News Column

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

August 14, 2014

Table One

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

Three Months Ended Six Months Ended June 30, June 30, Years ended December 31, 2014 2013 2014 2013 2013 2012 2011 SUMMARY OF OPERATIONS Total interest income $ 2,381$ 2,358$ 4,791



$ 4,661$ 9,414$ 9,838$ 11,207 Total interest expense

356 377 722



764 1,524 1,789 2,229 Net interest income

2,025 1,981 4,069



3,897 7,890 8,049 8,978 Provision (credit) for loan losses

- - - - (400 ) (248 ) 600 Total other income 507 254 713



526 1,440 2,352 2,034 Total other expenses

2,025 1,890 3,935



3,781 7,672 7,604 7,626 Income before income taxes

507 345 847



642 2,058 3,045 2,786 Net income

538 414 984



796 2,241 2,538 2,454 PER SHARE DATA (1) Net income

$ 0.31$ 0.24$ 0.57



$ 0.46$ 1.30$ 1.48$ 1.43 Cash dividends declared

0.20 0.19 0.40 0.38 0.76 0.73 0.73 Book value per share 19.83 18.39 19.83



18.39 17.91 20.77 20.09 AVERAGE BALANCE SHEET SUMMARY Total loans, net

$ 91,022$ 99,853$ 91,387



$ 99,071 97,374 104,566 $ 115,415 Investment securities

200,150 173,375 201,658



172,200 177,809 154,755 136,409 Deposits - interest bearing 229,439 215,122 228,935

213,971 218,229 208,308 204,616 Stockholders' equity

33,563 32,487 33,485



32,492 32,597 31,608 30,498 Total assets

333,421 301,605 335,642



300,843 316,172 293,601 283,734 SELECTED RATIOS Return on average assets

0.65 % 0.55 % 0.59 %



0.53 % 0.71 % 0.86 % 0.86 % Return on average equity

6.43 % 5.11 % 5.93 %



4.94 % 6.87 % 8.03 % 8.05 % Average equity to average assets

10.07 % 10.77 % 9.98 %



10.80 % 10.31 % 10.77 % 10.75 % Dividend payout ratio (1)

64.52 % 79.17 % 70.18 %



82.61 % 58.46 % 49.32 % 51.05 % Loan to Deposit ratio

34.25 % 40.36 % 34.25 % 40.36 % 32.67 % 40.33 % 45.75 % June 30, December 31, 2014 2013 2013 2012 2011 BALANCE SHEET Investments $ 202,383$ 171,920$ 199,955$ 178,208$ 150,961 Loans 94,445 99,044 93,402 99,387 109,428 Allowance for loan losses (1,864 ) (2,185 ) (1,865 ) (2,181 ) (2,504 ) Other assets 40,385 30,297 50,653 31,133 35,373 Total Assets $ 335,349$ 299,076$ 342,145$ 306,547$ 293,258 Deposits $ 275,730$ 245,398$ 285,877$ 246,462$ 239,177 Federal funds purchased and repurchase agreements 19,777 17,731 20,215 18,767 14,013 FHLB borrowings 3,469 3,562 3,516 3,606 3,693 Other liabilities 2,286 785 1,747 2,009 1,848 Stockholders' equity 34,087 31,600 30,790



35,703 34,527

Total Liabilities and Stockholders' equity $ 335,349$ 299,076$ 342,145$ 306,547$ 293,258 (1) Adjusted for the 4 percent common stock dividend to stockholders of record as of December 19, 2012. 32



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Table of Contents

First West Virginia Bancorp, Inc.

