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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

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

For the Quarterly Period Ended March 31, 2012

 

¨	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 practible date.

The number of shares outstanding of the issuer’s common stock as of March 31, 2012: Common Stock, $5.00 Par Value, shares outstanding: 1,652,814 shares

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FORM 10-Q INDEX

 

 

 

				Page No.
PART I - Financial Information
Item 1.		Financial Statements			3-26
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			27-36
Item 3.		Quantitative and Qualitative Disclosures About Market Risk			37
Item 4.		Controls and Procedures			37
PART II - Other Information
Item 1.		Legal Proceedings			38
Item 1A.		Risk Factors			38
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			38
Item 3.		Defaults upon Senior Securities			38
Item 4.		Mine Safety Disclosures			38
Item 5.		Other Information			38
Item 6.		Exhibits			38
		SIGNATURES			39

 

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FIRST WEST VIRGINIA BANCORP, INC.

PART I

FINANCIAL INFORMATION

 

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First West Virginia Bancorp, Inc.

CONSOLIDATED BALANCE SHEETS

 

		March 31, 2012				December 31, 2011
ASSETS
		(Unaudited)
Cash and due from banks		$	4,642,476			$	6,671,293
Due from banks - interest bearing			16,490,534				14,245,480
Total cash and cash equivalents			21,133,010				20,916,773
Investment securities:
Available-for-sale (at fair value)			161,371,078				150,960,955
Loans			106,396,413				109,428,476
Less allowance for loan losses			(2,497,002	)			(2,503,738	)
Net loans			103,899,411				106,924,738
Premises and equipment, net			6,010,434				5,917,719
Accrued income receivable			1,195,219				1,140,273
Goodwill			1,644,119				1,644,119
Bank owned life insurance			3,544,410				3,518,450
Other assets			2,274,527				2,235,063
Total assets		$	301,072,208			$	293,258,090
LIABILITIES
Noninterest bearing deposits:
Demand		$	33,891,198			$	31,915,482
Interest bearing deposits:
Demand			45,967,433				47,890,988
Savings			90,738,682				85,579,615
Time			73,194,421				73,790,921
Total deposits			243,791,734				239,177,006
Federal funds purchased and securities sold under agreements to repurchase			17,705,376				14,013,506
Federal Home Loan Bank borrowings			3,671,749				3,693,014
Accrued interest payable			189,985				217,726
Other liabilities			1,135,438				1,630,328
Total liabilities			266,494,282				258,731,580
STOCKHOLDERS’ EQUITY
Common stock - 2,000,000 shares authorized at $5 par value:
1,662,814 shares issued at March 31, 2012 and December 31, 2011			8,314,070				8,314,070
Treasury stock - 10,000 shares at cost:			(228,100	)			(228,100	)
Surplus			6,288,403				6,288,403
Retained earnings			17,076,284				16,920,319
Accumulated other comprehensive income			3,127,269				3,231,818
Total stockholders’ equity			34,577,926				34,526,510
Total liabilities and stockholders’ equity		$	301,072,208			$	293,258,090

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

 

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First West Virginia Bancorp, Inc.

CONSOLIDATED STATEMENTS OF INCOME

 

		Three Months Ended, March 31,
		2012				2011
		(Unaudited)
INTEREST AND DIVIDEND INCOME
Loans, including fees:
Taxable		$	1,343,667			$	1,541,088
Tax-exempt			122,511				143,397
Debt securities:
Taxable			631,987				826,095
Tax-exempt			420,056				341,812
Dividends			247				—
Other interest income			12,986				9,364
Total interest and dividend income			2,531,454				2,861,756
INTEREST EXPENSE
Deposits			417,699				532,047
Federal funds purchased and repurchase agreements			26,908				25,359
Federal Home Loan Bank borrowings			44,023				45,015
Total interest expense			488,630				602,421
Net interest income			2,042,824				2,259,335
PROVISION FOR LOAN LOSSES			—				30,000
Net interest income after provision for loan losses			2,042,824				2,229,335
NONINTEREST INCOME
Service charges and other fees			110,655				112,434
Net gains on available for sale securities			—				172
Other operating income			197,340				173,902
Total noninterest income			307,995				286,508
NONINTEREST EXPENSE
Salary and employee benefits			925,726				933,757
Net occupancy expense of premises			393,036				357,224
Other operating expenses			584,340				612,559
Total noninterest expense			1,903,102				1,903,540
Income before income taxes			447,717				612,303
INCOME TAX EXPENSE (BENEFIT)			(22,283	)			62,396
Net income		$	470,000			$	549,907
WEIGHTED AVERAGE SHARES OUTSTANDING			1,652,814				1,652,814
EARNINGS PER COMMON SHARE		$	0.28			$	0.33
DIVIDENDS PER COMMON SHARE		$	0.19			$	0.19

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

 

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First West Virginia Bancorp, Inc.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

		Three Months Ended, March 31,
		2012				2011
		(Unaudited)
Net Income		$	470,000			$	549,907
Other comprehensive income:
Investment securities available for sale:
Unrealized holding gains (losses) arising during the period			(167,627	)			331,359
Income tax effect			63,078				(124,691	)
Reclassification of gains recognized in earnings			—				172
Income tax effect			—				(64	)
Total other comprehensive income (loss)			(104,549	)			206,776
Comprehensive income		$	365,451			$	756,683

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

 

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First West Virginia Bancorp, Inc.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited)

 

		Common Stock												Retained				Treasury				Accumulated Other Compre- hensive				Total
		Shares				Amount				Surplus				Earnings				Stock				Income
BALANCE, DECEMBER 31, 2011			1,662,814			$	8,314,070			$	6,288,403			$	16,920,319			$	(228,100	)		$	3,231,818			$	34,526,510
Net income			—				—				—				470,000				—				—				470,000
Other comprehensive income			—				—				—				—				—				(104,549	)			(104,549	)
Cash dividend ($.19 per share)			—				—				—				(314,035	)			—				—				(314,035	)
BALANCE, March 31, 2012			1,662,814			$	8,314,070			$	6,288,403			$	17,076,284			$	(228,100	)		$	3,127,269			$	34,577,926
		Common Stock												Retained				Treasury				Accumulated Other Compre- hensive				Total
		Shares				Amount				Surplus				Earnings				Stock				Income
BALANCE, DECEMBER 31, 2010			1,662,814			$	8,314,070			$	6,288,403			$	15,722,313			$	(228,100	)		$	1,004,500			$	31,101,186
Net income			—				—				—				549,907				—				—				549,907
Other comprehensive income			—				—				—				—				—				206,776				206,776
Cash dividend ($.19 per share)			—				—				—				(314,035	)			—				—				(314,035	)
BALANCE, March 31, 2011			1,662,814			$	8,314,070			$	6,288,403			$	15,958,185			$	(228,100	)		$	1,211,276			$	31,543,834

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

 

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First West Virginia Bancorp, Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

		For the Three Months Ended March 31,
		2012				2011
OPERATING ACTIVITIES
Net income		$	470,000			$	549,907
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Provision for loan losses			—				30,000
Depreciation			123,389				116,503
Amortization of investment securities, net			141,383				63,711
Investment security gains			—				(172	)
Loss on disposal of premises and equipment			1,052			$	—
Increase in cash surrender value of bank-owned life insurance			(25,960	)			(25,303	)
Increase in interest receivable			(54,946	)			(175,003	)
Decrease in interest payable			(27,741	)			(29,878	)
Other, net			(1,050,165	)			(359,185	)
Net cash provided by (used in) operating activities			(422,988	)			170,580
INVESTING ACTIVITIES
Net decrease in loans, net of charge-offs			3,023,818				3,922,322
Proceeds from sales of securities available-for-sale			10,230				14,847
Proceeds from maturities of securities available-for-sale			11,612,345				2,521,558
Principal collected on mortgage-backed securities			4,289,084				5,680,030
Purchases of securities available-for-sale			(26,051,903	)			(13,603,114	)
Recoveries on loans previously charged-off			1,509				32,120
Purchases of premises and equipment			(217,156	)			(200,470	)
Net cash used in investing activities			(7,332,073	)			(1,632,707	)
FINANCING ACTIVITIES
Net increase in deposits			4,614,728				5,640,991
Dividends paid			(314,035	)			(314,035	)
Increase in short-term borrowings			3,691,870				420,181
Decrease in Federal Home Loan Bank borrowings			(21,265	)			(20,274	)
Net cash provided by financing activities			7,971,298				5,726,863
INCREASE IN CASH AND CASH EQUIVALENTS			216,237				4,264,736
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR			20,916,773				9,932,613
CASH AND CASH EQUIVALENTS, END OF PERIOD		$	21,133,010			$	14,197,349
Supplemental Disclosures:
Cash Paid for Interest		$	516,371			$	632,299
Cash Paid for Income Taxes		$	50,000			$	—

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

 

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First West Virginia Bancorp, Inc. and Subsidiary

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2012 AND 2011

(Unaudited)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A summary of the significant accounting and reporting policies applied in the presentation of the accompanying 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.

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 and the valuation of deferred tax assets.

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.

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

Securities are periodically reviewed for other-than-temporary impairment based upon a number of factors, including, but not limited to, the length of time and extent to which the market value has been less than cost, the financial condition of the underlying issuer, the ability of the issuer to meet contractual obligations, the likelihood of the security’s ability to recover any decline in its market value, and management’s intent and ability to hold the security for a period of time sufficient to allow for a recovery in market value. Among the factors that are considered in determining management’s intent and ability is a review of the Company’s capital adequacy, interest rate risk position and liquidity. The assessment of a security’s ability to recover any decline in market value, the ability of the issuer to meet contractual obligations and management’s intent and ability requires considerable judgment. Once a decline in value is determined to be other than temporary, if the investor does not intend to sell the security, and it is more-likely-than-not that it will not be required to sell the security, before recovery of the security’s amortized cost basis, the charge to earnings is limited to the amount of credit loss. Any remaining difference between fair value and amortized cost (the difference defined as the non-credit portion) is recognized in other comprehensive income, net of applicable taxes. Otherwise, the entire difference between fair value and amortized cost is charged to earnings. At March 31, 2012 and December 31, 2011, there were no investment securities identified by management to be other-than-temporarily impaired. If investments decline in fair value due to adverse changes in the financial markets, charges to income could occur in future periods.

