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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, 2015

 

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

For the transition period from                      to                     .

Commission File No. 1-13652

 

 

First West Virginia Bancorp, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

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

1701 Warwood Avenue

Wheeling, West Virginia 26003

(Address of principal executive offices)

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

N/A

(Former name, former address and former fiscal year,

if changed since last report)

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

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

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

 

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

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

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY

PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

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

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practible date. The number of shares outstanding of the issuer’s common stock as of March 31, 2015: Common Stock, $5.00 Par Value, shares outstanding: 1,728,730 shares

 

 

 

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FORM 10-Q INDEX

 

				Page No.
PART I - Financial Information
Item 1.		Financial Statements			4-28
		Consolidated Balance Sheets at March 31, 2015 (unaudited) and December 31, 2014			4
		Consolidated Statements of Income for the three months ended March 31, 2015 and March 31, 2014 (unaudited)			5
		Consolidated Statements of Comprehensive Income for the three months ended March 31, 2015 and March 31, 2014 (unaudited)			6
		Consolidated Statements of Changes in Stockholders’ Equity for the three months ended March 31, 2015 and March 31, 2014 (unaudited)			7
		Consolidated Statements of Cash Flows for the three months ended March 31, 2015 and March 31, 2014 (unaudited)			8
		Notes to the Consolidated Financial Statements (unaudited)			9-28
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			29-39
Item 3.		Quantitative and Qualitative Disclosures About Market Risk			40
Item 4.		Controls and Procedures			40
PART II - Other Information
Item 1.		Legal Proceedings			41
Item 1A.		Risk Factors			41
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			41
Item 3.		Defaults Upon Senior Securities			41
Item 4.		Mine Safety Disclosures			41
Item 5.		Other Information			41
Item 6.		Exhibits			41
SIGNATURES					42

 

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FIRST WEST VIRGINIA BANCORP, INC.

PART I

FINANCIAL INFORMATION

 

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Item 1 - Financial Statements

First West Virginia Bancorp, Inc. and Subsidiary

CONSOLIDATED BALANCE SHEETS

 

		March 31, 2015				December 31, 2014
(in thousands, except shares)		(Unaudited)
ASSETS
Cash and due from banks		$	5,472			$	5,348
Due from banks - interest bearing			18,793				15,048
Total cash and cash equivalents			24,265				20,396
Investment securities:
Available-for-sale (at fair value)			198,648				197,079
Loans			102,844				99,217
Less allowance for loan losses			(1,811	)			(1,813	)
Net loans			101,033				97,404
Premises and equipment, net			8,310				8,413
Accrued income receivable			1,121				1,015
Goodwill			1,644				1,644
Bank owned life insurance			3,867				3,840
Other assets			1,977				2,599
Total assets		$	340,865			$	332,390
LIABILITIES
Noninterest bearing deposits:
Demand		$	39,952			$	41,556
Interest bearing deposits:
Demand			57,760				55,459
Savings			115,788				112,756
Time			61,041				62,372
Total deposits			274,541				272,143
Federal funds purchased and securities sold under agreements to repurchase			25,924				21,051
Federal Home Loan Bank borrowings			3,396				3,420
Accrued interest payable			109				120
Other liabilities			665				784
Total liabilities			304,635				297,518
COMMITMENTS AND CONTINGENT LIABILITIES
Commitments and contingent liabilities			—				—
STOCKHOLDERS’ EQUITY
Common stock - 2,000,000 shares authorized at $5 par value:
1,728,730 shares issued at March 31, 2015 and December 31, 2014			8,644				8,644
Treasury stock - 10,000 shares at cost			(228	)			(228	)
Surplus			6,966				6,966
Retained earnings			19,349				18,655
Accumulated other comprehensive income			1,499				835
Total stockholders’ equity			36,230				34,872
Total liabilities and stockholders’ equity		$	340,865			$	332,390

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

 

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First West Virginia Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF INCOME

 

		Three Months Ended March 31,
		2015				2014
(in thousands, except shares and per share amounts)		(Unaudited)
INTEREST AND DIVIDEND INCOME
Loans, including fees:
Taxable		$	1,290			$	1,045
Tax-exempt			128				125
Debt securities:
Taxable			735				673
Tax-exempt			332				542
Other interest and dividend income			46				24
Total interest and dividend income			2,531				2,409
INTEREST EXPENSE
Deposits			261				285
Federal funds purchased and repurchase agreements			49				38
Federal Home Loan Bank borrowings			41				42
Total interest expense			351				365
Net interest income			2,180				2,044
PROVISION FOR LOAN LOSSES			—				—
Net interest income after provision for loan losses			2,180				2,044
NONINTEREST INCOME
Service charges and other fees			75				86
Net gains on available for sale securities			956				—
Other-than-temporary losses on securities:
Total other-than-temporary losses			—				(49	)
Portion of loss recognized in other comprehensive income (before taxes)			—				—
Net impairment losses recognized in earnings			—				(49	)
Other operating income			167				169
Total noninterest income			1,198				206
NONINTEREST EXPENSE
Salary and employee benefits			992				910
Net occupancy expense of premises			438				430
Other operating expenses			583				570
Total noninterest expense			2,013				1,910
Income before income taxes			1,365				340
INCOME TAX EXPENSE (BENEFIT)			327				(106	)
Net income		$	1,038			$	446
WEIGHTED AVERAGE SHARES OUTSTANDING			1,718,730				1,718,730
EARNINGS PER COMMON SHARE		$	0.60			$	0.26
DIVIDENDS PER COMMON SHARE		$	0.20			$	0.20

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

 

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First West Virginia Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

		Three Months Ended, March  31,
		2015				2014
(in thousands)		(Unaudited)
Net Income		$	1,038			$	446
Other comprehensive income:
Investment securities available for sale
Unrealized holding gains arising during the period			2,021				2,533
Income tax effect			(761	)			(953	)
Reclassification of (gains) losses recognized in earnings			(956	)			49
Income tax effect			360				(19	)
Total other comprehensive income			664				1,610
Comprehensive income		$	1,702			$	2,056

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

 

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First West Virginia Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited)

(in thousands, except shares and per share amounts)

 

																						Accumulated
																						Other
		Common Stock								Treasury								Retained				Comprehensive
		Shares				Amount				Stock				Surplus				Earnings				Income				Total
BALANCE, DECEMBER 31, 2014			1,728,730			$	8,644			$	(228	)		$	6,966			$	18,655			$	835			$	34,872
Net income			—				—				—				—				1,038				—				1,038
Other comprehensive income			—				—				—				—				—				664				664
Cash dividend ($.20 per share)			—				—				—				—				(344	)			—				(344	)
BALANCE, MARCH 31, 2015			1,728,730			$	8,644			$	(228	)		$	6,966			$	19,349			$	1,499			$	36,230
																						Accumulated
																						Other
		Common Stock								Treasury								Retained				Comprehensive
		Shares				Amount				Stock				Surplus				Earnings				Income (Loss)				Total
BALANCE, DECEMBER 31, 2013			1,728,730			$	8,644			$	(228	)		$	6,966			$	18,127			$	(2,718	)		$	30,791
Net income			—				—				—				—				446				—				446
Other comprehensive income			—				—				—				—				—				1,610				1,610
Cash dividend ($.20 per share)			—				—				—				—				(344	)			—				(344	)
BALANCE, MARCH 31, 2014			1,728,730			$	8,644			$	(228	)		$	6,966			$	18,229			$	(1,108	)		$	32,503

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

 

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First West Virginia Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

		Three Months Ended March 31,
(in thousands)		2015				2014
OPERATING ACTIVITIES
Net income		$	1,038			$	446
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization			160				152
Amortization of investment securities, net			170				103
Investment security gains			(956	)			—
Other-than-temporary losses on securities			—				49
Net gains on sales of mortgage loans			—				(2	)
Loss on disposal of premises and equipment			3				—
Increase in cash surrender value of bank-owned life insurance			(27	)			(26	)
Originations of mortgage loans held for sale			—				(85	)
Proceeds from sales of mortgage loans			—				87
Increase in interest receivable			(106	)			(129	)
Decrease in interest payable			(11	)			(10	)
Decrease (increase) in deferred taxes			48				(7	)
Other, net			54				(1,423	)
Net cash provided by (used in) operating activities			373				(845	)
INVESTING ACTIVITIES
Net decrease (increase) in loans, net of charge-offs			(3,632	)			2,432
Recoveries on loans previously charged-off			3				1
Proceeds from sales of securities available-for-sale			39,547				1
Proceeds from maturities, prepayments, and calls of securities available-for-sale			9,319				4,768
Purchases of securities available-for-sale			(48,584	)			(7,741	)
Purchases of premises and equipment			(60	)			(473	)
Net cash used in investing activities			(3,407	)			(1,012	)
FINANCING ACTIVITIES
Net increase (decrease) in deposits			2,398				(6,323	)
Dividends paid			(344	)			(344	)
Increase in short-term borrowings			4,873				524
Repayment of Federal Home Loan Bank borrowings			(24	)			(23	)
Net cash provided by (used in) financing activities			6,903				(6,166	)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS			3,869				(8,023	)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR			20,396				31,875
CASH AND CASH EQUIVALENTS, END OF PERIOD		$	24,265			$	23,852
Supplemental Disclosures:
Cash Paid for Interest		$	362			$	375
Cash Paid for Income Taxes			—				—

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, 2015 AND 2014

(Unaudited)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

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

The accompanying unaudited consolidated financial statements were prepared in accordance with instructions for Form 10-Q and, therefore, do not include information or footnotes necessary for a complete presentation of financial position, results of operations, and cash flows in conformity with generally accepted accounting principles. Accordingly, these financial statements should be read in conjunction with the consolidated financial statements and notes thereto of the Company included in the Annual Report on Form 10-K for the year ended December 31, 2014. However, in the opinion of management, all adjustments (consisting of only normal recurring adjustments) which are necessary for a fair presentation of the financial statements have been included. The results of operations for the three month period ended March 31, 2015, are not necessarily indicative of the results which may be expected for the entire year or any other period. The consolidated balance sheet of the Company as of December 31, 2014 has been derived from the audited consolidated balance sheet of the Company as of that date.

