News Column

FIRST WEST VIRGINIA BANCORP INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

May 13, 2014

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, 2014 2013 2013 2012 2011 2010 SUMMARY OF OPERATIONS Total interest income $ 2,409$ 2,303$ 9,414$ 9,838$ 11,207$ 11,858 Total interest expense 365 387 1,524 1,789 2,229 3,056 Net interest income 2,044 1,916 7,890 8,049 8,978 8,802 Provision (credit) for loan losses - - (400 ) (248 ) 600 220 Total other income 206 272 1,440 2,352 2,034 1,977 Total other expenses 1,910 1,891 7,672 7,604 7,626 7,723 Income before income taxes 340 297 2,058 3,045 2,786 2,836 Net income 446 381 2,241 2,538 2,454 2,339 PER SHARE DATA (1) Net income $ 0.26$ 0.22$ 1.30$ 1.48$ 1.43$ 1.36 Cash dividends declared 0.20 0.19 0.76 0.73 0.73 0.70 Book value per share 18.91 20.40 17.91 20.77 20.09 18.10 AVERAGE BALANCE SHEET SUMMARY Total loans, net $ 91,760$ 98,281 97,374 104,566 $ 115,415$ 124,074 Investment securities 203,183 171,013 177,809 154,755 136,409 116,990 Deposits - interest bearing 228,425 212,806 218,229 208,308 204,616 198,042 Stockholders' equity 33,406 32,498 32,597 31,608 30,498 29,415 Total assets 337,888 300,074 316,172 293,601 283,734 273,778 BALANCE SHEET Investments $ 205,679$ 175,853 199,955 178,208 $ 150,961$ 133,169 Loans 90,970 100,806 93,402 99,387 109,428 121,367 Allowance for loan losses (1,866 ) (2,178 ) (1,865 ) (2,181 ) (2,504 ) (2,059 ) Other assets 42,445 39,344 50,653 31,133 35,373 25,482 Total Assets $ 337,228$ 313,825 342,145 306,547 $ 293,258$ 277,959 Deposits $ 279,554$ 250,902 285,877 246,462 $ 239,177$ 228,475 Federal funds purchased and repurchase agreements 20,739 18,155 20,215 18,767 14,013 13,477 FHLB borrowings 3,492 3,584 3,516 3,606 3,693 3,776 Other liabilities 940 6,127 1,747 2,009 1,848 1,130 Stockholders' equity 32,503 35,057 30,790



35,703 34,527 31,101

Total Liabilities and Stockholders' equity $ 337,228$ 313,825 342,145



306,547 $ 293,258$ 277,959

SELECTED RATIOS Return on average assets 0.54 % 0.51 % 0.71 % 0.86 % 0.86 % 0.85 % Return on average equity 5.41 % 4.75 % 6.87 % 8.03 % 8.05 % 7.95 % Average equity to average assets 9.89 % 10.83 % 10.31 % 10.77 % 10.75 % 10.74 % Dividend payout ratio (1) 76.92 % 86.36 % 58.46 % 49.32 % 51.05 % 51.47 % Loan to Deposit ratio 32.54 % 40.18 % 32.67 % 40.33 % 45.75 % 53.12 %



(1) Adjusted for the 4 percent common stock dividend to stockholders of record as

of December 19, 2012 and the 4 percent common stock dividend to stockholders

of record as of December 20, 2010. 30



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First West Virginia Bancorp, Inc.