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

The following discussion and analysis provides further detail to the financial condition and results of operations of the Company. The section should be read in conjunction with the notes and financial statements presented elsewhere in this report. The Company's critical accounting policies involving the significant judgments and assumptions used in the preparation of the Consolidated Financial Statements as of June 30, 2014 have remained unchanged from the disclosures presented in the Company's Annual Report on Form 10-K for the year ended December 31, 2013 under the section "Management's Discussion and Analysis of Financial Condition and Results of Operations." Forward-Looking Information: Certain information contained in this report, which are not historical facts, may be forward-looking statements that involve risks and uncertainties. These statements are subject to important factors that could cause actual results to differ materially from those contemplated by such statements, including without limitation, the effect of changing economic conditions, changes in interest rates, changes in lending activities, changes in state and federal regulations, and other external factors which may materially impact the Company's operational and financial performance. Investors are cautioned that forward-looking statements, which are not historical fact, involve risks and uncertainties that could cause actual results to differ materially from those contemplated by such statements, including without limitation, the effect of changing regional and national economic conditions; changes in interest rates, spreads on earning assets and interest-bearing liabilities, and associated interest rate sensitivity; sources of liquidity available to the parent company and its related subsidiary operations; potential future credit losses and the credit risk of commercial, real estate, and consumer loan customers and their borrowing activities; actions of the Federal Reserve Board, Office of the Comptroller of the Currency, Federal Deposit Insurance Corporation, the Securities and Exchange Commission, and other regulatory bodies; potential legislative and federal and state regulatory actions and reform; competitive conditions in the financial services industry; rapidly changing technology affecting financial services, and/or other external developments materially impacting the Company's operational and financial performance. The Company does not assume any duty to update forward-looking statements. Critical Accounting Policies: The Company's accounting policies are integral to understanding the results reported. The accounting policies are described in detail in Note 1 of the Consolidated Financial Statements. Our most complex accounting policies require management's judgment to ascertain the valuation of assets, liabilities, commitments and contingencies. Detailed policies and control procedures have been established and are intended to ensure valuation methods are well controlled and applied consistently from period to period. In addition, the policies and procedures are intended to ensure that the process for changing methodologies occurs in an appropriate manner. The following is a brief description of our current accounting policies involving significant management valuation judgments. Other-Than-Temporary Impairment of Investment Securities: Investment securities are evaluated periodically to determine whether a decline in their value is other-than-temporary. Management utilizes criteria such as the magnitude and duration of the decline, in addition to the reasons underlying the decline, to determine whether the loss in value is other-than-temporary. The term "other-than-temporary" is not intended to indicate that the decline is permanent. It indicates that the prospects for a near term recovery of value are not necessarily favorable, or that there is a lack of evidence to support fair values equal to, or greater than, the carrying value of the investment. Once a decline in value is determined to be other-than-temporary, the value of the security is reduced and a corresponding charge to earnings is recognized. Allowance for Loan Losses: Arriving at an appropriate level of allowance for loan losses involves a high degree of judgment. The Company's allowance for loan losses provides for probable losses based upon evaluations of known, and inherent risks in the loan portfolio. Management uses historical information to assess the adequacy of the allowance for loan losses as well as the prevailing business environment; as it is affected by changing economic conditions and various external factors, which may impact the portfolio in ways currently unforeseen. The allowance is increased by provisions for loan losses and by recoveries of loans previously charged-off and reduced by loans charged-off. For a full discussion of the Company's methodology of assessing the adequacy of the reserve for loan losses, refer to Note 1 of the Consolidated Financial Statements. Goodwill: As discussed in Note 1 of the notes to the Consolidated Financial Statements, the Company must assess goodwill each year for impairment. This assessment involves estimating cash flows for future periods. If the future cash flows were less than the recorded goodwill balance, we would be required to take a charge against earnings to write down the assets to the lower value. Deferred Tax Assets: The Company uses an estimate of future earnings to support its position that the benefit of the deferred tax assets will be realized. If future income should prove non-existent or less than the amount of the deferred tax assets within the tax years to which they may be applied, the asset may not be realized and our net income will be reduced. The deferred tax assets are described further in Note 1 of the Consolidated Financial Statements.



OVERVIEW

The Company reported net income of $983,945 or $.57 per share for the six months ended June 30, 2014 compared to $795,752 or $.46 per share for the same period during 2013. The increase in net income for the six months ended June 30, 2014 as compared to the same period in 2013 of $188,193 or 23.6% was primarily the result of the increase in net interest income and noninterest income, offset in part by the increase in noninterest expense and the decrease in the income tax benefit. Net interest income increased $172,556 or 4.4%, primarily due to the increase in the interest earned on investment securities and the decrease in the interest expense paid on interest bearing liabilities, offset in part by the decrease in the interest and fees earned on loans. Noninterest income increased $186,480 or 35.4% primarily due to the increase in the net gains on sales of investment securities offset in part by the other-than-temporary losses on investments combined with the decrease in service charges and fees earned on deposit accounts and the decrease in other operating income. Noninterest expenses increased $154,201 or 4.1% during the six month period ended June 30, 2014 as compared to the same period in 2013 primarily due to increases in salary and employee benefits expenses, occupancy expenses, and other operating expenses. The ROA was .59% for the six months ended June 30, 2014 as compared to .53% for the same period of the prior year. For the six months ended June 30, 2014 compared to June 30, 2013, the ROE was 5.93% and 4.94%, respectively. 33



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Table of Contents

First West Virginia Bancorp, Inc.

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

For the second quarter of 2014, net income was $537,689 or $.31 per share as compared to $414,415 or $.24 per share for the same period in 2013. The increase in net income for the three months ended June 30, 2014 as compared to the same period in 2013 of $123,274 or 29.7% was primarily the result of the increase in net interest income and noninterest income, offset in part by the increase in noninterest expense and the decrease in the income tax benefit. Net interest income increased $43,923 or 2.2% primarily due to the increase in the interest earned on investment securities and the decrease in the interest expense paid on interest bearing liabilities, offset in part by the decrease in the interest and fees earned on loans. Noninterest income increased $252,220 or 99.2% for the three months ended June 30, 2014 as compared to the same period of the prior year primarily due to the increase in the net gains on sales of investment securities, offset slightly by the decrease in other operating income and in service charges and fees earned on deposit accounts. Noninterest expense increased $134,395 or 7.1% during the three month period ended June 30, 2014 as compared to the same period in 2013 primarily due to the increases in salary and employee benefits expenses, occupancy expenses, and other operating expenses.