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

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

Cash and Cash Equivalents: Cash and cash equivalents consist of cash on hand and amounts due from banks and federal funds sold with maturities of less than 90 days. At March 31, 2015, the Company’s cash accounts exceeded federally insured limits by approximately $806,000. Additionally, the Company had approximately $17,837,000 on deposit with the Federal Reserve Bank and the Federal Home Loan Bank of Pittsburgh as of March 31, 2015.

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

Securities are periodically reviewed for other-than-temporary impairment based upon a number of factors, including, but not limited to, the length of time and extent to which the market value has been less than cost, the financial condition of the underlying issuer, the ability of the issuer to meet contractual obligations, the likelihood of the security’s ability to recover any decline in its market value, and management’s intent and ability to hold the security for a period of time sufficient to allow for a recovery in market value. Among the factors that are considered in determining management’s intent and ability is a review of the Company’s capital adequacy, interest rate risk position and liquidity. The assessment of a security’s ability to recover any decline in market value, the ability of the issuer to meet contractual obligations and management’s intent and ability requires considerable judgment. Once a decline in value is determined to be other-than-temporary, if the 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, 2015 and December 31, 2014, 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.

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

 

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First West Virginia Bancorp, Inc. and Subsidiary

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2015 AND 2014

(Unaudited)

 

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Loans and Loans Held for Sale: Loans are generally reported at the principal balance outstanding, net of unearned income. Interest income on loans is accrued based on the principal outstanding. It is the Company’s policy to discontinue the accrual of interest when either the principal or interest is past due 90 days or more, unless the loan is both well secured and in the process of collection. It is the Company’s policy not to recognize interest income on specific impaired loans unless the likelihood of future loss is remote. Interest payments received on such loans are applied as a reduction of the loan principal balance. A nonaccrual loan may be returned to accrual status when none of its principal and interest payments are due and there has been a sustained period of repayment performance. Loans are considered past due when contractually required principal and interest payments have not been made on the due dates. Loan origination and commitment fees and certain direct loan origination costs are deferred and the net amount amortized over the contractual life of the related loans or commitments as an adjustment of the related loan’s yield. Loans held for sale are carried at the lower of cost or estimated market value in the aggregate. There were no loans held for sale as of March 31, 2015 and December 31, 2014.

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

The Company has entered into an agreement with the Federal Home Loan Bank of Pittsburgh (“FHLB”) under which the bank may sell conforming one-to-four family residential mortgage loans to the FHLB. The current agreement dated December 28, 2013 provides for a maximum commitment of $5,000,000. This commitment expires on December 28, 2015. Loans sold to the FHLB are sold with limited recourse or credit risk based upon utilization of the original commitment. The bank also maintains the servicing of these loans, for which it is paid a servicing fee. The total amount of loans sold and outstanding to the FHLB were $8,267,000 and $8,501,000 as of March 31, 2015 and December 31, 2014, respectively. These loans were also subject to recourse obligation or credit risk in the amount of $322,000 and $323,000 at March 31, 2015 and December 31, 2014, respectively. No liability has been recorded for the recourse obligation as the likelihood of incurring the liability is considered remote. The amount of income recognized as a result of this agreement was $6,000 and $8,000 for the three months ended March 31, 2015 and 2014, respectively.

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

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

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

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

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

 

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First West Virginia Bancorp, Inc. and Subsidiary

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2015 AND 2014

(Unaudited)

 

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Allowance for Loan Losses: (Continued)

 

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

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

Individual loan reviews are based upon specific quantitative and qualitative criteria, including the size of the loan, loan quality ratings, value of collateral, repayment ability of borrowers, and historical experience factors. The historical experience factors utilized for individual loan reviews are based upon past loss experience, known trends in losses and delinquencies, the growth of loans in particular markets and industries, and known changes in economic conditions in the particular lending markets. Allowances for homogeneous loans (such as residential mortgage loans, personal loans, etc.) are evaluated based upon historical loss experience, trends in losses and delinquencies, growth of loans in particular markets, and known changes in economic conditions in each lending market. There can be no assurance the allowance for loan losses will be adequate to cover all losses, but management believes the allowance for loan losses in the amount of $1,811,000 at March 31, 2015, was adequate to provide for probable losses from existing loans based on information currently available. While management uses available information to provide for loan losses, the ultimate collectibility of a substantial portion of the loan portfolio, and the need for future additions to the allowance, will be based on changes in economic conditions and other relevant factors. As such, an adverse change in economic activity could reduce cash flows for both commercial and individual borrowers, which would likely cause the Company to experience increases in problem assets, delinquencies and losses on loans.

Goodwill: Goodwill resulted from the Company’s purchase of a less-than-whole financial institution (the “branch”). The goodwill value of $1,644,000 is supported ultimately by revenue that is driven by the volume of business transacted. A decline in earnings as a result of a lack of growth or the inability to deliver cost effective services over sustained periods can lead to impairment of goodwill that could adversely impact earnings in future periods.

Goodwill is periodically reviewed for impairment. No impairment losses were recognized as of March 31, 2015 and 2014. Additionally, future events could cause management to conclude that impairment indicators exist and that the goodwill is impaired, which would result in the Company recording an impairment loss. Any resulting impairment loss could have a material, adverse impact on the Company’s financial condition and results of operations.

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

Bank-owned Life Insurance: Bank-owned life insurance consists of investments in life insurance policies on executive officers and other members of the bank’s management. The policies are carried at their net cash surrender value. Changes in the policy value are recorded as an adjustment to the carrying value with the corresponding amount recognized as non-interest income or expense. Earnings on these policies are based on the net earnings on the cash surrender value of the policies. The net cash surrender value of bank-owned life insurance was $3,867,000 and $3,840,000 at March 31, 2015 and December 31, 2014, respectively. The death benefit value of the bank-owned life insurance was $8.9 million at March 31, 2015 and $8.8 million at December 31, 2014. 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 $30,000 and $39,000 for the three months ended March 31, 2015 and 2014, respectively.

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

 

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First West Virginia Bancorp, Inc. and Subsidiary

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2015 AND 2014

(Unaudited)

 

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

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

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

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

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

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

 

•

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

 

•

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

 

•

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

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

In June 2014, the FASB issued ASU 2014-11, Transfers and Servicing: Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures. The amendments in this update require entities to account for repurchase-to-maturity transactions as secured borrowings (rather than as sales with forward repurchase agreements), eliminates accounting guidance on linking repurchase financing transactions, and expands disclosure requirements related to certain transfers of financial assets that are accounted for as sales and certain transfers, such as repos, securities lending transactions, and repurchase-to-maturity transactions, accounted for as secured borrowings. The amendments in ASU 2014-11 are effective for annual periods beginning after December 15, 2014. The amendments must present changes in accounting for transactions outstanding on the effective date as a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. Early adoption is prohibited. Adoption of the ASU is not expected to have a significant effect on the Company’s consolidated financial statements.

 

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First West Virginia Bancorp, Inc. and Subsidiary

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2015 AND 2014

(Unaudited)

 

NOTE 2 - INVESTMENT SECURITIES

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

 

		(Expressed in thousands)
		March 31, 2015
		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
Securities available-for-sale:
Obligations of U.S. Government corporations and agencies		$	48,746			$	90			$	(163	)		$	48,673
Obligations of states and political subdivisions			32,672				2,105				(16	)			34,761
Mortgage-backed securities			114,656				918				(568	)			115,006
Equity securities			171				38				(1	)			208
Total available-for-sale		$	196,245			$	3,151			$	(748	)		$	198,648

 

		December 31, 2014
		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
Securities available-for-sale:
Obligations of U.S. Government corporations and agencies		$	44,595			$	13			$	(602	)		$	44,006
Obligations of states and political subdivisions			40,349				2,144				(71	)			42,422
Mortgage-backed securities			110,626				818				(1,001	)			110,443
Equity securities			171				38				(1	)			208
Total available-for-sale		$	195,741			$	3,013			$	(1,675	)		$	197,079

Certain investments in debt securities are reported in the financial statements at an amount less than their historical cost. Total fair value of these investments at March 31, 2015 and December 31, 2014, was approximately $71,348,000 and $92,305,000, which is approximately 35.9% and 46.8%, respectively, of the Company’s available-for-sale investment portfolio.

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

The unrealized losses on the Company’s investments in direct obligations of U.S. government corporations and agencies were caused by interest rate increases. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost bases of the investments. Because the Company does not intend to sell the investments and it is not more likely than not the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at March 31, 2015.

The unrealized losses on the Company’s investments in residential mortgage-backed securities were caused by interest rate increases. The Company expects to recover the amortized cost basis over the term of the securities. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell the investments and it is not more likely than not the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at March 31, 2015.

The unrealized losses on the Company’s investments in securities of state and political subdivisions were caused by interest rate increases. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost bases of the investments. Because the Company does not intend to sell the investments and it is not more likely than not the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at March 31, 2015.

 

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First West Virginia Bancorp, Inc. and Subsidiary

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2015 AND 2014

(Unaudited)

 

NOTE 2 - INVESTMENT SECURITIES (CONTINUED)

 

On a quarterly basis, the Company evaluates the severity and duration of impairment for its investment securities portfolio and the Company’s ability to hold the securities until they recover. Generally, impairment is considered other-than-temporary when an investment security has sustained a decline in market value for a period of twelve months. The Company has concluded that any impairment of its investment securities portfolio is not other-than-temporary but is the result of interest rate changes that are not expected to result in the noncollection of principal and interest during the period. There are 37 positions that are temporarily impaired at March 31, 2015.