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

The following discussion and analysis provides further detail to the financial condition and results of operations of the Company. The section should be read in conjunction with the notes and financial statements presented elsewhere in this report. The Company's critical accounting policies involving the significant judgments and assumptions used in the preparation of the Consolidated Financial Statements as of March 31, 2014 have remained unchanged from the disclosures presented in the Company's Annual Report on Form 10-K for the year ended December 31, 2013 under the section "Management's Discussion and Analysis of Financial Condition and Results of Operations." Forward-Looking Information: Certain information contained in this report, which are not historical facts, may be forward-looking statements that involve risks and uncertainties. These statements are subject to important factors that could cause actual results to differ materially from those contemplated by such statements, including without limitation, the effect of changing economic conditions, changes in interest rates, changes in lending activities, changes in state and federal regulations, and other external factors which may materially impact the Company's operational and financial performance. Investors are cautioned that forward-looking statements, which are not historical fact, involve risks and uncertainties that could cause actual results to differ materially from those contemplated by such statements, including without limitation, the effect of changing regional and national economic conditions; changes in interest rates, spreads on earning assets and interest-bearing liabilities, and associated interest rate sensitivity; sources of liquidity available to the parent company and its related subsidiary operations; potential future credit losses and the credit risk of commercial, real estate, and consumer loan customers and their borrowing activities; actions of the Federal Reserve Board, Office of the Comptroller of the Currency, Federal Deposit Insurance Corporation, the Securities and Exchange Commission, and other regulatory bodies; potential legislative and federal and state regulatory actions and reform; competitive conditions in the financial services industry; rapidly changing technology affecting financial services, and/or other external developments materially impacting the Company's operational and financial performance. The Company does not assume any duty to update forward-looking statements. Critical Accounting Policies: The Company's accounting policies are integral to understanding the results reported. The accounting policies are described in detail in Note 1 of the Consolidated Financial Statements. Our most complex accounting policies require management's judgment to ascertain the valuation of assets, liabilities, commitments and contingencies. Detailed policies and control procedures have been established and are intended to ensure valuation methods are well controlled and applied consistently from period to period. In addition, the policies and procedures are intended to ensure that the process for changing methodologies occurs in an appropriate manner. The following is a brief description of our current accounting policies involving significant management valuation judgments. Other-Than-Temporary Impairment of Investment Securities: Investment securities are evaluated periodically to determine whether a decline in their value is other-than-temporary. Management utilizes criteria such as the magnitude and duration of the decline, in addition to the reasons underlying the decline, to determine whether the loss in value is other-than-temporary. The term "other-than-temporary" is not intended to indicate that the decline is permanent. It indicates that the prospects for a near term recovery of value are not necessarily favorable, or that there is a lack of evidence to support fair values equal to, or greater than, the carrying value of the investment. Once a decline in value is determined to be other-than-temporary, the value of the security is reduced and a corresponding charge to earnings is recognized. Allowance for Loan Losses: Arriving at an appropriate level of allowance for loan losses involves a high degree of judgment. The Company's allowance for loan losses provides for probable losses based upon evaluations of known, and inherent risks in the loan portfolio. Management uses historical information to assess the adequacy of the allowance for loan losses as well as the prevailing business environment, as it is affected by changing economic conditions and various external factors, which may impact the portfolio in ways currently unforeseen. The allowance is increased by provisions for loan losses and by recoveries of loans previously charged-off and reduced by loans charged-off. For a full discussion of the Company's methodology of assessing the adequacy of the reserve for loan losses, refer to Note 1 of the Consolidated Financial Statements. Goodwill: As discussed in Note 1 of the notes to the Consolidated Financial Statements, the Company must assess goodwill each year for impairment. This assessment involves estimating cash flows for future periods. If the future cash flows were less than the recorded goodwill balance, we would be required to take a charge against earnings to write down the 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. 31



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First West Virginia Bancorp, Inc.

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

OVERVIEW The Company reported net income of $446,256 or $.26 per share for the three months ended March 31, 2014 compared to $381,337 or $.22 per share for the same period during 2013. The increase in net income for the three months ended March 31, 2014 as compared to the same period in 2013 of $64,919 or 17.0% was primarily the result of the increase in net interest income and income tax benefit, offset in part by the decrease in noninterest income and the increase in noninterest expenses. Net interest income increased $128,633 or 6.7%, primarily due to the increase in the interest earned on investment securities combined with the reduction in the expense paid on interest bearing liabilities, offset in part by the decline in the interest and fees earned on loans. Noninterest income decreased $65,740 or 24.1% primarily due to the other-than-temporary impairment recognized on securities in an unrealized loss position that the Bank intends to sell combined with the decline in service charges and fees earned on deposit accounts and other operating income. Noninterest expenses increased $19,806 or 1.0% during the three month period ended March 31, 2014 as compared to the same period in 2013 primarily due to the increases in occupancy expenses and other operating expenses, offset in part by the decrease in salary and employee benefits expense. Income tax benefit increased during the first quarter of 2014 as compared to the same period in 2013 primarily due to the increase in tax exempt income. The ROA was .54% for the three months ended March 31, 2014 as compared to .51% for the same period of the prior year. For the three months ended March 31, 2014 compared to March 31, 2013, the ROE was 5.41% and 4.75%, 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, 2014