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

EARNINGS ANALYSIS - For the six months ended June 30, 2014

Net Interest Income

Net interest income, which is the primary source of earnings for the Company, is the difference between interest earned on loans and investments and interest paid on deposits and other liabilities. Changes in the volume and mix of earning assets and interest bearing liabilities combined with changes in market rates of interest greatly effect net interest income. Table Two presents the average balance sheets and an interest rate analysis for the six months ended June 30, 2014 and 2013. For the six months ended June 30, 2014, net interest income was $4,069,482, an increase of $172,556 or 4.4%, from the same period in 2013. Net interest income increased primarily due to the increase in the average volume of earning assets offset in part by the decrease in the taxable equivalent net yield on earning assets. The average earnings assets increased approximately $34.5 million or 12.3% from June 30, 2013 to 2014. The taxable equivalent net yield on earning assets decreased from 3.33% at June 30, 2013 to 2.97% at June 30, 2014. Interest income on investment securities during the first six months of 2014 increased $394,897 or 19.6% as compared to the same period of the prior year. The increase in interest income on investment securities during the first six months of 2014 was primarily due to the rise in the average volume combined with an increase in the yields earned. The average volume of investment securities has increased approximately $23.8 million or 13.4% since December 31, 2013. The taxable equivalent yield on investment securities increased 2 basis points in 2014, from 3.07% at December 31, 2013 to 3.09% at June 30, 2014 and increased 1 basis point from June 30, 2013. Interest and fees on loans decreased $294,689 or 11.2%, from the same period in 2013 primarily due to the decrease in the average loan volume combined with the decline in the average yield on loans. The average loan volume decreased approximately $6.0 million or 6.1% since December 31, 2013. The taxable equivalent yield on loans fell 10 basis points in 2014 from 5.62% at December 31, 2013 to 5.52% at June 30, 2014 and fell 10 basis points from June 30, 2013. During the six months ended June 30, 2014, interest expense declined $42,364 or 5.5% as compared to the same period in 2013. The decrease in the average yield paid on interest bearing liabilities, partially offset by an increase in the average volume of interest bearing liabilities primarily contributed to the decrease in interest expense during the six month period ended June 30, 2014. The average yield paid on interest bearing liabilities fell 5 basis points from .63% at December 31, 2013 to .58% at June 30, 2014 and decreased 8 basis points since June 30, 2013. The average volume of interest bearing liabilities increased approximately $11.3 million or 4.7% since December 31, 2013.



Noninterest Income

Noninterest income increased $186,480 or 35.4% for the six months ended June 30, 2014 as compared to same period of the prior year. The increase in noninterest income was primarily due to the increase in the net gains on sales of investment securities offset in part by the other-than-temporary losses on investments combined with the decrease in service charges and fees earned on deposit accounts and the decrease in other operating income. The net gains on investment securities increased $258,163 for the six month period ended June 30, 2014 as compared to the same period in 2013. The Company's subsidiary bank sold approximately $11.9 million of nontaxable state and political subdivision securities during the second quarter of 2014 in order to reinvest in mortgage backed investment securities and taxable securities of state and political subdivisions in accordance with the Company's deferred tax asset plan. The Company accounted for securities gains of $296,959 and securities losses of $36,546 during the six month period ended June 30, 2014 and securities gains of $2,268 and securities losses of $18 during the six month period ended June 30, 2013.



Service charges and other fees represent charges that are earned from assessments made on checking and savings accounts. Service charges and other fee income fell $13,681 in the first six months of 2014 as compared to the same period in 2013, down 7.1% from 2013.

Other operating income represents fees from safe deposit box rentals, sales of checkbooks, sales of cashiers' checks and money orders, utility collections, ATM charges and card fees, credit life commissions, credit card fees and commissions and various other charges and fees related to normal customer banking relationships. For the six month period ended June 30, 2014, other operating income decreased $8,684 or 2.6% compared to the same period in 2013. The decrease in other operating income was primarily due to decreases in FHLB fee income, checkbook income, and other miscellaneous income, offset in part by an increase in ATM fees. 34



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Table of Contents

First West Virginia Bancorp, Inc.

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

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

The following table presents an average balance sheet, interest earned on interest bearing assets, interest paid on interest bearing liabilities, average interest rates and interest differentials for the six months ended June 30, 2014 and 2013. Average balance sheet information for the periods ended June 30, 2014 and 2013 was compiled using the daily averages. Loan fees and unearned discounts were included in income for average rate calculation purposes. Average yields on investment securities available for sale have been calculated based on amortized cost. Non-accrual loans were included in the average balance computations; however, no interest was included in income subsequent to the non-accrual status classification. For the six months ended For the six months ended June 30, 2014 June 30, 2013 Average Average Average Average Volume Interest Rate Volume Interest Rate ASSETS: Investment securities: U.S. Treasury and U. S. Government agencies $ 49,900$ 452



1.83 % $ 44,672$ 387 1.75 % Mortgage backed securities

95,621 921 1.94 % 77,387 693 1.81 % States and political subdivisions 55,971 1,031 3.71 % 49,956 929 3.75 % Other securities 166 3 3.64 % 185 3 3.27 % Total Investment securities: 201,658 2,407 2.41 % 172,200 2,012 2.36 % Interest bearing deposits 21,363 27 0.25 % 8,598 13 0.30 % Loans, net of unearned income 91,387 2,332 5.15 % 99,071 2,627 5.35 % Other earning assets 1,314 25 3.84 % 1,328 9 1.37 % Total earning assets 315,722 4,791 3.06 % 281,197 4,661 3.34 % Other assets 21,785 21,829 Allowance for loan losses (1,865 ) (2,183 ) Total Assets $ 335,642$ 300,843 LIABILITIES Time deposits $ 65,973$ 350 1.07 % $ 69,878$ 429 1.24 % Savings deposits 110,278 180 0.33 % 96,669 159 0.33 % Interest bearing demand deposits 52,684 31 0.12 % 47,424 28 0.12 % Federal funds purchased and repurchase agreements 19,769 77 0.79 % 17,491 63 0.73 % FHLB and other long-term borrowings 3,491 83 4.79 % 3,605 85 4.75 % Total interest bearing liabilities 252,195 721 0.58 % 235,067 764 0.66 % Demand deposits 49,444 32,594 Other liabilities 518 690 Total Liabilities 302,157 268,351 STOCKHOLDERS' EQUITY 33,485 32,492 Total Liabilities and Stockholders' Equity $ 335,642