The following tables show the Company’s gross unrealized losses and fair value of the Company’s investments with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position, at March 31, 2015 and December 31, 2014:

 

		(Expressed in thousands)
		March 31, 2015
		Less than Twelve Months								Twelve Months or Greater								Total
		Fair Value				Gross Unrealized Losses				Fair Value				Gross Unrealized Losses				Fair Value				Gross Unrealized Losses
U.S. Government corporations and agencies		$	14,563			$	(37	)		$	15,873			$	(126	)		$	30,436			$	(163	)
Obligations of states and political subdivisions			2,340				(16	)			—				—				2,340				(16	)
Mortgage-backed securities			5,054				(17	)			33,499				(551	)			38,553				(568	)
Total debt securities			21,957				(70	)			49,372				(677	)			71,329				(747	)
Equity securities			19				(1	)			—				—				19				(1	)
Total		$	21,976			$	(71	)		$	49,372			$	(677	)		$	71,348			$	(748	)

 

		(Expressed in thousands) December 31, 2014
		Less than Twelve Months								Twelve Months or Greater								Total
		Fair Value				Gross Unrealized Losses				Fair Value				Gross Unrealized Losses				Fair Value				Gross Unrealized Losses
U.S. Government corporations and agencies		$	5,486			$	(9	)		$	36,006			$	(593	)		$	41,492			$	(602	)
Obligations of states and political subdivisions			766				(7	)			5,000				(64	)			5,766				(71	)
Mortgage-backed securities			7,193				(12	)			37,835				(989	)			45,028				(1,001	)
Total debt securities			13,445				(28	)			78,841				(1,646	)			92,286				(1,674	)
Equity securities			19				(1	)			—				—				19				(1	)
Total		$	13,464			$	(29	)		$	78,841			$	(1,646	)		$	92,305			$	(1,675	)

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

 

		March 31, 2015				March 31, 2014
Balance at beginning of period		$	—			$	—
Additions for credit-related OTTI not previously recognized			—				49
Reductions for securities sold during the period (realized)			—				—
Balance at end of period		$	—			$	49

No other-than-temporary impairment losses were recognized in accumulated other comprehensive income as of March 31, 2015 and 2014.

 

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First West Virginia Bancorp, Inc. and Subsidiary

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2015 AND 2014

(Unaudited)

 

NOTE 2 - INVESTMENT SECURITIES (CONTINUED)

 

The amortized cost and fair value of investment securities at March 31, 2015, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

		(Expressed in thousands) March 31, 2015
		Amortized Cost				Fair Value
Due in one year or less		$	2			$	2
Due after one year through five years			25,496				25,632
Due after five years through ten years			40,523				41,132
Due after ten years			15,397				16,668
			81,418				83,434
Mortgage-backed securities			114,656				115,006
Equity securities			171				208
Total		$	196,245			$	198,648

Proceeds from sales of securities available-for-sale during the three month periods ended March 31, 2015 and 2014, were $39,547,000 and $1,000, respectively. Gross gains of $956,000 and no gross losses were realized during the three months ended March 31, 2015. Gross gains and gross losses realized during the three months ended March 31, 2014 were less than $500 and not considered material for financial reporting and disclosure purposes. Assets carried at $72,647,000 and $63,856,000 at March 31, 2015 and December 31, 2014, respectively, were pledged to secure United States Government and other public funds and for other purposes as required or permitted by law.

NOTE 3 - LOANS AND LEASES

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

 

		(Expressed in Thousands)
		March 31, 2015				December 31, 2014
Consumer Real Estate:
Construction		$	3,567			$	3,519
Farmland			89				93
Residential 1-4 family			23,323				23,737
Home equity loans			1,071				1,207
Home equity lines of credit			4,147				3,966
Total Consumer Real Estate			32,197				32,522
Commercial Real Estate:
Non-farm, non-residential			36,662				37,411
Multifamily (5 or more) residential properties			9,475				9,538
Total Commercial Real Estate			46,137				46,949
Commercial and Other Loans:
Commercial			10,833				5,720
Non-rated industrial development obligations			11,092				11,384
Other loans			20				19
Total Commercial and Other Loans			21,945				17,123
Consumer Loans:
Installment and other loans to individuals			2,250				2,261
Credit cards			459				503
Total Consumer Loans			2,709				2,764
Total Loans			102,988				99,358
Less unearned interest and deferred fees			144				141
Gross Loans			102,844				99,217
Less allowance for loan losses			1,811				1,813
Net Loans		$	101,033			$	97,404

 

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First West Virginia Bancorp, Inc. and Subsidiary

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2015 AND 2014

(Unaudited)

 

NOTE 3 - LOANS AND LEASES (CONTINUED)

 

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

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

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

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

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

Non-accrual loans amounted to $921,000 and $1,032,000 at March 31, 2015 and December 31, 2014, respectively. The amount of interest income that would have been recognized had the loans performed in accordance with their original terms was $10,000, $19,000 and $63,000 for the three months ended March 31, 2015 and 2014 and for the year ended December 31, 2014, respectively.

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

 

		March 31, 2015
		Current				30-59 Days Past Due				60-89 Days Past Due				90 Days or More Past  Due				Total Past Due				Total Loans				90 Days or More Past Due and Accruing
Commercial and other loans		$	21,925			$	—			$	—			$	20			$	20			$	21,945			$	—
Commercial real estate			45,791				—				—				346				346				46,137				—
Consumer real estate			31,930				78				32				157				267				32,197				—
Consumer			2,703				6				—				—				6				2,709				—
Unearned interest and deferred fees			(144	)			—				—				—				—				(144	)			—
Total loans		$	102,205			$	84			$	32			$	523			$	639			$	102,844			$	—
Non-accrual loans included above are as follows:
Commercial and other loans		$	—			$	—			$	—			$	20			$	20			$	20			$	—
Commercial real estate			262				—				—				346				346				608				—
Consumer real estate			104				—				32				157				189				293				—
Consumer			—				—				—				—				—				—				—
Total non-accrual loans		$	366			$	—			$	32			$	523			$	555			$	921			$	—

 

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First West Virginia Bancorp, Inc. and Subsidiary

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2015 AND 2014

(Unaudited)

 

NOTE 3 - LOANS AND LEASES (CONTINUED)

 

		December 31, 2014
		Current				30-59 Days Past Due				60-89 Days Past Due				90 Days or More Past Due				Total Past Due				Total Loans				90 Days or More Past Due and Accruing
Commercial and other loans		$	17,078			$	6			$	—			$	39			$	45			$	17,123			$	—
Commercial real estate			46,246				—				13				690				703				46,949				—
Consumer real estate			32,384				71				—				67				138				32,522				—
Consumer			2,742				5				3				14				22				2,764				14
Unearned interest and deferred fees			(141	)			—				—				—				—				(141	)			—
Total loans		$	98,309			$	82			$	16			$	810			$	908			$	99,217			$	14
Non-accrual loans included above are as follows:
Commercial and other loans		$	—			$	—			$	—			$	39			$	39			$	39			$	—
Commercial real estate			—				—				13				690				703				703				—
Consumer real estate			223				—				—				67				67				290				—
Consumer			—				—				—				—				—				—				—
Total non-accrual loans		$	223			$	—			$	13			$	796			$	809			$	1,032			$	—

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

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

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

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

 

March 31, 2015		Pass				Special Mention				Substandard				Doubtful				Total
Commercial and other		$	21,925			$	—			$	20			$	—			$	21,945
Commercial real estate			41,102				1,102				3,933				—				46,137
Total		$	63,027			$	1,102			$	3,953			$	—			$	68,082

 

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Table of Contents

First West Virginia Bancorp, Inc. and Subsidiary

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2015 AND 2014

(Unaudited)

 

NOTE 3 - LOANS AND LEASES (CONTINUED)

 

December 31, 2014		Pass				Special Mention				Substandard				Doubtful				Total
Commercial and other		$	17,084			$	—			$	39			$	—			$	17,123
Commercial real estate			41,679				1,170				4,100				—				46,949
Total		$	58,763			$	1,170			$	4,139			$	—			$	64,072

For consumer and consumer real estate loan classes, the Company also evaluates credit quality based on the aging status of the loan, which was previously presented, and by payment activity. The following table presents the recorded investment in those loan classes based on payment activity as of March 31, 2015 and December 31, 2014 (in thousands):

 

March 31, 2015		Performing				Non-performing				Total
Consumer		$	2,709			$	—			$	2,709
Consumer real estate			31,904				293				32,197
Total		$	34,613			$	293			$	34,906
December 31, 2014		Performing				Non-performing				Total
Consumer		$	2,750			$	14			$	2,764
Consumer real estate			32,232				290				32,522
Total		$	34,982			$	304			$	35,286

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

Impaired loans at March 31, 2015 and December 31, 2014 are set forth in the following tables (in thousands):

 

		March 31, 2015
		Unpaid Contractual Principal Balance				Recorded Investment With No Allowance				Recorded Investment With Allowance				Total Recorded Investment				Related Allowance
Commercial and other loans		$	20			$	—			$	20			$	20			$	20
Commercial real estate			608				380				228				608				77
Consumer real estate			431				81				350				431				9
Total		$	1,059			$	461			$	598			$	1,059			$	106
		December 31, 2014
		Unpaid Contractual Principal Balance				Recorded Investment With No Allowance				Recorded Investment With Allowance				Total Recorded Investment				Related Allowance
Commercial and other loans		$	39			$	—			$	39			$	39			$	39
Commercial real estate			744				474				270				744				78
Consumer real estate			493				143				350				493				9
Consumer			18				—				11				11				1
Total		$	1,294			$	617			$	670			$	1,287			$	127

 

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2015 AND 2014

(Unaudited)

 

NOTE 3 - LOANS AND LEASES (CONTINUED)

 

		March 31, 2015
		Average Recorded Investment				Interest Income Recognized				Interest Income Recognized  Cash Basis
Commercial and other loans		$	39			$	—			$	—
Commercial real estate			703				—				214
Consumer real estate			489				5				1
Total		$	1,231			$	5			$	215
		March 31, 2014
		Average Recorded Investment				Interest Income Recognized				Interest Income Recognized Cash Basis
Commercial and other loans		$	25			$	—			$	—
Commercial real estate			911				1				—
Consumer real estate			224				—				—
Total		$	1,160			$	1			$	—

Loan Modifications

The Company’s loan portfolio also includes certain loans that have been modified in a troubled debt restructuring (TDR), where economic concessions have been granted to borrowers who have experienced or are expected to experience financial difficulties. These concessions typically result from the Company’s loss mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance or other actions. Certain TDRs are classified as nonaccrual at the time of restructure and may only be returned to accrual status after considering the borrower’s sustained repayment performance for a reasonable period, generally six months. TDRs on accrual status may remain in accrual status after they have been restructured as long as they continue to perform in accordance with their modified terms. There was one TDR in accrual status at March 31, 2015 and two TDRs in accrual status at December 31, 2014.