Net Interest Income

Net interest income, which is the primary source of earnings for the Company, is the difference between interest earned on loans and investments and interest paid on deposits and 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, 2014 and 2013. For the three months ended March 31, 2014, net interest income increased $128,633 or 6.7%, from the same period in 2013. The increase in net interest income was primarily due to the increase in the interest earned on investment securities combined with the reduction in the expense paid on interest bearing liabilities, offset in part by the decline in the interest and fees earned on loans. 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 3.18% for the three month period ended March 31, 2014 as compared to 3.30% for the same period in 2013. The average volume of earning assets increased $19.8 million or 6.6% from December 31, 2013 to March 31, 2014. For the three months ended March 31, 2014, interest and fees on loans decreased $118,181 or 9.2%, from the same period in 2013 primarily due to the decline in the average loan volume combined with the decrease in the yield earned on loans. The taxable equivalent yield on loans fell 6 basis points, to 5.54% for the three month period ended March 31, 2014 as compared to 5.60% for the same period in 2013. The average balance on loans decreased $5.6 million or 5.8% since December 31, 2013 to March 31, 2014. Interest income on investment securities increased $212,256 or 21.1% during the first quarter of 2014, as compared to the same period of the prior year. The increase in interest income on investment securities was primarily due to the increase in the average volume of investment securities combined with the increase in the yield earned. The taxable equivalent yield on investment securities increased 5 basis points, to 3.15% during the three month period ended March 31, 2014 as compared to 3.10% for the same period in 2013. The average volume of the investment portfolio increased approximately $25.4 million or 14.3% from December 31, 2013 to March 31, 2014. Interest expense decreased $22,080 or 5.7% during the three months ended March 31, 2014 as compared to the same period in 2013. The decrease in interest expense was primarily due to the decline in the average yield paid on interest bearing liabilities which were offset in part by an increase in the average balances of interest bearing liabilities. The average yield on interest bearing liabilities fell 8 basis points, from .67% during the period ended March 31, 2013 to .59% during the period ended March 31, 2014, while the average volume grew $17.3 million or 7.4% 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. 32



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First West Virginia Bancorp, Inc.

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

Noninterest Income Noninterest income decreased $65,740 or 24.1% for the three months ended March 31, 2014 as compared to the same period of the prior year. The decrease in noninterest income was primarily due to the other-than-temporary impairment recognized on securities in an unrealized loss position that the Bank intends to sell combined with the decline in service charges and fees earned on deposit accounts and other operating income. 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 $12,067 or 12.3%, during the first three months of 2014 as compared to the same period in 2013 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, 2014, other operating income decreased $4,433 or 2.5% compared to the same period in 2013. The decrease in other operating income during the three month period ended March 31, 2014 as compared to the same period in the prior year was primarily due to the decreases in fee income earned on loans sold to the FHLB, checkbook income, and credit card fees, offset in part by an increase in ATM fees. Noninterest Expense Noninterest expense increased $19,806 or 1.0% for the three months ended March 31, 2014 as compared to the same period of the prior year. The increase in noninterest expense was primarily due to increases in occupancy expenses and other operating expenses, offset in part by the decrease in salary and employee benefits expense. Salary and employee benefits represent the largest component of noninterest expense. Salary and employee benefits decreased $5,214 or .6% during the first quarter of 2014 as compared to the same period in 2013. The decrease was primarily attributable to reductions in salary and payroll tax expenses offset in part by the increase in employee benefit expenses. The Company had 94 full-time equivalent employees at March 31, 2014 versus 95 full-time equivalent employees at March 31, 2013. Occupancy expenses increased $21,504 or 5.3% for the three month period ended March 31, 2014 as compared to the same period of the prior year primarily due to increases in building maintenance expenses, furniture and fixture expenses, depreciation expenses, and insurance expenses, offset in part by a decline in utilities expenses, real estate taxes, and land lease expenses. Other operating expense increased $3,516 or .6%, compared to the same period of the prior year. The increase in other operating expenses was primarily due to increases in regulatory assessments, director fees, advertising, and service expenses, offset in part by the decreases in stationary and supplies expenses, postage and transportation expenses, and other taxes. Other operating expenses for the three months ended March 31 included the following: Percent Net Increase Increase 2014 2013 (Decrease) (Decrease) Directors' fees $ 27,875$ 25,150$ 2,725 10.8 % Stationery and supplies 29,048 35,070 (6,022 ) (17.2 )%