$ 300,843

Net yield on earning assets $ 4,070 2.60 % $ 3,897 2.79 % The fully taxable equivalent basis of interest income from obligations of states and political subdivisions has been determined using a combined Federal and State corporate income tax rate of 40% for the six months ended June 30, 2014 and 2013, respectively. The effect of this adjustment is presented below. Investment securities $ 201,658$ 3,089 3.09 % $ 172,200$ 2,632 3.08 % Loans 91,387 2,503 5.52 % 99,071 2,760 5.62 % Total earning assets $ 315,722$ 5,644 3.60 % $ 281,197$ 5,414 3.88 % Taxable equivalent net yield on earning assets $ 4,923 2.97 % $ 4,650 3.33 % 35



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Table of Contents

First West Virginia Bancorp, Inc.

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

EARNINGS ANALYSIS - For the six months ended June 30, 2014 (continued)

Noninterest Expense

Noninterest expense increased $154,201 or 4.1% for the six months ended June 30, 2014 as compared to the same period of the prior year. The increase in noninterest expense was primarily due to the increases in salary and employee benefits expenses, occupancy expenses, and other operating expenses. Salary and employee benefits expenses increased $17,344 or .9% during the six months ended June 30, 2014 over the same period in 2013. Salary and employee benefits expenses in 2014 compared to 2013 increased primarily as a result of a rise in salary expenses. Net occupancy expenses of premises increased $46,038 or 5.7% during the six months ended June 30, 2014 compared to the same period in 2013. Increases in furniture and fixtures expenses, depreciation expenses, banking house expenses, and insurance expenses, offset in part by the decline in real estate taxes, land lease expense, and utilities contributed to the increase in occupancy expenses in 2014 as compared to 2013. Other operating expenses for the six months ended June 30 included the following: Net Percent Increase Increase 2014 2013 (Decrease) (Decrease) Directors' fees $ 64,900$ 47,750$ 17,150 35.9 % Stationery and supplies 70,519 71,981 (1,462 ) (2.0 )%



Regulatory assessment and deposit insurance 152,262 135,588

16,674 12.3 % Advertising 89,323 98,396 (9,073 ) (9.2 )% Postage and transportation 76,488 88,801 (12,313 ) (13.9 )% Other taxes 89,602 90,142 (540 ) (0.6 )% Service expense 256,384 219,279 37,105 16.9 % Other 438,504 395,226 43,278 11.0 % Total $ 1,237,982$ 1,147,163$ 90,819 7.9 % Income Taxes Income tax benefit for the six month period ended June 30, 2014 was $136,928, decreasing $16,642 or 10.8% compared to the same period in 2013. The decrease in income tax benefit was primarily due to the increase in net gains on sales of securities during the first six months of 2014 over the same period in 2013. Components of the income tax benefit for June 30, 2014 were $160,966 for federal tax benefit and $24,038 for West Virginia corporate net income tax expense. Federal income tax rates remain consistent at 34% for the six months ended June 30, 2014 and 2013 and for the year ended December 31, 2013. West Virginia corporate net income tax rates were 6.50% in 2014 and 7.00% in 2013. 36



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Table of Contents

First West Virginia Bancorp, Inc.

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

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

The following table presents an average balance sheet, interest earned on interest bearing assets, interest paid on interest bearing liabilities, average interest rates and interest differentials for the three months ended June 30, 2014 and 2013. Average balance sheet information for the periods ended June 30, 2014 and 2013 was compiled using the daily averages. Loan fees and unearned discounts were included in income for average rate calculation purposes. Average yields on investment securities available for sale have been calculated based on amortized cost. Non-accrualloans were included in the average balance computations; however, no interest was included in income subsequent to the non-accrual status classification. Average rates were annualized for the three month periods ended June 30, 2014 and 2013. For the three months ended For the three months ended June 30, 2014 June 30, 2013 Average Average Average Average Volume Interest Rate Volume Interest Rate ASSETS: Investment securities: U.S. Treasury and other U. S. Government agencies $ 49,737$ 224 1.81 % $ 43,378$ 185 1.71 % Mortgage backed securities 98,222 477 1.95 % 78,407 348 1.78 % Obligations of states and political subdivisions 52,026 489 3.77 % 51,407 474 3.70 % Other securities 165 1 2.43 % 183 1 2.19 % Total Investment securities: 200,150 1,191 2.39 % 173,375 1,008 2.33 % Interest bearing deposits 21,757 14 0.26 % 7,596 6 0.32 % Loans, net of unearned income 91,022 1,162 5.12 % 99,853 1,339 5.38 % Other earning assets 1,324 14 4.24 % 1,321 5 1.52 % Total earning assets 314,253 2,381 3.04 % 282,145 2,358 3.35 % Other assets 21,032 21,643 Allowance for loan losses (1,864 ) (2,183 ) Total Assets $ 333,421$ 301,605 LIABILITIES Time deposits $ 65,608$ 170 1.04 % $ 69,200$ 206 1.19 % Savings deposits 110,827 91 0.33 % 99,246 82 0.33 % Interest bearing demand deposits 53,004 15 0.11 % 46,676 13 0.11 % Federal funds purchased and repurchase agreements 19,833 39 0.79 % 17,287 32 0.74 % FHLB and other long-term borrowings 3,480 41 4.73 % 3,572 43 4.83 % Total interest bearing liabilities 252,752 356 0.56 % 235,981 376 0.64 % Demand deposits 46,658 32,598 Other liabilities 448 539 Total Liabilities 299,858 269,118 STOCKHOLDERS' EQUITY 33,563 32,487 Total Liabilities and Stockholders' Equity $ 333,421$ 301,605 Net yield on earning assets $ 2,025 2.58 % $ 1,982 2.82 % The fully taxable equivalent basis of interest income from obligations of states and political subdivisions has been determined using a combined Federal and State corporate income tax rate of 40% for the three months ended June 30, 2014 and 2013, respectively. The effect of this adjustment is presented below. Investment securities $ 200,150$ 1,511 3.03 % $ 173,375$ 1,324 3.06 % Loans 91,022 1,251 5.51 % 99,853 1,404 5.64 % Total earning assets $ 314,253$ 2,790 3.56 % $ 282,145$ 2,739 3.89 % Taxable equivalent net yield on earning assets $ 2,434 3.11 % $ 2,363 3.36 % 37