Common stock of the Federal Home Loan Bank (“FHLB”) and Federal Reserve Bank represents ownership interest in institutions that are wholly owned by other financial institutions. These equity securities are accounted for at cost and are classified with other assets. The Bank is a member of the FHLB and, as such, is required to maintain a minimum investment in stock of the FHLB that varies with the level of advances outstanding with the FHLB. The stock is bought from and sold to the FHLB based upon its $100 par value. The stock does not have a readily determinable fair value and, as such, is classified as restricted stock, carried at cost and evaluated by management. The stock’s value is determined by the ultimate recoverability of the par value rather than by recognizing temporary declines. The determination of whether the par value will ultimately be recovered is influenced by criteria such as the following: (a) the significance of the decline in net assets of the FHLB as compared with the capital stock amount and the length of time this situation has persisted, (b) commitments by the FHLB to make payments required by law or regulation and the level of such payments in relation to the operating performance, (c) the impact of legislative and regulatory changes on the customer base of the FHLB, and (d) the liquidity position of the FHLB.

 

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First West Virginia Bancorp, Inc. and Subsidiary

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2012 AND 2011

(Unaudited)

 

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Investment Securities: (Continued)

 

The FHLB had incurred losses in 2009 and for parts of 2010 due primarily to other-than-temporary impairment credit losses on its private- label mortgage-backed securities portfolio. These securities were the most affected by the extreme economic conditions in place during the previous several years. As a result, the FHLB had suspended the payment of dividends and limited the amount of capital stock repurchases. The FHLB had reported net income for both the fourth quarter and the year ended December 31, 2011, and has declared a $.10 percent annualized dividend to its shareholders effective February 23, 2012. While the FHLB has not committed to regular dividend payments or future limited repurchases of excess capital stock, it will continue to monitor the overall financial performance of the FHLB in order to determine the status of limited repurchases of excess capital or dividends in the future. Management evaluated the stock and concluded that the stock was not impaired for the periods presented herein. More consideration was given to the long-term prospects for the FHLB as opposed to the recent stress caused by the extreme economic conditions the world is facing. Management also considered that the FHLB’s regulatory capital ratios have increased from the prior year, liquidity appears adequate, new shares of FHLB stock continue to exchange hands at $100 par value, and the resumption of dividends.

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. Nonaccrual loans 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. 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 March 31, 2012 and December 31, 2011, respectively.

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, 2011 provides for a maximum commitment of $5,000,000. This commitment expires on December 28, 2012. 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 $9,763,351 and $9,470,840 as of March 31, 2012 and December 31, 2011, respectively. These loans were also subject to recourse obligation or credit risk in the amount of $405,909 and $383,269 at March 31, 2012 and December 31, 2011, respectively. The amount of income recognized as of a result of this agreement was $24,597 and $16,101 for the three months ended March 31, 2012 and 2011, 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.

 

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First West Virginia Bancorp, Inc. and Subsidiary

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2012 AND 2011

(Unaudited)

 

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Allowance for Loan Losses: (Continued)

 

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.

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. Factors considered by management in determining impairment include payment status and collateral value. The amount of impairment for these types of loans is determined by the difference between the present value of the expected cash flows related to the loan, using the original interest rate, and its recorded value, or as a practical expedient in the case of collateralized loans, the difference between the fair value of the collateral and the recorded amount of the loans. When foreclosure is probable, impairment is measured based on the fair value of the collateral.

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 $2,497,002 at March 31, 2012, 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 $1.6 million 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. 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 $3,544,410 and $3,518,450 at March 31, 2012 and December 31, 2011, respectively. The death benefit value of the bank-owned life insurance at March 31, 2012 and December 31, 2011 was $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 $49,929 and $17,921 for the three months ended March 31, 2012 and March 31, 2011, respectively.

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

 

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Table of Contents

First West Virginia Bancorp, Inc. and Subsidiary

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2012 AND 2011

(Unaudited)

 

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

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

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

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

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

Recent Accounting Pronouncements: In April 2011, the FASB issued ASU 2011-03, Transfers and Services (Topic 860): Reconsideration of Effective Control for Repurchase Agreements. The main objective in developing this Update is to improve the accounting for repurchase agreements (repos) and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity. The amendments in this Update remove from the assessment of effective control (1) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee, and (2) the collateral maintenance implementation guidance related to that criterion. The amendments in this Update apply to all entities, both public and nonpublic. The amendments affect all entities that enter into agreements to transfer financial assets that both entitle and obligate the transferor to repurchase or redeem the financial assets before their maturity. The guidance in this Update is effective for the first interim or annual period beginning on or after December 15, 2011 and should be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. Early adoption is not permitted. The adoption of the standard did not have a significant impact on the Company’s financial position or results of operations.

In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS. The amendments in this Update result in common fair value measurement and disclosure requirements in U.S. GAAP and IFRS. Consequently, the amendments change the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. The amendments in this Update are to be applied prospectively. For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011. For nonpublic entities, the amendments are effective for annual periods beginning after December 15, 2011. Early application by public entities is not permitted. The expanded disclosures have been provided in Notes 9 and 10.

In June 2011, the FASB issued ASU 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income. The amendments in this Update improve the comparability, clarity, consistency, and transparency of financial reporting and increase the prominence of items reported in other comprehensive income. To increase the prominence of items reported in other comprehensive income and to facilitate convergence of U.S. GAAP and IFRS, the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity was eliminated. The amendments require that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In the two-statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present total other comprehensive income, the components of other comprehensive income, and the total of comprehensive income. All entities that report items of comprehensive income, in any period presented, will be affected by the changes in this Update. For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. For nonpublic entities, the amendments are effective for fiscal years ending after December 15, 2012, and interim and annual periods thereafter. The amendments in this Update should be applied retrospectively, and early adoption is permitted. This did not have a significant impact on the Company’s financial statements.

 

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Table of Contents

First West Virginia Bancorp, Inc. and Subsidiary

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2012 AND 2011

(Unaudited)

 

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Recent Accounting Pronouncements (Continued)

 

In September 2011, the FASB issued ASU 2011-08, Intangibles – Goodwill and Other Topics (Topic 350), Testing Goodwill for Impairment. The objective of this update is to simplify how entities, both public and nonpublic, test goodwill for impairment. The amendments in the Update permit an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in Topic 350. The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent. Under the amendments in this Update, an entity is not required to calculate the fair value of a reporting unit unless the entity determines that it is more likely than not that its fair value is less than its carrying amount. The amendments in this Update apply to all entities, both public and nonpublic, that have goodwill reported in their financial statements and are effective for interim and annual goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011, if an entity’s financial statements for the most recent annual or interim period have not yet been issued or, for nonpublic entities, have not yet been made available for issuance. This ASU is not expected to have a significant impact on the Company’s financial statements.

In September 2011, the FASB issued ASU 2011-09, Compensation-Retirement Benefits-Multiemployer Plans (Subtopic 715-80): Disclosures about an Employer’s Participation in a Multiemployer Plan. The amendments in this Update will require additional disclosures about an employer’s participation in a multiemployer pension plan to enable users of financial statements to assess the potential cash flow implications relating to an employer’s participation in multiemployer pension plans. The disclosures also will indicate the financial health of all of the significant plans in which the employer participates and assist a financial statement user to access additional information that is available outside the financial statements. For public entities, the amendments in this Update are effective for annual periods for fiscal years ending after December 15, 2011, with early adoption permitted. For nonpublic entities, the amendments are effective for annual periods of fiscal years ending after December 15, 2012, with early adoption permitted. The amendments should be applied retrospectively for all prior periods presented. This ASU is not expected to have a significant impact on the Company’s financial statements.

In December 2011, the FASB issued ASU 2011-10, Property, Plant, and Equipment (Topic 360): Derecognition of in Substance Real Estate-a Scope Clarification. The amendments in this Update affect entities that cease to have a controlling financial interest in a subsidiary that is in substance real estate as a result of default on the subsidiary’s nonrecourse debt. Under the amendments in this Update, when a parent (reporting entity) ceases to have a controlling financial interest in a subsidiary that is in substance real estate as a result of default on the subsidiary’s nonrecourse debt, the reporting entity should apply the guidance in Subtopic 360-20 to determine whether it should derecognize the in substance real estate. Generally, a reporting entity would not satisfy the requirements to derecognize the in substance real estate before the legal transfer of the real estate to the lender and the extinguishment of the related nonrecourse indebtedness. That is, even if the reporting entity ceases to have a controlling financial interest under Subtopic 810-10, the reporting entity would continue to include the real estate, debt, and the results of the subsidiary’s operations in its consolidated financial statements until legal title to the real estate is transferred to legally satisfy the debt. The amendments in this Update should be applied on a prospective basis to deconsolidation events occurring after the effective date. Prior periods should not be adjusted even if the reporting entity has continuing involvement with previously derecognized in substance real estate entities. For public entities, the amendments in this Update are effective for fiscal years, and interim periods within those years, beginning on or after June 15, 2012. For nonpublic entities, the amendments are effective for fiscal years ending after December 15, 2013, and interim and annual periods thereafter. Early adoption is permitted. This ASU is not expected to have a significant impact on the Company’s financial statements.

In December 2011, the FASB issued ASU 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities. The amendments in this Update affect all entities that have financial instruments and derivative instruments that are either (1) offset in accordance with either Section 210-20-45 or Section 815-10-45 or (2) subject to an enforceable master netting arrangement or similar agreement. The requirements amend the disclosure requirements on offsetting in Section 210-20-50. This information will enable users of an entity’s financial statements to evaluate the effect or potential effect of netting arrangements on an entity’s financial position, including the effect or potential effect of rights of setoff associated with certain financial instruments and derivative instruments in the scope of this Update. An entity is required to apply the amendments for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.