Regulatory assessment and deposit insurance 75,591 69,316

6,275 9.1 % Advertising 39,346 38,677 669 1.7 % Postage and transportation 41,100 45,113 (4,013 ) (8.9 )% Other taxes 43,272 45,627 (2,355 ) (5.2 )% Service expense 110,437 109,836 601 0.5 % Other 203,842 198,206 5,636 2.8 % Total $ 570,511$ 566,995$ 3,516 0.6 % Income Taxes Income tax benefit increased $21,832 during the three month period ended March 31, 2014 as compared to the same period in 2013 primarily due to the increase in tax-exempt income. Components of the income tax benefit for March 31, 2014 were an income tax benefit of $117,335 for federal taxes and an income tax expense of $11,387 for West Virginia corporate net income taxes. Federal income tax rates remain consistent at 34% for the three months ended March 31, 2014 and 2013 and for the year ended December 31, 2013. West Virginia corporate net income tax rates were 6.50% for the three months ended March 31, 2014 and 7.00% for the three months ended March 31, 2013 and for the year ended December 31, 2013. 33



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First West Virginia Bancorp, Inc.

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

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

The following table presents an average balance sheet, interest earned on interest bearing assets, interest paid on interest bearing liabilities, average interest rates and interest differentials for the three months ended March 31, 2014 and 2013. Average balance sheet information for the periods ended March 31, 2014 and 2013 was compiled using the daily averages. Loan fees and unearned discounts were included in income for average rate calculation purposes. Average yields on investment securities available for sale have been calculated based on amortized cost. Non-accrualloans were included in the average balance computations; however, no interest was included in income subsequent to the non-accrual status classification. (Unaudited) (Unaudited) March 31, 2014 March 31, 2013 Average Average Average Average Volume Interest Rate Volume Interest Rate ASSETS: Investment securities: U.S. Treasury and U. S. Government agencies $ 50,064$ 229



1.86 % $ 45,981$ 202 1.78 % Mortgage backed securities

92,992 443 1.93 % 76,356 345 1.83 % States and political subdivisions 59,960 542 3.67 % 48,489 455 3.81 % Other securities 167 2 4.86 % 187 2 4.34 % Total Investment securities: 203,183 1,216 2.43 % 171,013 1,004 2.38 % Interest bearing deposits 20,965 13 0.25 % 10,494 7 0.27 % Loans, net of unearned income 91,760 1,170 5.17 % 98,281 1,288 5.31 % Other earning assets 1,303 10 3.11 % 1,334 4 1.22 % Total earning assets 317,211 2,409 3.08 % 281,122 2,303 3.32 % Other assets 22,542 21,134 Allowance for loan losses (1,865 ) (2,182 ) Total Assets $ 337,888$ 300,074 LIABILITIES Time deposits $ 66,341$ 180 1.10 % $ 70,564$ 222 1.28 % Savings deposits 109,723 89 0.33 % 94,063 77 0.33 % Interest bearing demand deposits 52,361 16 0.12 % 48,179 14 0.12 % Federal funds purchased and repurchase agreements 19,706 38 0.78 % 17,744 31 0.71 % FHLB and other long-term borrowings 3,503 42 4.86 % 3,765 43 4.63 % Total interest bearing liabilities 251,634 365 0.59 % 234,315 387 0.67 % Demand deposits 52,260 32,589 Other liabilities 588 672 Total Liabilities 304,482 267,576 STOCKHOLDERS' EQUITY 33,406 32,498 Total Liabilities and Stockholders' Equity $ 337,888