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

 

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First West Virginia Bancorp, Inc. and Subsidiary

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2015 AND 2014

(Unaudited)

 

NOTE 3 - LOANS AND LEASES (CONTINUED)

 

The following tables include the recorded investment and number of modifications for new TDRs, as of the respective dates. The Company reports the recorded investment in the loans prior to a modification and also the recorded investment in the loans after the loans were restructured (in thousands):

 

		March 31, 2015												December 31, 2014
Troubled Debt Restructurings		Number of Contracts				Pre- Modification Outstanding Recorded Investment				Post Modification Outstanding Recorded Investment				Number of Contracts				Pre- Modification Outstanding Recorded Investment				Post Modification Outstanding Recorded Investment
Commercial and other loans			—			$	—			$	—				—			$	—			$	—
Commercial real estate			—				—				—				—				—				—
Consumer real estate			—				—				—				1				350				350
Total			—			$	—			$	—				1			$	350			$	350
Troubled Debt Restructurings That Subsequently Defaulted Within 12 Months After Restructuring
Commercial and other loans			—			$	—			$	—				—			$	—			$	—
Commercial real estate			—				—				—				—				—				—
Consumer real estate			—				—				—				1				350				350
Total			—			$	—			$	—				1			$	350			$	350

The following tables include new troubled debt restructurings by type of modification (in thousands):

 

March 31, 2015

Troubled Debt Restructurings

Interest Only

Term

Combination

Total Modification

Commercial and other loans

$

—

$

—

$

—

$

—

Commercial real estate

—

—

—

—

Consumer real estate

—

—

—

—

Total

$

—

$

—

$

—

$

—

 

		December 31, 2014
Troubled Debt Restructurings		Interest Only				Term				Combination				Total Modification
Commercial and other loans		$	—			$	—			$	—			$	—
Commercial real estate			—				—				—				—
Consumer real estate			—				350				—				350
Total		$	—			$	350			$	—			$	350

There were no funds committed to be advanced to customers whose loans were classified as TDRs at March 31, 2015. At December 31, 2014, there were funds of $33,000 committed to be advanced to customers whose loans were classified as TDRs.

 

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2015 AND 2014

(Unaudited)

 

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, 2015 and March 31, 2014 (in thousands):

 

March 31, 2015		Commercial and Other				Commercial Real Estate				Consumer Real Estate				Consumer				Total
Allowance for Loan Losses:
Beginning Balance, January 1, 2015		$	281			$	1,254			$	263			$	15			$	1,813
Charge-offs			—				—				—				(5	)			(5	)
Recoveries			—				2				—				1				3
Provision			23				(24	)			(2	)			3				—
Ending Balance, March 31, 2015		$	304			$	1,232			$	261			$	14			$	1,811
Loans individually evaluated for impairment		$	20			$	77			$	9			$	—			$	106
Loans collectively evaluated for impairment			284				1,155				252				14				1,705
Ending Balance		$	304			$	1,232			$	261			$	14			$	1,811
March 31, 2014		Commercial and Other				Commercial Real Estate				Consumer Real Estate				Consumer				Total
Allowance for Loan Losses:
Beginning Balance, January 1, 2014		$	260			$	1,315			$	263			$	27			$	1,865
Charge-offs			—				—				—				—				—
Recoveries			—				—				—				1				1
Provision			(5	)			—				6				(1	)			—
Ending Balance, March 31, 2014		$	255			$	1,315			$	269			$	27			$	1,866
Loans individually evaluated for impairment		$	23			$	174			$	—			$	—			$	197
Loans collectively evaluated for impairment			232				1,141				269				27				1,669
Ending Balance		$	255			$	1,315			$	269			$	27			$	1,866

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

 

March 31, 2015		Commercial and Other				Commercial Real Estate				Consumer Real Estate				Consumer				Unearned Discounts				Total
Loans individually evaluated		$	20			$	608			$	431			$	—			$	—			$	1,059
Loans collectively evaluated			21,925				45,529				31,766				2,709				(144	)			101,785
Ending Balance		$	21,945			$	46,137			$	32,197			$	2,709			$	(144	)		$	102,844
December 31, 2014
Loans individually evaluated		$	39			$	744			$	493			$	11			$	—			$	1,287
Loans collectively evaluated			17,084				46,205				32,029				2,753				(141	)			97,930
Ending Balance		$	17,123			$	46,949			$	32,522			$	2,764			$	(141	)		$	99,217

 

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First West Virginia Bancorp, Inc. and Subsidiary

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2015 AND 2014

(Unaudited)

 

NOTE 5 - PREMISES AND EQUIPMENT

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

 

		March 31, 2015				December 31, 2014				Estimated Useful Life Years
Land		$	1,984			$	1,984
Land improvements			419				419				5 - 20
Leasehold improvements			1,089				1,087				5 - 20
Buildings			6,998				6,998				5 - 50
Furniture, fixtures & equipment			4,279				4,228				3 - 30
Total			14,769				14,716
Less accumulated depreciation			6,459				6,303
Premises and equipment, net		$	8,310			$	8,413

Charges to operations for depreciation approximated $160,000 and $152,000 for the three months ended March 31, 2015 and 2014, respectively.

NOTE 6 - DEPOSITS

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

 

		March 31, 2015
		Demand
		Noninterest Bearing				Interest Bearing				Savings				Time
Individuals, partnerships and corporations (includes certified and official checks)		$	39,458			$	49,640			$	110,714			$	58,061
States and political subdivisions			492				8,120				5,074				2,498
Commercial banks and other depository institutions			2				—				—				482
Total		$	39,952			$	57,760			$	115,788			$	61,041
		December 31, 2014
		Demand
		Noninterest Bearing				Interest Bearing				Savings				Time
Individuals, partnerships and corporations (includes certified and official checks)		$	41,102			$	48,583			$	108,108			$	59,400
States and political subdivisions			384				6,876				4,617				2,490
Commercial banks and other depository institutions			70				—				31				482
Total		$	41,556			$	55,459			$	112,756			$	62,372

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

 

(dollars in thousands)		Maturities of Time Deposits
		March 31, 2015				December 31, 2014
Due in 2015		$	24,894			$	35,151
Due in 2016			19,565				13,213
Due in 2017			6,595				6,215
Due in 2018			4,221				4,252
Due in 2019			3,501				3,522
Due in 2020 and thereafter			2,265				19
Total		$	61,041			$	62,372

 

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2015 AND 2014

(Unaudited)

 

NOTE 6 - DEPOSITS (CONTINUED)

 

Time deposits include certificates of deposit issued in denominations of $100,000 or more which amounted to $20,756,000 and $21,348,000 at March 31, 2015 and December 31, 2014, respectively. Interest expense on certificates of deposit of $100,000 or more was $64,000 and $71,000 for the three months ended March 31, 2015 and 2014, respectively.

The following table sets forth the remaining maturity of time certificates of deposit of $100,000 or more:

 

		Maturities of Time Deposits in Excess of $100,000
(dollars in thousands)		March 31, 2015				December 31, 2014
Three Months or Less		$	3,127			$	4,870
Over Three and Less than Six Months			2,542				3,123
Over Six and Less than Twelve Months			6,020				4,515
Over Twelve Months			9,067				8,840
Total		$	20,756			$	21,348

NOTE 7 - FEDERAL HOME LOAN BANK BORROWINGS

The subsidiary Bank is a member of the Federal Home Loan Bank of Pittsburgh (“FHLB”). The FHLB borrowings are secured by a blanket lien by the FHLB on certain residential real estate loans or securities with a market value at least equal to the outstanding balances. The remaining maximum borrowing capacity with the FHLB at March 31, 2015 was approximately $39.3 million subject to the purchase of additional FHLB stock. The subsidiary bank had FHLB borrowings of $3,396,000 and $3,420,000 at March 31, 2015 and December 31, 2014, respectively. At March 31, 2015 the subsidiary bank had three fixed rate amortizing advances which totaled $3,396,000 with interest rates ranging from 4.65% to 4.89% of which $1,907,000 will mature through 2018 and $1,489,000 will mature through 2023. The collateral securing these borrowings totaled $3,543,000 at March 31, 2015.

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

Contractual maturities of FHLB borrowings as of March 31, 2015 were as follows (in thousands):

 

Due in 2015		$	75
Due in 2016			105
Due in 2017			110
Due in 2018			1,760
Due in 2019			43
Due in 2020 and thereafter			1,303
Total		$	3,396

 

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First West Virginia Bancorp, Inc. and Subsidiary

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2015 AND 2014

(Unaudited)

 

NOTE 8 - ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The activity in accumulated other comprehensive income (loss) at March 31 is as follows:

 

(dollars in thousands)		Accumulated Other Comprehensive Income (Loss) (1) Unrealized Gains (Losses) on Securities Available for Sale
		Three months ended March 31,
		2015				2014
Beginning Balance		$	835			$	(2,718	)
Other comprehensive income before reclassifications			1,260				1,580
Amounts reclassified from accumulated other comprehensive income			(596	)			30
Period Change			664				1,610
Ending Balance		$	1,499			$	(1,108	)

 

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

 

		Amount Reclassified from Accumulated Other Comprehensive Income (Loss)
Details about Accumulated Other Comprehensive Income (Loss) Components		Three months ended March 31,								Affected Line Item in the Statement of Income
(dollars in thousands)		2015				2014
Securities available for sale (1):
Net securities gains reclassified into earnings		$	(956	)		$	—			Net gains on available for sale securities
Other-than-temporary losses reclassified into earnings			—				49			Other-than-temporary losses on securities
Related income tax expense (benefit)			360				(19	)		Income tax expense (benefit)
Net effect on accumulated other comprehensive income (loss) for the period		$	(596	)		$	30			Net of tax
Total reclassifications for the period		$	(596	)		$	30			Net of tax

 

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

 

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First West Virginia Bancorp, Inc. and Subsidiary

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2015 AND 2014

(Unaudited)

 

NOTE 9 - REGULATORY MATTERS

The Company’s subsidiary bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the bank must meet specific capital guidelines that involve quantitative measures of the bank’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The bank’s capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weighting, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to adjusted total assets (as defined). For March 31, 2015, Interim Final Basel III rules require the bank to maintain minimum amounts and ratios of common equity Tier I capital (as defined in the regulations) to risk-weighted assets (as defined). Additionally under Basel III rules, the decision was made to opt-out of including accumulated other comprehensive income in regulatory capital. For December 31, 2014, regulatory capital ratios were calculated under Basel I rules.