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Table of Contents

First West Virginia Bancorp, Inc.

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

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

Net Interest Income

For the three months ended June 30, 2014, net interest income was $2,025,280, increasing $43,923 or 2.2%, from the same period in 2013. The increase in net interest income was primarily due to the increase in the interest earned on investment securities combined with the decrease in the interest paid on interest bearing liabilities, offset in part by the decrease in the interest earned on loans. The taxable equivalent net yield on earning assets decreased from 3.36% at June 30, 2013 to 3.11% at June 30, 2014. Table Three presents the average balance sheets and an interest rate analysis for three months ended June 30, 2014 and 2013. Interest and fees on loans decreased $176,508 or 13.2% for the three month period ended June 30, 2014 as compared to the same period in 2013 due to the decline in the average volume of loans combined with the decrease in the average yield on loans. The average loan volume decreased approximately $6.4 million or 6.5% since December 31, 2013. The taxable equivalent yield on loans fell 11 basis points, to 5.51% at June 30, 2014 from 5.62% at December 31, 2013. Interest income on investment securities increased $182,641 or 18.1% during the second quarter of 2014 compared to the same period of the prior year. The increase in interest income on investment securities was primarily due to the rise in the average volume, offset in part by a decline in the yield earned. The investment portfolio average volume increased approximately $22.3 million or 12.6% since December 31, 2013 and $26.8 million or 15.4% since June 30, 2013. The taxable equivalent yield earned on investment securities declined 3 basis points, to 3.03% for the three months ended June 30, 2014 as compared to 3.06% for the same period in 2013. Interest expense paid on interest bearing liabilities fell $20,284 or 5.4% during the three months ended June 30, 2014 as compared to the same period in 2013. The decrease in interest expense was primarily due to the decline in the average yield paid on interest bearing liabilities, which was offset in part by an increase in average balances of interest bearing liabilities. The average yield paid on interest bearing liabilities was down 8 basis points, from .64% at June 30, 2013 to .56% at June 30, 2014. The average volume of interest bearing liabilities rose approximately $16.8 million or 7.1%, from June 30, 2013 to June 30, 2014 primarily due to an increase in the balances maintained in savings deposits, interest bearing demand deposits, and repurchase agreements offset in part by the decline in time deposits and Federal Home Loan Bank borrowings.



Noninterest Income

Noninterest income increased $252,220 or 99.2% for the three months ended June 30, 2014 as compared to the same period of the prior year. The increase in noninterest income was primarily due to the increase in the net gains on sales of investment securities, offset in part by the slight decreases in other operating income and service charges and other fee income. The net gains on investment securities increased $258,085 for the three month period ended June 30, 2014 as compared to the same period in 2013. The Company's subsidiary bank sold approximately $11.9 million of nontaxable state and political subdivision securities during the second quarter of 2014 in order to reinvest in mortgage backed investment securities and taxable securities of state and political subdivisions in accordance with the Company's deferred tax asset plan. The Company accounted for securities gains of $296,864 and securities losses of $36,543 during the three month period ended June 30, 2014 and securities gains of $2,254 and securities losses of $18 during the three month period ended June 30, 2013. During the second quarter of 2014, other operating income decreased $4,251 or 2.7% as compared to same period of the prior year. The decrease in other operating income during the three month period ended June 30, 2014 as compared to the same period in the prior year was primarily due to decreases in FHLB fee income, checkbook income, and other miscellaneous income, offset in part by an increase in ATM fees. Noninterest Expense Noninterest expense increased $134,395 or 7.1% for the three months ended June 30, 2014 as compared to the same period of the prior year. The increase in noninterest expense was primarily due to the increases in salary and employee benefits expenses, occupancy expenses, and other operating expenses. Salary and employee benefits expenses increased $22,558 or 2.5% during the three months ended June 30, 2014 over the same period in 2013. Salary and employee benefit expense in 2014 compared to 2013 increased primarily as a result of an increase in salary expenses and payroll taxes, offset in part by a slight decrease in employee benefits expenses. Net occupancy expenses of premises increased $24,534 or 6.2% during the three months ended June 30, 2014 compared to the same period in 2013. The increase in net occupancy expenses in 2014 as compared to 2013 was primarily due to an increase in furniture and fixtures expenses and depreciation expenses, offset in part by the decline in real estate taxes, banking house expenses, and land lease expenses. 38



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Table of Contents

First West Virginia Bancorp, Inc.