$ 300,074

Net yield on earning assets $ 2,044 2.61 % $ 1,916 2.76 % 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, 2014 and 2013. The effect of this adjustment is presented below. Investment securities $ 203,183$ 1,578 3.15 % $ 171,013$ 1,307 3.10 % Loans 91,760 1,253 5.54 % 98,281 1,356 5.60 % Total earning assets $ 317,211$ 2,854 3.65 % $ 281,122$ 2,674 3.86 % Taxable equivalent net yield on earning assets $ 2,489 3.18 % $ 2,287 3.30 % 34



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First West Virginia Bancorp, Inc.

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

BALANCE SHEET ANALYSIS Investments Investment securities increased approximately $5.7 million or 2.9% from December 31, 2013 to March 31, 2014. The investment portfolio is managed to attempt to achieve an optimum mix of asset quality, liquidity and maximum yield on investment. The investment portfolio consists of U.S. Government agency and corporation securities, obligations of states and political subdivisions, corporate debt securities, mortgage-backed securities and equity securities. Taxable securities comprised 69.1% of total securities at March 31, 2014, as compared to 69.8% at December 31, 2013. Other than the normal risks inherent in purchasing U.S. Government agency and corporation securities, corporate debt securities, mortgage-backed securities and obligations of states and political subdivisions, i.e., interest rate risk, management has no knowledge of other market or credit risk involved in these investments. The Company does not have any high risk hybrid/derivative instruments. Investment securities that are classified available for sale are available for sale at any time based upon management's assessment of changes in economic or financial market conditions. These securities are carried at fair value and the unrealized holding gains and losses, net of taxes, are reflected as a separate component of stockholders' equity until realized. Available for sale securities, at fair value, increased 2.9% from December 31, 2013 and represented 100% of the investment portfolio at March 31, 2014. The increase in the available for sale securities was primarily due to purchases of obligations of U.S. Government agencies and corporations, mortgage backed securities, and obligations of states and political subdivisions, offset in part by calls of obligations of U.S. Government agencies and corporations and obligations of states and political subdivisions. The Company did not have any investment securities classified as held to maturity securities at March 31, 2014 and December 31, 2013. As the investment portfolio consists primarily of fixed rate debt securities, changes in the market rates of interest will affect the carrying value of securities available for sale, adjusted upward or downward and represent temporary adjustments in value. The carrying value of securities available for sale was below book value by $1,776,108 and $4,358,005 at March 31, 2014 and December 31, 2013, respectively. Loans Total loans, net of unearned income, declined approximately $2.4 million or 2.6% from December 31, 2013 to March 31, 2014. The decrease in total loans in 2013 was primarily due to the decrease in commercial real estate, consumer, and consumer real estate loans which decreased $2,612,000, $220,000, and $122,000, respectively, offset in part by the increase in commercial and other loans which increased $526,000. The decline in commercial real estate loans was primarily due to a decline in non-farm, non-residential loans as well as a decline in multifamily residential loans. The decline in consumer loans was primarily due to the decrease in installment loans to individuals offset in part by a slight increase in credit cards. The decrease in consumer real estate loans was primarily in residential real estate, home equity, farmland, and construction loans offset in part by an increase in home equity lines of credit. Commercial and other loans increased due to an increase in non-rated industrial development obligations offset in part by a decrease in commercial loans. 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-two percent (32%) of the loan portfolio. Commercial and other loans which include commercial and industrial loans and non-rated industrial development obligations comprised nineteen percent (19%) of the loan portfolio. Consumer loans which include installment and other loans to individuals and credit cards comprised four percent (4%) of the loan portfolio. The changes in the composition of the loan portfolio from December 31, 2013 to March 31, 2014 were a 2% decrease in commercial real estate loans, a 1% increase in consumer real estate loans, and a 1% increase in commercial and other loans. 35



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First West Virginia Bancorp, Inc.