In December 2011, the FASB issued ASU 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05. In order to defer only those changes in Update 2011-05 that relate to the presentation of reclassification adjustments, the paragraphs in this Update supersede certain pending paragraphs in Update 2011-05. Entities should continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect before Update 2011-05. All other requirements in Update 2011-05 are not affected by this Update, including the requirement to report comprehensive income either in a single continuous financial statement or in two separate but consecutive financial statements. Public entities should apply these requirements for fiscal years, and interim periods within those years, beginning after December 15, 2011. Nonpublic entities should begin applying these requirements for fiscal years ending after December 15, 2012, and interim and annual periods thereafter. This ASU did not have a significant impact on the Company’s financial statements.

 

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First West Virginia Bancorp, Inc. and Subsidiary

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2012 AND 2011

(Unaudited)

 

NOTE 2 - INVESTMENT SECURITIES

The amortized cost and estimated fair values of investment securities are as follows at March 31, 2012 and December 31, 2011:

 

		(Expressed in thousands) March 31, 2012
		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
Securities available-for-sale:
Obligations of U.S. Government corporations and agencies		$	37,110			$	144			$	(49	)		$	37,205
Obligations of states and political subdivisions			44,426				3,120				(80	)			47,466
Mortgage-backed securities			74,617				1,865				(14	)			76,468
Equity securities			204				28				—				232
Total available-for-sale		$	156,357			$	5,157			$	(143	)		$	161,371

 

		(Expressed in thousands) December 31, 2011
		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
Securities available-for-sale:
Obligations of U.S. Government corporations and agencies		$	36,014			$	202			$	—			$	36,216
Obligations of states and political subdivisions			42,154				3,150				—				45,304
Mortgage-backed securities			67,402				1,820				(7	)			69,215
Equity securities			209				17				—				226
Total available-for-sale		$	145,779			$	5,189			$	(7	)		$	150,961

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.

On a quarterly basis, the Company evaluates the severity and duration of impairment for its investment securities portfolio and the Company’s ability to hold the securities till they recover. Generally, impairment is considered other than temporary when an investment security has sustained a decline in market value for a period of twelve months. The Company has concluded that any impairment of its investment securities portfolio is not other than temporary but is the result of interest rate changes that are not expected to result in the noncollection of principal and interest during the period. There are 15 positions that are temporarily impaired at March 31, 2012.

The following tables show the Company’s gross unrealized losses and fair value, aggregated by investment category and length of time, that the individual securities have been in a continuous unrealized loss position, at March 31, 2012 and December 31, 2011:

 

		(Expressed in thousands) March 31, 2012
		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		$	8,051			$	(49	)		$	—			$	—			$	8,051			$	(49	)
Obligations of states and political subdivisions			2,222				(80	)			—				—				2,222				(80	)
Mortgage-backed securities			5,136				(13	)			102				(1	)			5,238				(14	)
Total		$	15,409			$	(142	)		$	102			$	(1	)		$	15,511			$	(143	)

 

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First West Virginia Bancorp, Inc. and Subsidiary

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2012 AND 2011

(Unaudited)

 

NOTE 2 - INVESTMENT SECURITIES (CONTINUED)

 

		(Expressed in  thousands) December 31, 2011
		Less than  Twelve Months								Twelve Months or Greater								Total
		Fair Value				Gross Unrealized Losses				Fair Value				Gross Unrealized Losses				Fair Value				Gross Unrealized Losses
Mortgage-backed securities		$	2,008			$	(6	)		$	112			$	(1	)		$	2,120			$	(7	)
Total		$	2,008			$	(6	)		$	112			$	(1	)		$	2,120			$	(7	)

The amortized cost and fair value of investment securities available for sale at March 31, 2012, 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) March 31, 2012
		Amortized Cost				Fair Value
Due in one year or less		$	547			$	550
Due after one year through five years			13,334				13,454
Due after five years through ten years			36,994				37,848
Due after ten years			30,661				32,819
			81,536				84,671
Mortgage-backed securities			74,617				76,468
Equity securities			204				232
Total		$	156,357			$	161,371

Proceeds from sales of securities available-for-sale during the three month periods ended March 31, 2012 and 2011, were $10,230 and $14,847, respectively. Gross gains of $297 and gross losses of $297 were realized during the three months ended March 31, 2012 and gross gains of $288 and gross losses of $116 were realized during the three months ended March 31, 2011. Assets carried at $56,045,000 and $53,581,000 at March 31, 2012 and December 31, 2011, respectively, were pledged to secure United States Government and other public funds and for other purposes as required or permitted by law.

The maturity distribution using book value including accretion of discounts and amortization of premiums and approximate yield of investment securities at March 31, 2012 and December 31, 2011 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)		March 31, 2012												December 31, 2011
		Amortized Cost				Fair Value				Yield				Amortized Cost				Fair Value				Yield
U.S. Government corporations and agencies
Within One Year		$	7			$	7				0.80	%		$	11			$	11				0.80	%
After One But Within Five Years			11,500				11,543				1.68				11,500				11,558				1.68
After Five But Within Ten Years			25,600				25,652				1.99				24,500				24,644				2.36
After Ten Years			3				3				0.88				3				3				0.86
			37,110				37,205				1.89				36,014				36,216				2.14
States & Political Subdivisions
Within One Year			540				543				5.45				1,145				1,151				5.48
After One But Within Five Years			1,834				1,911				5.54				1,834				1,913				5.54
After Five But Within Ten Years			11,394				12,196				5.66				11,395				12,285				5.66
After Ten Years			30,658				32,816				5.90				27,780				29,955				6.07
			44,426				47,466				5.82				42,154				45,304				5.92
Mortgage-Backed Securities			74,617				76,468				2.95				67,402				69,215				3.03
Equity Securities			204				232				2.18				209				226				2.25
Total		$	156,357			$	161,371				3.55	%		$	145,779			$	150,961				3.68	%

 

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First West Virginia Bancorp, Inc. and Subsidiary

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2012 AND 2011

(Unaudited)

 

NOTE 3 - LOANS AND LEASES

Loans outstanding at March 31, 2012 and December 31, 2011, are as follows:

 

		(Expressed in Thousands)
		March 31, 2012				December 31, 2011
Commercial and Other Loans:
Commercial		$	4,331			$	4,354
Non-rated industrial development obligations			11,049				11,508
Other loans			84				76
Total Commercial and Other Loans			15,464				15,938
Commercial Real Estate:
Non-farm, non-residential			47,647				49,146
Multifamily (5 or more) residential properties			7,115				7,222
Total Commercial Real Estate			54,762				56,368
Consumer Real Estate:
Construction			124				295
Farmland			205				213
Residential 1-4 Family			24,724				24,961
Home Equity Loans			2,259				2,380
Home Equity Lines of Credit			2,455				2,303
Total Consumer Real Estate			29,767				30,152
Consumer Loans:
Installment and other loans to individuals			6,007				6,484
Credit Cards			505				606
Total Consumer Loans			6,512				7,090
Total loans		$	106,505			$	109,548
Less unearned interest and deferred fees			109				119
Net loans		$	106,396			$	109,429

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.

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. 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.

Non-accrual loans amounted to $3,888,837 and $4,045,937 at March 31, 2012 and December 31, 2011, respectively. The amount of interest income that would have been recognized had the loans performed in accordance with their original terms was $60,400, $105,100 and $353,340 for three months ended March 31, 2012 and 2011 and for the year ended December 31, 2011, respectively.

 

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First West Virginia Bancorp, Inc. and Subsidiary

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2012 AND 2011

(Unaudited)

 

NOTE 3 - LOANS AND LEASES (CONTINUED)

 

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

 

		March 31, 2012
		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		$	15,438			$	—			$	—			$	26			$	26			$	15,464			$	—
Commercial real estate			51,640				195				—				2,927				3,122				54,762				—
Consumer real estate			29,515				121				38				93				252				29,767				—
Consumer			6,493				—				7				12				19				6,512				—
Unearned interest and deferred fees			(109	)			—				—				—				—				(109	)			—
Total loans		$	102,977			$	316			$	45			$	3,058			$	3,419			$	106,396			$	—
Non-performing loans included above are as follows:
Non-accrual loans		$	663			$	161			$	7			$	3,058			$	3,226			$	3,889			$	—

 

		December 31, 2011
		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		$	15,655			$	257			$	—			$	26			$	283			$	15,938			$	—
Commercial real estate			52,727				409				36				3,196				3,641				56,368				—
Consumer real estate			29,681				221				140				110				471				30,152				—
Consumer			7,040				9				17				24				50				7,090				—
Unearned interest and deferred fees			(119	)			—				—				—				—				(119	)			—
Total loans		$	104,984			$	896			$	193			$	3,356			$	4,445			$	109,429			$	—
Non-performing loans included above are as follows:
Non-accrual loans		$	498			$	189			$	3			$	3,356			$	3,548			$	4,046			$	—

The Company utilizes an internal asset classification system as a means of reporting problem and potential problem loans. Under the Company’s risk rating system, the Company classifies problem and potential problem loans as “Special Mention”, “Substandard”, and “Doubtful.” Substandard loans include those 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. Risk ratings are updated any time the situation warrants. Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass-rated loans.