As of March 31, 2015, the most recent notifications from the Office of the Comptroller of the Currency categorized the bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes has changed the capital category. The capital ratios of the Company’s subsidiary bank, along with the regulatory framework for adequately capitalized and well capitalized institutions are depicted as set forth in the following table:

 

(Amounts Expressed in Thousands)		Actual								For Capital Adequacy Purposes								To be Well Capitalized Under Prompt Corrective Action Provisions
		Amount				Ratio				Amount				Ratio				Amount				Ratio
Progressive Bank, N.A.
As of March 31, 2015
Total Capital (to Risk Weighted Assets)		$	33,719				22.66	%		$	11,905				8.0	%		$	14,881				10.0	%
Tier I Capital (to Risk Weighted Assets)			31,908				21.44	%			8,929				6.0	%			11,905				8.0	%
Common Equity Tier I Capital (to Risk Weighted Assets)			31,908				21.44	%			6,696				4.5	%			9,673				6.5	%
Tier I Capital (to Adjusted Total Assets)			31,908				9.62	%			13,262				4.0	%			16,578				5.0	%
As of December 31, 2014
Total Capital (to Risk Weighted Assets)		$	32,700				21.29	%		$	12,290				8.0	%		$	15,362				10.0	%
Tier I Capital (to Risk Weighted Assets)			30,887				20.11	%			6,145				4.0	%			9,217				6.0	%
Tier I Capital (to Adjusted Total Assets)			30,887				9.30	%			13,280				4.0	%			16,600				5.0	%

NOTE 10 - FAIR VALUE MEASUREMENTS

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

 

•		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.

 

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First West Virginia Bancorp, Inc. and Subsidiary

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2015 AND 2014

(Unaudited)

 

NOTE 10 - FAIR VALUE MEASUREMENTS (CONTINUED)

 

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

The following table presents the assets reported on the balance sheet at their fair value as of March 31, 2015 and December 31, 2014, by level within the fair value hierarchy. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

 

(dollars in thousands)		March 31, 2015
		Level I				Level II				Level III				Total
Assets measured on a recurring basis:
Securities available for sale:
U.S. Government corporations and agencies		$	—			$	48,673			$	—			$	48,673
Obligations of states and political subdivisions			—				34,761				—				34,761
Mortgage-backed securities			—				115,006				—				115,006
Equity securities			208				—				—				208
Total securities available for sale:		$	208			$	198,440			$	—			$	198,648
Assets measured on a nonrecurring basis:
Impaired loans		$	—			$	—			$	493			$	493

 

(dollars in thousands)		December 31, 2014
		Level I				Level II				Level III				Total
Assets measured on a recurring basis:
Securities available for sale:
U.S. Government corporations and agencies		$	—			$	44,006			$	—			$	44,006
Obligations of states and political subdivisions			—				42,422				—				42,422
Mortgage-backed securities			—				110,443				—				110,443
Equity securities			208				—				—				208
Total securities available for sale:		$	208			$	196,871			$	—			$	197,079
Assets measured on a nonrecurring basis:
Impaired loans		$	—			$	—			$	503			$	503

 

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First West Virginia Bancorp, Inc. and Subsidiary

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2015 AND 2014

(Unaudited)

 

NOTE 11 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

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

 

(dollars in thousands)		Quantitative Information about Level III Fair Value Measurements
March 31, 2015		Fair Value Estimate				Valuation Techniques		Unobservable Input		Range (Weighted Average)
Impaired Loans		$	493			Appraisal of collateral (1)		Appraisal adjustments (2)		-30.0% to 0.0% (-11.6%)
								Liquidation expenses (2)		9.0% (9.0%)
(dollars in thousands)		Quantitative Information about Level III Fair Value Measurements
December 31, 2014		Fair Value Estimate				Valuation Techniques		Unobservable Input		Range (Weighted Average)
Impaired Loans		$	503			Appraisal of collateral (1)		Appraisal adjustments (2)		-30.0% to 0.0% (-11.5%)
								Liquidation expenses (2)		0.0% to 9.0% (8.8%)

 

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

(2)

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

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

Collateral-dependent Impaired Loans

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

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

Financial Instruments

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

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

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

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

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

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

 

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2015 AND 2014

(Unaudited)

 

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

 

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

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

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

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

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

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

 

		March 31, 2015
		Carrying				Estimated Fair Value
(Amounts Expressed in Thousands)		Amount				Level I				Level II				Level III				Total
Financial assets:
Cash and cash equivalents		$	24,265			$	24,265			$	—			$	—			$	24,265
Investment securities			198,648				208				198,440				—				198,648
Loans, net			101,033				—				—				101,954				101,954
Accrued interest receivable			1,121				1,121				—				—				1,121
Financial liabilities:
Deposits			274,541				204,360				60,995				—				265,355
Federal funds purchased and repurchase agreements			25,924				25,924				—				—				25,924
Federal Home Loan Bank borrowings			3,396				—				3,698				—				3,698
Accrued interest payable			109				109				—				—				109

 

		December 31, 2014
		Carrying				Estimated Fair Value
(Amounts Expressed in Thousands)		Amount				Level I				Level II				Level III				Total
Financial assets:
Cash and cash equivalents		$	20,396			$	20,396			$	—			$	—			$	20,396
Investment securities			197,079				208				196,871				—				197,079
Loans, net			97,404				—				—				98,445				98,445
Accrued interest receivable			1,015				1,015				—				—				1,015
Financial liabilities:
Deposits			272,143				199,444				62,289				—				261,733
Federal funds purchased and repurchase agreements			21,051				21,051				—				—				21,051
Federal Home Loan Bank borrowings			3,420				—				3,714				—				3,714
Accrued interest payable			120				120				—				—				120

 

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

First West Virginia Bancorp, Inc.

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

 

		(Unaudited) Three Months Ended March 31,								Years ended December 31,
		2015				2014				2014				2013				2012				2011
SUMMARY OF OPERATIONS
Total interest income		$	2,531			$	2,409			$	9,601			$	9,414			$	9,838			$	11,207
Total interest expense			351				365				1,449				1,524				1,789				2,229
Net interest income			2,180				2,044				8,152				7,890				8,049				8,978
Provision (credit) for loan losses			—				—				—				(400	)			(248	)			600
Total other income			1,198				206				1,877				1,440				2,352				2,034
Total other expenses			2,013				1,910				8,060				7,672				7,604				7,626
Income before income taxes			1,365				340				1,969				2,058				3,045				2,786
Net income			1,038				446				1,904				2,241				2,538				2,454
PER SHARE DATA (1)
Net income		$	0.60			$	0.26			$	1.11			$	1.30			$	1.48			$	1.43
Cash dividends declared			0.20				0.20				0.80				0.76				0.73				0.73
Book value per share			21.08				18.91				20.29				17.91				20.77				20.09
AVERAGE BALANCE SHEET SUMMARY
Total loans, net		$	101,182			$	91,760			$	94,103			$	97,374			$	104,566			$	115,415
Investment securities			191,696				203,183				199,571				177,809				154,755				136,409
Deposits - interest bearing			233,088				228,425				230,440				218,229				208,308				204,616
Stockholders’ equity			34,244				33,406				33,767				32,597				31,608				30,498
Total assets			334,516				337,888				335,515				316,172				293,601				283,734
BALANCE SHEET
Investments		$	198,648			$	205,679			$	197,079			$	199,955			$	178,208			$	150,961
Loans			102,844				90,970				99,217				93,402				99,387				109,428
Allowance for loan losses			(1,811	)			(1,866	)			(1,813	)			(1,865	)			(2,181	)			(2,504	)
Other assets			41,184				42,445				37,907				50,653				31,133				35,373
Total Assets		$	340,865			$	337,228			$	332,390			$	342,145			$	306,547			$	293,258
Deposits		$	274,541			$	279,554			$	272,143			$	285,877			$	246,462			$	239,177
Federal funds purchased and repurchase agreements			25,924				20,739				21,051				20,215				18,767				14,013
FHLB borrowings			3,396				3,492				3,420				3,516				3,606				3,693
Other liabilities			774				940				904				1,747				2,009				1,848
Stockholders’ equity			36,230				32,503				34,872				30,790				35,703				34,527
Total Liabilities and Stockholders’ Equity		$	340,865			$	337,228			$	332,390			$	342,145			$	306,547			$	293,258
SELECTED RATIOS
Return on average assets			1.26	%			0.54	%			0.57	%			0.71	%			0.86	%			0.86	%
Return on average equity			12.29	%			5.41	%			5.64	%			6.87	%			8.03	%			8.05	%
Average equity to average assets			10.24	%			9.89	%			10.06	%			10.31	%			10.77	%			10.75	%
Dividend payout ratio (1)			33.33	%			76.92	%			72.07	%			58.46	%			49.32	%			51.05	%
Loan to deposit ratio			37.46	%			32.54	%			36.46	%			32.67	%			40.33	%			45.75	%

 

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

 

 

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First West Virginia Bancorp, Inc.

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

 

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

The Company’s critical accounting policies involving the significant judgments and assumptions used in the preparation of the Consolidated Financial Statements as of March 31, 2015 have remained unchanged from the disclosures presented in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 under the section “Management’s Discussion and Analysis of Financial Condition and Results of Holding Company Operations.”

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

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

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

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

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

 

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First West Virginia Bancorp, Inc.