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

Loans - (Continued)



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, 2014 and December 31, 2013: (Unaudited) (Unaudited) (dollars in thousands) March 31, 2014 December 31, 2013 After one After one Year Year In one Through After In one Through After Year or Less Five Years Five Years Year or Less Five Years Five Years Construction $ 351 $ 11 $ 255 $ 351 $ 37 $ 99 Commercial real estate - nonfarm, nonresidential property 485 7,177 26,594 913 6,788 27,644 Commercial 499 2,094 2,796 594 2,684 2,211 Nonrated industrial development obligations 363 1,934 9,541 564 1,631 9,005 Total $ 1,698$ 11,216$ 39,186 $ 2,422 $ 11,140$ 38,959 The following table presents an analysis of fixed and variable rate loans as of March 31, 2014 and December 31, 2013 along with the contractual maturities of loans other than installment loans and residential mortgages: (Unaudited) (Unaudited) (dollars in thousands) March 31, 2014 December 31, 2013 After one After one Year Year In one Through After In one Through After Year or Less Five Years Five Years Year or Less Five Years Five Years Fixed Rates $ 1,331$ 8,840$ 6,585 $ 1,526 $ 9,213$ 6,815 Variable Rates 367 2,376 32,601 896 1,927 32,144 Total $ 1,698$ 11,216$ 39,186 $ 2,422 $ 11,140$ 38,959 36



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First West Virginia Bancorp, Inc.

Management's Discussion and Analysis of the Financial Condition and Results of Holding Company 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 is $9,425,319 and $9,489,935 as of March 31, 2014 and December 31, 2013, respectively. The loans which were sold were also subject to a recourse obligation or credit risk in the amount of $343,331 and $342,602 at March 31, 2014 and December 31, 2013, respectively.



Non-performing Loans

Non-performing assets include non-accrual loans on which the collectibility of the full amount of interest is uncertain; loans which have been renegotiated to provide for a reduction or deferral of interest on principal because of a deterioration in the financial position of the borrower; loans past due ninety days or more as to principal or interest; and other real estate owned. A summary of nonperforming assets is presented in the following table. Total non-performing loans were $1,258,000 at March 31, 2014 as compared to $1,314,000 at December 31, 2013. Non-performing loans decreased $56,000 in 2014. The decrease in non-performing loans in 2014 was primarily due to the decrease in non-accrual loans. Risk Elements Loans which are in the process of collection, but are contractually past due 90 days or more as to interest or principal, renegotiated, non-accrual loans and other real estate are as follows: (dollars in thousands) March 31, December 31, 2014 2013 2012 2011 2010 Past Due 90 Days or More, still accruing: Commercial and Other Loans $ - $ - $ - $ - $ - Commercial real estate - - - - - Consumer real estate - - - - 28 Consumer - - - - - $ - $ - $ - $ - $ 28 Renegotiated: Commercial and Other Loans $ - $ - $ - $ - $ - Commercial real estate 43 44 - - - Consumer real estate - - - - - Consumer - - - - - $ 43$ 44 $ - $ - $ - Non-accrual: Commercial and Other Loans $ 25$ 26$ 31$ 39$ 54 Commercial real estate 848 885 3,115 3,533 4,147 Consumer real estate 339 355 388 447 688 Consumer 3 4 17 27 14 $ 1,215$ 1,270$ 3,551$ 4,046$ 4,903 Other Real Estate $ - $ - $ - $ 138$ 8 Total non-performing assets $ 1,258$ 1,314 $



3,551 $ 4,184$ 4,939

Total non-performing assets to total loans and other real estate 1.38 % 1.41 %



3.57 % 3.82 % 4.07 %

Loans are placed in non-accrual when the principal or interest is past due 90 days or more, unless the loan is both well secured and in the process of collection. Non-accrual loans were $1,215,000 or 1.3% of total loans outstanding as of March 31, 2014, as compared to $1,270,000 or 1.4% of total loans outstanding as of December 31, 2013. Non-accrual loans decreased in 2014 primarily due to the payments being applied to nonaccrual loans. Management continues to monitor the nonperforming assets to ensure against deterioration in collateral values. 37



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First West Virginia Bancorp, Inc.