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

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

Noninterest Expense - (continued)

Other operating expenses for the three months ended June 30 included the following: Net Percent Increase Increase 2014 2013 (Decrease) (Decrease) Directors' fees $ 37,025$ 22,600$ 14,425 63.8 % Stationery and supplies 41,470 36,911 4,559 12.4 %



Regulatory assessment and deposit insurance 76,671 66,272

10,399 15.7 % Advertising 49,978 59,719 (9,741 ) (16.3 )% Postage and transportation 35,388 43,688 (8,300 ) (19.0 )% Other taxes 46,330 44,515 1,815 4.1 % Service expense 145,947 109,443 36,504 33.4 % Other 234,662 197,020 37,642 19.1 % Total $ 667,471$ 580,168$ 87,303 15.0 % Income Taxes Income tax benefit for the three month period ended June 30, 2014 was $30,980, decreasing $38,474 or 55.4% compared to the same period in 2013. The decrease in income tax benefit was primarily due to the increase in net gains on sales of securities during the three month period ended June 30, 2014 over the same period in 2013. Balance Sheet Analysis Investments Investment securities increased approximately $2.4 million or 1.2% from December 31, 2013 to June 30, 2014. The investment portfolio is managed to attempt to achieve an optimum mix of asset quality, liquidity and maximum yield on investment. The investment portfolio consists of U.S. Government agency and corporation securities, obligations of states and political subdivisions, corporate debt securities, mortgage-backed securities and equity securities. Taxable securities comprised 74.3% of total securities at June 30, 2014, as compared to 69.8% at December 31, 2013. Other than the normal risks inherent in purchasing U.S. Government agency and corporation securities, corporate debt securities, mortgage-backed securities and obligations of states and political subdivisions, i.e., interest rate risk, management has no knowledge of other market risk involved in these investments. The Company does not have any high risk hybrid/derivative instruments. Investment securities that are classified available for sale are available for sale at any time based upon management's assessment of changes in economic or financial market conditions. These securities are carried at fair value and the unrealized holding gains and losses, net of taxes, are reflected as a separate component of stockholders' equity until realized. Available for sale securities, at fair value, represented 100% of the investment portfolio at June 30, 2014 and December 31, 2013. The increase in the available for sale securities was primarily due to the increase in market value of the securities combined with purchases of mortgage backed investment securities, securities of state and political subdivisions and obligations of U.S. Government corporations and agencies, offset in part by sales of nontaxable state and political subdivision securities in accordance with the Company's deferred tax asset plan. The Company did not have any investment securities classified as held to maturity securities at June 30, 2014 and December 31, 2013. As the investment portfolio consists primarily of fixed rate debt securities, changes in the market rates of interest will affect the carrying value of securities available for sale, adjusted upward or downward and represent temporary adjustments in value. The carrying values of securities available for sale was above amortized cost by $452,626 at June 30, 2014 and was below amortized cost by $4,358,005 at December 31, 2013, respectively.



Loans

Total loans, net of unearned income, increased $1,042,966 or 1.1% from December 31, 2013 to June 30, 2014. The increase in total loans in 2014 was primarily due to the increase in consumer real estate loans, offset in part by decreases in commercial real estate loans, commercial and other loans, and consumer loans which decreased $665,000, $665,000 and $462,000, respectively. The increase in consumer real estate loans was primarily due to an increase in construction loans. The decline in commercial real estate loans during 2014 was primarily due to a decrease in multifamily residential loans, offset in part by an increase in non-farm, non-residential loans. Commercial and other loans declined during 2014 primarily in non-rated industrial development obligations. The decline in consumer loans was primarily 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-six percent (46%) of the loan portfolio. Consumer real estate loans which include construction, farmland, real estate residential loans, and home equity loans comprised thirty-four percent (34%) of the loan portfolio. Commercial and other loans which include commercial and industrial loans and non-rated industrial development obligations comprised seventeen percent (17%) of the loan portfolio. Consumer loans which include installment and other loans to individuals and credit cards comprised three percent (3%) of the loan portfolio. The changes in the composition of the loan portfolio from December 31, 2013 to June 30, 2014 were a 3% increase in consumer real estate loans, a 1% decrease in commercial real estate loans, a 1% decrease in consumer loans and a 1% decrease in commercial and other loans. 39



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Table of Contents

First West Virginia Bancorp, Inc.

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

Maturities and sensitivities of Loans to Changes in Interest Rates

The following table presents the contractual maturities of loans other than installment loans and residential mortgages as of June 30, 2014 and December 31, 2013: (Unaudited) (Unaudited) (dollars in thousands) June 30, 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 $ 3,002$ 306 $ 351 $ 37 $ 99 Commercial real estate - nonfarm, nonresidential property 495 6,893 28,695 913 6,788 27,644 Commercial 738 1,895 2,762 594 2,684 2,211 Nonrated industrial development obligations 397 1,265 8,985 564 1,631 9,005 Total $ 1,981$ 13,055$ 40,748 $ 2,422 $ 11,140$ 38,959 The following table presents an analysis of fixed and variable rate loans as of June 30, 2014 and December 31, 2013 along with the contractual maturities of loans other than installment loans and residential mortgages: (Unaudited) (Unaudited) (dollars in thousands) June 30, 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 $ 1,550$ 7,927$ 6,025 $ 1,526 $ 9,213$ 6,815 Variable Rates 431 5,128 34,723 896 1,927 32,144 Total $ 1,981$ 13,055$ 40,748 $ 2,422 $ 11,140$ 38,959 Loans Held for Sale The Company has entered into an agreement with the Federal Home Loan Bank of Pittsburgh ("FHLB") under which the bank may sell conforming one-to-four family residential mortgage loans to the FHLB. The agreement provides for a maximum commitment of $5,000,000. Loans sold to the FHLB are sold with limited recourse or credit risk based upon utilization of the original commitment. The bank also maintains the servicing of these loans, for which it is paid a servicing fee. The total amount of loans sold and outstanding under this agreement was $8,885,666 and $9,489,935 as of June 30, 2014 and December 31, 2013, respectively. The loans which were sold were also subject to a recourse obligation or credit risk in the amount of $328,835 and $342,602 at June 30, 2014 and December 31, 2013, respectively.