 

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First West Virginia Bancorp, Inc. and Subsidiary

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2012 AND 2011

(Unaudited)

 

NOTE 3 - LOANS AND LEASES (CONTINUED)

 

The following tables present the risk category of loans by class of loans based on the most recent analysis performed and the contractual aging as of March 31, 2012 and December 31, 2011 (in thousands):

 

March 31, 2012		Pass				Special Mention				Substandard				Doubtful				Total
Commercial and Other		$	15,427			$	—			$	37			$	—			$	15,464
Commercial Real Estate			43,400				4,123				6,517				722				54,762
Construction and Land Development			329				—				—				—				329
Total		$	59,156			$	4,123			$	6,554			$	722			$	70,555
Current		$	59,156			$	4,123			$	3,743			$	—			$	67,022
Past Due 30-59 days			—				—				155				—				155
Past Due 60-89 days			—				—				—				—				—
Past Due 90 days or more			—				—				—				—				—
Non-accrual			—				—				2,656				722				3,378
Total		$	59,156			$	4,123			$	6,554			$	722			$	70,555
December 31, 2011		Pass				Special Mention				Substandard				Doubtful				Total
Commercial and Other		$	15,882			$	—			$	56			$	—			$	15,938
Commercial Real Estate			43,067				5,807				6,786				708				56,368
Construction and Land Development			508				—				—				—				508
Total		$	59,457			$	5,807			$	6,842			$	708			$	72,814
Current		$	59,164			$	5,807			$	3,653			$	—			$	68,624
Past Due 30-59 days			257				—				325				—				582
Past Due 60-89 days			36				—				—				—				36
Past Due 90 days or more			—				—				—				—				—
Non-accrual			—				—				2,864				708				3,572
Total		$	59,457			$	5,807			$	6,842			$	708			$	72,814

For consumer and residential 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 March 31, 2012 and December 31, 2011 (in thousands):

 

March 31, 2012		Performing				Non-performing				Total
Consumer		$	6,483			$	29			$	6,512
Consumer Real Estate			29,285				482				29,767
Total		$	35,768			$	511			$	36,279
December 31, 2011		Performing				Non-performing				Total
Consumer		$	7,063			$	27			$	7,090
Consumer Real Estate			29,705				447				30,152
Total		$	36,768			$	474			$	37,242

 

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First West Virginia Bancorp, Inc. and Subsidiary

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2012 AND 2011

(Unaudited)

 

NOTE 3 - LOANS AND LEASES (CONTINUED)

 

Impaired loans at March 31, 2012 and December 31, 2011 are set forth in the following tables (in thousands):

 

		March 31, 2012
		Unpaid Contractual Principal Balance				Recorded Investment With No Allowance				Recorded Investment With Allowance				Total Recorded Investment				Related Allowance
Commercial and Other Loans		$	38			$	38			$	—			$	38			$	—
Commercial real estate			3,340				938				2,402				3,340				797
Consumer real estate			482				482				—				482				—
Total		$	3,860			$	1,458			$	2,402			$	3,860			$	797
		December 31, 2011
		Unpaid Contractual Principal Balance				Recorded Investment With No Allowance				Recorded Investment With Allowance				Total Recorded Investment				Related Allowance
Commercial and Other Loans		$	46			$	39			$	7			$	46			$	7
Commercial real estate			3,533				1,056				2,477				3,533				829
Consumer real estate			312				312				—				312				—
Total		$	3,891			$	1,407			$	2,484			$	3,891			$	836

The average recorded investment in impaired loans at March 31, 2012 and March 31, 2011 are set forth below in the following table. No interest income was recognized on impaired loans subsequent to their classification as impaired (in thousands):

 

		Average Recorded Investment
		March 31, 2012				March 31, 2011
Commercial and Other Loans		$	35			$	55
Commercial real estate			3,180				4,136
Consumer real estate			573				374
Total		$	3,788			$	4,565

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. TDR’s on accrual status may remain in accrual status after they have been restructured as long as they continue to perform in accordance with their modified terms. There were no TDR’s in accrual status at March 31, 2012 and December 31, 2011.

 

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First West Virginia Bancorp, Inc. and Subsidiary

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2012 AND 2011

(Unaudited)

 

NOTE 3 - LOANS AND LEASES (CONTINUED)

 

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 modified loans during the period, 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.

 

		March 31, 2012												December 31, 2011
		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
Troubled Debt Restructurings
Commercial and Other Loans			—			$	—			$	—				—			$	—			$	—
Commercial real estate			—				—				—				4				3,935				2,594
Consumer real estate			—				—				—				1				23				22
Consumer			—				—				—				—				—				—
Total			—			$	—			$	—				5			$	3,958			$	2,616
Troubled Debt Restructurings That subsequently defaulted
Commercial and Other Loans			—			$	—			$	—				—			$	—			$	—
Commercial real estate			—				—				—				3				3,680				2,388
Consumer real estate			—				—				—				1				23				22
Consumer			—				—				—				—				—				—
Total			—			$	—			$	—				4			$	3,703			$	2,410

No additional funds are committed to be advanced to customers whose loans were classified as TDR’s

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 as of March 31, 2012 and March 31, 2011 (in thousands):

 

March 31, 2012		Commercial and other				Commercial Real Estate				Consumer Real Estate				Consumer				Total
Allowance for Loan Losses:
Beginning Balance		$	179			$	2,082			$	193			$	50			$	2,504
Charge-offs			—				(3	)			—				(5	)			(8	)
Recoveries			—				—				—				1				1
Provision			(31	)			(7	)			41				(3	)			—
Ending Balance		$	148			$	2,072			$	234			$	43			$	2,497
Loans individually evaluated for impairment		$	—			$	797			$	—			$	—			$	797
Loans collectively evaluated for impairment			148				1,275				234				43				1,700
Ending Balance		$	148			$	2,072			$	234			$	43			$	2,497

 

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First West Virginia Bancorp, Inc. and Subsidiary

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2012 AND 2011

(Unaudited)

 

NOTE 4 - ALLOWANCE FOR LOAN LOSSES (CONTINUED)

 

 

March 31, 2011		Commercial and other				Commercial Real Estate				Consumer Real Estate				Consumer				Total
Allowance for Loan Losses:
Beginning Balance		$	212			$	1,511			$	272			$	64			$	2,059
Charge-offs			—				(118	)			—				(3	)			(121	)
Recoveries			—				30				—				2				32
Provision			(4	)			50				(8	)			(8	)			30
Ending Balance		$	208			$	1,473			$	264			$	55			$	2,000
Loans individually evaluated for impairment		$	—			$	219			$	—			$	—			$	219
Loans collectively evaluated for impairment			208				1,254				264				55				1,781
Ending Balance		$	208			$	1,473			$	264			$	55			$	2,000

The following table presents loans individually and collectively evaluated for impairment by class of loans as of March 31, 2012 and December 31, 2011 (in thousands):

 

March 31, 2012		Commercial and other				Commercial Real Estate				Consumer Real Estate				Consumer				Unearned Discounts				Total
Loans individually evaluated		$	38			$	3,340			$	482			$	—			$	—			$	3,860
Loans collectively evaluated			15,426				51,422				29,285				6,512				(109	)			102,536
Ending Balance		$	15,464			$	54,762			$	29,767			$	6,512			$	(109	)		$	106,396
December 31, 2011
Loans individually evaluated		$	46			$	3,533			$	312			$	—			$	—			$	3,891
Loans collectively evaluated			15,892				52,835				29,840				7,090				(119	)			105,538
Ending Balance		$	15,938			$	56,368			$	30,152			$	7,090			$	(119	)		$	109,429

NOTE 5 - PREMISES AND EQUIPMENT

Premises and equipment are stated at cost, less accumulated depreciation, as follows:

 

		March 31, 2012				December 31, 2011				Original Useful Life Years
Land		$	1,973,014			$	1,973,014
Land improvements			338,069				338,069			15
Leasehold improvements			1,063,735				1,063,735			15
Buildings			5,360,646				5,193,157			39
Furniture, fixtures & equipment			5,156,471				5,130,953			3 - 7
Total			13,891,935				13,698,928
Less accumulated depreciation			7,881,501				7,781,209
Premises and equipment, net		$	6,010,434			$	5,917,719

Charges to operations for depreciation approximated $123,389 and $116,405 for the three months ended March 31, 2012 and 2011, respectively.

 

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First West Virginia Bancorp, Inc. and Subsidiary

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2012 AND 2011

(Unaudited)

 

NOTE 6 - DEPOSITS

The composition of the Bank’s deposits at March 31, 2012 and December 31 follows:

 

		(Expressed in Thousands) March 31, 2012
		Demand
		Noninterest Bearing				Interest Bearing				Savings				Time
Individuals, partnerships and corporations (includes certified and official checks)		$	33,383			$	39,240			$	85,700			$	69,588
United States Government			—				—				—				—
States and political subdivisions			446				6,728				4,934				3,116
Commercial banks and other depository institutions			62				—				105				490
Total		$	33,891			$	45,968			$	90,739			$	73,194
		(Expressed in Thousands) December 31, 2011
		Demand
		Noninterest Bearing				Interest Bearing				Savings				Time
Individuals, partnerships and corporations (includes certified and official checks)		$	31,319			$	41,702			$	80,857			$	70,125
United States Government			1				—				—				—
States and political subdivisions			540				6,189				4,723				3,176
Commercial banks and other depository institutions			55				—				—				490
Total		$	31,915			$	47,891			$	85,580			$	73,791

A maturity distribution of time certificates of deposit at March 31, 2012 and December 31, 2011, follows:

 

(dollars in thousands)		Maturities of Time Deposits
		March 31, 2012				December 31, 2011
Due in 2012		$	31,322			$	43,761
Due in 2013			18,178				10,066
Due in 2014			7,531				6,703
Due in 2015			6,873				6,373
Due in 2016			6,395				6,223
Due in 2017 and thereafter			2,895				665
Total		$	73,194			$	73,791

Time deposits include certificates of deposit issued in denominations of $100,000 or more which amounted to $21,793,000 and $22,040,000 at March 31, 2012 and December 31, 2011, respectively. Interest expense on certificates of deposit of $100,000 or more was $113,000 and $121,100 for the three months ended March 31, 2012 and 2011, respectively.