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

 

OVERVIEW

The Company reported net income of $1,038,000 or $.60 per share for the three months ended March 31, 2015 compared to $446,000 or $.26 per share for the same period during 2014. The increase in net income for the three months ended March 31, 2015 as compared to the same period in 2014 of $592,000 was primarily the result of the increase in noninterest income as well as the increase in net interest income, offset in part by an increase in income tax expense and an increase in noninterest expenses. Noninterest income increased $992,000, primarily due to the net gains on available for sale securities. Net interest income increased $136,000, or 6.7%, primarily due to the increase in the interest and fees earned on loans combined with the slight reduction in the expense paid on interest bearing liabilities, offset in part by a decline in the interest earned on investment securities. Income tax expense increased $433,000 during the first quarter of 2015 as compared to the same period in 2014 primarily due to the net gains on available for sale securities. Noninterest expenses increased $103,000, or 5.4%, during the three month period ended March 31, 2015 compared to the same period in 2014 primarily due to an increase in salary and employee benefit expenses combined with slight increases in occupancy expenses and other operating expenses. The ROAA was 1.26% for the three months ended March 31, 2015 as compared to .54% for the same period of the prior year. For the three months ended March 31, 2015 compared to March 31, 2014, the ROAE was 12.29% and 5.41%, respectively.

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

EARNINGS ANALYSIS - For the three months ended March 31, 2015

Net Interest Income

Net interest income, which is the primary source of earnings for the Company, is the difference between interest earned on loans and investments and interest paid on deposits and borrowings. Changes in the volume and mix of interest earning assets and interest bearing liabilities combined with changes in market rates of interest greatly affect net interest income. Table One presents the average balance sheets and an interest rate analysis for the three months ended March 31, 2015 and 2014.

For the three months ended March 31, 2015, net interest income increased $136,000 or 6.7%, from the same period in 2014. The increase in net interest income was primarily due to the increase in the interest and fees earned on loans combined with the slight reduction in the expense paid on interest bearing liabilities, offset in part by a decline in the interest earned on investment securities. 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 3.21% for the three month period ended March 31, 2015 as compared to 3.18% for the same period in 2014. The average volume of earning assets decreased $693,000 or 0.2% from December 31, 2014 to March 31, 2015.

For the three months ended March 31, 2015, interest and fees on loans increased $248,000 or 21.2%, from the same period in 2014 primarily due to the increase in the average loan volume and yield earned on loans. The taxable equivalent yield on loans increased 49 basis points, to 6.03% for the three month period ended March 31, 2015 as compared to 5.54% for the same period in 2014. The average balance on loans increased $7.1 million or 7.5% since December 31, 2014 to March 31, 2015.

Interest income on investment securities decreased $148,000 or 12.2% during the first quarter of 2015, as compared to the same period of the prior year. The decrease in interest income on investment securities was primarily due to the decrease in average volume as well as the decrease in the yield earned. The taxable equivalent yield on investment securities decreased 43 basis points, to 2.72% during the three month period ended March 31, 2015 as compared to 3.15% for the same period in 2014. The average volume of the investment portfolio decreased approximately $7.9 million or 3.9% from December 31, 2014 to March 31, 2015.

Interest expense decreased $14,000 or 3.8% during the three months ended March 31, 2015 as compared to the same period in 2014. The decrease in interest expense was primarily due to the decline in the average yield paid on interest bearing liabilities which was offset in part by an increase in the average balances of interest bearing liabilities. The average yield on interest bearing liabilities fell 4 basis points, from .59% during the period ended March 31, 2014 to .55% during the period ended March 31, 2015, while the average volume grew $7.7 million or 3.0% 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 time deposits, offset in part by an increase in the average yield on FHLB and other long term borrowings and repurchase agreements.

 

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First West Virginia Bancorp, Inc.

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

 

Noninterest Income

Noninterest income increased $992,000 for the three months ended March 31, 2015 as compared to the same period of the prior year. The increase in noninterest income was primarily due to the net gains on available for sale securities which totaled $956,000 for the first quarter of 2015. These sales occurred as part of the Company’s deferred tax asset strategy and to take advantage of favorable market conditions.

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 $11,000 or 12.8%, during the first three months of 2015 as compared to the same period in 2014 primarily due to a decline in overdraft charges which fluctuate based on customer activity.

Other operating income represents fees from safe deposit box rentals, sales of checkbooks, sales of cashiers’ checks and money orders, utility collections, ATM charges and card fees, 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, 2015, other operating income decreased $2,000 or 1.2% compared to the same period in 2014. This decrease was primarily due to the declines in fee income earned on loans sold to the FHLB and checkbook income, offset in part by an increase in ATM fees.

Noninterest Expense

Noninterest expense increased $103,000 or 5.4% for the three months ended March 31, 2015 as compared to the same period of the prior year. The increase in noninterest expense was primarily due to the increase in salary and employee benefit expenses combined with slight increases in occupancy expenses and other operating expenses.

Salary and employee benefits represent the largest component of noninterest expense. Salary and employee benefits increased $82,000 or 9.0% during the first quarter of 2015 as compared to the same period in 2014. The increase was primarily attributable to an increase in salary expenses due to additional employees. The Company had 99 full-time equivalent employees at March 31, 2015 versus 94 full-time equivalent employees at March 31, 2014.

Occupancy expenses increased $8,000 or 1.9% for the three month period ended March 31, 2015 as compared to the same period of the prior year primarily due to increases in depreciation expenses related to the newly constructed Warwood branch combined with slight increases in building maintenance expenses, real estate taxes, and utilities, offset in part by slight declines in furniture and fixture expenses and insurance expenses.

Other operating expense increased $13,000 or 2.3%, compared to the same period of the prior year. The increase in other operating expenses was primarily due to increases in directors’ fees and various other expenses, offset in part by decreases in advertising expenses and postage and transportation expenses. The increase in directors’ fees was primarily the result of the increase in the number of directors.

Other operating expenses for the three months ended March 31 included the following (in thousands):

 

		2015				2014				Net Increase (Decrease)				Percent Increase (Decrease)
Directors’ fees		$	47			$	28			$	19				67.9	%
Stationery and supplies			28				29				(1	)			(3.4	)%
Regulatory assessment and deposit insurance			77				76				1				1.3	%
Advertising			30				39				(9	)			(23.1	)%
Postage and transportation			32				41				(9	)			(22.0	)%
Other taxes			45				43				2				4.7	%
Service expense			111				110				1				0.9	%
Other			213				204				9				4.4	%
Total		$	583			$	570			$	13				2.3	%

Income Taxes

Income tax expense increased $433,000 during the three month period ended March 31, 2015 as compared to the same period in 2014 primarily due to the net gains on available for sale securities. Components of the income tax expense for March 31, 2015 were an income tax expense of $289,000 for federal taxes and $38,000 for West Virginia corporate net income taxes. Federal income tax rates remained consistent at 34% for the three months ended March 31, 2015 and 2014 and for the year ended December 31, 2014. West Virginia corporate net income tax rates were 6.50% for the three months ended March 31, 2015 and 2014 and for the year ended December 31, 2014.

Under U.S. GAAP, a valuation allowance is required to be recognized if it is “more likely than not” that a deferred tax asset will not be realized. A valuation allowance was recorded in 2014 due to the Company’s concern that a deferred tax asset may not be realized. The determination of the realizability of the deferred tax asset is highly subjective and dependent on judgment. At March 31, 2015, the valuation allowance of $225,000 was considered to be adequate based on the Company’s projections of future taxable income and tax planning strategies.

 

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First West Virginia Bancorp, Inc.

Management’s Discussion and Analysis of the Financial Condition and Results of 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, 2015 and 2014. Average balance sheet information for the periods ended March 31, 2015 and 2014 was compiled using the daily average balance sheet. Total loans are gross of the allowance for loan losses, net of unearned income and include loans held for sale. Non-accrual loans were included in the average balance computations; however, no interest was included in income subsequent to the non-accrual status classification. Loan fees and unearned discounts were included in income for average rate calculation purposes. Average yields on investment securities available for sale have been calculated based on amortized cost.

 

		(Unaudited) March 31, 2015												(Unaudited) March 31, 2014
		Average Volume				Interest				Average Rate				Average Volume				Interest				Average Rate
ASSETS:
Investment securities:
U.S. Treasury and U. S. Government agencies		$	45,379			$	197				1.76	%		$	50,064			$	229				1.86	%
Mortgage backed securities			109,588				515				1.91	%			92,992				443				1.93	%
States and political subdivisions
Taxable			2,212				22				4.03	%			—				—				—
Non-taxable			34,346				332				3.92	%			59,960				542				3.67	%
Other securities			171				1				2.37	%			167				2				4.86	%
Total Investment securities			191,696				1,067				2.26	%			203,183				1,216				2.43	%
Interest bearing deposits			20,568				11				0.22	%			20,965				13				0.25	%
Loans, net of unearned income			101,182				1,418				5.68	%			91,760				1,170				5.17	%
Other earning assets			848				35				16.74	%			1,303				10				3.11	%
Total earning assets			314,294				2,531				3.27	%			317,211				2,409				3.08	%
Other assets			22,032												22,542
Allowance for loan losses			(1,810	)											(1,865	)
Total Assets		$	334,516											$	337,888
LIABILITIES
Time deposits		$	62,070			$	151				0.99	%		$	66,341			$	180				1.10	%
Savings deposits			114,236				93				0.33	%			109,723				89				0.33	%
Interest bearing demand deposits			56,782				17				0.12	%			52,361				16				0.12	%
Federal funds purchased and repurchase agreements			22,789				49				0.87	%			19,706				38				0.78	%
FHLB and other long-term borrowings			3,407				41				4.88	%			3,503				42				4.86	%
Total interest bearing liabilities			259,284				351				0.55	%			251,634				365				0.59	%
Noninterest bearing demand deposits			40,127												52,260
Other liabilities			861												588
Total Liabilities			300,272												304,482
STOCKHOLDERS’ EQUITY			34,244												33,406
Total Liabilities and Stockholders’ Equity		$	334,516											$	337,888
Net yield on earning assets						$	2,180				2.81	%						$	2,044				2.61	%

The fully taxable equivalent basis of interest income from obligations of states and political subdivisions has been determined using a combined Federal and State corporate income tax rate of 40% for the three months ended March 31, 2015 and 2014. The effect of this adjustment is presented below.