Non-performing Loans

Non-performing assets include non-accrual loans on which the collectibility of the full amount of interest is uncertain; loans which have been renegotiated to provide for a reduction or deferral of interest on principal because of a deterioration in the financial position of the borrower; loans past due ninety days or more as to principal or interest; and other real estate owned. A summary of nonperforming assets is presented in the following table. Total non-performing loans were $1,173,000 at June 30, 2014 as compared to $1,314,000 at December 31, 2013. The decline in non-performing loans in 2014 was primarily due to decreases in non-accrual loans. 40



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Table of Contents

First West Virginia Bancorp, Inc.

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

Non-performing Loans (Continued)

Risk Elements

Loans which are in the process of collection, but are contractually past due 90 days or more as to interest or principal, renegotiated, non-accrual loans and other real estate are as follows: (dollars in thousands) June 30, December 31, 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 $ 20$ 26$ 31$ 39$ 54 Commercial real estate 792 885 3,115 3,533 4,147 Consumer real estate 316 355 388 447 688 Consumer 2 4 17 27 14 $ 1,130$ 1,270$ 3,551$ 4,046$ 4,903 Other Real Estate $ - $ - $ - $ 138$ 8 Total non-performing assets $ 1,173$ 1,314 $



3,551 $ 4,184$ 4,939

Total non-performing assets to total loans and other real estate 1.24 % 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 $1,130,000 or 1.2% of total loans outstanding as of June 30, 2014, as compared to $1,270,000 or 1.4% of total loans outstanding as of December 31, 2013. Non-accrual loans decreased in 2014 primarily from loan payments. Management continues to monitor the nonperforming assets to ensure against deterioration in collateral values.



Allowance for Loan Losses

In all lending activities there is an inherent risk that borrowers will be unable to repay their obligations. The Company maintains an allowance for loan losses to absorb probable loan losses. The Company has historically maintained the allowance for loan losses at a level greater than actual charge-offs. Although a subjective evaluation is determined by management, the Company believes it has appropriately assessed the risk of loans in the loan portfolio and has provided for an allowance which is adequate based on that assessment. Because the allowance is an estimate, any change in the economic conditions of the Company's market area could result in new estimates which could affect the Company's earnings. Management monitors the quality of the loan portfolio through reviews of past due loans and all significant loans which are considered to be potential problem loans on a monthly basis. The internal loan review function provides for an independent review of commercial, real estate, and installment loans in order to measure the asset quality of the portfolio. Management's review of the loan portfolio has not indicated any material loans, not disclosed in the accompanying tables and discussions which are known to have possible credit problems that cause management to have serious doubts as to the ability of each borrower to comply with their present loan repayment terms. The allowance for loan losses decreased $995 or .1%, since December 31, 2013. The allowance for loan losses represented 2.0% of outstanding loans as of June 30, 2014 and at December 31, 2013. Charge-offs amounted to $4,092 and recoveries were $3,097 for the six month period ended June 30, 2014. There was no provision made to the allowance for loan losses during the six months ended June 30, 2014 and 2013. The additions and deletions to the allowance for loan losses are based on management's evaluation of characteristics of the loan portfolio, current and anticipated economic conditions, past loan experiences, net loans charged-off, specific problem loans and delinquencies, and other factors. The Company has allocated the allowance for possible loan losses to specific portfolio segments based upon historical net charge-off experience, changes in the level of nonperforming assets, local economic conditions and management's experience as presented in the following table. 41



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Table of Contents

First West Virginia Bancorp, Inc.

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

Allowance for Loan Losses (Continued)

Table Seven - Analysis of Allowance for Possible Loan Losses

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

(dollars in thousands) June 30, December 31, 2014 2013 2012 2011 2010 Allowance for loan losses: Balance at beginning of period: $ 1,865$ 2,181$ 2,504$ 2,059$ 1,894 Loans Charged-off: Commercial and other loans - - - 8 14 Commercial real estate - - 87 156 - Consumer real estate - - - 28 - Consumer 4 12 9 19 51 Total 4 12 96 211 65 Recoveries: Commercial and other loans - - - 2 1 Commercial real estate - 84 15 45 - Consumer real estate - - - - - Consumer 3 12 6 9 9 Total 3 96 21 56 10 Net Charge-offs (recoveries) 1 (84 ) 75 155 55 Provision (credit) charged to operations - (400 ) (248 ) 600 220 Balance at end of period: $ 1,864$ 1,865 $



2,181 $ 2,504$ 2,059

Average loans outstanding $ 91,387$ 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 1.97 % 2.00 %



2.19 % 2.29 % 1.70 %

The following table presents an allocation of the allowance for possible loan losses at June 30, 2014 and each of the four year periods ended December 31, 2013. The allocation presented below is based on the historical average of net charge offs per category combined with the change in loan growth and management's review of the loan portfolio. June 30, 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 $ 240 17.0 % $ 260 17.9 % $ 179 15.7 % $ 179 14.6 % $ 212 16.9 % Commercial real estate 1,270 45.9 % 1,315 47.1 % 1,762 50.4 % 2,082 51.5 % 1,511 46.5 % Consumer real estate 330 33.9 % 263 31.3 % 193 28.6 % 193 27.4 % 272 28.1 % Consumer 24 3.2 % 27 3.7 % 47 5.3 % 50 6.5 % 64 8.5 % Total $ 1,864 100.0 % $ 1,865 100.0 % $ 2,181 100.0 % $ 2,504 100.0 % $ 2,059 100.0 % 42



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First West Virginia Bancorp, Inc.