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

 

(dollars in thousands)		Maturities of Time Deposits in Excess of $100,000
		March 31, 2012				December 31, 2011
Three Months or Less		$	3,729			$	4,411
Over Three and Less than Six Months			3,248				3,719
Over Six and Less than Twelve Months			4,278				5,103
Over Twelve Months			10,538				8,807
Total		$	21,793			$	22,040

 

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First West Virginia Bancorp, Inc. and Subsidiary

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2012 AND 2011

(Unaudited)

 

NOTE 7 - FEDERAL HOME LOAN BANK BORROWINGS

The subsidiary Bank is a member of the Federal Home Loan Bank of Pittsburgh. 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 March 31, 2012 was approximately $36.1 million subject to the purchase of additional FHLB stock. The subsidiary bank had FHLB borrowings of $3,671,749 and $3,693,014 at March 31, 2012 and December 31, 2011, respectively. At March 31, 2012 the subsidiary bank had three fixed rate amortizing advances which totaled $3,671,749 with a weighted average interest rate of 4.78% of which $2,085,228 will mature in 2018 and $1,586,520 will mature in 2023.

The subsidiary bank also has a one year line of credit agreement with the Federal Home Loan Bank. The maximum credit available under this agreement is $7.0 million and expires in December 2012. There were no borrowings outstanding under this agreement at March 31, 2012 and December 31, 2011, respectively.

Contractual maturities of FHLB borrowings as of March 31, 2012 were as follows:

 

Due in 2012		$	65,337
Due in 2013			90,832
Due in 2014			95,267
Due in 2015			99,919
Due in 2016			104,800
Due in 2017 and thereafter			3,215,594
Total		$	3,671,749

NOTE 8 - REGULATORY MATTERS

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

As of March 31, 2012, the most recent notifications from the Office of the Comptroller of the Currency categorized the bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes has changed the capital category. The capital ratios of the Company and its subsidiary bank, along with the regulatory framework for adequately capitalized and well capitalized institutions are depicted as set forth in the following table:

 

		Actual								For Capital Adequacy Purposes								To be Well Capitalized Under Prompt  Corrective Action Provisions
(Amounts Expressed in Thousands)		Amount				Ratio				Amount				Ratio				Amount				Ratio
First West Virginia Bancorp, Inc.
As of March 31, 2012
Total Capital (to Risk Weighted Assets)		$	31,689				21.23	%		$	11,939				8.0	%		$	14,923				10.0	%
Tier I Capital (to Risk Weighted Assets)			29,819				19.98	%			5,969				4.0	%			8,954				6.0	%
Tier I Capital (to Adjusted Total Assets)			29,819				10.36	%			11,512				4.0	%			14,390				5.0	%
As of December 31, 2011
Total Capital (to Risk Weighted Assets)		$	31,494				21.55	%		$	11,691				8.0	%		$	14,614				10.0	%
Tier I Capital (to Risk Weighted Assets)			29,662				20.30	%			5,845				4.0	%			8,768				6.0	%
Tier I Capital (to Adjusted Total Assets)			29,662				10.46	%			11,340				4.0	%			14,175				5.0	%
Progressive Bank, N.A.
As of March 31, 2012
Total Capital (to Risk Weighted Assets)		$	31,464				21.12	%		$	11,920				8.0	%		$	14,900				10.0	%
Tier I Capital (to Risk Weighted Assets)			29,594				19.86	%			5,960				4.0	%			8,940				6.0	%
Tier I Capital (to Adjusted Total Assets)			29,594				10.29	%			11,500				4.0	%			14,375				5.0	%
As of December 31, 2011
Total Capital (to Risk Weighted Assets)		$	31,269				21.43	%		$	11,674				8.0	%		$	14,592				10.0	%
Tier I Capital (to Risk Weighted Assets)			29,437				20.17	%			5,837				4.0	%			8,755				6.0	%
Tier I Capital (to Adjusted Total Assets)			29,437				10.39	%			11,328				4.0	%			14,160				5.0	%

 

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First West Virginia Bancorp, Inc. and Subsidiary

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2012 AND 2011

(Unaudited)

 

NOTE 9 - 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.

The following table presents the assets reported on the balance sheet at their fair value as of March 31, 2012 and December 31, 2011, 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.

 

			XXXXX				XXXXX				XXXXX				XXXXX
		March 31, 2012
(dollars in thousands)		Level I				Level II				Level III				Total
Assets measured on a recurring basis:
Securities available for sale:
U.S. Government corporations and agencies		$	—			$	37,205			$	—			$	37,205
Obligations of states and political subdivisions			—				47,466				—				47,466
Mortgage-backed securities
U.S. sponsored entities			—				76,468				—				76,468
Subtotal mortgage-backed securities			—				76,468				—				76,468
Equity securities			232				—				—				232
Total securities available for sale:		$	232			$	161,139			$	—			$	161,371
Assets measured on a nonrecurring basis:
Impaired loans		$	—			$	—			$	3,860			$	3,860
Other real estate loans		$	—			$	—			$	91			$	91
Mortgage servicing rights		$	—			$	—			$	52			$	52

 

			XXXXX				XXXXX				XXXXX				XXXXX
		December 31, 2011
(dollars in thousands)		Level I				Level II				Level III				Total
Assets measured on a recurring basis:
Securities available for sale:
U.S. Government corporations and agencies		$	—			$	36,216			$	—			$	36,216
Obligations of states and political subdivisions			—				45,304				—				45,304
Mortgage-backed securities
U.S. sponsored entities			—				69,215				—				69,215
Subtotal mortgage-backed securities			—				69,215				—				69,215
Equity securities			226				—				—				226
Total securities available for sale:		$	226			$	150,735			$	—			$	150,957
Assets measured on a nonrecurring basis:
Impaired loans		$	—			$	—			$	3,891			$	3,891
Other real estate loans		$	—			$	—			$	138			$	138
Mortgage servicing rights		$	—			$	—			$	52			$	52

 

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First West Virginia Bancorp, Inc. and Subsidiary

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2012 AND 2011

(Unaudited)

 

NOTE 9 - FAIR VALUE MEASUREMENTS (CONTINUED)

 

Impaired loans that are collateral dependent are written down to fair value through the establishment of specific reserves. Techniques used to value the collateral that secure the impaired loans include observable inputs employed by certified appraisers for similar assets classified as Level III inputs. Other real estate owned is measured at fair value, less cost to sell at the date of foreclosure. Valuations are periodically performed by management and the assets are carried at the lower of carrying amount, or fair value less cost to sell.

The following table presents additional quantitative information about assets measured at fair value on a nonrecurring basis and for which the Level 3 inputs were used in determining fair value.

 

(dollars in thousands)		Quantitative Information about Level 3 Fair Value Measurements
March 31, 2012		Fair Value Estimate				Valuation Techniques		Unobservable Input		Range (Weighted Average)
Impaired Loans		$	3,891			Appraisal of collateral (1)		Appraisal adjustments (2)		0% to - 36.3% (8.8%)
								Liquidation expenses (2)		3.2% to 18.7% (9.7%)
Other real estate owned and repossessed assets		$	138			Appraisal of collateral (1)(3)
Mortgage Servicing Rights		$	52			Discounted Cash Flow		Remaining term		2.9 years to 7 years (3.49 years)
								Discount rate		9.5% to 10.5% (10%)

 

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

(2)

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

(3)	Valuation includes qualitative adjustments by managemnt and estimated liquidation expenses.

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 year end or that will be realized in the future.

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

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

Investment Securities: Fair values for investment securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments.

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. Where quoted market prices were available, primarily for certain residential mortgage loans, such market rates were utilized as estimates for fair value.

Bank Owned Life Insurance: The carrying amount of bank owned life insurance represents the cash surrender value of the underlying insurance policies, if such policies were terminated. Management believes that the carrying amount approximates the fair value.

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 at the amount payable on demand as of year end. The fair values for time deposits are based on discounted value of cash flows. The discount rates are estimated using rates currently offered for similar instruments with similar remaining maturities.

 

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Table of Contents

First West Virginia Bancorp, Inc. and Subsidiary

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2012 AND 2011

(Unaudited)

 

NOTE 9 - FAIR VALUE MEASUREMENTS (CONTINUED)

 

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

Federal Home Loan Bank borrowings: The fair value of FHLB and other long term borrowings is the carrying amount. Management believes that the carrying amount approximates the fair value.

Accrued Interest Payable: The carrying amount of accrued interest payable approximates it 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.

The estimates of fair values of financial instruments are summarized as follows at March 31, 2012 and December 31, 2011:

 

		March 31, 2012
(Amounts Expressed in Thousands)		Level I				Level II				Level III				Total Fair Value
Financial assets:
Cash and cash equivalents		$	21,133			$	—			$	—			$	21,133
Investment securities			232				161,139				—				161,371
Loans			—				—				107,607				107,607
Bank owned life insurance			3,544				—				—				3,544
Accrued interest receivable			1,195				—				—				1,195
Financial liabilities:
Deposits			170,681				74,207				—				244,888
Other borrowings			17,705				—				—				17,705
Federal Home Loan Bank borrowings			—				3,672				—				3,672
Accrued interest payable			190				—				—				190

 

		March 31, 2012								December 31, 2011
(Amounts Expressed in Thousands)		Carrying Amount				Fair Value				Carrying Amount				Fair Value
Financial assets:
Cash and cash equivalents		$	21,133			$	21,133			$	20,917			$	20,917
Investment securities			161,371				161,371				150,961				150,961
Loans			106,396				107,607				106,925				105,733
Bank owned life insurance			3,544				3,544				3,518				3,518
Accrued interest receivable			1,195				1,195				1,140				1,140
Financial liabilities:
Deposits			243,792				244,888				239,177				227,662
Federal funds purchased and repurchase agreements			17,705				17,705				14,014				14,014
Federal Home Loan Bank borrowings			3,672				3,672				3,693				3,693
Accrued interest payable			190				190				218				218

 

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First West Virginia Bancorp, Inc.

