commercial and other loans

     1,474         3,765         16,331         928         4,299         11,896   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,120       $ 11,860       $ 56,542       $ 1,794       $ 13,231       $ 49,047   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following table presents an analysis of fixed and variable rate loans other than installment loans and residential mortgages as of June 30, 2015 and December 31, 2014 due to mature after one year:

 

     (Unaudited)      (Unaudited)  

(dollars in thousands)

   June 30, 2015      December 31, 2014  
     Fixed Rate      Variable
Rate
     Total Due
After
One Year
     Fixed Rate      Variable
Rate
     Total Due
After
One Year
 

Commercial real estate

   $ 11,115       $ 37,191       $ 48,306       $ 12,101       $ 33,982       $ 46,083   

Commercial and other loans

     13,036         7,060         20,096         8,859         7,336         16,195   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 24,151       $ 44,251       $ 68,402       $ 20,960       $ 41,318       $ 62,278   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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 $7,944,000 and $8,501,000 as of June 30, 2015 and December 31, 2014, respectively. The loans which were sold were also subject to a recourse obligation or credit risk in the amount of $316,000 and $323,000 at June 30, 2015 and December 31, 2014, 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 $1,219,000 at June 30, 2015 as compared to $1,437,000 at December 31, 2014. The decline in non-performing loans in 2015 was primarily due to decreases in non-accrual loans combined with slight declines in renegotiated loans and loans past due ninety days or more and still accruing interest.

 

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Table of Contents

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

Non-performing Loans (Continued)

 

Table Six - 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)

   June 30,     December 31,  
     2015     2014     2013     2012     2011  

Past due 90 days or more, still accruing:

          

Commercial and other loans

   $ —        $ —        $ —        $ —        $ —     

Commercial real estate

     —          —          —          —          —     

Consumer real estate

     —          —          —          —          —     

Consumer

     —          14        —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   $ —        $ 14      $ —        $ —        $ —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Renegotiated:

          

Commercial and other loans

   $ —        $ —        $ —        $ —        $ —     

Commercial real estate

     —          41        44        —          —     

Consumer real estate

     350        350        —          —          —     

Consumer

     —          —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   $ 350      $ 391      $ 44      $ —        $ —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-accrual:

          

Commercial and other loans

   $ 20      $ 39      $ 26      $ 31      $ 39   

Commercial real estate

     569        703        885        3,115        3,533   

Consumer real estate

     280        290        355        388        447   

Consumer

     —          —          4        17        27   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   $ 869      $ 1,032      $ 1,270      $ 3,551      $ 4,046   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other real estate

   $ —        $ —        $ —        $ —        $ 138   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total non-performing assets

   $ 1,219      $ 1,437      $ 1,314      $ 3,551      $ 4,184   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total non-performing assets to total loans and other real estate

     1.16     1.45     1.41     3.57     3.82

Generally, all banks recognize interest income on the accrual basis, except for certain loans which are placed on a non-accrual status. A loan is placed on a non-accrual status when, in the opinion of management, doubt exists as to its collectibility. In accordance with the Office of the Comptroller of the Currency Policy, banks may not accrue interest on any loan when either the principal or interest is past due ninety days or more unless the loan is both well secured and in the process of collection. Non-accrual loans were $869,000 or .8% of total loans outstanding as of June 30, 2015, as compared to $1,032,000 or 1.0% of total loans outstanding as of December 31, 2014. Non-accrual loans decreased in 2015 primarily from loan payments. The amount of interest income that would have been recognized had the loans performed in accordance with their original terms was $12,000 and $19,000 for the three months ended June 30, 2015 and June 30, 2014, respectively. For the six months ended June 30, 2015 and 2014, the amount of interest income that would have been recognized had the loans performed in accordance with their original terms was $21,000 and $37,000. Management continues to monitor the nonperforming assets to ensure against deterioration in collateral values.

 

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

 

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 $55,000 or 3.0%, since December 31, 2014. The allowance for loan losses represented 1.7% and 1.8% of outstanding loans as of June 30, 2015 and at December 31, 2014, respectively. Charge-offs amounted to $63,000 and recoveries were $8,000 for the six month period ended June 30, 2015. There was no provision made to the allowance for loan losses during the six months ended June 30, 2015. The credit quality of the loan portfolio combined with the recent level of net charge-offs and nonperforming assets continue to be considered in the calculation of the provision for loan losses. 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 following table presents a summary of loans charged off and recoveries of loans previously charged off by type of loan.

Table Seven - Analysis of Allowance for Possible Loan Losses

 

(dollars in thousands)

   June 30,     December 31,  
     2015     2014     2013     2012     2011  

Allowance for loan losses:

          

Balance at beginning of period:

   $ 1,813      $ 1,865      $ 2,181      $ 2,504      $ 2,059   

Loans charged-off:

          

Commercial and other loans

     57        5        —          —          8   

Commercial real estate

     —          36        —          87        156   

Consumer real estate

     —          —          —          —          28   

Consumer

     6        16        12        9        19   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

     63        57        12        96        211   

Recoveries:

          

Commercial and other loans

     —          —          —          —          2   

Commercial real estate

     2        —          84        15        45   

Consumer real estate

     —          —          —          —          —     

Consumer

     6        5        12        6        9   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

     8        5        96        21        56   

Net charge-offs (recoveries)