 

Investment securities		$	191,696			$	1,288				2.72	%		$	203,183			$	1,578				3.15	%
Loans			101,182				1,503				6.02	%			91,760				1,253				5.54	%
Total earning assets		$	314,294			$	2,837				3.66	%		$	317,211			$	2,854				3.65	%
Taxable equivalent net yield on earning assets						$	2,486				3.21	%						$	2,489				3.18	%

 

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First West Virginia Bancorp, Inc.

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

 

BALANCE SHEET ANALYSIS

Investments

Investment securities increased approximately $1.6 million or .8% from December 31, 2014 to March 31, 2015. The investment portfolio is managed to attempt to achieve an optimum mix of asset quality, liquidity and maximum yield on investment. The investment portfolio consists of U.S. Government agency and corporation securities, obligations of states and political subdivisions, corporate debt securities, mortgage-backed securities and equity securities. Taxable securities comprised 83.7% of total securities at March 31, 2015, as compared to 79.6% at December 31, 2014. Due to the Company’s current deferred tax asset position, the purchase strategy is focused on taxable versus non-taxable investment securities. 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, represented 100% of the investment portfolio at March 31, 2015 and increased .8% from December 31, 2014 primarily due to the increase in the unrealized gains on available for sale securities. Purchases of investment securities were mostly offset by sales, prepayments, and calls. The Company did not have any investment securities classified as held to maturity securities at March 31, 2015 and December 31, 2014. As the investment portfolio consists primarily of fixed rate debt securities, changes in the market rates of interest will affect the carrying value of securities available for sale, adjusted upward or downward and represent temporary adjustments in value. The carrying value of securities available for sale was above book value by $2,403,000 and $1,338,000 at March 31, 2015 and December 31, 2014, respectively.

Table Two - Investment Portfolio

The maturity distribution using book value including accretion of discounts and amortization of premiums and approximate yield of investment securities at March 31, 2015 and December 31, 2014 are presented in the following table. Tax equivalent yield basis was used on tax exempt obligations. Approximate yield was calculated using a weighted average of yield to maturities. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

The Company’s subsidiary bank sold non-taxable state and political subdivision securities with an amortized cost of approximately $5.1 million and mortgage-backed securities with an amortized cost of approximately $33.5 million in the first quarter of 2015 and reinvested the proceeds primarily in mortgage-backed securities. These sales occurred as part of the Company’s deferred tax asset strategy and to take advantage of favorable market conditions.

 

(dollars in thousands)		March 31, 2015												December 31, 2014
		Amortized Cost				Fair Value				Yield				Amortized Cost				Fair Value				Yield
U.S. Government corporations and agencies
Within One Year		$	2			$	2				0.01	%		$	1			$	1				0.01	%
After One But Within Five Years			23,095				23,111				1.56				22,095				21,899				1.58
After Five But Within Ten Years			25,649				25,560				1.99				22,499				22,106				1.83
After Ten Years			—				—				—				—				—				—
			48,746				48,673				1.79				44,595				44,006				1.71
States & Political Subdivisions
Within One Year			—				—				—				604				607				6.81
After One But Within Five Years			2,401				2,521				6.14				2,998				3,125				6.12
After Five But Within Ten Years			14,874				15,572				5.23				16,782				17,343				5.18
After Ten Years			15,397				16,668				6.13				19,965				21,347				5.91
			32,672				34,761				5.73				40,349				42,422				5.64
Mortgage-Backed Securities			114,656				115,006				2.10				110,626				110,443				2.16
Equity Securities			171				208				3.29				171				208				4.32
Total		$	196,245			$	198,648				2.66	%		$	195,741			$	197,079				2.81	%

 

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First West Virginia Bancorp, Inc.

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

 

Loans

Total loans, net of unearned income, increased approximately $3.6 million or 3.7% from December 31, 2014 to March 31, 2015. The increase in total loans in 2015 was primarily due to the increase in commercial loans of $4,822,000, offset in part by the declines in commercial real estate, consumer real estate, and consumer loans which decreased $812,000, $325,000, and $55,000, respectively. Commercial and other loans increased due to an increase in commercial loans, offset slightly by a decrease in non-rated industrial development obligations. The decline in commercial real estate loans was a result of the decrease in non-farm, non-residential loans as well as a slight decrease in multi-family residential loans. Consumer real estate loans decreased primarily in residential real estate and home equity loans, offset in part by increases in construction loans and home equity lines of credit. The decline in consumer loans was primarily due to the decrease in credit cards as well as a small decrease in installment loans to individuals.

Commercial real estate loans which include real estate loans secured by non-farm, non-residential properties and multi-family residential property loans comprised forty-five percent (45%) of the loan portfolio. Consumer real estate loans which include construction, farmland, real estate residential loans, and home equity loans comprised thirty-one percent (31%) of the loan portfolio. Commercial and other loans which include commercial and industrial loans and non-rated industrial development obligations comprised twenty-one percent (21%) of the loan portfolio. Consumer loans which include installment and other loans to individuals and credit cards comprised three percent (3%) of the loan portfolio. The changes in the composition of the loan portfolio from December 31, 2014 to March 31, 2015 were a 4% increase in commercial and other loans, a 2% decrease in commercial real estate loans, and a 2% decrease in consumer real estate loans.

Table Three - Loan Portfolio - Maturities and Sensitivities of Loans to Changes in Interest Rates

The following table presents the contractual maturities of loans other than installment loans and residential mortgages as of March 31, 2015 and December 31, 2014:

 

		(Unaudited)												(Unaudited)
(dollars in thousands)		March 31, 2015												December 31, 2014
		In One Year or Less				After One Year Through Five Years				After Five Years				In One Year or Less				After One Year Through Five Years				After Five Years
Commercial real estate		$	654			$	8,158			$	37,325			$	866			$	8,932			$	37,151
Commercial and other loans			1,052				4,284				16,609				928				4,299				11,896
Total		$	1,706			$	12,442			$	53,934			$	1,794			$	13,231			$	49,047

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

 

		(Unaudited)												(Unaudited)
(dollars in thousands)		March 31, 2015												December 31, 2014
		Fixed Rate				Variable Rate				Total Due After One Year				Fixed Rate				Variable Rate				Total Due After One Year
Commercial real estate		$	11,478			$	34,005			$	45,483			$	12,101			$	33,982			$	46,083
Commercial and other loans			13,696				7,197				20,893				8,859				7,336				16,195
Total		$	25,174			$	41,202			$	66,376			$	20,960			$	41,318			$	62,278

 

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First West Virginia Bancorp, Inc.

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

 

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 provides for a maximum commitment of $5,000,000. Loans sold to the FHLB are sold with limited recourse or credit risk based upon utilization of the original commitment. The bank also maintains the servicing of these loans, for which it is paid a servicing fee. The total amount of loans sold and outstanding under this agreement was $8,267,000 and $8,501,000 as of March 31, 2015 and December 31, 2014, respectively. The loans which were sold were also subject to a recourse obligation or credit risk in the amount of $322,000 and $323,000 at March 31, 2015 and December 31, 2014, respectively.

Non-performing Loans

Non-performing assets include non-accrual loans on which the collectibility of the full amount of interest is uncertain; loans which have been renegotiated to provide for a reduction or deferral of interest on principal because of a deterioration in the financial position of the borrower; loans past due ninety days or more as to principal or interest; and other real estate owned. A summary of non-performing assets is presented in the following table. Total non-performing loans were $1,271,000 at March 31, 2015 as compared to $1,437,000 at December 31, 2014. Non-performing loans decreased $166,000 in 2015. The decrease in non-performing loans in 2015 was primarily due to the decrease in non-accrual loans and renegotiated commercial real estate loans.

Table Four - Risk Elements

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

 

(dollars in thousands)		March 31,				December 31,
		2015				2014				2013				2012				2011
Past due 90 days or more, still accruing:
Commercial and other loans		$	—			$	—			$	—			$	—			$	—
Commercial real estate			—				—				—				—				—
Consumer real estate			—				—				—				—				—
Consumer			—				14				—				—				—
		$	—			$	14			$	—			$	—			$	—
Renegotiated:
Commercial and other loans		$	—			$	—			$	—			$	—			$	—
Commercial real estate			—				41				44				—				—
Consumer real estate			350				350				—				—				—
Consumer			—				—				—				—				—
		$	350			$	391			$	44			$	—			$	—
Non-accrual:
Commercial and other loans		$	20			$	39			$	26			$	31			$	39
Commercial real estate			608				703				885				3,115				3,533
Consumer real estate			293				290				355				388				447
Consumer			—				—				4				17				27
		$	921			$	1,032			$	1,270			$	3,551			$	4,046
Other real estate		$	—			$	—			$	—			$	—			$	138
Total non-performing assets		$	1,271			$	1,437			$	1,314			$	3,551			$	4,184
Total non-performing assets to total loans and other real estate			1.24	%			1.45	%			1.41	%			3.57	%			3.82	%

Loans are placed in non-accrual when the principal or interest is past due ninety days or more, unless the loan is both well secured and in the process of collection. Non-accrual loans were $921,000 or .9% of total loans outstanding as of March 31, 2015, as compared to $1,032,000 or 1.0% of total loans outstanding as of December 31, 2014. Non-accrual loans decreased in 2015 primarily due to the payments being applied to nonaccrual loans. Management continues to monitor the non-performing assets to ensure against deterioration in collateral values.

 

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First West Virginia Bancorp, Inc.

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

 

Loans-Continued

Generally, all banks recognize interest income on the accrual basis, except for certain loans which are placed on a non-accrual status. A loan is placed on a non-accrual status when, in the opinion of management, doubt exists as to its collectibility. In accordance with the Office of the Comptroller of the Currency Policy, banks may not accrue interest on any loan when either the principal or interest is past due ninety days or more unless the loan is both well secured and in the process of collection. The amount of interest income that would have been recognized had the loans performed in accordance with their original terms was $10,000 and $19,000 for the three months ended March 31, 2015 and 2014, respectively. Interest income of $5,000 and $1,000 was recognized on the renegotiated loans subsequent to their classification as impaired for the three months ended March 31, 2015 and March 31, 2014, respectively.