Management’s Discussion and Analysis of the Financial Condition and Results of Holding Company Operations

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

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

 

		(Unaudited)
		Three Months Ended March 31,								Years ended December 31,
		2012				2011				2011				2010				2009				2008
SUMMARY OF OPERATIONS
Total interest income		$	2,531			$	2,862			$	11,207			$	11,858			$	12,914			$	13,514
Total interest expense			488				603				2,229				3,056				4,328				5,275
Net interest income			2,043				2,259				8,978				8,802				8,586				8,239
Provision for loan losses			—				30				600				220				184				—
Total other income			308				287				2,034				1,977				1,791				1,488
Total other expenses			1,903				1,904				7,626				7,723				7,592				7,009
Income before income taxes			448				612				2,786				2,836				2,601				2,718
Net income			470				550				2,454				2,339				2,305				2,206
PER SHARE DATA (1)
Net income		$	0.28			$	0.33			$	1.48			$	1.42			$	1.39			$	1.33
Cash dividends declared			0.19				0.19				0.76				0.73				0.73				0.71
Book value per share			20.92				19.08				20.89				18.82				18.64				17.39
AVERAGE BALANCE SHEET SUMMARY
Total loans, net		$	107,967			$	119,581			$	115,415			$	124,074			$	128,206			$	120,722
Investment securities			145,284				130,226				136,409				116,990				112,142				108,114
Deposits - interest bearing			207,594				203,493				204,616				198,042				190,981				182,450
Stockholders’ equity			31,266				30,088				30,498				29,415				28,192				27,295
Total assets			289,456				279,665				283,734				273,778				266,414				258,275
BALANCE SHEET
Investments		$	161,371			$	138,823			$	150,961			$	133,169			$	115,997			$	112,366
Loans			106,396				117,324				109,428				121,367				128,581				124,635
Allowance for loan losses			(2,497	)			(2,000	)			(2,504	)			(2,059	)			(1,894	)			(1,923	)
Other assets			35,802				29,756				35,373				25,482				28,447				23,086
Total Assets		$	301,072			$	283,903			$	293,258			$	277,959			$	271,131			$	258,164
Deposits		$	243,792			$	234,116			$	239,177			$	228,475			$	221,246			$	206,385
Federal funds purchased and repurchase agreements			17,705				13,898				14,013				13,477				11,025				11,013
FHLB borrowings			3,672				3,755				3,693				3,776				7,354				10,929
Other liabilities			1,325				590				1,848				1,130				700				1,100
Stockholders’ equity			34,578				31,544				34,527				31,101				30,806				28,737
Total Liabilities and Stockholders’ equity		$	301,072			$	283,903			$	293,258			$	277,959			$	271,131			$	258,164
SELECTED RATIOS
Return on average assets			0.65	%			0.80	%			0.86	%			0.85	%			0.87	%			0.85	%
Return on average equity			6.05	%			7.41	%			8.05	%			7.95	%			8.18	%			8.08	%
Average equity to average assets			10.80	%			10.76	%			10.75	%			10.74	%			10.58	%			10.57	%
Dividend payout ratio (1)			67.86	%			57.58	%			51.35	%			51.41	%			52.52	%			53.38	%
Loan to Deposit ratio			43.64	%			50.11	%			45.75	%			53.12	%			58.12	%			60.39	%

 

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First West Virginia Bancorp, Inc.

Management’s Discussion and Analysis of the Financial Condition and Results of Holding Company Operations

 

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

The Company’s critical accounting policies involving the significant judgments and assumptions used in the preparation of the Consolidated Financial Statements as of March 31, 2012 have remained unchanged from the disclosures presented in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011 under the section “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Forward-Looking Information: Certain information contained in this report, which are not historical facts, may be forward-looking statements that involve risks and uncertainties. These statements are subject to important factors that could cause actual results to differ materially from those contemplated by such statements, including without limitation, the effect of changing economic conditions, changes in interest rates, changes in lending activities, changes in state and federal regulations, and other external factors which may materially impact the Company’s operational and financial performance.

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 and Other Intangible Assets: As discussed in Note 1 of the notes to the Consolidated Financial Statements, the Company must assess goodwill and other intangible assets each year for impairment. This assessment involves estimating cash flows for future periods. If the future cash flows were less than the recorded goodwill and other intangible assets balances, 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 $470,000 or $.28 per share for the three months ended March 31, 2012 compared to $549,907 or $.33 per share for the same period during 2011. The decrease in net income for the three months ended March 31, 2012 as compared to the same period in 2011 of $79,907 or 14.5% was primarily the result of the decrease in net interest income, offset in part by increase in noninterest income combined with the decreases in noninterest expenses, the provision for loan losses and income tax expense. Net interest income fell $216,511 or 9.6%, primarily due to the decline in the interest and fees earned on loans combined with the decline in the interest earned on investment securities, offset in part by the reduction in the expense paid on interest bearing liabilities. Noninterest income increased $21,487 or 7.5% primarily due to the increase in other operating income which was offset in part by the decline in service charges and fees earned on deposit accounts. Noninterest expenses decreased $438 or .02% during the three month period ended March 31, 2012 as compared to the same period in 2011 primarily due to the decreases in other operating expenses, as well as decreases in salary and employee benefits expense, offset in part by a increase in occupancy expenses. Income tax expense decreased during the first quarter of 2012 as compared to the same period in 2011 primarily due to the increase in tax exempt income combined with a decrease of $164,586 in pre-taxable income. The ROA was .65% for the three months ended March 31, 2012 as compared to .80% for the same period of the prior year. For the three months ended March 31, 2012 compared to March 31, 2011, the ROE was 6.05% and 7.41%, respectively. The sections that follow discuss in more detail the information contained in the summary of Selected Financial Data of the Company.

 

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Management’s Discussion and Analysis of the Financial Condition and Results of Holding Company Operations

 

EARNINGS ANALYSIS - For the three months ended March 31, 2012

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 earning assets and interest bearing liabilities combined with changes in market rates of interest greatly effect net interest income. Table One presents the average balance sheets and an interest rate analysis for the three months ended March 31, 2012 and 2011 and the year ended December 31, 2011.

For the three months ended March 31, 2012, net interest income declined $216,511 or 9.6%, from the same period in 2011. The decrease in net interest income was primarily due to the decrease in the yield earned on loans combined with the increase in the interest earned on investment securities, offset in part by the decrease in the interest paid on interest bearing liabilities. The changes in the volume and mix of earning assets and interest bearing liabilities combined with the changes in market rates of interest resulted in a taxable equivalent net yield on average earning assets of 3.58% for the three month period ended March 31, 2012 as compared to 4.00% for the same period in 2011. The average volume of earning assets increased $15.8 million or 6.2% from December 31, 2011 to March 31, 2012.

For the three months ended March 31, 2012, interest and fees on loans decreased $218,307 or 13.0%, from the same period in 2011 primarily due to the decline in the average loan volume combined with the decrease in the yield earned on loans. The taxable equivalent yield on loans fell 27 basis points, to 5.77% for the three month period ended March 31, 2012 as compared to 6.04% for the same period in 2011. The average balance on loans decreased $7.4 million or 6.5% since December 31, 2011. The decrease in loan volume was primarily due to the decreased demand for commercial and commercial real estate loans, as well as consumer and consumer real estate loans.

Interest income on investment securities fell $118,864 or 9.9% during the first quarter of 2012, 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 yield earned on investment securities, offset in part by the increase in the average volume. The taxable equivalent yield on investment securities declined 66 basis points, to 3.69% during the three month period ended March 31, 2012 as compared to 4.35% for the same period in 2011. The average volume of the investment portfolio increased approximately $8.9 million from December 31, 2011 to March 31, 2012.

Interest expense decreased $113,791 or 18.9% during the three months ended March 31, 2012 as compared to the same period in 2011. The decrease in interest expense was primarily due to the decline in the average yield paid on interest bearing liabilities which were offset in part by an increase in the average balances of interest bearing liabilities. The average yield on interest bearing liabilities fell 24 basis points, from 1.11% during the period ended March 31, 2011 to .87% during the period ended March 31, 2012, while the average volume grew $5.8 million or 2.6% during this same period. The decline in the average yield on interest bearing liabilities was primarily due to the decline in the interest rates on interest bearing deposits combined with a reduction in the average yield paid on repurchase agreements.

Noninterest Income

Noninterest income increased $21,487 or 7.5% for the three months ended March 31, 2012 as compared to same period of the prior year. The increase in noninterest income was primarily due to the increase in other operating income partially offset by the decline in service charges and other fee income.

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, home equity credit line fees, credit life commissions, credit card fees and commissions and various other charges and fees related to normal customer banking relationships. For the three month period ended March 31, 2012, other operating income increased $23,438 or 13.5% compared to the same period in 2011. The increase in other operating income during the three month period ended March 31, 2012 as compared to the same period in the prior year was primarily due to the increases in ATM fees, credit card fees, fee income earned on loans sold to the FHLB and in the earnings related to the cash surrender value of the bank owned life insurance on its key officers, offset in part by decreases in the sales of checkbooks, credit life commissions and utility bill and collection fees.

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 $1,779 or 1.6%, during the first three months of 2012 as compared to the same period in 2011.

 

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Management’s Discussion and Analysis of the Financial Condition and Results of Holding Company Operations

 

Table One 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 March 31, 2012 and 2011. Average balance sheet information for the periods ended March 31, 2012 and 2011 and was compiled using the daily averages. Loan fees and unearned discounts were included in income for average rate calculation purposes. Average yields on investment securities available for sale have been calculated based on amortized cost. Non-accrual loans were included in the average balance computations; however, no interest was included in income subsequent to the non-accrual status classification.