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

Allowance for Loan Losses In all lending activities there is an inherent risk that borrowers will be unable to repay their obligations. The Company maintains an allowance for loan losses to absorb probable loan losses. The Company has historically maintained the allowance for loan losses at a level greater than actual charge-offs. Although a subjective evaluation is determined by management, the Company believes it has appropriately assessed the risk of loans in the loan portfolio and has provided for an allowance which is adequate based on that assessment. Because the allowance is an estimate, any change in the economic conditions of the Company's market area could result in new estimates which could affect the Company's earnings. Management monitors the quality of the loan portfolio through reviews of past due loans and all significant loans which are considered to be potential problem loans on a monthly basis. The internal loan review function provides for an independent review of commercial, real estate, and installment loans in order to measure the asset quality of the portfolio. Management's review of the loan portfolio has not indicated any material loans, not disclosed in the accompanying tables and discussions which are known to have possible credit problems that cause management to have serious doubts as to the ability of each borrower to comply with their present loan repayment terms. The allowance for loan losses increased $995 or .1%, since December 31, 2013. The allowance for loan losses represented 2.1% and 2.0% of outstanding loans as of March 31, 2014 and at December 31, 2013. Net loan recoveries amounted to $995 for the three month period ended March 31, 2014, compared to net loan charge-offs of $3,459 for the same period in 2013. There was no provision made to the allowance for loan losses during the three months ended March 31, 2014 and March 31, 2013. The credit quality of the loan portfolio combined with the recent level of net charge-offs and nonperforming assets continue to be considered in the calculation of the provision for loan losses. The Company has allocated the allowance for possible loan losses to specific portfolio segments based upon historical net charge-off experience, changes in the level of nonperforming assets, local economic conditions and management's experience. The following table presents an allocation of the allowance for possible loan losses at each of the four year periods ended December 31, 2013, and the three month period ended March 31, 2014. The allocation presented below is based on the historical average of net charge offs per category combined with the change in loan growth and management's review of the loan portfolio.



Analysis of Allowance for Possible Loan Losses

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

(dollars in thousands) March 31, December 31, 2014 2013 2012 2011 2010 Allowance for loan losses: Balance at beginning of period: $ 1,865$ 2,181$ 2,504$ 2,059$ 1,894 Loans charged off: Commercial and other loans - - - 8 14 Commercial real estate - - 87 156 - Consumer real estate - - - 28 - Consumer - 12 9 19 51 Total - 12 96 211 65 Recoveries: Commercial and other loans - - - 2 1 Commercial real estate - 84 15 45 - Consumer real estate - - - - - Consumer 1 12 6 9 9 Total 1 96 21 56 10 Net charge-offs (recoveries) (1 ) (84 ) 75 155 55 Provision (credit) to operations - (400 ) (248 ) 600 220 Balance at end of period: $ 1,866$ 1,865 $



2,181 $ 2,504$ 2,059

Average loans outstanding $ 91,760$ 97,374 $



104,566 $ 115,415$ 124,074

Ratio of net charge-offs to average loans outstanding for the period 0.00 % (0.09 )% 0.07 % 0.13 % 0.04 % Ratio of the allowance for loan losses to loans outstanding for the period 2.05 % 2.00 % 2.19 % 2.29 % 1.70 % 38



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First West Virginia Bancorp, Inc.