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

Other Assets Other assets decreased approximately $1.4 million during the six month period ended June 30, 2014 primarily due to the change in the deferred tax position on available-for-sale securities from an asset to a liability.



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 $10,146,622 during the first six months of 2014. Since year end the decrease in total deposits was primarily due to decreases in noninterest bearing demand deposits, interest bearing demand deposits and certificates of deposit which fell approximately $9.7 million, $2.8 million and $2.0 million, respectively, offset in part by an increase in savings deposits of $4.4 million. At June 30, 2014, noninterest bearing deposits comprised 17% of total deposits and interest bearing deposits which include NOW, money market, savings and time deposits comprised 83% of total deposits. The changes in the composition of the deposit mix since December 31, 2013 were a 3% decrease in noninterest bearing deposits and a 3% increase in interest bearing deposits.



Federal Funds Purchased and Repurchase Agreements

Federal funds purchased and repurchase agreements represent borrowings of a short duration, usually less than 30 days. For repurchase agreements, the securities underlying the agreements remained under the Bank's control. There were no Federal funds purchased at June 30, 2014 and December 31, 2013. Repurchase agreements decreased $438,211 or 2.2%, from December 31, 2013 to June 30, 2014. The decrease in repurchase agreements since year end was primarily due to the decrease in the balances maintained by existing commercial customers. Other Liabilities



Other liabilities increased approximately $550,955 during the six month period ended June 30, 2014 primarily due to investment purchases recorded based on trade dates.

Capital Resources

Stockholders' equity increased 10.7% during the six month period ended June 30, 2014 and was primarily due to the 9.7% increase in accumulated other comprehensive income and the 1.0% increase from current earnings after quarterly dividends. The increase in accumulated other comprehensive income is primarily attributable to the effect of the change in the net unrealized gains (losses) on securities available-for-sale. Stockholders' equity amounted to 10.2% and 9.0% of total assets at June 30, 2014 and December 31, 2013, respectively. The Company paid dividends of $.40 and $.38 per share during the six month periods ended June 30, 2014 and June 30, 2013, respectively. The Company paid dividends of $.20 and $.19 per share during the three month periods ended June 30, 2014 and June 30, 2013, respectively. The Company's primary source of funds for payment of dividends to shareholders is from the dividends from its subsidiary bank. The approval of the Comptroller of the Currency is required to pay dividends if the total of all dividends declared by a national bank in any calendar year exceeds the total of its net profits (as defined) for the year, combined with its retained net profits of the preceding two years. Under this formula, the Company's subsidiary bank can declare dividends in 2014, without approval of the Comptroller of the Currency, of approximately $2,275,000, plus an additional amount equal to the bank's net profit for 2014 up to the date of any such dividend declaration. 43



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Table of Contents

First West Virginia Bancorp, Inc.

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

Liquidity Liquidity management ensures that funds are available to meet loan commitments, deposit withdrawals, and operating expenses. Funds are provided by loan repayments, investment securities maturities, or deposits, and can be raised by liquidating assets or through additional borrowings. The Company had investment securities with an estimated fair value of $202,383,178 classified as available-for-sale at June 30, 2014. These securities are available for sale at any time based upon management's assessment in order to provide necessary liquidity should the need arise. The fair value of temporarily impaired investment securities that the Company has the intent and ability to hold until the anticipated recovery in market value is $101,443,000. In addition, the Company's subsidiary bank, Progressive Bank, N.A., is a member of the Federal Home Loan Bank of Pittsburgh ("FHLB"). Membership in the FHLB provides an additional source of funding in the form of collateralized advances. The remaining maximum borrowing capacity with the FHLB at June 30, 2014 was approximately $34.1 million subject to the purchase of additional FHLB stock. The subsidiary bank had short term lines of credit in the aggregate amount of approximately $19.8 million and $19.4 million available with the FHLB at June 30, 2014 and December 31, 2013, respectively. There were no short term borrowings outstanding pursuant to these agreements as of June 30, 2014 and December 31, 2013. The subsidiary bank also has an agreement with a financial institution for an available line of credit in the amount of $4,000,000 to be used for federal funds borrowings. There were no borrowings outstanding related to this agreement as of June 30, 2014 and December 31, 2013. The subsidiary bank also has pledged investment securities in the amount of $17.3 million to secure the ability to borrow from the Federal Reserve discount window should the need arise. There were no borrowings outstanding from the Federal Reserve as of June 30, 2014. At June 30, 2014 and December 31, 2013, the Company had outstanding loan commitments and unused lines of credit totaling $23,166,000 and $27,315,000, respectively. As of June 30, 2014, management placed a high probability for required funding within one year of approximately $15.1 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. 44



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Table of Contents

FIRST WEST VIRGINIA BANCORP, INC.

PART I


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