 

		(Unaudited)												(Unaudited)
		March 31, 2012												March 31, 2011
		Average Volume				Interest				Average Rate				Average Volume				Interest				Average Rate
ASSETS:
Investment securities:
U.S. Treasury and U. S. Government agencies		$	34,932			$	180				2.07	%		$	36,075			$	259				2.91	%
Mortgage backed securities			68,250				451				2.66	%			60,142				557				3.76	%
States and political subdivisions			41,986				420				4.02	%			33,824				351				4.21	%
Other securities			116				1				3.47	%			185				1				2.19	%
Total Investment securities:			145,284				1,052				2.91	%			130,226				1,168				3.64	%
Interest bearing deposits			15,805				9				0.23	%			10,687				6				0.23	%
Loans, net of unearned income			107,967				1,466				5.46	%			119,581				1,684				5.71	%
Other earning assets			1,227				4				1.31	%			1,407				4				1.15	%
Total earning assets			270,283				2,531				3.77	%			261,901			$	2,862				4.43	%
Other assets			21,676												19,774
Allowance for loan losses			(2,503	)											(2,010	)
Total Assets		$	289,456											$	279,665
LIABILITIES
Time deposits		$	73,814			$	316				1.72	%		$	78,537			$	408				2.11	%
Savings deposits			88,681				87				0.39	%			81,177				106				0.53	%
Interest bearing demand deposits			45,099				14				0.12	%			43,779				18				0.17	%
Federal funds purchased and repurchase agreements			15,412				27				0.70	%			13,636				25				0.74	%
FHLB and other long-term borrowings			3,682				44				4.81	%			3,765				45				4.85	%
Total interest bearing liabilities			226,688				488				0.87	%			220,894			$	602				1.11	%
Demand deposits			30,428												27,831
Other liabilities			1,074												852
Total Liabilities			258,190												249,577
STOCKHOLDERS’ EQUITY			31,266												30,088
Total Liabilities and Stockholders’ Equity		$	289,456											$	279,665
Net yield on earning assets						$	2,043				3.04	%						$	2,260				3.50	%

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 March 31, 2012 and 2011. The effect of this adjustment is presented below.

 

Investment securities		$	145,284			$	1,332				3.69	%		$	130,226			$	1,396				4.35	%
Loans			107,967				1,548				5.77	%			119,581				1,780				6.04	%
Total earning assets		$	270,283			$	2,893				4.31	%		$	261,901			$	3,186				4.93	%
Taxable equivalent net yield on earning assets						$	2,405				3.58	%						$	2,584				4.00	%

 

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Management’s Discussion and Analysis of the Financial Condition and Results of Holding Company Operations

 

EARNINGS ANALYSIS - For the three months ended March 31, 2012 (Continued)

 

Noninterest Expense

Noninterest expense decreased $438 or .02% for the three months ended March 31, 2012 as compared to same period of the prior year. The decrease in noninterest expense was primarily due to decreases in other operating expenses and salary and employee benefits expenses, offset in part by an increase in occupancy expenses. Other operating expense decreased $28,219, or 4.6%, compared to the same period of the prior year. The decrease in other operating expenses was primarily due to decreases in regulatory assessments other taxes service expenses director fees and office supplies, offset in part by an increase in advertising expenses during the three month period ended March 31, 2012 as compared to the same period in 2011.

Other operating expenses for the three months ended March 31 included the following:

 

Unaudited		2012				2011
Directors’ fees		$	29,600			$	31,100
Stationery and supplies			37,043				37,786
Regulatory assessment and deposit insurance			68,576				103,307
Advertising			49,929				17,921
Postage and transportation			40,240				41,861
Other taxes			46,355				47,196
Service Expense			91,034				102,922
Other			221,563				230,466
Total		$	584,340			$	612,559

Occupancy expenses increased $35,812 or 10.0% , compared to the same period of the prior year. Occupancy expenses increased for the three months ended March 31, 2012 as compared to the same period in 2011 primarily due to increases in real estate taxes, furniture and fixture expenses, depreciation expenses, other real estate owned expenses, insurance on bank premises, offset in part by the decrease in building maintenance expenses.

Income Taxes

Income tax expense fell during the three month period ended March 31, 2012, decreasing 135.7% compared to the same period in 2011. Income tax expense decreased primarily due to the decrease in pre-taxable income of $164,586 combined with the increase in tax-exempt income during the first three months of 2012 over the same period in 2011. Components of the income tax expense for March 31, 2012 were a income tax benefit of $38,184 for federal taxes and an income tax expense of $15,901 for West Virginia corporate net income taxes. Federal income tax rates remain consistent at 34% for the three months ended March 31, 2012 and 2011 and for the year ended December 31, 2011. West Virginia corporate net income tax rates decreased to 7.75% during the first quarter of 2012 as compared to 8.50% in 2011.

Balance Sheet Analysis

Investments

Investment securities increased approximately $10.4 million or 6.9% from December 31, 2011 to March 31, 2012. 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 70.6% of total securities at March 31, 2012, as compared to 70.0% at December 31, 2011. 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 or credit 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, increased 6.9% from December 31, 2011 and represented 100% of the investment portfolio at March 31, 2012. The increase in the available for sale securities was primarily due to the purchase of obligations of U.S Government agency and corporation securities , obligations of states and political subdivisions and mortgage backed securities. The Company did not have any investment securities classified as held to maturity securities at March 31, 2012 and December 31, 2011. 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 book value by $5,014,059 and $5,181,681 at March 31, 2012 and December 31, 2011, respectively.

 

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Management’s Discussion and Analysis of the Financial Condition and Results of Holding Company Operations

 

Loans

Total loans, net of unearned income, declined $3,032,063 or 2.8% from December 31, 2011 to March 31, 2012. The decrease in total loans in 2012 was primarily due to the decreases in commercial real estate loans, consumer loans, commercial and other loans and consumer real estate loans, which decreased $1,606,000, $578,000, $474,000 and $385,000, respectively. During the first quarter of 2012, the decrease in commercial real estate loans was primarily due to the decrease of $1,449,000 in loans secured by non-farm non-residential commercial real estate as well as a slight decrease in multi-family residential loans. The decrease in consumer loans during the first quarter of 2012 was primarily due to the decline of $477,000 in installment loans to individuals. The decrease in consumer real estate loans was primarily in residential real estate loans, offset in part by an increase in home equity lines of credit during the first quarter of 2012. Commercial loans declined during 2012 primarily in non-rated industrial development obligations.

Commercial real estate loans which include real estate loans secured by non-farm, non-residential properties and multi-family residential property loans comprised fifty-one percent (51%) of the loan portfolio. Consumer real estate loans which include construction, farmland, real estate residential loans, and home equity loans comprised twenty-eight percent (28%) of the loan portfolio. Commercial and other loans which include commercial and industrial loans and non-rated industrial development obligations comprised fifteen percent (15%) of the loan portfolio. Consumer loans which include installment and other loans to individuals and credit cards comprised six percent (6%) of the loan portfolio. There was no change in the composition of the loan portfolio from December 31, 2011 to March 31, 2012.

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 March 31, 2012 and December 31, 2011:

 

		(Unaudited)												(Unaudited)
		March 31, 2012												December 31, 2011
(dollars in thousands)		In one Year or Less				After one Year Through Five Years				After Five Years				In one Year or Less				After one Year Through Five Years				After Five Years
Construction		$	—			$	11			$	113			$	—			$	13			$	282
Commercial real estate - nonfarm, nonresidential property			3,651				3,142				40,854				3,571				3,027				42,548
Commercial			730				2,319				1,282				657				2,572				1,125
Nonrated industrial development obligations			249				3,863				6,937				289				4,270				6,949
Total		$	4,630			$	9,335			$	49,186			$	4,517			$	9,882			$	50,904

The following table presents an analysis of fixed and variable rate loans as of March 31, 2012 and December 31, 2011 along with the contractual maturities of loans other than installment loans and residential mortgages:

 

		(Unaudited)												(Unaudited)
		March 31, 2012												December 31, 2011
(dollars in thousands)		In one Year or Less				After one Year Through Five Years				After Five Years				In one Year or Less				After one Year Through Five Years				After Five Years
Fixed Rates		$	3,951			$	5,252			$	10,281			$	3,905			$	5,751			$	10,208
Variable Rates			679				4,083				38,905				612				4,131				40,696
Total		$	4,630			$	9,335			$	49,186			$	4,517			$	9,882			$	50,904

 

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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 current agreement dated December 28, 2011 provides for a maximum commitment of $5,000,000. This commitment expires on December 28, 2012. 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 under this agreement is $9,763,351 and $9,470,840 as of March 31, 2012 and December 31, 2011, respectively. The loans which were sold were also subject to a recourse obligation or credit risk in the amount of $405,909 and $383,269 at March 31, 2012 and December 31, 2011, 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 $3,980,000 at March 31, 2012 as compared to $4,184,000 at December 31, 2011. Non-performing loans decreased $204,000 in 2012. The decrease in non-performing loans in 2012 was primarily due to the decrease in non-accrual loans, as well as a decrease in other real estate loans.

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:

 

		March 31,				December 31,
(dollars in thousands)		2012				2011				2010				2009				2008
Past Due 90 Days or More , still accruing:
Commercial and Other Loans		$	—			$	—			$	—			$	—			$	—
Commercial real estate			—				—				—				—				—
Consumer real estate			—				—				28				—				—
Consumer			—				—				—				—				—
			—				—				28				—				—
Non-accrual:
Commercial and Other Loans		$	38			$	39			$	54			$	2,254			$	111
Commercial real estate			3,340				3,533				4,147				1,195				2,866
Consumer real estate			482				447				688				624				282
Consumer			29				27				14				19				16
		$	3,889			$	4,046			$	4,903			$	4,092			$	3,275
Other Real Estate		$	91			$	138			$	8			$	173			$	8
Total non-performing assets		$	3,980			$	4,184			$	4,939			$	4,265			$	3,283
Total non-performing assets to total loans and other real estate
			3.74	%			3.82	%			4.07	%			3.31	%			2.63	%

Loans are placed in non-accrual when the principal or interest is past due 90 days or more, unless the loan is both well secured and in the process of collection. Non-accrual loans were $3,889,000 or 3.7% of total loans outstanding as of March 31, 2012, as compared to $4,046,000 or 3.7% of total loans outstanding as of December 31, 2011. Non-accrual loans decreased in 2012 primarily due to the payments received on nonaccrual loans. There were no loans past due 90 days or more and still accruing interest at March 31, 2012 and December 31, 2011. Other real estate owned totaled $91,000 and $138,000 at March 31, 2012 and December 31, 2011, respectively. Management continues to monitor the nonperforming assets to ensure against deterioration in collateral values.