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

Loan Portfolio - Allocation of allowance for possible loan losses

The following table presents an allocation of the allowance for possible loan losses at March 31, 2014 and each of the four year periods ended December 31, 2013. The allocation presented below is based on the historical average of net charge offs per category combined with the change in loan growth and management's review of the loan portfolio. March 31, December 31, 2014 2013 2012 2011 2010 Percent Percent Percent Percent Percent of loans of loans of loans of loans of loans in each in each in each in each in each category category category category category to total to total to total to total to total (dollars in thousands) Amount loans Amount loans Amount loans Amount loans Amount loans Commercial and other loans $ 255 18.9 % $ 260 17.9 % $ 179 15.7 % $ 179 14.6 % $ 212 16.9 % Commercial real estate 1,315 45.6 % 1,315 47.1 % 1,762 50.4 % 2,082 51.5 % 1,511 46.5 % Consumer real estate 269 32.0 % 263 31.3 % 193 28.6 % 193 27.4 % 272 28.1 % Consumer 27 3.5 % 27 3.7 % 47 5.3 % 50 6.5 % 64 8.5 % Total $ 1,866 100.0 % $ 1,865 100.0 % $ 2,181 100.0 % $ 2,504 100.0 % $ 2,059 100.0 % Deposits A stable core deposit base is the major source of funds for the Company's subsidiary bank. The deposit mix depends upon many factors including competition from other financial institutions, depositor interest in certain types of deposits, changes in the interest rate and the Company's need for certain types of deposit growth. Total deposits decreased approximately $6.3 million or 2.2% during the first three months of 2014. Since year end the decrease in total deposits was primarily due to decreases in noninterest and interest bearing demand deposits and certificates of deposit which decreased approximately $6,500,000, $1,200,000 and $1,700,000, respectively, offset in part by an increase in savings deposits of $3,100,000. At March 31, 2014, noninterest bearing deposits comprised 18% of total deposits and interest bearing deposits which include NOW, money market, savings and time deposits comprised 82% of total deposits. The changes in the composition of the deposit mix from December 31, 2013 to March 31, 2014 were a 2% increase in interest bearing deposits and a 2% 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, 2014 and December 31, 2013. Repurchase agreements increased $523,757 or 2.6%, from December 31, 2013 to March 31, 2014. The increase since year end was primarily due to the increase in the balances maintained by existing repurchase agreement customers.



Other Liabilities

Other liabilities decreased approximately $796,869 during the three month period ended March 31, 2014 primarily due to investment purchases recorded based on trade dates and a decline in accrued expenses.



Capital Resources

Stockholders' equity increased 5.6% during the three month period ended March 31, 2014 entirely from current earnings after quarterly dividends, and a 5.2% increase in accumulated other comprehensive income. The increase in accumulated other comprehensive income is primarily attributable to the effect of the change in the net unrealized loss on securities available for sale. Stockholders' equity amounted to 9.6% and 9.0% of total assets at March 31, 2014 and December 31, 2013, respectively. The Company paid dividends of $.20 and $.19 per share during the three month periods ended March 31, 2014 and 2013, respectively. The Company's primary source of funds for payment of dividends to shareholders is from the dividends from its subsidiary bank. The approval of the Comptroller of the Currency is required to pay dividends if the total of all dividends declared by a national bank in any calendar year exceeds the total of its net profits (as defined) for the year, combined with its retained net profits of the preceding two years. Under this formula, the Company's subsidiary bank can declare dividends in 2014, without approval of the Comptroller of the Currency, of approximately $2,275,000, plus an additional amount equal to the bank's net profit for 2014 up to the date of any such dividend declaration. 39



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Table of Contents

First West Virginia Bancorp, Inc.

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

Liquidity Liquidity management ensures that funds are available to meet loan commitments, deposit withdrawals, and operating expenses. Funds are provided by loan repayments, investment securities maturities, or deposits, and can be raised by liquidating assets or through additional borrowings. The Company had investment securities with an estimated fair value of $205,678,778 classified as available for sale at March 31, 2014. These securities are available for sale at any time based upon management's assessment in order to provide necessary liquidity should the need arise. The fair value of temporarily impaired investment securities that the company has the intent and ability to hold until the anticipated recovery in market value is $126,059,000. 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, 2014 was approximately $36.2 million subject to the purchase of additional FHLB stock. At March 31, 2014, the subsidiary bank had a short term line of credit in the aggregate amount of approximately $19.4 million available with the FHLB. There were no short term borrowings outstanding pursuant to this agreement as of March 31, 2014. At March 31, 2014 and December 31, 2013, the Company had outstanding loan commitments and unused lines of credit totaling $25.2 million and $27.3 million, respectively. As of March 31, 2014, management placed a high probability for required funding within one year of approximately $17.1 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. 40



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Table of Contents

FIRST WEST VIRGINIA BANCORP, INC.

PART I


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