     55        52        (84     75        155   

Provision (credit) charged to operations

     —          —          (400     (248     600   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period:

   $ 1,758      $ 1,813      $ 1,865      $ 2,181      $ 2,504   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Average loans outstanding

   $ 101,486      $ 94,103      $ 97,374      $ 104,566      $ 115,415   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ratio of net charge-offs to average loans outstanding for the period

     0.05     0.06     -0.09     0.07     0.13

Ratio of the allowance for loan losses to loans outstanding for the period

     1.68     1.83     2.00     2.19     2.29

 

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

Allowance for Loan Losses (Continued)

 

The following table presents an allocation of the allowance for possible loan losses at June 30, 2015 and each of the four year periods ended December 31, 2014. The allocation presented below is based on the historical average of net charge offs per category combined with the change in loan growth, level of nonperforming assets, and local economic conditions, and management’s review of the loan portfolio.

 

     June 30,     December 31,  
     2015     2014     2013     2012     2011  

(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

   $ 344         20.6   $ 281         17.2   $ 260         17.9   $ 179         15.7   $ 179         14.6

Commercial real estate

     1,143         46.6     1,254         47.3     1,315         47.1     1,762         50.4     2,082         51.5

Consumer real estate

     256         30.2     263         32.7     263         31.3     193         28.6     193         27.4

Consumer

     15         2.6     15         2.8     27         3.7     47         5.3     50         6.5
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 1,758         100.0   $ 1,813         100.0   $ 1,865         100.0   $ 2,181         100.0   $ 2,504         100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

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 $4.8 million during the first six months of 2015. 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 $3.7 million, $2.9 million and $1.6 million, respectively, offset in part by an increase in savings deposits of $3.4 million. At June 30, 2015, noninterest bearing deposits comprised 14% of total deposits and interest bearing deposits which include NOW, money market, savings and time deposits comprised 86% of total deposits. The changes in the composition of the deposit mix since December 31, 2014 were a 1% decrease in noninterest bearing deposits and a 1% increase in interest bearing deposits.

Repurchase Agreements

Repurchase agreements represent borrowings of a short duration, usually overnight, and are repeated each business day until the agreement is terminated. The securities underlying the agreements remained under the Bank’s control. Repurchase agreements increased $2.3 million or 10.8%, from December 31, 2014 to June 30, 2015 primarily due to the increase in the balances maintained by existing commercial customers.

Capital Resources

In comparing June 30, 2014 to December 31, 2014, stockholders’ equity did not fluctuate significantly in total as the 2.0% decrease in accumulated other comprehensive income was offset by the 2.0% increase from current earnings after quarterly dividends. The decrease 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 10.6% and 10.5% of total assets at June 30, 2015 and December 31, 2014, respectively. The Company paid dividends of $.40 per share during the six month periods ended June 30, 2015 and June 30, 2014. The Company paid dividends of $.20 per share during the three month periods ended June 30, 2015 and June 30, 2014.

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 2015, without approval of the Comptroller of the Currency, of approximately $1,500,000, plus an additional amount equal to the bank’s net profit for 2015 up to the date of any such dividend declaration.

 

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Table of Contents

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 $191,337,000 classified as available-for-sale at June 30, 2015. 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 $138,183,000. 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 June 30, 2015 was approximately $39.9 million subject to the purchase of additional FHLB stock. The subsidiary bank had short term lines of credit in the aggregate amount of approximately $21.4 million and $19.8 million available with the FHLB at June 30, 2015 and December 31, 2014, respectively. There were no short term borrowings outstanding pursuant to these agreements as of June 30, 2015 and December 31, 2014. 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 June 30, 2015 and December 31, 2014. The subsidiary bank also has pledged investment securities in the amount of $19.6 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 June 30, 2015. At June 30, 2015 and December 31, 2014, the Company had outstanding loan commitments and unused lines of credit totaling $16,557,000 and $23,155,000, respectively. As of June 30, 2015, management placed a high probability for required funding within one year of approximately $7.8 million. Approximately $7.4 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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Table of Contents

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 June 30, 2015 was as follows: given a 200 basis point increase scenario net interest income would be reduced by approximately 2.8%, and given a 200 basis point decrease scenario net interest income would be reduced by approximately 16.5%. 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 .4%, and given a 100 basis point decrease scenario net interest income would be reduced by 7.7%. 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 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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Table of Contents

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 May 1, 2015 a report on Form 8-K was filed which contained a press release dated April 29, 2015 that reported the announcement of First West Virginia Bancorp Inc.’s first quarter earnings.

On May 14, 2015 a report on Form 8-K was filed which contained the results of the submission of matters to a vote of security holders at First West Virginia Bancorp Inc.’s annual meeting of shareholders held May 12, 2015.

 

  (b) Exhibits

The exhibits listed in the Exhibit Index on page 47 of this FORM 10-Q are incorporated by reference and/or filed herewith.

 

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Table of Contents

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

  President and Chief Executive Officer
        By:  

/s/ Francie P. Reppy

 

Francie P. Reppy

 

Executive Vice President, Chief

Administrative Officer and Chief Financial

Officer

Dated: August 14, 2015

 

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Table of Contents

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 Restated Articles of Incorporation of First West Virginia Bancorp, Inc.      X               
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               

 

47