 

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Management’s Discussion and Analysis of the Financial Condition and Results of Holding Company 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 $6,736 or .3%, since December 31, 2011. The allowance for loan losses represented 2.3% of outstanding loans as of March 31, 2012 and at December 31, 2011. Net loan charge-offs amounted to $6,736 for the three month period ended March 31, 2012, compared to loan charge-offs of $88,375 for the same period in 2011. There was no provision made to the allowance for loan losses during the three months ended March 31, 2012. There was a provision in the amount of $30,000 made to the allowance for loan losses during the three months ended March 31, 2011. 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 Company has allocated the allowance for possible loan losses to specific portfolio segments based upon historical net charge-off experience, changes in the level of nonperforming assets, local economic conditions and management’s experience.

The following table presents an allocation of the allowance for possible loan losses at each of the four year periods ended December 31, 2011, and the three month period ended March 31, 2012. The allocation presented below is based on the historical average of net charge offs per category combined with the change in loan growth and management’s review of the loan portfolio.

Table Seven - Analysis of Allowance for Possible Loan Losses

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

 

		March 31,				December 31,
(dollars in thousands)		2012				2011				2010				2009				2008
Allowance for loan losses:
Balance at beginning of period:		$	2,504			$	2,059			$	1,894			$	1,923			$	2,043
Loans Charged off:
Commercial and Other loans			—				8				14				10				150
Commercial real estate			3				156				—				155				15
Consumer real estate			—				28				—				—				—
Consumer			5				19				51				66				29
Total			8				211				65				231				194
Recoveries:
Commercial and Other loans			—				2				1				11				69
Commercial real estate			—				45				—				—				3
Consumer real estate			—				—				—				—				—
Consumer			1				9				9				7				2
Total			1				56				10				18				74
Net Charge-offs			7				155				55				213				120
Additions Charged to Operations			—				600				220				184				—
Balance at end of period:		$	2,497			$	2,504			$	2,059			$	1,894			$	1,923
Average Loans Outstanding		$	107,967			$	115,415			$	124,074			$	128,206			$	120,722
Ratio of net charge-offs to Average loans outstanding for the period			0.01	%			0.13	%			0.04	%			0.17	%			0.10	%
Ratio of the Allowance for Loan Losses to Loans Outstanding for the period			2.35	%			2.29	%			1.70	%			1.47	%			1.54	%

 

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Management’s Discussion and Analysis of the Financial Condition and Results of Holding Company Operations

 

Table Eight

Loan Portfolio - Allocation of allowance for possible loan losses

The following table presents an allocation of the allowance for possible loan losses at March 31, 2012 and each of the four year periods ended December 31, 2011. The allocation presented below is based on the historical average of net charge offs per category combined with the change in loan growth and management’s review of the loan portfolio.

 

		March 31,								December 31,
		2012								2011								2010								2009								2008
(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		$	148				14.5	%		$	179				14.6	%		$	212				16.9	%		$	203				16.1	%		$	202				17.7	%
Commercial real estate			2,072				51.5	%			2,082				51.5	%			1,511				46.5	%			1,345				45.5	%			1,350				41.8	%
Consumer real estate			234				28.0	%			193				27.4	%			272				28.1	%			267				28.2	%			267				29.2	%
Consumer			43				6.0	%			50				6.5	%			64				8.5	%			79				10.2	%			104				11.3	%
Total		$	2,497				100.0	%		$	2,504				100.0	%		$	2,059				100.0	%		$	1,894				100.0	%		$	1,923				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 increased approximately $4.6 million or 1.9% during the first three months of 2012. Since year end the increase in total deposits was primarily due to increases in noninterest bearing demand deposits and savings deposits which increased approximately $1,976,000 and $5,159,000, respectively, offset in part by decreases in interest bearing demand deposits and certificates of deposit which fell $1,924,000 and $596,000, respectively. At March 31, 2012, 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 from December 31, 2011 to March 31, 2012 were a 1% increase in noninterest bearing deposits and a 1% decrease in interest bearing deposits.

Federal Funds Purchased and Repurchase Agreements

Federal funds purchased and repurchase agreements represent borrowings of a short duration, usually less than 30 days. For repurchase agreements, the securities underlying the agreements remained under the Bank’s control. There were no Federal funds purchased at March 31, 2012 and December 31, 2011. Repurchase agreements increased $3,691,870 or 26.4%, from December 31, 2011 to March 31, 2012. The increase in repurchase agreements since year end was primarily due to the increase in the balances maintained by existing commercial customers.

Capital Resources

Stockholders’ equity increased .5% during the three month period ended March 31, 2012 entirely from current earnings after quarterly dividends, and a .3% decrease in accumulated other comprehensive income. The decrease in accumulated other comprehensive income is primarily attributable to the effect of the change in the net unrealized gain on securities available for sale. Stockholders’ equity amounted to 11.5% and 11.8% of total assets at March 31, 2012 and December 31, 2011, respectively. The Company paid dividends of $.19 per share during the three month periods ended March 31, 2012 and 2011, respectively.

The Company’s primary source of funds for payment of dividends to shareholders is from the dividends from its subsidiary bank. The approval of the Comptroller of the Currency is required to pay dividends if the total of all dividends declared by a national bank in any calendar year exceeds the total of its net profits (as defined) for the year, combined with its retained net profits of the preceding two years. Under this formula, the Company’s subsidiary bank can declare dividends in 2012, without approval of the Comptroller of the Currency, of approximately $2,396,000, plus an additional amount equal to the bank’s net profit for 2012 up to the date of any such dividend declaration.

 

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Management’s Discussion and Analysis of the Financial Condition and Results of Holding Company 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 $161,371,078 classified as available for sale at March 31, 2012. 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 $15,511,000. 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 March 31, 2012 was approximately $36.1 million subject to the purchase of additional FHLB stock. At March 31, 2012, the subsidiary bank had a short term line of credit in the aggregate amount of approximately $7 million available with the FHLB. There were no short term borrowings outstanding pursuant to this agreement as of March 31, 2012. At March 31, 2011 and December 31, 2010, the Company had outstanding loan commitments and unused lines of credit totaling $22,609,000 and $15,371,000, respectively. As of March 31, 2012, management placed a high probability for required funding within one year of approximately $14.7 million. Approximately $7.2 million is principally unused overdraft, home equity and credit card lines on which management places a low probability for required funding.

 

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FIRST WEST VIRGINIA BANCORP, INC.

PART I

 

Item 3

Quantitative and Qualitative Disclosures About Market Risk

The Company’s subsidiary bank uses an asset/liability model to measure the impact of changes in interest rates on net interest income on a periodic basis. Assumptions are made to simulate the impact of future changes in interest rates and/or changes in balance sheet composition. The effect of changes in future interest rates on the mix of assets and liabilities may cause actual results to differ from simulated results. Guidelines established by the Company’s subsidiary bank provides that the estimated net interest income may not change by more than 10% in a one year period given a +/- 200 basis point parallel shift in interest rates. Excluding the potential effect of interest rate changes on assets and liabilities of the Holding Company which are not deemed material, the anticipated impact on net interest income of the subsidiary bank at March 31, 2012 was as follows: given a 200 basis point increase scenario net interest income would be reduced by approximately 4.0%, and given a 200 basis point decrease scenario net interest income would be decreased by approximately 5.1%. 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 decreased by approximately 1.2%, and given a 100 basis point decrease scenario net interest income would be decreased by 4.1%. 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 Chairman, President and Chief Executive Officer, Sylvan J. Dlesk, and Executive Vice President, Chief Administrative Officer and Chief Financial Officer, Francie P. Reppy, after evaluating the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) as of a date within 90 days prior to the filing of this report (the “Evaluation Date”), have concluded that, as of the Evaluation Date, the Company’s disclosure controls and procedures were adequate and effective to ensure that material information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

Changes in Internal Controls

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

 

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FIRST WEST VIRGINIA BANCORP, INC.

PART II

OTHER INFORMATION

 

Item 1

Legal Proceedings

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

 

Item 1A

Risk Factors

    Not applicable to Smaller Reporting Companies

 

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

    Inapplicable

 

Item 3

Defaults Upon Senior Securities

    Inapplicable

 

Item 4

Mine Safety Disclosures

 

Item 5

Other Information

    Inapplicable

 

Item 6

Exhibits and Reports on Form 8-K

    (a)     Reports on Form 8-K

On February 16, 2012 a report on Form 8-K was filed which reported under Item 5.03 three amendments to the Company’s By-Laws.

On March 26, 2012 a report on Form 8-K was filed which contained a press release dated March 21, 2012 that reported the announcement of First West Virginia Bancorp Inc.’s fourth quarter and year   end earnings.

    (b)     Exhibits

The exhibits listed in the Exhibit Index on page 40 of this FORM 10-Q are incorporated by reference and/or filed herewith.

 

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SIGNATURES

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

 

First West Virginia Bancorp, Inc.
(Registrant)
By:		/s/ Sylvan J. Dlesk
		Sylvan J. Dlesk
		Chairman, President and Chief Executive Officer
By:		/s/ Francie P. Reppy
		Francie P. Reppy
		Executive Vice President, Chief Administrative Officer and Chief Financial Officer

Dated: May 14, 2012

 

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EXHIBIT INDEX

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

 

Incorporated by Reference

Exhibit Number

Description

Filed Herewith

Form

File No.

Exhibit

Filing Date

3.1

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

10-K

001-13652

3.1

3/31/10

3.2

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

10-K

001-13652

3.1

3/31/12

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

11.1

Statement regarding computation of per share earnings.

X

13.3

Summarized Quarterly Financial Information

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

 

40