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 $2,000 or .1%, since December 31, 2014. The allowance for loan losses represented 1.8% of outstanding loans as of March 31, 2015 and December 31, 2014. Net loan charge-offs amounted to $2,000 for the three month period ended March 31, 2015, compared to net loan recoveries of $1,000 for the same period in 2014. There was no provision made to the allowance for loan losses during the three months ended March 31, 2015 and March 31, 2014. The credit quality of the loan portfolio combined with the recent level of net charge-offs and nonperforming assets continue to be considered in the calculation of the provision for loan losses. The additions and deletions to the allowance for loan losses are based on management’s evaluation of characteristics of the loan portfolio, current and anticipated economic conditions, past loan experiences, net loans charged-off, specific problem loans and delinquencies, and other factors.

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

Table Five - Analysis of Allowance for Possible Loan Losses

 

(dollars in thousands)		March 31,				December 31,
		2015				2014				2013				2012				2011
Allowance for loan losses:
Balance at beginning of period:		$	1,813			$	1,865			$	2,181			$	2,504			$	2,059
Loans charged off:
Commercial and other loans			—				5				—				—				8
Commercial real estate			—				36				—				87				156
Consumer real estate			—				—				—				—				28
Consumer			5				16				12				9				19
Total			5				57				12				96				211
Recoveries:
Commercial and other loans			—				—				—				—				2
Commercial real estate			2				—				84				15				45
Consumer real estate			—				—				—				—				—
Consumer			1				5				12				6				9
Total			3				5				96				21				56
Net charge-offs (recoveries)			2				52				(84	)			75				155
Provision (credit) to operations			—				—				(400	)			(248	)			600
Balance at end of period:		$	1,811			$	1,813			$	1,865			$	2,181			$	2,504
Average loans outstanding		$	101,182			$	94,103			$	97,374			$	104,566			$	115,415
Ratio of net charge-offs to average loans outstanding for the period			0.00	%			0.06	%			-0.09	%			0.07	%			0.13	%
Ratio of the allowance for loan losses to loans outstanding for the period			1.76	%			1.83	%			2.00	%			2.19	%			2.29	%

 

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First West Virginia Bancorp, Inc.

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

 

Table Six - Allocation of Allowance for Possible Loan Losses

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

 

		March 31,								December 31,
		2015								2014								2013								2012								2011
(dollars in thousands)		Amount				Percent of loans in each category to total loans				Amount				Percent of loans in each category to total loans				Amount				Percent of loans in each category to total loans				Amount				Percent of loans in each category to total loans				Amount				Percent of loans in each category to total loans
Commercial and other loans		$	304				21.3	%		$	281				17.2	%		$	260				17.9	%		$	179				15.7	%		$	179				14.6	%
Commercial real estate			1,232				44.8	%			1,254				47.3	%			1,315				47.1	%			1,762				50.4	%			2,082				51.5	%
Consumer real estate			261				31.3	%			263				32.7	%			263				31.3	%			193				28.6	%			193				27.4	%
Consumer			14				2.6	%			15				2.8	%			27				3.7	%			47				5.3	%			50				6.5	%
Total		$	1,811				100.0	%		$	1,813				100.0	%		$	1,865				100.0	%		$	2,181				100.0	%		$	2,504				100.0	%

Other Assets

Other assets decreased approximately $622,000, or 23.9%, during 2015 primarily as a result of the decrease in the deferred tax asset related to unrealized gains on available-for-sale securities.

Deposits

A stable core deposit base is the major source of funds for the Company’s subsidiary bank. The deposit mix depends upon many factors including competition from other financial institutions, depositor interest in certain types of deposits, changes in the interest rate and the Company’s need for certain types of deposit growth. Total deposits increased approximately $2.4 million, or .9% during the first three months of 2015. Since year end the increase in total deposits was primarily due to increases in savings and interest bearing demand deposits of $3,032,000 and $2,301,000, respectively, offset in part by decreases in noninterest bearing deposits and certificates of deposit which decreased approximately $1,604,000 and $1,331,000, respectively. At March 31, 2015, noninterest bearing deposits comprised 14.6% of total deposits and interest bearing deposits which include NOW, money market, savings and time deposits comprised 85.4% of total deposits. The changes in the composition of the deposit mix from December 31, 2014 to March 31, 2015 were a .7% increase in interest bearing deposits and a .7% decrease in noninterest 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, 2015 and December 31, 2014. Repurchase agreements increased $4,873,000 or 23.1%, from December 31, 2014 to March 31, 2015. The increase since year end was primarily due to the increase in the balances maintained by existing repurchase agreement customers.

Capital Resources

Stockholders’ equity increased 3.9% during the three month period ended March 31, 2015 due to a 1.9% increase in accumulated other comprehensive income and an increase of 2.0% from current earnings after quarterly dividends. The increase in accumulated other comprehensive income is primarily attributable to the effect of the change in the net unrealized gains on securities available for sale. Stockholders’ equity amounted to 10.6% and 10.5% of total assets at March 31, 2015 and December 31, 2014, respectively. The Company paid dividends of $.20 per share during the three month periods ended March 31, 2015 and 2014, 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 2015, without approval of the Comptroller of the Currency, of approximately $1,500,000, plus an additional amount equal to the bank’s net profit for 2015 up to the date of any such dividend declaration.

 

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First West Virginia Bancorp, Inc.

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

 

Liquidity

Liquidity management ensures that funds are available to meet loan commitments, deposit withdrawals, and operating expenses. Funds are provided by loan repayments, investment securities maturities, or deposits, and can be raised by liquidating assets or through additional borrowings. The Company had investment securities with an estimated fair value of $198,648,000 classified as available for sale at March 31, 2015. These securities are available for sale at any time based upon management’s assessment in order to provide necessary liquidity should the need arise. The fair value of temporarily impaired investment securities that the company has the intent and ability to hold until the anticipated recovery in market value is $71,348,000. 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, 2015 was approximately $39.3 million subject to the purchase of additional FHLB stock. At March 31, 2015, the subsidiary bank had a short term line of credit in the aggregate amount of approximately $19.8 million available with the FHLB. There were no short term borrowings outstanding pursuant to this agreement as of March 31, 2015. At March 31, 2015 and December 31, 2014, the Company had outstanding loan commitments and unused lines of credit totaling $17,285,000 and $23,155,000, respectively. As of March 31, 2015, management placed a high probability for required funding within one year of approximately $8.3 million. Approximately $7.3 million is principally unused overdraft, home equity and credit card lines on which management places a low probability for required funding.

 

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FIRST WEST VIRGINIA BANCORP, INC.

PART I

Item 3 Quantitative and Qualitative Disclosures About Market Risk

The Company’s subsidiary bank uses an asset/liability model to measure the impact of changes in interest rates on net interest income on a periodic basis. Assumptions are made to simulate the impact of future changes in interest rates and/or changes in balance sheet composition. The effect of changes in future interest rates on the mix of assets and liabilities may cause actual results to differ from simulated results. Guidelines established by the Company’s subsidiary bank provides that the estimated net interest income may not change by more than 10% in a one year period given a +/- 200 basis point parallel shift in interest rates. Excluding the potential effect of interest rate changes on assets and liabilities of the Holding Company which are not deemed material, the anticipated impact on net interest income of the subsidiary bank at March 31, 2015 was as follows: given a 200 basis point increase scenario net interest income would be reduced by approximately 1.1%, and given a 200 basis point decrease scenario net interest income would be reduced by approximately 11.7%. The results using a +/-100 basis point interest rate scenario are also presented. Under the 100 basis point increase scenario net interest income would increase by approximately 0.5%, and given a 100 basis point decrease scenario net interest income would be reduced by 6.2%. 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, noninterest income and expenses, investment practices, and deposit practices all change as a result of changes in interest rates and would need to be considered by the Asset Liability Committee.

Item 4 Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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

Changes in Internal Controls

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

 

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FIRST WEST VIRGINIA BANCORP, INC.

PART II

OTHER INFORMATION

 

Item 1

Legal Proceedings

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

 

Item 1A

Risk Factors

Not applicable to Smaller Reporting Companies

 

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

Inapplicable

 

Item 3

Defaults Upon Senior Securities

Inapplicable

 

Item 4

Mine Safety Disclosures

None

 

Item 5

Other Information

Inapplicable

 

Item 6

Exhibits and Reports on Form 8-K

 

(a)

Reports on Form 8-K

On March 5, 2015 a report on Form 8-K was filed which contained a press release dated March 4, 2015 that reported the announcement of First West Virginia Bancorp Inc.’s fourth quarter and year end earnings.

On March 26, 2015 a report on Form 8-K was filed which stated that the Board of Directors of First West Virginia Bancorp, Inc. appointed William G. Petroplus to serve as the President and Chief Executive Officer of the Company and Progressive Bank, N.A., its wholly owned subsidiary bank, effective immediately.

 

(b)

Exhibits

The exhibits listed in the Exhibit Index on page 43 of this FORM 10-Q are incorporated by reference and/or filed herewith.

 

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SIGNATURES

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

 

First West Virginia Bancorp, Inc.
(Registrant)
By:		/s/ William G. Petroplus
		William G. Petroplus
		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 12, 2015

 

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EXHIBIT INDEX

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

 

Incorporated by Reference

Exhibit Number

Description

Filed Herewith

Form

File No.

Exhibit

Filing Date

3.1

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

10-K

001-13652

3.1

3/31/10

3.2

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

8-K

001-13652

3.2

12/23/13

10.3

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

10-K

001-13652

10.3

3/31/10

10.4

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

10-K

001-13652

10.4

3/31/10

10.5

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

10-K

001-13652

10.5

3/31/10

10.7

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

10-K

001-13652

10.7

3/31/10

10.8

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

10-K

001-13652

10.8

3/29/13

11.1

Statement regarding computation of per share earnings.

X

13.3

Summarized Quarterly Financial Information.

X

15

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

X

31.1

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

X

31.2

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

X

32

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

X

99.1

Independent Accountant’s Report.

X

101

Interactive Data File.

X

 

43